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
For the fiscal year ended September 30, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 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)
(732) 981-0990
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
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(Title of Class)
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(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. [ X ]
The registrant has only one class of voting securities, its common
stock, par value $0.0001 per share (the "Common Stock"), and no classes of
nonvoting securities. While it is difficult to determine the number of shares of
Common Stock owned by non-affiliates, the registrant estimates that the
aggregate market value of outstanding Common Stock on November 30, 1997, (based
upon the closing selling price of such Common Stock on the Nasdaq National
Market on November 28, 1997) held by non-affiliates was approximately $22.9
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 November 30, 1997, there were outstanding 11,802,159 shares of
the registrant's Common Stock, par value $0.0001.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement of Exogen, Inc. in connection with the Annual
Meeting of Stockholders scheduled on or about February 25, 1998, is incorporated
by reference into Part III of this Form 10-K.
<PAGE>
EXOGEN, INC.
1997 Form 10-K Annual Report
TABLE OF CONTENTS
Page
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.....
<PAGE>
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
SAFHS device 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's Pre-Market Approval ("PMA") application for its first
model, the SAFHS Model 2A, was approved by the U. S. Food and Drug
Administration ("FDA") in October 1994. The Company designed a second-generation
SAFHS device, the SAFHS 2000(R), 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 does the SAFHS Model 2A. The Company
filed a PMA supplement for the SAFHS 2000 in December 1995, and in March 1997,
the FDA approved this supplement. In May 1997, the Company commenced commercial
distribution of the SAFHS 2000 in the United States.
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
<PAGE>
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
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.
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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
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 additional cost of approximately $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.
<PAGE>
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
(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 28,000,000 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. A new estrogen-derivative
drug thereapy, which does not have the potential for side effects of cancer, has
recently been approved for the treatment of osteoporosis. 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, trauma centers, and community-based practices.
<PAGE>
Establish Reimbursement by Third-Party Payors. In the United States,
the Company is engaged in broad-based efforts to obtain reimbursement for the
SAFHS device as a new treatment device from third-party payors, including
managed care organizations, workers' compensation insurers, traditional
indemnity insurers, and Medicare. To substantiate the effectiveness of the SAFHS
devices, the Company has collected patient-outcomes data on over 4,000 fractures
since the introduction of SAFHS in October 1994. The Company uses scientific,
clinical, and patient-outcomes data on the safety and effectiveness of the SAFHS
treatment to support the Company's third-party reimbursement efforts.
Internationally, the Company uses indigenous clinical data as well as data
collected in the United States to support reimbursement efforts with
governmental and major private insurers.
Broaden Sales and Marketing Efforts. The Company has a nationwide
network of independent and direct sales representatives in the United States. At
September 30, 1997, the Company had 17 employees in its direct sales
organization and a network of 185 independent sales representatives 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 a development agreement 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 late 1997, pilot
clinical trials using SAFHS were completed in Europe for reamed intramedullary
rodded fractures. Also in 1997, the Company completed preclinical studies in the
United States for spine fusion, and is in preclinical studies for cartilage
repair. The Company expects that university-based pilot clinical trials using
the SAFHS treatment in leg-lengthening procedures will be completed in 1998. 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
on 62 post-menopausal women in the United States, which trial will be completed
in early 1998. The Company is seeking to establish strategic alliances with
other health-care companies to further develop certain applications of its
technologies.
Establish Manufacturing Capability. During 1996, the Company
established manufacturing capability at its facility in Piscataway, New Jersey,
to augment its outside manufacturing source. The Company refurbishes the SAFHS
Model 2A, and in 1997, began manufacturing the SAFHS 2000. The Company believes
that this manufacturing capability, together with its product engineering
capability, has and will continue to (i) advance its product design and
development efforts, (ii) provide better control over its costs, and (iii)
reduce its dependence on its contract manufacturer that also manufactures the
SAFHS 2000.
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.
<PAGE>
Sonic Accelerated Fracture Healing System ("SAFHS")
SAFHS is a non-invasive device that delivers ultrasound energy to
accelerate fracture healing through specifically programmed, low-intensity
acoustic pressure waves. The SAFHS treatment was designed to maximize ease of
use. 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.
Treatment requires use of the device only once daily for 20 minutes. The
treatment period averages approximately four months for treatment of a tibia
fracture and approximately eight weeks for a distal radius fracture. The device
is portable 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 device alerts
the patient about treatment status and 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 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 Model 2A. The original SAFHS device, the SAFHS Model 2A, is
currently being sold principally outside the United States. This device 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 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. The list
price of the SAFHS Model 2A is $2,950, regardless of the length of treatment.
<PAGE>
SAFHS 2000. The Company's second-generation SAFHS device, the SAFHS
2000, 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, and in March 1997, the FDA approved this supplement. In May 1997,
the Company commenced commercial distribution of the SAFHS 2000 in the United
States. The list price of the SAFHS 2000 is $3,500, regardless of the length of
treatment.
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 anticipates their
completion in 1998. Following completion of these pilot trials, the Company
intends to submit to the FDA an IDE for pivotal clinical trials, and plans to
begin the pivotal clinical trials if a strategic alliance is established. No
assurance can be given that the mechanical-stress device will prove to be safe
and efficacious, that a strategic alliance will be established, 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
<PAGE>
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.
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,
trauma centers, and 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
SAFHS. The Company has a nationwide network of independent and direct
sales representatives in the United States. At September 30, 1997, the Company
had 17 employees in its direct sales organization and a network of 185
independent sales representatives throughout the United States. The Company's
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 and workers' compensation organizations, with coordinated marketing
through the Company's sales force and reimbursement specialists.
<PAGE>
Other Products. In January 1997, the Company entered into a sales and
distribution agreement with FLA Orthopedics, Inc. ("FLA") and Clinitex Medical
Corporation ("Clinitex"), a wholly owned subsidiary of FLA, to market and sell
in the United States Clinitex's nonfiberglass synthetic casting materials used
in fracture immobilization. The Company paid FLA $200,000 upon the execution of
the agreement. To date, sales by the Company of Clinitex products have been
minimal. The Company has decided not to pay FLA the $150,000 required to
continue marketing and selling the Clintex products in fiscal 1998, and to
consequently terminate the agreement.
International
The Company established a wholly owned German subsidiary in fiscal
1995, and in fiscal 1996 introduced the SAFHS device in Germany and Austria
through the subsidiary's network of independent sales agents. In fiscal 1997,
the Company expanded its sales into Holland, Denmark, and the United Kingdom. In
other European countries, the Company is selecting and training 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. During fiscal 1997, the Company filed applications for national
reimbursement coverage for its SAFHS device in Germany and France.
In November 1995, the Company signed development agreements with Teijin
Limited, a Japanese corporation, 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 is
responsible for complying with the regulatory requirements and for marketing and
distributing the SAFHS device in Japan. In May 1997, Teijin received import
approval to market the SAFHS Model 2A in Japan, and in August 1997, Teijin
submitted an application for reimbursement from the Japanese Ministry of Health.
The development agreement with Teijin for the mechanical-stress device 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 will receive reimbursement
approvals in any country, or that its partners, distributors, and agents 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, foreign regulations, and reimbursement approvals.
For further information on international operations, see Footnote 5,
"Geographic Segment Information," of the Consolidated Financial Statements
included herein.
<PAGE>
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, 1997, the Company has been paid by over
800 third-party payors including (i) traditional indemnity insurers including
Blue Shield organizations, (ii) workers' compensation insurers, (iii) HMO and
managed care organizations, (iv) automobile insurers, and (v) third-party
administrators. The Company believes that case-by-case reimbursement approval
will continue to be the predominant method of obtaining pre-authorization and
reimbursement for the SAFHS device until payor coverage at the national,
regional, or local level is obtained. The Company is seeking to establish
separate reimbursement codes for the SAFHS device with various payors 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, however, continues to pursue coverage
for SAFHS by providing additional information to the HCFA staff. In the interim,
the Company is not shipping orders to patients covered under Medicare. No
assurance can be given that the Company will be successful in obtaining coverage
for the SAFHS device under the Medicare program.
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
<PAGE>
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. In
Germany, Holland, and France, the Company is using indigenous clinical data as
well as data collected in the United States on the effectiveness of the SAFHS
device to support the Company's filings for reimbursement coverage. In Japan,
Teijin has submitted an application for reimbursement from the Japanese National
Health Insurance Bureau. These countries may have more stringent reimbursement
requirements than the United States, and the Company currently has limited
experience in obtaining reimbursement for its products in countries other than
the United States.
As of September 30, 1997, the international accounts receivable is
primarily derived from sales in Germany, where the Company has received limited
local reimbursement on a case-by-case basis. To assist the collection of
outstanding claims and to expedite the reimbursement process on future claims,
the Company is seeking nationwide approval by the National Krankenkasse, the
German governing organization that establishes medical reimbursement policy for
health-care providers. To this end, in August 1997 the Company submitted a
formal application to the National Krankenkasse. The application process
includes a scientific assessment and a reimbursement assessment; the Company is
currently in the scientific-assessment phase. In the interim, the Company has
elected to sell SAFHS devices in Germany only when reimbursement is preapproved.
There can be no assurance that sufficient 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 either in the United States or abroad 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 SAFHS 2000 is manufactured by the Company and by a contract
manufacturer. The Company also refurbishes the SAFHS Model 2A at its facility.
<PAGE>
The agreement between the Company and the contract manufacturer is documented by
specific purchase orders, effective into 1999, covering a portion of anticipated
requirements. This contract manufacturer also performs certain design
engineering for the Company. Both the Company's facility and its contract
manufacturer's facility have been inspected by the FDA for Good Manufacturing
Practices ("GMP") and have been found to be in compliance with GMP requirements.
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 the Company conforms with the European
Community Medical Device Directive. 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. Any failure by the
Company or the contract manufacturer to maintain its respective manufacturing
facility in accordance with GMP or CE requirements could result in the inability
to manufacture the SAFHS device, and could 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 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. 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.
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 the treatment of lower-back spine fusion and on 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, 1997, the Company had six employees engaged in
research and development and regulatory affairs and eight employees engaged in
engineering. The Company's expenditures for research and development (which
includes clinical trials, regulatory affairs, and engineering) were
approximately $3.1 million, $4.0 million, and $2.5 million in fiscal 1997, 1996,
and 1995, respectively.
<PAGE>
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 eight
issued United States patents, one issued foreign (Canadian) patent, 12 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.
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.
<PAGE>
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
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
<PAGE>
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.
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.
<PAGE>
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, and in March 1997,
the FDA approved this supplement. In May 1997, the Company commenced commercial
distribution of the SAFHS 2000 in the United States. 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
Federal Trade Commission. Products may be promoted by the Company and any of its
agents only for the products' approved indications. No assurance can be given
that the FDA will not impose modifications to the labeling that could adversely
affect the Company's ability to market, sell, or be reimbursed for the SAFHS
device. In addition, 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.
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 manufactured by the Company and a contract manufacturer. Both
facilities have been inspected by the FDA and are the only facilities approved
for the production of the SAFHS device. Any failure by the Company or the
contract manufacturer to maintain its respective facility in accordance with FDA
GMP requirements could result in the inability 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.
<PAGE>
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, or 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
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
<PAGE>
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 million per occurrence and an annual aggregate maximum of $3
million. In addition, the Company maintains umbrella liability insurance,
including product liability coverage, of $10 million per occurrence and an
annual aggregate maximum of $10 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.
Employees
As of November 30, 1997, the Company had 75 employees, consisting of 24
in sales and marketing, eight in engineering, 14 in finance and administration,
five in quality assurance, 10 in reimbursement and customer service, six in
research and development and regulatory affairs, and eight 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 approximately 32,000 square feet of a facility in
Piscataway, New Jersey. This leased space contains approximately 9,000 square
feet of manufacturing space and 23,000 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 its 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
<PAGE>
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. Exogen and Interpore since have agreed that (i) Exogen's
counsel will assume the status of lead defense counsel in the litigation; (ii)
any adverse judgment entered in the litigation will be entered against Exogen
and Interpore jointly and severally; and (iii) Exogen will indemnify Interpore
for any payments that are required to be made to the consultant as a result of
the litigation, and Exogen and Interpore thereafter will resolve separately
their respective liabilities. As a result of the foregoing, in March 1996 Exogen
and Interpore dismissed their claims against each other in this litigation,
without prejudice to their right to resolve them, if necessary, as described
above. The Company does not believe that the consultant's claims have merit, and
together with Interpore, is vigorously defending this action. The discovery
process has been completed, and the Company anticipates making a motion that the
Court enter a judgment in favor of the Company and Interpore and against the
consultant. There can be no assurance, however, that the motion will be granted
or 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.
In March 1997, the Company received a demand from Pilla Consulting,
Inc. and Arthur A. Pilla (collectively, "Pilla") for royalties allegedly due
pursuant to a consulting agreement between Pilla Consulting and the predecessor
company to Interpore. Pilla claims entitlement to royalties of 1.25% of the net
revenues generated from the sale of SAFHS devices. The Company does not believe
that Pilla's claim has any merit. For that reason, on April 2, 1997, the Company
filed a complaint against Pilla in the Supreme Court for the State of New York
seeking a judicial declaration that the Company is not liable to Pilla for any
royalties. Pilla asserted a counterclaim against the Company, seeking to be
awarded the demanded royalties, that the Company asked the Court to dismiss on
the grounds that Pilla failed to state a claim against the Company. Pilla
subsequently asked the Court for permission to replead the counterclaim, and the
Company has opposed this motion on the grounds that the amended claim also fails
to state a claim against the Company. These motions are pending. The Company
intends to aggressively pursue the action against Pilla and to
vigorously defend against any counterclaim(s) by Pilla seeking said royalties or
equivalent payments under any legal theory. There can be no assurance, however,
that Pilla's claim will not be upheld.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
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....................................... 63 Chairman of the Board of Directors and Vice President of
Research and Development and Regulatory Affairs
Patrick A. McBrayer................................. 46 Chief Executive Officer, President, and Director
Richard H. Reisner.................................. 54 Vice President, Chief Financial Officer, and Secretary
Roger J. Talish..................................... 55 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 to 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.
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 fiscal 1996 and 1997, based on transaction data as
reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
Fiscal years ended
September 30, 1996 and 1997 High Low
--------------------------- ---- ---
<S> <C> <C>
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
1997
----
First quarter................... $ 6.000 $ 3.250
Second quarter.................. $ 7.625 $ 3.500
Third quarter................... $ 5.750 $ 3.375
Fourth quarter.................. $ 5.625 $ 3.000
</TABLE>
On November 28, 1997, 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 November 30, 1997, there were approximately 204 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
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
<PAGE>
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.
Common Stock Warrants
In September 1997, the Company and a consultant entered into an
advisory agreement whereby the consultant acquired a warrant (at a cost of $0.20
per share) to purchase up to 100,000 shares of the Company's Common Stock at an
exercise price of $4.50 per share (the "Cash Purchase Warrant"). The Cash
Purchase Warrant is immediately exercisable and expires five years after
issuance subject, however, to expiration on August 1, 1998, in the event that
the Company does not, by April 30, 1998, consummate a strategic partnering
transaction relating to the commercialization of certain of the Company's
non-invasive technologies (each a "Strategic Partnering Transaction"). Further,
for each of the Strategic Partnering Transactions described in the advisory
agreement and subsequently entered into by the Company, the consultant will
receive a warrant (at no cost) to purchase 75,000 shares of the Company's Common
Stock at an exercise price of $4.50 per share (the "Transaction Warrant"). For
each such Strategic Partnering Transaction consummated prior to April 30, 1998,
the consultant will receive, in lieu of the foregoing Transaction Warrant, a
Transaction Warrant to purchase 125,000 shares of the Company's Common Stock at
an exercise price of $4.50 per share (subject to adjustment). Such Transaction
Warrants, if issued, would expire five years after issuance.
As of November 30, 1997, the Cash Purchase Warrant was not exercised,
and no additional Transaction Warrants have been issued to the consultant.
Private Placement of Common Stock
On October 20, 1997, the Company completed a private placement (the
"Private Placement") of 1,799,019 shares of its Common Stock for aggregate
proceeds of approximately $7.5 million. The Common Stock subject to the Private
Placement was sold by the Company pursuant to Regulation D of the Securities Act
of 1933, as amended, on the basis that the Common Stock was issued under
circumstances not involving a public offering. Pursuant to a Registration Rights
Agreement, dated October 20, 1997, by and among the Company and the investors in
the Private Placement, the Company is required to file a registration statement
registering the shares of Common Stock sold in the Private Placement within 90
days of the consummation of the Private Placement.
Participants in the Private Placement included certain investment
funds, trusts, and individuals, including Messrs. Benson, Lothrop, and Wall,
each of whom is a director of the Company. Additional information regarding this
item is incorporated herein by reference to "Certain Transactions" in the
Company's Definitive Proxy Statement, which is to be filed with the SEC on or
about January 8, 1998.
<PAGE>
Item 6. Selected Financial Data
Set forth below are the selected consolidated financial data for the
Company for the five fiscal years ended September 30, 1997. 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,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product sales ........................... $ 7,081 $ 5,777 $ 1,852 $ -- $ --
Revenues from development agreements .... 400 1,100 -- -- --
-------- -------- -------- -------- --------
Total revenues ...................... 7,481 6,877 1,852 -- --
-------- -------- -------- -------- --------
Operating costs and expenses:
Cost of product sales ................... 3,864 3,661 1,128 -- --
Research and development and related
patent acquired ..................... -- -- -- -- 1,068
Research and development ................ 3,124 3,988 2,545 1,432 572
Selling, general, and administrative .... 12,291 11,030 5,775 1,782 382
-------- -------- -------- -------- --------
Total operating costs and expenses .. 19,279 18,679 9,448 3,214 2,022
-------- -------- -------- -------- --------
Operating loss .............................. (11,798) (11,802) (7,596) (3,214) (2,022)
Other income (expense):
Interest income (expense), net .......... 701 1,438 604 (185) (24)
Other expense, net ...................... (51) (224) (59) (2) (21)
-------- -------- -------- -------- --------
Total other income (expense), net ... 650 1,214 545 (187) (45)
-------- -------- -------- -------- --------
Loss before income taxes .................... (11,148) (10,588) (7,051) (3,401) (2,067)
Provision for income taxes .................. 4 -- -- -- --
-------- -------- -------- -------- --------
Net loss .................................... $(11,152) $(10,588) $ (7,051) $ (3,401) $ (2,067)
======== ======== ======== ======== ========
Net loss per share .......................... $ (1.12) $ (1.07) -- -- --
======== ========
Weighted average shares outstanding ......... 9,946 9,875 -- -- --
Pro forma net loss per share ................ -- -- $ (0.93) $ (0.48) $ (0.32)
======== ======== ========
Pro forma weighted average shares outstanding -- -- 7,574 7,020 6,517
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents and short- and long-term
investments .................................. $ 8,544 $19,534 $31,061 $ 640 $ 180
Working capital .................................. 11,042 17,235 30,054 301 (461)
Total assets ..................................... 14,789 25,511 34,886 1,773 442
Redeemable Preferred Stock ....................... -- -- -- 6,002 1,758
Total stockholders' equity (deficit) ............. 12,091 23,077 33,342 (5,487) (2,075)
</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, 1997 compared with Fiscal Year ended September
30, 1996
Essentially all of the Company's product sales were from the Company's
SAFHS devices. For fiscal 1997, product sales were $7.1 million, compared with
$5.8 million for fiscal 1996. The increase of $1.3 million (or 23%) was a result
of an increase in sales volume. International product sales were 18% of total
product sales in fiscal 1997, compared with 14% in fiscal 1996.
In fiscal 1997, the Company recorded revenues of $400,000 related to
development agreements with Teijin Limited, a Japanese corporation, compared
with $1.1 million in fiscal 1996. These development agreements cover two of the
Company's technologies: (i) the SAFHS device and (ii) 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 is 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.
<PAGE>
Cost of product sales was $3.9 million for fiscal 1997, compared with
$3.7 million for fiscal 1996. Included in cost of sales were royalties and the
cost of manufacture of the SAFHS device by the Company and an outside source.
Excluding revenues related to development agreements, gross profit for fiscal
1997 was $3.2 million (or 45% as a percentage of product sales), compared with
$2.1 million (or 37%) for fiscal 1996. This $1.1 million increase (or 52%) in
gross profit was principally due to the increase in sales volume and reduced
per-unit product costs, partially offset by a decrease in the average realized
selling price of a SAFHS device, which was approximately $2,025 for fiscal 1997,
compared with approximately $2,285 for fiscal 1996. The decrease in average
realized selling price was primarily due to an increase in the allowances for
returns and for price reductions by third-party payors.
Research and development expenses in fiscal 1997 decreased to $3.1
million from $4.0 million in fiscal 1996. The decrease of $864,000 (or 22%) was
primarily the result of (i) reduced expenditures for designing and building the
mechanical-stress device for clinical studies, (ii) the discontinuation of
shipments of SAFHS devices in connection with certain clinical prescriptions for
which reimbursement is currently not available, and (iii) reduced costs
associated with analyses of clinical data for the SAFHS therapy. This decrease
was partially offset by increased expenses associated with additional research
projects.
Selling, general, and administrative expenses in fiscal 1997 increased
to $12.3 million from $11.0 million in fiscal 1996. The $1.3 million increase
(or 11%) resulted from (i) expanded selling and marketing efforts related to the
SAFHS Model 2A, both in the United States and in Europe, and the introduction in
May 1997 of the second-generation SAFHS 2000, in the United States, (ii)
marketing activities relating to the Company's line of synthetic casting
materials used in fracture immobilization, (iii) increased activities relating
to reimbursement efforts, and (iv) a nonrecurring charge of approximately
$150,000, related to a workforce reduction in the third quarter of fiscal 1997.
Net interest income in fiscal 1997 decreased to $701,000 from $1.4
million in fiscal 1996, consistent with the level of funds available for
investment. Other expense, net for fiscal 1997 decreased to $51,000 from
$224,000 for fiscal 1996, principally due to the settlement of a legal action by
the Company in the second quarter of fiscal 1996.
The Company incurred net losses of $11.2 million, or $1.12 per share,
in fiscal 1997 compared with $10.6 million, or $1.07 per share, in fiscal 1996
(per share data based upon weighted average shares outstanding, which exclude
options because they are antidilutive). The increase of $564,000 (or 5%) in net
loss was caused principally by the factors discussed above.
Fiscal Year ended September 30, 1996 compared with Fiscal Year ended September
30, 1995
For fiscal 1996, product sales were $5.8 million, 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. No such revenues were reported for fiscal 1995.
<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 sales 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 ("IPO") 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 of fiscal 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.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $34.3 million at September 30,
1997. Through September 30, 1997, the Company had funded its operations
primarily through the private placement of equity securities (aggregating $17.6
million) and an IPO of Common Stock in July 1995 (aggregating $28.5 million,
including proceeds from the overallotment option). Subsequent to the close of
fiscal 1997, on October 20, 1997, the Company completed a $7.5 million private
placement of 1,799,019 shares of its Common Stock.
At September 30, 1997, the Company had a working capital balance of
approximately $11 million. In fiscal 1997, the Company used net cash of $10.9
million for operating activities, primarily to fund (i) selling and marketing of
the SAFHS Model 2A and, in the second half of fiscal 1997, the SAFHS 2000 and
(ii) an increase in the international accounts receivable days outstanding from
240 days at September 30, 1996, to 390 days at September 30, 1997. The Company's
<PAGE>
capital expenditures in fiscal 1997 were $165,000. The Company estimates that
equipment and furnishings to expand in-house manufacturing and administrative
support activities will require capital expenditures of approximately $300,000
during each of the next two fiscal years.
To help conserve its capital resources, the Company reduced its
workforce during the quarter ended June 30, 1997. Through the reduction, the
Company expects to realize approximately $750,000 of annual pretax savings;
approximately $221,000 was saved in fiscal 1997.
The Company plans to finance its capital needs from existing capital
resources and the proceeds of the October 1997 private placement, the
combination of which the Company believes will be sufficient to fund its
operations into fiscal 1999. Additional funding might 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.
Recent Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share." This statement establishes standards for computing and presenting
earnings per share ("EPS"), replacing the presentation of currently required
primary EPS with a presentation of Basic EPS. For entities with complex capital
structures, SFAS 128 requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. Under this new standard,
Basic EPS is computed based on weighted average shares outstanding and excludes
any potential dilution; Diluted EPS reflects potential dilution from the
exercise or conversion of securities into common stock or from other contracts
to issue common stock, and is similar to the currently required fully diluted
EPS. SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and earlier application is
not permitted. When adopted, the Company will be required to restate its EPS for
all prior periods presented. The Company does not expect the impact of the
adoption of SFAS 128 to be material to previously reported EPS.
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
approval from the FDA for the Company's SAFHS device, developing the Company's
sales and marketing organization, supervising the manufacture of the SAFHS
device by a contract manufacturer, developing in-house manufacturing capability,
and selling 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 the SAFHS Model 2A device and began marketing it in October
1994, and further received approval of the SAFHS 2000 device and began marketing
the SAFHS 2000 in May 1997, and therefore has limited experience in marketing
and selling its products in commercial quantities. The Company had no previous
<PAGE>
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 was approved by the FDA for commercial
marketing in October 1994 to treat closed, cast-immobilized, fresh fractures of
the tibia and distal radius within approved indications. Since that time, the
Company has been engaged in efforts to gain physician acceptance of the SAFHS
device and reimbursement coverage for its use. 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. 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 (which has occurred substantially on a case-by-case
basis), 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
Successful sales of SAFHS devices in the United States, Europe, and
other countries 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 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, medically
necessary, appropriate for the specific patient, cost-effective, and not
experimental or investigational. 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. In most cases, in the United States, the Company has received
reimbursement approval from third-party payors only on a case-by-case basis.
Currently, third-party payors that have conducted technology assessments of the
SAFHS therapy, and have established medical guidelines for its use, require the
Company, in most cases, to obtain preauthorization from these third-party payors
prior to providing the SAFHS devices to the patients. There can be no assurance
<PAGE>
that third-party reimbursement will be sufficiently available for the SAFHS
device or any of the Company's other products that may be developed, that such
third-party reimbursement will be adequate, or that other third-party payors,
including Medicare, will not recommend that the SAFHS device not be covered
under their programs.
In August 1996, the Technology Advisory Committee of the Health Care
Financing Administration recommended that the SAFHS device not be covered under
the Medicare program. The Company, however, continues to pursue coverage for
SAFHS by providing additional information to the HCFA staff; in the interim, the
Company is not shipping orders to patients covered under Medicare. The United
States Congress is also considering various proposals to significantly reduce
Medicare and Medicaid expenditures, which, if they were enacted and if SAFHS
were covered under Medicare or Medicaid, could have a material adverse effect on
the Company's business, financial condition, results of operations, and cash
flows. 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 has limited experience in obtaining
reimbursement for its products in countries other than the United States, and
has obtained only limited reimbursement in Germany. There is no assurance that
the Company's efforts to obtain reimbursement approval in Germany and in other
countries will be successful. 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, 1997, had an accumulated deficit of approximately $34.3 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 and reimbursement activities 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 in-house manufacturing capability.
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.
Dependence on Principal Product
Essentially 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.
<PAGE>
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, Austria, the Netherlands, Denmark, Switzerland, Belgium, and Israel.
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.
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, which were principally in Germany,
were 14% of total product sales in fiscal 1996 and 18% in fiscal 1997, and such
revenues are expected to continue to represent a significant 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.
<PAGE>
As of September 30, 1997, the balance in international accounts
receivable, net of allowances for returns and bad debt, was $1.4 million, with
days outstanding of approximately 390 days. The international accounts
receivable is primarily derived from sales in Germany, where the Company has
received limited local reimbursement on a case-by-case basis. To assist the
collection of outstanding claims and to expedite the reimbursement process on
future claims, the Company is seeking nationwide approval by the National
Krankenkasse, the German governing organization that establishes medical
reimbursement policy for health-care providers. To this end, in August 1997 the
Company submitted a formal application to the National Krankenkasse. The
application process includes a scientific assessment and a reimbursement
assessment; the Company is currently in the scientific-assessment phase. In the
interim, the Company has elected to sell SAFHS devices in Germany only when
reimbursement is preapproved. There can be no assurance that the Company will
obtain a favorable ruling on its request for nationwide approval on a timely
basis, if at all. Lack of approval by the National Krankenkasse for the
Company's products could have a material adverse effect on the Company's
business, financial condition, results of operations, and cash flows.
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, delays in
receiving payments on accounts receivable balances, reimbursement approvals
(both government and private), 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, or cash flows.
Manufacturing and Related Risks
The Company has developed in-house refurbishing capability for the
SAFHS Model 2A device and in-house manufacturing capability for the SAFHS 2000
device. In addition, the Company uses a contract manufacturer to manufacture a
portion of the Company's SAFHS 2000 production. Both the Company's and the
contract manufacturer's respective facilities have been inspected by the FDA,
and have been approved for the production of the SAFHS 2000 under the FDA's Good
Manufacturing Practices ("GMP") requirements. Any failure by either the Company
or the contract manufacturer to maintain its respective facility in accordance
with GMP requirements could result in the inability to manufacture the SAFHS
device on a commercial scale, and could 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>
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.
Extensive Government Regulation
The manufacture and sale of medical devices are 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 is required to file PMA supplements for new or expanded
indications for its SAFHS technology. In addition, modifications to its SAFHS
devices may require PMA supplements. If a supplement were not accepted by the
FDA, the Company would be required to undertake and complete the entire PMA
process in order to use future SAFHS devices to treat those additional
indications or commercialize a modified device. 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.
<PAGE>
The Company filed a PMA Supplement for its second-generation SAFHS, the
SAFHS 2000, in December 1995, and in March 1997, the FDA approved this
supplement. In May 1997, the Company commenced commercial distribution of the
SAFHS 2000 in the United States. The Company recently filed a PMA Supplement
seeking approval of an expanded indication for the SAFHS 2000, but withdrew that
application in July 1997 to revise and resubmit it for both expanded and new
applications. The Company expects to refile this Supplement during the second
quarter of fiscal 1998. 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 or a supplement to an existing 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.
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
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.
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 itself 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
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
<PAGE>
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
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.
<PAGE>
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 the Company's Form 10-K
for the year ended September 30, 1996, for more information relating to the
Stockholder Rights Plan.)
The Company's Bylaws 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
Information in response to this item is incorporated herein by
reference to "Election of Directors" in Exogen, Inc.'s definitive proxy
statement ("Definitive Proxy Statement") to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934 (the "Exchange Act") with the Securities
and Exchange Commission ("SEC") not later than 120 days after the end of fiscal
1997. Information with respect to compliance with Section 16(a) of the Exchange
Act is incorporated herein by reference to "Compliance with Reporting
Requirements" in the Company's Definitive Proxy Statement to be filed with the
SEC.
Item 11. Executive Compensation
Information in response to this item is incorporated herein by
reference to "Executive Officers and Information Regarding Executive
Compensation" in the Company's Definitive Proxy Statement 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 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
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,
1997 and 1996 Consolidated Statements of Operations for the
years ended September 30, 1997, 1996, and 1995 Consolidated
Statement of Changes in Stockholders' Equity for the years
ended September 30, 1997, 1996, and 1995 Consolidated
Statements of Cash Flows for the years ended September 30,
1997, 1996, and 1995 Notes to Consolidated Financial
Statements
(2) Financial Statement Schedules. Schedule II--Valuation and
Qualifying Accounts for the years ended September 30, 1997,
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 ended 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 [RESERVED]
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).
<PAGE>
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).
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
ended 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 ended September 30, 1995.
<PAGE>
10.16 Employment Agreement dated March 1, 1997,
between the Company and Patrick A. McBrayer.
Incorporated by reference to Exhibit 10.16
to the Company's Form 10-Q for the second
quarter ended March 31, 1997.
10.17* Severance Agreement, dated May 27, 1997,
between the Company and John Bohan.
10.18* Common Stock Purchase Agreement, dated
October 20, 1997, between the Company and
certain investors listed on Schedule 1
thereto.
10.19* Registration Rights Agreement, dated October
20, 1997, between the Company and certain
investors listed on Schedule 1 thereto.
10.20* Form of Amendment to 1995 Stock Option /
Stock Issuance Plan.
10.21* Form of Amendment to Employee Stock Purchase
Plan.
21.1 List of Subsidiary. Incorporated by
reference to Exhibit 21.1 to the Company's
Form 10-K for the year ended September 30,
1995.
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. Incorporated by
reference to Exhibit 99.1 to the Company's
Form 10-K for the year ended September 30,
1996.
* 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 1997.
<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 17, 1997
-----------------------
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 17, 1997
-----------------
John P. Ryaby,
Chairman of the Board and
Vice President of Research and
Development and Regulatory Affairs
By: /s/ Patrick A. McBrayer December 17, 1997
-----------------------
Patrick A. McBrayer,
Chief Executive Officer,
President, and Director
(Principal Executive Officer)
By: /s/ Richard H. Reisner December 17, 1997
----------------------
Richard H. Reisner,
Vice President,
Chief Financial Officer,
and Secretary
(Principal Financial and
Accounting Officer)
By: /s/ Buzz Benson December 17, 1997
---------------
Buzz Benson,
Director
By: /s/ Donald J. Lothrop December 17, 1997
---------------------
Donald J. Lothrop,
Director
<PAGE>
By: /s/ Peter C. Madeja December 17, 1997
-------------------
Peter C. Madeja,
Director
By: /s/ David J. Ottensmeyer December 17, 1997
------------------------
David J. Ottensmeyer,
Director
By: /s/ Terence D. Wall December 17, 1997
-------------------
Terence D. Wall,
Director
<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 [RESERVED]
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).
<PAGE>
EXOGEN, INC.
EXHIBIT INDEX
-------------
Number Description
------ -----------
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).
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 ended 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 ended September 30, 1995.
10.16 Employment Agreement dated March 1, 1997, between the
Company and Patrick A. McBrayer. Incorporated by
reference to Exhibit 10.16 to the Company's Form 10-Q
for the second quarter ended March 31, 1997.
10.17* Severance Agreement, dated May 27, 1997, between the
Company and John Bohan.
10.18* Common Stock Purchase Agreement, dated October 20,
1997, between the Company and certain investors
listed on Schedule 1 thereto.
10.19* Registration Rights Agreement, dated October 20,
1997, between the Company and certain investors
listed on Schedule 1 thereto.
10.20* Form of Amendment to 1995 Stock Option / Stock
Issuance Plan.
10.21* Form of Amendment to Employee Stock Purchase Plan.
21.1 List of Subsidiary. Incorporated by reference to
Exhibit 21.1 to the Company's Form 10-K for the year
ended September 30, 1995.
23.1* Consent of Arthur Andersen LLP.
<PAGE>
EXOGEN, INC.
EXHIBIT INDEX
-------------
Number Description
------ -----------
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. Incorporated by reference to Exhibit
99.1 to the Company's Form 10-K for the year ended
September 30, 1996.
* Filed herewith.
+ Confidential treatment granted.
<PAGE>
EXOGEN, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
1. FINANCIAL STATEMENTS
Report of Independent Public Accountants.............................
Consolidated Balance Sheets as of September 30, 1997 and 1996........
Consolidated Statements of Operations for the years ended
September 30, 1997, 1996, and 1995..............................
Consolidated Statement of Changes in Stockholders' Equity
for the years ended September 30, 1997, 1996, and 1995..........
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996, and 1995..............................
Notes to Consolidated Financial Statements...........................
2. FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts for the years ended
September 30, 1997, 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, 1997 and 1996,
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, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, 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 and financial statement schedules 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 3, 1997(except with respect to the matter discussed in the second
paragraph of Note 15, as to which the date is November 14, 1997)
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands, except share data)
September 30,
----------------------
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 4,018 $ 8,115
Short-term investments ..................................... 4,526 6,824
Accounts receivable, net of allowances of $1,786 and $346 in
1997 and 1996, respectively ........................... 3,384 2,943
Inventories ................................................ 1,515 1,239
Interest receivable ........................................ 60 202
Other current assets ....................................... 237 344
-------- --------
Total current assets .......................... 13,740 19,667
Furniture, fixtures and equipment, net ......................... 758 979
Long-term investments .......................................... -- 4,595
Other assets ................................................... 291 270
-------- --------
Total assets .................................. $ 14,789 $ 25,511
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 463 $ 685
Accrued liabilities ........................................ 2,178 1,625
Capital lease obligations .................................. 2 15
Other current liabilities .................................. 55 107
-------- --------
Total current liabilities ..................... 2,698 2,432
Capital lease obligations ...................................... -- 2
-------- --------
Total liabilities ............................. 2,698 2,434
Commitments and contingencies (Note 11)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands, except share data)
(continued)
September 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $0.0001 par value; 3,000,000 shares
authorized in 1997 and 1996; no shares issued or
outstanding ........................................... -- --
Common Stock, $0.0001 par value; 27,000,000 shares
authorized in 1997 and 1996; 9,998,140 shares issued
and outstanding in 1997 and 9,909,192 shares issued
and outstanding in 1996 ............................... 1 1
Additional paid-in capital ................................. 46,691 46,272
Cumulative translation adjustment .......................... (275) (22)
Accumulated deficit ........................................ (34,326) (23,174)
-------- --------
Total stockholders' equity .................... 12,091 23,077
-------- --------
Total liabilities and stockholders' equity .... $ 14,789 $ 25,511
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(in thousands, except per share data)
For the years ended September 30,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales .......................... $ 7,081 $ 5,777 $ 1,852
Revenues from development agreements ... 400 1,100 --
-------- -------- --------
Total revenues .................... 7,481 6,877 1,852
-------- -------- --------
Operating costs and expenses:
Cost of product sales .................. 3,864 3,661 1,128
Research and development ............... 3,124 3,988 2,545
Selling, general, and administrative ... 12,291 11,030 5,775
-------- -------- --------
Total operating costs and expenses 19,279 18,679 9,448
-------- -------- --------
Operating loss .............................. (11,798) (11,802) (7,596)
Other income (expense):
Interest income, net ................... 701 1,438 604
Other expense, net ..................... (51) (224) (59)
-------- -------- --------
Total other income, net .......... 650 1,214 545
-------- -------- --------
Loss before income taxes .................... (11,148) (10,588) (7,051)
Provision for income taxes .................. 4 -- --
-------- -------- --------
Net loss .................................... $(11,152) $(10,588) $ (7,051)
======== ======== ========
Net loss per share .......................... $ (1.12) $ (1.07) --
======== ======== ========
Weighted average shares outstanding ......... 9,946 9,875 --
Pro forma net loss per share ................ -- -- $ (0.93)
========
Pro forma weighted average shares outstanding -- -- 7,574
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
For the Years Ended September 30, 1997, 1996, and 1995
(in thousands)
Common Stock Additional Cumulative
------------ Paid-in Translation Accumulated
Shares Amount Capital Adjustment Deficit Total
------ ------ ------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 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
Issuance of Common Stock 57 -- 205 -- -- 205
Exercise of stock options 32 -- 12 -- -- 12
Sale of warrants ........ -- -- 20 -- -- 20
Amortization of
nonemployee stock
option and warrant
compensation ......... -- -- 182 -- -- 182
Translation adjustment .. -- -- -- (253) -- (253)
Net loss ................ -- -- -- -- (11,152) (11,152)
----- ------- ------- -------- ------- -------
Balance, September 30, 1997 9,998 $ 1 $ 46,691 $ (275) $(34,326) $ 12,091
===== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in thousands)
For the years ended September 30,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................... $(11,152) $(10,588) $ (7,051)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .......................... 394 330 186
Amortization of net premium (discount) on short- and
long-term investments ............................. 72 (196) (75)
Amortization of nonemployee stock
option/warrant compensation ....................... 182 52 --
Provision for losses on accounts receivable ............ 250 -- --
Other adjustments ...................................... 2 14 47
Decrease (increase) in assets:
Accounts receivable, net ............................... (908) (2,081) (871)
Interest receivable .................................... 142 (158) (44)
Inventories ............................................ (320) 311 (738)
Other current assets ................................... 104 (131) (148)
Other assets ........................................... (30) (46) (188)
Increase (decrease) in liabilities:
Accounts payable ....................................... (207) 162 80
Accrued liabilities .................................... 577 637 577
Notes payable .......................................... -- -- (380)
Other current liabilities .............................. (52) 107 --
-------- -------- --------
Net cash used in operating activities ............. (10,946) (11,587) (8,605)
-------- -------- --------
Cash flows from investing activities:
Purchase of short- and long-term investments ................ (1,392) (20,868) (16,310)
Proceeds from sale of short- and long-term
investments ............................................... 8,212 18,532 7,500
Purchase of furniture, fixtures and equipment ............... (165) (411) (916)
Other investing activities .................................. -- 4 (4)
-------- -------- --------
Net cash provided by (used in) investing activities 6,655 (2,743) (9,730)
-------- -------- --------
Cash flows from financing activities:
Proceeds from Preferred Stock issuances and
bridge financing .......................................... -- -- 11,379
Proceeds from exercise of stock options ..................... 12 37 --
Proceeds from sale of stock warrants ........................ 20 -- --
Proceeds from sale of Common Stock .......................... 205 245 28,508
Principal payments under capital leases ..................... (15) (14) (13)
-------- -------- --------
Net cash provided by financing activities ......... 222 268 39,874
-------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in thousands)
(continued)
For the years ended September 30,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Effect of exchange rate changes on cash and cash
equivalents ................................................... (28) 1 (3)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ............. (4,097) (14,061) 21,536
Cash and cash equivalents, beginning of year ..................... 8,115 22,176 640
-------- -------- --------
Cash and cash equivalents, end of year ........................... $ 4,018 $ 8,115 $ 22,176
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<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.
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 and 1997, the
Company further strengthened its domestic sales and marketing infrastructure,
continued its research and development activities of the SAFHS device and other
technologies, and began and expanded commercial distribution of the SAFHS device
in certain European countries. Essentially all the Company's product sales are
generated from sales of the SAFHS device, and therefore, the Company is subject
to the risks associated with a single product. The majority of primary payors
for significantly all the Company's sales are third-party insurers.
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, (i) the Company paid
$600,000 for those rights and (ii) the Company is obligated to make royalty
payments to Interpore based upon net revenues from sales of devices covered by
the Initial Patent.
Under the terms of the License Agreement, the Company paid $475,000 to
the patent holder. 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.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Translation 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 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,
---------------------
1997 1996
------- -------
<S> <C> <C>
Cash and cash equivalents
- -------------------------
Cash .......................................... $ 205 $ 145
Money markets ................................. 1,557 917
Commercial paper .............................. 2,256 7,053
------- -------
4,018 8,115
Short-term investments
- ----------------------
U.S. Agency notes ............................. 1,000 2,171
Corporate bonds ............................... 2,518 2,955
Bank notes .................................... 1,008 1,502
Other ......................................... -- 196
------- -------
4,526 6,824
Long-term investments
- ---------------------
U.S. Agency notes ............................. -- 2,017
Corporate bonds ............................... -- 2,578
------- -------
-- 4,595
Total cash, cash equivalents, and investments ...... $ 8,544 $19,534
======= =======
</TABLE>
As of September 30, 1997 and 1996, all short-term and long-term
investments, if any, 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.
Accounts Receivable
Accounts receivable is recorded net of accumulated allowances for (i)
returns and amounts that the Company believes a respective third-party payor
might deduct from the price of the SAFHS device (see also "Revenue Recognition
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and Cost of Sales" discussed above) and (ii) bad debt. Bad debt expense is
classified as a Selling, general, and administrative expense, and was $250,000
in fiscal 1997. No bad debt expense was recorded prior to fiscal 1997; in fiscal
1996 and 1995, accounts receivable allowances were recorded in the aggregate as
sales reserves. Because the SAFHS device was new and marketed only since October
1994, it was not practicable in fiscal 1996 and 1995 to segregate the allowances
discussed above into three components. Changes in economic or other conditions
could affect the ability of third-party payors to meet their obligations.
Of the $3.4 million in Accounts Receivable, net at September 30, 1997,
approximately 40% was derived from the Company's operations in Europe,
principally Germany, where the Company has received limited local reimbursement
on a case-by-case basis. (See Note 5, "Geographic Segment Information," below
for a further discussion of international operations.)
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. Management
reviews these assets 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, 1997, no long-lived assets have
been impaired.
Patent Costs
Costs incurred relating to developing patents are expensed as incurred.
Income Taxes
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 bases of existing assets and liabilities.
Net Loss Per Common Share
For the years ended September 30, 1997 and 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. 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 have not been presented
as such information is not meaningful.
Stock-Based Compensation
Accounting for stock options issued to employees and nonemployee
directors and stock issued pursuant to the Company's employee stock purchase
plan is based upon the "intrinsic value" method set forth in Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," with supplemental pro forma disclosures of "fair value" as required
by Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation."
The "fair value" method of accounting is used for stock options and
warrants issued to consultants. The fair value is calculated using an option
pricing model, and the resultant compensation is recognized over the shorter of
the vesting period or the service period.
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 and
disallowed amounts; additionally, the accounts receivable has been reduced by an
estimated reserve for 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 obsolescence
reserves. In the case of accrued liabilities not evidenced by invoices,
estimates are based on management's judgment.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recent Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share." This statement establishes standards for computing and presenting
earnings per share ("EPS"), replacing the presentation of currently required
primary EPS with a presentation of Basic EPS. For entities with complex capital
structures, SFAS 128 requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. Under this new standard,
Basic EPS is computed based on weighted average shares outstanding and excludes
any potential dilution; Diluted EPS reflects potential dilution from the
exercise or conversion of securities into common stock or from other contracts
to issue common stock, and is similar to the currently required fully diluted
EPS. SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and earlier application is
not permitted. When adopted, the Company will be required to restate its EPS for
all prior periods presented. The Company does not expect the impact of the
adoption of SFAS 128 to be material to previously reported EPS.
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 1997, 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,
--------------------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Net revenues:
United States ................. $ 7,400 $ 7,284 $ 2,035
Europe ........................ 1,300 787 --
Intercompany eliminations ..... (1,219) (1,194) (183)
Operating loss:
United States ................. 10,292 10,813 7,366
Europe ........................ 1,457 919 230
Intercompany eliminations ..... 49 70 --
Identifiable assets:
United States ................. 13,041 24,449 34,813
Europe ........................ 1,748 1,062 73
</TABLE>
Intercompany eliminations 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. Of
the $1.8 million of identifiable assets in Europe at September 30, 1997, $1.4
million were accounts receivable, 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. The European accounts receivable is derived
principally from sales in Germany, where the Company has received limited local
reimbursement on a case-by-case basis. To assist the collection of outstanding
claims and to expedite the reimbursement process on future claims, the Company
is seeking nationwide approval by the National Krankenkasse, the German
governing organization that establishes medical reimbursement policy for
health-care providers. To this end, in August 1997 the Company submitted a
formal application to the National Krankenkasse. The application process
includes a scientific assessment and a reimbursement assessment; the Company is
currently in the scientific-assessment phase. In the interim, the Company has
elected to sell SAFHS devices in Germany only when reimbursement is preapproved.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Development Agreement Revenues
The Company recorded revenues of $400,000 and $1.1 million in fiscal
1997 and 1996, respectively, 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: (i) the
SAFHS device and (ii) 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 is
responsible for complying with the regulatory requirements and for 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.
7. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------------------
1997 1996
------ ------
<S> <C> <C>
Finished goods ........................... $1,218 $ 768
Parts and components ..................... 297 471
------ ------
$1,515 $1,239
====== ======
</TABLE>
8. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of the following (in
thousands):
<TABLE>
<CAPTION>
September 30,
----------------------
1997 1996
------- -------
<S> <C> <C>
Furniture, fixtures and equipment ................ $ 1,573 $ 1,421
Leasehold improvements ........................... 80 71
------- -------
1,653 1,492
Accumulated depreciation and amortization ........ (895) (513)
------- -------
$ 758 $ 979
======= =======
</TABLE>
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Depreciation and amortization expense was $383,000, $319,000, and
$176,000, for the years ended September 30, 1997, 1996, and 1995, respectively.
9. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------
1997 1996
------ ------
<S> <C> <C>
Compensation and benefits .................. $ 637 $ 490
Taxes other than income .................... 446 241
Warranty expenses .......................... 156 157
Research and development ................... 312 136
Other ...................................... 627 601
------ ------
$2,178 $1,625
====== ======
</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.
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.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Commitments and Contingencies
The Company leases a facility in Piscataway, New Jersey; the lease
commenced May 1995 and has a remaining term of four 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>
1998............................................... $ 457
1999............................................... 464
2000............................................... 471
2001............................................... 478
---------
$ 1,870
=========
</TABLE>
Rent expense was $493,000, $353,000, and $233,000 for the years ended
September 30, 1997, 1996, and 1995, respectively.
The Company is also committed to pay royalties on sales of certain of
its products. Royalty expense in fiscal 1997, 1996, and 1995 was $417,000,
$346,000, and $112,000, respectively.
The Company's SAFHS device is currently both manufactured by the
Company and produced by a contract manufacturer. The agreement between the
Company and this manufacturer is documented by specific purchase orders,
effective to June 1999, covering anticipated requirements. At September 30,
1997, these purchase orders amounted to commitments of approximately $1.5
million.
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.
The Company is also a party to two lawsuits (one initiated in fiscal
1995, the other in fiscal 1997) that to date have not been settled. The Company
does not believe that these lawsuits have any merit, and accordingly, no
provision has been established in the accompanying consolidated financial
statements. Management believes that these lawsuits 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's 1995 Stock Option/Stock Issuance Plan (the "1995 Plan")
was adopted by the Board of Directors and stockholders as of May 25, 1995, for
the purpose of attracting and retaining the services of selected employees
(including officers and directors) and consultants. The Plan is the successor
equity incentive program to the Company's 1993 Stock Option Plan (the "1993
Plan"), and options outstanding under the 1993 Plan were incorporated into the
1995 Plan. The 1995 Plan provides for options designated as either nonqualified
or incentive stock options with a term of no more than 10 years. The 1995 Plan
became effective with the IPO and will terminate on April 30, 2005, unless
sooner terminated by the Board of Directors. A total of 750,000 shares of Common
Stock has been authorized for issuance under the 1995 Plan, and 64,961 shares
remained available for future grant as of September 30, 1997.
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)
Stock option activity pursuant to the 1993 and 1995 Plans is summarized
as follows:
<TABLE>
<CAPTION>
Exercise Price
------------------------------
Weighted-
Shares Low High Average
------ --- ---- -------
<S> <C> <C> <C> <C>
Balance at September 30, 1994 .... 55,000 $ 0.02 $ 0.02 $ 0.02
Granted ..................... 296,450 $ 0.02 $ 13.00 $ 5.88
Exercised ................... (125) $ 0.02 $ 0.02 $ 0.02
Canceled/Forfeited .......... (2,025) $ 0.02 $ 5.50 $ 3.28
--------
Balance at September 30, 1995 .... 349,300 $ 0.02 $ 13.00 $ 4.98
Granted ..................... 173,250 $ 8.00 $ 25.50 $ 15.27
Exercised ................... (19,989) $ 0.02 $ 10.00 $ 1.84
Canceled/Forfeited .......... (12,524) $ 0.02 $ 18.50 $ 4.49
--------
Balance at September 30, 1996 .... 490,037 $ 0.02 $ 25.50 $ 8.76
Granted ..................... 450,175 $ 3.50 $ 4.75 $ 4.17
Exercised ................... (31,952) $ 0.02 $ 0.60 $ 0.39
Canceled/Forfeited .......... (275,287) $ 0.02 $ 25.50 $ 11.89
--------
Balance at September 30, 1997 .... 632,973 $ 0.02 $ 25.50 $ 4.55
========
</TABLE>
At September 30, 1997, 1996, and 1995, stock options to purchase
119,124, 86,417, and 15,999 shares of Common Stock were exercisable at
weighted-average prices of $5.21, $6.71, and $0.02, respectively.
During fiscal 1997, 148,000 options previously issued to certain
consultants and employees with a weighted-average exercise price of $14.96 were
canceled and reissued at the fair market value of the Company's Common Stock on
the date of reissuance. The weighted-average exercise price of the reissued
options was $4.15 per share and the vesting period of these options commenced
from the reissuance date.
Options generally become exercisable in ratable installments over four-
to 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.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes information about stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------ ----------------------------
Weighted-
Average Weighted- Weighted-
Shares Remaining Average Shares Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 9/30/97 Life Price at 9/30/97 Price
- --------------- ---------- ---- ----- ---------- -----
<S> <C> <C> <C> <C> <C>
$0.02 - $0.60 110,873 7.08 years $ 0.41 49,324 $ 0.31
$3.50 - $3.50 33,000 9.21 years $ 3.50 -- $ --
$4.00 - $4.00 267,475 9.32 years $ 4.00 5,000 $ 4.00
$4.50 - $4.75 122,000 9.34 years $ 4.73 23,750 $ 4.67
$5.50 - $5.50 16,500 7.51 years $ 5.50 8,256 $ 5.50
$8.00 - $8.00 40,750 8.38 years $ 8.00 12,876 $ 8.00
$11.00 - $13.00 25,750 8.09 years $ 12.51 11,293 $ 12.45
$18.50 - $25.50 16,625 8.31 years $ 20.08 8,625 $ 21.54
-------- -------
$0.02 - $25.50 632,973 8.74 years $ 4.55 119,124 $ 5.21
======== =======
</TABLE>
There were no direct issuances of Common Stock or stock appreciation
rights under the 1995 Plan as of September 30, 1997.
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, which is in accordance with Section 423 of the Internal Revenue
Code, 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. Payroll deductions may not exceed 10% of
the participant's total cash earnings in each semi-annual period, and 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 date of entry
into the offering period or (ii) the fair market value on the semi-annual
purchase date.
A total of 150,000 shares of Common Stock has been reserved for
issuance under the Purchase Plan. Stock issued pursuant to the Purchase Plan
during fiscal 1997, 1996, and 1995 was 56,996, 38,944 and 0, respectively, at
weighted-average purchase prices of $3.60, $6.47 and $0.00, respectively. As of
September 30, 1997, 54,060 shares remained available for future grant under the
Purchase Plan.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 as defined in
the Purchase Plan.
Stock Warrants
In September 1997, the Company and a consultant entered into an
advisory agreement whereby the consultant acquired a warrant (at a cost of $0.20
per share) to purchase up to 100,000 shares of the Company's Common Stock at an
exercise price of $4.50 per share. The warrant is fully vested and immediately
exercisable and expires five years after issuance subject, however, to
expiration on August 1, 1998, in the event that the Company does not, by April
30, 1998, consummate a strategic partnering transaction relating to the
commercialization of certain of the Company's non-invasive technologies (each a
"Strategic Partnering Transaction"). Further, for each of the three Strategic
Partnering Transactions described in the advisory agreement and subsequently
entered into by the Company, the consultant will receive a warrant (at no cost)
to purchase 75,000 shares of the Company's Common Stock at an exercise price of
$4.50 per share (the "Transaction Warrant"). For each Strategic Partnering
Transaction consummated prior to April 30, 1998, the consultant will receive, in
lieu of the foregoing Transaction Warrant, a Transaction Warrant to purchase
125,000 shares of the Company's Common Stock at an exercise price of $4.50 per
share (subject to adjustment). Such Transaction Warrants, if issued, would
expire five years after issuance.
As of September 30, 1997, the warrant was not exercised and no
additional warrants were due to the consultant.
Fair Value Disclosures
Stock options granted to employees (and nonemployee directors) are set
at the closing price of the Company's Common Stock on the date of grant, and the
related number of shares granted are fixed at that point in time. Therefore,
under the principles of APB 25, the Company does not recognize compensation
expense associated with the grant of such options. Additionally, under
provisions of APB 25, employee stock purchase plans such as the Company's do not
require the recognition of compensation expense. However, under the provisions
of SFAS 123, the Company is required to use an option valuation model to provide
supplemental pro forma information regarding options granted and stock issued
under the employee stock purchase plan after September 30, 1995.
Stock options and warrants issued to consultants are accounted for
under SFAS 123. Compensation expense recognized for such options and warrants
was $182,000 and $52,000 for the years ended September 30, 1997 and 1996,
respectively.
The fair value of the options and warrants was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal 1997 and 1996, respectively: risk-free
interest rates of 6.13% and 5.67%; dividend yields of 0% and 0%; volatility
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
factors for the expected market price of the Company's Common Stock of 38.4% and
40.6%; and expected lives of the options of 3.55 years and 4.44 years. These
assumptions resulted in weighted-average fair values of $1.45 and $6.17 per
share for stock options and warrants granted to employees (and nonemployee
directors) and consultants in fiscal 1997 and 1996, respectively.
The fair value of shares under the Company's employee stock purchase
plan was estimated at the subscription date (i.e., "enrollment" date) of
participants into the respective offering periods under the purchase plan. The
estimate was based upon a Black-Scholes option pricing model with the following
weighted-average assumptions for purchase periods during fiscal 1997 and 1996,
respectively: risk-free interest rates of 6.05% and 5.48%; dividend yields of 0%
and 0%; volatility factors for the expected market price of the Company's Common
Stock of 37.0% and 50.1%; and expected term length of 1.94 years and 1.17 years.
Pro forma information regarding net loss and net loss per share, as
shown below, was determined as if the Company had accounted for its employee
stock options and shares sold under its employee stock purchase plan under the
fair value method of SFAS 123. For purposes of pro forma disclosures, the
estimated fair value is amortized over the applicable vesting periods. Since the
SFAS 123 method of accounting has not been applied during fiscal years prior to
October 1, 1995, the resulting pro forma compensation expense might not be
representative of that to be expected in future years. The Company's pro forma
information is as follows (in thousands, except per share information):
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net loss:
As reported ....................... $ (11,152) $ (10,588)
Pro forma ......................... $ (11,370) $ (10,733)
Net loss per share:
As reported ....................... $ (1.12) $ (1.07)
Pro forma ......................... $ (1.14) $ (1.09)
</TABLE>
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 issued prior to
the IPO, 1,357,332 and 1,060,836 shares are vested as of September 30, 1997 and
1996, respectively. The unvested 27,666 shares at September 30, 1997, vest over
the next two months.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 was 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.
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. The change in valuation allowance during
1997, 1996, and 1995 was $5,050,000, $3,478,000, and $2,813,000, respectively.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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,
1997 1996
------------- -------------
<S> <C> <C>
Deferred Tax Asset:
Start-up costs ..................................... $ 488 $ 732
Research and development costs ..................... 548 548
Research and development and related patent acquired 7 184
Vacation accrual ................................... 52 18
Allowances for returns, disallowances, and bad debts 650 555
Net operating loss ................................. 9,936 5,736
German net operating loss .......................... 1,135 575
Other .............................................. 708 126
------- -------
Deferred tax asset ................................. 13,524 8,474
Less: Valuation Allowance .............................. (13,524) (8,474)
------- -------
$ 0 $ 0
======= =======
</TABLE>
At September 30, 1997, the Company has net operating loss carryforwards
for United States federal income tax purposes of approximately $24.8 million.
These net operating loss carryforwards expire on various dates beginning 2007.
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, 1997, the Company also has net operating loss carryforwards for German
income tax purposes of $2.3 million, which are not subject to any limitations.
14. Supplemental Disclosure of Cash Flow Information
Cash paid for interest was $12,000, $9,000, and $169,000 in 1997, 1996,
and 1995, respectively.
The Company paid $4,000 in income taxes in fiscal 1997. No income taxes
were paid in fiscal 1996 or 1995.
The Company recorded $0, $0, and $35,000 of amortization related to
Preferred Stock issuance costs in 1997, 1996, and 1995, respectively.
15. Subsequent Events
On October 20, 1997, the Company completed a $7.5 million private
placement of 1,799,019 shares of its Common Stock. The participants in the
private placement included several shareholders of record on September 30, 1997,
and two new investment groups. The Company will use the financing's proceeds for
general corporate purposes.
<PAGE>
EXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On November 14, 1997, the Board of Directors of the Company approved,
subject to stockholder approval at the 1998 Annual Meeting of Stockholders, (i)
an amendment to the 1995 Stock Option / Stock Issuance Plan, which
includes an increase in the number of shares of Common Stock available for
issuance thereunder from 750,000 to 1,350,000 shares and (ii) an amendment to
the Employee Stock Purchase Plan to increase the number of shares of Common
Stock available for issuance thereunder from 150,000 to 350,000 shares.
Information regarding the amendments to the 1995 Stock Option / Stock Issuance
Plan and Employee Stock Purchase Plan is set forth in the Company's Definitive
Proxy Statement, which the Company expects will be mailed to stockholders on or
about January 8, 1998, in connection with the 1998 Annual Meeting of
Stockholders.
<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
Year ended September 30, 1997
Allowance for returns, bad
debt, and price deductions
by third-party payors ......... $ 346 $3,811 $(58) (b) $ 2,313 (a) $1,786
</TABLE>
(a) Returns and write-offs.
(b) Foreign currency translation adjustments.
EXHIBIT 10.17
May 27, 1997
Mr. John Bohan
3 St.Andrews Court
New Hope, PA 18938
Dear John:
This letter serves to review the terms of your separation from employment with
Exogen, Inc. (the "Company"):
1. Your employment with Exogen will terminate effective May 31, 1997.
According to Exogen's Severance Pay Plan, you are eligible to receive
severance pay equal to one-half month's base salary. If you sign the
attached General Release Of All Claims ("General Release") within the
period specified in the General Release and do not revoke it after
seven (7) days, you are eligible for enhanced severance pay benefits
equal to two and one- half months. Since you are an officer of the
Company, Exogen's Compensation Committee has approved a total enhanced
severance pay equal to six months base salary. Exogen's Severance Pay
Plan and Summary Plan Description are attached and provide complete
details regarding your separation terms and severance. Please read
this document in its entirety.
2. On May 31, 1997 you will be paid your regular semi-monthly gross
wages. On June 15, 1997 you will be paid wages which includes all of
your accrued and unused vacation days, and you will also be refunded
for your unused contributions under Exogen's Employee Stock Purchase
Plan. Other than the payments mentioned in this paragraph, you agree
that prior to the execution of this letter you were not entitled to
receive any further monetary payments or benefits from the Company,
and that the only payments and benefits that you are entitled to
receive from the Company in the future are those specified in this
letter.
3. As of May 31, 1997 you will have vested 10,000 options which are
exercisable into Exogen Common Stock under an option agreement
previously granted to you by Exogen. You have up to three months
following termination of your employment (i.e., until August 31, 1997)
in which to exercise the options for any or all of the option shares
which are vested as of May 31, 1997. Except as so modified, the
agreements evidencing your options remain in full force and effect. In
addition, pursuant to the Stock Purchase Agreement between you and the
Company dated February 5, 1994, the Company currently has the
Repurchase Rights for 25,000 shares. The Repurchase Rights do not
lapse on those shares until February 5, 1998, however, the Company's
Board of Directors has chosen not to exercise its rights to repurchase
those shares. The certificates held in escrow will be sent to you
within the next ten days.
4. It is our expectation that all Company owned property, including but
not limited to marketing materials, computer equipment and credit
cards, given to you in support of executing your responsibilities will
be returned to Exogen by May 31, 1997.
<PAGE>
5. Your health care benefits which include health insurance, life
insurance and LTD insurance, as it currently exists, will continue
until May 31, 1997. Information regarding COBRA will be sent to you
under separate cover. Exogen's Severance Pay Plan includes payment of
your COBRA premiums for the period covered by your severance pay,
subject to the conditions discussed in #1 above regarding the signing
of the General Release.
6. At all times in the future, you will remain bound by Exogen's
Proprietary Information and Inventions, Non-Solicitation and
Non-Competition Agreement signed by you on February 5, 1994, a copy of
which is attached.
Please review the attached documents as soon as possible. If you decide to sign
the General Release, do so by the required date and return it directly to
Exogen's Human Resources Department.
Sincerely,
/s/Patrick A. McBrayer
- ----------------------
Patrick A. McBrayer
President & CEO
Please sign below in acknowledgment of this separation agreement.
- ----------------------------------------
John Bohan Date
EXHIBIT 10.18
EXOGEN, INC.
COMMON STOCK PURCHASE AGREEMENT
October 20, 1997
<PAGE>
TABLE OF CONTENTS
1. Purchase and Sale of Stock....................................
1.1 Sale and Issuance of Common Stock....................
1.2 Closing..............................................
1.3 Actions at the Closing...............................
2. Representations and Warranties of the Company.................
2.1 Organization and Good Standing; Power and Authority;
Qualifications...................................
2.2 Authorization........................................
2.3 Capitalization.......................................
2.4 Valid Issuance of Common Stock.......................
2.5 Consents.............................................
2.6 Litigation...........................................
2.7 Compliance with Other Instruments....................
2.8 Financial Statements.................................
2.9 SEC Filings..........................................
2.10 Other Information....................................
2.11 Intellectual Property Rights.........................
2.12 Title to Assets and Properties; Insurance............
2.13 Compliance with Laws; Permits........................
2.14 Offering Exemption...................................
2.15 Taxes................................................
3. Representations and Warranties of the Investor................
3.1 Authorization........................................
3.2 Purchase Entirely for Own Account....................
3.3 Disclosure of Information............................
3.4 Investment Experience................................
3.5 Accredited Investor..................................
3.6 Restricted Securities................................
4. Certain Covenants.............................................
4.1 Use of Proceeds......................................
4.2 Rule 144 Reporting...................................
5. Transfer Taxes................................................
6. Expenses......................................................
7. Indemnification...............................................
7.1 General Indemnification..............................
7.2 Indemnification Principles...........................
7.3 Claim Notice.........................................
8. Remedies......................................................
<PAGE>
9. Miscellaneous.................................................
9.1 Survival of Warranties...............................
9.2 Successors and Assigns...............................
9.3 Governing Law........................................
9.4 Counterparts.........................................
9.5 Titles and Subtitles.................................
9.6 Notices..............................................
9.7 Finder's Fee.........................................
9.8 Attorneys' Fees......................................
9.9 Amendments and Waivers...............................
9.10 Severability.........................................
9.11 Entire Agreement.....................................
9.12 Press Releases and Announcements.....................
SCHEDULE 1 - List of Investors, addresses, number of shares of Common Stock
being purchased and purchase price due from each Investor
EXHIBIT A - Registration Rights Agreement
EXHIBIT B-1 - Certificate for Individual Investors
EXHIBIT B-2 - Certificate for Corporate, Partnership, Trust, Foundation and
Joint Investors
EXHIBIT C - Secretary's Certificate
EXHIBIT D - Opinion of Brobeck, Phleger & Harrison LLP
<PAGE>
COMMON STOCK PURCHASE AGREEMENT
-------------------------------
THIS STOCK PURCHASE AGREEMENT is made as of the 20th day of
October, 1997, by and between Exogen, Inc., a Delaware corporation (the
"Company"), and the investors listed on Schedule 1 attached hereto, each of
which is herein referred to as an "Investor".
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
1.1 Sale and Issuance of Common Stock. Subject to the terms
and conditions of this Agreement, each Investor agrees to purchase at the
Closing and the Company agrees to sell and issue to the Investor at the Closing,
that number of shares of the Company's common stock, $.0001 par value per share
("Common Stock"), and at a purchase price per share, as is set forth opposite
each Investor named on Schedule 1 attached hereto (such transaction referred to
as the "Purchase"). The maximum aggregate number of shares of Common Stock sold
pursuant to this Agreement shall be One Million Nine Hundred Eighty-Nine
Thousand Six Hundred Thirty (1,989,630) shares.
1.2 Closing. The purchase and sale of the Common Stock shall
take place at the offices of Brobeck, Phleger & Harrison LLP, 1633 Broadway,
47th floor, New York, New York 10019 at 10:00 a.m. New York Time, on the date
hereof, or at such time and place upon which the Company and Investors shall
agree (the "Closing"). At the Closing, the Company shall deliver to each
Investor a certificate or certificates representing the Common Stock which such
Investor is purchasing, registered in the name of such Investor or its nominee,
against payment of the purchase price therefor by wire transfer to the Company's
bank account (designated at least one business day prior to the Closing) in the
amount set forth on Schedule 1.
1.3. Actions at the Closing. Simultaneously with, or prior to,
the execution and delivery of this Agreement, the following actions shall occur:
(a) The Registration Rights Agreement (the
"Registration Rights Agreement"), by and between the Company and the Investors,
substantially in the form of Exhibit A hereto, and all other schedules,
certificates and other documents being delivered pursuant to or in connection
with this Agreement by any party hereto at or prior to the Closing
(collectively, the "Ancillary Documents") shall be duly executed and delivered
by the parties thereto.
(b) The Company shall deliver to the Investors
certificates of good standing from the jurisdictions set forth on Schedule
1.3(b) under its name dated as of a date no earlier than five days prior to the
Closing.
(c) The Common Stock to be issued shall have been
approved for listing on The NASDAQ Stock Market, subject to official notice of
issuance.
<PAGE>
(d) The Investors shall deliver to the Company a
completed certificate pertaining to such Investor's status as an investor
substantially in the form of Exhibit B-1 or B-2, as appropriate.
(e) The Company shall deliver to the Investors a
certificate executed by the secretary of the Company, substantially in the form
of Exhibit C hereto, certifying (i) a copy of its organizational documents
(including the Certificate of Incorporation and bylaws of the Company), (ii)
resolutions authorizing the transaction and (iii) incumbency matters.
(f) The Investors shall receive from Brobeck, Phleger
& Harrison LLP, counsel for the Company, an opinion addressed to the Investors,
dated as of the Closing, satisfactory in form and substance to the Investors,
which shall include the opinions set forth in Exhibit D attached hereto.
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to the Investor that:
2.1 Organization and Good Standing; Power and Authority;
Qualifications. Each of the Company and its subsidiary, Exogen (Europe) GmbH, a
German corporation (the "Subsidiary") (i) is duly organized, validly existing
and in good standing under the laws of its jurisdiction of organization and (ii)
has all requisite power and authority to own, lease and operate its properties
and to carry on its business as presently conducted and as proposed to be
conducted. The Company has all requisite power and authority to enter into and
carry out the transactions contemplated by this Agreement and the Ancillary
Documents to which it is a party. Each of the Company and its Subsidiary is
qualified to transact business as a foreign corporation in, and is in good
standing under the laws of, those jurisdictions that constitute all of the
jurisdictions wherein the character of the property owned or leased or the
nature of the activities conducted by it makes such qualification necessary and
where failure to so qualify would individually or in the aggregate have a
material adverse effect on properties, business, prospects, operations,
earnings, assets, liabilities or the condition (financial or otherwise) of the
Company and its Subsidiary taken as a whole, whether or not in the ordinary
course of business (a "Material Adverse Effect"). All of the outstanding shares
of capital stock of each class (other than director qualifying shares) of the
Subsidiary have been validly issued and fully paid and nonassessable, and are
owned beneficially and of record, by the Company, free and clear of
Encumbrances.
2.2 Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement and the Ancillary
Documents, the performance of all obligations of the Company hereunder and
thereunder and the authorization, issuance and delivery of the Common Stock
being sold hereunder has been taken, and this Agreement and the Ancillary
Documents, constitute valid and legally binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, and other laws of general application affecting enforcement of
creditors' rights generally, (ii) as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Registration Rights Agreement may be limited by applicable federal or state
securities laws.
<PAGE>
2.3 Capitalization. The authorized capitalization of the
Company immediately following the Purchase will consist of: (a) 3,000,000 shares
of preferred stock of the Company (the "Preferred Stock"), par value $.0001 per
share, of which no shares are issued and outstanding; and (b) 27,000,000 shares
of Common Stock, par value $.0001 per share ("Common Stock"), of which 9,998,140
shares are issued and outstanding and all such outstanding shares are validly
issued, fully paid and nonassessable and free and clear of all Encumbrances (as
defined in Section 2.12). No class of capital stock ("Capital Stock") of the
Company is entitled to preemptive rights. There are no outstanding options,
warrants, subscription rights, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, shares of any class of
Capital Stock of the Company, or contracts, by which the Company or its
Subsidiary is or may become bound to issue additional shares of its Capital
Stock or options, warrants or other rights to purchase or acquire any shares of
its Capital Stock, except as follows: (i) 750,000 shares of Common Stock have
been reserved for issuance pursuant to the Company's 1995 Stock Option/Stock
Issuance Plan (of which options to purchase 632,973 shares of Common Stock have
been granted and are outstanding), (ii) 150,000 shares of Common Stock have been
reserved for issuance pursuant to the Company's Employee Stock Purchase Plan (of
which 95,940 shares of Common Stock have been purchased and are included in
total shares of Common Stock outstanding), and (iii) as set forth on Schedule
2.3, shares of Common Stock reserved for issuance pursuant to a certain warrant
to purchase Common Stock of the Company and certain warrant obligations. Except
as set forth in Schedule 2.3 hereto, the Company has not declared or paid any
dividend or made any other distribution of cash, stock or other property to its
stockholders.
2.4 Valid Issuance of Common Stock. The Common Stock which is
being purchased by each Investor hereunder, when issued, sold and delivered in
accordance with the terms hereof for the consideration expressed herein, will be
duly and validly issued and outstanding, fully paid and nonassessable with no
personal liability attaching to the ownership thereof, free and clear of any
Encumbrances, other than Encumbrances, if any, arising as a result of actions
taken by the Investors, and not subject to preemptive or similar rights of
stockholders of the Company or others.
2.5 Consents. Except as disclosed on Schedule 2.5 hereto and
for any post-Closing notifications or filings as may be required under
applicable federal or state securities laws, if any, which shall be made on a
timely basis, no consent, approval, order or authorization of, or registration,
qualification, designation, declaration or filing with, any person (governmental
or private) on the part of the Company or its Subsidiary is required in
connection with the consummation of the transactions contemplated by this
Agreement and the Ancillary Documents.
2.6 Litigation. Except as set forth in the SEC Documents (as
defined below), there is no civil, criminal or administrative action, suit,
claim, notice, hearing, inquiry, proceeding or investigation at law or in equity
by or before any court, arbitrator or similar panel, governmental
instrumentality or other agency now pending or, to the best knowledge of the
Company, threatened against the Company or its Subsidiary or any of their
respective directors or executive officers in their capacities as directors and
executive officers of the Company or the assets (including the Intellectual
Property) of the Company or its Subsidiary (a "Litigation"). Neither the Company
nor its Subsidiary is a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company or its Subsidiary currently pending or which either of the Company or
its Subsidiary intends to initiate.
<PAGE>
2.7 Compliance with Other Instruments. The Company is not in
violation or default of any provisions (a) of its Second Amended and Restated
Certificate of Incorporation, as amended, or Amended and Restated Bylaws or (b)
of any instrument, judgment, order, writ, decree or contract to which it is a
party or by which it is bound, or to its best knowledge, of any provision of
domestic (federal, state or local) or foreign law, statute, rule or regulation
applicable to the Company except, with respect to clause (b), where such
violation would not, individually or in the aggregate, have a Material Adverse
Effect. The execution, delivery and performance of this Agreement and the
Ancillary Documents by the Company and the consummation of the transactions
contemplated hereby and thereby will not (x) result in any such violation or be
in conflict with or constitute, with or without the passage of time and giving
of notice, either a default under any such agreement, instrument, judgment,
order, writ, decree or contract referred to in the previous sentence (including
any registration rights agreements), or (y) result in the creation of any lien,
charge or Encumbrance upon any assets of the Company or its Subsidiary or the
suspension, revocation, impairment, forfeiture, or nonrenewal of any material
permit, license, authorization, or approval applicable to the Company or its
Subsidiary, their business or operations or any of their assets or properties.
2.8 Financial Statements. The financial statements (including
any related schedule and/or notes) included in the SEC Documents (the "Financial
Statements") are complete and correct in all material respects and have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated. The Financial Statements
fairly present the consolidated financial condition, operating results and
changes in shareholders' equity of the Company as of the dates, and for the
periods, indicated therein. Except as set forth in the SEC Documents, the
Company has no liabilities or obligations, contingent or otherwise, except (i)
liabilities and obligations in the respective amounts reflected or reserved
against in the Company's balance sheet (the "Balance Sheet") as of June 30, 1997
included in the SEC Documents or (ii) liabilities and obligations (matured or
unmatured, fixed or contingent) incurred since June 30, 1997 in the ordinary
course of business consistent (in amount and kind) with past practice (none of
which is a liability resulting from breach of contract, breach of warranty,
tort, infringement, claim or lawsuit) which individually or in the aggregate do
not have a Material Adverse Effect. Since June 30, 1997, the Company and its
Subsidiary have operated their business only in the ordinary course and there
has not been individually or in the aggregate any change that would have a
Material Adverse Effect (a "Material Adverse Change") other than changes
disclosed in the SEC Documents or otherwise set forth in Schedule 2.8 hereto.
Except as set forth in the SEC Documents, the Company has never had, nor does it
presently have, any subsidiaries, nor has it owned, nor does it presently own,
whether directly or indirectly owned, any capital stock or other proprietary
interest, directly or indirectly, in any corporation, association, trust,
partnership, joint venture or other entity.
2.9 SEC Filings. The Company has filed all proxy statements,
reports and other documents required to be filed by it under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") from and after July 20,
1995 (the "SEC Documents"), and the Company has delivered to the Investor:
(a) its quarterly report on Form 10-Q for the quarter ended December
31, 1996;
(b) its quarterly report on Form 10-Q for the quarter ended March 31,
1997;
<PAGE>
(c) its quarterly report on Form 10-Q for the quarter ended June 30,
1997;
(d) its annual report on Form 10-K for the fiscal year ended
September 30, 1996; and
(e) its proxy statement to stockholders as filed with the SEC on
January 8, 1997.
Each SEC Document was in compliance in all materials respects
with the requirements of its respective report form and, as of its filing date,
no such SEC Document filed by the Company with the Securities and Exchange
Commission ("SEC") contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary in order
to make the statements made therein, in the light of the circumstances under
which they were made, not misleading.
2.10 Other Information. The Company has delivered to each
Investor copies of all press releases, reports to stockholders and other
documents released to the public since October 1, 1996.
2.11. Intellectual Property Rights. (a) Except as disclosed on
Schedule 2.11(a) hereto, the Company or its Subsidiary owns or has the right to
use all of the Intellectual Property (as defined below) necessary, required or
desirable for the conduct of its business as presently or as presently proposed
to be conducted, except where the absence of any thereof would not individually
or in the aggregate have a Material Adverse Effect.
(b) Except as disclosed on Schedule 2.11(b), to the best
knowledge of the Company, the Company has not interfered with, infringed upon or
misappropriated any Intellectual Property rights of third parties, except for
interferences, infringements and misappropriations which would not individually
or in the aggregate have a Material Adverse Effect, and the Company has not
received any claim, demand or notice alleging any such interference,
infringement or misappropriation (including any claim that it must license or
refrain from using any Intellectual Property rights of any third party). To the
best knowledge of the Company, no third party has interfered with, infringed
upon or misappropriated any Intellectual Property rights of the Company, except
for interferences, infringements and misappropriations which would not
individually or in the aggregate have a Material Adverse Effect.
As used in this Agreement, "Intellectual Property" means all
intellectual property owned, leased, licensed, and used by the Company or its
Subsidiary, including without limitation, (i) all world wide inventions and
discoveries (whether patentable or unpatentable and whether or not reduced to
practice), all improvements thereto, and all patents, patent applications and
patent disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions and reexaminations thereof, (ii)
all trademarks, service marks, trade dress, logos, trade names and corporate
names, together with all translations, adaptations, derivations and combinations
thereof and including all goodwill associated therewith, and all applications,
registrations, renewals and derivatives in connection therewith, (iii) all
copyrightable works, all copyrights and all applications, registrations and
renewals in connection therewith, (iv) all mask works and all applications,
registrations and renewals in connection therewith, (v) all know-how, trade
secrets and confidential business information, whether patentable or
unpatentable and whether or not reduced to practice (including ideas, research
<PAGE>
and development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, addresses, phone numbers, pricing and cost
information, and business and marketing plans and proposals), (vi) all other
proprietary rights of any type of description (regardless of whether the same
have been formally registered), (vii) all copies and tangible embodiments
thereof (in whatever form or medium) and (viii) all licenses and agreements in
connection with the foregoing.
2.12. Title to Assets and Properties; Insurance. (a) The
Company has good and marketable title, or a valid leasehold interest in or
contractual right to use, all of its assets and properties, free and clear of
any mortgages, judgments, claims, liens, security interests, pledges, escrows,
charges or other encumbrances of any kind or character whatsoever
("Encumbrances"), except in each case for such defects in title and such other
liens and Encumbrances which do not individually or in the aggregate materially
detract from the value to the Company of the properties and assets of the
Company and its Subsidiary taken as a whole.
(b) The Company and its Subsidiary maintain insurance in such
amounts (to the extent available in the public market), including
self-insurance, retainage and deductible arrangements, and of such a character
as is reasonable for companies engaged in the same or similar business.
2.13. Compliance with Laws; Permits. (a) Except as provided in
Schedule 2.13, the Company and its Subsidiary are in compliance, and the
business of the Company and its Subsidiary have been conducted in compliance
with, all federal, state, local and foreign laws, rules, ordinances, codes,
consents, authorizations, registrations, regulations, decrees, directives,
judgments and orders applicable to them, their business and the ownership of
their assets including, but not limited to, Environmental Laws (as defined
below) except where the failure to comply would not individually or in the
aggregate have a Material Adverse Effect. The Company and its Subsidiary have
all federal, state, local and foreign governmental licenses, permits,
qualifications and authorizations ("Permits") necessary in the conduct of the
business as currently conducted. All such Permits are in full force and effect,
and no violations have been recorded in respect of any such Permits; no
proceeding is pending or, to the best knowledge of the Company, threatened to
revoke or limit any such Permit; and no such Permit will be suspended, canceled
or adversely modified as a result of the execution and delivery of this
Agreement or the Ancillary Documents and the consummation of the transactions
contemplated hereby or thereby, except in any of the foregoing cases where
failure to have such Permit would not individually or in the aggregate have a
Material Adverse Effect.
(b) For purposes of this Agreement, "Environmental
Laws" means, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. ss.ss. 9601, et seq.; the Emergency
Planning and Community Right-to-Know Act of 1986, 42 U.S.C. ss.ss. 11001, et
seq.; the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6901, et
seq.; the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601, et seq.; the
Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. ss.ss. 136, et
seq.; the Clean Air Act, 42 U.S.C. ss.ss. 7401, et seq.; the Clean Water Act
(Federal Water Pollution Control Act), 33 U.S.C. ss.ss. 1251, et seq.; the Safe
Drinking Water Act, 42 U.S.C. ss.ss. 300f, et seq.; the Occupational Safety and
Health Act, 29 U.S.C. ss.ss. 641, et seq.; the Hazardous Materials
<PAGE>
Transportation Act, 49 U.S.C. ss.ss. 1801, et seq.; as any of the above statutes
have been or may be amended from time to time, all rules and regulations
promulgated pursuant to any of the above statutes, and any other foreign,
federal, state or local law, statute, ordinance, rule or regulation governing
environmental matters, as the same have been or may be amended from time to
time, including any common law cause of action providing any right or remedy
with respect to environmental matters, and all applicable judicial and
administrative decisions, orders, and decrees relating to environmental matters.
2.14. Offering Exemption. Assuming the accuracy of the
representations and warranties contained in Section 3 hereof, the offer and sale
of the Common Stock and the issuance and delivery of the Common Stock to the
Investors are each exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act") and under applicable state securities and "blue
sky" laws, as currently in effect and are otherwise in compliance with
applicable federal and state securities laws.
2.15. Taxes. The Company and its Subsidiary have filed or
caused to be filed all income tax returns which are required to be filed and
have paid or caused to be paid all Taxes (as defined below) that have become
due, except Taxes the validity or amount of which is being contested in good
faith by appropriate proceedings and with respect to which adequate reserves
have been set aside. "Taxes," for purposes of this Agreement, means any taxes,
assessments, duties, fees, levies, imposts, deductions, withholdings, including,
without limitation, income, gross receipts, ad valorem, value added, excise,
real or personal property, asset, sales, use, license, payroll, transaction,
capital, net worth and franchise taxes, estimated taxes, withholding,
employment, social security, workers compensation, utility, severance,
production, unemployment compensation, occupation, premium, windfall profits,
transfer and gains taxes, or other governmental charges of any nature whatsoever
imposed by any government or taxing authority of any country or political
subdivision of any country and any liabilities with respect thereto, including
any penalties, additions to tax, fines or interest thereon, and includes any
liability of the Company and its Subsidiary arising under any tax sharing
agreement to which it is or has been a party.
3. Representations and Warranties of the Investor. Each
Investor, severally and not jointly, hereby represents and warrants that:
3.1 Authorization. This Agreement constitutes its valid and
legally binding obligation, enforceable in accordance with its terms.
3.2 Purchase Entirely for Own Account. This Agreement is made
with each Investor in reliance upon each Investor's representation to the
Company, which by such Investor's execution of this Agreement such Investor
hereby confirms, that the Common Stock to be received by such Investor will be
acquired for investment for such Investor's own account, not as a nominee or
agent, for investment purposes only, and not with a view to the resale or
distribution of any part thereof within the meaning of the Securities Act, and
that such Investor has no present intention of selling, granting any
participation in, or otherwise distributing the same. By executing this
Agreement, each Investor further represents that it does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to the Common
Stock. Each Investor represents that it will not, directly or indirectly, offer,
sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy,
<PAGE>
purchase or otherwise acquire or take a pledge of) any of the shares of Common
Stock except in compliance with the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations promulgated thereunder and applicable
state securities laws. Each Investor represents that it has full power and
authority to enter into this Agreement.
3.3 Disclosure of Information. Each Investor believes it has
received all the information it considers necessary or appropriate for deciding
whether to purchase the Common Stock. Each Investor further represents that it
has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Common Stock. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of each Investor to
rely thereon.
3.4 Investment Experience. Each Investor is an investor in
securities of companies in the development stage and acknowledges that it is
able to fend for itself, can bear the economic risk of its investment and has
such knowledge and experience in financial or business matters such that it is
capable of evaluating the merits and risks of its investment in the Common
Stock.
3.5 Accredited Investor. Each Investor is an "accredited
investor" within the meaning of SEC Rule 501 of Regulation D, as presently in
effect. Each Investor has completed or caused to be completed the Certificate
for Investors attached hereto as Exhibit B-1 or B-2, as appropriate, and the
responses provided therein shall be true as of the Closing.
3.6 Restricted Securities. Each Investor understands that the
shares of Common Stock it is purchasing are characterized as "restricted
securities" ("Restricted Securities") under the federal securities laws inasmuch
as they are being acquired from the Company in a transaction not involving a
public offering and that under such laws and applicable regulations such
securities may not be resold without registration under the Act, except in
certain limited circumstances. In this connection, each Investor represents that
it is familiar with SEC Rule 144, as presently in effect, and understands the
resale limitations imposed thereby and by the Act.
4. Certain Covenants
4.1 Use of Proceeds. The net proceeds received by the Company
from the sale of the Common Stock as contemplated by this Agreement will be used
by the Company for general working capital purposes.
4.2 Rule 144 Reporting. With a view to making available to the
Investors the benefits of certain rules and regulations of the SEC which may
permit the sale of the Common Stock to the public without registration, the
Company agrees to use its best efforts to:
(a) make and keep public information available, as
those terms are understood and defined in rule 144 under the Securities
Act, at all times;
(b) use its best efforts to file with the SEC in a
timely manner all reports and other documents required of the Company
under the Securities Act and the Exchange Act; and
<PAGE>
(c) so long as the Investor owns any Restricted
Securities (as defined in Section 3.6 hereof), furnish to the Investor
forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of Rule 144, and of the
Securities Act and the Exchange Act, a copy of the most recent annual
or quarterly report of the Company filed with the Securities and
Exchange Commission, and such other reports and documents of the
Company and other information in the possession of or reasonably
obtainable by the Company as the Investor may reasonably request in
availing itself of any rule or regulation of the SEC allowing an
Investor to sell any such securities without registration.
5. Transfer Taxes. The Company agrees that it will pay, and
will hold each Investor harmless from, any and all liability with respect to any
stamp or similar Taxes which may be determined to be payable in connection with
the execution and delivery and performance of this Agreement, and that it will
similarly pay and hold each Investor harmless from all Taxes in respect of the
issuance of the Common Stock to such Investor.
6. Expenses. (a) Except as set forth in Section 6(b), the
Company and each Investor shall pay all the costs and expenses incurred by it or
on its behalf in connection with this Agreement and the consummation of the
transactions contemplated hereby.
(b) Within 10 days from the receipt of a billing
statement from one of the Pequot entities listed on Schedule 1 (the
"Pequot Entities"), the Company shall pay and shall reimburse the
Pequot Entities for all of their reasonable legal costs and expenses
incurred in connection with this transaction (including the negotiation
and preparation of this Agreement and the Ancillary Documents and the
consummation of the transactions contemplated hereby and thereby);
provided, however, in no event shall the liability of the Company under
this Section 6(b) in the aggregate exceed $25,000.
7. Indemnification.
7.1 General Indemnification. The Company shall indemnify,
defend and hold each Investor, its affiliates, their respective officers,
directors, partners, employees, agents, representatives, successors and assigns
(each an "Investor Entity") harmless from and against all Losses (as defined
below) incurred or suffered by an Investor Entity (whether incurred or suffered
directly or indirectly through ownership of capital stock of the Company)
arising from the breach of any of the representations, warranties, covenants or
agreements made by the Company in this Agreement or in any Ancillary Document.
Each Investor, severally and not jointly, shall indemnify, defend and hold the
Company, its affiliates, their respective officers, directors, employees,
agents, representatives, successors and assigns harmless against all Losses
arising from the breach of any of its representations, warranties, covenants or
agreements in this Agreement or in any Ancillary Documents. Notwithstanding
anything to the contrary in this Agreement, no indemnification payment by the
Company pursuant to this Section 7 with respect to any Losses otherwise payable
hereunder as a result of a breach of the representations and warranties of the
Company (other than any Losses resulting from breaches of the representation and
warranty in Section 2.3 which shall not be subject to the Deductible (as defined
below)) shall be payable until the time as such Losses shall aggregate for all
Investor Entities to more than $75,000 (the "Deductible"), and then only to the
extent that such Losses, in the aggregate for all Investor Entities, exceed the
Deductible.
<PAGE>
7.2 Indemnification Principles. For purposes of this Section
7, (i) "Losses" shall mean each and all of the following items: claims, losses,
(including, without limitation, losses of earnings) liabilities, obligations,
payments, damages, charges, judgments, fines, penalties, amounts paid in
settlement, costs and expenses (including, without limitation, interest which
may be imposed in connection therewith, costs and expenses of investigation,
actions, suits, proceedings, demands, assessments and fees, expenses and
disbursements of counsel, consultants and other experts); and (ii) each of the
representations and warranties made by any party in this Agreement and in the
Ancillary Documents shall be deemed to have been made without the inclusion of
limitations or qualifications as to materiality, such as the words "Material
Adverse Effect," "immaterial," "material" and "in all material respects" or
words of similar import. Any payment (or deemed payment) by the Company to an
Investor pursuant to this Section 7, shall be treated for federal income tax
purposes as an adjustment to the price paid by such Investor for the Common
Stock pursuant to this Agreement.
7.3 Claim Notice. A party seeking indemnification under this
Section 7 shall, promptly upon becoming aware of the facts indicating that a
claim for indemnification may be warranted, give to the party from whom
indemnification is being sought a claim notice relating to such Loss (a "Claim
Notice"). Each Claim Notice shall specify the nature of the claim, the
applicable provision(s) of this Agreement or other instrument under which the
claim for indemnity arises, and, if possible, the amount or the estimated amount
thereof. No failure or delay in giving a Claim Notice (so long as the same is
given prior to expiration of the representation or warranty upon which the claim
is based) and no failure to include any specific information relating to the
claim (such as the amount or estimated amount thereof) or any reference to any
provision of this Agreement or other instrument under which the claim arises
shall affect the obligation of the party from whom indemnity is sought.
8. Remedies. In case any one or more of the covenants and/or
agreements set forth in this Agreement shall have been breached by any party
hereto, each Investor, with respect to a breach by the Company, and the Company,
with respect to a breach by an Investor, may proceed to protect and enforce its
rights either by suit in equity and/or by action at law, including, but not
limited to, an action for damages as a result of any such breach and/or an
action for specific performance of any such covenant or agreement contained in
this Agreement.
9. Miscellaneous.
9.1 Survival of Warranties. The warranties, representations
and covenants of the Company and each Investor contained in or made pursuant to
this Agreement shall survive the execution and delivery of this Agreement and
the Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
9.2 Successors and Assigns. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors, permitted assigns, heirs and
personal representatives of the parties (including transferees of any shares of
Common Stock sold hereunder), except that the Company may not assign its rights
and obligations under this Agreement to any person without the prior written
consent of the Investors purchasing two-thirds of the Common Stock to be sold
pursuant to this Agreement, except in connection with a merger, consolidation or
<PAGE>
sale of all or substantially all of the assets of the Company. Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
9.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of New York without regard to the
principles of conflicts or choice of law. Each of the parties hereto hereby
irrevocably and unconditionally consents to submit to the exclusive jurisdiction
of the courts of the State of New York and of the United States of America, for
any Litigation arising out of or relating to this Agreement and the Ancillary
Documents and the transactions contemplated hereby and thereby, and further
agrees that service of any process, summons, notice or document by U.S.
registered mail to its respective address set forth in this Agreement shall be
effective service of process for any Litigation brought against it in any such
court.
9.4 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.5 Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
9.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof in the case of the Company
and on Schedule 1 in the case of each Investor, or at such other address as such
party may designate by ten (10) days' advance written notice to the other
parties.
9.7 Finder's Fee. Each party represents that it neither is nor
will be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Investor or any of its officers, partners,
employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless the
Investors from any liability for any commission or compensation in the nature of
a finders' fee (and the costs and expenses of defending against such liability
or asserted liability) for which the Company or any of its officers, employees
or representatives is responsible.
9.8 Attorneys' Fees. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
<PAGE>
9.9 Amendments and Waivers. No term of this Agreement may be
amended, discharged or terminated and the observance of any term of this
Agreement may not be waived (either generally or in a particular instance and
either retroactively or prospectively), without the prior written consent of the
Investors purchasing two-thirds of the Common Stock to be sold pursuant to this
Agreement. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each holder of any securities purchased under this
Agreement at the time outstanding, each future holder of all such securities,
and the Company. No waiver of any of the provisions of this Agreement shall be
deemed to or shall constitute a waiver of any other provision hereof (whether or
not similar). No delay on the part of any party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof.
9.10 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
9.11 Entire Agreement. This Agreement and the documents
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations, or covenants except as specifically set forth
herein or therein.
9.12 Press Releases and Announcements. Each of the parties
hereto agrees that it will not issue any press release or announcement relating
to the subject matter of this Agreement without the prior written approval of
the other parties; provided, however, that any party may make any public
disclosure it believes in good faith is required by law or regulation (in which
case the disclosing party shall advise the other parties, provide them with a
copy of the proposed disclosure prior to making the disclosure, and use
reasonable efforts to agree upon the text of such press release, before issuing
any such press release).
[Remainder of this page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Common
Stock Purchase Agreement as of the date first above written.
EXOGEN, INC.
By: /s/ Patrick A. McBrayer
-----------------------
Name: Patrick A. McBrayer
Title: President and Chief Executive Officer
Address: 10 Constitution Avenue
P.O. Box 6860
Piscataway, NJ 08855
INVESTORS:
DELPHI VENTURES III, L.P.
By: Delphi Management Partners III, L.L.C.,
General Partner
By: /s/ Donald J. Lothrop
---------------------
Name: Donald J. Lothrop
Title: Managing Member
DELPHI BIO-INVESTMENTS III, L.P.
By: Delphi Management Partners III, L.L.C.,
General Partners
By: /s/ Donald J. Lothrop
---------------------
Name: Donald J. Lothrop
Title: Managing Member
COMMON STOCK PURCHASE AGREEMENT
<PAGE>
THE DEMETER TRUST DTD 6/5/90
TRUSTEE
By: /s/ Richard Johnston
--------------------
Name: Richard Johnston
ALEXANDRA F. JOHNSTON TRUST DTD
11/6/78
Trustee
By: /s/ Richard Johnston
--------------------
Name: Richard Johnston
BRADFORD D. JOHNSTON TRUST DTD
11/6/78
Trustee
By: /s/ Richard Johnston
--------------------
Name: Richard Johnston
WILLIAM M. JOHNSTON TRUST DTD
11/6/7
Trustee
By: /s/ Richard Johnston
--------------------
Name: Richard Johnston
ROBERT F. JOHNSTON
By: /s/ Robert F. Johnston
----------------------
Robert F. Johnston
COMMON STOCK PURCHASE AGREEMENT
<PAGE>
PEQUOT PRIVATE EQUITY FUND L.P.
By: /s/ Amiel Peretz
-----------------
Name: Amiel Peretz
Title: CFO, DSCMI Inv. Mgr.
PEQUOT OFFSHORE PRIVATE EQUITY
FUND, INC.
By: /s/ Amiel Peretz
----------------
Name: Amiel Peretz
Title: CFO, DSCMI Inv. Mgr.
COMMON STOCK PURCHASE AGREEMENT
<PAGE>
PIPER JAFFRAY HEALTHCARE CAPITAL
LIMITED PARTNERSHIP (SBIC)
By: Piper Ventures Management IV Limited
Partnership, its General Partner
By: /s/ Buzz Benson
---------------
Buzz Benson, Managing Director Piper
Ventures Capital, Inc., Its General Partner
COMMON STOCK PURCHASE AGREEMENT
<PAGE>
TERENCE D. WALL
By: /s/ Terence D. Wall
-------------------
Terence D. Wall
COMMON STOCK PURCHASE AGREEMENT
EXHIBIT 10.19
-----------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
-----------------------------------------------------
October 20, 1997
<PAGE>
TABLE OF CONTENTS
1. Registration Rights...........................................
1.1 Definitions..........................................
1.2 Shelf Registration...................................
1.3 Company Registration.................................
1.4 Obligations of the Company...........................
1.5 Furnish Information..................................
1.6 Expenses of Registration.............................
1.7 Expenses of Company Registration.....................
1.8 Underwriting Requirements............................
1.9 Delay of Registration................................
1.10 Indemnification......................................
1.11 Reports Under Securities Exchange Act of 1934........
1.12 Assignment of Registration Rights....................
1.13 Limitations on Subsequent Registration Rights........
1.14 "Market Stand-Off" Agreement.........................
1.15 No Required Sale.....................................
2. Miscellaneous.................................................
2.1 Successors and Assigns...............................
2.2 Governing Law........................................
2.3 Counterparts.........................................
2.4 Titles and Subtitles.................................
2.5 Notices..............................................
2.6 Expenses.............................................
2.7 Amendments and Waivers...............................
2.8 Severability.........................................
2.9 Nominees for Beneficial Owners.......................
2.10 Specific Performance.................................
2.11 No Inconsistent Agreements...........................
2.12 Entire Agreement.....................................
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is made as of the 20th day
of October, 1997 by and between Exogen, Inc., a Delaware corporation (the
"Company"), and the investors listed on Schedule 1 hereto (collectively, the
"Investors").
RECITALS
WHEREAS, the Company and the Investors are parties to the
Common Stock Purchase Agreement of even date herewith (the "Stock Purchase
Agreement");
WHEREAS, in order to induce the Company to enter into the
Stock Purchase Agreement and to induce the Investors to invest funds in the
Company pursuant to the Stock Purchase Agreement, the Investors and the Company
hereby agree that this Agreement shall govern the rights of the Investors to
cause the Company to register shares of Common Stock issuable to the Investors
and certain other matters as set forth herein;
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Registration Rights. The Company covenants and agrees
as follows:
1.1 Definitions. For purposes of this Section 1:
(a) The term "Act" means the Securities Act
of 1933, as amended.
(b) The terms "Form S-3" means such form
under the Act as in effect on the date hereof or any registration form under the
Act subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
(c) The term "register," "registered," and
"registration" refer to a registration effected by preparing and filing a
registration statement or similar document in compliance with the Securities Act
of 1933, as amended (the "Act"), and the declaration or ordering of
effectiveness of such registration statement or document;
(d) The term "Registrable Securities" means
(1) the Common Stock issued pursuant to the Stock Purchase Agreement and (2) any
Common Stock of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for or in replacement of,
such Common Stock, excluding in all cases, however, any Registrable Securities
which are sold, assigned, pledged, hypothecated or otherwise disposed of by an
Investor in a transaction in which such Investor's rights under this Agreement
are not assigned or assignable;
(e) The number of shares of "Registrable
Securities then outstanding" shall be determined by the number of shares of
Common Stock outstanding which are, and the number of shares of Common Stock
issuable pursuant to then exercisable or convertible securities which are,
Registrable Securities; and
<PAGE>
(f) The term "Holder" means one of the
Investors.
1.2 Shelf Registration.
(a) The Company shall, subject to the
limitations specified in this Agreement, use its best efforts (i) to file a
shelf registration statement on Form S-3 or any other form available to the
Company within ninety (90) days from the date hereof (the "Filing Date")
covering the registration under the Act of all Registrable Securities then
outstanding to be offered or sold on a delayed or continuous basis as provided
by this Agreement, pursuant to Rule 415 of the Act (the "Shelf Registration
Statement"); and (ii) to maintain the effectiveness of the Shelf Registration
Statement for a period of two (2) years from the date this Agreement (or such
shorter period in accordance with Section 1.3).
(b) If any offering pursuant to Section
1.2(a) hereof involves an underwritten offering, an underwriter will be selected
by the Holders of two-thirds of the Registrable Securities then outstanding and
shall be reasonably acceptable to the Company. In such event, the right of any
Holder to include its Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute Registrable
Securities through such underwriting shall (together with the Company as
provided in Section 1.4(e)) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting.
Notwithstanding any other provision of this Section 1.2, if the underwriter
advises the Holders in writing that marketing factors require a limitation of
the number of shares to be underwritten, then the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated among all Holders thereof in proportion (as nearly as practicable) to
the amount of Registrable Securities of the Company owned by each Holder;
provided, however, that the number of shares of Registrable Securities to be
included in such underwriting shall not be reduced unless all Other Securities
(as defined below) are first entirely excluded from the underwriting.
(c) Notwithstanding the foregoing, if the
Company shall furnish to the Holders a certificate signed by the Chief Executive
Officer or President of the Company stating that, in the good faith judgment of
the Board of Directors of the Company, it would be seriously detrimental (a
"Detrimental Condition") to the Company and its stockholders for a registration
statement to be filed or to become or remain effective, as the case may be, and
provided that the Detrimental Condition has not resulted from actions taken by
the Company, (i) the Company shall have the right to defer taking action with
respect to the filing of the Shelf Registration Statement for a period of not
more than ninety (90) days after the Filing Date, (ii) in case a Shelf
Registration Statement has been filed but has not become effective, the Company
may cause such registration statement to be withdrawn or may postpone amending
or supplementing such registration statement until such Detrimental Condition no
longer exists, but in no event for more than ninety (90) days, or (iii) in case
a Shelf Registration Statement has been filed and has become effective, the
Company may cause such registration statement to be withdrawn and its
effectiveness terminated or may postpone amending or supplementing such
registration statement until such Detrimental Condition no longer exists, but in
no event for more than ninety (90) days. The Company may not declare a
<PAGE>
Detrimental Condition, or take any of the actions specified in clauses (i), (ii)
or (iii) of the preceding sentence (and can take only one such action specified
in clauses (i), (ii) or (iii) per Detrimental Condition), more than once in any
twelve-month period. The Company shall give written notice of its determination
to postpone or withdraw a registration statement and of the fact that the
Detrimental Condition for such postponement or withdrawal no longer exists, in
each case, promptly after the occurrence thereof. The following events or
circumstances may result in the filing of a registration statement being
seriously detrimental to the Company and its shareholders: a pending material
acquisition, merger or sale or purchase of assets, pending or threatened
material litigation, pending or threatened material regulatory or governmental
action, pending material change in the business, prospects, condition (financial
or other) or properties of the Company. The foregoing list is for illustrative
purposes only and is not meant to be exclusive.
(d) If the Company shall give any notice of
postponement or withdrawal of any registration statement, the Company shall not,
during the period of postponement or withdrawal pursuant to clauses (i), (ii) or
(iii) of the prior paragraph, register any Common Stock, other than pursuant to
a registration statement on Form S-4 or S-8 (or an equivalent registration form
then in effect). Each Holder of Registrable Securities agrees that, upon receipt
of any notice from the Company that the Company has determined to withdraw any
registration statement pursuant to the immediately preceding paragraph, such
Holder will discontinue its disposition of Registrable Securities pursuant to
such registration statement and, if so directed by the Company, will deliver to
the Company (at the Company's expense) all copies, other than permanent file
copies, then in such Holder's possession of the prospectus covering such
Registrable Securities that was in effect at the time of receipt of such notice.
If the Company shall have withdrawn or prematurely terminated a registration
statement filed under this Section 1.2 (whether pursuant to the immediately
preceding paragraph, or as a result of any stop order, injunction or other order
or requirement of the SEC or any other governmental agency or court), the
Company shall not be considered to have effected an effective registration for
the purposes of this Agreement until the Company shall have filed a new
registration statement covering the Registrable Securities covered by the
withdrawn registration statement and such registration statement shall have been
declared effective and shall not have been withdrawn. If the Company shall give
any notice of withdrawal or postponement of a registration statement, the
Company shall, at such time as the Detrimental Condition that caused such
withdrawal or postponement no longer exists (but in no event later than ninety
(90) days after the date of the postponement or withdrawal), use its best
efforts to effect the registration under the Securities Act of the Registrable
Securities covered by the withdrawn or postponed registration statement in
accordance with this Section 1.2 (unless the Holder shall have withdrawn such
request, in which case the Company shall not be considered to have effected an
effective registration for the purposes of this Agreement).
(e) Without the prior written consent of the
Holders of two-thirds of the Registrable Securities then outstanding, the
registration statement filed pursuant to this Section 1.2 may not include other
securities of the Company (i) which are held by persons who, by virtue of
agreements with the Company, are entitled to include their securities in any
such registration, (ii) which are held by officers and directors of the Company,
or (iii) which are being offered for the account of the Company (collectively,
the securities referred to in clauses (i), (ii) and (iii) in this paragraph are
hereinafter referred to as the "Other Securities").
<PAGE>
1.3 Company Registration. If (but without any
obligation to do so) the Company proposes to register (including for this
purpose a registration effected by the Company for stockholders other than the
Holders) any of its stock or other securities under the Act in connection with
the public offering of such securities solely for cash (other than a
registration relating solely to the sale of securities to participants in a
Company stock option, stock purchase or similar plan or a SEC Rule 145
transaction, a registration on any form which does not include substantially the
same information as would be required to be included in a registration statement
covering the sale of the Registrable Securities or a registration in which the
only Common Stock being registered is Common Stock issuable upon conversion of
debt securities that are also being registered), the Company shall, at such
time, promptly give each Holder written notice of such registration. Upon the
written request of each Holder given within twenty (20) days after mailing of
such notice by the Company in accordance with Section 2.5, the Company shall,
subject to the provisions of Section 1.8, cause to be registered under the Act
all of the Registrable Securities that each such Holder has requested to be
registered. No registration effected pursuant to this Section 1.3 shall relieve
the Company of its obligations to effect the required registration pursuant to
Section 1.2. Any Holder shall have the right to withdraw his request for
inclusion of its Registrable Securities in any registration statement pursuant
to this Section 1.3 by giving written notice to the Company of its request to
withdraw.
1.4 Obligations of the Company. When required under
this Section 1 to effect the registration of the Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the Securities and
Exchange Commission (the "SEC") a Shelf Registration Statement or, if
applicable, any other form of registration statement, as the case may be, with
respect to the Registrable Securities and use its best efforts to cause such
registration statement to become effective within one hundred twenty (120) days
after such registration statement was filed and to keep such Shelf Registration
Statement effective for a period up to the second anniversary of the date hereof
or until the distribution contemplated in the Shelf Registration Statement has
been completed; provided, however, that before filing a registration statement
or prospectus or any amendments or supplements thereto, or comparable statements
under securities or blue sky laws of any jurisdiction, the Company will furnish
to one counsel for the Holders (the "Holders' Counsel") participating in the
planned offering (selected by the Holders of two-thirds of the Registrable
Securities then outstanding included in such registration), and the
underwriters, if any, copies of all such documents proposed to be filed
(including all exhibits thereto), which documents will be subject to the
reasonable review and reasonable comment of such counsel.
(b) Prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders whose Registrable
Securities are covered by the Shelf Registration Statement such numbers of
copies of a prospectus, including a preliminary prospectus, in conformity with
the requirements of the Act, and such other documents as they may reasonably
request in order to facilitate the disposition of Registrable Securities owned
by them.
<PAGE>
(d) Use its best efforts to register and
qualify the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders whose Registrable Securities are covered by the Shelf
Registration Statement; provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or jurisdictions
unless the Company is already subject to service in such jurisdiction.
(e) In the event the Registrable Securities
are to be sold through an underwritten public offering, enter into and perform
its obligations under an underwriting agreement, in usual and customary form,
with the managing underwriter of such offering. The Holders proposing to
distribute Registrable Securities through such underwritten public offering
shall also enter into and perform their obligations under such an agreement.
(f) In the event the Registrable Securities
are to be sold through an underwritten public offering, use its best efforts to
furnish, on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this Section
1, (i) an opinion, dated such date, of the counsel representing the Company for
the purposes of such registration, in form and substance as is customarily given
to underwriters in an underwritten public offering, addressed to the
underwriters, and (ii) a letter, dated such date, from the independent certified
public accountants of the Company addressed to the underwriters, stating that
such accountants are independent public accountants within the meaning of the
Act and the applicable published rules and regulations thereunder, and otherwise
in form and in substance as is customarily given by independent certified public
accountants to underwriters in connection with an underwritten public offering.
(g) Promptly notify (i) each Holder selling
Registrable Securities covered by such registration statement and each managing
underwriter, if any: (A) when the registration statement, the prospectus or any
prospectus supplement related thereto or post-effective amendment to the
registration statement has been filed and, with respect to the registration
statement or any post-effective amendment, when the same has become effective,
(B) of the issuance by the SEC of any stop order suspending the effectiveness of
the registration statement or the initiation of any proceedings for that
purpose, (C) of the receipt by the Company of any notification with respect to
the suspension of the qualification of any Registrable Securities for sale under
the securities or blue sky laws of any jurisdiction or the initiation of any
proceeding for such purpose, and (D) when a prospectus relating to the
registration statement is required to be delivered under the Act of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing; and (ii) Holders' Counsel and each managing
underwriter of any request by the SEC for amendments or supplements to such
registration statement or prospectus related thereto or for additional
information. If the notification relates to an event described in clause (i)(D),
the Company shall, in accordance with paragraph (b) of this Section 1.4,
promptly prepare and furnish to each Holder selling Registrable Securities
covered by such registration statement and each managing underwriter, if any, a
reasonable number of copies of a prospectus supplemented or amended so that, as
<PAGE>
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein in the light of the circumstances under which they were made
not misleading.
(h) Cooperate with the selling Holders of
Registrable Securities and the managing underwriter, if any, to facilitate the
timely preparation and delivery of certificates not bearing any restrictive
legends representing the Registrable Securities to be sold, and cause such
Registrable Securities to be issued in such denominations and registered in such
names in accordance with the underwriting agreement prior to any sale of
Registrable Securities to the underwriters or, if not an underwritten offering,
in accordance with the instructions of the selling Holders of Registrable
Securities at least three business days prior to any sale of Registrable
Securities and instruct any transfer agent and registrar of Registrable
Securities to release any stop transfer orders in respect thereto.
(i) Comply with all applicable rules and
regulations of the SEC, and make generally available to its security holders, as
soon as reasonably practicable after the effective date of the registration
statement (and in any event within 16 months thereafter), an earnings statement
(which need not be audited) covering the period of at least twelve consecutive
months beginning with the first day of the Company's first calendar quarter
after the effective date of the registration statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder.
(j) (i) Cause all such Registrable
Securities covered by such registration statement to be listed on the principal
securities exchange on which similar securities issued by the Company are then
listed (if any), if the listing of such Registrable Securities is then permitted
under the rules of such exchange, or (ii) if no similar securities are then so
listed, to either cause all such Registrable Securities to be listed on a
national securities exchange or to secure designation of all such Registrable
Securities as a National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ") "national market system security" within the meaning
of Rule 11Aa2-1 of the Exchange Act or, failing that, secure NASDAQ
authorization for such shares and, without limiting the generality of the
foregoing, take all actions that may be required by the Company as the issuer of
such Registrable Securities in order to facilitate the managing underwriter's
arranging for the registration of at least two market makers as such with
respect to such shares with the National Association of Securities Dealers, Inc.
(the "NASD").
(k) Provide and cause to be maintained a
transfer agent and registrar for all such Registrable Securities covered by such
registration statement not later than the effective date of such registration
statement.
(l) Deliver promptly to Holders' Counsel and
each underwriter, if any, copies of all correspondence between the SEC and the
Company, its counsel or auditors and all memoranda relating to discussions with
the SEC or its staff with respect to the registration statement, other than
those portions of any such memoranda which contain information subject to
attorney-client privilege with respect to the Company, and, upon receipt of such
confidentiality agreements as the Company may reasonably request, make
<PAGE>
reasonably available for inspection by Holders' Counsel, by any underwriter, if
any, participating in any disposition to be effected pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such underwriter, all pertinent financial and other records, pertinent
corporate documents and properties of the Company, and cause all of the
Company's officers, directors and employees to supply all information reasonably
requested by Holders' Counsel or such underwriter, attorney, accountant or agent
in connection with such registration statement.
(m) Use reasonable best efforts to obtain
the withdrawal of any order suspending the effectiveness of the registration
statement.
(n) Upon written request, furnish to each
Holder participating in the offering and the managing underwriter, without
charge, at least one conformed copy of the registration statement and any
post-effective amendments thereto, including financial statements and schedules,
all documents incorporated therein by reference and all exhibits (including
those incorporated by reference).
(o) Take all such other commercially
reasonable actions as are necessary or advisable in order to expedite or
facilitate the disposition of such Registrable Securities.
1.5 Furnish Information. It shall be a condition
precedent to the obligations of the Company to take any action pursuant to this
Section 1 with respect to the Registrable Securities of the Holders whose
Registrable Securities are covered by the Shelf Registration Statement that each
of such Holders shall furnish to the Company such information regarding itself,
the Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holders'
Registrable Securities.
1.6 Expenses of Registration.
(a) "Expenses" shall mean any and all fees
and expenses incident to the Company's performance of or compliance with this
Article 1, including, without limitation: (i) SEC, stock exchange or NASD
registration and filing fees and all listing fees and fees with respect to the
inclusion of securities in NASDAQ, (ii) fees and expenses of compliance with
state securities or "blue sky" laws and in connection with the preparation of a
"blue sky" survey, including without limitation, reasonable fees and expenses of
blue sky counsel, (iii) printing and copying expenses, (iv) messenger and
delivery expenses, (v) expenses incurred in connection with any road show, (vi)
fees and disbursements of counsel for the Company, (vii) with respect to each
registration, the fees and disbursements of one counsel for the selling
Holder(s) (selected by the Holders of two-thirds of the Registrable Securities
then outstanding included in such registration), (viii) fees and disbursements
of the Company's independent public accountants (including the expenses of any
audit and/or "cold comfort" letter) and fees and expenses of other persons,
including special experts, retained by the Company, (ix) any fees and expenses
payable to a Qualified Independent Underwriter (as such term is defined in
Conduct Rule 2720 of the National Association of Securities Dealers, Inc.'s
By-Laws) and (x) any other fees and disbursements of underwriters, if any,
customarily paid by issuers or sellers of securities (collectively, "Expenses").
<PAGE>
(b) The Company shall pay all Expenses with
respect to any registration pursuant to Section 1.2, whether or not such
registration statement becomes effective or remains effective for the period
contemplated by Section 1.2(a).
(c) Notwithstanding the foregoing, (i) the
provisions of this Section 1.6 shall be deemed amended to the extent necessary
to cause these expense provisions to comply with "blue sky" laws of each state
in which the offering is made and (ii) in connection with any registration
hereunder, each Holder of Registrable Securities being registered shall pay all
underwriting discounts and commissions and any transfer taxes, if any,
attributable to the sale of such Registrable Securities, pro rata with respect
to payments of discounts and commissions in accordance with the number of shares
sold in the offering by such Holder, and (iii) the Company shall, in the case of
all registrations under this Section 1, be responsible for all its internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties).
1.7 Expenses of Company Registration. The Company
shall bear and pay all Expenses incurred in connection with any registration
filing or qualification of Registrable Securities with respect to the
registrations pursuant to Section 1.3 for each Holder (which right may be
assigned as provided in Section 1.12), but excluding underwriting discounts and
commissions relating to Registrable Securities.
1.8 Underwriting Requirements. In connection with any
offering involving an underwriting of shares of the Company's capital stock, the
Company shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by stockholders to be
included in such offering exceeds the amount of securities sold other than by
the Company that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, that the underwriters determine in their sole discretion
will not jeopardize the success of the offering (the securities so included to
be apportioned pro rata among the selling stockholders according to the total
amount of securities entitled to be included therein owned by each selling
stockholder or in such other proportions as shall mutually be agreed to by such
selling stockholders) but in no event shall the amount of securities of the
selling Holders included in the offering be reduced below thirty percent (30%)
of the total amount of securities included in such offering. For purposes of the
preceding parenthetical concerning apportionment, for any selling stockholder
that is a Holder of Registrable Securities and that is a partnership or
corporate partners, retired partners and stockholders of such Holder, or the
estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing persons shall be deemed to be a
single "selling stockholder," and any pro-rata reduction with respect to such
"selling stockholder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included in
such "selling stockholder," as defined in this sentence.
<PAGE>
1.9 Delay of Registration. The Holders shall not have
any right to obtain or seek an injunction restraining or otherwise delaying any
such registration as the result of any controversy that might arise with respect
to the interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable
Securities are included in a registration statement under this Section 1:
(a) To the extent permitted by law, the
Company will indemnify and hold harmless the Holder whose Registrable Securities
are covered by the Registration Statement, its directors, officers, fiduciaries,
employees and stockholders or general or limited partners (and the directors,
officers, employees and stockholders thereof), any underwriter (as defined in
the Act) for such Holders and each person, if any, who controls such Holders or
underwriter within the meaning of the Act or the Securities Exchange Act of
1934, as amended (the "1934 Act"), each officer, director, employee, stockholder
or partner of such underwriter, against any losses, claims, damages, or
liabilities (joint or several) or actions or proceedings (whether commenced or
threatened) and expenses (including reasonable fees of counsel and any amounts
paid in any settlement effected with the Company's consent), to which they may
become subject under the Act, the 1934 Act or any state securities law, insofar
as such losses, claims, damages, or liabilities (or actions or proceedings in
respect thereof) ("Claims") or expenses arise out of or are based upon any of
the following statements, omissions or violations (collectively a "Violation"):
(i) any untrue statement or alleged untrue statement of a material fact
contained in such registration statement, including any preliminary prospectus,
summary prospectus or final prospectus contained therein or any amendments or
supplements thereto, together with documents incorporated by reference therein,
(ii) the omission or alleged omission to state therein a material fact required
to be stated therein, or necessary to make the statements therein not
misleading, or (iii) any violation or alleged violation by the Company of the
Act, the 1934 Act, any state securities law or any rule or regulation
promulgated under the Act, the 1934 Act or any state securities law; and the
Company will pay to such Holders, and each such underwriter or controlling
person any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability, expense
or action or proceeding; provided, however, that (A) the indemnity agreement
contained in this Section 1.10 shall not apply to amounts paid in settlement of
any such Claim if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), (B) the Company shall not be
liable in any case for any such Claim to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holders, or any such underwriter or controlling person.
Such indemnity and reimbursement of expenses shall remain in full force and
effect regardless of any investigation made by as on behalf of such indemnified
party and shall survive the transfer of such securities by such Holder.
(b) To the extent permitted by law, each
Holder whose Registrable Securities are covered by the Shelf Registration
Statement will, severally and not jointly, indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
registration statement, each person, if any, who controls the Company within the
meaning of the Act, any underwriter, and any controlling person of any such
underwriter, against any losses, claims, damages, or liabilities (joint or
several) to which any of the foregoing persons may become subject, under the
Act, or the 1934 Act, insofar as such Claim arises out of or is based upon any
<PAGE>
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and such Holder will pay, as incurred, any legal or other expenses reasonably
incurred by any person intended to be indemnified pursuant to this Section 1.10,
in connection with investigating or defending any such Claim; provided, however,
that the indemnity agreement contained in this Section 1.10 shall not apply to
amounts paid in settlement of any such Claim if such settlement is effected
without the consent of such Holder, which consent shall not be unreasonably
withheld; provided that, in no event shall any indemnity under this Section 1.10
exceed the net proceeds from the offering received by such Holder. Such
indemnity and reimbursement of expenses shall remain in full force and effect
regardless of any investigation made by as on behalf of such indemnified party
and shall survive the transfer of such securities by such Holder.
(c) Promptly after receipt by an indemnified
party under this Section 1.10 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this Section
1.10, deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that an indemnified
party (together with all other indemnified parties which may be represented
without conflict by one counsel) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the indemnifying party, (i) if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding; (ii) if the indemnifying party fails to take
reasonable steps necessary to defend diligently the action or proceeding within
30 days after receiving notice from such indemnified party; or (iii) if such
indemnified party who is a defendant in any action or proceeding which is also
brought against the indemnifying party reasonably shall have concluded that
there may be one or more legal defenses available to such indemnified party
which are not available to the indemnifying party. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 1.10, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
1.10.
(d) If the indemnification provided for in
this Section 1.10 is held by a court of competent jurisdiction to be unavailable
to an indemnified party with respect to any Claim or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such Claim or expense in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and of the indemnified party on the other in connection with the statements
or omissions that resulted in such Claim or expense as well as any other
relevant equitable considerations. The relative fault of the indemnifying party
and of the indemnified party shall be determined by reference to, among other
<PAGE>
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission. If, however, the allocation provided in the first
sentence of this paragraph is not permitted by applicable law, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative faults but also the relative benefits of the indemnifying party and the
indemnified party as well as any other relevant equitable considerations. The
parties hereto agree that it would not be just and equitable if contributions
pursuant to this Section 1.10(d) were to be determined by pro rata allocation or
by any other method of allocation which does not take account of the equitable
considerations referred to in the preceding sentences of this Section 1.10(d).
The amount paid or payable in respect of any Claim shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending such Claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Notwithstanding anything in this
Section 1.10(d) to the contrary, no indemnifying party (other than the Company)
shall be required pursuant to this Section 1.10(d) to contribute any amount in
excess of the net proceeds received by such indemnifying party from the sale of
Registrable Securities in the offering to which the Claims of the indemnified
parties relate, less the amount of any indemnification payment made by such
indemnifying party pursuant to Sections 1.10(b).
(e) Notwithstanding the foregoing, to the
extent that the provisions on indemnification and contribution contained in the
underwriting agreement entered into in connection with the underwritten public
offering are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.
(f) The obligations of the Company and
Holders under this Section 1.10 shall survive the completion of any offering of
Registrable Securities in a registration statement under this Section 1, and
otherwise.
1.11 Reports Under Securities Exchange Act of 1934.
With a view to making available to the Holders the benefits of Rule 144
promulgated under the Act and any other rule or regulation of the SEC that may
at any time permit a Holder to sell securities of the Company to the public
without registration or pursuant to a registration on Form S-3, the Company
agrees to:
(a) make and keep public information
available, as those terms are understood and defined in SEC Rule 144, at all
times;
(b) take such action as is necessary to
maintain the Holder's ability to utilize Form S-3 for the sale of their
Registrable Securities;
(c) file with the SEC in a timely manner all
reports and other documents required of the Company under the Act and the 1934
Act; and
<PAGE>
(d) furnish to any Holder, so long as the
Holder owns any Registrable Securities, forthwith upon request (i) a written
statement by the Company that it has complied with the reporting requirements of
SEC Rule 144, the Act and the 1934 Act (at any time after it so qualifies), (ii)
a copy of the most recent annual or quarterly report of the Company and such
other reports and documents filed by the Company with the SEC, and (iii) such
other information as may be reasonably requested in availing any Holder of any
rule or regulation of the SEC which permits the selling of any such securities
without registration or pursuant to such form.
1.12 Assignment of Registration Rights.
(a) The rights to cause the Company to
register Registrable Securities pursuant to this Section 1 may be assigned (but
only with all related obligations) by a Holder to a transferee or assignees of
such securities who acquires at least two percent (2%) of the Registrable
Securities (as adjusted for stock splits, combinations and the like), provided:
(i) the Company is, within a reasonable time after such transfer, furnished with
written notice of the name and address of such transferee or assignee and the
securities with respect to which such registration rights are being assigned;
(ii) such transferee or assignee agrees in writing to be bound by and subject to
the terms and conditions of this Agreement, including, without limitation, the
provisions of Section 1.14 below; and (iii) such assignment shall be effective
only if such transfer is exempt from registration under the Act. For the
purposes of determining the number of shares of Registrable Securities held by a
transferee or assignee, the holding of transferees and assignees of a
partnership who are partners or retired partners of such partnership (including
spouses and ancestors, lineal descendants and siblings of such partners or
spouses who acquire Registrable Securities by gift, will or intestate
succession) shall be aggregated together with the partnership; provided that all
assignees and transferees who would not qualify individually for assignment of
registration rights shall have a single attorney-in-fact for the purpose of
exercising any rights, receiving notices or taking any action under this Section
1.
(b) Subject to clause (a) above, the right
to have the Company register the Registrable Securities pursuant to this Section
1 may not otherwise be assigned; provided, however, that (i) any heir or the
estate of an Investor which acquires the Registrable Securities from such
Investor by will or intestate succession shall be entitled to have the Company
register the Registrable Securities pursuant to this Section 1 (provided that
such heirs or such estate shall have a single attorney-in-fact for the purpose
of exercising any rights, receiving any notices or taking any action under this
Section 1), and (ii) any individual Investor may sell, assign or transfer
Registrable Securities to his or her spouse or children or to a trust
established for the benefit of his or her spouse, children or himself or
herself, and such transferee shall be entitled to have the Company register the
Registrable Securities pursuant to this Section 1, if, and only if, such
transferee agrees in writing to be bound by the terms of this Agreement. In each
such event and for purposes of this Agreement, the term "Holder" as used herein
shall include all such heirs, such estate or such transferees.
<PAGE>
1.13 Limitations on Subsequent Registration Rights.
From and after the date of this Agreement, the Company shall not, without the
prior written consent of the Holders of two-thirds of the Registrable Securities
then outstanding, enter into any agreement with any holder or prospective holder
of any securities of the Company that would allow such holder or prospective
holder (a) to include such securities in any registration filed under Section
1.2 hereof, unless under the terms of such agreement, such holder or prospective
holder may include such securities in any such registration only to the extent
that the inclusion of his securities will not reduce the amount of the
Registrable Securities of the Holders that is included or (b) to make a demand
registration that could result in such registration statement being declared
effective within one hundred twenty (120) days of the effective date of any
registration effected pursuant to Section 1.2.
1.14 "Market Stand-Off" Agreement. Each Investor
hereby agrees that, during the period of duration specified by the Company and
an underwriter of Common Stock or other securities of the Company, following the
effective date of a registration statement of the Company filed under the Act,
it shall not, to the extent requested by the Company and such underwriter,
directly or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase or otherwise transfer
or dispose of (other than to donees who agree to be similarly bound) any
securities of the Company held by it at any time during such period except
Common Stock included in such registration, and each Investor agrees to enter
into an agreement to such effect with such underwriter; provided, however, that
(a) all officers and directors of the Company enter into similar agreements,
and, (b) such market stand-off time period shall not exceed 120 days. If the
underwriters agree to any waivers of such restrictions, then the Investors shall
be entitled to sell, transfer or dispose of the same number or amount of
securities of the Company as the person or entity receiving such waiver, upon
the same terms and conditions set forth in such waiver.
In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to the Registrable
Securities of the Investors (and the shares or securities of every other person
subject to the foregoing restriction) until the end of such period.
1.15 No Required Sale. Nothing in this Agreement
shall be deemed to create an independent obligation on the part of any Holder to
sell any Registrable Securities pursuant to any effective registration
statement.
2. Miscellaneous.
2.1 Successors and Assigns. Except as otherwise
provided herein, and provided that the transfer or assignment is in accordance
with the terms hereof, the terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the respective successors and assigns of the
parties (including any permitted transferees of any shares of Registrable
Securities). Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.
2.2 Governing Law. This Agreement shall be governed
by and construed under the laws of the State of New York without regard to
principles of conflicts or choice of laws.
<PAGE>
2.3 Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
2.4 Titles and Subtitles. The titles and subtitles
used in this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement.
2.5 Notices. Unless otherwise provided, any notice
required or permitted under this Agreement shall be given in writing and shall
be deemed effectively given upon personal delivery to the party to be notified
or upon deposit with the United States Post Office, by registered or certified
mail, postage prepaid and addressed to the party to be notified at the address
indicated for such party in the Stock Purchase Agreement, or at such other
address as such party may designate by ten (10) days' advance written notice to
the other parties.
2.6 Expenses. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
2.7 Amendments and Waivers. Any term of this
Agreement may be amended and the observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
two-thirds of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this Section 2.7 shall be binding upon each
Holder of any Registrable Securities then outstanding, each future Holder of all
such Registrable Securities, and the Company.
2.8 Severability. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
2.9 Nominees for Beneficial Owners. If Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its option, be treated as the Holder of such
Registrable Securities for purposes of any request or other action by any Holder
or Holders of Registrable Securities pursuant to this Agreement (or any
determination of any number or percentage of shares constituting Registrable
Securities held by any Holder or Holders of Registrable Securities contemplated
by this Agreement), provided that the Company shall have received assurances
reasonably satisfactory to it of such beneficial ownership.
2.10 Specific Performance. The parties hereto
acknowledge that there would be no adequate remedy at law if any party fails to
perform any of its obligations hereunder, and accordingly agree that each party,
in addition to any other remedy to which it may be entitled at law or in equity,
shall be entitled to injunctive relief, including specific performance, to
enforce such obligations without the posting of any bond, and, if any action
should be brought in equity to enforce any of the provisions of this Agreement,
none of the parties hereto shall raise the defense that there is an adequate
remedy at law.
<PAGE>
2.11 No Inconsistent Agreements. The rights granted
to the Holders of Registrable Securities hereunder do not in any way conflict
with and are not inconsistent with any other agreements to which the Company is
a party or by which it is bound. Without the prior written consent of the
holders of two-thirds of the Registrable Securities then outstanding, neither
the Company nor any Holder will, on or after the date of this Agreement, enter
into any agreement with respect to its securities which is inconsistent with the
rights granted in this Agreement or otherwise conflicts with the provisions
hereof, other than any lock-up agreement with the underwriters in connection
with any registered offering effected hereunder, pursuant to which the Company
shall agree not to register for sale, and the Company shall agree not to sell or
otherwise dispose of, Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, for a specified period following
the registered offering. The Company further agrees that if any other
registration rights agreement entered into after the date of this Agreement with
respect to any of its securities contains terms which are more favorable to, or
less restrictive on, the other party thereto than the terms and conditions in
this Agreement are (insofar as they are applicable to the Holders), then the
terms and conditions of this Agreement shall immediately be deemed to have been
amended without further action by the Company or any of the Holders of
Registrable Securities so that the Holders shall be entitled to the benefit of
any such more favorable or less restrictive terms or conditions.
2.12 Entire Agreement. This Agreement (including the
Exhibits hereto, if any) constitutes the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first above written.
EXOGEN, INC.
By: /s/ Patrick A. McBrayer
-----------------------
Name: Patrick A. McBrayer
Title: President and Chief Executive Officer
Address: 10 Constitution Avenue
P.O. Box 6860
Piscataway, NJ 08855
INVESTORS:
DELPHI VENTURES III, L.P.
By: Delphi Management Partners III, L.L.C.,
General Partner
By: /s/ Donald J. Lothrop
---------------------
Name: Donald J. Lothrop
Title: Managing Member
DELPHI BIO-INVESTMENTS III, L.P.
By: Delphi Management Partners III, L.L.C.,
General Partners
By: /s/ Donald J. Lothrop
---------------------
Name: Donald J. Lothrop
Title: Managing Member
REGISTRATION RIGHTS AGREEMENT
<PAGE>
THE DEMETER TRUST DTD 6/5/90
TRUSTEE
By: /s/ Richard Johnston
--------------------
Name: Richard Johnston
ALEXANDRA F. JOHNSTON TRUST DTD
11/6/78
Trustee
By: /s/ Richard Johnston
--------------------
Name: Richard Johnston
BRADFORD D. JOHNSTON TRUST DTD
11/6/78
Trustee
By: /s/ Richard Johnston
--------------------
Name: Richard Johnston
WILLIAM M. JOHNSTON TRUST DTD
11/6/7
Trustee
By: /s/ Richard Johnston
--------------------
Name: Richard Johnston
ROBERT F. JOHNSTON
By: /s/ Robert F. Johnston
----------------------
Robert F. Johnston
REGISTRATION RIGHTS AGREEMENT
<PAGE>
PEQUOT PRIVATE EQUITY FUND L.P.
By: /s/ Amiel Peretz
----------------
Name: Amiel Peretz
Title: CFO, DSCMI Inv. Mgr.
PEQUOT OFFSHORE PRIVATE EQUITY
FUND, INC.
By: /s/ Amiel Peretz
------------------
Name: Amiel Peretz
Title: CFO, DSCMI Inv. Mgr.
REGISTRATION RIGHTS AGREEMENT
<PAGE>
PIPER JAFFRAY HEALTHCARE CAPITAL
LIMITED PARTNERSHIP (SBIC)
By: Piper Ventures Management IV Limited
Partnership, its General Partner
By: /s/ Buzz Benson
---------------
Buzz Benson, Managing Director Piper
Ventures Capital, Inc., Its General Partner
REGISTRATION RIGHTS AGREEMENT
<PAGE>
TERENCE D. WALL
By: /s/ Terence D. Wall
-------------------
Terence D. Wall
REGISTRATION RIGHTS AGREEMENT
EXHIBIT 10.20
EXOGEN, INC.
1995 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
(As Amended through November 14, 1997)
--------------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1995 Stock Option/Stock Issuance Plan is intended to
promote the interests of Exogen, Inc., a Delaware corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into four separate equity
programs:
(i) the Discretionary Option Grant Program
under which eligible persons may, at the discretion of the Plan
Administrator, be granted options to purchase shares of Common Stock,
(ii) the Salary Investment Option Grant
Program under which eligible employees may elect to have a portion of
their base salary invested each year in options to purchase shares of
Common Stock,
(iii) the Stock Issuance Program under which
eligible persons may, at the discretion of the Plan Administrator, be
issued shares of Common Stock directly, either through the immediate
purchase of such shares or as a bonus for services rendered the
Corporation (or any Parent or Subsidiary), and
(iv) the Automatic Option Grant Program under
which Eligible Directors shall automatically receive option grants at
periodic intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Six shall apply to all
equity programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Board shall have authority to administer the
Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance
Programs with respect to Section 16 Insiders. However the Board may, at its sole
discretion, delegate such authority to the Primary Committee.
<PAGE>
B. Administration of the Discretionary Option Grant, Salary
Investment Option Grant and Stock Issuance Programs with respect to all other
persons eligible to participate in those programs may, at the Board's
discretion, be vested in the Primary Committee or a Secondary Committee, or the
Board may retain the power to administer those programs with respect to such
persons.
C. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate the
functions of any committee and reassume all powers and authority previously
delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant,
Salary Investment Option Grant and Stock Issuance Programs and to make such
determinations under, and issue such interpretations of, the provisions of such
programs and any outstanding options or stock issuances thereunder as it may
deem necessary or advisable. Decisions of the Plan Administrator within the
scope of its administrative functions under the Plan shall be final and binding
on all parties who have an interest in the Discretionary Option Grant, Salary
Investment Option Grant or Stock Issuance Program under its jurisdiction or any
option or stock issuance thereunder.
E. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant Program shall
be self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to option
grants made thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary
Option Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the
board of directors of any Parent or Subsidiary, and
(iii) consultants and other independent
advisors who provide services to the Corporation (or any Parent or
Subsidiary).
B. Only Employees shall be eligible to participate in the
Salary Investment Option Grant Program.
<PAGE>
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant and
Salary Investment Option Grant Programs, which eligible persons are to receive
option grants, the time or times when such option grants are to be made, the
number of shares to be covered by each such grant, the status of the granted
option as either an Incentive Option or a Non-Statutory Option, the time or
times at which each option is to become exercisable, the vesting schedule (if
any) applicable to the option shares and the maximum term for which the option
is to remain outstanding and (ii) with respect to stock issuances under the
Stock Issuance Program, which eligible persons are to receive stock issuances,
the time or times when such issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable to the
issued shares and the consideration to be paid by the Participant for such
shares.
D. The Plan Administrator shall have the absolute discretion
either to grant options in accordance with the Discretionary Option Grant and/or
Salary Investment Option Grant Program or to effect stock issuances in
accordance with the Stock Issuance Program.
E. The individuals eligible to participate in the Automatic
Option Grant Program shall be those individuals who first become non-employee
Board members after the Effective Date, whether through appointment by the Board
or election by the Corporation's stockholders, and those individuals who
continue to serve as non-employee Board members after the Effective Date. A
non-employee Board member who has previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall not be eligible to receive an
option grant under the Automatic Option Grant Program at the time he or she
first becomes a non-employee Board member, but such individual shall be eligible
to receive periodic option grants under the Automatic Option Grant Program upon
his or her continued service as a non-employee Board member at one or more
Annual Stockholders Meetings.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares repurchased
by the Corporation on the open market. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 1,350,000
shares. Such authorized share reserve reflects the 1-for-2 reverse stock split
effected prior to the Effective Date and is comprised of (i) the number of
shares which remained available for issuance, as of the Effective Date, under
the Predecessor Plan as last approved by the Corporation's stockholders,
including the shares subject to the outstanding options incorporated into the
Plan and any other shares which would have been available for future option
grants under the Predecessor Plan, (ii) an increase of 500,000 shares authorized
by the Board and approved by the Corporation's stockholders prior to the
Effective Date and (iii) an increase of 600,000 shares authorized by the Board
in November 1997, subject to approval by the Corporation's stockholders at the
1998 Annual Meeting.
B. No one person participating in the Plan may receive
options, separately exercisable stock appreciation rights and direct stock
issuances for more than 300,000 shares of Common Stock per calendar year.
<PAGE>
C. Shares of Common Stock subject to outstanding options shall
be available for subsequent issuance under the Plan to the extent (i) the
options (including any options incorporated from the Predecessor Plan) expire or
terminate for any reason prior to exercise in full or (ii) the options are
cancelled in accordance with the cancellation-regrant provisions of Article Two.
Unvested shares issued under the Plan and subsequently cancelled or repurchased
by the Corporation, at the original exercise or direct issue price paid per
share, pursuant to the Corporation's repurchase rights under the Plan shall be
added back to the number of shares of Common Stock reserved for issuance under
the Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
shares subject to any options surrendered in connection with the stock
appreciation right provisions of the Plan shall not be available for reissuance.
In addition, should the exercise price of an option under the Plan (including
any option incorporated from the Predecessor Plan) be paid with shares of Common
Stock or should shares of Common Stock otherwise issuable under the Plan be
withheld by the Corporation in satisfaction of the withholding taxes incurred in
connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance.
D. Should any change be made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
issuable under the Plan, (ii) the number and/or class of securities for which
any one person may be granted options, separately exercisable stock appreciation
rights and direct stock issuances per calendar year, (iii) the number and/or
class of securities for which automatic option grants are to be subsequently
made per Eligible Director under the Automatic Option Grant Program and (iv) the
number and/or class of securities and the exercise price per share in effect
under each outstanding option (including any option incorporated from the
Predecessor Plan) in order to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; provided, however, that each such
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
1. The exercise price per share shall be fixed by the
Plan Administrator but shall not be less than the Fair Market Value per share of
Common Stock on the option grant date.
2. The exercise price shall become immediately due
upon exercise of the option and shall, subject to the provisions of Section I of
Article Six and the documents evidencing the option, be payable in one or more
of the forms specified below:
(i) cash or check made payable to the
Corporation,
(ii) shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market
Value on the Exercise Date, or
(iii) to the extent the option is exercised
for vested shares, through a special sale and remittance procedure
pursuant to which the Optionee shall concurrently provide irrevocable
written instructions to (a) a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the
purchased shares plus all applicable Federal, state and local income
and employment taxes required to be withheld by the Corporation by
reason of such exercise and (b) the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm
in order to complete the sale transaction.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
B. Exercise and Term of Options. Each option shall be
exercisable at such time or times, during such period and for such number of
shares as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option. However, no option shall have a term in excess
of ten (10) years measured from the option grant date.
<PAGE>
C. Effect of Termination of Service.
1. The following provisions shall govern the exercise
of any options held by the Optionee at the time of cessation of Service or
death:
(i) Any option outstanding at the time of the
Optionee's cessation of Service for any reason shall remain exercisable
for such period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option exercisable in whole or in part
by the Optionee at the time of death may be subsequently exercised by
the personal representative of the Optionee's estate or by the person
or persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service
exercise period, the option may not be exercised in the aggregate for
more than the number of vested shares for which the option is
exercisable on the date of the Optionee's cessation of Service. Upon
the expiration of the applicable exercise period or (if earlier) upon
the expiration of the option term, the option shall terminate and cease
to be outstanding for any vested shares for which the option has not
been exercised. However, the option shall, immediately upon the
Optionee's cessation of Service, terminate and cease to be outstanding
to the extent it is not otherwise at that time exercisable for vested
shares.
(iv) Should the Optionee's Service be terminated
for Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(v) In the event of an Involuntary Termination
following a Corporate Transaction,the provisions of Section III of this
Article Two shall govern the period for which the outstanding options
are to remain exercisable following the Optionee's cessation of Service
and shall supersede any provisions to the contrary in this Section.
2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the
option is to remain exercisable following the Optionee's cessation of
Service from the period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem
appropriate, but in no event beyond the expiration of the option term,
and/or
<PAGE>
(ii) permit the option to be exercised, during
the applicable post-Service exercise period, not only with respect to
the number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the
Optionee would have vested under the option had the Optionee continued
in Service.
D. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. Limited Transferability of Options. During the lifetime of
the Optionee, Incentive Options shall be exercisable only by the Optionee and
shall not be assignable or transferable other than by will or by the laws of
descent and distribution following the Optionee's death. However, Nonstatutory
Options may, in connection with the Optionee's estate plan, be assigned in whole
or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Six shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to
Employees.
B. Dollar Limitation. The aggregate Fair Market Value
(determined as of the respective date or dates of grant) of the shares of Common
Stock for which one or more options granted to any Employee under the Plan (or
any other option plan of the Corporation or any Parent or Subsidiary) may for
the first time become exercisable as Incentive Options during any one (1)
calendar year shall not exceed the sum of One Hundred Thousand Dollars
($100,000). To the extent the Employee holds two (2) or more such options which
become exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
<PAGE>
C. 10% Stockholder. If any Employee to whom an Incentive
Option is granted is a 10% Stockholder, then the exercise price per share shall
not be less than one hundred ten percent (110%) of the Fair Market Value per
share of Common Stock on the option grant date, and the option term shall not
exceed five (5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not so accelerate
if and to the extent: (i) such option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation (or parent
thereof) or to be replaced with a comparable option to purchase shares of the
capital stock of the successor corporation (or parent thereof), (ii) such option
is to be replaced with a cash incentive program of the successor corporation
which preserves the spread existing on the unvested option shares at the time of
the Corporate Transaction and provides for subsequent payout in accordance with
the same vesting schedule applicable to such option or (iii) the acceleration of
such option is subject to other limitations imposed by the Plan Administrator at
the time of the option grant. The determination of option comparability under
clause (i) above shall be made by the Plan Administrator, and its determination
shall be final, binding and conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan on both an aggregate and per
individual basis following the consummation of such Corporate Transaction and
(ii) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same.
E. Any options which are assumed or replaced in the Corporate
Transaction and do not otherwise accelerate at that time shall automatically
accelerate (and any of the Corporation's outstanding repurchase rights which do
not otherwise terminate at the time of the Corporate Transaction shall
automatically terminate and the shares of Common Stock subject to those
<PAGE>
terminated rights shall immediately vest in full) in the event the Optionee's
Service should subsequently terminate by reason of an Involuntary Termination
within eighteen (18) months following the effective date of such Corporate
Transaction. Any options so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the option term
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination.
F. Each outstanding option shall automatically accelerate (and
any outstanding repurchase rights shall automatically terminate and the shares
of Common Stock subject to those terminated rights shall immediately vest in
full) in the event the Optionee's Service should terminate by reason of an
Involuntary Termination within eighteen (18) months following the effective date
of a Change in Control. Any options so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the option term
(ii) the expiration of the one (1)-year period measured from the effective date
of the Involuntary Termination.
G. The portion of any Incentive Option accelerated in
connection with a Corporate Transaction or Change in Control shall remain
exercisable as an Incentive Option only to the extent the applicable One Hundred
Thousand Dollar limitation is not exceeded. To the extent such dollar limitation
is exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.
H. The grant of options under the Discretionary Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected option holders,
the cancellation of any or all outstanding options under the Discretionary
Option Grant Program (including outstanding options incorporated from the
Predecessor Plan) and to grant in substitution new options covering the same or
different number of shares of Common Stock but with an exercise price per share
based on the Fair Market Value per share of Common Stock on the new option grant
date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority
to grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of
tandem stock appreciation rights:
(i) One or more Optionees may be granted the
right, exercisable upon such terms as the Plan Administrator may
establish, to elect between the exercise of the underlying option for
shares of Common Stock and the surrender of that option in exchange for
a distribution from the Corporation in an amount equal to the excess of
<PAGE>
(a) the Fair Market Value (on the option surrender date) of the number
of shares in which the Optionee is at the time vested under the
surrendered option (or surrendered portion thereof) over (b) the
aggregate exercise price payable for such shares.
(ii) No such option surrender shall be
effective unless it is approved by the Plan Administrator. If the
surrender is so approved, then the distribution to which the Optionee
shall be entitled may be made in shares of Common Stock valued at Fair
Market Value on the option surrender date, in cash, or partly in shares
and partly in cash, as the Plan Administrator shall in its sole
discretion deem appropriate.
(iii) If the surrender of an option is
rejected by the Plan Administrator, then the Optionee shall retain
whatever rights the Optionee had under the surrendered option (or
surrendered portion thereof) on the option surrender date and may
exercise such rights at any time prior to the later of (a) five (5)
business days after the receipt of the rejection notice or (b) the last
day on which the option is otherwise exercisable in accordance with the
terms of the documents evidencing such option, but in no event may such
rights be exercised more than ten (10) years after the option grant
date.
C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:
(i) One or more Section 16 Insiders may be
granted limited stock appreciation rights with respect to their
outstanding options.
(ii) Upon the occurrence of a Hostile
Take-Over, each such individual holding one or more options with such a
limited stock appreciation right shall have the unconditional right
(exercisable for a thirty (30)-day period following such Hostile
Take-Over) to surrender each such option to the Corporation, to the
extent the option is at the time exercisable for vested shares of
Common Stock. In return for the surrendered option, the Optionee shall
receive a cash distribution from the Corporation in an amount equal to
the excess of (a) the Take-Over Price of the shares of Common Stock
which are at the time vested under each surrendered option (or
surrendered portion thereof) over (b) the aggregate exercise price
payable for such shares. Such cash distribution shall be paid within
five (5) days following the option surrender date.
(iii) The Plan Administrator shall pre-approve,
at the time the limited right is granted, the subsequent exercise of
that right in accordance with the terms of the grant and the provisions
of this Section V. No additional approval of the Plan Administrator
shall be required at the time of the actual option surrender and cash
distribution.
(iv) The balance of the option (if any) shall
continue in full force and effect in accordance with the documents
evidencing such option.
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive
authority to determine the calendar year or years (if any) for which the Salary
Investment Option Program is to be in effect and to select the Employees
eligible to participate in the Salary Investment Option Grant Program for such
calendar year or years. Each selected Employee who elects to participate in the
Salary Investment Option Grant Program must, prior to the start of each calendar
year of participation, file with the Plan Administrator (or its designate) an
irrevocable authorization directing the Corporation to reduce his or her base
salary for that calendar year by a designated multiple of one percent (1%).
However, the amount of such salary reduction must be not less than Five Thousand
Dollars ($5,000.00) and must not be more than the lesser of (i) twenty percent
(20%) of his or her rate of base salary for the calendar year or (ii) Twenty
Thousand Dollars ($20,000.00). Each individual who files a proper salary
reduction authorization shall automatically be granted an option under this
Salary Investment Option Grant Program on the first trading day in January of
the calendar year for which that salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one
or more documents in the form approved by the Plan Administrator; provided,
however, that each such document shall comply with the terms specified below.
A. Exercise Price.
1. The exercise price per share shall be thirty-three
and one-third percent (33-1/3%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately due
upon exercise of the option and shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
B. Number of Option Shares. The number of shares of Common
Stock subject to the option shall be determined pursuant to the following
formula (rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the Optionee's base salary
reduction for the calendar year, and
B is the Fair Market Value per share of Common Stock
on the option grant date.
<PAGE>
C. Exercise and Term of Options. The option shall become
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the calendar
year for which the salary reduction is in effect. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
D. Effect of Termination of Service. Should the Optionee cease
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
term or (ii) the expiration of the two (2)-year period measured from the date of
such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by the
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and distribution.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the two
(2)-year period measured from the date of the Optionee's cessation of Service.
However, the option shall, immediately upon the Optionee's cessation of Service
for any reason, terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction while the
Optionee remains in Service, each outstanding option held by such Optionee under
this Salary Investment Option Grant Program shall automatically accelerate so
that each such option shall, immediately prior to the effective date of the
Corporate Transaction, become fully exercisable for all of the shares of Common
Stock at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. Each such outstanding
option shall be assumed by the successor corporation (or parent thereof) in the
Corporate Transaction and shall remain exercisable for the fully-vested shares
until the earlier of (i) the expiration of the option term or (ii) the
expiration of the two (2)-year period measured from the date of Optionee's
cessation of Service.
B. In the event of a Change in Control while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall immediately become fully exercisable for all of the
shares of Common Stock at the time subject to such option and may be exercised
for any or all of such shares as fully-vested shares of Common Stock. The option
shall remain so exercisable until the earlier of (i) the expiration of the
option term or (ii) the expiration of the two (2)-year period measured from the
date of Optionee's cessation of Service.
C. The grant of options under the Salary Investment Option
Grant Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
<PAGE>
III. REMAINING TERMS
The remaining terms of each option granted under the Salary
Investment Option Grant Program shall be the same as the terms in effect for
option grants made under the Discretionary Option Grant Program.
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. Purchase Price.
1. The purchase price per share shall be fixed by the
Plan Administrator, but shall not be less than the Fair Market Value per share
of Common Stock on the stock issuance date.
2. Subject to the provisions of Section I of Article
Six shares of Common Stock may be issued under the Stock Issuance Program for
any of the following items of consideration which the Plan Administrator may
deem appropriate in each individual instance:
(i) cash or check made payable to the
Corporation, or
(ii) past services rendered to the Corporation
(or any Parent or Subsidiary).
B. Vesting Provisions.
1. Shares of Common Stock issued under the Stock
Issuance Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:
(i) the Service period to be completed by the
Participant or the performance objectives to be attained,
(ii) the number of installments in which the
shares are to vest,
(iii) the interval or intervals (if any) which
are to lapse between installments, and
(iv) the effect which death, Permanent
Disability or other event designated by the Plan Administrator is to
have upon the vesting schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
<PAGE>
2. Any new, substituted or additional securities or
other property (including money paid other than as a regular cash dividend)
which the Participant may have the right to receive with respect to the
Participant's unvested shares of Common Stock by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. The Participant shall have full stockholder rights
with respect to any shares of Common Stock issued to the Participant under the
Stock Issuance Program, whether or not the Participant's interest in those
shares is vested. Accordingly, the Participant shall have the right to vote such
shares and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service
while holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive
the surrender and cancellation of one or more unvested shares of Common Stock
(or other assets attributable thereto) which would otherwise occur upon the
cessation of the Participant's Service or the non-completion of the vesting
schedule applicable to such shares. Such waiver shall result in the immediate
vesting of the Participant's interest in the shares of Common Stock as to which
the waiver applies. Such waiver may be effected at any time, whether before or
after the Participant's cessation of Service or the attainment or non-attainment
of the applicable performance objectives.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the outstanding repurchase rights under the Stock
Issuance Program shall terminate automatically, and all the shares of Common
Stock subject to those terminated rights shall immediately vest in full, in the
event of any Corporate Transaction, except to the extent (i) those repurchase
rights are assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed in the Stock Issuance Agreement.
B. Any repurchase rights that are assigned in the Corporate
Transaction shall automatically terminate, and all the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in the event
the Participant's Service should subsequently terminate by reason of an
Involuntary Termination within eighteen (18) months following the effective date
of such Corporate Transaction.
<PAGE>
C. All of the outstanding repurchase rights under the Stock
Issuance Program shall terminate automatically, and all the shares of Common
Stock subject to those terminated rights shall immediately vest in full, in the
event the Optionee's service should terminate by reason of an Involuntary
Termination within eighteen (18) months following the effective date of a Change
in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates
specified below:
1. Each Eligible Director who is first elected or
appointed as a non-employee Board member after the Effective Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 7,500 shares of Common Stock.
2. On the date of each Annual Stockholders Meeting,
beginning with the 1996 Annual Meeting, each individual who is to continue to
serve as an Eligible Director shall automatically be granted a Non-Statutory
Option to purchase an additional 1,250 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 1,250-share option grants
any one Eligible Director may receive over his or her period of Board service.
B. Exercise Price.
1. The exercise price per share shall be equal to one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall be payable in one or more
of the alternative forms authorized under the Discretionary Option Grant
Program. Except to the extent the sale and remittance procedure specified
thereunder is utilized, payment of the exercise price for the purchased shares
must be made on the Exercise Date.
C. Option Term. Each option shall have a term of ten (10)
years measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be
immediately exercisable for any or all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. Each initial grant shall vest, and the
Corporation's repurchase right shall lapse, in a series of four (4) equal and
successive annual installments over the Optionee's period of continued service
as a Board member, with the first such installment to vest upon the Optionee's
completion of one (1) year of Board service measured from the option grant date.
Each annual grant shall vest, and the Corporation's repurchase right shall
lapse, upon the Optionee's completion of one (1) year of Board service measured
from the option grant date.
E. Effect of Termination of Board Service. The following
provisions shall govern the exercise of any options held by the Optionee at the
time the Optionee ceases to serve as a Board member:
<PAGE>
(i) Should the Optionee cease to serve as a
Board member for any reason (other than death or Permanent Disability),
then the Optionee shall have a six (6)-month period following the date
of such cessation of Board service in which to exercise each such
option.
(ii) Should the Optionee die while the option
is outstanding, then the personal representative of the Optionee's
estate or the person or persons to whom the option is transferred
pursuant to the Optionee's will or in accordance with the laws of
descent and distribution shall have a twelve (12)- month period
following the date of the Optionee's cessation of Board service in
which to exercise each such option.
(iii) During the limited post-service exercise
period, the option may not be exercised in the aggregate for more than
the number of vested shares for which the option is exercisable at the
time of the Optionee's cessation of Board service.
(iv) Should the Optionee cease to serve as a
Board member by reason of death or Permanent Disability, then all
shares at the time subject to the option shall immediately vest so that
such option may, during the twelve (12)-month exercise period following
the Optionee's death or Permanent Disability, be exercised for all or
any portion of such shares as fully-vested shares of Common Stock.
(v) In no event shall the option remain
exercisable after the expiration of the option term. Upon the
expiration of the limited post-service exercise period or (if earlier)
upon the expiration of the option term, the option shall terminate and
cease to be outstanding for any vested shares for which the option has
not been exercised. However, the option shall, immediately upon the
Optionee's cessation of Board service, terminate and cease to be
outstanding to the extent it is not otherwise at that time exercisable
for vested shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-
OVER
A. In the event of any Corporate Transaction, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of such shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
B. In connection with any Change in Control, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Change in Control, become fully
exercisable for all of the shares of Common Stock at the time subject to such
<PAGE>
option and may be exercised for all or any portion of such shares as
fully-vested shares of Common Stock. Each such option shall remain exercisable
for such fully-vested option shares until the expiration or sooner termination
of the option term or the surrender of the option in connection with a Hostile
Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee
shall have a thirty (30)-day period in which to surrender to the Corporation
each automatic option held by him or her. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to the surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. Stockholder approval
of the amendments to the Plan at the 1998 Annual Meeting shall constitute
preapproval of the grant of each such option surrender right under this
Automatic Option Grant Program and the subsequent exercise of that right in
accordance with the terms and provisions of this Section II.C. No additional
approval or consent of the Plan Administrator shall be required at the time of
the actual option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
E. The grant of options under the Automatic Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
<PAGE>
ARTICLE SIX
MISCELLANEOUS
I. FINANCING
A. The Plan Administrator may permit any Optionee or
Participant to pay the option exercise price under the Discretionary Option
Grant Program or the purchase price for shares issued under the Stock Issuance
Program by delivering a promissory note payable in one or more installments. The
terms of any such promissory note (including the interest rate and the terms of
repayment) shall be established by the Plan Administrator in its sole
discretion. Promissory notes may be authorized with or without security or
collateral. In no event may the maximum credit available to the Optionee or
Participant exceed the sum of (i) the aggregate option exercise price or
purchase price payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or the
Participant in connection with the option exercise or share purchase.
B. The Plan Administrator may, in its discretion, determine
that one or more such promissory notes shall be subject to forgiveness by the
Corporation in whole or in part upon such terms as the Plan Administrator may
deem appropriate.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common
Stock upon the exercise of options or stock appreciation rights or upon the
issuance or vesting of such shares under the Plan shall be subject to the
satisfaction of all applicable Federal, state and local income and employment
tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any
or all holders of Non-Statutory Options or unvested shares of Common Stock under
the Plan (other than the options granted or the shares issued under the
Automatic Option Grant Program) with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in connection
with the exercise of their options or the vesting of their shares. Such right
may be provided to any such holder in either or both of the following formats:
(i) Stock Withholding: The election to have
the Corporation withhold, from the shares of Common Stock otherwise
issuable upon the exercise of such Non-Statutory Option or the vesting
of such shares, a portion of those shares with an aggregate Fair Market
Value equal to the percentage of the Taxes (not to exceed one hundred
percent (100%)) designated by the holder.
(ii) Stock Delivery: The election to deliver
to the Corporation, at the time the Non-Statutory Option is exercised
or the shares vest, one or more shares of Common Stock previously
acquired by such holder (other than in connection with the option
exercise or share vesting triggering the Taxes) with an aggregate Fair
Market Value equal to the percentage of the Taxes (not to exceed one
hundred percent (100%)) designated by the holder.
<PAGE>
III. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan was adopted by the Board on May 25, 1995 and was
subsequently approved by the Corporation's stockholders. The Plan became
effective on the Effective Date.
B. On November 14, 1997 the Board adopted a series of
amendments to the Plan which (i) increased the number of shares of Common Stock
reserved for issuance over the term of the Plan by an additional 600,000 shares,
(ii) rendered all non-employee Board members eligible to receive option grants
and direct stock issuances under the Discretionary Option Grant and Stock
Issuance Programs, (iii) allowed unvested shares issued under the Plan and
subsequently repurchased by the Corporation at the option exercise price or
direct issue price paid per share to be reissued under the Plan, (iv) removed
certain restrictions on the eligibility of non-employee Board members to serve
as Plan Administrator, and (v) effected a series of additional changes to the
provisions of the Plan (including the stockholder approval requirements) in
order to take advantage of the 1996 amendments to Rule 16b-3 of the 1934 Act
which exempts certain officer and director transactions under the Plan from the
short-swing liability provisions of the federal securities laws. The amendments
listed above are subject to stockholder approval at the 1998 Annual Meeting. In
addition to such amendments, the Board, without the need for stockholder
approval, amended the Plan to (i) allow the Board or the Primary Committee to
administer the Plan with respect to Section 16 Insiders, (ii) allow
Non-Statutory Options to be transferred in limited circumstances and (iii)
eliminate the six (6)-month holding requirement for limited stock appreciation
rights. Should the required stockholder approval of the November 1997 amendments
not be obtained, then the amendments to the Plan which required such stockholder
approval shall have no force and effect and any options granted on the basis of
the 600,000-share increase shall terminate and cease to remain outstanding
without ever becoming exercisable for those shares, and no further option grants
shall be made on the basis of such increase. The provisions of the Plan as in
effect immediately prior to the November 1997 amendments requiring shareholder
approval shall automatically be reinstated, and option grants and share
issuances may thereafter continue to be made pursuant to the reinstated
provisions of the Plan.
C. The Plan shall serve as the successor to the Predecessor
Plan, and no further option grants shall be made under the Predecessor Plan
after the Effective Date. All options outstanding under the Predecessor Plan on
such date shall, immediately upon approval of the Plan by the Corporations's
stockholders, be incorporated into the Plan and treated as outstanding options
under the Plan. However, each outstanding option so incorporated shall continue
to be governed solely by the terms of the documents evidencing such option, and
no provision of the Plan shall be deemed to affect or otherwise modify the
rights or obligations of the holders of such incorporated options with respect
to their acquisition of shares of Common Stock.
D. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two applicable
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.
<PAGE>
E. The Plan shall terminate upon the earliest of (i) April 30,
2005, (ii) the date on which all shares available for issuance under the Plan
shall have been issued pursuant to the exercise of the options or the issuance
of shares (whether vested or unvested) under the Plan or (iii) the termination
of all outstanding options in connection with a Corporate Transaction. Upon a
clause (i) termination, all options and unvested stock issuances outstanding on
such date shall thereafter continue to have force and effect in accordance with
the provisions of the documents evidencing such options or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect the rights and obligations with
respect to options, stock appreciation rights or unvested stock issuances at the
time outstanding under the Plan unless the Optionee or the Participant consents
to such amendment or modification. In addition, certain amendments may require
stockholder approval pursuant to applicable laws and regulations.
B. Options to purchase shares of Common Stock may be granted
under the Discretionary Option Grant and Salary Investment Option Grant Programs
and shares of Common Stock may be issued under the Stock Issuance Program that
are in each instance in excess of the number of shares then available for
issuance under the Plan, provided any excess shares actually issued under those
programs are held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option
or stock appreciation right under the Plan and the issuance of any shares of
Common Stock (i) upon the exercise of any option or stock appreciation right or
(ii) under the Stock Issuance Program shall be subject to the Corporation's
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the options and stock appreciation rights
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued
or delivered under the Plan unless and until there shall have been compliance
with all applicable requirements of Federal and state securities laws, including
the filing and effectiveness of the Form S-8 registration statement for the
shares of Common Stock issuable under the Plan, and all applicable listing
requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which Common Stock is then listed for trading.
<PAGE>
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option grant
program in effect under the Plan.
B. Board shall mean the Corporation's Board of Directors.
C. Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders which
the Board does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
E. Common Stock shall mean the Corporation's common stock.
F. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is
a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those immediately
prior to such transaction; or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
G. Corporation shall mean Exogen, Inc., a Delaware corporation.
H. Discretionary Option Grant Program shall mean the discretionary
option grant program in effect under the Plan.
I. Effective Date shall mean the date on which the Underwriting
Agreement is executed and the initial public offering price of the Common Stock
is established.
<PAGE>
J. Eligible Director shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
K. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. Exercise Date shall mean the date on which the Corporation shall
have received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If there
is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price
on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) For purposes of option grants made on the Effective
Date, the Fair Market Value shall be deemed to be equal to the initial
public offering price per share at which the Common Stock is to be sold
pursuant to the Underwriting Agreement.
N. Hostile Take-Over shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. Incentive Option shall mean an option which satisfies the
requirements of Code Section 422.
P. Involuntary Termination shall mean the termination of the Service of
any individual which occurs by reason of:
<PAGE>
(i) such individual's involuntary dismissal or
discharge by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which
materially reduces his or her level of responsibility, (B) a reduction
in his or her level of compensation (including base salary, fringe
benefits and participation in corporate-performance based bonus or
incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation
is effected by the Corporation without the individual's consent.
Q. Misconduct shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
R. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
S. Non-Statutory Option shall mean an option not intended to satisfy
the requirements of Code Section 422.
T. Optionee shall mean any person to whom an option is granted under
the Discretionary Option Grant, Automatic Option Grant or Salary Investment
Option Grant Program.
U. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Participant shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for the purposes of the Automatic Option
Grant Program, Permanent Disability or Permanently Disabled shall mean the
inability of the non-employee Board member to perform his or her usual duties as
a Board member by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more.
X. Plan shall mean the Corporation's 1995 Stock Option/Stock Issuance
Plan, as set forth in this document.
<PAGE>
Y. Plan Administrator shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant, Salary Investment Option Grant and
Stock Issuance Programs with respect to one or more classes of eligible persons,
to the extent such entity is carrying out its administrative functions under
those programs with respect to the persons under its jurisdiction.
Z. Predecessor Plan shall mean the Corporation's existing 1993 Stock
Option Plan.
AA. Primary Committee shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance
Programs with respect to Section 16 Insiders.
AB. Salary Investment Option Grant Program shall mean the salary
investment option grant program in effect under the Plan.
AC. Secondary Committee shall mean a committee of two (2) or more Board
members appointed by the Board to administer the Discretionary Option Grant,
Salary Investment Option Grant and Stock Issuance Programs with respect to
eligible persons other than Section 16 Insiders.
AD. Section 16 Insider shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AE. Section 12(g) Registration Date shall mean the first date on which
the Common Stock is registered under Section 12(g) of the 1934 Act.
AF. Service shall mean the provision of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
AG. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.
AH. Stock Issuance Agreement shall mean the agreement entered into by
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
AI. Stock Issuance Program shall mean the stock issuance program in
effect under the Plan.
AJ. Subsidiary shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
AK. Take-Over Price shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
<PAGE>
AL. Taxes shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of such holder's options
or the vesting of his or her shares.
AM. 10% Stockholder shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
AN. Underwriting Agreement shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
EXHIBIT 10.21
EXOGEN, INC.
EMPLOYEE STOCK PURCHASE PLAN
----------------------------
(As Amended through November 14, 1997)
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the
interests of Exogen, Inc. by providing eligible employees with the opportunity
to acquire a proprietary interest in the Corporation through participation in a
payroll-deduction based employee stock purchase plan designed to qualify under
Section 423 of the Code. Capitalized terms herein shall have the meanings
assigned to such terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret
and construe any provision of the Plan and to adopt such rules and regulations
for administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 350,000 shares.
Such authorized share reserve reflects the 1-for-2 reverse stock split effected
prior to the Effective Date and includes (i) the original share reserve of
150,000 shares established for the Plan and (ii) the 200,000-share increase
adopted by the Board on November 14, 1997, subject to approval by the
Corporation's stockholders at the 1998 Annual Meeting.
B. Should any change be made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and class of securities
issuable under the Plan, (ii) the maximum number and class of securities
purchasable per Participant on any one Purchase Date and (iii) the number and
class of securities and the price per share in effect under each outstanding
purchase right in order to prevent the dilution or enlargement of benefits
thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under
the Plan through a series of successive offering periods until such time as (i)
the maximum number of shares of Common Stock available for issuance under the
Plan shall have been purchased or (ii) the Plan shall have been sooner
terminated.
<PAGE>
B. Each offering period shall be of such duration (not to
exceed twenty-four (24) months) as determined by the Plan Administrator prior to
the start date. However, the initial offering period shall commence at the
Effective Time and terminate on the last business day in July 1997. The next
offering period shall commence on the first business day in August 1997, and
subsequent offering periods shall commence as designated by the Plan
Administrator.
C. Each offering period shall be comprised of a series of one
or more successive Purchase Periods. Purchase Periods shall begin on the first
business day in February and August each year and terminate on the last business
day in July and January respectively each year.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start
date of the initial offering period shall be eligible to enter that offering
period or any subsequent offering period under the Plan on the start date of any
Purchase Period within the applicable offering period on which he or she remains
an Eligible Employee.
B. Each individual who first becomes an Eligible Employee
after the start date of the initial offering period shall be eligible to enter
that offering period or any subsequent offering period under the Plan on the
start date of any Purchase Period within the applicable offering period on which
he or she is an Eligible Employee with at least three (3) months of service with
the Corporation or any Corporate Affiliate.
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering
period, the Eligible Employee must complete the enrollment forms prescribed by
the Plan Administrator (including a stock purchase agreement and a payroll
deduction authorization form) and file such forms with the Plan Administrator
(or its designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for
purposes of acquiring shares of Common Stock under the Plan may be any multiple
of one percent (1%) of the Cash Compensation paid to the Participant during each
Purchase Period within that offering period, up to a maximum of ten percent
(10%). The deduction rate so authorized shall continue in effect for the
remainder of the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during
the offering period, reduce his or her rate of payroll deduction to
become effective as soon as possible after filing the appropriate form
with the Plan Administrator. The Participant may not, however, effect
more than one (1) such reduction per Purchase Period.
(ii) The Participant may, prior to the
commencement of any new Purchase Period within the offering period,
increase the rate of his or her payroll deduction by filing the
appropriate form with the Plan Administrator. The new rate (which may
<PAGE>
not exceed the ten percent (10%) maximum) shall become effective as of
the start date of the Purchase Period following the filing of such
form.
B. Payroll deductions shall begin on the first pay day
following the Participant's Entry Date into the offering period and shall
(unless sooner terminated by the Participant) continue through the pay day
ending with or immediately prior to the last day of that offering period. The
amounts so collected shall be credited to the Participant's book account under
the Plan, but no interest shall be paid on the balance from time to time
outstanding in such account. The amounts collected from the Participant shall
not be held in any segregated account or trust fund and may be commingled with
the general assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the
termination of the Participant's purchase right in accordance with the
provisions of the Plan.
D. The Participant's acquisition of Common Stock under the
Plan on any Purchase Date shall neither limit nor require the Participant's
acquisition of Common Stock on any subsequent Purchase Date, whether within the
same or a different offering period.
VII. PURCHASE RIGHTS
A. Grant of Purchase Right. A Participant shall be granted a
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under
the Plan to any Eligible Employee if such individual would, immediately after
the grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Corporation or any Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall
be automatically exercised in installments on each successive Purchase Date
within the offering period, and shares of Common Stock shall accordingly be
purchased on behalf of each Participant (other than any Participant whose
payroll deductions have previously been refunded in accordance with the
Termination of Purchase Right provisions below) on each such Purchase Date. The
purchase shall be effected by applying the Participant's payroll deductions for
the Purchase Period ending on such Purchase Date to the purchase of whole shares
of Common Stock at the purchase price in effect for the Participant for that
Purchase Date.
C. Purchase Price. The purchase price per share at which
Common Stock will be purchased on the Participant's behalf on each Purchase Date
within the offering period shall be equal to eighty-five percent (85%) of the
lower of (i) the Fair Market Value per share of Common Stock on the
<PAGE>
Participant's Entry Date into that offering period or (ii) the Fair Market Value
per share of Common Stock on that Purchase Date. However, for each Participant
whose Entry Date is other than the start date of the offering period, the clause
(i) amount shall in no event be less than the Fair Market Value per share of
Common Stock on the start date of that offering period.
D. Number of Purchasable Shares. The number of shares of
Common Stock purchasable by a Participant on each Purchase Date during the
offering period shall be the number of whole shares obtained by dividing the
amount collected from the Participant through payroll deductions during the
Purchase Period ending with that Purchase Date by the purchase price in effect
for the Participant for that Purchase Date. However, the maximum number of
shares of Common Stock purchasable per Participant on any one Purchase Date
shall not exceed 2,500 shares, subject to periodic adjustments in the event of
certain changes in the Corporation's capitalization.
E. Excess Payroll Deductions. Any payroll deductions not
applied to the purchase of shares of Common Stock on any Purchase Date because
they are not sufficient to purchase a whole share of Common Stock shall be held
for the purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable by the Participant on the
Purchase Date shall be promptly refunded.
F. Termination of Purchase Right. The following provisions
shall govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to
the next Purchase Date in the offering period, terminate his or her
outstanding purchase right by filing the appropriate form with the Plan
Administrator (or its designate), and no further payroll deductions
shall be collected from the Participant with respect to the terminated
purchase right. Any payroll deductions collected during the Purchase
Period in which such termination occurs shall, at the Participant's
election, be immediately refunded or held for the purchase of shares on
the next Purchase Date. If no such election is made at the time such
purchase right is terminated, then the payroll deductions collected
with respect to the terminated right shall be refunded as soon as
possible.
(ii) The termination of such purchase right
shall be irrevocable, and the Participant may not subsequently rejoin
the offering period for which the terminated purchase right was
granted. In order to resume participation in any subsequent offering
period, such individual must re-enroll in the Plan (by making a timely
filing of the prescribed enrollment forms) on or before his or her
scheduled Entry Date into that offering period.
(iii) Should the Participant cease to remain
an Eligible Employee for any reason (other than death or disability)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Period in which the purchase right so
terminates shall be immediately refunded. Should the Participant cease
to remain an Eligible Employee by reason of death or disability while
his or her purchase right remains outstanding, then that purchase right
<PAGE>
shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Period in which such death or disability
occurs shall, at the election of the Participant (or, in the event of
the Participant's death, the personal representative of the
Participant's estate), be immediately refunded or held for the purchase
of shares on the next Purchase Date. If no such election is made prior
to the next Purchase Date, then the payroll deductions collected with
respect to the terminated right shall be refunded as soon as possible.
(iv) Should the Participant cease to remain in
active service by reason of an approved unpaid leave of absence, then
no further payroll deductions shall be collected on the Participant's
behalf during such leave, and the Participant shall have the election,
exercisable up until the last business day of the Purchase Period in
which such leave commences, to (a) withdraw all the payroll deductions
collected on the Participant's behalf to date in that Purchase Period
or (b) have such funds held for the purchase of shares at the end of
such Purchase Period. Upon the Participant's return to active service
following the approved leave, his or her payroll deductions under the
Plan shall automatically resume at the rate in effect at the time the
leave began, provided such return to service occurs prior to the
expiration date of the offering period in which such leave began.
G. Corporate Transaction. Each outstanding purchase right
shall automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant
for the Purchase Period in which such Corporate Transaction occurs to the
purchase of whole shares of Common Stock at a purchase price per share equal to
eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of
Common Stock on the Participant's Entry Date into the offering period in which
such Corporate Transaction occurs or (ii) the Fair Market Value per share of
Common Stock immediately prior to the effective date of such Corporate
Transaction. However, the applicable share limitations per Participant shall
continue to apply to any such purchase, and the clause (i) amount above shall
not, for any Participant whose Entry Date for the offering period is other than
the start date of that offering period, be less than the Fair Market Value per
share of Common Stock on such start date.
The Corporation shall use its best efforts to provide at least
ten (10)-days prior written notice of the occurrence of any Corporate
Transaction, and Participants shall, following the receipt of such notice, have
the right to terminate their outstanding purchase rights prior to the effective
date of the Corporate Transaction.
H. Proration of Purchase Rights. Should the total number of
shares of Common Stock to be purchased pursuant to outstanding purchase rights
on any particular date exceed the number of shares then available for issuance
under the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. During the Participant's lifetime, the
purchase right shall be exercisable only by the Participant and shall not be
assignable or transferable by the Participant other by will or the laws of
descent and distribution following the Participant's death.
<PAGE>
J. Stockholder Rights. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to
acquire Common Stock pursuant to any purchase right outstanding under this Plan
if and to the extent such accrual, when aggregated with (i) rights to purchase
Common Stock accrued under any other purchase right granted under this Plan and
(ii) similar rights accrued under other employee stock purchase plans (within
the meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value of such stock on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.
B. For purposes of applying such accrual limitations, the
following provisions shall be in effect:
(i) The right to acquire Common Stock under
each outstanding purchase right shall accrue in a series of
installments on each successive Purchase Date during the offering
period on which such right remains outstanding.
(ii) No right to acquire Common Stock under
any outstanding purchase right shall accrue to the extent the
Participant has already accrued in the same calendar year the right to
acquire Common Stock under one (1) or more other purchase rights at a
rate equal to Twenty-Five Thousand Dollars ($25,000) worth of Common
Stock (determined on the basis of the Fair Market Value of such stock
on the date or dates of grant) for each calendar year such rights were
at any time outstanding.
C. Should any purchase right of a Participant not accrue for a
particular Purchase Period by reason of such accrual limitations, then the
payroll deductions which the Participant made during that Purchase Period with
respect to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions
of this Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on May 5, 1995 and shall
become effective at the Effective Time, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
<PAGE>
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
B. Unless sooner terminated by the Board, the Plan shall
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 Plan shall have been
sold pursuant to purchase rights exercised under the Plan or (iii) the date on
which all purchase rights are exercised in connection with a Corporate
Transaction. No further purchase rights shall be granted or exercised, and no
further payroll deductions shall be collected, under the Plan following its
termination.
X. AMENDMENT OF THE PLAN
The Board may alter, amend, suspend or discontinue the Plan at
any time to become effective immediately following the close of any Purchase
Period. However, the Board may not, without the approval of the Corporation's
stockholders, (i) materially increase the number of shares of Common Stock
issuable under the Plan or the maximum number of shares purchasable per
Participant on any one Purchase Date, except for permissible adjustments in the
event of certain changes in the Corporation's capitalization, (ii) alter the
purchase price formula so as to reduce the purchase price payable for the shares
of Common Stock purchasable under the Plan, or (iii) materially increase the
benefits accruing to Participants under the Plan or materially modify the
requirements for eligibility to participate in the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of
the Plan shall be paid by the Corporation.
B. Nothing in the Plan shall confer upon the Participant any
right to continue in the employ of the Corporation or any Corporate Affiliate
for any period of specific duration or interfere with or otherwise restrict in
any way the rights of the Corporation (or any Corporate Affiliate employing such
person) or of the Participant, which rights are hereby expressly reserved by
each, to terminate such person's employment at any time for any reason, with or
without cause.
C. The provisions of the Plan shall be governed by the laws of
the State of New Jersey without resort to that State's conflict-of-laws rules.
<PAGE>
Schedule A
----------
Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
------------------------
Exogen, Inc.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
B. Cash Compensation shall mean the (i) regular base salary
paid to a Participant by one or more Participating Companies during such
individual's period of participation in the Plan, plus (ii) any pre-tax
contributions made by the Participant to any Code Section 401(k) salary deferral
plan or any Code Section 125 cafeteria benefit program now or hereafter
established by the Corporation or any Corporate Affiliate, plus (iii) all of the
following amounts to the extent paid in cash: overtime payments, bonuses,
commissions, profit-sharing distributions and other incentive-type payments.
However, Eligible Earnings shall not include any contributions (other than Code
Section 401(k) or Code Section 125 contributions) made on the Participant's
behalf by the Corporation or any Corporate Affiliate to any deferred
compensation plan or welfare benefit program now or hereafter established.
C. Code shall mean the Internal Revenue Code of 1986, as
amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Affiliate shall mean any parent or subsidiary
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
F. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation.
G. Corporation shall mean Exogen, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Exogen, Inc. which shall by appropriate action adopt
the Plan.
H. Effective Time shall mean the time at which the
Underwriting Agreement is executed and finally priced. Any Corporate Affiliate
which becomes a Participating Corporation after such Effective Time shall
designate a subsequent Effective Time with respect to its employee-Participants.
I. Eligible Employee shall mean any person who is engaged, on
a regularly-scheduled basis of more than twenty (20) hours per week for more
than five (5) months per calendar year, in the rendition of personal services to
any Participating Corporation as an employee for earnings considered wages under
Code Section 3401(a).
<PAGE>
J. Entry Date shall mean the date an Eligible Employee first
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. Fair Market Value per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If there
is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price
on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) For purposes of the initial offering period which
begins at the Effective Time, the Fair Market Value shall be deemed to
be equal to the price per share at which the Common Stock is sold in
the initial public offering pursuant to the Underwriting Agreement.
L. 1933 Act shall mean the Securities Act of 1933, as amended.
M. Participant shall mean any Eligible Employee of a
Participating Corporation who is actively participating in the Plan.
N. Participating Corporation shall mean the Corporation and
such Corporate Affiliate or Affiliates as may be authorized from time to time by
the Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan as of the Effective Time are listed in
attached Schedule A.
O. Plan shall mean the Corporation's Employee Stock Purchase
Plan, as set forth in this document.
P. Plan Administrator shall mean the committee of two (2) or
more Board members appointed by the Board to administer the Plan.
Q. Purchase Date shall mean the last business day of each
Purchase Period. The initial Purchase Date shall be January 31, 1996.
R. Purchase Period shall mean each successive six (6)-month
period within the offering period at the end of which there shall be purchased
shares of Common Stock on behalf of each Participant.
S. Stock Exchange shall mean either the American Stock
Exchange or the New York Stock Exchange.
<PAGE>
T. Underwriting Agreement shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
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 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
In thousands except share data at 9/30/97, or 12 months ended 9/30/97.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,018
<SECURITIES> 4,526
<RECEIVABLES> 5,170
<ALLOWANCES> 1,786
<INVENTORY> 1,515
<CURRENT-ASSETS> 13,740
<PP&E> 1,653
<DEPRECIATION> 895
<TOTAL-ASSETS> 14,789
<CURRENT-LIABILITIES> 2,698
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 12,090
<TOTAL-LIABILITY-AND-EQUITY> 14,789
<SALES> 7,081
<TOTAL-REVENUES> 7,481
<CGS> 3,864
<TOTAL-COSTS> 3,864
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 250
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