<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
Commission File Number: 0-23247
--------------------------
FOCAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3142791
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
4 MAGUIRE ROAD, LEXINGTON, MA 02421
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (781) 280-7800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
par value
Preferred Share Purchase Rights
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No / /
Indicate by check mark if disclosures 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. Yes /X/ No / /
The aggregate value of voting stock held by non-affiliates of the Registrant
was approximately $95,449,000 as of March 20, 2000, based upon the average of
the high and low prices of the Registrant's Common Stock reported for such date
on the Nasdaq National Market. Shares of Common Stock held by each executive
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 20, 2000, the Registrant had outstanding 14,235,231 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain information is incorporated into Part III of this report by
reference to the Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
Focal, Inc. ("Focal" or the "Company") develops, manufactures and
commercializes synthetic, absorbable, liquid surgical sealants based on the
Company's proprietary polymer technology. The Company's family of FOCALSEAL
surgical sealant products is currently being developed for use inside the body
to seal leaks resulting from lung, neurological, cardiovascular and
gastrointestinal surgery. FOCALSEAL-L surgical sealant, the Company's first
product, is initially being used to seal air leaks following lung surgery. The
Company has entered into an exclusive marketing and distribution agreement for
its lung, cardiovascular and gastrointestinal surgical sealant products in North
America with the Genzyme Surgical Products division of Genzyme Corporation
("Genzyme Surgical"). In markets outside North America, Focal has entered into
an exclusive marketing and distribution agreement for all of its surgical
sealant products with Ethicon, Inc., a division of Johnson & Johnson
("Ethicon"). Focal has submitted a Premarket Approval ("PMA") application to the
FDA for FOCALSEAL-L surgical sealant for lung applications and the General and
Plastic Surgery Devices Advisory Panel of the FDA has scheduled a meeting on
May 8, 2000 to review this application. The Company has received CE mark
approval for FOCALSEAL-L surgical sealant for lung indications and has received
CE mark approval of FOCALSEAL-S surgical sealant for neurosurgery indications in
Europe. In addition, the Company has received marketing approval for FOCALSEAL-L
surgical sealant in Canada.
There are more than 4 million open and minimally invasive lung,
neurological, cardiovascular and gastrointestinal surgical procedures performed
each year worldwide. In many of these procedures, air or fluid leaks may arise
and cannot be effectively treated with existing wound closure products such as
sutures and staples. These leaks may occur in an unpredictable and unexpected
manner, and the Company's products, if approved, may be effective in reducing
such post-surgical leaks. Because of the unpredictable nature of these leaks, it
may be difficult at the completion of surgery for the surgeon to determine
whether a particular surgical site will leak. Accordingly, the Company believes
that its FOCALSEAL surgical sealants may be used routinely in certain
procedures. The Company has successfully completed clinical trials of
FOCALSEAL-L surgical sealant for lung surgery in the United States and in Europe
and has completed a clinical trial of FOCALSEAL S surgical sealant for
neurosurgery in Europe. In these clinical trials, FOCALSEAL-L surgical sealant
was effective in sealing air and fluid leaks following lung surgery and
neurosurgery and no unanticipated adverse device effects were observed. Focal
intends to develop products and conduct clinical trials for cardiovascular and
gastrointestinal surgery indications, although the timing and magnitude of these
efforts are dependent on the Company securing additional resources.
Patients with persistent air or fluid leaks may require prolonged
hospitalization, have more complications, higher levels of post-operative pain,
and a higher risk of mortality. Sutures and staples represent the principal
products comprising the over $2.8 billion worldwide wound closure market.
Sutures and staples work very effectively in bringing dissected tissues back
together after surgery. However, sutures and staples do not have inherent
sealing capabilities, and therefore cannot consistently eliminate air and fluid
leakage at the wound site.
Focal's surgical sealants have the following features which the Company
believes allow the product to effectively reduce the incidence of air and fluid
leaks following surgery:
- Adheres very well to underlying tissue;
- Expands and contracts with tissue;
- Withstands high levels of air and fluid pressure.
- Conforms well to tissue surfaces;
2
<PAGE>
FOCALSEAL surgical sealants, which are biocompatible, are designed to remain
intact through the critical wound healing period and are then absorbed and
eliminated by the body. Focal has developed two primary formulations of its
products, FOCALSEAL-L surgical sealant and FOCALSEAL-S surgical sealant, which
are designed to have absorption times that parallel long-term and short-term
synthetic, absorbable polymer sutures, respectively.
Focal believes the use of its FOCALSEAL surgical sealants could potentially
shorten patient recovery times and hospital stays and reduce post-surgical
complications. Focal's pivotal U.S. clinical trial of FOCALSEAL-L surgical
sealant for lung surgery demonstrated a trend toward earlier patient discharge
from the hospital.
The Company has completed a 180 patient, multicenter clinical trial in the
United States involving the use of FOCALSEAL-L surgical sealant in sealing air
leaks following lung surgery. Focal has submitted a Premarket Approval ("PMA")
application to the FDA for lung surgery indications and, pending FDA approval,
expects to launch FOCALSEAL-L surgical sealant in the United States through
Genzyme Surgical's sales force in 2000.
FOCALSEAL-S surgical sealant, the Company's second surgical sealant
formulation, will initially be used to seal cerebrospinal fluid ("CSF") leaks
following neurosurgery. Focal has received CE Mark approval for this product. In
1998, the Company completed a 44 patient multicenter clinical trial of
FOCALSEAL-S surgical sealant for this neurosurgery indication in Europe. All of
the patients enrolled in this clinical trial received FOCALSEAL-S surgical
sealant and 100% of these patients were sealed at the end of surgery. The
Company has received IDE approval from the FDA and has initiated a clinical
trial in the United States.
The Company believes, based upon preclinical evaluation of its polymers,
that its FOCALSEAL-L and FOCALSEAL-S surgical sealant formulations will also be
applicable to cardiovascular surgery, gastrointestinal surgery and other
surgical applications. Focal has successfully demonstrated in preclinical models
that FOCALSEAL-L surgical sealant is effective in sealing blood leaks in
coronary artery bypass graft ("CABG") surgery and other cardiovascular
indications. Focal is currently conducting further preclinical trials.
Focal is also developing other applications for the liquid formulations of
its polymer technology, including local drug delivery systems. In local drug
delivery applications, the Company believes that its polymers can deliver high
concentrations of drugs at local disease sites, thereby potentially enhancing
efficacy and reducing toxicity associated with systemic delivery of drugs. Focal
has demonstrated in preclinical models the ability to obtain sustained release
of drugs at a local disease site.
Focal's family of surgical sealants and its other products under development
are based on the Company's proprietary synthetic, absorbable polymer technology.
The Company's liquid formulations are comprised primarily of water, absorbable
polymers such as polyethylene glycol ("PEG") and other synthetic components.
These components are widely used in other medical products approved for use
inside the body, including synthetic absorbable sutures. The Company designs its
proprietary polymer formulations in order to control characteristics such as
absorption, viscosity, crosslinking time, strength, flexibility and elasticity.
This enables the Company to tailor formulations for particular surgical
applications. A key distinguishing characteristic of the Company's polymer
formulations is that they are applied as liquids and then converted by light
into solid gels inside the body. The solid gel formed after the light has been
applied is highly flexible, elastic and transparent and strongly adheres to
moist or dry tissue. The resulting solid gel is then absorbed and eliminated
from the body over periods of time varying from weeks to months to years.
The Company believes it has built a strong patent portfolio related to its
polymerizable polymer technology. The Company has received, licensed or believes
it has the option or right to license 41 issued United States patents and 29
foreign patents corresponding to certain of the issued United States patents,
has five additional United States patent applications that have been allowed and
has 24 patent applications pending in the United States, as well as foreign
counterparts of certain of these applications.
3
<PAGE>
Focal was incorporated in Delaware in June 1991. The Company's principal
executive offices are located at 4 Maguire Road, Lexington, Massachusetts 02421.
Its telephone number is (781) 280-7800.
SURGICAL SEALANT MARKET
Effective closure of internal wounds following surgical procedures is
critical to the restoration of the function of injured and diseased tissue and
the ultimate success of the surgical procedure. Failure to effectively seal
surgical wounds can result in leakage of air in lung surgery, cerebrospinal
fluid in neurosurgery, blood in cardiovascular surgery, and gastrointestinal
contents in gastrointestinal surgery. Air and fluid leaks resulting from
surgical procedures can lead to significant post-surgical morbidity that may
result in prolonged hospitalization, higher levels of post-operative pain and
complications and a higher mortality rate.
The current annual worldwide market for wound closure products, consisting
primarily of surgical sutures and staples, is estimated at over $2.8 billion.
Sutures and staples facilitate healing by joining wound edges and allowing the
body to heal naturally. However, because sutures and staples do not have
inherent sealing capabilities, they cannot consistently eliminate air and fluid
leakage at the wound site. This is particularly the case when sutures and
staples are used to close tissues containing air or fluids under pressure, such
as the lobes of the lung, the dural membrane surrounding the brain and spinal
cord, blood vessels and the gastrointestinal tract. In addition, in minimally
invasive surgical procedures, where the physician must operate through small
access devices, it can be more difficult and time-consuming for the physician to
place sutures and staples as compared to open surgical procedures. The Company
believes that the use of surgical sealants in minimally invasive procedures
could enhance the efficacy of these procedures through more effective and rapid
wound closure.
The limitations of sutures and staples in sealing certain air and fluid
leaks have led to the adaptation of other technologies for wound closure. These
alternatives include the use of liquid fibrin glues and nonliquid collagen patch
products. Fibrin glues were originally developed as hemostatic agents to stop
diffuse bleeding. They have limited effectiveness in many surgical sealant
applications because they do not adhere strongly to, or move and expand with,
underlying tissue, particularly moist tissue. They are also not capable of
withstanding high pressure leaks. In spite of these limitations, annual
international sales of fibrin glue sealants are estimated to be approximately
$200 million.
Collagen patches have similar limitations, in that they are not highly
adherent, strong or elastic. In addition, both collagen patches and fibrin glues
are absorbed by enzymatic reaction. Enzymatic reaction can result in variable
absorption time from patient to patient, depending upon metabolic rates, and can
potentially result in absorption prior to healing of the surgical site. Collagen
patches and fibrin glues are derived from animal by-products, including bovine
collagen and bovine and/or human plasma. These derivatives have resulted in
significant safety concerns such as disease transmission. Furthermore, the wound
closure industry has undergone a significant shift away from animal-derived
materials to synthetic materials due to the more predictable absorption,
superior performance characteristics and more favorable safety profile of
synthetic sutures. Currently, the Company estimates that over 65% of suture
material is synthetic, as compared to only approximately 25% in 1975.
Due to the limitations of sutures and staples in achieving rapid, leakproof
wound closure and the inadequacy of animal by-product sourced glues and patches,
Focal believes that a significant market opportunity exists for its synthetic,
absorbable, liquid, surgical sealants.
FOCAL'S SYNTHETIC POLYMER TECHNOLOGY
Focal's family of surgical sealants and its other products under development
are based on the Company's proprietary synthetic, absorbable polymer technology.
The Company's polymers are designed to incorporate several beneficial
characteristics, which are critical to their use as surgical sealants and in
4
<PAGE>
other medical applications, including adherence to tissue; strength, flexibility
and elasticity; consistent absorption; and safety and biocompatibility.
The Company's proprietary liquid formulations are primarily comprised of
water, absorbable polymers such as polyethylene glycol, or PEG, and other
synthetic components. Water makes up approximately 70 to 85% of Focal's
formulations and PEG and other synthetic components comprise the remaining 15 to
30% of the formulation. The components of Focal's surgical sealants are widely
used in other medical products approved for use inside the body, such as
synthetic absorbable sutures, intravenously-administered pharmaceuticals, pain
medications and eye drops. The Company designs its proprietary polymer
formulations in order to control characteristics such as absorption, viscosity,
setting time, strength, flexibility and elasticity. This enables the Company to
tailor polymers for particular applications. A key distinguishing characteristic
of the Company's polymer formulations is that they are applied as liquids and
are converted by light into solid gels inside the body, a process known as
photopolymerization. The solid gel formed after the light has been applied is
highly flexible, elastic and transparent and strongly adheres to moist or dry
tissue. The design and macromer composition of the Company's polymers enable
them to convert quickly to solid gels without generating heat, which is a
significant clinical advantage over other IN VIVO polymerizable materials.
The key technological hurdle which the Company overcame in the development
of its synthetic, liquid surgical sealants was the crucial need to adhere
strongly to moist tissue surfaces. The Company's surgical sealants adhere to
tissue as a result of a proprietary two-step priming and sealing process. To use
FOCALSEAL surgical sealant, the physician first applies a liquid primer which
penetrates the uneven surfaces of the tissue. Once the primer is brushed on, the
sealant is applied over the primer and both are exposed to a specific wavelength
of visible light. The primer and sealant contain a photoinitiator which enables
them to convert rapidly to a solid gel upon exposure to light. The viscosity and
rapid conversion characteristics of the Company's surgical sealants enable the
physician to apply the sealant where desired and avoid significant run- off of
the material prior to polymerization. Surgeons can perform the entire surgical
sealant application process quickly and efficiently after sufficient training.
The key properties of the Company's synthetic liquid polymers are:
- ADHERENCE TO TISSUE. The Company's FOCALSEALsurgical sealants adhere
strongly to both moist and dry tissue, a requirement for an effective
sealant. The combination of a viscous liquid formulation polymer
incorporating a photoinitiator enables the Company's polymers to adhere to
tissue when applied as a liquid and to polymerize rapidly when exposed to
light. The Company's sealants have been shown to be four times more
adherent to tissue than fibrin glues.
- STRENGTH, FLEXIBILITY AND ELASTICITY. The composition of the Company's
polymers provides a high degree of strength, flexibility and elasticity,
enabling them to stretch with the tissue to which they are applied. These
qualities are especially significant when the polymers are used in areas
where resistance to air and fluid pressure is critical, including the
lungs, the dural membrane surrounding the brain, the vascular system and
the gastrointestinal tract. The Company's sealants have been shown to be
12 times more resistant to burst pressures than fibrin glues.
- CUSTOMIZABLE POLYMER CHARACTERISTICS. By modifying the chemical
composition of its polymers, the Company is able to control
characteristics such as absorption, viscosity, setting time, strength,
flexibility and elasticity. The customizable nature of the Company's
polymer technology enables Focal to design and develop products with
characteristics and properties that are tailored for specific clinical
indications.
- HYDROLYTIC ABSORPTION. The Company's synthetic polymers are designed to be
predictably broken down by water, a process known as hydrolysis, and are
absorbed by the body over a specified period of time depending upon their
chemical composition. As a result, the Company's polymers should have a
relatively consistent absorption profile from patient to patient. Collagen
patches and fibrin
5
<PAGE>
glues are absorbed by enzymatic reaction, which can vary significantly
from patient to patient depending upon an individual's metabolism.
- TOTALLY SYNTHETIC COMPOSITION; SAFETY AND BIOCOMPATIBILITY. Focal's
synthetic polymers are comprised of materials which are commonly found in
other medical products approved for use in humans. The PEG backbone allows
the formulations to be water-soluble and biocompatible, resulting in
minimal reaction with the tissue to which the polymer is applied. In
addition, the absence of animal or human derived materials eliminates
safety concerns related to transmission of blood borne diseases such as
HIV and hepatitis. Preclinical toxicology testing of FOCALSEAL-L and
FOCALSEAL-S surgical sealants, and clinical trials of FOCALSEAL-L and
FOCALSEAL-S surgical sealants, indicate that these biomaterial
formulations are nontoxic.
- TRANSPARENCY. The Company's polymers are transparent, enabling the
physician to observe the underlying tissue to which the polymers have
adhered to confirm sufficient coverage of the wound site. Other products
used as surgical sealants, including fibrin glues and collagen patches,
are not transparent.
The Company has also developed proprietary systems to deliver its surgical
sealants and other products to the wound site. Easy to use brush applicators
have been designed by the Company to apply its FOCALSEAL surgical sealants and
primer over tissue surfaces. These application devices have been tailored to
each specific indication, such as lung surgery and neurosurgery. The Company
also employs a light source and light wand to generate and deliver consistent
amounts of light necessary for conversion of its liquid formulations to solid
gels. These light sources and light wands are manufactured by third parties on
behalf of Focal.
6
<PAGE>
PRODUCTS AND PRODUCT DEVELOPMENT PROGRAMS
The following table summarizes the status of the Company's products and
research and product development programs:
<TABLE>
<CAPTION>
MARKETING RIGHTS
PRODUCT DEVELOPMENT -----------------------------
PROGRAM INDICATION STATUS NORTH AMERICA INTERNATIONAL
------------------- ---------- ------ ------------- -------------
<S> <C> <C> <C> <C>
Surgical Sealants
FOCALSEAL-L Lung Surgery PMA submitted to the FDA, panel Genzyme Ethicon
meeting scheduled for May 8, Surgical
2000; CE Mark approval Products
received; Approval received in
Canada
FOCALSEAL-S Neurosurgery CE Mark approval received in Focal Ethicon
Europe; IDE approved by FDA in
Q3 1999 and pivotal clinic
trials underway
FOCALSEAL-L Cardiovascular Preclinical(1) Genzyme Ethicon
surgery Surgical
Products
FOCALSEAL Gastrointestinal Preclinical(1) Genzyme Ethicon
surgery Surgical
Products
Local Drug Delivery Various Preclinical (1) Focal Focal
</TABLE>
- ------------------------
(1) "Preclinical" refers to formulation development and laboratory
experimentation in animal models, including animal efficacy, safety and
toxicology testing.
FOCALSEAL SURGICAL SEALANT PRODUCTS.
Focal is developing its FOCALSEAL-L and FOCALSEAL-S liquid surgical sealants
for use inside the body with or without sutures and staples to seal leaks
resulting from lung, neurological, cardiovascular and gastrointestinal surgery.
FOCALSEAL surgical sealant is expected to be used as an adjunct to sutures and
staples in most indications. The FOCALSEAL surgical sealant system consists of a
procedure kit containing primer and sealant solutions and disposable
applicators, a light source used for converting Focal's product from a liquid to
a solid gel, and a reusable light wand. The Company's FOCALSEAL-L surgical
sealant product for lung surgery will be marketed in North America by Genzyme
Surgical Products, pending FDA approval, and is being marketed outside North
America by Ethicon. Genzyme Surgical also has the marketing rights to Focal's
surgical sealants for cardiovascular and gastrointestinal indications. Ethicon
has marketing rights to all additional surgical sealant products outside North
America. Focal has retained the marketing rights to its neurosurgery sealant in
North America and has retained manufacturing rights to its products worldwide.
FOCALSEAL-L FOR LUNG SURGERY. The Company has developed FOCALSEAL-L
surgical sealant to seal air leaks resulting from lung surgery. During lung
surgery, air leaks can develop in the lung tissue that has been traumatized
during surgery and can unpredictably occur along staple and suture lines.
Approximately 300,000 lung surgery procedures, primarily for the treatment of
lung cancer, are performed worldwide each year including 150,000 such procedures
in the United States. According to the Company's clinical trial data
7
<PAGE>
in the U.S. and Europe, the vast majority of patients undergoing lung surgery
experience intraoperative air leaks that are not resolved with sutures or
staples. Approximately 15% of lung surgery patients have air leaks that persist
longer than seven days and approximately 5% of patients have air leaks that are
severe enough to warrant additional surgery.
As air leaks from the lung it accumulates in the thoracic cavity, making
breathing difficult as the lung cannot expand and contract normally. As a
result, patients require insertion of chest drainage tubes to vent accumulated
air. These chest tubes prolong pain and limit patient mobility. In addition to
remaining in the hospital until the air leaks are resolved, patients with
persistent air leaks must receive more intense nursing observation and care
while in the hospital than patients who do not experience air leaks. This
additional hospitalization and more intensive care, as well as the additional
surgery required for patients whose air leaks are severely prolonged, result in
substantial additional healthcare costs. Because it is often not possible to
determine at the conclusion of surgery which air leaks are likely to be
prolonged or sustained, the Company believes that FOCALSEAL-L surgical sealant
may be used routinely in major lung surgery procedures.
A PMA was submitted to the FDA in June 1999 for FOCALSEAL-L surgical sealant
and the PMA was accepted as a filing in July 1999. The FDA has given the PMA
filing expedited review status. A panel meeting at the FDA's General and Plastic
Surgery Devices Advisory Panel is scheduled for May 8, 2000. Pending FDA
approval, this product will be launched through Genzyme Surgical Products' sales
force in the United States. A 180 patient, multicenter clinical trial was
completed in late 1998 in the United States involving the use of FOCALSEAL-L
surgical sealant in sealing air leaks following lung surgery. The four hospitals
involved in the clinical trial were Massachusetts General Hospital, University
of Pennsylvania Medical Center, The Johns Hopkins University Medical Center and
Strong Memorial Hospital. Patients were randomized into the treated (received
sutures and/or staples plus FOCALSEAL-L surgical sealant) or control (received
suture and/or staples only) group. In the study, prior to randomization, it was
determined that the vast majority of the patients had air leaks following the
use of standard sutures and staples. FOCALSEAL-L surgical sealant was effective
in sealing intraoperative air leaks in 92% of the patients who were randomized
into the treated group. By contrast, only 29% of those patients in the
untreated, or control group, were free of intraoperative air leaks. Through the
date of discharge from the hospital, 39% of those patients treated with
FOCALSEAL-L surgical sealant remained leak-free compared with 11% in the control
group. In addition, the mean time to air leak cessation was 30.9 hours in the
treated group of patients, compared with 52.3 hours in the control group. To
summarize, the end points required by the FDA, comparing the treated group with
the control group, were as follows:
- % of patients leak-free intraoperatively;
- % of patients leak-free through hospital discharge;
- mean time to air leak cessation.
All three of these end points were met with statistical significance and
demonstrated clinical significance as well. In addition to these formal end
points, a trend toward earlier removal of the chest tube and earlier hospital
discharge was demonstrated. On average, chest tubes were removed 0.7 days
earlier in the treated group versus the control group and patients were
discharged 2.7 days earlier in the treated group versus the control group. There
were no unexpected safety results noted when comparing the treated group and the
control group, including at the six month follow-up period required for all
patients.
Focal and its marketing partner outside North America, Ethicon, are
currently selling FOCALSEAL-L surgical sealant for lung surgeries in thirteen
countries in Europe and certain other countries including Australia and New
Zealand. During 1999, Focal recorded approximately $1.4 million in product
revenues based on shipment of product to Ethicon. In June 1999, Ethicon
announced that it had excess inventories of FOCALSEAL-L sealant and,
consequently, during the second half of 1999, Focal recorded negligible product
sales. However, Ethicon continues to sell product from previously purchased
inventories. Focal believes
8
<PAGE>
that approximately 3,000 procedures were performed using FOCALSEAL-L sealant in
lung surgery applications during 1999 primarily in Europe. In an effort to
increase market penetration in Europe, during 2000 Focal plans to add additional
marketing resources to work more closely with the Ethicon sales force in Europe
and with those surgeons who have become the early adopters of this new
technology. Additionally, the Company plans to use the knowledge obtained from
working directly with surgeons in Europe to leverage the Company's market
opportunity in the United States. See "Strategic Alliances-Ethicon-a division of
Johnson & Johnson."
FOCALSEAL-S FOR NEUROSURGERY. The Company is developing FOCALSEAL-S
surgical sealant to seal the dura, a membrane that encapsulates the brain and
spinal cord and contains cerebrospinal fluid ("CSF") for cushioning and support.
In cranial surgeries, the neurosurgeon must open the cranium and penetrate
through the dural membrane. Following surgery, the neurosurgeon must
meticulously suture the dura in an attempt to achieve leakproof closure, a
process that may require the use of up to hundreds of small sutures. These
attempts are not always successful, resulting in potentially serious CSF leaks.
Approximately 185,000 cranial surgeries are performed annually in the United
States, and the Company estimates that 370,000 of such procedures are performed
each year worldwide. Leakage of CSF has been reported to occur in up to 15% of
these procedures. Because these leaks occur in an unpredictable manner, an
effective surgical sealant may be used prophylactically in cranial surgery
procedures. CSF leakage can result in infections, including meningitis, caused
by the passage of infectious agents through the dural leak, as well as
debilitating headaches.
In spinal surgeries, the surgeon seeks to avoid penetration of the dura.
According to published literature, inadvertent penetration of the dura occurs in
up to approximately 13% of the approximately 800,000 spinal surgeries that are
performed annually worldwide. Penetration of the dura can result in leakage of
CSF with potential complications similar to those that can arise in cranial
surgeries. When inadvertent penetration of the dura occurs in spinal surgeries,
the surgeon generally does not elect to use sutures to close the dural leak due
to the risk of injuring the spinal cord with the suturing needle. Therefore,
there is a real need for a surgical sealant product that can effectively seal
CSF leaks in this spinal indication.
Focal received European CE Mark approval of FOCALSEAL-S surgical sealant in
the fourth quarter of 1999 for neurosurgery and spinal surgery indications. The
Company and its marketing partner outside North America, Ethicon, plan to launch
this product in Europe in 2000. A 44 patient clinical trial was completed in
1998 at three hospitals in Europe, including one hospital in The Netherlands and
two hospitals in Switzerland. All patients enrolled in the trial received
FOCALSEAL-S surgical sealant on the dural membrane following cranial surgery.
There was no control arm of the study. The two clinical end points were sealing
of intraoperative CSF leaks and safety. These end points were successfully
attained. Following the use of FOCALSEAL-S surgical sealant, 100% of the
patients were leak-free at the end of their surgery. There were no unexpected
safety issues noted during the clinical trial, including the three month
follow-up period required for all patients.
The Company received approval of its investigational device exemption, or
IDE, application for FOCALSEAL-S from the FDA in the third quarter of 1999 and
initiated a 340 patient multicenter clinical trial in the fourth quarter of
1999.
CARDIOVASCULAR SURGICAL SEALANT. Focal is evaluating use of its FOCALSEAL-L
surgical sealant for use in sealing vascular anastomoses (the attachment of
blood vessels in surgical procedures) and arteriotomies (the surgical opening in
a vein or artery) in cardiovascular surgeries. There are approximately
1.3 million cardiac and vascular procedures performed annually worldwide,
including over 500,000 coronary artery bypass graft, or CABG, surgeries. These
procedures include both open and minimally invasive coronary artery bypass graft
surgeries and other vascular surgical procedures. In most cardiovascular
surgical procedures, vascular anastomoses are performed with sutures. These
anastomoses use both blood vessel grafts from the patient's own veins or
arteries, which occasionally leak, and synthetic grafts, which regularly
9
<PAGE>
leak. In minimally invasive CABG surgeries, achievement of a leakproof vascular
anastomosis can be particularly difficult and time consuming because the small
access ports through which the surgeon must operate can make placement of
sutures difficult. Failure to achieve a leakproof vascular graft anastomosis can
result in sudden blood leaks that may potentially be life-threatening and may
occur unpredictably after the surgery has been completed. These complications
can add significant costs to cardiovascular procedures by increasing the level
of care required and prolonging hospitalization. The Company's sealants have
been shown to be effective in sealing vascular leaks in several preclinical
large animal models. A preclinical study was completed by a collaborator from
Massachusetts General Hospital using a coronary artery bypass graft surgery
model. In this study, FOCALSEAL-L surgical sealant was effective in sealing
blood leaks following a CABG procedure. Additional preclinical testing of the
cardiovascular sealant product is in progress. The Company is currently
formulating its plans for initiating clinical trials of its cardiovascular
sealant in the United States. The Company does not expect to initiate such
clinical trials until 2001 at the earliest.
In August 1998, Focal expanded its January 1997 agreement with Ethicon with
the funding of approximately $2.6 million for cardiovascular sealant development
efforts. Focal has received $2.0 million of this funding to date. In
February 2000, Ethicon informed Focal that it does not intend to continue the
development and commercialization of the cardiovascular sealant and will not pay
the final installment of $0.6 million. Focal is currently evaluating its plans
for submitting a dossier to the regulatory body in Europe to obtain CE Mark
approval.
GASTROINTESTINAL SURGICAL SEALANT. Focal is evaluating the use of its
FOCALSEAL surgical sealants to prevent leakage of gastrointestinal contents
following gastrointestinal surgery. Leakage can occur as a result of incomplete
reattachment of the portions of the digestive tract being operated upon and may
result in infections, delayed healing or fibrosis. Clinically significant
gastrointestinal tract leakage is most prevalent and unpredictable in esophageal
and large bowel surgeries. Approximately 1.3 million gastrointestinal surgeries
are performed annually worldwide, including esophageal and large bowel
surgeries. Postoperative leaks are reported to occur in up to 5 to 10% of large
bowel surgeries and in up to 25% of esophageal surgeries. The Company believes
that, due to the unpredictable nature of leaks in these procedures, FOCALSEAL
surgical sealant may be used routinely. The Company's sealants have been shown
to be effective in sealing gastrointestinal leaks in several preclinical large
animal models.
LOCAL DRUG DELIVERY
Focal's polymers have properties that enable them to incorporate and deliver
drugs over a sustained period of time at local disease sites. Local drug
delivery can enable the administration of drugs in much higher concentrations
than if the drugs were delivered systemically. This can potentially increase the
efficacy of the drugs without a corresponding increase in side effects. Focal
has explored the delivery of drugs, including cancer drugs, growth factors,
proteins, antibiotics and cardiovascular drugs, with its polymers.
The focus of current research efforts is on the local delivery of cancer
drugs for the treatment of breast cancer. These projects are at an early stage
of development and while the Company has demonstrated proof of principle that
its drug delivery technology may work, there is substantial research and
development yet to be performed before these products enter human clinical
trials. There are several studies underway at university research hospitals and
preliminary results from these ongoing studies are encouraging. The Company is
seeking corporate partners to license or assist in the development of the local
drug delivery technology or, alternatively, may consider a sale of such
technology to a third party.
OTHER RESEARCH AND DEVELOPMENT INITIATIVES
The Company has identified several additional potential applications for its
proprietary synthetic, liquid formulation polymer technology, including
synthetic coatings for vascular grafts. Although the
10
<PAGE>
Company has generated early stage proof of principle in certain of these
indications, the Company is currently devoting minimal resources to these
projects. There can be no assurance that the Company will in the future devote
resources to any of these research initiatives, that any of such research
initiatives will result in the identification of product formulations that
demonstrate sufficient promise in animal models to enable them to become
candidates to enter human clinical trials, or that any products for which the
Company is able to seek and obtain regulatory approvals and introduce
commercially either in the United States or internationally will result from
these efforts.
RESEARCH AND DEVELOPMENT EXPENDITURES
During the years ended December 31, 1997, 1998 and 1999, the Company
incurred expenses of $15.7, $15.6 and $14.4 million, respectively, on research
and development activities, including amounts funded by the Company's strategic
partners.
STRATEGIC ALLIANCES
Focal's commercial strategy is to enter into strategic marketing alliances
with leading medical products company distributors. The Company's strategic
marketing relationships with Genzyme Surgical Products and with Ethicon are
described below.
GENZYME SURGICAL PRODUCTS (A DIVISION OF GENZYME CORPORATION)
In October 1999, Focal entered into a Marketing and Distribution Agreement
with Genzyme Surgical Products, a tracking stock division of Genzyme
Corporation. Genzyme Surgical Products develops and markets a portfolio of
devices, biomaterials and biotherapeutics for the cardiothoracic and general
surgery markets. Genzyme was granted exclusive marketing and distribution rights
to Focal's surgical sealant products for lung surgery, cardiovascular surgery
and gastrointestinal surgery in North America. Focal retained marketing rights
to its neurosurgery sealant product and manufacturing rights to all surgical
sealant products in North America.
Genzyme Surgical Products expects to have 25 sales representatives selling
the FOCALSEAL-L surgical sealant product if and when approved by the FDA. In
addition, Focal plans to hire eight product specialists to support the Genzyme
Surgical Products sales force in the field with training and product
demonstrations.
Under the terms of the Distribution Agreement, Focal will be reimbursed for
its cost of manufacturing FOCALSEAL-L sealant plus 50% of the gross margin
generated from Genzyme Surgical Products' sales of the product to end users. The
term of the Distribution Agreement is ten years, with two five-year renewal
options which are automatic if Genzyme Surgical Products meets minimum
performance standards.
In addition to the Marketing and Distribution Agreement, in October 1999
Focal and Genzyme Surgical Products entered into a Stock Purchase Agreement,
with up to $20 million in Focal common stock purchases committed by Genzyme
Surgical Products over an 18 month period. An initial $5 million investment
closed in November 1999, with Genzyme purchasing approximately 810,000 shares at
a 25% premium to the ten day average trading price of the Company's common stock
prior to the investment. At Focal's option, up to three additional $5.0 million
investments will be made by Genzyme Surgical Products. The first additional
investment of $5 million may be called by Focal in April 2000, subject to the
satisfaction of specified conditions. This investment will be priced (i) at a
25% premium to a twenty day average trading price of the Company's common stock
prior to closing if the trading average is less than $6.40, (ii) at $8.00 per
share if the trading average is between $6.40 and $8.00 and (iii) at the twenty
day trading average if such trading average exceeds $8.00 per share. The final
two investments of $5 million each may be called by Focal in October 2000 and
April 2001, respectively. Each such investment is contingent on, among other
things, Focal receiving FDA approval of its PMA for FOCALSEAL-L surgical
11
<PAGE>
sealant for lung surgery indications. These final two investments will be priced
based upon the twenty day trading average of the Company's common stock.
ETHICON (A JOHNSON & JOHNSON COMPANY)
In January 1997, the Company entered into an exclusive Distribution, License
and Supply Agreement with Ethicon, Inc., a Johnson & Johnson company, for the
research, development and commercialization of the Company's surgical sealant
products. Ethicon received marketing rights for all surgical sealant indications
in all territories outside North America, while the Company retained
manufacturing rights and receives a combined royalty/transfer price on all
Ethicon sales. The Ethicon Agreement outlines the basis and timetable for the
development, supply, marketing, packaging and distribution of FOCALSEAL-L and
FOCALSEAL-S surgical sealants for use intraoperatively as surgical sealants for
lung surgery and neurosurgery indications and other indications. In
August 1998, the Ethicon Agreement was expanded with a funding agreement for
development of a cardiovascular surgical sealant. However, in February 2000,
Ethicon informed Focal that it does not intend to continue the development and
commercialization of the cardiovascular surgical sealant.
The Ethicon Agreement provided the Company with an initial payment of
$7.0 million for research and development. During 1997 and 1998, Ethicon
provided Focal with development funding of $5 million and $3 million,
respectively, and paid a $2 million milestone payment upon receipt of a CE Mark
for FOCALSEAL-L surgical sealant for lung surgery. An additional milestone
payment of $1 million was received in the fourth quarter of 1999 upon the CE
Mark approval of FOCALSEAL-S surgical sealant.
Ethicon is responsible for obtaining regulatory clearances and approvals in
Japan and countries outside of the European Union. Ethicon will pay Focal a
specified percentage of net sales of surgical sealant products manufactured by
Focal and shipped to Ethicon. In addition, in the event Focal is unable to
achieve specified supply targets or is in non-compliance with the manufacturing
standards established for the CE mark and by Ethicon, Ethicon has the right to
manufacture surgical sealants for sale in all territories outside North America.
Such manufacturing rights, if exercised by Ethicon, will be royalty-bearing and
non-exclusive.
Ethicon may terminate the agreement at any time after January 2000 upon
twelve months' prior written notice.
PATENTS AND PROPRIETARY RIGHTS
The Company believes that patents and other proprietary rights are important
to its business. The Company's policy is to file patent applications to protect
technology, inventions and improvements to its inventions that are considered
important to its business and that provide a competitive advantage. Focal also
relies on trade secrets, general know-how, in-licensing opportunities and
continuing technological innovation.
The Company has received, licensed or believes it has the option or right to
license 41 issued United States patents and 29 foreign patents corresponding to
certain of the issued United States patents, has five additional United States
patent applications that have been allowed and has 24 patent applications
pending in the United States, as well as foreign counterparts of certain of
these applications. The issued United States patents have expiration dates
ranging from 2010 to 2016. These patents and patent applications cover certain
aspects of the Company's photopolymerizable polymer formulations, surgical
sealant compositions and methods, and designs for delivery devices.
The Company has licensed from the University of Texas and Endoluminal
Therapeutics, Inc. (a company controlled by one of the Company's founding
scientists) worldwide rights to certain technologies which are the subject of
issued patents and pending patent applications based upon technologies developed
by two of the Company's founders. These licenses are terminable in the event of
failure by the
12
<PAGE>
Company to pay scheduled royalties, failure to commercialize products in the
fields covered by these licenses and under certain other conditions.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the medical products industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, the Company intends to seek
patent protection for its proprietary technology, products and processes.
The Company's success will depend in part on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the United States and internationally.
There can be no assurance that the Company's pending or future patent
applications will issue, or that the claims of the Company's issued patents, or
any patents that may issue in the future will provide any competitive advantages
for the Company's products or that they will not be successfully challenged,
narrowed, invalidated or circumvented in the future. Moreover, litigation and
interference or opposition proceedings associated with enforcing or defending
patents or trade secrets is expensive and can divert the efforts of technical
and management personnel.
The Company has filed patent applications in certain foreign countries
corresponding to certain patent applications that it filed in the United States
and may file additional patent applications inside and outside the United
States. The Company believes that the protection afforded by foreign patents or
any other foreign intellectual property protection, if obtained, may be more
limited than that provided domestically. In addition, there can be no assurance
that competitors will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use, import and
sell its products.
The Company is aware that certain medical device, pharmaceutical and other
companies, universities and research institutions have filed patent applications
or have issued patents relating to the compositions and methods for wound
closure and adhesion prevention. In addition, the medical device and
pharmaceutical industries have been characterized by extensive litigation
regarding patents and other intellectual property rights, and many companies in
the medical device and pharmaceutical industries have employed intellectual
property litigation to gain a competitive advantage. There can be no assurance
that litigation will not be brought against the Company by third parties in the
future challenging the Company's patent rights or claiming infringement by the
Company of patents held by the third parties. Because patent applications in the
United States are confidential until the patents issue, and publication of
discoveries in the scientific and patent literature tends to lag behind actual
discoveries by several months, the Company cannot be certain that Company
inventors or licensors were the first to conceive of inventions covered by
pending patent applications or that Company was the first to file patent
applications for such inventions.
The Company may be required or find it desirable to obtain licenses to
patents or proprietary rights of others. No assurance can be given that any
licenses required under any patents or proprietary rights of third parties would
be made available on terms acceptable to the Company, or at all. If the Company
does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or could find
that the development, manufacture or sale of products requiring such licenses is
foreclosed. Litigation may be necessary to defend against or assert claims of
patent infringement or invalidity, to enforce or defend patents issued to the
Company, to protect trade secrets or know-how owned by the Company, or to
determine the scope and validity of the proprietary rights of others. In
addition, interference proceedings declared by the United States Patent and
Trademark Office, or opposition proceedings in a foreign patent office, may be
necessary to determine the priority of inventions with respect to patent
applications of the Company or its licensors. Litigation, interference or
opposition proceedings could result in substantial costs to and diversion of
effort by the Company, and adverse
13
<PAGE>
determinations in any such proceedings could have a material adverse effect on
the business, financial condition or results of operations of the Company.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention and patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that relevant inventions will not be
developed by a person not bound by an invention assignment agreement. There can
be no assurance that binding agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
GOVERNMENT REGULATION
UNITED STATES
The Company's proposed products and its research and development activities
are subject to regulation by numerous governmental authorities, principally the
FDA and corresponding state and foreign regulatory agencies. The Federal Food,
Drug, and Cosmetic Act (the "FDC Act"), as amended, the regulations promulgated
thereunder, and other federal and state statutes and regulations, govern, among
other things, the preclinical and clinical testing, manufacture, safety,
efficacy, labeling, storage, record keeping, advertising and promotion of
medical devices and drugs, including the products currently under development by
the Company. Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources.
In the United States, medical devices are classified into three different
classes, class I, II and III, on the basis of controls deemed necessary to
reasonably ensure the safety and effectiveness of the device. Class I devices
are subject to general controls (e.g., labeling and adherence to FDA's good
manufacturing practice requirements ("GMPs")) and class II devices are subject
to general and special controls (e.g., performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, class III
devices are those which must receive premarket approval by the FDA to ensure
their safety and effectiveness (e.g., life-sustaining, life-supporting and
implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed Class I or II devices).
14
<PAGE>
Unless it is exempt, a new medical device can be marketed only with
marketing clearance obtained through a premarket notification under
Section 510(k) of the FDC Act or a premarket approval ("PMA") application under
Section 515 of the FDC Act. A 510(k) clearance will typically be granted by the
FDA if it can be established that the device is substantially equivalent to a
"predicate device," which is a legally marketed class I or II device or a
preamendment class III device (i.e. one that has been marketed since a date
prior to May 28, 1976) for which the FDA has not called for PMAs. The FDA has
been requiring an increasingly rigorous demonstration of substantial equivalence
and this may include a requirement to submit human clinical trial data. It
generally takes four to twelve months from the date of a 510(k) submission to
obtain clearance, but it may take longer.
The FDA may determine that a medical device is not substantially equivalent
to a predicate device, or that additional information is needed before a
substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional information, could
prevent or delay the market introduction of new products that fall into this
category. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
effectiveness, or that constitute a major change in the intended use of the
device, will require new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed class I or class II device, or if it is a
preamendment class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device, typically including the results of
clinical trials, bench tests, and laboratory and animal studies. The PMA must
also contain a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must include the proposed labeling,
advertising literature, and any training materials. The PMA process can be
expensive, uncertain and lengthy, and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the PMA. The FDA review of a PMA application generally takes one to three years
from the date the PMA is accepted for filing, but may take significantly longer.
The review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of
clinicians, may be convened to review and evaluate the application and provide a
recommendation to the FDA as to whether the device should be approved. The FDA
accords substantial weight to the recommendation but is not bound by it. Toward
the end of the PMA review process, the FDA generally will conduct an inspection
of the manufacturer's facilities to ensure compliance with applicable GMP
requirements, which include elaborate testing, control documentation and other
quality assurance procedures. The Company recently underwent an FDA GMP
inspection of its facilities in Lexington, Massachusetts in connection with its
PMA application for FocalSeal L sealant for lung surgery. Also, prior to PMA
approval, the FDA undertakes a bioresearch monitoring review of some of the
investigational sites to assure the accuracy of the clinical data. The FDA has
undertaken such a review and Focal is presently working with the FDA in
connection with the bioresearch monitoring inspections of the FOCALSEAL-L
surgical sealant data. The Company believes it has satisfied the FDA's
bioresearch monitoring questions raised to date.
If FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
approval letter, authorizing marketing of the device for certain indications. If
the FDA's evaluation of the PMA application or
15
<PAGE>
manufacturing facilities is not favorable, the FDA will deny approval of the PMA
application or issue a "non-approvable" letter. The FDA may determine that
additional clinical trials are necessary, in which case the PMA may be delayed
for one or more years while additional clinical trials are conducted and
submitted in an amendment to the PMA. Modifications to a device that is the
subject of an approved PMA, its labeling or manufacturing process may require
approval by the FDA of PMA supplements or new PMAs. Supplements to a PMA often
require the submission of the same type of information required for an initial
PMA, except that the supplement is generally limited to that information needed
to support the proposed change from the product covered by the original PMA.
If human clinical trials of a device are required, either for a 510(k)
submission or a PMA application, and the device presents a "significant risk,"
the sponsor of the trial (usually the manufacturer or the distributor of the
device) must file an investigational device exemption ("IDE") application prior
to commencing human clinical trials. The IDE application must be supported by
data, typically including the results of animal and laboratory testing. If the
IDE application is approved by the FDA and one or more appropriate Institutional
Review Boards ("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs without the need for FDA approval. Submission of an IDE
does not give assurance that FDA will approve the IDE and, if it is approved,
there can be no assurance that FDA will determine that the data derived from the
studies support the safety and efficacy of the device or warrant the
continuation of clinical studies. Sponsors of clinical trials are permitted to
sell investigational devices distributed in the course of the study provided
such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. An IDE supplement must be submitted to and
approved by the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety or welfare of human subjects.
The Company's FOCALSEAL surgical sealant products will be regulated as a
class III medical device and will require a separate PMA approval for each
indication to be marketed in the United States. There can be no assurance that
the Company will receive FDA approval of its PMA application for FOCALSEAL-L
surgical sealant for lung surgery in the United States, In addition, the Company
may be required to obtain IDEs for additional applications of FOCALSEAL surgical
sealant and for other products that the Company develops that are regulated by
the FDA as medical devices. There is no assurance that data, typically the
results of animal and laboratory testing, that may be provided by the Company in
support of future IDE applications will be deemed adequate for the purpose of
obtaining IDE approval, that the Company will obtain approval to conduct
clinical studies of any such future product, or that such clinical studies, if
completed, will generate data adequate to support PMA approval. There can be no
assurance that PMA approval can be obtained for any product in a timely fashion,
or at all.
If clearance or approval is obtained, any device manufactured or distributed
by the Company will be subject to pervasive and continuing regulation by the
FDA. The Company will be subject to inspection by the FDA and will have to
comply with the host of regulatory requirements that usually apply to medical
devices marketed in the United States, including labeling regulations, GMP
requirements, the Medical Device Reporting ("MDR") regulation (which requires a
manufacturer to report to the FDA certain types of adverse events involving its
products), and the FDA's prohibitions against promoting products for unapproved
or "off-label" uses. The Company's failure to comply with applicable regulatory
requirements could result in enforcement action by the FDA, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Other products that may be developed by the Company, including products for
local drug delivery, may be regulated as drugs requiring FDA approval of a new
drug application ("NDA") prior to commercialization in the United States. The
NDA approval process is generally considered more onerous, costly and lengthy
than the PMA process, often requiring more extensive preclinical and clinical
testing, and
16
<PAGE>
many products for which NDAs have been submitted by other companies have never
been approved for marketing.
If the FDA believes that a company is not in compliance with law, it can
institute proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the Company, its
officers and its employees. Failure to comply with the regulatory requirements
could have material adverse effect on the Company's business, financial
condition and results of operations. In addition, regulations regarding the
manufacture and sale of the Company's products are subject to change. The
Company cannot predict the effect, if any, that such changes might have on its
business, financial condition or results of operations.
INTERNATIONAL
In order for the Company and its strategic partners to market the Company's
products in Europe and other foreign countries, the Company and/or its partners
must obtain required regulatory approvals and comply with extensive regulations
governing safety, quality and manufacturing processes. These regulations vary
significantly from country to country. The time required to obtain approval to
market the Company's products may be longer or shorter than that required in the
United States. In order to market FOCALSEAL surgical sealants and other products
being developed by the Company in the member countries of the European Union,
the Company will be required to obtain CE mark certification. CE mark
certification is an international symbol of adherence to quality assurance
standards and compliance with applicable European medical device directives. In
December 1997, the Company received a CE mark for its FOCALSEAL-L surgical
sealant for lung surgery and obtained ISO 9001 status. In November 1999, the
Company received a CE mark for its FOCALSEAL-S sealant for neurosurgery. In
September 1999, Focal successfully completed the annual CE Mark surveillance
audit. Although the audit has been successfully completed, there can be no
assurance that the Company will be successful in maintaining its CE mark
certification and ISO 9001 status or that additional CE Mark approvals will be
received for other clinical indications.
SALES AND MARKETING
Focal intends to market and sell its surgical sealants in North America
through Genzyme Surgical Products and internationally through Ethicon. Genzyme
Surgical has a team of 25 sales representatives who will be distributing the
FOCALSEAL-L lung surgery sealant product throughout the United States and a team
of six sales representatives who will be distributing the product in Canada. The
sales representatives in the United States will initially be focused on the
several hundred largest centers that account for a substantial portion of the
lung surgery procedures performed annually.
Ethicon has a team of specialized sales representatives to sell Focal's
product in Europe and certain other countries including Australia and New
Zealand. Sales to date have not been substantial. However, there has been more
aggressive adoption in selected areas by certain surgeons who have historically
been early adopters of new technologies. In an effort to increase market
penetration, during 2000 Focal plans to add additional marketing resources to
work more closely with the Ethicon sales force. Additionally, the Company plans
to use the knowledge obtained from working directly with surgeons in Europe to
leverage the Company's market opportunity in the United States
The Company's sales and marketing strategy for other products that it may in
the future seek to develop, may include using a combination of the Company's own
direct sales force, strategic marketing partners and distributors. The sales and
marketing plans for these products, if any, will be dependent on the Company's
success in entering into strategic marketing relationships, its ability to
leverage its own internal sales force to market additional products beyond the
surgical sealant products and its ability to hire and retain additional
specialized sales personnel. There can be no assurance that the Company will be
able to secure any additional strategic marketing partners or international
distributors on terms that are
17
<PAGE>
acceptable to the Company, or at all, or that the Company will be successful in
building a direct sales force in the United States.
MANUFACTURING
The Company has only limited experience in manufacturing its FOCALSEAL
surgical sealants. The Company believes it has sufficient manufacturing capacity
at its Lexington, Massachusetts facility to meet anticipated supply requirements
for FOCALSEAL-L and FOCALSEAL-S surgical sealant in the United States and in
international markets for the next several years.
The Company performs certain steps in the FOCALSEAL surgical sealant
manufacturing process internally and relies on outside contractors for others.
Certain proprietary processes, including polymer synthesis, are performed by
Focal. The Company uses outside contractors for nonproprietary, high volume
processes including sterilization and aseptic filling. The Company also
contracts with third parties for the manufacture of syringes, applicators, light
sources and light wands.
There can be no assurance that the Company will be able to attract, train
and retain the required manufacturing personnel or will be able to increase its
manufacturing capability in the future to meet potentially increasing demand for
its surgical sealant products in a timely manner, or at all. Manufacturers often
encounter difficulties in scaling up production of their products, including
problems involving production yields, quality control and assurance, component
supply and shortages of qualified personnel. The Company anticipates that it
will need to significantly increase its current manufacturing capacity to meet
commercial needs over the next several years and that it may need to establish
additional manufacturing capacity to meet these anticipated needs. In addition,
the Company expects that it will need to identify and qualify additional sources
for materials and outsourced manufacturing processes. There can be no assurance
that the Company's manufacturing scale-up efforts will be successful or that
reliable, high-volume manufacturing can be established or maintained at
commercially reasonable costs on a timely basis, or at all.
The Company would experience supply interruptions in the event it is unable
to establish or maintain commercial levels of polymer synthesis, as the
Company's polymer formulations are proprietary and are not available from third
parties. In addition, there can be no assurance that the Company will not
encounter unanticipated problems and delays in connection with its contract
manufacturers and suppliers. Delays associated with or difficulties encountered
in establishing commercial manufacturing, the establishment of new manufacturing
facilities, or problems encountered with contract manufacturers and suppliers,
would result in disruptions of product supply to the Company's marketing
partners and for use in clinical trials. In such event Ethicon could, under its
agreement with the Company, commence manufacturing of surgical sealants for
sales in all territories outside North America. Any of the foregoing would have
a material adverse affect on the Company's business, financial condition and
results of operations.
The Company purchases raw materials used in its products from various
suppliers. Certain materials and components are currently purchased by the
Company from single sources. These materials have generally been readily
available in the marketplace and have not been the subject of shortages. There
can, however, be no assurance that the Company or its suppliers or contract
manufacturers will not experience material shortages in the future. Any such
future shortages of materials or components could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and to list its products with the FDA. As such, the Company is
subject to inspections by the FDA for compliance with applicable GMP
requirements, which include elaborate testing, control documentation and other
quality assurance procedures. Further, the Company and the third party
manufacturers of its products are required to comply with various FDA
requirements for design, safety, advertising and labeling.
18
<PAGE>
Complex medical devices, such as the Company's products, can experience
performance that require review and possible corrective action by the
manufacturer. There can be no assurance that component failures, manufacturing
errors or design defects that could result in an unsafe condition or injury will
not occur. If any such failures or defects were deemed serious, the Company
could be required to withdraw or recall products, which could result in
significant costs to the Company. There can be no assurance that market
withdrawals or product recalls will not occur in the future. Any future product
problems could result in market withdrawals or recalls of products, which could
have a material adverse affect on the Company's business, financial condition or
results of operations.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company competes with many domestic and foreign medical device,
pharmaceutical and biopharmaceutical companies. In the surgical sealant area,
the Company will compete with existing methodologies for sealing air and fluid
leaks resulting from surgery, including some traditional wound closure products
such as sutures and staples, marketed by companies such as Johnson & Johnson,
and United States Surgical Corporation (Tyco). Other products currently being
marketed include fibrin glue, sold in Europe and the Pacific Rim countries by
Immuno AG, Cention and Fujisawa and in the U.S. by Baxter Healthcare Corporation
and others. Additional products are under development at Bristol-Myers Squibb
Company and Vitex. Other potential competitors in the surgical sealant market
include Closure Medical Corporation, B. Braun GmBH, Cryolife and Cohesion and
others. Competitive products may also be under development by other large
medical device, pharmaceutical and biopharmaceutical companies. The other areas
in which Focal is developing products, such as local drug delivery and adhesion
prevention, are intensely competitive markets and the Company will encounter
competition from major medical device, pharmaceutical and biopharmaceutical
companies in such markets. Many of the Company's current and potential
competitors have substantially greater financial, technological, research and
development, regulatory and clinical, marketing and sales, and personnel
resources than the Company.
Certain of these competitors may also have greater experience in developing
products, conducting clinical trials, obtaining regulatory approvals, and
manufacturing and marketing such products. Certain of these competitors may
obtain patent protection, approval or clearance by the FDA or foreign countries
or product commercialization earlier than the Company, any of which could
materially adversely affect the Company. Furthermore, if the Company attains
significant commercial sales of its products, it will also be competing with
respect to manufacturing efficiency and marketing capabilities, areas in which
it currently has limited experience. Finally, there can be no assurance that the
Company's marketing partners will not pursue parallel development of other
technologies or products, which may result in a marketing partner developing
additional products that would compete with the Company's products.
Other recently developed technologies or procedures are, or may in the
future be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive in these fields. In such event, the Company's business,
financial condition and results of operations could be materially adversely
affected.
THIRD PARTY REIMBURSEMENT
Reimbursement and health care payment systems in international markets vary
significantly by country. In connection with international product
introductions, the Company and its strategic marketing partners may be required
to seek international reimbursement approvals. If required, there can be no
assurance that any such approvals will be obtained in a timely manner, or at
all, and failure to receive such international reimbursement approvals could
have an adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
19
<PAGE>
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices such as the Company's products,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of surgical procedures. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payors, there will be no separate,
additional reimbursement for the Company's products. Accordingly, the Company
believes that there will be no procedure-specific reimbursement codes for the
Company's products. The Company anticipates that hospital administrators and
physicians will justify the additional cost of surgical sealants by the
attendant cost savings and clinical benefits that the Company believes will be
derived from the use of its products.
There can be no assurance that reimbursement for the Company's products will
be available in the United States or in international markets under either
governmental or private reimbursement systems. Furthermore, the Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors. Failure by physicians, hospitals and other users of
the Company's products to obtain sufficient reimbursement from health care
payors for procedures in which the Company's products are used or adverse
changes in governmental and private third party payors' policies toward
reimbursement for such procedures would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's business may be also materially adversely affected by the
continuing efforts of government and third-party payors to contain or reduce the
costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of certain medical products and prescription
pharmaceuticals is subject to government control. In the United States, an
increasing emphasis on managed care has put, and will continue to put, pressure
on pharmaceutical and medical product pricing. Such initiatives and proposals,
if adopted, could decrease the price that the Company receives for any products
it may develop and sell in the future, and thereby have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, to the extent that such proposals or initiatives have a material
adverse effect on other companies that are corporate partners or prospective
corporate partners for certain of the Company's products, the Company's ability
to commercialize its products may be materially adversely affected.
EMPLOYEES
As of December 31, 1999, the Company employed 76 persons of whom 38 were in
research and, development, 9 were in manufacturing, 19 were in clinical,
regulatory affairs and quality assurance, and 10 were in management, finance and
administration. None of the Company's current employees is represented by a
labor union or is the subject of a collective bargaining agreement. The Company
believes that relations with its employees are good.
SCIENTIFIC ADVISORS AND CLINICAL INVESTIGATORS
Focal has recruited several physician specialists and experienced
practitioners in various fields pertaining to its products to serve as
scientific advisors and clinical investigators.
There is no fixed term of service for the scientific advisors. Current
members may resign or be removed at any time, and additional members may be
appointed. In general, members do not serve on an exclusive basis with the
Company and are not obligated to assign inventions to the Company. Drs. Langer,
Brem, and Slepian are scientific founders of the Company and certain inventions
of Dr. Slepian have been licensed to the Company under the Company's license
agreements with Endoluminal Therapeutics, Inc., a company controlled by
Dr. Slepian. Drs. Langer and Brem also serve as members of the Company's board
of directors. Scientific advisors have from time to time received option grants
to purchase Common Stock of the Company. Scientific Advisors have also received
cash compensation, with the amount of such compensation dependent on the time
commitment and level of involvement of each advisor. All scientific advisors
receive reimbursement for expenses incurred in traveling to and attending
meetings on behalf of the Company.
20
<PAGE>
The following individuals are currently either scientific advisors to Focal
or surgeons involved in Focal's clinical trials. Their respective areas of
specialization are identified below.
<TABLE>
<S> <C>
BIOMATERIALS/POLYMER SCIENCE
John Eaton, Ph.D. Baylor University College of Medicine
Joseph Vacanti, M.D. Boston Children's Hospital
Allan Hoffman, Ph.D. University of Washington
DRUG DELIVERY AND TISSUE ENGINEERING
Robert Langer, Ph.D. Massachusetts Institute of Technology
Marvin Slepian, M.D. University of Arizona Medical Center
Henry Brem, M.D. Johns Hopkins Medical Center
Jane Shaw, Ph.D. President of Stable Network; Former President of
Alza Corporation
PROCEDURE DEVELOPMENT
Joseph LoCicero III, M.D. Harvard Medical School
Peter Johnson, M.D. University of Pittsburgh Medical School
David Torchiana, M.D. Massachusetts General Hospital
LUNG SURGERY
John Wain, M.D. Massachusetts General Hospital
Larry Kaiser, M.D. University of Pennsylvania Medical Center
Stephen Yang, M.D. Johns Hopkins Medical Center
Richard Feins, M.D. Strong Memorial Hospital
Cameron Wright, M.D. Massachusetts General Hospital
David Johnstone, M.D. Strong Memorial Hospital
Paolo Maccharini, M.D. Hanover, Germany
Albert Linder, M.D. Lugenklinik-Heuer, Germany
NEUROSURGERY
Andre Grotenhuis, M.D. University Hospital Nijmegan, The Netherlands
Prof. Nicholas de Tribolet, M.D. Centre Hospitalier Universitaire Vaudriis,
Prof. Bernard George, M.D. Switzerland
Rees Cosgrove, M.D. Hospital Lasiboisiere, France
Henry Van Loveren, M.D. Massachusetts General Hospital
Mayfield Neurological Institute, University of
Cincinnati
</TABLE>
RISK FACTORS THAT MAY AFFECT OPERATING RESULTS
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be considered to be forward-looking statements. Although not
a complete list of words that might identify forward-looking statements, we use
the words "believes," "anticipates," "plans," "expects," "intends" and similar
expressions to identify forward-looking statements. There are a number of
important factors that could cause our actual results to differ materially from
those indicated by forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Form 10-K.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY. The Company has incurred net losses in each year since its
inception, including a net loss of approximately $16.8 million during 1999. At
December 31, 1999, the Company had an accumulated deficit of $76.2 million. The
Company's operating losses have resulted primarily from expenses incurred in
connection with the Company's research and development activities, including
preclinical and clinical trials, development of manufacturing processes and
general and administrative expenses. The Company expects to incur net
21
<PAGE>
losses through at least 2001 and may incur net losses in subsequent periods,
although the amount of future net losses and time required by the Company to
reach profitability are highly uncertain. The Company's ability to achieve and
sustain profitability will be dependent upon obtaining regulatory approval for
and successfully commercializing its FOCALSEALsurgical sealants, including
receiving adequate sales and marketing support from its strategic marketing
partners, Genzyme Surgical Products and Ethicon. There can be no assurance that
Focal will obtain required regulatory approvals, or successfully develop,
manufacture, commercialize and market products or that the Company will ever
record product revenues or achieve profitability. Profitability, if achieved,
may not be sustained.
UNCERTAINTIES RELATED TO EARLY STAGE OF COMMERCIALIZATION AND
DEVELOPMENT. Except for the FOCALSEAL-L and FOCALSEAL-S surgical sealants for
lung surgery and neurosurgery indications, all of the Company's products are in
early stages of development or research. To date the Company has received a CE
Mark approval for FOCALSEAL-L surgical sealant for lung surgery, a CE mark for
FOCALSEAL-S sealant for neurosurgery and approval in Canada for FOCALSEAL-L
sealant for lung surgery. Focal has not received marketing approval for any
products from the FDA. In addition, FOCALSEAL-L and FOCALSEAL-S surgical
sealants will potentially require significant additional research and
development efforts before either is suitable for any indications beyond lung
surgery and neurosurgery, The development and commercialization of new
bioabsorbable synthetic polymer products are highly uncertain and subject to a
number of significant risks. Potential products that appear to be promising at
early stages of development may not reach the market for a number of reasons.
Such reasons include the possibilities that the potential products will be found
ineffective or cause harmful side effects during preclinical testing or clinical
trials, fail to receive necessary regulatory approvals, be difficult to
manufacture on a commercial scale, be uneconomical, fail to achieve market
acceptance or be precluded from commercialization by proprietary rights of third
parties. No assurance can be given that any of the Company's development
programs will be successfully completed, that clinical trials will generate
anticipated results or will commence or be completed as planned, that any PMA
application will be accepted or ultimately approved by the FDA, that required
regulatory approvals will be obtained on a timely basis, if at all, or that any
products for which approval is obtained will be commercially successful. If any
of the Company's development programs are not successfully completed, required
regulatory approvals are not obtained, or products for which approvals are
obtained are not commercially successful, the Company's business, financial
condition and results of operations would be materially adversely affected.
EARLY STAGE OF CLINICAL TESTING AND LACK OF EXTENSIVE CLINICAL DATA. A 180
patient clinical trial of the Company's FOCALSEAL-L surgical sealant product for
lung surgery has been completed in the United States, and the company has
submitted its PMA to the FDA and is anticipating a panel meeting in the first
half of 2000. Although the Company believes that the results of this trial are
sufficient to obtain marketing approval in the U.S., there are no assurances
that the FDA will not require additional clinical testing of FOCALSEAL-L
surgical sealant to obtain U.S. marketing approval. Although Focal has commenced
United States clinical trials of FOCALSEAL-S surgical sealant, there are no
assurances that the FDA will not require the Company to pursue certain clinical
endpoints. It may be more difficult for the Company to demonstrate the efficacy
of FOCALSEAL-S surgical sealant in the United States trial than in the European
trial, which could result in delays or adversely affect the success of the
clinical trial.
There can be no assurance that FOCALSEAL-L or FOCALSEAL-S surgical sealants
will receive marketing approval from the FDA or that any of the Company's other
products will prove to be safe and effective in United States or international
clinical trials under applicable regulatory guidelines. In addition, clinical
trials may identify significant technical or other obstacles to be overcome
prior to obtaining necessary regulatory or international approvals. If the
FOCALSEAL-L and FOCALSEAL-S surgical sealant products and the Company's other
products under development do not prove to be safe and effective in clinical
trials or if the Company is otherwise unable to commercialize these products
successfully, the Company's business, financial condition and results of
operations will be materially and adversely affected.
22
<PAGE>
DEPENDENCE UPON FOCALSEAL SURGICAL SEALANTS. The Company anticipates that
revenues derived from the North American launch of FOCALSEAL-L surgical sealant,
pending FDA approval, will account for a substantial majority of the Company's
near term product revenues. In addition, the Company's future success will
depend, in significant part, on its ability to successfully complete additional
clinical trials and to obtain regulatory approval and market acceptance of
FOCALSEAL-L and FOCALSEAL-S surgical sealant in the United States. Although the
Company has submitted a PMA application to the FDA based on the results of a
180-patient clinical trial in the United States, there can be no assurance that
the FDA will approve the PMA or, if marketing approval were granted by the FDA,
that the Company and its marketing partner, Genzyme Surgical Products, will
successfully commercialize FOCALSEAL-L surgical sealant in the United States.
Failure by the Company to gain marketing approval from the FDA for FOCALSEAL-L
surgical sealant or to be able to successfully commercialize FOCALSEAL-L
surgical sealant in the United States would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the Company's ability to pursue further development and ultimate
commercialization of its surgical sealant products for cardiovascular and
gastrointestinal surgery is contingent on its ability to secure additional
resources for these programs.
DEPENDENCE ON STRATEGIC MARKETING PARTNERS. The Company has established
strategic marketing alliances with Genzyme Surgical and Ethicon in the field of
surgical sealants. Under these agreements, the Company is dependent upon Genzyme
Surgical and Ethicon for the marketing and sale of the Company's surgical
sealants. In June 1999, Ethicon announced that it has excess inventory of FOCAL
SEAL-L and, consequently, the Company recorded negligible product sales under
its arrangement with Ethicon in the second half of 1999. To date, all of the
Company's revenues have been derived from sales by Ethicon. The failure of
Genzyme Surgical or Ethicon to continue to support the Company in the
commercialization of its sealant products would have a material adverse affect
on the Company's business, financial condition and results of operations.
The Company's strategy for development and commercialization of certain of
its future products may depend upon the Company entering into additional
arrangements with research collaborators, corporate partners and others, and
upon the subsequent success of these third parties in performing their
obligations. There can be no assurance that the Company will be able to enter
into additional strategic alliances on terms favorable to the Company, or at
all. The Company's inability to enter into additional strategic alliances could
have an adverse affect on the Company's business, financial condition and
results of operations.
The Company cannot control the amount and timing of resources which its
current or any future corporate partners devote to the Company's programs or
potential products. If any of the Company's current or future corporate partners
breach their agreements with the Company or otherwise fail to conduct their
collaborative activities in a timely manner, the clinical development and/or
commercialization of products may be delayed, and the Company may be required to
devote additional resources to product development and commercialization, or
terminate certain development programs. The termination of any current or future
strategic alliances could have a material adverse affect on the Company's
business, financial condition and results of operations.
In addition, Focal's current and any future strategic partners may develop,
either alone or with others, products that compete directly with the development
and marketing of the Company's products. Competing products, either developed by
the corporate partners or to which the corporate partners have rights, may
result in their withdrawal of support with respect to all or a portion of the
Company's technology, marketing and development efforts, which would have a
material adverse affect on the Company's business, financial condition and
results of operations. There can be no assurance that disputes will not arise in
the future with respect to the ownership of rights to any products or technology
developed with corporate partners. These and other possible disagreements
between corporate partners in the Company could lead to delays in or termination
of the collaborative research, development or commercialization of certain
products and could require or result in litigation or arbitration, which would
be time-consuming
23
<PAGE>
and expensive, and would have a material adverse affect on the Company's
business, financial condition and results of operations.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's FOCALSEAL surgical sealants
represent a new method of sealing air and fluid leaks that arise in connection
with surgery, and there can be no assurance that these products will gain
commercial acceptance among physicians, patients and health care payors, even if
necessary international and United States marketing approvals can be obtained.
The Company believes that recommendations and endorsements by physicians will be
essential for market acceptance of FOCALSEAL, and there can be no assurance that
any such recommendations or endorsements will be obtained. Physicians will not
use the FOCALSEAL surgical sealants unless they determine, based on clinical
data and other factors, that these systems are an effective means of sealing air
and fluid leaks and that the clinical benefits to the patient and cost savings
achieved through use of these systems outweigh their cost. Such determinations
will depend, in part, on the ability of the Company's FOCALSEAL-L surgical
sealant to reduce the time a lung surgery patient must be connected to a chest
tube and the length of hospital stays associated with lung surgery. Acceptance
among physicians may also depend upon the Company's ability to train thoracic
surgeons and other potential users of the Company's products in the application
of liquid surgical sealants, which such physicians typically have not performed,
and the willingness of such users to learn these new techniques. Failure of the
Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL. Focal will
require substantial additional funding in order to continue its research and
product development programs, including for preclinical testing and clinical
trials of its product candidates, for operating expenses, for the pursuit of
regulatory approvals for its product candidates, and may require additional
funding for establishing manufacturing and marketing capabilities in the future.
The Company believes that its existing capital resources, interest income and
committed equity financing from Genzyme Corporation, will be sufficient to
satisfy its current and projected funding requirements for at least 12 months.
However, no assurance can be given that the Company's resources will be
sufficient to conduct its research and development programs as planned.
Moreover, the receipt of two of the three future equity payments by Genzyme is
subject to the satisfaction of certain conditions, including the receipt of FDA
approval of the PMA for FOCAL-L lung sealant, and there can be no assurance that
such conditions will be satisfied. In June 1999 and in January 2000, the Company
reduced its workforce to focus the majority of its capital resources and efforts
on the commercialization of its lung sealant product and on the clinical trials
of its neurosurgery sealant product, and certain other development efforts were
put on hold due to resource constraints.
The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the magnitude of these programs, progress with preclinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
if any, the costs involved in filing and prosecuting patent applications and
enforcing patent claims, competing technological and market developments, the
establishment of additional strategic alliances, the cost of manufacturing
facilities and of commercialization activities, and the cost of product
in-licensing and any possible acquisitions. There can be no assurance that the
Company's cash, cash equivalents and marketable securities, and interest income
earned thereon, together with funding, if any, that may be received under the
Company's Stock Purchase Agreement with Genzyme Corporation, will be adequate to
satisfy its capital and operating requirements.
Focal intends to seek additional funding through strategic alliances, and
may seek additional funding through public or private sales of the Company's
securities, including equity securities. In addition, the Company has obtained
equipment lease financing and other forms of debt financing and may continue to
pursue opportunities to obtain additional lease or debt financing in the future.
There can be no assurance, however, that additional equity or debt financing
will be available on reasonable terms, if at all. Any additional equity
financings would be dilutive to the Company's stockholders. If adequate funds
are not
24
<PAGE>
available, Focal may be required to curtail significantly one or more of its
research and development programs and/or obtain funds through arrangements with
corporate partners or others that may require Focal to relinquish rights to
certain of its technologies or product candidates.
UNCERTAINTY OF ABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT, EMPLOYEES AND
CONSULTANTS. The Company is highly dependent on the principal members of its
management and scientific staff. The loss of services of any of these personnel
could impede the achievement of the Company's development objectives.
Furthermore, recruiting and retaining qualified scientific personnel to perform
research and development work in the future will also be critical to the
Company's success. There can be no assurance that the Company will be able to
attract and retain personnel on acceptable terms given the competition among
biotechnology, pharmaceutical and healthcare companies, universities and
non-profit research institutions for experienced scientists. In addition, the
Company relies on members of its Scientific Advisory Board and a significant
number of consultants to assist the Company in formulating its research and
development strategy. All of Focal's consultants and the members of the
Company's Scientific Advisory Board are employed by employers other than the
Company, and may have commitments to, or advisory or consulting agreements with,
other entities that may limit their availability to the Company.
POTENTIAL PRODUCT LIABILITY OR PRODUCT RECALL EXPOSURE; LIMITED INSURANCE
COVERAGE. The use of any of the Company's potential products in clinical trials,
and the sale of any approved products, may expose the Company to liability
claims resulting from the use of its products or to product recalls. Product
liability claims might be made directly by consumers, health care providers or
by distributors or others selling such products. Focal has obtained product
liability insurance coverage, subject to certain policy limits, for its clinical
trials. The Company intends to expand its insurance coverage to include the sale
of commercial products if marketing approval is obtained for products in
development. However, insurance coverage is becoming increasingly expensive, and
no assurance can be given that the Company will be able to maintain insurance
coverage at a reasonable cost or in sufficient amounts to protect the Company
against losses due to liability. There can also be no assurance that the Company
will be able to obtain commercially reasonable product liability insurance for
any products approved for marketing. A successful product liability claim or
series of claims brought against the Company or a product recall could have a
material adverse effect on its business, financial condition and results of
operations.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS. The Company's research and
development processes involve the controlled use of hazardous materials. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by such laws and regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company. The Company
believes that it is in compliance in all material respects with applicable
environmental laws and regulations.
ITEM 2. PROPERTIES
Focal currently occupies approximately 54,000 square feet of manufacturing,
laboratory and administrative space in Lexington, Massachusetts under a lease
which expires in September 2004. Focal has an option to extend this lease for
several additional five year periods. The Company believes that this facility is
sufficient to meet the Company's requirements through at least 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(A) MARKET PRICE OF AND DIVIDENDS OF THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "FOCL." The following table sets forth the range of the high and low sale
prices by quarter as reported on the Nasdaq National Market for the last two
fiscal years.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1999
First Quarter............................................... $14.00 $ 5.75
Second Quarter.............................................. $ 9.00 $ 6.69
Third Quarter............................................... $ 7.63 $ 3.13
Fourth Quarter.............................................. $ 5.81 $ 3.38
FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter............................................... $19.00 $10.63
Second Quarter.............................................. $20.50 $ 8.75
Third Quarter............................................... $12.50 $ 5.50
Fourth Quarter.............................................. $10.50 $ 6.50
</TABLE>
On March 20, 2000, the closing price per share of the Company's Common Stock
was $8.125 per share, as reported by the Nasdaq National Market, and the number
of common stockholders of record was 190. The Company has never paid any
dividends on its Common Stock. The Company currently intends to retain any
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future.
(B) RECENT SALES OF UNREGISTERED SECURITIES
On November 5, 1999, Focal sold 810,372 shares of its Common Stock, $.01 par
value per share, to Genzyme Corporation, for aggregate proceeds of
$5.0 million. No person acted as an underwriter with respect to this
transaction. Focal relied on Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act") for the exemption from the registration
requirements of the Securities Act, since no registration of the shares to be
offered was made prior to issuance and sale.
(C) REPORT OF OFFERING OF SECURITIES AND USE OF PROCEEDS THEREFROM
On December 11, 1997, the Company commenced and completed its initial public
offering (the "IPO") of 2,500,000 shares of its Common Stock, $0.01 par value
per share, at a public offering price of $10.00 per share pursuant to a
registration statement on Form S-1 (file no. 333-38379) filed with the
Securities and Exchange Commission. All of the shares registered were sold,
including an additional 375,000 shares which were sold upon exercise of the
underwriters' over-allotment option. Lehman Brothers, Piper Jaffray, Inc., and
Pacific Growth Equities, Inc. were the managing underwriters of the IPO. All of
the net proceeds of the IPO, less funds expended to date, were held in cash,
cash equivalents and marketable securities at December 31, 1999.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FOCAL, INC.
SELECTED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
Revenues:
Collaborative R&D revenues......... $ 968 $ 3,098 $17,489 $ 5,114 $ 1,773
Product revenues................... 3,071 1,423
-----------------------------------------------------------
Total revenues................... 968 3,098 17,489 8,185 3,196
Costs and Expenses:
Cost of product revenues........... 3,740 2,373
Research & development............. 9,665 11,680 15,712 15,590 14,454
General & administrative........... 2,098 2,175 3,058 3,815 3,919
-----------------------------------------------------------
Total costs and expenses......... 11,763 13,855 18,770 23,145 20,746
Interest income...................... 443 691 968 1,765 908
Interest expense..................... (107) (92) (129) (212) (199)
-----------------------------------------------------------
NET LOSS............................. $(10,459) $(10,158) $ (442) $(13,407) $(16,841)
===========================================================
Basic and diluted net loss per share
(1)................................ $ (1.26) $ (0.04) $ (1.01) $ (1.24)
================================================
Shares used in computing net loss
per share.......................... 8,088,898 10,410,091 13,291,182 13,551,856
================================================
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999
-----------------------------------------------------------
BALANCE SHEETS.
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents and
marketable securities.............. $ 6,948 $12,208 $33,239 $25,346 $13,463
Working Capital...................... 4,401 9,003 30,867 22,188 11,325
Total assets......................... 9,306 14,089 39,606 30,461 18,751
Capital lease obligations, long term
portion............................ 462 315 1,422 1,391 1,333
Total stockholders' equity........... 5,995 10,099 32,512 23,776 13,148
</TABLE>
- ------------------------
(1) Pro forma in 1996 and 1997. See note 1 to the financial statements.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements, including the notes thereto, appearing elsewhere in this Annual
Report on Form 10-K.
OVERVIEW
Focal was founded in 1991, and is focused on the development, manufacture
and commercialization of synthetic, absorbable surgical sealants based on the
Company's proprietary polymer technology. Since inception, Focal has funded its
operations primarily through the private placement of equity securities and
through an initial public offering of common stock. In addition, Focal has
entered into strategic alliances with corporate partners and has recorded
revenues totalling $28.5 million through December 31, 1999, in connection with
these alliances.
Focal has incurred net losses in each year since its inception, including
net losses of approximately $16.8 million during 1999. At December 31, 1999,
Focal had an accumulated deficit of $76.2 million. Focal's operating losses have
resulted primarily from expenses incurred in connection with its research and
development activities, including preclinical and clinical trials, development
of manufacturing processes and general and administrative expenses. Focal
expects to incur net losses at least through 2001 and may incur net losses in
subsequent periods although the amount of future net losses and the time
required by Focal to reach profitability are highly uncertain. The Company's
ability to achieve and sustain profitability will be dependent upon obtaining
regulatory approval for and successfully commercializing its FOCALSEALsurgical
sealants in North America. The Company has marketing and distribution partners
for the majority of its products throughout the world, including Genzyme
Surgical Products, a division of Genzyme Corporation, in North America and
Ethicon, a Johnson & Johnson company, in Europe and other international markets.
The Company's ability to achieve and sustain profitability is dependent in large
part on the ability of its marketing partners to effectively market and
distribute the Company's sealant products. There can be no assurance that Focal
will obtain required regulatory approvals, or successfully develop, manufacture,
commercialize and market products or that Focal will ever achieve profitability.
Focal introduced its first commercial product, FOCALSEAL-L surgical sealant
for lung surgery indications, in Europe in 1998 through its strategic marketing
alliance with Ethicon. Focal anticipates the launch of FOCALSEAL-L sealant for
lung surgery indications in North America through its marketing partner, Genzyme
Surgical Products, in 2000, pending FDA approval. Focal anticipates that
revenues derived from the sales of FOCALSEAL-L surgical sealant for lung surgery
will account for all of the Company's near term product revenues.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues for the year ended December 31, 1999 (the "1999 Period") were
$3.2 million compared with $8.2 million for the year ended December 31, 1998
(the "1998 Period"). Revenues in the 1999 Period included $1.4 million in
product revenue and $1.8 million in collaborative research revenues. Revenues in
the 1998 Period included $3.1 million in product revenues and $5.1 million in
collaborative research revenues.
Product revenues decreased to $1.4 million in the 1999 Period from
$3.1 million in the 1998 Period. Shipments of FOCALSEAL-L surgical sealant were
made to Ethicon during the first two quarters of 1999 for Ethicon's distribution
to its customers. In June 1999, Ethicon announced that it had sufficient
inventories to meet anticipated demand for the product for at least several
quarters. As a result, there were virtually no additional sales of product to
Ethicon in the second half of 1999. However, Ethicon continued to sell product
to customers from its inventory and it is estimated that approximately 3,000
procedures were performed in Europe and other countries outside of North America
using FOCALSEAL-L surgical sealant
28
<PAGE>
during 1999. Focal records revenues based on the specified transfer price at the
time of shipment of product to its marketing and distribution partner, Ethicon.
Higher collaborative revenues were realized in the 1998 Period than the 1999
Period in connection with Focal's strategic alliance with Ethicon, including
$3.0 million in revenues from Ethicon for the development of its lung surgery
and neurosurgery sealant products and $1.5 million for the development of its
cardiovascular sealant product. In addition, in the 1998 Period $0.5 million in
collaborative research revenues were realized from other sources, including a
grant from the National Institutes of Health. In the 1999 Period, collaborative
revenues included a milestone payment of $1.0 million from Ethicon in connection
with the receipt of CE mark approval of FOCALSEAL-S sealant and $0.8 million in
research funding of a cardiovascular sealant product.
Cost of product revenues for the 1999 Period totalled $2.4 million compared
with $3.7 million for the 1998 Period. These costs were recorded in connection
with the commercial sales of FOCALSEAL-L surgical sealant product through
Ethicon in Europe and other international markets. Gross margins were negative
in both periods due to the lack of economies of scale and the fixed overhead
costs being spread over the limited sales volumes.
Research, development, clinical and regulatory expenses were $14.5 million
for the 1999 Period, compared with $15.6 million for the 1998 Period. The number
of staff in research and development was reduced in June 1999 in connection with
the completion of substantially all of the development work on FOCALSEAL-L
sealant and FOCALSEAL-S sealant. Clinical and regulatory expenses decreased in
the 1999 Period due to the completion in late 1998 of the U.S. clinical trial of
FOCALSEAL-L surgical sealant. The Company expects research, development,
clinical and regulatory expenses to decrease annually for the next several years
as the Company shifts away from research and development activities for its lead
products and toward commercialization of these products.
General and administrative expenses increased to $3.9 million for the 1999
Period from $3.8 million for the 1998 Period. General and administrative
expenses during both years consisted primarily of personnel costs, travel,
public and investor relations, legal, insurance and general overhead expenses.
Interest income decreased to $0.9 million in the 1999 Period from
$1.8 million in the 1998 Period, as a result of lower average cash balances
available for investment, as the Company incurs net losses and draws down on the
proceeds from its initial public offering.
The Company recorded a net loss of $16.8 million for the 1999 Period,
compared with a net loss of $13.4 million for the 1998 Period. The increased net
loss was primarily the result of a decline in collaborative research revenues
and lower product revenues in 1999 as compared with 1998. The Company
anticipates that it will incur net operating losses at least through 2001.
YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues for the 1998 Period were $8.2 million compared with $17.5 million
for the year ended December 31, 1997 (the "1997 Period"). Revenues in the 1998
Period included $3.1 million in product revenues and $5.1 million in
collaborative research revenues. Revenues in the 1997 Period of $17.5 million
consisted exclusively of collaborative research revenues.
Higher collaborative revenues were realized in the 1997 Period than the 1998
Period in connection with Focal's strategic alliance with Ethicon, including a
one-time, non-refundable payment of $7.0 million, as well as funding of
$5.0 million for research and development activities and a milestone payment of
$2.0 million for obtaining a CE mark for FOCALSEAL-L sealant for lung surgery.
In addition, during the 1997 Period, Focal recorded $3.4 million in revenues
from its local drug delivery partnership with Novartis. This alliance was
terminated in early 1998.
29
<PAGE>
During the 1998 Period, Focal recorded $3.0 million in collaborative
research revenues from Ethicon for the development of its lung surgery and
neurosurgery sealant products and $1.5 million for the development of its
cardiovascular sealant product. In addition, $0.6 million in collaborative
research revenues were realized from other sources, including a grant from the
National Institutes of Health.
Product revenues of $3.1 million realized in the 1998 Period represented
Focal's shipments of AdvaSeal surgical sealant products to Ethicon for its
distribution in Europe and other markets outside North America. The Company
realized no product revenues in the 1997 Period.
Cost of product revenues for the 1998 Period totalled $3.7 million. These
costs were recorded in connection with commercial sales of FOCALSEAL-L surgical
sealant product. Gross margins in the 1998 Period were negative due to the
startup phase of Focal's manufacturing operations and the resulting lack of
economies of scale and certain fixed overhead costs being amortized over the
limited volume experienced in the year of launch. Additionally, costs of
approximately $150,000 were incurred relating to a voluntary product recall
announced in August 1998.
Research and development expenses were $15.6 million for the 1998 Period,
compared with $15.7 million for the 1997 Period. The number of staff in the
research and development group were at approximately the same levels in 1997 and
1998. Clinical and regulatory expenses increased in the 1998 Period with
clinical trials ongoing in both Europe and the United States. Manufacturing
scale-up costs decreased in the 1998 Period from the 1997 Period. During the
1997 Period, manufacturing scale-up costs were charged to research and
development, since the lung sealant product CE Mark approval had not yet been
received. During the 1998 Period, the majority of manufacturing scale-up costs
were capitalized and charged to cost of goods sold upon product shipment.
General and administrative expenses increased to $3.8 million for the 1998
Period from $3.1 million for the 1997 Period. General and administrative
expenses during these years consisted primarily of personnel costs, which
increased in the 1998 Period due to the hiring of additional administrative and
finance personnel. In addition, in the 1998 Period, certain general and
administrative expenses, including public and investor relations, insurance and
legal expenses, increased as a result of Focal's transition to a publicly traded
company.
Interest income increased to $1.8 million for the 1998 Period, from
$1.0 million for the 1997 Period, as a result of higher average cash balances,
including the proceeds from the initial public offering.
The Company recorded a net loss of approximately $13.4 million for the 1998
Period, compared with a net loss of $0.4 million for the 1997 Period. This
increase in net loss was primarily due to the receipt of a one-time payment of
$7.0 million in the 1997 Period and higher collaborative research and
development funding in the 1997 Period.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily from
the sale of preferred stock in private placements as well as the Company's 1997
initial public offering. In October 1999, Focal received a $5.0 million equity
investment from Genzyme Surgical Products, in connection with the agreement
described below. Through December 31, 1999, the Company has raised approximately
$88.5 million from equity financings and has received $7.0 million in equipment
lease financing. In addition, the Company has received collaborative funding,
exclusive of equity investments, from Ethicon and other corporate partners
totaling approximately $28.5 million through December 31, 1999.
Cash used in operations totalled $16.6 million for the year ended
December 31, 1999, as compared to the use of $11.1 million for the same period
in 1998. The increase in cash used in operations was due to higher net losses
incurred in 1999, compared to 1998, as well as higher investments in working
capital. Cash used in operations is equal to the net loss incurred for each
period, plus non-cash charges such as depreciation and amortization of property
and equipment plus any changes in working capital.
30
<PAGE>
Capital expenditures from inception through December 31, 1999 totalled
$8.7 million, representing laboratory equipment, office furniture and equipment,
computers and certain leasehold improvements. The majority of these purchases
have been financed through either direct financing leases or sale and leaseback
arrangements. As of December 31, 1999, the Company did not have any material
commitments for future capital expenditures. The Company has commitments from
lenders in the form of lease lines totalling approximately $750,000 to provide
for its expected capital needs during 2000.
In October 1999, in connection with entering into a Marketing and
Distribution Agreement with Genzyme Surgical Products, Focal and Genzyme
Surgical Products entered into a Stock Purchase Agreement, with up to
$20.0 million in purchases of the Company's common stock committed by Genzyme
Surgical over an eighteen month period. The first $5.0 million purchase was made
by Genzyme Surgical in November 1999, with Genzyme purchasing approximately
810,000 shares at a 25% premium to the ten day average trading price of the
Company's common stock prior to the investment. At Focal's option, up to three
additional $5.0 million investments will be made by Genzyme Surgical Products.
The first additional investment of $5.0 million may be called by Focal in
April 2000, subject to the satisfaction of specified conditions. This investment
will be priced (i) at a 25% premium to a twenty day average trading price of the
Company's common stock prior to closing if the trading average is less than
$6.40, (ii) at $8.00 per share if the trading average is between $6.40 and $8.00
and (iii) at the twenty day trading average if such trading average exceeds
$8.00 per share. The final two investments of $5.0 million each may be called by
Focal in October 2000 and April 2001, respectively. Each such investment is
contingent on, among other things, the Company receiving FDA approval of its PMA
for FOCALSEAL-L surgical sealant for lung surgery indications. These final two
investments will be priced based upon the twenty day trading average of the
Company's common stock.
The Company believes that its existing capital resources will be sufficient
to satisfy its current and projected funding requirements for at least
15 months. The Company intends to seek additional funding through strategic
alliances, and may seek additional funding through public or private sales of
the Company's securities, including the sale of up to an additional
$15.0 million of the Company's common stock to Genzyme Corporation, subject to
the satisfaction of specified closing conditions. In addition, the Company has
obtained equipment lease financing and other forms of debt financing and may
continue to pursue opportunities to obtain additional lease or debt financing in
the future. There can be no assurance, however, that additional equity or debt
financing will be available on reasonable terms, if at all. Any additional
equity financing would be dilutive to the Company's stockholders. If adequate
funds are not available, the Company may be required to curtail significantly
one or more of its research and development programs and/or obtain funds through
arrangements with corporate partners or others that may require the Company to
relinquish rights to certain of its technologies or product candidates.
Under certain agreements with universities and consultants, the Company is
obligated to make payments for sponsored research and consulting services. The
Company's research funding commitments under these agreements totalled
approximately $134,000 at December 31, 1999. Payments under these agreements are
typically made on a quarterly or monthly basis. There can be no assurance that
the Company's capital resources will be sufficient to enable the Company to
conduct its research and development programs as planned. The Company's future
capital requirements will depend on many factors, including continued progress
in its research and development programs, progress with preclinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
if any, the costs involved in filing and prosecuting patent applications and
enforcing patent claims, competing technological and market developments, the
establishment of additional strategic alliances, the cost of manufacturing
facilities and of commercialization activities and arrangements, the success of
the sales and distribution efforts of its marketing partners, and the cost of
product in-licensing and any possible acquisitions. There can be no assurance
that the Company's cash, cash equivalents and marketable will be adequate to
satisfy its capital and operating requirements.
31
<PAGE>
YEAR 2000 DISCLOSURE
Year 2000 issues, created by information systems that are unable to
accurately interpret dates after December 31, 1999, created potential risks for
the Company, including potential problems with the Company's products as well as
in the information technology ("IT") and non-IT systems that the Company uses in
its business operations. The Company was also exposed to risks from third
parties with whom the Compant interacts who fail to adequately address their own
year 2000 issues.
The Company's plans to address these year 2000 issues with its IT systems
consisted of four phases: (1) inventory-identifying all IT systems;
(2) assessing--identifying IT systems that use date functions and assessing them
for year 2000 functionality; (3) remediation--reprogramming or replacing where
necessary inventoried items to ensure that they are year 2000 ready; and
(4) testing and certification--testing the code modifications and new inventory
with other associated systems, including extensive date testing and performing
quality assurance testing to ensure successful operation in the post-1999
environment.
The Company completed substantially all planned phases of its year 2000
program without significant incident. The Company had also identified its most
important customers, suppliers and business partners to assess any year 2000
issues which they might pose to the Company. To date, the Company has not
experienced any significant problems with its most important customers,
suppliers and business partners. The Company used both internal and external
resources to reprogram or replace and test software for year 2000 issues. As of
December 31, 1999, the Company spent approximately $340,000 on its year 2000
project and the development of new systems and system modifications.
Focal developed contingency plans late in 1999 to address any potential year
2000 issues. These contingency plans included the use of manual or alternative
processes. Focal has not had to use these contingency plans to date.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Investments and Hedging Activities," which was
amended by Financial Accounting Standards Board Statement No. 137, which
deferred the adoption of FAS 133 until fiscal years beginning after June 15,
2000. Focal does not expect the implementation of this statement to have a
significant impact on its results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), Revenue Recognition in Financial Statements,
which provides interpretative guidance on various matters concerning revenue
recognition. SAB 101 had no impact on the 1999 results of operations, however
the Company is still evaluating the potential future effects of applying SAB
101, particularly regarding future licensing and distribution upfront payments,
if any.
IMPACT OF INFLATION AND CHANGING PRICES
The Company does not expect inflation, which has been low in recent years,
to have any significant impact on its business for the foreseeable future.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains an investment portfolio in accordance with its
Investment Policy. The primary objectives of the Company's Investment Policy are
to preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's Investment Policy specifies credit quality
standards for the Company's investment and limits the amount of credit exposure
to any single issue, issuer or type of investment.
32
<PAGE>
The Company's investments consist of securities of various types and
maturities of one year or less, with an average maturity of 3 months. The
Company accounts for its investments in accordance with Statement of Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). All of the Company's cash equivalents and marketable
securities are treated as available-for-sale under SFAS 115.
The securities held in the company's investment portfolio are subject to
interest rate risk. Changes in interest rates affect the fair market value of
the available-for-sale securities. After a review of the Company's marketable
securities as of December 31, 1999, the Company has determined that in the event
of a hypothetical ten percent increase in interest rates, the resulting decrease
in fair market value of the Company's marketable investment securities would be
insignificant to the financial statements as a whole.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
and Stockholders
Focal, Inc.
We have audited the accompanying balance sheets of Focal, Inc. as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Focal, Inc. at December 31,
1998 and 1999, and the results of its operations and its 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.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 25, 2000, except for
Note 11 as to which the
date is February 25, 2000
34
<PAGE>
FOCAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,516,936 $ 8,746,897
Marketable securities..................................... 16,829,291 4,715,842
Accrued interest receivable............................... 359,911 76,770
Accounts receivable....................................... 587,380 52,579
Inventories, net.......................................... 937,017 1,573,934
Prepaid expenses and other assets......................... 252,086 428,112
----------- -----------
Total current assets........................................ 27,482,621 15,594,134
Notes receivable from related parties....................... 282,442 271,753
Property and equipment...................................... 7,568,435 8,241,953
Less accumulated depreciation and amortization.............. 4,886,037 5,370,919
----------- -----------
Net property and equipment.................................. 2,682,398 2,871,034
Other assets................................................ 13,368 14,025
----------- -----------
Total assets................................................ $30,460,829 $18,750,946
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,105,585 $ 729,534
Accrued liabilities....................................... 2,752,359 2,613,875
Deferred revenue.......................................... 550,000 --
Current portion of capital lease obligations.............. 886,517 926,041
----------- -----------
Total current liabilities................................... 5,294,461 4,269,450
Capital lease obligations................................... 1,390,821 1,333,090
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 13,367,767 and 14,234,208 shares issued and
outstanding at December 31, 1998 and 1999,
respectively............................................ 133,678 142,342
Additional paid-in capital................................ 84,884,786 90,178,169
Accumulated deficit....................................... (59,327,360) (76,168,598)
Notes receivable from related parties..................... (1,443,133) (828,131)
Deferred compensation..................................... (464,206) (183,713)
Accumulated other comprehensive income.................... (8,218) 8,337
----------- -----------
Total stockholders' equity.................................. 23,775,547 13,148,406
----------- -----------
Total liabilities and stockholders' equity.................. $30,460,829 $18,750,946
=========== ===========
</TABLE>
See accompanying notes.
35
<PAGE>
FOCAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
REVENUES:
Collaborative research revenues...................... $17,489,264 $ 5,113,953 $ 1,772,617
Product revenues..................................... $ -- $ 3,071,490 $ 1,422,919
-----------------------------------------
Total revenues....................................... $17,489,264 $ 8,185,443 $ 3,195,536
Costs and expenses:
Cost of product revenues........................... -- 3,739,807 2,373,383
Research and development........................... 15,711,504 15,590,647 14,453,371
General and administrative......................... 3,058,424 3,815,432 3,918,917
-----------------------------------------
Total costs and expenses............................. 18,769,928 23,145,886 20,745,671
-----------------------------------------
Other income (expense):
Interest income.................................... 968,141 1,765,420 908,460
Interest expense................................... (129,022) (212,323) (199,563)
-----------------------------------------
839,119 1,553,097 708,897
=========================================
Net loss............................................. $ (441,545) $(13,407,346) $(16,841,238)
=========================================
Basic and diluted net loss per share................. $ (0.04) $ (1.01) $ (1.24)
=========================================
Shares used in computing basic and diluted net loss
per share.......................................... 10,410,091 13,291,182 13,551,856
=========================================
</TABLE>
See accompanying notes.
36
<PAGE>
FOCAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
CONVERTIBLE RECEIVABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL FROM
----------------------- --------------------- PAID-IN ACCUMULATED RELATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT PARTIES
----------- --------- ---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996...... 24,345,247 $ 243,452 723,344 $ 7,233 $56,303,958 $(45,478,469) $ --
Exercise of stock options for notes
receivable....................... 1,494,775 14,948 1,673,109 (1,688,057)
Net proceeds from initial public
offering (IPO)................... 2,500,000 25,000 22,471,550
Conversion of preferred stock upon
IPO.............................. (24,345,247) (243,452) 8,117,803 81,178 162,274
Exercise of stock options and
warrants......................... -- -- 32,648 327 13,849 -- --
Deferred compensation.............. -- -- -- -- 153,040 -- --
Amortization of deferred
compensation.....................
Comprehensive income:
Unrealized gain on marketable
securities..................... -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- (441,545) --
Total comprehensive income......... -- -- -- -- -- -- --
----------- --------- ---------- -------- ----------- ------------ -----------
Balances at December 31, 1997...... -- -- 12,868,570 128,686 80,777,780 (45,920,014) (1,688,057)
Net proceeds from exercise of
over-allotment option............ 375,000 3,750 3,545,750
Exercise of stock options.......... -- -- 92,578 926 118,539 -- --
Shares repurchased and retired..... (24,884) (249) (29,675) 29,923
Principal payments on notes
receivable....................... 215,001
Shares issued under employee stock
purchase plan.................... 56,503 565 472,392
Amortization of deferred
compensation.....................
Comprehensive income:
Unrealized gain on marketable
securities..................... -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- (13,407,346) --
Total comprehensive income....... -- -- -- -- -- -- --
----------- --------- ---------- -------- ----------- ------------ -----------
Balances at December 31, 1998...... -- -- 13,367,767 133,678 84,884,786 (59,327,360) (1,443,133)
----------- --------- ---------- -------- ----------- ------------ -----------
Exercise of stock options and
warrants......................... -- -- 68,586 685 188,828 -- --
Shares repurchased and retired..... -- -- (54,515) (545) (65,009) 65,554
Shares issued under Employee Stock
Purchase Plan.................... -- -- 41,998 420 198,748
Net proceeds from the issuance of
common stock..................... -- -- 810,372 8,104 4,934,566 -- --
Principal payments on notes
receivable....................... 549,448
Deferred compensation.............. -- -- -- -- 36,250 -- --
Amortization of deferred
compensation..................... -- -- -- -- -- -- --
Comprehensive income:
Unrealized gain on marketable
securities..................... -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- (16,841,238) --
Total comprehensive income....... -- -- -- -- -- -- --
----------- --------- ---------- -------- ----------- ------------ -----------
Balances at December 31, 1999...... -- $ -- 14,234,208 $142,342 $90,178,169 $(76,168,598) $ (828,131)
=========== ========= ========== ======== =========== ============ ===========
<CAPTION>
ACCUMULATED
OTHER TOTAL
DEFERRED COMP. STOCKHOLDERS'
COMPENSATION INCOME EQUITY
------------ ----------- -------------
<S> <C> <C> <C>
Balances at December 31, 1996...... $(934,104) $(43,043) $10,099,027
Exercise of stock options for notes
receivable....................... --
Net proceeds from initial public
offering (IPO)................... 22,496,550
Conversion of preferred stock upon
IPO.............................. --
Exercise of stock options and
warrants......................... -- -- 14,176
Deferred compensation.............. (153,040) -- --
Amortization of deferred
compensation..................... 318,279 318,279
Comprehensive income:
Unrealized gain on marketable
securities..................... -- 25,685 25,685
Net loss......................... -- -- (441,545)
-----------
Total comprehensive income......... -- -- (415,860)
--------- -------- -----------
Balances at December 31, 1997...... (768,865) (17,358) 32,512,172
Net proceeds from exercise of
over-allotment option............ 3,549,500
Exercise of stock options.......... -- -- 119,464
Shares repurchased and retired..... --
Principal payments on notes
receivable....................... 215,001
Shares issued under employee stock
purchase plan.................... 472,957
Amortization of deferred
compensation..................... 304,659 304,659
Comprehensive income:
Unrealized gain on marketable
securities..................... -- 9,140 9,140
Net loss......................... -- -- (13,407,346)
-----------
Total comprehensive income....... -- -- (13,398,206)
--------- -------- -----------
Balances at December 31, 1998...... (464,206) (8,218) 23,775,547
--------- -------- -----------
Exercise of stock options and
warrants......................... -- -- 189,513
Shares repurchased and retired..... --
Shares issued under Employee Stock
Purchase Plan.................... 199,168
Net proceeds from the issuance of
common stock..................... -- -- 4,942,670
Principal payments on notes
receivable....................... 549,448
Deferred compensation.............. (36,250) -- --
Amortization of deferred
compensation..................... 316,743 -- 316,743
Comprehensive income:
Unrealized gain on marketable
securities..................... -- 16,555 16,555
Net loss......................... -- -- (16,841,238)
-----------
Total comprehensive income....... -- -- (16,824,683)
--------- -------- -----------
Balances at December 31, 1999...... $(183,713) $ 8,337 $13,148,406
========= ======== ===========
</TABLE>
See accompanying notes.
37
<PAGE>
FOCAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (441,545) $(13,407,346) $(16,841,238)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 1,128,923 1,158,452 954,490
Amortization of deferred compensation................... 318,279 304,659 316,743
Interest accrued on notes receivable.................... (112,238) (103,280) (64,111)
Loss on sale of equipment, furniture and fixtures....... -- -- 828
Changes of operating assets and liabilities:
Accrued interest receivable........................... (42,790) (158,686) 283,141
Contract revenues receivable.......................... (2,046,641) 2,046,641 --
Accounts receivable................................... -- (587,380) 534,801
Inventories........................................... (566,989) (370,028) (636,917)
Prepaid expenses and other assets..................... (173,837) 233,632 (176,026)
Accounts payable...................................... 1,075,501 (471,520) (376,051)
Accrued liabilities................................... 589,712 297,657 (138,484)
Deferred revenue...................................... 94,667 (200,000) (550,000)
Other assets.......................................... (647) (672) (657)
Notes receivable...................................... 33,908 164,318 74,800
----------- ------------ ------------
Net cash used in operating activities....................... (143,697) (11,093,553) (16,618,681)
INVESTING ACTIVITIES
Purchase of marketable securities........................... (9,589,782) (27,762,163) (7,774,937)
Sale and maturity of marketable securities.................. 9,929,811 17,370,386 19,904,941
Purchase of property and equipment.......................... (2,326,008) (1,130,337) (1,143,954)
----------- ------------ ------------
Net cash provided by (used in) investing activities......... (1,985,979) (11,522,114) 10,986,050
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net................. 22,510,726 3,549,500 4,942,670
Proceeds from lease financing............................... 2,029,382 1,077,336 1,066,426
Principal payments on capital lease obligations............. (1,065,126) (1,112,432) (1,084,633)
Principal payments on notes receivable...................... -- 215,001 549,449
Proceeds from the issuance of common stock under the
employee stock purchase plan.............................. -- 472,957 199,168
Proceeds from exercise of stock options..................... -- 119,464 189,512
----------- ------------ ------------
Net cash provided by financing activities................... 23,474,982 4,321,826 5,862,592
-----------------------------------------
Net increase (decrease) in cash and cash equivalents........ 21,345,306 (18,293,841) 229,961
Cash and cash equivalents at beginning of the year.......... 5,465,471 26,810,777 8,516,936
----------- ------------ ------------
Cash and cash equivalents at end of the year................ $26,810,777 $ 8,516,936 $ 8,746,897
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Property acquired under capital lease obligations....... $ 379,639 $ -- $ --
=========== ============ ============
Interest paid........................................... $ 129,022 $ 212,323 $ 199,563
=========== ============ ============
</TABLE>
See accompanying notes.
38
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Focal, Inc. (the Company) develops, manufactures and commercializes
synthetic, absorbable surgical sealants based on the Company's proprietary
polymer technology. The Company's family of FOCALSEAL surgical sealant products
is currently being developed for use inside the body to seal air and fluid leaks
resulting from lung, neurological, cardiovascular and gastrointestinal surgery.
REVERSE STOCK SPLIT
On October 16, 1997, the Board of Directors approved a 1 for 3.25 reverse
stock split of common shares, effected in the form of a reverse stock dividend
which became effective on December 11, 1997. All common share and per common
share amounts included in the accompanying financial statements and notes
thereto have been restated to give effect to a 1 for 3.25 reverse stock split.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents include funds held in investments with original
maturities of three months or less. Marketable securities consist of investments
in agencies of the U.S. government, investment grade corporate notes and other
investments with original maturities of greater than three months.
The Company determines the appropriate classification of cash equivalents
and marketable securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company has classified such
holdings as available-for-sale securities, which are carried at fair value, with
unrealized gains and losses reported as a separate component of stockholders'
equity.
CONCENTRATION OF CREDIT RISK
The Company invests its cash equivalents and marketable securities with
institutions that have strong credit ratings. The Company has developed
guidelines relative to investment risk and liquidity.
All product revenues, substantially all collaborative research revenues and
all accounts receivable are derived from one customer.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of financial instruments held by the Company, which include
cash equivalents, accounts receivable, accounts payable and accrued expenses,
approximate fair value due to their short duration.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
39
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over estimated useful lives of 3-5 years. Property and
equipment under capital leases are amortized using the straight-line method over
the lease term, typically 4 years.
REVENUE RECOGNITION
Revenues from collaborative research agreements are recognized as earned
upon the incurrence of reimbursable expenses or the achievement of certain
milestones. Payments received in advance of research performed are designated as
deferred revenue. Reimbursable expenses incurred or milestones achieved but not
yet reimbursed are designated as contract revenues receivable.
Product revenues are recognized upon shipment to the customer (see Note 8).
RESEARCH AND DEVELOPMENT COSTS AND PATENT COSTS
All research and development costs, including the cost of acquiring patents
and licensing fees paid in connection with university technology licensing
agreements, are expensed as incurred.
STOCK BASED COMPENSATION
The Company accounts for its stock based compensation arrangements under the
provisions of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES."
"ACCOUNTING FOR STOCK-BASED COMPENSATION." The Company has adopted the
disclosure provisions only of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (FAS 123).
INCOME TAXES
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and income tax basis of assets and liabilities as well as net
operating loss carryforwards and are measured using the enacted tax rates and
laws that will be in effect when the differences reverse. Deferred tax assets
are reduced by a valuation allowance to reflect the uncertainty associated with
their ultimate realization.
BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, EARNINGS PER
SHARE. Basic net loss per share is computed based on the weighted average number
of shares of common stock outstanding. Diluted net loss per share does not
differ from basic net loss per share since potential common shares to be issued
upon exercise of stock options are anti-dilutive for all periods presented. Pro
forma net loss per share for 1997 is computed using the weighted average number
of outstanding common shares and convertible preferred shares, assuming
conversion at date of issuance. Historical earnings per share for 1997 has not
been presented since such amounts are not deemed meaningful due to the
significant change in the Company's capital structure that occurred in
connection with the initial public offering in 1997.
40
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Investments and Hedging Activities," which was
amended by Financial Accounting Standards Board Statement No. 137, which
deferred the adoption of FAS 133 until fiscal years beginning after June 15,
2000. Focal does not expect the implementation of this statement to have a
significant impact on its results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), Revenue Recognition in Financial Statements,
which provides interpretative guidance on various matters concerning revenue
recognition. SAB 101 had no impact on the 1999 results of operations, however,
the Company is still evaluating the potential future effects of applying SAB
101, particularly regarding future licensing and distribution upfront payments,
if any.
2. MARKETABLE SECURITIES
Available-for-sale marketable securities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. government securities due within one
year......................................... $ 1,000,000 $ 490 $ 0 $ 1,000,490
Corporate notes due within one year............ 15,837,508 5,384 (14,091) 15,828,801
----------- ------ -------- -----------
Total debt securities included in marketable
securities................................... $16,837,508 $5,874 $(14,091) $16,829,291
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate notes due within one year.............. $4,707,503 $8,339 $ -- $4,715,842
---------- ------ ---- ----------
Total debt securities included in marketable
securities..................................... $4,707,503 $8,339 $ -- $4,715,842
========== ====== ==== ==========
</TABLE>
Amortized cost basis was used in computing the cost of marketable securities
sold.
3. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Purchased parts and subassemblies..................... $219,298 $ 146,906
Work in process....................................... 672,928 1,265,623
Finished goods........................................ 44,791 161,405
-------- ----------
$937,017 $1,573,934
======== ==========
</TABLE>
41
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Leasehold improvements............................... $1,118,916 $1,187,801
Laboratory equipment................................. 4,678,566 5,530,008
Office equipment, computers and software............. 1,157,125 897,351
Furniture and fixtures............................... 613,828 626,793
---------- ----------
$7,568,435 $8,241,953
Less accumulated depreciation and amortization....... (4,886,037) (5,370,919)
---------- ----------
$2,682,398 $2,871,034
========== ==========
</TABLE>
5. ACCRUED LIABILITIES
ACCRUED LIABILITIES CONSIST OF THE FOLLOWING AT DECEMBER 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Accrued university research funding and outside
scientific services................................ $1,022,264 $ 687,167
Accrued payroll and related expenses................. 669,140 620,145
Accrued professional fees............................ 217,900 250,492
Accrued other........................................ 843,055 1,056,071
---------- ----------
$2,752,359 $2,613,875
========== ==========
</TABLE>
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of preferred
stock, $.01 par value, in one or more series, each of such series to have such
rights and preferences, including voting rights, dividend rights, conversion
rights, redemption priveleges and liquidation preferences, as shall be
determined by the Board of Directors.
In 1997, the Board of Directors of the Company adopted a Preferred Shares
Rights Agreement (the "Rights Plan") designed to protect shareholders from
unsolicited attempts to acquire the Company on terms that do not maximize
stockholder value. In connection with the Rights Plan, the Board of Directors
will designate a certain number of shares of the Company's preferred stock as
Series A Participating Preferred Stock. Under the Rights Plan, a right to
purchase one one-thousandth of one share of the Series A Preferred Stock (the
"Rights") will be distributed as a dividend for each share of common stock. The
terms of the Rights Plan provide that the Rights will become exercisable upon
the earlier of the tenth day after any person or group acquires 15% or more of
the Company's outstanding common stock or the tenth business day after any
person or group commences a tender or exchange offer which would, if completed,
result in the offer or owning 15% or more of the Company's outstanding common
stock. The Rights may generally be redeemed by action of the Board of Directors
at $.001 per Right at any time prior
42
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. STOCKHOLDERS' EQUITY (CONTINUED)
to the tenth day following the public announcement that any person or group has
acquired 15% or more of the outstanding common stock of the Company. The Rights
expire on January 28, 2007. The Rights have certain anti-takeover effects in
that they would cause substantial dilution to the party attempting to acquire
the Company. In October 1999, the Board of Directors approved an amendment to
the Rights Plan which provides that certain purchases of voting stock by Genzyme
Corporation will not trigger the exercisability of the Rights under the Rights
Plan.
In certain circumstances, the Rights allow the Company's stockholders to
purchase the number of shares of the Company's common stock having a market
value at the time of the transaction equal to twice the exercise price of the
Rights, or in certain circumstances, the stockholders would be able to acquire
that number of shares of the acquirer's common stock having a market value, at
the time of the transaction, equal to twice the exercise price of the Rights.
The Company will continue to issue Rights with future issuances of common stock.
WARRANTS
Prior to the initial public offering, the Company granted warrants to secure
lease financing, to raise capital, to obtain letters of credit and as a form of
compensation to various consultants. At December 31, 1999, the Company has
common stock warrants outstanding covering 43,782 shares at exercise prices
ranging from $5.66 to $12.03 per share expiring at various dates through
February 2006.
STOCK OPTIONS
The 1992 Incentive Stock Plan ("the 1992 Plan") authorizes the grant of
incentive stock options and nonqualified stock options to employees and
nonqualified stock options to consultants. A total of 2,600,000 shares have been
reserved for issuance under the 1992 Plan. The exercise price of incentive stock
options granted under the 1992 Plan may not be less than 100% of the fair market
value of the common stock as of the grant date, as determined by the Board of
Directors. The exercise price of nonqualified stock options may not be less than
85% of the fair market value of the common stock as of the grant date. Options
issued under the 1992 Plan generally have a four year vesting period, unless
otherwise determined by the Board of Directors. The term of stock options
granted under the 1992 Plan may not exceed ten years. Subject to the approval of
the Board of Directors, the Plan allows option holders the right to immediately
exercise outstanding options (both vested and unvested), with the subsequent
share issuances being subject to a repurchase option by the Company under
certain conditions according to the original vesting schedule and exercise
price.
In May 1999, the Company adopted the 1999 Stock Incentive Plan ("the 1999
Plan"). A total of 875,000 shares have been reserved for issuance under the 1999
Plan. The 1999 Plan authorizes the grant of incentive and nonqualified stock
options to officers, directors, consultants and advisors of the Company. The
Board establishes the exercise price at the time an option is granted and
specifies such price in the applicable option agreement. Options issued under
the 1999 Plan generally have a four year vesting period, unless otherwise
determined by the Board of Directors. The term of stock options granted under
the 1999 Plan may not exceed ten years.
For certain options granted under the 1992 Plan, the Company recognizes as
compensation expense the excess of the deemed value for accounting purposes of
the common stock issuable upon exercise of
43
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. STOCKHOLDERS' EQUITY (CONTINUED)
such options over the aggregate exercise price of such options. In connection
with these grants, $36,250 of deferred compensation was recorded in the year
ended December 31, 1999. This compensation expense is being amortized over the
vesting period of each option.
In January 1997, the Board of Directors approved a program under which
directors, executive officers and certain other key employees were permitted to
exercise options to purchase 1,494,775 common shares in exchange for four-year
notes with an interest rate of 6% per annum as permitted by the 1992 Plan. The
notes are full recourse and principal and accrued interest are payable upon the
maturity of the note. Under certain conditions, the shares are subject to a
repurchase option by the Company according to the original vesting schedule. At
December 31, 1999, a total of 75,777 shares issued under the 1992 Plan are
subject to the Company's repurchase option and $828,131 of notes receivable are
outstanding and included in the stockholders' equity section of the accompanying
financial statements.
The 1997 Employee Stock Purchase Plan (the Purchase Plan) has 200,000 shares
of common stock reserved for issuance thereunder. Under the Purchase Plan,
eligible employees may purchase common shares at a price per share equal to 85%
of the lower of the fair market value of the common stock at the beginning of a
two year offering period or the end of each six month purchase period included
in such offering period. Participation in the offering period is limited to 15%
of the employee's compensation or $25,000 in any calendar year. The first
offering period commenced in January 1998 and the Purchase Plan will terminate
in 2007.
The 1997 Non-Employee Director Option Plan (the "Director Plan") has 150,000
shares of common stock reserved for issuance thereunder. Effective with the 1998
annual meeting of stockholders and annually thereafter, each nonemployee
director is automatically be granted a nonstatutory option to purchase 5,000
shares of common stock. The exercise price of each of these options will be
equal to the fair market value of the common stock on the date of grant. Each
option granted under the Director Plan will vest on a cumulative monthly basis
over a four-year period. The Director Plan will terminate in September 2007,
unless terminated earlier in accordance with the provisions of the Director
Plan.
44
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. STOCKHOLDERS' EQUITY (CONTINUED)
The following table presents the activity of all of the Company's stock
plans for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------- ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- -------------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year......................... 1,712,650 $1.14 497,267 $4.42 780,362 $7.55
Granted........................ 313,058 6.40 394,778 9.87 1,171,392 4.40
Exercised...................... (1,510,287) 1.13 (92,578) 1.26 (53,675) 1.66
Canceled....................... (18,154) 2.01 (19,105) 4.66 (174,805) 8.18
---------- ----- ------- ----- --------- -----
Outstanding at end of year..... 497,267 $4.42 780,362 $7.55 1,723,274 $5.53
========== ===== ======= ===== ========= =====
Options exercisable at end of
year......................... 184,052 $2.74 189,439 $5.07 310,721 $6.27
========== ===== ======= ===== ========= =====
Weighted average fair value per
share of options granted
during the year.............. $3.69 $5.84 $2.55
===== ===== =====
</TABLE>
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
- --------------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.00-$3.875 449,022 9.1 $ 3.46 96,405 $ 2.16
$4.0625-$4.375 697,046 9.8 4.35 23,886 4.06
$ 4.75-$8.25 454,786 8.7 7.44 152,236 7.52
$ 8.625-$18.00 122,420 8.4 12.71 38,194 13.01
--------- -------
1,723,274 310,721
========= =======
</TABLE>
45
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. STOCKHOLDERS' EQUITY (CONTINUED)
FAS 123 DISCLOSURES
If the compensation cost for the option plans had been determined based on
the fair value at the grant date for grants in 1997, 1998 and 1999, consistent
with the provisions of FAS 123, the pro forma net loss and net loss per share
for 1997, 1998 and 1999, would be as follows (in thousands except per share
amounts):
<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............................ $ (442) $ (792) $(13,407) $(14,121) $(16,841) $(17,914)
Basic and diluted net loss per
share............................. $(0.04) $(0.08) $ (1.01) $ (1.06) $ (1.24) $ (1.32)
</TABLE>
The fair value of options and warrants issued at the date of grant were
estimated using the Black-Scholes model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
OPTIONS GRANTED
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Expected life (years)....................................... 5.0 5.0 5.0
Interest rate............................................... 6.0 4.5 6.4
Volatility.................................................. 60% 66% 60%
</TABLE>
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.
The effects on 1997, 1998 and 1999 pro forma net loss and net loss per share
of expensing the estimated fair value of stock options are not necessarily
representative of the effects on reporting the results of operations for future
years as the periods presented include only one, two and three years,
respectively, of option grants under the Company's plans.
COMMON STOCK RESERVED FOR ISSUANCE
At December 31, 1999, the Company has reserved 3,868,782 shares of common
stock for issuance upon the exercise of all outstanding warrants and options
authorized under the Company's various stock plans.
7. COMMITMENTS
The Company has a ten-year lease agreement expiring in 2004 for its
principal facility. In connection with this lease, the lessor funded
approximately $4,367,000 of leasehold improvements which are reimbursed as part
of the minimum lease payments. The Company has certain options to purchase the
building and the leasehold improvements.
The Company leases the majority of its equipment, furniture and fixtures
under capital leases. Included in property and equipment at December 31, 1998
and 1999, respectively, were assets with a cost basis of $7,253,337 and
$7,994,045 acquired under capital leases. Accumulated amortization as of
December 31, 1998 and 1999, respectively, related to these assets was $4,742,226
and $5,229,830.
46
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. COMMITMENTS (CONTINUED)
As of December 31, 1999, the Company's future minimum lease payments under
capital and operating leases are as follows:
<TABLE>
<CAPTION>
BUILDING
CAPITAL OPERATING
LEASES LEASE
---------- ----------
<S> <C> <C>
2000................................................. $1,065,569 $1,147,974
2001................................................. 808,956 1,147,974
2002................................................. 459,640 1,147,974
2003................................................. 181,500 1,147,974
2004................................................. -- 860,980
Thereafter........................................... -- --
---------- ----------
Total minimum lease payments......................... 2,515,665 $5,452,876
==========
Less interest........................................ 256,534
----------
Present value of minimum lease payments.............. 2,259,131
Less capital lease obligations due within one year... 926,041
----------
Capital lease obligations--long-term portion......... $1,333,090
==========
</TABLE>
Total rent expense was $1,090,332, $1,114,389 and $1,126,917 in 1997, 1998,
and 1999, respectively.
The Company has a lease commitment totaling $1.5 million from a leasing
company for the financing of equipment and leasehold improvements. Under this
agreement, the term for financing equipment purchases and leasehold improvements
is 48 months and 36 months, respectively. The interest rate is established as of
the commencement date for each new drawdown, based on a treasury security index,
and is fixed for the term of the financing. There is a fixed percentage buy-out
provision at the end of the lease period. The lease financings are
collateralized by the equipment and leasehold improvements being financed. As of
December 31, 1999, there were $1,066,000 in outstanding borrowings under this
financing arrangement. There are no financial covenants in connection with this
lease financing.
8. RESEARCH AND DEVELOPMENT, LICENSING AND MARKETING AND DISTRIBUTION AGREEMENTS
In October 1999, the Company entered into a Marketing and Distribution
Agreement with Genzyme Surgical Products ("Genzyme Surgical"), a division of
Genzyme Corporation. Genzyme Surgical was granted exclusive marketing and
distribution rights to Focal's surgical sealant products for lung surgery,
cardiovascular surgery and gastrointestinal surgery in North America. The
Company retained manufacturing rights to these products. Under the terms of the
agreement, the Company will be reimbursed for its cost of manufacturing product
plus 50% of the gross margin generated from Genzyme Surgical's sales of the
Company's sealant products to customers. The term of the agreement is for ten
years, with two five year renewal options which are automatic if Genzyme
Surgical meets certain minimum performance standards.
In addition to the Marketing and Distribution Agreement, in October 1999
Focal and Genzyme Surgical also entered into a Stock Purchase Agreement, with up
to $20 million in purchases of the Company's common stock being committed by
Genzyme Surgical over an eighteen month period, subject
47
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. RESEARCH AND DEVELOPMENT, LICENSING AND MARKETING AND DISTRIBUTION AGREEMENTS
(CONTINUED)
to certain specified conditions. In November 1999, Genzyme Surgical purchased
810,000 shares of the Company's common stock for $5 milion, representing a 25%
premium to the ten day average trading price of the Company's common stock
immediately prior to the purchase. An additional purchase of $5 million may be
made in April 2000, subject to the satisfaction of specified conditions. The
purchase will be priced at (i) a 25% premium to the twenty day average trading
price of the Company's common stock prior to closing if the trading average is
less than $6.40, (ii) at $8.00 per share if the trading average is between $6.40
and $8.00 and (iii) at the twenty day trading average if such trading average
exceeds $8 per share. The final two purchases of $5 million each are both
contingent on, among other things, the Company receiving FDA approval of its PMA
for FocalSeal-L surgical sealant for lung surgery indications. These final two
investments will be priced based upon the then current market value of the
common stock and are at the Company's option.
In January 1997, the Company entered into a distribution and licensing
agreement with the Ethicon, Inc. division of Johnson & Johnson ("Ethicon") for
the research, development and commercialization of the Company's surgical
sealant products. Ethicon received marketing rights to all territories outside
North America in exchange for (a) a one-time, nonrefundable payment to the
Company for past research and development expenditures; (b) fixed quarterly
funding for two years to be applied toward future research and development
costs; (c) funding of certain additional research and development expenses;
(d) payments upon achievement of specific milestones; and (e) specified
percentages of product sales, if any, representing a combined royalty and
product cost payment. The Company retained worldwide manufacturing rights and
North American marketing rights. The term of the Ethicon Agreement extends until
January 2007, subject to one year extensions at Ethicon's discretion. In
addition, Ethicon may terminate the agreement at any time after January 2000
upon 12 months' prior written notice with or without cause. In August 1998, the
Ethicon Agreement was expanded to include research and development funding for a
cardiovascular sealant.
The Company has collaborative research agreements and technology licensing
agreements with certain universities. The Company has worldwide exclusive
licenses to the technologies developed under these agreements, in exchange for
funding certain research and payment of licensing fees and royalties on
applicable product sales. Research and development expense and licensing fees
incurred under these agreements during the years ended December 31, 1997, 1998,
and 1999, totaled $144,000, $150,000, and $268,000, respectively. In connection
with these agreements, the Company has research funding commitments totaling
approximately $134,000 at December 31, 1999.
9. INCOME TAXES
Due to net losses incurred by the Company in each year since its inception,
no provision for income taxes has been recorded. At December 31, 1999, the
Company had tax net operating loss carryforwards of approximately $72.1 million
and federal and state research and development tax credit carryforwards of
approximately $4.1 million which expire at various times through 2019.
48
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
9. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets as of
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating losses...................................... $22,468,000 $27,418,000
Research and development tax credits...................... 3,290,000 4,067,000
Other..................................................... 885,000 709,000
----------- -----------
26,643,000 32,194,000
Valuation allowance....................................... (26,643,000) (32,194,000)
----------- -----------
Net deferred tax assets..................................... $ -- $ --
=========== ===========
</TABLE>
For financial reporting purposes, a valuation allowance has been provided
since realization of such deferred tax assets is uncertain at this time. The
valuation allowance increased by $5,551,000 during 1999, due primarily to the
increase in tax credits and net operating loss carryforwards. The future
utilization of the net operating loss carryforwards may be subject to
limitations under the change in stock ownership provisions of the Internal
Revenue Code.
10. RELATED PARTY TRANSACTIONS
In connection with an employment agreement, interest-bearing loans
aggregating $120,000 were made to an officer of the Company. Principal and
accrued interest on this loan were paid in full during 1998. Other officer and
nonofficer employee notes receivable, certain of which notes contain similar
repayment terms as those described above, are outstanding and included in notes
receivable from related parties in the accompanying financial statements.
Certain participants in the Company's preferred stock financing transactions
include venture capital funds affiliated with members of the Company's board of
directors.
11. SUBSEQUENT EVENT
On February 25, 2000, the board of directors voted to increase the number of
shares reserved for issuance under the 1999 Stock Incentive Plan (the "1999
Plan") from 875,000 shares to 1,525,000 shares. The increase is subject to
approval of the Company's shareholders at the May 2000 annual meeting.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the Company's two most recently completed fiscal years there have
been no disagreements with its independent accountants on accounting and
financial disclosure matters.
49
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Except as set forth below, the information required by this item is
incorporated by reference to the information under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
definitive proxy statement to be filed with the Securities and Exchange
Commission with respect to the Company's 2000 Annual Meeting of Stockholders
(the "Proxy Statement") to be held May 24, 2000.
The executive officers, who are elected by the board of directors, and other
key employees of the Company, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Robert J. DePasqua........................ 51 President, Chief Executive Officer and
Director
S. Jack Herman............................ 51 Vice President, New Product Development
and Technical Services
Mary Lou Mooney........................... 43 Vice President, Clinical and Regulatory
Affairs & Quality
Ronald S. Rudowsky........................ 51 Vice President, Sales & Marketing
W. Bradford Smith......................... 44 Vice President, Finance and Administration
and Chief Financial Officer
Peter K. Jarrett, Ph.D.................... 43 Senior Director, Materials Research and
Development
Thomas Bromander.......................... 42 Director, Manufacturing
</TABLE>
ROBERT J. DEPASQUA has been President, Chief Executive Officer and a
Director since joining Focal in December 1999. From 1998 to 1999, he served as
President and Chief Executive Officer at Biolink, a medical device company. From
1994 to 1998, Mr. DePasqua was self-employed as a private investor and Board
member of several companies. From 1989 to 1994 , he served as President and
Chief Executive Officer at Spectranetics, a medical device company. From 1979 to
1989, Mr. DePasqua held a variety of positions at Boston Scientific Corporation,
a medical device company, including President of the Microvasive division.
Mr. DePasqua received his B.S. in Engineering from Northeastern University.
S. JACK HERMAN joined the Company as Vice President, Operations in
August 1992. He had been Vice President, New Product Development and Technical
Services since January 2000. From March 1990 to May 1992, Mr. Herman served as
President and Chief Executive Officer of Cardiopulmonary Corporation, a medical
equipment development company. From 1982 to 1990, he held various positions with
C. R. Bard, Inc., a medical device company, most recently as President of its
Critical Care Division. Mr. Herman previously held product development
management positions with Cobe Laboratories. Mr. Herman holds an M.B.A. from the
University of Colorado and a B.S. in Mechanical Engineering from the University
of Missouri.
MARY LOU MOONEY, Vice President, Clinical Affairs, Regulatory Affairs and
Quality, joined the Company in June 1993 as Director, Regulatory Affairs. In
January 1997, Ms. Mooney was promoted to her current position. From March 1991
to June 1993, she held various positions with C.R. Bard Inc., a medical device
company, most recently as Director, Regulatory Affairs and Quality Assurance for
its ventures division. Ms. Mooney has also held regulatory positions with
Cardiac Pacemakers, Inc., Biometric Research Institute, Inc. and Cordis
Corporation. Ms. Mooney holds an M.S. in Biomedical Science from Drexel
University.
50
<PAGE>
RONALD S. RUDOWSKY, Vice President, Sales & Marketing, joined the Company in
January 1994 as Director, Procedure Development. In January 1997, Mr. Rudowsky
was promoted to his current position. From June 1991 to December 1993, he was
the Director of Marketing of Ethicon Endo-Surgery, a medical device company and
a division of Johnson & Johnson. Previously, he spent 14 years in various sales
and marketing positions at Ethicon, Inc. Mr. Rudowsky holds a B.B.A. in
Marketing from Marshall University.
W. BRADFORD SMITH, Vice President, Finance and Administration and Chief
Financial Officer, joined the Company as Director of Finance in May 1993. In
March 1994, Mr. Smith was appointed to his current position. From June 1990 to
May 1993, he served as Director of Finance for CytoTherapeutics, Inc., a
biotechnology company. Prior to that, he was Director of Finance at ImmuCell
Corporation, a biotechnology company, a Financial Analyst for a division of
Lockheed Corporation and a Senior Accountant with Coopers & Lybrand. Mr. Smith
holds an M.B.A. from the University of New Hampshire and a B.S. from Tufts
University.
PETER K. JARRETT, Ph.D., Senior Director of Materials Research and
Development, joined the Company in 1993 as Senior Scientist in Materials
Research and Development. In 1996, Dr. Jarrett was promoted to the position of
Director of Materials Development and to Senior Director of Materials Research
and Development in 1998. From 1984 to 1993, Dr. Jarrett was employed by Davis &
Geck, a Tyco company primarily involved in medical devices, in various positions
including Research Fellow. Dr. Jarrett received his Ph.D. in 1983 from the
University of Connecticut in Polymer Science and received a B.A. in Chemistry
from Connecticut College.
THOMAS S. BROMANDER, Director of Manufacturing, joined the company as
Manager of Manufacturing in August 1993. Mr. Bromander was promoted to Associate
Director of Manufacturing in March 1997 and to Director of Manufacturing in
April 1998. From 1991 to 1993, he served as Advanced Engineering Manager at
Cordis Corporation (a Johnson & Johnson company), a medical device company, and
Manufacturing Manager at Abiomed, Inc., a medical device company. From 1981 to
1991, Mr. Bromander held various engineering positions at C.R. Bard, Inc., a
medical device company, including Manufacturing Engineering Manager.
Mr. Bromander received his B.S. in Mechanical Engineering from the University of
Lowell.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors--Compensation for
Directors," "--Compensation for Executive Officers," "--Report of the
Compensation Committee" and "--Compensation Committee Interlocks and Insider
Information" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Stock Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Item 8 of this Annual
Report on Form 10-K.
51
<PAGE>
1. Financial Statements:
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Independent Auditors.............................. 34
Balance Sheets as of December 31, 1998 and 1999............. 35
Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999....................................... 36
Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1998 and 1999.......................... 37
Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999....................................... 38
Notes to Financial Statements............................... 39
</TABLE>
2. Financial Statement Schedules:
All financial statement schedules are omitted because they are not
applicable or the required information is shown in the Financial Statements or
the notes thereto.
3. Exhibits:
The exhibits listed in the Exhibit Index immediately preceding the Exhibits
are filed as a part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K:
1. A Current Report on Form 8-K was filed on November 5, 1999 to report,
pursuant to Item 5, the issuance of a press release relating to the
Company entering into an agreement with Genzyme Corporation.
THE FOLLOWING TRADEMARKS OF THE COMPANY ARE MENTIONED IN THIS ANNUAL REPORT
ON FORM 10-K: FocalSeal-TM- and Focal-TM-.
52
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
<TABLE>
<S> <C> <C>
Date: March 29, 2000 FOCAL, INC.
By: /s/ ROBERT J. DEPASQUA,
-----------------------------------------
Robert J. DePasqua,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert J. DePasqua and W. Bradford Smith,
jointly and severally, his or her attorneys-in-fact, and each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President, Chief Executive March 29, 2000
/s/ ROBERT J. DEPASQUA Officer and Director
------------------------------------------- (Principal Executive
Robert J. DePasqua Officer)
Vice President, Finance and March 29, 2000
/s/ W. BRADFORD SMITH Chief Financial Officer
------------------------------------------- (Principal Financial and
W. Bradford Smith Accounting Officer)
/s/ HENRY BREM, M.D. Director March 29, 2000
-------------------------------------------
Henry Brem, M.D.
/s/ JANET EFFLAND Director March 29, 2000
-------------------------------------------
Janet Effland
/s/ ROBERT LANGER, PH.D. Director March 29, 2000
-------------------------------------------
Robert Langer, Ph.D.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JESSE I. TREU Director March 29, 2000
-------------------------------------------
Jesse I. Treu, Ph.D.
/s/ DONALD GRILLI Director March 29, 2000
-------------------------------------------
Donald Grilli
</TABLE>
54
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<C> <S>
3.2 (1) Restated Certificate of Incorporation of the Company.
3.3 (1) Bylaws of the Company as amended.
4.2 (1) Specimen Common Stock Certificate.
10.1 (1) Form of Indemnification Agreement between the Company and
each of its directors and officers.
10.3 (1)* 1997 Directors' Option Plan and forms of agreements
thereunder.
10.4 (1) Restated Investors Rights Agreement dated April 12, 1996
among the Company and certain stockholders of the Company.
10.5 (1) Lease Agreement dated April 4, 1994 between the Company and
The Mutual Life Insurance Company of New York relating to
lease of facility located at 4 Maguire Road, Lexington, MA,
as amended to date.
10.6 (1) Master Lease Agreement dated October 30, 1992 between the
Company and Comdisco, Inc.
10.7 (1) Master Lease Agreement dated February 28, 1994 between the
Company and MMC/GATX Limited Partnership I.
10.8 (1) Master Loan and Security Agreement dated April 18, 1997
between the Company and Transamerica Leasing.
10.9 (1)+ Patent and Technology License Agreement dated June 11, 1992
between the Company and University of Texas.
10.10 (1)+ Exclusive License Agreement dated August 7, 1992 among the
Company, Marvin Slepian, M.D. and Endoluminal Therapeutics,
Inc.
10.11 (1)+ Distribution, License and Supply Agreement dated January 2,
1997 between the Company and Ethicon, Inc.
10.12 (1) Agreement for Consulting Services dated November 15, 1991
between the Company and Robert Langer, Ph.D.
10.13 (1) Agreement for Consulting Services dated August 7, 1992
between the Company and Marvin Slepian, M.D.
10.14 (1) Form of Restricted Stock Purchase Agreement and schedule of
current officers and directors party thereto.
10.15 (1) Form of Preferred Shares Rights Agreement between the
Company and Norwest Bank Minnesota N.A.
10.18+ Marketing and Distribution Agreement between Focal and
Genzyme Surgical Products dated October 21, 1999.
10.19 Stock Purchase Agreement between Focal and Genzyme
Corporation dated October 21, 1999.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<C> <S>
10.20 Registration Rights Agreement between Focal and Genzyme
Corporation dated October 21, 1999.
23.1 Consent of Ernst & Young LLP, independent auditors.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 333-38379, originally filed with the Securities and
Exchange Commission on October 21, 1997.
* Management contract or compensatory plan filed as an exhibit pursuant to
Items 14(a) and 14(c) of Form 10-K.
+ Confidential treatment requested as to certain portions.
56
<PAGE>
Exhibit 10.18
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
DISTRIBUTION AND MARKETING COLLABORATION AGREEMENT
between
FOCAL, INC.
and
GENZYME CORPORATION
October 21, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
ARTICLE 1 DEFINITIONS.................................................................................1
ARTICLE 2 COLLABORATION COMMITTEE.....................................................................8
2.1 COLLABORATION COMMITTEE.....................................................................8
2.2 MEETINGS....................................................................................8
2.3 SPECIFIC RESPONSIBILITIES OF THE COLLABORATION
COMMITTEE...................................................................................9
2.4 QUORUM; VOTING..............................................................................9
ARTICLE 3 DISTRIBUTION...............................................................................10
3.1 APPOINTMENT OF GENZYME AS EXCLUSIVE DISTRIBUTOR............................................10
3.2 LICENSE TO USE TRADEMARKS..................................................................11
3.3 ACCEPTANCE OF APPOINTMENT..................................................................11
3.4 FOCAL RETAINED RIGHTS......................................................................11
3.5 NO SALES OUTSIDE THE TERRITORY.............................................................12
ARTICLE 4 PROMOTION AND SALE.........................................................................12
4.1 SALES AND PROMOTIONAL EFFORTS AND PERSONNEL................................................12
4.2 ANNUAL SALES PLANS, SALES REPORTS AND ANNUAL
SALES FORECASTS............................................................................13
4.3 INTERNAL AND EXTERNAL TRAINING.............................................................14
4.4 ADVERTISING AND PROMOTIONAL MATERIALS......................................................15
4.5 SYSTEM PACKAGING...........................................................................16
4.6 MEDICAL CONFERENCES........................................................................17
4.7 MEDICAL INQUIRIES..........................................................................17
4.8 SALES ADMINISTRATION.......................................................................17
4.9 PROMOTION AND MARKETING EXPENSES...........................................................17
ARTICLE 5 PRODUCT RESEARCH AND DEVELOPMENT, MANUFACTURING
AND SERVICING..............................................................................18
5.1 COLLABORATION COMMITTEE ROLE...............................................................18
5.2 RESEARCH AND DEVELOPMENT...................................................................18
5.3 MANUFACTURING..............................................................................18
5.4 SUPPLY SHORTAGES...........................................................................18
5.5 PASS-THROUGH WARRANTY AND SERVICE FOR REUSABLE
PRODUCTS...................................................................................21
5.6 GENERAL COMMERCIALIZATION ACTIVITIES.......................................................21
5.7 RESPONSIBILITIES OF GENZYME................................................................22
ARTICLE 6 PRODUCT SUPPLY, FORECASTS, PURCHASE PRICE AND
SHIPMENT...................................................................................22
6.1 SUPPLY OF THE PRODUCTS.....................................................................22
i
<PAGE>
6.2 DEMONSTRATION SYSTEMS......................................................................22
6.3 ANNUAL SALES FORECASTS.....................................................................23
6.4 PURCHASE MINIMUMS..........................................................................24
6.5 PURCHASE ORDERS AND PROCEDURES.............................................................25
6.6 PURCHASE PRICE.............................................................................25
6.7 PAYMENT TERMS..............................................................................27
6.8 FOCAL SHIPMENT.............................................................................28
6.9 TITLE TO THE PRODUCTS......................................................................28
6.10 TAXES......................................................................................28
6.11 PRODUCT WARRANTY...........................................................................29
6.12 QUALITY ASSURANCE; NONCONFORMING PRODUCTS..................................................30
6.13 SPECIFICATIONS AND SYSTEM EXPIRATION.......................................................30
6.14 RESALE PRICING.............................................................................31
ARTICLE 7 REGULATORY MATTERS.........................................................................31
7.1 SYSTEM AND DISTRIBUTION APPROVALS..........................................................31
7.2 POST MARKETING STUDIES.....................................................................31
7.3 COMMUNICATION WITH REGULATORY AUTHORITIES..................................................31
7.4 GOVERNMENTAL INSPECTIONS...................................................................32
7.5 SYSTEM COMPLAINTS..........................................................................32
7.6 POST MARKETING SURVEILLANCE................................................................32
7.7 SYSTEM RECALLS.............................................................................32
ARTICLE 8 OWNERSHIP, CONFIDENTIALITY AND PUBLIC INFORMATION..........................................33
8.1 OWNERSHIP..................................................................................33
8.2 USE OF NON-CLINICAL AND CLINICAL DATA......................................................33
8.3 CONFIDENTIALITY............................................................................33
8.4 COVENANT NOT TO COMPETE....................................................................33
8.5 PUBLIC DISCLOSURES.........................................................................34
8.6 PUBLICATIONS...............................................................................34
8.7 OTHER PARTIES..............................................................................34
ARTICLE 9 TRADEMARKS.................................................................................35
9.1 TRADEMARK REGISTRATION.....................................................................35
9.2 NO RIGHTS IN TRADEMARKS, TRADE NAMES, LOGOS OR
DESIGNATIONS...............................................................................35
9.3 TRADEMARKS AFTER TERMINATION OR EXPIRATION.................................................35
ARTICLE 10 PATENT AND TRADEMARK INDEMNIFICATION AND
LITIGATION.................................................................................36
10.1 PATENT AND TRADEMARK INDEMNITY.............................................................36
10.2 LIMITATION OF INDEMNITY....................................................................36
10.3 INFRINGEMENT BY THIRD PARTIES..............................................................37
10.4 THIRD PARTY LICENSE AGREEMENTS.............................................................37
ARTICLE 11 TERM AND TERMINATION.......................................................................38
11.1 INITIAL TERM...............................................................................38
ii
<PAGE>
11.2 EXTENSION TERM.............................................................................38
11.3 TERMINATION BY EITHER PARTY................................................................38
11.4 TERMINATION BY GENZYME.....................................................................39
11.5 TERMINATION BY FOCAL.......................................................................39
11.6 TERMINATION BY FOCAL AND GENZYME...........................................................40
ARTICLE 12 ARIGHTS AND DUTIES UPON TERMINATION OR EXPIRATION..........................................40
12.1 MONIES PAID OR DUE.........................................................................40
12.2 TERMINATION OF DISTRIBUTION RIGHTS.........................................................40
12.3 REMAINING SYSTEMS..........................................................................40
12.4 TRANSFER OF APPROVALS AND TRANSITION ASSISTANCE............................................40
12.5 SURVIVAL OF RIGHTS.........................................................................41
12.6 RIGHTS NOT EXCLUSIVE.......................................................................41
ARTICLE 13 REPRESENTATIONS AND WARRANTIES; COVENANTS..................................................41
13.1 AUTHORIZATION..............................................................................41
13.2 INTELLECTUAL PROPERTY RIGHTS...............................................................42
13.3 COMPLIANCE WITH APPLICABLE LAWS............................................................42
ARTICLE 14 INDEMNIFICATION, LIMITATION OF LIABILITY AND
INSURANCE..................................................................................42
14.1 INDEMNIFICATION BY GENZYME.................................................................42
14.2 INDEMNIFICATION BY FOCAL...................................................................42
14.3 CONDITIONS TO INDEMNIFICATION..............................................................42
14.4 SETTLEMENTS................................................................................43
14.5 LIMITATION OF LIABILITY....................................................................43
14.6 INSURANCE..................................................................................43
ARTICLE 15 IMPROVEMENT PRODUCTS.......................................................................44
15.1 IMPROVEMENT PRODUCTS.......................................................................44
ARTICLE 16 MISCELLANEOUS..............................................................................44
16.1 FORCE MAJEURE; OTHER EVENTS................................................................44
16.2 GOVERNING LAW..............................................................................45
16.3 GOVERNMENTAL APPROVALS AND MODIFICATION BY
LEGISLATION................................................................................45
16.4 INJUNCTIVE RELIEF..........................................................................45
16.5 DISPUTE RESOLUTION.........................................................................45
16.6 SEVERABILITY AND CLAIMS....................................................................46
16.7 ENTIRE AGREEMENT...........................................................................46
16.8 AMENDMENT..................................................................................47
16.9 NOTICES....................................................................................47
16.10 BINDING EFFECT AND ASSIGNMENT..............................................................48
16.11 HEADINGS AND REFERENCES....................................................................48
16.12 NO AGENCY..................................................................................48
16.13 COUNTERPARTS...............................................................................48
</TABLE>
iii
<PAGE>
DISTRIBUTION AND MARKETING COLLABORATION AGREEMENT
Distribution and Marketing Collaboration Agreement (this "Agreement")
made this 21st day of October, 1999, between Focal, Inc., a Delaware corporation
("Focal"), and Genzyme Corporation, a Massachusetts corporation ("Genzyme").
WHEREAS, Focal develops, manufactures and markets synthetic,
absorbable, liquid surgical wound-closure sealants based on Focal's proprietary
polymer technology, including without limitation the FocalSeal(R)-L and
FocalSeal(R)-S products;
WHEREAS, Genzyme Surgical Products ("GSP"), a tracking stock division
of Genzyme Corporation, is a leading medical products company with experience
and skills in promoting, marketing and selling products for use within the Field
(as hereafter defined), including biomaterials similar to the products
developed, manufactured and marketed by Focal;
WHEREAS, Genzyme, acting through GSP, desires to market, sell and
distribute the Systems in the Territory for use in the Field following the
issuance of applicable Regulatory Approvals (each hereafter defined); and
WHEREAS, Focal and Genzyme are prepared to enter into a distribution
and marketing collaboration agreement on the terms and conditions set forth
below.
NOW, THEREFORE, in consideration of the covenants and obligations
expressed herein, and intending to be legally bound, the parties agree as
follows:
ARTICLE 1
DEFINITIONS
1.1 "Affiliate" shall mean any corporation, limited liability company,
firm, partnership or other entity, whether de jure or de facto, which, at the
time in question, is directly or indirectly owned by or controlled by, or under
common control with, Focal or Genzyme, as the case may be. For the purposes of
this definition, a party shall be deemed to have "control" if such party (a)
owns, directly or indirectly, 50% or more of (i) the voting stock or
shareholders' equity of a corporation, (ii) the partnership interests in a
partnership, (iii) the membership interests in a limited liability company, or
(iv) in the case of any other entity, the right to receive 50% or more of either
the profits or the assets upon dissolution, or (b) possesses, directly or
indirectly, the power to direct or cause the direction of the management and
policies of the corporation or other entity or the power to elect more than 50%
of the members of the governing body of the corporation, limited liability
company or other entity.
1.2 "Annual Sales Plan" shall have the meaning ascribed to it in
Section 4.2(a) of this Agreement.
1.3 "Annual Sales Report" shall have the meaning ascribed to it in
Section 4.2(f) of this Agreement.
<PAGE>
1.4 "Annual Sales Forecast" shall have the meaning ascribed to it in
Section 6.3(a) of this Agreement.
1.5 "Applicators" shall mean the devices, other than Light Sources,
Light Wands and Lamp Modules, heretofore or hereafter used or developed for the
delivery of the Sealants and the Primers in the Field, including but not limited
to, syringes, syringe extensions, flow through brushes, plungers and other
components.
1.6 "Average Net Sales Price" shall mean, with respect to sales of each
Product in a given country in the Territory during any applicable period, (i)
the aggregate gross invoice price for each Product actually sold by Genzyme to
Third Parties less, to the extent actually incurred, charged or credited to the
Third Party and identified on the invoice or other documentation related to the
sale, (ii) the sum of (a) trade or cash discounts, quantity discounts, rebates
and other price reductions, (b) Product returns; provided, that no charge may be
taken for the return by Third Parties of Obsolete Products without the approval
of the Collaboration Committee, (c) bad debt write-offs, (d) packaging, shipping
and other delivery charges (excluding any such charges included in Manufacturing
Costs), (e) sales, value added, excise and other direct taxes, and (f) any
losses or charges related to foreign currency exchange for Products purchased by
Genzyme from Focal in Dollars and sold by Genzyme in a foreign currency, and the
resulting difference between (i) and (ii) divided by (iii) the number of units
of the relevant Product sold during the period. Average Net Sales Price shall be
determined on a Product-by-Product basis and country-by-country basis. Average
Net Sales Price shall be calculated in Dollars and if any payments are made to
Genzyme by a Third Party in foreign currency, such payments shall be converted
to Dollars at the rate and pursuant to the procedures determined by the
Collaboration Committee.
Average Net Sales Price shall not include sales between Genzyme and any
of its Affiliates intended for resale; in such cases, the resale by such
Affiliate shall be the sale included in the calculation of Average Net Sales
Price. If the sale of any Product is associated, by contract or course of
dealing, with the use or sale of one or more other products or services (a
"Multiple Products Sale"), the Average Net Sales Price shall be calculated by
the Collaboration Committee based upon a recommendation from Genzyme to the
Collaboration Committee, and shall equal a fair and equitable allocation of all
consideration received in connection with a Multiple Products Sale, considering
the nature and economic value of each Product in the Multiple Products Sale, but
the Average Net Sales Price shall not be less than the Average Net Sales Price
for the Product sold alone (in similar quantities) during the calendar quarter
during which such Multiple Product Sale occurs, and shall be subject to review
and approval by the Collaboration Committee. Notwithstanding the foregoing,
during the period commencing on the launch date of a System in a country within
the Territory and ending on the last day of the first full calendar quarter
following immediately thereafter, the Average Net Sales Price per unit shall
equal Genzyme's estimate of the Average Net Sales Price.
1.7 "Collaboration Committee" shall have the meaning ascribed to it in
Section 2.1 of this Agreement.
1.8 "Commercial Know-How" shall mean all commercial trade secret
information relating to commercialization of the Systems, and shall include
without limitation, customer lists, Annual Sales Plans, surveys, sales call
lists, market research, customer information, service information, marketing
strategy, training materials, sales and marketing materials prepared by or on
behalf of each party, and
2
<PAGE>
such other information in the possession of each party or its agents relating to
advertising, marketing, promotion or commercial sale of the Systems.
1.9 "Dollars" or "$" shall mean United States dollars.
1.10 "Effective Date" shall mean the date as of which this Agreement is
effective and shall be the date of this Agreement as first written above.
1.11 "Extension Term" shall mean the period or periods, if any, during
which the Initial Term is extended in accordance with Section 11.2 of this
Agreement.
1.12 "FDA" shall mean the United States Food and Drug Administration,
and any successor agency with responsibilities comparable to the United States
Food and Drug Administration.
1.13 "Field" shall mean all surgical sealing performed during
pulmonary, cardiovascular (including peripheral vascular), or gastrointestinal
human surgical procedures (including open procedures and minimally invasive
procedures, such as catheter based procedures) of air and fluid (including
without limitation blood) leaks.
1.14 "Focal" shall mean Focal, Inc. and its Affiliates.
1.15 "Focal Indemnified Party" shall have the meaning ascribed to it in
Section 14.1 of this Agreement.
1.16 "Focal Patent Rights" shall mean all Patent Rights which are owned
or controlled by, in whole or in part, or licensed (with a right to sublicense)
to, Focal, and in which now or hereafter Focal has the right to grant licenses
or sublicenses, which generically or specifically claim (i) any Product or
System, (ii) the process for manufacturing any Product or System, (iii)
intermediates used in such manufacturing process for any Product or System, (iv)
methods to formulate or deliver any Product or System, (v) use of any Product or
System, or (vi) intermediates or any manufacturing process required or useful
for the production of any Products or System.
1.17 "Genzyme" shall mean Genzyme Corporation and its Affiliates.
1.18 "Genzyme Indemnified Party" shall have the meaning ascribed to it
in Section 14.2 of this Agreement.
1.19 "GSP" shall mean Genzyme Surgical Products, a tracking stock
division of Genzyme Corporation.
1.20 "Improvement Product" shall mean any modification or variation of
a Product for use in the Field that is conceived or developed for any of the
following purposes or has any of the following consequences: (i) improves the
Product's overall performance; (ii) reduces the Product's cost of materials,
parts, production or manufacture; (iii) increases the Product's durability or
continuous performance characteristics; (iv) increases or enhances the Product's
marketability or commercial acceptance; (v) replaces or displaces the Product in
any commercial market; or (vi) any modification or variations of a Product that
competes or has the potential to compete with the related Product in the Field.
3
<PAGE>
1.21 "Initial Term" shall have the meaning ascribed to it in Section
11.1 of this Agreement.
1.22 "Launch Plan" shall have the meaning ascribed to it in Section
4.2(a) of this Agreement.
1.23 "Liability" shall have the meaning ascribed to it in Section 14.1
of this Agreement.
1.24 "Lamp Modules" shall mean the device for use in the Field which is
described on EXHIBIT A to this Agreement and which is intended for insertion
into the Light Source.
1.25 "Light Sources" shall mean the device for use in the Field
described on EXHIBIT A to this Agreement and which is intended to be the source
of light emission by the Light Wand.
1.26 "Light Wands" shall mean the device for use in the Field described
on EXHIBIT A to this Agreement and which is intended to emit the light generated
by the Light Source for the purpose of illuminating the Sealant and completing
the sealing process.
1.27 "MAA" shall mean a marketing authorization application filed with
the Regulatory Authority of a country within the Territory submitted to obtain
Regulatory Approval, including without limitation, a "Premarket Approval
Application" filed with the FDA.
1.28 "Manufacturing Costs" shall mean the variable costs and fixed
costs incurred by Focal (or in the case of Section 5.4 of this Agreement, by
Genzyme) in manufacturing a Product and/or securing such Product from Third
Party suppliers. For purposes of this definition, "variable costs" shall include
the cost of labor directly involved in the production of a Product, raw
materials, supplies and other resources directly consumed in the manufacture,
manufacturing engineering, materials management, quality assurance, quality
control, packaging, labeling, storage, warehousing and shipping of a Product.
For purposes of this definition, "fixed costs" shall be deemed to include that
portion of the cost of manufacturing-associated labor, facilities, utilities,
insurance, equipment depreciation and other fixed costs directly related to the
manufacture, quality assurance, quality control, packaging, labeling, storage,
warehousing and shipping of a Product, allocated based upon the proportion of
such costs directly attributable to the support or performance of the applicable
activities or such other method of cost allocation as may be approved by the
Collaboration Committee. For purposes of this definition,
"manufacturing-associated labor" shall mean those persons directly providing
services as part of the Product manufacturing process within the functional
areas identified in the preceding sentence, and shall not include persons
indirectly supporting the manufacturing process, including without limitation,
persons working in the general management, finance, corporate development,
legal, human resources, accounting, marketing, sales and customer service, and
other similar areas.
1.29 "Manufacturing Know-How" shall mean all information, techniques,
inventions, discoveries, improvements, practices, methods, knowledge, skill,
experience and other technology, whether or not patentable or copyrightable, and
any copyrights based thereon, owned or controlled by Focal, or licensed to Focal
(with a right to sublicense) relating to or necessary or useful for the
production, purification, packaging, storage and transportation of Products or
Systems, including without limitation specifications, acceptance criteria,
manufacturing batch records, standard operating procedures, engineering plans,
installation, operation and process qualification protocols for equipment,
validation records, master files submitted to Regulatory Authorities, process
validation reports, environmental monitoring processes, test data (including
pharmacological, toxicological and clinical test data), cost data and employee
training materials.
4
<PAGE>
1.30 "Manufacturing License" shall have the meaning ascribed to it in
Section 5.4(f) of this Agreement.
1.31 "Monthly Sales Reports" shall have the meaning ascribed to it in
Section 4.2(c) of this Agreement.
1.32 "Notified Party" shall have the meaning ascribed to it in Section
7.5 of this Agreement.
1.33 "Notifying Party" shall have the meaning ascribed to it in Section
7.5 of this Agreement.
1.34 "Obsolete Product" shall mean any Product that, at the time of
return or proposed return by a customer, has a remaining shelf life that is less
than 25% of the original shelf life of the Product as marked on the Product, or
otherwise stated on the label or accompanying packaging.
1.35 "Patent Rights" shall mean all United States and foreign patents
and patent applications, and all continuations, continuations-in-part,
divisions, reissues, reexaminations, renewals or extensions thereof.
1.36 "Post Marketing Surveillance" or "PMS" shall have the meaning
ascribed to it in Section 7.6 of this Agreement.
1.37 "Primer" shall mean the synthetic, absorbable, surgical
biomaterial for use in the Field described in EXHIBIT A to this Agreement
heretofore or hereafter developed, manufactured and sold by Focal and which is
intended for use in conjunction with the Sealant as part of the sealing process.
1.38 "Product" shall mean each of the following: (a) Applicators, Light
Sources, Lamp Modules, Light Wands, Primers and Sealants, (b) any other
biomaterial, device or instrument for use in the Field which is determined by
the Collaboration Committee to be a Product and to be subject to the terms of
this Agreement, and (c) any Improvement Products.
1.39 "Promotional Materials Expenses" shall mean the out-of-pocket
expenditures paid by Focal and Genzyme to Third Parties for marketing and
promotional materials for a System in accordance with the Launch Plans and
Annual Sales Plans, but excluding training and educational materials utilized by
Focal in performing its training obligations under this Agreement.
1.40 "Proprietary Information" shall mean all information, including
without limitation, proprietary information and materials (whether or not
patentable) regarding a party's technology, products, business information or
objectives, which is designated as confidential in writing by the disclosing
party, whether by letter or by the use of an appropriate stamp or legend, prior
to or at the time any such information is disclosed by the disclosing party to
the other party. Notwithstanding the foregoing, (a) all Focal Patent Rights and
Technology shall constitute Proprietary Information, (b) all tracings and other
information identifying persons or institutions to whom Genzyme sells Products
or Systems shall constitute Proprietary Information; and (c) information which
is orally, electronically or visually disclosed by a party, or is disclosed in
writing without an appropriate letter, stamp or legend, shall constitute
Proprietary Information of a party (i) if the disclosing party, within thirty
(30) days after such disclosure, delivers to the other party a written document
or documents describing the information and referencing the place and date of
such oral, visual, electronic or written disclosure and the names of the persons
to whom such disclosure was made, or (ii) such information is of the type that
is customarily
5
<PAGE>
considered to be confidential information by persons engaged in activities that
are substantially similar to the activities being engaged in by the parties
pursuant to this Agreement.
1.41 "Purchase Price" shall have the meaning ascribed to it in Section
6.6(a) of this Agreement.
1.42 "Purchase Minimums" shall mean the Tier I Purchase Minimums and
Tier II Purchase Minimums, individually or together.
1.43 "Quality Systems Regulations" or "QSR" shall mean the FDA's
Quality Systems Regulations, as promulgated under the United States Food, Drug
and Cosmetic Act, as amended, and in effect during the term of this Agreement.
1.44 "Regulatory Approval" shall mean, with respect to each country of
the Territory and for a particular System, the final approval granted by a
Regulatory Authority that is required lawfully, or is deemed by the
Collaboration Committee to be necessary, to commercially sell a System for use
in the Field within such country. Regulatory Approval shall not include pricing
or reimbursement approval.
1.45 "Regulatory Authority" shall mean, with respect to each country of
the Territory, the medical regulatory authority that is the functional
counterpart to the FDA and shall have the authority and jurisdiction to provide
Regulatory Approval for the Systems.
1.46 "Research and Development" shall mean scientific studies,
pre-clinical, clinical and post-clinical research and development, including
without limitation any post Regulatory Approval studies required as a condition
to such Regulatory Approval, and other regulatory activities conducted in the
Field and in the Territory and relating to the Products or Systems.
1.47 "Scientific Know-How" shall mean all information and expertise
known by Focal that relates to the Products or Systems, and shall include
without limitation all chemical, pharmacological, toxicological, clinical,
pharmacoeconomic data, assay, quality control and manufacturing data and any
other scientific information and reagents relating to the Systems and useful or
required for the Research and Development of the Systems that is known as of the
Effective Date of this Agreement or developed after the date of this Agreement
by Focal, and any item of scientific knowledge which is otherwise necessary or
useful to make, use or sell the Systems.
1.48 "Sealant" shall mean the synthetic, absorbable, surgical
wound-closure sealant based upon and incorporating a hydrogel polymer in
membrane, liquid, gel or other form heretofore or hereafter developed,
manufactured and sold by Focal for use in the Field, currently known as the
FocalSeal -Registered Trademark- -L and FocalSeal -Registered Trademark- -S
Systems, as described more fully ON EXHIBit A.
1.49 "Specifications" shall mean, with respect to any System, the
specifications for the Product or System approved by any Regulatory Authority as
part of the Regulatory Approval for the Product or System, as such
specifications may be modified or supplemented from time to time to reflect
modifications to such Regulatory Approvals. Such Specifications, and any
modifications or supplements thereto, shall become a part of this Agreement and
shall be attached as an exhibit hereof.
6
<PAGE>
1.50 "System" shall mean any single Product, or combination of
Products, including packaging and package inserts, sold by Genzyme to Third
Parties as a single product and as approved by the Collaboration Committee.
1.51 "System Launch" shall mean the manufacturing, promotional,
training, marketing and sales activities conducted prior to and following
Regulatory Approval of a System in any country in the Territory in conjunction
with the initial commercial introduction of such System.
1.52 "Technology" shall mean Manufacturing Know-How, Scientific
Know-How, Commercial Know-How and all other inventions, trade secrets,
copyrights, know-how, data and other intellectual property of any kind which is
necessary or useful to make, use or sell the Products or Systems, but not
including Focal Patent Rights.
1.53 "Territory" shall mean, collectively, the countries of the United
States of America (including its territories and possessions), Canada and
Mexico.
1.54 "Third Party" shall mean any person other than a party (including
its Affiliates) to this Agreement.
1.55 "Tier I Purchase Minimums" and "Tier II Purchase Minimums" shall
have the meanings ascribed to each term in Section 6.4(a) and 6.4(b),
respectively, of this Agreement.
1.56 "Trademark" means a trademark, including Focal -Registered
Trademark- and FocalSeal -Registered Trademark-, and any variation or
substitute mark thereof, proposed by Focal for use with the Systems in the
Territory, whether such mark is proposed, pending, allowed or registered;
provided, however, that using such variation or substitute mark shall be
subject to Genzyme's approval, which approval shall not be unreasonably
withheld. Notwithstanding the foregoing, "Trademarks" shall not under any
circumstances include trademarks of Genzyme used with the Systems in the
Territory.
1.57 ADDITIONAL DEFINITIONS. Each of the following definitions is set
forth in the section of this Agreement indicated below:
<TABLE>
<CAPTION>
DEFINITION SECTION
---------- -------
<S> <C>
"ADR" 16.5(c)
"Agreement" Preamble
"Assumed Obligation" 3.1(b)
"Claim" 16.6(c)
"Cure Quarter" 5.4(d)
"Election Notice" 5.4(d)
"Performance Suspension Event" 16.1(b)
"Genzyme Royalty" 5.4(g)
"Plans" 4.2(a)
7
<PAGE>
"Provisional Payment" 6.7(c)
"Reduced Genzyme Royalty" 5.4(h)(ii)
"Reusable Products" 5.5(a)
"SOP" 7.7
"Shortfall Products" 5.4(c)
"Shortfall Units" 5.4(c)
"Stock Purchase Agreement" 11.5(a)
"Suspension Request" 16.1(b)
"Third Party License Agreements" 10.4(a)
"Transitional Costs" 5.4(h)(i)
</TABLE>
ARTICLE 2
COLLABORATION COMMITTEE
2.1 COLLABORATION COMMITTEE. Promptly after the Effective Date, the
parties shall establish a committee with the duties and responsibilities set
forth in this Agreement that shall be comprised of personnel from Focal and
Genzyme (the "Collaboration Committee"). The Collaboration Committee shall
include four (4) voting members, two (2) of whom shall be appointed by Genzyme
and two (2) of whom shall be appointed by Focal. Each party shall make its
designation of its initial representatives not later than fifteen (15) days
after the Effective Date. Each party shall use reasonable efforts to designate
as its representatives, individuals that shall have the requisite experience and
knowledge to oversee the commercialization activities contemplated by this
Agreement. Vacancies on the Collaboration Committee shall be filled within ten
(10) days after the date such vacancy occurs. In addition, each party may
designate any number of additional persons to serve as advisors to the
Collaboration Committee. Each party shall designate its members to the
Collaboration Committee, and shall notify the other party in writing each time
it permanently replaces and appoints a new designated member. If a member of the
Collaboration Committee is unable to attend a meeting, the party that appointed
such member may designate a substitute to participate in lieu of the absent
member. One member of the Collaboration Committee shall be elected by the
Collaboration Committee to serve as its Chairman for any term approved by the
Collaboration Committee. The Chairman shall preside at all meetings of the
Collaboration Committee, shall prepare the agenda for each meeting, shall cause
minutes of each meeting to be taken and shall maintain the records of the
Collaboration Committee. There shall be no limit on the number of alternate or
successive terms that a member may serve as Chairman.
2.2 MEETINGS. The Collaboration Committee shall meet periodically at
such times and places as it may select but, in any event, it shall meet (i)
within thirty (30) days after the Effective Date, and (ii) at least once each
quarter during each calendar year. If the Collaboration Committee does not
determine to meet elsewhere, its meetings shall alternate locations between the
offices of Focal in Lexington, MA and Genzyme in Cambridge, MA, with the first
meeting to be held at Focal's offices. The Collaboration
8
<PAGE>
Committee may meet in person or by video- or tele- conferencing, and individual
members may participate in any of the foregoing ways. All costs of participation
by each member in the activities of the Collaboration Committee shall be borne
by the party appointing such member.
2.3 SPECIFIC RESPONSIBILITIES OF THE COLLABORATION COMMITTEE. The
Collaboration Committee shall coordinate matters relating to the
commercialization of the Products and the activities of Focal and Genzyme in the
Territory, and in connection therewith the Collaboration Committee shall be
responsible for:
(a) developing and approving an overall strategy for the marketing,
promotion and sale of the Systems in the Territory;
(b) reviewing and approving the Launch Plans and Annual Sales Plans
submitted by Focal and Genzyme, approving the number of units of Products to be
furnished by Focal to Genzyme for demonstration purposes in connection with the
launch of a System and each year thereafter, and approving the plans for
representation of the Systems at major surgical conferences and meetings in the
Territory;
(c) providing advice to Focal on its Research and Development
activities and its manufacturing activities,
(d) reviewing and approving the methods of calculating
Manufacturing Costs and Average Net Sales Price, and based on such calculations
establishing the Purchase Price for the Products;
(e) reviewing and approving Genzyme's calculation of the Genzyme
Royalty, the Reduced Genzyme Royalty and Transitional Costs (each as defined in
Section 5.4(g) or (h) of this Agreement);
(f) reviewing and approving the Annual Sales Forecasts and the
Annual Purchase Minimums for each Product;
(g) developing and approving procedures for the coordination of
activities among the parties to achieve efficient regulatory compliance
practices with respect to the Systems in the Territory;
(h) reviewing and approving Genzyme's appointment of
sub-distributors for the Systems within the Territory;
(i) at the request of either Party, determining whether a product
or potential product is an Improvement Product; and
(j) performing such other functions as are specified in this
Agreement or as the parties may decide are appropriate to further the commercial
success of the Systems in the Territory and the purposes of this Agreement,
including the periodic evaluation of actual performance against performance
objectives.
2.4 QUORUM; VOTING. The presence of all four (4) voting members, shall
constitute a quorum for purposes of consideration and action by the
Collaboration Committee. Each member (including the
9
<PAGE>
Chairman) shall have one vote on all matters requiring a vote, and whenever
action is to be taken to approve any matter requiring the authorization or
approval of the Collaboration Committee, a unanimous vote of all four (4)
members of the Collaboration Committee shall be required to approve or authorize
such matters. The Collaboration Committee may take any action, including
providing its approval for any matter, by means of a written consent signed by
each of the four (4) members of the Collaboration Committee. For matters as to
which the Collaboration Committee is to review and provide advice (rather than
take action or make a determination), a quorum shall not be required and advice
shall be determined by a consensus of all participating members of the
Collaboration Committee, so long as at least one designee of each of Genzyme and
Focal shall be present and participating. If the Collaboration Committee is
unable to obtain the vote required to approve, or take other action on, any
matter requiring a vote, or if any member of the Collaboration Committee wishes
to contest a deadlock, then the matter may be approved or settled in accordance
with Section 16.5, and any requirement for approval by the Collaboration
Committee under this Agreement shall be satisfied by action in accordance with
Section 16.5. Meetings of the Collaboration Committee may be adjourned and
reconvened if a quorum is not present.
ARTICLE 3
DISTRIBUTION
3.1 APPOINTMENT OF GENZYME AS EXCLUSIVE DISTRIBUTOR.
(a) Focal hereby appoints Genzyme as its exclusive distributor
during the Initial Term (and any Extension Term) to promote, sell and distribute
the Systems for use in the Field within the Territory, subject to the
co-promotion rights retained by Focal in the Territory pursuant to Section 3.4
of this Agreement.
(b) Genzyme shall be entitled to appoint Third Parties to act as
wholesalers or sub-distributors of the Systems to promote, market and sell the
Systems in the Territory; provided, that (i) any appointment shall be subject to
the approval of the Collaboration Committee, and (ii) Genzyme shall cause such
Third Party as a condition to such appointment to (A) assume as its direct
obligation the obligations of Genzyme as set forth in Sections 3.2 through 3.5
(inclusive), Sections 7.4 through 7.7 (inclusive), Article 8, Section 6.11,
Section 9.2, Article 14 (except Section 14.2) and Section 16.2, (the "Assumed
Obligations"), and (B) agree that Focal shall be a third party beneficiary of
the provisions relating to the Assumed Obligations and shall have the right to
enforce the Assumed Obligations directly against such Third Party. Genzyme shall
use reasonable commercial efforts to monitor and compel compliance by such Third
Party with such Assumed Obligations, and will provide to Focal prompt written
notice of any breach by such Third Party of an Assumed Obligation. Genzyme shall
thereafter use reasonable commercial efforts to compel such Third Party to cure
the breach of its Assumed Obligation(s) and if such breach is not cured within
thirty (30) days of the date Genzyme first provides written notice to Focal (or
such additional reasonable period of time if the breach is not capable of being
cured within thirty (30) days, which period shall in no event be longer than an
additional thirty (30) days), then Genzyme shall notify Focal of such failure to
cure. Focal shall then have the right to enforce the Assumed Obligations
directly against the Third Party. If Focal waives such right to enforce the
Assumed Obligations, then Genzyme will determine an appropriate further course
of action, which may include termination of the agreement or arrangement between
Genzyme and such Third Party. Focal shall not have any obligations to such Third
Parties except under Article 8 and Article 14 (except
10
<PAGE>
Section 14.1). The foregoing provisions are not intended to relieve Genzyme of
its obligation to comply with the provisions encompassing the Assumed
Obligations in other parts of the Territory, nor shall any such appointment of a
wholesaler or sub-distributor relieve or modify any obligations (other than the
Assumed Obligations) of Genzyme under this Agreement, including but not limited
to its obligations under Sections 3.2, 3.3, 3.4, 3.5 and 6.4 hereof.
3.2 LICENSE TO USE TRADEMARKS. Focal hereby grants a co-exclusive
license to Genzyme, with the right to grant a sublicense to Third Parties
pursuant to the terms of Section 3.1(b), to use the Trademarks solely for use in
connection with the promotion, marketing, sale and distribution of the Systems
in the Field and in the Territory during the term of this Agreement. Genzyme's
use (and each Third Party sublicensee's use) of the Trademarks shall be in a
manner reasonably approved by Focal, and limited to the extent necessary or
useful for the activities of Genzyme contemplated under this Agreement.
3.3 ACCEPTANCE OF APPOINTMENT. Genzyme hereby agrees to serve as
Focal's exclusive distributor of the Systems in the Field within the Territory
during the Initial Term and any Extension Term, and to use its reasonable
commercial efforts to diligently promote, market, sell and distribute the
Systems throughout the Territory in accordance with the terms of this Agreement.
3.4 FOCAL RETAINED RIGHTS.
(a) Focal shall have the right to co-promote the Systems for use in
the Field and within the Territory. The co-promotion activities of the parties
shall be conducted in accordance with policies and procedures established by the
Collaboration Committee based upon the Co-Promotion Guidelines attached hereto
as EXHIBIT B; PROVIDED THAT the polices and procedures established by the
Collaboration Committee shall meet or exceed the guidelines for performance
criteria established in the Co-Promotion Guidelines. The Co-Promotion Guidelines
attached hereto as EXHIBIT B shall remain in effect until the Collaboration
Committee shall agree to revise or modify such Co-Promotion Guidelines and,
thereafter, the Co-Promotion Guidelines, as so amended or revised, shall remain
in effect until further amended or revised Co-Promotion Guidelines are adopted
by the Collaboration Committee. Any such amended or revised Co-Promotion
Guidelines adopted by the Collaboration Committee from time to time shall be
designated as such and shall be deemed to be attached as an exhibit to this
Agreement and made a part hereof. Notwithstanding the foregoing, no revision or
modification to the Co-Promotion Guidelines may be adopted that grants to Focal
the right to sell the Systems in the Field within the Territory unless each
party has received an opinion from legal counsel that the granting of such
rights is legally permissible within the Territory.
(b) Except as specifically provided in this Agreement, no rights or
licenses with respect to the Patent Rights, Trademarks, Commercial Know-How,
Scientific Know-How or other technical information or other proprietary rights
are granted or deemed granted by Focal to Genzyme hereunder or in connection
herewith; provided, that the foregoing shall not affect Genzyme's right under
this Agreement to use, market and resell the Systems purchased from Focal.
(c) Except as specifically provided in this Agreement, Focal and
Third Parties receiving grants of licenses or other rights from Focal with
respect to the Systems or Trademarks, retain all rights therein in the Territory
not expressly granted to Genzyme under this Agreement. In particular, (i)
notwithstanding the distribution rights granted to Genzyme under Section 3.1,
Focal and Third Parties
11
<PAGE>
receiving grants of licenses or other rights from Focal with respect to the
Systems or Trademarks, shall retain both during and after the Initial Term and
any Extension Term, the right (A) to promote, market and sell the Products and
Systems (1) outside of the Field within the Territory and (2) outside and inside
the Field outside of the Territory, (B) to conduct Research and Development
activities, and (C) to otherwise examine and consider business opportunities
with respect to the Systems and (ii) Focal shall retain the right to research,
develop, market, distribute and sell any products outside the Field and both
outside and within the Territory for (A) the prophylaxis, treatment and/or
inhibition of restenosis and/or stenosis, (B) any intraoperative use of any
product for the prevention of surgical adhesions, (C) for the sealing of leaks
after either spinal or cranial neurosurgery and (D) the coating of medical
devices during or as part of their manufacture.
3.5 NO SALES OUTSIDE THE TERRITORY. Genzyme expressly agrees not to
make sales of the Systems outside the Territory. Genzyme shall not sell the
Systems to a Third Party which it knows is actively soliciting resale of the
Systems outside the Territory. In the event that a Focal licensee or distributor
for an area outside the Territory is selling the Systems for use in the Field in
the Territory, Focal shall use its reasonable commercial efforts, consistent
with applicable law, to stop such licensee or distributor from selling the
Systems for use in the Field in the Territory. Focal warrants that no
distributor (other than Genzyme) or licensee is entitled to sell the Systems for
use in the Field in the Territory.
ARTICLE 4
PROMOTION AND SALE
4.1 SALES AND PROMOTIONAL EFFORTS AND PERSONNEL.
(a) Genzyme shall establish the promotion and sale of the Systems,
and Focal shall establish the promotion of the Systems, as important corporate
priorities of GSP and Focal, respectively, and unless otherwise specified in
this Agreement, each party shall at their expense devote appropriate resources
and shall use their reasonable commercial efforts to diligently promote sales of
the Systems for use in the Field throughout the Territory.
(b) Genzyme and Focal agree, subject to and to the extent permitted
by Regulatory Authorities and subject to Focal's obtaining the required
Regulatory Approvals, to commence in all material respects activities relating
to the promotion and sale of Systems in accordance with this Agreement
immediately after the Effective Date. Focal shall make available to Genzyme
quantities of the Products in accordance with Sections 6.1 and 6.2 of this
Agreement to support such activities.
(c) To fulfill their respective obligations under this Agreement,
Genzyme and Focal shall each establish and maintain a sales and promotional
group (in the case of Genzyme) and promotional group (in the case of Focal),
which may include Third Parties as permitted under this Agreement, for the
promotion and selling of the Systems in the Territory sufficient to perform
their respective obligations under this Agreement and to carry out their
respective responsibilities under the Annual Sales Plans as approved by the
Collaboration Committee. Genzyme and Focal shall each dedicate on a full or
part-time basis not less than the number of sales representatives (in the case
of Genzyme), product specialists (in the case of Focal) and other marketing,
promotion, sales, administrative, repair and Systems support personnel
identified in the Co-Promotion Guidelines or the
12
<PAGE>
Annual Sales Plans to the promotion and sale of the Systems. Each party shall be
solely responsible for the hiring, compensation, management, supervision and
evaluation of its personnel.
(d) If either party believes that the other party is not promoting
the Systems in accordance with the Annual Sales Plans approved by the
Collaboration Committee or the terms of this Agreement (including, in
particular, the provisions of this Article 4), such party shall bring such
concerns to the Collaboration Committee, and any disputes with respect to
efforts of the other party shall be resolved by the Collaboration Committee,
and, if not resolved to the reasonable satisfaction of Focal and Genzyme in that
forum, in accordance with Section 16.5 hereof.
4.2 ANNUAL SALES PLANS, SALES REPORTS AND ANNUAL SALES FORECASTS.
(a) Focal and Genzyme shall jointly prepare and submit to the
Collaboration Committee (i) within 90 days after the Effective Date of this
Agreement a detailed plan for promotional, marketing and sales activities to be
conducted for the System Launch of the FocalSeal(R)-L System in the United
States (the System Launch plan for the FocalSeal(R)-L System in the United
States, and the System Launch plan for any other System in any country within
the Territory, a "Launch Plan") in accordance with the Co-Promotion Guidelines
attached hereto as EXHIBIT B, as subsequently amended or revised from time to
time in accordance with Section 3.4(a) hereof, and (ii) prior to September 30th
of each calendar year during the Initial Term and any Extension Term a
reasonably detailed marketing and sales plan (the "Annual Sales Plan") for the
following year for all Systems that have received Regulatory Approval, including
as part of the Annual Sales Plan, one or more Launch Plans for any System for
which Regulatory Approval is reasonably anticipated to be received during the
following year (the Annual Sales Plans and the Launch Plans, collectively, the
"Plans"). Each Annual Sales Plan shall be designed to optimize commercialization
of the System for use in the Field within the Territory, and among other
provisions, shall include (i) a detailed report of the prior year's promotion
and marketing activities and sales results, including annualized information
with respect to the data furnished in the Monthly Sales Reports described in
Section 4.2(c), (ii) information concerning promotional, training and marketing
activities planned for the next year, (iii) the Annual Sales Forecasts for the
next year as described in Section 6.3(a), (iv) a detailed budget for the next
year that includes an estimate of the aggregate and per unit Manufacturing Costs
for each Product and the estimated promotional and selling expenses for each of
the Systems, and the aggregate amount of Promotional Materials Expenses
projected for each party, and (v) a description of specific responsibilities and
duties to be performed by Focal and Genzyme during the next year in addition to
the activities required under this Agreement.
(b) The Collaboration Committee shall review the Plans and shall
provide comments and suggestions to Focal and Genzyme. If either party does not
agree with or accept the comments or suggestions of the Collaboration Committee,
such party may request a meeting of the Collaboration Committee to discuss such
objections. When the parties and the Collaboration Committee have reached
agreement, the Plans shall be relied upon as the guidelines for the marketing,
sale and development of the Systems in the Territory during the applicable year.
Until the parties and the Collaboration Committee reach an agreement on a Plan,
the Plan submitted by Focal and Genzyme to the Collaboration Committee for the
previous year shall be relied upon for the applicable year.
(c) Not later than the 20th day of each month in which sales occur,
Genzyme shall submit to the Collaboration Committee a monthly report for the
preceding month period (the "Monthly Sales Reports"). The Monthly Sales Reports,
which shall be stated in Dollars, shall include the
13
<PAGE>
following information with respect to the preceding month: (i) the unit volumes
and the Dollar amount of purchases of each of the Products purchased by Genzyme
from Focal, (ii) the unit volumes and the aggregate Dollar amount of resales of
each of the Systems sold by Genzyme to Third Parties in each of the countries
within the Territory, and (iii) the identity of Third Parties that purchased the
Systems and the amount of such purchases, sorted in a manner reasonably
determined by the Collaboration Committee. Not later than the 15th day of each
month in which sales occur, Focal shall provide Genzyme with a report regarding
its promotional activities during the preceding month containing such
information as Genzyme shall reasonably request. To the extent appropriate,
Genzyme shall incorporate such information into the Monthly Sales Reports.
(d) The Monthly Sales Report submitted to the Collaboration
Committee in January, April, July and October of each calendar year shall
include a calculation of the Average Net Sales Price for the preceding calendar
quarter in accordance with Section 6.6(b) of this Agreement.
(e) The Monthly Sales Report submitted to the Collaboration
Committee in September of each calendar year shall include the proposed Annual
Sales Forecast for the next calendar year in accordance with Section 6.3(a) of
this Agreement.
(f) Not later than January 30th of each calendar year, Genzyme and
Focal shall submit to the Collaboration Committee an annual report for the
preceding 12 month period (each referred to as the "Annual Sales Report"). Each
Annual Sales Report shall include the following information with respect to the
preceding twelve (12) month period: (i) the unit volumes and the Dollar amount
of purchases of each of the Products purchased by Genzyme from Focal, (ii) the
unit volumes and the Dollar amount of resales of each of the Systems sold by
Genzyme to Third Parties in each of the countries within the Territory, (iii)
the unit volumes and the Dollar amount of inventory levels of Products
maintained by Genzyme as of December 31st of the preceding year, (iv) the
Average Net Sales Price for each of the Products in each of the countries of the
Territory, (v) a comparison of the actual Manufacturing Costs, promotional and
selling expenses and Promotional Materials Expenses to the estimates of the same
contained in the Annual Sales Plan and (vi) customer payment history on an
account-by-account basis. In addition, the Annual Sales Report shall contain
such other information concerning the promotional and marketing activities of
Focal and Genzyme as may be reasonably requested by the Collaboration Committee.
4.3 INTERNAL AND EXTERNAL TRAINING.
(a) Genzyme and Focal at all times shall ensure that their
respective sales and promotion groups and other employees or contractors who may
be involved in meeting their respective obligations under this Agreement are
fully trained with respect to the Systems. To satisfy this requirement, and
subject to review by the Collaboration Committee, Genzyme and Focal, at their
cost and expense (unless otherwise provided in Section 4.3), shall develop and
provide, from time to time, general sales and promotion training, Field specific
sales and promotion training and System-specific sales and promotion training to
their sales and promotion groups and other employees or contractors who may be
involved in meeting their respective obligations under this Agreement.
(b) In connection with the System Launch of the FocalSeal
- -Registeres Trademark- -L System in the United States and in addition to the
training to be furnished by Focal under Section 4.3(c) of this Agreement,
Focal, at its sole cost and expense, shall provide System-specific training
at dates and times reasonably
14
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
requested by Genzyme to Genzyme's sales representatives at the offices of Focal
in Lexington, MA and at the offices of Genzyme in Cambridge, Framingham or Fall
River, MA. All of Genzyme's out-of-pocket expenses in sending its sales
representatives to participate in Focal assisted training (including
transportation, lodging, food and translation costs) shall be borne by Genzyme.
(c) During each calendar year following the System Launch of the
FocalSeal -Registered Trademark- -L System in the United States, Focal shall
provide System-specific training at dates and times reasonably requested by
Genzyme to Genzyme's sales representatives and to Third Parties at locations
other than the Focal offices in Lexington, MA or Genzyme's offices in
Cambridge, Framingham or Fall River, MA. Focal shall be responsible for the
aggregate cost of providing knowledgeable and experienced trainers to conduct
such training for up to [**] days each calendar year, and for eligible
out-of-pocket expenses incurred in furnishing such training up to [**] each
calendar year. Genzyme shall be obligated to reimburse Focal for the
reasonable cost of trainers and eligible out-of-pocket expenses in excess of
such amounts. "Eligible out-of-pocket expenses" shall be expenses incurred
and actually paid in conformance with travel and entertainment policies
reasonably established by Genzyme and generally applicable to the Genzyme
sales force.
(d) As part of such training assistance, Focal shall supply, at its
cost, the sample Systems used during such training and reasonable quantities of
System training materials. Focal shall provide Genzyme with a copy of all
training materials for review and comment prior to use, and Focal shall
accommodate all reasonable comments suggested by Genzyme in a timely manner.
Genzyme may copy any training materials or methods provided or utilized by Focal
for future training programs to be conducted by Genzyme. In addition to
participating in training programs, Focal shall assist Genzyme in continuing
medical education programs for Third Party users of the Systems by providing to
Genzyme appropriate medical, clinical and scientific information as it becomes
available to Focal.
4.4 ADVERTISING AND PROMOTIONAL MATERIALS.
(a) Genzyme shall be responsible for the form and content of all
marketing and promotional materials related to the Systems for use in the
Territory; provided, that all marketing and promotional materials shall be
reviewed in advance and approved by Focal for purposes of determining compliance
with the requirements of the applicable Regulatory Authorities. To the extent
reasonably requested by Genzyme, Focal shall (i) create, design, develop and
prepare such materials ("design activities"), and (ii) produce and deliver to
Genzyme a sufficient supply of promotional materials for use within the
Territory to meet Genzyme's reasonable promotional needs ("production
activities"). Prior to commencing any design activities or production activities
for materials to be used in the Territory, Focal shall present such plans or
materials to Genzyme for review and approval. To the extent permitted under its
agreements with Third Parties, Focal agrees to furnish to Genzyme copies of all
marketing and promotional materials for the Systems prepared by Focal or by
Third Parties selling the Systems outside of the Territory, and to permit
Genzyme to adopt and use such marketing and promotional materials within the
Territory.
(b) With respect to written and visual promotional or educational
materials, Focal shall be presented and described as the party that developed
and manufactured the Systems, and with
15
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPERATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
equal size and prominence Genzyme shall be presented and described as the
exclusive distributor of the Systems in the Field and within the Territory. As
permitted by applicable laws and regulations, all documentary information,
promotional material and oral presentations (where practical) promoting the
Systems in the Territory shall display the trade names, logos and trade dress of
the Systems in a manner that promotes the Systems and each of the parties in an
appropriate manner in accordance with this Agreement. Focal agrees to provide
Genzyme with promotional materials in English, French and Spanish for use in the
Territory.
(c) Subject to Section 4.4(d) of this Agreement, aggregate
Promotional Materials Expenses for design activities up to [**] incurred
by Focal in connection with the System Launch of the FocalSeal -Registered
Trademark- -L System in the United States shall be borne solely by Focal. All
Promotional Materials Expenses for design activities related to the System
Launch of the FocalSeal(R)-L System in the United States in excess of [**]
shall be allocated among the parties based upon a determination to be made by
the Collaboration Committee. For each year commencing with the calendar year
immediately following the year the FocalSeal -Registered Trademark- -L System
is launched in the United States, Focal shall be responsible for up to the
first [**] (as adjusted to reflect changes in the U.S. Producer Price Index
or other similar measure of price increases in the United States) of
aggregate Promotional Materials Expenses incurred by the parties for design
activities. All Promotional Materials Expenses for design activities in
excess of such annual limit shall be allocated among the parties based upon a
determination to be made by the Collaboration Committee. For all Promotional
Materials Expenses incurred by the parties for production activities in
connection with the System Launch of the FocalSeal -Registered Trademark- -L
System in the United States and thereafter during each year following the
System Launch, Focal shall be responsible for [**] and Genzyme shall be
responsible for [**] of the aggregate Promotional Materials Expenses.
(d) Estimates of the projected annual Promotional Materials
Expenses shall be included in the Annual Sales Plan. If Genzyme elects to obtain
some or all of the promotional materials from Third Parties, subject to approval
by the Collaboration Committee, which approval shall not be unreasonably
withheld, each party shall reimburse the other party to the extent necessary in
accordance with the allocations set forth in Section 4.4(c) of this Agreement.
Notwithstanding anything to the contrary contained in this Agreement,
Promotional Materials Expenses incurred by either party in excess of 110% of the
amounts projected for such party as set forth in the Launch Plan or any Annual
Sales Plan, or as otherwise permitted by action of the Collaboration Committee,
shall not be eligible for reimbursement and shall be borne solely by the party
incurring such excess expenses.
4.5 SYSTEM PACKAGING. The System shall be promoted, marketed and
sold under brand names selected by Genzyme and approved by the Collaboration
Committee (including without limitation the FocalSeal -Registered Trademark-
- -L and FocalSeal -Registered Trademark- -S brand names), which approval shall
not be unreasonably withheld or delayed, PROVIDED THAT any incremental
expenses associated with the use of a brand name other than FocalSeal
- -Registered Trademark- -L and FocalSeal -Registered Trademark- -S shall be
borne by Genzyme. The packaging and inserts, and all sales and promotional
materials, for the Systems shall identify both parties with equal prominence,
and shall bear both the Focal name, trademarks and logo and the Genzyme name,
trademark and logo in equal size and prominence, designating Focal as the
developer and manufacturer of the Systems and Genzyme as the exclusive
distributor of the Systems in the Territory in the Field. Focal agrees that
it will not create a
16
<PAGE>
trade dress for any Systems intended for sale outside of the Territory that is
not, at its cost and expense, easily distinguishable at first glance from
Systems intended for sale within the Territory.
4.6 MEDICAL CONFERENCES. Focal and Genzyme shall participate annually
at all major pulmonary, cardiovascular, gastrointestinal and other medical
conferences, meetings, symposia and trade shows within the Field and held within
the Territory reasonably determined by the Collaboration Committee to be
important to the promotion and sale of the Systems including, but not limited
to, the regular meetings of the American Association of Thoracic Surgeons, the
Society of Thoracic Surgeons, the American College of Surgeons, the General
Thoracic Surgical Club and the American Society of Colorectal Surgery, and other
similar meetings. As reasonably determined by the Collaboration Committee,
participation by Focal at such meetings shall include, but shall not be limited
to, making available to Genzyme experienced and knowledgeable Focal
representatives trained with respect to the Systems who shall work within
Genzyme's exhibition space for a substantial portion of such meetings to promote
the Systems. Focal shall not charge Genzyme for the cost of its representatives
attending and participating at such meetings and the time expended by Focal's
representatives shall not be considered a training activity under Section 4.3 of
this Agreement. Focal shall be entitled to receive reimbursement for reasonable
out-of-pocket expenses incurred by its representatives who attend such meetings
solely to provide assistance to Genzyme within its exhibition space.
4.7 MEDICAL INQUIRIES. Genzyme shall have responsibility for the
preparation and distribution of correspondence and information to physicians in
the Territory relating to the Systems in the Field; provided, that upon the
reasonable request of Genzyme, Focal shall, at its own cost and expense, provide
assistance to Genzyme in meeting this obligation. Genzyme will keep such records
as shall be necessary to document physician inquiries in compliance with
applicable regulatory requirements. Except in the case of medical emergency,
Genzyme will refer all questions relating to the Systems raised by physicians in
the Territory to Focal for its response. Genzyme shall have the right to refer
medical inquiries to Focal if Genzyme does not have the requisite
Systems-related medical expertise to respond to such inquiries. In such event,
Focal shall be responsible for responding to such inquiries and Focal personnel
shall have direct access to the inquiring physicians. At the request of Genzyme,
Focal shall cooperate with Genzyme to develop jointly form response letters
which contain information responding to the most frequent or routine questions
received regarding the Systems.
4.8 SALES ADMINISTRATION. Genzyme, at its cost and expense, shall be
responsible for handling all matters directly related to System sales
administration, including without limitation, originating and confirming System
orders, working with Focal to track the status of System shipments, preparing
and delivering System invoices, processing and collecting outstanding
receivables on System sales to Third Parties, answering System inquiries and
otherwise performing clerical and bookkeeping functions associated with such
activities. Focal shall cooperate with Genzyme in carrying out these duties, and
upon Genzyme's request, shall provide such assistance as may be reasonably
requested.
4.9 PROMOTION AND MARKETING EXPENSES. Except as otherwise provided in
this Agreement, all costs and expenses incurred by Focal or Genzyme in
distributing, promoting and, solely in the case of Genzyme, selling a System in
the Territory in accordance with the terms of this Agreement shall be borne by
the party incurring such expenses.
17
<PAGE>
ARTICLE 5
PRODUCT RESEARCH AND DEVELOPMENT,
MANUFACTURING AND SERVICING
5.1 COLLABORATION COMMITTEE ROLE. At least once each calendar quarter
during the term of this Agreement, Focal shall present a report to the
Collaboration Committee regarding Research and Development and Product
manufacturing and warranty servicing that may have an effect on the
commercialization of the Systems for use in the Field within the Territory. The
views, if any, expressed by members of the Collaboration Committee shall be
advisory, and Focal shall be under no obligation to consider or to act on such
views, except with respect to action that is taken by the Collaboration
Committee on matters expressly within the authority granted to the Collaboration
Committee under this Agreement.
5.2 RESEARCH AND DEVELOPMENT. Focal shall be responsible for conducting
any Research and Development activities that it determines, in its sole
discretion acting in good faith, to be necessary or advisable to commercialize
the Systems for sale for use in the Field in the Territory as contemplated by
this Agreement, including without limitation any Research and Development
activities that it determines are necessary or advisable to develop product
enhancements or improvements necessary to maintain the competitiveness of the
Systems in the Territory. Although Focal shall have the sole responsibility for
conducting such activities, Focal shall give adequate and due consideration to
Genzyme's concerns in connection with such process. The parties acknowledge that
Focal shall have the right, subject to the limitations set forth in this
Agreement, to conduct any and all additional Research and Development
activities, including clinical studies, relating to the Systems or other
products that Focal desires to conduct for uses outside the Field and/or outside
of the Territory.
5.3 MANUFACTURING. Focal shall manufacture, or shall obtain from Third
Party suppliers, the Products for sale to Genzyme and for subsequent resale by
Genzyme to Third Parties exclusively in the Territory. All Products sold to
Genzyme shall be supplied in a finished form and shall be incorporated into
packaging that is suitable for delivery to Third Parties.
5.4 SUPPLY SHORTAGES.
(a) COLLABORATION COMMITTEE ATTENTION. If at any time Focal becomes
unable to meet the Annual Sales Forecast for any Product or becomes aware that
it will be unable to meet such Annual Sales Forecast for any Products, Focal
shall immediately bring such problem to the attention of the Collaboration
Committee. The Collaboration Committee shall work with Focal to identify methods
of increasing production or to locate alternative providers. Focal shall
consider the recommendations of the Collaboration Committee and shall implement
such remedial actions as it determines are appropriate, but in any event Focal
shall respond to the supply shortage with speed and diligence commensurate with
the severity of the current or potential supply shortage.
(b) EQUITABLE SUPPLY. If Focal is unable to meet the world-wide
requirements of any Product, Focal shall not supply such Products to any other
distributor in a preferred manner to Genzyme. To the contrary, Focal shall
allocate among such other distributors and Genzyme those quantities of Products
that Focal has in its inventory and that Focal is able to produce or obtain on a
fair and equitable basis taking into consideration on a relative basis with
respect to each distributor and Genzyme, the sales
18
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPERATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
of the Product for the preceding calendar year and reasonable projections of
Product sales during the anticipated period of the supply shortage.
(c) SUPPLY MINIMUMS. If Focal is [**] to supply one or more
Products to Genzyme in amounts at least equal to meet (i) [**] of the
quantities for such quarters set forth in the applicable Annual Sales
Forecast for the Light Source, Light Wand or Lamp Module, or (ii) [**] of the
quantities for such quarters set forth in the applicable Annual Sales
Forecast for the Sealant, Primer or Applicators (for purposes of this Section
5.4, a "Triggering Event"), then, Genzyme shall, subject to Genzyme's notice
obligations and Focal's cure rights as set forth below, be entitled to
exercise the rights set forth in subsection (d) with respect to the
Product(s) related to the Triggering Event (the "Shortfall Product(s)"). The
number of units of Products which Focal was obligated, but failed, to supply
to Genzyme to meet the applicable [**] or [**] requirements set forth in this
Section 5.4(c) are referred to herein as the "Shortfall Units".
(d) NOTICE AND CURE. Within twenty (20) days after the occurrence
of a Triggering Event, Genzyme may give notice to Focal of such event. Focal may
cure the supply deficiency by supplying to Genzyme, in the quarter immediately
following the [**] consecutive quarter period during which such Triggering Event
has occurred (the "Cure Quarter"), the quantity of those Products identified in
the Genzyme notice equal to (i) all Shortfall Units plus (ii) the lesser of (A)
a number of units of the Shortfall Product at least equal to the percentages of
the quantities set forth for the applicable Shortfall Product (i.e. [**] for the
Light Source, Light Wand or Lamp Module and [**] for the Sealant, Primer or
Applicators) for the Cure Quarter set forth in the applicable Annual Sales
Forecast, or (B) the number of units of the Shortfall Product which Genzyme has
ordered for delivery in the Cure Quarter. If Genzyme delivers this notice and
Focal fails to cure the supply deficiency for any Shortfall Product as provided
in the preceding sentence, then Genzyme may elect by giving notice to Focal,
within twenty (20) days after the end of the Cure Quarter, to either (i)
terminate this Agreement in accordance with Section 11.4(c), (ii) obtain its
future supply requirements of the Shortfall Products from Third Party suppliers
in accordance with Section 5.4(e), (iii) manufacture its supply requirements of
the Shortfall Products in accordance with Section 5.4(f), or (iv) to exercise
any combination of the remedies described in clauses (ii) or (iii) of this
Section 5.4(d) (the "Election Notice").
(e) THIRD PARTY SUPPLIERS. If Genzyme elects to obtain some or all
of the Shortfall Products from Third Parties, Genzyme agrees that the Shortfall
Products supplied by the Third Party shall comply with the requirements of any
applicable Regulatory Approval. A Shortfall Product obtained from a Third Party
supplier shall not be subject to, or included in the calculation of, the
Purchase Minimums unless such Shortfall Product is to be incorporated into and
sold in combination with another Product supplied by Focal. In such event, the
Collaboration Committee shall, to the extent required, equitably adjust the
Purchase Minimums for the applicable combination Product which incorporates
Shortfall Products that are thereafter supplied by Third Parties.
(f) MANUFACTURING. Upon the delivery of an Election Notice under
Section 5.4(d)(iii) or (iv), Focal shall automatically be deemed to have granted
to Genzyme an irrevocable, exclusive, royalty bearing license under the Focal
Patent Rights and the Trademarks (with a right to sublicense) (the
"Manufacturing License"), solely for Genzyme to make, have made, use and have
used, and import
19
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPERATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
the Shortfall Products for distribution and sale within the Field in the
Territory. The term of the Manufacturing License shall commence on the date of
delivery of the Exercise Notice under Section 5.4(d)(iii) or (iv) and shall
continue, as applicable, during the Initial Term or any Extension Term, PROVIDED
THAT if the Exercise Notice is delivered more than [**] years after the
commencement of the Initial Term, the term of the Manufacturing License shall
end [**] years after the date of delivery of the Exercise Notice, but only
if the Agreement is extended for the final Extension Term by Genzyme pursuant to
Section 11.2. Upon and after activation of the Manufacturing License under the
terms hereof, Focal, at its cost and expense, shall (A) furnish to Genzyme
within sixty (60) days after the Election Notice all Manufacturing Know-How
necessary to allow Genzyme to scale up full manufacturing of the Shortfall
Products, (B) render to Genzyme such technical, administrative, engineering and
other assistance reasonably requested by Genzyme to facilitate the orderly,
efficient and expeditious transition of the Shortfall Product manufacturing to
Genzyme, (C) execute and deliver any agreements, notices, assignments and other
instruments mutually agreed upon by Genzyme and Focal to be necessary to
consummate such transition and (D) provide to Genzyme, or its designees, such
additional records and information relating to this Agreement that does not
constitute Focal Proprietary Information.
(g) ROYALTY PAYMENT. With respect to each of the Shortfall Products
for which Genzyme has submitted an Election Notice under Section 5.4(d)(ii),
(iii) or (iv), Genzyme shall pay to Focal, within 45 days after the end of each
calendar quarter, a royalty equal to [**] of the difference between (x) the
Average Net Sales Price of each unit of Shortfall Product multiplied by the
number of Shortfall Units sold in each country of the Territory during the
preceding calendar quarter, and (y) the Manufacturing Costs of each unit of such
Shortfall Product multiplied by the number of Shortfall Units sold in each
country of the Territory (the "Genzyme Royalty"), subject to adjustment under
subsection (h) below.
(h) TRANSITIONAL COST RECAPTURE.
(i) As used in this Section, "Transitional Costs" shall mean the
actual incremental costs incurred by Genzyme in connection with the commencement
of the manufacturing process for the Shortfall Products for which Genzyme has
obtained a Manufacturing License, including, but not limited to technology
transfer, manufacturing scale-up and validation, regulatory compliance, quality
control and quality assurance.
(ii) In order to permit Genzyme to recapture the Transitional
Costs, notwithstanding the provisions of subsection (g) relating to the Genzyme
Royalty, the Genzyme Royalty shall be reduced to [**] of the difference between
(x) the Average Net Sales Price of each unit of Shortfall Product multiplied by
the number of Shortfall Units sold in each country of the Territory during the
preceding calendar quarter, and (y) the Manufacturing Costs of each unit of such
Shortfall Product multiplied by the number of Shortfall Units sold in each
country of the Territory (the "Reduced Genzyme Royalty"). The Reduced Genzyme
Royalty shall be applicable until such time as the cumulative aggregate amount
of the Reduced Genzyme Royalty paid by Genzyme to Focal is equal to the
Transitional Costs, at which time the Genzyme Royalty set forth in subsection
(g) shall apply.
20
<PAGE>
(iii) The parties acknowledge that Transitional Costs could include
costs that would also constitute Manufacturing Costs (such as amortization of
capital facility expenses). To the extent that Genzyme has recaptured
Transitional Costs pursuant to subsection (ii) above, all costs included in such
recaptured Transitional Costs shall be excluded from the Manufacturing Costs for
purposes of calculating the Genzyme Royalty or the Reduced Genzyme Royalty.
(i) WARRANTY ON SHORTFALL PRODUCTS. Focal shall warrant to Genzyme
that all Shortfall Products which are thereafter manufactured by Genzyme
pursuant to Section 5.4(f) or that Genzyme elects to have supplied by Third
Parties pursuant to Section 5.4(e), shall, assuming that such Shortfall Products
are manufactured in accordance with, and conform to, the applicable
Specifications, be free from material defects in design (the parties hereby
acknowledging that such warranty shall be the only warranty that shall be made
by Focal to Genzyme regarding the Shortfall Products), subject to the provisions
of Section 6.11(b) and (c).
5.5 PASS-THROUGH WARRANTY AND SERVICE FOR REUSABLE PRODUCTS.
(a) In addition to the warranties provided by Focal to Genzyme
pursuant to Section 6.11, Focal shall pass-through to any Third Party end-user
of Light Sources, Lamp Modules and other instruments or devices (other than the
Light Wands) that are reusable and shall be packaged and sold as part of a
System (the "Reusable Products") the warranties provided to Focal by suppliers
of such Reusable Products. The terms of such warranties as they exist as of the
Effective Date are set forth in EXHIBIT C attached hereto. Focal shall not allow
the reduction or modification in any material respect of such warranties without
the approval of the Collaboration Committee, which approval shall not be
unreasonably withheld in the event of any change in warranty by any supplier of
Reusable Products.
(b) Focal shall have responsibility for all interaction with the
suppliers of Reusable Products (subject to Genzyme's rights under Section 5.4)
including, but not limited to, the obligation, consistent with industry
standards, to inspect all deliveries of Reusable Products for conformity with
all applicable warranties.
(c) Focal, at its cost and expense, shall be responsible for
performing, either directly or indirectly, all repair, replacement and other
after-sale support services for the Reusable Products. Such services shall
include repair and replacement services during and after the expiration of the
applicable warranty. Focal shall cause such services to be performed in
accordance with the requirements of the applicable Regulatory Authorities. Focal
may charge Third Party end-users reasonable fees and expenses as approved by the
Collaboration Committee for repair and replacement services furnished after the
expiration of the warranty period or otherwise outside the coverage of the
warranty, PROVIDED THAT if the Collaboration Committee cannot agree on a fee,
Focal shall establish a reasonable and customary fee for such services.
5.6 GENERAL COMMERCIALIZATION ACTIVITIES.
(a) Except for those duties or responsibilities specifically
assigned to Genzyme under this Agreement, or as specifically assumed by Genzyme
under any approved Launch Plan, Annual Sales Plan or under Section 5.4, Focal
shall be responsible for all aspects of the commercialization of the Systems in
the Territory, including without limitation, testing, packaging, labeling,
storing, shipping, supplying and customer support for the Systems but
specifically excluding sales of the Systems.
21
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
(b) Focal shall not have any right to sell, or to represent to any
Third Party that it has the authority or power to commit Genzyme to make a sale,
of the Systems in the Field within the Territory. All sales that may arise as a
indirect consequence of promotional activities conducted by Focal shall be sales
completed by Genzyme, and all payments received from Third Party purchasers
shall be recognized as revenue of Genzyme.
(c) The parties acknowledge that Focal shall have the right,
subject to the limitations set forth in this Agreement, to manufacture, package,
label, ship and supply the Systems for use outside the Field and/or for sale
outside of the Territory.
5.7 RESPONSIBILITIES OF GENZYME.
(a) Genzyme shall cooperate with and render to Focal research,
technical and engineering consultation, including making its personnel available
at reasonable times, for reasonable periods and at reasonable fees, to
facilitate Research and Development activities and to assist in Product
manufacturing upon the reasonable request of the Collaboration Committee.
(b) The parties acknowledge that Genzyme shall have the right,
subject to the limitations set forth in this Agreement, including, but not
limited to, the provisions of Section 8.4, to conduct research, development and
commercialization activities, and to promote, market and sell products for use,
within the Field and/or for sale within the Territory.
ARTICLE 6
PRODUCT SUPPLY, FORECASTS, PURCHASE PRICE AND SHIPMENT
6.1 SUPPLY OF THE PRODUCTS. Focal shall supply Genzyme with all of
Genzyme's purchase requirements for the Products in the Territory for use in the
Field. Genzyme shall purchase all such purchase requirements exclusively from
Focal, except to the extent otherwise permitted pursuant to Section 5.4 of this
Agreement. Focal shall not be obligated to supply in any calendar quarter a
number of units of each Product that is greater than [**] of the number of units
of such Product specified in the applicable Annual Sales Forecast.
6.2 DEMONSTRATION SYSTEMS. Each Launch Plan and each Annual Sales Plan
shall establish the number of units of sample Products that each party
anticipates will be necessary during each calendar quarter to achieve the
promotional and sale objectives of the relevant Plan. Focal shall supply samples
in accordance with the Plans, which samples shall be in a sterile condition
(unless the Product is sold in a non-sterile condition), and shall be deemed to
have a price equal to their Manufacturing Costs. The aggregate price of samples
supplied by Focal shall be shared equally by Genzyme and Focal; provided that
(a) each party shall bear the full cost of Light Sources and Light Wands for its
respective sales/promotional activities, and (b) if either party uses in excess
of [**] of the number of units of samples of Products (other than Light Sources
and Light Wands) projected for such party in the Launch Plan (through the end of
the launch period) or Annual Sales Plan (for the calendar year covered by the
22
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
Annual Sales Plan), the party using the excess samples shall be solely
responsible for the cost of the number of units of samples in excess of [**].
Genzyme shall pay for samples that it orders from Focal at a price equal to [**]
of the Manufacturing Costs within forty-five (45) days after the date of the
related invoice provided, that at such time as Genzyme's sample orders for a
Product exceed [**] of its projected annual samples, Genzyme shall pay Focal
[**] of the Manufacturing Costs for any units in excess of [**] of such amount.
Further, within twenty (20) days after the end of each calendar quarter, Focal
shall deliver to Genzyme a statement of the number of units of Products (other
than Light Sources and Light Wands) used by Focal as sample Products during the
preceding calendar quarter. Within forty-five (45) days after receipt of such
statement, Genzyme shall pay Focal [**] of the Manufacturing Costs of the
samples identified in the statement; provided that at such time as the samples
of a Product used by Focal exceed [**] of its projected annual samples, Genzyme
shall not be obligated to pay Focal any portion of the Manufacturing Costs for
such excess samples. Sample units of Products shall be used solely for
demonstration and training purposes and not for resale, and shall not be counted
for the purposes of calculating the achievement by Genzyme of the Purchase
Minimums.
6.3 ANNUAL SALES FORECASTS.
(a) ANNUAL SALES FORECASTS. Attached hereto as Exhibit D is a
proposed forecast, broken down on a quarterly basis, of Genzyme's projected
sales in units for each of the Products in the Territory commencing January
1, 2000, and ending December 31, 2000. Within 30 days after the System Launch
of the FocalSeal -Registeres Trademark- -L System in the United States, the
Collaboration Committee shall make such adjustments to this estimate as it
deems advisable (including prorating the forecast to reflect that portion of
the calendar year that remains available for System sales after the System
Launch), and shall adopt such forecast as the forecast for calendar year
2000; provided, that if the Collaboration Committee is not able to reach
agreement on the Annual Sales Forecast for calendar year 2000 within such 30
day period, the forecast set forth as EXHIBIT D shall become the Annual Sales
Forecast for calendar year 2000, appropriately prorated from the date of
first commercial sale in the United States of the FocalSeal -Registered
Trademark- -L System. Thereafter, annually together with the September
Monthly Sales Report, Genzyme shall provide to the Collaboration Committee a
proposed twelve (12) month forecast for the next calendar year broken down on
a quarterly basis of Genzyme's projected sales in units for each of the
Systems in the Territory which shall be subject to review and approval of the
Collaboration Committee as described in Section 6.3(b) of this Agreement (the
initial and subsequent forecasts, collectively, the "Annual Sales Forecasts").
(b) ANNUAL PURCHASE OBJECTIVES AND REVISED SALES FORECASTS. The
Collaboration Committee shall review each proposed Annual Sales Forecast with
Genzyme, and in conjunction with its approval of the Annual Sales Plan and
subject to any revisions that may be reasonably required by the Collaboration
Committee, shall approve the Annual Sales Forecast as submitted or with such
modifications thereto as the Collaboration Committee may deem appropriate, and
such approved Annual Sales Forecast shall serve as Genzyme's purchase objectives
for the following year. Genzyme shall submit to the Collaboration Committee a
revised sales forecast for any calendar quarter during which Genzyme's sales for
such calendar quarter are projected to exceed by more than twenty-five percent
(25%) the quarterly forecast set forth in the Annual Sales Forecast previously
approved by the Collaboration Committee, which revised quarterly forecast shall
be submitted solely for the purpose of
23
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPERATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
enabling Focal to plan its manufacturing production for such period and shall
not be used for purposes of determining whether Genzyme has satisfied the
Purchase Minimums set forth in Section 6.4(a) of this Agreement or for purposes
of determining whether a Triggering Event under Section 5.4 has occurred.
Subject to the terms of this Agreement, Genzyme shall not be obligated to
satisfy the purchase objectives, but Genzyme shall use reasonable commercial
efforts to do so.
(c) DISAGREEMENT REGARDING THE ANNUAL SALES FORECASTS. If the
Collaboration Committee is unable to reach agreement to approve any Annual Sales
Forecast, Focal and Genzyme agree to negotiate the Annual Sales Forecast in good
faith. If Focal and Genzyme are unable to reach agreement within thirty (30)
days after either party furnishes notice to the other that it believes a
deadlock exists, then the Annual Sales Forecast and Purchase Minimums shall be
determined in accordance with the procedures set forth in Section 16.5 of this
Agreement, except that a deadlock with respect to establishing the Annual Sales
Forecast for 2000 shall be resolved as set forth in Section 6.3(a). During the
period that the parties are seeking to reach agreement on the Annual Sales
Forecast, the Annual Sales Forecast and Purchase Minimums in effect during the
immediately preceding calendar year, appropriately prorated with respect to any
period which is less than a full calendar year in a manner consistent with the
pro-ration method used for the commencement of the Annual Sales Forecast for
calendar year 2000, shall apply, subject to retroactive adjustment to reflect
the revised Annual Sales Forecast determined in accordance with Section 16.5 of
this Agreement.
6.4 PURCHASE MINIMUMS.
(a) TIER I PURCHASE MINIMUMS. Except as provided in subsection
6.4(c) below, commencing with the calendar year during which Regulatory
Approval in the United States for the FocalSeal -Registered Trademark- -L
System is first received and in each calendar year thereafter, Genzyme agrees
to purchase from Focal in accordance with the provisions of this Agreement
not less than [**] of the Annual Sales Forecast for each Product projected
for each calendar quarter of the applicable calendar year or partial year, as
the case may be ( the "Tier I Purchase Minimums"). If Genzyme fails to
satisfy a Tier I Purchase Minimum for a Product within ten (10) days after
the receipt of notice from Focal regarding such failure, Genzyme shall be
entitled to notify Focal of its intent to cure such deficiency by purchasing
sufficient quantities of the relevant Product to achieve the Tier I Purchase
Minimum; PROVIDED THAT Focal may refuse to allow such cure if Genzyme has
cured a Tier I Purchase Minimum for the relevant Product at any time during
the preceding [**] year period.
(b) TIER II PURCHASE MINIMUMS. Except as provided in subsection
6.4(c) below, commencing with the calendar year during which Regulatory
Approval in the United States for the FocalSeal -Registered Trademark- -L
System is first received and in each calendar year thereafter, Genzyme agrees
to purchase from Focal in accordance with the provisions of this Agreement,
not less than [**] of the Annual Sales Forecast for each Product projected
for each calendar quarter of the applicable calendar year or partial year, as
the case may be ( the "Tier II Purchase Minimums"). If Genzyme fails to
satisfy a Tier II Purchase Minimum for a Product, within ten (10) days after
the receipt of notice from Focal regarding such failure Genzyme shall be
entitled to notify Focal of its intent to cure such deficiency by purchasing
sufficient quantities of the relevant Product to achieve the Tier II Purchase
Minimum; provided that
24
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPERATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
Focal may refuse to allow such cure if Genzyme has cured a Tier II Purchase
Minimum for the relevant Product at any time during the preceding two (2) year
period.
(c) LIMITATION OF PURCHASE MINIMUMS. Notwithstanding anything
herein to the contrary, no Purchase Minimum shall be established for, and
Genzyme shall have no minimum purchase obligation with respect to, Light
Sources, Light Wands and Lamp Modules.
(d) CURE OF PURCHASE MINIMUM DEFICIENCIES. Unless Focal determines
that Genzyme does not have the right to cure a Purchase Minimum pursuant to the
proviso contained in the last sentence of each of subsections 6.4(a) and 6.4(b)
above, upon receipt of a Genzyme cure notice, Focal shall not be entitled to
terminate this Agreement pursuant to Section 11.5(b) of this Agreement if
Genzyme purchases and pays for a sufficient number of units of Products to
satisfy the Purchase Minimum deficiency within ninety (90) days after the date
of the Genzyme cure notice.
6.5 PURCHASE ORDERS AND PROCEDURES. Genzyme shall place orders for the
Products pursuant to written or oral purchase orders in accordance with purchase
procedures mutually acceptable to the parties (which shall include, among other
things, the procedures for Focal's written acceptance of any purchase order).
The purchase procedures shall provide for the delivery of written purchase
orders by mail, overnight courier or facsimile, and for the delivery of oral
purchase orders if a written purchase order confirming the oral purchase order
is received within five (5) days after the oral purchase order. The quantities
and dates of delivery established by the purchase order or procedure shall be
binding upon Genzyme and Focal. Upon request, Focal will acknowledge and confirm
to Genzyme in writing its obligation to satisfy the supply requirements set
forth in the Genzyme purchase order. Focal shall not be deemed in default for a
delay in fulfilling any purchase order if the Products are shipped in full
satisfaction of the purchase order within four (4) business days from the time
of Focal's receipt of the purchase order, PROVIDED THAT, if the Annual Sales
Forecast is revised to increase the quantity of the Products which Focal is
required to ship to Genzyme, then the time period in which Focal is required to
fulfill any purchase order for such Products shall be increased from four (4)
business days to such commercially reasonable number of days as is agreed to by
the Collaboration Committee, and FURTHER PROVIDED that the aggregate quantities
of such Product ordered for such calendar quarter are not in excess of [**] of
the Annual Sales Forecast for that Product for such calendar quarter.
6.6 PURCHASE PRICE.
(a) PURCHASE PRICE. The purchase price per unit for each of the
Products sold by Focal to Genzyme (the "Purchase Price") shall be established
for each country in the Territory, shall be determined by the Collaboration
Committee based upon its review and approval of the methods of calculating
Manufacturing Costs and Average Net Sales Price pursuant to Section 2.3(d), and
shall be an amount equal to:
(i) in the case of Lamp Modules, Light Sources and Light Wands, (A)
the Manufacturing Costs of each unit of a Product, PLUS (B) [**] of the
difference between (1) the Average Net Sales Price of each unit of a Product
sold in each country of the Territory during the preceding calendar quarter, and
(2) the Manufacturing Costs of each unit of such Product; and
25
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPERATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
(ii) in the case of the Sealants, Primers and Applicators, the
greater of:
(A) (1) the Manufacturing Costs of each unit of Sealant,
Primers and Applicators, PLUS (2) [**] of the difference between (x) the [**]
of each unit of Sealant, Primers and Applicators sold in each country of the
Territory during the preceding calendar quarter and (y) the [**] of each unit
of Sealant, Primer and Applicator; and
(B) The [**] of each unit of Sealant, Primer and
Applicator multiplied by:
(1) A factor of [**], for any calendar year in which the
number of units of Sealant shipped by Focal to
Genzyme is less than [**] units; or
(2) A factor of [**], for any calendar year in which (x)
the number of units of Sealant shipped by Focal to
Genzyme is [**] or more but less than [**] units and
(y) the per unit Manufacturing Costs of Sealant,
Primers and Applicators, taken together, at such
time have decreased an aggregate of no less than
[**] from the Manufacturing Costs of such Products,
taken together, in effect at the time of the first
sale of such Products by Focal to Genzyme; or
(3) A factor of [**], for any calendar year in which (x)
the number of units of Sealant shipped by Focal to
Genzyme is [**] or more but less than [**] units and
(y) the per unit Manufacturing Costs of Sealant,
Primers and Applicators, taken together, at such
time have decreased an aggregate of no less than
[**] from the Manufacturing Costs of such Products,
taken together, in effect at the time of the first
sale of such Products by Focal to Genzyme; or
(4) A factor of [**] in any calendar year in which (x)
the number of units of Sealant shipped by Focal to
Genzyme is [**] units or more and (y) the per unit
Manufacturing Costs of Sealant, Primers and
Applicators, taken together, at such time have
decreased an aggregate of not less than [**] from
the Manufacturing Costs of such Products, taken
together, in effect at the time of the first sale of
such Products by Focal to Genzyme.
If the [**] decreases outlined above are not achieved at the
corresponding volume levels, then the factor to be used in calculating the
Purchase Price under this Section 6.6(a)(ii)(B) shall be the factor in effect
at the next lowest volume level.
(b) PURCHASE PRICE CALCULATION. The Collaboration Committee shall
determine the Purchase Price based upon information furnished by the parties.
Within twenty (20) days after the end of each calendar quarter (i) Focal shall
deliver a report to the Collaboration Committee setting forth in reasonable
detail the Manufacturing Costs of each Product on a per unit basis during the
preceding
26
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
calendar quarter, and (ii) Genzyme shall deliver a report to the Collaboration
Committee setting forth in reasonable detail its calculation of the Average Net
Sales Price for each Product in each country of the Territory during the
preceding calendar quarter. The Collaboration Committee, in its reasonable
discretion, may require either party to submit additional data or information to
substantiate the calculations contained in the reports. Based on these reports,
which shall be subject to Collaboration Committee approval, the Collaboration
Committee shall establish the Purchase Price for the current calendar quarter
(without retroactive effect). If, for any reason, the Collaboration Committee is
not able to establish the Purchase Price for any Product within ten (10) days
after the receipt by the Collaboration Committee of the last report or the
receipt of additional information if requested by the Collaboration Committee,
the Purchase Price in effect during the preceding calendar quarter shall
continue until such time as the Collaboration Committee makes a final
determination.
(c) Notwithstanding anything herein to the contrary, the
Manufacturing Costs of any Light Sources, Light Wands and Lamp Modules that
Genzyme, with the approval of the Collaboration Committee, provided free of
charge to end-user customers (excluding Light Sources and Light Wands for
sales/promotional activities which are the subject of the provision in Section
6.2) shall be shared equally by Focal and Genzyme.
6.7 PAYMENT TERMS.
(a) INVOICES AND PAYMENT TERMS. Focal shall invoice Genzyme for
the Purchase Price no sooner than the date of Product shipment. The invoices
shall require provisional payments in accordance with Section 6.7(c). Payment
of any invoice is due [**] days after the date of the invoice. All payments
hereunder to be made by Genzyme shall be in Dollars. No part of any amount
payable by Genzyme may be reduced due to any counterclaim, set-off,
adjustment or other right which Genzyme may have against Focal, except with
respect to Products that are returned to Focal in accordance with Section
6.12 of this Agreement.
(b) METHOD AND PLACE OF PAYMENT; LATE PAYMENT INTEREST. All
payments to be made under this Agreement shall be paid by check or wire transfer
as selected by Genzyme, and shall be delivered to such address or wired to such
account or accounts as Focal shall designate from time to time in writing to
Genzyme. Any such payment shall be deemed to have been paid when received by
Focal with respect to check payments or when recorded in the proper account with
respect to wire transfer payments. Any invoice not paid prior to the due date
shall bear interest from the due date until the date payment is received in full
by Focal at a rate equal to the lesser of one percent (1.0%) per month or at the
maximum per annum rate allowed by applicable law.
(c) PROVISIONAL PAYMENTS. The Purchase Price cannot be determined
until the Average Net Sales Price, Manufacturing Costs and the number of units
of Product purchased for the relevant Product are known or established. For this
reason, the invoice submitted by Focal at the time of Product shipment shall
require a provisional payment for each unit of Product purchased (the
"Provisional Payment"). The Provisional Payment shall be subject to adjustment
and reconciliation in accordance with Section 6.7(d). The Provisional Payment
shall be established by the Collaboration Committee prior to March 15th of each
calendar year, and shall apply for one (1) year commencing April 1 and ending
March 31. The Provisional Payment shall be calculated in the same manner as the
Purchase Price is calculated under Section 6.6(a) on the basis of the following
assumptions: (i) Manufacturing Costs shall be deemed to equal Focal's estimate
of Manufacturing Costs assuming that
27
<PAGE>
the number of units of Product manufactured equals the aggregate Annual Sales
Forecast for the Product; (ii) the Average Net Sales Price shall equal the
Average Net Sales Price for the immediately preceding year, and (iii) the number
of units of Product purchased by Genzyme shall equal the aggregate Annual Sales
Forecast for the Product for the relevant year.
(d) PAYMENT RECONCILIATION. Prior to March 15th of each calendar
year, based upon information furnished by the parties, the Collaboration
Committee (i) shall calculate the Purchase Price for the immediately preceding
year in accordance with Section 6.6(a), and (ii) shall compare the Purchase
Price against the Provisional Payment actually paid by Genzyme for each unit of
Product during the preceding year. On the basis of such calculation and
comparison, any overpayment or underpayment of the Purchase Price for all of the
units of Product sold during the preceding year (i) shall be paid by Genzyme to
Focal prior to April 1 with respect to any underpayment, and (ii) shall be
credited and applied by Focal until exhaustion against any payments for Products
that shall become payable by Genzyme to Focal after April 1 with respect to any
overpayment. Prior to March 15th, the Collaboration Committee shall prepare and
submit to each party a written report that shall explain the calculations and
reconciliations performed by the Collaboration Committee.
(e) COLLECTION OF DELINQUENT ACCOUNTS. Genzyme shall be responsible
for the collection of all amounts due from Third Parties resulting from the sale
of the Systems by Genzyme.
6.8 FOCAL SHIPMENT. In accordance with guidelines established by the
Collaboration Committee, Focal shall ship the Systems pursuant to Genzyme's
written delivery instructions by a carrier mutually acceptable to the parties
C.I.P. (E. G. "Carriage and Insurance Paid To" under Incoterms 1990) to (i)
Genzyme facilities located within the Territory as reasonably designated by
Genzyme but not to exceed three (3) different locations within the Territory, or
(ii) to any number of shipping destinations within the Territory designated by
Third Parties that purchase the Systems from Genzyme as specified in the
associated purchase order. Genzyme may change the shipment destinations to its
facilities at any time by written notice to Focal. Other terms and conditions
related to System shipments, including but not limited to, the shipping
container form, minimum shipment size, import and export administration and
other details relating to order fulfillment and shipment shall be subject to
guidelines reasonably established by the Collaboration Committee. Genzyme and
Focal acknowledge the intention to bill Third Party purchasers of the Systems
for all shipping charges.
6.9 TITLE TO THE PRODUCTS. Title to the Products sold hereunder, and
risk of loss with respect to such Products, shall pass to Genzyme upon delivery
of the Products to the carrier for shipment to the destinations designated by
Genzyme or Third Party pursuant to Section 6.8 of this Agreement. Upon the
passage of title, Focal's liability for risk of loss shall cease, and Genzyme
shall be the owner of such Products for all purposes. Except as otherwise
provided in this Agreement, the Products sold to Genzyme under this Agreement
are non-returnable, including without limitation, Systems that have become
obsolete as a result of an expired shelf life; provided, that Focal has complied
with the requirements of Section 6.13(ii) of this Agreement.
6.10 TAXES. The party receiving any payments pursuant to this Agreement
shall pay any and all taxes levied on such payments. If laws or regulations
require that taxes be withheld on any payment, the remitting party will (i)
deduct those taxes from the payment, (ii) pay the taxes to the proper taxing
28
<PAGE>
authority, and (iii) send evidence of the obligation together with proof of
payment to the other party within sixty (60) days following that payment.
6.11 PRODUCT WARRANTY.
(a) PRODUCT WARRANTY. All Products supplied by Focal under this
Agreement will be manufactured in accordance with the Specifications and in
accordance with QSR requirements and Regulatory Approvals. Focal warrants that
all the Products supplied by Focal under this Agreement (other than the Reusable
Products), at the time of shipment and for the shelf life of the Products when
stored and handled in accordance with the Specifications: (i) shall meet all
Specifications, (ii) shall be free from material defects in design,
construction, material and workmanship, and (iii) shall not be adulterated or
misbranded at the time of shipment. Focal warrants to Genzyme that all Reusable
Products provided to Genzyme will be free from material defects in design.
(b) THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER
REPRESENTATIONS OR WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING WITHOUT
LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE WITH RESPECT TO SUPPLY OF THE PRODUCTS HEREUNDER TO GENZYME. NO IMPLIED
WARRANTY ARISING BY USAGE, COURSE OF DEALING OR COURSE OF PERFORMANCE IS GIVEN
OR MADE BY FOCAL OR SHALL ARISE BY OR IN CONNECTION WITH ANY SALE OF THE SYSTEMS
BY GENZYME. GENZYME IS NOT AUTHORIZED TO GIVE OR MAKE ANY OTHER REPRESENTATION
OR WARRANTY OR TO MODIFY THE FOREGOING WARRANTY IN ANY MANNER.
(c) The limited warranty set forth in this Section 6.11 does not
apply to any non-conformity of any Products resulting from (i) alteration or
repair by any party other than Focal or its agents, (ii) misuse, negligence,
abuse, accident, mishandling or storage in an improper environment by any party
other than Focal or its agents, or (iii) use, handling, storage or maintenance
by any party other than Focal or its agents other than in accordance with
instructions or recommendations provided by Focal.
(d) Except for Genzyme's rights under Section 11.4 of this
Agreement, Focal's obligations to Genzyme with respect to Products that do not
meet the warranty contained herein is limited to replacement of such Product(s);
provided, that such Products are returned to Focal accompanied by a reasonably
detailed statement of the claimed defect or non-conformity and proof of date of
purchase, and packed and shipped according to instructions provided by Focal,
and only if, upon examination by Focal, the Products are determined to have been
defective under the terms of this Agreement. FOCAL'S LIABILITY TO GENZYME, AND
THE EXCLUSIVE REMEDY AVAILABLE TO GENZYME IN CONNECTION WITH PRODUCTS THAT FAIL
TO MEET THIS WARRANTY (WHETHER SUCH LIABILITY IS BASED ON CLAIMS ALLEGING
CONTRACT, NEGLIGENCE, BREACH OF WARRANTY, STRICT LIABILITY OR ANY OTHER LEGAL
THEORY) SHALL BE STRICTLY LIMITED TO FOCAL'S OBLIGATIONS AS SPECIFICALLY AND
EXPRESSLY SET FORTH IN THIS SECTION 6.11 AND IN SECTION 11.4 OF THIS AGREEMENT.
29
<PAGE>
6.12 QUALITY ASSURANCE; NONCONFORMING PRODUCTS.
(a) INSPECTIONS. For the purpose of monitoring compliance with
QSRs, other Regulatory Authority requirements and the terms of this Agreement,
Focal and Genzyme shall each have the right on an annual basis and at such other
times as are reasonably established by the Collaboration Committee, and upon
reasonable notice and during normal business hours, to inspect (i) the
facilities used by the other party to manufacture, store and handle the
Products, and (ii) the other party's records relating to manufacture, adverse
events and complaint investigations with respect to the Products.
(b) FAILURE TO MEET WARRANTY. Any claim by Genzyme that the
Products when shipped did not meet Specifications or the terms of the related
warranty must be made in writing to Focal within forty-five (45) days of receipt
of shipment by Genzyme if such defect is reasonably discoverable by Genzyme
within such period, or otherwise, as promptly as practicable after such defect
is discovered by Genzyme, and such writing shall indicate the specific
nonconforming characteristics of the Products. Genzyme shall have the right to
perform analytical testing on the Products. The Products which Genzyme claims
fail to meet the Specifications or the related warranty shall be returned by
Genzyme to Focal at Focal's expense, and if Focal agrees with Genzyme's claim of
nonconformance, then, at Genzyme's direction, Focal shall (i) replace as
promptly as possible such Products with Products meeting the Specifications and
warranty, and (ii) shall make such adjustment to the Purchase Minimum for the
applicable year to reflect Focal's failure or delay in supplying conforming
Products. If Focal does not agree in good faith with Genzyme's claim of
nonconformance, then the parties agree to submit the Products in question to an
independent party which has the capability of testing the Product to determine
whether or not it complies with the Specifications or warranty. In the event the
parties cannot agree upon such independent party, or in the event it is not
possible to acquire the services of such an independent party at a reasonable
cost, then such dispute shall be resolved by the Collaboration Committee, or if
the Collaboration Committee cannot resolve such dispute, then pursuant to
Section 16.5. Except as described in this Section 6.12, no shipment or portion
of a shipment of any quantity of the Products shall be returned to Focal for
replacement without Focal's prior written consent. If no claim of
non-conformance is made by Genzyme in accordance with this Section 6.12, Genzyme
shall be deemed to have accepted the Products. Notwithstanding the foregoing,
acceptance of any Product by Genzyme shall not affect Focal's obligation to
defend, indemnify and hold harmless Genzyme in accordance with Section 14 of
this Agreement.
6.13 SPECIFICATIONS AND SYSTEM EXPIRATION. Any change in Specifications
that would materially and adversely affect the marketing of the Systems in any
country in the Territory (in Genzyme's reasonable judgment, and if Focal
disagrees, then the issue will be resolved by the Collaboration Committee or, if
necessary, pursuant to Section 16.5), except changes due to court order or
unilateral regulatory action, will require the prior review and consent of the
Collaboration Committee, which consent shall not be unreasonably withheld.
Genzyme shall be entitled to return to Focal at Focal's expense any Systems
previously accepted by Genzyme which the parties reasonably agree cannot or
should not be sold due to a failure to conform to the Specifications or to a
change in Specifications. Genzyme shall not be obligated to accept delivery of
the Systems unless (i) the Systems meet the Specifications and any related
warranty, and (ii) on the date of receipt the remaining shelf life
30
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPERATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
of the Systems is not less than [**] of the original shelf life of the Systems
as set forth in the Specifications.
6.14 RESALE PRICING. As part of the Launch Plans and the Annual Sales
Plans, Focal shall provide an analysis of the factors affecting the resale
pricing of the Systems including a discussion of competitive products,
reimbursement policies and practices, current market conditions, anticipated
Manufacturing Costs and promotional and selling expenses, distribution issues,
market and economic trends and other factors that may influence the amount that
may be charged to Third Parties for the Systems, and shall include a non-binding
recommendation concerning suggested resale pricing. The Launch Plans and the
Annual Sales Plans shall include suggested resale prices for the Systems in all
relevant markets and sub-markets. Notwithstanding the suggested resale pricing
in the Plans, Genzyme shall have the right, exercisable in its sole discretion,
to establish the resale price for any System purchased from Focal under this
Agreement, and to accept any price paid by any Third Party for such System.
ARTICLE 7
REGULATORY MATTERS
7.1 SYSTEM AND DISTRIBUTION APPROVALS. Focal, at its sole cost and
expense, shall be responsible for preparing and submitting the MAA in each
country within the Territory and for obtaining and maintaining Regulatory
Approvals for the Systems in the Territory. Genzyme, at its sole cost and
expense, shall be responsible for seeking, obtaining and maintaining all
licenses, registrations and permits required to be obtained by Genzyme to enable
Genzyme to act as the exclusive distributor of the Systems in the Field in the
Territory pursuant to this Agreement. Each of the parties shall cooperate in
good faith with the other in making and maintaining all regulatory filings that
may be necessary or desirable in connection with the execution, delivery and
performance of this Agreement. Notwithstanding the foregoing, the parties
acknowledge that in accordance with the regulatory scheme in Mexico, it is
anticipated that the MAA will be prepared and submitted by a sub-distributor
appointed by Genzyme, and approved by the Collaboration Committee in accordance
with Section 3.1(b) of this Agreement, to promote and sell the Systems in
Mexico. Focal shall undertake to take such actions as shall be necessary or
appropriate to facilitate the efforts of such sub-distributor to attain and
maintain all Regulatory Approvals required in Mexico.
7.2 POST MARKETING STUDIES. Focal, at its sole cost and expense, shall
be responsible for conducting all post marketing studies of the Systems required
by Regulatory Authorities as a condition to the issuance, continuation or
maintenance of a Regulatory Approval, or in connection with any other related
regulatory matter.
7.3 COMMUNICATION WITH REGULATORY AUTHORITIES. Focal shall have
responsibility for all communications with Regulatory Authorities relating to
Regulatory Approvals for the Systems. Except as set forth above, the
Collaboration Committee shall determine from time to time which party shall have
responsibility for communications with various other government agencies and
shall divide those responsibilities as it sees fit. Each party shall promptly
advise the other party of material developments and events relating to its
respective regulatory responsibilities.
31
<PAGE>
7.4 GOVERNMENTAL INSPECTIONS. Each party shall advise the other party
of any governmental visits to, or written or oral inquires about, any facilities
or procedures for the manufacture, storage, or handling of the Systems, or the
marketing, selling, promotion or distribution of the Systems promptly (but in no
event later than two (2) business days) after notice of such visit or inquiry.
Each party shall furnish to the other party any report or correspondence issued
by or provided to the governmental authority in connection with such visit or
inquiry.
7.5 SYSTEM COMPLAINTS. Focal shall have responsibility for maintaining
System complaint information and the assessment and submission of appropriate
reports to the relevant Regulatory Authorities in accordance with applicable
regulatory requirements. If at any time either party (the "Notifying Party")
receives notice of a System complaint (which shall mean any written, electronic
or oral communication that alleges deficiencies related to the identity,
quality, durability, reliability, safety, effectiveness or performance of the
Systems), the Notifying Party shall notify the other party (the "Notified
Party") in a timely manner (which, in the case of a notification by Genzyme,
shall not be later three (3) days), by telephone, confirmed in writing, to the
person designated as the Notified Party's contact for such purposes. In addition
to the foregoing, the parties shall develop mutually acceptable guidelines and
procedures to govern the sharing of System complaint information. Upon request
from Genzyme, Focal shall provide summary information to Genzyme in such detail
as Focal shall determine is appropriate regarding System complaints that have
occurred world-wide with respect to the Systems to the extent Focal is able to
assemble such information and to the extent permitted by applicable law or
regulation and other agreements with Third Parties.
7.6 POST MARKETING SURVEILLANCE. Focal, at its sole cost and expense,
shall have the responsibility of conducting Post Marketing Surveillance ("PMS")
for the Systems sold by Genzyme in the Territory. Genzyme shall fully cooperate
with Focal in its efforts to conduct PMS and will provide to Focal such
assistance as may be necessary for Focal to fully satisfy its PMS obligations,
including the collection of System related information and the preparation of
reports with respect to such information. The scope and details of such
cooperation by Genzyme shall be mutually agreed upon by the parties.
7.7 SYSTEM RECALLS. Focal, with the advice of Genzyme, shall prepare
and maintain a written Standard Operating Procedure ("SOP") to handle any
recalls of the Systems in the Territory. In the event that (i) any governmental
agency or authority issues a request or directive or orders that the Systems be
recalled or retrieved; (ii) a court of competent jurisdiction orders that the
Systems be recalled or retrieved; or (iii) Focal and Genzyme reasonably and
mutually determine, after consultation, that the Systems should be recalled,
retrieved or a "dear doctor" letter is required relating to restrictions on use
of the Systems, then Focal shall conduct such activity and the parties shall
take all appropriate corrective actions and shall execute the steps detailed in
the SOP; provided, that in the event that Focal and Genzyme are not able to
agree on the course of action to be taken, the final determination of the
appropriate course of action shall be made by Focal. In the event such action
results from the breach of Focal's warranties or covenants under this Agreement
or from side effects alleged to be caused in whole or in part by the Systems, or
Focal's (or Focal's agent's) negligence or willful misconduct, Focal shall, in
addition to any obligations under Section 14.2 and Section 6.11, be responsible
for the expenses thereof. In the event such action results from Genzyme's
negligence or willful misconduct, Genzyme shall, in addition to any obligations
under Section 14.1, be responsible for the expenses thereof. In all other
circumstances where neither the actions or omissions of Focal nor Genzyme is
responsible for the System recall or other activity agreed upon by the parties,
Focal and Genzyme shall share equally the expenses of notification and System
return, and the costs of destruction, repair or replacement and
32
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
distribution of System as authorized by Focal or required by the applicable
Regulatory Authorities. Genzyme and Focal shall cooperate fully with one another
in conducting any such action and shall use their respective reasonable efforts,
consistent with normal business practice, to minimize the cost of such action.
Genzyme shall destroy Systems lawfully recalled only upon Focal's (or any
governmental authority's) written instruction to destroy such Systems.
Otherwise, Genzyme may return the recalled Systems to Focal within thirty (30)
days after completion of the action.
ARTICLE 8
OWNERSHIP, CONFIDENTIALITY AND PUBLIC INFORMATION
8.1 OWNERSHIP. Nothing herein shall be interpreted or construed to
grant to Genzyme any rights or interest in the Focal Patent Rights, Trademarks,
Technology or other business or commercial rights associated with the Products
(other than the distribution and manufacturing rights for the Systems and the
license rights to the Trademarks granted hereunder) owned by Focal or to which
Focal is otherwise entitled under this Agreement or otherwise.
8.2 USE OF NON-CLINICAL AND CLINICAL DATA. Focal agrees to provide
Genzyme with data relevant to the promotion and sale of the Systems for use in
the Field in the Territory derived from any non-clinical and clinical studies of
the Systems obtained in connection with Research and Development for which
disclosure is not otherwise barred by contract, and shall permit Genzyme to use
it for the promotion of the Systems in the Territory.
8.3 CONFIDENTIALITY. Each party agrees that all Proprietary Information
it obtains from the other is the confidential property of the disclosing party.
Except as expressly allowed in this Agreement and except for disclosures made in
connection with regulatory matters or as otherwise required by law (provided
that the parties shall confer in advance and mutually agree on the extent of
such disclosures), the receiving party for a period ending five (5) years from
the date of expiration or termination of this Agreement shall hold in confidence
and not use or disclose any Proprietary Information of the disclosing party and
shall similarly bind its employees in writing. The receiving party shall not be
obligated under this Section 8.3 with respect to information the receiving party
can document:
(i) is or has become publicly available through no fault of the
receiving party or its employees or agents;
(ii) is received from a Third Party lawfully in possession of such
information and lawfully empowered to disclose such information and provided the
receiving party abides by all restrictions imposed by such Third Party;
(iii) was rightfully in the possession of the receiving party prior
to its disclosure by the other party provided the receiving party abides by all
restrictions imposed on its possession of such information; or
(iv) is or was developed independently of the information provided
by the disclosing party.
8.4 COVENANT NOT TO COMPETE. During the term of this Agreement, [**]
year after the expiration of this Agreement or the termination of this
Agreement by Focal pursuant to Section 11.3
33
<PAGE>
or Section 11.5 of this Agreement, Genzyme agrees that it will not directly or
indirectly distribute, market or sell in the Territory any products which
directly compete with the Systems in the Field for uses that are included within
the Regulatory Approval(s) for the Systems, except that Genzyme may promote,
market and sell in the Territory (i) products of any kind whatsoever (including
drugs or devices) to produce hemostasis by accelerating the clotting process of
blood, and (ii) other products that may be distributed, marketed or sold for use
in the Field in procedures that may involve surgical repair so long as the
promotion, advertising and sale of such products does not materially interfere
with the promotion, marketing and sale of the Systems in the Territory as
reasonably determined by the Collaboration Committee. The Collaboration
Committee shall be responsible for determining if a product competes, or has the
potential to compete, with the Systems during the term of this Agreement;
thereafter, the parties shall mutually agree upon the competitiveness of any
product. If, at any time, Genzyme requests a waiver, exception or release from
the restrictions of this covenant, Focal agrees that it will consider, and it
will act upon, such request in good faith; provided, that Focal shall be under
no obligation to satisfy any such request.
8.5 PUBLIC DISCLOSURES.
(a) Focal and Genzyme shall agree on the timing, content and form
of the initial press release announcing this transaction to be issued by each
party, or jointly, as the parties may agree; provided, that the initial press
release shall be issued within one (1) business day after the Effective Date.
(b) Focal and Genzyme may disclose the terms and conditions of this
Agreement to the extent that such disclosure is required by law, including
without limitation the securities and antitrust laws of the United States. The
parties acknowledge and agree that the determination that a disclosure is
required by law shall be made in the sole, but reasonably exercised, discretion
of the party making such disclosure.
(c) If reasonably required in connection with the conduct of their
respective businesses, Focal and Genzyme may disclose the existence or terms of
this Agreement to bankers, other business associates and potential investors if
such persons have agreed in writing to keep the information confidential. Upon
the request of either party, the other party shall identify those Third Parties
to whom such disclosure has been made.
8.6 PUBLICATIONS. Focal and Genzyme shall not submit for written or
oral publication any manuscript, abstract or the like which includes data or
other information related to the Systems that may materially and adversely
effect the promotion, marketing and sale of the Systems in the Territory without
providing in advance to the Collaboration Committee a copy of such submission
for review and comment. With respect to a manuscript, the manuscript shall be
provided by Focal or Genzyme to the Collaboration Committee a minimum of thirty
(30) days in advance, and with respect to an abstract, the abstract shall be
provided by Focal or Genzyme to the Collaboration Committee a minimum of
fourteen (14) days in advance. It is specifically understood that neither Focal
nor Genzyme has control of any publication made by Third Party physicians unless
such publication is based on data supplied by Focal or Genzyme.
8.7 OTHER PARTIES. Notwithstanding anything to the contrary contained
in this Agreement, Focal and Genzyme shall use reasonable efforts to each cause
any of its Affiliates and any Third Party
34
<PAGE>
contractors, scientists and other persons working with them who may have access
to Proprietary Information, or who may be in a position to publish on matters
relevant to this Agreement, to enter into one or more agreements with such
persons to cause them to be bound by the confidentiality and publication
restrictions of this Article 8.
ARTICLE 9
TRADEMARKS
9.1 TRADEMARK REGISTRATION. The Trademarks for the Products will be
owned by Focal, and shall be registered and maintained by Focal at its sole
expense. Focal represents that the registration of the Focal -Registered
Trademark- and FocalSeal -Registered Trademark- Trademarks and the Trademark
depicting the Company's tear drop logo (each as prepared by Focal to be used
with the Systems) has been granted, or has been applied for and is pending,
in each of the countries of the Territory, as of the Effective Date. Focal
agrees to continue to use its best efforts to pursue registration of the
Trademarks, including any other trademarks proposed by Focal to be used with
the Systems after the Effective Date in each of the countries of the
Territory where such Trademarks are pending. In the event the Trademarks are
not available in any country in the Territory, Focal shall develop new
trademarks for identifying the Systems in such country. In accordance with
Focal's guidelines, Genzyme shall utilize the Trademarks in connection with
the commercialization of the Systems, including without limitation, all
product packaging and promotional materials. Genzyme shall be permitted to
use its own trademarks in combination with the Trademarks, and with respect
to each such joint use, the Genzyme trademarks and the Trademarks shall be
displayed with equal prominence on the article, package or promotional
material. Genzyme shall submit exemplars of all packaging, promotional or
advertising material which includes the proposed form of use of the
Trademarks, including any Genzyme trademarks to be employed with the
Trademarks, to Focal for prior review and approval, which approval shall not
be unreasonably withheld or delayed. Focal shall be identified as the owner
of its Trademarks on all Genzyme packaging and promotional material. Genzyme
agrees to cooperate with Focal at Focal's expense to pursue and maintain
Trademark registrations in the Territory.
9.2 NO RIGHTS IN TRADEMARKS, TRADE NAMES, LOGOS OR DESIGNATIONS. Each
of Genzyme and Focal acknowledges that it has paid no consideration for the use
of the trademarks, trade names, logos and designations belong to the other
party, and except as described in this Agreement, nothing contained in this
Agreement shall give Genzyme or Focal any right, title or interest in or to any
of the trademarks, trade names, logos or designations belong to the other party.
Each of Genzyme and Focal acknowledges that the other party owns and retains all
proprietary rights in trademarks, trade names, logos and designations belonging
to the other party, and agrees that it will not at any time during or after the
term of this Agreement assert or claim any interest or do anything that might
adversely affect the validity or enforceability of any trademark, trade names,
logo or designations belonging to the other party. Each of Genzyme and Focal
agrees that it will not affix any trademarks belonging to the other party to any
product other than the Systems, and agrees that it will use the trademark
belonging to the other party solely in connection with the Systems.
9.3 TRADEMARKS AFTER TERMINATION OR EXPIRATION. Upon expiration or
termination of this Agreement, Genzyme and Focal will each cease all display,
advertising and use of the trademarks, trade names, logos and designations of
the other party, and Genzyme will not thereafter use, advertise or display any
name, mark or logo that is, or any part of which is, similar to any such
designation
35
<PAGE>
associated with the Systems, except to the extent necessary for Genzyme to sell
any Systems remaining in its inventory after termination of this Agreement in
accordance with Section 12.3 of this Agreement; provided, further, that the use
of the Trademarks, trade names, logos and designations by Genzyme after
expiration or termination is otherwise in accordance with this Agreement.
ARTICLE 10
PATENT AND TRADEMARK INDEMNIFICATION AND LITIGATION
10.1 PATENT AND TRADEMARK INDEMNITY. If Genzyme receives written notice
of a claim that any of the Products, Systems or Trademarks infringe upon a
patent, trademark or other intellectual property rights of a Third Party in the
Territory, or Genzyme becomes aware of a Third Party threat to sue or bring an
action for intellectual property infringement in the Territory, or if Genzyme
becomes aware of Third Party intellectual property rights in the Territory that
may give rise to a claim of infringement, Genzyme will notify Focal promptly in
writing and give Focal all necessary information and assistance. Focal shall
have the exclusive authority to evaluate, defend and settle any such claim as it
deems appropriate. Focal, at its own expense and option, may then (i) settle or
defend against such claim, (ii) procure ownership of or a license to the rights
alleged to be infringed, (iii) replace or modify the Products or Systems to
avoid infringement, provided, that Focal shall use reasonable commercial efforts
to assure that such replacements or modifications do not materially affect the
sales prospects of the Systems, (iv) require Genzyme to recall the Systems from
the Territory after consideration and consultation with Genzyme of the actions
described in the preceding clauses (i), (ii) and (iii), or (v) do any
combination of the foregoing; provided, however, that Focal hereby agrees to use
reasonable efforts to minimize the impact of its actions on Genzyme's ability to
market, sell and distribute the Systems. Provided such timely notice has been
given by Genzyme, Focal shall fully indemnify Genzyme from any expenses, costs
or losses resulting from such infringement in accordance with Section 14.2;
provided, however, that failure by Genzyme to provide timely notice shall
relieve Focal of its obligation to Genzyme under this Section 10.1 only to the
extent that such failure materially prejudices Focal's ability to defend such
action. Notwithstanding any decision by Focal to take one or more of the actions
described above, if a claim that any of the Products, Systems or Trademarks
infringe upon a patent, trademark or other intellectual property rights of a
Third Party materially and adversely affects Genzyme's distribution of the
Systems in the Territory, Genzyme shall be relieved of its obligation to satisfy
the Purchase Minimums in an amount reasonably determined to be attributable to
such claim.
10.2 LIMITATION OF INDEMNITY. The indemnity in Section 10.1 shall not
apply to (i) any claim arising out of a modification by Genzyme of the Products
or Systems after delivery by Focal, (ii) any infringement occurring after (a)
Genzyme has been offered the opportunity to discuss with Focal the alleged
infringement of, and Genzyme has received notice from Focal to terminate the
promotion or sale of, Systems that include, in Focal's reasonable judgment, the
Product or System which is the subject of the infringement, and (b) Genzyme does
not, in a commercially reasonable period of time, terminate such promotion or
sale, (iii) Genzyme's use of the Systems after Focal has informed Genzyme of
modifications or changes in the Products or Systems required to avoid such
claims (which modifications or changes do not materially affect the sales
prospects of the Systems) and Focal has offered to implement those modifications
or changes, if such claim would have been avoided by implementation thereof, and
Genzyme fails to have such modifications or changes implemented, (iv) any claim
is found to be based upon the recklessness or willful action or inaction of
Genzyme, (v) any claim if Genzyme fails to give Focal reasonably prompt notice
of such claim to the extent such failure materially
36
<PAGE>
prejudices Focal, (vi) any claims of infringement of any patent, copyright or
trade secrets in which Genzyme or its Affiliates has an interest or license, or
(vii) the settlement of any claim if Focal is not given the prior opportunity to
approve in writing such settlement.
10.3 INFRINGEMENT BY THIRD PARTIES. Focal shall have the sole right and
option, at its sole and absolute discretion, to file and maintain lawsuits in
its own name for infringement by Third Parties of any Patent Rights, Trademarks
or other proprietary rights relating to the Products or Systems that occur
within the Territory. Genzyme shall, at the request and expense of Focal, give
Focal all reasonable assistance and cooperation in any such proceedings at
Focal's expense. Notwithstanding any decision or action by Focal arising out of
any Third Party infringement, or the results or outcomes thereof, Genzyme's
obligation to make payments to Focal under this Agreement shall be unaffected
and, in the event that Genzyme's distribution of the Systems is adversely
affected by such Third Party infringement, Focal shall not be obligated to
offset any payments made hereunder. Notwithstanding any decision on the part of
Focal to forgo bringing or continuing to prosecute any suit, claim or
litigation, even if permitted under law, Genzyme shall not have the right to
bring, file or litigate any claim for infringement by Third Parties of any
proprietary rights held by Focal occurring in the Territory without Focal's
prior written consent, which consent shall not be unreasonably withheld. If such
consent is granted, Focal shall cooperate with Genzyme, and shall assign to
Genzyme such rights as are reasonably determined by Focal to be necessary to
bring, file or litigate such claim. Any recovery realized by either party as a
result of any infringement litigation pursuant to this Section 10.3 (whether by
way of settlement or otherwise) shall be first allocated to reimbursement of
legal fees and expenses incurred by the party initiating the proceeding, then,
if applicable, toward reimbursement of the other party's legal fees and
expenses, and then the remainder shall be divided between the parties as
follows: seventy-five percent (75%) to the party initiating such proceedings and
twenty-five percent (25%) to the other party.
10.4 THIRD PARTY LICENSE AGREEMENTS.
(a) Focal shall, at its own expense, take all such actions and
shall participate in such proceedings as shall be reasonably necessary to ensure
that Focal's rights under any agreements with Third Parties pursuant to which
Focal has in-licensed Focal Patent Rights or Scientific Know-How ("Third Party
License Agreements"), shall remain in full force and effect. If Focal fails to
take any such actions and participate in such proceedings and the Collaboration
Committee determines that such Third Party License Agreement is material to the
development and commercialization of any Product or System in the Field in the
Territory, then Genzyme shall have the right to require that Focal take, and
Focal agrees to use its reasonable best efforts to take, all such actions as
Genzyme shall reasonably deem necessary or desirable to ensure that such Third
Party License Agreements remain in force and effect and that Focal's rights
under such Third Party License Agreements remain in full force and effect,
including, but not limited to, the execution and filing of any court-related
filings and documents, the pursuit of injunctive proceedings, and the taking of
any other similar measures.
(b) Focal shall, within five business days after notice thereof,
provide written notice to Genzyme of any challenges or claims with respect to
any Third Party License Agreements, or alleged breaches under any Third Party
License Agreements.
(c) Focal shall not allow or agree to any amendment, waiver or
modification to any Third Party License Agreements, which amendment, waiver or
modification restricts, modifies or limits in any way Genzyme's rights under
this Agreement, without the prior written consent of Genzyme.
37
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPERATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
ARTICLE 11
TERM AND TERMINATION
11.1 INITIAL TERM. This Agreement shall commence as of the Effective
Date and, unless otherwise earlier terminated pursuant to this Article 11,
this Agreement shall expire on that date which is [**] after the date the
FocalSeal -Registered Trademark- -L System receives Regulatory Approval in
the United States (the "Initial Term").
11.2 EXTENSION TERM. The term of this Agreement may be extended (i)
by Genzyme, at its option, for up to [**] successive [**] periods (each [**]
period, an "Extension Term") if Genzyme satisfies the Purchase Minimums
during the last two full calendar years of the Initial Term or any Extension
Term immediately preceding such renewal, as applicable, by providing written
notice to Focal of such election not later than six (6) months prior to the
expiration of the Initial Term or any Extension Term, as the case may be, or
(ii) by Focal and Genzyme, jointly, for up to three successive Extension
Terms by joining in a written confirmation of such election not later than
six (6) months prior to the expiration of the Initial Term or any Extension
Term, as the case may be.
11.3 TERMINATION BY EITHER PARTY. This Agreement may be terminated
unilaterally by either party upon written notice to the other party in the event
of any of the following:
(a) nonpayment of all or any portion of any properly due and
payable amount that is (i) continuing for twenty (20) business days after the
defaulting party has received notice from the non- defaulting party of such
nonpayment, and (ii) not the subject of a good faith dispute between the
parties, in which case such dispute shall be resolved pursuant to the terms of
Section 16.5 of this Agreement;
(b) material breach by the other party of any provision herein
(other than as specified in Sections 11.3(a), 11.4 and 11.5 of this Agreement)
and (i) for a breach that can be reasonably cured within thirty (30) days, such
breach is continuing thirty (30) days after the non-defaulting party gives the
defaulting party notice of such breach specifying in reasonable detail the
particulars of the alleged breach, or (ii) for a breach that by its nature can
not be reasonably cured by the defaulting party within thirty (30) days, such
breach is continuing and either (x) no material steps have been taken by the
defaulting party to cure such breach during the thirty (30) day period following
receipt of the non-defaulting party's notice, or (y) the breach has not been
cured within a reasonable period of time as determined by the non-defaulting
party, which period shall in no event be longer than ninety (90) days;
(c) the other party becomes insolvent, or voluntary or involuntary
proceedings are instituted by or against the other party, which proceedings are
not stayed or dismissed against the party within thirty (30) days, or a receiver
or custodian is appointed for such party's business, or a substantial portion of
such party's business is subject to attachment or similar process, or the other
party is unable to satisfy its financial obligations as they become due, enters
into any compromise or arrangement with its creditors or enters into
liquidation;
(d) upon sixty (60) days prior written notice if a force majeure
event (as described in Section 16.1 of this Agreement) excusing non-performance
hereunder continues for a period of three (3) consecutive months;
38
<PAGE>
(e) upon sixty (60) days prior written notice upon the occurrence
of any event under Section 16.6(a) of this Agreement.
(f) upon prior written notice provided on or before March 1,
2002 in the event that Regulatory Approval of the FocalSeal -Registered
Trademark- -S System in the United States is not received on or before
December 31, 2001.
11.4 TERMINATION BY GENZYME. Genzyme may terminate this Agreement upon
thirty (30) days written notice to Focal in the event that:
(a) there is a material change in the frequency or severity of
adverse System-related events or there is a recall of any System for any reason
related to safety, which events require additional or modified warnings in
System labeling, and as a result the distribution of the Systems is
significantly and adversely affected during each of three (3) consecutive months
as determined in good faith by Genzyme;
(b) Genzyme is prohibited from selling any System in the United
States as a result of the denial of any required governmental approval, or as a
result of a court decision (or the receipt of a legal opinion from counsel
reasonably acceptable to both parties) that such System infringes upon a Third
Party's patent, trademark or other intellectual property rights;
(c) Focal fails to meet the supply minimums established in Section
5.4 and (i) no force majeure condition existed that had a material adverse
effect on Focal's ability to meet such supply minimums, and (ii) after Genzyme
has given proper notice to Focal pursuant to Section 5.4, Focal has not cured
such deficiencies in accordance with Section 5.4; or
(d) If a Performance Suspension Event (as defined herein) has
occurred.
11.5 TERMINATION BY FOCAL. Focal may terminate this Agreement in the
event that:
(a) if, notwithstanding the satisfaction by Focal of all conditions
to Genzyme's obligations to purchase Shares pursuant to the Stock Purchase
Agreement dated as of the date hereof between the parties (the "Stock Purchase
Agreement"), Genzyme fails to purchase all or any portion of such Shares
required to be purchased by Genzyme at any Closing pursuant to the Stock
Purchase Agreement and such failure is continuing thirty (30) days after the
receipt by Genzyme of written notice to such effect. The term "Shares" and
"Closing" shall be as defined in the Stock Purchase Agreement.
(b) Genzyme does not actively commence the promotion, marketing
and sale of the FocalSeal -Registered Trademark- -L System in accordance with
this Agreement within ninety (90) days after the date the FocalSeal
- -Registered Trademark- -L System receives Regulatory Approval in the United
States; provided, that Focal furnishes a notice of termination within thirty
(30) days after the end of such ninety (90) day period; or
(c) Genzyme fails to satisfy a Tier I Purchase Minimum for three
(3) consecutive calendar quarters or fails to satisfy a Tier II Purchase Minimum
for any calendar quarter, and (i) no force majeure condition existed that had a
material adverse effect on Genzyme's ability to meet such Purchase Minimums;
(ii) Focal met its supply obligations under this Agreement in all material
respects during the affected period and for 60 days immediately prior to such
affected period, (iii) no recall or other Regulatory Authority action occurred
that had a material adverse effect on Genzyme's ability to meet
39
<PAGE>
such Purchase Minimums; (iv) no claim of infringement by a Third Party with
respect to any Products had a material adverse effect on Genzyme's ability to
meet such Purchase Minimums; (v) Genzyme was able to lawfully sell all of the
Systems for use in the Field in the Territory during the affected period and for
90 days immediately prior to such affected period; or (vi) Genzyme has not cured
the failure in accordance with, and to the extent permitted by, Section 6.4 of
this Agreement; and, provided further, that Focal furnishes a notice of
termination prior to the later of (x) sixty (60) days after such failure occurs,
or (ii) sixty (60) days after Genzyme's failure to successfully cure a Purchase
Minimum deficiency after giving notice of its intent to do so under Section 6.4
of this Agreement.
11.6 TERMINATION BY FOCAL AND GENZYME. Focal and Genzyme may elect at
any time to terminate this Agreement upon mutual written agreement.
ARTICLE 12
RIGHTS AND DUTIES UPON TERMINATION OR EXPIRATION
12.1 MONIES PAID OR DUE. Upon the termination of this Agreement prior
to its expiration under Article 11 of this Agreement, Focal shall have the right
to retain all payments received from Genzyme pursuant to this Agreement, and
each party shall pay to the other all sums accrued hereunder which are then due.
12.2 TERMINATION OF DISTRIBUTION RIGHTS. Subject to Section 12.3, upon
expiration or termination of this Agreement, Genzyme's rights to market and sell
the Systems in the Territory shall immediately terminate. Upon such expiration
or termination, all promotional materials related to Systems that contain
Genzyme's name shall no longer be used to promote, market and sell the Systems.
12.3 REMAINING SYSTEMS. Upon expiration or termination of this
Agreement, Genzyme shall notify Focal of the amounts of the Systems that Genzyme
then has on hand, and Focal, in its sole discretion, with respect to all or any
specified portion of such amounts, may, within twenty (20) days after the
receipt of such notice, elect (i) to permit Genzyme and its sub-distributors to
sell the remaining amounts of the Systems for a period following the expiration
or termination of this Agreement not to exceed eighteen (18) months, (ii) to
repurchase the Systems from Genzyme at the actual Purchase Price paid by Genzyme
for the Systems, or (iii) to do a combination of the foregoing; provided,
however, in the event of termination by Genzyme pursuant to Sections 11.3 or
11.4, the foregoing election shall be made by Genzyme. In the event that either
party elects the option set forth in clause (i) above, Focal and Genzyme shall
cooperate to market and sell the Systems, and Focal shall have no obligation to
accept from Genzyme the amounts of the Systems that Genzyme has on hand at the
end of the post-termination sale period.
12.4 TRANSFER OF APPROVALS AND TRANSITION ASSISTANCE.
(a) Upon expiration or termination of this Agreement, Genzyme shall
take such reasonable steps as shall be required to cause the transfer to Focal
(or Focal's designated Affiliate) of any Regulatory Approvals, if any, issued in
the name of Genzyme or a Genzyme Affiliate, to the extent permitted by
applicable law and to the extent they are transferable pursuant to the terms
thereof. Any out-of-pocket fees and similar expenses incurred by Genzyme to
effect such transfer shall be borne by Focal.
40
<PAGE>
(b) Upon expiration of this Agreement or termination of this
Agreement pursuant to Section 11.3, 11.4 or 11.5 herein, Genzyme shall, at
Focal's cost and expense, render commercially reasonable assistance to
facilitate the transition to Focal of those promotional, marketing, sales and
sales administration activities performed by Genzyme under this Agreement.
Genzyme shall undertake to help Focal effect such transition efficiently and
quickly, and will provide to Focal, or its designees, such records and
information relating to this Agreement that does not constitute Genzyme
Proprietary Information; provided that, Genzyme shall permit Focal to retain and
use the Genzyme Proprietary Information set forth in Section 4.2(c)(iii) unless
such termination is pursuant to a material breach by Focal pursuant to Section
11.3(a), (b) or (c) or 11.4(d) of the Agreement. In addition, Genzyme shall
execute and deliver any agreements, notices, assignments and other instruments
mutually agree upon by Genzyme and Focal to be necessary to consummate such
transition.
12.5 SURVIVAL OF RIGHTS. Upon expiration or termination of this
Agreement, all rights and obligations of the parties under this Agreement shall
terminate, except those described in the following Articles:
<TABLE>
<CAPTION>
ARTICLE SURVIVING SECTIONS
------- ------------------
<S> <C>
Article 6 Section 6.11
Article 8 All Sections
Article 9 Section 9.3
Article 10 All Sections (except Section 10.4)
Article 12 All Sections
Article 13 All Sections
Article 14 All Sections
</TABLE>
In addition, any other provision which by its terms is stated to
survive this Agreement, and any other provision required to interpret and
enforce the parties' rights and obligations under this Agreement (including
without limitation Article 1 Definitions and Article 16 - Miscellaneous), shall
survive to the extent required for the full observation and performance of this
Agreement by the parties hereto.
12.6 RIGHTS NOT EXCLUSIVE. All rights to terminate, and rights upon
termination, provided to either party in this Agreement are in addition to other
remedies in law or equity which may be available to either party, including
without limitation, and notwithstanding any other provision of this Agreement,
the right of either party to seek the return of any monies paid to the other
party under this Agreement.
ARTICLE 13
REPRESENTATIONS AND WARRANTIES; COVENANTS
13.1 AUTHORIZATION. Focal and Genzyme each represents and warrants to
the other that (i) it has the legal authority and right to enter into and
perform this Agreement, (ii) this Agreement has been duly executed and delivered
and is a valid and binding agreement enforceable against such party in
accordance with its terms, (iii) no authorization, consent or approval of, or
any filing or registration with, any governmental authority or regulatory body
(other than as contemplated by this Agreement) or Third Party is required for
the execution, delivery and performance of this Agreement by such party, (iv)
the execution, delivery and performance of this Agreement will not conflict in
any material fashion with the terms of any other agreement to which it is or
becomes a party or by which it is or becomes bound,
41
<PAGE>
and (v) each Party has not made and will not make any commitments to others in
conflict with or in derogation of the rights conferred to the other party under
this Agreement.
13.2 INTELLECTUAL PROPERTY RIGHTS. Focal hereby represents and warrants
that, as of the Effective Date, (i) Focal possesses the right, title and
interest in or to, or has exclusive licence rights to (with the right to
sublicense) the Focal Patent Rights and the Technology, (ii) the Focal Patent
Rights and the Technology are free and clear of any lien or other encumbrance
that would interfere with the rights granted to Genzyme pursuant to this
Agreement or interfere with the promotion, marketing and sale of the Systems in
the Territory, and (iii) Focal is not aware of any valid patent, trade secret or
similar proprietary rights of a Third Party in the Territory that would be
infringed or misappropriated by the promotion, distribution or sale of the
Systems by Genzyme, or by the use of the Systems by Third Parties that purchase
the Systems from Genzyme.
13.3 COMPLIANCE WITH APPLICABLE LAWS. Focal and Genzyme each covenants
to the other that it will comply fully with all laws applicable to it and its
activities under this Agreement.
ARTICLE 14
INDEMNIFICATION, LIMITATION OF LIABILITY AND INSURANCE
14.1 INDEMNIFICATION BY GENZYME. Genzyme shall indemnify, defend and
hold harmless Focal and its Affiliates, employees, officers and directors, and
each of their respective successors and assigns (each, a "Focal Indemnified
Party") from and against any and all liability, loss, damage, cost, and expense
(including reasonable attorneys' fees), subject to the limitations in Section
14.5 (collectively, a "Liability"), which the Focal Indemnified Party may incur,
suffer or be required to pay resulting from or arising in connection with a
claim by a Third Party relating to (a) the breach by Genzyme of any covenant,
representation or warranty contained in this Agreement, (b) any negligent or
willful act or omission by Genzyme in connection with Genzyme's manufacture,
promotion, marketing, distribution or sale of the Systems, or (c) interactions
and communications by Genzyme with governmental authorities in connection with
such promotion and advertising.
14.2 INDEMNIFICATION BY FOCAL. Focal shall indemnify, defend and hold
harmless Genzyme and its Affiliates, employees, officers and directors, and each
of their respective successors and assigns (each, a "Genzyme Indemnified Party")
from and against any and all Liability, which the Genzyme Indemnified Party may
incur, suffer or be required to pay resulting from or arising in connection with
a claim by a Third Party relating to (i) the breach by Focal of any covenant,
representation or warranty contained in this Agreement, (ii) the development,
manufacture, promotion or marketing of the Systems or any other activity
conducted by Focal under this Agreement which is or is alleged to be the
proximate cause of injury, death or property damage to a Third Party, (iii) any
negligent or willful act or omission by Focal in connection with the promotion
and advertising of the Systems, or (iv) interactions and communications by Focal
with governmental authorities in connection with such promotion and advertising.
14.3 CONDITIONS TO INDEMNIFICATION. The obligations of the indemnifying
party under Sections 14.1 and 14.2 are conditioned upon the delivery of written
notice to the indemnifying party of any potential Liability promptly after the
Indemnified Party receives written notice of such potential Liability. The
indemnifying party shall have the right to assume the defense of any suit or
claim related
42
<PAGE>
to the Liability if it has assumed responsibility for the suit or claim in
writing; however, if in the reasonable judgment of the Indemnified Party such
suit or claim involves an issue or matter which could have a materially adverse
effect on the business, operations or assets of the Indemnified Party, the
Indemnified Party may waive its rights to indemnity under this Agreement and
control the defense or settlement thereof, provided, that such waiver shall
constitute a waiver of any indemnification rights such Indemnified Party may
assert at law or in equity against the indemnifying party. If the indemnifying
party defends the suit or claim, the Indemnified Party may participate in (but
not control) the defense thereof at its sole cost and expense.
14.4 SETTLEMENTS. Neither party may settle a claim or action related to
a Liability without the consent of the other party, if such settlement would
impose any monetary obligation on the other party or require the other party to
submit to an injunction. Any payment made by a party to settle any such claim or
action shall be at its own cost and expense.
14.5 LIMITATION OF LIABILITY. FOCAL AND GENZYME AGREE THAT NO PARTY
SHALL BE LIABLE TO ANOTHER PARTY FOR ANY SPECIAL, CONSEQUENTIAL, EXEMPLARY OR
INCIDENTAL DAMAGES (INCLUDING LOST OR ANTICIPATED REVENUES OR PROFITS RELATING
TO THE SAME), ARISING FROM ANY CLAIM RELATING TO THE PRODUCTS OR UNDER THIS
AGREEMENT, WHETHER SUCH CLAIM IS BASED ON CONTRACT, TORT (INCLUDING NEGLIGENCE)
OR OTHERWISE, EVEN IF AN AUTHORIZED REPRESENTATIVE OF SUCH PARTY IS ADVISED OF
THE POSSIBILITY OR LIKELIHOOD OF SUCH RECOVERY.
14.6 INSURANCE.
(a) Genzyme and Focal shall each maintain at their own cost product
liability, comprehensive general liability, property and transit insurance
coverage in amounts reasonably determined by the Collaboration Committee from
time to time from a reputable insurance carrier (or by means of self-insurance
if approved by the Collaboration Committee). The insurance obtained by each
party shall (a) name the other party (including their respective officers,
directors, employees, Affiliates, agents, successors and assigns) as additional
insureds with respect to matters arising from this Agreement, and (b) provide
that underwriters and insurance companies of the insured may not have any right
of subrogation against the other party (including its respective officers,
directors, employees, servants, Affiliates, agents, successors and assigns),
except in the event a claim results from Genzyme or Focal's respective gross
negligence or willful misconduct.
(b) Upon reasonable advance request, each Party shall furnish the
other Party with one or more certificates from a reputable insurance carrier
showing all insurance obtained in accordance with this Section. The certificates
shall include the following statement: "The insurance certified hereunder is
applicable to all contracts between [Focal] [Genzyme] and the Insured. This
insurance may be canceled or altered only after ten (10) days' written notice to
[Genzyme] [Focal] and the Insured."
(c) The Collaboration Committee shall review the adequacy of the
insurance described above on an annual basis and the Collaboration Committee
shall have the authority to reasonably direct the modification of such
insurance.
43
<PAGE>
ARTICLE 15
IMPROVEMENT PRODUCTS
15.1 IMPROVEMENT PRODUCTS. Any Improvement Products developed by Focal
shall be subject to the terms and conditions of this Agreement, including
without limitation, the authority of the Collaboration Committee. To the extent
the promotion, marketing and sale of Improvement Products is inconsistent with
the specific terms and conditions of this Agreement or the overall scheme of the
arrangement contemplated by this Agreement, the parties agree to modify and
conform this Agreement on terms and conditions mutually acceptable to the
parties. If the Collaboration Committee is unable to reach agreement on any
matter related to the integration of Improvement Products into this Agreement,
such dispute shall be resolved in accordance with Section 16.5 of this
Agreement.
ARTICLE 16
MISCELLANEOUS
16.1 FORCE MAJEURE; OTHER EVENTS.
(a) If the performance (other than payment obligations) of any part
of this Agreement by either party is prevented, restricted, interfered with or
delayed by reason of any cause beyond the reasonable control of the party liable
to perform, including acts of God, acts of civil or military authority, fires,
floods, epidemics, quarantine restrictions, war, armed hostilities, riots and
transportation delays directly resulting from a broadly based industry-wide
strike or work stoppage, unless conclusive evidence to the contrary is provided,
the party so affected shall, upon giving written notice to the other party, be
excused from such performance to the extent of such prevention, restriction,
interference or delay, provided that the affected party shall use its reasonable
efforts to avoid or remove such causes of non-performance and shall continue
performance with the utmost dispatch whenever such causes are removed. When such
circumstances arise, the parties shall discuss what, if any, modification of the
terms of this Agreement may be required in order to arrive at an equitable
solution.
(b) For purposes of Section 11.4(d) of this Agreement, a
"PERFORMANCE SUSPENSION EVENT" shall be deemed to have occurred if, on or before
April 30, 2001, a Third Party has made or filed with a court or arbitrator a
written request (a "SUSPENSION REQUEST") seeking to prohibit, restrain or enjoin
the performance by the Company or Genzyme of their respective obligations under
this Agreement which Suspension Request is based upon or arises out of a claim
which, if substantiated, would constitute a breach by Focal of its
representations and warranties set forth in clause (iv) or clause (v) of Section
13.1 of this Agreement and (i) on or before April 30, 2001, such court or
arbitrator has granted an award, order, injunction or decision enforcing such
Suspension Request and such award, order, injunction or decision continues to be
in effect and is binding upon the parties on April 30, 2001; or (ii) as of April
30, 2001, such Suspension Request has been pending for a period of not less than
one hundred thirty-five (135) days and has not been denied or dismissed with
prejudice, or (iii) as of April 30, 2001, such Suspension Request has been
pending for a period of less than one hundred thirty-five (135) days and a court
or arbitrator subsequently grants an award, order, injunction or decision
enforcing such Suspension Request.
44
<PAGE>
16.2 GOVERNING LAW. This Agreement shall be deemed to have been made in
the Commonwealth of Massachusetts and its form, execution, validity,
construction and effect shall be determined in accordance with the laws of the
Commonwealth of Massachusetts, without giving effect to the principles of
conflicts of law thereof.
16.3 GOVERNMENTAL APPROVALS AND MODIFICATION BY LEGISLATION.
(a) In addition to the obligations of the parties as set forth in
Section 7.1, the parties acknowledge that the approval of some portions of this
Agreement may be required by other governmental authorities or agencies. If such
approval is required, the parties will use their best efforts to obtain such
approval. If such approval is denied, the parties, in good faith, shall review
those portions of the Agreement that have not been approved, shall modify such
portions of the Agreement as may be reasonably appropriate to meet the
objections consistent with the business interests of the parties, and shall
otherwise take all steps that may be reasonably required to continue the
distribution of the Systems as contemplated by this Agreement.
(b) If, at any time during the term of this Agreement, any
provision, term, condition or object of this Agreement is in conflict with any
law, statute, court judgment or regulation, including applicable anti-trust
laws, of any country in the Territory, the parties will use their best efforts
to modify the applicable provision in a manner that is in conformity with such
law, statute, court judgment or regulation, and appropriate modifications to
this Agreement shall be made by the parties to avoid such conflict and to ensure
lawful performance of this Agreement.
16.4 INJUNCTIVE RELIEF. The parties acknowledge that damages at law may
be an inadequate remedy for the breach of any of the duties and obligations of
the parties contained in this Agreement; accordingly, to the extent permitted
under, and in accordance with, Section 16.5(d), each party shall be entitled,
without the need of establishing actual damages, to such injunctive relief as
may be necessary to prevent, or to enjoin the continuation of, any such breach.
16.5 DISPUTE RESOLUTION.
(a) Any matter or dispute that cannot be resolved by the required
vote of the Collaboration Committee, and any other dispute, controversy or claim
arising out of or relating to this Agreement, or the breach, termination, or
invalidity of this Agreement, shall be submitted in the first instance to the
most senior officer of the Focal and Genzyme business unit responsible for the
performance of each party's obligations under this Agreement.
(b) If the matter or dispute cannot be resolved by the senior
officers of the relevant business units pursuant to Section 16.5(a) within
twenty (20) days after submission, either party may submit such matter or
dispute to the Chief Executive Officer of Focal and the Chief Executive Officer
of Genzyme.
(c) If the matter or dispute cannot be resolved by the individuals
designated in Section 16.5(b) within thirty (30) days after such submission,
either party may initiate an Alternative Dispute Resolution ("ADR") proceeding
in accordance with the procedures set forth in EXHIBIT E attached hereto.
45
<PAGE>
(d) The arbitration decision shall be binding upon the parties. The
decision of the arbitrators shall be executory, and the prevailing party may
enter such decision in any court having competent jurisdiction. Each party shall
have the right to institute judicial proceedings against the other party or
anyone acting by, through or under such other party (including the right to seek
and to obtain injunctive relief) solely to enforce the instituting party's
arbitration rights or the decision of the arbitrators or to enforce, protect
and/or preserve the instituting party's intellectual property rights.
16.6 SEVERABILITY AND CLAIMS.
(a) If any provision of this Agreement is held by a court of
competent jurisdiction to be invalid or unenforceable, it shall be modified, if
possible, to the minimum extent necessary to make it valid and enforceable or,
if such modification is not possible, it shall be stricken and the remaining
provisions shall remain in full force and effect; provided, however, that if a
provision is stricken so as to significantly alter the economic arrangements of
this Agreement, the party adversely affected may terminate this Agreement upon
sixty (60) days' prior written notice to the other party.
(b) If any of the material terms or provisions of this Agreement is
in conflict with any applicable statute or rule of law in any jurisdiction, then
such term or provision shall be deemed inoperative in such jurisdiction to the
extent of such conflict and the parties will renegotiate the affected terms and
conditions of this Agreement to resolve any inequities.
(c) If any Third Party threatens or initiates any claim, action,
suit, arbitration or proceeding (a "Claim") relating to or arising out of (i)
the execution, delivery or performance of this Agreement, (ii) the right by
Focal to grant to Genzyme the rights conferred under this Agreement, or (iii)
the conflict of the terms of this Agreement with any other agreement, commitment
or arrangement to which Focal is bound, Focal shall promptly furnish notice to
Genzyme of the existence of the Claim. Focal agrees to vigorously contest any
Claim, including without limitation, taking such actions as may be reasonably
required under the circumstances to defend against the imposition of any form of
injunctive relief that could adversely affect the ability of Focal to perform
its obligations under this Agreement pending the final judgement, determination
or resolution of such Claim. Focal shall select reputable, appropriately
qualified counsel to defend such Claim and shall consult with Genzyme and give
due consideration to Genzyme's concerns with respect to such decision. Focal
shall furnish sufficient information to Genzyme on a periodic basis regarding
the status of the Claim so as to enable Genzyme to make a determination as to
the likely outcome of such Claim. In addition, Focal shall not settle,
compromise, consent to the entry of any judgement or accept any arbitration
decision relating to a Claim that could cause the termination, novation or
substantial revision of all or any part of this Agreement, or otherwise could
materially and adversely affect Genzyme's ability to enjoy the financial
benefits of this Agreement, without Genzyme's prior written consent, which
consent shall not be unreasonably withheld.
16.7 ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement
between the parties relating to the distribution of the Systems. All previous
writings and understandings, whether oral or written, heretofore made are
expressly merged in and made a part of this Agreement, including without
limitation (i) the Confidential Non-Disclosure Agreement, dated January 21,
1999, between the parties, and (ii) the Genzyme letter, dated August 23, 1999,
and accepted by Focal on August 25, 1999, setting forth the proposal for this
collaboration. The parties acknowledge the existence of a Stock Purchase
Agreement and a Registration Rights Agreement, dated the date hereof, relating
to the acquisition by
46
<PAGE>
Genzyme of Focal common stock. In the event of any inconsistency between this
Agreement and the Stock Purchase Agreement, the Registration Rights Agreement,
or any ancillary agreement or document contemplated by this Agreement or the
Stock Purchase Agreement, the terms of this Agreement shall govern.
16.8 AMENDMENT. This Agreement may not be amended, supplemented or
otherwise modified except by an instrument in writing signed by both parties
that specifically refers to this Agreement.
16.9 NOTICES. Any notice required or permitted under this Agreement be
sent by certified mail or courier service, charges pre-paid, or by facsimile
transmission, to the address or facsimile number specified below:
If to Focal: Focal, Inc.
4 Maguire Road
Lexington, Massachusetts 02173
Attn: Chief Executive Officer
Telephone: 781-280-7800
Fax: 781-280-7802
With a copy to: Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attn: Steven D. Singer
Telephone: 617-526-6000
Fax: 617-526-5000
If to Genzyme: Genzyme Corporation
One Kendall Square
Cambridge, Massachusetts 02139
Attn: Earl M. Collier, Jr.
President, Genzyme Surgical Products
Telephone: 617-252-7863
Fax: 617-761-8918
With a copy to: Genzyme Corporation
One Kendall Square
Cambridge, Massachusetts 02139
Attn: Chief Corporate Counsel
Telephone: 617-252-7560
Fax: 617-252-7553
and
47
<PAGE>
Palmer & Dodge
One Beacon Street
Boston, Massachusetts 02108
Attn: Paul M. Kinsella, Esq.
Telephone: 617-573-0513
Fax: 617-227-4420
or to such other address or facsimile number as the person may specify in a
notice duly given to the sender as provided herein. A notice will be deemed to
have been given as of the date that is five (5) business days after it is
deposited in the United States mail or the date it is delivered by a an
overnight or same day courier service or, in the case of facsimile transmission,
when received.
16.10 BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the successors and assigns of the parties
hereto. This Agreement may not be assigned or otherwise transferred by either
Party without the consent of the other party; provided, however, that either
Genzyme or Focal may, without such consent, assign its rights and obligations
under this Agreement (i) to any Affiliate in connection with a corporate
reorganization, or (ii) to a Third Party in connection with a merger,
consolidation or sale of all or substantially all of such party's assets;
provided, however, that with respect to clause (i) the Affiliate shall continue
to be directly or indirectly owned or controlled by the party assigning this
Agreement or by the person who directly or indirectly owns or controls such
party ("control" to be defined as set forth in Section 1.1), and, with respect
to either clause (i) or clause (ii), such party's rights and obligations under
this Agreement shall be assumed by its successor in interest in any such
transaction and shall not be transferred separate from all or substantially all
of its other business assets, including those business assets that are the
subject of this Agreement. Any purported assignment in violation of the
preceding sentence shall be void. Any permitted assignee shall assume in writing
all obligations of its assignor under this Agreement.
16.11 HEADINGS AND REFERENCES. All section headings contained in this
Agreement are for convenience of reference only and shall not affect the meaning
or interpretation of this Agreement. Unless the context requires otherwise, all
references in this Agreement to any article or section shall be deemed and
construed as references to an article or section of this Agreement.
16.12 NO AGENCY. It is understood and agreed that each party shall have
the status of an independent contractor under this Agreement and that nothing in
this Agreement shall be construed as authorization for either party to act as
agent for the other. Members of the Collaboration Committee shall remain
employees of Genzyme or Focal, as the case may be.
16.13 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument. A facsimile
transmission of the signed Agreement shall be legal and binding on all parties.
[Remainder of page intentionally left blank]
48
<PAGE>
IN WITNESS WHEREOF, the parties, through their authorized officers,
have duly executed this Agreement intending it to be effective and binding as of
the date first written above.
FOCAL, INC.
By: /s/ David M. Clapper
-----------------------------------------
Name: David M. Clapper
Title: President
GENZYME CORPORATION
By: /s/ Earl M. Collier, Jr.
-----------------------------------------
Name: Earl M. Collier, Jr.
Title: Executive Vice President
49
<PAGE>
EXHIBIT A
PRODUCTS
I. APPLICATORS
The Sealant product is applied to tissue via a delivery system
(depicted in the drawing below) consisting of separate applicators for the
primer and sealant solutions.
Each applicator consists of a disposable syringe, an extension that
contains a lumen for material delivery and a flow-through brush to allow
dispensing and spreading of the primer or sealant on the tissue surface. The
syringe attaches to the extension via a luer-lock hub. The applicators and
associated brushes are supplied sterile in a tray and are intended for single
use.
PRIMER APPLICATOR
- Single-use, disposable, sterile packaged in procedural kit
- Accepts a Focal-specified 5 cc syringe with luer-lock tip
- Shaft length is nominal 17 cm from luer hub to tip
- Distal end has nominal 45[degree] bent tip to facilitate use in
thoracic cavity
- Non-removable flow-through brush
- Atraumatic brush with synthetic bristles
- Smooth external surfaces which prevent damage to tissue or
surgical gloves
- Allows comfortable input forces to dispense primer
- EtO sterilized
SEALANT APPLICATOR
- Single-use, disposable, sterile packaged in procedural kit
- Accepts a custom Focal red 10 cc syringe with luer-lock tip
- Shaft length is nominal 17 cm from luer hub to tip
- Distal end has nominal 45[degree] bent tip to facilitate use in
thoracic cavity
- Includes removable, positive lock flow-through brush
- Atraumatic brush with synthetic bristles
A-1
<PAGE>
- Allows comfortable input forces to dispense sealant
- EtO sterilized
A-2
<PAGE>
II. LAMP MODULES
- Customer replaceable, self-aligning Xenon arc lamp
- Lamp life of 300 hours
A-3
<PAGE>
III. LIGHT SOURCES
- Source of visible light using a self-regulating power supply
capable of operating at 110 volts/60 Hz or 220 volts/50 Hz.
- Portable (not to exceed 10 kg).
- Noise level [less than] TBD dB at TBD meters on all sides.
- Provides visible light (470-520 nm wavelength range) at 400
milliwatts minimum output bandwidth at factory set duration of 40
seconds.
- Maximum delay of 0.1 seconds between pulses.
- Surgeon control allows mid-cycle light shut-off.
- Customer Replaceable, self-aligning lamp.
- Target Cost of Goods with overhead: [less than or equal to]$3,258
each (assuming > 300 units/year).
- Optical/electrical connector is easy to inert and remove, but
difficult to inadvertently remove.
- The light source is packaged non-sterile.
- Passes EN60601 ISO standard for earth ground and leakage current.
A-4
<PAGE>
IV. LIGHT WANDS
- Re-usable; 1 year expected life.
- Hand-held, ambidextrous grip with finger activation of light
switch.
- Nominal 5 mm diameter x 15 cm shaft length with curved tip
(nominal 45[degree]) for access to thoracic cavity.
- Atraumtic external surfaces to prevent damage to tissue or
surgical gloves.
- Flexible, low friction, cable housing optical fiber(s) and
electrical conductors (3.5 m length).
- Entire assembly is sealed for submersion in fluids.
- External surfaces resistant to common cleaning alcohols,
disinfecting detergents.
- Steam resterilizable for > 300 cycles.
- 75% Transmission efficiency (minimum).
- Passes EN60601 ISO standard for earth ground and leakage current.
A-5
<PAGE>
PRIMER AND SEALANT
The Sealant product is delivered as a two-component system (depicted in
the drawing below) consisting of a lower viscosity primer and a higher viscosity
sealant. The materials are polymerized using a custom visible light source. The
materials hydrolyze and are absorbed by the body.
The sealant system consists of 4 sub-systems:
- Primer and Sealant formulations
- Separate applicators for applying primer and sealant
- Light Wand to provide directed light energy to the application
site
- Light Source
PRIMER AND SEALANT
The primer and sealant formulations will be shipped and stored frozen
as part of a procedural kit with an initial shelf-life of 15 months. It is
anticipated that by one year after commercial introduction, the shelf-life can
be increase to 24 months. Storage, handling, and/or mixing requirements will be
within the capabilities of the hospital staff and infrastructure.
The system will require no more than 10 minutes to prepare for use.
The primer will be packaged as a 2-component system to yield at least 5
cc in a specified single-use, clear syringe that is compatible with the primer
applicator. The liquid component will be frozen in a clear vial. The second
component will be lyophilized and frozen in a clear vial. The outer surface of
the two primer vials will be sterilized by ETO following placement in a sealed
tray.
The thawed contents of the sealant syringe is ready to use once
attached to its applicator. In the sterile field, the thawed contents of the
liquid vial will be transferred into the lyophilized vial with the included
needle and primer syringe, mixed and drawn back into the syringe for use.
The sealant will be aseptially filled and packaged to yield at least 8
cc in a light-protected single-use syringe compatible with the sealant
applicator. The unfilled sealant syringe will be rendered sterile by ETO.
A-6
<PAGE>
EXHIBIT B
CO-PROMOTION GUIDELINES
These Co-Promotion Guidelines set forth the policies and protocols
that Genzyme Surgical Products, a division of Genzyme Corporation ("GSP") and
Focal, Inc. ("Focal") have agreed to implement under the Distribution and
Marketing Collaboration Agreement dated as of October 21, 1999 to maximize
market penetration of the FocalSeal -Registered Trademark- -L product. These
Guidelines are subject to revision or supplement by the Collaboration
Committee. To maximize market penetration in an efficient and effective
manner, GSP and Focal agree to the following:
- Overall promotional, marketing and sales strategy and direction
will be the responsibility of the Collaboration Committee.
- GSP will employ a cardiac sales group of at least twenty (20)
individuals in the US market that will sell FocalSeal -Registered
Trademark- -L product as one of its primary products. Focal will
employ a dedicated thoracic promotional group of at least eight
(8) individuals to co-promote the same product within a
reasonable time after System Launch.
- Each sales/promotional group will be separately managed by their
respective organizations and will have separate and specifically
assigned hospital accounts for which they are primarily
responsible to ensure accountability and to accurately measure
performance.
- GSP, with the approval of the Collaboration Committee, will
determine the assignment of hospital accounts to the respective
sales/promotional groups. Given the unique strengths of each
organization, GSP and Focal agree to assign primary responsibility
for major cardiovascular accounts to GSP and major pulmonary
accounts to Focal to the extent possible.
- Focal product specialists shall not be authorized to commit or
finalize Product sales. All sales shall be subject to approval and
acceptance by GSP. All sales to end-users will be recognized as
sales by GSP and, accordingly, will be recorded as revenue by GSP
regardless of which organization generated the order.
- Focal will be responsible for the design and implementation of
promotional and sales training. GSP agrees that its sales force
will meet or exceed the product knowledge standards as determined
by Focal that are necessary to properly sell the Products.
Additionally, Focal will provide appropriate training support at
national and regional sales meetings, conventions and surgeon
training sessions as provided for in the Agreement.
- To develop a consistent approach to end-users, the sales
management of both organizations will implement compatible field
organization policies.
B-1
<PAGE>
Recognizing the importance of the Product representatives to the market
penetration goal, GSP will assist Focal to recruit candidates that have skills,
expertise and qualifications that are consistent with existing GSP sales
representatives.
- The Collaboration Committee will on a quarterly basis review the
effectiveness and efficiency of all policies and procedures.
B-2
<PAGE>
EXHIBIT C
REUSABLE PRODUCT WARRANTY
The following sets forth the terms of the Third Party warranty as
currently in effect with respect to the Light Sources and Lamp Modules (with
capitalized terms having the meanings set forth in that certain Supply Agreement
between Focal and ILC):
WARRANTIES AND INDEMNIFICATION
1.1 WARRANTIES
(a) Materials, Workmanship. ILC warrants the Light Sources and
Replacement Lamp Modules to be free from defective material and workmanship and
agrees to promptly remedy any such defect or to promptly (but in no event, in no
more than fifteen (15) days) furnish a new part in exchange for any part of any
unit of its manufacture which, under normal installation, use, and service
discloses such defect, provided the unit is delivered to ILC intact, for
examination with all transportation charges prepaid for the following periods:
(a) the duration of the warranty for the Light Sources shall be the lesser of
eighteen (18) months after delivery to Focal or twelve (12) months after
delivery to end users of the Light Sources; (b) the duration of the warranty for
the Replacement Light Module shall be as stated in the Specifications. In the
event the returned units are defective, ILC shall promptly return the repaired
or replaced unit to Focal or Focal's designee, at ILC's expense. ILC shall not
be obligated to pay the expenses of transporting the Light Sources or
Replacement Lamp Modules to ILC. Notwithstanding the foregoing, the warranty in
this Section 5.1.1 does not extend to any Light Source or Replacement Lamp
Module (i) which has been subjected to misuse, neglect, accident, incorrect
wiring not installed by ILC, improper installation, or to use in violation of
instructions furnished in writing by ILC with the Light Source customer
documentation, (ii) which has been repaired or altered other than by ILC, (iii)
the serial number of which has been removed, defaced or changed, or (iv) which
has been used with accessories not manufactured or recommended by ILC or Focal.
1.2 OTHER WARRANTIES. ILC further covenants, represents and warrants to
Focal that (i) all Light Sources old by ILC to Focal hereunder will comply in
all material respects with the Specifications, conform with the information
shown on the Q.A. Data Sheet provided for the particular shipment and not
contain any Latent Defects; (ii) all of the Light Sources sold hereunder shall
have been manufactured, package, stored and shipped in conformance with all
applicable current Good Manufacturing Practices which are in force or
hereinafter adopted by the FDA or any other analogous foreign government agency
with jurisdiction over the Light Sources; (iii) title to all Light Sources sold
hereunder shall pass to Focal as provided herein free and clear of any security
interest, lien, or other encumbrance; (iv) ILC has not previously granted and
will not grant any rights to use and sell the Light Sources to any third party,
which rights are inconsistent with the rights granted to Focal herein; and (v)
neither the manufacture, use nor sale of the Light Sources will infringe any
United States patent, trademark, or other intellectual property right or
misappropriate any trade secret of any third party in the U.S., or to ILC's
knowledge as of the Effective Date, infringe any patent, trademark or other
intellectual property right or misappropriated any trade secret of any third
party outside the U.S.
1.3 DISCLAIMER. EXCEPT AS EXPRESSLY PROVIDED HEREIN, ILC MAKES NO
REPRESENTATION OR WARRANTY AS TO THE LIGHT SOURCES, AND ILC HEREBY
C-1
<PAGE>
EXPRESSLY DISCLAIMS ANY AND ALL IMPLIED OR STATUTORY WARRANTIES, INCLUDING
WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, OR NONINFRINGEMENT, OR WARRANTIES ARISING OUT OF COURSE OF DEALING OR
INDUSTRY PRACTICE.
1.4 LIMITATION OF LIABILITY. THE FEES RECEIVED BY ILC UNDER THIS
AGREEMENT DO NOT INCLUDE ANY ASSUMPTION BY ILC OF ANY RISK OF FOCAL OR ANY OTHER
PERSON OR ENTITY, OF ANY CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION,
ANY LOSS OF PROFITS, OR OTHERWISE. ACCORDINGLY, ILC SHALL NOT BE LIABLE TO FOCAL
FOR ANY LOSS OF USE, DATA OR PROFITS, BUSINESS INTERRUPTION OR ANY SPECIAL,
INCIDENTAL, INDIRECT, CONSEQUENTIAL, EXEMPLARY, OR RELIANCE DAMAGES HOWEVER
CAUSED IN ANY WAY OUT OF THIS AGREEMENT, EVEN IF ADVISED OF THE POSSIBILITY OF
SUCH DAMAGE AND NOTWITHSTANDING THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY
REMEDY.
C-2
<PAGE>
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPERATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
EXHIBIT D
Annual Sales Forecast
SALES FORECAST
JANUARY 1, 2000 TO DECEMBER 31, 2000
The table set forth below contains the Annual Sales Forecast for
calendar year 2000 as referenced in Section 6.3(a) of this Agreement.
This Annual Sales Forecast is stated in units of Products, and
assumes the Product Launch for the FocalSeal -Registered Trademark- -L System
will take place on or before April 1, 2000. If the Product Launch takes place
before April 1, 2000, the Annual Sales Forecast shall remain as stated. If
the Product Launch takes place after April 1, 2000, the Annual Sales Forecast
shall be adjusted as follows: (i) if the Product Launch occurs on or before
the 15th day of the month, then such month shall be deemed to constitute
"April 2000" under the Annual Sales Forecast and the Annual Sales Forecast
for each succeeding month shall apply in accordance with the table, and (ii)
if the Product Launch occurs after the 15th day of the month, then the next
month shall be deemed to constitute "April 2000" under the Annual Sales
Forecast and the Annual Sales Forecast for each succeeding month shall apply
in accordance with the table.
For the purpose of calculating the Purchase Minimums for which Genzyme
is responsible in 2000 under Section 6.4, the units of Products set forth below
in the Table shall be reduced by [**]. For example, if during the 2nd quarter of
2000, the Tier 1 Purchase Minimum, as defined under Section 6.4(a) is [**] units
(forecast of [**] Sealant units x [**] x [**]) and the Genzyme sales
representatives generated orders totaling [**] units during the 2nd quarter, an
additional [**] units would be required to be purchased by Genzyme.
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------------- -------------------- -------------------- -------------------
JAN. FEB. MAR. APRIL MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC.
---- ---- ---- ----- --- ---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SEALANT KITS [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**]
APPLICATOR KITS [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**]
LIGHT SOURCES (A) [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**]
LIGHT WANDS [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**]
LAMP MODULES (B) [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**]
</TABLE>
(a) The lead time for ordering Light Sources is currently 4+ months.
(b) It is recommended that one spare Lamp Module be purchased with each Light
Source.
D-1
<PAGE>
EXHIBIT E
ADR PROCEDURES
1. To begin an ADR proceeding, a Party shall provide written notice to
the other Party of the issues to be resolved by ADR. Within fourteen (14) days
after its receipt of such notice, the other Party may, by written notice to the
Party initiating the ADR, add additional issues subject to ADR pursuant to
Section 16.5 to be resolved within the same ADR.
2. Within twenty-one (21) days following receipt of the original ADR
notice, the Parties shall select a mutually acceptable neutral party to preside
in the resolution of any disputes in this ADR proceeding. If the Parties are
unable to agree on a mutually acceptable neutral party within such period, a
Party may request the President of the CPR Institute for Dispute Resolution
("CPR"), 366 Madison Avenue, 14th Floor, New York, New York 10017, to select a
neutral party pursuant to the following procedures:
(a) The CPR shall submit to the Parties a list of not less than
five (5) candidates within fourteen (14) days after receipt of the request,
along with a Curriculum Vitae for each candidate. No candidate shall be an
employee, director or shareholder of a Party or any of their Affiliates.
(b) Such list shall include a statement of disclosure by each
candidate of any circumstances likely to affect his or her impartiality.
(c) Each Party shall number the candidates in order of preference
(with the number one (1) signifying the greatest preference) and shall deliver
the list to the CPR within seven (7) days following receipt of the list of
candidates. If a Party believes a conflict of interest exists regarding any of
the candidates, that Party shall provide a written explanation of the conflict
to the CPR along with its list showing its order of preference for the
candidates. Any Party failing to return a list of preferences on time shall be
deemed to have no order of preference.
(d) If the Parties collectively have identified fewer than three
(3) candidates deemed to have conflicts, the CPR immediately shall designate as
the neutral party the candidate for whom Focal on the one hand, and Genzyme on
the other hand, have indicated the greatest preference. If a tie should result
between two candidates, the CPR may designate either candidate. If the Parties
collectively have identified three (3) or more candidates deemed to have
conflicts, the CPR shall review the explanations regarding conflicts and, in its
sole discretion, may either (i) immediately designate as the neutral party the
candidate for whom the Parties collectively have indicated the greatest
preference, or (ii) issue a new list of not less than five (5) candidates, in
which case the procedures set forth in subsection 2(a)-(d) shall be repeated.
3. No earlier than twenty-eight (28) days or later than fifty-six (56)
days after selection, the neutral party shall hold a hearing to resolve each of
the issues identified by the Parties. The ADR proceeding shall take place at a
location agreed upon by the Parties. If the Parties cannot agree, the neutral
party shall designate a location other than the principal place of business of
either Party or any of their Affiliates.
E-1
<PAGE>
4. At least seven (7) days prior to the hearing, each Party shall
submit the following to the other Party and the neutral party:
(a) a copy of all exhibits on which such Party intends to rely in
any oral or written presentation to the neutral party;
(b) a list of any witnesses such Party intends to call at the
hearing, and a short summary of the anticipated testimony of each witness;
(c) a proposed ruling on each issue to be resolved, together with a
request for a specific damage award or other remedy for each issue. The proposed
rulings and remedies shall not contain any recitation of the facts or any legal
arguments and shall not exceed one (1) page per issue.
(d) a brief in support of such Party's proposed rulings and
remedies, provided that the brief shall not exceed twenty (20) pages. This page
limitation shall apply regardless of the number of issues raised in the ADR
proceeding.
5. Consistent with subsections 4(a)-(d), the neutral party shall
establish the rules for and resolve any disputes concerning, any discovery to be
conducted prior to the ADR hearing, including but not limited to depositions,
interrogatories, requests for admissions, or production of documents.
6. The hearing shall be conducted on two (2) consecutive days and shall
be governed by the following rules:
(a) Each Party shall be entitled to five (5) hours of hearing time
to present its case. The neutral party shall determine whether each Party has
had the five (5) hours to which it is entitled.
(b) Each Party shall be entitled, but not required, to make an
opening statement, to present regular and rebuttal testimony, documents or other
evidence, to cross-examine witnesses, and to make a closing argument.
Cross-examination of witnesses shall occur immediately after their direct
testimony (unless a witness affiliated with a party has been called by the other
party in that party's case, in which event the party with which the witness is
affiliated may examine the witness either immediately after the direct
examination or as part of that party's case), and cross-examination time shall
be charged against the party conducting the cross-examination.
(c) The Party initiating the ADR shall begin the hearing and, if it
chooses to make an opening statement, shall address not only issues it raised
but also any issues raised by the responding Party. The responding Party, if it
chooses to make an opening statement, also shall address all issues raised in
the ADR. Thereafter, the presentation of regular and rebuttal testimony and
documents, other evidence, and closing arguments shall proceed in the same
sequence.
(d) Settlement negotiations, including any statements made therein,
shall not be admitted or referenced to in the ADR hearing under any
circumstances. Affidavits prepared
E-2
<PAGE>
for purposes of the ADR hearing also shall not be admissible. As to all other
matters, the neutral party shall have sole discretion regarding the
admissibility of any evidence.
7. Within seven (7) days following completion of the hearing, each
Party may submit to the other Party and the neutral party a post-hearing brief
in support of its proposed rulings and remedies, provided that such brief shall
not contain or discuss any new evidence and shall not exceed ten (10) pages.
This page limitation shall apply regardless of the number of issues raised in
the ADR proceeding.
8. The neutral party shall rule on each disputed issue within fourteen
(14) days following completion of the hearing. In making his/her ruling, the
neutral party shall apply the governing law provisions of the Agreement. Such
ruling shall adopt in its entirety the proposed ruling and remedy of one of the
Parties on each disputed issue but may adopt one Party's proposed rulings and
remedies on some issues and the other Party's proposed rulings and remedies on
other issues. The neutral party may, but need not, issue a written opinion or
otherwise explain the basis of the ruling.
9. The neutral party shall be paid a reasonable fee plus expenses.
These fees and expenses, along with the reasonable legal fees and expenses of
the prevailing Party (including all reasonable expert witness fees and
expenses), the fees and expenses of a court reporter, if any, and any expenses
for a hearing room, shall be paid as follows:
(a) If the neutral party rules in favor of one Party on all
disputed issues in the ADR, the losing Party shall pay 100% of such fees and
expenses.
(b) If the neutral party rules in favor of one Party on some issues
and the other Party on other issues, the neutral party shall issue with the
rulings a written determination as to how such fees and expenses shall be
allocated between the parties. The neutral party shall allocate fees and
expenses in a way that bears a reasonable relationship to the outcome of the
ADR, with the Party prevailing on more issues, or on issues of greater value or
gravity, recovering a relatively larger share of its legal fees and expenses.
10. The rulings of the neutral party and the allocation of fees and
expenses shall be binding, non-reviewable, and non-appealable, and may be
entered as a final judgment in any court having jurisdiction.
11. Except as provided in subsection (i) or as required by law, the
existence of the dispute, any settlement negotiations, the ADR hearing, any
submissions (including exhibits, testimony, proposed rulings, and briefs), and
the rulings and any written opinion of the neutral party shall be deemed
Confidential Information. The neutral party shall have the authority to impose
sanctions for unauthorized disclosure of Proprietary Information.
12. No ADR proceeding between the Parties shall include, by
consolidation, joint or otherwise, any third party, without the consent of both
Parties.
E-3
<PAGE>
EXHIBIT 10.19
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
FOCAL, INC.
AND
GENZYME CORPORATION
------------------------------------
October 21, 1999
------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Article I SALE OF THE SHARES.........................................................................1
1.1. Initial Sale and Purchase of the Shares........................................................1
1.2. Options to Sell Additional Shares of Common Stock..............................................1
Article II CLOSING AND FUNDING........................................................................6
2.1. The Closings...................................................................................6
2.2. Initial Closing Funding........................................................................6
2.3. Delivery of Shares.............................................................................6
Article III REPRESENTATIONS AND WARRANTIES OF THE COMPANY..............................................7
3.1. Organization...................................................................................7
3.2. Authority to Execute and Perform Agreement.....................................................7
3.3. Capitalization.................................................................................7
3.4. Subsidiaries...................................................................................8
3.5. SEC Reports....................................................................................8
3.6. Financial Statements...........................................................................9
3.7. Absence of Undisclosed Company Liabilities.....................................................9
3.8. No Material Adverse Effect.....................................................................9
3.9. Actions and Proceedings........................................................................9
3.10. No Breach.....................................................................................10
3.11. Registration Rights...........................................................................10
3.12. Brokers or Finders............................................................................10
3.13. Patents, Trademarks, Etc......................................................................10
3.14. Anti-Takeover Laws............................................................................11
Article IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER...........................................11
4.1. Authorization of Agreement....................................................................11
4.2. Litigation....................................................................................11
4.3. Investment Intention..........................................................................11
4.4. Due Diligence.................................................................................12
4.5. Brokers or Finders............................................................................12
Article V CONDITIONS TO CLOSING AND FUNDING.........................................................12
5.1. Conditions Precedent to Obligations of Purchaser at any Closing...............................12
-i-
</TABLE>
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
5.2. Additional Conditions Precedent to the Obligations of the Purchaser at Option Closings........13
5.3. Conditions Precedent to Obligations of the Company at any Closing.............................15
5.4. Conditions Precedent to Obligations of the Purchaser at the Initial Closing Funding...........15
Article VI DOCUMENTS TO BE DELIVERED.................................................................16
6.1. Deliveries by the Company to the Purchaser at each Closing....................................16
6.2. Deliveries by the Company and the Purchaser at the Initial Closing............................16
6.3. Deliveries by the Company to the Purchaser at the Initial Closing Funding.....................16
6.4. Deliveries by the Purchaser to the Company at the Initial Closing Funding and each
Closing.......................................................................................17
Article VII CERTAIN COVENANTS OF THE COMPANY..........................................................17
7.1. Participation Rights of Purchaser in Future Issuances.........................................17
7.2. Reservation of Common Stock and Other Securities..............................................18
7.3. Corporate Existence; Conduct of Business......................................................18
7.4. No Impairment.................................................................................18
7.5. Integration...................................................................................18
7.6. Provision of Information......................................................................19
7.7. Rights Agreement..............................................................................19
Article VIII STANDSTILL AGREEMENT AND RIGHT OF FIRST REFUSAL...........................................19
8.1. Certain Definitions...........................................................................19
8.2. Prohibited Activities.........................................................................19
8.3. Exceptions....................................................................................20
8.4. Change of Control Notice and Agreement to Negotiate...........................................20
Article IX RESTRICTIONS ON TRANSFER..................................................................21
9.1. Restricted Shares.............................................................................21
9.2. Requirements for Transfer.....................................................................21
9.3. Legends.......................................................................................22
Article X MISCELLANEOUS.............................................................................22
10.1. Survival of Representations and Warranties....................................................22
10.2. Fees and Expenses.............................................................................22
-ii-
</TABLE>
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
10.3. Further Assurances............................................................................22
10.4. Dispute Resolution............................................................................22
10.5. Entire Agreement; Amendments and Waivers......................................................23
10.6. Governing Law.................................................................................23
10.7. Table of Contents and Headings................................................................23
10.8. Notices.......................................................................................23
10.9. Section Headings, Construction................................................................24
10.10. Counterparts..................................................................................24
10.11. Rules of Construction.........................................................................24
10.12. Severability..................................................................................24
10.13. Binding Effect; Assignment....................................................................25
10.14. Limitation of Liability.......................................................................25
10.15. Use of Names..................................................................................25
-iii-
</TABLE>
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
COMPANY DISCLOSURE SCHEDULES
Schedule 3.4 - Subsidiaries and Other Investments
Schedule 3.5(b) - Terminated Contract
Schedule 3.11 - Holders of Registration Rights
Schedule 3.13 - Intellectual Property Agreements
EXHIBITS
Exhibit A - Form of Registration Rights Agreement`
Exhibit B - Form of Company Board Resolutions
Exhibit C - Form of Opinion of Company's Counsel
Exhibit D - ADR Procedures
</TABLE>
-iv-
<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT, dated as of October 21, 1999 (this
"AGREEMENT"), by and between FOCAL, INC., a Delaware corporation (the
"COMPANY"), and GENZYME CORPORATION, a Massachusetts corporation (the
"PURCHASER").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue and sell, and the Purchaser
wishes to purchase, shares of the Company's common stock, par value $.01 per
share (the "COMMON STOCK"), upon the terms and conditions set forth in this
Agreement; and
WHEREAS, the Purchaser proposes to grant to the Company options to
require the Purchaser, subject to certain conditions, to purchase additional
shares of Common Stock;
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements hereinafter contained, the parties hereby agree as follows:
ARTICLE I
SALE OF THE SHARES
1.1. INITIAL SALE AND PURCHASE OF THE SHARES. Upon the terms and
subject to the conditions contained herein, on the date hereof (the "INITIAL
CLOSING DATE"), the Company shall agree to sell to the Purchaser, and the
Purchaser shall agree to purchase from the Company, for $5,000,000 in cash (the
"INITIAL CLOSING FUNDING AMOUNT"), a number (rounded down to the nearest whole
number) of newly issued shares of Common Stock (the "INITIAL SHARES") obtained
by dividing $5,000,000 by the Initial Closing Purchase Price. The "INITIAL
CLOSING PURCHASE PRICE," subject to adjustment in accordance with Section 1.2(c)
hereof, shall mean the lesser of (a) the product obtained by multiplying (i)
1.25 by (ii) the average of the per share closing prices of the Common Stock as
reported by on the Nasdaq National Market (the "NASDAQ") for the ten trading
days immediately following the date of the first public announcement by the
Company of the execution of this Agreement (the "ANNOUNCEMENT DATE"), which
Announcement Date shall occur within one trading day of the date of this
Agreement, or (b) $8.00 (in each case, subject to equitable adjustment to
reflect any stock split, stock contribution, stock dividend or similar
recapitalization event affecting the Common Stock which becomes effective after
the date hereof and on or before the Initial Closing Funding Date (as
hereinafter defined)).
1.2. OPTIONS TO SELL ADDITIONAL SHARES OF COMMON STOCK.
(a) Upon the terms and subject to the conditions set forth
herein, the Purchaser hereby grants to the Company the right and option,
exercisable at the Company's sole and absolute discretion:
(i) To sell to the Purchaser (the "FIRST
OPTION") as soon as practicable after the date upon which all applicable closing
conditions set forth in Article V and Article VI hereof have been fulfilled or
waived (the "FIRST OPTION CLOSING DATE"), at a per share sale price equal to the
First Option Purchase Price, a number (rounded down to the nearest whole number)
<PAGE>
of newly issued shares of Common Stock (the "FIRST OPTION SHARES") not to exceed
the number obtained by dividing (A) $5,000,000 by (B) the First Option Purchase
Price. The "FIRST OPTION PURCHASE PRICE," subject to adjustment in accordance
with Sections 1.2(c), Section 1.2(d) and 1.2(e)(ii) hereof, shall mean:
(1) if the average of the per share
closing prices of the Common Stock as reported by the Nasdaq or (or if the
Common Stock is listed on the New York Stock Exchange (the "NYSE") and the NYSE
is the principal exchange upon which the Common Stock is traded, then as
reported by the NYSE) for the 20 trading days immediately preceding the date
that the Exercise Notice (as defined in Section 1.2(g) applicable to the First
Option is delivered (such average price is hereinafter referred to as the "FIRST
OPTION SHARE VALUE") is less than or equal to $6.40 per share (subject to
equitable adjustment to reflect on any stock split, stock combination, stock
dividend or similar recapitalization event affecting the Common Stock which
becomes effective after the date hereof and on or before the First Option
Closing Date), the product obtained by multiplying (A) 1.25 by (B) the First
Option Share Value;
(2) if the First Option Share Value is
greater than $6.40 per share (subject to equitable adjustment in the same manner
as described in clause (1) above) but less than or equal to $8.00 per share
(subject to equitable adjustment in the same manner as described in clause (1)
above), then $8.00 (subject to equitable adjustment in the same manner as
described in clause (1) above); or
(3) if the First Option Share Value is
greater than $8.00 per share (subject to equitable adjustment in the same manner
as described in clause (1) above), then the First Option Share Value.
(ii) If the Company has obtained final marketing
authorization from the U.S. Food and Drug Administration for its FocalSeal(R)-L
for the indications and subject to the labeling restrictions set forth in the
Premarket Approval Application initially filed with the FDA in June 1999 with
respect thereto (the "REQUIRED FDA APPROVAL") on or before March 31, 2001, to
sell to the Purchaser (the "SECOND OPTION"), as soon as practicable after the
date upon which all applicable closing conditions set forth in Article V and
Article VI hereof have been fulfilled or waived (the "SECOND OPTION CLOSING
DATE"), at a per share sale price equal to the Second Option Purchase Price, a
number of newly issued shares (the "SECOND OPTION SHARES") not to exceed the
number (rounded down to the nearest whole number) obtained by dividing (A)
$5,000,000 by (B) the Second Option Purchase Price. The "SECOND OPTION PURCHASE
PRICE," subject to adjustment in accordance with Section 1.2(c), Section 1.2(d)
and Section 1.2(e)(ii) hereof shall mean an amount equal to the average of the
per share closing prices of the Common Stock as reported by the Nasdaq (or if
the Common Stock is listed on the NYSE and the NYSE is the principal exchange
upon which the Common Stock is traded, then as reported by the NYSE) for the 20
trading days immediately preceding the date that the Exercise Notice applicable
to the Second Option is delivered.
(iii) If the Company has obtained the Required FDA
Approval on or before March 31, 2001, to sell to the Purchaser (the "THIRD
OPTION" and, together with the First Option and the Second Option, the
"OPTIONS"), as soon as practicable after the date upon which all applicable
closing conditions set forth in Article V and Article VI hereof have been
fulfilled
2
<PAGE>
or waived (the "THIRD OPTION CLOSING DATE"), a number (rounded down to the
nearest whole number) of newly issued shares of Common Stock (the "THIRD OPTION
SHARES") not to exceed the number obtained by dividing (A) $5,000,000 by (B) the
Third Option Purchase Price. The "THIRD OPTION PURCHASE PRICE," subject to
adjustment in accordance with Section 1.2(c), Section 1.2(d) and Section
1.2(e)(ii) hereof, shall mean the average of the per share closing prices of the
Common Stock as reported by the Nasdaq (or if the Common Stock is listed on the
NYSE and the NYSE is the principal exchange upon which the Common Stock is
traded, then as reported by the NYSE) for the 20 trading days immediately
preceding the date that the Exercise Notice applicable to the Third Option is
delivered.
(b) The First Option Closing Date, the Second Option Closing
Date and the Third Option Closing Date are referred to herein collectively as
the "OPTION CLOSING DATES", and together with the Initial Closing Date, as the
"CLOSING DATES". The Initial Shares, the First Option Shares, the Second Option
Shares and the Third Option Shares are referred to collectively herein as the
"SHARES". The Initial Closing Purchase Price, the First Option Purchase Price,
the Second Option Purchase Price and the Third Option Purchase Price, in each
case subject to adjustment in accordance with Section 1.2(c), Section 1.2(d) and
Section 1.2(e)(ii) hereof, are referred to collectively herein as the "PER SHARE
PURCHASE PRICES".
(c) In the event that a Material Event (as hereinafter
defined) occurs (i) within 135 days prior to commencement of the Price
Determination Period (as hereinafter defined) and such Material Event has not
been disclosed by a public announcement made by or in a Company SEC Report (as
hereinafter defined) filed by the Company in each case not fewer than three
trading days prior to the commencement of the Price Determination Period or (ii)
during the Price Determination Period, regardless of whether such Material Event
has been disclosed in any public announcement made by or Company SEC Report
filed by the Company then, notwithstanding the provisions of Section 1.2(a), the
Per Share Purchase Price shall be subject to adjustment as provided in this
Section 1.2(c) (a "PRICE ADJUSTMENT EVENT"). For purposes of this Section
1.2(c), "MATERIAL EVENT" shall mean any event or occurrence (other than the
entering into of this Agreement) which is reasonably likely to materially affect
(either adversely or positively) (1) the business, properties, results of
operations or financial condition of the Company or (2) the ability of the
Company to perform its obligations under this Agreement. For purposes of this
Agreement, the "PRICE DETERMINATION PERIOD" shall mean the period of trading
days during which the closing prices of the Common Stock are averaged to
calculate the Per Share Purchase Price payable for Shares to be purchased at a
Closing. In the event that a Price Adjustment Event shall have occurred, then:
(i) unless the Material Event has already been announced or disclosed, the
Company shall promptly publicly announce or file a Company SEC Report disclosing
such Material Event; (ii) the Price Determination Period with respect to such
purchase shall be delayed and shall commence on the third trading day following
the date of the public announcement or disclosure of such Material Event; and
(iii) such Closing shall take place as soon as practicable following the
termination of the applicable Price Determination Period.
(d) In the event that an Option Closing has been delayed in
accordance with Section 5.2(a)(v) as a result of a Suspension Event (as defined
in Section 5.2(a)(v)) then, notwithstanding the provisions of Section 1.2(a) but
subject to any further adjustment required pursuant to Section 1.2(c), the Price
Determination Period with respect to such Option Closing
3
<PAGE>
shall mean the period of 20 trading days immediately preceding the last trading
day prior to the delayed Option Closing Date.
(e) Notwithstanding anything to the contrary herein, and
regardless of whether an Exercise Notice with respect to such Option has
previously been delivered, the Options set forth in Section 1.2(a) shall
immediately terminate and shall have no further force or effect upon the
occurrence of the following events on or prior to the applicable Option Closing
Date:
(i) the effectiveness of any reclassification
of, or recapitalization affecting, the Common Stock other than (A) a change in
par value, or from par value to no par value, or from no par value to par value,
(B) a subdivision or combination of shares of Common Stock, (C) a stock dividend
payable in shares of Common Stock, or (D) any reclassification, recapitalization
or other change in the Common Stock if the Board of Directors of the Company,
acting in good faith, concludes, after comparing the rights, characteristics and
privileges of the Common Stock prior to such event with the rights,
characteristics and privileges of the securities issued in exchange for, in
replacement of or otherwise in respect of shares of Common Stock in connection
with such reclassification, recapitalization or other change in the Common
Stock, that the Common Stock prior to such event and the securities issued in
connection with such event, taken together, would all constitute securities of
the same class for all purposes under the Securities Act of 1933, as amended
(the "SECURITIES ACT") and the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT");
(ii) the closing of any consolidation or merger
of the Company with or into another corporation, other than: (A) a merger with
another corporation in which the Company is the continuing corporation and which
does not result in any reclassification of, or recapitalization affecting, the
Common Stock and in which the stockholders of the Company immediately prior to
the merger own in excess of 50% of the Common Stock immediately following the
merger or (B) a merger with another corporation in which the continuing
corporation following the merger (1) is a company with publicly-traded common
stock listed on the Nasdaq or the NYSE and with an aggregate market
capitalization immediately following the consummation of such merger of less
than or equal to $2,000,000,000 and (2) the continuing corporation is the
permitted assignee or transferee of and has assumed all of the Company's
obligations under the Distribution and Marketing Collaboration Agreement dated
the date hereof between the Company and the Purchaser (the "DISTRIBUTION AND
MARKETING AGREEMENT"); PROVIDED, HOWEVER, that, following the occurrence of any
merger described in clause (B) of this paragraph, then, notwithstanding any
other provisions of this Agreement, (x) "Common Stock" shall mean the publicly
traded common stock of the continuing corporation and "Shares" shall mean the
shares of Common Stock issuable upon exercise of the Options and (y) the Per
Share Purchase Price for Shares purchased upon the exercise of any Option
thereafter exercised shall, subject to adjustment in accordance with Sections
1.2(c) and 1.2(d), equal the average of the per share closing prices of the
Shares as reported by the Nasdaq, or, if the Common Stock is listed on the NYSE
and the NYSE is the principal exchange upon which the Common Stock is traded,
then as reported by the NYSE, for the 20 trading days immediately preceding the
date upon which the Exercise Notice applicable to such Option is delivered;
4
<PAGE>
(iii) the closing of any sale of all or
substantially all of the assets of the Company; or
(iv) the termination of the Distribution and
Marketing Agreement by the Purchaser pursuant to Sections 11.3(b) or 11.4(d)
thereof.
(f) The agreement between the Company and the Purchaser with
respect to each of the First Option, the Second Option and the Third Option are
separate agreements, and the right of the Company to sell Shares, and the
obligation of the Purchaser to purchase Shares, on each Option Closing Date are
separate rights and obligations. If either (i) the Company does not exercise any
Option within the applicable exercise period or (ii) the Company exercises such
Option but the Option Closing does not occur because the applicable closing
conditions to be fulfilled by the Company have not been fulfilled due to reasons
other than bad faith actions of the Purchaser, or willful misconduct or a breach
of this Agreement by the Purchaser, then such Option shall terminate and shall
be of no further force and effect but such termination shall not have any other
effect on the other Options.
(g) The Company may exercise the First Option, the Second
Option or the Third Option, as the case may be, in whole or in part, by
delivering to the Purchaser at any time during the applicable period specified
below a written notice setting forth the number of Shares that the Company is
requiring the Purchaser to purchase at the Per Share Purchase Price and the
aggregate purchase price (not to exceed $5,000,000) (any such notice being an
"EXERCISE NOTICE"):
(i) in the case of the First Option, to be
effective the Exercise Notice must be delivered during the 20-day period
commencing on April 1, 2000 and ending at 5:00 p.m., Boston time, on April 20,
2000;
(ii) in the case of the Second Option, to be
effective the Exercise Notice must be delivered during the 20-day period
commencing on October 1, 2000 and ending at 5:00 p.m., Boston time, on October
20, 2000; PROVIDED, HOWEVER that, if the Required FDA Approval has not been
obtained by March 31, 2000 but is obtained on or before March 31, 2001, then the
commencement of the 20-day period for the exercise of the Second Option shall be
delayed so that such 20-day period shall commence on the date which is a number
of days after October 1, 2000 equal to the number of days after March 31, 2000
that the Required FDA Approval is obtained (or if such commencement date is not
a trading day, then on the next trading day thereafter) and shall end at 5:00
p.m., Boston time, on the 20th day thereafter (or if such day is not a trading
day, then at 5:00 p.m., Boston time, on the next trading day thereafter); and
(iii) in the case of the Third Option, to be
effective the Exercise Notice must be delivered during the 20-day period
commencing on April 1, 2001 and ending at 5:00 p.m., Boston time, on April 20,
2001; PROVIDED, HOWEVER that, if the Required FDA Approval has not been obtained
by March 31, 2000 but is obtained on or before March 31, 2001, then the
commencement of the 20-day period for the exercise of the Third Option shall be
delayed so that such 20-day period shall commence on the date which is a number
of days after April 1, 2001 equal to the number of days after March 31, 2000
that the Required FDA Approval is obtained
5
<PAGE>
(or if such commencement date is not a trading day, then on the next trading day
thereafter) and shall end at 5:00 p.m., Boston time, on the 20th day thereafter
(or, if such day is not a trading day, then the next trading day thereafter).
ARTICLE II
CLOSING AND FUNDING
2.1. THE CLOSINGS. The closing (the "INITIAL CLOSING") of the sale and
purchase of the Initial Shares shall take place at the offices of Hale and Dorr
LLP, 60 State Street, Boston, Massachusetts, at 10:00 a.m., Boston time, on the
Initial Closing Date. The closing of any sale and purchase of Shares pursuant to
the First Option is referred to herein as the "FIRST OPTION CLOSING" and shall
occur on the First Option Closing Date. The closing of any sale and purchase of
Shares pursuant to the Second Option is referred to herein as the "SECOND OPTION
CLOSING" and shall occur on the Second Option Closing Date. The closing of any
sale and purchase of Shares pursuant to the Third Option is referred to herein
as the "THIRD OPTION CLOSING" and shall occur on the Third Option Closing Date.
The Initial Closing, the First Option Closing, the Second Option Closing and the
Third Option Closing are referred to herein individually as a "CLOSING" and
collectively as the "CLOSINGS." The First Option Closing, the Second Option
Closing and the Third Option Closing (each an "OPTION CLOSING") shall take place
at the offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts, or
at such other place as shall be mutually agreed upon by the parties, at 10:00
a.m., Boston time, on the applicable Option Closing Date.
2.2. INITIAL CLOSING FUNDING. Subject to the fulfillment or waiver of
the conditions set forth in Section 5.4 and Section 6.3 hereof, the payment of
the Initial Closing Funding Amount (the "INITIAL CLOSING FUNDING") shall occur
on the next trading day following the completion of the Price Determination
Period applicable to the Initial Closing (the "INITIAL CLOSING FUNDING DATE").
2.3. DELIVERY OF SHARES. At the Initial Closing Funding and at each
Option Closing, (a) the Company shall deliver to the Purchaser a certificate or
certificates evidencing the Shares being purchased by the Purchaser at such
Initial Closing Funding or Option Closing, against payment by wire transfer of
immediately available funds of an amount equal to the applicable Per Share
Purchase Price multiplied by the number of Shares being purchased at such
Initial Closing Funding or Closing to an account designated in writing by the
Company two business days prior to the Initial Closing Funding Date or the
Option Closing Date, as applicable and (b) the parties shall make the other
deliveries specified in Article VI hereof. The Shares delivered to the Purchaser
at such Initial Closing Funding Date or the Option Closing shall be free and
clear of any Liens, except for the restrictions of transfer provided in the
Registration Rights Agreement dated the date hereof between the Company and the
Purchaser substantially in the form attached hereto as EXHIBIT A (the
"REGISTRATION RIGHTS AGREEMENT"). For purposes of this Agreement, "LIEN" means
any lien, pledge, mortgage, deed of trust, security interest, claim, lease,
charge, option, right of first refusal, easement, servitude, transfer
restriction under any shareholder or similar agreement, encumbrance or any other
restriction or limitation whatsoever.
6
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to and agrees with the Purchaser,
as of the Initial Closing Date, and as of each Option Closing Date, that:
3.1. ORGANIZATION. The Company is a corporation or other legal entity
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has corporate or similar power and authority to own, lease
and operate its assets and to carry on its business as now being and as
heretofore conducted. The Company is qualified or otherwise authorized to
transact business as a foreign corporation or other organization in all
jurisdictions in which such qualification or authorization is required by law,
except for jurisdictions in which the failure to be so qualified or authorized
could not reasonably be expected to have a Material Adverse Effect. For purposes
of this Agreement, "MATERIAL ADVERSE EFFECT" means any event or occurrence which
is reasonably likely to materially adversely affect (i) the business,
properties, results of operations or financial condition of the Company or (ii)
the ability of the Company to perform its obligations under this Agreement.
3.2. AUTHORITY TO EXECUTE AND PERFORM AGREEMENT. The Company has the
corporate power and authority to enter into, execute and deliver this Agreement
and the Registration Rights Agreement and to carry out the transactions
contemplated by this Agreement and the Registration Rights Agreement. The
execution and delivery of each of this Agreement and the Registration Rights
Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of the Company. This Agreement has been, and the Registration Rights Agreement
when executed at the Initial Closing will be, duly executed and delivered by the
Company and constitute valid and binding obligations of the Company, enforceable
in accordance with their respective terms; subject as to enforcement of remedies
to applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting generally the enforcement of creditor's rights and subject to a
court's discretionary authority with respect to the granting of a decree
ordering specific performance or other equitable remedies. No approval of the
stockholders of the Company is required for the Company to enter into this
Agreement or to consummate the transactions contemplated hereby.
3.3. CAPITALIZATION.
(a) The authorized capital of the Company consists of
55,000,000 shares of capital stock, consisting of (1) 50,000,000 shares of
Common Stock, of which there are 13,445,432 shares issued and outstanding as of
September 30, 1999, 1,878,745 shares reserved for issuance upon the exercise of
certain options issued pursuant to the Company's 1992 Equity Incentive Plan,
1999 Stock Incentive Plan and 1997 Non-Employee Director Option Plan, 123,753
shares reserved for issuance pursuant to the Company's 1997 Employee Stock
Purchase Plan, and 43,782 shares reserved for issuance upon the exercise of
certain outstanding warrants to purchase Common Stock and (2) 5,000,000 shares
of preferred stock, per value $.01 per share ("Preferred Stock"), none of which
are issued and outstanding; and all shares of Common Stock
7
<PAGE>
and Preferred Stock have the rights, privileges, restrictions and conditions
specified in the Company's Certificate of Incorporation.
(b) All of the issued and outstanding shares of Common Stock
have been duly authorized for issuance and are validly issued, fully paid and
non-assessable.
(c) The Shares to be issued pursuant to this Agreement, upon
delivery to the Purchaser of certificates therefor against payment in accordance
with the terms of this Agreement: (i) will be validly issued, fully paid and
nonassessable; (ii) except for the restrictions on transfer provided in this
Agreement and in the Registration Rights Agreement, will be free and clear of
all Liens, other than any Liens that may be granted by the Purchaser; and (iii)
assuming that the representations of the Purchaser in Article IV hereof are true
and correct, will be exempt from the registration requirements of the Securities
Act.
3.4. SUBSIDIARIES. Except as disclosed in SECTION 3.4 of the Disclosure
Schedule, the Company has no Subsidiaries and, does not own, directly or
indirectly, any shares of capital stock or other security of any other entity or
any other investment in any other entity. For purposes of this Agreement,
"SUBSIDIARY" means any Person of which 50% or more of the outstanding voting
securities or other voting equity interests are owned, directly or indirectly,
by the Company, and "PERSON" means any individual, corporation, partnership,
limited liability company, firm, joint venture, association, joint-stock
company, trust, unincorporated organization, governmental or regulatory body or
other entity, as applicable.
3.5. SEC REPORTS. (a) The Company has timely filed with the U.S.
Securities and Exchange Commission (the "SEC") under the Exchange Act all
documents required to be filed under Sections 13, 14 or 15(d) of the Exchange
Act since December 31, 1997. Prior to each Closing Date, the Company shall have
previously delivered to the Purchaser (a) each Annual Report on Form 10-K of the
Company filed with the SEC since December 31, 1998 (the Annual Report on Form
10-K most recently filed prior to a given Closing Date is referred to herein as
the "COMPANY 10-K" relating to such Closing Date), (b) all proxy statements
relating to the Company's meetings of stockholders held since December 31, 1998
and (c) all other documents filed by the Company with the SEC since December 31,
1998, in each case as filed with the SEC (collectively, the "COMPANY SEC
REPORTS"). As of their respective dates, such documents complied in all material
respects with applicable SEC requirements and did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) Neither the Company nor any Subsidiary of the Company, if
any, is a party to or bound by, and neither they nor their properties are
subject to, any contract or other agreement, or any amendment thereto, required
to be disclosed in a Form 10-K, Form 10-Q or Form 8-K of the Company which is
not disclosed in the Company SEC Reports. Except as disclosed in the Company SEC
Reports or as disclosed on Schedule 3.5(b) attached hereto, all of such
contracts and other agreements are valid, subsisting, in full force and effect,
binding upon the Company or the applicable subsidiary of the Company, if any,
and, to the best knowledge of the Company, binding upon the other parties
thereto in accordance with their terms, and the Company or the applicable
subsidiary of the Company, if any, have paid in full or accrued all
8
<PAGE>
amounts now due from them thereunder, and have satisfied in full or provided for
their liabilities and obligations thereunder which are presently required to be
satisfied or provided for and are not in default under any of them, nor, to the
best knowledge of the Company, is any other party to any such contract or other
agreement in default thereunder, nor does any condition exist that with notice
or lapse of time or both would constitute a default thereunder, other than any
such breaches or defaults which would not, either individually or in the
aggregate, have a Material Adverse Effect. True and complete copies of all of
the contracts and other agreements referred to in this Section 3.5 have been
provided previously to the Purchaser.
3.6. FINANCIAL STATEMENTS. The financial statements (the "FINANCIAL
STATEMENTS") contained in the Company 10-K and each of the Company's Quarterly
Reports on Form 10-Q for each quarter ended after the end of the most recent
fiscal year covered by the Company 10-K (the "COMPANY 10-QS") have been prepared
from, and are in accordance with, the books and records of the Company and
fairly present the financial condition, results of operations and cash flows of
the Company as of and for the periods presented therein, all in accordance with
generally accepted accounting principles applied on a consistent basis, except
as otherwise indicated therein and subject, in the case of the unaudited
Financial Statements included in the Company 10-Qs, to normal year-end and audit
adjustments, which in the aggregate are not material, and the absence of
footnote disclosures.
3.7. ABSENCE OF UNDISCLOSED COMPANY LIABILITIES. Except as otherwise
disclosed in the Company's SEC Reports, as at the end of the most recent fiscal
year covered by the Company 10-K, the Company had no material liabilities of any
nature, whether accrued, absolute, contingent or otherwise (including, without
limitation, liabilities as guarantor or otherwise with respect to obligations of
others or liabilities for taxes due or then accrued or to become due) that were
not adequately reflected or reserved against on the balance sheet dated the date
of the end of the most recent fiscal year (or the notes thereto) included in
such Company 10-K (the "AUDITED BALANCE SHEET"). The Company has no such
liabilities, other than liabilities (i) adequately reflected or reserved against
on such Audited Balance Sheet, or as otherwise disclosed in the Company's SEC
Reports, (ii) reflected in the Company's unaudited consolidated balance sheet
contained in the unaudited Financial Statements included in the Company 10-Qs,
(iii) incurred since the date of the unaudited balance dated the date of the end
of the most recent quarter included in the Company's most recently filed 10-Q
(the "UNAUDITED BALANCE SHEET Date") in the ordinary course of business or (iv)
that would not, in the aggregate, have a Material Adverse Effect.
3.8. NO MATERIAL ADVERSE EFFECT. Since the Unaudited Balance Sheet
Date, except as disclosed in the Company SEC Reports, there has occurred no
event which could have a Material Adverse Effect.
3.9. ACTIONS AND PROCEEDINGS. Except as set forth in the Company SEC
Reports, there are no actions, suits or claims or legal, administrative or
arbitration proceedings ("LEGAL PROCEEDINGS") pending or, to the best knowledge
of the Company, threatened against the Company that individually or in the
aggregate could have a Material Adverse Effect.
9
<PAGE>
3.10. NO BREACH. Except for (a) filings required under the Exchange Act
and (b) any required filing of a Notification and Report form under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
ACT"), and (c) subject to filing a notice of sale on Form D pursuant to Rule 506
under the Securities Act, if applicable, the delivery and performance of this
Agreement by the Company and consummation by it of the transactions contemplated
hereby will not (i) violate any provision of the charter or by-laws of the
Company, (ii) violate, conflict with or result in the breach of any of the terms
or conditions of, result in modification of, or otherwise give any other
contracting party the right to terminate or accelerate obligations under, or
constitute (or with notice or lapse of time or both constitute) a default under,
any material instrument, contract or other agreement to which the Company or any
Subsidiary of the Company, if any, is party or to which any of them or any of
their assets or properties is bound or subject, (iii) violate any law, ordinance
or regulation or any order, judgment, injunction, decree or requirement (each an
"ORDER") of any court, arbitrator or governmental or regulatory body applicable
to the Company or any Subsidiary of the Company, if any, or by which any of
their assets or properties is bound, (iv) require on the part of the Company or
any Subsidiary of the Company, if any, any filing with, notice to, or permit,
consent or approval of, any governmental or regulatory body or (v) result in the
creation of any Lien on the assets or properties of the Company or any
Subsidiary of the Company, if any, excluding from the foregoing clauses (ii),
(iii), (iv) and (v) violations, breaches and defaults which, and filings,
notices, permits, consents and approvals the absence of which, in the aggregate,
would not have a Material Adverse Effect.
3.11. REGISTRATION RIGHTS. Except as set forth in the Company SEC
Reports or on SCHEDULE 3.11 hereto, no Person has demand or other rights to
cause the Company to file any registration statement under the Securities Act
relating to any securities of the Company or any right to participate in such
registration statement.
3.12. BROKERS OR FINDERS. No Person has acted, directly or indirectly,
as a broker, finder or financial advisor for the Company or its Affiliates in
connection with the transactions contemplated by this Agreement, and no Person
is entitled to any fee or commission or like payment in respect thereof. As used
in this Agreement, "AFFILIATE" means, with respect to any Person, any other
Person controlling, controlled by or under common control with such Person.
3.13. PATENTS, TRADEMARKS, ETC. As used herein, "INTELLECTUAL PROPERTY"
shall mean patents, patent applications, patent rights, biological materials,
information, manufacturing techniques, data, designs, concepts, technical
information, inventions, developments, discoveries, software, know-how, methods,
techniques, formulae, processes and other proprietary ideas. The Company has
licensed from third parties the Intellectual Property covered by the license
agreements listed on SCHEDULE 3.13 (the "INTELLECTUAL PROPERTY AGREEMENTS"). The
Company possesses or has valid and sufficient rights to use the Intellectual
Property used in its business as currently conducted or as proposed to be
conducted. The Company has not received notice from a third party that the
Company's operations infringe upon or conflict with the intellectual property
rights of such third party and, to the Company's knowledge, there is no basis
for any third party to do so. No claim is pending or, to the Company's
knowledge, threatened to the effect that any such Intellectual Property of the
Company or any Intellectual Property Agreements are invalid or unenforceable by
the Company. The Company has taken reasonable precautions to maintain as
confidential all material and protectable technical or other proprietary
10
<PAGE>
information developed by and belonging to the Company which has not been
patented and, to the Company's knowledge, such information has been kept
confidential pursuant to appropriate arrangements for confidentiality. Except as
set forth on SCHEDULE 3.13 hereto, the Company has not granted or assigned to
any other Person any right to manufacture, have manufactured, assemble or sell
the products or proposed products or to provide the services or proposed
services of the Company (other than agreements to provide services to the
Company) which is not terminable on notice by the Company without cost or other
liability to the Company.
3.14. ANTI-TAKEOVER LAWS. Seller has taken all action necessary such
that no "fair price," "control share acquisition," "business combination,"
"anti-takeover" or similar statute (including, without limitation Section 203 of
the Delaware General Corporation Law and Chapters 110C, 110D, 110E or 110F of
the General Laws of the Commonwealth of Massachusetts) will apply to (i) the
execution or delivery of this Agreement, (ii) the purchase of the Shares at the
Initial Closing or at any Option at any Option Closing, (iii) the exercise by
the Purchaser of its rights pursuant to Section 7.1 hereof, (iv) the acquisition
by the Purchaser of Voting Stock (as hereinafter defined) of the Company to the
extent permitted pursuant to Sections 8.2 and 8.3 or (v) the consummation of the
transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Company, as of the
date hereof and as of each Option Closing Date, that:
4.1. AUTHORIZATION OF AGREEMENT. The Purchaser has the corporate power
and authority to execute and deliver this Agreement and the Registration Rights
Agreement and to carry out the transactions contemplated by this Agreement and
the Registration Rights Agreement. The execution and delivery of each of this
Agreement and the Registration Rights Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on behalf of the Purchaser. This Agreement has been,
and the Registration Rights Agreement when executed at the Initial Closing will
be, duly executed by the Purchaser and constitute valid and binding obligations
of the Purchaser, enforceable against the Purchaser in accordance with their
respective terms; subject as to enforcement of remedies to applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
generally the enforcement of creditor's rights and subject to a court's
discretionary authority with respect to the granting of a decree ordering
specific performance or other equitable remedies.
4.2. LITIGATION. There are no Legal Proceedings pending or, to the best
knowledge of the Purchaser, threatened that are reasonably likely to prohibit or
restrain the ability of the Purchaser to enter into this Agreement or consummate
the transactions contemplated hereby.
4.3. INVESTMENT INTENTION. The Purchaser is acquiring the Initial
Shares, and will acquire any additional Shares at any Option Closing, for its
own account without a view to the distribution (as such term is used in Section
2(11) of the Securities Act) thereof in violation of applicable law; PROVIDED,
HOWEVER, that in making the representation, such Purchaser does not
11
<PAGE>
agree to hold the Shares for any minimum or specific term and reserves the right
to sell, transfer or otherwise dispose of the Shares at any time in accordance
with the provisions of this Agreement and the Registration Rights Agreement and
in compliance with Federal and state securities laws applicable to such sale,
transfer or disposition. The Purchaser is an "accredited investor" within the
meaning of Regulation D under the Securities Act. The Purchaser understands that
the Shares have not been registered under the Securities Act and cannot be sold
unless subsequently registered under the Securities Act or an exemption from
such registration is available. The Purchaser understands that certificates
representing the Shares will be issued with a legend substantially in the
following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND ACCORDINGLY NEITHER SUCH SECURITIES
NOR ANY INTEREST THEREIN MAY BE SOLD, TRANSFERRED, PLEDGED, OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT AND THE RULES AND REGULATIONS THEREUNDER.
The Purchaser further acknowledges that in making the representation
and warranty contained in Section 3.3(c)(iii) hereof, the Company is relying on
the accuracy of the representations and warranties of the Purchasers contained
in this Section 4.3 and Section 4.4.
4.4. DUE DILIGENCE. The Purchaser acknowledges that it has been given a
full opportunity to ask questions of the Company concerning the Company's
business and financial affairs and the terms and conditions of the transactions
contemplated by this Agreement and to obtain any additional information as it
desired in order to evaluate its investment, and that such questions have been
answered to the satisfaction of the Purchaser.
4.5. BROKERS OR FINDERS. No Person has acted, directly or indirectly,
as a broker, finder or financial advisor for the Purchaser or its Affiliates in
connection with the transactions contemplated by this Agreement, and no Person
is entitled to any fee or commission or like payment in respect thereof.
ARTICLE V
CONDITIONS TO CLOSING AND FUNDING
5.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER AT ANY CLOSING.
The obligation of the Purchaser to purchase Shares from the Company pursuant to
this Agreement at any Closing is subject to the fulfillment, on or prior to the
applicable Closing Date, of each of the following conditions (any or all of
which may be waived by the Purchaser in whole or in part to the extent permitted
by applicable law):
(a) all representations and warranties of the Company shall be
true and correct at and as of such Closing Date, except to the extent expressly
made as of an earlier date;
(b) the Company shall have performed and complied in all
material respects with all obligations and covenants required by this Agreement
to be performed or complied with
12
<PAGE>
by the Company on or prior to such Closing Date, including delivery, or causing
the delivery of, the documents indicated in Article VI; and
(c) no Legal Proceedings shall have been instituted or
threatened or claim or demand made against the Company or the Purchaser seeking
to restrain or prohibit or to obtain substantial damages with respect to the
consummation of the transactions contemplated hereby, and there shall not be in
effect any order by a court, arbitrator, or governmental or regulatory body of
competent jurisdiction restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated hereby.
5.2. ADDITIONAL CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE
PURCHASER AT OPTION CLOSINGS. The obligations of the Purchaser to purchase the
Shares from the Company pursuant to this Agreement at any Option Closing is
subject to the fulfillment, on or prior to the applicable Option Closing Date,
of each of the following conditions (any or all of which may be waived by the
Purchaser in whole or in part to the extent permitted by applicable law):
(a) With respect to any Option Closing, the following
conditions:
(i) The Company shall not have entered into an
agreement relating to or have publicly announced its intention to effect any
transaction of the type described in Section 1.2(e) hereof.
(ii) The applicable Exercise Notice shall have been
timely delivered by the Company within the applicable time periods set forth in
Section 1.2(g) and shall have been received by the Purchaser.
(iii) None of the following events shall have
occurred prior to or after the delivery of the applicable Exercise Notice and
not have been resolved to the satisfaction of the Purchaser prior to the
applicable Closing Date:
(1) the Common Stock ceases to be quoted
on the Nasdaq (or, if the principal exchange on which the Common Stock is then
listed and traded is the NYSE rather than the Nasdaq, then the NYSE);
(2) the Company ceases to be a reporting
company under the Exchange Act;
(3) the Company has made an assignment
for the benefit of creditors, or has admitted in writing its inability to pay or
generally fails to pay its debts as they mature or become due, or has petitioned
or applied for the appointment of a trustee or other custodian, liquidator or
receiver of the Company or any Subsidiary of the Company which is a "significant
subsidiary" of the Company within the meaning of Rule 1-02(w) of Regulation S-X
(a "SIGNIFICANT SUBSIDIARY"), if any, or of any substantial part of the assets
of the Company or any Significant Subsidiary of the Company, if any, or has
commenced any case or other proceeding relating to the Company or any
Significant Subsidiary of the Company, if any, under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation or similar law of any jurisdiction, now or hereafter in effect, or
has taken any action to authorize or in furtherance of any of the foregoing, or
if any such petition or application has
13
<PAGE>
been filed or any such case or other proceeding has been commenced against the
Company or any Significant Subsidiary of the Company, if any, and the Company or
any Significant Subsidiary of the Company, if any, has indicated its approval
thereof, consent thereto or acquiescence therein or such petition or application
has not been dismissed within 45 days following the filing thereof; or
(4) a decree or order is entered
appointing any such trustee, custodian, liquidator or receiver or adjudicating
the Company or any Significant Subsidiary of the Company, if any, bankrupt or
insolvent, or approving a petition in any such case or other proceeding, or a
decree or order for relief is entered in respect of the Company or any
Significant Subsidiary of the Company, if any, in an involuntary case under
federal bankruptcy laws as now or hereafter constituted.
(iv) No Material Event shall have occurred which
would constitute a Price Adjustment Event for which the required adjustment in
the applicable Per Share Purchase Price has not been made in accordance with
Section 1.2(c).
(v) No Suspension Event shall have occurred which has
not been denied, dismissed with prejudice or rescinded. For purposes of this
Agreement, a "SUSPENSION EVENT" shall be deemed to have occurred if: (1) a third
party has made or filed a written claim (a "SUSPENSION REQUEST") requesting a
court or arbitrator to prohibit, restrain or enjoin the performance by the
Company or the Purchaser of their respective obligations under the Distribution
and Marketing Agreement, which Suspension Request is based upon or arises out of
a claim which, if substantiated, would constitute a breach by the Company of its
representations and warranties set forth in clause (iv) or (v) of Section 13.1
of the Distribution and Marketing Agreement or (2) a court or arbitrator has
granted an award, order, injunction or decision enforcing such Suspension
Request. With respect to any Option, (1) if such Suspension Event is rescinded,
denied or dismissed with prejudice on or prior to the 90th day following the
delivery date of the applicable Exercise Notice for the First Option, the Second
Option or the Third Option, as the case may be, then, subject to the fulfillment
or waiver of the other applicable conditions set forth in Sections 5.1 and 5.2,
the Option Closing with respect to such Option shall occur as soon as
practicable following the resolution of such Suspension Event or (2) if such
Suspension Event is not rescinded, denied or dismissed with prejudice on or
before the 90th day following the delivery date of the applicable Exercise
Notice, but is subsequently rescinded, denied or dismissed with prejudice then,
subject to the fulfillment or waiver of the other applicable conditions set
forth in Sections 5.1 and 5.2, the Option Closing with respect to such Option
shall, at the option of the Company, occur on the earlier of: (A) the next
subsequent Option Closing Date, if any, or (B) as soon as practicable following
the resolution of such Suspension Event.
(vi) The conditions set forth in Section 5.1 and the
other provisions of this Section 5.2 shall have been satisfied or waived on or
prior to the 90th day following the delivery date of the applicable Exercise
Notice; PROVIDED, HOWEVER, that in the event that a Closing is delayed in
accordance with Section 1.2(c) due to the occurrence of a Material Event, such
90-day period shall be extended by the number of days that the commencement of
the Price Determination Period is so delayed, but in no event shall such
extension be for more than 45 days; PROVIDED, FURTHER, that in the event that an
Option Closing is delayed in accordance with
14
<PAGE>
Section 5.2(a)(v) due to the occurrence of a Suspension Event which is
subsequently resolved prior to the termination of such Option, then such 90-day
period shall be extended until the occurrence of such Option Closing (subject to
further extension pursuant to Section 1.2(c) on account of a Material Event),
but in no event shall such period be extended beyond the 135th day following the
latest date upon which the Exercise Notice for the Third Option could be timely
delivered in accordance with Section 1.2(g)(iii).
(b) With respect to the Second Option Closing and the Third
Option Closing, the Required FDA Approval shall not have been suspended,
rescinded, or modified in any materially adverse respect.
5.3. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AT ANY CLOSING.
The obligations of the Company to consummate the transactions contemplated by
this Agreement at any Closing are subject to the fulfillment, prior to or on the
applicable Closing Date, of each of the following conditions (any or all of
which may be waived by the Company in whole or in part to the extent permitted
by applicable law):
(a) all representations and warranties of the Purchaser
contained herein shall be true and correct; and
(b) the Purchaser shall have performed and complied in all
material respects with all obligations and covenants required by this Agreement
to be performed or complied with by the Purchaser on or prior to such Closing
Date, including delivery, or causing the delivery of, the documents indicated in
Article VI; and
(c) there shall not be in effect any Order by a court,
arbitrator or governmental or regulatory body of competent jurisdiction
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated hereby.
5.4. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER AT THE
INITIAL CLOSING FUNDING. The obligation of the Purchaser to pay the Initial
Closing Funding Amount to the Company at the Initial Closing Funding is subject
to the fulfillment on the Initial Closing Funding Date of each of the following
conditions (any or all of which may be waived by the Purchaser in whole or in
part to the extent permitted by applicable law):
(a) No Material Event shall have occurred which would
constitute a Price Adjustment Event for which the required adjustment in the
Initial Closing Purchase Price has not been made in accordance with Section
1.2(c); and
(b) Except as disclosed in any Company SEC Report filed prior
to the Initial Closing Funding, the representations and warranties set forth in
Sections 3.8 and 3.9 hereof shall be true and correct as if made on and as of
the Initial Closing Funding Date.
15
<PAGE>
ARTICLE VI
DOCUMENTS TO BE DELIVERED
6.1. DELIVERIES BY THE COMPANY TO THE PURCHASER AT EACH CLOSING. At
each Closing, the Company shall deliver, or shall cause to be delivered, to the
Purchaser the following (PROVIDED THAT, in the case of the Initial Closing the
Company shall not be required to deliver the stock certificate specified in
Section 6.1(b) or the receipt specified in Section 6.1(f) until the Initial
Closing Funding Date):
(a) a certificate (dated the applicable Closing Date and in
form and substance reasonably satisfactory to the Purchaser) executed on behalf
of the Company certifying as to the fulfillment of the conditions in Sections
5.1 and 5.2 applicable to such Closing Date;
(b) except in the case of the Initial Closing, certificate(s)
representing the Shares being purchased at the Closing which shall be validly
delivered and transferred to the Purchaser, free and clear of any and all Liens;
(c) a certificate of the Secretary of the Company, certifying
as to the adoption by the Board of Directors of the Company of resolutions
substantially in the form attached as EXHIBIT B;
(d) an opinion of Hale and Dorr LLP, counsel to the Company,
dated the Closing Date, substantially in the form attached hereto as EXHIBIT C;
(e) a certificate of good standing with respect to the Company
issued by the Secretary of State of the State of Delaware dated as soon as
practicable prior to the Closing Date; and
(f) except in the case of the Initial Closing, a receipt for
the purchase price paid for the Shares purchased at the Closing.
6.2. DELIVERIES BY THE COMPANY AND THE PURCHASER AT THE INITIAL
CLOSING. At the Initial Closing, the Company and the Purchaser shall execute and
deliver the Registration Rights Agreement.
6.3. DELIVERIES BY THE COMPANY TO THE PURCHASER AT THE INITIAL CLOSING
FUNDING. At the Initial Closing Funding, the Company shall deliver, or cause to
be delivered, to the Purchaser the following:
(a) certificate(s) representing the Shares being
purchased at the Initial Closing;
(b) a certificate dated the Initial Closing Funding Date and
in form and substance reasonably satisfactory to the Purchaser executed on
behalf of the Company certifying as to the fulfillment of the conditions set
forth in Section 5.4; and
16
<PAGE>
(c) a receipt for the Initial Closing Funding Amount paid at
Initial Funding Closing.
6.4. DELIVERIES BY THE PURCHASER TO THE COMPANY AT THE INITIAL CLOSING
FUNDING AND EACH OPTION CLOSING. At the Initial Closing Funding and each Option
Closing, as applicable, the Purchaser shall deliver, by wire transfer of
immediately available funds to an account specified by the Company in accordance
with Section 2.2 hereof, to the Company the aggregate purchase price payable for
the Shares purchased at such Initial Closing Funding or Option Closing.
ARTICLE VII
CERTAIN COVENANTS OF THE COMPANY
The Company covenants and agrees that, so long as the Purchaser holds
of record or beneficially at least 25% of the aggregate Shares purchased
hereunder (or shares of capital stock or other securities of the Company issued
in replacement of, in exchange for, or otherwise in respect of the Shares), it
will perform and observe the following covenants and provisions:
7.1. PARTICIPATION RIGHTS OF PURCHASER IN FUTURE ISSUANCES.
(a) Except with respect to "EXEMPT ISSUANCES" as defined in
Section 7.1(c) below, in the event that the Company proposes to issue any Common
Stock or options, warrants, purchase rights or other securities which by their
terms are directly or indirectly exercisable for, convertible into or
exchangeable for shares of Common Stock (such shares of Common Stock or any such
securities are referred to herein as "EQUITY SECURITIES"), the Company will
deliver to the Purchaser a notice of such proposed issuance (the "NOTICE OF
PROPOSED ISSUANCE"), which shall specify (i) the type and number of Equity
Securities proposed to be issued, (ii) the purchase price per security (or where
such price is not known, the manner in which such price will be determined) of
Equity Securities proposed to be issued, (iii) the use to which the proceeds of
such Equity Securities are intended to be put and (iv) the material terms and
conditions of such proposed issuance (or where such terms and conditions are not
known, the manner in which they will be determined).
(b) Except with respect to an Exempt Issuance, the Purchaser
shall have the right to purchase all (or any portion) of its Pro Rata Portion of
such Equity Securities as are proposed to be issued, at the price and on the
terms and conditions contained in the Notice of Proposed Issuance; PROVIDED,
HOWEVER, that the Purchaser shall not have the right to purchase such Equity
Securities if, at the time of such proposed purchase, the Purchaser (i) has
failed to purchase Shares pursuant to the exercise of an Option on the
applicable Option Closing Date (unless such failure resulted from the failure of
the Company to fulfill any conditions set forth in Article V or Article VI
hereof required to be fulfilled by the Company on such Option Closing Date) or
(ii) has committed an uncured, material breach of the Distribution and Marketing
Agreement which would give rise to a right on the part of the Company to
terminate the Distribution and Marketing Agreement pursuant to Sections 11.3(a),
11.3(b) or 11.5 thereof. The Purchaser's "PRO RATA PORTION" shall equal a
fraction, the numerator of which is the number of shares of Common Stock then
held by the Purchaser, and the denominator of which is the total number of
shares of Common Stock then outstanding. The rights set forth in this Section
7.1
17
<PAGE>
shall be exercised by the Purchaser, if at all, by written notice to the
Company delivered not later than 20 days after the receipt by the Purchaser of
the Notice of Proposed Issuance in accordance with the terms and conditions
stated therein.
(c) As used in this Section 7.1, "EXEMPT ISSUANCES" shall
include the issuance of any Equity Securities (i) to employees, directors or
consultants of the Company as compensation for services, (ii) as a dividend or
distribution payable PRO RATA to all holders of Common Stock, (iii) upon a stock
split, subdivision, reclassification or exchange of shares of Common Stock, (iv)
in connection with the conversion or exercise of any outstanding Equity
Securities which were outstanding as of the date of this Agreement or were
issued in compliance with this Section 7.1 after the date of this Agreement, (v)
to any corporate partner or academic institution as consideration for an
agreement relating to the licensing of intellectual property rights of the
Company to such corporate partner or academic institution or the licensing of
intellectual property rights by such corporate partner or academic institution
to the Company, or (vi) to any seller as consideration in connection with any
asset or stock purchase, merger, consolidation or other business combination
transaction.
7.2. RESERVATION OF COMMON STOCK AND OTHER SECURITIES. The Company
shall take any and all actions necessary or appropriate to ensure that at all
times there shall be a sufficient number of authorized and unissued shares of
Common Stock reserved and available for issuance to the Purchaser upon the
exercise of the Options. If the Common Stock is reclassified into a different
class or series of capital stock of the Company other than in a transaction as a
result of which the Options are terminated in accordance with Section 1.2(e),
then the Company shall take any and all actions necessary or appropriate to
ensure that there shall be a sufficient number of authorized and unissued shares
of such capital stock reserved and available for issuance to the Purchaser upon
the exercise of the Options.
7.3. CORPORATE EXISTENCE; CONDUCT OF BUSINESS. The Company will
continue to engage principally in the business now conducted by the Company. The
Company will keep in full force and effect its corporate existence and any
patents and other intellectual property rights used or useful in its business
(except such rights as the Board of Directors, in its reasonable business
judgment, has determined are not material to the Company's continuing
operations).
7.4. NO IMPAIRMENT. The Company will not, by amendment of its
Certificate of Incorporation or By-Laws or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the Company, but
will at all times in good faith assist in the carrying out of all of the
provisions of this Agreement.
7.5. INTEGRATION. Neither the Company nor any affiliate (as defined in
Rule 501(b) of the Securities Act) of the Company will offer, sell or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
the Securities Act) that will be integrated with the sale of the Shares in a
manner that would require the registration of the Shares sold hereunder under
the Securities Act.
18
<PAGE>
7.6. PROVISION OF INFORMATION. The Company shall furnish to the
Purchaser such information regarding the Company and its business as the
Purchaser may reasonably request from time to time in connection with any Option
Closing.
7.7. RIGHTS AGREEMENT. The Board of Directors of the Company shall
approve an amendment (the "RIGHTS AMENDMENT") to the Rights Agreement dated as
of December 17, 1997 between the Company and Norwest Bank Minnesota, N.A. (the
"RIGHTS PLAN") so as to provide that (a) the Purchaser will not become an
"Acquiring Person" and (b) no "Triggering Event" or "Distribution Date" (as such
terms are defined in the Company's Rights Plan) will occur in each case as a
result of (i) the approval, execution and delivery of this Agreement, (ii) the
purchase of the Shares at the Initial Closing or at any Option Closing; (iii)
the exercise by the Purchaser of its rights under Section 7.1 hereof and (iv)
the acquisition by the Purchaser of Voting Stock (as hereinafter defined) of the
Company to the extent permitted pursuant to Sections 8.2 and 8.3 hereof.
Promptly following the execution and delivery of this Agreement, Company shall
take all action necessary to make the Rights Amendment effective.
ARTICLE VIII
STANDSTILL AGREEMENT AND RIGHT OF FIRST REFUSAL
8.1. CERTAIN DEFINITIONS. Unless the context otherwise requires, the
following terms, for all purposes of this Article VIII, shall have the meanings
specified in this Section 8.1:
(a) "VOTING STOCK" shall mean the Common Stock, any securities
convertible into or exercisable or exchangeable for Common Stock and any other
securities issued by the Company having the power to vote in the election of
directors of the Company, other than securities having such power only upon the
happening of a contingency which has not yet occurred.
(b) "CHANGE OF CONTROL" shall mean (i) the acquisition by any
"person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act
including any such person's "affiliates" and "associates" as such terms are used
in the Exchange Act (other than a Subsidiary, any employee benefit plan of the
Company, or any entity organized, appointed or established by the Company to
hold securities of the Company pursuant to such benefit plan), directly or
indirectly, of Voting Stock representing 50% or more of the combined voting
power of the Voting Stock then outstanding; or (ii) a merger or consolidation of
the Company with any other corporation (other than a merger or consolidation
which would result in the Voting Stock outstanding immediately prior thereto
continuing to represent, either by remaining outstanding or by being converted
into voting securities of the surviving entity, at least 50% of the combined
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation) or (iii) the sale of all or
substantially all of the assets of the Company.
8.2. PROHIBITED ACTIVITIES. The Purchaser agrees that, during the
period commencing on the Initial Closing Date and ending on the earlier of (a)
the date which is five years after the Initial Closing Date or (b) the date
which is one year after the termination of the Distribution and Marketing
Agreement, unless it has obtained the prior written consent of the Company, or,
except as set forth in Section 8.3 below, it will not, directly or indirectly,
alone or as a member of
19
<PAGE>
a "group" (as such term is used in Section 13(d)(3) of the Exchange Act) (i)
acquire beneficial ownership as determined pursuant to Rule 13d-3 under the
Exchange Act of any Voting Stock, other than pursuant to the exercise of
Options, pursuant to Section 7.1 of this Agreement or by way of stock dividend,
stock split or recapitalization effected by the Company, or other distributions
or offerings made available to holders of Voting Stock generally, (ii) make a
tender or exchange offer for Voting Stock if, after such acquisition, the
Purchaser would beneficially own 20% of more of the total combined voting power
of the Voting Stock then outstanding or (iii) engage in any solicitation of
proxies for the purpose of obtaining stockholder approval for any transaction
that would result in the Purchaser acquiring Voting Stock, if, after such
acquisition, the Purchaser would beneficially own 20% or more of the total
combined voting power of the Voting Stock then outstanding (iv) take any action
which could reasonably be expected to force the Company to make a public
announcement regarding any of the types of matters set forth in clauses (ii) or
(iii) above; or provided that it will not be a violation of this Section 8.2 if
the Purchaser acquires the Voting Stock as a result of any action taken by the
Company or its Affiliates.
8.3. EXCEPTIONS. The parties agree that the restrictions set forth in
Section 8.2 above shall not apply if (a) the Company's Board of Directors
determines to solicit proposals to engage in a bona fide Change of Control
transaction; (b) the Company notifies the Purchaser that it has received a
proposal from a third party that could result in a Change of Control transaction
and that the Company's Board of Directors has determined to consider such
proposal; (c) the Company enters into a definitive agreement to engage in a
Change of Control Transaction with either the Purchaser or any third party; or
(d) a public announcement of the commencement or making of, or the intention to
commence or make, a tender or exchange offer by any person other than the
Company or the Purchaser for Voting Stock representing 20% or more of the
combined voting power of Voting Stock then outstanding; PROVIDED, HOWEVER, the
restrictions shall be reinstated if (i) the Board of Directors of the Company
subsequently notifies Purchaser in writing that it has determined to cease
entertaining proposals to negotiate a Change of Control transaction pursuant to
either (a) or (b) above and is neither then engaged in negotiations or
discussions relating to nor has entered into a definite agreement with any third
party for such Change of Control transaction; (ii) any merger agreement or other
definitive agreement entered into under clause (a), (b) or (c) above is
subsequently terminated or expires before the transaction contemplated thereby
is consummated; or (iii) such tender or exchange offer referred to in clause (d)
above is withdrawn or terminated without such person acquiring such 20%
ownership level; and FURTHER PROVIDED THAT, if Purchaser has acquired any
additional securities of the Company during the time such restriction was not in
effect and such limitation is reinstated as a consequence of the foregoing
proviso, then from and after the reinstatement of such limitation, Purchaser
shall not, except as otherwise permitted under Section 8.2(b)(i), acquire
beneficial ownership of any additional securities of the Company or authorize or
make a tender, exchange or other offer therefor, if the effect of such
acquisition would be to increase the percentage of the Voting Stock then owned
by Purchaser to an amount equal to the greater of (1) 20% or (2) the percentage
of the Voting Stock then owned by Purchaser (as such percentage may decrease
over time as a result of dispositions of securities by Purchaser).
8.4. CHANGE OF CONTROL NOTICE AND AGREEMENT TO NEGOTIATE. The
Company agrees that during the period commencing on the Initial Closing Date
and ending on the earlier of (i) the date on which the Distribution and
Marketing Agreement is terminated and (ii) the date on which
20
<PAGE>
the Purchaser ceases to hold an aggregate of at least 25% of the Shares
purchased hereunder (or shares of capital stock or other securities of the
Company issued in replacement of, in exchange for, or otherwise in respect of
the Shares), the Company shall promptly notify the Purchaser in writing not
later than one trading day following the receipt of any written proposal (a
"CHANGE OF CONTROL OFFER") from a third party (the "ACQUIRING PARTY") that
could result in a Change of Control transaction (unless Company's Board of
Directors has determined not to consider such proposal). Such notice (the
"CHANGE OF CONTROL NOTICE") shall describe in reasonable detail the terms and
conditions of the Change of Control Offer and shall offer the Purchaser the
opportunity to enter into good faith negotiations with the Company to enter
into a Change of Control transaction on terms no less favorable to the
Purchaser than the terms set forth in the Change of Control Notice. The
Purchaser shall inform the Company within two business days after receipt of
the Change of Control Notice if it wishes to negotiate with the Company with
respect to a Change of Control transaction on terms no less favorable to the
Company than the terms set forth in the Change of Control Notice (an
"EQUIVALENT TRANSACTION"). If the Purchaser either fails to respond in
writing within such two business day period, or responds that it does not
wish to negotiate such an Equivalent Transaction, the Company shall have no
further obligations to the Purchaser with respect to a Change of Control
transaction with such Acquiring Party. If the Purchaser responds in writing
within such two business day period that it wishes to negotiate with the
Company for an Equivalent Transaction, then the Company, subject to the Board
of Directors' fiduciary duties under applicable law, shall negotiate in good
faith with the Purchaser with respect to a Change of Control transaction with
the Purchaser on terms no less favorable to the Purchaser than the terms
offered by the Acquiring Party.
ARTICLE IX
RESTRICTIONS ON TRANSFER
9.1. RESTRICTED SHARES. "RESTRICTED SHARES" means (i) the Shares and
(ii) any other shares of capital stock of the Company issued in respect of such
shares (as a result of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events); PROVIDED, HOWEVER, that the Shares shall
cease to be Restricted Shares (x) upon any sale pursuant to a registration
statement under the Securities Act, Section 4(l) of the Securities Act or Rule
144 under the Securities Act or (y) at such time as they become eligible for
sale under Rule 144(k) under the Securities Act.
9.2. REQUIREMENTS FOR TRANSFER.
(a) Restricted Shares shall not be sold or transferred unless
either (i) they first shall have been registered under the Securities Act, or
(ii) the Company first shall have been furnished with an opinion of legal
counsel, reasonably satisfactory to the Company, to the effect that such sale or
transfer is exempt from the registration requirements of the Securities Act.
(b) Notwithstanding the foregoing, no registration or opinion
of counsel shall be required for (i) a transfer by the Purchaser to a wholly
owned subsidiary; provided that the transferee agrees in writing to be subject
to the terms of this Agreement, or (ii) a transfer made in accordance with Rule
144 under the Securities Act.
21
<PAGE>
9.3. LEGENDS. Each certificate representing Restricted Shares shall
bear a legend substantially in the form set forth in Section 4.3 hereof, which
legend shall be removed from the certificates representing any Restricted
Shares, at the request of the holder thereof, at such time as they become
eligible for resale pursuant to Rule 144(k) under the Securities Act.
ARTICLE X
MISCELLANEOUS
10.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The parties hereto
hereby agree that the representations and warranties contained in this Agreement
or in any certificate, document or instrument delivered in connection herewith,
shall survive the execution and delivery of this Agreement, and each Closing
hereunder, regardless of any investigation made by the parties hereto. The
parties hereto agree that the agreements and covenants of each of the parties
contained in this Agreement shall survive the execution and delivery of this
Agreement, and each Closing hereunder.
10.2. FEES AND EXPENSES. Except as otherwise provided in this
Agreement, the Company and the Purchaser shall each bear its own expenses
incurred in connection with the negotiation and execution of this Agreement and
each other agreement, document and instrument contemplated by this Agreement and
the consummation of the transactions contemplated hereby and thereby.
10.3. FURTHER ASSURANCES. The Company and the Purchaser each agrees to
execute and deliver such other documents or agreements and to take such other
action as may be reasonably necessary or desirable for the implementation of
this Agreement and the consummation of the transactions contemplated hereby.
10.4. DISPUTE RESOLUTION.
(a) Any matter or dispute that cannot be resolved by the
parties hereto, and any other dispute, controversy or claim arising out of or
relating to this Agreement, or the breach, termination, or invalidity of this
Agreement, shall be submitted in the first instance to the most senior officer
of the Focal and Genzyme business unit responsible for the performance of each
party's obligations under this Agreement.
(b) If the matter or dispute cannot be resolved by the senior
officers of the relevant business units pursuant to Section 10.4(a) within 20
days after submission, either party may submit such matter or dispute to the
Chief Executive Officer of Focal and the Chief Executive Officer of Genzyme.
(c) If the matter of dispute cannot be resolved by the
individuals designated in Section 10.4(b) within 30 days after such submission,
either party may submit such matter or dispute to arbitration alternative
dispute resolution ("ADR"), as provided in EXHIBIT D attached hereto.
(d) The arbitration decision shall be binding upon the
parties. The decision of the arbitrators shall be executory, and the prevailing
party may enter such decision in any court
22
<PAGE>
having competent jurisdiction. Each party shall have the right to institute
judicial proceedings against the other party or anyone acting by, through or
under such other party (including the right to seek and to obtain injunctive
relief) solely to enforce the instituting party's arbitration rights or the
decision of the arbitrators.
10.5. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement
(including the schedules and exhibits hereto) represents the entire
understanding and agreement between the parties hereto with respect to the
subject matter hereof and can be amended, supplemented or changed, and any
provision hereof can be waived, only by written instrument making specific
reference to this Agreement signed by the party against whom enforcement of any
such amendment, supplement, modification or waiver is sought. No action taken
pursuant to this Agreement, including without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representation, warranty, covenant or
agreement contained herein. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a further or
continuing waiver of such breach or as a waiver of any other or subsequent
breach. No failure on the part of any party to exercise, and no delay in
exercising, any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of such right, power or remedy
by such party preclude any other or further exercise thereof or the exercise of
any other right, power or remedy. All remedies hereunder are cumulative and are
not exclusive of any other remedies provided by law.
10.6. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Massachusetts.
10.7. TABLE OF CONTENTS AND HEADINGS. The table of contents and section
headings of this Agreement are for reference purposes only and are to be given
no effect in the construction or interpretation of this Agreement.
10.8. NOTICES. Any notice, demand, request or delivery required or
permitted to be given by the Company or the Purchaser pursuant to the terms of
this Agreement shall be in writing and shall be deemed given (i) when delivered
personally or when sent by verifiable facsimile transmission (with a hard copy
to follow), (ii) on the next business day after timely delivery to an overnight
courier and (iii) on the third business day after deposit in the U.S. mail
(certified or registered mail, return receipt requested, postage prepaid),
addressed to the parties as follows:
If to the Company, to:
Focal, Inc.
4 Maguire Road
Lexington, MA 02173
Attention: President
Telecopier: (781) 280-7802
23
<PAGE>
With a copy to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Steven D. Singer, Esq.
Telecopier: (617) 526-5000
If to a Purchaser, to:
Genzyme Corporation
One Kendall Square
Cambridge, MA 02139
Attention: Chief Corporate Counsel
Telecopier: (617) 252-7553
With a copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Attention: Paul M. Kinsella, Esq.
Telecopier: (617) 227-4420
Any party may by notice given in accordance with this Section 10.8 to the other
parties designate another address or person for receipt of notices hereunder.
10.9. SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms.
10.10. COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, and both of which
together shall constitute one and the same instrument.
10.11. RULES OF CONSTRUCTION. The parties hereto agree that they have
been represented by counsel during the negotiation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or ruling of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
10.12. SEVERABILITY. If any provision of this Agreement is held invalid
or unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement shall remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable. The
24
<PAGE>
parties further agree to replace such invalid or unenforceable provision of this
Agreement with a valid and enforceable provision that will achieve, to the
extent possible, the economic, business and other purposes of such invalid or
unenforceable provision.
10.13. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns. Nothing in this Agreement shall create or be deemed to create
any third party beneficiary rights in any person or entity not a party to this
Agreement. No assignment of this Agreement or of any rights or obligations
hereunder may be made by either the Company or the Purchaser (by operation of
law or otherwise) without the prior written consent of the other parties hereto
and any attempted assignment without the required consents shall be void;
PROVIDED, HOWEVER, that the Purchaser may assign this Agreement and any or all
rights or obligations hereunder (including, without limitation, the Purchaser's
obligation to purchase the Shares) to any Affiliate of the Purchaser. Upon any
such permitted assignment, the references in this Agreement to the Purchaser
shall also apply to any such assignee unless the context otherwise requires.
10.14. LIMITATION OF LIABILITY. (a) The Purchaser's liability to the
Company and its officers, employees and stockholders for any claim arising under
this Agreement, or otherwise arising from the transactions contemplated herein,
regardless of the form of action (including, but not limited to, actions for
breach of contract, negligence, strict liability and rescission) will not exceed
the lesser of (i) the total amount invested or required to be invested by the
Purchaser in the Company pursuant to this Agreement prior to the event giving
rise to such claim, or (ii) the actual damages sustained by the affected party.
(b) In no event shall either party be liable to the other
party, or the officers, employees or stockholders of the other party for any
special, indirect, incidental or consequential damages, including, but not
limited to, loss of revenues and loss of profits, even if such party has been
advised of the possibility of such damages.
10.15. USE OF NAMES. Except as required by applicable law, neither the
Company nor the Purchaser shall use, directly or indirectly, the other party's
name in any advertisement, announcement, press release or other similar
communication unless it has received the prior written consent of the other
party for the specific use contemplated.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first written above.
THE COMPANY:
FOCAL, INC.
By: /s/ David M. Clapper
------------------------------------
Name: David M. Clapper
Title: President
THE PURCHASER:
GENZYME CORPORATION
By: /s/ Earl M. Collier, Jr.
------------------------------------
Name: Earl M. Collier, Jr.
Title: Executive Vice President
26
<PAGE>
SCHEDULE 3.4
SUBSIDIARIES AND OTHER INVESTMENTS
None
27
<PAGE>
SCHEDULE 3.5(B)
The Company has entered into a Letter Agreement dated July 28, 1998
(the "Letter Agreement") with Ethicon, Inc. ("Ethicon"), which amends in part
the Distribution License and Supply Agreement dated January 2, 1997 between
Ethicon and the Company. The Company has not filed the Letter Agreement as an
exhibit to any of the Company SEC reports.
28
<PAGE>
SCHEDULE 3.11
HOLDERS OF REGISTRATION RIGHTS
The Company is party to a Restated Investors Rights Agreement dated
April 12, 1996 among the Company and certain of its stockholders pursuant to
which the Company has granted to such stockholders certain rights to register
their shares of Common Stock of the Company.
29
<PAGE>
SCHEDULE 3.13
The Company has licensed from third parties the Intellectual Property
covered by the license agreements set forth below:
1. Patent and Technology License Agreement dated June 11, 1992
between the Company and the University of Texas.
2. Exclusive License Agreement dated August 7, 1992 by and among
the Company, Marvin Slepian, M.D. and Endoluminal
Therapeutics, Inc.
30
<PAGE>
EXHIBIT A
FORM OF REGISTRATION RIGHTS AGREEMENT
31
<PAGE>
EXHIBIT B
FORM OF COMPANY BOARD RESOLUTIONS
32
<PAGE>
EXHIBIT C
FORM OF OPINION OF COMPANY'S COUNSEL
33
<PAGE>
EXHIBIT D
ADR PROCEDURES
1. To begin an ADR proceeding, a Party shall provide written
notice to the other Party of the issues to be resolved by ADR. Within fourteen
(14) days after its receipt of such notice, the other Party may, by written
notice to the Party initiating the ADR, add additional issues subject to ADR
pursuant to Section 9.1 to be resolved within the same ADR.
2. Within twenty-one (21) days following receipt of the
original ADR notice, the Parties shall select a mutually acceptable neutral
party to preside in the resolution of any disputes in this ADR proceeding. If
the Parties are unable to agree on a mutually acceptable neutral party within
such period, a Party may request the President of the CPR Institute for Dispute
Resolution ("CPR"), 366 Madison Avenue, 14th Floor, New York, New York 10017, to
select a neutral party pursuant to the following procedures:
(1) The CPR shall submit to the Parties a list of not
less than five (5) candidates within fourteen (14) days after receipt
of the request, along with a CURRICULUM VITAE for each candidate. No
candidate shall be an employee, director or shareholder of a Party or
any of their Affiliates.
(2) Such list shall include a statement of disclosure
by each candidate of any circumstances likely to affect his or her
impartiality.
(3) Each Party shall number the candidates in order
of preference (with the number one (1) signifying the greatest
preference) and shall deliver the list to the CPR within seven (7) days
following receipt of the list of candidates. If a Party believes a
conflict of interest exists regarding any of the candidates, that Party
shall provide a written explanation of the conflict to the CPR along
with its list showing its order of preference for the candidates. Any
Party failing to return a list of preferences on time shall be deemed
to have no order of preference.
(4) If the Parties collectively have identified fewer
than three (3) candidates deemed to have conflicts, the CPR immediately
shall designate as the neutral party the candidate for whom Focal on
the one hand, and Genzyme on the other hand, have indicated the
greatest preference. If a tie should result between two candidates, the
CPR may designate either candidate. If the Parties collectively have
identified three (3) or more candidates deemed to have conflicts, the
CPR shall review the explanations regarding conflicts and, in its sole
discretion, may either (i) immediately designate as the neutral party
the candidate for whom the Parties collectively have indicated the
greatest preference, or (ii) issue a new list of not less than five (5)
candidates, in which case the procedures set forth in subsection
b(i)-(iv) shall be repeated.
3. No earlier than twenty-eight (28) days or later than
fifty-six (56) days after selection, the neutral party shall hold a hearing to
resolve each of the issues identified by the Parties. The ADR proceeding shall
take place at a location agreed upon by the Parties. If the
34
<PAGE>
Parties cannot agree, the neutral party shall designate a location other than
the principal place of business of either Party or any of their Affiliates.
4. At least seven (7) days prior to the hearing, each Party
shall submit the following to the other Party and the neutral party:
(1) a copy of all exhibits on which such Party
intends to rely in any oral or written presentation to the neutral
party;
(2) a list of any witnesses such Party intends to
call at the hearing, and a short summary of the anticipated testimony
of each witness;
(3) a proposed ruling on each issue to be resolved,
together with a request for a specific damage award or other remedy for
each issue. The proposed rulings and remedies shall not contain any
recitation of the facts or any legal arguments and shall not exceed one
(1) page per issue.
(4) a brief in support of such Party's proposed
rulings and remedies, provided that the brief shall not exceed twenty
(20) pages. This page limitation shall apply regardless of the number
of issues raised in the ADR proceeding.
5. Consistent with subsections d(i)-(iv), the neutral party
shall establish the rules for, and resolve any disputes concerning, any
discovery to be conducted prior to the ADR proceeding, including but not
necessarily limited to depositions, interrogatories, requests for admissions, or
production of documents.
6. The hearing shall be conducted on two (2) consecutive days
and shall be governed by the following rules:
(1) Each Party shall be entitled to five (5) hours of
hearing time to present its case. The neutral party shall determine
whether each Party has had the five (5) hours to which it is entitled.
(2) Each Party shall be entitled, but not required,
to make an opening statement, to present regular and rebuttal
testimony, documents or other evidence, to cross-examine witnesses, and
to make a closing argument. Cross-examination of witnesses shall occur
immediately after their direct testimony (unless a witness affiliated
with a party has been called by the other party in that party's case,
in which event the party with which the witness is affiliated may
examine the witness either immediately after the direct examination or
as part of that party's case), and cross-examination time shall be
charged against the party conducting the cross-examination.
(3) The Party initiating the ADR shall begin the
hearing and, if it chooses to make an opening statement, shall address
not only issues it raised but also any issues raised by the responding
Party. The responding Party, if it chooses to make an opening
statement, also shall address all issues raised in the ADR. Thereafter,
the presentation of regular and rebuttal testimony and documents, other
evidence, and closing arguments shall proceed in the same sequence.
35
<PAGE>
(4) Settlement negotiations, including any statements
made therein, shall not be admitted or referred to in the ADR hearing
under any circumstances. Affidavits prepared for purposes of the ADR
hearing also shall not be admissible. As to all other matters, the
neutral party shall have sole discretion regarding the admissibility of
any evidence.
7. Within seven (7) days following completion of the hearing,
each Party may submit to the other Party and the neutral party a post-hearing
brief in support of its proposed rulings and remedies, provided that such brief
shall not contain or discuss any new evidence and shall not exceed ten (10)
pages. This page limitation shall apply regardless of the number of issues
raised in the ADR proceeding.
8. The neutral party shall rule on each disputed issue within
fourteen (14) days following completion of the hearing. In making his/her
ruling, the neutral party shall apply the governing law provisions of the
Agreement. Such ruling shall adopt in its entirety the proposed ruling and
remedy of one of the Parties on each disputed issue but may adopt one Party's
proposed rulings and remedies on some issues and the other Party's proposed
rulings and remedies on other issues. The neutral party may but need not, issue
a written opinion or otherwise explain the basis of the ruling.
9. The neutral party shall be paid a reasonable fee plus
expenses. These fees and expenses, along with the reasonable legal fees and
expenses of the prevailing Party (including all reasonable expert witness fees
and expenses), the fees and expenses of a court reporter, if any, and any
expenses for a hearing room, shall be paid as follows:
(1) If the neutral party rules in favor of one Party
on all disputed issues in the ADR, the losing Party shall pay 100% of
such fees and expenses.
(2) If the neutral party rules in favor of one Party
on some issues and the other Party on other issues, the neutral party
shall issue with the rulings a written determination as to how such
fees and expenses shall be allocated between the parties. The neutral
party shall allocate fees and expenses in a way that bears a reasonable
relationship to the outcome of the ADR, with the Party prevailing on
more issues, or on issues of greater value or gravity, recovering a
relatively larger share of its legal fees and expenses.
10. The rulings of the neutral party and the allocation of
fees and expenses shall be binding, non-reviewable, and non-appealable, and may
be entered as a final judgment in any court having jurisdiction.
11. Except as provided in subsection (i) or as required by
law, the existence of the dispute, any settlement negotiations, the ADR hearing,
any submissions (including exhibits, testimony, proposed rulings, and briefs),
and the rulings and any written opinion of the neutral party shall be deemed
Confidential Information. The neutral party shall have the authority to impose
sanctions for unauthorized disclosure of Proprietary Information.
12. No ADR proceeding between the Parties shall include, by
consolidation, joint or otherwise, any third party, without the consent of both
Parties.
36
<PAGE>
EXHIBIT 10.20
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated October
21, 1999, by and between FOCAL, INC., a Delaware corporation (the "Company"),
and GENZYME CORPORATION, a Massachusetts corporation (the "STOCKHOLDER").
In connection with the Stock Purchase Agreement, dated the date hereof
(the "STOCK PURCHASE AGREEMENT"), the Company has agreed, subject to the terms
and conditions set forth therein, to issue and sell to the Stockholder shares of
the Company's common stock, par value $.01 per share (the "COMMON STOCK"). In
order to induce the Stockholder to enter into the Stock Purchase Agreement, the
Company has agreed to provide certain registration rights under the Securities
Act of 1933, as amended (the "SECURITIES ACT"). Capitalized terms used herein
and not otherwise defined shall have the respective meanings set forth in the
Stock Purchase Agreement.
In consideration of the Stockholder entering into the Stock Purchase
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the
meanings specified:
(a) "HOLDER" means any person owning or having the right to acquire
Registrable Securities, including initially the Stockholder, and any permitted
assignee thereof; and
(b) "REGISTRABLE SECURITIES" means the Shares acquired at the
Initial Closing or at an Option Closing, and any securities issued or issuable
from time to time (with any adjustments) in replacement of, in exchange for or
otherwise in respect of the Shares provided however, that shares of Common Stock
which are Registrable Securities shall cease to be Registrable Securities upon
(x) any sale pursuant to (i) a registration statement filed by the Company with
the Securities and Exchange Commission for a public offering and sale of
securities of the Company or (ii) Rule 144 under the Securities Act or (y) any
sale to a person or entity in a manner which does not comply with Section 8(e)
of this Agreement.
(c) "REGISTRATION TERMINATION DATE" shall mean the date after which
the Company shall no longer be obligated to file a registration statement (a
"REGISTRATION STATEMENT") pursuant to Section 2, to maintain the effectiveness
of a Registration Statement filed pursuant to Section 2 or to include
Registrable Securities on any Registration Statement pursuant to Section 3, and
shall be the sixth anniversary of the Initial Closing Date.
<PAGE>
2. MANDATORY REGISTRATION.
(a) Subject to Section 4(a), from time to time on or after the date
90 days after the Initial Closing Date and prior to Registration Termination
Date, at the request of the Holder, the Company shall prepare and file with the
Securities and Exchange Commission (the "SEC") a Registration Statement on Form
S-3 (or, if Form S-3 is not available, on such form of Registration Statement as
is then available to effect a registration of the Registrable Securities,
subject to the consent of the Holder which consent will not be unreasonably
withheld, as a "shelf" registration statement under Rule 415 under the
Securities Act (or any successor or similar rule providing for an offering of
securities on a continuous basis)) covering the resale of all Registrable
Securities or such portion thereof as the Holder may request. The Registration
Statement shall state, to the extent permitted by Rule 416 under the Securities
Act, that it also covers such indeterminate number of shares of Common Stock as
may be required to prevent dilution resulting from stock splits, stock dividends
or similar events. The Company shall not be obligated pursuant to this Section 2
to cause more than four separate Registration Statements to be declared
effective.
(b) The Company shall, subject to Sections 4(h) and 4(i) hereof,
maintain the effectiveness of a Registration Statement filed pursuant to this
Section 2 from the effective date thereof until the earlier to occur of (i) the
date on which all of the Registrable Securities covered by the Registration
Statement have been sold and (ii) 180 days from the effective date of such
Registration Statement.
3. PIGGYBACK REGISTRATION.
If at any time after the first anniversary of the Initial Closing
Date and prior to the Registration Termination Date, (a) the Company proposes to
register shares of Common Stock and/or any securities issued in exchange for, in
replacement of or otherwise with respect to Common Stock under the Securities
Act (a "PROPOSED REGISTRATION") in connection with the public offering of such
shares or securities (other than a registration relating solely to the sale of
securities to participants in a Company stock plan or a registration on Form S-4
under the Securities Act or any successor or similar form registering stock
issuable upon a reclassification, a business combination involving an exchange
of securities or an exchange offer for securities of the issuer or another
entity) and (b) a Registration Statement covering the sale of all of the
Registrable Securities is not then effective and available for sales thereof by
the Holder, the Company shall, at such time, promptly give the Holder written
notice of such Proposed Registration. The Holder shall have twenty (20) days
from its receipt of such notice to deliver to the Company a written request
specifying the amount of Registrable Securities that the Holder intends to sell
and the Holder's intended method of distribution. Upon receipt of such request,
the Company shall use its best efforts to cause all Registrable Securities which
the Company has been requested to register to be registered under the Securities
Act to the extent necessary to permit their sale or other disposition in
accordance with the intended methods of distribution specified in the request of
the Holder; PROVIDED, HOWEVER, that the Company shall have the right, prior to
the date the applicable Registration Statement becomes effective, to postpone or
withdraw any Proposed Registration without obligation to the Holder. In
connection with any Proposed Registration involving an underwriting, the Company
shall not be required to include any Registrable Securities in such underwriting
unless the Holders accept customary terms of the
2
<PAGE>
underwriting as agreed upon between the Company and the underwriters selected by
it, and then only in such quantity as will not, in the opinion of the
underwriters, materially and adversely affect such public offering. In the event
of a reduction in the number of Shares to be included in an underwriting
pursuant to the previous sentence, the number of shares that may be included in
such Proposed Registration by the Holder and any other holders of securities of
the Company who are entitled, by contract with the Company, to have securities
included in such registration (the "OTHER REGISTRATION RIGHTS HOLDERS") and who
have requested such registration shall be allocated among the Holder and such
Other Registration Rights Holders in proportion, as nearly as practicable, to
the respective number of shares of Common Stock (on an as-converted basis) which
they held at the time the Company gave notice of the Proposed Registration. If
any Holder or Other Registration Rights Holders would thus be entitled to
include more securities than such holders requested to be registered, the excess
shall be allocated among the Holder and the Other Registration Rights Holders
pro rata in the manner described in the preceding sentence. The parties agree
that it is customary in an underwritten offering for the indemnification
obligation of a selling securityholder like the Stockholder to underwriters to
be several and not joint and limited to the net proceeds the selling
securityholder receives in the offering.
4. OBLIGATIONS OF THE COMPANY.
In connection with the registration of Registrable Securities
pursuant to this Agreement, the Company shall:
(a) (i) within 60 days of receipt of a request pursuant to Section
2, prepare and file with the SEC a Registration Statement with respect to the
Registrable Securities which complies with the provisions of the Securities Act
and the rules and regulations of the SEC thereunder and (ii) use its best
efforts to cause such Registration Statement to become effective as soon as
possible thereafter and (iii) keep any Registration Statement covering
Registrable Securities effective until the earlier of (1) 180 days from the
effective date of such Registration Statement and (2) the sale of all
Registrable Securities covered by the Registration Statement; PROVIDED, HOWEVER,
if the Holder requests the Company to register Registrable Securities pursuant
to Section 2 and (A) at such time the Company is engaged in, or has a firm plan
to engage in, a primary offering of Common Stock which is expected to close
within 60 days of the date of the request or (B) is engaged in any other
activity which the Company's Board of Directors determines in good faith would
be materially and adversely affected by such requested registration, then the
Company, at its option and without prejudice to the Holder's rights under
Section 3, may delay the filing of the Registration Statement until 90 days
following the request and shall use its best efforts to cause such Registration
Statement to become effective as soon as possible after filing;
(b) prepare and file with the SEC such amendments and supplements to
any Registration Statement covering Registrable Securities and the prospectus
used in connection with such Registration Statement as may be necessary to
comply with the provisions of the Securities Act and the rules and regulations
thereunder to maintain the effectiveness of the Registration Statement, to
otherwise permit sales by the Holder under the Registration Statement, or as may
be reasonably requested by the Holder in order to incorporate information
concerning the Holder or the Holder's intended methods of distribution;
3
<PAGE>
(c) amend any Registration Statement covering Registrable
Securities, or file a new Registration Statement, or both, as necessary to cover
all securities issued in exchange for, in replacement of or otherwise with
respect to the Shares or any other securities previously issued with respect to
the Shares;
(d) secure the designation and quotation of the Registrable
Securities on the Nasdaq National Market or the stock exchange on which the
Common Stock, or other securities of the Company issued in replacement of, in
exchange for, or otherwise in respect of the Shares, are then listed and
principally traded;
(e) furnish to the Holder such number of copies of the prospectus
included in a Registration Statement covering Registrable Securities, including
a preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents as the Holder may reasonably request in order to
facilitate the disposition of the Holder's Registrable Securities;
(f) if the Registrable Securities cease to be "covered securities"
under Section 18(b)(1) of the Securities Act (or any successor thereto), use its
best efforts to register or qualify the Registrable Securities under the
securities or "blue sky" laws of such jurisdictions within the United States as
shall be reasonably requested from time to time by the Holder, and do any and
all other acts or things which may be necessary or advisable to enable the
Holder to consummate the public sale or other disposition of the Registrable
Securities in such jurisdictions; provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such
jurisdiction;
(g) in the event of an underwritten public offering of the
Registrable Securities, enter into an perform its obligations under an
underwriting agreement, in usual and customary form reasonably acceptable to the
Company, with the managing underwriter of such offering;
(h) notify the Holder immediately upon the occurrence of any event
as a result of which the prospectus included in a Registration Statement, as
then in effect, contains an untrue statement of material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing,
and as promptly as possible, prepare, file and furnish to the Holder a
reasonable number of copies of a supplement or an amendment to such prospectus
as may be necessary so that such prospectus does not contain an untrue statement
of material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing; PROVIDED, HOWEVER, that the Company may delay
preparing, filing and distributing any such supplement or amendment if the Board
of Directors of the Company determines in good faith that such supplement or
amendment could, in its reasonable judgment, (i) interfere with or adversely
affect the negotiation or completion of a transaction that is being contemplated
by the Company or (ii) involve initial or continuing disclosure obligations that
are not in the best interests of the Company or the Company's stockholders at
such time; PROVIDED, FURTHER, that (1) the Company will give notice (a
"STANDSTILL NOTICE") of any such delay as promptly as practicable under the
circumstances, (2) such delay shall not extend for a period
4
<PAGE>
of more than 20 calendar days and (3) the Company may utilize such delay no more
than three times in any 365-day period;
(i) use its best efforts to prevent the issuance of any stop order
or other order suspending the effectiveness of a Registration Statement covering
Registrable Securities and, if such an order is issued, to obtain the withdrawal
thereof at the earliest possible time and to notify the Holder of the issuance
of such order and the resolution thereof;
(j) furnish to the Holder, on the date that a Registration Statement
covering Registrable Securities becomes effective, an opinion, dated such date,
of outside counsel representing the Company (and reasonably acceptable to the
Holder) addressed to the Holder and in form and substance as is customarily
given to underwriters in an underwritten public offering;
(k) provide the Holder and its representatives the opportunity to
conduct a reasonable inquiry of the Company's financial and other records during
normal business hours and make available its officers, directors and employees
for questions regarding information which the Holder may reasonably request in
order to conduct any due diligence;
(l) permit counsel for the Holder to review a Registration Statement
covering Registrable Securities and all amendments and supplements thereto a
reasonable period of time prior to the filing thereof with the SEC; and
(m) at the request of any Holder at any time after any Registrable
Securities held by such Holder become eligible for resale pursuant to Rule
144(k) under the Securities Act, deliver a letter to the Company's transfer
agent irrevocably instructing the transfer agent to remove any securities law
legend from any certificate representing such Registrable Securities which have
become eligible for the sale pursuant to Rule 144(k).
5. OBLIGATIONS OF HOLDER.
In connection with any registration of the Registrable Securities
pursuant to this Agreement, the Holder shall:
(a) furnish to the Company such information regarding itself and the
intended methods of disposition of Registrable Securities as the Company shall
reasonably request in order to effect the registration thereof;
(b) upon receipt of any Standstill Notice from the Company pursuant
to Section 4(h), immediately discontinue disposition of Registrable Securities
until the earlier of (i) the expiration of the period during which such
Standstill Notice is in effect or (ii) the date that such Holder is advised by
the Company that the then current prospectus may be used and has received copies
of any additional or supplemental filings that are incorporated or deemed
incorporated by reference into such prospectus;
(c) upon receipt of any notice from the Company of the issuance of a
stop order pursuant to Section 4(i), immediately discontinue disposition of
Registrable Securities pursuant to the applicable Registration Statement until
withdrawal of the stop order; and
5
<PAGE>
(d) if so requested by the Company, provided the Company is not at
such time in breach of this Agreement, not sell or otherwise transfer pursuant
to a Registration Statement or pursuant to Rule 144 under the Securities Act
("RULE 144") any Registrable Securities during the period beginning on the
second business day prior to the effective date of a registration statement
filed by the Company under the Securities Act in connection with a primary
offering underwritten on a firm commitment or best efforts basis, and ending, at
the managing underwriter's discretion, as late as the 90th calendar day
following such effective date.
6. INDEMNIFICATION.
In the event that any Registrable Securities are included in a
Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company shall indemnify and
hold harmless the Holder, the officers, directors, employees, agents and
representatives of the Holder, and each person, if any, who controls the Holder
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), against any losses, claims, damages,
liabilities or reasonable out-of-pocket expenses (whether joint or several)
(collectively, including legal or other expenses incurred in connection with
investigating or defending same, "LOSSES"), insofar as any such Losses arise out
of or are based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Company will reimburse the Holder, and each such officer,
director, employee, agent, representative or controlling person for any legal or
other expenses as reasonably incurred by any such entity or person in connection
with investigating or defending any Loss; PROVIDED, HOWEVER, that the foregoing
indemnity shall not apply to amounts paid in settlement of any Loss if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be obligated to indemnify
any person for any Loss to the extent that such Loss arises out of or is based
upon and in conformity with written information furnished by such person
expressly for use in such Registration Statement; and PROVIDED, FURTHER, that
the Company shall not be required to indemnify any person to the extent that any
Loss results from such person selling Registrable Securities to a person to whom
there was not sent or given, at or prior to the written confirmation of the sale
of such securities, a copy of the prospectus, as most recently amended or
supplemented, if the Company had a reasonable time prior to the sale furnished
to the Holder sufficient copies thereof.
(b) To the extent permitted by law, the Holder shall indemnify and
hold harmless the Company, the officers, directors, employees, agents and
representatives of the Company, and each person, if any, who controls the
Company within the meaning of the Securities Act or the Exchange Act, against
any Losses to the extent (and only to the extent) that such Losses are based
upon (i) any untrue statement or alleged untrue statement of a material fact
contained in a Registration Statement, including any preliminary prospectus or
final prospectus contained therein or any amendments or supplements thereto or
(ii) the omission or alleged omission to state therein a material fact required
to be stated therein, or necessary to make the
6
<PAGE>
statements therein, in light of the circumstances under which they were made,
not misleading, if and only to the extent that the statement or omission was
made in reliance upon or in conformity with written information furnished by the
Holder expressly for use in such Registration Statement; and the Holder will
reimburse any legal or other expenses as reasonably incurred by the Company and
any such officer, director, employee, agent, representative, or controlling
person, in connection with investigating or defending any such Loss; AND FURTHER
PROVIDED, that the foregoing indemnity shall not apply to amounts paid in
settlement of any such Loss if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld; PROVIDED,
HOWEVER, that, in no event shall any indemnity under this subsection 6(b) exceed
the net sale price of securities sold by the Holder under the Registration
Statement.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 6, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in and to assume the
defense thereof with counsel mutually satisfactory to the parties; PROVIDED,
HOWEVER, that an indemnified party shall have the right to retain its own
counsel, with the reasonably incurred fees and expenses of one such counsel to
be paid by the indemnifying party, if there are actual or potential conflicting
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall relieve such indemnifying party of any liability to the indemnified
party under this Section 6 with respect to such action to the extent such
failure prejudices to its ability to defend such action, but the omission so to
deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section 6 or with respect to any other action.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 6 is unavailable or insufficient to hold harmless an indemnified
party for any reason, the Company and the Holder agree to contribute to the
aggregate Losses to which the Company or the Holder may be subject in such
proportion as is appropriate to reflect the relative fault of the Company and
the Holder in connection with the statements or omissions which resulted in such
Losses; PROVIDED, HOWEVER, that in no case shall the Holder be responsible for
any amount in excess of the net sale price of securities sold by it under the
Registration Statement. Relative fault shall be determined by reference to
whether any alleged untrue statement or omission relates to information provided
by the Company or by the Holder. The Company and the Holder agree that it would
not be just and equitable if contribution were determined by pro rata allocation
or any other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 6, each person who controls the
Holder within the meaning of either the Securities Act or the Exchange Act and
each officer, director, employee, agent or representative of the Holder shall
have the same rights to contribution as the Holder, and each person who controls
the Company within the meaning of either the Securities Act or the Exchange Act
and each officer, director, employee, agent or representative of the
7
<PAGE>
Company shall have the same rights to contribution as the Company, subject in
each case to the applicable terms and conditions of this paragraph (d).
(e) The obligations of the Company and the Holder under this Section
6 shall survive the completion of any offering of Registrable Securities
pursuant to a Registration Statement under this Agreement, or otherwise.
7. REPORTS.
With a view to making available to the Holder the benefits of Rule
144 and any other rule or regulation of the SEC that may at any time permit the
Holder to sell securities of the Company to the public without registration, the
Company agrees that so long as it is subject to the reporting requirements under
the Exchange Act, it will:
(a) make and keep current public information about the Company
available, as those terms are understood and defined in Rule 144;
(b) use its best efforts to file with the SEC in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Exchange Act; and
(c) furnish to the Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company, if true, that it has complied with the reporting requirements of Rule
144, the Securities Act and the Exchange Act, (ii) a copy of the most recent
annual or quarterly report of the Company and (iii) such other reports and
documents filed by the Company and such other information as may be reasonably
requested in availing the Holder of any rule or regulation of the SEC which
permits the selling of any such securities without registration.
8. MISCELLANEOUS.
(a) EXPENSES OF REGISTRATION. All expenses, other than underwriting
discounts and commissions payable with respect to Registrable Securities sold by
the Holder and the expenses of counsel for the Holder, incurred in connection
with the registrations, filings or qualifications described herein, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, the fees and disbursements of counsel for the Company in
connection with the opinion described in Section 4(j) hereof shall be borne by
the Company.
(b) AMENDMENT; WAIVER. Any provisions of this Agreement may be
amended only pursuant to a written instrument executed by the Company and the
Holder. Any waiver of the provision of this Agreement may be made only pursuant
to a written instrument executed in accordance with this paragraph shall be
binding upon the Holder, each future Holder, and the Company.
(c) NOTICES. Any notice, demand, request or delivery required or
permitted to be given by the Company or the Holder pursuant to the terms of this
Agreement shall be in writing and shall be deemed given (i) when delivered
personally or when sent by verifiable facsimile transmission (with a hard copy
to follow), (ii) on the next business day after timely
8
<PAGE>
delivery to an overnight courier and (iii) on the third business day after
deposit in the U.S. mail (certified or registered mail, return receipt
requested, postage prepaid), addressed to the parties as follows:
If to the Company, to:
Focal, Inc.
4 Maguire Road
Lexington, MA 02173
Attention: President
Telecopier: (781) 280-7802
with a copy (which shall not constitute notice) to:
Hale & Dorr LLP
60 State Street
Boston, MA 02109
Attention: Steven D. Singer, Esq.
Telecopier: (617) 526-5000
if to the Stockholder, to:
Genzyme Corporation
One Kendall Square
Cambridge, MA 02130
Attention: Chief Corporate Officer
Telecopier: (617) 252-7553
with a copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Attention: Paul M. Kinsella, Esq.
Telecopier: (617) 227-4420
and if to any other Holder, at such Holder's address as such Holder shall have
furnished the Company in writing.
(d) TERMINATION. The obligations under Sections 2, 3, 4 and 5 of
this Agreement shall terminate on the Registration Termination Date, but any
such termination shall be without prejudice to (i) the parties' rights and
obligations arising from breaches of this Agreement occurring prior to such
termination and (ii) the indemnification and contribution obligations under this
Agreement. The indemnification and contribution provisions shall survive
indefinitely. The obligations under Section 7 shall survive for as long as the
Holder owns or has the right to acquire any Registrable Securities.
9
<PAGE>
(e) ASSIGNMENT. The rights of the Holder hereunder shall be assigned
automatically to any transferee of Registrable Securities, as long as: (i) the
Company is, within a reasonable period of time following such transfer,
furnished with written notice of the name and address of such transferee, (ii)
immediately following such transfer, the further disposition of Registrable
Securities is restricted under the Securities Act or under state securities
laws, (iii) the transferee agrees in writing with the Company to be bound by all
of the provisions hereof and (iv) such rights of the Holder may not be
transferred to more than 5 persons (excluding for this purpose Affiliates of the
Stockholder, to whom such rights may be transferred in any case provided that
the conditions in clauses (i) through (iii) are satisfied). If the Stockholder
transfers any portion of its Registrable Securities to another Holder, the
respective obligations of the Stockholder and such Holder under this Agreement,
including without limitation the obligations under Sections 5 and 7, shall be
several and not joint in all instances.
(f) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Massachusetts.
(g) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first-above written.
FOCAL, INC.
By: /s/ David M. Clapper
------------------------------------
Name: David M. Clapper
Title: President
GENZYME CORPORATION
By: /s/ Earl M. Collier, Jr.
------------------------------------
Name: Earl M. Collier, Jr.
Title: Executive Vice President
10
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-48801 and 333-84753) pertaining to the 1992 Incentive
Stock Plan, the 1997 Director Stock Option Plan and the 1997 Employee Stock
Purchase Plan, and the 1999 Stock Incentive Plan of Focal, Inc. of our report
dated January 25, 2000, except for Note 11 as to which the date is
February 25, 2000, with respect to the financial statements of Focal, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31,
1999.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,746,897
<SECURITIES> 4,715,842
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,573,934
<CURRENT-ASSETS> 15,594,134
<PP&E> 8,241,953
<DEPRECIATION> 5,370,919
<TOTAL-ASSETS> 18,750,946
<CURRENT-LIABILITIES> 4,269,450
<BONDS> 0
0
0
<COMMON> 142,342
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,750,946
<SALES> 0
<TOTAL-REVENUES> 3,195,536
<CGS> 2,373,383
<TOTAL-COSTS> 18,372,288
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199,563
<INCOME-PRETAX> (16,841,238)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,841,238)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,841,238)
<EPS-BASIC> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>
