SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-26154
EXOGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3208468
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Constitution Avenue
P. O. Box 6860, Piscataway NJ 08855
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 981-0990
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
None
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] [ No ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
While it is difficult to determine the number of shares owned by
non-affiliates, the registrant estimates that the aggregate market value of
outstanding Common Stock on December 19, 1996 (based upon the closing selling
price of such Common Stock on the Nasdaq National Market on December 19, 1996)
held by non-affiliates was approximately $23.3 million. For this computation,
the registrant has excluded the market value of all shares of its Common Stock
reported as beneficially owned by officers, directors and certain significant
stockholders of the registrant. Such exclusion shall not be deemed to constitute
an admission that any such stockholder is an affiliate of the registrant.
As of December 19, 1996, there were outstanding 9,911,067 shares of the
registrant's Common Stock, par value $.0001.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement of Exogen, Inc. relative to the Annual Meeting of
Stockholders to be held on February 7, 1997, which is incorporated by reference
into Part III of this Form 10-K.
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EXOGEN, INC.
1996 Form 10-K Annual Report
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 4a. Executive Officers of the Registrant
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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PART I
Item 1. Business
Exogen, Inc. (the "Company" or "Exogen") designs, develops,
manufactures, and markets medical devices for the non-invasive treatment of
musculoskeletal injury and disease. The Company's proprietary ultrasound and
mechanical-stress technologies are based on the principle that bone growth is
stimulated by mechanical force. The Company's Sonic Accelerated Fracture Healing
System ("SAFHS(R)") device utilizes mechanical force, produced by ultrasound, to
accelerate fracture healing for closed, cast-immobilized, fresh fractures of the
tibia and distal radius within its approved indications. The SAFHS device is
small and portable, and is used by the patient once daily for 20 minutes. The
Company's Pre-Market Approval ("PMA") application for the SAFHS Model 2A was
approved by the U. S. Food and Drug Administration ("FDA") in October 1994. The
SAFHS Model 2A is the only medical device approved by the FDA for the
acceleration of fresh-fracture healing of the tibia and the distal radius. The
Company established a subsidiary in Germany during fiscal 1995 as part of its
strategy to introduce the SAFHS device in Europe, and commenced commercial
distribution of the device in certain European countries during fiscal 1996 (see
"Sales and Marketing").
Industry Overview
Background
Bone, which forms the human skeleton, undergoes constant change during
an individual's lifetime through a dynamic process of cellular action. Bone is
continually remodeled so that between 10% and 20% of the adult skeleton
undergoes resorption (removal) and formation annually. At the cellular level,
bone consists of specialized bone cells (osteoblasts, osteocytes and
osteoclasts) and minerals, proteins, hormones, water, and other large molecules
such as sugars. Bone is formed by osteoblasts, which line the surface of a
bone's structure, and osteocytes, which are located within the bone's structure.
Osteoclasts are cells that resorb bone through a degradation process. Bone's
natural remodeling process, which is balanced between resorption and formation,
can be affected by a number of factors. For example, smoking has been shown to
slow the process of bone formation, while exercise such as walking or running,
which applies mechanical force to the body on impact, has been shown to
stimulate the process of bone formation.
Bone progresses through two forms as it develops: woven bone and
lamellar bone. Woven bone is unorganized and premature, and is found either in
growing bones or at fracture sites as newly formed bone. Lamellar bone is mature
bone that results from the further remodeling of woven bone. Two types of mature
bone comprise substantially all of the human skeleton: cortical bone (dense or
compact bone), which constitutes approximately 80% of the skeleton, and
cancellous bone (spongy bone), which constitutes approximately 20% of the
skeleton. Cortical bone is approximately 30% porous, and consists of a dense
bundle of vascular channels, containing blood vessels, surrounded by mature
bone. Cancellous bone is approximately 70% porous, highly vascularized, and
consists of a loosely formed matrix of beams designed to withstand the principal
stresses and strains applied to the bone. The density of cortical bone is four
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to six times higher than cancellous bone. Cortical bone forms the middle 80% of
the long bones of the body, including the tibia and fibula in the lower leg, the
femur in the upper leg, the radius and ulna in the lower arm, and the humerus in
the upper arm. Cancellous bone constitutes the remaining 20% of bone located at
the ends of the long bones. For example, the distal radius, which is cancellous
bone, is the portion of the radius located closest to the wrist. All cancellous
bone is surrounded by a cortical outer layer.
When a fracture occurs in either cortical or cancellous bone, a complex
biological healing process is initiated. In cortical bone, there are five stages
of repair and remodeling that, if completed, eventually restore the bone to its
original pre-fracture condition. The first healing stage lasts approximately 48
hours, and is an inflammatory response in the tissue at the fracture site that
stimulates the formation of stem (early stage) cells originating from bone
marrow and from surface tissue at the fracture site. As the inflammation
subsides, the dead tissue at the bone ends is removed and stem cells begin to
organize into a cellular matrix. In the second stage, which lasts several weeks,
stem cells proliferate in the bone marrow cavity and evolve into cartilage cells
and soft fracture callus (a matrix of fibrous tissue, cartilage and woven bone)
in the outer and inner surface of the bone. During this period, dead bone is
continually replaced with new cartilage cells. In the third stage of healing,
which begins approximately six to eight weeks after fracture, there is an
increase in soft callus that fills the marrow cavity and forms along the outside
of the bone. In the fourth stage, which typically begins 10 to 12 weeks after
fracture and extends to 20 weeks or more, the fracture callus gradually
calcifies through osteoblastic action, increasing the stability of the fracture
site. This calcified callus begins to remodel toward the end of this stage, and
continues to convert into lamellar bone in the fifth stage.
Fractures in cancellous bone heal in substantially the same manner and
stages as cortical bone, except that cancellous bone does not have a bone marrow
cavity, so bone healing occurs along the matrix of internal beams that comprise
its structure. Cancellous bone heals in approximately one-third less time than
cortical bone, primarily because cancellous bone is more vascularized than
cortical bone.
The process of bone healing in fresh fractures generally takes from
four to eight months for cortical bone and from three to six months for
cancellous bone. Many fractures take substantially longer to heal, and some do
not heal at all. "Non-unions" are fractures that have not healed within nine
months and have shown no sign of healing for the prior three months. Physicians
may identify certain fractures, at the time of occurrence, as being susceptible
to extended healing times and associated complications. According to the
orthopaedic literature, some of the factors taken into account by physicians in
making such a determination include fracture characteristics such as the gap
size, location, displacement, and fragmentation of the fracture, and patient
characteristics such as the age, gender, health condition, weight, and smoking
habits of the patient. Many of these fractures could result in costly surgery,
rehabilitation therapy, and in some cases, permanent disability.
Fracture Market
Over 6,000,000 fractures occur each year in the United States, of which
more than 800,000 are tibia and distal radius fractures. The Company believes
that approximately 350,000 of these tibia and distal radius fractures are
candidates for treatment with the SAFHS device. Many of these fractures could be
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treated surgically, and in some instances, multiple surgical procedures are
needed to achieve healing. Each of these surgical procedures may involve costs
of $7,500 or more, and can result in complications, such as infection and death.
In addition, these fractures expose the patient to the risks of longer-term
complications, such as severe muscular atrophy, joint disorders, and loss of
function. Patients often require rehabilitative therapy for up to several months
following surgery, at an approximate cost of $1,000 to $4,000 per fracture.
Indirect medical costs due to lost wages, lost productivity, and immobility may
also be incurred during the healing period.
Methods of Treating Fractures
Various methods exist for the treatment of bone fractures. The most
common therapy is to immobilize the fracture with an external cast, generally
for 12 to 18 weeks for tibia fractures and five to eight weeks for distal radius
fractures. Certain fractures are treated surgically using one or more of the
following methods to provide stability and promote healing: internal fixation
devices such as plates, rods and screws; bone grafts using human bone or
synthetic bone; and external fixation devices, which are external frames with
metal pins placed through the skin into the bone.
All of the conventional therapies for bone fractures supplement the
body's fracture healing process by immobilizing the injured bone, by providing
scaffolds for healing such as bone grafts, or by initiating healing when the
healing process has prematurely stopped. None, however, accelerates the fracture
healing process. Different approaches have been investigated and developed to
augment or replace conventional therapies, including electrical stimulation
devices and bone growth factors. Electrical stimulation devices were first
approved by the FDA and introduced commercially in 1979. Although electrical
stimulation devices demonstrate efficacy in initiating healing, their
indications for use have been limited to non-union fractures. Bone growth
factors are proteins that promote the healing process and have been in clinical
trials for several years. However, these clinical trials have also been limited
to non-union fractures.
Clinical studies begun in the mid-1980s, which supported the Company's
PMA application for its SAFHS device, demonstrated that mechanical force applied
to bone induces the formation of bone and accelerates the natural healing
process in fresh fractures. This work was based on a widely accepted scientific
principle that bone responds to mechanical force by inducing bone formation
and/or inhibiting bone loss. These clinical studies established that
acceleration of fracture healing is accomplished by using the mechanical force
produced by low-intensity ultrasound waves.
Ultrasound is mechanical energy that can be transmitted into the body
in pulses of acoustic (sound) pressure waves at frequencies above the human
hearing range. Ultrasound is used for numerous non-invasive therapeutic and
diagnostic purposes, and millions of ultrasound procedures are performed in the
United States each year. Therapeutic ultrasound systems transmit high levels of
acoustic energy to generate heat (thermal effect) into the tissue, and have been
found to be a relatively safe and effective non-invasive treatment for
soft-tissue injuries including damaged ligaments, tendons, and muscles.
Therapeutic ultrasound has not, however, been widely investigated for use in
bone, because of the potential risk of inducing excessive heat into the bone
tissue. Diagnostic ultrasound, by contrast, uses low levels of acoustic energy
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(non-thermal) as a safe, non-invasive method for viewing internal organs and
fetuses. These low levels, however, were not previously thought to have biologic
therapeutic effects. The SAFHS clinical trials demonstrated that low-intensity
(similar to diagnostic ultrasound), non-thermal, specifically programmed
ultrasound energy can safely accelerate the healing of fresh fractures within
the approved indications for the SAFHS device.
Osteoporosis Background and Market
Numerous bone disorders result from changes in the natural remodeling
process of bone resorption and formation. The most widespread of these is
osteoporosis, a disease characterized by a decrease in bone mass and
deterioration of bone structure. This deterioration leads to an increase in
fracture risk due to bone fragility and reduced strength of the weight-bearing
skeleton, particularly the spine and the hip. Loss of bone mass occurs when the
removal of bone by the osteoclasts exceeds the bone-formation activities of the
osteoblasts and osteocytes. As a person ages, the osteoclastic action tends to
predominate and, beginning at approximately age 40, bone mass begins to decline
at the rate of approximately 0.5% per year. Women lose a significantly greater
percentage of bone mass (between 10% and 20%) following the onset of menopause
and the cessation of estrogen production. Bone mass also deteriorates from lack
of physical activity such as extended bed rest.
Over 25,000,000 people in the United States, primarily post-menopausal
women and the elderly, have osteoporosis. In 1992, over 1,200,000 fractures in
the United States, or approximately 20% of the estimated total fractures, were
osteoporosis-related. Existing drug therapies, such as estrogen-replacement
therapy, calcitonin, and calcium supplements, have been useful in preventing
bone loss, but none can form new bone. In addition, use of existing therapies
are limited by complications and certain side effects including an increased
incidence of endometrial, ovarian, and breast cancers in women taking estrogen.
Strenuous exercise has been shown to reduce bone loss in the elderly but must be
performed with caution as exercise may itself cause fractures. Several new drug
therapies are in clinical trials for the treatment of osteoporosis to address
the limitations of current therapeutic approaches. In addition, the Company is
developing a mechanical-stress device for the treatment of osteoporosis,
although this product is not commercially available to treat this disease and
there is no assurance that the Company will ever successfully develop or
commercialize such a device.
Business Strategy
The Company's business strategy is to become a leading provider of
devices for the non-invasive treatment of musculoskeletal injury and disease.
The Company believes a significant market exists for cost-effective,
non-invasive medical devices that allow the patient to return to normal
activities as rapidly as possible. The following are key elements of the
Company's strategy:
Promote Physician Acceptance. Exogen is the only company to have
obtained FDA approval to market a medical device for accelerating the healing of
fresh fractures of the tibia and distal radius. The Company seeks to gain broad
physician acceptance of this new treatment modality through the dissemination of
scientific, clinical, and patient-outcomes data on the SAFHS treatment. The
Company's marketing efforts are targeted to orthopaedic surgeons in academic
institutions and in community-based practices.
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Establish Reimbursement by Third-Party Payors. The Company has
implemented a comprehensive plan to obtain reimbursement for the SAFHS device as
a new treatment device from a broad range of third-party payors, including
managed care organizations, workers' compensation insurers, traditional
indemnity insurers, and Medicare. The Company uses the scientific, clinical, and
patient-outcomes data on the safety and effectiveness of the SAFHS treatment to
establish third-party reimbursement.
Broaden Sales and Marketing Efforts. The Company has established a
nationwide network of independent and direct sales representatives in the United
States. At September 30, 1996, there were 32 people employed in the Company's
direct sales organization and 28 independent sales agencies throughout the
United States. A primary focus of the Company's marketing efforts is national
and regional managed care organizations and insurance carriers, with coordinated
marketing through the Company's sales force and reimbursement specialists.
During 1996, the Company commenced marketing the SAFHS device in several
European countries through its wholly owned German subsidiary using sales agents
and independent distributors. In addition, in December 1995 the Company signed
development agreements with Teijin Limited, a Japanese corporation, to market
the SAFHS device in Japan, subject to Japanese regulatory approvals.
Expand Technology Applications. The Company is seeking to expand the
applications of its SAFHS treatment to other fractures. In 1995, the Company
initiated pilot clinical trials in Europe for internally fixed fractures and
leg-lengthening procedures. In 1996, the Company commenced pre-clinical studies
in the United States for spine fusion and cartilage repair. The Company has also
developed a mechanical-stress device that may prevent and treat osteoporosis,
and commenced a pilot clinical trial for this device during 1996 in the United
States.
Establish Manufacturing Capability. During 1996, the Company
established manufacturing capability at its facility in Piscataway, New Jersey,
where the Company is currently refurbishing the SAFHS Model 2A. The Company
believes that this manufacturing capability, together with its product
engineering capability, will advance its product design and development efforts,
provide better control over its costs, and reduce its dependence on its contract
manufacturer.
Products and Products Under Development
Exogen's products are focused on the non-invasive treatment of
musculoskeletal injury and disease, and are based on the principle that bone
growth is stimulated by mechanical force. The Company's proprietary
mechanical-force technologies, including ultrasound and mechanical stress,
deliver energy that promotes the growth, repair, and maintenance of bone.
Sonic Accelerated Fracture Healing System ("SAFHS")
SAFHS Model 2A. SAFHS is a non-invasive device that delivers ultrasound
energy to accelerate fracture healing through specifically programmed,
low-intensity acoustic pressure waves. The SAFHS Model 2A is comprised of two
electronic components. The main operating unit controls the treatment time and
monitors the proper attachment and operation of the ultrasound transducer, and
is plugged into a standard electrical outlet. The second component, the
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ultrasound transducer, delivers a specific, low-intensity ultrasound signal to
the fracture site, and is powered by a limited-life battery designed to last for
120 treatments of 20 minutes each. To prevent electricity from traveling between
the transducer and the main operating unit, the main operating unit and the
transducer communicate through fiber optics. Once the SAFHS device has been
prescribed for a patient, the physician cuts a window in the patient's cast and
installs a plastic coupling fixture in the window. The transducer is locked into
the fixture for treatment, and a protective cap is inserted in the fixture when
the device is not being used.
The SAFHS treatment was designed to maximize ease of use. Treatment
requires use of the device only once daily for 20 minutes. The treatment period
averages approximately three months for treatment of a tibia fracture and
approximately six weeks for a distal radius fracture. The device is portable
(weighing approximately four pounds) and may be used by the patient at home, in
the workplace, or elsewhere. The patient coats the transducer head with an
ultrasound-conducting coupling gel to facilitate transmission of the ultrasound
signal, and locks the transducer into the coupling fixture set in the cast. The
SAFHS Model 2A produces audible tones to notify the patient that the treatment
has commenced or ended and alerts the patient in case of improper application or
performance of the device. The device also contains a patient-compliance
monitoring system that automatically records all treatment sessions and provides
a detailed record, including date and time, of the patient's use of the device
for monitoring by the physician and the Company. The list price of the SAFHS
Model 2A is $2,950, regardless of the length of treatment.
The prescribing physician is responsible for submitting to the Company
(i) the prescription for the SAFHS device, (ii) a letter of medical necessity,
and (iii) the required paperwork for submission of the claim to the applicable
third-party payor. The device is shipped by the Company to the physician's
office, either directly or through the Company's sales representatives. A
Company sales representative is available at the physician's office, if
necessary, to assist the physician in instructing the patient in the use of the
SAFHS device. The documentation signed by the patient requires the return of the
device at the end of the treatment period. The main operating unit may be
serviced and reused; the transducer, however, is designed to be discarded and
ceases to operate once the battery has been expended. Patients do not pay a
refundable deposit for the device, and consequently, the Company expects that
not all SAFHS devices will be returned by patients.
The Company provides the SAFHS device for the duration of the treatment
of the fracture, regardless of the length of treatment. The Company maintains a
toll-free telephone number and provides 24-hour coverage to respond to inquiries
from either patients or physicians. If necessary, replacement units and supplies
are provided to the patient.
SAFHS 2000(R). The Company has designed a second-generation SAFHS
device, the SAFHS 2000, which is entirely battery operated and smaller and
lighter than the SAFHS Model 2A for enhanced portability. The SAFHS 2000
utilizes the same ultrasound signal as the SAFHS Model 2A. The Company filed a
PMA supplement for the SAFHS 2000 in December 1995. No assurance can be given
that the PMA supplement will be granted by the FDA on a timely basis, or at all.
<PAGE>
Mechanical-Stress Device
The Company has developed a mechanical-stress device designed to
inhibit bone loss and increase bone mass. The device delivers mechanical force
to the bone similar to the SAFHS technology. The device induces low-intensity
vibrational stress within the skeleton at frequencies similar to those generated
by the muscles of the human body. The device consists of a resonating platform,
on which the patient stands, that delivers mechanical stress to the
weight-bearing skeleton.
In preclinical studies conducted by the Company, the device has been
shown to inhibit bone loss and enhance bone mass with treatments of less than 20
minutes per day. In a clinical study conducted by the Company in Europe, the
Company has demonstrated that approximately 90% of the vibrational stress
produced by this device reaches the hip and approximately 85% reaches the spine,
the regions of the weight-bearing skeleton most susceptible to bone loss and
resulting fractures. The Company commenced pilot clinical trials in the United
States for its mechanical-stress device in 1996, and intends to submit to the
FDA an IDE to commence pivotal clinical trials following completion of these
pilot trials. No assurance can be given that the mechanical-stress device will
prove to be safe and efficacious, that product development will ever be
successfully completed, that a PMA, if applied for, will be granted by the FDA
on a timely basis, or at all, that adequate levels of third-party reimbursement
will be available, or that the mechanical-stress device will ever achieve
commercial acceptance.
Results of SAFHS Clinical Trials
The results of the SAFHS clinical trials, which were acquired by the
Company from Interpore Orthopaedics, Inc. ("Interpore"), demonstrated the safety
and efficacy of the SAFHS treatment, and the Company believes such results were
critical to obtaining approval for the SAFHS Model 2A from the FDA for certain
fracture indications. The PMA application for the SAFHS Model 2A was filed in
July 1990 and received FDA approval in October 1994. The PMA application
consisted of clinical data on 182 fractures in 179 patients at 21 clinical
sites. Of these fractures, 97 were included in the tibia clinical trial and 85
were included in the distal radius trial. The SAFHS clinical trials were
prospective, randomized, double-blind, and placebo-controlled. All patients were
cast-immobilized, and all received treatment, commencing within seven days of
fracture, using the SAFHS device or, in the case of the placebo group, an
identical device with no ultrasound signal emission.
The results of both studies showed that the average time to a healed
fracture (as measured clinically and by x-ray) was accelerated in the
SAFHS-treated group as compared with the placebo-treated group by approximately
38%. The SAFHS-treated tibia fractures healed in an average of 96 days, compared
with an average of 154 days in the placebo-treated fractures. The SAFHS-treated
distal radius fractures healed in 61 days on average, compared with 98 days on
average for the placebo-treated fractures. In addition, healing was accelerated
in all healing stages of the SAFHS-treated fracture in both types of bone. When
the patients were categorized by age (30 years old or under and over 30 years in
the tibia study, and 49 years old or under and over 49 years in the distal
radius study), there was a significantly greater acceleration of healing in the
older-patient populations. The older SAFHS-treated patients in the tibia study
healed in an average of 102 days, compared with an average of 187 days in the
placebo-treated patients, and the older SAFHS-treated patients in the distal
radius study healed in an average of 62 days, compared with an average of 102
days in the placebo-treated patients.
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Typically the fracture site in distal radius fractures is significantly
crushed. When the bone is restored to its normal length and anatomical position
to be set in a cast for healing, there is often a gap in the crushed-bone area.
The presence of this gap makes it difficult to maintain this restored position
throughout the healing process, even though the arm is immobilized in a cast.
During the healing process, the fractured bone end frequently shifts out of
proper alignment, commonly resulting in physical deformity and compromised wrist
function. The loss of alignment in patients with the SAFHS-treated distal radius
fractures was on average approximately 60% less than that experienced by the
placebo-treated fractures.
The clinical results demonstrated that the SAFHS device produced a
statistically significant and clinically meaningful acceleration of all stages
of healing in fresh bone fractures of both the tibia (which is an example of
cortical bone) and the distal radius (which is an example of cancellous bone)
within the approved indications for SAFHS. No contraindications or side effects
were identified in the clinical trials.
Sales and Marketing
The Company's marketing strategy is to gain broad physician and
third-party payor acceptance of the SAFHS device worldwide within the approved
indications. A critical element of this strategy is to utilize the results of
the SAFHS clinical trials to demonstrate the safety and efficacy of the SAFHS
treatment to both physicians and third-party payors. The Company's marketing
efforts are currently focused on orthopaedic surgeons in academic institutions
and in community-based practices. Through its direct sales force and
reimbursement specialists, the Company is working closely with orthopaedic
surgeons and other physicians, including primary care physicians who represent
third-party payors. Once a prescription is received by the Company from a
physician, the SAFHS device is shipped by the Company to the physician's office,
either directly or through the Company's sales representatives.
United States. The Company has established a direct sales organization of 32
people as of September 30, 1996, and has contracted with 28 independent sales
agencies in the United States. The Company's direct sales efforts are focused on
educating physicians and third-party payors in major metropolitan areas on the
benefits of the SAFHS technology for its approved indications. The Company
believes that these efforts will enable the Company's sales representatives to
better achieve nationwide market penetration. A primary focus of the Company's
marketing efforts is national and regional managed care organizations, with
coordinated marketing through the Company's sales force and reimbursement
specialists. The Company's Regional Business Directors manage the entire sales
organization as well as the field reimbursement efforts.
International. The Company established a wholly owned German subsidiary in 1995,
and in 1996 introduced the SAFHS device in Germany and Austria through its
network of independent sales agents. In other European countries, primarily
Holland, France, the Scandinavian countries, the United Kingdom, and Italy, the
Company plans to select and train independent distributors and agents. The
Company is sponsoring clinical trials in Europe to augment clinical data from
the United States, with the goal of achieving acceptance by surgeons and
governmental- and private-insurance payors in these markets. In December 1995,
the Company announced that it had signed development agreements with Teijin
<PAGE>
Limited, a Japanese corporation. The development agreements are for two of the
Company's products, the SAFHS device and the mechanical-stress device. The SAFHS
agreement provides for milestone payments to the Company for Teijin's
development of the product for commercial launch in Japan. The Company will
manufacture and supply SAFHS devices to Teijin for clinical trials and
subsequent sales in Japan. Teijin will be responsible for complying with the
regulatory requirements and for marketing and distributing the SAFHS device in
Japan. The mechanical-stress agreement provides for milestone payments to the
Company that will support, in part, the Company's clinical trials in the United
States in exchange for a first option in favor of Teijin to negotiate a
development and distribution agreement for this device for the Japanese market.
No assurance can be given that the Company or its collaborators can successfully
introduce the SAFHS device in Europe or Japan on terms acceptable to the
Company, or at all. Future foreign sales, if any, will be subject to certain
risks, including exchange rate fluctuations, international monetary conditions,
tariffs, import licenses, trade policies, domestic and foreign tax policies, and
foreign regulations.
Third-Party Reimbursement
Prior to approving coverage for a new medical technology, most
third-party payors require evidence that the technology is safe and effective,
not experimental or investigational, and medically necessary and appropriate for
the specific patient. Third-party payors typically require that the technology
has received FDA approval or clearance for marketing. New technologies are often
prescribed for off-label applications, for which reimbursement by third-party
payors may not be available. Increasing numbers of third-party payors and
managed care plans are beginning to require evidence that the technology is cost
effective.
In the United States, the Company has commenced a multi-level program
to obtain coverage and reimbursement from third-party payors for the SAFHS
device as a new treatment modality. (The SAFHS device is typically classified by
third-party payors as Durable Medical Equipment.) Although the Company has not
received broad approval from any reimbursement authority for payment of the
SAFHS device, it has received approval from various third-party payors on a
case-by-case basis. As of October 31, 1996, the Company has been paid by over
700 third-party payors including automobile insurers, workers' compensation
insurers, health insurers including Blue Shield organizations, and several
managed care and third-party administrator organizations. The Company believes
that case-by-case approval will continue to be the predominant method of
obtaining pre-authorization and reimbursement for the SAFHS device until
national or regional reimbursement approvals are obtained. The Company is
seeking to establish separate reimbursement codes for the SAFHS device with
various payors in order to expedite reimbursement processing for the SAFHS
device; however no assurance can be given that such codes will be assigned on a
timely basis, or at all.
Currently, the Health Care Financing Administration ("HCFA"), which
administers the Medicare program, has a national coverage policy for electrical
stimulation devices that initiate the healing of non-union fractures. Such
devices are reimbursed under a fee schedule in which the range of allowable
reimbursement is $2,800 to $2,950 per treatment regimen. In August 1996, HCFA's
Technology Advisory Committee recommended that the SAFHS device not be covered
under the Medicare program. The Company is continuing to pursue coverage for
SAFHS by providing additional information to the HCFA staff. No assurance can be
given that the Company can be successful in obtaining coverage for the SAFHS
device under the Medicare program.
<PAGE>
During 1995, the Company submitted clinical information to the
Technology Evaluation Center ("TEC") of the Blue Cross and Blue Shield
Association ("BCBSA") requesting that the TEC evaluate the SAFHS therapy. The
TEC program distributes the results of its evaluation to BCBSA member
organizations and to third-party payors and others who purchase TEC assessments,
and such evaluations are often used by payors in setting their own coverage and
reimbursement policies. In August 1995, the TEC completed its review with a
favorable assessment of the SAFHS therapy, and has disseminated this evaluation
to its subscribers.
In addition to Medicare and Blue Cross and Blue Shield, the Company's
reimbursement specialists are focused on obtaining coverage and reimbursement
from major national and regional managed care organizations and insurance
carriers throughout the United States. Most of the third-party payor
organizations independently evaluate new treatment modalities by reviewing the
published literature and/or the Medicare coverage and reimbursement policy on
the specific treatment modality. To assist the third-party payors in their
respective evaluations of the SAFHS device, the Company provides scientific and
clinical data that support the safety and effectiveness of the device.
When a prescribing physician submits a prescription for the SAFHS
device to the Company, he or she must also submit to the Company a letter of
medical necessity and the required paperwork for submission of the claim to the
applicable third-party payor. The Company ships the device to the physician,
either directly or through the Company's sales representatives, generally only
after obtaining prior reimbursement approval from the payor, when such
precertification is available. The Company charges a flat fee for the use of the
SAFHS device, regardless of the length of treatment. The Company's reimbursement
personnel work closely with third-party payors on a case-by-case basis.
The Company's international reimbursement plan varies by country. The
Company uses clinical and reimbursement data from the United States to augment
its international reimbursement efforts. Some countries may have more stringent
reimbursement requirements than the United States. The Company currently has
limited experience in obtaining reimbursement for its products in countries
other than the United States.
There can be no assurance that reimbursement for the Company's products
will be available, or that future reimbursement policies of payors will not
adversely affect the Company's ability to sell its products on a profitable
basis, or at all. The United States Congress is currently considering various
proposals to significantly reduce Medicare and Medicaid expenditures. The
Company cannot predict which, if any, of these proposals will be enacted and if
enacted, what effect, if any, they may have on the Company's business. Failure
by the Company to obtain favorable coverage determinations or sufficient
reimbursement from Medicare or from other third-party payors, or adverse changes
in governmental and private third-party payors' policies toward reimbursement
for the Company's products, would have a material adverse effect on the
Company's business, financial condition, results of operations, and cash flows.
Manufacturing
The Company's SAFHS device is currently manufactured by a contract
manufacturer. The agreement between the Company and the contract manufacturer is
documented by specific purchase orders, effective to 1998, covering anticipated
requirements. This contract manufacturer also performs certain design
<PAGE>
engineering for the Company. The FDA conducted a Good Manufacturing Practices
("GMP") inspection of this contract manufacturer's facility prior to PMA
approval, and found it to be in compliance with GMP requirements. In connection
with the PMA Supplement for the SAFHS 2000, the FDA inspected and approved the
contract manufacturer's facilities to manufacture the Company's SAFHS 2000. Any
failure by the contract manufacturer to maintain its manufacturing facility in
accordance with GMP requirements could result in the inability of such contract
manufacturer to manufacture the SAFHS device, and may limit the Company's
ability to deliver the SAFHS device to physicians and patients, which would have
a material adverse effect on the Company's business, financial condition,
results of operations, and cash flows.
To improve control and flexibility in product design, supply, and cost,
the Company has developed in-house manufacturing capability. The Company began
refurbishing the SAFHS Model 2A at its Piscataway, New Jersey facility in
November 1995. In January 1996, the Company's facility successfully completed a
GMP inspection by the FDA. In August 1996, the Company received ISO 9003
(International Organization of Standardization) Certification and CE Mark
Certification for the Company's SAFHS Model 2A. The CE Mark signifies that
Exogen conforms with the European Community Medical Device Directive. Prior to
commencing in-house manufacture of the SAFHS 2000 for commercial use, the
Company's facilities will require FDA determination of compliance with GMP
requirements associated with the PMA Supplement for the SAFHS 2000. The Company
believes that its Piscataway facility will have sufficient capacity to meet the
Company's anticipated manufacturing needs for at least the next three years.
There can be no assurance that the Company will be able to establish its
manufacturing capability for the SAFHS 2000, obtain GMP approval, or make the
transition to commercial manufacturing successfully or manufacture its products
cost effectively, or at all.
The manufacture of the SAFHS device involves an assembly process with a
number of significant components. Each device is tested and released by the
Company in accordance with FDA requirements. After commencing its own
manufacturing operations, Exogen plans to fabricate certain components, while
other components will continue to be purchased from various independent
suppliers. Most purchased components are available from more than one vendor.
However, certain components currently are and will continue to be manufactured
by single-source vendors. For certain of these components, there are relatively
few alternative sources of supply, and establishing additional or replacement
suppliers for such components cannot be accomplished quickly. Although the
Company is continually in the process of identifying primary and alternative
vendors, the qualification of additional or replacement vendors for certain
components or services is a lengthy process. Any supply interruption from
single-source vendors would have a material adverse effect on the Company's
business, financial condition, results of operations, and cash flows.
Research and Development
The Company's principal research and development program relates to the
development and clinical trials of the Company's mechanical-stress device.
Additionally, the Company has ongoing programs to develop new devices utilizing
its SAFHS technology and to expand SAFHS applications to other fractures,
lower-back spine fusion, and cartilage repair. No assurance can be given that
the SAFHS treatment will prove to be safe and efficacious for other fractures,
spine fusion, or cartilage repair or that any PMA, if applied for, will be
granted by the FDA on a timely basis, or at all.
<PAGE>
The Company is evaluating the use of ultrasound in a variety of
orthopaedic applications. The Company is providing SAFHS devices to physician
investigators for preliminary clinical studies in the use of ultrasound for
healing stress fractures, limb lengthening using an external fixation device,
and healing internally fixed fractures. The Company is supporting preclinical
studies on bony ingrowth into porous prostheses, the treatment of lower-back
spine fusion, and cartilage repair. The Company also sponsors research relating
to the basic science of ultrasound for both therapeutic as well as diagnostic
use.
As of November 30, 1996, the Company had eight employees engaged in
research and development and regulatory affairs and 11 employees engaged in
engineering. The Company's expenditures for research and development (which
includes clinical trials, regulatory affairs, and engineering) were
approximately $4.0 million, $2.5 million, and $1.4 million in fiscal 1996, 1995,
and 1994, respectively.
Patents, Copyrights and Proprietary Information
The Company's policy is to protect its proprietary position by, among
other things, filing both United States and foreign patent applications to
protect its owned and licensed technology, inventions, and improvements that are
important to the development of its business. The Company holds title to six
issued United States patents, one issued foreign (Canadian) patent, 10 pending
United States patent applications, and corresponding Patent Cooperation Treaty
("PCT") and foreign patent applications relating to its SAFHS technology. The
original United States ultrasound patent (the "Initial Patent") that is the
basis of the SAFHS device was set to expire in 2002, but has been granted a
five-year extension to 2007 based on the delays in marketing the invention
caused by extensive regulatory review. The other currently issued United States
patents relating to SAFHS technology are set to expire between 2008 and 2014.
The Company is also the exclusive licensee of four issued United States
patents, two issued foreign patents, and four pending foreign patents relating
to the use and application of mechanical-stress technology. The currently issued
United States patents relating to mechanical-stress technology are currently set
to expire between 2010 and 2011. All of the patents and patent applications
relating to mechanical-stress technology that the Company does not own are
licensed exclusively to the Company worldwide until the later of (i) the
expiration of the final patent licensed to the Company or (ii) March 2022. The
license agreement generally provides for the payment of royalties on the sale of
products utilizing the patented technology, and the Company's exclusive license
may revert to a nonexclusive license if the Company fails to use good faith
efforts to commercially exploit the patented technology.
The Company intends to file or cause to be filed on its behalf
additional United States, foreign, and international patent applications
relating to new developments or improvements in SAFHS and mechanical-stress
technology and to specific products it develops. While no assurance can be given
that the patent applications owned by the Company will issue as patents, or that
they will provide the Company with significant protection against competitive
products or otherwise be commercially valuable, the Company is unaware of any
facts that could preclude the grant of a patent from each of the pending patent
applications. There can be no assurance that any issued patents owned by the
Company will provide competitive advantages for the Company's products or will
not be challenged or designed around by its competitors.
<PAGE>
The Company believes it owns or has the right to use all proprietary
technology necessary to manufacture and market its products. Under current law,
patent applications in the United States are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a period after filing. The right to a device patent in the United States is
attributable to the first to invent the device, rather than the first to file a
patent application, while in foreign countries, ownership of a patent is
typically determined by priority of patent filing, not invention. Consequently,
the Company cannot be certain that it was the first to invent certain technology
covered by pending patent applications or that it was the first to file patent
applications for such inventions. In addition, the patent positions of medical
device companies, including the Company, are generally uncertain, partly because
the positions involve complex legal and factual questions. Moreover, patent law
relating to certain of the Company's fields of interest, particularly as to the
scope of claims in issued patents, is still developing, and it is unclear how
this uncertainty will affect the Company's patent rights.
The Company has not received any notices alleging, and is not aware of,
any infringement by the Company of any other entity's patents. However, because
of the volume of patents issued and patent applications filed relating to
medical devices, there can be no assurance that current and potential
competitors and other third parties have not filed or in the future will not
file applications for, or have not received or in the future will not receive,
patents and will obtain additional proprietary rights relating to materials or
processes used or proposed to be used by the Company. Accordingly, there can be
no assurance that the Company's products do not infringe any patents or
proprietary rights of third parties.
The Company also relies upon trade secrets, technical know-how, and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute appropriate confidentiality agreements in connection with
their employment, consultation, or advisory relationships with the Company. The
Company also typically requires its employees, consultants, and certain advisors
to agree to disclose and assign to the Company all inventions conceived of on
Company time, using Company property or that relate to the Company's business.
There can be no assurance, however, that the foregoing agreements will
effectively prevent disclosure of the Company's confidential information or
provide meaningful protection for the Company's confidential information if
there is unauthorized use or disclosure. Furthermore, no assurance can be given
that competitors will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
proprietary technology, or that the Company can meaningfully protect its rights
in unpatented proprietary technology.
The Company also holds rights to copyrights on text and on software
developed by or for itself for use in its SAFHS device. The Company intends to
file copyright registrations for such software. There can be no assurance that
any copyrights owned by the Company will provide competitive advantages for the
Company's products or will not be challenged or circumvented by its competitors.
The Company's owned and licensed patents and copyrights and its
products may, in the future, be subject to litigation regarding patent and other
intellectual property rights. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
<PAGE>
be required to obtain licenses from the patent owners of each of such patents or
to redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be on
terms acceptable to the Company or that the Company would be successful in any
attempt to redesign its products or processes to avoid infringement. The
Company's failure to obtain these licenses or to redesign its products would
have a material adverse effect on the Company's business, financial condition,
results of operations, and cash flows. In addition, litigation may be necessary
to defend against claims of infringement, to enforce patents and copyrights
issued or licensed to the Company, or to protect trade secrets, and could
require significant diversion of management's attention and the expenditure of
financial resources, which could have a material adverse effect on the Company.
Government Regulation
The Company's existing products are regulated in the United States as
medical devices by the FDA under the Federal Food, Drug, and Cosmetic Act ("FDC
Act") and require the approval of a PMA by the FDA prior to commercialization.
Noncompliance with applicable requirements can result in failure of the
government to grant pre-market approval for devices, withdrawal of the PMA,
total or partial suspension of production, fines, injunctions, civil penalties,
recall or seizure of products, and criminal prosecution.
In the United States, medical devices are classified into three classes
(I, II, or III) on the basis of the controls necessary to reasonably assure
their safety and effectiveness. The Company's existing products are classified
as Class III devices, the class subject to the highest level of regulation by
the FDA. In addition to the general control requirements of the FDC Act
(including registration, labeling, pre-market notification, and adherence to
GMP), the Company's products are also subject to pre-market approval.
Before a new Class III device can be introduced into the market, the
manufacturer must obtain FDA clearance through a PMA application. The less
burdensome 510(k) pre-market notification process has not been, and is not
expected to be, available for any of the Company's products. Accordingly, the
Company has had to obtain, and expects to apply for, PMAs and PMA supplements
for its future products.
A PMA application must be supported by extensive data, including
preclinical and clinical trial data, to demonstrate the safety and efficacy of
the device for the indicated uses specified in the PMA application. If human
clinical trials of a device are required and the device presents a "significant
risk," the manufacturer or the distributor of the device must file an IDE and
have an approved 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,
human clinical trials may begin at a specific number of investigational sites
with a specified maximum number of patients, as approved by the FDA. Sponsors of
clinical trials are permitted to sell those devices distributed in the course of
study as long as compensation does not exceed recovery of the costs of
manufacturing, researching, developing, and handling.
<PAGE>
Upon receipt of the 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 "file" the
application. An FDA review of a PMA application generally takes between two to
three years from the date the PMA application is filed, but may take
significantly longer. The review time is often significantly extended by
requests from the FDA for more information or clarification of information
already provided in the submission. During the review period, an advisory
committee, including clinicians, will likely be convened to review and evaluate
the application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's GMP requirements prior to approval of a PMA
application.
The PMA process can be expensive, lengthy, and uncertain. There can be
no assurance that the Company will be able to obtain necessary regulatory
approvals. The loss of previously received approvals, or failure to comply with
existing or future regulatory requirements, would have a material adverse effect
on the Company's business, financial condition, results of operations, and cash
flows.
The PMA application for use of the SAFHS Model 2A to treat certain
fresh fractures of the tibia and distal radius was filed in July 1990, and the
FDA's approval for commercial marketing by the Company was issued in October
1994. The promotion by the Company of the SAFHS Model 2A to treat fractures not
covered by the initial PMA will require the submission of PMA supplements or new
PMA applications. PMA supplements often require submission of the same type of
information as in a PMA application, except that the supplement is limited to
information intended to support any changes from the product covered by the
original PMA and to support the treatment of new clinical indications, and may
not require the submission of as extensive clinical data or the convening of any
advisory committees. In addition, PMA supplements must be submitted to the FDA
before making any change that may affect the safety or effectiveness of the
device. These changes can include changes in device design, composition,
specifications, circuitry, software, or energy source. The Company has made
certain nonperformance-related changes to the SAFHS Model 2A since the device
was approved by the FDA. Although the Company believes such changes do not
require the filing of a PMA supplement and prior approval by the FDA, there can
be no assurance that the FDA will not require the Company to file a PMA
supplement, which would result in additional costs and delays in marketing the
device. A PMA supplement must also be submitted when unanticipated adverse
effects, increases in the incidence of anticipated adverse effects, or device
failures necessitate a label, manufacture, or device modification. The Company
filed a PMA supplement for its SAFHS 2000 in December 1995. The Company will
also be required to file a PMA application for its mechanical-stress device, if
and when development is completed. No assurance can be given that any
supplements will be filed or approved, or that new PMAs will be granted on a
timely basis, or at all. Delays in receipt or failure to receive such approvals
would have a material adverse effect on the Company's business, financial
condition, results of operations, and cash flows.
Any products manufactured or distributed by the Company pursuant to an
approved PMA are subject to pervasive and continuous regulation by the FDA
including record-keeping requirements, reporting of adverse experience with the
use of the device, post-market surveillance, post-market registry, and other
actions as deemed necessary by the FDA. Product labeling and promoting
activities are subject to scrutiny by the FDA and, in certain instances, by the
<PAGE>
Federal Trade Commission. Products may be promoted by the Company and any of its
distributors only for the products' approved indications. There can be no
assurance that the Company will not become subject to FDA actions as a result of
physicians' prescribing the SAFHS device for off-label uses. The Company has
been notified by the FDA that its labeling of the SAFHS device must be modified
to reflect the types of fractures treated in the SAFHS clinical trials,
consistent with the Company's physician instruction manual. Consequently, all
documents pertaining to the SAFHS device now include the following statement:
"All fractures in both clinical studies were treated with SAFHS therapy within
seven days of fracture." No assurance can be given that this or other
modifications to the labeling in the future will not adversely affect the
Company's ability to market, sell, or be reimbursed for the SAFHS device.
Product approvals may be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing. The FDC Act requires the Company's products be manufactured in
registered establishments and in accordance with GMP regulations. The Company's
SAFHS device is currently manufactured by a contract manufacturer. The contract
manufacturer's facility has been inspected by the FDA and is currently the only
facility approved for the production of the SAFHS device. Any failure by the
contract manufacturer to maintain its manufacturing facility in accordance with
FDA GMP requirements could result in the inability of such contract manufacturer
to manufacture the SAFHS device and may limit the Company's ability to deliver
the SAFHS device to physicians and patients, which would have a material adverse
effect on the Company's business, financial condition, results of operations,
and cash flows.
The Company also is subject to numerous federal, state, and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect upon the Company's business, financial condition,
results of operations, and cash flows.
Sales of medical devices outside the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval by a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may differ. Export
sales of investigational devices that have not received FDA marketing clearance
generally are subject to FDA export permit requirements. To obtain such a
permit, the Company must provide the FDA with documentation from the medical
device regulatory authority of the country in which the purchaser is located,
stating that the sale of the device is not a violation of that country's medical
device laws, and must demonstrate to the FDA that export is not contrary to
public health. No assurance can be given that such foreign regulatory approvals
will be granted on a timely basis, or at all.
During 1996, the Company received regulatory approval of the SAFHS
Model 2A in Germany. Under German law, medical devices must have a "GS" mark
affixed to the product labeling. The GS mark, which the Company received in
December 1995, denotes that the product meets certain safety standards. In 1996,
the Company also received the "CE" (Medical Device Directive) mark for the SAFHS
Model 2A. The CE mark is recognized by countries that are members of the
<PAGE>
European Union and the European Free Trade Association, and effective June 1998,
will be required to be affixed to all medical devices sold in the European
Union. No assurance can be given that any products that the Company might
develop or commercialize will obtain the CE mark, or will be able to obtain any
other required regulatory clearance or approval on a timely basis, or at all.
Competition
The medical device industry is characterized by intense competition.
Many of the Company's existing and potential competitors have substantially
greater financial, marketing, sales, distribution, and technical resources than
the Company and more experience in research and development, clinical trials,
regulatory matters, manufacturing, and marketing. In addition, most of these
companies have established third-party reimbursement for their products.
Furthermore, the medical device industry is characterized by rapid product
development and technological change. The Company's products could be rendered
obsolete or uneconomical by technological advances by one or more of the
Company's competitors or by other therapies such as drugs to treat conditions
addressed by the Company's products. The Company's business, financial
condition, results of operations, and cash flows will depend upon its ability to
remain competitive with other developers of such medical devices and therapies.
The SAFHS device competes with non-invasive bone growth electrical
stimulation devices and with various surgical treatments. The Company's
mechanical-stress device to prevent bone loss related to osteoporosis, if
developed and marketed, will compete with drug therapies and exercise regimens.
Four companies currently market electrical stimulation devices for the treatment
of non-union fractures. The Company believes at least one of these companies is
conducting clinical trials for the use of electrical stimulation for the
treatment of fresh fractures. In addition, other companies are developing a
variety of products and technologies to be used in the treatment of fractures
and osteoporosis, including growth factors, bone graft substitutes, and
exercise/physical therapy equipment. There can be no assurance that competitors
will not develop products that are superior to the Company's products, achieve
greater market acceptance, or render the Company's technology and products
obsolete or noncompetitive. As a result, the Company's long-term viability may
depend on whether it can continue to develop new products. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competition will not have a material adverse
effect on the Company's business, financial condition, results of operations, or
cash flows.
Product Liability and Insurance
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its product is alleged to have
resulted in adverse effects. The Company maintains product liability insurance
with coverage of $3.0 million per occurrence and an annual aggregate maximum of
$3.0 million. In addition, the Company maintains umbrella liability insurance,
including product liability coverage, of $5.0 million per occurrence and an
annual aggregate maximum of $5.0 million. There can be no assurance that
liability claims will not exceed the coverage limits of such policies or that
such insurance will continue to be available on commercially acceptable terms,
or at all. Consequently, product liability claims could have a material adverse
effect on the Company's business, financial condition, results of operations,
and cash flows.
<PAGE>
Employees
As of November 30, 1996, the Company had 102 employees, consisting of
37 in sales and marketing, 11 in engineering, 20 in finance and administration,
seven in quality assurance, 10 in reimbursement and customer service, eight in
research and development and regulatory affairs, and nine in manufacturing and
shipping. The Company believes that the success of its business depends, in
part, on its ability to attract and retain qualified personnel. None of the
Company's employees is covered by a collective bargaining agreement. Exogen
believes that it maintains good relations with its employees.
Item 2. Properties
The Company leases an approximately 36,000 square foot facility in
Piscataway, New Jersey. This facility contains approximately 12,000 square feet
of manufacturing space and 24,000 square feet devoted to research and
development, marketing, and administration. This facility is leased through
October 2001, and the Company has an option for a five-year renewal term. Exogen
believes this facility is adequate to meet its anticipated real estate
requirements for the next three years.
Item 3. Legal Proceedings
On April 4, 1995, a former consultant to Interpore, the company from
which Exogen purchased certain SAFHS ultrasound assets, filed a complaint
against Interpore and Exogen in the United States District Court for the
Southern District of New York, claiming the right, pursuant to the terms of a
consulting agreement between such consultant and the predecessor company to
Interpore, to certain royalties, not exceeding 1.25% of the net revenues
generated from the sale of SAFHS devices. On June 5, 1995, Exogen answered the
complaint, denied that it has any liability to the consultant, and asserted a
number of specific defenses. On the same day, Interpore did the same, and also
asserted cross-claims against Exogen, claiming that any royalties found to be
due to the consultant should be paid by Exogen and that Exogen should be liable
for Interpore's attorneys' fees and other costs incurred in the litigation. On
July 7, 1995, Exogen answered Interpore's cross-claims, denied that it has any
liability to the consultant or to Interpore, asserted a number of specific
defenses to Interpore's claims, and asserted cross-claims against Interpore that
any royalties found to be due to the consultant should be paid by Interpore and
that Interpore be liable for Exogen's attorneys' fees and other costs incurred
in the litigation. All parties are currently engaged in the discovery process.
The Company does not believe that the claims against it have merit, and is
vigorously defending this action. There can be no assurance, however, that the
consultant's claims will not be upheld.
On March 15, 1995, a former sales representative of the Company filed a
complaint against the Company in the United States District Court for the
District of New Jersey that alleged breach of the sales representative agreement
and sought damages as a result of the termination of the agreement by the
Company. In March 1996, the Company settled this matter, and the case was
dismissed with prejudice and without costs.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 4a. Executive Officers of the Registrant
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John P. Ryaby....................................... 62 Chairman of the Board of Directors and Vice President of
Research and Development and Regulatory Affairs
Patrick A. McBrayer................................. 45 Chief Executive Officer, President, and Director
John Bohan.......................................... 48 Vice President of Sales and Marketing
Richard H. Reisner.................................. 53 Vice President, Chief Financial Officer, and Secretary
Roger J. Talish..................................... 54 Vice President of Operations
- ---------
</TABLE>
John P. Ryaby, a founder of the Company, has been a Director of the
Company since March 1992 and Chairman of the Board of Directors since February
1994. Mr. Ryaby served as President and Chief Executive Officer of the Company
from March 1992 until his resignation from such offices in February 1994, and
currently serves as the Vice President of Research and Development and
Regulatory Affairs. Mr. Ryaby served from late 1989 until 1992 as the President
and Chief Operating Officer of Interpore, a division of Interpore International,
Inc., a physical and biological research company. Mr. Ryaby was a founder, and
from 1975 to 1982 was President and Chief Operating Officer, of Electro-Biology,
Inc. ("EBI"), a company involved in bone-growth electrical-stimulation
technology, and was responsible for obtaining regulatory approval of EBI's PMA
in 1979 and for establishing EBI's direct sales force.
Patrick A. McBrayer was named Chief Executive Officer, President, and a
Director of the Company in February 1994. Prior to joining the Company, Mr.
McBrayer served in various executive positions from 1987 to February 1994 at
Osteotech, Inc., including President and Chief Executive Officer. While at
Osteotech, Inc., a company that develops and markets biologic, biomaterial, and
implant systems for musculoskeletal surgery, Mr. McBrayer guided the company's
transition from its inception to a public entity. From 1979 through 1986, he
served in a variety of positions of increasing responsibility with Johnson &
Johnson, Inc., including Marketing Manager of the Patient Care Division, where
he built a significant business in surgical products.
John Bohan joined the Company in February 1994 as Vice President of
Sales and Marketing. Prior to joining the Company, Mr. Bohan held various
positions from 1972 to 1994 at Johnson & Johnson, Inc., including Vice President
of Marketing and Sales for Johnson & Johnson Medical, Inc., and for Ethicon,
Inc. Most recently, he served as Vice President of Sales and Marketing and as a
member of the Board of Directors of Johnson & Johnson Advanced Materials
Company.
<PAGE>
Richard H. Reisner, a founder of the Company, has served as its Vice
President and Chief Financial Officer since September 1992. From 1991 to 1992,
Mr. Reisner was Vice President and Chief Financial Officer of Cirrus Diagnostics
Inc. ("Cirrus"), a company that developed a system for the automation of
diagnostic immunoassay and chemistry testing, and was directly involved with the
acquisition of Cirrus by Diagnostic Products Corporation in May 1992. From 1990
to 1991, Mr. Reisner was the Corporate Controller for Datascope Corp., a
manufacturer of medical instruments. From 1988 to 1990, Mr. Reisner was
President and Chief Executive Officer of Pain Suppression Labs, Inc., a
manufacturer of electrical stimulation devices to suppress chronic headache
pain. From 1979 to 1988, Mr. Reisner was Vice President of Finance and
Administration of EBI, and was responsible for establishing third-party
reimbursement for EBI's bone-growth electrical-stimulation devices.
Roger J. Talish, a founder of the Company, has served as Vice President
of Operations for the Company since March 1992. From 1989 to 1992, Mr. Talish
was Vice President of Operations at Interpore, and from 1985 to 1989 held the
same position at Meditron, Inc. From 1978 to 1985, Mr. Talish held various
engineering management positions at EBI, including Director of Research and
Product Engineering.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been quoted on the Nasdaq National
Market under the trading symbol "EXGN" since the Company commenced public
trading on July 20, 1995. Prior to that date, there was no public market for the
Company's Common Stock.
The following table sets forth the high and low selling price for the
Company's Common Stock for the fiscal quarter ended September 30, 1995 and the
four quarters of fiscal 1996, based on transaction data as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
Fiscal years ended
September 30, 1995 and 1996 High Low
--------------------------- ---- ---
<S> <C> <C>
1995
Fourth quarter
(commencing July 20, 1995).. $16.00 $11.00
1996
First quarter................... $20.75 $12.75
Second quarter.................. $25.75 $11.75
Third quarter................... $14.00 $ 7.25
Fourth quarter.................. $ 9.50 $ 3.00
</TABLE>
On December 19, 1996, the last reported sale price for the Company's
Common Stock as reported by the Nasdaq National Market was $3.75 per share.
As of December 19, 1996 there were approximately 190 holders of record
of the Common Stock. This number excludes individual stockholders holding stock
under nominee security position listings.
The Company has not declared or paid any cash dividends since its
inception, and does not intend to pay any cash dividends in the foreseeable
future.
The Stockholder Rights Plan
Effective December 6, 1996, pursuant to a Preferred Shares Rights
Agreement (the "Rights Agreement") between the Company and Registrar and
Transfer Company, as Rights Agent (the "Rights Agent"), the Company's Board of
Directors declared a dividend of one right (a "Right") to purchase one
one-hundredth share of the Company's Series A Participating Preferred Stock
("Series A Preferred") for each outstanding share of Common Stock of the
Company. The dividend is payable on December 19, 1996 (the "Record Date") to
stockholders of record as of the close of business on that date. Each Right
<PAGE>
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Preferred at an exercise price of $30.00 (the "Purchase
Price"), subject to adjustment in the event the Company declares a dividend on
the Common Stock payable in Common Stock, subdivides the number of outstanding
shares of Common Stock into a larger number of such shares, or combines the
number of outstanding shares of Common Stock into a smaller number of such
shares, among other circumstances. In addition, under certain circumstances
described more fully in the Rights Agreement, the Rights may become exercisable
for a number of shares of Common Stock having a value equal to two times the
Purchase Price.
The Rights approved by the Board of Directors are designed to protect
and maximize the value of the outstanding equity interests in the Company in the
event of an unsolicited attempt by an acquirer to take over the Company in a
manner or on terms not approved by the Board of Directors. Takeover attempts
frequently include coercive tactics to deprive the Company's Board of Directors
and its stockholders of any effective opportunity to determine the Company's
future.
A copy of the Rights Agreement is attached as Exhibit 99.1 to this Form
10-K, and is incorporated herein by reference.
<PAGE>
Item 6. Selected Financial Data
Set forth below is the selected consolidated financial data for the
Company for the three fiscal years ended September 30, 1996. The following data
should be read in conjunction with the Company's financial statements, related
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
For the years ended September 30,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product sales ................................................... $ 5,777 $ 1,852 $ --
Revenues from development agreements ............................ 1,100 -- --
-------- -------- ------
Total revenues .............................................. 6,877 1,852 --
-------- -------- ------
Operating costs and expenses:
Cost of product sales ........................................... 3,661 1,128 --
Research and development ........................................ 3,988 2,545 1,432
Selling, general, and administrative ............................ 11,030 5,775 1,782
-------- -------- ------
Total operating costs and expenses .......................... 18,679 9,448 3,214
-------- -------- ------
Operating loss .................................................. (11,802) (7,596) (3,214)
Other income (expense):
Interest income (expense), net .................................. 1,438 604 (185)
Other expense, net .............................................. (224) (59) (2)
-------- -------- ------
Total other income (expense) ................................ 1,214 545 (187)
-------- -------- ------
Net loss........................................................ $(10,588) $ (7,051) $ (3,401)
======== ======== ========
Net loss per share.................................................. $ (1.07)
=========
Weighted average shares outstanding ................................. 9,875
Pro forma net loss per share ........................................ $ (0.93) $ (0.48)
======== ========
Pro forma weighted average shares outstanding ....................... 7,574 7,020
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents and short- and long-term
investments..................................................... $19,534 $ 31,061 $ 640
Working capital..................................................... 17,235 30,054 301
Total assets........................................................ 25,511 34,886 1,773
Redeemable Preferred Stock.......................................... - - 6,002
Total stockholders' equity (deficit)................................ 23,077 33,342 (5,487)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Annual Report on Form 10-K contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions, and the actual
events or results may differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below under "Business Considerations" as
well as those discussed in other filings made by the Company with the Securities
and Exchange Commission.
Results of Operations
Fiscal Year ended September 30, 1996 compared with Fiscal Year ended September
30, 1995
The Company's product sales are generated entirely from sales of the
Company's Sonic Accelerated Fracture Healing System ("SAFHS") Model 2A device.
For fiscal 1996, product sales were $5.8 million as compared with $1.9 million
for fiscal 1995, which was the period in which the Company first recorded sales.
International product sales were 14% of total product sales in fiscal 1996;
there were no international product sales in fiscal 1995.
In fiscal 1996, the Company recorded revenues of $1.1 million related
to development agreements with Teijin Limited, a Japanese corporation. No such
revenues were reported for fiscal 1995. These development agreements cover two
of the Company's technologies: (a) the SAFHS device and (b) the
mechanical-stress device under development. The SAFHS agreement provides for
milestone payments to the Company for Teijin's development of the product for
launch in Japan. The Company will manufacture and supply SAFHS devices to Teijin
for clinical trials and subsequent sales in Japan. Teijin will be responsible
for complying with the regulatory requirements and marketing and distributing
the SAFHS device in Japan. The mechanical-stress agreement provides for
milestone payments to the Company that will support, in part, the Company's
clinical trials in the United States in exchange for a first option in favor of
Teijin to negotiate a development and distribution agreement for this device for
the Japanese market.
<PAGE>
Cost of product sales was $3.7 million for fiscal 1996, compared with
$1.1 million for fiscal 1995. Included in cost of sales were royalties, the cost
of manufacture of the SAFHS device by outside sources, and the in-house cost of
refurbishment and quality assurance activities. Excluding revenues related to
development agreements, gross profit for 1996 was $2.1 million (or 37% as a
percentage of product sales), compared with $724,000 (or 39%) for 1995. This
$1.4 million increase (or 192%) in gross profit was principally due to the
increase in product volume, while the decrease in gross profit percentage was
due primarily to higher warranty costs.
Research and development expenses in fiscal 1996 increased to $4.0
million from $2.5 million in fiscal 1995. The increase of $1.4 million (or 57%)
was primarily the result of increased staff, additional research projects,
expanded efforts in designing and building the mechanical-stress device, and
extensive analyses of clinical data associated with the SAFHS therapy.
Selling, general, and administrative expenses in fiscal 1996 increased
to $11.0 million from $5.8 million in fiscal 1995. Of the $5.3 million (or 91%)
increase, $3.2 million was due to sales and marketing efforts in the United
States, including expansion of the direct sales force and related commissions on
sales. The remaining $2.1 million increase was primarily due to expanded
activities of the Company's subsidiary in Germany; increased domestic expenses,
including rent, utilities, and depreciation; and legal fees associated with
litigation and patent matters.
Net interest income in fiscal 1996 increased to $1.4 million from
$604,000 in fiscal 1995, principally due to a full year's interest earned on the
proceeds from the Company's Initial Public Offering in July 1995. Other expense,
net for fiscal 1996 increased to $224,000 from $59,000 for fiscal 1995,
principally due to the settlement of a legal action by the Company in the second
quarter 1996.
The Company incurred net losses of $10.6 million, or $1.07 per share
(per share data based upon weighted average shares outstanding, which exclude
options because they are antidilutive), in fiscal 1996 compared with $7.1
million, or $0.93 per share (per share data based upon pro forma weighted
average shares outstanding), in fiscal 1995. The increase of $3.5 million (or
47%) in net loss was caused principally by the factors discussed above.
Fiscal Year ended September 30, 1995 compared with Fiscal Year ended September
30, 1994
Product sales in fiscal 1995 were $1.9 million due to the Company's
commencement of commercial distribution of its initial SAFHS device, SAFHS Model
2A, in October 1994. Cost of product sales of $1.1 million in fiscal 1995
principally resulted from the cost of manufacture of the SAFHS device by outside
sources as well as the cost of inspection of the manufactured product. Also
included in cost of sales were royalties and costs related to the establishment
of in-house manufacturing and ancillary operations. Gross profit for 1995 was
$724,000, or 39% as a percentage of revenues. There were no revenues or
associated cost of product sales in fiscal 1994.
Research and development expenses in fiscal 1995 increased to $2.5
million from $1.4 million in fiscal 1994. The increase of $1.1 million (or 78%)
was primarily the result of expenditures associated with the development of the
SAFHS 2000 (a second-generation model of the SAFHS Model 2A device); expanded
efforts in designing and building the mechanical-stress device; increased staff;
and the cost of SAFHS devices shipped in connection with certain clinical
prescriptions for which reimbursement is currently not available.
<PAGE>
Selling, general, and administrative expenses in fiscal 1995 increased
to $5.8 million from $1.8 million in fiscal 1994. Of the $4.0 million (or 224%)
increase, $2.2 million was due to sales and marketing efforts in the commercial
introduction of the SAFHS Model 2A, including hiring and training a direct sales
force. The remainder of the $4.0 million increase was primarily due to increased
expenses, including rent, utilities, and depreciation, of the Company's new
facilities in Piscataway, New Jersey; increased legal fees related to patent
work and litigation; expansion of the administrative staff and increased
reimbursement activities; and the establishment of a subsidiary in Germany.
Net interest income in fiscal 1995 increased to $604,000 from $185,000
of net interest expense in fiscal 1994, principally due to interest earned on
the proceeds from the Series B Preferred Stock financing in November 1994 and
interest earned in the fourth quarter of fiscal 1995 on proceeds from the
Company's Initial Public Offering in July 1995.
The Company incurred net losses of $7.1 million, or $0.93 per share,
and $3.4 million, or $0.48 per share, in fiscal 1995 and 1994, respectively (per
share data based upon pro forma weighted average shares outstanding). The
increase of $3.7 million (or 107%) in net loss was caused principally by the
factors discussed above.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $23.2 million at September 30,
1996. Until July 1995, the Company had funded its operations primarily through
the private placement of equity securities aggregating $17.6 million. On July
25, 1995, the Company completed its Initial Public Offering of 2,500,000 shares
of Common Stock at a purchase price of $11.00 per share, for aggregate net
proceeds of approximately $24.7 million. On August 15, 1995, the underwriters of
the Initial Public Offering purchased an additional 375,000 shares of Common
Stock, pursuant to the over-allotment option, for aggregate net proceeds of
approximately $3.8 million.
In fiscal 1996, the Company used net cash of $11.6 million for
operating activities, primarily for continued commercial marketing of the SAFHS
Model 2A; an increased level of research and development expenditures; and a net
increase of $1.3 million in working capital items. The Company's capital
expenditures in 1996 were $411,000. The Company estimates that equipment and
furnishings to expand in-house manufacturing and administrative support
activities will require capital expenditures of approximately $800,000 during
each of the next two years.
The Company plans to finance its capital needs principally from
existing capital resources, which the Company believes will be sufficient to
fund its operations into fiscal 1998. Additional funding may not be available
when needed or on terms acceptable to the Company, which would have a material
adverse effect on the Company's business, financial condition, results of
operations, and cash flows.
<PAGE>
Business Considerations
Limited Operating History
The Company has a limited history of operations that, to date, has
consisted primarily of research and development, product engineering, obtaining
FDA approval for its SAFHS device, developing the Company's initial sales and
marketing organization, supervising the manufacture of the SAFHS device by a
contract manufacturer, and commencing sales of its SAFHS device domestically and
internationally. The Company was formed for the purpose of acquiring the SAFHS
technology and related clinical data, as well as the mechanical-stress
technology. The Company has limited direct clinical trial experience. The
Company received approval of its PMA application for and began marketing its
SAFHS device in October 1994, and therefore has limited experience in marketing
and selling its products in commercial quantities. The Company had no previous
direct manufacturing experience prior to commencing in-house refurbishing of its
SAFHS device in fiscal 1996. Whether the Company can successfully manage the
transition to a larger-scale commercial enterprise will depend, in part, upon
further developing its distribution network; successfully developing its
manufacturing capability; and strengthening its financial and management
systems, procedures, and controls. Failure to make such a transition
successfully would have a material adverse effect on the Company's business,
financial condition, results of operations, and cash flows.
Uncertainty of Market Potential and Market Acceptance
The Company's SAFHS device has been approved by the FDA to treat
closed, cast-immobilized, fresh fractures of the tibia and distal radius within
approved indications. The market potential of the Company's SAFHS device depends
on the acceptance by the medical community of the use of ultrasound technology
as a safe and effective method of treating fresh fractures and the use of the
Company's SAFHS device by physicians for treatment of these fractures. The SAFHS
device is based upon new technology that had not been used previously to treat
bone fractures. In addition, the proper placement of the device at the fracture
site is important for the proper delivery of the therapy, and acceptance of the
therapy will depend, in part, on whether the Company can continue to instruct
physicians and patients in the proper use of the device. There can be no
assurance that physicians will prescribe treatment using the SAFHS device. In
addition, use of the SAFHS device depends significantly on the availability and
extent of third-party reimbursement, increased awareness of the effectiveness of
the SAFHS technology, and focused sales efforts by the Company. Electrical
stimulation devices, the only other non-invasive devices commercially available
for the treatment of bone fractures, have gained only limited physician
acceptance to date. Failure of the Company's SAFHS device to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition, results of operations, and cash flows.
Dependence on Third-Party Reimbursement
The Company has not secured general reimbursement approval for its
SAFHS device from any large third-party payor, and to date has received
reimbursement approval from third-party payors only on a case-by-case basis.
Successful sales of SAFHS devices in the United States and other markets depend
on the availability of adequate reimbursement from third-party payors such as
managed care organizations, workers' compensation insurers, private insurance
plans, and government entities. There is significant uncertainty concerning
<PAGE>
third-party reimbursement for the use of any medical device incorporating new
technology, such as the SAFHS device. Reimbursement by a third-party payor may
depend on a number of factors, including the payor's determination that the use
of the SAFHS device is safe and effective, not experimental or investigational,
medically necessary, appropriate for the specific patient, and cost-effective.
In addition, devices incorporating a new technology are often prescribed by
physicians for indications other than those approved by the FDA (off-label).
Reimbursement for such off-label uses may not be available or permitted by
government regulations. Since reimbursement approval is required from each payor
individually, seeking such approvals is a time-consuming and costly process that
requires the Company to provide scientific and clinical support for the use of
the SAFHS device to each payor separately. There can be no assurance that
third-party reimbursement will be consistently available for the SAFHS device or
any of the Company's other products that may be developed or that such
third-party reimbursement will be adequate. The United States Congress is
currently considering various proposals to significantly reduce Medicare and
Medicaid expenditures. Such proposals, if enacted, could have a material adverse
effect on the Company's business, financial condition, results of operations,
and cash flows. Currently, the SAFHS device is not covered under the Medicare
program. In addition, third-party payors are increasingly limiting reimbursement
coverage for medical devices, and in many instances have put pressure on medical
suppliers to lower their prices. The Company currently has limited experience in
obtaining reimbursement for its products in countries other than the United
States. Lack of or inadequate reimbursement by governmental and other
third-party payors for the Company's products would have a material adverse
effect on the Company's business, financial condition, results of operations,
and cash flows.
History of Losses; Profitability Uncertain; Fluctuations in Operating Results
The Company has incurred substantial losses since inception and, as of
September 30, 1996, had an accumulated deficit of approximately $23.2 million.
Such losses have resulted principally from expenses associated with obtaining
FDA approval for the Company's SAFHS device, engineering and developing the
SAFHS and mechanical-stress devices, and establishing and expanding the sales
and marketing organization in the United States and in Europe. The Company
expects to generate substantial additional losses in the future primarily
attributable to development of, and clinical trials for, the mechanical-stress
device, clinical trials for expanded indications of the SAFHS technology, the
continued expansion of domestic and international sales and marketing
activities, and the expansion of manufacturing capability. In addition, the
Company expects its operating expenses to increase significantly over the next
several years due to increased costs of research and development, primarily in
connection with the mechanical-stress device and clinical trials for expanded
applications of the SAFHS technology, expansion of direct sales and marketing
activities, increase of in-house manufacturing capability, and expansion of
administrative functions. Results of operations may fluctuate significantly from
quarter to quarter based on such factors, and will also depend upon
reimbursement by third-party payors, new product introductions by the Company or
its competitors, timing of regulatory actions, expenditures incurred in the
research and development of new products, and the mix of product sales between
the United States and abroad. The Company's future revenues and profitability
are critically dependent on whether it can successfully market and sell its
SAFHS device. There can be no assurance that significant revenues or
profitability will ever be achieved.
<PAGE>
Dependence on Principal Product
All of the Company's product revenues to date have been derived from
sales of its SAFHS device. The SAFHS device is expected to continue to account
for substantially all of the Company's revenues for the foreseeable future. The
Company's long-term success will depend in part on the successful
commercialization of the SAFHS device for its approved indications, the
development and regulatory approval of SAFHS devices to treat additional
indications, and the acceptance of the SAFHS treatment by the medical community
and third-party payors. Failure to gain market acceptance for the SAFHS device
or to obtain adequate reimbursement coverage, among other factors, would have a
material adverse effect on the Company's business, financial condition, results
of operations, and cash flows.
Limited Sales and Marketing Experience
The Company began marketing the SAFHS device in the United States in
October 1994. Because of limited market awareness of SAFHS therapy, the sales
effort is a lengthy process, requiring the Company to educate physicians and
third-party payors regarding the clinical benefits and cost-effectiveness of the
SAFHS technology, to assist patients in the reimbursement process, and to
provide product support to patients. The Company uses a combination of direct
sales representatives and a network of independent sales representatives to
market and distribute its products. Independent sales representatives typically
market orthopaedic and other devices for a variety of manufacturers. These
representatives do not have prior experience in the sale or use of devices to
accelerate fresh fracture healing. There can be no assurance that these
independent sales representatives will commit the necessary resources to market
the SAFHS device effectively or that the Company's direct sales staff will
succeed in its efforts to promote the SAFHS technology to physicians and
third-party payors.
The Company markets the SAFHS device in several European countries
through independent distributors and sales agents, and has recorded sales in
Germany and Austria. The Company also will collaborate with marketing partners
in the Pacific Rim to assist with regulatory requirements and to market and
distribute the Company's products. The Company has entered into one such
agreement covering Japan with Teijin Limited, a Japanese corporation. Each of
the foreign markets in which the Company sells, or plans to sell, its products
has its own regulatory requirements and approvals, and the distribution, price,
and market structure to be established by the Company might vary from country to
country. No assurance can be given that the Company can successfully market the
SAFHS device in Europe or that it can secure additional marketing partners in
the Pacific Rim on terms acceptable to the Company, or at all.
The Company's marketing success in the United States and abroad will
depend on whether it can gain further regulatory approvals, successfully
demonstrate the cost-effectiveness of its products, further develop direct sales
capability to augment its existing distribution network, and establish
arrangements with distributors and marketing partners. Failure by the Company to
successfully market its products domestically and internationally would have a
material adverse effect on the Company's business, financial condition, results
of operations, and cash flows.
<PAGE>
Risks Associated with International Operations
The Company established a subsidiary in Germany during fiscal 1995 as
part of its strategy to introduce the SAFHS device in Europe, and commenced
commercial distribution of the device in certain European countries during
fiscal 1996. International product sales were 14% of total product sales in
fiscal 1996, and such revenues are expected to continue to represent an
increasing percentage of total revenues. The Company believes that its
profitability and continued growth will require expansion of sales in foreign
markets, and so it intends to continue to expand its operations outside the
United States and enter additional international markets, which will require
significant management attention and financial resources. There can be no
assurance that the Company will be able to achieve market acceptance of its
products in international markets or maintain or increase international market
demand for its products.
The Company's international product sales are denominated in foreign
currencies. Management can give no assurances that changes in currency and
exchange rates will not materially affect the Company's revenues, costs, cash
flows, and business practices and plans. Additional risks inherent in the
Company's international business activities generally include unexpected changes
in regulatory requirements, tariffs and other trade barriers, extended accounts
receivable payment cycles, difficulties in managing international operations,
potentially adverse tax consequences, restrictions on repatriation of earnings,
and the burdens of complying with a wide variety of foreign laws. There can be
no assurances that such factors will not have a material adverse effect on the
Company's future international revenues and, consequently, on the Company's
business, financial condition, results of operations, and cash flows.
Dependence on Single Sources of Manufacture and Supply
The Company's SAFHS device is currently manufactured by a contract
manufacturer. The purchase orders between the Company and the contract
manufacturer requires the Company to purchase a minimum number of SAFHS devices
from the contract manufacturer for the term of the agreement, effective to 1998.
The contract manufacturer's facility has been inspected by the FDA and is
currently the only facility approved for the production of the SAFHS device
under the FDA's Good Manufacturing Practices ("GMP") requirements. Any failure
by the contract manufacturer to maintain its manufacturing facility in
accordance with GMP requirements could result in the inability of such contract
manufacturer to manufacture the SAFHS device and may limit the Company's ability
to deliver the SAFHS device to physicians or patients, which would have a
material adverse effect on the Company's business, financial condition, results
of operations, and cash flows.
Several components incorporated in the SAFHS device currently are, and
will continue to be, manufactured by single-source vendors. For certain of these
components, there are relatively few alternative sources of supply, and
establishing additional or replacement suppliers for such components cannot be
accomplished quickly. Any supply interruption from single-source vendors would
have a material adverse effect on the Company's business, financial condition,
results of operations, and cash flows.
<PAGE>
No Manufacturing Experience
The Company has developed in-house refurbishing capability for the
SAFHS device, and is developing in-house manufacturing capability, although the
Company intends to continue to use its current manufacturer as the primary
supplier of its products for the foreseeable future. Before manufacturing the
SAFHS devices for commercial use, the Company's facility will require FDA
determination of compliance with GMP requirements. There can be no assurance
that the Company will be able to establish manufacturing capability, obtain GMP
approval, make the transition to commercial manufacturing successfully, or
manufacture its products cost-effectively, or at all.
Intense Competition and Risks Associated with Rapid Technological Change
The medical device industry is characterized by intense competition.
Many of the Company's existing and potential competitors have substantially
greater financial, marketing, sales, distribution, and technical resources than
the Company and more experience in research and development, clinical trials,
regulatory matters, manufacturing, and marketing. In addition, most of these
companies have established third-party reimbursement for their products.
Furthermore, the medical device industry is characterized by rapid product
development and technological change. The Company's products could be rendered
obsolete or uneconomical by technological advances by one or more of the
Company's competitors or by other therapies such as drugs to treat conditions
addressed by the Company's products. The Company's business, financial
condition, results of operations, and cash flows will depend upon whether the
Company can compete effectively with other developers of such medical devices
and therapies.
The SAFHS device competes with non-invasive bone-growth
electrical-stimulation devices and with various surgical treatments. The
Company's mechanical-stress device to prevent bone loss related to osteoporosis,
if developed and marketed, will compete with drug therapies and exercise
regimens. There can be no assurance that such device will ever be developed,
approved by the FDA, or become commercially available. Four companies currently
market electrical-stimulation devices for the treatment of non-union fractures
(fractures that remain unhealed after nine months). The Company believes that at
least one of these companies is conducting clinical trials for the use of
electrical stimulation for the treatment of fresh fractures. In addition, other
companies are developing a variety of products and technologies to be used in
the treatment of fractures and osteoporosis, including growth factors,
bone-graft substitutes, and exercise/physical therapy equipment. There can be no
assurance that competitors will not develop products that are superior to the
Company's products, achieve greater market acceptance, or render the Company's
technology and products obsolete or noncompetitive. As a result, the Company's
long-term viability may depend on whether it can continue to develop new
products. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competition will not
have a material adverse effect on the Company's business, financial condition,
results of operations, or cash flows.
<PAGE>
Extensive Government Regulation
The manufacture and sale of medical devices is subject to extensive
government regulation in the United States and in other countries. The process
of obtaining FDA and other required regulatory approvals can be time-consuming,
expensive, and uncertain, frequently requiring several years from commencing
clinical trials to receiving regulatory approval. For example, the process of
conducting clinical trials and obtaining the PMA for the SAFHS Model 2A took
nine years. The Company will be required to file PMA supplements for new
indications for its SAFHS technology. In addition, if modifications to its SAFHS
Model 2A affect safety or efficacy, a PMA supplement must be filed and approved
by the FDA. These supplements may not be accepted by the FDA, in which case the
Company would be required to undertake and complete the entire PMA process in
order to use the SAFHS Model 2A to treat those additional indications or
commercialize a modified device. Furthermore, there can be no assurance that the
Company will obtain any such approvals on a timely basis, or at all, which could
have a material adverse effect on the Company's business, financial condition,
results of operations, and cash flows. The Company has made certain
nonperformance-related changes to the SAFHS Model 2A since the device was
approved by the FDA. There can be no assurance that the FDA will not require the
Company to file a PMA supplement, which would result in additional costs and
delays in marketing the device. The Company filed a PMA supplement for its SAFHS
2000 in December 1995. The Company will also be required to file a PMA
application for its mechanical stress device, if and when development is
completed. No assurance can be given that such application will be made, and if
made, that a PMA will be granted on a timely basis, or at all. In order for the
Company to market the SAFHS device or any future products in foreign
jurisdictions, it will be required to seek regulatory approvals in those
jurisdictions. No assurance can be given that the Company can obtain required
regulatory approvals in foreign countries on a timely basis, or at all.
Regulatory approvals, if granted, may include significant limitations
on the indicated uses for which a product may be marketed. FDA enforcement
policy strictly prohibits the promotion by the Company and any of its
distributors of approved medical devices for off-label uses. There can be no
assurance that the Company will not become subject to FDA actions as a result of
physicians' prescribing the SAFHS device for off-label uses. In addition,
product approvals may be withdrawn for failure to comply with regulatory
standards or the occurrence of unforeseen problems following initial marketing.
The Company is required to adhere to FDA regulations setting forth GMP
requirements relating to tests, control, and documentation. Ongoing compliance
with GMP and other applicable regulatory requirements is monitored through
periodic inspections by state and federal agencies, including the FDA, and by
comparable agencies in other countries. Failure to comply with applicable United
States and international regulatory requirements can result in failure of the
relevant government agency to grant pre-market approval for devices, withdrawal
of approval, total or partial suspension of production, fines, injunctions,
civil penalties, recall or seizure of products, and criminal prosecution.
Furthermore, changes in existing regulations or adoption of new regulations or
policies could prevent the Company from obtaining, or affect the timing of,
future regulatory approvals or clearances.
There can be no assurance that the Company will be able to obtain
necessary regulatory approvals or clearances in the United States, Europe, the
Pacific Rim, or elsewhere on a timely basis, or at all. Delays in receipt of or
failure to receive such approvals or clearances, the loss of previously received
approvals or clearances, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition, results of operations, and cash flows.
<PAGE>
Limited Protection of Patents, Copyrights and Proprietary Rights; Risk of Patent
Infringement
The Company relies on a combination of patents, trade secrets,
copyrights, and confidentiality agreements to protect its proprietary
technology, rights, and know-how. No assurance can be given that the Company's
patent applications will issue as patents or that any issued patents owned by
the Company will provide competitive advantages for the Company's products or
will not be successfully challenged or circumvented by competitors. Under
current law, patent applications in the United States are maintained in secrecy
until patents are issued, and patent applications in foreign countries are
maintained in secrecy for a period after filing. The right to a device patent in
the United States is attributable to the first to invent the device, not the
first to file a patent application. Accordingly, the Company cannot be sure that
its products or technologies do not infringe patents that may be granted in the
future pursuant to pending patent applications or that its products do not
infringe any patents or proprietary rights of third parties. In the event that
any relevant claims of third-party patents are upheld as valid and enforceable,
the Company could be prevented from selling its products or could be required to
obtain licenses from the owners of such patents or be required to redesign its
products to avoid infringement. There can be no assurance that such licenses
would be available or, if available, would be on terms acceptable to the
Company, or that the Company would be successful in any attempt to redesign its
products or processes to avoid infringement. The Company's failure to obtain
these licenses or to redesign its products would have a material adverse effect
on the Company's business, financial condition, results of operations, and cash
flows. The Company also relies on trade secrets and proprietary information, and
enters into confidentiality agreements with its employees, consultants, and
advisors. There can be no assurance that the obligations to maintain the
confidentiality of such trade secrets and proprietary information will
effectively prevent disclosure of the Company's confidential information or
provide meaningful protection for the Company's confidential information if
there is unauthorized use or disclosure, or that the Company's trade secrets or
proprietary information will not be independently developed by the Company's
competitors. The Company also holds rights to copyrights on text and on software
developed by or for it for use in its SAFHS device. There can be no assurance
that any copyrights owned by the Company will provide competitive advantages for
the Company's products or will not be challenged or circumvented by its
competitors. Litigation may be necessary to defend against claims of
infringement, to enforce patents and copyrights issued or licensed to the
Company, or to protect trade secrets, and could result in substantial cost to,
and diversion of effort by, the Company. There can be no assurance that the
Company would prevail in any such litigation.
Uncertainty of New Product Development
The Company plans to seek FDA approval to commence clinical trials in
the near future to expand the approved indications for the SAFHS technology to
include other fractures, spine fusion, and cartilage repair. In addition, the
Company has developed a mechanical-stress device to prevent bone loss related to
osteoporosis. The Company has commenced a pilot clinical trial in the United
States, and anticipates that it will be required to undertake additional
development activities and human clinical trials before seeking regulatory
approval for this device. There can be no assurance that the mechanical-stress
<PAGE>
device will prove to be safe and efficacious, that product development will ever
be successfully completed, that a PMA, if applied for, will be granted by the
FDA on a timely basis, or at all, that adequate levels of third-party
reimbursement will be available, or that the mechanical-stress device will ever
achieve commercial acceptance. The Company's inability to show efficacy in
additional applications of its SAFHS technology, to successfully develop the
mechanical stress device, or to achieve market acceptance of such new
applications and products would have a material adverse effect on the Company's
business, financial condition, results of operations, and cash flows.
Royalty Payment Obligations; Potential Loss of Exclusive License
The Company is required to pay a royalty on any net revenues from sales
of the mechanical-stress device, if such device is successfully developed. In
the event that the Company does not commercially exploit the underlying
technology as required by the license agreement for such technology, the Company
will forfeit its exclusive license to the mechanical-stress technology. There
can be no assurance that the Company will commercially exploit such technology
within the meaning of such license, and forfeiture of such exclusive license
could have a material adverse effect on the Company's business, financial
condition, results of operations, and cash flows.
Product Liability and Insurance
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its products is alleged to have
resulted in adverse effects. There can be no assurance that liability claims
will not exceed the coverage limits of the Company's insurance policies or that
such insurance will continue to be available on commercially reasonable terms,
or at all. Consequently, product liability claims could have a material adverse
effect on the Company's business, financial condition, results of operations,
and cash flows.
Reliance on Key Personnel
The Company's success depends to a significant extent upon a number of
key management and technical personnel. The loss of the services of one or more
key employees could have a material adverse effect on the Company's business,
financial condition, results of operations, and cash flows. The Company also
believes that its future success will depend in large part on whether it can
attract and retain highly skilled technical, management, sales and marketing,
and reimbursement personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel. The Company's failure to attract, hire, and retain
these personnel would have a material adverse effect on the Company's business,
financial condition, results of operations, and cash flows.
Possible Volatility of Stock Price
The trading price of the Company's Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results, announcements of technological innovations or new products by the
Company or its competitors, changes in earning estimates by analysts, general
conditions in the medical device industry, and other events or factors. In
<PAGE>
addition, the stock market in general has experienced extreme price and volume
fluctuations that have affected the market price for many companies in
industries similar or related to that of the Company and that have been
unrelated to the operating performance of these companies. These market
fluctuations may adversely affect the market price of the Company's Common
Stock.
Certain Anti-Takeover Provisions
The Company's Second Amended and Restated Certificate of Incorporation
grants the Board of Directors the authority to issue up to 3,000,000 shares of
preferred stock of the Company, $0.0001 par value per share (the "Preferred
Stock"), in one or more series and to fix the rights, preferences, privileges,
and restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences, and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. Effective
December 6, 1996, pursuant to the Rights Agreement, the Company's Board of
Directors declared a dividend of one Right to purchase, under certain
circumstances, one one-hundredth share of the Company's Series A Preferred Stock
for each outstanding share of Common Stock of the Company. Although the Company
has no present plans to issue any additional shares of Preferred Stock, it may
do so in the future. See Part II, Item 5, "Market for Registrant's Common Equity
and Related Stockholder Matters--The Stockholder Rights Plan," and the copy of
the Rights Agreement attached as Exhibit 99.1 to this Form 10-K for more
information relating to the Stockholder Rights Plan.
The Company's By-Laws specify procedures for director nominations by
stockholders and the submission of other proposals for consideration at
stockholder meetings. Certain provisions of Delaware law applicable to the
Company could also delay or make more difficult a merger, tender offer, or proxy
contest involving the Company, including Section 203, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless certain conditions are met. The
possible issuance of Preferred Stock (including pursuant to the Rights Plan),
the procedures required for director nominations and stockholder proposals, and
Delaware law could have the effect of delaying, deferring, or preventing a
change in control of the Company, including without limitation, discouraging a
proxy contest, making more difficult the acquisition of a substantial block of
the Company's Common Stock, or limiting the price that investors might be
willing to pay in the future for shares of the Company's Common Stock.
Item 8. Financial Statements and Supplementary Data
The information in response to this item is set forth in the
Consolidated Financial Statements beginning on page F-3 of this report on Form
10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Certain information in response to this item is incorporated herein by
reference to "Election of Directors" in Exogen, Inc.'s Definitive Proxy
Statement dated on or about January 8, 1997 to be filed with the Securities and
Exchange Commission ("SEC") and to "Executive Officers" in Part I of this Form
10-K. Information on compliance with section 16(a) of the Securities Exchange
Act of 1934 is incorporated herein by reference to "Compliance with Reporting
Requirements" in the Company's Proxy Statement dated on or about January 8,
1997.
Item 11. Executive Compensation
Information in response to this item is incorporated herein by
reference to "Executive Compensation and Other Information" in the Company's
Definitive Proxy Statement dated on or about January 8, 1997 to be filed with
the SEC.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information in response to this item is incorporated herein by
reference to "Security Ownership of Certain Beneficial Owners and Management" in
the Company's Definitive Proxy Statement dated on or about January 8, 1997 to be
filed with the SEC.
Item 13. Certain Relationships and Related Transactions
Information in response to this item is incorporated herein by
reference to "Certain Transactions" in the Company's Definitive Proxy Statement
dated on or about January 8, 1997 to be filed with the SEC.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as a part of this Form 10-K:
(1) Financial Statements. The following Consolidated Financial
Statements of Exogen, Inc. and report of independent public
accountants relating thereto are filed with this report on
Form 10-K:
Consolidated Balance Sheets as of September 30, 1996
and 1995
Consolidated Statements of Operations for the years
ended September 30, 1996, 1995, and 1994
Consolidated Statement of Changes in Stockholders'
Equity for the years ended September 30, 1996, 1995,
and 1994
Consolidated Statements of Cash Flows for the years
ended September 30, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. Schedule II--Valuation and
Qualifying Accounts for the years ended September 30, 1996
and 1995. Schedules not listed above have been omitted
because the information required to be set forth therein is
not applicable or is shown in the Consolidated Financial
Statements or notes thereto.
(3) Exhibits.
3.1 Second Amended and Restated Certificate of
Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 to the Company's Form
10-Q for the third quarter ending June 30, 1995.
3.2 Amended and Restated Bylaws of the Company.
Incorporated by reference to Exhibit 3.3 to the
Company's Form S-1 Registration Statement
(Registration No. 33-92740).
4.1 See Exhibits 3.1 and 3.2 for provisions of the
Certificate of Incorporation and Bylaws of the
Company defining rights of holders of Common Stock
of the Company.
10.1 Amended and Restated Investors' Rights Agreement
dated as of November 14, 1994 among the Company,
the investors listed on Schedule A thereto, and
the individuals listed on Schedule B thereto.
Incorporated by reference to Exhibit 10.1 to the
Company's Form S-1 Registration Statement
(Registration No. 33-92740).
<PAGE>
10.2 Asset Purchase Agreement dated as of March 1, 1993
among Applied Epigenetics, Inc. ("AEI"), Interpore
International, Inc., and Interpore Orthopaedics,
Inc. Incorporated by reference to Exhibit 10.2 to
the Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.3 Employment Agreement dated January 15, 1994
between the Company and Patrick A. McBrayer.
Incorporated by reference to Exhibit 10.3 to the
Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.4 Employment Agreement dated February 3, 1994
between the Company and John Bohan. Incorporated
by reference to Exhibit 10.4 to the Company's Form
S-1 Registration Statement (Registration No.
33-92740).
10.5 Form of Consulting Agreements between the Company
and each of Drs. McLeod and Rubin, as amended.
Incorporated by reference to Exhibit 10.5 to the
Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.6 Form of Stock Restriction Agreement between the
Company and each of Drs. McLeod and Rubin and
Messrs. Reisner, Ryaby, Talish, McBrayer, and
Bohan. Incorporated by reference to Exhibit 10.6
to the Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.7 Form of Stock Purchase Agreement between the
Company and each of Messrs. Reisner, Ryaby, and
Talish. Incorporated by reference to Exhibit 10.7
to the Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.8+ Manufacturing Agreement dated January 20, 1994
between the Company and Hi- Tronics Designs, Inc.
Incorporated by reference to Exhibit 10.8 to the
Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.9 Form of 1993 Stock Option Plan Option Agreement.
Incorporated by reference to Exhibit 10.9 to the
Company's Form S-1 Registration Statement
(Registration No. 33-92740).
10.10 1995 Stock Option / Stock Issuance Plan.
Incorporated by reference to Exhibit 10.10 to the
Company's Form S-1 Registration Statement
(Registration No. 33- 92740).
10.11 Employee Stock Purchase Plan. Incorporated by
reference to Exhibit 10.12 to the Company's Form
S-1 Registration Statement (Registration No.
33-92740).
10.12 Lease Agreement dated December 13, 1994 by and
between the Company and Siemens Medical Systems,
Inc. Incorporated by reference to Exhibit 10.13 to
the Company's Form S-1 Registration Statement
(Registration No. 33-92740).
<PAGE>
10.13 License Agreement dated March 26, 1992 between AEI
and Drs. McLeod and Rubin. Incorporated by
reference to Exhibit 10.14 to the Company's Form
S-1 Registration Statement (Registration No.
33-92740).
10.14 SAFHS Agreement dated November 30, 1995 between
the Company and Teijin Limited.
10.15+ Mechanical-Stress Agreement dated November 30,
1995 between the Company and Teijin Limited.
11.1* Statement regarding Calculation of Shares Used in
Computing Net Loss Per Share.
21.1 List of Subsidiary.
23.1* Consent of Arthur Andersen LLP.
27* Financial Data Schedule.
99.1* Preferred Shares Rights Agreement, dated December
6, 1996, between the Company and Registrar and
Transfer Company, including the Certificate of
Determination, the Form of Rights Certificate, and
the summary of Rights attached thereto as Exhibits
A, B, and C, respectively.
* Filed herewith.
+ Confidential treatment granted.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal
1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EXOGEN, INC.
By: /s/ Patrick A. McBrayer December 20, 1996
-----------------------
Patrick A. McBrayer
Chief Executive Officer, President, and Director
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 dates indicated.
Signature Date
--------- ----
By: /s/ John P. Ryaby December 20, 1996
-----------------
John P. Ryaby
Chairman of the Board and Vice President of
Research and Development and Regulatory Affairs
By: /s/ Patrick A. McBrayer December 20, 1996
-----------------------
Patrick A. McBrayer
Chief Executive Officer, President, and Director
(Principal Executive Officer)
By: /s/ Richard H. Reisner December 20, 1996
----------------------
Richard H. Reisner
Vice President, Chief Financial Officer, and Secretary
(Principal Financial and Accounting Officer)
By: /s/ Buzz Benson December 20, 1996
---------------
Buzz Benson
Director
By: /s/ Donald J. Lothrop December 20, 1996
---------------------
Donald J. Lothrop
Director
<PAGE>
By: /s/ David J. Ottensmeyer December 20, 1996
------------------------
David J. Ottensmeyer
Director
By: /s/ Terry J. Sullivan December 20, 1996
---------------------
Terry J. Sullivan
Director
By: /s/ Terence D. Wall December 20, 1996
-------------------
Terence D. Wall
Director
<PAGE>
EXOGEN, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES
1. FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Balance Sheets as of September 30, 1996 and 1995
Consolidated Statements of Operations for the years ended
September 30, 1996, 1995, and 1994
Consolidated Statement of Changes in Stockholders' Equity
for the years ended September 30, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts for the years ended
September 30, 1996 and 1995
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Exogen, Inc.:
We have audited the accompanying consolidated balance sheets of Exogen,
Inc. (a Delaware corporation) and subsidiary as of September 30, 1996 and 1995
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 1996. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Exogen, Inc. and
subsidiary as of September 30, 1996 and 1995 and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1996 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules, and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements, and in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ARTHUR ANDERSEN LLP
----------------------
Arthur Andersen LLP
New York, New York
November 13, 1996 (except for Note 15, as to
which the date is December 6, 1996)
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30,
-----------------------
1996 1995
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 8,115 $ 22,176
Short-term investments ................................... 6,824 6,704
Accounts receivable, net of allowances of $346 and $198 in
1996 and 1995, respectively ......................... 2,943 871
Inventories .............................................. 1,239 1,553
Interest receivable ...................................... 202 44
Other current assets ..................................... 344 234
-------- --------
Total current assets ........................ 19,667 31,582
Furniture, fixtures and equipment, net ....................... 979 888
Long-term investments ........................................ 4,595 2,181
Other assets ................................................. 270 235
-------- --------
Total assets ................................ $ 25,511 $ 34,886
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 685 $ 523
Accrued liabilities ...................................... 1,625 990
Capital lease obligations ................................ 15 15
Other current liabilities ................................ 107 --
-------- --------
Total current liabilities ................... 2,432 1,528
Capital lease obligations .................................... 2 16
Commitments and contingencies (Note 11)
<PAGE>
<CAPTION>
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $0.0001 par value; 3,000,000 shares
authorized in 1996 and 1995; no shares issued or
outstanding ......................................... -- --
Common Stock, $0.0001 par value; 27,000,000 shares
authorized in 1996 and 1995; 9,909,192 shares issued
and outstanding in 1996 and 9,850,259 shares issued
and outstanding in 1995 ............................. 1 1
Additional paid-in capital ............................... 46,272 45,938
Cumulative translation adjustment ........................ (22) (11)
Accumulated deficit ...................................... (23,174) (12,586)
-------- --------
Total stockholders' equity .................. 23,077 33,342
-------- --------
Total liabilities and stockholders' equity .. $ 25,511 $ 34,886
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the years ended September 30,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales .......................... $ 5,777 $ 1,852 $ --
Revenues from development agreements ... 1,100 -- --
-------- -------- --------
Total revenues .................... 6,877 1,852 --
-------- -------- --------
Operating costs and expenses:
Cost of product sales .................. 3,661 1,128 --
Research and development ............... 3,988 2,545 1,432
Selling, general, and administrative ... 11,030 5,775 1,782
-------- -------- --------
Total operating costs and expenses 18,679 9,448 3,214
-------- -------- --------
Operating loss ......................... (11,802) (7,596) (3,214)
Other income (expense):
Interest income (expense), net ......... 1,438 604 (185)
Other expense, net ..................... (224) (59) (2)
-------- -------- --------
Total other income (expense) ..... 1,214 545 (187)
-------- -------- --------
Net loss ............................... $(10,588) $ (7,051) $ (3,401)
======== ======== ========
Net loss per share .......................... $ (1.07)
========
Weighted average shares outstanding ......... 9,875
Pro forma net loss per share ................ $ (0.93) $ (0.48)
======== ========
Pro forma weighted average shares outstanding 7,574 7,020
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1996, 1995, and 1994
(in thousands)
Additional Cumulative
Common Stock Paid-in Translation Accumulated
Shares Amount Capital Adjustment Deficit Total
------ ------ ------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1993 .............. 925 $ -- $ 4 $ -- $ (2,079) $ (2,075)
Amortization of Preferred
Stock issuance costs ............ -- -- -- -- (20) (20)
Issuance of Common Stock ........... 460 -- 9 -- -- 9
Net loss ........................... -- -- -- -- (3,401) (3,401)
----- ------ -------- ------ -------- --------
Balance, September 30,1994 ............ 1,385 -- 13 -- (5,500) (5,487)
Amortization of Preferred
Stock issuance costs ............ -- -- -- -- (35) (35)
Issuance of Common Stock ........... 2,875 -- 28,509 -- -- 28,509
Conversion of Preferred
Stock to Common Stock ........... 5,590 1 17,416 -- -- 17,417
Translation adjustment ............. -- -- -- (11) -- (11)
Net loss ........................... -- -- -- -- (7,051) (7,051)
----- ------ -------- ------ -------- --------
Balance, September 30, 1995 ........... 9,850 1 45,938 (11) (12,586) 33,342
Issuance of Common Stock ........... 39 -- 245 -- -- 245
Exercise of stock options .......... 20 -- 37 -- -- 37
Amortization of
nonemployee stock
option compensation ............. -- -- 52 -- -- 52
Translation adjustment ............. -- -- -- (11) -- (11)
Net loss ........................... -- -- -- -- (10,588) (10,588)
----- ------ -------- ------ -------- --------
Balance, September 30, 1996 ........... 9,909 $ 1 $ 46,272 $ (22) $(23,174) $ 23,077
===== ====== ======== ====== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended September 30,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $(10,588) $(7,051) $ (3,401)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ...................... 330 186 57
Amortization of net discount on short- and long-term
investments ................................... (196) (75) --
Amortization of nonemployee stock
option compensation ........................... 52 -- --
Other adjustments .................................. 14 47 37
Decrease (increase) in assets:
Accounts receivable ................................ (2,081) (871) --
Interest receivable ................................ (158) (44) --
Inventories ........................................ 311 (738) (780)
Other current assets ............................... (131) (148) (30)
Other assets ....................................... (46) (188) (11)
Increase (decrease) in liabilities:
Accounts payable ................................... 162 80 373
Accrued liabilities ................................ 637 577 364
Notes payable ...................................... -- (380) (250)
Other current liabilities .......................... 107 -- --
-------- -------- --------
Net cash used in operating activities ......... (11,587) (8,605) (3,641)
-------- -------- --------
Cash flows from investing activities:
Purchase of short- and long-term investments ............ (20,868) (16,310) --
Proceeds from sale of short- and long-term
investments ........................................... 18,532 7,500 --
Purchase of furniture, fixtures and equipment ........... (411) (916) (129)
Other investing activities .............................. 4 (4) 3
-------- -------- --------
Net cash used in investing activities ......... (2,743) (9,730) (126)
-------- -------- --------
Cash flows from financing activities:
Proceeds from Preferred Stock issuances, net of
issuance expenses, and bridge financing ............... -- 11,379 4,224
Proceeds from exercise of stock options ................. 37 -- --
Proceeds from sale of Common Stock, net of
issuance expenses ..................................... 245 28,508 9
Principal payments under capital leases ................. (14) (13) (6)
-------- -------- --------
Net cash provided by financing activities ..... 268 39,874 4,227
-------- -------- --------
<PAGE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(continued)
For the years ended September 30,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Effect of exchange rate changes on cash and cash
equivalents ............................................... 1 (3) --
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ......... (14,061) 21,536 460
Cash and cash equivalents, beginning of year ................. 22,176 640 180
-------- -------- --------
Cash and cash equivalents, end of year ....................... $ 8,115 $ 22,176 $ 640
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Exogen, Inc ("Exogen" or the "Company"), incorporated in New York in
January 1992 and reincorporated in Delaware in February 1993, designs, develops,
manufactures, and markets medical devices for the non-invasive treatment of
musculoskeletal injury and disease. The Company commenced operations in March
1993.
In fiscal 1993 and 1994, the Company's activities consisted of
acquiring certain assets related to the Sonic Accelerated Fracture Healing
System ("SAFHS") ultrasound technology (see Note 2), completing the Pre-Market
Approval ("PMA") requirements of the United States Food and Drug Administration
("FDA") relating to the SAFHS device, and establishing an internal
organizational structure. On October 5, 1994, the Company received a PMA from
the FDA to commercially distribute the Company's SAFHS device. The majority of
primary payors for significantly all the Company's sales are third-party
insurers. Changes in economic or other conditions could affect the ability of
these third-party payors to meet their obligations.
In fiscal 1995, the Company commenced commercial distribution of the
SAFHS device in the United States, continued to expand the internal
organizational structure, increased research and development activities, and
established a wholly owned German subsidiary. In fiscal 1996, the Company
further strengthened its domestic sales and marketing infrastructure, continued
its research and development activities of the SAFHS device and other
technologies, and commenced commercial distribution of the SAFHS device in
certain European countries. The Company's product sales are generated entirely
from sales of the SAFHS device, and therefore, the Company is subject to the
risks associated with a single product.
2. Acquisition of Ultrasound Technology and Patent
On March 1, 1993, the Company purchased certain assets related to the
SAFHS ultrasound technology from Interpore Orthopaedics, Inc. ("Interpore")
under the terms of an asset purchase agreement (the "Asset Purchase Agreement").
Concurrently, the Company acquired a license to the initial ultrasound United
States patent for bone healing (the "Initial Patent") under an agreement dated
March 1, 1993 (the "License Agreement").
Under the terms of the Asset Purchase Agreement, the Company was
obligated to pay $600,000 for those rights, with $100,000 paid at closing and
the balance evidenced by a noninterest-bearing note (discounted at 9.0% per
annum). The Company prepaid $120,000 of the note. The balance of this note,
which was due within 10 days after receipt of the Company's PMA for its SAFHS
device, was paid in October 1994. Under the terms of the Asset Purchase
Agreement, the Company is also obligated to make royalty payments to Interpore
based upon net revenues from sales of devices covered by the Initial Patent.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Under the terms of the License Agreement, the Company was obligated to
pay $475,000 to the patent holder. The Company paid $225,000 on the date of the
agreement. The remaining $250,000 was payable, together with interest at the
rate of 9% per annum, in various amounts over a 19-month period, which ended
October 1, 1994. On September 30, 1994, the Company made the final payment under
the terms of this agreement. Accordingly, the Company was assigned the subject
patent and the assignment was duly filed with the United States Patent and
Trademark Office.
The Company expensed the SAFHS ultrasound technology and the initial
patent on the date acquired in fiscal 1993.
3. Significant Accounting Policies
Consolidated Financial Statements
The consolidated financial statements include the accounts of Exogen,
Inc. and its wholly owned subsidiary. These statements are prepared from records
maintained in the country in which the enterprise is located. All intercompany
transactions and balances are eliminated in consolidation.
The Company established a German subsidiary, Exogen (Europe) GmbH, in
May 1995, and the subsidiary received final incorporation status in August 1995.
The subsidiary began distributing the SAFHS device in Europe in fiscal 1996.
Translation of Foreign Currency
All assets and liabilities of the Company's foreign operations are
translated to U.S. dollars at year-end exchange rates, while the income
statement is translated at average exchange rates in effect during the year, and
any adjustments are recorded as a component of stockholders' equity.
Revenue Recognition and Cost of Sales
Upon shipment of the SAFHS device, the Company records revenue net of
allowances for returns, bad debt, and amounts that the Company believes a
respective third-party payor might deduct from the price of the SAFHS device.
When revenue is recognized, the related costs are classified as cost of
sales. The cost of devices shipped in connection with certain clinical
prescriptions for which reimbursement is currently not available is recorded
either as sales and marketing expense or as research and development expense.
Royalties on product revenues are included in cost of sales.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cash and Cash Equivalents and Investments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash, cash
equivalents, and investments consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------
1996 1995
------- -------
<S> <C> <C>
Cash and cash equivalents
Cash .......................................... $ 145 $ 111
Money markets ................................. 917 10,020
Commercial paper .............................. 7,053 12,045
------- -------
8,115 22,176
Short-term investments
Commercial paper .............................. -- 4,027
U. S. Agency notes ............................ 2,171 --
Certificates of deposit ....................... -- 1,700
Corporate bonds ............................... 2,955 --
Bank notes .................................... 1,502 977
Other ......................................... 196 --
------- -------
6,824 6,704
Long-term investments
Bank notes .................................... -- 990
U. S. Agency notes ............................ 2,017 --
Corporate bonds ............................... 2,578 1,191
------- -------
4,595 2,181
Total cash, cash equivalents, and investments....... $19,534 $31,061
======= =======
</TABLE>
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." This Statement requires the classification of
debt and equity securities based on whether the securities will be held to
maturity, are considered trading securities, or are available for sale.
Classification within these categories may require the securities to be reported
at their fair market value with unrealized gains and losses included either in
current earnings or reported as a separate component of stockholders' equity. As
of September 30, 1996 and 1995, all short-term and long-term investments have
been classified as held to maturity. These investments are stated at amortized
cost, which approximates market, and consist of certificates of deposit,
commercial paper, U.S. Agency notes, and corporate bonds. The maturities of
long-term investments range from October 1997 to September 1998.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accounts Receivable
Accounts receivable is recorded net of accumulated allowances for
returns, bad debt, and amounts that the Company believes a respective
third-party payor might deduct from the price of the SAFHS device (see also
"Revenue Recognition and Cost of Sales" discussed above). Management is of the
opinion that there is no significant concentration of credit risk in accounts
receivable.
Inventories
Inventories are stated at the lower of cost or market on a first-in,
first-out basis.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the related assets' estimated
useful lives, which range from two to five years. Leasehold improvements are
recorded at cost, and are amortized using the straight-line method over the
useful life of the asset or the lease term, whichever is shorter.
Patent Costs
Costs incurred relating to developing patents are expensed as incurred.
Income Taxes
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires
accounting for deferred income taxes under the asset and liability method.
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable in future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities.
Net Loss Per Common Share
For the year ended September 30, 1996, net loss per share is determined
using the weighted average number of shares of Common Stock outstanding during
the period presented. The weighted average shares outstanding is based upon
Accounting Principles Board Opinion No. 15 ("APB 15"), "Earnings per Share."
Options have been excluded because they are antidilutive.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended September 30, 1995, pro forma net loss per share is
determined using the weighted average number of shares of Common Stock
outstanding during the period presented. The weighted average shares outstanding
is based upon (i) APB 15 for the periods after March 31, 1995 and (ii)
Securities and Exchange Commission Staff Accounting Bulletin No. 83 ("SAB 83")
for the period October 1994 through March 1995, which includes Preferred Stock
as outstanding for the entire year and options issued during the 12 months
preceding the Initial Public Offering at prices below the Initial Public
Offering price as outstanding through March 31, 1995.
For the year ended September 30, 1994, pro forma net loss per share is
determined using the weighted average number of shares of Common Stock
outstanding during the period presented. Pursuant to SAB 83, the Series B
Preferred Stock and options issued during the 12 months preceding the Initial
Public Offering (see Note 4) at prices below the Initial Public Offering price
have been included in the Company's loss per share computation for the period
presented as if the shares were converted into Common Stock at the beginning of
that period, even though they were antidilutive. The Series A Preferred Stock is
included for the period presented as if the shares were converted into Common
Stock at the beginning of that period. Options issued prior to the 12 months
preceding the Initial Public Offering are excluded as they are antidilutive.
Historical loss per share data for fiscal 1995 and 1994 have not been
presented as such information is not meaningful.
Stock Options
Accounting for stock options issued to employees and nonemployee
directors is based upon the "intrinsic value" method set forth in Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Accounting for stock options issued to nonemployees prior to
December 16, 1995 is also based upon APB 25. Accounting for stock options issued
to nonemployees (excluding nonemployee directors) after December 15, 1995 is
based upon the "fair value" method set forth in Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." See "Recent Pronouncements" below for a further discussion of
SFAS 123.
Management's Use of Significant Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Specifically, the accounts receivable and
revenue of the Company have been reduced by an estimated reserve for returns,
disallowed amounts, and bad debts. Actual results could differ from those
estimates. Also, the Company's inventory consists primarily of high-technology
finished goods subject to management's estimates as to the need of reserves for
obsolescence.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recent Pronouncements
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," which is effective for the Company's 1997 financial statements. SFAS 121
requires that long-lived assets and certain identifiable intangible assets held
and used by a company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets might not be
recoverable. The Company has determined that, as of September 30, 1996, no
assets covered by SFAS 121 have been impaired.
In October 1995, the Financial Accounting Standards Board issued SFAS
123, which is effective for the Company's 1997 financial statements. SFAS 123
allows companies to account for stock-based compensation to employees under
either (i) the new provisions of SFAS 123 or (ii) the provisions of APB 25 with
pro forma disclosure in the footnotes to the financial statements as if the
measurement provisions of SFAS 123 had been adopted. At this time, the Company
intends to continue accounting for its stock-based compensation to employees in
accordance with the provisions of APB 25.
In accounting for options issued to nonemployees, the implementation of
SFAS 123 did not materially impact the financial position or results of
operations of the Company, and had no effect on its cash flows.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
4. Initial Public Offering
On July 25, 1995, the Company completed its Initial Public Offering
("IPO") of 2,500,000 shares of Common Stock at a purchase price of $11.00 per
share, for aggregate net proceeds of approximately $24.7 million. On August 15,
1995, the underwriters of the IPO purchased an additional 375,000 shares of
Common Stock, pursuant to the over-allotment option, for aggregate net proceeds
of approximately $3.8 million.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Geographic Segment Information
The Company began operations outside the United States by establishing
a German subsidiary, Exogen (Europe) GmbH, in May 1995. For 1996 and 1995, net
revenues, operating loss, and identifiable assets pertaining to the geographic
areas in which the Company operates are as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Net revenues:
United States ......................... $ 7,284 $ 2,035
Europe ................................ 787 --
Intercompany eliminations ............. (1,194) (183)
Operating loss:
United States ......................... 10,813 7,366
Europe ................................ 919 230
Intercompany eliminations ............. 70 --
Identifiable assets:
United States ......................... 24,449 34,813
Europe ................................ 1,062 73
</TABLE>
Transfers between geographic areas represent intercompany export sales
of U.S.A.-produced goods, and are accounted for based on established sales
prices between the related companies. In computing operating loss for the
foreign subsidiary, no allocations of general corporate expenses or interest
have been made. Identifiable assets of the foreign subsidiary directly relate to
its operations. United States assets consist of all other assets of the Company.
6. Development Agreement Revenues
In fiscal 1996, the Company recorded revenues of $1.1 million related
to development agreements with Teijin Limited, a Japanese corporation. No such
revenues were reported for fiscal 1995. These development agreements cover two
of the Company's technologies: (a) the SAFHS device and (b) the
mechanical-stress device under development to treat the loss of bone mass
associated with osteoporosis. The SAFHS agreement provides for nonrefundable
milestone payments to the Company for Teijin's development of the product for
launch in Japan. The Company will manufacture and supply SAFHS devices to Teijin
for clinical trials and subsequent sales in Japan. Teijin will be responsible
for complying with the regulatory requirements and marketing and distributing
the SAFHS device in Japan. The mechanical-stress agreement provides for
nonrefundable milestone payments to the Company that will support, in part, the
Company's clinical trials in the United States in exchange for a first option in
favor of Teijin to negotiate a development and distribution agreement for this
device for the Japanese market.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
------ ------
<S> <C> <C>
Finished goods ........................... $ 768 $1,258
Parts and components ..................... 471 295
------ ------
$1,239 $1,553
====== ======
</TABLE>
8. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of the following (in
thousands):
<TABLE>
<CAPTION>
September 30,
----------------------
1996 1995
------- -------
<S> <C> <C>
Furniture, fixtures and equipment ................ $ 1,421 $ 1,024
Leasehold improvements ........................... 71 58
------- -------
1,492 1,082
Accumulated depreciation and amortization ........ (513) (194)
------- -------
$ 979 $ 888
======= =======
</TABLE>
Depreciation and amortization expense was $319,000, $176,000, and
$50,000, for the years ended September 30, 1996, 1995, and 1994, respectively.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------
1996 1995
------ ------
<S> <C> <C>
Compensation and benefits .................. $ 490 $ 207
Taxes other than income .................... 241 59
Warranty expenses .......................... 157 70
Research and development ................... 136 36
IPO costs .................................. -- 160
Other ...................................... 601 458
------ ------
$1,625 $ 990
====== ======
</TABLE>
10. Redeemable Preferred Stock
In March 1993, the Company entered into a Stock Purchase Agreement for
the sale of an aggregate of 7,500,000 of its authorized shares of Series A
Preferred Stock issuable in two tranches at a purchase price of $1.00 per share.
The first tranche of 1,846,154 shares of Series A Preferred Stock was issued in
March 1993, and was convertible into an aggregate of 923,073 shares of Common
Stock at an as-converted price of $2.00 per share. The second tranche of
5,653,846 shares of Series A Preferred Stock, issuance of which was contingent
upon receipt of the Company's PMA for its SAFHS device (which occurred in
October 1994), was issued in October 1994, and was convertible into an aggregate
of 2,826,918 shares of Common Stock at an as-converted price of $2.00 per share.
Of the second tranche, 753,846 Preferred shares were issued in August 1994 at
the election of a certain stockholder.
Shares of Redeemable Preferred Stock outstanding at September 30, 1994
were 2,600,000.
In November 1994, the Company entered into a Stock Purchase Agreement
for the sale of an aggregate of 3,680,303 of its authorized shares of Series B
Preferred Stock at a purchase price of $2.75, which was converted into an
aggregate of 1,840,145 shares of Common Stock at an as-converted price of $5.50
per share.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On July 25, 1995, concurrent with the completion of the Company's IPO,
11,180,303 shares of Redeemable Preferred Stock were converted into 5,590,136
shares of Common Stock.
11. Commitments and Contingencies
The Company leases a facility in Piscataway, New Jersey; the lease
commenced May 1995 and has a remaining term of five years. The length of the
lease is subject to adjustment, under certain conditions, as defined in the
lease agreement.
The approximate minimum annual rentals for the above-mentioned lease
are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Lease
---------------
<S> <C>
1997............................................ $ 499
1998............................................ 506
1999............................................ 513
2000............................................ 520
2001............................................ 527
--------
$ 2,565
========
</TABLE>
Rent expense was $353,000, $233,000, and $83,000 for the years
ended September 30, 1996, 1995, and 1994, respectively.
The Company is also committed to pay royalties on sales of
certain of its products. Royalty expense in fiscal 1996 and 1995 was $346,000
and $112,000, respectively.
The Company's SAFHS device is currently produced by a contract
manufacturer. The agreement between the Company and this manufacturer is
documented by specific purchase orders, effective to 1998, covering anticipated
requirements. At September 30, 1996, these purchase orders amounted to
commitments of approximately $3 million. A change of the contract manufacturer
could cause a delay in manufacturing and a possible loss of sales, which could
affect operating results adversely.
In March 1996, the Company settled a legal action brought against
the Company on March 15, 1995 by a former sales representative of the Company.
The settlement was recorded in Other expense, net. (See Part I, Item 3, "Legal
Proceedings," for a further discussion.) Also in fiscal 1995, the Company became
a party to a certain other lawsuit that continued through fiscal 1996 and has
not been settled. Management is of the opinion that this other lawsuit will not
have a material adverse effect on the Company's financial position, its results
of operations, or its cash flows.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Stock Option Plans and Stockholders' Equity
Stock Option and Stock Option/Stock Issuance Plans
The Company adopted the 1993 Stock Option Plan (the "1993 Plan")
for the purpose of attracting and retaining the services of selected employees
(including officers and directors) and consultants. The Plan provides for
options designated as either nonqualified or incentive stock options with a term
of no more than 10 years. Effective with the IPO, the 1993 Plan was superseded
by the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan"), and options
outstanding under the 1993 Plan were incorporated into the 1995 Plan.
The Company's 1995 Stock Option/Stock Issuance Plan was adopted
by the Board of Directors and stockholders as of May 25, 1995 and is the
successor equity incentive program to the Company's 1993 Stock Option Plan (the
"Predecessor Plan"). The 1995 Plan became effective with the IPO. A total of
750,000 shares of Common Stock has been authorized for issuance under the 1995
Plan. This share reserve is comprised of (i) the shares that remained available
for issuance under the Predecessor Plan, including the shares subject to
outstanding options thereunder, plus (ii) an increase of 500,000 shares. In no
event may any one participant in the 1995 Plan receive option grants, separately
exercisable stock appreciation rights, or direct stock issuances for more than
300,000 shares in any calendar year.
The 1995 Plan is divided into four separate components: (i) the
Discretionary Option Grant Program under which employees, nonemployee directors
(other than the members of the Compensation Committee), and consultants may, at
the discretion of the plan administrator, be granted options to purchase shares
of Common Stock at an exercise price of not less than the fair market value of
the Common Stock on the grant date, and under which stock appreciation rights
may be issued that will allow the holders to surrender their outstanding options
for an appreciation distribution, in cash or Common Stock, from the Company,
(ii) the Stock Issuance Program under which such persons may, in the plan
administrator's discretion, be issued shares of Common Stock directly, through
the purchase of such shares at a price not less than the fair market value of
the Common Stock at the time of issuance or as a bonus tied to the performance
of services, (iii) the Salary Investment Option Grant Program under which
selected officers and other key executives may elect to have a portion of their
base salaries applied each year to the acquisition of options to purchase shares
of Common Stock at an aggregate discount from the then fair market value equal
to their salaries' investment, and (iv) the Automatic Option Grant Program under
which option grants will automatically be made at periodic intervals to eligible
nonemployee directors to purchase shares of Common Stock at an exercise price
equal to 100% of the fair market value of the Common Stock on the grant date.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Under the Automatic Option Grant Program, each nonemployee director
first elected or appointed to the Board of Directors after the effective date of
the 1995 Plan will automatically be granted an option for 7,500 shares of Common
Stock on the date of his or her election or appointment to the Board of
Directors, provided such individual has not been in the prior employ of the
Company. In addition, at each annual stockholders' meeting held after the IPO,
each individual with at least six months of service on the Board of Directors
who will continue to serve as a nonemployee director following the meeting will
automatically be granted an option for 1,250 shares of Common Stock, whether or
not such individual has been in the prior employ of the Company or has joined
the Board of Directors prior to the IPO.
The 1995 Plan will terminate on April 30, 2005, unless sooner
terminated by the Board of Directors.
Stock option activity pursuant to the 1993 and 1995 Plans is
summarized as follows:
<TABLE>
<CAPTION>
Number of Option
Options Price Range
------- -----------
<S> <C> <C>
Balance at September 30, 1993
Granted ............................ 55,000 $ 0.02
-------
Balance at September 30, 1994 ........... 55,000 $ 0.02
Granted ............................ 296,450 $ 0.60-$13.00
Exercised .......................... 125 $ 0.02
Canceled ........................... 2,025 $ 0.02- $5.50
-------
Balance at September 30, 1995 ........... 349,300 $ 0.02-$13.00
Granted ............................ 173,250 $ 8.00-$25.50
Exercised .......................... 19,989 $ 0.02-$10.00
Canceled ........................... 12,524 $ 0.02-$18.50
-------
Balance at September 30, 1996 ........... 490,037 $ 0.02-$25.50
(80,167 shares exercisable) =======
</TABLE>
Options generally become exercisable in ratable installments over
four- or five-year periods.
In the opinion of management, options were issued at the fair market
value of the Company's Common Stock on the date of grant. Accordingly, no
compensation expense has been recorded for those options accounted for under APB
25. During fiscal 1996, 55,875 options were issued to nonemployees (excluding
nonemployee directors), and were accounted for under SFAS 123. Accordingly,
$52,000 in compensation expense associated with these options was recorded in
fiscal 1996.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
There were no direct issuances of Common Stock or stock appreciation
rights under the 1995 Plan as of September 30, 1996.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and stockholders as of May 25, 1995. The
Purchase Plan is designed to allow eligible employees of the Company and
participating subsidiaries to purchase shares of Common Stock, at semi-annual
intervals, through periodic payroll deductions. A total of 150,000 shares of
Common Stock has been reserved for issuance under the Purchase Plan.
The Purchase Plan will be implemented in a series of successive
offering periods; each offering period (other than the initial offering period)
will have a maximum duration of 24 months. The initial offering period started
upon the IPO and will end on the last business day in July 1997.
Payroll deductions may not exceed 10% of the participant's total cash
earnings in each semi-annual period. The purchase price per share will be
eighty-five percent (85%) of the lower of (i) the fair market value of the
Common Stock on the participant's entry date into the offering period or (ii)
the fair market value on the semi-annual purchase date. However, no individual
may purchase Common Stock under the Purchase Plan at a rate in excess of $25,000
worth of Common Stock (valued as of the participant's entry date into the
offering period) for each calendar year (or portion thereof) his or her purchase
rights remain outstanding.
The Purchase Plan will terminate upon the earliest of (i) the last
business day in July 2005, (ii) the date on which all shares available for
issuance under the Purchase Plan have been sold pursuant to purchase rights
exercised under the Purchase Plan, or (iii) the date on which all purchase
rights are exercised in connection with a Corporate Transaction.
Stock issued through September 30, 1996 pursuant to the Purchase Plan
totaled 38,944 shares at prices ranging from $5.21 to $9.35.
Restricted Stock Agreements
All holders of Common Stock issued prior to the IPO have entered into
restricted stock purchase agreements that grant certain repurchase rights to the
Company upon the sale, assignment, transfer, encumbrance, or other disposition
of the Company's shares or upon termination of service with the Company. The
repurchase rights terminate over time with respect to any and all shares in
which the purchaser's interest has vested. Of the Common Stock outstanding,
1,060,836 and 785,840 shares are vested as of September 30, 1996 and 1995,
respectively. The unvested 324,162 shares at September 30, 1996 vest over the
next 17 months.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Income Taxes
As a result of the losses generated, the Company has no provision for
income taxes. The Company has recorded a full valuation allowance against its
deferred tax assets as realizability of such asset is predicated upon the
Company's achieving profitability. Upon adopting Statement of Financial
Accounting Standards No. 109 on October 1, 1993, the valuation allowance was
$825,000. The change in valuation allowance during 1996, 1995, and 1994 was
$3,433,000, $2,813,000, and $1,358,000, respectively.
The types of temporary differences between the tax bases of assets
and liabilities and their financial reporting amounts that give rise to the
deferred tax asset and their approximate tax effects are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, September 30,
------------- -------------
1996 1995
------- -------
<S> <C> <C>
Deferred Tax Asset:
Start-up costs ............................................... $ 732 $ 1,000
Research and development costs ............................... 548 518
Research and development and related patent acquired ......... 184 247
Vacation accrual ............................................. 18 20
Allowances for returns, disallowances, and bad debts ......... 555 253
Net operating loss ........................................... 6,311 2,960
Other ........................................................ 126 (2)
------- -------
Deferred tax asset ........................................... 8,474 4,996
Less: Valuation Allowance ........................................ (8,474) (4,996)
------- -------
$ 0 $ 0
======= =======
</TABLE>
At September 30, 1996, the Company has net operating loss carryforwards
for United States federal income tax purposes of approximately $14.3 million.
These net operating loss carryforwards expire on various dates through 2010. The
Company's ability to utilize its net operating loss carryforwards is subject to
annual limitations in future periods pursuant to the "change in ownership rules"
under Section 382 of the Internal Revenue Code, as amended. At September 30,
1996, the Company also has net operating loss carryforwards for German income
tax purposes of $1.2 million, which are not subject to any limitations.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Supplemental Disclosure of Cash Flow Information
Cash paid for interest was $9,000, $169,000, and $49,000, in 1996,
1995, and 1994, respectively.
The Company recorded $0, $35,000, and $20,000 of amortization related
to Preferred Stock issuance costs in 1996, 1995, and 1994, respectively.
15. Subsequent Event
The Stockholder Rights Plan
The Company's Second Amended and Restated Certificate of Incorporation,
dated July 25, 1995, grants the Board of Directors the authority to issue up to
3,000,000 shares of preferred stock of the Company, $0.0001 par value per share
(the "Preferred Stock"), in one or more series and to fix the rights,
preferences, privileges, and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences, and the number of shares
constituting any series or the designation of such series, without further vote
or action by the stockholders.
Effective December 6, 1996, pursuant to a Preferred Shares Rights
Agreement (the "Rights Agreement") between the Company and Registrar and
Transfer Company, as Rights Agent (the "Rights Agent"), the Company's Board of
Directors declared a dividend of one right (a "Right") to purchase one
one-hundredth share of the Company's Series A Participating Preferred Stock
("Series A Preferred") for each outstanding share of Common Stock of the
Company. The dividend is payable on December 19, 1996 (the "Record Date") to
stockholders of record as of the close of business on that date. Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Preferred at an exercise price of $30.00 (the "Purchase
Price"), subject to adjustment in the event the Company declares a dividend on
the Common Stock payable in Common Stock, subdivides the number of outstanding
shares of Common Stock into a larger number of such shares, or combines the
number of outstanding shares of Common Stock into a smaller number of such
shares, among other circumstances. In addition, under certain circumstances
described more fully in the Rights Agreement, the Rights may become exercisable
for a number of shares of Common Stock having a value equal to two times the
Purchase Price.
The Rights will expire December 19, 2006, which should give the Company
adequate time to determine whether any further protection is required. The
Rights may be redeemed by the Company at the direction of the Board of Directors
at one cent per Right prior to 10 business days after the accumulation, through
open-market purchases, a tender offer, or otherwise, of 15% or more of the
combined number of the Company's shares of Common Stock by a single acquirer or
group, and thereafter in certain circumstances. Thus, the Rights should not
interfere with any merger or business combination approved by the Board of
Directors prior to that time.
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
--------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1995
Allowance for returns, bad
debt, and price deductions
by third-party payors .................... $ -- $ 352 $ -- $ 154 (a) $ 198
Year ended September 30, 1996
Allowance for returns, bad
debt, and price deductions
by third-party payors .................... $ 198 $1,667 $ -- $ 1,519 (a) $ 346
(a) Returns and write-offs.
</TABLE>
<PAGE>
EXOGEN, INC.
EXHIBIT INDEX
Number Description
------ -----------
3.1 Second Amended and Restated Certificate of
Incorporation of the Company. Incorporated by reference
to Exhibit 3.1 to the Company's Form 10-Q for the third
quarter ending June 30, 1995.
3.2 Amended and Restated Bylaws of the Company.
Incorporated by reference to Exhibit 3.3 to the
Company's Form S-1 Registration Statement (Registration
No. 33-92740).
4.1 See Exhibits 3.1 and 3.2 for provisions of the
Certificate of Incorporation and Bylaws of the Company
defining rights of holders of Common Stock of the
Company.
10.1 Amended and Restated Investors' Rights Agreement dated
as of November 14, 1994 among the Company, the
investors listed on Schedule A thereto, and the
individuals listed on Schedule B thereto. Incorporated
by reference to Exhibit 10.1 to the Company's Form S-1
Registration Statement (Registration No. 33-92740).
10.2 Asset Purchase Agreement dated as of March 1, 1993
among Applied Epigenetics, Inc. ("AEI"), Interpore
International, Inc. and Interpore Orthopaedics, Inc.
Incorporated by reference to Exhibit 10.2 to the
Company's Form S-1 Registration Statement (Registration
No. 33-92740).
10.3 Employment Agreement dated January 15, 1994 between the
Company and Patrick A. McBrayer. Incorporated by
reference to Exhibit 10.3 to the Company's Form S-1
Registration Statement (Registration No. 33-92740).
10.4 Employment Agreement dated February 3, 1994 between the
Company and John Bohan. Incorporated by reference to
Exhibit 10.4 to the Company's Form S-1 Registration
Statement (Registration No. 33-92740).
10.5 Form of Consulting Agreements between the Company and
each of Drs. McLeod and Rubin, as amended. Incorporated
by reference to Exhibit 10.5 to the Company's Form S-1
Registration Statement (Registration No. 33-92740).
10.6 Form of Stock Restriction Agreement between the Company
and each of Drs. McLeod and Rubin and Messrs. Reisner,
Ryaby, Talish, McBrayer, and Bohan. Incorporated by
reference to Exhibit 10.6 to the Company's Form S-1
Registration Statement (Registration No. 33-92740).
10.7 Form of Stock Purchase Agreement between the Company
and each of Messrs. Reisner, Ryaby, and Talish.
Incorporated by reference to Exhibit 10.7 to the
Company's Form S-1 Registration Statement (Registration
No. 33-92740).
10.8+ Manufacturing Agreement dated January 20, 1994 between
the Company and Hi-Tronics Designs, Inc. Incorporated
by reference to Exhibit 10.8 to the Company's Form S-1
Registration Statement (Registration No. 33-92740).
<PAGE>
10.9 Form of 1993 Stock Option Plan Option Agreement.
Incorporated by reference to Exhibit 10.9 to the
Company's Form S-1 Registration Statement (Registration
No. 33-92740).
10.10 1995 Stock Option / Stock Issuance Plan. Incorporated
by reference to Exhibit 10.10 to the Company's Form S-1
Registration Statement (Registration No. 33-92740).
10.11 Employee Stock Purchase Plan. Incorporated by reference
to Exhibit 10.12 to the Company's Form S-1 Registration
Statement (Registration No. 33-92740).
10.12 Lease Agreement dated December 13, 1994 by and between
the Company and Siemens Medical Systems, Inc.
Incorporated by reference to Exhibit 10.13 to the
Company's Form S-1 Registration Statement (Registration
No. 33-92740).
10.13 License Agreement dated March 26, 1992 between AEI and
Drs. McLeod and Rubin. Incorporated by reference to
Exhibit 10.14 to the Company's Form S-1 Registration
Statement (Registration No. 33-92740).
10.14 SAFHS Agreement dated November 30, 1995 between the
Company and Teijin Limited. Incorporated by reference
to Exhibit 10.14 to the Company's Form 10-K for the
year ending September 30, 1995.
10.15+ Mechanical-Stress Agreement dated November 30, 1995
between the Company and Teijin Limited. Incorporated by
reference to Exhibit 10.15 to the Company's Form 10-K
for the year ending September 30, 1995.
11.1* Statement regarding Calculation of Shares Used in
Computing Net Loss Per Share.
21.1 List of Subsidiary. Incorporated by reference to
Exhibit 21.1 to the Company's Form 10-K for the year
ending September 30, 1995.
23.1* Consent of Arthur Andersen LLP. Incorporated by
reference to Exhibit 23.1 to the Company's Form 10-K
for the year ending September 30, 1995.
27* Financial Data Schedule.
99.1* Preferred Shares Rights Agreement, dated December 6,
1996, between the Company and Registrar and Transfer
Company, including the Certificate of Determination,
the Form of Rights Certificate, and the summary of
Rights attached thereto as Exhibits A, B, and C,
respectively.
-----------------------
* Filed herewith.
+ Confidential treatment granted.
<TABLE>
<CAPTION>
Exhibit 11.1
EXOGEN, INC.
EARNINGS PER SHARE
CALCULATION OF SHARES USED IN COMPUTING
NET LOSS PER SHARE
(in thousands, except per share data)
For the years ended September 30,
-------------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Net loss ........................................................ $(10,588) $ (7,051) $ (3,401)
======== ======== =========
Net loss per share
- ------------------
Weighted average shares outstanding:
Common Stock .................................................... 9,875
--------
Total ...................................................... 9,875
========
Net loss per share .............................................. $ (1.07)
=========
Pro forma net loss per share
- ----------------------------
Weighted average shares outstanding:
Common Stock .................................................... 7,489 1,261
Redeemable Preferred Stock:
Series A ................................................... -- 3,750
Series B ................................................... -- 1,840
Stock options ................................................... 85 169
-------- ---------
Total ...................................................... 7,574 7,020
======== =========
Pro forma net loss per share .................................... $ (0.93) $ (0.48)
======== =========
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT
PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into the Company's
previously filed Registration Statement File No. 33-94750.
/s/ARTHUR ANDERSEN LLP
----------------------
Arthur Andersen LLP
New York, New York
December 20, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
In thousands, except share data at 9/30/96 or 12 months ended 9/30/96.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,115
<SECURITIES> 6,824
<RECEIVABLES> 3,289
<ALLOWANCES> 346
<INVENTORY> 1,239
<CURRENT-ASSETS> 19,667
<PP&E> 1,492
<DEPRECIATION> 513
<TOTAL-ASSETS> 25,511
<CURRENT-LIABILITIES> 2,432
<BONDS> 2
0
0
<COMMON> 1
<OTHER-SE> 23,076
<TOTAL-LIABILITY-AND-EQUITY> 25,511
<SALES> 5,777
<TOTAL-REVENUES> 6,877
<CGS> 3,661
<TOTAL-COSTS> 3,661
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (10,588)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,588)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,588)
<EPS-PRIMARY> (1.07)
<EPS-DILUTED> 0
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 8-A
-------------------
FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
EXOGEN, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-223208468
(State of incorporation (IRS Employer Identification No.)
or organization)
10 Constitution Avenue
P.O. Box 6860
Piscataway, New Jersey 08855
(Address of principal executive offices) (Zip Code)
-------------------
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class to be so registered
None
Name of each exchange on which each class is
to be registered
None
Securities to be registered pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights
(Title of Class)
<PAGE>
Item 1. Description of Securities to be Registered.
Effective as of December 6, 1996, pursuant to a Preferred Shares Rights
Agreement (the "Rights Agreement") between Exogen, Inc. (the "Company") and
Registrar and Transfer Company, as Rights Agent (the "Rights Agent"), the
Company's Board of Directors declared a dividend of one right (a "Right") to
purchase one one-hundredth share of the Company's Series A Participating
Preferred Stock ("Series A Preferred") for each outstanding share of Common
Stock, par value $0.0001 per share ("Common Shares"), of the Company. The
dividend is payable on December 19, 1996 (the "Record Date") to stockholders of
record as of the close of business on that date. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Preferred at an exercise price of $30.00 (the "Purchase Price"),
subject to adjustment in the event the Company declares a dividend on the Common
Stock payable in Common Stock, subdivides the number of outstanding shares of
Common Stock into a larger number of such shares or combines the number of
outstanding shares of Common Stock into a smaller number of such shares, among
other circumstances. In addition, under certain circumstances described more
fully herein, the Rights may become exercisable for a number of shares of Common
Stock having a value equal to two times the Purchase Price and/or Common Stock
of certain acquiring companies having a value equal to two times the Purchase
Price.
The following summary of the principal terms of the Rights Agreement is
a general description only and is subject to the detailed terms and conditions
of the Rights Agreement. A copy of the Rights Agreement is attached as Exhibit
99.1 to this Registration Statement and is incorporated herein by reference;
capitalized terms used but not otherwise defined herein shall have the meanings
ascribed to them in the Rights Agreement.
Certain Anti-takeover Effects
The Rights approved by the Board are designed to protect and maximize
the value of the outstanding equity interests in the Company in the event of an
unsolicited attempt by an acquiror to take over the Company, in a manner or on
terms not approved by the Board of Directors. Takeover attempts frequently
include coercive tactics to deprive the Company's Board of Directors and its
stockholders of any real opportunity to determine the destiny of the Company.
The Rights have been declared by the Board in order to deter such
tactics, including a gradual accumulation in the open market of a 15% or greater
position to be followed by a merger or a partial or two-tier tender offer that
does not treat all stockholders equally. These tactics can operate to unfairly
pressure stockholders, force them out of their investment and deprive them of
the full value of their shares.
The Rights are not intended to prevent a takeover of the Company and
will not do so. The Rights may be redeemed by the Company at $.01 per Right
within ten days (or on such later date as may be determined by a majority of the
Board of Directors, excluding directors affiliated with an Acquiring Person)
after the accumulation of 15% or more of the Company's shares by a single
acquiror or group. Accordingly, the Rights should not interfere with any merger
or business combination approved by the Board of Directors.
<PAGE>
However, the Rights may have the effect of rendering more difficult or
discouraging an acquisition of the Company deemed undesirable by the Board of
Directors. The Rights may cause substantial dilution to a person or group that
attempts to acquire the Company on terms or in a manner not approved by the
Company's Board of Directors, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the Rights. As a result, while the Rights
may provide the Board with leverage to obtain a higher price from a potential
acquiror, they may also prevent or deter offers not approved by the Board, and
therefore deprive stockholders, without providing them with the opportunity to
vote thereon, of the benefits of offers which may be at a higher price than the
current market price of the Company's Common Stock. In addition, assuming an
active trading market in the Rights themselves does not develop, stockholders
with lesser financial means might not be able to take full economic advantage of
the Rights. Further, the implementation of a rights plan may heighten the
susceptibility of the Company to greenmail by stockholders who threaten to
acquire a sufficient equity position to pass the Rights' triggering threshold,
although the Board can respond to any such action by redeeming the Rights at
$.01 per Right.
Issuance of the Rights does not in any way weaken the financial
strength of the Company or interfere with its business plans. The issuance of
the Rights themselves has no dilutive effect, will not affect reported earnings
per share, should not be taxable to the Company or to its stockholders, and will
not change the way in which the Company's shares are presently traded. The
Company's Board of Directors believes that the Rights represent a sound and
reasonable means of addressing the complex issues of corporate policy created by
the current takeover environment.
Rights Evidenced by Common Share Certificates
The Rights will not be exercisable until the Distribution Date (defined
below). Prior to the Distribution Date, certificates for the Rights ("Rights
Certificates") will not be sent to stockholders and the Rights will attach to
and trade only together with the Common Shares. Accordingly, Common Share
certificates outstanding on the Record Date will evidence the Rights related
thereto, and Common Share certificates issued after the Record Date but prior to
the Distribution Date will contain a notation incorporating the Rights Agreement
by reference. Until the Distribution Date (or earlier redemption or expiration
of the Rights), the surrender or transfer of any certificates for Common Shares,
even without notation or a copy of the Summary of Rights being attached thereto
(but as to certificates representing Common Shares issued after the Record Date,
only if they bear the legend required by the Rights Agreement), will also
constitute the transfer of the Rights associated with the Common Shares
represented by such certificate.
<PAGE>
Distribution Date
The Rights will separate from the Common Shares, Rights Certificates
will be issued and the Rights will become exercisable upon the earlier of: (i)
10 days (or such later date as may be determined by a majority of the Board of
Directors, excluding directors affiliated with the Acquiring Person, as defined
below (the "Continuing Directors")) following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding Common Shares, or (ii) 10 days (or such later date as may be
determined by a majority of the Continuing Directors) following the commencement
of, or announcement of an intention to make, a tender offer or exchange offer
the consummation of which would result in the beneficial ownership by a person
or group of 15% or more of the outstanding Common Shares. The earlier of such
dates is referred to as the "Distribution Date."
Issuance of Rights Certificates; Expiration of Rights
As soon as practicable following the Distribution Date, separate Rights
Certificates will be mailed to holders of record of the Common Shares as of the
close of business on the Distribution Date and such separate Rights Certificates
alone will evidence the Rights from and after the Distribution Date. All Common
Shares issued prior to the Distribution Date will be issued with Rights. Common
Shares issued after the Distribution Date may be issued with Rights if such
shares are issued (i) upon the conversion of outstanding convertible debentures
or any other convertible securities issued after adoption of the Rights
Agreement or (ii) pursuant to the exercise of stock options or under employee
benefit plans or arrangements unless such issuance would result in (or create a
risk that) such options, plans or arrangements would not qualify for otherwise
available special tax treatment. Except as otherwise determined by the Board of
Directors, no other Common Shares issued after the Distribution Date will be
issued with Rights. The Rights will expire on the earliest of (i) December 19,
2006 (the "Final Expiration Date"), (ii) redemption or exchange of the Rights as
described below, or (iii) consummation of an acquisition of the Company
satisfying certain conditions by a person who acquired shares pursuant to a
Permitted Offer as described below.
Initial Exercise of the Rights
Following the Distribution Date, and until one of the further events
described below, holders of the Rights will be entitled to receive, upon
exercise and the payment of $30.00 per Right, one one-hundredth share of the
Series A Preferred, subject to adjustment in the event the Company declares a
dividend on the Common Shares payable in Common Shares, subdivides the number of
outstanding Common Shares into a larger number of such shares or combines the
number of outstanding Common Shares into a smaller number of such shares, among
other circumstances. In addition, under certain circumstances described more
fully herein, the Rights may become exercisable for Common Shares having a value
equal to two times the Purchase Price and/or Common Stock of certain acquiring
companies having a value equal to two times the Purchase Price.
<PAGE>
Right to Buy Company Common Shares
Unless the Rights are earlier redeemed, in the event that an Acquiring
Person becomes the beneficial owner of 15% or more of the Company's Common
Shares then outstanding (other than pursuant to a Permitted Offer), then proper
provision will be made so that each holder of a Right which has not theretofore
been exercised (other than Rights beneficially owned by the Acquiring Person,
which will thereafter be void) will thereafter have the right to receive, upon
exercise and payment of the Purchase Price, Common Shares having a value equal
to two times the Purchase Price. For example, if the market price of Common
Shares on the Shares Acquisition Date (as defined below) was $15.00, a person
holding one Right could purchase four (4) Common Shares upon exercise of such
Right ($30.00/$7.50), whereas he/she could only purchase two (2) Common Shares
($30.00/$15.00) in the absence of such Rights. Rights are not exercisable
following the occurrence of an event as described above until such time as the
Rights are no longer redeemable by the Company as set forth below.
In the event that the Company does not have sufficient Common Shares
available for all Rights to be exercised, or the Board decides that it is
necessary and not contrary to the interests of Rights holders to do so, the
Company may instead substitute cash, assets or other securities for the Common
Shares for which the Rights would have been exercisable under this provision.
Right to Buy Acquiring Company Stock
Similarly, unless the Rights are earlier redeemed, in the event that,
after the Shares Acquisition Date, (i) the Company is acquired in a merger or
other business combination transaction, or (ii) 50% or more of the Company's
consolidated assets or earning power are sold (other than in transactions in the
ordinary course of business) (either of which event is referred to herein as an
"Acquisition"), proper provision must be made so that each holder of a Right
which has not theretofore been exercised (other than Rights beneficially owned
by the Acquiring Person, which will thereafter be void) will thereafter have the
right to receive, upon exercise, shares of Common Stock of the acquiring company
having a value equal to two times the Purchase Price (unless the transaction
satisfies certain conditions and is consummated with a person who acquired
shares pursuant to a Permitted Offer, in which case the Rights will expire). So
(assuming no satisfaction of such conditions) if for example the market price of
the acquiror's stock on the date of the Acquisition were $7.50, a person holding
one Right could purchase eight (8) shares of the acquiror's Common Stock upon
exercise of such Right ($30.00/$3.75), whereas he could only purchase four (4)
shares of acquiror's Common Stock ($30.00/$7.50) in the absence of such Rights.
Permitted Offer
A Permitted Offer means a tender offer for all outstanding Common
Shares that has been determined by a majority of the Continuing Directors to be
adequate and otherwise in the best interests of the Company and its
stockholders. Where the Board of Directors has determined that a tender offer
constitutes a Permitted Offer, the Rights will not become exercisable to
purchase Common Shares or shares of the acquiring company (as the case may be)
at the discounted price described above.
<PAGE>
Exchange Provision
At any time after the acquisition by an Acquiring Person of 15% or more
of the Company's outstanding Common Shares and prior to the acquisition by such
Acquiring Person of 50% or more of the Company's outstanding Common Shares, the
Board of Directors of the Company, following the approval of a majority of the
Board of Directors and a majority of the Continuing Directors, may exchange the
Rights (other than Rights owned by the Acquiring Person), in whole or in part,
at an exchange ratio of one Common Share per Right.
Redemption
At any time on or prior to the close of business on the earlier of (i)
the 10th day following the acquisition by an Acquiring Person (the "Shares
Acquisition Date") or such later date as may be determined by a majority of the
Continuing Directors and publicly announced by the Company, or (ii) the Final
Expiration Date of the Rights, the Company may redeem the Rights in whole, but
not in part, at a price of $.01 per Right.
Adjustments to Prevent Dilution
The Purchase Price payable, the number of Rights and the number of
Series A Preferred or Common Shares or other securities or property issuable
upon exercise of the Rights are subject to adjustment from time to time in
connection with the dilutive issuances by the Company as set forth in the Rights
Agreement. With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price.
Cash Paid Instead of Issuing Fractional Shares
No fractional portion less than integral multiples of one one-hundredth
of a Preferred Share will be issued upon exercise of a Right and in lieu
thereof, an adjustment in cash will be made based on the market price of the
Common Shares on the last trading date prior to the date of exercise.
No Stockholders' Rights Prior to Exercise
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company (other than any rights resulting from
such holder's ownership of Common Shares), including, without limitation, the
right to vote or to receive dividends.
Amendment of Rights Agreement
The provisions of the Rights Agreement may be supplemented or amended
by the Board of Directors in any manner prior to the close of business on the
Distribution Date without the approval of Rights holders. After the Distribution
Date, the provisions of the Rights Agreement may be amended by the Board in
order to cure any ambiguity, defect or inconsistency, to make changes which do
not adversely affect the interests of holders of Rights (excluding the interests
of any Acquiring Person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are not redeemable
or there are not Continuing Directors, the majority of which agree to such
adjustment.
<PAGE>
Rights and Preferences of the Series A Preferred
Series A Preferred purchasable upon exercise of the Rights will not be
redeemable. Each share of Series A Preferred will be entitled to an aggregate
dividend of 100 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Series A Preferred will be entitled to a minimum
preferential liquidation payment equal to $100 per share. Each share of Series A
Preferred will have 100 votes, voting together with the Common Shares. In the
event of any merger, consolidation or other transaction in which the Common
Shares are changed or exchanged, each share of Series A Preferred will be
entitled to receive 100 times the amount received per Common Share. These rights
are protected by customary anti-dilution provisions.
Because of the nature of the dividend, liquidation and voting rights of
the shares of Series A Preferred, the value of the one one-hundredth interest in
a share of Series A Preferred purchasable upon exercise of each Right should
approximate the value of one Common Share.
<PAGE>
Item 2. Exhibits.
Exhibit
99.1 Preferred Share Rights Agreement, dated as of
December 6, 1996, between Exogen, Inc. and
Registrar and Transfer Company, including the
Certificate of Determination, the form of
Rights Certificate and the Summary of Rights
attached thereto as Exhibits A, B and C,
respectively.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized.
EXOGEN, INC.
Date: December 10, 1996
By: /s/ PATRICK A. MCBRAYER
-----------------------
Patrick A. McBrayer
President and Chief Executive
Officer
<PAGE>
EXHIBIT INDEX
Exhibit
No. Exhibit
--- -------
99.1 Preferred Share Rights Agreement, dated as of
December 6, 1996, between Exogen, Inc. and
Registrar and Transfer Company, including the
Certificate of Determination, the form of Rights
Certificate and the Summary of Rights attached thereto as
Exhibits A, B and C, respectively.
<PAGE>
EXHIBIT 99.1
EXOGEN, INC.
and
REGISTRAR AND TRANSFER COMPANY
(Rights Agent)
RIGHTS AGREEMENT
DATED AS OF DECEMBER 6, 1996
<PAGE>
TABLE OF CONTENTS
Section 1. Certain Definitions
Section 2. Appointment of Rights Agent
Section 3. Issuance of Rights Certificates
Section 4. Form of Rights Certificates
Section 5. Countersignature and Registration
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights
Certificates
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights
Section 8. Cancellation and Destruction of Rights Certificates
Section 9. Reservation and Availability of Preferred Shares
Section 10. Preferred Shares Record Date
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights
Section 12. Certificate of Adjusted Purchase Price or Number of Shares
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power
Section 14. Fractional Rights and Fractional Shares
Section 15. Rights of Action
Section 16. Agreement of Rights Holders
Section 17. Rights Certificate Holder Not Deemed a Stockholder
Section 18. Concerning the Rights Agent
Section 19. Merger or Consolidation or Change of Name of Rights Agent
Section 20. Duties of Rights Agent
Section 21. Change of Rights Agent
Section 22. Issuance of New Rights Certificates
Section 23. Redemption
Section 24. Exchange
Section 25. Notice of Certain Events
<PAGE>
Section 26. Notices
Section 27. Supplements and Amendments
Section 28. Successors
Section 29. Determinations and Actions by the Board of Directors, etc.
Section 30. Benefits of this Agreement
Section 31. Severability
Section 32. Governing Law
Section 33. Counterparts
Section 34. Descriptive Headings
EXHIBITS
Exhibit A Form of Certificate of Designation
Exhibit B Form of Rights Certificate
Exhibit C Summary of Rights
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RIGHTS AGREEMENT
Rights Agreement, dated as of December 6, 1996 (the "Agreement"),
between Exogen, Inc., a Delaware corporation (the "Company"), and Registrar and
Transfer Company (the "Rights Agent").
On December 6, 1996 (the "Rights Dividend Declaration Date"), the Board
of Directors of the Company authorized and declared a dividend of one Preferred
Share purchase right (a "Right") for each Common Share (as hereinafter defined)
of the Company outstanding as of the Close of Business (as hereinafter defined)
on December 19, 1996 (the "Record Date"), each Right representing the right to
purchase one one-hundredth of a share of Series A Participating Preferred Stock
(as such number may be adjusted pursuant to the provisions of this Agreement),
having the rights, preferences and privileges set forth in the form of
Certificate of Designation of Rights, Preferences and Privileges of Series A
Participating Preferred Stock attached hereto as Exhibit A, upon the terms and
subject to the conditions herein set forth, and further authorized and directed
the issuance of one Right (as such number may be adjusted pursuant to the
provisions of this Agreement) with respect to each Common Share that shall
become outstanding between the Record Date and the earlier of the Distribution
Date and the Expiration Date (as such terms are hereinafter defined), and in
certain circumstances after the Distribution Date.
NOW, THEREFORE, in consideration of the promises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who, together with all
Affiliates and Associates of such Person, shall be the Beneficial Owner
of 15% or more of the Common Shares then outstanding, but shall not
include:
(i) the Company;
(ii) any Subsidiary of the Company;
(iii) any employee benefit plan of the Company or of any
Subsidiary of the Company, or any Person or entity organized,
appointed or established by the Company for or pursuant to the
terms of any such plan;
(iv) any Person who becomes an Acquiring Person solely as a
result of a reduction in the number of Common Shares outstanding
due to the repurchase of Common Shares by the Company, unless and
until such Person shall thereafter purchase or otherwise become
the Beneficial Owner of additional Common Shares constituting 1%
or more of the Common Shares outstanding at the time that such
Person becomes the Beneficial Owner of 15% or more of the then
outstanding Common Shares.
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Notwithstanding the foregoing, "Acquiring Person" shall not include any
Person whose ownership of 15% or more of the Common Shares then outstanding
results from any action, transaction or series of transactions approved in
advance by a majority of the Continuing Directors of the Company who are not
Affiliates or Associates of such Person or representatives of such Person or of
any such Affiliate or Associate (provided that such Person shall become an
Acquiring Person if such Person shall thereafter purchase or otherwise become
the Beneficial Owner of additional Common Shares constituting 1% or more of the
then outstanding Common Shares unless otherwise approved in advance by a
majority of the Continuing Directors who are not Affiliates or Associates of
such Person or representatives of such Person or of any such Affiliate or
Associate); provided, however, that any transfer of Common Shares by such Person
to a third party (other than the Company, any subsidiary of the Company, any
employee benefit plan of the Company or any trustee in respect thereof acting in
such capacity) who after such transfer owns 15% or more of the Common Shares
then outstanding will cause the Rights to become exercisable at the time and in
the manner provided for herein, unless such transferee's ownership of 15% or
more of the Common Shares is approved in advance by a majority of the Continuing
Directors who are not Affiliates or Associates of such transferee or
representatives of such transferee or of any such Affiliate or Associate. If the
Continuing Directors of the Company determine in good faith that a Person who
would otherwise be an "Acquiring Person" as defined pursuant to the foregoing
provisions of this paragraph (a), has become such inadvertently, and such Person
divests as promptly as practicable a sufficient number of Common Shares so that
such Person would no longer be an "Acquiring Person" as defined pursuant to the
foregoing provisions of this paragraph (a), then such Person shall not be deemed
to be an "Acquiring Person" for any purpose of this Agreement.
(b) "Adjustment Shares" shall have the meaning set forth in Section
11(a)(ii) hereof.
(c) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act.
(d) A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly, for
purposes of Section 13(d) of the Exchange Act and Rule 13d-3
thereunder (or any comparable or successor law or regulation);
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has (A) the right to acquire
(whether such right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona
fide public offering of securities), or upon the exercise of
conversion rights, exchange rights, rights (other than the
Rights), warrants or options, or otherwise; provided, however,
that a Person shall not be deemed pursuant to this Section
1(c)(ii)(A) the Beneficial Owner of, or to beneficially own, (1)
securities tendered pursuant to a tender or exchange offer made
by or on behalf of such Person or any of such Person's Affiliates
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or Associates until such tendered securities are accepted for
purchase or exchange, or (2) securities which a Person or any of
such Person's Affiliates or Associates may be deemed to have the
right to acquire pursuant to any merger or other acquisition
agreement between the Company and such Person (or one or more of
its Affiliates or Associates) if such agreement has been approved
by the Board of Directors of the Company prior to there being an
Acquiring Person; or (B) the right to vote or dispose of or has
"beneficial ownership" of (as determined pursuant to Rule 13d-3
of the General Rules and Regulations under the Exchange Act),
including pursuant to any agreement, arrangement or
understanding, whether or not in writing; provided, however, that
a Person shall not be deemed the "Beneficial Owner" of, or to
"Beneficially Own," any security under this subparagraph (ii)(B)
of this paragraph (c) as a result of an agreement, arrangement or
understanding to vote such security if such agreement,
arrangement or understanding: (1) arises solely from a revocable
proxy given in response to a public proxy or consent solicitation
made pursuant to, and in accordance with, the applicable
provisions of the General Rules and Regulation under the Exchange
Act, and (2) is not also then reportable by such Person on
Schedule 13D under the Exchange Act (or any comparable or
successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with
which such Person (or any of such Person's Affiliates or
Associates) has any agreement, arrangement or understanding,
whether or not in writing (other than customary agreements with
and between underwriters and selling group members with respect
to a bona fide public offering of securities), for the purpose of
acquiring, holding, voting (except to the extent contemplated by
the proviso to subparagraph (ii)(B) of this paragraph (c)) or
disposing of any securities of the Company; provided, however,
that in no case shall an officer or director of the Company be
deemed (x) the Beneficial Owner of any securities beneficially
owned by another officer or director of the Company solely by
reason of actions undertaken by such persons in their capacity as
officers or directors of the Company or (y) the Beneficial Owner
of securities held of record by the trustee of any employee
benefit plan of the Company or any Subsidiary of the Company for
the benefit of any employee of the Company or any Subsidiary of
the Company, other than the officer or director, by reason of any
influence that such officer or director may have over the voting
of the securities held in the plan.
(e) "Business Day" shall mean any day other than a Saturday, Sunday or
a day on which banking institutions in the State of Delaware or
California are authorized or obligated by law or executive order to
close.
(f) "Close of Business" on any given date shall mean 5:00 p.m.,
California time, on such date; provided, however, that if such date is
not a Business Day it shall mean 5:00 p.m., California time, on the
next succeeding Business Day.
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(g) "Common Shares" shall mean the shares of Common Stock, par value
$0.0001, of the Company, except that "Common Shares" when used with
reference to any Person other than the Company shall mean the capital
stock of such Person with the greatest voting power, or the equity
securities or other equity interest having power to control or direct
the management, of such Person.
(h) "common stock equivalents" shall have the meaning set forth in
Section 11(a)(iv) hereof.
(i) "Continuing Director" shall mean (i) any member of the Board of
Directors of the Company, while a member of the Board of Directors, who
is not an Acquiring Person, or an Affiliate or Associate of an
Acquiring Person, or a representative of an Acquiring Person or of any
such Affiliate or Associate, and who was a member of the Board of
Directors on the date that the Board of Directors initially approved
this Agreement, or (ii) any Person who subsequently becomes a member of
the Board of Directors, while a member of the Board of Directors, who
is not an Acquiring Person, or an Affiliate or Associate of an
Acquiring Person, or a representative of an Acquiring Person or of any
such Affiliate or Associate, if such Person's nomination for election
or election to the Board of Directors is recommended or approved by a
majority of the Continuing Directors.
(j) "current per share market price" shall have the meaning set forth
in Section 11(d) hereof.
(k) "Current Value" shall have the meaning set forth in Section
11(a)(iv) hereof.
(l) "Distribution Date" shall mean the earlier of (i) the Close of
Business on the tenth day (or such later date as may be determined by
action of a majority of Continuing Directors then in office) after the
Shares Acquisition Date (or, if the tenth day after the Shares
Acquisition Date occurs before the Record Date, the Close of Business
on the Record Date) or (ii) the Close of Business on the tenth day (or
such later date as may be determined by action of a majority of
Continuing Directors then in office) after the date that a tender or
exchange offer by any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company, or any Person or entity organized, appointed
or established by the Company for or pursuant to the terms of any such
plan) is first published or sent or given within the meaning of Rule
14d-2(a) of the General Rules and Regulations under the Exchange Act,
if, assuming the successful consummation thereof, such Person would be
the Beneficial Owner of 15% or more of the shares of Common Stock then
outstanding.
(m) "Equivalent Shares" shall mean Preferred Shares and any other class
or series of capital stock of the Company which is entitled to
participate in dividends and other distributions, including
distributions upon the liquidation, dissolution or winding up of the
Company, on a proportional basis with the Common Shares. In calculating
the number of any class or series of Equivalent Shares for purposes of
Section 11 of this Rights Agreement, the number of shares, or fractions
of a share, of such class or series of capital stock that is entitled
to the same dividend or distribution as a whole Common Share shall be
deemed to be one share.
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(n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(o) "Exchange Fraction" shall have the meaning set forth in Section
11(p) hereof.
(p) "Exchange Ratio" shall have the meaning set forth in Section 11(a)
hereof.
(q) "Expiration Date" shall mean the earlier of (i) the Close of
Business on the Final Expiration Date, (ii) the Redemption Date, (iii)
the time at which the Board of Directors orders the exchange of the
Rights as provided in Section 24 hereof, or (iv) the consummation of a
transaction contemplated by Section 13(d) hereof.
(r) "Final Expiration Date" shall mean December 19, 2006.
(s) "Nasdaq" shall mean the National Association of Securities Dealers,
Inc. Automated Quotation System.
(t) "Permitted Offer" shall mean a tender offer for all outstanding
Common Shares made in the manner prescribed by Section 14(d) of the
Exchange Act and the rules and regulations promulgated thereunder;
provided, however, that such tender offer occurs at a time when
Continuing Directors are in office and a majority of the Continuing
Directors then in office has determined that the offer is both adequate
and otherwise in the best interests of the Company and its stockholders
(taking into account all factors that such Continuing Directors deem
relevant).
(u) "Person" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of
such entity.
(v) "Post Transferee" shall have the meaning set forth in Section 7(e)
hereof.
(w) "Preferred Shares" shall mean shares of Series A Participating
Preferred Stock of the Company.
(x) "Principal Party" shall have the meaning set forth in Section 13(b)
hereof.
(y) "Prior Transferee" shall have the meaning set forth in Section 7(e)
hereof.
(z) "Purchase Price" shall have the meaning set forth in Section 4(a)
hereof.
(aa) "Ratio of Exchange" shall have the meaning set forth in Section
24(a) hereof.
(ab) "Record Date" shall have the meaning set forth in the recitals at
the beginning of this Agreement.
(ac) "Redemption Date" shall mean the time at which the Board of
Directors of the Company orders redemption of the Rights as provided in
Section 23 hereof.
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(ad) "Redemption Price" shall have the meaning set forth in Section
23(a) hereof.
(ae) "Rights Dividend Declaration Date" shall have the meaning set
forth in the recitals at the beginning of this Agreement.
(af) "Section 11(a)(ii) Trigger Date" shall have the meaning set forth
in Section 11(a)(iv) hereof.
(ag) "Section 13 Event" shall mean any event described in clause (i),
(ii) or (iii) of Section 13(a) hereof.
(ah) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(ai) "Spread" shall have the meaning set forth in Section 11(a)(iv)
hereof.
(aj) "Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include,
without limitation, a report filed pursuant to Section 13(d) under the
Exchange Act) by the Company or an Acquiring Person that an Acquiring
Person has become such; provided that, if such person is determined not
to have become an Acquiring Person pursuant to Section 1(a) hereof,
then no Shares Acquisition Date shall be deemed to have occurred.
(ak) "Subsidiary" of any Person shall mean any corporation or other
entity of which an amount of voting securities sufficient to elect a
majority of the directors or Persons having similar authority of such
corporation or other entity is Beneficially Owned, directly or
indirectly, by such Person.
(al) "Substitution Period" shall have the meaning set forth in Section
(am) "Total Exercise Price" shall have the meaning set forth in Section
4(a) hereof.
(an) "Trading Day" shall have the meaning set forth in Section 11(d)
hereof.
(ao) A "Triggering Event" shall be deemed to have occurred upon any
Person (other than the Company, any Subsidiary of the Company, any
employee benefit plan of the Company or any Subsidiary of the Company,
or any entity holding Common Shares for or pursuant to the terms of any
such plan), together with all Affiliates and Associates of such Person,
becoming an Acquiring Person.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable. Contemporaneously with any such appointment, the Company shall notify
the Rights Agent thereof.
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Section 3. Issuance of Rights Certificates.
(a) Until the Distribution Date, (i) the Rights will be evidenced
(subject to the provisions of Sections 3(b) and 3(c) hereof) by the
certificates for Common Shares registered in the names of the holders
thereof (which certificates shall also be deemed to be Rights
Certificates) and not by separate Rights Certificates, and (ii) the
right to receive Rights Certificates will be transferable only in
connection with the transfer of Common Shares. Until the earlier of the
Distribution Date or the Expiration Date, the surrender for transfer of
such certificates for Common Shares shall also constitute the surrender
for transfer of the Rights associated with the Common Shares
represented thereby. As soon as practicable after the Distribution
Date, the Company will prepare and execute, the Rights Agent will
countersign, and the Company will send or cause to be sent (and the
Rights Agent will, if requested, send) by first-class, postage-prepaid
mail, to each record holder of Common Shares as of the close of
business on the Distribution Date, at the address of such holder shown
on the records of the Company, a Rights Certificate, in substantially
the form of Exhibit B hereto (a "Rights Certificate"), evidencing one
Right for each Common Share so held, subject to adjustment as provided
herein. In the event that an adjustment in the number of Rights per
Common Share has been made pursuant to Section 11(a)(i), Section 11(i)
or Section 11(p) hereof, then at the time of distribution of the Rights
Certificates, the Company shall make the necessary and appropriate
rounding adjustments (in accordance with Section 14(a) hereof) so that
Rights Certificates representing only whole numbers of Rights are
distributed and cash is paid in lieu of any fractional Rights. As of
the Distribution Date, the Rights will be evidenced solely by such
Rights Certificates and may be transferred by the transfer of the
Rights Certificates as permitted hereby, separately and apart from any
transfer of one or more Common Shares, and the holders of such Rights
Certificates as listed in the records of the Company or any transfer
agent or registrar for the Rights shall be the record holders thereof.
(b) On the Record Date or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights in substantially the
form of Exhibit C hereto (the "Summary of Rights"), by first-class,
postage-prepaid mail, to each record holder of Common Shares as of the
close of business on the Record Date, at the address of such holder
shown on the records of the Company.
(c) Unless the Board of Directors by resolution adopted at or before
the time of the issuance (including pursuant to the exercise of rights
under the Company's benefit plans) of any Common Shares specifies to
the contrary, Rights shall be issued in respect of all Common Shares
that are issued after the Record Date but prior to the earlier of the
Distribution Date or the Expiration Date or, in certain circumstances
provided in Section 22 hereof, after the Distribution Date.
Certificates representing such Common Shares shall also be deemed to be
certificates for Rights, and shall bear the following legend:
<PAGE>
This certificate also evidences and entitles the holder hereof
to certain Rights as set forth in a Rights Agreement between
Exogen, Inc. and Registrar and Transfer Company, as Rights
Agent, dated as of December 6, 1996 (the "Rights Agreement"),
the terms of which are hereby incorporated herein by reference
and a copy of which is on file at the principal executive
offices of Exogen, Inc. Under certain circumstances, as set
forth in the Rights Agreement, such Rights will be evidenced
by separate certificates and will no longer be evidenced by
this certificate. Exogen, Inc. will mail to the holder of this
certificate a copy of the Rights Agreement, as in effect on
the date of mailing, without charge promptly after receipt of
a written request therefor. Under certain circumstances set
forth in the Rights Agreement, Rights issued to, or held by,
any Person who is, was or becomes an Acquiring Person or any
Affiliate or Associate thereof (as such terms are defined in
the Rights Agreement), whether currently held by or on behalf
of such Person or by any subsequent holder, may become null
and void.
With respect to such certificates containing the foregoing legend,
until the earlier of (i) the Distribution Date or (ii) the Expiration
Date, the Rights associated with the Common Shares represented by such
certificates shall be evidenced by such certificates alone and
registered holders of Common Shares shall also be the registered
holders of the associated Rights, and the surrender for transfer of any
such certificate shall also constitute the transfer of the Rights
associated with the Common Shares represented thereby. In the event
that the Company purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated
with such Common Shares shall be deemed canceled and retired so that
the Company shall not be entitled to exercise any Rights associated
with the Common Shares which are no longer outstanding.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase
Common Shares and of assignment to be printed on the reverse thereof)
shall be substantially in the form of Exhibit B hereto and may have
such marks of identification or designation and such legends, summaries
or endorsements printed thereon as the Company may deem appropriate and
as are not inconsistent with the provisions of this Agreement, or as
may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any
stock exchange on which the Rights may from time to time be listed, or
to conform to usage. Subject to the provisions of Section 11 and
Section 22 hereof, the Rights Certificates, whenever distributed, shall
be dated as of the Record Date (or in the case of Rights issued with
respect to Common Shares issued by the Company after the Record Date,
as of the date of issuance of such Common Shares) and on their face
shall entitle the holders thereof to purchase such number of one
one-hundredths of a Preferred Share as shall be set forth therein at
<PAGE>
the price set forth therein (such exercise price per one one-hundredth
of a Preferred Share being hereinafter referred to as the "Purchase
Price" and the aggregate exercise price of all Preferred Shares
issuable upon exercise of one Right being hereinafter referred to as
the "Total Exercise Price"), but the number and type of securities
purchasable upon the exercise of each Right and the Purchase Price
shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights beneficially owned by: (i) an
Acquiring Person or any Associate or Affiliate of an Acquiring Person,
(ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes
such or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and receives such
Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests
in such Acquiring Person or to any Person with whom such Acquiring
Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of
Directors of the Company has determined is part of a plan, arrangement
or understanding which has as a primary purpose or effect avoidance of
Section 7(e) hereof, and any Rights Certificate issued pursuant to
Section 6 or Section 11 hereof upon transfer, exchange, replacement or
adjustment of any other Rights Certificate referred to in this
sentence, shall contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person (as
such terms are defined in the Rights Agreement between Exogen,
Inc. and Registrar and Transfer Company, as Rights Agent,
dated as of December 6, 1996 (the "Rights Agreement")).
Accordingly, this Rights Certificate and the Rights
represented hereby may become null and void in the
circumstances specified in Section 7(e) of the Rights
Agreement.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the Company
by its Chairman of the Board, its Chief Executive Officer, its
President or any Vice President, either manually or by facsimile
signature, and shall have affixed thereto the Company's seal (if any)
or a facsimile thereof which shall be attested by the Secretary or an
Assistant Secretary of the Company, either manually or by facsimile
signature. The Rights Certificates shall be countersigned by the Rights
Agent, either manually or by facsimile signature, and shall not be
valid for any purpose unless so countersigned. In case any officer of
the Company who shall have signed any of the Rights Certificates shall
cease to be such officer of the Company before countersignature by the
Rights Agent and issuance and delivery by the Company, such Rights
Certificates, nevertheless, may be countersigned by the Rights Agent
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and issued and delivered by the Company with the same force and effect
as though the person who signed such Rights Certificates had not ceased
to be such officer of the Company. Any Rights Certificate may be signed
on behalf of the Company by any person who, at the actual date of the
signing of such Rights Certificate, shall be a proper officer of the
Company to sign such Rights Certificate, although at the date of the
signing of this Agreement such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its office designated for such purposes, books for
registration and transfer of the Rights Certificates issued hereunder.
Such books shall show the names and addresses of the respective holders
of the Rights Certificates, the number of Rights evidenced on its face
by each of the Rights Certificates and the date of each of the Rights
Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Sections 7(e), 14 and 24 hereof, at
any time after the Close of Business on the Distribution Date, and at
or prior to the Close of Business on the Expiration Date, any Rights
Certificate or Rights Certificates may be transferred, split up,
combined or exchanged for another Rights Certificate or Rights
Certificates, entitling the registered holder to purchase a like number
of one one-hundredths of a Preferred Share (or, following a Triggering
Event, other securities, cash or other assets, as the case may be) as
the Rights Certificate or Rights Certificates surrendered then entitled
such holder to purchase. Any registered holder desiring to transfer,
split up, combine or exchange any Rights Certificate or Rights
Certificates shall make such request in writing delivered to the Rights
Agent, and shall surrender the Rights Certificate or Rights
Certificates to be transferred, split up, combined or exchanged at the
office of the Rights Agent designated for such purpose. Neither the
Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and signed
the certificate contained in the form of assignment on the reverse side
of such Rights Certificate and shall have provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial
Owner) or Affiliates or Associates thereof as the Company shall
reasonably request. Thereupon the Rights Agent shall, subject to
Sections 7(e), 14 and 24 hereof, countersign and deliver to the person
entitled thereto a Rights Certificate or Rights Certificates, as the
case may be, as so requested. The Company may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed
in connection with any transfer, split up, combination or exchange of
Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Rights Certificate, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to them,
and, at the Company's request, reimbursement to the Company and the
Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Rights
Certificate if mutilated, the Company will make and deliver a new
Rights Certificate of like tenor to the Rights Agent for delivery to
the registered holder in lieu of the Rights Certificate so lost,
stolen, destroyed or mutilated.
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Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) Subject to Sections 7(e), 23(b) and 24(b) hereof, the registered
holder of any Rights Certificate may exercise the Rights evidenced
thereby (except as otherwise provided herein) in whole or in part at
any time after the Distribution Date upon surrender of the Rights
Certificate, with the form of election to purchase on the reverse side
thereof duly executed, to the Rights Agent at the office of the Rights
Agent designated for such purpose, together with payment of the
Purchase Price for each one-hundredth of a Preferred Share as to which
the Rights are exercised, at or prior to the Expiration Date.
(b) The Purchase Price for each one one-hundredth of a Preferred Share
issuable pursuant to the exercise of a Right shall initially be Thirty
Dollars ($30.00), shall be subject to adjustment from time to time as
provided in Sections 11 and 13 hereof and shall be payable in lawful
money of the United States of America in accordance with paragraph (c)
below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase duly executed,
accompanied by payment of the Purchase Price for the number of one
one-hundredths of a Preferred Share (or other securities or property,
as the case may be) to be purchased and an amount equal to any
applicable transfer tax required to be paid by the holder of such
Rights Certificate in accordance with Section 9 hereof in cash, or by
certified check or cashier's check payable to the order of the Company,
the Rights Agent shall, subject to Section 20(k) hereof, thereupon
promptly (i) (A) requisition from any transfer agent of the Preferred
Shares (or make available, if the Rights Agent is the transfer agent
for the Preferred Shares) a certificate or certificates for the number
of one one-hundredths of a Preferred Share to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with
all such requests or (B) if the Company shall have elected to deposit
the total number of one one-hundredths of a Preferred Share issuable
upon exercise of the Rights hereunder with a depositary agent,
requisition from the depositary agent of depositary receipts
representing such number of one one-hundredths of a Preferred Share as
are to be purchased (in which case certificates for the Preferred
Shares represented by such receipts shall be deposited by the transfer
agent with the depositary agent) and the Company hereby directs the
depositary agent to comply with such request, (ii) when appropriate,
requisition from the Company the amount of cash to be paid in lieu of
issuance of fractional shares in accordance with Section 14 hereof,
(iii) after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder
of such Rights Certificate, registered in such name or names as may be
designated by such holder and (iv) when appropriate, after receipt
thereof, deliver such cash to or upon the order of the registered
holder of such Rights Certificate. The payment of the Purchase Price
(as such amount may be reduced (including to zero) pursuant to Section
11(a)(iv) hereof) may be made in cash or by certified bank check or
<PAGE>
bank draft payable to the order of the Company. In the event that the
Company is obligated to issue other securities of the Company, pay cash
and/or distribute other property pursuant to Section 11(a) hereof, the
Company will make all arrangements necessary so that such other
securities, cash and/or other property are available for distribution
by the Rights Agent, if and when appropriate.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights
Certificate evidencing Rights equivalent to the Rights remaining
unexercised shall be issued by the Rights Agent to the registered
holder of such Rights Certificate or to his or her duly authorized
assigns, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Triggering Event or a Section 13
Event, any Rights beneficially owned by (i) an Acquiring Person or an
Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such (a "Post
Transferee"), (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and receives such
Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests
in such Acquiring Person or to any Person with whom the Acquiring
Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of
Directors of the Company has determined is part of a plan, arrangement
or understanding which has as a primary purpose or effect the avoidance
of this Section 7(e) (a "Prior Transferee") or (iv) any subsequent
transferee receiving transferred Rights from a Post Transferee or a
Prior Transferee, either directly or through one or more intermediate
transferees, shall become null and void without any further action and
no holder of such Rights shall have any rights whatsoever with respect
to such Rights, whether under any provision of this Agreement or
otherwise. The Company shall use all reasonable efforts to insure that
the provisions of this Section 7(e) and Section 4(b) hereof are
complied with, but shall have no liability to any holder of Rights
Certificates or to any other Person as a result of its failure to make
any determinations with respect to an Acquiring Person or any of such
Acquiring Person's Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any
purported exercise as set forth in this Section 7 unless such
registered holder shall have (i) completed and signed the certificate
contained in the form of election to purchase set forth on the reverse
side of the Rights Certificate surrendered for such exercise and (ii)
provided such additional evidence of the identity of the Beneficial
Owner (or former Beneficial Owner) or Affiliates or Associates thereof
as the Company shall reasonably request.
<PAGE>
Section 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Rights Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
canceled Rights Certificates to the Company, or shall, at the written request of
the Company, destroy such canceled Rights Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Preferred Shares.
(a) The Company covenants and agrees that it will use its best efforts
to cause to be reserved and kept available out of and to the extent of
its authorized and unissued shares of Preferred Stock not reserved for
another purpose (and, following the occurrence of a Triggering Event,
out of its authorized and unissued shares of Common Stock and/or other
securities), the number of Preferred Shares (and, following the
occurrence of the Triggering Event, Common Stock and/or other
securities) that will be sufficient to permit the exercise in full of
all outstanding Rights.
(b) If the Company shall hereafter list any of its Preferred Shares on
a national securities exchange, then so long as the Preferred Shares
(and, following the occurrence of a Triggering Event, Common Shares
and/or other securities) issuable and deliverable upon exercise of the
Rights may be listed on such exchange, the Company shall use its best
efforts to cause, from and after such time as the Rights become
exercisable (but only to the extent that it is reasonably likely that
the Rights will be exercised), all shares reserved for such issuance to
be listed on such exchange upon official notice of issuance upon such
exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a
Triggering Event in which the consideration to be delivered by the
Company upon exercise of the Rights has been determined in accordance
with Section 11(a)(iv) hereof, or as soon as is required by law
following the Distribution Date, as the case may be, a registration
statement under the Securities Act, with respect to the securities
purchasable upon exercise of the Rights on an appropriate form, (ii)
cause such registration statement to become effective as soon as
practicable after such filing and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting
the requirements of the Securities Act) until the date as of which the
Rights are no longer exercisable for such securities. A majority of the
Continuing Directors may cause the Company temporarily to suspend, for
a period not to exceed ninety (90) days after the date set forth in
clause (i) of the first sentence of this Section 9(c), the
exercisability of the Rights in order to enable the Company to prepare
and file such registration statement and permit it to become effective.
<PAGE>
Upon any such suspension, the Company shall issue a public announcement
stating, and notify the Rights Agent, that the exercisability of the
Rights has been temporarily suspended, as well as a public announcement
and notification to the Rights Agent at such time as the suspension is
no longer in effect. The Company will also take such action as may be
appropriate under, or to ensure compliance with, the securities or
"blue sky" laws of the various states in connection with the
exercisability of the Rights. Notwithstanding any provision of this
Agreement to the contrary, the Rights shall not be exercisable in any
jurisdiction, unless the requisite qualification in such jurisdiction
shall have been obtained, or an exemption therefrom shall be available,
and until a registration statement has been declared effective.
(d) The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all Preferred Shares delivered upon
exercise of Rights shall, at the time of delivery of the certificates
for such Preferred Shares (subject to payment of the Purchase Price),
be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges
which may be payable in respect of the original issuance or delivery of
the Rights Certificates or of certificates for Preferred Shares upon
the exercise of Rights. The Company shall not, however, be required to
pay any transfer tax which may be payable in respect of any transfer or
delivery of Rights Certificates to a person other than, or the issuance
or delivery of certificates or depositary receipts for Preferred Shares
in a name other than that of, the registered holder of the Rights
Certificate evidencing Rights surrendered for exercise or to issue or
to deliver any certificates or depositary receipts for Preferred Shares
upon the exercise of any Rights until any such tax shall have been paid
(any such tax being payable by the holder of such Rights Certificate at
the time of surrender) or until it has been established to the
Company's satisfaction that no such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for a number of one one-hundredths of a Preferred Share is issued
upon the exercise of Rights shall for all purposes be deemed to have become the
holder of record of such Preferred Shares represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
multiplied by the number of one one-hundredths of a Preferred Share with respect
to which the Rights have been exercised (and any applicable transfer taxes) was
made; provided, however, that if the date of such surrender and payment is a
date upon which the Preferred Shares transfer books of the Company are closed,
such person shall be deemed to have become the record holder of such shares on,
and such certificate shall be dated, the next succeeding Business Day on which
the Preferred Shares transfer books of the Company are open. Prior to the
exercise of the Rights evidenced thereby, the holder of a Rights Certificate
shall not be entitled to any rights of a holder of Preferred Shares for which
the Rights shall be exercisable, including, without limitation, the right to
vote, to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
<PAGE>
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number and kind of shares or other property
covered by each Right and the number of Rights outstanding are subject to
adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Common Shares payable in
Common Shares, (B) subdivide the outstanding Common Shares, (C) combine
the outstanding Common Shares (by reverse stock split or otherwise)
into a smaller number of Common Shares, or (D) issue any shares of its
capital stock in a reclassification of the Common Shares (including any
such reclassification in connection with a consolidation or merger in
which the Company is the continuing or surviving corporation), then, in
each such event, except as otherwise provided in this Section 11(a) and
Section 7(e) hereof: (1) each of the Rights outstanding at the time of
the record date for such dividend or the effective date of such
subdivision, combination or reclassification shall be proportionately
adjusted to that number of Rights (calculated to the nearest one
ten-thousandth of a Right) equal to a fraction (the "Exchange Ratio"),
the numerator of which shall be the total number of Common Shares or
shares of capital stock issued in such reclassification of the Common
Shares outstanding immediately following such time and the denominator
of which shall be the total number of Common Shares outstanding
immediately prior to such time, and the number of Rights that shall
thereafter be issued with respect to each Common Share or share of such
other capital stock that shall become outstanding thereafter prior to
the Distribution Date shall be equal to the total number of outstanding
Rights immediately after such event (as adjusted pursuant to this
clause (1)) divided by the total number of outstanding Common Shares or
shares of such other capital stock immediately after such event
(subject to further adjustment pursuant to the provisions of this
Agreement); (2) the Purchase Price in effect at the time of the record
date for such dividend or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that the Purchase
Price thereafter shall equal the result obtained by dividing the
Purchase Price in effect immediately prior to such time by the Exchange
Ratio; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par
value of the shares of capital stock of the Company issuable upon
exercise of such Right; and (3) the number of Preferred Shares or
shares of such other capital stock issuable upon the exercise of each
Right shall remain unchanged immediately after such event, but, in the
event of a reclassification, the kind of shares issuable upon the
exercise of each Right immediately after such reclassification shall be
appropriately adjusted. If an event occurs which would require an
adjustment under both this Section 11(a)(i) and Section 11(a)(ii)
hereof, the adjustment provided for in this Section 11(a)(i) shall be
in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii) hereof.
<PAGE>
(ii) Subject to Section 24 of this Agreement, in the event a Triggering
Event shall have occurred, then promptly following such Triggering
Event, proper provision shall be made so that each holder of a Right,
except as provided in Section 7(e) hereof, shall thereafter have the
right to receive for each Right, upon exercise thereof in accordance
with the terms of this Agreement and payment of the then-current Total
Exercise Price, in lieu of a number of one one-hundredths of a
Preferred Share, such number of Common Shares of the Company as shall
equal the result obtained by multiplying the then-current Purchase
Price by the then number of one one-hundredths of a Preferred Share for
which a Right was exercisable (or would have been exercisable if the
Distribution Date had occurred) immediately prior to the first
occurrence of a Triggering Event, and dividing that product by 50% of
the current per share market price (determined pursuant to Section
11(d) hereof) for Common Shares on the date of occurrence of the
Triggering Event (such number of shares being hereinafter referred to
as the "Adjustment Shares").
(iii) The right to buy Common Shares of the Company pursuant to Section
11(a)(ii) hereof shall not arise as a result of any Person becoming an
Acquiring Person through an acquisition of Common Shares pursuant to a
Permitted Offer.
(iv) In lieu of issuing Common Shares in accordance with Section
11(a)(ii) hereof, the Company may, if the Board of Directors determines
that such action is necessary or appropriate and not contrary to the
interest of holders of Rights (and, in the event that the number of
Common Shares which are authorized by the Company's Certificate of
Incorporation but not outstanding or reserved for issuance for purposes
other than upon exercise of the Rights are not sufficient to permit the
exercise in full of the Rights, or if any necessary regulatory approval
for such issuance has not been obtained by the Company, the Company
shall): (A) determine the excess of (1) the value of the Common Shares
issuable upon the exercise of a Right (the "Current Value") over (2)
the Purchase Price (such excess, the "Spread") and (B) with respect to
each Right, make adequate provision to substitute for such Common
Shares, upon exercise of the Rights, (1) cash, (2) a reduction in the
Purchase Price, (3) other equity securities of the Company (including,
without limitation, shares or units of shares of any series of
preferred stock which the Board of Directors of the Company has deemed
to have the same value as Common Shares (such shares or units of shares
of preferred stock are herein called "common stock equivalents")),
except to the extent that the Company has not obtained any necessary
stockholder or regulatory approval for such issuance, (4) debt
securities of the Company, except to the extent that the Company has
not obtained any necessary stockholder or regulatory approval for such
issuance, (5) other assets, or (6) any combination of the foregoing,
having an aggregate value equal to the Current Value, where such
aggregate value has been determined by the Board of Directors of the
Company based upon the advice of a nationally recognized investment
banking firm selected by the Board of Directors of the Company;
provided, however, if the Company shall not have made adequate
provision to deliver value pursuant to clause (B) above within thirty
<PAGE>
(30) days following the later of (x) the first occurrence of a
Triggering Event and (y) the date on which the Company's right of
redemption pursuant to Section 23(a) expires (the later of (x) and (y)
being referred to herein as the "Section 11(a)(ii) Trigger Date"), then
the Company shall be obligated to deliver, upon the surrender for
exercise of a Right and without requiring payment of the Purchase
Price, Common Shares (to the extent available), except to the extent
that the Company has not obtained any necessary stockholder or
regulatory approval for such issuance, and then, if necessary, cash,
which shares and/or cash have an aggregate value equal to the Spread.
If the Board of Directors of the Company shall determine in good faith
that it is likely that sufficient additional Common Shares could be
authorized for issuance upon exercise in full of the Rights or that any
necessary regulatory approval for such issuance will be obtained, the
thirty (30) day period set forth above may be extended to the extent
necessary, but not more than ninety (90) days after the Section
11(a)(ii) Trigger Date, in order that the Company may seek stockholder
approval for the authorization of such additional shares or take action
to obtain such regulatory approval (such period, as it may be extended,
the "Substitution Period"). To the extent that the Company determines
that some action need be taken pursuant to the first and/or second
sentences of this Section 11(a)(iv), the Company (x) shall provide,
subject to Section 7(e) hereof, that such action shall apply uniformly
to all outstanding Rights and (y) may suspend the exercisability of the
Rights until the expiration of the Substitution Period in order to seek
any authorization of additional shares, to take any action to obtain
any required regulatory approval and/or to decide the appropriate form
of distribution to be made pursuant to such first sentence and to
determine the value thereof. In the event of any such suspension, the
Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as
a public announcement at such time as the suspension is no longer in
effect. For purposes of this Section 11(a)(iv), the value of the Common
Shares shall be the current per share market price (as determined
pursuant to Section 11(d) hereof) of the Common Shares on the Section
11(a)(ii) Trigger Date and the value of any "common stock equivalent"
shall be deemed to have the same value as the Common Shares on such
date.
(b) In case the Company shall, at any time after the date of this
Agreement, fix a record date for the issuance of rights, options or
warrants to all holders of Common Shares or of any class or series of
Equivalent Shares entitling such holders (for a period expiring within
forty-five (45) calendar days after such record date) to subscribe for
or purchase Common Shares or Equivalent Shares or securities
convertible into Common Shares or Equivalent Shares at a price per
share (or having a conversion price per share, if a security
convertible into Common Shares or Equivalent Shares) less than the then
current per share market price of the Common Shares or Equivalent
Shares (as defined in Section 11(d)) on such record date, then, in each
such case, the Purchase Price to be in effect after such record date
shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of
which shall be the number of Common Shares and Equivalent Shares (if
any) outstanding on such record date, plus the number of Common Shares
<PAGE>
or Equivalent Shares, as the case may be, which the aggregate offering
price of the total number of Common Shares or Equivalent Shares, as the
case may be, so to be offered (and/or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at
such current market price, and the denominator of which shall be the
number of Common Shares and Equivalent Shares (if any) outstanding on
such record date, plus the number of additional Common Shares or
Equivalent Shares, as the case may be, to be offered for subscription
or purchase (or into which the convertible securities so to be offered
are initially convertible). In case such subscription price may be paid
in a consideration part or all of which shall be in a form other than
cash, the value of such consideration shall be as determined in good
faith by the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent and shall
be binding on the Rights Agent and the holders of the Rights. Common
Shares and Equivalent Shares owned by or held for the account of the
Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a
record date is fixed, and in the event that such rights, options or
warrants are not so issued, the Purchase Price shall be adjusted to be
the Purchase Price which would then be in effect if such record date
had not been fixed.
(c) In case the Company shall, at any time after the date of this
Agreement, fix a record date for the making of a distribution to all
holders of the Common Shares or of any class or series of Equivalent
Shares (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or
surviving corporation) of evidences of indebtedness or assets (other
than a regular quarterly cash dividend, if any, or a dividend payable
in Common Shares) or subscription rights, options or warrants
(excluding those referred to in Section 11(b)), then, in each such
case, the Purchase Price to be in effect after such record date shall
be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which shall
be the current market price (as determined pursuant to Section 11(d)
hereof) of a Common Share or an Equivalent Shares on such record date,
less the fair market value (as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the cash,
assets or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to a Common Share or
Equivalent Shares, as the case may be, and the denominator of which
shall be such current market price (as determined pursuant to Section
11(d) hereof) of a Common Share or Equivalent Shares on such record
date. Such adjustments shall be made successively whenever such a
record date is fixed, and in the event that such distribution is not so
made, the Purchase Price shall be adjusted to be the Purchase Price
which would have been in effect if such record date had not been fixed.
<PAGE>
(d) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iv) hereof, the "current
per share market price" of any security (a "Security" for the purpose
of this Section 11(d)) on any date shall be deemed to be the average of
the daily closing prices per share of such Security for the thirty (30)
consecutive Trading Days (as such term is hereinafter defined)
immediately prior to such date, and for purposes of computations made
pursuant to Section 11(a)(iv) hereof, the "current per share market
price" of any Security on any date shall be deemed to be the average of
the daily closing prices per share of such Security for the ten (10)
consecutive Trading Days immediately prior to such date; provided,
however, that in the event that the current per share market price of
the Security is determined during a period following the announcement
by the issuer of such Security of (i) a dividend or distribution on
such Security payable in shares of such Security or securities
convertible into such shares or (ii) any subdivision, combination or
reclassification of such Security, and prior to the expiration of the
requisite thirty (30) Trading Day or ten (10) Trading Day period, after
the ex-dividend date for such dividend or distribution, or the record
date for such subdivision, combination or reclassification, then, and
in each such case, the current per share market price shall be
appropriately adjusted to reflect the current market price per share
equivalent of such Security. The closing price for each day shall be
the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the Security
is not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities
exchange on which the Security is listed or admitted to trading or, if
the Security is not listed or admitted to trading on any national
securities exchange, the last sale price or, if such last sale price is
not reported, the average of the high bid and low asked prices in the
over-the-counter market, as reported by Nasdaq or such other system
then in use, or, if on any such date the Security is not quoted by any
such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the
Security selected by the Board of Directors of the Company. If on any
such date no market maker is making a market in the Common Shares, the
fair value of such shares on such date as determined in good faith by
the Board of Directors of the Company shall be used. The term "Trading
Day" shall mean a day on which the principal national securities
exchange on which the Security is listed or admitted to trading is open
for the transaction of business or, if the Security is not listed or
admitted to trading on any national securities exchange, a Business
Day. If the Common Shares are not publicly held or so listed or traded,
"current per share market price" shall mean the fair value per share as
determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed with the
Rights Agent and shall be conclusive for all purposes.
<PAGE>
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would
require an increase or decrease of at least 1% in the Purchase Price;
provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest ten-thousandth of a Common
Share or other share or ten-thousandth of a Preferred Share, as the
case may be. Notwithstanding the first sentence of this Section 11(e),
any adjustment required by this Section 11 shall be made no later than
the earlier of (i) three (3) years from the date of the transaction
which requires such adjustment or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a) or
13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock other than Preferred
Shares, thereafter the number of such other shares so receivable upon
exercise of any Right and if required, the Purchase Price thereof,
shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with
respect to the Common Shares contained in Sections 11(a), (b), (c),
(e), (h), (i), (j), (k), (l) and (m), and the provisions of Sections 7,
9, 10, 13 and 14 with respect to the Preferred Shares shall apply on
like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the
right to purchase, at the adjusted Purchase Price, the number of one
one-hundredths of a Preferred Share purchasable from time to time
hereunder upon exercise of the Rights, all subject to further
adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result
of the calculations made in Section 11(b), each Right outstanding
immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that
number of Preferred Shares (calculated to the nearest one
ten-thousandth of a share) obtained by (i) multiplying (x) the number
of Preferred Shares covered by a Right immediately prior to this
adjustment, by (y) the Purchase Price in effect immediately prior to
such adjustment of the Purchase Price, and (ii) dividing the product so
obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price as a result of the calculations made in Section 11(b) to
adjust the number of Rights, in substitution for any adjustment in the
number of Preferred Shares purchasable upon the exercise of a Right.
Each of the Rights outstanding after such adjustment of the number of
Rights shall be exercisable for the number of one one-hundredths of a
Preferred Share for which a Right was exercisable immediately prior to
such adjustment. Each Right held of record prior to such adjustment of
the number of Rights shall become that number of Rights (calculated to
<PAGE>
the nearest one ten-thousandth of a Right) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the
Purchase Price by the Purchase Price in effect immediately after
adjustment of the Purchase Price. The Company shall make a public
announcement of its election to adjust the number of Rights, indicating
the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if
the Rights Certificates have been issued, shall be at least ten (10)
days later than the date of the public announcement. If Rights
Certificates have been issued, upon each adjustment of the number of
Rights pursuant to this Section 11(i), the Company shall, as promptly
as practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Rights Certificates evidencing,
subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the
option of the Company, shall cause to be distributed to such holders of
record in substitution and replacement for the Rights Certificates held
by such holders prior to the date of adjustment, and upon surrender
thereof, if required by the Company, new Rights Certificates evidencing
all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued,
executed and countersigned in the manner provided for herein (and may
bear, at the option of the Company, the adjusted Purchase Price) and
shall be registered in the names of the holders of record of Rights
Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of Preferred Shares issuable upon the exercise of the
Rights, the Rights Certificates theretofore and thereafter issued may
continue to express the Purchase Price per one one-hundredth of a
Preferred Share and the number of one one-hundredths of a Preferred
Share which were expressed in the initial Rights Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below the par or stated value, if any, of the number
of one one-hundredths of a Preferred Share issuable upon exercise of
the Rights, the Company shall take any corporate action which may, in
the opinion of its counsel, be necessary in order that the Company may
validly and legally issue as fully paid and nonassessable shares such
number of one one-hundredths of a Preferred Share at such adjusted
Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date
for a specified event, the Company may elect to defer until the
occurrence of such event the issuing to the holder of any Right
exercised after such record date of the number of one one-hundredths of
a Preferred Share and other capital stock or securities of the Company,
if any, issuable upon such exercise over and above the number of one
one-hundredths of a Preferred Share and other capital stock or
securities of the Company, if any, issuable upon such exercise on the
basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due
bill or other appropriate instrument evidencing such holder's right to
receive such additional shares (fractional or otherwise) upon the
occurrence of the event requiring such adjustment.
<PAGE>
(m) Anything in this Section 11 to the contrary notwithstanding, prior
to the Distribution Date, the Company shall be entitled to make such
reductions in the Purchase Price, in addition to those adjustments
expressly required by this Section 11, as and to the extent that it in
its sole discretion shall determine to be advisable in order that any
(i) consolidation or subdivision of the Preferred or Common Shares,
(ii) issuance wholly for cash of any Preferred or Common Shares at less
than the current market price, (iii) issuance wholly for cash of
Preferred or Common Shares or securities which by their terms are
convertible into or exchangeable for Preferred or Common Shares, (iv)
stock dividends, or (v) issuance of rights, options or warrants
referred to in this Section 11, hereafter made by the Company to
holders of its Preferred or Common Shares shall not be taxable to such
stockholders.
(n) The Company covenants and agrees that it shall not, at any time
after the Distribution Date, effect or permit to occur any Triggering
Event or Section 13 Event, if (i) at the time or immediately after such
Triggering Event or Section 13 Event there are any rights, warrants or
other instruments or securities outstanding or agreements in effect
which would substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights or (ii) prior to, simultaneously
with or immediately after such Section 13 Event, the stockholders of
the Person who constitutes, or would constitute, the "Principal Party"
for purposes of Section 13(b) hereof shall have received a distribution
of Rights previously owned by such Person or any of its Affiliates and
Associates.
(o) The Company covenants and agrees that, after the Distribution Date,
it will not, except as permitted by Sections 23, 24 or 27 hereof, take
(or permit to be taken) any action if at the time such action is taken
it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be
afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in the
event the Company shall at any time after the date of this Agreement
(A) declare a dividend on the Preferred Shares payable in Preferred
Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the
outstanding Preferred Shares (by reverse stock split or otherwise) into
a smaller number of Preferred Shares, or (D) issue any shares of its
capital stock in a reclassification of the Preferred Shares (including
any such reclassification in connection with a consolidation or merger
in which the Company is the continuing or surviving corporation), then,
in each such event, except as otherwise provided in this Section 11 and
Section 7(e) hereof: (1) each of the Rights outstanding at the time of
the record date for such dividend or the effective date of such
subdivision, combination or reclassification shall be proportionately
adjusted to that number of Rights (calculated to the nearest one
ten-thousandth of a Right) equal to a fraction (the "Exchange
Fraction"), the numerator of which shall be the total number of
<PAGE>
Preferred Shares or shares of capital stock issued in such
reclassification of the Preferred Shares outstanding immediately
following such time and the denominator of which shall be the total
number of Preferred Shares outstanding immediately prior to such time,
and the number of Rights that shall thereafter be issued with respect
to each Common Share or share of other capital stock that shall be
issued in a reclassification of the Common Shares prior to the
Distribution Date shall be equal to the total number of outstanding
Rights immediately after such event (as adjusted pursuant to this
clause (1)) divided by the total number of outstanding Common Shares or
shares of such other capital stock immediately after such event
(subject to further adjustment pursuant to the provisions of this
Agreement); (2) the Purchase Price in effect at the time of the record
date for such dividend or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that the Purchase
Price thereafter shall equal the result obtained by dividing the
Purchase Price in effect immediately prior to such time by the Exchange
Fraction; provided, however, that in no event shall the consideration
to be paid upon the exercise of one Right be less than the aggregate
par value of the shares of capital stock of the Company issuable upon
exercise of such Right; and (3) the number of one one-hundredths of a
Preferred Share or share of such other capital stock issuable upon the
exercise of each Right shall remain unchanged immediately after such
event, but, in the event of a reclassification, the kind of shares
issuable upon the exercise of each Right immediately after such
reclassification shall be adjusted to be the kind of shares of such
other capital stock issued in such reclassification, rather than
Preferred Shares.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Preferred Shares a copy of
such certificate and (c) mail a brief summary thereof to each holder of a Rights
Certificate in accordance with Section 26 hereof. Notwithstanding the foregoing
sentence, the failure of the Company to make such certification or give such
notice shall not affect the validity of such adjustment or the force or effect
of the requirement for such adjustment. The Rights Agent shall be fully
protected in relying on any such certificate and on any adjustment contained
therein and shall not be deemed to have knowledge of such adjustment unless and
until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) In the event that, following the Shares Acquisition Date, directly
or indirectly:
(i) the Company shall consolidate with, or merge with and into,
any other Person (other than a Subsidiary of the Company in a
transaction the principal purpose of which is to change the state
of incorporation of the Company or which complies with Section
11(o) hereof);
<PAGE>
(ii) any Person (other than a Subsidiary of the Company in a
transaction that complies with Section 11(o) hereof) shall
consolidate with the Company, or merge with and into the Company
and the Company shall be the continuing or surviving corporation
of such consolidation or merger; or
(iii) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in
one or more transactions, assets or earning power aggregating 50%
or more of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company or one or more of its wholly owned
Subsidiaries in one or more transactions, each of which complies
with Section 11(o) hereof), then, and in each such case, proper
provision shall be made so that:
(A) each holder of a Right (except as otherwise provided
herein) shall thereafter have the right to receive, upon the
exercise thereof in accordance with the terms of this
Agreement, such number of validly authorized and issued, fully
paid and nonassessable and freely tradeable Common Shares of
the Principal Party (as hereinafter defined), free of any
liens, encumbrances, rights of first refusal or other adverse
claims, as shall be equal to the result obtained by (1)
multiplying the then current Purchase Price by the number of
one one-hundredths of a Preferred Share for which a Right was
exercisable immediately prior to the first occurrence of a
Section 13 Event (or, if a Triggering Event has occurred prior
to the first occurrence of a Section 13 Event, multiplying the
number of such one one-hundredths of a Preferred Share for
which a Right was exercisable immediately prior to the first
occurrence of a Triggering Event by the Purchase Price in
effect immediately prior to such first occurrence), and (2)
dividing that product (which, following the first occurrence
of a Section 13 Event, shall be referred to as the "Total
Exercise Price" for each Right and for all purposes of this
Agreement) by 50% of the current per share market price
(determined pursuant to Section 11(d) hereof) of the Common
Shares of such Principal Party on the date of consummation of
such Section 13 Event;
(B) such Principal Party shall thereafter be liable for, and
shall assume, by virtue of such Section 13 Event, all the
obligations and duties of the Company pursuant to this
Agreement;
(C) the term "Company" shall thereafter be deemed to refer to
such Principal Party, it being specifically intended that the
provisions of Section 11 hereof shall apply only to such
Principal Party following the first occurrence of a Section 13
Event; and
(D) such Principal Party shall take such steps (including, but
not limited to, the reservation of a sufficient number of its
Common Shares) in connection with the consummation of any such
transaction as may be necessary to assure that the provisions
hereof shall thereafter be applicable, as nearly as reasonably
may be, in relation to its Common Shares thereafter
deliverable upon the exercise of the Rights.
<PAGE>
(b) "Principal Party" shall mean, in the case of any transaction
described in clause (i), (ii) or (iii) of Section 13(a), the Person or
Acquiring Person referred to therein (or such Person's or Acquiring
Person's successor, including, if applicable, the Company, if it is the
surviving corporation), provided, however, that in any such case: (i)
if the Common Shares of such Person is not at such time and has not
been continuously over the preceding 12-month period registered under
Section 12 of the Exchange Act, and such Person is a direct or indirect
Subsidiary of another Person the Common Shares of which is and has been
so registered, "Principal Party" shall refer to such other Person; and
(ii) if such Person is a Subsidiary, directly or indirectly, of more
than one Person, "the Common Shares of two or more of which are and
have been so registered, Principal Party" shall refer to whichever of
such Persons is the issuer of the Common Shares having the greatest
aggregate market value, and provided, further, that for purposes of
transactions described in clause (iii) hereof, "Principal Party" shall
refer to that Person receiving the greatest portion of the assets or
earning power transferred pursuant to such transaction or transactions.
(c) If, for any reason, the Rights cannot be exercised for Common
Shares of such Principal Party as provided in Section 13(a), then each
holder of Rights shall have the right to exchange its Rights for cash
from such Principal Party in an amount equal to the number of Common
Shares that it would otherwise be entitled to purchase times 50% of the
current per share market price, as determined pursuant to Section 11(d)
hereof, of such Common Shares of such Principal Party. If, for any
reason, the foregoing formulation cannot be applied to determine the
cash amount into which the Rights are exchangeable, then the Board of
Directors, based upon the advice of one or more nationally recognized
investment banking firms, and based upon the total value of the
Company, shall determine such amount reasonably and with good faith to
the holders of Rights. Any such determination shall be final and
binding on the Rights Agent.
(d) Notwithstanding anything in this Agreement to the contrary, Section
13 shall not be applicable to a transaction described in clauses (i)
and (ii) of Section 13(a) if: (i) such transaction is consummated with
a Person or Persons who acquired Common Shares pursuant to a Permitted
Offer (or a wholly-owned Subsidiary of any such Person or Persons);
(ii) the price per share of Common Shares offered in such transaction
is not less than the price per share of Common Shares paid to all
holders of Common Shares whose shares were purchased pursuant to such
Permitted Offer; and (iii) the form of consideration being offered to
the remaining holders of Common Shares pursuant to such transaction is
the same form as the form of consideration paid pursuant to such
Permitted Offer. Upon consummation of any such transaction contemplated
by this Section 13(d), all Rights hereunder shall expire.
(e) The Company shall not consummate any Section 13 Event unless the
Principal Party shall have a sufficient number of authorized Common
Shares that have not been issued or reserved for issuance to permit the
exercise in full of the Rights in accordance with this Section 13 and
unless prior thereto the Company and such issuer shall have executed
and delivered to the Rights Agent a supplemental agreement confirming
that such Principal Party shall, upon consummation of such Section 13
Event, assume this Agreement in accordance with Sections 13(a) and (b)
<PAGE>
hereof, that all rights of first refusal or preemptive rights in
respect of the issuance of Common Shares of such Principal Party upon
exercise of outstanding Rights have been waived, that there are no
rights, warrants, instruments or securities outstanding or any
agreements or arrangements which, as a result of the consummation of
such transaction, would eliminate or substantially diminish the
benefits intended to be afforded by the Rights and that such
transaction shall not result in a default by such Principal Party under
this Agreement, and further providing that, as soon as practicable
after the date of such Section 13 Event, such Principal Party will:
(i) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities
purchasable upon exercise of the Rights on an appropriate form,
use its best efforts to cause such registration statement to
become effective as soon as practicable after such filing and use
its best efforts to cause such registration statement to remain
effective (with a prospectus at all times meeting the
requirements of the Securities Act) until the Expiration Date,
and similarly comply with applicable state securities laws;
(ii) use its best efforts to list (or continue the listing of)
the Rights and the securities purchasable upon exercise of the
Rights on a national securities exchange or to meet the
eligibility requirements for quotation on Nasdaq; and
(iii) deliver to holders of the Rights historical financial
statements for such Principal Party which comply in all respects
with the requirements for registration on Form 10 (or any
successor form) under the Exchange Act.
In the event that at any time after the occurrence of a Triggering
Event some or all of the Rights shall not have been exercised at the
time of a transaction described in this Section 13, the Rights which
have not theretofore been exercised shall thereafter be exercisable in
the manner described in Section 13(a) (without taking into account any
prior adjustment required by Section 11(a)(ii)).
(f) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights or
to distribute Rights Certificates which evidence fractional Rights. In
lieu of such fractional Rights, there shall be paid to the registered
holders of the Rights Certificates with regard to which such fractional
Rights would otherwise be issuable, an amount in cash equal to the same
fraction of the current market value of a whole Right. For the purposes
of this Section 14(a), the current market value of a whole Right shall
be the closing price of the Rights for the Trading Day immediately
prior to the date on which such fractional Rights would have been
otherwise issuable, as determined pursuant to the second sentence of
Section 11(d) hereof.
<PAGE>
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions that are integral multiples of one
one-hundredth of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares
(other than fractions that are integral multiples of one one-hundredth
of a Preferred Share). In lieu of fractional Preferred Shares that are
not integral multiples of one one-hundredth of a Preferred Share, the
Company shall pay to the registered holders of Rights Certificates at
the time such Rights are exercised as herein provided an amount in cash
equal to the same fraction of the current market value of a Common
Share. For purposes of this Section 14(b), the current market value of
a Common Share shall be the closing price of a Common Share (as
determined pursuant to the second sentence of Section 11(d) hereof) for
the Trading Day immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Right expressly
waives his or her right to receive any fractional Rights or any
fractional shares upon exercise of a Right.
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Rights Certificate (or, prior
to the Distribution Date, of the Common Shares), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his or her own behalf and for
his or her own benefit, enforce, and may institute and maintain any suit, action
or proceeding against the Company to enforce, or otherwise act in respect of,
his or her right to exercise the Rights evidenced by such Rights Certificate in
the manner provided in such Rights Certificate and in this Agreement. Without
limiting the foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and will be entitled to specific
performance of the obligations under, and injunctive relief against actual or
threatened violations of, the obligations of any Person subject to this
Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if
surrendered at the principal office or offices of the Rights Agent
designated for such purposes, duly endorsed or accompanied by a proper
instrument of transfer and with the appropriate forms and certificates
fully executed; and
<PAGE>
(c) subject to Sections 6(a) and 7(f) hereof, the Company and the
Rights Agent may deem and treat the person in whose name the Rights
Certificate (or, prior to the Distribution Date, the associated Common
Shares certificate) is registered as the absolute owner thereof and of
the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Rights Certificates or the associated
Common Shares certificate made by anyone other than the Company or the
Rights Agent) for all purposes whatsoever, and neither the Company nor
the Rights Agent shall be affected by any notice to the contrary.
Section 17. Rights Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Rights Certificate be construed to confer upon the holder of any
Rights Certificate, as such, any of the rights of a stockholder of the Company
or any right to vote for the election of directors or upon any matter submitted
to stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Rights Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time
to time, on demand of the Rights Agent, its reasonable expenses and
counsel fees and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its
duties hereunder. The Company also agrees to indemnify the Rights Agent
for, and to hold it harmless against, any loss, liability or expense,
incurred without negligence, bad faith or willful misconduct on the
part of the Rights Agent, for anything done or omitted by the Rights
Agent in connection with the acceptance and administration of this
Agreement, including the reasonable costs and expenses of defending
against any claim of liability in the premises.
(b) The Rights Agent shall be protected and shall incur no liability
for, or in respect of any action taken, suffered or omitted by it in
connection with, its administration of this Agreement in reliance upon
any Rights Certificate or certificate for the Preferred Shares or
Common Shares or for other securities of the Company, instrument of
assignment or transfer, power of attorney, endorsement, affidavit,
letter, notice, direction, consent, certificate, statement, or other
paper or document believed by it to be genuine and to be signed,
executed and, where necessary, verified or acknowledged, by the proper
Person or Persons, or otherwise upon the advice of counsel as set forth
in Section 20 hereof.
<PAGE>
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the
Rights Agent or any successor Rights Agent shall be a party, or any
corporation succeeding to the corporate trust business of the Rights
Agent or any successor Rights Agent, shall be the successor to the
Rights Agent under this Agreement without the execution or filing of
any paper or any further act on the part of any of the parties hereto;
provided, however, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section
21 hereof. In case at the time such successor Rights Agent shall
succeed to the agency created by this Agreement, any of the Rights
Certificates shall have been countersigned but not delivered, any such
successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Rights Certificates so
countersigned; and in case at that time any of the Rights Certificates
shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the
predecessor Rights Agent or in the name of the successor Rights Agent;
and in all such cases such Rights Certificates shall have the full
force provided in the Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Rights Certificates
so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, the Rights Agent may
countersign such Rights Certificates either in its prior name or in its
changed name; and in all such cases such Rights Certificates shall have
the full force provided in the Rights Certificates and in this
Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any
action taken or omitted by it in good faith and in accordance with such
opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring
Person and the determination of "current per share market price") be
proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect
thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by any one
<PAGE>
of the Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Chief Financial Officer, the
Secretary or any Assistant Secretary of the Company and delivered to
the Rights Agent; and such certificate shall be full authorization to
the Rights Agent for any action taken or suffered in good faith by it
under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own negligence, bad faith or willful
misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the
Rights Certificates (except its countersignature thereof) or be
required to verify the same, but all such statements and recitals are
and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of
the validity or execution of any Rights Certificate (except its
countersignature thereof); nor shall it be responsible for any breach
by the Company of any covenant or condition contained in this Agreement
or in any Rights Certificate; nor shall it be responsible for any
change in the exercisability of the Rights or any adjustment in the
terms of the Rights (including the manner, method or amount thereof)
provided for in Sections 3, 11, 13, 23 or 24, or the ascertaining of
the existence of facts that would require any such change or adjustment
(except with respect to the exercise of Rights evidenced by Rights
Certificates after receipt by the Rights Agent of a certificate
furnished pursuant to Section 12 describing such change or adjustment);
nor shall it by any act hereunder be deemed to make any representation
or warranty as to the authorization or reservation of any Preferred
Shares to be issued pursuant to this Agreement or any Rights
Certificate or as to whether any Preferred Shares will, when issued, be
validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered
all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or
performing by the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder
from any one of the Chairman of the Board, the Chief Executive Officer,
the President, any Vice President, the Chief Financial Officer, the
Secretary or any Assistant Secretary of the Company, and to apply to
such officers for advice or instructions in connection with its duties,
and it shall not be liable for any action taken or suffered by it in
good faith in accordance with instructions of any such officer or for
any delay in acting while waiting for those instructions. Any
<PAGE>
application by the Rights Agent for written instructions from the
Company may, at the option of the Rights Agent, set forth in writing
any action proposed to be taken or omitted by the Rights Agent under
this Rights Agreement and the date on and/or after which such action
shall be taken or such omission shall be effective. The Rights Agent
shall not be liable for any action taken by, or omission of, the Rights
Agent in accordance with a proposal included in any such application on
or after the date specified in such application (which date shall not
be less than five (5) Business Days after the date any officer of the
Company actually receives such application, unless any such officer
shall have consented in writing to an earlier date) unless, prior to
taking any such action (or the effective date in the case of an
omission), the Rights Agent shall have received written instructions in
response to such application specifying the action to be taken or
omitted.
(h) The Rights Agent and any stockholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or
lend money to the Company or otherwise act as fully and freely as
though it were not Rights Agent under this Agreement. Nothing herein
shall preclude the Rights Agent from acting in any other capacity for
the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall
not be answerable or accountable for any act, default, neglect or
misconduct of any such attorneys or agents or for any loss to the
Company resulting from any such act, default, neglect or misconduct,
provided reasonable care was exercised in the selection and continued
employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder or in the exercise of
its rights if there shall be reasonable grounds for believing that
repayment of such funds or adequate indemnification against such risk
or liability is not reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the
form of assignment or form of election to purchase, as the case may be,
has either not been completed or indicates an affirmative response to
clause 1 and/or 2 thereof, the Rights Agent shall not take any further
action with respect to such requested exercise or transfer without
first consulting with the Company.
(l) At any time and from time to time after the Distribution Date, upon
the request of the Company, the Rights Agent shall promptly deliver to
the Company a list, as of the most recent practicable date (or as of
such earlier date as may be specified by the Company), of the holders
of record of Rights.
<PAGE>
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Company and to each
transfer agent of the Preferred Shares and the Common Shares by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
thirty (30) days' notice in writing, mailed to the Rights Agent or successor
Rights Agent, as the case may be, and to each transfer agent of the Preferred
Shares and the Common Shares by registered or certified mail, and to the holders
of the Rights Certificates by first-class mail. If the Rights Agent shall resign
or be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after giving notice of such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Rights Certificate (who shall, with such notice, submit his or her Rights
Certificate for inspection by the Company), then the registered holder of any
Rights Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Company or by such a court, shall be a corporation organized and doing
business under the laws of the United States or of any state of the United
States, in good standing, which is authorized under such laws to exercise
corporate trust or stockholder services powers and is subject to supervision or
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least $50
million. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Preferred
Shares and the Common Shares, and mail a notice thereof in writing to the
registered holders of the Rights Certificates. Failure to give any notice
provided for in this Section 21, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Shares following the Distribution Date and
prior to the redemption or expiration of the Rights, the Company (a) shall, with
respect to Common Shares so issued or sold pursuant to the exercise of stock
options or warrants or under any employee plan or arrangement, or upon the
exercise, conversion or exchange of securities hereinafter issued by the
Company, and (b) may, in any other case, if deemed necessary or appropriate by
the Board of Directors of the Company, issue Rights Certificates representing
the appropriate number of Rights in connection with such issuance or sale;
provided, however, that (i) no such Rights Certificate shall be issued and this
sentence shall be null and void ab initio if, and to the extent that, such
<PAGE>
issuance or this sentence would create a significant risk of or result in
material adverse tax consequences to the Company or the Person to whom such
Rights Certificate would be issued or would create a significant risk of or
result in such options' or employee plans' or arrangements' failing to qualify
for otherwise available special tax treatment and (ii) no such Rights
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption.
(a) The Company may, at its option and with the approval of the Board
of Directors, at any time prior to the Close of Business on the earlier
of (i) the tenth day following the Shares Acquisition Date or such
later date as may be determined by action of a majority of Continuing
Directors then in office and publicly announced by the Company or (ii)
the Final Expiration Date, redeem all but not less than all the then
outstanding Rights at a redemption price of $.01 per Right,
appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof (such redemption
price being herein referred to as the "Redemption Price") and the
Company may, at its option, pay the Redemption Price either in Common
Shares (based on the current per share market price thereof (as
determined pursuant to Section 11(d) hereof) at the time of redemption)
or cash. Such redemption of the Rights by the Company may be made
effective at such time, on such basis and with such conditions as the
Board of Directors in its sole discretion may establish; provided,
however, if the Board of Directors of the Company authorizes redemption
of the Rights on or after the time a Person becomes an Acquiring
Person, then there must be Continuing Directors then in office and such
authorization shall require the concurrence of a majority of such
Continuing Directors.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights, evidence of which shall
have been filed with the Rights Agent, and without any further action
and without any notice, the right to exercise the Rights will terminate
and the only right thereafter of the holders of Rights shall be to
receive the Redemption Price. The Company shall promptly give public
notice of any such redemption; provided, however, that the failure to
give or any defect in, any such notice shall not effect the validity of
such redemption. Within ten (10) days after the action of the Board of
Directors ordering the redemption of the Rights, the Company shall give
notice of such redemption to the Rights Agent and the holders of the
then outstanding Rights by mailing such notice to all such holders at
their last addresses as they appear upon the registry books of the
Rights Agent or, prior to the Distribution Date, on the registry books
of the transfer agent for the Common Shares. Any notice which is mailed
in the manner herein provided shall be deemed given, whether or not the
holder receives the notice. Each such notice of redemption will state
the method by which the payment of the Redemption Price will be made.
Neither the Company nor any of its Affiliates or Associates may redeem,
acquire or purchase for value any Rights at any time in any manner
other than that specifically set forth in this Section 23 or in Section
24 hereof, and other than in connection with the purchase of Common
Shares prior to the Distribution Date.
<PAGE>
Section 24. Exchange.
(a) Subject to applicable laws, rules and regulations, and subject to
subsection (c) below, the Company may, at its option, by majority vote
of the Board of Directors and a majority vote of the Continuing
Directors, at any time after the occurrence of a Triggering Event,
exchange all or part of the then outstanding and exercisable Rights
(which shall not include Rights that have become void pursuant to the
provisions of Section 7(e) hereof) for Common Shares at an exchange
ratio of one Common Share per Right, appropriately adjusted to reflect
any stock split, stock dividend or similar transaction occurring after
the date hereof (such exchange ratio being hereinafter referred to as
the "Ratio of Exchange"). Notwithstanding the foregoing, the Board of
Directors shall not be empowered to effect such exchange at any time
after any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or any such
Subsidiary, or any entity holding Common Shares for or pursuant to the
terms of any such plan), together with all Affiliates and Associates of
such Person, becomes the Beneficial Owner of 50% or more of the Common
Shares then outstanding.
(b) Immediately upon the action of the Board of Directors ordering the
exchange of any Rights pursuant to subsection (a) of this Section 24
and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of Common Shares
equal to the number of such Rights held by such holder multiplied by
the Ratio of Exchange. The Company shall give public notice of any such
exchange; provided, however, that the failure to give, or any defect
in, such notice shall not affect the validity of such exchange. The
Company shall mail a notice of any such exchange to all of the holders
of such Rights at their last addresses as they appear upon the registry
books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of exchange will state the method
by which the exchange of the Common Shares for Rights will be effected
and, in the event of any partial exchange, the number of Rights which
will be exchanged. Any partial exchange shall be effected pro rata
based on the number of Rights (other than Rights which have become void
pursuant to the provisions of Section 7(e) hereof) held by each holder
of Rights.
(c) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with Section 24(a),
the Company shall either take such action as may be necessary to
authorize additional Common Shares for issuance upon exchange of the
Rights or alternatively, at the option of a majority of the Board of
Directors, with respect to each Right (i) pay cash in an amount equal
to the Current Value (as hereinafter defined), in lieu of issuing
Common Shares in exchange therefor, or (ii) issue debt or equity
securities or a combination thereof, having a value equal to the
Current Value, in lieu of issuing Common Shares in exchange for each
such Right, where the value of such securities shall be determined by a
nationally recognized investment banking firm selected by the Board of
Directors by majority vote of the Board of Directors, or (iii) deliver
<PAGE>
any combination of cash, property, Common Shares and/or other
securities having a value equal to the Current Value in exchange for
each Right. For purposes of this Section 24(c) only, the Current Value
shall mean the product of the current per share market price of Common
Shares (determined pursuant to Section 11(d) on the date of the
occurrence of the event described above in subparagraph (a)) multiplied
by the number of Common Shares for which the Right otherwise would be
exchangeable if there were sufficient shares available. To the extent
that the Company determines that some action need be taken pursuant to
clauses (i), (ii) or (iii) of this Section 24(c), the Board of
Directors may temporarily suspend the exercisability of the Rights for
a period of up to sixty (60) days following the date on which the event
described in Section 24(a) shall have occurred, in order to seek any
authorization of additional Common Shares and/or to decide the
appropriate form of distribution to be made pursuant to the above
provision and to determine the value thereof. In the event of any such
suspension, the Company shall issue a public announcement stating that
the exercisability of the Rights has been temporarily suspended.
(d) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common
Shares. In lieu of such fractional Common Shares, there shall be paid
to the registered holders of the Rights Certificates with regard to
which such fractional Common Shares would otherwise be issuable, an
amount in cash equal to the same fraction of the current per share
market value of a whole Common Share (as determined pursuant to the
second sentence of Section 11(d) hereof).
(e) The Company may, at its option, by majority vote of the Board of
Directors, at any time before any Person has become an Acquiring
Person, exchange all or part of the then outstanding Rights for rights
of substantially equivalent value, as determined reasonably and with
good faith by the Board of Directors, based upon the advice of one or
more nationally recognized investment banking firms.
(f) Immediately upon the action of the Board of Directors ordering the
exchange of any Rights pursuant to subsection (e) of this Section 24
and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of rights in
exchange therefor as has been determined by the Board of Directors in
accordance with subsection (e) above. The Company shall give public
notice of any such exchange; provided, however, that the failure to
give, or any defect in, such notice shall not affect the validity of
such exchange. The Company shall mail a notice of any such exchange to
all of the holders of such Rights at their last addresses as they
appear upon the registry books of the transfer agent for the Common
Shares of the Company. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the
exchange of the Rights will be effected.
<PAGE>
Section 25. Notice of Certain Events.
(a) In case the Company shall propose to effect or permit to occur any
Triggering Event described in Section 11(a)(ii)(A) or 11(a)(ii)(B) or a
Section 13 Event, the Company shall give notice thereof to each holder
of Rights in accordance with Section 26 hereof at least twenty (20)
days prior to occurrence of such Triggering Event or such Section 13
Event.
(b) In case any Triggering Event or Section 13 Event shall occur, then,
in any such case, the Company shall as soon as practicable thereafter
give to each holder of a Rights Certificate, in accordance with Section
26 hereof, a notice of the occurrence of such event, which shall
specify the event and the consequences of the event to holders of
Rights under Sections 11(a)(ii) and 13 hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
EXOGEN, INC.
10 Constitution Avenue
P.O. Box 6860
Piscataway, New Jersey 08855
Attn: President
Subject to the provisions of Section 21 hereof, any notice or demand
authorized by this Agreement to be given or made by the Company or by the holder
of any Rights Certificate to or on the Rights Agent shall be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Attention: Stock Transfer Administration
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. Prior to the Distribution Date,
the Company may supplement or amend this Agreement in any respect without the
approval of any holders of Rights and the Rights Agent shall, if the Company so
directs, execute such supplement or amendment. From and after the Distribution
Date, the Company and the Rights Agent may from time to time supplement or amend
this Agreement without the approval of any holders of Rights in order to (i)
cure any ambiguity, (ii) correct or supplement any provision contained herein
which may be defective or inconsistent with any other provisions herein, (iii)
shorten or lengthen any time period hereunder (which lengthening or shortening,
<PAGE>
following the first occurrence of an event set forth in the proviso to Section
23(a) hereof, shall be effective only if there are Continuing Directors and
shall require the concurrence of a majority of such Continuing Directors) or
(iv) to change or supplement the provisions hereunder in any manner that the
Company may deem necessary or desirable and that shall not adversely affect the
interests of the holders of Rights (other than an Acquiring Person or an
Affiliate or Associate of an Acquiring Person); provided, this Agreement may not
be supplemented or amended to lengthen, pursuant to clause (iii) of this
sentence, (A) a time period relating to when the Rights may be redeemed at such
time as the Rights are not then redeemable or (B) any other time period unless
such lengthening is for the purpose of protecting, enhancing or clarifying the
rights of, and/or the benefits to, the holders of Rights. Upon the delivery of a
certificate from an appropriate officer of the Company that states that the
proposed supplement or amendment is in compliance with the terms of this Section
27, the Rights Agent shall execute such supplement or amendment. Prior to the
Distribution Date, the interests of the holders of Rights shall be deemed
coincident with the interests of the holders of Common Shares.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors, etc.
For all purposes of this Agreement, any calculation of the number of Common
Shares outstanding at any particular time, including for purposes of determining
the particular percentage of such outstanding Common Shares of which any Person
is the Beneficial Owner, shall be made in accordance with the last sentence of
Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act.
The Board of Directors of the Company (and, where specifically provided for
herein, the Continuing Directors) shall have the exclusive power and authority
to administer this Agreement and to exercise all rights and powers specifically
granted to the Board, or the Company (or, where specifically provided for
herein, the Continuing Directors), or as may be necessary or advisable in the
administration of this Agreement, including, without limitation, the right and
power to (i) interpret the provisions of this Agreement and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement). All such actions, calculations, interpretations and
determinations (including, for purposes of clause (y) below, all omissions with
respect to the foregoing) which are done or made by the Board (or, where
specifically provided for herein, by the Continuing Directors) in good faith,
shall (x) be final, conclusive and binding on the Company, the Rights Agent, the
holders of the Rights Certificates and all other parties and (y) not subject the
Board or the Continuing Directors to any liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, the Common Shares) any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Rights Certificates (and, prior to the Distribution Date, the Common
Shares).
<PAGE>
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the close of business on the
tenth day following the date of such determination by the Board of Directors.
Section 32. Governing Law. This Agreement and each Right and each
Rights Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
"COMPANY" EXOGEN, INC.
By:/s/ Patrick A. McBrayer
-------------------
Name: Patrick A. McBrayer
Title: Chief Executive Officer and President
"RIGHTS AGENT" REGISTRAR AND TRANSFER COMPANY
By:/s/ William P. Tatler
-----------------
Name: William P. Tatler
Title: Vice President
<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES A PARTICIPATING PREFERRED STOCK
OF EXOGEN, INC.
Pursuant to Section 151 of the Delaware General Corporation Law
The undersigned, Patrick A. McBrayer and Richard H. Reisner, do hereby
certify:
1. That they are the duly elected and acting Chief Executive Officer
and President, and Vice President, Chief Financial Officer and Secretary,
respectively, of Exogen, Inc., a Delaware corporation (the "Corporation").
2. That pursuant to the authority conferred upon the Board of Directors
by the Amended and Restated Certificate of Incorporation of the said
Corporation, the said Board of Directors adopted the following resolution
creating a series of 140,000 shares of Preferred Stock designated as Series A
Participating Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the corporation by the Amended and Restated Certificate of
Incorporation, the Board of Directors does hereby provide for the issue
of a series of Preferred Stock, par value $.0001 per share, of the
Corporation, to be designated "Series A Participating Preferred Stock,"
initially consisting of 140,000 shares and to the extent that the
designations, powers, preferences and relative and other special rights
and the qualifications, limitations and restrictions of the Series A
Participating Preferred Stock are not stated and expressed in the
Amended and Restated Certificate of Incorporation, does hereby fix and
herein state and express such designations, powers, preferences and
relative and other special rights and the qualifications, limitations
and restrictions thereof, as follows (all terms used herein which are
defined in the Amended and Restated Certificate of Incorporation shall
be deemed to have the meanings provided therein):
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Participating Preferred Stock," par value $.0001 per
share, and the number of shares constituting such series shall be 140,000.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior right of the holders of
any shares of any series of Preferred Stock ranking prior and superior to the
shares of Series A Participating Preferred Stock with respect to dividends, the
holders of shares of Series A Participating Preferred Stock shall be entitled to
receive when, as and if declared by the Board of Directors out of funds legally
<PAGE>
available for the purpose, quarterly dividends payable in cash on the last day
of December, March, June and September in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Participating Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to, subject to the provision for
adjustment hereinafter set forth, 100 times the aggregate per share amount of
all cash dividends, and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock of
the Corporation (the "Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A
Participating Preferred Stock. In the event the Corporation shall at any time
after December 6, 1996 (the "Rights Declaration Date") (i) declare any dividend
on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount to which holders of
shares of Series A Participating Preferred Stock were entitled immediately prior
to such event under the preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Corporation shall declare a dividend or distribution
on the Series A Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
A Participating Preferred Stock, unless the date of issue of such shares is
prior to the record date for the first Quarterly Dividend Payment Date, in which
case dividends on such shares shall begin to accrue from the date of issue of
such shares, or unless the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders of shares of
Series A Participating Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Participating Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Participating Preferred Stock
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be no more than 30 days prior to the date fixed for the
payment thereof.
<PAGE>
Section 3. Voting Rights. The holders of shares of Series A
Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Participating Preferred Stock shall entitle the
holder thereof to 100 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at any time
after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the number of votes per share to which holders of shares
of Series A Participating Preferred Stock were entitled immediately prior to
such event shall be adjusted by multiplying such number by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders
of shares of Series A Participating Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
(C) Except as required by law, holders of Series A
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) The Corporation shall not declare any dividend on, make
any distribution on, or redeem or purchase or otherwise acquire for
consideration any shares of Common Stock after the first issuance of a share or
fraction of a share of Series A Participating Preferred Stock unless
concurrently therewith it shall declare a dividend on the Series A Participating
Preferred Stock as required by Section 2 hereof.
(B) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Participating Preferred Stock as provided
in Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series A
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Participating Preferred Stock;
(ii) declare or pay dividends on, make any other
distributions on any shares of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with Series A Participating
Preferred Stock, except dividends paid ratably on the Series A Participating
Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled;
<PAGE>
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A Participating
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such parity stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Participating Preferred
Stock; or
(iv) purchase or otherwise acquire for consideration any
shares of Series A Participating Preferred Stock, or any shares of stock ranking
on a parity with the Series A Participating Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(C) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series A Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution
or winding up of the Corporation, no distribution shall be made to the holders
of shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Participating Preferred Stock unless,
prior thereto, the holders of shares of Series A Participating Preferred Stock
shall have received $100 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series A Liquidation Preference"). Following the payment of
the full amount of the Series A Liquidation Preference, no additional
distributions shall be made to the holders of shares of Series A Participating
Preferred Stock unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series A Liquidation Preference by (ii)
100 (as appropriately adjusted as set forth in subparagraph (C) below to reflect
such events as stock splits, stock dividends and recapitalization with respect
to the Common Stock) (such number in clause (ii), the "Adjustment Number").
Following the payment of the full amount of the Series A Liquidation Preference
and the Common Adjustment in respect of all outstanding shares of Series A
Participating Preferred Stock and Common Stock, respectively, holders of Series
A Participating Preferred Stock and holders of shares of Common Stock shall
receive their ratable and proportionate share of the remaining assets to be
distributed in the ratio of the Adjustment Number to 1 with respect to such
Preferred Stock and Common Stock, on a per share basis, respectively.
<PAGE>
(B) In the event, however, that there are not sufficient
assets available to permit payment in full to the Series A Liquidation
Preference and the liquidation preferences of all other series of Preferred
Stock, if any, which rank on a parity with the Series A Participating Preferred
Stock, then such remaining assets shall be distributed ratably to the holders of
such parity shares in proportion to their respective liquidation preferences. In
the event, however, that there are not sufficient assets available to permit
payment in full of the Common Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Participating Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 100 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Participating Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Participating
Preferred Stock shall not be redeemable.
Section 9. Ranking. The Series A Participating Preferred Stock shall
rank junior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
Section 10. Amendment. The Amended and Restated Certificate of
Incorporation of the Corporation shall not be further amended in any manner
which would materially alter or change the powers, preference or special rights
of the Series A Participating Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of a majority or more of the
outstanding shares of Series A Participating Preferred Stock, voting separately
as a class.
<PAGE>
Section 11. Fractional Shares. Series A Participating Preferred Stock
may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Participating Preferred Stock.
RESOLVED FURTHER, that the President or any Vice President and the
Secretary or any Assistant Secretary of this corporation be, and they hereby
are, authorized and directed to prepare and file a Certificate of Designation of
Rights, Preferences and Privileges in accordance with the foregoing resolution
and the provisions of Delaware law and to take such actions as they may deem
necessary or appropriate to carry out the intent of the foregoing resolution."
3. That the authorized number of Preferred Stock of the Corporation is
3,000,000 and that no such Preferred Stock has been issued.
<PAGE>
We further declare under penalty of perjury that the matters set forth
in the foregoing Certificate of Designation are true and correct of our own
knowledge.
Executed at Piscataway, New Jersey on December 6, 1996.
-------------------
Patrick A. McBrayer
Chief Executive Officer and President
---------------------
Richard H. Reisner
Vice President, Chief Financial Officer
and Secretary
<PAGE>
EXHIBIT B
FORM OF RIGHTS CERTIFICATE
Certificate No. R- _____ Rights
NOT EXERCISABLE AFTER DECEMBER 19, 2006 OR EARLIER IF TERMINATED BY THE
COMPANY OR IF THE COMPANY EXCHANGES THE RIGHTS PURSUANT TO THE RIGHTS
AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, AT $30.00 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON
(AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT
HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED
BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON
WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF
AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES
SPECIFIED IN SECTION 7(E) OF SUCH RIGHTS AGREEMENT.]*
* The portion of the legend in bracket shall be inserted only if applicable and
shall replace the preceding sentence.
RIGHTS CERTIFICATE
EXOGEN, INC.
This certifies that ______________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement dated as of December 6, 1996 (the "Rights Agreement"),
between Exogen, Inc., a Delaware corporation (the "Company"), and Registrar and
Transfer Company (the "Rights Agent"), to purchase from the Company at any time
after the Distribution Date (as such term is defined in the Rights Agreement)
and prior to 5:00 p.m., California time, on December 19, 2006 at the office of
the Rights Agent designated for such purpose, or at the office of its successor
as Rights Agent, one one-hundredth of a fully paid non-assessable share of
Series A Participating Preferred Stock, par value $.0001 per share, (the
"Preferred Shares"), of the Company, at a purchase price of $30.00 per one
one-hundredth of a Preferred Share (the "Purchase Price"), upon presentation and
surrender of this Rights Certificate with the Form of Election to Purchase and
related Certificate duly executed. The number of Rights evidenced by this Rights
Certificate (and the number of one one-hundredths of a Preferred Share which may
be purchased upon exercise hereof) set forth above are the number and Purchase
Price as of December 6, 1996, based on the Preferred Shares as constituted at
such date. As provided in the Rights Agreement, the Purchase Price and the
number and kind of Common Shares or other securities which may be purchased upon
the exercise of the Rights evidenced by this Rights Certificate are subject to
modification and adjustment upon the happening of certain events.
<PAGE>
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the principal executive offices of
the Company and the above-mentioned office of the Rights Agent.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Rights Certificate (i) may be redeemed by the Company, at its option, at
a redemption price of $.01 per Right or (ii) may be exchanged by the Company in
whole or in part for Common Shares, substantially equivalent rights or other
consideration as determined by the Company.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the office of the Rights Agent designated for such purpose,
may be exchanged for another Rights Certificate or Rights Certificates of like
tenor and date evidencing Rights entitling the holder to purchase a like
aggregate amount of securities as the Rights evidenced by the Rights Certificate
or Rights Certificates surrendered shall have entitled such holder to purchase.
If this Rights Certificate shall be exercised in part, the holder shall be
entitled to receive upon surrender hereof another Rights Certificate or Rights
Certificates for the number of whole Rights not exercised.
No fractional portion of less than one one-hundredth of a Preferred
Share will be issued upon the exercise of any Right or Rights evidenced hereby
but in lieu thereof a cash payment will be made, as provided in the Rights
Agreement.
No holder of this Rights Certificate, as such, shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of the
Preferred Shares or of any other securities of the Company which may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
<PAGE>
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of ___________, 19__.
ATTEST: EXOGEN, INC.
By:
- --------------------- ----------------------
Richard H. Reisner Patrick A. McBrayer
Vice President, Chief Financial Officer Chief Executive Officer and
and Secretary President
Countersigned:
REGISTRAR AND TRANSFER COMPANY,
as Rights Agent
By: -------------------
Name:
Title:
<PAGE>
FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate)
FOR VALUE RECEIVED____________________hereby sells, assigns and transfers
unto _______________________________________________________________
(Please print name and address of transferee)
- ----------------------------------------------------------------------------
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint __________________________
Attorney, to transfer the within Rights Certificate on the books of the
within-named Company, with full power of substitution.
Dated: _______________, 1996
__________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
<PAGE>
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(i) this Rights Certificate [ ] is [ ] is not being sold,
assigned and transferred by or on behalf of a Person who is or was an Acquiring
Person, or an Affiliate or Associate of any such Person (as such terms are
defined in the Rights Agreement);
(ii) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or subsequently became an Acquiring
Person or an Affiliate or Associate of any such Person.
Dated: _______________, 1996
__________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
<PAGE>
FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE -- CONTINUED
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Rights Certificate)
To:
The undersigned hereby irrevocably elects to exercise
_______________________ Rights represented by this Rights Certificate to
purchase the number of one one-hundredths of a Preferred Share issuable upon the
exercise of such Rights and requests that certificates for such number of one
one-hundredths of a Preferred Share issued in the name of:
Please insert social security or other identifying number
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security or other identifying number
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
Dated: , 1996
__________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
<PAGE>
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Person (as such terms are defined in the
Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of any such Person.
Dated:____________,1996
_________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
<PAGE>
FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE -- CONTINUED
NOTICE
The signature in the foregoing Forms of Assignment and Election must
conform to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE>
EXHIBIT C
EXOGEN, INC.
STOCKHOLDER RIGHTS PLAN
Summary of Rights
Distribution Transfer of Rights; The Board of Directors has declared a
Rights Certificate: dividend of one Right (the "Right") for
each outstanding share of Common Stock,
par value $.0001, of Exogen, Inc. (the
"Company"). Prior to the Distribution
Date referred to below, the Rights will
be evidenced by, and trade with, the
certificates for the Common Stock. After
the Distribution Date, the Company will
mail Rights certificates to the
Company's stockholders and the Rights
will become transferable apart from the
Common Stock.
Distribution Date: Rights will separate from the Common
Stock and become exercisable on the
tenth day (or such later date as may be
determined by a majority of the
Directors not affiliated with the
acquiring person or group (the
"Continuing Directors")) after a person
or group (a) acquires beneficial
ownership of 15% or more of the
Company's Common Stock or (b) announces
a tender or exchange offer, the
consummation of which would result in
ownership by a person or group of 15% or
more of the Company's Common Stock.
Preferred Stock Purchasable After the Distribution Date, each Right
Upon Exercise of Rights: will entitle the holder to purchase, for
$30.00, a fraction of a share of the
Company's Preferred Stock with economic
terms similar to that of one share of
the Company's Common Stock.
<PAGE>
Flip-In: If an acquiror (an "Acquiring Person")
obtains 15% or more of the Company's
Common Stock (other than pursuant to a
tender offer deemed adequate and in the
best interests of the Company and its
stockholders by the Board of Directors
(a "Permitted Offer")), then each Right
(other than Rights owned by an Acquiring
Person or its affiliates) will entitle
the holder thereof to purchase, for the
exercise price, a number of shares of
the Company's Common Stock having a then
current market value of twice the
exercise price.
Flip-Over: If, after the Shares Acquisition Date
(defined below), (a) the Company merges
into another entity, (b) an acquiring
entity merges into the Company or (c)
the Company sells more than 50% of the
Company's assets or earning power, then
each Right (other than Rights owned by
an Acquiring Person or its affiliates)
will entitle the holder thereof to
purchase, for the exercise price, a
number of shares of Common Stock of the
person engaging in the transaction
having a then current market value of
twice the exercise price (unless the
transaction satisfies certain conditions
and is consummated with a person who
acquired shares pursuant to a Permitted
Offer, in which case the Rights will
expire).
Exchange Provision: At any time after an event triggering
the flip-in or flip-over rights and
prior to the acquisition by the
Acquiring Person of 50% or more of the
outstanding Common Stock, the Board of
Directors of the Company may exchange
the Rights (other than Rights owned by
the Acquiring Person or its affiliates),
in whole or in part, at an exchange
ratio of one share of Common Stock per
Right (subject to adjustment).
Redemption of the Rights: Rights will be redeemable at the
Company's option for $.01 per Right at
any time on or prior to the tenth day
(or such later date as may be determined
by a majority of the Continuing
Directors) after public announcement
that a person has acquired beneficial
ownership of 15% or more of the
Company's Common Stock (the "Shares
Acquisition Date").
<PAGE>
Expiration of the Rights: The Rights expire on the earliest of (a)
December 19, 2006, (b) exchange or
redemption of the Rights as described
above, or (c) consummation of a merger
or consolidation resulting in expiration
of the Rights as described above.
Amendment of Terms of Rights: The terms of the Rights and the Rights
Agreement may be amended in any respect
without the consent of the Rights
holders on or prior to the Distribution
Date; thereafter, the terms of the
Rights and the Rights Agreement may be
amended without the consent of the
Rights holders in order to cure any
ambiguities or to make changes which do
not adversely affect the interests of
Rights holders (other than the Acquiring
Person).
Voting Rights: Rights will not have any voting rights.
Anti-Dilution Provisions: Rights will have the benefit of certain
customary anti-dilution provisions.
Taxes: The Rights distribution should not be
taxable for federal income tax purposes.
However, following an event which
renders the Rights exercisable or upon
redemption of the Rights, stockholders
may recognize taxable income.
The foregoing is a summary of certain principal terms of the Stockholder Rights
Plan only and is qualified in its entirety by reference to the detailed terms of
the Rights Agreement dated as of December 6, 1996, between the Company and the
Rights Agent. Further details of the Rights are contained in a letter that will
be mailed to all the Company's stockholders.
