-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Blu/WX0c+dJUfN2L+xpQ8fd9WsYCHeELbGlAdkAmn8XzMPqfPcHJup1CE4GcMu5S 1sAkHagJzslituFoUNkrQQ== 0000905718-99-000215.txt : 19990409 0000905718-99-000215.hdr.sgml : 19990409 ACCESSION NUMBER: 0000905718-99-000215 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIONX IMPLANTS INC CENTRAL INDEX KEY: 0001030418 STANDARD INDUSTRIAL CLASSIFICATION: 3841 IRS NUMBER: 223458598 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22401 FILM NUMBER: 99584034 BUSINESS ADDRESS: STREET 1: 279B GREAT VALLEY PKWY CITY: MALVERN STATE: PA ZIP: 19355 BUSINESS PHONE: 6102960919 MAIL ADDRESS: STREET 1: 279B GREAT VALLEY PARKWAY CITY: MALVERN STATE: PA ZIP: 19355 FORMER COMPANY: FORMER CONFORMED NAME: BIONIX INC DATE OF NAME CHANGE: 19970109 10-K 1 10-K FOR 1998 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31,1998. [ ] 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 0-22401 BIONX IMPLANTS, INC. (Exact name of registrant as specified in its charter) Delaware 22-3458598 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 1777 Sentry Parkway West, Gwynedd Hall, Suite 400 Blue Bell, Pennsylvania 19422 (215-643-5000) (Address and telephone number, including area code, of registrant's principal executive office) Securities registered pursuant to Section 12(b) of the Act: none. Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock, par value $.0019 per share 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 reporting 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 the 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. [ ] Aggregate market value of voting stock held by non-affiliates as of February 5, 1999 was approximately $27,259,060. Number of shares of Common Stock outstanding as of February 5, 1999: 8,901,576 Documents incorporated by reference: Definitive proxy statement for the registrant's 1999 annual meeting of shareholders (Part III). BIONX IMPLANTS, INC. TABLE OF CONTENTS PART I Page Item 1 Business of the Company.....................................3 Item 2 Properties.................................................23 Item 3 Legal Proceedings..........................................23 Item 4 Submission of Matters to a Vote of Security Holders........23 Item 4A Executive Officers of the Registrant.......................24 PART II Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters................................26 Item 6 Selected Financial Data....................................27 Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition........................29 Item 7A Quantitative and Qualitative Disclosures About Market Risk.36 Item 8 Financial Statements and Supplementary Data ...............37 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................37 PART III Item 10 Directors of the Registrant................................38 Item 11 Executive Compensation.....................................38 Item 12 Security Ownership of Certain Beneficial Owners and Management......................................38 Item 13 Certain Relationships and Related Transactions.............38 PART IV Item 14 Exhibits, Financial Statements Schedules and Reports on Form 8-K........................................38 Signatures ...........................................................40 Item 1. Business of the Company Introduction Bionx Implants, Inc. (the "Company", "Bionx") was incorporated in Delaware in October 1995 to coordinate the business of four related companies controlled by U.S. and Finnish investors. In September 1996, the Company consummated a reorganization pursuant to which it acquired all of the capital stock of the four existing companies and issued in exchange a total of 5,263,160 shares of its Common Stock (the "Reorganization"). The four existing companies were Bioscience, Ltd. (which has been renamed Bionx Implants, Ltd. and has been engaged in the development of resorbable polymer products since 1984), Biocon, Ltd. (which held most of the Company's patents and patent applications and, during 1997, was merged into Bionx Implants, Ltd.) and two companies organized in the U.S. to further sales, marketing and development efforts, Biostent, Inc. ("Biostent") and Orthosorb, Inc. ("Orthosorb"). Of the 5,263,160 shares issued by the Company in the Reorganization, 2,578,949 shares were issued to the former U.S. stockholders of the four existing companies and 2,684,211 shares were issued to a Dutch company (Bionix, B.V.) owned by such stockholders and the former Finnish stockholders of Bionx Implants, Ltd. and Biocon, Ltd. The Company intends to dissolve Biostent and Orthosorb in the future. Unless otherwise indicated, all references herein to the business of the Company include Bionx Implants, Inc. and the four entities acquired by Bionx Implants, Inc. in connection with the Reorganization. See Note 1 of the Notes to the Company's Consolidated Financial Statements. This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("Forward-Looking Statements"). Such Forward-Looking Statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in such Forward-Looking Statements. Certain factors which could materially affect such results and the future performance of the Company are described in Exhibit 99.1 to this Annual Report on Form 10-K. Overview The Company is a leading developer, manufacturer and marketer of Self-Reinforced, resorbable polymer implants, including screws, pins, arrows and stents, for use in a variety of applications which include orthopaedic surgery, urology and cranio-facial surgery. The Company's proprietary manufacturing processes self-reinforce a resorbable polymer, modifying the gel-like or brittle polymer structure into a physiologically strong structure with controlled, variable strength retention (ranging from three weeks to six months depending upon the medical indication). The Company currently markets its products through a hybrid sales force comprised of a managed network of independent sales agents and direct sales representatives in the U.S., and independent distributors and dealers in markets outside of the U.S. The Company's twelve product lines, representing more than 150 distinct products, were designed to address recognized clinical needs. The Company estimates that its products have been used in over 270,000 surgeries worldwide. The Company has received 510(k) clearance from the U.S. Food and Drug Administration (the "FDA") for the ten product lines that it currently markets in the U.S. The Company has also received regulatory approvals for its product lines in certain European and Asian markets. Background The human skeletal system is comprised of bone, connective tissue (ligaments and tendons) and cartilage. Bone, which provides the basic support for the body, may sustain damage by traumatic incident, degenerative disease or surgical procedures designed to repair or correct skeletal abnormalities (osteotomy). As a result of the high vascularity of bone, the healing of bone requires only that the fractured sections be in close proximity to each other. Bone heals through a process that involves structural stress, either through load-bearing or use, resulting in the replacement of old, damaged bone with new healthy tissue. Healing of bone in healthy individuals generally requires three to 20 weeks, with the fastest healing occurring in children. Connective tissue, which attaches bones and/or attaches bone to muscle, can either be torn or forcibly pulled from its point of attachment to bone or muscle as a result of either trauma or surgical procedures. Ligaments and, to a lesser degree, tendons are vascular structures that have the capacity to heal and recreate their healthy structure. A critical factor in the proper healing of connective tissue is in reconnection or reattachment at the anatomically correct position to assure the return of functionality to the connection between bones and/or between bone and muscle. Connective tissue heals by creating a scar at the point of injury and then gradually replacing the scar tissue with healthy connective tissue. The more vascular the tissue involved, the faster the healing process. The healing of connective tissue generally occurs over a six to 24 week period that requires rest and immobilization of the tissue. Cartilage and cartilage-like (cartilaginous) soft tissue, such as the meniscus of the knee, provide cushion and articulating surfaces upon which bones impact during normal activity. These tissues can be damaged through either traumatic injury, long-term physical stress and/or degenerative disease. Since cartilaginous tissue is less vascular than either bone or connective tissue, or is avascular, the healing process in this tissue requires an extremely long time (and may never occur). Unlike bone and connective tissue, damaged cartilaginous tissue must be surgically assisted in the healing process. While damaged articulating cartilage has the potential to partially heal itself by generating replacement tissue, this process can leave a permanent defect in the cartilage since the substitute tissue does not possess the same functional properties as the pre-injury tissue. Injuries involving skeletal tissue will heal more rapidly when supplemented by physical manipulation and anatomical realignment. When attempting to repair skeletal tissue, orthopaedic surgeons perform surgical procedures to recreate anatomically correct positions and to maintain these positions. The techniques and tools used by surgeons differ according to the skeletal tissue involved and the location in the body. However, the objective in each instance is identical: to reposition the tissue in its correct anatomical position and provide fixation systems to maintain that position during healing. Traditional Approaches to Fixation To achieve proper skeletal tissue healing, orthopaedic surgeons either (i) use implantable devices, including screws, pins, tacks, plates and nails, to perform various internal fixation and repair techniques and/or (ii) apply external fixators and immobilization systems, such as casts. These techniques are designed to ensure appropriate reduction (close approximation of the separated tissues) and compression (pressure applied to the reduced tissues to assure maintenance of the reduction) during the healing process. Rigid Internal Fixation Rigid internal fixation (fracture fixation) procedures are performed to repair bone fractures. These procedures, performed either through an open incision or through percutaneous, minimally invasive techniques, are designed to produce correct realignment of bones, to create appropriate reduction and to fix bones in the anatomically correct position to maximize the potential for healing. Since the 1950's, rigid internal fixation techniques involving the internal placement of metal implants have been the standard of care for fracture management and have resulted in improved healing of fractures. Rigid internal fixation is intended as a temporary measure to allow for the initiation of the healing process by creating appropriate reduction. In practice, most metal implants utilized in rigid internal fixation are not removed and become a substitute for the strength and functionality of bone. Such strength and functionality would return to the bone if the fixation device were removed. Connective Tissue Fixation Connective tissue fixation may involve the reattachment of ligaments or tendons that have been torn at the point of attachment. Alternatively, ligaments or tendons may tear at a point other than the point of attachment, requiring reconnection to return functionality. Connective tissue fixation techniques are performed either through open incisions or through minimally invasive techniques, and involve the use of tacks, screws, nails or sutures to effect the anatomical reattachment as close to the original point of attachment as possible. The same repair options are available to the surgeon when ligaments are torn in areas other than at their point of attachment. In both fracture fixation and connective tissue repair, the affected joint or limb is immobilized for a period of time to promote healing. While traditional connective tissue fixation techniques have resulted in adequate repairs, metal fixation devices or suture systems can cause long-term problems and complications, including local pain and limited joint functionality, since the attachment site will not heal completely while the device remains in place. Cartilage and Cartilaginous Tissue Repair Repairs to cartilaginous tissue typically involve removal of the torn tissue or difficult and demanding surgical techniques. Removal of tissue can have long-term consequences for the patient and may lead to subsequent surgeries. Since cartilage has minimal vascularity, or is avascular, the healing of injuries to these tissues must be surgically assisted through complex arthroscopic or open surgical techniques. For example, suturing torn menisci is one of the most technically demanding skills in arthroscopic surgery and may result in surgical complications, including damage to the vascular and neural system. Limitations of Traditional Approaches Metal Implants For more than 30 years, stainless steel, titanium and metal alloy screws, tacks, pins and plates have been recognized as the standard of care for the fixation of bone and connective tissue as a result of the implants' strength and their relatively low reactivity rates. The use of metal implants as the standard of care has been reinforced through the application of Association for the Study of Internal Fixation ("ASIF") techniques and the training received by most orthopaedic surgeons. As a result, the Company believes that metal fixation devices are currently used in the vast majority of the repairs of skeletal tissue requiring internal fixation. Despite the nearly universal acceptance of metal fixation devices, the medical community has recognized several important limitations associated with these products. Most significantly, bone repaired with and supported by metal devices relies upon the implant to perform the load-bearing functions previously performed by bone. Physicians refer to this as stress shielding of the healing bones. Since bones grow and repair in response to stress, bones which are not called upon to perform their natural load-bearing functions tend to weaken in the fractured areas. For example, in a study of 17 patients with ankle fractures fixed with metal screws, bone mineral density decreased on average by 18.6% as compared to the non-operated ankle. Although it is recommended that metal implants be removed to deter stress shielding, frequently they are not removed. Furthermore, motion at the fracture site can cause metal implants to loosen and to create hollow areas in cancellous (spongy) bone. Connective tissue fixation techniques using metal implants can cause long-term problems, including local pain and loss of functionality due to abrasion of the surrounding tissue by the metal implant. In addition, some patients experience allergic reactions to certain metal fixation devices which remain implanted for extended periods of time. First Generation Resorbable Implants Resorbable fixation devices were developed in response to the limitations of metal fixation devices. The first generation of these devices was introduced in Europe in the mid-1980s and in the U.S. in the late 1980s. The majority of these devices are either brittle or overly flexible as a result of the processes, such as injection molding, which may be used in their manufacture. The low strength of these implants has lead designers to create overly large implants with extremely high molecular weights, which, in certain instances, may have caused local inflammation and irritation at the implant site. In addition, due to their large size, these implant configurations could be applied in only certain anatomical areas, which may limit their clinical utility. For screw-shaped implants, the application of torque to effect a successful implantation often results in the breaking of the implant and the release of relatively large particles into joints or soft tissues. Implants that do not have a discernible strength are limited in their application because surgeons are familiar with metal implants and demand similar strength from resorbable implants. Surgeons have reported that certain of the first generation resorbable implants resorb too quickly and do not provide fixation for the period required for proper bone or tissue healing. The combination of these factors has lead most surgeons to reject the first generation of resorbable implants, leaving metal implants as the standard of care. Self-Reinforced, Resorbable Implants The Company has developed a variety of proprietary resorbable polymer fixation implant product lines, including screws, pins, tacks, arrows, plates, membranes and urology stents, which provide an alternative to currently marketed implants. By modifying well-characterized resorbable polymers (e.g., poly-l-lactic acid ("PLLA") and polyglycolic acid ("PGA")) through the use of several proprietary manufacturing and processing techniques, the Company is able to create Self-Reinforced, resorbable implants. The Company's Self-Reinforcing technologies modify a resorbable polymer's properties from a gel-like or brittle structure into a physiologically strong polymer implant with controlled, variable strength retention (ranging from three weeks to six months, depending upon the medical indication) which can be used safely and reliably in a variety of applications, including orthopaedic surgery, urology and cranio-facial surgery. The Company's Self-Reinforcing technology also imparts to the processed polymer a number of critical characteristics which enhance the manufacturability of the implants and broaden the clinical applications for these devices. For example, the polymers can be machined using custom metal forming techniques, and, as a result, the Company has been able to design and develop a variety of resorbable implant devices, including pins, screws and other profiled (nonsmooth-surfaced) implants of clinically appropriate sizes that incorporate machined features, such as ridges and barbs, for improved fixation. The resorption of PLLA and PGA occurs in a predictable three step process. The first two steps are initiated by hydrolysis, which breaks down the polymer molecules into smaller chains, resulting in an initial reduction in molecular weight and a slight swelling of the implant, causing it to lock in place. The third step involves degradation. Unlike first generation unreinforced resorbable polymers which degraded rapidly in an uncontrolled process, the Company's Self-Reinforced, resorbable polymers degrade in a slow controlled fashion. Only when the Self-Reinforced, resorbable implant has degraded into small particles will they be released into the surrounding tissue for final degradation through cellular absorption. The slow and controlled degradation of Self-Reinforced, resorbable polymer implants causes the gradual transfer (ranging from three weeks to six months depending upon the medical indication) of the weight-bearing load from the implant to the tissue. Products The Company currently markets twelve product lines representing more than 150 distinct products. The Company's product lines are described below:
-------------------------------- ------------------------------ -------------------- Product Lines Targeted Indications(1) Regulatory Status Fracture Fixation: SR PLLA Pins Fractures/Osteotomies Marketed Worldwide SR PLLA Screws Fractures/Osteotomies Marketed Worldwide SR PGA Pins Fractures/Osteotomies Marketed Worldwide SR PGA Screws Fractures/Osteotomies Marketed Worldwide Tissue Repair: Meniscus Arrows Meniscus Repair Marketed Worldwide SR-PLLA Tacks Ligament Attachment Marketed Worldwide SR-PLLA Bankart Tacks Shoulder Repair Marketed Worldwide Cranio-Facial Fixation SR-PDLA Screws Mid-face Correction Marketed Worldwide SR-PDLA Plates Mid-face Correction Marketed Worldwide SR-PDLA Screw Endo-brow Lifts Marketed Worldwide Urology Stents: SR-PGA Stents Post Benign Prostatic Marketed Outside U.S. Hyperplasia Swelling SR-PLGA Stents Benign Prostatic Marketed Outside U.S. Hyperplasia Prophylaxis FDA Submission Expected in 1999(2)
------------------ (1) As described herein, FDA clearances for certain of the Company's products are limited to specific indications. (2) FDA submission dates reflect the Company's current plans and are subject to delay or cancellation depending upon contingencies that may arise in the development process. See Exhibit 99.1 to this Annual Report on Form 10-K - "Regulatory Submission Dates Subject to Change" and "Government Regulation." - - -------------------------------------------------------------------------------- PLLA and PGA Pins Fracture fixation pins are indicated for the management of cancellous bone fractures and osteotomies in the non-loadbearing areas of the skeletal system, including fractures of the ankle, knee, wrist, elbow, hand and foot. Fractures in these anatomical areas are most commonly the result of trauma. Osteotomies in these areas are normally used to correct congenital or induced bone malformation. The use of metal pins often results in pins protruding from the body to allow for their removal. This is especially true in certain pediatric fractures where the current technique is to leave the metal pins protruding from the joint or bone, with the limb awkwardly positioned, to facilitate the removal of the pins. This technique is inconvenient to the patient, is associated with increased levels of infection and results in additional trauma and expense when the pins are removed. The Company's resorbable pins, which range in diameter from 1.1 mm to 4.5 mm and in length from 10 mm to 70 mm, can be cut by a surgeon to the precise length required for an individual patient, thereby reducing the risk of discomfort and infection. The pins are designed to improve the fixation of fractures through two design innovations: (i) the pins are slightly oversized as compared to the drill channel and slightly oval in shape, providing an improved friction fit as compared with round metal pins; and (ii) the pins swell slightly when exposed to the moisture in the surgical site, locking the pin in the drill channel within hours after implantation. The Company's pins can be used in open surgical procedures and percutaneous and endoscopic techniques. In the U.S., while the Company's PLLA pins currently are cleared only for use in bunionectomies, the Company's PGA pins may be used in a variety of cancellous bone fixations. PLLA and PGA Screws Although management of fractures in the cancellous areas of bones with metal screws and plates is the standard of care, the procedures present orthopaedic surgeons with several problems. The inherent difference in stiffness between the metal screw and the bone can cause complications, including inducement of relative motion at the fracture site. Such motion can cause screws to loosen and can result in local bone degradation. Metal screws can also protrude from the bone surface after implantation or break under the healing stresses of bone and cause irritation in areas of the body where the skin and muscle covering of the fracture site is thin and contains high concentrations of nerves. The Company's screws range in diameter from 2.0 mm for delicate hand and foot procedures to 4.5 mm for use in ankle fractures. The Company's screw threads were specifically designed for use in cancellous fractures. The Company's screws are designed to take advantage of the swelling properties of Self-Reinforced materials to achieve optimum fixation with minimal bone damage. In areas where skin is thin, surgeons may shape the head of the Company's screw to conform to the bone contour in order to prevent irritation. In anatomical situations where breakage will occur after healing, the use of the Company's screws avoids the complications that result from the removal of broken metal implants. In the U.S., the Company's screws currently are cleared only for use in treating ankle fractures. Meniscus Arrows Tears of the cartilage pads in the knee, known as the menisci, are the most common knee injuries treated by orthopaedic surgeons in the U.S. Prior to the introduction of the Company's Meniscus Arrow, the treatment options available to surgeons were limited to either the removal of the damaged section (meniscectomy) or surgical repair using a variety of complex suturing techniques. The efficacy of meniscetomy, historically the preferred approach given the complex and lengthy nature of the suture repair procedure, has recently been questioned in peer-reviewed and published studies. These studies have shown that meniscus removal may be detrimental to the long-term outcome of the surgery and may lead to complications requiring further, more invasive, surgeries. The suturing alternative requires surgeons to tie secure knots arthroscopically, which is one of the most technically demanding skills in arthroscopic surgery. Surgical complications, including damage to the vascular and neural system, can arise during this time-consuming suturing process, due in part to the necessity of creating a small opening at the back of the knee to allow for the passing of sutures and the tying of knots. The Meniscus Arrow, commercially introduced by the Company in the U.S. during the second quarter of 1996, was the first resorbable, arthroscopically implanted fixation device designed for use in the repair of longitudinal, vertical ("bucket handle") tears of the medial and lateral meniscus. The Meniscus Arrow is a thin, pointed, barbed shaft with a t-shaped head that is driven across the meniscal tear, fixing the torn pieces of the meniscus together. The Meniscus Arrow may be implanted in a straightforward procedure that has been demonstrated to reduce operating room time by approximately 50% as compared with suturing and does not require substantial additional training for its use. This resorbable implant avoids both the long-term consequences of meniscus removal and complications to the arterial and nervous system that can arise from the suturing approach. The Company believes that surgeons who were unwilling to perform meniscus repairs in the past may now attempt such repairs, thereby potentially increasing the available market. PLLA Tacks Management of ruptures of the ligaments of the thumb, including ulnar collateral ligaments ("skier's thumb" or "gamekeeper's thumb"), is typically performed using either bone to ligament suturing techniques or metal anchors designed for use in small bones. These techniques are dependent upon the surgeon's skill at achieving good fixation and approximation of the torn section of the ligament without damaging the affected ligament in the suturing process. Even when suturing is successful, damage to the repaired ligament may occur at the site of the repair, since the sutures remain in place after the healing process is complete. Since suturing is performed without direct visualization of both sides of the wound, damage to nerves and vessels may also occur. The Company developed its PLLA tack to provide the surgeon with an easy to use implant designated to reduce the risk of long-term and intra-operative tissue damage that may occur in traditional suturing techniques. The insertion procedure for the Company's tack involves the use of standard surgical techniques to first create a channel in the ligament and a small drill hole in the bone, and then attaching the ligament with manual pressure. The Company's tack is designed to swell in the drill hole in order to provide immediate fixation and to withstand stresses in the thumb. The degradation of the tack after healing of the reattachment site reduces the risk of long-term tissue damage. In the U.S., the Company's PLLA tacks currently are cleared only for use in repairing ligaments of the thumb. PLLA Bankart Tacks Forward dislocations of the shoulder joint involve the separation of the ligaments from the bones that form the shoulder socket. Open surgical procedures to repair the damaged ligaments are the standard of care in treating patients with recurrent forward shoulder dislocations. However, more recently, minimally invasive procedures have also been developed to repair these injuries. Initially, metal screws were used to reattach the ligament to the bone. This approach proved unsatisfactory, however, because the screws often became loose, causing pain. Resorbable sutures have also been used to reattach the soft tissue to the bone. However, while they proved effective, the sutures are sometimes difficult to insert and present a risk of nerve injury. Resorbable tacks, staples or plugs were subsequently developed to avoid the problems associated with metal screws and resorbable sutures. The advantages of resorbable tacks, staples or plugs are that they can be easily inserted into the bone for reattachment of soft tissue and, because they are biogradable, they do not require surgical removal. In addition, unlike metal screws, biodegradable staples or plugs do not cause tissue irritation due to metal corrosion. The Bionx Bankart Tack was cleared by FDA in January 1998 for use in reattaching soft tissue to bone to repair a certain type of forward shoulder dislocation. It is a high-strength, biocompatible, resorbable tack-type product, which can be used in either open or minimally invasive surgery. The SR-PLLA material enables the device to retain sufficient strength to maintain soft tissue reattachment throughout the healing period, while its gradual resorption eliminates the need to remove the device at a later point in time. Cranio-Facial Fixation Metallic fixation of the facial skeleton has become the accepted standard of care in craniomaxillofacial trauma and reconstruction over the past 15 years. Titanium has become the material of surgical choice due to its strength, malleability, and tissue compatibility. However, implant removal remains an open long-term clinical question. Most metallic plates and screws are not removed. As a result, foreign body metallic properties continue to remain in the body. At present, there are no absolute answers regarding long-term (25-year) viability. This environment creates a surgical receptiveness to resorbable fixation implants in pediatric and adult craniofacial surgery, provided the products are comparable to titanium in mechanical strength, biocompatability and cost. The Company's BioSorb family of resorbable products includes screws and plates for craniofacial cosmetic, trauma, and reconstructive surgery. These products were launched in the international market in September, 1998. The products were launched in the U.S. market in November, 1998 following FDA clearance in September, 1998. The Company's self-reinforcing process imparts to the BioSorb line a unique set of performance characteristics including: (i) enhanced strength retention; (ii) resistance to torque damage; and (iii) the ability to bend the BioSorb plates without the need for external devices to heat the plates. The Company believes that these unique characteristics will allow for broader application and acceptance of the products in the clinical setting. Urology Stents Benign prostatic hyperplasia ("BPH"), a common condition in older men, is characterized by the non-cancerous enlargement of the prostate gland, which can block the normal flow of urine. The treatment of BPH typically involves either invasive surgical techniques and/or drug therapies. Invasive techniques, including the use of lasers, microwave or RF energy and other surgical options, are designed to remove a portion of the obstructive tissue, thereby enabling a return to normal urine flow. However, patients must typically accept urethral catheterization, together with its discomfort and associated risks of urinary tract infections, following these procedures--often for prolonged periods of time. Patients receiving drug therapy for BPH must accept a continuation of their symptoms, often for many months, before the effect of the drug treatment becomes noticeable. Efforts to address these problems have focused on the need for temporary prostate stents to relieve short term obstructive symptoms, but the experience to date with metallic and various non-resorbable stents have been marked by removal difficulties, stent dislocation, and various negative tissue reactions to these non-resorbable materials. In response to the needs in the market, the Company has developed the first resorbable, self-expanding stent for use in urological procedures. The Company's resorbable prostate stents are used to improve urine flow-rates whenever the temporary relief of BPH symptoms is needed. The design of the Company's stent allows it to be easily inserted under direct vision with a cystoscope, making the device suitable for both hospital as well as physician office use. The self-expanding nature of the Company's stent fixes the device firmly in the prostate to prevent the problems of dislocation so prevalent with previously marketed temporary stents. In various clinical studies, the Company's prostate stents have been shown to enable patients to avoid the need for catheterization following a variety of surgical procedures, to achieve relief from their symptoms while waiting for a therapeutic procedure, and to improve symptoms while waiting for BPH drug therapy to become effective. The Company's prostate stents are approved for sale in most international markets, and plans are underway to release these stents for distribution internationally. In the US, the FDA has advised the Company that its urology stent will require approval under the FDA's Premarket Approval ("PMA") process, which is generally more expensive and time-consuming than the FDA's 510(k) Premarket Notification process. The Company's stents cannot be marketed or sold in the U.S. until approval is obtained from the FDA. See "Government Regulation." Instrumentation The Company, with the assistance of certain contract manufacturers, has developed a series of instrumentation systems designed for use with each of the Company's product lines. The Company distributes its instruments both on an instrument-by-instrument basis or in kits. The implant grade stainless steel instruments are manufactured by third-parties and are designed specifically to enable implantation of a particular product manufactured by the Company. All of the Company's currently distributed instrumentation systems are reusable. Accordingly, sales or consignment of instrumentation systems are directed to new customers and to existing customers who are planning to initiate usage of one or more of the Company's new or existing products. In most cases, instrumentation is provided on a consignment basis to customers that commit to a certain purchase level of implant products. The instruments are loaned to customers on the basis of a one year consignment policy. The costs of such instruments are amortized over their estimated useful life. Geographic Information For geographic information regarding the Company, see Note 14 of the Notes to the Company's Consolidated Financial Statements. Product Development The Company's product development efforts focus upon expanding the use of the Company's platform technology to address the limitations of traditional surgical techniques and existing implants. To date, all of the Company's implants sold in the U.S. have been cleared through the 510(k) Premarket Notification process. However, lengthier and more costly PMA submissions will be required in order to obtain approval to sell urological stents and may be required for other new products in the U.S. The Company incurred research and development expenses of $459,666, $871,101 and $2,360,485 during 1996, 1997 and 1998, respectively. The Company is engaged in a number of studies designed to enable the Company to increase the applications of existing products and to introduce new products. The following table summarizes recently completed, ongoing and planned clinical trials for key products currently marketed or in development.
Clinical Estimated Clinical/Regulatory Product Indication Patients Duration Status(1) ORTHOPAEDICS PLLA Screws Colles fracture (wrist) 28 complete 510(k) clearance received 3/98 Endo-brow lifts (face) 50 complete 510(k) clearance received 3/98 Acetabular cup fixation (hip) 25 18-30 First patients enrolled 7/96 Femoral neck fixation (pediatric hip) 40 complete 510(k) submitted 8/97 PGA Screw Salter osteotomies (pediatric hip) 25 36-48 Commenced in 1997 PLLA Nail Osteochondritis dessicans (knee) 25 complete Enrollment commenced 10/96 PLLA Wedge High tibial osteotomy (leg) 25 TBD Commenced in 1997 ACL fixation (knee) 20 complete 510(k) to be submitted in 1999 PLLA Screw/Washer Rotator cuff repair (shoulder) 25 12-30 To commence in 1999 PLLA/PDLA Anchor Bankart tears and rotator cuff * * 510(k) clearance received 4/98 UROLOGY PGA Stent Lumen support post BPH treatment TBD TBD PMA required; IDE to be filed 1999 PLLA Stent Urethral stricture 60 24-36 Enrollment commenced pre-1996 PLLA Stent Use with finasteride 60 TBD Enrollment commenced 9/96 GENERAL SURGERY PLLA Stent Bile duct blockage 10 18-30 Enrollment commenced 1/96 Pancreatic duct blockage 10 18-30 Enrollment commenced pre-1996 CRANIO-FACIAL SURGERY PDLA Screw and Plate Mid-face corrections 50 complete 510(k) clearance received 9/98 Cranial facial fractures 10 complete 510(k) clearance received 2/99 PLGA Plate Cranial-facial fractures 26 complete Enrollment commenced 1997, 510(k) submission in 1999
- - --------------------- * Clinical data not meaningful. (1) Regulatory submission dates reflect the Company's plans and are subject to delay or cancellation depending upon contingencies that may arise in the development process. See Exhibit 99.1 to this Annual Report on Form 10-K - "Regulatory Submission Dates Subject to Change." The Company is also actively involved in other development projects that have not yet entered into full human clinical trials. These projects include the following: Intramedullary Nails. To treat fractures of the forearm and humerus in children, pediatric surgeons currently use flexible stainless steel wire as a substitute for nails in order to avoid damaging the growth plates in either bone of the forearm. While these wires are less invasive and do not stress-shield growing bones as do metal plates and screws, they may be difficult for the pediatric surgeon to manipulate in the small bones of a child and may require removal in the future. To respond to the needs of pediatric surgeons for a fast, easy to use and safe procedure to manage forearm and humeral fractures in children while avoiding the need to remove metal implants, the Company has developed and tested in preclinical studies a resorbable intramedullary nail made of poly-dl-lactic acid ("PDLA"). The Company believes that PDLA implants were chosen due to their greater tortional strength, higher flexibility and faster absorption rates than PLLA implants. These performance characteristics, particularly rapid, safe absorption, are important in children because of their rapid growth and the traumatic impact on children of surgically removing permanent implants. Based on the elimination of the need for removal surgery, the Company believes that its intramedullary nails are a superior alternative to current techniques for the fixation of displaced fractures in the pediatric forearm. Preclinical studies have demonstrated that the use of the Company's resorbable implants in the intramedullary canal do not create local inflammation or interfere with the normal healing process. Small Joint Prostheses. There is a growing need for the replacement of arthritic joints in the fingers and toes. The only current options for the surgeon are silicone implants which have begun to show long-term problems, including degradation of silicone; and fusion of the joint, which eliminates the pain but also limits the functional use of the particular digit. Utilizing its membrane and screw technologies, the Company has created a new system for the repair of joints in the fingers and toes. The Company's small joint replacement prosthesis consists of flexible pins that penetrates a mesh of reinforced PDLA. The prosthesis is used as a system to reconnect finger and/or toe joints after the removal of a diseased joint. The mesh provides the patient with a temporary, flexible joint that does not interfere with the natural healing process. Fixed in place with a pin, the joint is designed to be functional and load-bearing at an earlier stage than has been demonstrated with silicone implants and to create a pseudo-joint after resorption. Product development involves a high degree of risk. There can be no assurance that the Company's new product candidates in various early stages of development will prove to be safe and effective, will receive the necessary regulatory approvals or will ultimately be commercially successful. These product candidates will require substantial additional investment, laboratory development, clinical testing and FDA or other agency approval prior to their commercialization. The Company's inability to successfully develop and introduce these product candidates on a timely basis or at all, or achieve market acceptance of such products, could have a material adverse effect on the Company's business, financial condition and results of operations. Sales, Marketing and Distribution The Company sells its products through a hybrid sales force comprised of a managed network of independent sales agents and direct sales representatives in the U.S., and independent distributors and dealers in markets outside of the U.S. In the U.S., the Company manages a network of agents who are responsible for particular orthopaedic products and territories. In managing its U.S. network, the Company maintains a direct relationship with its medical community customers by handling all invoicing functions directly and paying commissions to its sales agents. The Company supports its U.S. managed network of sales agents with an in-house staff of trainers and managers who supplement the work of the sales agents, providing training to orthopaedic surgeons with respect to the features and modalities applicable to particular resorbable implant products. In certain geographic areas, which are characterized by unusual demographic or competitive factors, the Company has hired its own direct sales force. In Europe, the Company sells its products through networks of independent distributors and dealers that purchase products from the Company at discounts that vary by product and by market. These international distributors and dealers have the primary relationships with the physicians and hospitals that are using the Company's products. The Company typically operates under written agreements with its domestic and international sales agents, distributors and dealers. These agreements grant the dealers the right to sell the Company's products on an exclusive basis within a defined territory and permit the distributors to sell other medical products. Manufacturing The Company currently manufactures all of its implant products in its Tampere, Finland facility. All finished goods production, packaging and testing are conducted in a validated clean room with physically separate areas of varying types of air quality designed specifically for the production of resorbable polymeric materials and products. Substantially all aspects of the manufacturing process are subject to, and are designed to comply with, the FDA's Good Manufacturing Practices ("GMP") requirements. The facility is subject to inspection by the FDA and European regulatory agencies. The Company has received a European Community ("EC") Design Examination and an EC quality system Certificate and is entitled to affix a CE marking on all of its currently marketed orthopaedic, urological, dental and cranio-facial products. See "Government Regulation." The Company employs two separate processes to produce its Self-Reinforced polymers. The sintering process, used only for PGA products, involves the compression of polymer threads laid in molds to permit the bonding of such threads without melting the materials. The die drawing process, used for PLLA, PGA and PDLA products, runs polymers through a die in order to create reinforcing elements or fibrils. Both processes are supervised by experienced personnel and are subjected to quality control checks until final sterility testing and batch control paperwork has been completed. Microbial testing of the final product is contracted to an FDA-registered facility in the U.S. Much of the machinery utilized by the Company in the manufacturing process was either created by the Company's technical team or has been modified by that team to meet the Company's requirements. The raw materials for the Company's PLLA and PDLA materials are currently available from three qualified sources. The raw materials for the Company's PGA products are currently provided to the Company by two qualified sources. These raw materials have been utilized in products cleared by the FDA and the Company's suppliers maintain Device Master Files at the FDA that contain basic toxicology and manufacturing information accessible to the FDA. The Company does not have long-term supply contracts with any of such suppliers, although it is currently negotiating a supply agreement with its principal PLLA supplier. In the event that the Company is unable to obtain sufficient quantities of such raw materials on commercially reasonable terms, or in a timely manner, the Company would not be able to manufacture its products on a timely and cost-competitive basis which, in turn, would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, if any of the raw materials for the Company's PLLA products are no longer available in the marketplace, the Company would be forced to further develop its technology to incorporate alternate components. The incorporation of new raw materials into the Company's existing products would likely require clearance or approval from the FDA. There can be no assurance that such development would be successful or that, if developed by the Company or licensed from third parties, devices containing such alternative materials would receive FDA clearance on a timely basis, or at all. The Company intends to establish manufacturing capabilities in the U.S. in order to increase its manufacturing capacity for its existing and new products. The Company anticipates that it will either (i) equip and operate a leased facility in the eastern U.S. or (ii) contract with a third party to provide a manufacturing capability to the Company. The Company presently is exploring both of these alternatives. If the Company chooses to use a contract manufacturer, the Company would likely equip the manufacturer's facility, with the objective of ultimately transitioning to a Company-owned or Company-leased facility. The Company believes that on an interim basis, contract manufacturing may enable the Company to save certain staffing costs and enable senior management to focus on other aspects of its business; however, savings in staffing costs may be outweighed by fees payable to the contract manufacturer. The foregoing statement regarding such plans constitutes a Forward-Looking Statement. Actual timing could differ materially from such plans as a result of a number of factors, including the availability of trained personnel, the availability of necessary resources, space location factors and other factors cited in this paragraph. While the Company's plans may change, the Company anticipates that once full manufacturing commences in the U.S. facility, the Company will seek to manufacture the Company's entire product line both domestically and abroad. There can be no assurance that the Company will not encounter difficulties in scaling up production in the U.S., including problems involving production yield, quality control and assurance, and shortage of qualified personnel. In addition, the U.S. facility will be subject to GMP regulations, international quality control standards and other regulatory requirements. Difficulties encountered by the Company in manufacturing scale-up or the failure by the Company to establish and maintain the U.S. facility in accordance with such regulations, standards or other regulatory requirements could entail a delay or termination of production, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company continues to upgrade its production machinery and processes in Finland to address increased demand. No assurance can be given that the integration of these machines into the production process will occur within the scheduled time frame or will not result in difficulties in scale-up that could lead to delays in filling orders in the future. Licenses, Trade Secrets, Patents and Proprietary Rights The Company believes that its success is dependent in part upon its ability to preserve its trade secrets, obtain and maintain patent protection for its technologies, products and processes, and operate without infringing the proprietary rights of other parties. As a result of the substantial length of time and expense associated with developing and commercializing new medical devices, the medical device industry places considerable importance on obtaining and maintaining trade secrets and patent protection for new technologies, products and processes. The Company's patent strategy has been to seek patent protection for the technologies that produce the Company's Self-Reinforced resorbable polymer products and, when available, for the products themselves. The Company owns or has licenses to patents issued in the United States and in various foreign countries and has patent applications pending at the U.S. PTO and in the patent offices of various foreign countries. The Company's four principal U.S. patents (two of which are owned by the Company and two of which are licensed to the Company on an exclusive basis) will expire between 2004 and 2008. The two principal U.S. patents owned by the Company relate to the Company's Self-Reinforced resorbable polymer products, the Company's sintering process, and resorbable polymer products produced from the Company's controlled drawing process. The Company has received a notice of allowance for its U.S. patent application that relates to the Company's resorbable stent technology. The Company's other patents and patent applications relate to various uses for Self-Reinforced resorbable polymers, either alone or in combination with other resorbable polymers or biocompatible materials, and generally involve specific applications or improvements of the technologies disclosed in the Company's principal patents and patent applications. European counterparts to the two principal U.S. patents that are owned by the Company and the Japanese counterpart to one such patent are currently the subject of opposition proceedings. In addition, the Japanese counterpart to another of the Company's U.S. patent applications is being opposed. The Company is vigorously defending its European and Japanese patent positions in these proceedings. One of these European patents was revoked by the European Patent Office for lack of novelty based on an earlier publication. The Company successfully appealed the European Patent Office's revocation decision and has had that patent reinstated. The other European patent and the Japanese patent applications are being challenged on lack of novelty and inventiveness grounds on the basis of disclosures made in patent and other publications. The validity of the European patent has been recently upheld by the European Patent Office. This favorable decision has been appealed and no assurance can be given that this decision will not be reversed. Further, no assurance may be given as to the outcome of the pending Japanese opposition proceedings. In order to clarify and confirm its U.S. patent position, the Company requested reexamination by the U.S. PTO of the two principal U.S. patents owned by the Company. The issues raised during the reexamination proceedings were resolved in the Company's favor on the patent describing the self-reinforcing method used in approximately 98% of the Company's existing products. The second reexamination is still proceeding. This second reexamination is expected to continue at least through the fourth quarter of 1999 and could extend beyond that date. Such reexamination could result in some or all of the patent claims set forth in this U.S. patent being altered to provide narrower coverage or determined to be unpatentable. No assurance can be given as to the outcome of the ongoing reexamination process. Narrowing of the coverage or a holding of unpatentability of this U.S. patent may significantly ease entry to the U.S. market for the products of the Company's competitors and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has initiated a patent infringement lawsuit asserting that a third party who is selling self-reinforced devices is infringing one of the principal patents assigned to the Company. The Company is vigorously seeking both monetary and injunctive relief from the third party. The third party has asserted that this patent is invalid, unenforceable and not infringed. No assurance can be given that the Company will be successful in this lawsuit and that the patent will not be held to be invalid, unenforceable or not infringed. If the patent is held to be invalid, unenforceable or not infringed, the third party will be able to continue selling its self-reinforced devices, and this could have a material adverse effect on the Company's business, financial condition and results of operations. The Company also relies upon trade secret protection for certain unpatented aspects of its proprietary technology, including its Self-Reinforcing technology. Although the Company has taken steps to protect its trade secrets and know-how, through the use of confidentiality agreements with its employees and certain of its business partners and suppliers, there can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, that others will not independently develop or otherwise acquire substantially equivalent proprietary technology, information or techniques, that others will not otherwise gain access to or disclose the Company's proprietary technologies or that any particular proprietary technology will be regarded as a trade secret under applicable law. There can be no assurance that the steps taken by the Company will prevent misappropriation of its trade secrets. As a result of the reliance that the Company places on its trade secrets, loss of the Company's trade secret protection in this area would have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, the Company has a license to two principal U.S. patents. Pursuant to this license agreement, the Company has the exclusive right in the U.S. to manufacture, use and sell certain devices for fixation of meniscus lesions. This license agreement requires the Company to pay periodic royalties to the licensor, Saul N. Schreiber, M.D., an orthopaedic surgeon. The license has a term expiring in 2006, unless terminated earlier by the licensor for breach by the Company. In 1998, the Company paid or accrued a liability to the licensor for approximately $400,000 in royalties under this license agreement on U.S. Meniscus Arrow sales of approximately $12 million. There can be no assurance that these patents licensed to the Company are valid and enforceable, and, if enforceable, that they cannot be circumvented or avoided by competitors. The Company has initiated two separate patent infringement lawsuits, asserting that two third parties who are selling devices for the fixation of meniscal lesions are infringing one of the principal patents licensed to the Company. The Company is vigorously seeking both monetary and injunctive relief from both third parties. Both third parties have asserted that this patent is invalid, unenforceable and not infringed. No assurance can be given that the Company will be successful in this lawsuit and that the patent will not be held to be invalid, unenforceable or not infringed. If the patent is held to be invalid, unenforceable or not infringed, the third parties will be able to continue selling their devices for the fixation of meniscal lesions, and this could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that patent applications to which the Company holds rights will result in the issuance of patents, that any patents issued or licensed to the Company will not be challenged and held to be invalid or narrow in scope, or that the Company's present or future patents will provide significant coverage for or protection to the Company's present or future technologies, products or processes. Since patent applications are secret until patents are issued in the U.S., or corresponding applications are published in foreign countries, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, the Company cannot be certain that it was the first to make its inventions, or that it was the first to file patent applications for such inventions. In the event that a third party has also filed a patent application relating to an invention claimed in a Company patent application, the Company may be required to participate in an interference proceeding declared by the U.S. PTO to determine priority of invention, which could result in substantial uncertainties and cost for the Company, even if the eventual outcome is favorable to the Company. In addition, there can be no assurance that others will not obtain access to the Company's know-how or that others will not be, or have not been, issued patents that may prevent the sale of one or more of the Company's products or the practice of one or more of the Company's processes, or require licensing and the payment of significant fees or royalties by the Company to third parties in order to enable the Company to conduct its business. There can be no assurance that the Company would be able to obtain a license on terms acceptable to the Company or that the Company would be able to successfully redesign its products or processes to avoid such patents. In either such case, such inability could have a material adverse effect on the Company's business, financial condition and results of operations. Legal standards relating to the scope of claims and the validity of patents in the medical device field are still evolving, and no assurance can be given as to the degree of protection any patents issued to or licensed to the Company would provide. The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the medical device industry have employed intellectual property litigation to gain competitive advantage. The Company has initiated an opposition in the European Patent Office challenging the grant of a third party's European patent relating to a drawing process for manufacturing resorbable polymer products. Subsequently, another company has instituted its own opposition against that patent. These oppositions resulted in the revocation of that patent. The third party has appealed, and no assurance can be given that this favorable decision will not be reversed. If an appeal is successful, then no assurance can be given that the third party will not assert that its European patent is infringed by sales of one or more of the Company's products or by the practice of one or more of the Company's processes in any of the eight countries identified in the European patent. The Company has also initiated an opposition in the European Patent Office challenging the grant of a third party's European patent relating to a bioabsorbable membrane. This opposition will resulted in the narrowing of its claims. No assurance can be given that the third party will not assert that its European patent is infringed by sales of one or more of the Company's products or by the practice of one or more of the Company's processes in any of the countries identified in this European patent. Moreover, there can be no assurance that the Company will not be subject to claims that one or more of its products or processes infringe other patents or violate the proprietary rights of third parties. Defense and prosecution of patent claims can be expensive and time consuming, regardless of whether the outcome is favorable to the Company, and can result in the diversion of substantial financial, management and other resources from the Company's other activities. An adverse outcome could subject the Company to significant liability to third parties, require the Company to obtain licenses from third parties, or require the Company to cease any related product development activities or product sales. In addition, the laws of certain countries may not protect the Company's patent rights, trade secrets, inventions, products or processes to the same extent as in the U.S. The Company is currently prosecuting three patent infringement cases in the United States. As noted above, the prosecution of such cases can be expensive, and there can be no assurances as to the outcome. Through December 31, 1998, the Company has incurred approximately $350,000 relating to the prosecution of these matters. The Company has certain trademark registrations and pending trademark applications in the U.S. and in various countries. The Company's U.S. and foreign trademark registrations have 5-20 year terms and are renewable for additional terms for as long as the Company uses the registered trademark in the manner recited in the registration and makes the appropriate filings to maintain and renew registrations. There can be no assurance that any particular registration, or the mark that is the subject of that registration, will not be held to be invalid, narrow in scope or not owned exclusively by the Company. In the past, the Company has agreed with third-parties that it will not use certain trademarks in connection with certain devices. There can be no assurance that the Company will not enter into other arrangements to avoid or terminate infringement, opposition, cancellation or other proceedings, or to induce third-parties to give up or limit the use of their trademarks, trade names or other designations. Competition Competition in the medical device industry is intense both in the U.S. and abroad. In orthopaedics, the Company's principal competitors are the numerous companies that sell metal implants The Company competes with the manufacturers and marketers of metal implants by emphasizing the ease of implantation of the Company's Self-Reinforced, resorbable implants, the cost effectiveness of such products and the elimination of risks associated with the failure to perform removal surgeries. Within the resorbable implant market, Johnson & Johnson and Biomet sell an FDA-cleared resorbable product for use in the fracture fixation market. Smith & Nephew, U.S. Surgical, Zimmer (a subsidiary of Bristol Myers-Squibb), Howmedica (a division of Pfizer) and Synthes have reported that they are developing resorbable products for internal fixation. The Company is competing with Johnson & Johnson and expects to compete with the other manufacturers of resorbable internal fixation devices primarily on the basis of the physiological strength of the Company's polymers and the length of the strength retention time demonstrated by the Company's products. In knee arthroscopy for meniscal repair, the Company's Meniscus Arrow products compete with a non-resorbable product marketed by Smith & Nephew, resorbable products marketed by U.S. Surgical, Conmed, Johnson & Johnson and Innovasive Devices, and with a series of suturing techniques developed by orthopaedic surgeons for the repair of the meniscus. In urology, two companies (Boston Scientific and Contimed) have developed temporary metal or non-resorbable polymer stents for use in the ureter or urethra or for use in the treatment of prostate disease. The Company is not presently aware of any substantial development of resorbable stents for this application outside of the Company's efforts in Europe. The Company believes that the difficulty and discomfort associated with the subsequent removal of temporary non-resorbable stents should provide the Company's Self-Reinforced, resorbable urology stents with a potential competitive advantage. Overall, the Company believes that the primary competitive factors in the markets for its products are safety and efficacy, ease of implantation, quality and reliability, pricing and the cost effectiveness of resorbable products as compared with non-resorbable products. In addition, the length of time required for products to be developed and to receive regulatory approval is an important competitive factor. The Company believes that it competes favorably with respect to these factors, although there can be no assurance that it will continue to do so. For information regarding the potential impact of certain competitive practices upon the Company's performance, see "Management's Discussion and Analysis of Financial Condition and Results of Operation - Results of Operations For the Years Ended December 31, 1996, 1997 and 1998 - Product Sales." The medical device industry is characterized by rapid product development and technological advancement. The Company's products could be rendered noncompetitive or obsolete by technological advancements made by the Company's current or potential competitors. There can be no assurance that the Company will be able to respond to technological advancements through the development and introduction of new products. Moreover, many of the Company's existing and potential competitors have substantially greater financial, marketing, sales, distribution and technological resources than the Company. Such existing and potential competitors may be in the process of seeking FDA or other regulatory approvals, or patent protection, for their respective products or may also enjoy substantial advantages over the Company in terms of research and development expertise, experience in conducting clinical trials, experience in regulatory matters, manufacturing efficiency, name recognition, sales and marketing expertise or the development of distribution channels. Since the Company's products compete with procedures that have, over the years, become standard within the medical community, there also can be no assurance that the procedures underlying the Company's resorbable products will be able to replace more established procedures and 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 and results of operations. Government Regulation United States. Products manufactured or marketed by the Company in the U.S. are subject to extensive regulation by the FDA. Pursuant to the Federal Food, Drug and Cosmetic Act, as amended, and the regulations promulgated thereunder (the "FDC Act"), the FDA regulates the clinical testing, manufacture, labeling, distribution and promotion of medical devices. Noncompliance with applicable requirements can result in, among other things, warnings letters, import detentions, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals and criminal prosecution. The FDA also has the authority to request repair, replacement or refund of the cost of any device manufactured or distributed by the Company. Under the FDC Act, medical devices are classified into three classes (class I, II or III), on the basis of the controls deemed necessary by the FDA to reasonably assure their safety and efficacy. Under the FDA's regulations, class I devices are subject to general controls (for example, labeling and adherence to GMP requirements) and class II devices are subject to general and special controls (for example, performance standards, postmarket surveillance, patient registries and FDA guidelines). Generally, class III devices are those which must receive premarket approval by the FDA to ensure their safety and efficacy (for example, life-sustaining, life-supporting and certain implantable devices, or new devices which have not been found substantially equivalent to legally marketed class I or class II devices). The Company believes that its products are class II or class III devices. Before a new device can be introduced into the market in the U.S., the manufacturer or distributor generally must obtain FDA marketing clearance through either a 510(k) premarket notification or a PMA application. The Company believes that it usually takes from four to twelve months from submission to obtain 510(k) clearance, although it can take longer, and that the FDA's review of a PMA application after it is accepted for filing can last from one to three years, or even longer. If a medical device manufacturer or distributor can establish, among other things, that a device is "substantially equivalent" in intended use and technological characteristics to a class I or class II medical device or a "preamendment" (in commercial distribution before May 28, 1976) Class III device for which the FDA has not called for PMA applications (defined below), the manufacturer or distributor may seek clearance from the FDA to market the device by filing a 510(k). The 510(k) must be supported by appropriate information establishing to the satisfaction of the FDA the claim of substantial equivalence to a legally marketed predicate device. In recent years, the FDA has been requiring a more rigorous demonstration of substantial equivalence, including more frequent requests for clinical data in 510(k) submissions. If clinical testing of a device is required and if the device presents a "significant risk", an Investigational Device Exemption ("IDE") application must be approved prior to commencing clinical trials. The IDE application must be supported by data, typically including the results of laboratory and animal testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards ("IRBs"), clinical trials may begin at a specific number of investigational sites with a maximum number of patients, as approved by the agency. If the device presents a "nonsignificant risk" to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by one or more appropriate IRBs without the need for FDA approval. In all cases, the clinical trials must be conducted under the auspices of an IRB pursuant to FDA regulations. The Company's failure to adhere to regulatory requirements generally applicable to clinical trials and to the conditions of an IDE approval could result in a material adverse effect on the Company, including an inability to obtain marketing clearance or approval for its products. There can be no assurance that any clinical study proposed by the Company will be permitted by the FDA, will be completed or, if completed, will provide data and information that supports FDA clearance or approval. Following submission of the 510(k) notification, the manufacturer or distributor may not place the device into commercial distribution unless and until an order is issued by the FDA finding the product to be substantially equivalent. In response to a 510(k), the FDA may declare that the device is substantially equivalent to another legally marketed device and allow the proposed device to be marketed in the U.S. The FDA, however, may require further information, including clinical data, to make a determination regarding substantial equivalence, or may determine that the proposed device is not substantially equivalent and require a PMA. Such a request for additional information or determination that the device is not substantially equivalent would delay market introduction of the product. There can be no assurance that the Company will obtain 510(k) premarket clearance within satisfactory time frames, if at all, for any of the devices for which it may file a 510(k). For any medical device cleared through the 510(k) process, modifications or enhancements that could significantly affect the safety or effectiveness of the device or that constitute a major change to the intended use of the device will require a new 510(k) submission. If a manufacturer or distributor of medical devices cannot establish that a proposed device is substantially equivalent to a legally marketed device, the manufacturer or distributor must seek premarket approval of the proposed device through submission of a PMA. A PMA must be supported by extensive data, including laboratory, preclinical and clinical trial data to prove the safety and effectiveness of the device, and extensive manufacturing information. Following receipt of a PMA, if the FDA determines that the application is sufficiently complete to permit a substantive review, the FDA will "file" the application for review. The PMA approval process can be lengthy, expensive and uncertain. If granted, the approval of the PMA may include significant limitations on the indicated uses for which a product may be marketed. To date, all of the Company's products sold in the U.S. have received 510(k) clearance. Furthermore, the FDA is generally familiar with the toxicological properties of polymers used in the Company's orthopaedic products and to date has not required extensive preclinical or clinical testing with respect to biocompatibility as a condition of granting 510(k) clearance to those products. In certain submissions for orthopaedic products, the Company obtained clearance within 90 days of submission. Other submissions by the Company, however, have taken longer. The FDA has advised the Company that its urology stent will require PMA approval. There can be no assurance that the FDA will not determine that other products currently in development by the Company or future products must also undergo the more costly, lengthy and uncertain PMA approval process or that the FDA's familiarity with the Company's polymers will shorten the FDA's review time or reduce testing requirements for either 510(k) clearance or PMA approval. There can be no assurance that the Company will be able to obtain further 510(k) clearances or PMA approvals, if required, to market its products for their intended uses on a timely basis, if at all. Moreover, regulatory approvals, if granted, may include significant limitations on the indicated uses for which a product may be marketed. Delays in the receipt of or the failure to obtain such clearances or approvals, the need for additional clearances or approvals, the loss of previously received clearances or approvals, unfavorable limitations or conditions of approval, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. The Company's PGA pins have received 510(k) clearance for the general intended use of "maintenance of alignment of small fragments of fractured non-load bearing bones in the presence of appropriate immobilization." The Company has promoted this product for numerous specific indications within the general framework of the language quoted above. Although the Company believes that these specific indications are covered by the 510(k) clearance already received for its PGA pins, there can be no assurance that the FDA would not consider promotion of this product for the specific indications to be a change to the intended use of the device requiring a new 510(k) submission. Manufacturers of medical devices for marketing in the U.S. are required to adhere to the Quality System Regulation ("QSR") setting forth detailed GMP requirements, which include testing, control and documentation requirements. The QSR revises the previous GMP regulation and imposes certain enhanced requirements that are likely to increase the cost of compliance. Enforcement of GMP requirements has increased significantly in the last several years, and the FDA has publicly stated that compliance will be more strictly scrutinized. Manufacturers must also comply with Medical Device Reporting ("MDR") requirements that a company report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. Delays in the receipt of, or the failure to obtain, regulatory clearances and approvals, the restriction, suspension or revocation of regulatory clearances and approvals, if obtained, or any failure to comply with regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. From time to time the FDA has made changes to the GMP and other requirements that increase the cost of compliance. Changes in existing laws or requirements or adoption of new laws or requirements could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will not incur significant costs to comply with applicable laws and requirements in the future or that applicable laws and requirements will not have a material adverse effect upon the Company's business, financial condition and results of operations. The Company also is subject to numerous federal, state and local laws relating to such matters as safe working conditions, environmental protection, and fire hazard control. 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 and results of operations. Regulations regarding the development, manufacture and sale of the Company's products are subject to change. The Company cannot predict the impact, if any, that such changes might have on its business, financial condition and results of operations. International. Sales of medical devices outside the U.S. are subject to foreign regulatory requirements that vary widely from country to country. The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ. In most instances, the Company currently relies on its distributors for the receipt of premarket approvals and compliance with clinical trial requirements in those foreign countries that require them. Many countries in which the Company intends to operate either do not currently regulate medical devices or have minimal registration requirements; however, these countries may develop more extensive regulations in the future that could adversely affect the Company's ability to market its products. Other countries have requirements similar to those of the U.S. The disparity in the regulation of medical devices among foreign countries may result in more rapid product clearance in certain countries than in others. The products sold by the Company are subject to premarket approval as well as other regulatory requirements in many countries. For all products sold after June 14, 1998, the European Economic Area requires the Company to achieve compliance with the requirements of the Medical Devices Directive (the "MDD") and affix CE marking on its products to attest such compliance. To achieve this, the Company's products must meet the Essential Requirements as defined under the MDD relating to safety and performance of its products and the Company must successfully undergo verification of its regulatory compliance ("conformity assessment") by a Notified Body selected by the Company. The nature of such assessment will depend on the regulatory class of the Company's products. Under European law, the Company's products are likely to be in class III. In the case of class III products, the Company must (as a result of the regulatory structure which the Company has elected to follow) establish and maintain a complete quality system for design and manufacture as described in Annex II of the MDD (this corresponds to a quality system for design described in ISO 9001 and EN 46001 standards). The Notified Body must audit this quality system and determine if it meets the requirements of the MDD. In addition, the Notified Body must approve the specific design of each device in class III. The Company received an EC Design Examination and an EC quality system Certificate from a Notified Body on January 23, 1997. As part of the design approval process, the Notified Body must also verify that the products comply with the Essential Requirements of the MDD. In order to comply with these requirements, the Company must, among other things, complete a risk analysis and present sufficient clinical data. The clinical data presented by the Company must provide evidence that the products meet the performance specifications claimed by the Company, provide sufficient evidence of adequate assessment of unwanted side-effects and demonstrate that the benefits to the patient outweigh the risks associated with the device. The Company will be subject to continued supervision by the Notified Body and will be required to report any serious adverse incidents to the appropriate authorities. The Company also will be required to comply with additional national requirements that are beyond the scope of the MDD. The Company is entitled to affix a CE marking on all of its currently marketed orthopaedic, dental, cranio-facial and urology products. There can be no assurance that the Company will be able to achieve and/or maintain compliance required for CE marking for any or all of its products or that it will be able to produce its products in a timely and profitable manner while complying with the requirements of the MDD and other regulatory requirements. Third-Party Reimbursement In the U.S. and other markets, health care providers such as hospitals and physicians, that purchase medical devices, such as the Company's products, generally rely on third-party payors, including Medicare, Medicaid and other health insurance plans, to reimburse all or part of the cost of the procedure in which the medical device is being used. The Company believes that, to date, domestic health care providers have been reimbursed in full for the cost of procedures which utilize the Company's products. However, there can be no assurance that third-party reimbursement for such procedures will be consistently available or that such third-party reimbursement will be adequate. There is significant uncertainty concerning third-party reimbursement for the procedures which utilize any medical device incorporating new technology. Reimbursement by a third-party payor may depend on a number of factors, including the payor's determination that the use of the Company's products are clinically useful and cost-effective, medically necessary and not experimental or investigational. Since reimbursement approval is required from each payor individually, seeking such approvals can be a time consuming and costly process which, in the future, could require the Company to provide supporting scientific, clinical and cost-effectiveness data for the use of the Company's products to each payor separately. Congress and certain state legislatures have considered reforms in the health care industry that may affect current reimbursement practices, including controls on health care spending through limitations on the growth of Medicare and Medicaid spending. The development of managed care programs in which the providers contract to provide comprehensive health care to a patient population at a fixed cost per person has also given rise to substantial pressure on health care providers to lower costs. Outside the U.S., the success of the Company's products is also dependent in part upon the availability of reimbursement and health care payment systems. These reimbursement and health care payment systems vary significantly by country, and include both government sponsored health care and private insurance plans. Accordingly, there can be no assurance that third-party reimbursement available under any one system will be available for procedures utilizing the Company's products under any other reimbursement system. Several governments have recently attempted to dramatically reshape reimbursement policies affecting medical devices. Typically, the Company's international independent distributors have obtained any necessary reimbursement approvals. The ability of hospitals and physicians to obtain appropriate reimbursement from government and private third-party payors for procedures in which the Company's products are used is critical to the success of the Company. Failure by such users of the Company's products to obtain sufficient reimbursement from third-party payors for procedures in which the Company's products are used, or adverse changes in government and private payors' policies toward reimbursement for such procedures would have a material adverse effect on the Company's business, financial condition and results of operations. Product Liability and Insurance The Company's business is subject to product liability risks inherent in the testing, manufacturing and marketing of the Company's products. There can be no assurance that product liability claims will not be asserted against the Company or its licensees. While the Company maintains product liability insurance, there can be no assurance that this coverage will be adequate to protect the Company against future product liability claims. In addition, product liability insurance is expensive and there can be no assurance that product liability insurance will be available to the Company in the future, on terms satisfactory to the Company, if at all. A successful product liability claim or series of such claims brought against the Company in excess of its coverage could have a material adverse effect on the Company's business, financial condition and results of operations. Employees As of December 31, 1998, the Company employed 105 full-time employees; 49 full-time employees in the U.S. and 56 full-time employees in Finland. Of its full-time employees, at that date 34 were engaged in sales and marketing, 18 were engaged in research, development, regulatory and quality assurance matters, 32 were engaged in manufacturing and 21 were engaged in financial and administrative services. The Company also contracts with independent consultants from time to time. The Company's Finnish production and office employees are members of a union and the terms of their employment are governed in part by a collective bargaining agreement. The Company believes that it maintains satisfactory relations with its employees. Item 2. Properties The Company currently operates two facilities, a central manufacturing facility in Tampere, Finland that is part owned and part leased by the Company and office space in Blue Bell, Pennsylvania that is leased by the Company. The Finnish facility, comprising approximately 18,000 square feet, is located in an industrial science park adjacent to the Technical University at Tampere. Currently, that facility houses the Company's manufacturing, quality control and product development functions and serves as the Company's European customer service and central shipping location. The Company operates its corporate headquarters, its executive offices and its worldwide marketing and sales operations from its 13,500 square foot office space in Pennsylvania. The annual rent on these facilities is approximately $395,000. In addition, in order to establish a U.S. manufacturing presence, the Company anticipates that it will either (i) equip and operate a leased facility in the eastern U.S. or (ii) contract with a third party to provide a manufacturing capability to the Company. No specific site has been selected. See "Business--Manufacturing". Item 3. Legal Proceedings Reference is made to "Business--Licenses, Trade Secrets, Patents and Proprietary Rights" for information regarding certain patent proceedings. The Company is subject from time to time to various other legal proceedings ("Other Proceedings"), including product liability claims, which arise in the ordinary course of its business. The Company believes that no existing Other Proceedings are likely to have a material adverse effect on its business, financial condition, and results of operations. Item 4. Submissions of Matters to a Vote of Security Holders Not applicable. Item 4A. Executive Officers of the Registrant The Company's executive officers, their respective ages (as of December 31, 1998) and their positions with the Company are set forth below:
Name Age Position David W. Anderson 46 President, Chief Executive Officer and Director Pertti Tormala 53 Executive Vice President, Research and Director Michael J. O'Brien 38 Vice President, Finance and Administration, and Chief Financial Officer Pertti Viitanen 48 Managing Director of the Company's Finnish subsidiary Gerald Carlozzi 43 Vice President, Product Development James Hogan 42 President, Urology and Non-Vascular Stenting Division Gregory S. Jones 41 Vice President, Marketing Stephen A. Lubischer 36 Vice President, U.S. Sales - Orthopaedics Division Michael F. Matz 40 Vice President, Sales - Craniofacial Division
David W. Anderson has been the President and Chief Executive Officer and a member of the Board of Directors of Bionx Implants, Inc. since its inception in 1995. He has served as the chief executive officer of the Company's operating subsidiaries since December 1994. Prior to joining the Company, he was the President and Chief Executive Officer of Kensey Nash Corporation, a developer of cardiology products, from 1992 to 1994. From 1989 to 1992, Mr. Anderson was a Vice President of LFC Financial Corp., a private investment and venture capital company, with responsibility for healthcare. From 1986 to 1989, he was a founder and Executive Vice President of Osteotech, Inc., a high technology orthopaedic company. Mr. Anderson also served in a number of operations and general management positions with Schering Plough Corporation, a pharmaceutical and health care products manufacturer, from 1978 to 1986. Pertti Tormala is a founder of the Company's Finnish subsidiaries and has directed the Company's research and development work since the mid -1980's. He has been a director of Bionx Implants, Inc. since its inception. Professor Tormala is the Chairman of the Institute of Biomaterials at the Technical University at Tampere and is an international lecturer on the science and application of bioabsorbable Self-Reinforced polymers in medicine. In 1995, Professor Tormala was elected to an Academy Professor Chair by the Finnish Academy. He has written and published a substantial number of peer reviewed articles, many on resorbable polymers. Professor Tormala received a Masters Degree and Ph.D. in Polymer Chemistry from the University of Helsinki. Michael J. O'Brien joined the Company in November 1996 as Vice President, Finance and Administration, and Chief Financial Officer. From January 1996 to October 1996, Mr. O'Brien served as a financial consultant to Biocyte Corporation and Immunotherapy, Inc. From July 1993 to January 1996, Mr. O'Brien was the Chief Financial Officer, and from December 1994 to January 1996 Mr. O'Brien was the President and acting Chief Executive Officer, of Biocyte Corporation, a biopharmaceutical company engaged in stem cell transplantation. From September 1986 to February 1993, he held senior finance and operations positions at domestic and international sites with The Ultimate Corporation, a computer systems reseller, and from February 1993 to July 1993, he served as a consultant to The Ultimate Corporation. From September, 1983 to September 1986, he was an auditor with the public accounting firm of Deloitte & Touche. Pertti Viitanen has been the Managing Director of the Company's Finnish operations since 1990. Prior to joining the Company, he was the production and export manager for a major Finnish plastics manufacturer from 1981 to 1990. From 1968 to 1981, Mr. Viitanen held positions of increasing responsibility in sales and operations at companies in the paper and machine tool industries. Mr. Viitanen received a Masters in Science Degree in Plastics Technology from the Technical University at Tampere. Gerard S. Carlozzi joined the Company in November 1998 as Vice President of Product Development. Prior to joining the Company he held positions with Synthes USA, a leader in Orthopedic and Maxillofacial Trauma products, as the Director of Biotechnology Development and the Director of Product Development for Maxillofacial Surgical Products, from 1995 to 1998. From 1986 to 1995, Mr. Carlozzi held various positions with Acufex Microsurgical, a pioneer and leader in Arthroscopic orthopedic surgery, which was acquired by Smith & Nephew. At Acufex Microsurgical, as the Director of Research and Development and General Manager for the Spinal Products Group, he held positions responsible for Research & Development, Sales and Marketing, Manufacturing, Quality Assurance, Clinical and Regulatory Affairs and other various general management and business development functions. From 1979 to 1986, Mr. Carlozzi held various management positions in Research & Development, Marketing and Sales for Infusaid Corporation, a manufacturer of implantable drug delivery systems. From 1974 to 1979, he held various product development positions for Boston Gear Works, an industrial manufacturer of power transmission products. James Hogan joined the Company in November, 1998 as President, Urology and Non-Vascular Stenting Division. Prior to joining Bionx Implants, Mr. Hogan was President and CEO of ArgoMed, Inc., a privately held urology device company since March 1997. From August, 1993, until March 1997 he was the Vice President of Marketing and International Operations for Iotek, a drug delivery company in Switzerland. Prior to Iotek, Mr. Hogan spent 12 years in urology with American Medical Systems, in a variety of sales and marketing positions, based at various US and international locations. Greg Jones joined the Company in June 1998 as Vice President of Marketing. From 1991 to 1998, Mr. Jones was employed by Linvatec Corporation, a subsidiary of Conmed. At Linvatec, Mr. Jones held numerous marketing positions, the last of which was the Director of Global Marketing. In that position, he managed the Arthroscopy and Hall Surgical/Powered Instrument groups. He was responsible for product management, product disclosures, medical education, conventions, consultant relationships, training, advertising and promotion, and various other product management functions. From 1986 to 1991, Mr. Jones worked in product management, national account sales, field sales and market research for Smith & Nephew United, a wound management company. From 1983 to 1986, Mr. Jones was a financial analyst for Paradyne Corporation. Stephen A. Lubischer joined the Company in April 1996 as Vice President, U.S. Sales. Prior to joining the Company, Mr. Lubischer held positions in sales and distribution management at Interpore International, a manufacturer and marketer of bone substitute materials, from 1990 to April 1996. He also held sales positions with the Critikon subsidiary of Johnson & Johnson from 1987 to April 1990. Michael F. Matz joined the Company in September 1997 as Vice-President, Sales - Craniofacial Division. Prior to joining the company, Mr. Matz served as Vice President, Business Unit Director of Anspach Fixation Systems, a division of The Anspach Effort, Inc., a privately held medical instrument manufacturer. Anspach Fixation Systems manufactured and globally marketed titanium craniomaxillofacial implants. The technology was acquired in 1994 from Techmedica, Inc where Mr. Matz co-developed and initiated the company's Craniofacial Division in 1989. Prior to launching Techmedica Craniofacial, Mr. Matz held sales and sales management positions with Zimmer and Baxter Healthcare. Executive officers serve at the discretion of the Board, subject to the provisions of applicable employment agreements. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters (a) Market and Dividend Information The Company's Common Stock commenced trading on the Nasdaq National Market System under the symbol "BINX" on April 25, 1997. The following table sets forth, for the periods indicated, the intra-day high and low sales prices per share of Common Stock on the Nasdaq National Market System:
High Low Second Quarter Ended June 30, 1997............................... $20.00 $10.50 Third Quarter Ended September 30, 1997........................... 29.75 16.00 Fourth Quarter Ended December 31, 1997.......................... 26.50 20.00 First Quarter Ended March 31, 1998.................................. 31.88 17.88 Second Quarter Ended June 30, 1998............................... 24.94 15.00 Third Quarter Ended September 30, 1998........................... 16.63 5.50 Fourth Quarter Ended December 31, 1998.......................... 10.88 4.88
As of February 5, 1999, there were 71 stockholders of record of the Company's Common Stock. The Company estimates that as of such date, there were approximately 2,930 beneficial owners of its Common Stock, although no assurances can be given with respect to the accuracy of this estimate. The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain any future earnings for funding its growth and, therefore, does not anticipate paying any cash dividends in the foreseeable future. (b) Use of Proceeds The Company's initial public offering was effected pursuant to a registration statement on Form S-1 (No. 333-22359) declared effective by the Securities and Exchange Commission (the "SEC") on April 24, 1997. The offering commenced on April 25, 1997 and terminated after all securities were sold. Pursuant to Rule 463, the following information is presented to supplement the related information set forth in the Company's prior public reports. (i) From April 25, 1997 through December 31, 1998, the Company has used the following amount of the net proceeds from such offering for the following categories enumerated by the SEC:
Reasonable Estimated Amount --------------------------------------------- Category (in thousands) Construction of plant, building and facilities $ 1,241 Purchase and installation of machinery and equipment 1,290 Purchases of real estate - Acquisition of other businesses - Repayment of indebtedness 695 Working capital 2,398 Short term investments 14,910
(ii) None of the above-mentioned uses of proceeds represented direct or indirect payments to directors or officers of the Company or their associates, to persons owning ten percent or more of any class of equity security of the Company or to affiliates of the Company. Such uses do not represent a material change in the use of proceeds described in the above-mentioned registration statement. Item 6. Selected Financial Data The following consolidated selected financial data is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the related Notes thereto included elsewhere in this Annual Report. The Consolidated Statement of Operations data for the years ended December 31, 1996, 1997 and 1998 and the Consolidated Balance Sheet data as of December 31, 1997 and 1998 are derived from audited Consolidated Financial Statements of the Company included elsewhere in this Annual Report. The Consolidated Statement of Operations data for the years ended December 31, 1994 and 1995 and the Consolidated Balance Sheet data at December 31, 1994, 1995 and 1996 are derived from audited consolidated financial statements not included in this Annual Report.
Years Ended December 31, ---------------------------------------------------------------- 1994 1995 1996 1997 1998 (In thousands except per share amounts) Consolidated Statement of Operations Data: Revenues.................................................. $1,280 $1,622 $5,379 $16,014 $21,100 Gross Profit.............................................. 804 1,084 3,165 12,336 16,573 Operating Expenses........................................ 883 2,439 7,819 10,579 15,320 Operating income (loss)................................... (79) (1,355) (4,654) 1,757 1,253 Net income (loss)......................................... (162) (1,478) (4,992) 2,158 1,261 Earnings (loss) per share(1): Basic................................................ (0.89) 0.28 0.14 Diluted.............................................. (0.89) 0.25 0.14 Shares used in computing earnings (loss) per share(1): Basic................................................ 5,621 7,787 8,918 Diluted.............................................. 5,621 8,526 9,243 December 31, ----------------------------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Consolidated Balance Sheet Data: Working capital (deficit)................................. $ (164) $ (576) $ 2,046 $24,549 $23,984 Total assets.............................................. 2,029 1,794 9,370 33,541 36,949 Long-term debt less current portion....................... 301 896 590 115 75 Mandatorily redeemable convertible preferred stock........................................ -- -- 5,000 -- -- Accumulated deficit....................................... (1,215) (2,693) (7,686) (5,527) (4,266) Total stockholders' equity (deficit)...................... (280) (1,036) 1,023 29,081 30,241
- - -------------------- (1) In 1996 the Company was reorganized as described in Note 1 to the Company's Consolidated Financial Statements. Accordingly, earnings (loss) per share is not presented for 1994 and 1995. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto presented elsewhere herein. The discussion in this Annual Report on Form 10-K contains Forward-Looking Statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed in the Forward-Looking Statements. Factors that could cause or contribute to such differences include, without limitation, those discussed in Exhibit 99.1, in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and under the caption "Business" in this Annual Report on Form 10-K. Overview The Company was founded in 1984 to develop certain resorbable polymers for orthopaedic uses. The Company has incurred substantial operating losses since its inception and, as of December 31, 1998, had an accumulated deficit of approximately $4.3 million. Such losses have resulted principally from expenses associated with the development and patenting of the Company's Self-Reinforcing technologies and resorbable implant designs, preclinical and clinical studies, preparation of submissions to the FDA and foreign regulatory agencies, the development of sales, marketing and distribution channels, the write-off of acquired in-process research and development, and the development of the Company's manufacturing capabilities. Although the Company's revenues grew significantly in the second half of 1996 and during 1997 and 1998 and although the Company reported a profit for 1997 and 1998, no assurance can be given that revenues will continue to grow or that revenues of any magnitude will exceed expenses incurred in anticipation of future growth. There can be no assurance that the Company will be able to successfully commercialize its products or that profitability will continue. The Company first introduced its PGA pins in 1984 and its PGA screws in 1986. In 1987, the Company introduced its first PLLA products, PLLA pins. PLLA screws were introduced in 1989. Since the introduction of these products, the Company has expanded its PGA and PLLA pin and screw product lines to address additional clinical indications. The Company's PGA membrane product was introduced in 1992, and, in 1995, the Company launched its Meniscus Arrow, PLLA tacks, and PGA and PLLA urology stents. In 1998, the Company launched its cranio-facial product line. Prior to 1996, the Company derived substantially all of its revenue from sales of its PLLA and PGA screws and pins. A substantial portion of the Company's revenues and revenue growth in the second half of 1996 and during 1997 and 1998 resulted from sales of the Meniscus Arrow, which received FDA clearance in March 1996. To date, all products sold by the Company have been launched first in international markets. During 1996, 1997 and 1998, international product sales represented 32%, 15% and 20%, respectively, of the Company's total product sales. See Note 14 of the Notes to the Company's Consolidated Financial Statements. The Company typically sells or consigns implant grade, stainless steel surgical instruments for use with each of its Self-Reinforced, resorbable products. The sale of these instruments result in margins which are typically lower than the margins applicable to the Company's implant products. However, since orthopaedic companies operating in the U.S. have traditionally loaned rather than sold instruments to their customers, the Company anticipates that in the future, it will be necessary for the Company to provide an increasing proportion of its instrumentation in the U.S. on a loan basis. In most cases, instrumentation is provided on a consignment basis to customers that commit to a certain purchase level of implant products. The instruments are loaned on the basis of a one year consignment policy. Similar practices are not common in international markets. For financial statement purposes, revenues from the sale of instrumentation systems are included within product sales and costs associated with such systems are included within cost of goods sold. In the case of consigned product, the Company amortizes the cost of the instrumentation over a three to four year period as cost of goods sold. The Company's instrumentation systems are reusable. Accordingly, sales and loans of such systems are likely to be most pronounced in periods shortly after product launches and likely to be less prevalent as penetration of the market increases over the long term. For information regarding the Company's instrumentation practices, see "Business- Products - Instrumentation." The Company sells its products through managed networks of independent sales agents, direct sales representatives, distributors and dealers. In the U.S., the Company handles all invoicing functions directly and pays commissions to its sales agents or representatives. Outside the U.S., the Company sells its products directly to distributors and dealers at discounts that vary by product and by market. Accordingly, the Company's U.S. sales result in higher gross margins than international sales. The Company anticipates that during the next few years, the relative percentage of its U.S. product sales to total product sales is likely to continue to increase. Since the Company pays commissions on sales made through its U.S. agent network, an increased percentage of U.S. sales in the future will likely result in an increase in the percentage of selling, general and administrative expenses to total sales. This increase will be partially offset by the higher gross margins received on products sold in the U.S. Outside of the orthopaedic market, the Company may seek to establish licensing or distribution agreements with strategic partners to develop certain products and to market and distribute products that the Company elects not to distribute through its managed networks of independent sales agents, distributors and dealers. The Company has licensed its membrane patent for use in dental and two other applications in Europe to Ethicon GmbH, a subsidiary of Johnson & Johnson. During 1996, Ethicon GmbH paid the Company approximately $201,000. No licensing fees were received during 1997 or 1998. Ethicon GmbH has agreed to pay royalties to the Company upon the initiation of commercial sales of its membrane products, which were released for commercial sale in July, 1997. Revenues from the Company's sales of such products have not been material. No assurance can be given that royalty payments from Ethicon GmbH will be material in the future. Furthermore, no assurance can be given that the Company will be able to enter into other license arrangements regarding other products on satisfactory terms. The Company has entered into agreements pursuant to which the Company is obligated to pay royalties based on net sales of certain of the Company's products, including the Meniscus Arrow. To the extent that sales of the Meniscus Arrow products and other licensed products increase in future periods, the Company's license obligations are expected to increase. The Company currently manufactures its implant products solely at its Tampere, Finland plant. The Company intends to use a portion of its capital resources to establish a manufacturing capability in the U.S. The Company plans to establish this capability either by equipping and operating a leased facility or contracting with a third party to provide a manufacturing capability to the Company. The Company believes that on an interim basis, contract manufacturing may enable the Company to save certain staffing costs and enable senior management to focus on other aspects of its business. However, if the Company arranges for a third party to provide contract manufacturing in the U.S., fees payable to such manufacturer may exceed any savings in staffing costs and result in higher costs of goods sold and lower gross profit. Ultimately, in operating a U.S. facility, the Company will incur certain duplicative manufacturing costs which could result in higher costs of goods sold and lower gross profit margins. For information regarding the operations of the Company by geographic area, see Note 14 of the Notes to the Company's Consolidated Financial Statements. The Company invoices more than 85% of its consolidated revenues in US Dollars. Approximately 80% of the expenses incurred by the Company are denominated in US Dollars. The remaining portion of revenues and expenses are denominated in European currencies, predominantly Finnish Markka. The Company seeks to manage its foreign currency risk for these other currencies through the purchase of foreign currency options and forward contracts. No assurances can be given that such hedging techniques will protect the Company from exposure resulting from relative changes in the economic strength of the foreign currencies applicable to the Company. Foreign exchange transaction gains and losses can vary significantly from period to period. While the Company's operating losses have resulted in net operating loss carryforwards of approximately $2,100,000 for income tax reporting purposes as of December 31, 1998, the extent to which such carryforwards are available to offset future U.S. and Finnish taxable income is significantly limited as a result of various ownership changes that have occurred in recent years. Additionally, because U.S. tax laws limit the time during which these carryforwards may be applied against future taxes, the Company may not be able to take full advantage of the U.S. portion of these carryforwards for federal income tax purposes. Furthermore, income earned by a foreign subsidiary may not be offset against operating losses of U.S. entities. The statutory tax rates applicable to the Company and its foreign subsidiaries vary substantially. Tax rates have fluctuated in the past and may do so in the future. See Note 12 of the Notes to the Company's Consolidated Financial Statements. The Company's results of operations have fluctuated in the past on an annual and quarterly basis and may fluctuate significantly from period to period in the future, depending on many factors, many of which are outside of the Company's control. Such factors include the timing of government approvals, the medical community's acceptance of the Company's products, the success of competitive products, the ability of the Company to enter into strategic alliances with corporate partners, expenses associated with patent matters, the results of regulatory inspections and the timing of expenses related to product launches. Results of Operations for the Years Ended December 31, 1996, 1997 and 1998 Product Sales. The Company's product sales increased by 213% from $5.0 million in 1996 to $15.8 million in 1997, and by 31% to $20.7 million in 1998. The increase in product sales in 1997 reflected further penetration in Meniscus Arrow sales in the United States from its U.S. introduction in the second quarter of 1996, as well as increased utilization of the Company's managed network of independent sales agents in the U.S. and increased sales of several non-Arrow products in both the U.S. and international markets. The increase in product sales in 1998 reflected continued penetration in Meniscus Arrow sales in the United States and increased sales of several non-Arrow products in both the U.S. and international markets. Revenues generated from the sale of instrumentation systems and related loaner fees represented 20%, 11% and 8% of total sales in 1996, 1997 and 1998, respectively, amounting to approximately $1.0 million in 1996, $1.8 million in 1997 and $1.7 million in 1998. The increase from the 1996 level to the 1997 level was attributable primarily to the U.S. introduction of the Meniscus Arrow during the second quarter of 1996. The decline from 1997 to 1998 in both percentage and dollar terms declined due to the increasingly competitive environment. Instrumentation revenues relating to the Meniscus Arrow during 1996, 1997 and 1998 were approximately $453,000, $850,000 and $624,000 respectively. License and grant revenues. License and grant revenues decreased by 30% from $345,000 in 1996 to $242,000 in 1997 and increased by 73% to $418,000 in 1998. The decline in revenue from 1996 to 1997 was due to the lack of any license revenue recorded in 1997, compared with $201,000 recorded in 1996. The increase in revenues from 1997 to 1998 resulted from an increase in the level of research activity during 1998. Gross profit; gross profit margins. The Company's gross profit increased by 290% from $3.2 million in 1996 to $12.3 million in 1997 and by 34% to $16.6 million in 1998. The increase in the Company's gross profit during 1996 and 1997 primarily reflected the increased sales of Meniscus Arrow products after their introduction in the U.S. in the second quarter of 1996. Overall, the Company's gross profit margin increased from 58.8% in 1996 to 77.0% in 1997 and increased to 78.5% in 1998. During 1997 and 1998, the increase in gross profit margin was primarily due to the volume increase in revenues which created operational efficiencies in production. The Company's gross profit margin applicable to implant sales, representing implant sales less related raw materials, direct labor and overhead and associated variable expenses, increased from 66.7% in 1996 to 80.2% in 1997 and 82.9% in 1998. The improvement in this portion of the Company's gross profit margin resulted primarily from increased sales of higher margin Meniscus Arrow products, increased U.S. based sales, increased sales of higher margin PLLA products and the leveraging of certain fixed manufacturing costs over the Company's expanded revenue base. The Company amortizes the cost of instrumentation inventory consigned to customers, and classifies this as an inventory reserve. This amortization charge increased from $0 during 1996 to $510,000 during 1997 and $800,000 during 1998. The increase is due to a related increase in the number of instruments consigned to customers versus the previous practice of selling the instruments. Selling, general and administrative expenses. Selling, general and administrative expenses increased by 114% from $4.5 million in 1996 to $9.7 million in 1997, and by 33% to $13.0 million in 1998. Such expenses were 89.9% of product sales in 1996, 61.6% of product sales in 1997, and 62.7% of product sales in 1998. The increases in the dollar amount of selling, general and administrative expenses during these periods were primarily attributable to the costs incurred in the launch of the craniofacial division, the increase in commission payment obligations, reflecting the Company's increased product sales in the U.S., the increase in expenses in regulatory and patent activities, including the costs of prosecuting patent infringement suits, and the increase in expenses associated with establishing and supporting a managed network of independent sales agents in the U.S. Selling, general and administrative expenses have declined as a percentage of revenue due to increased efficiencies resulting from the leveraging of certain non-selling expenses over an expanded revenue base. Acquired in-process research and development. In September 1996, in connection with the Company's reorganization, the Company recorded a non-recurring charge of $2.8 million for the acquisition of in-process research and development. This amount was expensed as non-recurring charges because the acquired in-process technology had not reached technological feasibility and had no future alternative uses. Since the reorganization, the Company has used the acquired in-process technology to develop new orthopaedic and craniofacial surgery products, which have or will become part of the Company's line of products when completed. The fair value of the in-process technology in reorganization was based on analysis of the markets, projected cash flows and risks associated with achieving such projected cash flows. In developing these cash flow projections, revenues were forecasted based on relevant factors, including aggregate revenue growth rates for the business as a whole, individual revenues, characteristics of the potential market for the products and the anticipated life of the underlying technology. Research and development. Research and development expenses increased by 89.5% from $460,000 in 1996 to $871,000 in 1997 and by 171% to $2,360,000 in 1998. These increases reflected an increased volume of product development work being performed by the Company and increased staffing levels. Other income and expense. Other income and expense consists of interest income and expense and miscellaneous expense and income items. The Company generated net interest expense of $87,000 during 1996, and net interest income of $752,000 during 1997 and $986,000 during 1998. Net interest income generated during 1997 and 1998 was obtained from funds received from the Company's initial public offering during the second quarter of 1997. A foreign currency transaction gain of $408,000 was recorded in "other income" in 1997, compared to a foreign currency transaction losses of $263,000 during 1998. Net foreign currency transaction gains and losses in 1996 were insignificant. Income taxes. In 1996, one of the Company's Finnish subsidiaries recorded a profit, which resulted in a Finnish tax liability of $208,000. In 1997, the Company recorded an income tax provision of $758,000, or 26% of income from operations, which primarily reflected the income generated in the Company's Finnish subsidiary. In 1998, the Company recorded an income tax provision of $741,000, or 37% of income from operations. This increase in effective tax rate reflected the increase in income generated by the Finnish subsidiary taxed at the rate of 28%. Although an operating loss was recorded by the U.S. entity during 1998, no corresponding tax benefit was recognized due to the net operating loss position in the U.S. Net income. The Company reported a net loss of $4,992,000 in 1996 and net income of $2,158,000 and $1,261,000 in 1997 and 1998, respectively. Recent Accounting Pronouncements In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("Statement 98-1"). Once the capitalization criteria of Statement 98-1 have been met, external directs costs of materials and services consumed in developing or obtaining internal-use computer software; payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use computer software project (to the extent of the time spent directly on the project); and interest costs incurred when developing computer software for internal use should be capitalized. Training costs and data conversion costs, should be expensed as incurred. Statement 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998, with earlier application encouraged. The adoption of this standard is not expected to have a material impact on the Company's earnings or financial position. In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (the "Statement"). The Statement requires costs of start-up activities, including organizational costs, to be expensed as incurred. Start-up activities are defined as those one-time activities related to opening a new facility, introducing a new product or service, conducting businesses in a new territory, conducting business with a new process in an existing facility, or commencing a new operation. The Statement is effective for fiscal years beginning after December 15, 1998. The adoption of this standard is not expected to have a material impact on the Company's earnings or financial position. In June 1998, the FASB issued Statement of Financial Accounting Standards No.133, Accounting for Derivative Instruments and Hedging Activities ("Statement133"). Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Statement 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure the instrument at fair value. The accounting changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This Statement is effective for all fiscal quarters beginning after June 15, 1999. The Company intends to adopt this accounting standard as required. The adoption of this standard is not expected to have a material impact on the Company's earnings or financial position. Year 2000 Compliance Readiness The Company's centralized corporate business and technical information systems have been fully assessed as to year 2000 compliance and functionality. Presently, these systems are nearly complete with respect to required software changes, tests and migration to the production environment. The Company anticipates that internal business and technical information system year 2000 compliance issues will be substantially remedied by the end of the second quarter 1999. This expectation constitutes a Forward-Looking Statement. The Company has satisfactorily completed the identification and review of computer hardware and software suppliers and is in the process of verifying, reviewing and logging year 2000 preparedness of general business partners, suppliers, vendors, and/or service providers that the Company has identified as critical. Costs The Company incurred costs of approximately $250,000 in 1998 associated with the purchase of and modifications to the Company's existing systems to make them year 2000 ready. The Company expects to incur costs between $100,000 and $200,000 in 1999 for a total project cost of less than $500,000. Most of these costs relate to the implementation of a new internal business system, which will be depreciated over its estimated life. Any other cost relating to this undertaking will be expensed as incurred. Based on the estimates and information currently available, the Company does not anticipate that the cost associated with year 2000 compliance issues will be material to the Company's consolidated financial position or results of operations. Risks and Contingency Plans Considering the substantial progress made to date, the Company does not anticipate delays in finalizing internal year 2000 remediation within the remaining time schedules. There can be no assurances, however, that the Company's internal systems or those of a third party on which the Company relies will be year 2000 compliant by the year 2000. An interruption of the Company's ability to conduct its business due to a year 2000 readiness problem could have a material adverse effect on the Company. Anticipated completion of this review is estimated to be by the end of the second quarter of 1999. Pending the results of the Company's review of the year 2000 preparedness of its critical third parties, the Company will then determine what course of action and contingencies will need to be made, if any. Quarterly Product Sales The following table presents unaudited product sales information for the quarters indicated. In the opinion of management, this information has been prepared on the same basis as the product sales data included in the Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K. Product sales for any period are not necessarily indicative of product sales to be expected for any future period.
(in thousands) 1997 Quarter ended March 31................................................ $ 3,218 Quarter ended June 30................................................. 3,822 Quarter ended September 30............................................ 4,149 Quarter ended December 31............................................. 4,584 1998 Quarter ended March 31................................................ $ 4,459 Quarter ended June 30................................................. 5,057 Quarter ended September 30............................................ 5,265 Quarter ended December 31............................................. 5,902
The quarterly increases in product sales principally reflect the continuing development of the Company's managed network of independent sales agents in the U.S. and the U.S. introduction of the Meniscus Arrow products during the second quarter of 1996. The Company anticipates that in future periods, third quarter revenues may be adversely impacted due to relatively lower European sales activity during the summer months. See "-- Results of Operations for the Years Ended December 31, 1996, 1997 and 1998 -- Product Sales." Revenue trends will depend upon many factors, including demand and market acceptance for the Company's existing and future products, the timing of regulatory approvals, the timing and results of clinical trials, the timing of the introduction of new products by the Company and by competing companies, competitive sales practices, the ability of the Company to enter into strategic alliances with corporate partners and the Company's ability to attract and retain highly qualified technical, sales and marketing personnel. Accordingly, there can be no assurance that future revenues will not vary significantly from quarter to quarter. Liquidity and Capital Resources Historically, the Company has relied upon bank loans (guaranteed in certain instances by the Company's principal stockholders), capital contributions by its principal stockholders and government grants to fund its operations. In September 1996, the Company completed a private placement of $5.0 million in preferred stock (all of which was converted into Common Stock upon consummation of the Company's initial public offering in April 1997) and warrants (all of which were exercised during April 1997). The net proceeds were used to repay bank debt, to pay down trade debt, to fund manufacturing and product development efforts and for other working capital purposes. During 1997, the Company consummated its initial public offering. Net proceeds from the initial public offering and the exercise of warrants during April 1997 were $21.7 million. In addition, the Company made arrangements for a $2 million credit line, secured by the personal property of Bionx Implants, Inc. and its Biostent, Inc. subsidiary. Amounts to be advanced thereunder are subject to the lender's discretion and are limited to specific percentages of certain domestic receivables and inventory. To date, no amounts have been borrowed pursuant to this facility. At December 31, 1997 and 1998, cash and cash equivalents totaled $22.6 million and $14.2 million, respectively. The decrease in cash and cash equivalents of $8.4 million resulted from the use of cash in operating activities, primarily attributable to increased inventory levels, and a $2.0 million increase in plant and equipment. As of December 31, 1998, the Company had working capital of $24.0 million, compared with $24.5 million at December 31, 1997. Long-term debt (including the current portion) was reduced by $43,000, from the level at the beginning of the year to $115,000 as of December 31, 1998. The interest rates on the debt remaining as of December 31, 1998 averaged 1% per annum. The Company believes that existing capital resources from its initial public offering, its September 1996 private placement and its $2.0 million credit line, together with cash flow from operations (if, and to the extent, generated), will be sufficient to fund its operations during 1999. This statement constitutes a Forward-Looking Statement. Actual results could differ materially from the Company's expectations regarding its capital requirements and its sources of capital. The Company's future capital requirements and the adequacy of available capital resources will depend on numerous factors, including market acceptance of its existing and future products, the successful commercialization of products in development, progress in its product development efforts, the magnitude and scope of such efforts, acquisition opportunities, progress with preclinical studies, clinical trials and product clearances by the FDA and other agencies, the cost and timing of the Company's efforts to expand its manufacturing capabilities, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, competing technological and market developments, and the development of strategic alliances for the marketing of certain of the Company's products. The sufficiency of the Company's capital reserves with respect to operations beyond 1999 will depend primarily upon the Company's operating results and the extent to which such results are capable of funding anticipated growth. To the extent that funds generated from the Company's operations, together with its existing capital resources, and the net interest earned thereon, are insufficient to meet current or planned operating requirements, the Company will be required to obtain additional funds through equity or debt financings, strategic alliances with corporate partners and others, or through other sources. The terms of any equity financings may be dilutive to stockholders and the terms of any debt financings may contain restrictive covenants which limit the Company's ability to pursue certain courses of action. Principal stockholders of the Company who previously provided funding to the Company and provided guarantees to sources of credit have indicated that they do not intend to continue furnishing such assistance. The Company does not have any committed sources of additional financing beyond that described above, and there can be no assurance that additional funding, if necessary, will be available on acceptable terms, if at all. If adequate funds are not available, the Company may be required to delay, scale-back or eliminate certain aspects of its operations or attempt to obtain funds through arrangements with strategic partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, products or potential markets. If adequate funds are not available, the Company's business, financial condition and results of operations could be materially and adversely affected. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The following financial information is set forth on the following pages immediately following this page: Page Independent Auditors' Report F-1 Consolidated Balance Sheets as of December 31, 1997 and 1998 F-2 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 F-3 Consolidated Statement of Stockholders' Equity (Deficit) and Comprehensive Income for the Years Ended December 31, 1996, 1997 and 1998 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 F-5 Notes to Consolidated Financial Statements F-7 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Bionx Implants, Inc. : We have audited the accompanying consolidated balance sheets of Bionx Implants, Inc. and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit) and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998. In connection with our audits of the consolidated financial statements, we have also audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bionx Implants, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Philadelphia, Pennsylvania February 3, 1999
BIONX IMPLANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1998 December 31, ----------------------------------------------- 1997 1998 ---- ---- ASSETS Current assets: Cash and cash equivalents................................ $22,631,652 $14,213,368 Inventory, net (note 3).................................. 2,549,528 9,777,988 Trade accounts receivable, net of allowance of........... $110,707 and $142,883 as of December 31, 1997 and 1998, respectively............................... 2,954,629 4,643,280 Grants receivable........................................ 128,953 188,888 Related party receivable(note 5)......................... 115,266 238,950 Prepaid expenses and other current assets................ 158,434 726,154 Deferred tax asset....................................... 355,000 828,784 ------------ ------- Total current assets.......................................... 28,893,462 30,617,412 Investments................................................... 87,115 87,115 Plant and equipment, net (note 4)............................. 849,241 2,560,440 Goodwill and intangibles, net................................. 3,711,163 3,684,081 --------- --------- Total assets.................................................. $33,540,981 $36,949,048 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable................................... $ 1,774,960 $ 4,176,406 Long-term debt, current portion (note 7)................. 43,314 40,842 Related party liability (note 5)......................... 74,358 -- Current income tax liability............................. 994,229 577,673 Accrued and other current liabilities (note 6)........... 1,457,539 1,838,984 --------- --------- Total current liabilities..................................... 4,344,400 6,633,905 --------- --------- Long-term debt (note 7)....................................... 115,370 74,527 ---------- ------ Series A mandatorily redeemable convertible preferred stock, par value $0.001 per share; 2,000,000 shares authorized, none issued and outstanding at December 31, 1997 and 1998 (note 9)........................... -- -- Stockholders' equity (notes 9 and 11) Preferred stock, par value $0.001 per share, 8,000,000 shares authorized, none issued and outstanding.......................... -- -- Common stock, par value $0.0019 per share, 31,600,000 shares authorized, 8,916,812 and 8,922,076 shares issued as of December 31, 1997 and 1998, respectively........................................ 16,942 16,952 Treasury stock, 20,500 shares as of December 31, 1998 -- (128,198) Additional paid-in capital............................... 35,616,254 35,642,502 Accumulated deficit...................................... (5,527,354) (4,266,009) Accumulated other comprehensive income (note 2).......... (1,024,631) (1,024,631) ----------- ----------- Total stockholders' equity ................................... 29,081,211 30,240,616 ---------- ---------- Total liabilities and stockholders' equity.................... $33,540,981 $36,949,048 ============ ========== See accompanying notes to consolidated financial statements.
BIONX IMPLANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 Years ended December 31, ------------------------------------------------------------------------- 1996 1997 1998 ---- ---- ---- Revenues: Product sales............................. $5,033,952 15,772,674 20,682,965 License and grant revenues (note 13)...... 345,203 241,685 417,507 ------- ------- ------- Total revenues...................... 5,379,155 16,014,359 21,100,472 --------- ---------- ---------- Cost of goods sold........................... 2,214,061 3,678,112 4,527,301 --------- --------- --------- Gross profit................................. 3,165,094 12,336,247 16,573,171 --------- ---------- ---------- Selling, general and administrative 4,527,421 9,708,389 12,959,532 Acquired in-process research and development................................ 2,832,035 -- -- Research and development..................... 459,666 871,101 2,360,485 ----------- ------------ --------- Total operating expenses..................... 7,819,122 10,579,490 15,320,017 ---------- ---------- ---------- Operating income (loss)...................... (4,654,028) 1,756,757 1,253,154 ----------- --------- --------- Other income and (expenses): Interest income and (expense), net........ (86,906) 751,694 985,609 Other, net................................ (42,951) 408,256 (236,002) ----------- ------- --------- Total other income (expense), net (129,857) 1,159,950 749,607 ---------- --------- ------- Income (loss) before provision for income taxes .................................... (4,783,885) 2,916,707 2,002,761 Provision for income taxes (note 12) (208,390) (758,344) (741,416) --------- --------- --------- Net income (loss)............................ (4,992,275) 2,158,363 1,261,345 =========== ========= ========= Earnings (loss) per share (note 2): Basic................................... $ (0.89) 0.28 0.14 Diluted................................. $ (0.89) 0.25 0.14 Shares used in computing earnings (loss) per share (note 2): Basic................................... 5,621,320 7,786,937 8,918,391 Diluted................................. 5,621,320 8,526,081 9,243,369 See accompanying notes to consolidated financial statements.
BIONX IMPLANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 COMMON STOCK FOREIGN TOTAL PAR VALUE ADDITIONAL CURRENCY STOCKHOLDERS' OR STATED TREASURY PAID-IN ACCUMULATED TRANSLATION EQUITY VALUE STOCK CAPITAL DEFICIT ADJUSTMENT (DEFICIT) Balance, December 31, 1995 $ 1,343,316 -- 580,998 (2,693,442) (267,147) (1,036,275) Effect of reorganization (note 1) (1,333,266) -- 8,442,389 -- -- 7,109,123 Proceeds from the issuance of Common stock 55 -- 49,820 -- -- 49,875 Issuance costs--Series A mandatorily redeemable Convertible preferred stock -- -- (105,214) -- -- (105,214) Comprehensive loss -- -- (4,992,275) (2,430) (4,994,705) ---------- ---------- --------- ----------- --------- ----------- Balance, December 31, 1996 $ 10,105 -- 8,967,993 (7,685,717) (269,577) 1,022,804 Proceeds from initial public offering, 4,370 -- 21,095,441 -- -- 21,099,811 net Conversion of Series A mandatorily Redeemable convertible Preferred stock 2,000 -- 4,998,000 -- -- 5,000,000 Proceeds from warrant exercise 466 -- 551,568 -- -- 552,034 Proceeds from the exercise of incentive stock options 1 -- 3,252 -- -- 3,253 Comprehensive income -- -- 2,158,363 (755,054) 1,403,309 ----------- -------- ---------- --------- ------------ --------- Balance, December 31, 1997 $ 16,942 -- 35,616,254 (5,527,354) (1,024,631) 29,081,211 Treasury Stock purchased -- (128,198) -- -- -- (128,198) Proceeds from the exercise of incentive stock options 10 -- 26,248 -- -- 26,258 Comprehensive income -- -- 1,261,345 -- 1,261,345 ----------- -------- ----------- ---------- ------------ --------- Balance, December 31, 1998 $ 16,952 (128,198) 35,642,502 (4,266,009) (1,024,631) 30,240,616 ============ ========= ========== =========== =========== =========== See accompanying notes to consolidated financial statements.
BIONX IMPLANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1996, 1997 and 1998 Years Ended December 31, ---------------------------------------------------------- 1996 1997 1998 ---- ---- ---- Cash flows from operating activities: Net income (loss).................................... (4,992,275) 2,158,363 1,261,345 ------------ --------- --------- Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization....................... 161,434 268,366 815,781 Acquired in-process research and development........ 2,832,035 -- -- Deferred tax provision.............................. -- (355,000) -- Other non-cash charges.............................. 105,600 -- -- Change in assets and liabilities: Increase in accounts receivable, net (1,284,957) (1,367,006) (1,803,177) Increase in inventory, net........................ (295,657) (1,529,053) (7,228,460) Increase in grant receivable...................... (114,981) (6,140) (59,935) (Increase) decrease in deferred issuance costs.................................. (194,981) 194,981 -- (Increase) decrease in prepaid expense, related party and other assets.......................... 17,060 (3,910) (576,878) (Increase) decrease in deposits................... (43,964) 43,964 -- Increase in intangibles........................... -- -- Increase (decrease) in accounts payable........... (60,622) 922,805 2,401,446 Increase (decrease) in related party.............. (34,912) (88,826) (74,358) Increase (decrease) in current tax liability...... 205,065 769,093 (890,340) Increase (decrease) in accrued and other liabilities............................... 859,094 148,722 381,445 ------- ------- ------- 2,150,214 (1,002,004) (7,034,476) --------- ---------- ----------- Net cash provided by (used in) operating Activities.......................................... (2,842,061) 1,156,359 (5,773,131) ----------- --------- ----------- Cash flows from investing activities: Purchases of plant and equipment.................... (81,590) (412,263) (2,044,271) Purchases of computer software and intangibles...... -- -- (455,627) Proceeds from sale of investments................... 3,827 15,165 -- --------- ----------- ----------- Net cash used in investing activities.................. (77,763) (397,098) (2,499,898) ---------- ----------- ----------- Cash flows from financing activities: Repayment of long-term debt......................... (435,256) (646,259) (43,315) Net proceeds from the issuance of preferred stock................................... 4,894,786 -- -- Proceeds from the issuance of common stock.......... 49,875 -- -- Proceeds from initial public offering, net.......... -- 21,099,811 -- Purchase of treasury shares -- -- (128,198) Exercise of warrants................................ -- 552,034 -- Proceeds from exercise of employee stock options..................................... -- 3,253 26,258 --- -------------- ------- Net cash provided by (used in) financing activities.... 4,509,405 21,008,839 (145,255) --------- ---------- --------- Net effects of foreign exchange rate differences....... (47,112) (729,579) -- ------- --------- -- Net increase (decrease) in cash and cash equivalents.................................... 1,542,469 21,038,521 (8,418,284) Cash and cash equivalents at beginning of period....... $ 50,662 1,593,131 22,631,652 ------------- --------- ---------- Cash and cash equivalents at end of period............. $ 1,593,131 22,631,652 14,213,368 =========== ========== ========== Supplemental disclosure of cash flow information: Cash paid for interest................................. $ 195,035 26,398 1,423 Cash paid for taxes.................................... $ 3,325 190,578 1,631,756 ============== ============ ========= Non-cash financing activities: Issuance of common stock related to the Reorganization.................................... $ 7,109,123 -- -- ============= ============ ========= Conversion of Series A mandatorily redeemable convertible preferred stock to common stock...... $ -- 5,000,000 -- ============== =========== ========== See accompanying notes to consolidated financial statements
BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 (1) ORGANIZATION Basis of Presentation Bionx Implants, Inc. (the Company) was incorporated in October, 1995 as a Delaware corporation. In 1996, the Company completed a reorganization, described more fully below, whereby four corporate entities that constituted the business activities of the Company were reorganized into Bionx Implants, Inc. The shareholders of the four separate corporations who were shareholders having a common interest in the combined activities of the business exchanged their shares pro-rata, directly or indirectly, for the shares of Bionx Implants, Inc. Given the common ownership relationship of the four predecessor corporations and the subsequent reorganization into the Company described below, the accompanying financial statements include the four predecessor corporations' financial statements combined for the period January 1, 1996 to September 2, 1996. The predecessor corporations are consolidated as of December 31, 1997 and 1998, for the period from September 3, 1996 to December 31, 1996, and for the years ended December 31, 1997 and 1998. Reorganization In September 1996, the Company completed its reorganization. A group of common stockholders controlled the U.S. subsidiaries and 61% of Bioscience, Ltd. and approximately 58% of Biocon, Ltd. Prior to the reorganization, with the balance of the Finnish subsidiaries controlled by a group of minority shareholders (the Minority Interest). The reorganization was accounted for as a recapitalization except for the component associated with the Minority Interest, which was accounted for as a purchase. The purchase price for the Minority Interest has been allocated to assets acquired and liabilities assumed based on their fair market value at the date of the reorganization. The fair value of the assets acquired and liabilities assumed, after giving effect to the write-off of certain purchased research and development ($2.8 million), is summarized as follows (in thousands): Current assets.............................................. $1,549 Plant and equipment......................................... 266 Intangibles................................................. 800 Goodwill.................................................... 3,219 Current liabilities......................................... (751) Long-term liabilities....................................... (343) Pursuant to the reorganization, (i) the Company's four operating entities became wholly-owned subsidiaries of the Company, (ii) each of the Company's Finnish shareholders received capital stock of a Dutch company, and (iii) each of the Company's United States investors received capital stock of both a Dutch company and the Company. Upon consummation of the reorganization, the sole assets of the Dutch company were 2,684,211 shares of the Company's common stock. As a result of the reorganization, the Company had four wholly-owned subsidiaries--Orthosorb, Inc., Biostent, Inc., Bioscience, Ltd., and Biocon, Ltd. Shortly after the reorganization was completed, the Company issued a total of 2,000,000 shares of its Series A mandatorily redeemable preferred stock ("Series A") and 421,065 common stock warrants to certain accredited investors in exchange for an aggregate capital contribution of $5,000,000. Acquired in-process research and development In September 1996, in connection with the Company's Reorganization, the Company recorded a non-recurring charge of $2.8 million for the acquisition of in-process research and development. This amount was expensed as non-recurring charges because the acquired in-process technology had not reached technological feasibility and had no future alternative uses. Since the Reorganization, the Company has used the acquired in-process technology to develop new orthopaedic and craniofacial surgery products, which have or will become part of the Company's line of products when completed. The fair value of the in-process technology in reorganization was based on analysis of the markets, projected cash flows and risks associated with achieving such projected cash flows. In developing these cash flow projections, revenues were forecasted based on relevant factors, including aggregate revenue growth rates for the business as a whole, individual revenues, characteristics of the potential market for the products and the anticipated life of the underlying technology. The fair value of the acquired in-process research and development projects associated with the Reorganization are based upon a discounted cash flow analysis. The projection of cash flows employed in this analysis was provided by operational projections relied upon by management at the Reorganization date. Based upon this projection, cash flows for these projects were expected to commence in 1998 and to grow significantly in 1999 and 2000. To these projected cash flows, risk adjusted discount rates in the range of 18% to 25% were applied to the projected cash flows. The most significant assumptions affecting management's cash flow projections for the business and operations of the projects, upon which the valuation of the acquired in-process research and development projects is based, are the timing for market entrance of the projects, and assumed rates of market penetration thereafter. Initial Public Offering During the second quarter of 1997, the Company completed its initial public offering (the "IPO") of 2,300,000 shares of Common Stock (including the exercise of the underwriters over-allotment of 300,000 shares) at $10.50 per share. (Note 9) Business Purpose The Company is a leading developer, manufacturer and marketer of self-reinforced, resorbable polymer implants, including screws, pins, arrows and stents, for use in a variety of applications which include orthopaedic surgery, urology, dentistry and craniofacial surgery. The Company's proprietary manufacturing processes self-reinforce a resorbable polymer, modifying the gel-like or brittle polymer structure into a physiologically strong structure with controlled, variable strength retention (ranging from three weeks to six months depending upon the medical indication). The Company currently markets its twelve product lines through managed networks of independent agents, distributors and dealers. Prior to 1997, the Company sustained operating losses and had generated its first positive cash flow from operations during 1997. The Company plans to continue to finance its future operations with revenues from future product sales, royalty payments and license and government grant payments, if any, and proceeds from the sale of capital stock. The Company's future operations are dependent upon its ability to sustain profitable operations. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents include cash on hand and in the bank as well as short-term securities. The carrying amount of cash and cash equivalents approximates its fair value due to its short-term nature. Inventory Inventory is valued at the lower of cost or market, with cost being determined under a first-in, first-out (FIFO) method. Reserves are established for excess and obsolete inventory on a specific identification basis. The instrument inventory, to the extent it is released on consignment, is amortized over its estimated useful life of three to four years. Investments Investments consist of certain real property interests in Finland. The Company can classify its investments in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. All of the Company's investments are classified as held-to-maturity and are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. All other investments would be classified as available-for-sale. A decline in the market value below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend and interest income are recognized when earned. The amortized cost approximates market value as of December 31, 1997 and 1998. Plant and Equipment Major additions and replacements of assets are capitalized at cost. Maintenance, repairs, and minor replacements are expensed as incurred. Machinery and equipment are depreciated using the straight-line method over a five to fifteen-year period. Leasehold improvements and equipment acquired under capital lease are amortized using the straight-line method over the estimated useful life of the asset or the lease term, whichever is shorter. Upon retirement or sale, the cost of the asset disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Intangibles Patents and rights are stated at cost. Amortization of patents is recorded using the straight-line method over the remaining legal lives of the patents, generally for periods ranging up to 12 years. Software costs are stated at cost, and are amortized using the straight-line method over 5 to 7 years. Accumulated amortization related to intangibles was $93,693 and $415,484 at December 31, 1997 and 1998, respectively. The Company's policy is to evaluate the appropriateness of the carrying value of the unamortized balances of intangible assets on the basis of estimated future cash flows (undiscounted) and other factors. If such evaluation were to indicate an impairment of these intangibles assets, such impairment would be recognized by a write-down of the applicable assets. The Company continues to evaluate the continuing value of patents and patent applications, particularly as expenses to prosecute or maintain these patents come due. Through this evaluation, the Company may elect to continue to maintain these patents: seek to out-license them; or abandon them. Goodwill Goodwill, representing costs in excess of the fair value of assets acquired, is amortized on a straight-line basis over 20 years. On a periodic basis, the Company evaluates the carrying value of intangible assets based upon expectations of undiscounted cash flows. Accumulated amortization related to goodwill was $214,632 and $375,550 at December 31, 1997 and 1998, respectively. Certain Risks and Concentrations The Company extends unsecured trade credit in connection with its commercial sales to a diversified customer base comprised of both foreign and domestic entities, most of which are concentrated in the healthcare industry. The Company invests its excess cash in deposits with major U.S. financial institutions and money market funds. To date, the Company has not experienced any losses on its cash equivalents and money market funds. The Company's products require approvals or clearances from the U.S. Food and Drug Administration (FDA) and international regulatory agencies prior to commercialized sales. There can be no assurance that the Company's products will receive any of the required approvals or clearances. If the Company were denied such approvals or clearances, or such approvals or clearances were delayed, it would have a material adverse impact on the results of operations and financial position of the Company. Fair Value of Financial Instruments Financial Accounting Standards Board Statement No. 107, Disclosures About Fair Value of Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Cash, trade accounts receivable, prepaid expenses and other current assets, trade accounts payable and accrued expenses reported in the balance sheets equal or approximate fair value due to their short maturities. Based on the borrowing rates currently available to the Company, the fair value of all of the Company's loans is approximately $240,000. Stock Option Plan Effective January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No. 123. Revenue Recognition Revenue from product sales is recognized upon shipment and passage of title to the customer. Revenue from license fees is recognized when the required milestones are met. Revenue from grant agreements is recognized in the period in which the related expenses are incurred and in accordance with the Company's obligations under the terms of the respective grants. Research and Development All research and development costs are expensed as incurred. Foreign Exchange Risk Management The Company routinely hedges its estimated net economic exposure through foreign exchange options and forward cover on a rolling 12-month basis. Market value gains are recognized in income currently and the resulting gains offset foreign exchange transaction losses. Determination of hedge activity is based upon market conditions, the magnitude of foreign currency assets and liabilities and perceived risks. A net foreign currency exchange transaction gain of $408,000 was recorded in "other income" in 1997, and net foreign currency exchange transaction losses of $236,000 were recorded in "other income" in 1998. There were no significant foreign currency transaction gains or losses in 1996. As of December 31, 1998, the Company had no foreign currency options or forward contracts outstanding. Foreign Currency Translation Effective January 1, 1998, the Company changed the functional currency of its Finnish subsidiary, from the Finnish Markka to the US Dollar. This change arose due to certain changes in the economic conditions of the Finnish operations. The underlying economic factors which influenced the Company's decision to change the functional currency was derived from an analysis of the indicators outlined in FAS 52, Appendix A. This included an analysis of the currency denominations of the related assets, cash flows, revenues and expenses of the Finnish operating subsidiary. Exchange adjustments resulting from foreign currency transactions are recognized in operations. Prior to 1998, the financial statements of the Company's foreign subsidiaries were translated into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. Substantially all assets and liabilities of the foreign subsidiaries were translated at year-end exchange rates and income and expense items are translated at an average exchange rate for the year. Accounting for Income Taxes Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits which are not expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate change is enacted. Comprehensive Income On January 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and presentation of the Company's comprehensive income (loss) and its components in a full set of financial statements. Comprehensive income (loss) consists of net income (loss) for the year and foreign currency translations adjustments and is presented in the consolidated statement of changes in stockholder's equity and comprehensive income (loss). The Statement requires only additional disclosures in the consolidate financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of the statement. Comprehensive Income (Loss) is summarized below:
1996 1997 1998 Net Income (loss) $ (4,992,275) $ 2,158,363 $ 1,261,345 Foreign currency translation adjustment (2,430) (755,054) -- ------------- ------------ ----------- Total comprehensive income (loss) $ (4,994,705) $ 1,403,309 $ 1,261,345 ============= ========== ==========
Earnings (Loss) Per Share Basic earnings (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period, giving effect to any treasury shares. During October, 1998, 20,500 shares of treasury stock was reacquired by the Company. Diluted earnings (loss) per share is computed using the weighted average number of common and potential dilutive common shares outstanding during the period. Potential dilutive common shares consist of stock options and warrants using the treasury stock method and are excluded if their effect is antidilutive. The following table sets forth the calculation of the total number of shares used in the computation of earnings (loss) per common share for the years ended December 31, 1996, 1997 and 1998:
1996 1997 1998 ---- ---- ---- Shares used in computing basic earnings (loss) per share 5,621,320 7,786,937 8,918,391 Assumed conversion of Series A Mandatorily Redeemable Convertible Preferred Stock and related warrants using the if-converted method -- 405,310 -- Incremental shares from assumed exercise of dilutive options and warrants -- 333,834 324,978 --------- --------- --------- Shares used in computing pro forma diluted earnings (loss) per share 5,621,320 8,526,081 9,243,369 ========= ========= =========
(3) INVENTORY Inventory consists of the following components as of December 31, 1997 and 1998:
1997 1998 ---- ---- Raw materials $ 437,032 1,781,661 Finished goods - Implants 492,334 2,570,416 Instruments 984,566 2,457,156 Instruments on consignment 1,300,921 3,944,080 --------- --------- 3,214,853 10,753,313 Less: Inventory reserve (155,570) (175,565) Accumulated amortization - consigned instruments (509,755) (799,760) --------- --------- $2,549,528 9,777,988 ========== =========
The Company amortizes the cost of instrumentation inventory consigned to customers. (4) PLANT AND EQUIPMENT Plant and equipment consist of the following components as of December 31, 1997 and 1998:
1997 1998 ---- ---- Machinery and production equipment $ 1,219,435 1,998,820 Construction in progress -- 97,835 Furniture and fixtures -- 775,979 Capitalized software costs -- 302,613 Computer equipment 84,582 173,041 --------- -------- 1,304,017 3,348,288 Less accumulated depreciation (454,776) (787,848) --------- --------- $ 849,241 2,560,440 ============ =========
(5) RELATED PARTY TRANSACTIONS Under an employment agreement dated August 21, 1992, the Company was obligated to pay an executive officer (Dr. Pertti Tormala) a 2 percent royalty on sales of certain products for which the Company received a patent after August 1992. This agreement also required that the Company pay a minimum royalty of approximately $2,200 per month. Dr. Tormala and another employee are parties to an additional agreement that provides royalties on sales of a specific product patented prior to 1992, again subject to certain annual minimums. The aggregate amount of all royalties due to employees related to these agreements was $74,358 as of December 31, 1997. In December, 1996, the Company restructured the employment agreement with Dr. Tormala to eliminate any future royalty obligation beyond these payments. The Company's product development efforts are dependent upon Dr. Tormala, who is a founder, director, and executive officer of the Company and is currently an Academy Professor at the Technical University in Tampere, Finland and as such is permitted by the University to devote his efforts to developing new products for the Company. This executive utilizes a group of senior researchers, graduate students, and faculty at the Technical University to perform research and development projects involving resorbable polymers and other topics impacting the Company's technology and processes. This arrangement, partially funded by the Company and permitted in Finland as a means of encouraging the commercialization of technological development, has resulted in substantial cost savings to the Company while substantially expanding its product development effort. The Company's funding obligation, which amounted to $167,000, $271,000 and $328,000 during the years ended December 31, 1996, 1997 and 1998 respectively, consists of providing the University with reasonable compensation for University resources (including graduate students) utilized by the Company. During 1998, the Company loaned $9,158 (50,000 Finnish Markka) to a related party, Bioabsorbable Concepts, Inc. During 1997 and 1998, the Company paid certain administrative expenses on behalf of Bionix B.V., a related party. The loan amounts outstanding were $115,266 and $238,950 as of December 31, 1997 and 1998, respectively, and are payable in 1999. (6) ACCRUED AND OTHER CURRENT LIABILITIES Accrued and other current liabilities consist of the following components as of December 31, 1997 and 1998:
1997 1998 ---- ---- Commissions........................................... $ 457,184 619,241 Royalties............................................. 267,986 264,544 Wages................................................. 279,642 270,718 Taxes withheld........................................ 82,079 225,995 Interest.............................................. 948 692 Inventory purchases................................... -- 128,780 Professional fees..................................... 234,658 197,809 Research.............................................. 65,012 74,200 Other................................................. 70,030 57,005 ------------- ----------- $ 1,457,539 1,838,984 =========== =========
(7) LONG-TERM DEBT Long-term debt consists of the following components as of December 31, 1997 and 1998:
1997 1998 ---- ---- Loans from financial institutions $ 40,843 -- Loans from Finnish government 101,447 101,447 Other debt 16,394 13,922 ------ ------ 158,684 115,369 Less current portion (43,314) (40,842) -------- -------- $ 115,370 74,527 ========== ======
The loans from the financial institutions are payable in semi-annual and annual installments with interest rates of one percent (1%). The loans from the Finnish government are made in order to support technology development and are payable in annual installments with interest rates of one percent (1%) . The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1998 are as follows: 1999, $40,842; 2000, $27,234; 2001, $8,342, 2002, $8,342, 2003 and beyond, $30,609. (8) LINE OF CREDIT In April 1997, the Company entered into a $2 million credit line agreement secured by the personal property of the Company and a subsidiary. Amounts to be advanced thereunder are subject to the lender's discretion at an interest rate approximating the prime rate at the time of advance, and are limited to specific percentages of certain domestic receivables and inventory. To date, no amounts have been borrowed under the credit line. (9) COMMON STOCKHOLDERS' EQUITY In September, 1996, the Company issued 2,000,000 shares of Series A mandatorily redeemable convertible preferred stock (the "Series A Preferred") and warrants to purchase 421,065 shares of common stock at an exercise price of $5.70 per share. The net proceeds to the Company were $4,894,786. On February 24, 1997, the Company effected a 1 for 1.9 reverse stock split. All common shares and per share amounts in the accompanying consolidated financial statements have been retroactively adjusted to reflect this common stock reverse split. Preferred stock amounts, other than the shares of common stock into which Series A Preferred is convertible, have not been retroactively adjusted. During the second quarter of 1997, the Company completed its IPO of 2,300,000 shares of Common Stock (including the exercise of the underwriters' over-allotment of 300,000 shares) at $10.50 per share. Upon consummation of the IPO, the 2,000,000 shares of Series A Preferred outstanding automatically converted into 1,052,638 shares of common stock on a 1 for 1.9 basis. An additional 245,065 shares of Common Stock were issued upon the exercise of all outstanding warrants. The net proceeds of the IPO, after underwriting discounts and costs in connection with the sale and distribution of the securities and the exercise of the warrants, were approximately $21.7 million. During the fourth quarter of 1998, the Company's board of directors announced a buy-back program to repurchase its common stock from time to time. During 1998, the Company repurchased 20,500 shares for a purchase price of $128,198. (10) COMMITMENTS UNDER OPERATING LEASES The Company leases offices and laboratory facilities, equipment, and vehicles under various non-cancelable operating lease arrangements. Future minimum rental commitments required by such leases are as follows:
Year ending December 31: 1999 513,847 2000 514,977 2001 485,768 2002 471,241 2003 348,107
Rental expense for the years ended December 31, 1996, 1997 and 1998 aggregated $98,755, $202,624 and $454,702, respectively. (11) STOCK OPTION PLANS In September 1996, the Board of Directors adopted a stock option plan (the 1996 Option Plan) under which the number of common shares which may be issued under the Option Plan, as amended, cannot exceed 850,000 shares. The 1996 Option Plan permits the granting of both incentive stock options and non-qualified options. Options are exercisable over a period determined by the Board of Directors, but no longer than ten years after the grant date. At December 31, 1998, there were 353,556 additional shares available for grant under the 1996 Option Plan. The per share weighted-average fair value of stock options granted in 1996, 1997 and 1998 was $5.86, $16.66 and $12.43 respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions for the years ended December 31:
1996 1997 1998 ---- ---- ---- Risk-free interest rate 6.50% 6.22% 5.30% Expected life of option in years 10 10 10 Expected dividend yield - - - Volatility of stock price - 43.5% 84.7%
The Company applies APB Opinion No. 25 in accounting for its 1996 Option Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased and net income decreased as indicated below: 1996 1997 1998 ---- ---- ---- Net income (loss): As reported $(4,992,275) 2,158,363 1,261,345 Pro forma (5,074,269) 1,704,353 913,106 Basic earning (loss) per common share As reported (0.89) 0.28 0.14 Pro forma (0.90) 0.22 0.10 Diluted earnings (loss) per common share: As reported (0.89) 0.25 0.14 Pro forma (0.90) 0.20 0.10
Since no stock options or warrants were granted prior to January 1, 1995, the pro forma net loss reflects the full impact of calculating compensation cost for stock options under SFAS No. 123. A summary of activity under the 1996 Option Plan from January 1, 1996 to December 31, 1998 is as follows:
RANGE OF EXERCISE SHARES PRICES PER SHARE Balance, December 31, 1995 277,009 $ 0.9025 Granted..................................... 147,373 4.75-9.50 ------- --------- Balance, December 31, 1996.................... 424,382 0.9025-9.50 Granted..................................... 235,400 16.00-25.00 Exercised................................... (685) 4.75 Forfeited................................... (8,529) 4.75-9.50 ---------- -------------- Balance, December 31, 1997.................... 650,568 0.9025-25.00 Granted..................................... 91,350 6.38 -22.00 Exercised................................... (5,264) 4.75 -9.50 Forfeited................................... (240,210) 4.75-25.00 ------------ ------------------- Balance, December 31, 1998.................... 496,444 $ 0.9025-22.00 ------- ----------------- Shares exercisable at December 31, 1998 293,481 $ 0.9025-16.00 ------- -----------------
The following table summarizes information about stock options outstanding under the 1996 Option Plan at December 31, 1998:
Options Outstanding Options Exercisable --------------------------------------------------------- -------------------------------------------- Weighted Range of Average Weighted Weighted Exercise Number Remaining Average Average Prices Outstanding Contractual Exercise Number Exercise Life (Years) Price Exercisable Price $ 0.9025 277,009 5.9 $ 0.9025 221,608 $ 0.9025 4.75-9.50 123,685 7.7 7.65 70,793 7.33 16.00 5,400 8.4 16.00 1,080 16.00 6.38-22.00 90,350 9.8 15.52 -- -- ------ ------- $.9025-22.00 496,444 8.3 $ 5.42 293,481 $ 2.60 ======= =======
As part of an employment agreement, an officer and stockholder of the Company was granted an option in 1995 to purchase an equivalent of 277,009 common shares at an exercise price of $.9025 per share, the deemed fair market value at the grant date as determined by the Board of Directors. These options vest 30% on each of the first and second and 20% on each of the third and fourth anniversaries of the grant date and are exercisable over a period no longer than ten years after the grant date. On September 2, 1996, the Company granted various employees options to acquire 58,686 shares of common stock at $4.75 per share, the deemed fair value at the date of grant as determined by the Board of Directors. A total of 43,109 shares vested as of December 31, 1998 and the balance substantially vest 20% per year on each of the next three years at December 31. As of December 31, 1998, 17,897 of these granted options have been forfeited or exercised. On November 24, 1996, the Company granted various employees options to acquire 88,686 shares of common stock at $9.50 per share, the deemed fair value at the grant date as determined by the Board of Directors. A grant of options covering 65,790 shares vests as follows: 15,790 on each of the first and second anniversaries of the date of grant, 13,158 on the third anniversary of the date of grant, and 10,526 on the fourth and fifth anniversaries of the date of grant. The remaining options covering 22,896 shares vest 20% per year on each of the next five anniversaries of the date of grant. As of December 31, 1998, 5,790 of these granted options have been forfeited or exercised. During 1997, the Company granted various employees options to acquire 235,400 shares of common stock at prices ranging from $16.00 to $25.00 per share, the fair market value on the grant date. As of December 31, 1998, 230,000 of these granted options have been forfeited. During 1998, the Company granted various employees options to acquire 91,350 shares of common stock at prices ranging from $6.38 to $22.00 per share, the fair market value on the grant date. . As of December 31, 1998, 1,000 of these granted options have been forfeited. (12) INCOME TAXES At December 31, 1998, the Company and its subsidiaries had available U.S. federal net operating loss carryforwards ("NOL") of approximately $2,100,000 and U.S. state net operating loss carryforward of approximately $1,000,000 for income tax reporting purposes, which are available to offset future federal and state taxable income, if any, through 2018 and 2008, respectively. The Tax Reform Act of 1986 (the "Act") provides for a limitation on the annual use of U.S. NOL carryforwards (following certain ownership changes, as defined by the Act) that could significantly limit the Company's ability to utilize certain carryforwards. The Company has experienced various ownership changes, as defined by the Act, as a result of past financings. Accordingly, the Company's ability to utilize the aforementioned carryforwards may be limited. Additionally, because tax law limits the time during which these carryforwards may be applied against future taxes, the Company may not be able to take full advantage of these carryforwards for income tax purposes. Income tax expense attributable to the income before provision for taxes was $758,344 and $741,416 for the years ended December 31, 1997 and 1998, respectively, and differed from the amounts computed by applying the U.S. federal income tax rate of 35 percent to pretax income (loss) as a result of the following:
1997 1998 ---- ---- Computed "expected" tax (benefit) expense $ 1,020,847 700,966 Increase (reduction) in income taxes resulting from: Difference in the foreign tax rates........................ (245,454) (303,800) Net change in the valuation allowance for deferred tax assets...................................... (146,804) 218,936 Permanent items............................................ 70,000 106,831 Other, net................................................. 59,755 18,483 -------- ------ Income tax expense $ 758,344 741,416 =========== =======
The income tax expense for the years ended December 31, 1996, 1997 and 1998 relate to the foreign operations of the Company. There were no federal or state income taxes in the United States for the years ended December 31, 1996, 1997 and 1998 due to the operating losses in such jurisdictions. Income tax expense consisted of the following:
1996 1997 1998 Current provision $ 208,390 1,113,344 1,215,200 Deferred benefit - (355,000) (473,784) ------------- ---------- ------------- Total income tax expense $ 208,390 758,344 741,416 ============== =========== =============
The tax effects of temporary differences that give rise to significant portions of the Federal, foreign and state deferred tax assets at December 31, 1997 and 1998 are presented below:
1997 1998 ---- ---- Deferred tax assets: Net operating loss carryforwards.............................. $ 328,686 473,624 Research and development costs................................ 109,890 109,890 Deferred intercompany profit.................................. 769,910 1,234,430 -- Recognition of accrued expenses or reserves for financial statement reporting purposes but not for income tax reporting purposes............................... 315,815 429,501 ---------- ------- Total gross deferred tax assets............................... 1,524,301 2,247,445 Deferred tax liability: Depreciation expense -- (30,424) -- -------- expense......................................................... 1,524,301 2,217,021 Total net deferred tax assets Less valuation allowance...................................... (1,169,301) (1,388,237) ----------- ----------- Net deferred tax assets............................................ $ 355,000 828,784 ========== =========
Realization of net deferred tax assets is dependent on future earnings, which are uncertain. Accordingly, a valuation allowance was recorded by the Company against certain assets at December 31, 1997 and 1998. The total valuation allowance decreased by $146,804, and increased by $218,936 for the years ended December 31, 1997 and 1998, respectively. (13) LICENSE AND GRANT REVENUE In May 1995, the Company entered into an exclusive license agreement with Ethicon GmbH (a wholly-owned subsidiary of Johnson & Johnson) to market a product based on the Company's patents for bioresorbable membranes. As part of this agreement, Ethicon GmbH paid the Company a nonrefundable license fee and milestone revenue of $201,287 for the year ended December 31, 1996. The license agreement requires Ethicon GmbH to pay royalties based upon net sales of these products. This license agreement terminates upon the later of the expiration of all of the Company's patent rights covering its membrane technology or 20 years. Royalties relating to this agreement for the year ended December 31, 1997 and 1998 were insignificant. In addition, the Company has applied for grants from the Finnish government to conduct research on resorbable polymers. The revenue from such grants was $143,916, $241,685 and $417,507 for the years ended December 31, 1996, 1997 and 1998, respectively. In connection with such grants, the Company typically commits to perform research projects and to report on the status of, and the conclusions drawn from, its projects. (14) SEGMENT AND RELATED INFORMATION The Company adopted SFAS No. 131 Disclosures About Segments of an Enterprise and Related Information, in 1998. The Company believes that all of its material operations are part of the medical device industry, with similar purpose, production processes, markets, and regulatory requirements, and it currently reports as a single industry segment. To date, the Company manufactures its products solely in its facility in Finland. The Company sells products in the U.S. through a hybrid sales force comprised of managed network of independent sales agents and direct sales representatives managed from its U.S. headquarters and sells products internationally through a network of independent distributors and dealers managed from the Company's facility in Finland. Approximately 68%, 85% and 80% of the Company's revenue from external customers in 1996, 1997 and 1998, respectively was generated in the US. The remaining external revenue was generated in foreign countries concentrated in Europe and Asia. Of the remaining 20% of 1998 external revenue, no one particular country accounted for revenues greater than approximately of 8% of total revenue. Information regarding the Company's product sales, net income (loss) and identifiable assets by geographic area is set forth below:
UNITED STATES INTERNATIONAL ELIMINATIONS CONSOLIDATED Year ended December 31, 1996 Product sales: Customers............................... $ 3,412,204 $ 1,621,748 $ -- $ 5,033,952 Intercompany............................ -- 3,506,864 (3,506,864) -- --------------- --------- ----------- ------------ Total product sales 3,412,204 5,128,612 (3,506,864) 5,033,952 Net loss.................................. (2,269,215) (1,476,516) (1,246,544) (4,992,275) Identifiable assets....................... 5,061,627 8,468,315 (4,160,193) 9,369,749 Year ended December 31, 1997 Product sales: Customers............................... $ 13,449,891 $ 2,322,783 $ -- $ 15,772,674 Intercompany............................ 7,072,314 (7,072,314) -- --------------- --------- ----------- --------------- -- Total product sales 13,449,891 9,395,097 (7,072,314) 15,772,674 Net income (loss)......................... (615,759) 3,674,368 (900,246) 2,158,363 Identifiable assets....................... 33,670,471 6,849,627 (6,979,117) 33,540,981 Year ended December 31, 1998 Product sales: Customers............................... $16,480,164 $ 4,202,801 $ -- $20,682,965 Intercompany............................ 438,806 11,599,940 (12,038,746) -- ------------- ---------- ------------ --------------- Total product sales 16,918,970 15,802,741 (12,038,746) 20,682,965 Net income (loss)......................... (1,153,412) 3,666,429 (1,251,672) 1,261,345 Identifiable assets....................... 31,383,328 13,301,995 (8,210,060) 36,475,264
Sales from the subsidiary in Finland to the parent company are based upon profit margins which represent competitive pricing of similar products. No single customer accounted for more than 5% of consolidated revenue in 1996, 1997 and 1998. PART III Item 10. Directors of the Registrant The registrant incorporates by reference herein information set forth in its definitive proxy statement for its 1999 annual meeting of shareholders that is responsive to the information required with respect to this Item. Item 11. Executive Compensation The registrant incorporates by reference herein information set forth in its definitive proxy statement for its 1999 annual meeting of shareholders that is responsive to the information required with respect to this Item. Item 12. Security Ownership of Certain Beneficial Owners and Management The registrant incorporates by reference herein information set forth in its definitive proxy statement for its 1999 annual meeting of shareholders that is responsive to the information required with respect to this Item. Item 13. Certain Relationships and Related Transactions The registrant incorporates by reference herein information set forth in its definitive proxy statement for its 1999 annual meeting of shareholders that is responsive to the information required with respect to this Item. PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) See Item 8 for a list of financial statement information presented herein. (b) The following financial statement schedule is filed as part of this Annual Report. Description Page Schedule II - Valuation and Qualifying Accounts S-1 All other schedules have been omitted because they are not applicable or the required information is included in the registrant's Consolidated Financial Statements or the notes thereto. (c) The following exhibits are incorporated by reference herein or annexed to this Annual Report on Form 10-K: 3.1 Restated Certificate of Incorporation of the Registrant. (1) 3.2 Bylaws of the Registrant. (1) 4.1 Specimen Common Stock Certificate. (1) 10.1 Reorganization Agreement dated as of September 5, 1996. (1) 10.2 Registrant's 1996 Stock Option/Stock Issuance Plan. (1) 10.3 Form of Amended and Restated Employment Agreement between the Registrant and David W. Anderson. (1) 10.4 Form of Employment Agreement between the Registrant's Subsidiary and Pertti Tormala, as amended. (1) 10.5 Form of Proprietary Information and Inventions Agreement. (1) 10.6 Investors' Rights Agreement, dated as of September 6, 1996, between the Registrant and certain holders of the Registrant's securities. (1) 10.7 Stock Purchase Agreement between the Registrant and purchasers of the Company's Preferred Stock and Warrants. (1) 10.8* License Agreement between the Registrant's Subsidiary and Saul N. Schreiber. (1) 10.9* License Agreement among the Registrant's Subsidiary, Pertti Tormala, Markku Tamminmaki and Menifix I/S. (1) 10.10* Licensing, Manufacturing and Distribution Agreement among the Registrant's Subsidiary, Pertti Tormala and various Danish and Finnish inventors. (1) 10.11 Shareholders' Agreement among Bionix, B.V. and certain shareholders of the Company. (1) 10.12 Headquarters Lease. (1) 10.13 Security Agreements and Secured Promissory Note. (1) 10.14 Form of Employment Agreement between the Registrant and Michael J. O'Brien. (2) 21.1 List of Subsidiaries. (1) 23.1 Consent of KPMG LLP. 24.1 Power of Attorney. 27.1 Financial Data Schedule. 99.1 Information Regarding Forward-Looking Statements - - ---------------------- (1) Incorporated by reference to the applicable exhibit set forth in the Registrant's Registration Statement on Form S-1 initially filed with the Commission on February 26, 1997 (No. 333-22359). (2) Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. * Certain portions of this exhibit have been omitted based upon a request for confidential treatment. The omitted portions of this exhibit have been separately filed with the Securities and Exchange Commission. (d) During the quarter ended December 31, 1998, the Company did not file any Current Reports on Form 8-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this ____ day of March, 1999. BIONX IMPLANTS, INC. By:/s/David W. Anderson ___________________ David W. Anderson (President and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated: Signature Title Date /S/____________________ David W. Anderson President, Chief Executive Officer and Director (Principal Executive Officer) March __, 1999 /S/____________________ David J. Bershad Director March __, 1999 /S/____________________ Anthony J. Dimun Director March __, 1999 /S/____________________ David H. MacCallum Director March __, 1999 /S/____________________ Pertti Tormala Director March __, 1999 /S/____________________ Terry D. Wall Director March __, 1999 /S/____________________ Michael J. O'Brien Chief Financial and Accounting Officer March __, 1999 *By:_______________________ David W. Anderson Attorney-in-Fact Bionx Implants, Inc. and Subsidiaries Valuation and Qualifying Accounts For the Three Years Ended December 31, 1998
Charged Charged Charged Balance to Balance to Balance at Balance at Costs and at Costs and at Costs and at Classifications 12/31/95 Expenses Deductions 12/31/96 Expenses Deductions 12/31/97 Expenses Deductions 12/31/98 Inventory Reserves.... $161,021 119,325 - 280,346 384,979 - 665,325 310,000 - 975,325 ---------- --------- --------- -------- ------- --------- ------- ------- -------- --------- Accounts Receivable Reserves.... $ - 97,325 - 97,325 31,035 17,653) 110,707 70,205 (38,029) 142,883 ---------- --------- --------- -------- ------- ---------- --------- ------ --------- -------
EXHIBIT INDEX Exhibit Number Description 23.1 Consent of KPMG LLP 24.1 Power of Attorney 27.1 Financial Data Schedule 99.1 Information Regarding Forward-Looking Statements EX-24 2 POWER OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY WHEREAS, the undersigned officers and directors of Bionx Implants, Inc. desire to authorize David W. Anderson and Michael J. O'Brien to act as their attorneys-in-fact and agents, for the purpose of executing and filing an Annual Report on Form 10-K, including all amendments thereto, NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David W. Anderson and Michael J. O'Brien, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to sign the Bionx Implants, Inc. Annual Report on Form 10-K for the year ended December 31, 1998, including any and all amendments and supplements thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this power of attorney in the following capacities on this __ day of March, 1999. SIGNATURE TITLE /s/David W. Anderson ___________________ President, Chief Executive Officer and Director David W. Anderson /s/David J. Bershad ______________________ Director David J. Bershad /s/Anthony J. Dimun ______________________ Director Anthony J. Dimun /d/David H. MacCallum _____________________ Director David H. MacCallum /s/Pertti Tormala _____________________ Director Pertti Tormala /s/Terry D. Wall _____________________ Director Terry D. Wall /s/Michael J. O'Brien _____________________ Vice President, Administration and Chief Michael J. O'Brien Financial Officer (Chief Financial and Accounting Officer) EX-27 3 FDS --
5 (Replace this text with the legend) 0001030418 BIONX IMPLANTS, INC. 1 U.S. 12-MOS DEC-31-1998 DEC-31-1998 1 14,213,368 0 5,015,955 142,883 9,777,988 30,143,628 3,348,288 (787,848) 36,475,264 6,160,121 0 0 0 16,952 30,223,664 36,475,264 20,682,965 21,100,472 4,527,301 15,320,017 236,002 0 (985,609) 2,002,761 741,416 1,261,345 0 0 0 1,261,345 0.14 0.14
EX-99 4 STATEMENT FORWARD-LOOKING INFORMATION EXHIBIT 99.1 BIONX IMPLANTS, INC. STATEMENT REGARDING FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for "forward-looking statements" (as defined in the Act). The Annual Report on Form 10-K to which this Exhibit is attached, the Company's Annual Report to Shareholders, any Quarterly Report on Form 10-Q or any Current Report on Form 8-K of the Company, or any other written or oral statements made by or on behalf of the Company may include forward-looking statements which reflect the Company's current view (as of the date such forward-looking statement is made) with respect to future events, prospects, projections or financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from those made, implied or projected in such statements. These uncertainties and other factors include, but are not limited to, the following matters (as well as other factors referenced in the Annual Report on Form 10-K to which this Exhibit is attached or other filings or written or oral statements made by or on behalf of the Company): History of Operating Losses; Accumulated Deficit; Uncertainty of Future Profitability; Fluctuating Results of Operations. The Company has incurred substantial operating losses since its inception; at December 31, 1998, it had an accumulated deficit of approximately $4.3 million. Such losses have resulted principally from expenses associated with the development and patenting of the Company's Self-Reinforcing technologies and resorbable implant designs, preclinical and clinical studies, preparation of submissions to the FDA and foreign regulatory bodies, the development of sales, marketing and distribution channels, the write-off of acquired in-process research and development and the development of manufacturing capabilities. Although the Company's revenues grew significantly during 1997 and 1998 and the Company reported a profit for 1997 and 1998, no assurance can be given that revenues will continue to increase or that revenues will exceed expenses incurred in anticipation of future revenue growth. Accordingly, the Company may incur significant operating losses in the future as the Company continues its product development efforts, expands its marketing, sales and distribution activities and scales up its manufacturing capabilities. There can be no assurance that the Company will be able to successfully commercialize its products or that profitability will continue. The Company's results of operations have fluctuated in the past on an annual and quarterly basis and may fluctuate significantly from period to period in the future, depending upon a number of factors, many of which are outside of the Company's control. Such factors include the timing of government approvals, the medical community's continued acceptance of the Company's products, the success of competitive products, the ability of the Company to enter into strategic alliances with corporate partners, expenses associated with patent matters, and the timing of expenses related to product launches. Due to one or more of these factors, in one or more future quarters the Company's results of operating may fall below the expectations of securities analysts and investors. In that event, the market price of the Company's Common Stock could be materially and adversely affected. Uncertainty of Market Acceptance. The Company's success will depend in part upon the continued acceptance of the Company's Self-Reinforced, resorbable implants, particularly its Meniscus Arrow products, by the medical community, including health care providers, such as hospitals and physicians, and third-party payors. Such acceptance may depend upon the extent to which the medical community perceives the Company's products as a safe, reliable and cost-effective alternative to non-resorbable products, which are widely accepted, have a long history of use and are generally sold at prices lower than the prices of the Company's products. Such acceptance may also depend upon the extent to which the medical community believes that the Company's Self-Reinforced, resorbable implants have overcome the strength and composition difficulties experienced with first generation resorbable implants. Ultimately, for the Company's products to gain wide market acceptance, it will also be necessary for the Company to convince surgeons that the benefits associated with the Company's products justify the modification of standard surgical techniques in order to use the Company's implants safely and effectively. There can be no assurance that the Company's products will achieve significant market acceptance on a timely basis, or at all. Failure of some or all of the Company's products to achieve significant market acceptance could have a material adverse effect on the Company's business, financial condition and results of operations. Uncertainties Relating to Licenses, Trade Secrets, Patents and Proprietary Rights. For information pertaining to risks associated with the Company's licenses, trade secrets, patents and proprietary rights, see Item 1 ("Business - - -- Licenses, Trade Secrets, Patents and Proprietary Rights") of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Regulatory Submission Dates Subject to Change. From time to time the Company publicizes estimates regarding future regulatory submission dates. Regulatory submissions can be delayed, or plans to submit proposed products can be canceled, for a number of reasons, including the receipt of unanticipated preclinical or clinical study reports, a determination by the FDA that PMA approval rather than 510(k) clearance is required with respect to a particular submission, changes in regulations, adoption of new, or unanticipated enforcement of existing, regulations, technological developments and competitive developments. Accordingly, no assurances can be given that the Company's anticipated submissions will be made on their target dates, or at all. Delays in such submissions could have a material adverse effect on the Company's business, financial condition and results of operations. Government Regulation. For information regarding the risks associated with U.S. and international government regulation, see Item 1 ("Business -- Government Regulations") of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Competition. Many of the Company's competitors have substantially greater financial, marketing, sales, distribution and technological resources than the Company. Such existing and potential competitors may be in the process of seeking FDA approval for their respective products or may possess substantial advantages in the process of seeking FDA approval for their respective products or may possess substantial advantages over the Company in terms of research and development expertise, experience in conducting clinical trials, experience in regulatory matters, manufacturing efficiency, name recognition, sales and marketing expertise or distribution channels. 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 and results of operations. See Item 1 ("Business -- Competition") and Item 7 ("Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations for the years ended December 31, 1996, 1997 and 1998 - Product Sales") of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Dependence Upon Independent Sales Agents, Distributors and Dealers. The Company markets and sells its products in large part through managed networks of independent sales agents in the U.S. and independent distributors and dealers in foreign countries. As a result, a substantial portion of the Company's revenues are dependent upon the sales efforts of such sales agents, distributors and dealers. The Company may also rely on its distributors to assist it in obtaining reimbursement and regulatory approvals in certain international markets. There can be no assurance that the Company's sales agents, distributors and dealers, certain of which operate relatively small businesses, have the financial stability to assure their continuing presence in their markets. The inability of a sales agent, distributor or dealer to perform its obligations, or the cessation of business by a sales agent, distributor or dealer, could materially and adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to engage or retain qualified sales agents, distributors or dealers in each territory targeted by the Company. The failure to engage such entities in such territories would have a material adverse effect on the Company's business, financial condition and results of operations. See Item 1 ("Business -- Sales, Marketing and Distribution") of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Risks Relating to International Operations. Approximately 15% of the Company's product sales during 1997 and approximately 20% of sales during 1998 were generated in international markets. A number of risks are inherent in international operations. International sales and operations may be limited or disrupted by the imposition of government controls, export license requirements, political instability, trade restrictions, changes in tariffs, difficulties in managing international operations, import restrictions and fluctuations in foreign currency exchange rates. During 1998, the Company incurred a loss of $236,000 resulting from foreign currency transactions. The international nature of the Company's business subjects it and its representatives, agents and distributors to the laws and regulations of the foreign jurisdictions in which they operate, and in which the Company's products are sold. The regulation of medical devices in a number of such jurisdictions, particularly in the European Union, continues to develop and there can be no assurance that new laws or regulations will not have a material adverse effect on the Company's business, financial condition and results of operations. Product Liability Risks; Limited Insurance Coverage. For information regarding risks associated with the Company's exposure to products liability claims, see Item 1 ("Business -- Product Liability and Insurance") of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. No Assurance of Ability to Manage Growth. The Company experienced substantial growth in product sales during the second half of 1996 and during 1997 and 1998. Although there can be no assurance that such growth can be sustained, products in development may potentially lead to further growth. There can be no assurance that the Company will be able to (i) develop the necessary manufacturing capabilities, (ii) manage an expanded sales and marketing network, (iii) attract, retain and integrate the required key personnel, or (iv) implement the financial, accounting and management systems to meet growing demand for its products should it occur. Failure of the Company to successfully manage its growth could have a material adverse effect on the Company's business, financial condition and results of operations. Uncertainties Regarding Manufacturing. The Company currently manufactures its implant products solely in Finland. The Company intends to develop a manufacturing capability in the U.S. in order to increase its manufacturing capacity for its existing and new implant products. For information regarding risks associated with the Company's plans to establish a U.S. manufacturing capability, see Item 1 ("Business -- Manufacturing") of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Limited Sources of Supply; Lack of Contractual Arrangements. The raw materials for the Company's PLLA products are currently available to the Company from three qualified sources, while the Company's PGA raw materials are available from two qualified sources. The Company's raw materials have been utilized in products cleared by the FDA and the Company's suppliers maintain Device Master Files at the FDA that contain basic toxicology and manufacturing information. The Company does not have long-term supply contracts with any of its suppliers, although it is currently negotiating a supply agreement with its principal PLLA supplier. In the event that the Company is unable to obtain sufficient quantities of raw materials on commercially reasonable terms, or in a timely manner, the Company would not be able to manufacture its products on a timely and cost-competitive basis which, in turn, would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, if any of the raw materials for the Company's PGA and PLLA products are no longer available in the marketplace, the Company would be forced to further modify its Self-Reinforcing processes to incorporate alternate raw materials. The incorporation of new raw materials into the Company's existing products would likely require the Company to seek clearance or approval from the FDA. There can be no assurance that such development would be successful or that, if developed by the Company or licensed from third parties, products containing such alternative materials would receive regulatory approvals on a timely basis, or at all. Uncertainties Relating to Strategic Partners. The Company anticipates that it may be necessary to enter into arrangements with corporate partners, licensees or others, in order to efficiently market, sell and distribute certain of its products. Such strategic partners may also be called upon to assist in the support of such products, including support of certain product development functions. As a result, the success of such products may be dependent in part upon the efforts of such third parties. The Company has negotiated one such agreement with Ethicon GmbH, a subsidiary of Johnson & Johnson, pursuant to which Ethicon GmbH has the right to market and sell in Europe certain products, based upon the Company's membrane patent, in dentistry and two other unrelated fields of use. There can be no assurance that the Company will be able to negotiate additional acceptable arrangements with strategic partners or that the Company will realize any meaningful revenues pursuant to such arrangements. Possible Volatility of Stock Price. The stock markets have experienced price and volume fluctuations that have particularly affected medical technology companies, resulting in changes in the market prices of the stocks of many companies that may not have been directly related to the operating performance of those companies. Such broad market fluctuations may materially and adversely affect the market price of the Company's Common Stock. Factors such as variations in the Company's results of operations, comments by securities analysts, under-performance against analysts' estimates, announcements of technological innovations, new products or new pricing practices by the Company or its competitors, changing government regulations and developments with respect to FDA or foreign regulatory submissions, the results of regulatory inspections, patents, proprietary rights or litigation may have a material adverse effect on the market price of the Company's Common Stock. The words "believe", "expect", "anticipate", "project" and similar expressions identify "forward-looking statements", which speak only as of the date that any such statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. -----END PRIVACY-ENHANCED MESSAGE-----