-----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, Vm4V/+QaSmuArsYyUZ+g7eWBupknHnA/jJqz5NFsNOu7zaMAxe0np217TaXfHxHx Aa/wH/q6s5mcu4UHGfJYyQ== 0000950109-97-001571.txt : 19970227 0000950109-97-001571.hdr.sgml : 19970227 ACCESSION NUMBER: 0000950109-97-001571 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19970226 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIONX IMPLANTS INC CENTRAL INDEX KEY: 0001030418 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 223458598 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-22359 FILM NUMBER: 97543517 BUSINESS ADDRESS: STREET 1: 279B GREAT VALLEY PARKWAY 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 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------ BIONX IMPLANTS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3841 22-3458598 (STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER JURISDICTION INDUSTRIAL IDENTIFICATION NO.) OF INCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) 279B GREAT VALLEY PARKWAY MALVERN, PENNSYLVANIA 19355 (610) 296-0919 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------ DAVID W. ANDERSON 279B GREAT VALLEY PARKWAY MALVERN, PENNSYLVANIA 19355 (610) 296-0919 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) WITH COPIES TO PETER H. EHRENBERG, ESQ. ALEXANDER D. LYNCH, ESQ. LOWENSTEIN, SANDLER, KOHL, FISHER & BROBECK, PHLEGER & HARRISON LLP BOYLAN, P.A. 1633 BROADWAY, 47TH FLOOR 65 LIVINGSTON AVENUE NEW YORK, NEW YORK 10019 ROSELAND, NEW JERSEY 07068 (212) 581-1600 (201) 992-8700 ------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly as practicable after this Registration Statement is declared effective. ------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ------------ CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE AMOUNT OF REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE - ----------------------------------------------------------------------------------------- Common Stock, par value $.0019 per share...... 2,300,000 shs. $14.00 $32,200,000 $9,758
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes 300,000 shares which may be purchased by the Underwriters to cover over-allotments, if any. (2) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457(a) under the Securities Act of 1933. ------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject To Completion, Dated February 26, 1997 PROSPECTUS 2,000,000 SHARES LOGO COMMON STOCK ------------ All of the 2,000,000 shares of Common Stock offered hereby are being sold by Bionx Implants, Inc. (the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $12.00 and $14.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Application has been made for quotation of the Common Stock on the Nasdaq National Market under the symbol "BINX." THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE""RISK FACTORS" COMMENCING ON PAGE 6. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Underwriting Price to Discounts and Proceeds to Public Commissions[1] Company[2] - -------------------------------------------------------------------------------- Per Share.................................. $ $ $ - -------------------------------------------------------------------------------- Total[3]................................... $ $ $ - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
1. For information regarding indemnification of the Underwriters, see "Underwriting." 2. Before deducting expenses of the offering payable by the Company, estimated at $985,000. 3. The Company has granted the Underwriters an option, exercisable within 30 days from the date hereof, to purchase up to 300,000 additional shares of Common Stock on the same terms as set forth above, solely to cover over- allotments, if any. If such option is exercised in full, the total Price to Public will be $ , the Underwriting Discounts and Commissions will be $ and the Proceeds to the Company will be $ . See "Underwriting." ------------ The shares of Common Stock offered by the Underwriters are subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and to certain other conditions. It is expected that delivery of such shares will be made through the offices of UBS Securities LLC, 299 Park Avenue, New York, New York on or about , 1997. ------------ UBS SECURITIES HAMBRECHT & QUIST VOLPE, WELTY & COMPANY LLC , 1997 BIONX IMPLANTS INC. (LOGO) TWO PAGE GATEFOLD PAGE 1 Marketing a broad line of proprietary, Self-Reinforced resorbable products that solve medical needs in a variety of specialties. Picture of the Bionx technology applied to a resorbable polymer showing self- reinforcing fibrils in the matrix. Since 1995, Bionx Implants has marketed its products into the worldwide Orthopaedic market: providing the surgical users with the first broad range of resorbable products that meet their clinical needs. For fracture management Bionx markets 4 full lines of resorbable pins and screws with over 100 specific product sizes applicable to the majority of orthopaedic procedures involving fracture management. Picture display of the Bionx Implant Product lines for Fracture Fixation including PLLA SmartScrews, PLLA SmartPins, PGA Screws and Pins in a variety of lengths and diameters. Picture of football player with arrows detailing usage points in current practice with emphasis on ankles, wrists, elbows, knees and feet. Bionx has used this broad base to create, with input from leading orthopaedists, new products that address other critical unmet needs. In February 1996 the Company introduced its SmartTack product, its first product dedicated to serving the clinical needs of the hand surgeon. Photograph of skier with demonstrating approved indication for SmartTack in the thumb PAGE 2 In the second quarter of 1996, Bionx Implants introduced its patented Meniscus Arrow to provide the arthroscopist with a rapid and effective means of repairing meniscal tears, a procedure that prior to the introduction of the Meniscus Arrow required the surgeon to perform complex and demanding arthroscopic surgical procedures. Picture of a basketball player on dribble with a blow-up schematic of the knee showing the Meniscus Arrow in place repairing a meniscus tear. The Meniscus Arrow: Shortens operative time Simplifies meniscal repair procedures Reduces the potential for complications Bionx Implants: working today to create the next generation of proprietary Self-Reinforced resorbable implants for the orthopaedic surgeon. ------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including the information under "Risk Factors." THE COMPANY Bionx Implants, Inc. (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 maxillo-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 managed networks of independent sales agents in the U.S. and independent distributors and dealers in markets outside of the U.S. The Company's nine product lines, representing more than 100 distinct products, were designed to address recognized clinical needs. The Company estimates that its products have been used in over 150,000 surgeries. The Company has received 510(k) clearance from the Food and Drug Administration ("FDA") for the six 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. The Company uses several proprietary manufacturing and processing technologies to modify well characterized resorbable polymers (e.g., poly-l- lactic acid ("PLLA") and polyglycolic acid ("PGA")) into appropriately designed, Self-Reinforced, resorbable implants which can be used safely and reliably in surgical applications. In addition to providing the strength necessary for these applications, the Company's Self-Reinforcing technology also imparts to the resorbable polymer a number of characteristics which enhance the manufacturability of the implants and broaden their potential clinical applications. For example, the Self-Reinforced polymers can be machined (e.g., lathed, heat-treated and forged) into clinically appropriate sizes and modified using custom metal forming techniques to incorporate features, such as ridges and barbs, for improved fixation. The human skeletal system is comprised of bone, connective tissue (ligaments and tendons) and cartilage, all of which may be damaged as a result of trauma, degenerative disease or surgical intervention. For more than four decades, orthopaedic surgeons have used implantable metal devices, including screws, pins and tacks, to repair skeletal tissue and to facilitate healing. While metal implants have been recognized as the standard of care for fixation of skeletal tissue due to their high strength and low complication rates, these devices have several limitations, including reduction of healed bone strength due to stress shielding (prevention of the transfer of weight-bearing load from the implant to the bone) and the need to remove the implants. First generation resorbable implants were developed in response to the limitations of metal fixation devices. These implants do not require removal following surgery, but are either brittle or overly flexible due to the processes, such as injection molding, which are used in their manufacture. As a result of their low strength, these implants had to be produced in large sizes which limited their clinical utility. To address the limitations of metal implants and first generation resorbable implants, the Company developed Self-Reinforced, resorbable polymer implants, including pins, screws and other profiled (nonsmooth-surfaced) implants, of clinically appropriate sizes. The Company believes that the principal advantages of its Self-Reinforced, resorbable polymer implants include: . Improved Bone Healing. As a result of the controlled degradation of the Company's Self-Reinforced, resorbable implants in bone, there is a gradual transfer of the weight-bearing load from the fixation 3 device to the bone, which the Company believes promotes more effective bone healing than can occur with metal implants. . Improved Soft Tissue Healing. Fractures and soft tissue injuries that involve the articulating surfaces of joints have been difficult to address with metal implants due to the potential for erosion of these delicate surfaces. In a clinical study of 34 patients who received the Company's Meniscus Arrow, no such erosion occurred. . Lower Implant Failure Rate. The Company believes, based on clinical experience and feedback that it has received from the medical community, that its Self-Reinforced, resorbable implants have a significantly lower rate of failure upon insertion than the 7-10% failure rate of competitors' first generation unreinforced, resorbable implants. . Reduced Need for Repeat Surgery. The Company's implants are resorbed by the body over a controlled period of time, based on the indicated use, which allows the patient to avoid the cost, trauma and inconvenience of follow-up surgery to remove an implant after healing is complete. The Company has leveraged its Self-Reinforcing platform technology to develop and introduce high quality, clinically proven, resorbable implants into major segments of the medical device industry. The Company's Self-Reinforced, resorbable implants include pins and screws for repair of fractures of the ankle, hand, knee, elbow, wrist and foot, resorbable stents for use in urological procedures, and the Meniscus Arrow, the first resorbable, arthroscopically administered fixation device designed for use in the repair of longitudinal, vertical tears of the medial and lateral meniscus of the knee. Prior to the introduction of the Meniscus Arrow, damaged menisci could only be treated through complex suturing techniques or removal of the torn section. The Meniscus Arrow has demonstrated the ability to reduce operating room time by approximately 50% and to decrease the risk of arterial and nervous system complications which may occur with suturing techniques. The Company is also developing more than ten additional Self-Reinforced, resorbable polymer implants for approximately 18 different applications. Products under development include PLLA plates and anchors, intramedullary nails, resorbable joint prostheses, and ultra-high strength resorbable composites, all of which are planned for commercial introduction within the next several years. The Company's use of well known and well characterized polymers has, to date, allowed for clearance of the Company's orthopaedic products by 510(k) submissions. The FDA is familiar with the toxicological properties of these polymers, and has not required extensive preclinical or clinical tests prior to granting marketing clearance. In certain recent cases, clearances have been obtained within 90 days after submission. The Company believes that many of its products under development for orthopaedic and related applications will be subject to clearance by 510(k) submissions, while certain of its other products, including urology stents, may be subject to a more extensive regulatory approval process. THE OFFERING Common Stock Offered................ 2,000,000 shares Common Stock Outstanding after this Offering............................ 8,607,513 shares(1) Use of Proceeds..................... To establish a manufacturing capability in the U.S. and expand manufacturing capacity in Finland, to fund increased research and development, to expand sales and marketing, to fund working capital and for other general corporate purposes, including repayment of certain long-term debt. Proposed Nasdaq National Market Symbol.............................. BINX - -------- (1) Excludes 424,382 shares of Common Stock reserved for issuance pursuant to stock options outstanding as of December 31, 1996. Also excludes an aggregate of 425,618 shares of Common Stock reserved for future issuance under the Company's Stock Option/Stock Issuance Plan as of December 31, 1996. See "Management -- Stock Option/Stock Issuance Plan" and "Description of Capital Stock" and Note 11 of Notes to Consolidated Financial Statements. 4 SUMMARY CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1992(1) 1993(1) 1994 1995 1996 ---------- ---------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Product sales............. $ 1,522 $ 1,177 $ 1,265 $ 1,355 $ 5,034 Gross profit.............. 951 831 788 817 2,929 Operating expenses........ 1,668 1,135 883 2,439 4,905 Operating loss............ (717) (304) (95) (1,622) (1,976) Net loss.................. (651) (219) (162) (1,478) (1,969) Pro forma net loss per share(2)................. (0.31) Shares used in computing pro forma net loss per share(2)................. 6,370
DECEMBER 31, 1996 -------------------------------------- PRO FORMA ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4) ------ ------------ ----------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital........................ $2,046 $2,046 $25,241 Total assets........................... 5,284 5,284 28,479 Long-term debt less current portion.... 590 590 590 Mandatorily redeemable convertible preferred stock....................... 5,000 -- -- Accumulated deficit.................... (4,663) (4,663) (4,663) Total stockholders' equity (deficit)... (3,063) 1,937 25,132
- -------- (1) Consolidated Statement of Operations data for the years ended December 31, 1992 and 1993 have been derived from unaudited financial statements of the Company. (2) See Note 2 of Notes to Consolidated Financial Statements for information concerning the computation of pro forma net loss per share. (3) Gives effect to the automatic conversion of all outstanding shares of Preferred Stock of the Company into 1,052,638 shares of Common Stock and the assumed cashless exercise of all outstanding warrants into 236,451 shares of Common Stock, calculated based on an assumed initial public offering price of $13.00 per share. (4) Adjusted to give effect to the receipt of the net proceeds from the sale of the 2,000,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $13.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company). ---------------- Unless otherwise indicated, all information in this Prospectus (i) assumes the Underwriters' over-allotment option is not exercised, (ii) reflects a 1 for 1.9 reverse stock split of the Common Stock effected on February 24, 1997 (the "Reverse Stock Split"), (iii) gives effect to the conversion of all outstanding shares of Preferred Stock into 1,052,638 shares of Common Stock which will occur upon the closing of this Offering (the "Preferred Stock Conversion") and (iv) assumes the cashless exercise of all outstanding warrants into 236,451 shares of Common Stock upon the closing of this Offering, calculated based on an assumed initial public offering price of $13.00 per share (the "Warrant Exercise"). See "Description of Capital Stock," "Capitalization" and "Underwriting." The Company's logo is a trademark of the Company. This Prospectus also includes trademarks and trade names of companies other than the Company. 5 RISK FACTORS Prospective investors in the shares offered hereby should carefully consider the following risk factors, in addition to the other information contained in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. History of Operating Losses; Accumulated Deficit; Uncertainty of Future Profitability; Fluctuating Results of Operations. The Company has incurred substantial operating losses since its inception and, at December 31, 1996, had an accumulated deficit of approximately $4.7 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 U.S. Food and Drug Administration (the "FDA") and foreign regulatory bodies, the development of sales, marketing and distribution channels and the development of manufacturing capabilities. Although the Company's revenues grew significantly during 1996, no assurance can be given that this trend will continue 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 be achieved. 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 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 operations 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. See "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." Uncertainty of Market Acceptance. The Company's success will depend in part upon the acceptance of the Company's Self-Reinforced, resorbable implants 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. See "Business -- Competition." Uncertainties Relating to Licenses, Trade Secrets, Patents and Proprietary Rights. The Company's success will depend 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 secret and patent protection for new technologies, products and processes. 6 The Company owns or has licenses to patents issued in the United States and various foreign countries and has patent applications pending at the U.S. Patent and Trademark Office ("U.S. PTO") and in patent offices of various foreign countries. Provided that all requisite maintenance fees are paid, 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. 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. One of these European patents has been revoked by the European Patent Office for lack of novelty based on an earlier publication. The Company has filed an appeal of the European Patent Office's revocation decision. The other European patent and the Japanese patent application are being challenged on lack of novelty and inventiveness grounds on the basis of disclosures made in patent and other publications. The Company is vigorously defending its European and Japanese patent positions in these proceedings. No assurance can be given as to whether such appeal in Europe will be successful or as to the outcome of the pending opposition proceedings. In order to clarify and confirm its U.S. patent position, the Company intends in the first quarter of 1997 to request reexamination by the U.S. PTO of the two principal U.S. patents owned by the Company. No assurance can be given as to whether the issues raised in the reexamination proceedings will be resolved in the Company's favor. The reexamination process is expected to take up to twelve months or longer. Such reexamination could result in some or all of the patent claims set forth in these two U.S. patents being altered to provide narrower coverage or being determined to be unpatentable. No assurance can be given as to the outcome of the reexamination process. Narrowing of the coverage or a holding of unpatentability in relation to one or both of these two principal U.S. patents 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 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 the Company's proprietary technologies, or that any particular proprietary technology will be regarded as a trade secret under applicable law. There can also 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 would have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, the Company is licensed under 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, which requires the Company to pay periodic royalties, has a term expiring in 2006, unless terminated earlier by the licensor for breach by the Company. 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. 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 7 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. No assurance can be given that these oppositions will result in either the revocation of that patent or the narrowing of its claims. If neither opposition 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. 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. See "Business -- Licenses, Trade Secrets, Patents and Proprietary Rights." Uncertainties Relating to Product Development. Product development involves a high degree of risk. There can be no assurance that the Company's products under development will prove to be safe and effective, will receive the necessary regulatory approvals or will ultimately be commercially successful. These products will require substantial additional investment, laboratory development, clinical testing and regulatory approvals prior to their commercialization. There can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of new products. The Company's inability to successfully develop and introduce products under development 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. See "Business -- Product Development." Estimates of Procedures Uncertain; Regulatory Submission Dates Subject to Change. To assist investors in evaluating the Company, this Prospectus contains certain estimates of procedures performed in the U.S. on an annual basis. These estimates have been derived by the Company on the basis of its analysis of market research reports compiled by independent third-party sources which the Company believes to be reliable. However, all such estimates are inherently subject to uncertainties, and the Company is unable to determine with any degree of certainty the number of potential patients for any indication or the number of patients who are suitable for treatment using any of the Company's products. This Prospectus also reflects the Company's estimates regarding future regulatory submission dates. Regulatory submissions can be delayed, or plans to submit proposed products can be canceled, for a number 8 of reasons, including the receipt of unanticipated preclinical or clinical study reports, a determination by the FDA that PMA approval (as defined herein) 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. See "Business -- Government Regulation." Dependence on Key Personnel and Relationship with the Technical University at Tampere. The Company's ability to operate successfully depends in part upon the continued service of certain key scientific, technical, managerial and finance personnel, and its continuing ability to attract and retain additional highly qualified scientific, technical, managerial and finance personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to retain existing personnel and attract or retain additional highly qualified employees in the future. At present, the Company does not maintain key man life insurance on any of its employees and only has individual employment agreements with two of its employees. The loss of key personnel and the inability to hire and retain qualified personnel in key positions could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's product development efforts are dependent upon Pertti Tormala, Ph.D. and the Technical University in Tampere, Finland. Dr. Tormala, a founder, director and executive officer of the Company, is currently an Academy Professor at the Technical University and has been permitted by the University to devote his efforts to developing new products for the Company. Dr. Tormala 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 relating to the Company's technologies and manufacturing processes. This arrangement, permitted in Finland as a means of encouraging the commercialization of technological development, has resulted in substantial cost savings to the Company while greatly expanding its product development efforts. There can be no assurance that the University will allow Dr. Tormala to continue to devote his efforts and University resources to the Company's product development efforts. Any failure by the Company to obtain the continued services of Dr. Tormala, or any requirement that the Company fund research at the Technical University at a substantially increased level, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview," "Management" and "Certain Transactions." Government Regulation. The Company's products are subject to extensive regulation by the FDA and certain foreign regulatory agencies. Pursuant to the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated thereunder (the "FDC Act"), the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. Noncompliance with applicable requirements can result in, among other things, warning letters, fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing clearances or 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. The Company is prohibited from marketing new devices in the U.S. until it obtains clearance from the FDA under the premarket notification provisions of Section 510(k) of the FDC Act ("510(k)") or approval of a Premarket Approval Application ("PMA") from the FDA. A 510(k) submission generally requires supporting data, which may include clinical data. The process of obtaining PMA approval is much more costly, lengthy and uncertain. A PMA application requires extensive clinical data and other supporting information. When clinical data is required for either a 510(k) submission or a PMA application, the process of compiling the data can be expensive and time-consuming, and 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 will support clearance or approval. The Company believes that it usually takes from four to 9 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. In all cases, there can be no assurance that 510(k) clearance or PMA approval will ever be obtained. Moreover, regulatory clearances or approvals, if granted, 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. There can be no assurance that the FDA will not determine that the Company's urology stents, certain products currently in development by the Company or future products must undergo the more costly, lengthy and uncertain PMA approval process. It is likely that the FDA will require the Company to seek PMA approval for its urological stents. 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. Any products manufactured or distributed by the Company pursuant to FDA clearances or approvals are subject to pervasive and continuing regulation by the FDA. Changes in existing requirements or adoption of new requirements could adversely affect the ability of the Company to be in regulatory compliance. Failure to comply with regulatory 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 be required to incur significant costs to comply with laws and regulations in the future or that laws or regulations will not have a material adverse effect upon the Company's business, financial condition and results of operations. The FDC Act requires devices to be manufactured in accordance with good manufacturing practices ("GMPs") which impose certain procedural and documentation requirements upon the Company with respect to manufacturing, quality assurance and other matters. Enforcement of GMP regulations has increased significantly in the last several years, and the FDA has publicly stated that compliance will be more strictly scrutinized. The FDA has recently finalized changes to the GMP regulations, including design controls, which will likely increase the cost of compliance with GMP requirements. In October 1994, the Company's facility in Finland was inspected by the FDA. The inspector made several observations related to GMPs, which resulted in a Warning Letter being issued to the Company on February 23, 1995. The Company then began an exchange of correspondence with the FDA, which concluded with an October 10, 1995 letter from the FDA stating, among other things, that the Company's responses to the Warning Letter were "adequate" and that during the next inspection, the FDA would "verify that the corrections have been implemented." Such an inspection is expected to occur in the near future. In addition, international regulatory bodies often establish regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. As a result of the Company's sales in Europe, the Company is required to receive a "CE" marking certification, an international symbol of quality and compliance with the applicable European medical device directive. In January 1997, the Company received an EC Design Examination and an EC Quality System Certificate from a European Notified Body, which entitles the Company to affix a CE marking on all of its currently marketed orthopaedic, dental and maxillo- facial products. Submission of the required design dossier for the Company's stent products is scheduled for late 1997. Failure to obtain CE marking for the Company's stent products by June 14, 1998 would prohibit the Company from selling such 10 products in the European Economic Area unless and until compliance is achieved. 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 applicable requirements. The Company is also subject to numerous environmental and safety laws and regulations, including those governing use of hazardous materials. Any violation of, and the cost of compliance with, these regulations could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Government Regulation." Competition. The medical device industry is subject to intense competition both in the U.S. and abroad. The Company's products compete against metal implants and other resorbable products for orthopaedic surgery, urology, dentistry, and maxillo-facial surgery applications. Potential competitors may be able to develop technologies that are as effective as, or more effective or easier to use than, those offered by the Company, which could render the Company's products noncompetitive or obsolete. 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 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 "Business -- Competition." Dependence Upon Independent Sales Agents, Distributors and Dealers. The Company markets and sells its products 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 "Business -- Sales, Marketing and Distribution." Risks Relating to International Operations. Approximately 32% of the Company's product sales during 1996 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. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Business -- Government Regulation" and Note 14 of Notes to Consolidated Financial Statements. Product Liability Risks; Limited Insurance Coverage. The Company's business is subject to product liability risks in the testing, manufacturing and marketing of its products. There can be no assurance that product 11 liability claims will not be asserted against the Company, its strategic partners 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, in the future, product liability insurance will be available to the Company on terms satisfactory to the Company, if at all. A successful product liability claim or series of 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. See "Business -- Product Liability and Insurance." No Assurance of Ability to Manage Growth. The Company experienced substantial growth in product sales during the second half of 1996. 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. See "Business -- Manufacturing," "-- Sales, Marketing and Distribution," "-- Facilities" and "Management." 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. The Company anticipates that it will establish this capability either by (i) equipping and operating a leased facility in the eastern U.S. or (ii) contracting with a third party to provide a manufacturing capability to the Company. The Company presently is exploring both of these alternatives. If the Company pursues contract manufacturing, it will solicit bids from reliable medical device manufacturers, including a subsidiary of Vital Signs, Inc. ("Vital Signs"). Certain of the directors and principal stockholders of the Company are directors, officers and stockholders of Vital Signs. If the Company uses a contract manufacturer, the Company would equip the manufacturer's facility, with the objective of ultimately transitioning to a neighboring Company-owned or Company-leased facility. There can be no assurance that the Company will be able to enter into a contract manufacturing agreement or otherwise secure the use of suitable facilities in the U.S. on commercially reasonable terms, or at all. Furthermore, regardless of the alternative selected, the integration of the Company's existing operations with the U.S. facility may result in inefficiencies and delays, especially as a result of the technical requirements necessary to produce products in accordance with the Company's specifications. There can be no assurance that the Company will not encounter difficulties in scaling up production, including problems involving production yield, quality control and assurance, and shortages 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 have a material adverse effect on the Company's business, financial condition and results of operations. During 1995 and 1996, the Company experienced occasional periods of delay in filling product orders due to increases in demand beyond forecasted levels. The Company is currently upgrading its production machinery and processes to address this 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 further delays in filling orders in the future. Difficulties experienced in integrating such machinery on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing" and "-- Facilities" and "Certain Transactions." 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 12 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. See "Business -- Manufacturing" and "-- Government Regulation." Ability to Maintain 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 private health insurance plans, to reimburse all or part of the cost of the procedures in which the medical devices are being used. The Company believes that, to date, U.S. 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 for the Company's products or that such third-party reimbursement will be adequate. There is significant uncertainty concerning third-party reimbursement for 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 is 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. Federal and state government agencies are increasingly considering limiting health care expenditures. For example, the U.S. Congress is currently considering various proposals to significantly reduce Medicaid and Medicare expenditures. Such proposals, if enacted, could have a material adverse effect on the Company's business, financial condition and results of operations. Outside the U.S., the Company relies on distributors to establish reimbursement from third-party payors in their respective territories. Health care reimbursement systems vary from country to country and, 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. Lack of or inadequate reimbursement by government and other third-party payors for procedures utilizing the Company's products would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Third-Party Reimbursement." Possible Future Capital Needs; Uncertainty of Additional Financing. The Company has experienced negative operating cash flows since its inception. The Company has expended, and expects to continue to expend in the future, substantial funds to pursue product development efforts, expand its sales and marketing activities and expand its manufacturing capabilities. The Company expects that its existing capital resources, together with the net proceeds of this Offering, the interest earned thereon and the cash flow from operations, will be adequate to fund the Company's operations through 1998. However, the Company's future capital requirements and the adequacy of available funds 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, progress with preclinical studies, clinical trials and product clearances by the FDA and other agencies, the cost and timing of its efforts to expand its manufacturing capabilities, the cost of filing, prosecuting, defending and enforcing patent claims 13 and other intellectual property rights, competing technological and market developments, and the development of strategic alliances for the marketing of certain of its products. To the extent that funds generated from the Company's operations, together with its existing capital resources, the proceeds of this Offering and the 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, 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, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 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. Control by Directors, Executive Officers and Affiliated Entities. The Company's directors, executive officers and entities affiliated with them will, in the aggregate, beneficially own approximately 63% of the Company's outstanding shares of Common Stock following the completion of this Offering (or approximately 61% if the Underwriters exercise their over-allotment options in full), assuming that all Warrants are exercised by payment of the full exercise price. These stockholders, if acting together, would be able to significantly influence all matters requiring approval by the stockholders of the Company, including the election of directors and the approval of mergers or other business combination transactions. See "Certain Transactions" and "Principal Stockholders." Potential Anti-Takeover Effects of Delaware Law and the Company's Certificate of Incorporation and Bylaws. The Company's Board of Directors has the authority, without further action by the stockholders, to issue from time to time, up to 8,000,000 shares of Preferred Stock in one or more classes or series, and to fix the rights and preferences of such Preferred Stock. The Company's Certificate of Incorporation provides for staggered terms for members of the Board of Directors and does not permit stockholders to act without a meeting. The Company is also subject to provisions of Delaware corporate law which, subject to certain exceptions, will prohibit the Company from engaging in any "business combination" with a person who, together with affiliates and associates, owns 15% or more of the Company's Common Stock (an "Interested Stockholder") for a period of three years following the date that such person became an Interested Stockholder, unless the business combination is approved in a prescribed manner. Additionally, the bylaws of the Company establish an advance notice procedure for stockholder proposals and for nominating candidates for election as directors. These provisions of Delaware law and of the Company's Certificate of Incorporation and bylaws may have the effect of delaying, deterring or preventing a change in control of the 14 Company, may discourage bids for the Common Stock at a premium over the prevailing market price, and may adversely affect the market price, and the voting and other rights of the holders, of the Common Stock. See "Description of Capital Stock." Shares Eligible for Future Sale. Sales of substantial amounts of Common Stock (including shares issued upon the exercise of outstanding options and warrants) in the public market after this Offering or the prospect of such sales could materially and adversely affect the market price of the Common Stock and may have a material adverse effect on the Company's ability to raise any necessary capital to fund its future operations. Upon completion of this Offering, the Company will have 8,607,513 shares of Common Stock outstanding. The 2,000,000 shares offered hereby will be freely tradeable without restrictions or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except that any shares held by "affiliates" of the Company within the meaning of the Securities Act will be subject to the resale limitations of Rule 144 promulgated under the Securities Act ("Rule 144"). The remaining 6,607,513 outstanding shares are "restricted" securities that may be sold only if registered under the Securities Act, or sold in accordance with an applicable exemption from registration, such as Rule 144. Rule 144 imposes a holding period with respect to securities purchased directly from an issuer. The Securities and Exchange Commission has amended Rule 144, effective in April 1997, to reduce the holding period for sales subject to certain resale restrictions from two years to one year and to reduce the holding period applicable to non-affiliates for non-restricted sales from three years to two years. The officers and directors of the Company and other holders of Common Stock who together hold 6,607,513 shares of Common Stock and options to purchase an additional 395,431 shares of Common Stock (of which, options to purchase 98,894 shares are currently exercisable), have agreed not to sell, directly or indirectly, any Common Stock without the prior written consent of UBS Securities LLC for a period of 180 days from the date of this Prospectus (the "Lock-up Agreements"). However, UBS Securities LLC may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to such Lock-up Agreements. Approximately 90 days after the completion of this Offering, the Company intends to file a registration statement on Form S-8 under the Securities Act to register the future issuance of all shares of Common Stock reserved for issuance under the Company's Stock Option/Stock Issuance Plan. As of December 31, 1996, 424,382 shares of Common Stock were reserved for issuance pursuant to outstanding options and 425,618 shares of Common Stock were reserved for future issuance under the Company's Stock Option/Stock Issuance Plan. Such registration statement will automatically become effective upon filing. Accordingly, shares registered thereunder will, subject to Rule 144 limitations applicable to affiliates, be available for sale in the public market, except to the extent that such shares are subject to vesting restrictions with the Company or certain contractual restrictions on sale or transfer (including options covering 395,431 shares which are subject to Lock-up Agreements). After this Offering, the holders of approximately 1,290,000 shares of Common Stock will be entitled to certain demand and piggyback rights with respect to the registration of such shares under the Securities Act. If such holders, by exercising their demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market price of the Company's Common Stock. If the Company, either on its own behalf or on behalf of certain stockholders, were to initiate a registration and include shares held by such holders pursuant to the exercise of their piggyback registration rights, such sales could have a material adverse effect on the Company's ability to raise needed capital. See "Certain Transactions," "Shares Eligible for Future Sale," "Description of Capital Stock--Registration Rights of Certain Holders" and "Underwriting." No Prior Public Market For Common Stock; Possible Volatility of Stock Price. Prior to this Offering, there has been no public market for the Company's Common Stock and there can be no assurance that an active public market for the Common Stock will develop or be sustained after this Offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price has been determined by negotiations between the Company and the Underwriters and is not necessarily indicative of the market price at which the Common Stock of the Company will trade after this Offering. Among the factors considered in such negotiations were prevailing market conditions, certain financial 15 information of the Company, market valuations of other companies that the Company and the representatives of the Underwriters believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. 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 Common Stock following this Offering. Factors such as variations in the Company's results of operations, comments by securities analysts, underperformance against analysts' estimates, announcements of technological innovations or new products by the Company or its competitors, changing government regulations and developments with respect to FDA or foreign regulatory submissions, patents, proprietary rights or litigation may have a material adverse effect on the market price of the Common Stock. Dilution; No Dividends. Purchasers of the Common Stock offered hereby will suffer immediate and substantial dilution in the net tangible book value per share from the initial public offering price. The Company has not paid cash dividends since its inception and does not intend to pay any dividends on its Common Stock in the foreseeable future. See "Dilution" and "Dividend Policy." 16 THE COMPANY Bionx Implants, Inc. (the "Company") was incorporated in Delaware in October 1995 to coordinate the businesses 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 engaged in the development of resorbable polymer products since 1984), Biocon, Ltd. (which holds most of the Company's patents and patent applications) and two companies organized in the U.S. to further sales, marketing and development efforts. 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 controlled by such stockholders and owned by such stockholders and the former Finnish stockholders of Bioscience, Ltd. and Biocon, Ltd. 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. The Company's principal executive offices are located at 279B Great Valley Parkway, Malvern, Pennsylvania 19355. Its telephone number at that address is (610) 296-0919. USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,000,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $23,195,000 ($26,822,000 if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $13.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company estimates that approximately $4-5 million of the net proceeds will be used to purchase equipment for, and to otherwise establish, a manufacturing capability in the U.S. and to expand manufacturing capacity in Finland, approximately $3-4 million will be used to develop maxillo-facial products and to establish a sales and marketing infrastructure for such products, approximately $6-8 million will be used for the development of new resorbable polymers, the development of additional product applications in the fields of urology and spinal fixation, and related clinical and regulatory support, and the balance will be used for working capital and other general corporate purposes, including the repayment of certain long-term debt. The foregoing represents estimates only; the actual amounts expended by the Company for these purposes and the timing of such expenditures will depend on numerous factors, including the status of the Company's development efforts, actions relating to patent and regulatory matters, the extent to which the Company's products gain market acceptance and competition. The long-term debt to be repaid consists of approximately $440,000 in loans from Finnish financial institutions maturing from 1997 to 2000 at interest rates ranging from 6% to 13% per annum. The Company may use a portion of the net proceeds to acquire complementary businesses, products or technologies, although the Company currently has no agreements and is not involved in any negotiations with respect to any such transactions. Pending use of the net proceeds of this Offering, the Company plans to invest the net proceeds in interest-bearing, investment grade securities. The Company intends to invest in liquid assets in a manner that will not subject it to regulation under the Investment Company Act of 1940. Although the Company believes that the net proceeds from this Offering, together with cash flows from operations and existing cash and cash equivalents, will be sufficient to maintain its current and planned operations through 1998, there can be no assurance that the Company will not require additional financing within two years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." DIVIDEND POLICY 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 growth and, therefore, does not anticipate paying any cash dividends in the foreseeable future. 17 CAPITALIZATION The following table sets forth, at December 31, 1996, (i) the actual capitalization of the Company, assuming completion of the Reverse Stock Split, (ii) the pro forma capitalization of the Company, giving effect to the Preferred Stock Conversion and the Warrant Exercise upon the closing of this Offering, and (iii) the pro forma capitalization of the Company as adjusted to reflect the receipt of the estimated net proceeds from the sale of 2,000,000 shares of Common Stock in this Offering at an assumed initial public offering price of $13.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. This table should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto included elsewhere in this Prospectus.
DECEMBER 31, 1996 ------------------------------------ PRO FORMA ACTUAL PRO FORMA(2) AS ADJUSTED(2) ------- ------------ -------------- (IN THOUSANDS) Long-term debt less current portion....... $ 590 $ 590 $ 590 Mandatorily redeemable convertible preferred stock.......................... 5,000 -- -- Stockholders' equity: Preferred Stock: $.001 par value; 8,000,000 shares authorized, no shares issued and outstanding on an actual, pro forma or pro forma as adjusted basis.................................. -- -- -- Common Stock: $.0019 par value; 31,600,000 shares authorized; 5,318,424 shares issued and outstanding on an actual basis; 6,607,513 shares issued and outstanding on a pro forma basis; 8,607,513 shares issued and outstanding on a pro forma as adjusted basis(1)...................... 10 13 16 Additional paid-in capital................ 1,859 6,856 30,048 Accumulated deficit....................... (4,663) (4,663) (4,663) Foreign currency translation adjustment... (269) (269) (269) ------- ------- ------- Total common stockholders' equity (deficit)............................. (3,063) 1,937 25,132 ------- ------- ------- Total capitalization................... $ 2,527 $ 2,527 $25,722 ======= ======= =======
- -------- (1) Excludes 424,382 shares of Common Stock reserved for issuance pursuant to stock options outstanding as of December 31, 1996 at a weighted average exercise price of $3.23 per share. Also excludes an additional 425,618 shares of Common Stock reserved for future grant under the Company's Stock Option/Stock Issuance Plan as of December 31, 1996. See "Management -- Stock Option/Stock Issuance Plan," "Description of Capital Stock" and Note 11 of Notes to Consolidated Financial Statements. (2) Prior to this Offering, the Company had outstanding 2,000,000 shares of Preferred Stock and warrants entitling the holders to purchase a total of 421,065 shares of Common Stock at an exercise price of $5.70 per share (the "Warrants"). Concurrently with the closing of this Offering, all of the outstanding shares of Preferred Stock will be converted into 1,052,638 shares of Common Stock after giving effect to the Reverse Stock Split. The Company has the right, and intends, to call the Warrants upon the closing of this Offering. See "Description of Capital Stock -- Warrants." 18 DILUTION The net tangible book value of the Company's Common Stock as of December 31, 1996 was $1,936,708, or $0.29 per share. The net tangible book value per share of Common Stock represents the amount of the Company's tangible assets less total liabilities, divided by the 6,607,513 shares of Common Stock outstanding (after giving effect to the Preferred Stock Conversion and the Warrant Exercise). Net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in this Offering and the pro forma net tangible book value per share of Common Stock immediately after completion of this Offering. After giving effect to the Preferred Stock Conversion, the Warrant Exercise and the sale by the Company of the 2,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share (after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company), the pro forma net tangible book value of the Company as of December 31, 1996 would have been $25,131,708, or $2.92 per share. This represents an immediate increase in net tangible book value of $2.63 per share to existing stockholders and an immediate dilution in net tangible book value of $10.08 per share to new investors of Common Stock in this Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share............... $13.00 ------ Net tangible book value per share before the Offering......... $0.29 Increase per share attributable to new investors.............. 2.63 ----- Pro forma net tangible book value per share after the Offer- ing.......................................................... 2.92 ------ Dilution per share to new investors........................... $10.08 ======
The following table sets forth, on a pro forma basis as of December 31, 1996, the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing holders of Common Stock and by the new investors, after giving effect to the Warrant Exercise and Preferred Stock Conversion and before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, at an assumed initial public offering price of $13.00 per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ----------------- ------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- --------- Existing stockholders........ 6,607,513 76.8 $ 7,064,080 21.4 $ 1.07 New investors................ 2,000,000 23.2 26,000,000 78.6 13.00 --------- ----- ----------- ----- Total...................... 8,607,513 100.0% $33,064,080 100.0% ========= ===== =========== =====
The foregoing tables (i) assume the conversion of all Preferred Stock into Common Stock and the cashless exercise of all 421,065 Warrants upon the closing of this Offering, (ii) assume no exercise of the Underwriters' over- allotment option, (iii) exclude 424,382 shares of Common Stock reserved for issuance pursuant to stock options outstanding as of December 31, 1996, and (iv) exclude an additional 425,618 shares of Common Stock reserved for future grant under the Company's Stock Option/Stock Issuance Plan as of December 31, 1996. See "Management -- Stock Option/Stock Issuance Plan," "Description of Capital Stock" and Note 11 of Notes to Consolidated Financial Statements. 19 SELECTED CONSOLIDATED 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 Prospectus. The Consolidated Statement of Operations data for the years ended December 31, 1994, 1995 and 1996 and the Company's Consolidated Balance Sheet data at December 31, 1995 and 1996 are derived from audited Consolidated Financial Statements of the Company included elsewhere in this Prospectus. The Consolidated Statement of Operations data with respect to the years ended December 31, 1992 and 1993 and the Consolidated Balance Sheet data at December 31, 1992, 1993 and 1994 are derived from unaudited consolidated financial statements not included in this Prospectus. Such unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company's financial position and the results of its operations for those years.
YEAR ENDED DECEMBER 31, --------------------------------------------- 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF OPERA- TIONS DATA: Product sales................... $ 1,522 $ 1,177 $ 1,265 $ 1,355 $ 5,034 Gross profit.................... 951 831 788 817 2,929 Operating expenses.............. 1,668 1,135 883 2,439 4,905 Operating loss.................. (717) (304) (95) (1,622) (1,976) Other income and expense, net... 66 85 (67) 144 215 Net loss........................ (651) (219) (162) (1,478) (1,969) Pro forma net loss per share(1)....................... (0.31) Shares used in computing pro forma net loss per share(1).... 6,370
DECEMBER 31, ------------------------------------------------------- 1992 1993 1994 1995 1996 ------ ------ ------- ------- --------------------- ACTUAL PRO FORMA(2) ------- ------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital (deficit).............. $ (364) $ (224) $ (164) $ (576) $ 2,046 $ 2,046 Total assets............ 2,855 2,551 2,029 1,794 5,284 5,284 Long-term debt less current portion........ 763 890 301 896 590 590 Mandatorily redeemable convertible preferred stock.................. -- -- -- -- 5,000 -- Accumulated deficit..... (819) (956) (1,215) (2,693) (4,663) (4,663) Total stockholders' equity (deficit)....... 606 333 1,159 (1,036) (3,063) 1,937
- -------- (1) See Note 2 of Notes to Consolidated Financial Statements for information concerning the computation of pro forma net loss per share. (2) Gives effect to the Preferred Stock Conversion and the Warrant Exercise. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Prospectus 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 the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. 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, at December 31, 1996, had an accumulated deficit of approximately $4.7 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 and the development of its manufacturing capabilities. Although the Company's revenues grew significantly in 1996, no assurance can be given that this trend will continue or that revenues of any magnitude will exceed expenses incurred in anticipation of future growth. Accordingly, the Company may incur significant operating losses in the future as it 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 be achieved. 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. 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 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 1994, 1995 and 1996, international product sales represented 65%, 65% and 32%, respectively, of the Company's total product sales. The Company typically sells implant grade, stainless steel surgical instruments for use with each of its Self-Reinforced, resorbable products. The margins for these instruments are typically lower than the margins applicable to the Company's implant products. However, since orthopaedic companies 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. 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 the Company's procurement of such systems are included within 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. Thus, the negative impact on the Company's gross profit margins associated with sales and loans of a particular instrument system is expected to decrease after a substantial market penetration has been achieved. Similarly, such impact is likely to lessen to the extent that sales and loans of instrument systems decrease as a percentage of total product sales. However, no assurance can be given as to the extent to which instrumentation sales will depress the Company's gross profit margins in the future. 21 The Company sells its products through managed networks of independent sales agents, distributors and dealers. In the U.S., the Company handles all shipping and invoicing functions directly and pays commissions to its sales agents. 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. 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 1995 and 1996, Ethicon GmbH paid the Company approximately $200,000 and $201,000, respectively, in licensing fees. Ethicon GmbH has agreed to pay royalties to the Company upon the initiation of commercial sales of its membrane products, which are targeted for commercial release in the second quarter of 1997. No assurance can be given that the Company will be able to enter into other license arrangements 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 has benefited from the research and development activities of Dr. Pertti Tormala, the founder of the Company, at the Technical University in Tampere, Finland. Dr. Tormala is currently an Academy Professor at the Technical University and is permitted by the University to devote his efforts to developing products for the Company. Dr. Tormala 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 relating to the Company's technology and manufacturing processes. This arrangement, permitted in Finland as a means of encouraging the commercialization of technological development, has resulted in substantial cost savings to the Company while greatly expanding its product development efforts. Any failure by the Company to obtain the continued services of Dr. Tormala, or any requirement that the Company fund research at a substantially increased level, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has hired certain senior researchers from the University program and anticipates that, in the future, more of its product development work will be performed and funded directly by the Company, thereby increasing the Company's research and development expenses. The Company currently manufactures its implant products solely at its Tampere, Finland plant. The Company intends to use a portion of the proceeds of this Offering 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. 22 While the Company's operating losses have resulted in net operating loss carryforwards of approximately $2.1 million for income tax reporting purposes, 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 Bionx Implants, Inc. or its U.S. subsidiaries. As a result, the Company may incur tax obligations (as it has incurred during 1996) during periods when it reflects a consolidated net operating loss. The statutory tax rates applicable to the Company and its foreign subsidiaries vary substantially, presently ranging from approximately 40% in the U.S. to 28% in Finland. Tax rates have fluctuated in the past and may do so in the future. See Note 12 of Notes to 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, and the timing of expenses related to product launches. RESULTS OF OPERATIONS Product sales. The Company's product sales increased by 7.1% from $1.3 million in 1994 to $1.4 million in 1995 and by 271.6% to $5.0 million in 1996. The increase in 1995 reflected the commencement of sales through the Company's managed network of independent sales agents in the U.S. and volume increases in certain orthopaedic product lines. The substantial increase in product sales during 1996 primarily resulted from the U.S. introduction of the Company's Meniscus Arrow products in the second quarter of 1996. In addition, the 1996 sales increase reflects increased utilization of the Company's managed network of independent sales agents in the U.S., increased sales of the Company's existing products in international markets and increased instrumentation sales. Revenues generated from the sale of instrumentation sets and related loaner fees represented 8%, 15% and 20% of total sales in 1994, 1995 and 1996, respectively, increasing from approximately $100,000 in 1994 and $200,000 in 1995 to approximately $1.0 million in 1996. The 1996 increase is attributable primarily to the U.S. introduction of the Meniscus Arrow during the second quarter of 1996. Gross profit; gross profit margins. The Company's gross profit increased by 3.6% from $788,000 in 1994 to $817,000 in 1995 and by 258.6% to $2.9 million in 1996. The substantial increase in the Company's gross profit during 1996 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 declined from 62.3% in 1994 to 60.3% in 1995 and to 58.2% in 1996. Substantially all of this decline is attributable to the inclusion within products sales and cost of goods sold of revenues and expenses associated with instrumentation. The Company's gross profit margin applicable to implant sales, representing implant revenues less related raw materials, direct labor and overhead and associated variable expenses, increased from 65.1% in 1994 to 66.1% in 1995 and to 66.7% in 1996. The improvement in this portion of the Company's gross profit margin in 1995 was attributable in large part to a change in the Company's product mix from primarily PGA products to primarily PLLA products. In general, the costs associated with manufacturing PLLA products are substantially less than comparable costs for PGA products. The improvement in this portion of the Company's gross profit margin in 1996 resulted primarily from increased sales of higher margin Meniscus Arrow products, increased sales of higher margin PLLA products and the leveraging of certain fixed manufacturing costs over the Company's expanded revenue base. Selling, general and administrative expenses. Selling, general and administrative expenses increased by 212.2% from $693,000 in 1994 to $2.2 million in 1995 and by 105.4% to $4.4 million in 1996. Such expenses 23 were 54.8% of product sales in 1994, 159.8% of product sales in 1995 and 88.3% of product sales in 1996. Selling, general and administrative expenses consist primarily of commissions paid on product sales in the U.S., patent and license related expenses, costs incurred in connection with the regulatory process and expenses associated with supporting the Company's managed networks of independent sales agents, distributors and dealers. The increases in the dollar amount of selling, general and administrative expenses during these periods were primarily attributable to increased commission payment obligations reflecting the Company's increased product sales in the U.S. and increased expenses associated with establishing and supporting a managed network of independent sales agents in the U.S. The substantial increase in the percentage relationship of such expenses to product sales in 1995 reflects the investment made by the Company in 1995 in establishing and supporting its U.S. managed network of independent sales agents. Such expenses were incurred in anticipation of the product sales growth which the Company experienced in 1996. Research and development. Research and development expenses increased by 44.7% from $190,000 in 1994 to $274,000 in 1995 and by 67.6% to $460,000 in 1996. 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 licensing fees from third parties, grant revenues from Finnish government agencies, interest expense and other miscellaneous income and expense items. Interest expense has remained relatively constant over the past three years. License and grant revenues were negligible in 1994, increased to $267,000 in 1995 and increased by 29.3% to $345,000 in 1996. Royalty payments based upon actual sales are expected to commence in the second quarter of 1997, although no assurances can be given with respect to the timing or amount of such payments. Upon the commencement of such sales by Ethicon GmbH, the Company will be required to cease its dental membrane sales in Europe. Income taxes. Due to operating losses in Finland and in the U.S., the Company did not incur any tax obligations during 1994 or 1995. In 1996, one of the Company's Finnish subsidiaries recorded a profit, which resulted in a Finnish tax liability of $208,000. QUARTERLY PRODUCT SALES The following table presents unaudited product sales information for the last eight quarters through December 31, 1996. 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 Prospectus. Product sales for any period are not necessarily indicative of product sales to be expected for any future period.
(IN THOUSANDS) -------------- 1995: Quarter ended March 31........... $ 225 Quarter ended June 30............ 378 Quarter ended September 30....... 335 Quarter ended December 31........ 417 1996: Quarter ended March 31........... 716 Quarter ended June 30............ 750 Quarter ended September 30....... 1,160 Quarter ended December 31........ 2,408
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., the introduction in the U.S. of the Company's PLLA screw products during the fourth quarter of 1995 and the U.S. introduction of the Meniscus Arrow products during the second quarter of 1996. The increase in product sales from the first quarter of 1995 to the second quarter of 1995 also reflects the commencement of sales in the U.S. through the Company's managed network of independent sales agents during the second quarter. Minimal sales of the Company's products were made in the U.S. during the first quarter of 1995 while the Company was establishing its U.S. 24 managed network of independent sales agents. 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. 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, 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 preferred stock and warrants in which it received net proceeds of approximately $4.9 million. These 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. The Company's cash and cash equivalents increased by $1.5 million from December 31, 1995 to December 31, 1996 as a result of the Company's September 1996 private placement. The infusion of cash from that transaction was offset in part by the Company's net loss for the year, a $1.3 million increase in accounts receivable and a $299,000 increase in inventory. As of December 31, 1996, the Company had working capital of $2.0 million. At that date, the Company had outstanding approximately $800,000 of long-term debt (including the current portion of such indebtedness); the Company expects to repay a portion of such long-term debt out of the proceeds of this Offering. The Company believes that existing capital resources from its September 1996 private placement, cash flow from operations and the anticipated net proceeds from this Offering will be sufficient to fund its operations through 1998. However, the Company's future capital requirements and the adequacy of available funds 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, progress with preclinical studies, clinical trials and product clearances by the FDA and other agencies, the cost and timing of its 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 its products. To the extent that funds generated from the Company's operations, together with its existing capital resources, the proceeds of this Offering and the 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, 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. 25 BUSINESS OVERVIEW Bionx Implants, Inc. (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 maxillo-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 managed networks of independent sales agents in the U.S. and independent distributors and dealers in markets outside of the U.S. The Company's nine product lines, representing more than 100 distinct products, were designed to address recognized clinical needs. The Company estimates that its products have been used in over 150,000 surgeries. The Company has received 510(k) clearance from the FDA for the six 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 its 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 or rupture 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 26 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. Annually, approximately 735,000 rigid internal fixation procedures are performed in the U.S. 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 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. Annually, approximately 360,000 soft tissue fixation procedures are performed in the U.S. Cartilage and Cartilaginous Tissue Repair Repairs to cartilagenous 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. Annually, approximately 940,000 cartilage repairs and replacements are performed in the U.S. 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 importantly, bone repaired with and supported by metal devices relies upon the implant to perform the load-bearing functions previously 27 performed by bone. Physicians refer to this as stress shielding of the healing bone. 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 are used in their manufacture. The low strength of these implants has led 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 led 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 nine proprietary resorbable polymer fixation implant product lines, including screws, pins, tacks, arrows, membranes and urology stents, which provide an alternative to metal implants and overcome the limitations of first generation resorbable fixation devices. By modifying well-characterized resorbable polymers (e.g., PLLA and 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, dentistry and maxillo-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 (e.g. lathed, heat- treated and forged) and modified using custom metal forming techniques. As a result, the Company has designed and developed 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 into large particles (greater than 1mm) in an uncontrolled process, the Company's Self-Reinforced, resorbable polymers degrade in a slow controlled fashion into small particles. Only when the Self-Reinforced, resorbable implant has degraded into small particles will they be released into the surrounding tissue for final 28 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 bone. The Company believes that the principal advantages of its Self-Reinforced, resorbable implants include: . Improved Bone Healing. The controlled degradation of the Company's Self- Reinforced, resorbable implants in bone results in a gradual transfer of the weight-bearing load from the fixation device to the bone, eliminating stress shielding. In a trial involving 39 patients with ankle fractures, bone mineral density decreased on average by 6.4% in those patients in which the Company's PLLA screws were used, as compared to an 18.6% average decrease for those patients receiving metal screws. As a result, the Company believes that its implants promote more effective bone healing than metal implants. . Improved Soft Tissue Healing. Fractures and soft tissue injuries that involve the articulating surfaces of joints have been difficult to address with metal implants due to the potential for erosion of these delicate surfaces. In a clinical study of 34 patients who received the Company's Meniscus Arrow, no such erosion occurred. . Lower Implant Failure Rate. Competitors' first generation unreinforced, resorbable implants have a reported failure rate of 7-10% on insertion. The Company believes, based on clinical experience with its self- reinforced, resorbable implants and feedback from the medical community, that the Company's implants have a significantly lower rate of failure. . Reduced Need for Repeat Surgery. The Company's implants are absorbed by the body over a controlled period of time, which is based on their indicated use. This controlled resorption allows the patient to avoid the cost, trauma and inconvenience of follow-up surgery to remove the implant. These advantages may be especially beneficial in the treatment of ankle fractures, which typically involves the removal of the metal implant. The potential for re-fracture of the site upon removal, which exists whenever metal implants are removed, is also eliminated. The Company's use of well known and well characterized polymers has, to date, allowed for clearance of the Company's orthopaedic products through 510(k) submissions. The FDA is familiar with the toxicological properties of these polymers, and has not required extensive preclinical or clinical tests prior to granting marketing clearance. In certain recent cases, clearances have been obtained within 90 days after submission. BUSINESS STRATEGY The Company's goal is to leverage its Self-Reinforcing technology as a platform for the development and sale of resorbable polymer implants across a wide range of medical/surgical applications. The key elements of the Company's business strategy include: . Develop Proprietary Products by Leveraging the Company's Platform Technology. The Company intends to leverage its core technology as a platform for developing new Self-Reinforced, resorbable implants which allow surgeons to effectively treat specific medical needs where current treatment modalities are not optimal. For example, the Company has developed its Meniscus Arrow for use in the repair of tears of the medial and lateral meniscus and has developed resorbable, self-expanding stents for use in the urinary tract and for prostate related disease, two indications in which current therapies have clinical limitations. . Enhance Core Technology Platform. The Company is developing next generation polymers and high strength resorbable composites, which are designed to further enhance the Company's core technology and expand the applications for its products. The technologies which the Company has developed to produce Self-Reinforced polymers are applicable to any resorbable polymer, and may be applied to the development of new, more durable, stronger, profiled (nonsmooth-surfaced) implants. In addition, the Company may work with universities and other polymer developers to expand its proprietary polymer base. 29 . Leverage Existing Customer Base. Over 1,000 orthopaedic surgeons worldwide have used the Company's Self-Reinforced, resorbable implants. Substantially all of these surgeons are repeat customers. The Company believes that it has developed a reputation for producing high quality, safe and reliable resorbable implants. The Company intends to leverage its reputation with its customers to build new markets for its products, to increase acceptance of its existing products and to accelerate adoption of products currently under development. . Maintain Focused Sales and Marketing Efforts. The Company intends to continue to focus its sales and marketing efforts initially on the estimated $595 million annual orthopaedic resorbable biomaterial and meniscal preservation markets. Accordingly, outside 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. . Expand the Company's Manufacturing Capabilities. The Company manufactures its implant products in Finland. Through the establishment of its managed network of independent sales agents in the U.S., the Company has substantially increased its presence in the U.S. With this increased presence, the Company believes that it will be able to more effectively support U.S. selling efforts by establishing a manufacturing capability in the U.S. to supplement its Finnish manufacturing capacity. Management may seek to arrange for a contract manufacturer to provide this capability to the Company. PRODUCTS The Company currently markets nine product lines representing more than 100 distinct products. The Company also provides specially designed instruments for use with each of its products. The Company's product lines are described below:
ANNUAL POTENTIAL PRODUCT LINES TARGETED INDICATIONS(1) REGULATORY STATUS U.S. PROCEDURES(1) ------------- ------------------------ ---------------------------- ------------------ (IN THOUSANDS) Fracture Fixation: SR-PLLA Fractures/Osteotomies Marketed Worldwide 100 Pins SR-PLLA Fractures/Osteotomies Marketed Worldwide 125 Screws SR-PGA Fractures/Osteotomies Marketed Worldwide 400 Pins SR-PGA Fractures/Osteotomies Marketed Worldwide 125 Screws Tissue Repair: Meniscus Meniscus Repair Marketed Worldwide 138 Arrows SR-PLLA Ligament Attachment Marketed Worldwide 15 Tacks SR-PGA Alveolar Ridge Marketed Outside of the U.S. NA Membrane Urology Stents: SR-PGA Post Benign Prostatic Marketed Outside of the U.S. NA Stents Hyperplasia Swelling FDA Submission in 1997(2) SR-PLLA Benign Prostatic Marketed Outside of the U.S. NA Stents Hyperplasia Prophylaxis FDA Submission in 1998(2)
-------- (1) As described herein, FDA clearances for certain of the Company's products are limited to specific indications. The Company's estimates for the number of potential annual procedures in the U.S. have been derived by the Company on the basis of its analysis of market research reports compiled by independent third-party sources which the Company believes to be reliable. Such market research reports contain approximate total procedure amounts from which the Company has estimated the number of potential procedures eligible for the targeted indication. "NA" denotes that data is not available. See "Risk Factors - Estimates of Procedures Uncertain; Regulatory Submission Data Subject to Change." (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. These submission dates could be delayed if the FDA requires PMA approval rather than 510(k) clearance for the urology stents. See "Risk Factors -- Estimates of Procedures Uncertain; Regulatory Submission Dates Subject to Change" and " -- Government Regulation." 30 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 1.1mm to 4.5mm and in length from 10mm to 70mm, can be cut by the 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 or contains high concentrations of nerves. The Company's screws range in diameter from 2.0mm for delicate hand and foot procedures to 4.5mm 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 meniscectomy, 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 knots arthroscopically, which is one of the most technically demanding skills in arthroscopic surgery. Surgical 31 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, is 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 designed 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. PGA Membrane Repair of defects in the gum or jaw to facilitate the use of dental implants requires the use of membranes to support and contain materials that are implanted at these sites to assist the body in growing new bone. Current membranes, made from either non-resorbable materials or collagen sponges, may limit the surgeon's capabilities to effect good repairs because they either must be removed in a second surgery or may not provide support for a period sufficient to complete the healing process. The Company's membrane is a resorbable sheet of self-reinforced polymer that degrades over a clinically appropriate period to allow for bone growth and does not require removal in a second surgery. The Company has licensed Johnson & Johnson's Ethicon GmbH subsidiary to sell products based on the Company's membrane patent for use in dental and two other applications in Europe. Ethicon GmbH has advised the Company that it expects to commence commercial sales of such products during the second quarter of 1997. In the U.S., the Company is assessing whether the orthopaedic market for the membrane product is sufficient for the Company to incur the expense of pursuing FDA clearance on its own. For the dental surgery market in the U.S., the Company presently intends to pursue a strategic alliance with a corporate partner, although no assurance can be given that an arrangement satisfactory to the Company will 32 be negotiated. The Company's membrane products cannot be marketed or sold in the U.S. until clearance or approval is obtained from the FDA. See "Risk Factors -- Government Regulation." PGA Urology Stents Benign prostatic hyperplasia ("BPH"), a common condition in older men, is characterized by the enlargement of the prostate gland, which can block the normal flow of urine. Conventional treatment of BPH typically involves a number of invasive surgical techniques and/or drug therapies. Such techniques, including the use of lasers, RF energy and other cutting mechanisms to open an enlarged prostate to allow for free urine flow, have the side effect of rebound due to edema after surgery. In order to respond to this problem, surgeons either catheterize their patients with a catheter for a period of time after surgery or insert a temporary stent. Both approaches have drawbacks. Removal of a Foley catheter requires a return to the hospital or surgical center and may cause significant discomfort for the patient. Also, the infection rate for patients with Foley catheters has historically been high. Experience with conventional metal and non-resorbable polymer urology stents demonstrates that tissue begins to grow over these implants shortly after surgery is completed. As a result, removal of temporary stents can be difficult and painful. The Company has developed the first resorbable, self-expanding stent for use in urological procedures. The Company's resorbable urinary tract stents are used to prevent postsurgical urine retention after thermal treatment for BPH. The design of the Company's stent allows it to be easily inserted under direct vision with a cystoscope and to have its location checked by the use of ultrasound. The self-expanding property of the Company's stent allows the urologist to place a stent of reasonable diameter into the prostatic urethra and then to have the stent swell and lock itself into position without the application of other devices, such as a balloon catheter. In studies conducted by the Company, the Company's PGA stent enabled a substantial percentage of patients to void on the first or second day after implantation following laser treatment of BPH. In contrast, the study data indicated that indwelling catheters do not enable patients to void on their own for an average of six days after such surgery is performed. The Company believes that its stent provides the patient with immediate relief of post- operative edema, avoids the necessity for return to the clinic for catheter removal, avoids the potential inconvenience associated with the use of an indwelling system and reduces the potential for infection associated with use of a catheter in a sensitive area of the body. The Company's stents cannot be marketed or sold in the U.S. until clearance or approval is obtained from the FDA. See "Risk Factors --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, instrumentation sales 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. 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. The Company currently has ten products for 18 different indications in various stages of development. To date, all of the Company's implants sold in the U.S. have been cleared through the 510(k) pre-market notification process. However, lengthier and more costly PMA submissions may be required in order to obtain approval to sell urological stents and other new products in the U.S. 33 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 ANNUAL POTENTIAL PRODUCT INDICATION PATIENTS DURATION CLINICAL/REGULATORY STATUS(1) U.S. PROCEDURES(2) ------- ---------------------------------- -------- ----------- ----------------------------- ------------------ (IN MONTHS) (IN THOUSANDS) ORTHOPAEDICS PLLA Screw Colles fracture (wrist) 28 12-18 Enrollment complete 16 Endo-brow lifts (face) 50 6-12 Enrollment complete 15 Acetabular cup fixation (hip) 25 18-30 First patients enrolled 7/96 180 Femoral neck fixation (leg) 40 24-36 FDA submission in 1997 165 PGA Screw Salter osteotomies (pediatric hip) 25 36-48 To commence in 1997 NA PLLA Nail Osteochondritis dessicans (knee) 25 6-12 Enrollment commenced 10/96 9 PLLA Tack Bankhart tears (shoulder) 20 24-36 FDA submission in 1997 87 PLLA Wedge High tibial osteotomy (leg) 25 12-24 To commence in 1997 NA ACL fixation (knee) 20 18-30 To commence in 1997 149 PLLA Screw/Washer Rotator cuff repair (shoulder) 25 12-30 To commence in 1997 87 UROLOGY PGA Stent Lumen support post BPH treatment 96 36-48 FDA submission in 1997 300 PLLA Stent Urethral stricture 60 24-36 Enrollment commenced pre-1996 100 PLLA Stent Use with finasteride 60 TBD Enrollment commenced 9/96 NA GENERAL SURGERY PLLA Stent Bile duct blockage 10 18-30 Enrollment commenced 1/96 NA Pancreatic duct blockage 10 18-30 Enrollment commenced pre-1996 NA MAXILLO-FACIAL SURGERY PLLA Screw Sagittal split osteotomy (jaw) 47 24-30 FDA submission in 1997 25 PDLA Screw and Plate Mid-face corrections 50 12-24 First patients enrolled 11/96 110 PLLA Plate Cranial-facial fractures 26 12-24 Enrollment commenced 15
------- (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. The submission data for the PGA urology stent could be delayed if the FDA requires PMA approval rather than 510(k) approval. See "Risk Factors -- Estimates of Procedures Uncertain; Regulatory Submission Dates Subject to Change" and "-- Government Regulation." (2) The Company's estimates for the number of potential annual procedures in the U.S. have been derived by the Company on the basis of its analysis of market research reports compiled by independent third-party sources which the Company believes to be reliable. Such market research reports contain approximate total procedure amounts from which the Company has estimated the number of potential procedures eligible for the targeted indication. "NA" denotes that data is not available. See "Risk Factors - Estimates of Procedures Uncertain; Regulatory Submission Dates Subject to Change." 34 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: PLLA Anchors. Commercially available bone anchors are designed to be deployed into the bone and to secure soft tissue, such as ligaments and tendons, to the bone. While a majority of bone anchors used today are sufficiently strong to reattach torn ligaments, most are difficult to remove as a result of permanently deployed barbs or self-tapping screw threads. If removal is not possible, the presence of the first implanted anchor makes it difficult to deploy revision bone anchors or sequential devices in close proximity to the first device. As a result, surgeons may be unable to achieve precise reattachment of the tissue to locations in the bone which are critical for effective repair. In addition, certain metal anchors do not fit in the drill hole flush with the surface of the bone and leave a metal surface upon which the ligament is sutured. Long term contact between the metal anchor surface and the ligament reduces the area available for reattachment on the bone surface, creates an area of potential local irritation and, because the anchor is not at the same level as the surrounding bone, may create an area of raised tissue that can be felt post-operatively by the patient. Furthermore, existing anchors hold the tied sutures extremely tightly against the bone, which may result in long-term tissue damage. The Company has designed a resorbable anchor to address the principal shortcomings of existing metal anchors. The design of the Company's anchor enables it to be inserted without the use of a bone tap, to be easily removed if misplaced or if the suture breaks, and to accommodate any type of suture. Since there have been at least five predecessor devices and because the product design is a modification of the Company's PLLA screw, the Company believes that the FDA will not require clinical verification of the anchor's efficacy, although no assurance can be given in this regard. Biomechanical tests have demonstrated the pull-out (the force necessary to remove the anchor from the bone) of the Company's anchor to be equal to or greater than that of certain currently approved products. The Company plans to seek 510(k) clearance for this product in 1997. See "-- Government Regulation." 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 have greater initial 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. The Company plans to commence a multi-center clinical trial of its intramedullary nails in children in 1997. 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 a flexible pin 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 35 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 managed networks of independent sales agents 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 shipping and invoicing functions directly and paying commissions to its sales agents. The Company supports its U.S. managed network of sales agents with product specialists 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 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 within a defined territory and permit the distributors to sell other medical products. The Company has licensed Johnson & Johnson's Ethicon GmbH subsidiary to sell in Europe certain products, based on the Company's membrane patent, in dentistry and two other unrelated fields of use. Under that arrangement, the Company received license fees in 1995 and 1996 and will be entitled to receive royalty payments once the licensee commences sales. MANUFACTURING The Company currently manufactures all of its products in its Tampere, Finland facility. All finished goods production, packaging and testing are conducted in a validated 1,000 square foot 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 GMP regulations. The facility is subject to inspection by the FDA and European regulatory agencies. The Company has received an EC Design Examination and an EC quality system Certificate and is entitled to affix a CE marking on all of its currently marketed orthopaedic, dental and maxillo- 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 have 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. 36 The raw materials for the Company's PLLA 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 and PGA 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 neighboring 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. Regardless of the approach to be utilized, the Company currently plans to commence packaging and sterilization functions in the U.S. by late 1997 and to commence the balance of the manufacturing process in the U.S. by 1999. 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. During 1995 and 1996, the Company experienced occasional periods of delay in filling product orders due to increases in demand beyond forecasted levels. The Company is currently upgrading its production machinery and processes to address this 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 further delays in filling orders in the future. See "Certain Transactions." 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 secret and patent protection for new technologies, products and processes. 37 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, in certain instances, 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. Provided that all requisite maintenance fees are paid, 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 also has pending two principal U.S. patent applications that relate 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. One of these European patents has been revoked by the European Patent Office for lack of novelty based on an earlier publication. The Company has filed an appeal of the European Patent Office's revocation decision. The other European patent and the Japanese patent application are being challenged on lack of novelty and inventiveness grounds on the basis of disclosures made in patent and other publications. The Company is vigorously defending its European and Japanese patent positions in these proceedings. No assurance can be given as to whether such appeal in Europe will be successful or as to the outcome of the pending opposition proceedings. In order to clarify and confirm its U.S. patent position, the Company intends in the first quarter of 1997 to request reexamination by the U.S. PTO of the two principal U.S. patents owned by the Company. No assurance can be given as to whether the issues raised in the reexamination proceedings will be resolved in the Company's favor. The reexamination process is expected to take up to twelve months or longer. Such reexamination could result in some or all of the patent claims set forth in these two U.S. patents being altered to provide narrower coverage or determined to be unpatentable. No assurance can be given as to the outcome of the reexamination process. Narrowing of the coverage or a holding of unpatentability in relation to one or both of these two principal U.S. patents 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 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 also 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 is licensed under 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, which requires the Company to pay periodic royalties, has a term expiring in 2006, unless terminated earlier by the licensor for breach by the Company. 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. 38 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. No assurance can be given that these oppositions will result in either the revocation of that patent or the narrowing of its claims. If neither opposition is successful, then no assurance can be given that the third party will not assert that its European patent is intringed 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. 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 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. 39 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 sells 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 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 and with a series of suturing techniques developed by orthopaedic surgeons for the repair of the meniscus. The Company is aware that several companies, including U.S. Surgical and Innovasive Devices, are developing and testing products with approaches to meniscus repair similar to the Company's approach. In urology, several companies 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. 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 40 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, warning 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, premarket notification and adherence to GMPs) 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 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 pre-amendment class III medical device for which the FDA has not called for PMAs, 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 41 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. 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. There can be no assurance that the FDA will not determine that the Company's urology stents, certain products currently in development or future products must undergo the more costly, lengthy and uncertain PMA approval process. It is likely that the FDA will require the Company to seek PMA approval for its urological stents. 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 applicable regulations setting forth detailed GMP requirements, which include testing, control and documentation requirements. Enforcement of GMP regulations has increased significantly in the last several years, and the FDA publicly stated that compliance would 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. The Company's facilities and manufacturing processes, as well as those of any suppliers, are subject to periodic inspection by the FDA and other agencies. In October 1994, the Company's facility in Finland was inspected by the FDA. The inspector made several observations related to GMPs, which resulted in a Warning 42 Letter being issued to the Company on February 23, 1995. The Company then began an exchange of correspondence with the FDA, which concluded with an October 10, 1995 letter from the FDA stating, among other things, that the Company's responses to the Warning Letter were "adequate" and that during the next inspection, the FDA would "verify that the corrections have been implemented." Such an inspection is expected to occur in the near future. The FDA has recently finalized changes to the GMP regulations, including design controls, which will likely increase the cost of compliance with GMP requirements. Changes in existing requirements or adoption of new 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 such laws and regulations in the future or that such laws and regulations 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. In order to continue selling its products within the European Economic Area following June 14, 1998, the Company is required 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 43 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 and maxillo-facial products. Submission of the required design dossier for the Company's stent products is scheduled for late 1997. Failure to obtain a CE marking for the Company's stent products by June 14, 1998 would mean that the Company would be unable to sell such products in the European Economic Area unless and until compliance was achieved. 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 44 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, 1996, the Company employed 14 full-time employees in the U.S. and 33 full-time employees in Finland. Of its full-time employees, at that date 14 were engaged in sales and marketing, six were engaged in research, development, regulatory and quality assurance matters, 24 were engaged in manufacturing and three 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. FACILITIES 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 Malvern, Pennsylvania that is leased by the Company on a month-to-month basis. The Finnish facility, comprising approximately 10,000 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 2,500 square foot office space in Pennsylvania. The Company intends to relocate from its existing facility in Malvern, Pennsylvania in 1997. The Company anticipates that it will either (i) equip and operate a leased facility in the eastern U.S. or (ii) relocate its headquarters and contract with a third party to provide a manufacturing capability to the Company. No specific site has been selected. See "-- Manufacturing" and "Certain Transactions." 45 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table sets forth certain information with respect to the executive officers and directors of the Company:
NAME AGE POSITION - ---- --- -------- President, Chief Executive Officer and David W. Anderson................ 44 Director Executive Vice President, Research and Pertti Tormala................... 51 Director Michael J. O'Brien............... 36 Vice President, Finance and Administration and Chief Financial Officer Pertti Viitanen.................. 46 Managing Director of the Company's Finnish subsidiaries Stephen A. Lubischer............. 34 Vice President, U.S. Sales Terry D. Wall(1)................. 55 Chairman of the Board David J. Bershad(1).............. 57 Director Anthony J. Dimun(2).............. 53 Director David H. MacCallum(2)............ 59 Director
- -------- (1) Member of Compensation Committee (2) Member of Audit Committee 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 international sites with The Ultimate Corporation, a computer hardware reseller, and from February 1993 to July 1993, he served as a consultant to The Ultimate Corporation. He began his career as an auditor with the accounting firm of Deloitte & Touche. 46 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. 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 Criticon subsidiary of Johnson & Johnson from 1987 to April 1990. TERRY D. WALL has been a director of Bionx Implants, Inc. since its inception and a director of the Company's operating subsidiaries since 1992. He has served as the President and Chief Executive of Vital Signs, Inc. ("Vital Signs"), a manufacturer of disposable anesthesia and respiratory devices, since he founded that company in 1972. Prior to establishing Vital Signs, he held various sales and marketing positions with The Foregger Co., the medical division of Westinghouse Corp., and the medical division of American Optical Corp. Mr. Wall is also a director of EchoCath, Inc. ("EchoCath") and Exogen, Inc. DAVID J. BERSHAD has been a director of Bionx Implants, Inc. since its inception and a director of the Company's operating subsidiaries since 1992. Mr. Bershad is, and has been for more than the past five years, a senior partner with the New York law firm of Milberg Weiss Bershad Hynes & Lerach, LLP. Mr. Bershad is also a director of Vital Signs. ANTHONY J. DIMUN has been a director of Bionx Implants, Inc. since its inception and a director of the Company's operating subsidiaries since 1992. For more than the past five years, he has served as Executive Vice President and Chief Financial Officer of Vital Signs. Prior to joining Vital Signs on a permanent basis in 1991, he served as a Senior Vice President of First Atlantic Capital Ltd., a U.S. affiliate of an international merchant banking group, from 1989 to 1991, a financial consultant during 1988, a partner in the accounting firm of Goldstein Golub and Kessler (from 1978 to 1987) and a senior audit manager in the accounting firm of Ernst & Young LLP. He is also a director of Vital Signs and EchoCath. DAVID H. MACCALLUM has been a director of Bionx Implants, Inc. since its inception and a director of the Company's operating subsidiaries since 1992. Since May 1994, Mr. MacCallum has been the Managing Director for Life Sciences Investment Banking at UBS Securities LLC. Prior to commencing his association with UBS Securities LLC, Mr. MacCallum served from 1983 to May 1994 as the Co- Head, Investment Banking for Hambrecht & Quist LLC. Mr. MacCallum is also a director of MiniMed, Inc. BOARD OF DIRECTORS AND OFFICERS In accordance with the terms of the Company's Certificate of Incorporation to be effective upon the completion of this Offering, the Board of Directors of the Company (the "Board") will be divided into three classes, denominated Class I, Class II and Class III, with members of each class holding office for staggered three-year terms. Messrs. Anderson and Wall will be Class I directors whose terms will expire at the 1998 annual meeting of stockholders, Messrs. Bershad and Tormala will be Class II directors whose terms will expire at the 1999 annual meeting of stockholders and Messrs. Dimun and MacCallum will be Class III directors whose terms will expire at the 2000 annual meeting of stockholders (in all cases subject to the election and qualification of their successors or to their earlier death, resignation or removal). At each annual stockholder meeting commencing with the 1998 annual meeting, the successors to the directors whose terms expire will be elected to serve from the time of their election and qualification until the third annual meeting of stockholders following their election or until a successor has been duly elected and qualified. Officers serve at the discretion of the Board. 47 The Audit Committee of the Board was established in February 1997 to review, act on and report to the Board with respect to various auditing and accounting matters, including the selection of the Company's auditors, the scope of the annual audits, the fees to be paid to the auditors, the performance of the Company's independent auditors and the accounting practices of the Company. The Compensation Committee of the Board was established in February 1997 to determine the salaries and incentive compensation of the employee-officers of the Company and to provide recommendations for the salaries and incentive compensation of the other employees and the consultants of the Company. The Compensation Committee will also administer the Company's benefit plans. EXECUTIVE COMPENSATION During 1996, the only executive officer of the Company who received in excess of $100,000 in compensation from the Company was David W. Anderson, the Company's Chief Executive Officer. The following table sets forth the compensation paid by the Company during 1996 to the Chief Executive Officer and to the Company's four other most highly compensated executive officers (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION -------------------------------- --------------------- OTHER ANNUAL SECURITIES ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) UNDERLYING OPTIONS(#) COMPENSATION --------------------------- -------- ------- --------------- --------------------- ------------ David W. Anderson....... $151,600 $40,000 -- -- $7,708(2) President and Chief Executive Officer Stephen A. Lubischer(3)........... 74,622 -- -- 52,632(4) 7,462(2) Vice President, U.S. Sales Michael J. O'Brien(5)... 9,167 -- -- 65,790(6) 917(2) Vice President, Finance and Administration, and Chief Financial Officer Pertti Tormala.......... 84,680 -- -- -- 26,400(7) Executive Vice President, Research Pertti Viitanen......... 80,725 -- -- -- -- Managing Director of the Company's Finnish subsidiaries
- -------- (1) Perquisites and other personal benefits do not exceed ten percent of salary plus bonus for any of the Named Executive Officers. (2) Represents amounts paid on behalf of the Named Executive Officer for various employee benefits selected by such individual pursuant to a cafeteria plan. (3) Mr. Lubischer joined the Company as its Vice President, U.S. Sales in April 1996. He is currently paid an annual salary of $100,000. (4) In September 1996, Mr. Lubischer was granted options covering 39,474 shares of Common Stock, of which options covering 15,790 shares are vested and options covering 23,684 shares will vest in three equal annual installments on December 31, 1997, 1998 and 1999. In November 1996, Mr. Lubischer was granted options covering an additional 13,158 shares vesting ratably over a five year period. (5) Mr. O'Brien joined the Company as its Vice President, Finance and Administration, and Chief Financial Officer in November 1996. He is currently paid an annual salary of $110,000. (6) Mr. O'Brien was granted his options upon commencement of employment. Of the shares covered by his options, 15,790 shares vest on each of November 24, 1997 and 1998, 13,158 shares vest on November 24, 1999 and 10,526 shares vest on each of November 24, 2000 and 2001. (7) Represents royalty payments due to Professor Tormala under a now superceded employment agreement with respect to 1996 product sales. 48 EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement, with David W. Anderson, its President and Chief Executive Officer. The term of the agreement will expire on December 31, 1998. Pursuant to the agreement, Mr. Anderson receives minimum annual compensation of $160,000 and is entitled to receive a performance based bonus. Mr. Anderson is also entitled to receive all health insurance benefits generally made available to the Company's employees as well as a monthly car allowance of $500. The agreement further provides that if Mr. Anderson's employment is terminated without cause by the Company prior to the expiration of the initial term, or if Mr. Anderson terminates the agreement for good reason prior to the expiration of the initial term, Mr. Anderson will be entitled to base salary and health insurance benefits continuation for a period of one year after the date of termination. The Company has also entered into a new employment agreement with Pertti Tormala effective December 1996. The agreement provides for a term expiring in 2002. Pursuant to the agreement, Professor Tormala will receive a base salary of 540,000 FIM (approximately $120,000) and is eligible to receive cash bonuses granted by the Company's Board of Directors. Professor Tormala is also entitled to a car, certain pension benefits and reimbursement of all reasonable travel and entertainment expenses. Under the agreement, all patents, patent applications and other industrial property rights developed by Professor Tormala relating to the Company's research and development activities are the sole property of the Company. The agreement permits Professor Tormala to spend up to 16 hours per month working on a business to be spun-off from the Company prior to the consummation of this Offering. See "Certain Transactions." STOCK OPTION INFORMATION The following table sets forth certain information concerning stock options granted during the year ended December 31, 1996 to the Named Executive Officers who received stock options during that year. In accordance with the rules of the Securities and Exchange Commission (the "Commission"), the following table also sets forth the potential realizable value over the term of the options (the period from the grant date to the expiration date) based on assumed rates of stock price appreciation of 5% and 10% compounded annually. These amounts do not represent the Company's estimate of future stock price performance. Actual realizable values, if any, of stock options will depend on the future performance of the Common Stock. No stock appreciation rights were granted during the fiscal year ended December 31, 1996. OPTION GRANTS IN THE FISCAL YEAR ENDED DECEMBER 31, 1996
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO OPTION TERM(3) OPTIONS EMPLOYEES IN EXERCISE PRICE PER EXPIRATION ----------------------- NAME GRANTED (#)(1) 1996 SHARE ($/SHARE)(2) DATE 5% 10% ---- -------------- ------------- ------------------ ---------- ----------- ----------- Stephen A. Lubischer.... 39,474 26.8% $4.75 9/2/06 $ 118,126 298,128 13,158 8.9 9.50 11/23/06 78,751 198,752 Michael J. O'Brien...... 65,790 44.6 9.50 11/23/06 393,754 993,758
- -------- (1) These options were granted under the Company's Stock Option/Stock Issuance Plan. For information regarding the vesting of these options, see the notes to the Summary Compensation Table. (2) The exercise price per share of the options was equal to the fair market value of the Common Stock on the date of grant as determined by the Board. (3) The potential realizable value is calculated based on the term of the option at the date of grant (10 years). It is calculated assuming that the fair market value of the Company's Common Stock on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the options and that the options are exercised and sold on the last day of their term for the appreciated stock price. 49 No stock options or stock appreciation rights were exercised by the Named Executive Officers during 1996 and no stock appreciation rights were outstanding as of December 31, 1996. The following table sets forth certain information with respect to the value of stock options held by the Named Executive Officers as of December 31, 1996. FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT DECEMBER 31, 1996(#) DECEMBER 31, 1996(1)($) ------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- David W. Anderson........... 83,104 193,905 $1,005,351 $2,345,766 Stephen A. Lubischer........ 15,790 36,842 130,268 241,446 Michael J. O'Brien.......... -- 65,790 -- 230,265
- -------- (1) Based on a value equal to an assumed initial public offering price of $13.00 per share, minus the per share exercise price, multiplied by the number of shares underlying the options. STOCK OPTION/STOCK ISSUANCE PLAN The Company's Stock Option/Stock Issuance Plan (the "Plan") was adopted by the Company's Board of Directors and stockholders in September 1996. A total of 850,000 shares of Common Stock have been authorized for issuance under the Plan. In no event may any one person participating in the Plan receive options, separately exercisable stock appreciation rights and direct stock issuances for more than 278,947 shares in any calendar year. The Plan is divided into four separate components: (i) the Discretionary Option Grant Program under which employees, consultants and other independent advisors who provide services to the Company may, at the discretion of the plan administrator, be granted options to purchase shares of Common Stock; (ii) the Stock Issuance Program under which such persons may, in the plan administrator's discretion, be issued shares of Common Stock directly, either through the immediate purchase of such shares at a price not less than the fair market value of the Common Stock on the date of issuance or as a bonus for services rendered to the Company; (iii) the Salary Investment Option Grant Program under which employees designated by the plan administrator may elect to have a portion of their base salary invested each year in options to purchase shares of Common Stock at an exercise price equal to thirty-three and one-third percent (33 1/3%) of the fair market value of the Common Stock on the grant date; and (iv) the Automatic Option Grant Program under which eligible non-employee directors shall automatically, at periodic intervals, receive option grants to purchase shares of Common Stock at an exercise price equal to one hundred percent (100%) of the fair market value of the Common Stock on the grant date. The Discretionary Option Grant, the Salary Investment Option Grant and the Stock Issuance Programs will be administered by the Compensation Committee of the Company's Board of Directors. The Compensation Committee, as plan administrator, has full authority to determine which eligible persons are to receive option grants or stock issuances, the time or times when such option grants or stock issuances are to be made, the number of shares subject to each such grant or issuance, the status of any granted option as either an incentive option or a non-statutory option under the Federal tax laws, the vesting schedule (if any) applicable to the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The Automatic Option Grant Program is self-executing, with all grants thereunder being made in strict compliance with the express terms of that program, and no administrative discretion will be exercised by the Board of Directors or any committees with respect to those grants. 50 Prior to the adoption of the Plan, the Company committed itself to grant options to certain employees at specified option exercise prices which, at the time such commitments were made, were intended to represent the fair market value of the Common Stock. Options granted under these commitments will be governed by the Discretionary Option Grant Program, subject to the commitments made with respect to the exercise price and the term of such options. Should the Company's stockholders approve a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all of the assets of the Company, in which the stockholders of the Company before the transaction own less than 50% of the voting securities of the surviving or successor corporation following the transaction (a "Corporate Transaction"), each outstanding option under the Discretionary Option Grant Program will automatically vest in full, unless such option will be assumed or replaced with an equivalent incentive program by the successor corporation. Any options so assumed or replaced, and in the event of a change in control of the ownership of the Company each outstanding option under this program, will automatically vest in full if the optionee's service with the Company is involuntary terminated within 18 months following the effective date of the Corporate Transaction or the change in control. In the event of any Corporate Transaction or change in control while the optionee remains in service to the Company, each outstanding option under the Salary Investment Option Grant Program will automatically vest in full and will remain exercisable until the earlier of the expiration of the option term or the expiration of the two year period from the optionee's cessation of service with the Company. Upon any Corporate Transaction, all the shares of Common Stock subject to repurchase rights under the Stock Issuance Program will immediately vest in full, unless those repurchase rights are assigned to the successor corporation. Any shares under repurchase rights so assigned, and in the event of a change in control all shares subject to repurchase rights under the Stock Issuance Program, will immediately vest in full if the optionee's service with the Company is involuntary terminated within 18 months following the effective date of the Corporate Transaction or the change in control. Tandem stock appreciation rights may be issued under the Plan which will allow optionees to surrender their outstanding options in exchange for an appreciation distribution from the Company equal to the excess of (i) the fair market value of the vested shares of Common Stock subject to the surrendered option over (ii) the aggregate exercise price payable for such shares. Such appreciation distribution may be made in cash or in shares of Common Stock. Furthermore, limited stock appreciation rights may be issued to officers and directors of the Company under the Plan which, upon the occurrence of a hostile take-over, permit such individuals holding options with such limited stock appreciation rights in effect for at least six months the unconditional right to surrender such options in return for a cash distribution from the Company in an amount equal to the excess of (i) the take-over price of the vested shares surrendered under the option over (ii) the aggregate exercise price payable for such shares. The plan administrator has the authority to effect, with the consent of the affected option holders, the cancellation of outstanding options under the Discretionary Option Grant Program in return for new options covering the same or a different number of shares with an exercise price based on the fair market value of the Common Stock on the new grant date. Under the Automatic Option Grant Program, each non-employee director first elected or appointed to the Board of Directors after the date of this Offering, will automatically be granted a non-statutory option for shares of Common Stock equal to the greater of (i) 3,000 or (ii) the number equal to $30,000 divided by the price at which the Common Stock is offered in this Offering, provided such individual has not been in the prior employ of the Company. In addition, at each annual stockholders meeting after this Offering, each individual with at least six months service on the Board of Directors as a non-employee director and who will continue to serve as a non-employee director following the meeting will automatically be granted a non-statutory option for 3,000 shares of Common Stock, provided such individual has continued his or her service 51 as a non-employee director for a period of at least one year after he or she ceases serving as an employee of the Company. Each automatic grant will have a term of ten years, subject to earlier termination following the optionee's cessation of service on the Board of Directors as provided in the Plan. Fifty percent of the shares subject to an automatic grant will vest on the date of grant, 25% one year after the date of grant, and the remaining 25% two years after the date of grant. In the event of a Corporate Transaction or change in control, the shares of Common Stock under the Automatic Option Grant Program will automatically vest in full. Upon the occurrence of a hostile take-over, the optionee will have a 30 day period in which to surrender to the Company each automatic option held by him or her in exchange for a cash distribution from the Company equal to the excess of the take-over price of the shares subject to the surrendered option over the aggregate exercise price payable for such shares. The Plan will terminate on September 3, 2006, unless sooner terminated pursuant to its terms. LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION The Company's Certificate of Incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for (i) any breach of their duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unlawful payments of dividends or unlawful stock repurchases or redemptions, or (iv) any transaction from which the director derived an improper personal benefit. Such limitation of liability does not apply to liabilities arising under the federal and state securities and environmental laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company's by-laws also provide that the Company shall indemnify, to the fullest extent permitted by law, all present and former directors and officers, and any such person serving or agreeing to serve as an officer or director with any other enterprise at the Company's request, in connection with any proceeding threatened, pending or instituted against such party by reason of their serving or agreeing to serve in such capacity. Section 145 of the Delaware General Corporation Law generally allows the Company to indemnify the parties described in the preceding paragraph for all expenses (including attorneys' fees), judgments, fines, and amounts in settlement actually paid and reasonably incurred in connection with any proceedings so long as such party acted in good faith and in a manner reasonably believed to be in or not opposed to the Company's best interests and, with respect to any criminal proceedings, if such party had no reasonable cause to believe his or her conduct to be unlawful. Indemnification may be provided by the Company only if the applicable standard of conduct set forth in Section 145 has been met by the indemnified party upon a determination made (i) by a majority vote of directors who are not parties to such proceedings, even though less than a quorum, or (ii) if there are no such directors, or if the directors so direct, by independent legal counsel in a written opinion, or (iii) by the stockholders. At present, there is no pending litigation or proceeding involving a director or officer of the Company in which indemnification is required or permitted. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1996, the Board of Directors performed all of the responsibilities of the Compensation Committee. Mr. Wall, who is the Chairman of the Board of the Company, Mr. Anderson, who is the President and Chief Executive Officer of the Company, and Professor Tormala, who is an Executive Vice President of the Company, participated in all discussions and decisions regarding salaries and incentive compensation for all employees of the Company, except that Mr. Anderson and Professor Tormala were excluded from discussions regarding their own salary and incentive compensation. Mr. Wall has not received any salary or incentive compensation from the Company. 52 CERTAIN TRANSACTIONS In September 1996, the Company consummated its Reorganization. Pursuant to the Reorganization, (i) the U.S. and Finnish stockholders of the Company's four operating subsidiaries contributed the capital stock of those entities to Bionix, B.V. (the "Dutch Company") and Bionx Implants, Inc. (the "Parent Company"), (ii) the Dutch Company contributed to the Parent Company the capital stock of the operating companies that it received from such stockholders, (iii) the Parent Company issued 2,684,211 shares of Common Stock to the Dutch Company, (iv) the Company's four operating entities became wholly-owned subsidiaries of the Parent Company, (v) each of the Company's Finnish stockholders received capital stock of the Dutch Company and (vi) each of the Company's U.S. investors received capital stock of both the Dutch Company and the Parent Company. The shares issued to the Company's directors and executive officers or their affiliated entities pursuant to the Reorganization were as follows: (i) David Anderson: 131,222 shares of the Company's Common Stock and shares representing 1.3% of the equity and 3.3% of the voting power of the Dutch Company's capital stock; (ii) David J. Bershad: 254,732 shares of the Company's Common Stock and shares representing 1.9% of the equity and 4.9% of the voting power of the Dutch Company's capital stock; (iii) Anthony J. Dimun: 129,416 shares of the Company's Common Stock and shares representing 1.3% of the equity and 3.3% of the voting power of the Dutch Company's capital stock; (iv) David H. MacCallum: 97,179 shares of the Company's Common Stock and shares representing 1.0% of the equity and 2.6% of the voting power of the Dutch Company's capital stock; (v) Pertti Tormala: shares representing 41.9% of the equity and 21.6% of the voting power of the Dutch Company's capital stock; (vi) Pertti Viitanen: shares representing 5.4% of the equity and 2.8% of the voting power of the Dutch Company's capital stock; and (vii) Terry D. Wall: 1,966,400 shares of the Company's Common Stock and shares representing 18.0% of the equity and 46.5% of the voting power of the Dutch Company's capital stock. Promptly after the Reorganization was consummated, the Company issued a total of 2,000,000 shares of its Preferred Stock (convertible into a total of 1,052,638 shares of Common Stock) and Warrants covering 421,065 shares of Common Stock to several U.S. investors in exchange for an aggregate capital contribution of $5,000,000. In this round of financing, T. Rowe Price Threshold Fund III, L.P. ("Threshold") acquired 1,200,000 shares of Preferred Stock and Warrants covering 252,632 shares for an aggregate purchase price of $3,000,000, David J. Bershad acquired 120,000 shares of Preferred Stock and Warrants covering 25,264 shares for an aggregate purchase price of $300,000, Anthony J. Dimun (through an affiliated entity) acquired 40,000 shares of Preferred Stock and Warrants covering 8,422 shares for an aggregate purchase price of $100,000, David H. MacCallum (through an affiliated entity) acquired 20,000 shares of Preferred Stock and Warrants covering 4,211 shares for an aggregate purchase price of $50,000 and Terry D. Wall (through an affiliated entity) acquired 160,000 shares of Preferred Stock and Warrants covering 33,685 shares for an aggregate purchase price of $400,000. Each share of Preferred Stock will convert into approximately 0.526 of a share of Common Stock upon consummation of this Offering. Messrs. Bershad, Dimun, MacCallum and Wall were directors of the Company at the time of this financing. As stated elsewhere herein, the Company's Preferred Stock will be automatically converted into Common Stock, and the Warrants will be called, upon closing of this Offering. Holders of the Preferred Stock and Warrants (including Threshold and Messrs. Bershad, Dimun, MacCallum and Wall or their affiliated entities) have rights to demand registration under the Securities Act of shares of Common Stock issuable pursuant to the conversion of the Preferred Stock and pursuant to the exercise of the Warrants on two occasions beginning six months after the closing of this Offering. Such investors also have the right to cause the Company to register such shares under the Securities Act pursuant to a "shelf" registration statement commencing one year after this Offering. In addition, in the event that the Company proposes to register any of its securities or the securities of any other shareholder under the Securities Act, the current holders of the Preferred Stock and Warrants will have rights, subject to certain exceptions and limitations, to have shares of Common Stock issuable upon conversion of the Preferred Stock or upon exercise of the Warrants included in such registration statement. See "Description of Capital Stock --Registration Rights of Certain Holders." From October 1994 through April 1995, the Company was a party to a distribution agreement with a subsidiary of Vital Signs which entitled that subsidiary to distribute the Company's products in the U.S. on a 53 non-exclusive basis. During the term of that agreement, the Vital Signs subsidiary paid the Company approximately $105,000 for products purchased for distribution by such subsidiary. Pursuant to that relationship, the Company borrowed $100,000 from Vital Signs at an interest rate of nine percent per annum. In addition, upon termination of the distribution agreement, the Company agreed to pay the Vital Signs subsidiary $87,000 upon return of certain inventory. That amount, as well as all principal and interest due on such borrowing, was paid by the Company in 1996. Terry D. Wall, the Chairman of the Board of the Company, is the principal stockholder and Chief Executive Officer of Vital Signs and he, Anthony J. Dimun and David J. Bershad are directors of Vital Signs. The Company believes that the terms of these transactions were no less favorable to the Company than terms that would be available from similarly situated unrelated parties. During the three years ended December 31, 1996, Professor Tormala (an officer, director and principal beneficial stockholder of the Company) earned royalty payments totaling approximately $182,000 from the Company pursuant to the terms of an employment agreement that was terminated as of December, 1996 and license agreements covering certain of the Company's products. In lieu of continuing royalty payments under the employment agreement, Professor Tormala's new employment agreement provides for an increase in his base salary. Pentti Rokkanen, M.D., who beneficially owns 7.0% of the Company's outstanding Common Stock, provides consulting services to the Company. During the three years ended December 31, 1996, a total of approximately $95,000 of consulting fees were accrued and ultimately paid to Professor Rokkanen. As described elsewhere herein, the Company presently is considering the possibility of contracting with a third party to provide a manufacturing operation to the Company in the eastern U.S. If the Company pursues such an arrangement, it will solicit bids from reliable medical device manufacturers, including Thomas Medical Products, Inc. ("Thomas"), a wholly-owned subsidiary of Vital Signs. Messrs. Wall, Dimun and Bershad, each of whom are directors of Vital Signs, will not participate in any such determination pertaining to Thomas. Terry Wall, Pertti Tormala and the Company are each one-third equity owners in a business organized to engage in developing, manufacturing and selling polymer-based advanced drug delivery systems (the "Business"). The Company acquired its interest in the Business from an unrelated individual in 1996 in exchange for a payment of $65,000 and has not incurred any expenses relating to the Business since that time. The Business has no tangible assets and is expected to be in the development stage for a period of at least four years. The Board of Directors has concluded that in light of the substantial expenditures that would be required in order to bring any of the Business' products to market, it is in the best interests of the Company and its stockholders for the Company to forego its development of the Business and to spin-off the Business. The Company intends to distribute its interest in the Business to stockholders of record of the Company as of a date prior to the effective date of this Offering. Accordingly, investors in this Offering will not have an ownership interest in the Business. Professor Tormala's employment agreement with the Company enables him to dedicate certain of his services to the Business, but provides that he may not work more than 16 hours per month during business hours on matters pertaining to the Business. See "Management - Employment Agreements." During 1994 and 1995, Messrs. Wall, Anderson, Bershad, Dimun and MacCallum contributed $494,000, $150,000, $61,000, $33,333 and $11,667, respectively, to subsidiaries of the Company in exchange for shares of capital stock of such subsidiaries. Such shares were exchanged for shares of Common Stock and shares of the Dutch company's capital stock pursuant to the Reorganization. Through December 31, 1996, the Company granted executive officers and directors options to purchase a total of 395,431 shares of Common Stock with exercise prices ranging from $0.9025 to $9.50 per share. For information regarding employment agreements with executive officers, see "Management - Employment Agreements." 54 PRINCIPAL STOCKHOLDERS The following table sets forth information known to the Company with respect to the beneficial ownership of its Common Stock as of December 31, 1996, and as adjusted to reflect the sale of Common Stock offered by the Company hereby, for (i) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's directors, (iii) each Named Executive Officer and (iv) all directors and Named Executive Officers as a group.
PERCENT OF TOTAL(1) -------------------- SHARES PERCENT PERCENT BENEFICIALLY BEFORE AFTER NAMES OF BENEFICIAL OWNER(2) OWNED(1) OFFERING OFFERING(3) - ---------------------------- ------------ -------- ----------- Bionix, B.V.(4).............................. 2,684,211 42.1 30.1 Terry D. Wall(5)............................. 2,568,715 40.1 29.2 T. Rowe Price Threshold Fund III, L.P.(6) ... 884,211 13.3 10.1 David W. Anderson(7)......................... 249,167 3.9 2.8 David J. Bershad(8).......................... 393,886 6.2 4.5 Anthony J. Dimun(9).......................... 193,571 3.0 2.2 Stephen A. Lubischer(10)..................... 15,790 * * Michael J. O'Brien........................... -- -- -- David H. MacCallum(11)....................... 138,813 2.2 1.6 Pentti Rokkanen(12).......................... 443,217 7.0 5.0 Pertti Tormala(13)........................... 1,124,818 17.7 12.8 Pertti Viitanen(14).......................... 144,840 2.3 1.6 All directors and Named Executive Officers as a group (nine persons)(15)............... 4,829,600 73.8 54.3
- -------- (*) Less than 1%. (1) Applicable percentage ownership is based on 6,371,062 shares of Common Stock outstanding as of December 31, 1996 (giving pro forma effect to the Preferred Stock Conversion) together with applicable stock options and Warrants for such stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, based on factors including voting and investment power with respect to shares. Shares of Common Stock subject to the Warrants and shares of Common Stock subject to stock options currently exercisable, or exercisable within 60 days after December 31, 1996, are deemed outstanding for computing the percentage ownership of the person holding such stock options or Warrants, but are not deemed outstanding for computing the percentage ownership of any other person. In light of the Commission's rules regarding the calculation of beneficial ownership with respect to exercisable Warrants, each holder of Warrants is deemed to be the beneficial owner of all shares covered by such holder's Warrants. Each owner of an equity interest in the Dutch Company is deemed to beneficially own a percentage of the shares of the Common Stock owned by the Dutch Company equal to such owner's proportionate equity interest in the Dutch Company. (2) Except as otherwise indicated in the footnotes to this table and pursuant to applicable community property laws, persons named in the table have sole voting and investment power with respect to all shares of Common Stock. Unless otherwise indicated, the address of all 5% shareholders is c/o the Company, 279B Great Valley Parkway, Malvern, Pennsylvania 19355. The address of T. Rowe Price Threshold Fund III, L.P. is 100 E. Pratt Street, Baltimore, Maryland 21202. (3) In calculating the percentage ownership after this Offering, this table assumes that no holders of Warrants utilize a cashless exercise approach and that, as a result, a total of 421,065 shares of Common Stock are issued upon the closing of this Offering pursuant to the exercise of Warrants. (4) The capital stock of the Dutch Company is owned by the former stockholders of the Company's operating subsidiaries. The Board of Directors of the Dutch Company consists of David W. Anderson (who is also the chief executive officer of the Dutch Company), David J. Bershad, Anthony J. Dimun, David H. MacCallum, Pertti Tormala, Pertti Viitanen, Terry D. Wall and Pentti Rokkanen, all but the last of whom are directors or executive officers of the Company. Messrs. Anderson, Bershad, Dimun, MacCallum and Wall beneficially own capital stock of the Dutch Company representing, in the aggregate, approximately 23.5% of the equity and 60.6% of the voting power of the Dutch Company's capital stock. Messrs. Tormala, Viitanen and Rokkanen own capital stock of the Dutch Company representing, in the aggregate, approximately 63.8% of the equity and 32.9% of the voting power of the Dutch Company's capital stock. The remaining equity and voting power of the Dutch Company's capital stock is allocated among several other Finnish investors. (5) Mr. Wall's shares include 33,685 shares of Common Stock issuable upon the exercise of Warrants and 484,419 shares of Common Stock owned by the Dutch Company, representing Mr. Wall's proportionate equity interest in the 2,684,211 shares of Common Stock owned by the Dutch Company. Mr. Wall has the right to cause the Dutch Company to transfer such 484,419 shares to him 55 pursuant to an agreement with the Dutch Company. All of Mr. Wall's shares of Common Stock and of the Dutch Company's capital stock are held in an investment partnership which he controls. (6) Such Fund's shares include 252,632 shares of Common Stock issuable upon the exercise of Warrants. (7) Mr. Anderson's shares include 83,104 shares of Common Stock issuable upon the exercise of vested stock options and 34,841 shares of Common Stock owned by the Dutch Company, representing Mr. Anderson's proportionate equity interest in the 2,684,211 shares of Common Stock owned by the Dutch Company. Mr. Anderson has the right to cause the Dutch Company to transfer such 34,841 shares to him pursuant to an agreement with the Dutch Company. (8) Mr. Bershad's shares include 25,264 shares of Common Stock issuable upon the exercise of Warrants and 50,732 shares of Common Stock owned by the Dutch Company, representing Mr. Bershad's proportionate equity interest in the 2,684,211 shares of Common Stock owned by the Dutch Company. Mr. Bershad has the right to cause the Dutch Company to transfer such shares to him pursuant to an agreement with the Dutch Company. A total of 254,732 of Mr. Bershad's shares of Common Stock and all of Mr. Bershad's shares of the Dutch Company's capital stock are held in an investment partnership which he controls. (9) Mr. Dimun's shares include 8,422 shares of Common Stock issuable upon the exercise of Warrants and 34,680 shares of Common Stock owned by the Dutch Company, representing Mr. Dimun's proportionate equity interest in the 2,684,211 shares of Common Stock owned by the Dutch Company. Mr. Dimun has the right to cause the Dutch Company to transfer such 34,680 shares to him pursuant to an agreement with the Dutch Company. All of Mr. Dimun's shares of Common Stock and of the Dutch Company's capital stock and all of his Warrants are held in entities which he controls. (10) Mr. Lubischer's shares represent shares of Common Stock issuable upon the exercise of vested options. (11) Mr. MacCallum's shares include 4,211 shares of Common Stock issuable upon the exercise of Warrants and 26,896 shares of Common Stock owned by the Dutch Company, representing Mr. MacCallum's proportionate equity interest in the 2,684,211 shares of Common Stock owned by the Dutch Company. Mr. MacCallum has the right to cause the Dutch Company to transfer such shares to him pursuant to an agreement with the Dutch Company. A total of 10,527 of Mr. MacCallum's shares of Common Stock and all of his Warrants are held in an entity which he controls. (12) Represents Professor Rokkanen's proportionate equity interest in the 2,684,211 shares of Common Stock owned by the Dutch Company. Professor Rokkanen has the right to cause the Dutch Company to transfer such 443,217 shares to him pursuant to an agreement with the Dutch Company. (13) Represents Professor Tormala's proportionate equity interest in the 2,684,211 shares of Common Stock owned by the Dutch Company. Professor Tormala has the right to cause the Dutch Company to transfer such 1,124,818 shares to him pursuant to an agreement with the Dutch Company. That agreement enables Professor Tormala to direct the voting by the Dutch Company of a specified number of shares of the Company's Common Stock held by the Dutch Company. As of December 31, 1996, that specified number equals 2,052,643, representing Professor Tormala's proportionate equity interest in the 2,684,211 shares of Common Stock owned by the Dutch Company (1,124,818 shares) and the proportionate equity interest of all other Finnish investors in such 2,684,211 shares (927,825 shares). The table above excludes from Professor Tormala's beneficial ownership the 927,825 shares attributable to the equity interests of such other Finnish investors. (14) Represents Mr. Viitanen's proportionate equity interest in the 2,684,211 shares of Common Stock owned by the Dutch Company. Mr. Viitanen has the right to cause the Dutch Company to transfer such 144,840 shares to him pursuant to an agreement with the Dutch Company. (15) Includes 71,582 shares of Common Stock issuable upon the exercise of Warrants, 98,894 shares of Common Stock issuable upon the exercise of vested stock options, and 1,901,226 shares of Common Stock owned by the Dutch Company, representing the directors' and Named Executive Officers' proportionate equity interest in the 2,684,211 shares of Common Stock owned by the Dutch Company. The directors and Named Executive Officers as a group beneficially own approximately 70.8% of the equity and approximately 85.0% of the voting power associated with the capital stock of the Dutch Company. The directors and Named Executive Officers of the Company as a group have a right to vote all of the 2,684,211 shares of Common Stock owned by the Dutch Company. If all such 2,684,211 shares were deemed to be beneficially owned by the Company's directors and Named Executive Officers, such persons as a group would be deemed to be the beneficial owners of 5,612,585 shares of Common Stock, representing 85.8% of the shares outstanding before this Offering and 63.1% of the shares outstanding after this Offering. 56 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 31,600,000 shares of Common Stock and 8,000,000 shares of Preferred Stock (after giving effect to a reduction in the authorized shares of Preferred Stock which will result from the mandatory conversion of the outstanding shares of Preferred Stock upon the closing of this Offering). The following summaries of certain provisions of the Common Stock and Preferred Stock do not purport to be complete and are subject to, and qualified in their entirety by, the provisions of the Company's Certificate of Incorporation, which is included as an exhibit to the Registration Statement of which this Prospectus forms a part, and by applicable law. COMMON STOCK As of January 31, 1997, there were 6,607,513 shares of Common Stock outstanding, as adjusted to reflect the conversion of all outstanding shares of Preferred Stock and the assumed cashless exercise of all outstanding Warrants upon the closing of this Offering. Such shares were held of record by 21 stockholders. The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable, and the shares of Common Stock to be issued upon the closing of this Offering will be fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority, without action by the stockholders, to designate and issue Preferred Stock in one or more series and to designate the rights, preferences and privileges of each series, any or all of which may be greater than the rights of the Common Stock. It is not possible to state the actual effect of the issuance of any shares of Preferred Stock upon the rights of holders of the Common Stock until the Board of Directors determines the specific rights of the holders of such Preferred Stock. However, the effects might include, among other things, restricting dividends on the Common Stock, diluting the voting power of the Common Stock, impairing the liquidation rights of the Common Stock and delaying or preventing a change in control of the Company without further action by the stockholders. The Company has no present plans to issue any shares of Preferred Stock. REGISTRATION RIGHTS OF CERTAIN HOLDERS The holders of 1,289,089 shares of Common Stock (the "Registrable Securities"), after giving effect to the mandatory conversion of the outstanding shares of Preferred Stock and the assumed cashless exercise of the Warrants upon the closing of this Offering, or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under the terms of an agreement between the Company and the holders of Registrable Securities. Subject to certain limitations in that agreement, the holders of a majority of the Registrable Securities may require, on two occasions beginning six months following the date of this Prospectus, that the Company register the Registrable Securities for public resale. If the Company registers any of its Common Stock either for its own account or for the account of other security holders, the holders of Registrable Securities are entitled to include their shares of Common Stock in the registration statement, subject to the ability of the underwriters to limit the number of shares included in the offering (but to not less than 30% of the offering). The holders of Registrable Securities may also require the Company to register all or a portion of their Registrable Securities 57 on Form S-3 when use of such form becomes available to the Company, provided, among other things limitations, that the proposed aggregate selling price (net of any underwriters' discounts or commissions) is at least $1 million. All registration expenses must be borne by the Company and all selling expenses relating to Registrable Securities must be borne by the holders of the securities being registered. WARRANTS Prior to this Offering, the Company had outstanding Warrants entitling the holders to purchase a total of 421,065 shares of Common Stock at an exercise price of $5.70 per share. The Company, will call the Warrants upon the closing of this Offering. To avoid forfeiture of the Warrants upon such call, the holders of the Warrants must then either pay the exercise price in cash or arrange for a cashless exercise in which the Company will issue to each holder a number of shares of Common Stock having a fair market value equal to (x) the amount by which the fair market value of one share of Common Stock exceeds $5.70 multiplied by (y) the number of Warrants exercised. Except as otherwise indicated herein, this Prospectus assumes that each Warrant holder will exercise such holder's Warrants by means of a cashless exercise and that, based upon an assumed initial public offering price of $13.00 per share, a total of 236,451 shares of Common Stock will be issued upon the exercise of the Warrants. CERTAIN CHANGE OF CONTROL PROVISIONS Bionx Implants, Inc. is a Delaware corporation and is subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior to the determination of interested stockholder status, did own) 15% or more of a corporation's voting stock. The authorization of undesignated Preferred Stock makes it possible for the Board of Directors to issue Preferred Stock with voting or other rights or preferences that could impede the success of any attempt to change control of the Company. Upon consummation of this Offering, the Company's Certificate of Incorporation will provide for staggered terms for members of the Board of Directors and will eliminate the right of stockholders to act without a meeting. The amendment of the staggered term and stockholder meeting provisions would require approval of at least two-thirds of the outstanding Common Stock. Additionally, the Bylaws of the Company will, upon consummation of this Offering, establish an advance notice procedure for stockholder proposals and for nominating candidates for election as directors. The above-mentioned provisions of Delaware law and of the Company's Certificate of Incorporation and Bylaws may have the effect of delaying, deterring or preventing a change in control of the Company, may discourage bids for the Common Stock at a premium over the prevailing market price, and may adversely affect the market price, and the voting and other rights of the holders, of the Common Stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Stocktrans, Inc. 58 SHARES ELIGIBLE FOR FUTURE SALE Prior to this Offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could materially and adversely affect the market prices of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock of the Company in the public market after the restrictions described below lapse could also materially and adversely affect the prevailing market price of the Common Stock and the ability of the Company to raise equity capital in the future. Upon completion of this Offering, the Company will have 8,607,513 shares of Common Stock outstanding, assuming no exercise of options after December 31, 1996 and after giving effect to the Preferred Stock Conversion and the Warrant Exercise. Of these shares, the 2,000,000 shares sold in this Offering will be freely tradable without restriction under the Securities Act, unless held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 6,607,513 shares of Common Stock held by existing stockholders were issued and sold by the Company in reliance on exemptions from the registration requirements of the Securities Act. These shares may be sold in the public market only if registered, or pursuant to an exemption from registration such as Rule 144 or Rule 144(k) under the Securities Act. The Company's directors, executive officers and certain other stockholders of the Company that beneficially own or have dispositive power over substantially all of the shares of Common Stock outstanding prior to this Offering, including Common Stock to be issued upon the closing of this Offering pursuant to the conversion of the Company's Preferred Stock and pursuant to the exercise of all outstanding Warrants, have entered into lock- up agreements under which they have agreed not to sell, offer, make any short sale or otherwise dispose of or enter into any contract, arrangement or commitment to sell or otherwise dispose of any shares of Common Stock or securities convertible or exchangeable or exercisable for any rights to purchase or acquire Common Stock owned by them for a period of 180 days after the date of this Prospectus, without the prior written consent of UBS Securities LLC. The Company has entered into a similar agreement, except that the Company may grant options and issue stock under its current stock option and stock purchase plans, and pursuant to other currently outstanding options. Approximately 90 days after the completion of this Offering, the Company intends to file a registration statement on Form S-8 under the Securities Act to register the future issuance of all shares of Common Stock reserved for issuance under the Company's Stock Option/Stock Issuance Plan. As of December 31, 1996, an aggregate of 424,382 shares of Common Stock were reserved for issuance pursuant to outstanding options and 425,618 shares of Common Stock have been reserved for future grant under the Company's Stock Option/Stock Issuance Plan. Such registration statement will automatically become effective upon filing. Accordingly, shares registered thereunder will, subject to Rule 144 limitations applicable to affiliates, be available for sale in the public market, except to the extent that such shares are subject to vesting restrictions with the Company or certain contractual restrictions on sale or transfer (including options covering 395,431 shares which are subject to Lock- up Agreements). No shares of Common Stock, other than the 2,000,000 shares offered hereby and 3,846 shares subject to options which will be vested on or after the effective date of such Registration Statement on Form S-8 and which are held by persons who have not executed lock-up agreements, will be available for immediate sale prior to the expiration of the lock-up agreements. The 6,607,513 shares held by existing stockholders will become eligible for public resale upon expiration of the lock-up agreements, subject in some cases to volume limitations imposed by Rule 144 and subject to the Company's ability or obligation to register any of these shares for resale at any time after the lock-up agreements expire. After this Offering, the holders of 1,289,089 shares of Common Stock (after giving effect to the Preferred Stock Conversion and the Warrant Exercise) will be entitled to certain demand and piggyback rights with respect to the registration of such shares under the Securities Act. If such holders, by exercising their demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market price of the Company's Common Stock. If the Company, either on its own behalf or on behalf of certain shareholders, were to initiate a registration and include shares held 59 by such holders pursuant to the exercise of their piggyback registration rights, such sales could have an adverse effect on the Company's ability to raise needed capital. See "Certain Transactions" and "Description of Capital Stock - Registration Rights of Certain Holders." In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for a minimum holding period (which the Securities and Exchange Commission has reduced from two years to one year, effective in April 1997), including the holding period of any prior owner, except an affiliate, is entitled to sell in "broker's transactions" or to market makers, within any three month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding (approximately 86,000 shares immediately after this Offering) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for a minimum holding period (reduced from three years to two years, effective in April 1997), is entitled to sell such shares without being required to comply with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Under Rule 701 under the Securities Act, persons who purchase shares upon exercise of options granted prior to the effective date of this Offering are entitled to sell such shares 90 days after the effective date of this Offering in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice provisions of Rule 144. 60 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below (the "Underwriters"), for whom UBS Securities LLC, Hambrecht & Quist LLC and Volpe, Welty & Company L.L.C. are acting as representatives (the "Representatives"), have agreed to purchase from the Company the following respective number of shares of Common Stock:
UNDERWRITERS SHARES ------------ --------- UBS Securities LLC................................................. Hambrecht & Quist LLC.............................................. Volpe, Welty & Company L.L.C....................................... --------- Total.......................................................... 2,000,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriting Agreement contains certain provisions whereby if any Underwriter defaults in its obligations to purchase shares, and the aggregate obligations of the Underwriters so defaulting do not exceed ten percent of the shares offered hereby, the remaining Underwriters, or some of them, must assume such obligations. The Representatives have advised the Company that the Underwriters propose to offer the shares of Common Stock directly to the public at the offering price set forth on the cover of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the public offering of the shares of Common Stock, the Offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 300,000 additional shares of Common Stock to cover over allotments, if any, at the public offering price set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The executive officers, directors, employees and certain other stockholders of the Company who beneficially own or have dispositive power over substantially all of the shares of Common Stock outstanding prior to this Offering, including Common Stock to be issued upon the closing of this Offering pursuant to the conversion of the Company's Preferred Stock and pursuant to the exercise of Warrants, have agreed that they will not, without the prior written consent of UBS Securities LLC, offer, sell or otherwise dispose of any shares of securities exchangeable for or convertible into shares of Common Stock owned by them for a period of 180 days after the date of this Prospectus. The Company has agreed that it will not, without the prior 61 written consent of UBS Securities LLC, offer, sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus, except that the Company may grant options and issue shares under its current Stock Option/Stock Issuance Plan and may issue shares pursuant to other currently outstanding options. The Representatives have advised the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority in excess of five percent of the number of shares of Common Stock offered hereby. An entity affiliated with Hambrecht & Quist LLC beneficially owns 147,370 shares (assuming exercise in full of the Warrants owned by such entity) of the Company's Common Stock. Certain individuals affiliated with UBS Securities LLC beneficially own, in the aggregate, 153,554 shares (assuming exercise in full of the Warrants owned by such individuals) of the Company's Common Stock. Prior to this Offering, there has been no public market for the Common Stock of the Company. The initial public offering price was determined through negotiations among the Company and the Representatives. Among the factors considered in such negotiations were prevailing market conditions, certain financial information of the Company, market valuations of other companies that the Company and the representatives of the Underwriters believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. The initial public offering price set forth on the cover page of this Prospectus should not, however, be considered an indication of the actual value of the Common Stock. Such price is subject to change as a result of market conditions and other factors. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to this Offering at or above the initial offering price. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A., Roseland, New Jersey. Certain legal matters will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, New York, New York. EXPERTS The consolidated financial statements of Bionx Implants, Inc. as of December 31, 1995 and 1996, and for each of the years in the three-year period ended December 31, 1996, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent Certified Public Accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The statements in this Prospectus under the captions "Risk Factors -- Uncertainties Relating to Licenses, Trade Secrets, Patents and Proprietary Rights" and "Business -- Licenses, Trade Secrets, Patents and Proprietary Rights" on matters of U.S. intellectual property law have been reviewed and approved by Kenyon & Kenyon, New York, New York, U.S. intellectual property counsel for the Company, as experts in U.S. intellectual property law, and are included herein in reliance upon such review and approval. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 29549, a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in 62 the Registration Statement and the exhibits and schedules thereto. To the extent that statements contained in this Prospectus as to the contents of any contract or any other document relate to a contract or document that is filed as an exhibit to the Registration Statement, reference is made to the copy of such contract or document. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected by anyone without charge at the Commission's principal office in Washington, D.C. and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by the Commission. The Commission also maintains a site on the World Wide Web that will contain reports, proxy and information statements and other information regarding the Company. The address for such site is http://www.sec.gov. 63 BIONX IMPLANTS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report............................................. F-2 Financial Statements: Consolidated Balance Sheets at December 31, 1995 and 1996................ F-3 Consolidated Statements of Operations for the Years ended December 31, 1994, 1995, and 1996 ................................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Years ended December 31, 1994, 1995, and 1996................................. F-5 Consolidated Statements of Cash Flows for the Years ended December 31, 1994, 1995, and 1996.................................................... F-6 Notes to Consolidated Financial Statements............................... F-7
F-1 INDEPENDENT AUDITORS' REPORT The 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, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Philadelphia, Pennsylvania January 24, 1997, except for the first paragraph of Note 15 which is as of February 24, 1997 F-2 BIONX IMPLANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996
DECEMBER 31, ----------------------- PRO FORMA DECEMBER 31, 1996 1995 1996 (NOTE 2) ----------- ---------- ----------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........ $ 50,662 1,593,131 1,593,131 Inventory, net (note 3).......... 731,644 1,030,809 1,030,809 Trade accounts receivable, net of allowance of $97,325 as of December 31, 1996............... 398,168 1,708,432 1,708,432 Grants receivable................ 7,730 122,711 122,711 Deferred offering costs (note 15)............................. -- 194,981 194,981 Prepaid expenses and other current assets.................. 170,065 153,005 153,005 ----------- ---------- ---------- Total current assets............... 1,358,269 4,803,069 4,803,069 Investments........................ 104,161 100,334 100,334 Deposits........................... -- 43,964 43,964 Plant and equipment, net (note 4).. 331,808 336,286 336,286 ----------- ---------- ---------- Total assets....................... $ 1,794,238 5,283,653 5,283,653 =========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQ- UITY (DEFICIT) Current liabilities: Trade accounts payable........... $ 908,695 848,127 848,127 Long-term debt, current portion (note 7)........................ 363,293 223,037 223,037 Related party (note 5)........... 198,096 163,184 163,184 Current income tax liability..... -- 205,065 205,065 Accrued and other current liabil- ities (note 6).................. 464,225 1,317,196 1,317,196 ----------- ---------- ---------- Total current liabilities.......... 1,934,309 2,756,609 2,756,609 ----------- ---------- ---------- Long-term debt (note 7)............ 896,204 590,336 590,336 ----------- ---------- ---------- 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, 1995 and 2,000,000 shares issued and outstanding as of December 31, 1996 (converts into 1,052,638 pro forma common shares as of December 31, 1996 upon consummation of the offering contemplated herein) (note 8)........................ -- 5,000,000 -- ----------- ---------- ---------- Stockholders' equity (deficit) (notes 8,9,15): Preferred stock, par value $0.001 per share, 8,000,000 shares authorized and none issued and outstanding................... -- -- -- Common stock, par value $0.0019 per share, 31,600,000 shares authorized and 5,318,424 shares issued and outstanding as of December 31, 1996 (6,607,513 pro forma common shares as of December 31, 1996 upon conversion of the Series A preferred stock in conjunction with the Offering contemplated herein)......................... 1,343,316 10,105 12,554 Additional paid-in capital....... 580,998 1,858,870 6,856,421 Accumulated deficit.............. (2,693,442) (4,662,690) (4,662,690) Foreign currency translation adjustment...................... (267,147) (269,577) (269,577) ----------- ---------- ---------- Total stockholders' equity (defi- cit).............................. (1,036,275) (3,063,292) 1,936,708 ----------- ---------- ---------- Commitments and contingencies (note 10) Total liabilities and stockholders' equity (deficit).................. $ 1,794,238 5,283,653 5,283,653 =========== ========== ==========
See accompanying notes to consolidated financial statements. F-3 BIONX IMPLANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
YEARS ENDED DECEMBER 31, ----------------------------------- 1994 1995 1996 ---------- ---------- ----------- Product sales............................ $1,264,733 1,354,719 5,033,952 Cost of goods sold....................... 476,447 538,013 2,105,128 ---------- ---------- ----------- Gross profit............................. 788,286 816,706 2,928,824 ---------- ---------- ----------- Selling, general and administrative...... 693,159 2,164,340 4,445,362 Research and development................. 189,530 274,213 459,666 ---------- ---------- ----------- Total operating expenses................. 882,689 2,438,553 4,905,028 ---------- ---------- ----------- Operating loss........................... (94,403) (1,621,847) (1,976,204) ---------- ---------- ----------- Other income and expenses: License and grant revenue (note 13).... 15,682 266,887 345,203 Interest expense....................... (93,250) (98,021) (86,906) Other, net............................. 10,208 (25,035) (42,951) ---------- ---------- ----------- Total other income (expense), net........ (67,360) 143,831 215,346 ---------- ---------- ----------- Loss before provision for income taxes... (161,763) (1,478,016) (1,760,858) Provision for income taxes (note 12)..... -- -- (208,390) ---------- ---------- ----------- Net loss................................. $ (161,763) (1,478,016) (1,969,248) ========== ========== =========== Pro forma net loss per share (note 2).... $ (0.31) =========== Shares used in computing pro forma net loss per share (note 2)................. 6,369,655 ===========
See accompanying notes to consolidated financial statements. F-4 BIONX IMPLANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
COMMON STOCK FOREIGN TOTAL PAR VALUE ADDITIONAL CURRENCY STOCKHOLDERS' PREFERRED OR STATED PAID-IN ACCUMULATED TRANSLATION EQUITY STOCK VALUE CAPITAL DEFICIT ADJUSTMENT (DEFICIT) --------- ----------- ---------- ----------- ----------- ------------- Balance, January 1, 1994 (unaudited)............ $-- 494,406 299,998 (1,053,663) (188,529) (447,788) Proceeds from the issuance of common stock................ -- 269,577 95,000 -- -- 364,577 Foreign currency translation adjustment........... -- -- -- -- (35,210) (35,210) Net loss.............. -- -- -- (161,763) -- (161,763) ---- ----------- --------- ---------- -------- ---------- Balance, December 31, 1994................... -- 763,983 394,998 (1,215,426) (223,739) (280,184) Proceeds from the issuance of common stock................ -- 579,333 186,000 -- -- 765,333 Foreign currency translation adjustment........... -- -- -- -- (43,408) (43,408) Net loss.............. -- -- -- (1,478,016) (1,478,016) ---- ----------- --------- ---------- -------- ---------- 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) 1,333,266 -- -- -- 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) Foreign currency translation adjustment........... -- -- -- -- (2,430) (2,430) Net loss.............. -- -- -- (1,969,248) -- (1,969,248) ---- ----------- --------- ---------- -------- ---------- Balance, December 31, 1996................... $-- 10,105 1,858,870 (4,662,690) (269,577) (3,063,292) ==== =========== ========= ========== ======== ==========
See accompanying notes to consolidated financial statements. F-5 BIONX IMPLANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
YEARS ENDED DECEMBER 31, --------------------------------- 1994 1995 1996 --------- ---------- ---------- Cash flows from operating activities: Net loss.............................. $(161,763) (1,478,016) (1,969,248) --------- ---------- ---------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation......................... 61,432 71,194 76,042 Change in assets and liabilities: (Increase) decrease in accounts re- ceivable........................... 12,785 19,772 (1,310,264) Increase in inventory............... (82,196) (150,547) (299,165) Increase in grants receivable....... -- -- (114,981) Increase in deferred insuance costs.............................. -- -- (194,981) (Increase) decrease in prepaid ex- pense and other assets............. (3,000) (54,589) 17,060 Increase in deposits................ -- -- (43,964) Increase (decrease) in accounts pay- able............................... 10,721 79,047 (60,568) Increase (decrease) in related par- ty................................. -- 198,096 (34,912) Increase in current tax liability... -- -- 205,065 Increase (decrease) in accrued and other liabilities.................. 133,682 (240,309) 852,971 --------- ---------- ---------- 133,424 (77,336) (907,697) --------- ---------- ---------- Net cash used in operating activities... (28,339) (1,555,352) (2,876,945) --------- ---------- ---------- Cash flows from investing activities: Purchases of plant and equipment...... (3,008) (37,316) (80,520) Purchases of investments.............. -- (2,056) -- Proceeds from sale of investments..... -- -- 3,827 --------- ---------- ---------- Net cash used in investing activities... (3,008) (39,372) (76,693) --------- ---------- ---------- Cash flow from financing activities: Proceeds from long-term debt.......... -- 484,139 -- Repayment of long-term debt........... (196,445) -- (446,124) Net proceeds from the issuance of pre- ferred stock......................... -- -- 4,894,786 Proceeds from the issuance of common stock................................ 364,577 765,333 49,875 --------- ---------- ---------- Net cash provided by financing activi- ties................................... 168,132 1,249,472 4,498,537 --------- ---------- ---------- Net effects of foreign exchange rate differences............................ (35,210) (43,408) (2,430) --------- ---------- ---------- Net increase (decrease) in cash and cash equivalents............................ 101,575 (388,660) 1,542,469 Cash and cash equivalents at beginning of period.............................. 337,747 439,322 50,662 --------- ---------- ---------- Cash and cash equivalents at end of pe- riod................................... $ 439,322 50,662 1,593,131 ========= ========== ========== Supplemental disclosure of cash flow in- formation: Cash paid for interest................. $ -- 54,213 195,035 Cash paid for taxes.................... -- -- 3,325
See accompanying notes to consolidated financial statements. F-6 BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 (1) ORGANIZATION Basis of Presentation Bionx Implants, Inc. (the Company) was incorporated in October, 1995 as a Delaware corporation. In 1996, the Company entered into a reorganization, described more fully below, whereby four corporate entities that separately controlled 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. All stockholders of the four entities substantially retained their respective pro-rata equity stake ownership subsequent to the reorganization of the Company. Given the ownership relationship of the four predecessor corporations and the subsequent reorganization into the Company described below, the accompanying consolidated financial statements include the four predecessor corporations' financial statements as of December 31, 1995 and 1996 and for each of the years ended December 31, 1994, 1995 and 1996. All financial information contained herein is presented in U.S. dollars. Reorganization In September 1996, the Company consummated its reorganization. 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 such Dutch company were shares of the Company's common stock. Shortly after the reorganization was consummated, the Company issued a total of 2,000,000 shares of its Series A mandatorily redeemable convertible 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. Accordingly, at present the Company has four wholly-owned subsidiaries-- OrthoSorb, Inc., Biostent, Inc., Bioscience, Ltd., and Biocon, Ltd.--each of which are wholly-owned by the Company. 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 maxillo-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 nine product lines through managed networks of independent agents, distributors and dealers. Since inception, the Company has sustained operating losses and has not generated positive cash flow from operations. The Company plans to continue to finance its future operations with proceeds from the sale of capital stock, such as the proposed initial public offering contemplated by the prospectus ("Offering"), and revenues from future product sales, royalty payments and license and government grant payments, if any. The Company's future operations are dependent upon the successful execution of planned financings, such as the Offering, and ultimately, upon achieving profitable operations, if ever. If the Offering contemplated herein is not consummated, it will be necessary for the Company to seek other sources of capital or adjust its proposed future operating plans. F-7 BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the financial statements of the Company and its four 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. Investments Investments consist of certain real property interests in Finland. The Company can classify its equity securities 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, 1995 and 1996. 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. 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. F-8 BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 combined 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 the Company's various loans is approximately $700,000. Stock Option Plan Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. 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 made in 1995 and future years 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 Currency Translation The financial statements of the Company's foreign subsidiaries are 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 are translated at year-end exchange rates and F-9 BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) income and expense items are translated at an average exchange rate for the year. Exchange adjustments resulting from foreign currency transactions are generally recognized in operations, while adjustments resulting from the translation of financial statements are reflected as a separate component of stockholders' equity (deficit). The Company does not hedge its currency translation exposure. Accounting for Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards (SFAS) No.109, 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. Pro Forma Net Loss Per Share (Unaudited) Pro forma net loss per share is computed using the weighted average number of common shares outstanding giving effect to certain adjustments described below. Common equivalent shares from stock options are excluded from the computation of pro forma net loss per share as their effect is anti-dilutive, except that, pursuant to Securities and Exchange Commission (SEC) Staff Accounting Bulletins and SEC staff policy, common stock and common stock equivalent shares issued at prices below the anticipated initial public offering price during the preceding twelve months of the offering have been included in the computation as if they were outstanding for all periods presented (using the treasury stock method and the anticipated offering price). Pursuant to SEC staff policy, the calculation of shares used in computing pro forma net loss per share also includes the weighted average number of common equivalent shares of Series A preferred stock and warrants that will automatically convert into shares of common stock upon completion of the Offering (using the if-converted method) from their respective original dates of issuance. The following table sets forth the calculation of the total number of shares used in the computation of pro forma net loss per common share:
FOR THE YEAR ENDED DECEMBER 31, 1996 ------------ Weighted average common shares outstanding....................... 5,281,020 Weighted average of incremental shares assumed to be outstanding related to common stock options and warrants granted and convertible preferred stock based on the treasury stock method.. 748,335 Weighted average convertible preferred stock (if converted method)......................................................... 340,300 --------- Weighted average common and common equivalent shares used in computation of pro forma net loss per common share.............. 6,369,655 =========
F-10 BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pro Forma Balance Sheet (Unaudited) The unaudited pro forma balance sheet as of December 31, 1996 reflects the conversion of the existing 2,000,000 shares of Series A mandatorily redeemable convertible preferred stock into 1,052,638 shares of common stock (adjusted for the common stock reverse split), which conversion is contingent upon the closing of the Offering. In addition, the unaudited pro forma balance sheet as of December 31, 1996 reflects the assumed cashless exercise of the warrants covering 421,065 shares of common stock into 236,451 shares of common stock (adjusted for the common stock reverse split). (3) INVENTORY Inventory consists of the following components as of December 31, 1995 and 1996:
1995 1996 --------- --------- Raw materials............................................. $ 80,108 101,122 Finished goods............................................ 812,557 1,210,033 --------- --------- 892,665 1,311,155 Less reserves............................................. (161,021) (280,346) --------- --------- $ 731,644 1,030,809 ========= =========
(4) PLANT AND EQUIPMENT Plant and equipment consist of the following components as of December 31, 1995 and 1996:
1995 1996 --------- -------- Machinery and production equipment......................... $ 658,711 731,015 Computer equipment......................................... 13,829 14,613 --------- -------- 672,540 745,628 Less accumulated depreciation.............................. (340,732) (409,342) --------- -------- $ 331,808 336,286 ========= ========
(5) RELATED PARTY TRANSACTIONS Under an employment agreement dated August 21, 1992, the Company was obligated to pay an executive 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. The same executive 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 $98,096 and $163,184 as of December 31, 1995 and 1996, respectively. The December 31, 1995 related party balance also included a $100,000 interest-bearing loan from Vital Signs, Inc., a company for which the Chairman of the Board and another director of the Company are executives. This loan was repaid in 1996. The Company's product development efforts are dependent upon one employee 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 F-11 BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. (6) ACCRUED AND OTHER CURRENT LIABILITIES Accrued and other current liabilities consist of the following components as of December 31, 1995 and 1996:
1995 1996 -------- --------- Commissions and royalties.................................... $ 21,948 359,687 Wages........................................................ 133,495 184,920 Withholding tax and social security.......................... 177,940 157,325 Interest..................................................... 130,842 77,252 Inventory purchases.......................................... -- 23,002 Professional fees............................................ -- 305,492 Value-added and other taxes.................................. -- 78,981 Other........................................................ -- 130,537 -------- --------- $464,225 1,317,196 ======== =========
(7) LONG-TERM DEBT Long-term debt consists of the following components as of December 31, 1995 and 1996:
1995 1996 ---------- -------- Loans from financial institutions......................... $ 595,134 546,930 Loans from Finnish government............................. 352,911 226,483 Bank note payable......................................... 300,000 -- Other debt................................................ 11,452 39,960 ---------- -------- 1,259,497 813,373 Less current portion...................................... (363,293) (223,037) ---------- -------- $ 896,204 590,336 ========== ========
The loans from the financial institutions are payable in semi-annual and annual installments with interest rates ranging from 3.7 to 13.0 percent. The loans from the Finnish government are payable in annual installments with an interest rate of 1 percent. The bank note payable was a demand bank note which accrued interest at the prime rate. The bank note was repaid with the proceeds of the Series A mandatorily convertible preferred stock offering. The loans are secured by all of the assets of the Finnish subsidiaries. The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1996 are as follows: 1997, $223,037; 1998, $238,153; 1999, $242,830; 2000, $60,856 and 2001, $48,497. (8) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK The Company issued 2,000,000 shares of its Series A mandatorily redeemable convertible preferred stock (Series A Preferred), and warrants to purchase 421,065 shares of common stock (at an exercise price of $5.70 per share) in September 1996. Net proceeds to the Company were $4,894,786. F-12 BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The holders of Series A Preferred are not entitled to dividends, unless declared by the Company. Dividends, if any, are non-cumulative. As of December 31, 1996, no such dividends have been declared on the Series A. The holders of Series A Preferred are entitled to a liquidation preference over all other types of capital stock. The preference equals $2.50 per share together with all accrued and unpaid dividends plus an amount equal to the Series A Preferred pro rata share of all remaining Company assets available for distribution. In addition, each share of Series A Preferred is convertible into common stock at a conversion ratio of 1 for 1.9. Further, such conversion becomes automatic immediately prior to the closing of an initial public offering for the sale of the Company's common stock at an aggregate gross sales proceeds of not less than $10,000,000 at a price of $9.50 per share or more. In connection with the Series A Preferred offering, the Company issued warrants covering 421,065 shares. The warrants entitle the holders to purchase from the Company a total of 421,065 shares of common stock at an exercise price of $5.70 per share, subject to adjustment as defined. Until such time as the warrants are exercised in full or expire, the purchase price and the number of shares of common stock (or other securities) issuable upon exercise of the warrants are subject to adjustment for dilution, as defined. The warrants expire on September 5, 2001. The Company may require the exercise of the warrants upon the occurrence and satisfaction of certain conditions applicable to the closing of the Company's proposed Offering. The Company is obligated to redeem the Series A Preferred at its redemption value, at any time after August 2001, upon the written request of a majority of the Series A Preferred stockholders. (9) COMMON STOCKHOLDERS' EQUITY Common stockholders' equity consists of the following as of December 31, 1995 and 1996:
1995 1996 ---------------------------- ---------------------------- ADDITIONAL ADDITIONAL COMMON PAID-IN COMMON PAID-IN SHARES STOCK CAPITAL SHARES STOCK CAPITAL ------ ---------- ---------- --------- ------- ---------- Biocon, Ltd.: Class A, at stated value................ 10,647 $ 240,101 $ -- -- $ -- $ -- Class B, at stated value................ 3,587 80,033 -- -- -- -- Bioscience, Ltd., at stated value........... 4,050 1,023,180 -- -- -- -- Biostent, Inc., at stated value........... 1,031 1 9,999 -- -- -- OrthoSorb, Inc., at stated value........... 1,031 1 570,999 -- -- -- Bionx Implants, Inc. ... -- -- -- 5,318,424 10,105 1,858,870 ---------- -------- --------- ------- ---------- $1,343,316 $580,998 5,318,424 $10,105 $1,858,870 ========== ======== ========= ======= ==========
In September 1996, 55,264 shares of common stock were issued to a former employee, in accordance with the terms of his employment, at a price of $.9025 per share, the estimated fair market value of such stock on the date that such commitment was made, as determined by the Board of Directors. See note 1 for a discussion of the reorganization in September 1996. F-13 BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (10) COMMITMENTS AND CONTINGENCIES The Company leases offices and laboratory facilities, equipment, and vehicles under various noncancelable operating lease arrangements. Future minimum rental commitments required by such leases are as follows:
YEAR ENDING DECEMBER 31: ------------------------ 1997 ........................................................ $137,739 1998 ........................................................ 111,902 1999 ........................................................ 109,890 2000 ........................................................ 99,231 2001......................................................... 99,231
Rental expense for the years ended December 31, 1994, 1995 and 1996 aggregated $105,041, $90,815 and $98,755, 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 granted 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, 1996, there were 425,618 additional shares available for grant under the 1996 Option Plan. The per share weighted-average fair value of stock options granted during 1995 and 1996 was $0.46 and $5.86 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1995--expected dividend yield 0%, risk-free interest rate of 7.06%, and an expected life of 10 years; 1996--expected dividend yield 0%, risk-free interest rate of 6.50%, and an expected life of 10 years. 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 to the pro forma amounts indicated below:
1995 1996 ----------- ----------- Net loss: As reported......................................... $(1,478,016) $(1,969,248) Pro forma (unaudited) .............................. (1,530,121) (2,051,242)
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. F-14 BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A summary of activity under the 1996 Option Plan from January 1, 1994 to December 31, 1996 is as follows:
RANGE OF EXERCISE SHARES PRICES PER SHARE ------- ----------------- Balance, January 1, 1994.............................. -- $ -- Granted............................................. -- -- ------- ------------ Balance, December 31, 1994............................ -- -- Granted............................................. 277,009 0.9025 ------- ------------ 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 ======= ============ Shares exercisable at December 31, 1996............... 102,740 $0.9025-4.75 ======= ============
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 19,635 shares vested during 1996 and the balance substantially vest 20% per year on each of the next four years at December 31. On November 24, 1996, the Company granted various employees options to acquire 88,687 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 22,897 shares vest 20% per year on each of the next five anniversaries of the date of grant. (12) INCOME TAXES At December 31, 1996, the Company and its subsidiaries had available U.S. and Finnish net operating loss carryforwards ("NOL") of approximately $2.1 million for income tax reporting purposes, which are available to offset future taxable income, if any, through 2011. 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 as well as the proposed Offering. 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. F-15 BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Income tax expense attributable to the loss before provision for taxes was $208,390 for the year ended December 31, 1996 and differed from the amounts computed by applying the U.S. federal income tax rate of 35 percent to pretax loss as a result of the following:
1996 --------- Computed "expected" tax benefit..................................... $(616,300) Increase (reduction) in income taxes resulting from: Difference in the foreign tax rates............................... (47,430) Change in the valuation allowance for Federal deferred tax assets........................................................... 896,930 Other, net........................................................ (24,810) --------- Income tax expense.................................................. $ 208,390 =========
The tax effects of temporary differences that give rise to significant portions of the Federal, foreign and state deferred tax assets at December 31, 1995 and 1996 are presented below:
1995 1996 --------- ---------- Deferred tax assets: Net operating loss carryforwards...................... $ 350,893 787,485 Research and development costs........................ 177,537 184,125 Depreciation adjustments.............................. 55,661 60,937 Inventory-related items............................... 93,761 615,638 Recognition of accrued expenses or reserves for financial statement reporting purposes but not for income tax reporting purposes........................ 64,408 128,844 --------- ---------- Total gross deferred tax assets....................... 742,260 1,777,029 Less valuation allowance.............................. (742,260) (1,777,029) --------- ---------- Net deferred tax assets................................. $ -- -- ========= ==========
The net change in the total valuation allowance for the years ended December 31, 1994, 1995, and 1996 were increases of approximately $79,195, $155,140 and $1,034,769, 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 nonrefundable license fees and milestone revenue of $199,904 and $201,287 for the years ended December 31, 1995 and 1996, respectively. 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. In addition, the Company has applied for grants from the Finnish government to conduct research on resorbable polymers. The revenue from such grants was $15,682, $66,983 and $143,916 for the years ended December 31, 1994, 1995 and 1996, respectively. F-16 BIONX IMPLANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (14) GEOGRAPHIC INFORMATION Information about the Company's operations by geographic area is as follows:
UNITED STATES EUROPE CONSOLIDATED ----------- ---------- ------------ Year ended December 31, 1994 Total net sales.......................... $ 440,348 $ 824,385 $ 1,264,733 Net loss................................. (15,200) (146,563) (161,763) Identifiable assets...................... 340,191 1,689,167 2,029,358 Year ended December 31, 1995 Total net sales.......................... $ 477,952 $ 876,767 $ 1,354,719 Net loss................................. (1,323,214) (154,802) (1,478,016) Identifiable assets...................... 745,329 1,048,909 1,794,238 Year ended December 31, 1996 Total net sales.......................... $ 3,412,204 $1,621,748 $ 5,033,952 Net income (loss)........................ (2,269,215) 299,967 (1,969,248) Identifiable assets...................... 5,061,627 222,026 5,283,653
(15) SUBSEQUENT EVENTS Reverse Stock Split On February 24, 1997, the Company effected a 1 for 1.9 reverse stock split. All common shares, per share and pro forma amounts in the accompanying consolidated financial statements have been retroactively adjusted for all periods presented to reflect this common stock reverse split for all periods presented. Preferred stock amounts, other than the shares of common stock into which the Series A Preferred is convertible, have not been retroactively adjusted to reflect the reverse stock split. Initial Public Offering (Unaudited) On February 14, 1997, the Board of Directors authorized the filing of a registration statement for the Offering with the Securities and Exchange Commission for the sale of 2,000,000 shares of common stock. If the Offering is consummated under the terms presently anticipated, all 2,000,000 shares of the Series A Preferred outstanding as of the closing date of the Offering will be automatically converted into 1,052,638 shares of common stock on a 1 for 1.9 basis and the Company will have the right to require the exercise of warrants to purchase 421,065 shares of common stock. No dividends will be payable with respect to such preferred stock. The deferred offering costs associated with the Offering will be recorded as a reduction of stockholders' equity (deficit) if the Offering is consummated. If the Offering is not consummated, the deferred offering costs will be charged to operations. Spin-Off (Unaudited) Two of the Company's shareholders and the Company are each one third equity owners in a business organized to engage in developing, manufacturing and selling polymer-based advanced drug delivery systems (the "Business"). On February 14, 1997, the Board of Directors concluded that in light of the substantial expenditures that would be required in order to bring any of the Business' products to market, it is in the best interests of the Company and its shareholders for the Company to forego its development of the Business and to spin-off the Business. The Company intends to distribute its interest in the Business to shareholders of record of the Company as of a date prior to the effective date of the Offering. F-17 No person is authorized in connection with any offering made hereby to give any information or to make any representation not contained herein and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the Common Stock offered hereby, nor does it constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which it is unlawful to make such an offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any date subsequent to the date hereof. ----------------- TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 6 The Company.............................................................. 17 Use of Proceeds.......................................................... 17 Dividend Policy.......................................................... 17 Capitalization........................................................... 18 Dilution................................................................. 19 Selected Consolidated Financial Data..................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 21 Business................................................................. 26 Management............................................................... 46 Certain Transactions..................................................... 53 Principal Stockholders................................................... 55 Description of Capital Stock............................................. 57 Shares Eligible for Future Sale.......................................... 59 Underwriting............................................................. 61 Legal Matters............................................................ 62 Experts.................................................................. 62 Additional Information................................................... 62 Financial Statements..................................................... F-1
----------------- Until , 1997 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 2,000,000 Shares [LOGO OF BIONX IMPLANTS INC. APPEARS HERE] Common Stock ----------------- PROSPECTUS , 1997 ----------------- UBS Securities Hambrecht & Quist VOLPE, WELTY & COMPANY LLC PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market application and listing fee. SEC registration fee............................................... $ 9,758 NASD filing fee.................................................... 3,720 Nasdaq National Market application and listing fee................. 40,019 Printing and engraving costs....................................... 100,000 Legal fees and expenses............................................ 500,000 Accounting fees and expenses....................................... 160,000 Blue Sky fees and expenses......................................... 20,000 Directors' and officers' liability insurance....................... 135,000 Transfer Agent..................................................... 5,000 Miscellaneous expenses............................................. 11,503 -------- Total.......................................................... $985,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directions and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. The Company's Certificate of Incorporation provides that the Company shall indemnify to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, and the Company's by-laws provide that the Company shall indemnify to the fullest extent permitted by law, all present and former directors and officers, and any such person serving or agreeing to serve as an officer or director (or, in the case of the Certificate of Incorporation in any other capacity), with any other enterprise at the Company's request, in connection with any proceeding threatened, pending or instituted against such party by reason of their serving or agreeing to serve in such capacity. The Company's Certificate of Incorporation also permits indemnification of the Company's agents extending to the limits created by Delaware law. The Company's By-Laws describe certain procedures applicable to indemnification rights. The Underwriting Agreement to be filed as Exhibit 1.1 to this Registration Statement will provide for indemnification by the Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since the Registrant's incorporation in October 1995, the Registrant has issued and sold the following unregistered securities. 1. In September 1996, the Registrant issued and sold 5,263,160 shares of Common Stock pursuant to the Reorganization upon the transfer to the Registrant of all of the capital stock of four operating subsidiaries. 2. In September 1996, the Registrant issued and sold 2,000,000 shares of Preferred Stock and warrants to purchase 421,065 shares of Common Stock (at an exercise price of $5.70 per share) to investors at an aggregate price of $5,000,000. II-1 3. In September 1996, the Registrant issued and sold 55,264 shares of its Common Stock to a former employee at an aggregate price of approximately $50,000. Such sale was made to honor a pre-existing commitment to the former employee. The Registrant from time to time has granted stock options to purchase shares of Common Stock to certain officers and employees. The following table sets forth certain information regarding such grants:
RANGE OF NO. OF SHARES EXERCISE PRICES ------------- --------------- 1995........................................... 277,009 $ .9025 1996........................................... 147,373 $4.75-$9.50
The above securities were offered and sold by the Registrant in reliance upon an exemption from registration under either (i) Section 4(2) of the Securities Act as transactions not involving any public offering or (ii) Rule 701 under the Securities Act. No underwriters were involved in connection with the sales of securities referred to in this Item 15. ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES (a) Exhibits 1.1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant and amendments thereto as currently in effect. 3.2 Form of Restated Certificate of Incorporation to be filed after the closing of the Offering made under this Registration Statement. 3.3 Bylaws of the Registrant, as currently in effect. 4.1* Specimen Common Stock Certificate. 5.1* Opinion of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A. 10.1 Reorganization Agreement dated as of September 5, 1996. 10.2* Registrant's 1996 Stock Option/Stock Issuance Plan and form of option granted thereunder. 10.3 Form of Amended and Restated Employment Agreement between the Registrant and David W. Anderson. 10.4 Form of Employment Agreement between the Registrant's Subsidiary and Pertti Tormala. 10.5 Form of Proprietary Information and Inventions Agreement. 10.6 Investors' Rights Agreement, dated as of September 6, 1996, between the Registrant and certain holders of the Registrant's securities. 10.7 Stock Purchase Agreement between the Registrant and Purchasers of the Company's Preferred Stock and Warrants. 10.8+ License Agreements between the Registrant's Subsidiary and Saul N. Schreiber. 10.9+ License Agreement among the Registrant's Subsidiary, Pertti Tormala, Markku Tamminmaki and Menifix I/S. 10.10+ Licensing, Manufacturing and Distribution Agreement among the Registrant's Subsidiary, Pertti Tormala and various Danish and Finnish inventors. 10.11 Shareholders' Agreement among Bionix, B.V. and certain shareholders of the Company. 21.1 List of Subsidiaries. 23.1 Consent of KPMG Peat Marwick LLP (including a report regarding the financial statement schedule). 23.2 Consent of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A. (to be included in Exhibit 5.1). 23.3 Consent of Kenyon & Kenyon. 24.1 Power of Attorney (see page II-4). 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. + Confidential treatment requested. II-2 (b) Financial Statement Schedules This Registration Statement includes the following financial statement schedule: (a) Schedule II -- Valuation and Qualifying Accounts All other schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby further undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN OF MALVERN, STATE OF PENNSYLVANIA, ON THE 25TH DAY OF FEBRUARY, 1997. BIONX IMPLANTS, INC. By: /s/ David W. Anderson --------------------------------- David W. Anderson (President and Chief Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS 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 attorneys-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all 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 to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE --------- ----- ---- /s/ David W. Anderson President, Chief February 25, 1997 - ------------------------------------- Executive Officer DAVID W. ANDERSON and Director (Principal Executive Officer) /s/ David J. Bershad Director February 25, 1997 - ------------------------------------- DAVID J. BERSHAD /s/ Anthony J. Dimun Director February 25, 1997 - ------------------------------------- ANTHONY J. DIMUN
II-4
SIGNATURE TITLE DATE --------- ----- ---- Director February , 1997 - ------------------------------------- DAVID H. MACCALLUM /s/ Pertti Tormala Director February 25, 1997 - ------------------------------------- PERTTI TORMALA /s/ Terry D. Wall Director February 25, 1997 - ------------------------------------- TERRY D. WALL /s/ Michael J. O'Brien Vice President, February 25, 1997 - ------------------------------------- Finance and MICHAEL J. O'BRIEN Administration, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)
II-5
EXHIBIT NO. DESCRIPTION ------- ----------- ----- 1.1* Form of Underwriting Agreement. Certificate of Incorporation of the Registrant and amendments 3.1 thereto as currently in effect. 3.2 Form of Restated Certificate of Incorporation to be filed after the closing of the Offering made under this Registration Statement. 3.3 Bylaws of the Registrant, as currently in effect. 4.1* Specimen Common Stock Certificate. 5.1* Opinion of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A. 10.1 Reorganization Agreement dated as of September 5, 1996. Registrant's 1996 Stock Option/Stock Issuance Plan and form of 10.2* option granted thereunder. 10.3 Form of Amended and Restated Employment Agreement between the Registrant and David W. Anderson. Form of Employment Agreement between the Registrant's 10.4 Subsidiary and Pertti Tormala. 10.5 Form of Proprietary Information and Inventions Agreement. 10.6 Investors' Rights Agreement, dated as of September 6, 1996, between the Registrant and certain holders of the Registrant's securities. 10.7 Stock Purchase Agreement between the Registrant and Purchasers of the Company's Preferred Stock and Warrants. License Agreements between the Registrant's Subsidiary and 10.8+ Saul N. Schreiber. 10.9+ License Agreement among the Registrant's Subsidiary, Pertti Tormala, Markku Tamminmaki and Menifix I/S. 10.10+ Licensing, Manufacturing and Distribution Agreement among the Registrant's Subsidiary, Pertti Tormala and various Danish and Finnish inventors. Shareholders' Agreement among Bionix, B.V. and certain 10.11 shareholders of the Company. 21.1 List of Subsidiaries. Consent of KPMG Peat Marwick LLP (including a report regarding 23.1 the financial schedule). 23.2 Consent of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A. (to be included in Exhibit 5.1). 23.3 Consent of Kenyon & Kenyon. 24.1 Power of Attorney (see page II-4). 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. + Confidential treatment requested. SCHEDULE II BIONX IMPLANTS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
CHARGED CHARGED CHARGED BALANCE TO BALANCE TO BALANCE TO BALANCE AT COSTS AND AT COSTS AND AT COSTS AND AT CLASSIFICATION 12/31/93 EXPENSES DEDUCTIONS 12/31/94 EXPENSES DEDUCTIONS 12/31/95 EXPENSES DEDUCTIONS 12/31/96 - -------------- -------- --------- ---------- -------- --------- ---------- -------- --------- ---------- -------- Inventory Reserves.. $-- -- -- -- 161,021 -- 161,021 119,325 -- 280,346 ==== === === === ======= === ======= ======= === ======= Accounts Receivable Reserves........... $-- -- -- -- -- -- -- 97,325 -- 97,325 ==== === === === ======= === ======= ======= === =======
EX-3.1 2 CERTIFICATE OF INCORPORATION OF REGISTRANT, AS AMENDED Exhibit 3.1 CERTIFICATE OF INCORPORATION OF BIONIX, INC. * * * * * 1. The name of the corporation is Bionix, Inc. 2. The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. 3. The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 4. The total number of shares of stock which the corporation shall, have authority to issue is Thirteen Million (13,000,000) of which stock Ten Million (10,000,000) shares of the par value of One One Thousandth of a Dollar ($.001) each, amounting in the aggregate to Ten Thousand Dollars ($10,000.00) shall be common stock and of which Three Million (3,000,000) shares of the par value of One One Thousandth of a Dollar ($.001) each, amounting in the aggregate to Three Thousand Dollars ($3,000.00) shall be Convertible Preferred stock. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof are as follows: Holders of the Company's Convertible Preferred shares of any series will be granted the voting rights of the equivalent number of common shares in all issues requiring shareholder votes. At all elections of directors of the corporation, each stockholder shall be entitled to as many votes as shall equal the number of votes which (except for such provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by him, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them as he may see fit. The number of authorized shares of any class or classes of stock may be increased or decreased by the affirmative vote of the holders of a majority of the stock of the corporation entitled to vote. 5. The name and mailing address of each incorporator is as follows: NAME MAILING ADDRESS ---- --------------- L. J. Vitalo Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801 K. A. Widdoes Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801 D. M. Dembkowski Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801 6. The corporation is to have perpetual existence. 7. In furtherance and not in limitation of the powers conferred by statute, the board of directors is expressly authorized: To make, alter or repeal the by-laws of the corporation. To authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation. To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. By a majority of the whole board, to designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The by-laws may provide that in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the by-laws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the -2- corporation; and, unless the resolution or by-laws, expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. When and as authorized by the stockholders in accordance with law, to sell, lease or exchange all or substantially all of the property and assets of the corporation, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property including shares of stock in, and/or other securities of, any other corporation or corporations, as its board of directors shall deem expedient and for the best interests of the corporation. 8. Elections of directors need not be by written ballot unless the by-laws of the corporation shall so provide. Meetings of stockholders may be held within or without the State of Delaware, as the by-laws may provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the by-laws of the corporation. 9. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. 10. A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. 11. This certificate of incorporation shall be effective upon filing. WE, THE UNDERSIGNED, being each of the incorporators hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this certificate, hereby declaring and certifying that this is our act and deed and the facts herein stated are true, and accordingly have hereunto set our hands this 11th day of October, 1995. -3- /s/ L.J. Vitalo ------------------------------------- L.J. Vitalo /s/ K.A. Widdoes ------------------------------------- K.A. Widdoes /s/ D.M. Dembkowski ------------------------------------- D.M. Dembkowski -4- CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF BIONIX, INC. (Pursuant to Section 241 of the General Corporation Law of the State of Delaware) It is hereby certified that: 1. The name of the corporation is Bionix, Inc. 2. The Board of Directors of the corporation has duly adopted certain amendments to its Certificate of Incorporation in accordance with the provisions of Section 241 of the General Corporation Law of Delaware. 3. The corporation has not received any payment for its stock. 4. The amendments adopted by the Board are as follows: a. Article 4 shall be deleted in its entirety and a new Article 4 added as follows: "4. The aggregate number of shares which the Corporation shall have authority to issue is seventy million (70,000,000), divided into sixty million (60,000,000) shares of common stock with par value of $.001 per share and ten million (10,000,000) shares of preferred stock with par value of $.001 per share." The preferred stock may be issued from time to time in one or more series. The Board of Directors of the corporation is hereby expressly authorized to provide, by resolution or resolutions duly adopted by it prior to issuance, for the creation of each such series and to fix the designation and the powers, preferences, rights, qualifications, limitations and restrictions relating to the shares of each such series. The authority of the Board of Directors with respect to each series of Preferred Stock shall include, but not be limited to, determining the following: (a) the designation of such series, the number of shares to constitute such series and the stated value if different from the par value thereof; (b) whether the shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights, which may be general or limited; (c) the dividends, if any, payable on such series, whether any such dividends shall be cumulative, and, if so, from what dates, the conditions and dates upon which such dividends shall be payable, and the preference or relation which such dividends shall bear to the dividends payable on any shares of stock of any other class or any other series of preferred stock; (d) whether the shares of such series shall be subject to redemption either by the corporation or the holders thereof, and, if so, the times, prices and other conditions of such redemption; (e) the amount or amounts payable upon shares of such series upon, and the rights of the holders of such series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the corporation; (f) whether the shares of such series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to and the manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or other corporate purposes and the terms and provisions relating to the operation thereof; (g) whether the shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or any other series of Preferred Stock or any other securities and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchange; (h) the limitations and restrictions, if any, to be effective while any shares of such series are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the corporation of, the common stock or shares of stock of any other class or any other series of preferred stock; (i) the conditions or restrictions, if any, upon the creation of indebtedness of the corporation or upon the issue of any additional stock, including additional shares of such series or of any other series of preferred stock or of any other class; and (j) any other powers, preferences and relative, participating, optional and other specific rights, and any qualifications, limitations and restrictions, thereof. -2- The powers, preferences and relative, participating, optional and other special rights of each series of preferred stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. All shares of any one series of preferred stock shall be identical in all respects with all other shares of such series, except that shares of any one series issued at different times may differ as to the dates from which dividends thereof shall be cumulative. b. A new Article 12 is added to the Certificate of Incorporation. 12. (a) Every person who is or was a director or officer of the corporation shall be indemnified by the corporation to the fullest extent allowed by Section 145 of the Delaware General Corporation Law against all liabilities and expenses imposed upon or incurred by that person in connection with any proceeding in which that person may be made, or threatened to be made, a party, or in which that person may become involved by reason of that person being or having been a director or officer or of serving or having served in any capacity with any other enterprise at the request of the corporation, whether or not that person is a director or officer or continues to serve the other enterprise at the time the liabilities or expenses are imposed or incurred. (b) To the fullest extent permitted by applicable law, the corporation is authorized to provide indemnification of (and advancement of expenses to) agents of the corporation (and any other persons to which Delaware law permits the corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, votes of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to the corporation, its stockholders and others. IN WITNESS WHEREOF, this Certificate of Amendment of the corporation's Certificate of Incorporation has been signed by a majority of the directors of the corporation this 3rd day of September, 1996. /s/ David W. Anderson -------------------------------- David W. Anderson /s/ David J. Bershad -------------------------------- David J. Bershad /s/ Terence D. Wall -------------------------------- Terence D. Wall /s/ Anthony J. Dimun -------------------------------- Anthony J. Dimun -3- Certificate of Designations, Preferences and Rights of Series A Convertible Participating Preferred Stock of Bionix, Inc. Pursuant to Section 151 of the general corporation law of the State of Delaware, Bionix, Inc., a Delaware corporation (the "Corporation"), certifies that pursuant to the authority contained in its Certificate of Incorporation, as amended, and in accordance with the provisions of Section 151 of the general corporation law of the State of Delaware, its board of directors has adopted the following resolution creating a series of preferred stock designated as Series A Convertible Participating Preferred Stock: RESOLVED, that a series of the class of preferred stock of the Corporation be hereby created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: 1. Number of Shares. The series of Preferred Stock, par value $.001 ---------------- per share, authorized and designated as "Series A Convertible Participating Preferred Stock" shall consist of 2,000,000 shares (the "Series A Preferred Stock"). 2. Dividends. The holders of Series A Preferred Stock shall be --------- entitled to receive dividends, separate and apart from any other class or series of capital stock of the Corporation, at such time and in such amounts per share of Series A Preferred Stock as the Board of Directors may declare from time to time, whether in cash, in kind or in shares of capital stock of the Corporation, payable out of any assets legally available therefor (the "Preferred Dividend"). In addition to any Preferred Dividends, the holders of the Series A Preferred Stock shall be entitled to receive, out of any assets legally available therefor, dividends at the same rate as any dividends (other than dividends paid in additional shares of Common Stock, provided that the adjustments called for in Section 6F below are effected) are paid with respect to the Common Stock, treating each share of Series A Preferred Stock as being equal to the number of shares of Common Stock (including fractions of a share and rounded up to the nearest whole number) into which each share of Series A Preferred Stock is then convertible. No dividend shall be declared or payable in cash or other property of the Corporation with respect to the Common Stock other than in the form of shares of Common Stock. The Preferred Dividend described in this Section 2 shall not be cumulative. 3. Liquidation; Stated Preference. Upon any liquidation, dissolution ------------------------------ or winding up of the Corporation, whether voluntary or involuntary, the holders of the shares of Series A -2- Preferred Stock shall be entitled to be paid and receive the full amount of their Stated Preference per share of Series A Preferred Stock, before any distribution or payment is made upon any stock ranking on liquidation junior to the Series A Preferred Stock. For purposes hereof, the Common Stock shall rank on liquidation junior to the Series A Preferred Stock. 3A. For purposes hereof the "Stated Preference" for each share of Series A Preferred Stock shall be an amount equal to (i) $2.50 per share together with all dividends declared but unpaid thereon and any outstanding Redemption Interest amounts (referred to in Section 7D below), computed to the date payment is made available, plus (ii) an amount equal to the Series A Preferred Stock pro rata share of all remaining assets available for distribution to stockholders of the Corporation, being deemed for such purpose to be determined by the number of shares of Common Stock (including fractions of a share rounded up to the nearest whole number) into which the shares of Series A Preferred Stock are then convertible relative to the total number of shares of Common Stock then outstanding; provided, however, that in the event of any "Qualifying Liquidation -------- ------- Event" (as defined below) the holders of Series A Preferred Stock shall be entitled to receive a Stated Preference in an amount equal to the Series A Preferred Stock pro rata share in all of the Corporation's assets available for distribution to stockholders, being deemed for such purpose to be determined by the number of shares of Common Stock (including fractions of a share rounded up to the next whole share) into which the shares of Series A Preferred Stock are then convertible relative to the total number of shares of Common Stock then outstanding. For purposes of this Section 3, "Qualifying Liquidation Event" means any liquidation (or event deemed to constitute a liquidation under this Section 3) as to which the total value of net assets, proceeds or consideration available and payable currently (without contingency or escrow and subject to no other offset or liabilities) to all stockholders of the Corporation, assuming the conversion to Common Stock of the Series A Preferred Stock and of all outstanding securities, options, warrants and other rights issued or issuable by the Corporation, is equal to at least $3.00 per share. 3B. After the Corporation has distributed the full amount of the Stated Preference to the holders of Series A Preferred Stock, the remainder of the Corporation's assets legally available to the Stockholders shall be distributed to the holders of capital stock ranking junior to the Series A Preferred Stock in accordance with their respective terms. If upon such liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the assets to be distributed among the holders of Series A Preferred Stock shall be insufficient to permit payment in full to the holders of Series A Preferred Stock of the Stated Preference amounts, then the entire assets of the Corporation available to be so distributed shall be distributed ratably among the holders of Series A Preferred Stock. 3C. The following events shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of the provisions of this Section 3: (i) any consolidation or merger of the Corporation into or with any other entity or entities which results in the exchange of 40% or more of the outstanding shares of the Corporation's voting securities (in a single transaction or a series of related transactions) for securities or other consideration issued or paid or caused to be issued or paid by any such entity or affiliate thereof (other than a merger to reincorporate the Corporation in a different jurisdiction) upon consummation of which -3- the holders of the Corporation's outstanding voting securities immediately prior to such transaction hold less than 55% of the voting securities of the resulting or surviving corporation; and (ii) the sale, lease, abandonment, transfer or other disposition by the Corporation of 40% or more of its assets (in a single transaction or a series of related transactions). 3D. In the event of such liquidation event, if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value. For this purpose, any securities shall be valued as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability covered by (ii) below: (a) If traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty (30) day period ending three (3) days prior to the closing; (b) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the closing; and (c) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Series A Preferred Stock. (ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above under Section 3D(i) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of such Series A Preferred Stock. In the event the requirements of this Section 3 are not complied with, the Corporation shall forthwith either: cause such closing to be postponed until such time as the requirements of this Section 3 have been complied with; or cancel such transaction, in which event the rights, preferences and privileges of the holders of the Series A Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in Section 3F hereof. 3E. Each holder of Series A Preferred Stock shall have the right at any time to convert all or any amount of Series A Preferred Stock into shares of Common Stock in accordance with the terms hereof, or in the case of any such liquidation which constitutes a reorganization or reclassification, any holder of Series A Preferred Stock may elect to receive the benefits of the provisions of Section 6G below. -4- 3F. The Corporation shall give to each holder of record of Series A Preferred Stock written notice of such liquidation, dissolution or winding up, stating a payment date, the amount of the Stated Preference and the place where said stated payments shall be payable, with such notice to be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier or telex, not less than twenty (20) days prior to the payment date stated therein, to the holders of record of Series A Preferred Stock, such notice to be addressed to each such holder at its address as shown by the records of the Corporation. 4. Voting. The holder of each share of Series A Preferred Stock shall ------ have the right to one vote for each share of Common Stock into which such Preferred Stock could then be converted and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as converted basis (after aggregating all shares into which shares of Series A Preferred Stock held by each holder could be converted) shall be rounded up to the nearest whole number. 4A. General. Except as may be provided otherwise in these terms ------- of the Series A Preferred Stock or required by law, the Series A Preferred Stock shall vote together with all other voting classes and series of stock of the Corporation as a single class on all actions to be taken by the stockholders of the Corporation. Each share of Series A Preferred Stock shall entitle the holder thereof to such number of votes per share as shall equal the number of shares of Common Stock (including fractions of a share rounded up to the nearest whole share) into which the shares of Series A Preferred Stock are then convertible by its terms (after aggregating all shares into which shares of Series A Preferred Stock held by each holder could be converted). 4B. Board Size. The Corporation shall not increase the maximum ---------- number of directors constituting the Board of Directors to a number in excess of seven (7) without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a series. 4C. Board Seats. The holders of the Series A Preferred Stock, ----------- voting as a separate series, shall be entitled to elect (1) one director of the Corporation. The holders of the Series A Preferred Stock and the Common Stock, voting together as a single class, shall be entitled to elect all other directors of the Corporation. At any meeting (or in a written consent in lieu thereof) held for the purpose of electing directors, the presence in person or by proxy (or the written consent) of the holders of a majority of the shares of Series A Preferred Stock then outstanding shall constitute a quorum of the Series A Preferred Stock for the election of the director to be elected solely by the holders of the Series A Preferred Stock. A vacancy in any directorship elected by the holders of the Series A Preferred Stock shall be filled only by vote or written consent of the holders of the Series A Preferred Stock, and a vacancy in the directorships elected jointly by the holders of the Series A Preferred Stock and the Common Stock shall be -5- filled only by vote or written consent of the Series A Preferred Stock and the Common Stock, as provided above. 5. Restrictions. At any time when shares of Series A Preferred Stock ------------ in an amount equal to at least 10% of the number of shares of Series A Preferred Stock originally issued are outstanding, except where the vote or written consent of the holders of a greater number or percentage of shares of the Corporation is required by law or by the Certificate of Incorporation and in addition to any other vote required by law or the Certificate of Incorporation, without the approval of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a series, the Corporation will not undertake or do any of the following: 5A. Create or authorize the creation of any additional class or series of shares of stock unless the same ranks junior to the Series A Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, or increase the authorized amount of the Series A Preferred Stock or increase the authorized amount of any additional class or series of shares of stock unless the same ranks junior to the Series A Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, or create or authorize any obligation or security convertible into shares of Series A Preferred Stock or into shares of any other class or series of stock unless the same ranks junior to the Series A Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, whether any such creation, authorization or increase shall be by means of amendment to the Certificate of Incorporation, as amended, or by merger, consolidation or otherwise; 5B. Consent to (i) consolidation or merger of the Corporation into or with any other entity or entities which results in the exchange of 40% or more of the outstanding shares of the Corporation's voting securities (in a single transaction or a series of related transactions) for securities or other consideration issued or paid or caused to be issued or paid by any such entity or affiliate thereof (other than a merger to reincorporate the Corporation in a different jurisdiction) after which the holders of the Corporation's outstanding voting securities hold less than 55% of the voting securities of the resulting or surviving corporation, or (ii) the sale, lease, abandonment, transfer or other disposition by the Corporation of 40% or more of its assets (in a single transaction or a series of related transactions); unless upon such event the holders of Series A Preferred Stock and Common Stock held as a result of the exercise of a certain Common Stock Purchase Warrant dated ____________, 1996 (the "Warrant") receive net proceeds at least equal to the "Qualified Return Price" (as defined below); 5C. Amend, alter or seek a waiver of any term of the Series A Preferred Stock or otherwise amend, alter or repeal its Certificate of Incorporation or By-laws in a way materially adverse to or inconsistent with the terms of the Series A Preferred Stock; 5D. Purchase or set aside any sums for the purchase of, or pay any dividend or make any distribution on, any shares of stock other than the Series A Preferred Stock, except for dividends or other distributions payable on the Common Stock solely in the form of additional -6- shares of Common Stock and except for the purchase of shares of Common Stock from former employees of the Corporation who acquired such shares directly from the Corporation, if each such purchase is made pursuant to contractual rights held by the Corporation relating to the termination of employment of such former employee and the purchase price does not exceed the original issue price paid by such former employee to the Corporation for such shares; or 5E. Redeem or otherwise acquire any shares of Series A Preferred Stock except as expressly authorized in Section 7 hereof or pursuant to a purchase offer made pro rata to all holders of the shares of Series A Preferred Stock on the basis of the aggregate number of outstanding shares of Series A Preferred Stock then held by each such holder. 5F. For purposes of Section 5B, "Qualified Return Price" shall mean an amount equal to (i) $2.50 per share (and with respect to the exercised Warrant, the initial exercise price), increased by (ii) thirty-five percent (35%) each year, compounded on an annual basis measured from the date of issuance (or exercise, in the case of the Warrant) to the date of calculation, pro-rated for any partial years, reduced by (iii) the per share amount of any dividends or other distributions on account of the Series A Preferred Stock or Common Stock (issued upon exercise of the Warrant) actually made and paid prior to the date of calculation, which amount, in the case of stock consideration shall be calculated such that the proposed purchase price of shares to be received by holders of Series A Preferred Stock and Common Stock (issued upon exercise of the Warrant) is discounted by 25% unless such shares are freely tradeable. 6. Conversions. The holders of shares of Series A Preferred Stock ----------- shall have the following conversion rights: 6A. Right to Convert. Subject to the terms and conditions of this ---------------- Section 6, the holder of any share or shares of Series A Preferred Stock shall have the right, at its option at any time, to convert any such shares of Series A Preferred Stock (except that upon any liquidation of the Corporation the right of conversion shall terminate at the close of business on the business day fixed for payment of the amount distributable on the Series A Preferred Stock) into such number of fully paid and nonassessable shares of Common Stock as is obtained by (i) multiplying the number of shares of Series A Preferred Stock so to be converted by $2.50 and (ii) dividing the result by the conversion price of $2.50 per share or, in case an adjustment of such price has taken place pursuant to the further provisions of this Section 6, then by the conversion price as last adjusted and in effect at the date any share or shares of Series A Preferred Stock are surrendered for conversion (such price, or such price as last adjusted, being referred to as the "Conversion Price"). Such rights of conversion shall be exercised by the holder thereof by giving written notice that the holder elects to convert a stated number of shares of Series A Preferred Stock into Common Stock and by surrender of a certificate or certificates for the shares so to be converted to the Corporation at its principal office (or such other office or agency of the Corporation as the Corporation may designate by notice in writing to the holders of the Series A Preferred Stock) at any time during its usual business hours on the date set forth in such notice, together with a statement of the name or names (with address) in which the certificate or certificates for shares of Common Stock shall be issued. -7- 6B. Issuance of Certificates; Time Conversion Effected. Promptly -------------------------------------------------- after the receipt of the written notice referred to in Section 6A above and surrender of the certificate or certificates for the share or shares of Series A Preferred Stock to be converted, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder, registered in such name or names as such holder may direct, a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares of Series A Preferred Stock. To the extent permitted by law, such conversion shall be deemed to have been effected and the Conversion Price shall be determined as of the close of business on the date on which such written notice shall have been received by the Corporation and the certificate or certificates for such share or shares shall have been surrendered as aforesaid, and at such time the rights of the holder of such share or shares of Series A Preferred Stock shall cease, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby. 6C. Fractional Shares; Dividends; Partial Conversion. No ------------------------------------------------ fractional shares shall be issued upon conversion of Series A Preferred Stock into Common Stock and no adjustment shall be made upon any conversion on account of any cash dividends on the Common Stock issued upon such conversion. At the time of each conversion, the Corporation shall pay in cash an amount equal to all dividends, accrued and unpaid on the shares of Series A Preferred Stock surrendered for conversion to the date upon which such conversion is deemed to take place as provided in Section 6B. In case the number of shares of Series A Preferred Stock represented by the certificate or certificates surrendered exceeds the number of shares converted, the Corporation shall, upon such conversion, execute and deliver to the holder, at the expense of the Corporation, a new certificate or certificates for the number of shares of Series A Preferred Stock represented by the certificate or certificates surrendered which are not to be converted. If any fractional share of Common Stock would, except for the provisions of the first sentence of this Section 6C, be delivered upon such conversion, the Corporation, in lieu of delivering such fractional share, shall pay to the holder surrendering the Series A Preferred Stock for conversion an amount in cash equal to the current market price of such fractional share, as determined in good faith by the Board of Directors of the Corporation. 6D. Adjustment of Price Upon Issuance of Common Stock. Except as ------------------------------------------------- provided in Section 6E, if and whenever the Corporation shall issue or sell, or is, in accordance with Sections 6D(1) through 6D(7), deemed to have issued or sold, any shares of Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then, forthwith upon such issue or sale, the Conversion Price shall be reduced to the price determined by multiplying the applicable Conversion Price by a fraction: (1) the numerator of which shall be (a) the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock, plus (b) the number of shares of Common Stock which the net aggregate consideration, if any, received by the Corporation for the total number of such -8- additional shares of Common Stock so issued would purchase at the applicable Conversion Price for the Series A Preferred Stock in effect immediately prior to such issuance, and (2) the denominator of which shall be (a) the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock plus (b) the number of such additional shares of Common Stock so issued. For purposes of this Section 6D, the following Sections 6D(1) to 6D(7) shall also be applicable: 6D(1) Issuance of Rights or Options. In case at any time the ----------------------------- Corporation shall in any manner grant (whether directly or by assumption in a merger or otherwise) any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or security convertible into or exchangeable for Common Stock (such warrants, rights or options being called "Options" and such convertible or exchangeable stock or securities being called "Convertible Securities") whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities (determined by dividing (i) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of all such Options, plus, in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options) shall be less than the Conversion Price in effect immediately prior to the time of the granting of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued for such price per share as of the date of granting of such Options or the issuance of such Convertible Securities and thereafter shall be deemed to be outstanding. Except as otherwise provided in Section 6D(3), no adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. 6D(2) Issuance of Convertible Securities. In case the Corporation ---------------------------------- shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (i) the total amount -9- received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and thereafter shall be deemed to be outstanding, provided that (a) except as otherwise provided in Section 6D(3), no adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any Options to purchase any such Convertible Securities for which adjustments of the Conversion Price have been or are to be made pursuant to other provisions of this Section 6D, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. 6D(3) Change in Option Price or Conversion Rate. Upon the happening ----------------------------------------- of any of the following events, namely, if the purchase price provided for in any Option referred to in Section 6D(1), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in Section 6D(1) or 6D(2), or the rate at which Convertible Securities referred to in Section 6D(1) or 6D(2) are convertible into or exchangeable for Common Stock shall change at any time (including, but not limited to, changes under or by reason of provisions designed to protect against dilution), the Conversion Price in effect at the time of such event shall forthwith be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold, and any adjustments for dilutive issuances or deemed dilutive issuances of Common Stock subsequent to such time shall be determined based on such readjusted Conversion Price; and on the termination of any such Option or any such right to convert or exchange such Convertible Securities, the Conversion Price then in effect hereunder shall forthwith be increased to the Conversion Price which would have been in effect at the time of such termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such termination, never been issued. 6D(4) Consideration for Stock. In case any shares of Common Stock, ----------------------- Options or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Corporation in connection therewith. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the Corporation, without deduction of any expenses incurred or any -10- underwriting commissions or concessions paid or allowed by the Corporation in connection therewith. In case any Options shall be issued in connection with the issue and sale of other securities of the Corporation, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued for such consideration as determined in good faith by the Board of Directors of the Corporation. 6D(5) Record Date. In case the Corporation shall take a record of ----------- the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (ii) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. 6D(6) Treasury Shares. The number of shares of Common Stock --------------- outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purpose of this Section 6D. 6E. Certain Issues of Common Stock Excepted. Anything herein to the --------------------------------------- contrary notwithstanding, the Corporation shall not be required to make any adjustment of the Conversion Price in the case of the issuance from and after the date of filing of these terms of the Series A Preferred Stock of any Reserved Shares, as defined in this Section 6E. For purposes hereof the term "Reserved Shares" shall mean and include: (i) up to an aggregate of 1,052,632 shares (appropriately adjusted to reflect the occurrence of any event described in Section 6F) of Common Stock to directors, officers, employees or consultants of the Corporation in connection with their service as directors of the Corporation, their employment by the Corporation or their retention as consultants by the Corporation, plus such number of shares of Common Stock which are repurchased by the Corporation from such persons after such date pursuant to contractual rights held by the Corporation and at repurchase prices not exceeding the respective original purchase prices paid by such persons to the Corporation therefor (collectively, the "Employee Shares"); and (ii) such number of shares of Common Stock or other securities convertible or exchangeable therefor, as the Corporation may issue for purposes of corporate business transactions, including joint venture, product development, acquisition of a division or product line by the Corporation, with any such transaction and each issuance of capital stock to be subject to the prior approval of at least a majority of directors who are not regularly employed by the Corporation or any wholly-owned subsidiary thereof and, if requested by the Director representative of the holders of Series A Preferred Stock, based upon projected growth and earnings analysis validated by a third party mutually acceptable to both the Corporation and the Director representative of the holders of Series A Preferred Stock that (i) the issuance of such shares by the Corporation shall be accretive to earnings by at least 10% over the ensuing twelve (12) months; and (ii) the sales revenue growth rate of the Corporation over the ensuing twelve -11- (12) months shall be at least equal to the Corporation's historical sales growth rate during the prior year (the "Transaction Shares"). 6F. Subdivision or Combination of Common Stock. In case the ------------------------------------------ Corporation shall at any time subdivide (by any stock split, stock dividend or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and, conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. 6G. Reorganization or Reclassification. If any capital ---------------------------------- reorganization or reclassification of the capital stock of the Corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization or reclassification, lawful and adequate provisions shall be made whereby each holder of a share or shares of Series A Preferred Stock shall thereupon have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore receivable upon the conversion of such share or shares of Series A Preferred Stock, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common Stock immediately theretofore receivable upon such conversion had such reorganization or reclassification not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of such holder to the end that the provisions hereof (including without limitation provisions for adjustments of the Conversion Price) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such conversion rights. 6H. Notice of Adjustment. Upon any adjustment of the Conversion -------------------- Price, then and in each such case the Corporation shall give written notice thereof, by delivery in person, certified or registered mail, return receipt requested, telecopier or telex, addressed to each holder of shares of Series A Preferred Stock at the address of such holder as shown on the books of the Corporation, which notice shall state the Conversion Price resulting from such adjustment, setting forth in reasonable detail the method upon which such calculation is based. 6I. Other Notices. In case at any time: ------------- (i) the Corporation shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the holders of its Common Stock; (ii) the Corporation shall offer for subscription pro rata to the --- ---- holders of its Common Stock any additional shares of stock of any class or other rights; (iii) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or a consolidation or merger of the Corporation with or into -12- another entity or entities, or a sale, lease, abandonment, transfer or other disposition of all or substantially all its assets; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then, in any one or more of said cases, the Corporation shall give, by delivery in person, certified or registered mail, return receipt requested, telecopier or telex, addressed to each holder of any shares of Series A Preferred Stock at the address of such holder as shown on the books of the Corporation, (x) at least twenty (20) days' prior written notice of the date on which the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, and (y) in the case of any such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, at least twenty (20) days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (x) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto and such notice in accordance with the foregoing clause (y) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, as the case may be. 6J. Stock to be Reserved. The Corporation will at all times reserve -------------------- and keep available out of its authorized Common Stock, solely for the purpose of issuance upon the conversion of Series A Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of Series A Preferred Stock. The Corporation covenants that all shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and, without limiting the generality of the foregoing, the Corporation covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the Conversion Price in effect at the time. The Corporation will take all such action as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirement of any national securities exchange upon which the Common Stock may be listed. The Corporation will not take any action which results in any adjustment of the Conversion Price if the total number of shares of Common Stock issued and issuable after such action upon conversion of the Series A Preferred Stock would exceed the total number of shares of Common Stock then authorized by the Certificate of Incorporation, as amended. 6K. No Reissuance of Series A Preferred Stock. Shares of Series A ----------------------------------------- Preferred Stock which are converted into shares of Common Stock as provided herein shall not be reissued. -13- 6L. Issue Tax. The issuance of certificates for shares of Common --------- Stock upon conversion of Series A Preferred Stock shall be made without charge to the holders thereof for any issuance tax in respect thereof, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Series A Preferred Stock which is being converted. 6M. Closing of Books. The Corporation will at no time close its ---------------- transfer books against the transfer of any Series A Preferred Stock or of any shares of Common Stock issued or issuable upon the conversion of any shares of Series A Preferred Stock in any manner which interferes with the timely conversion of such Series A Preferred Stock, except as may otherwise be required to comply with applicable securities laws. 6N. Definition of Common Stock. As used in this Section 6, the term -------------------------- "Common Stock" shall mean and include the Corporation's authorized Common Stock, par value $.001 per share, as constituted on the date of filing of these terms of the Series A Preferred Stock, and shall also include any capital stock of any class of the Corporation thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; provided that the shares of Common Stock receivable upon conversion of shares of Series A Preferred Stock shall include only shares designated as Common Stock of the Corporation on the date of filing of this instrument, or in case of any reorganization or reclassification of the outstanding shares thereof, the stock, securities or assets provided for in Section 6G. 6O. Mandatory Conversion. If at any time the Corporation shall -------------------- effect a firm commitment underwritten public offering of shares of Common Stock in which (i) the gross proceeds received by the Corporation from such public offering shall be at least $10,000,000 and (ii) the price paid by the public for such shares shall be at least $5.00 per share (appropriately adjusted to reflect the occurrence of any event described in Section 6F), then effective upon the closing of the sale of such shares by the Corporation pursuant to such public offering, all outstanding shares of Series A Preferred Stock shall automatically convert to shares of Common Stock on the basis set forth in this Section 6. In addition, upon the approval of holders representing at least 66 2/3% of the outstanding Series A Preferred Stock, or at such time as only 200,000 shares (subject to equitable adjustments for stock splits, stock dividends and the like) of Series A Preferred Stock remain outstanding, all outstanding shares of Series A Preferred Stock shall automatically convert to shares of Common Stock on the basis set forth in this Section 6. Holders of shares of Series A Preferred Stock so converted may deliver to the Corporation at its principal office (or such other office or agency of the Corporation as the Corporation may designate by notice in writing to such holders) during its usual business hours, the certificate or certificates for the shares so converted. As promptly as practicable thereafter, the Corporation shall issue and deliver to such holder a certificate or certificates for the number of whole shares of Common Stock to which such holder is entitled, together with any cash dividends and payment in lieu of fractional shares to which such holder may be entitled pursuant to Section 6C. Until such time as a holder of shares of Series A Preferred Stock shall surrender his or its -14- certificates therefor as provided above, such certificates shall be deemed to represent the shares of Common Stock to which such holder shall be entitled upon the surrender thereof. 7. Redemption. The shares of Series A Preferred Stock shall be redeemed ---------- as follows: 7A. Mandatory Redemption. At any time after August __, 2001 upon the -------------------- written request of holders of not less than a majority of the then outstanding shares of Series A Preferred Stock, the Corporation shall be obligated to redeem from each holder of shares of Series A Preferred Stock, all of the shares of Series A Preferred Stock held by such holder, with such redemption to be completed within ninety (90) days of the date the notice of redemption is delivered to the Corporation (the "Redemption Date"). 7B. Redemption Price and Payment. The shares of Series A Preferred ---------------------------- Stock to be redeemed on the Redemption Date shall be redeemed by paying for each such share in cash an amount equal to $2.50 per share plus, in the case of each share, an amount equal to all dividends declared but unpaid thereon, computed to the Redemption Date (such amount being referred to as the "Redemption Amount"). Such payment shall be made in full on the Redemption Date to all the holders entitled thereto, pro rata, based on the relative number of shares being redeemed by each such holder. 7C. Redemption Mechanics. At least 20 but not more than 30 days prior -------------------- to the Redemption Date, written notice (the "Redemption Notice") shall be given by the Corporation by delivery in person, certified or registered mail, return receipt requested, telecopier or telex, to each holder of record (at the close of business on the business day next preceding the day on which the Redemption Notice is given) of shares of Series A Preferred Stock notifying such holder of the redemption and specifying the Redemption Amount, the Redemption Date and the place where said Redemption Amount shall be payable. The Redemption Notice shall be addressed to each holder at his address as shown by the records of the Corporation. From and after the close of business on the Redemption Date, unless there shall have been a default in the payment of the Redemption Amount, all rights of holders of shares of Series A Preferred Stock (except the right to receive the Redemption Price) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Series A Preferred Stock on the Redemption Date are insufficient to redeem the total number of outstanding shares of Series A Preferred Stock, the holders of shares of Series A Preferred Stock shall share ratably in any funds legally available for redemption of such shares according to the respective amounts which would be payable with respect to the full number of shares owned by them if all such outstanding shares were redeemed in full. The shares of Series A Preferred Stock not redeemed shall remain outstanding and entitled to all rights and preferences provided herein. At any time thereafter when additional funds of the Corporation are legally available for the redemption of such shares of Series A Preferred Stock, such funds will be used, at the end of the next succeeding fiscal quarter, to redeem the balance of such shares, or such portion thereof for which funds are then legally available, on the basis set forth above. -15- 7D. Default. If the Corporation fails to redeem the Series A ------- Preferred Stock in full as called for, the Corporation shall be obligated to pay an additional interest amount to the holders of outstanding Series A Preferred Stock based on the Redemption Amount outstanding ("Redemption Interest") payable in cash quarterly in arrears at the initial rate of 8% per annum calculated from the date of the redemption notice, increasing one point each successive calendar quarter (or portion thereof) during which the full outstanding Redemption Amount balance (plus Redemption Interest, if any) is not paid in full. In the event that the Corporation does not pay such Redemption Interest in full within one hundred twenty (120) days following the date of the redemption notice, then all accrued and unpaid Redemption Interest shall be due and payable in kind in the form of additional shares of Series A Preferred Stock, at an assumed value of $2.50 per share, in an amount equal to the Redemption Interest ("PIK Interest") until such time as the Corporation has sufficient legal capital available to pay the Redemption Interest in cash. Any and all outstanding Redemption Interest amounts shall be included as being due and payable to the holders of Series A Preferred Stock for purposes of determining the Stated Preference upon any liquidation under Section 3. 7E. Redeemed or Otherwise Acquired Shares to be Retired. Any shares --------------------------------------------------- of Series A Preferred Stock redeemed pursuant to this Section 7 or otherwise acquired by the Corporation in any manner whatsoever shall be canceled and shall not under any circumstances be reissued; and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce accordingly the number of authorized shares of Series A Preferred Stock. 8. Amendments. No provision of these terms of the Series A Preferred ---------- Stock may be amended, modified or waived without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, except for those provisions which expressly call for a greater number or percentage of shares of Series A Preferred Stock. COMMON STOCK 1. Relative Rights of Common Stock and Preferred Stock. All preferences, --------------------------------------------------- voting powers, relative, participating, optional or other specific rights and privileges, and qualifications, limitations, or restrictions of the Common Stock are expressly made subject and subordinate to those that may be fixed with respect to any shares of Preferred Stock. 2. Voting Rights. Except as otherwise required by law or this Certificate ------------- of Incorporation, each holder of Common Stock shall have one vote in respect of each share of stock held by him of record on the books of the Corporation for the election of directors and on all matters submitted to a vote of stockholders of the Corporation. 3. Dividends. Subject to the preferential rights of the Preferred Stock, --------- the holders of shares of Common Stock shall be entitled to receive, when and if declared by the Board of -16- Directors, out of the assets of the Corporation which are by law available therefor, dividends payable either in cash, in property or in shares of capital stock. 4. Dissolution, Liquidation or Winding Up. In the event of any -------------------------------------- dissolution, liquidation or winding up of the affairs of the Corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of the Preferred Stock, holders of Common Stock shall be entitled, unless otherwise provided by law or this Certificate of Incorporation, to receive all of the remaining assets of the Corporation or whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively. IN WITNESS WHEREOF, the undersigned under penalty of perjury hereby certifies that this instrument is the act and deed of Bionix, Inc. and that the facts stated in the foregoing certificate of designations, preferences and rights of its Series A Convertible Participating Preferred Stock are true this 5th day of September, 1996. BIONIX, INC. By: /s/ David Anderson --------------------------- David Anderson, President EX-3.2 3 FORM OF RESTATED CERT. OF INCORP-POST-FILING EXHIBIT 3.2 [THIS RESTATED CERTIFICATE OF INCORPORATION WILL BE FILED AT THE CLOSE OF THE OFFERING] RESTATED CERTIFICATE OF INCORPORATION OF BIONX IMPLANTS, INC. Bionx Implants, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is Bionx Implants, Inc. Bionx Implants, Inc. was originally incorporated under the name Bionix, Inc. The original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on October 11, 1995. 2. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of this corporation. 3. The text of the Restated Certificate of Incorporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: ARTICLE I The name of the corporation is Bionx Implants, Inc. (the "corporation"). ARTICLE II The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV The aggregate number of shares which the corporation shall have authority to issue is thirty nine million six hundred thousand (39,600,000), divided into thirty one million six hundred thousand (31,600,000) shares of common stock with par value of $.0019 per share and eight million (8,000,000) shares of preferred stock with par value of $.001 per share. The preferred stock may be issued from time to time in one or more series. The Board of Directors of the corporation is hereby expressly authorized to provide, by resolution or resolutions duly adopted by it prior to issuance, for the creation of each such series and to fix the designation and the powers, preferences, rights, qualifications, limitations and restrictions relating to the shares of each such series. The authority of the Board of Directors with respect to each series of preferred stock shall include, but not be limited to, determining the following: (a) the designation of such series, the number of shares to constitute such series and the stated value if different from the par value thereof; (b) whether the shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights, which may be general or limited; (c) the dividends, if any, payable on such series, whether any such dividends shall be cumulative, and, if so, from what dates, the conditions and dates upon which such dividends shall be payable, and the preference or relation which such dividends shall bear to the dividends payable on any shares of stock of any other class or any other series of preferred stock; (d) whether the shares of such series shall be subject to redemption either by the corporation or the holders thereof, and, if so, the times, prices and other conditions of such redemption; (e) the amount or amounts payable upon shares of such series upon, and the rights of the holders of such series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the corporation; (f) whether the shares of such series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to and the manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or other corporate purposes and the terms and provisions relating to the operation thereof; (g) whether the shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or any other series of preferred stock or any other securities and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchange; (h) the limitations and restrictions, if any, to be effective while any shares of such series are outstanding upon the payment of dividends or the making of -2- other distributions on, and upon the purchase, redemption or other acquisition by the corporation of, the common stock or shares of stock of any other class or any other series of preferred stock; (i) the conditions or restrictions, if any, upon the creation of indebtedness of the corporation or upon the issue of any additional stock, including additional shares of such series or of any other series of preferred stock or of any other class; and (j) any other powers, preferences and relative, participating, optional and other specific rights, and any qualifications, limitations and restrictions, thereof. The powers, preferences and relative, participating, optional and other special rights of each series of preferred stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. All shares of any one series of preferred stock shall be identical in all respects with all other shares of such series, except that shares of any one series issued at different times may differ as to the dates from which dividends thereof shall be cumulative. ARTICLE V The corporation is to have perpetual existence. ARTICLE VI In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: 1. To make, alter or repeal the by-laws of the corporation. 2. To authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation. 3. To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. 4. By a majority of the whole Board of Directors, to designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The by-laws may provide that in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such -3- committee, to the extent provided in the resolution of the Board of Directors, or in the by-laws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution or by-laws expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. 5. When and as authorized by the stockholders in accordance with law, to sell, lease or exchange all or substantially all of the property and assets of the corporation, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property including shares of stock in, and/or other securities of, any other corporation or corporations, as its board of directors shall deem expedient and for the best interests of the corporation. ARTICLE VII Elections of directors need not be by written ballot unless the by- laws of the corporation shall so provide. ARTICLE VIII Meetings of stockholders may be held within or without the State of Delaware, as the by-laws may provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the by-laws of the corporation. ARTICLE IX The corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE X 1. Limitation of Liability. To the fullest extent permitted by the ----------------------- General Corporation Law of the State of Delaware as the same exists or as may hereafter be amended, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. -4- 2. Amendments. Neither any amendment nor repeal of this Article X, ---------- nor the adoption of any provision of the corporation's Certificate of Incorporation inconsistent with this Article X, shall eliminate or reduce the effect of this Article X, in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article X, would accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent provision. ARTICLE XI 1. Every person who is or was a director or officer of the corporation shall be indemnified by the corporation to the fullest extent allowed by Section 145 of the Delaware General Corporation Law against all liabilities and expenses imposed upon or incurred by that person in connection with any proceeding in which that person may be made, or threatened to be made, a party, or in which that person may become involved by reason of that person being or having been a director or officer or of serving or having served in any capacity with any other enterprise at the request of the corporation, whether or not that person is a director or officer or continues to serve the other enterprise at the time the liabilities or expenses are imposed or incurred. 2. To the fullest extent permitted by applicable law, the corporation is authorized to provide indemnification of (and advancement of expenses to) agents of the corporation (and any other persons to which Delaware law permits the corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, votes of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to the corporation, its stockholders and others. ARTICLE XII The following provisions shall be effective immediately after the corporation consummates the closing of a sale of shares of Common Stock made pursuant to a firm commitment underwritten public offering of Common Stock in which (i) the gross proceeds received by the corporation from such public offering are at least ten million dollars and (ii) the price paid by the public for such shares is at least $9.50: 1. No action shall be taken by the shareholders of the corporation except at an annual or special meeting of the stockholders called in accordance with the By-laws of the corporation and no action shall be taken by the stockholders by written consent. 2. Upon the later of the date on which this Restated Certificate of Incorporation is filed with the Secretary of State of Delaware and the date on which this Article XII becomes effective in accordance with its terms (such later date being referred to herein as the "Effective Date"), the Board of Directors of the corporation shall be divided into three classes, the respective terms of office of which shall end in successive years . The number of directors on the Board shall be determined in accordance with the by-laws of the corporation. The number of -5- directors in each class shall be as nearly equal as possible, except that no director shall be moved from one class to another class in order to attain equality or near equality in the size of the respective classes. Such classes shall be designated as "Class I", "Class II" and "Class III". Unless they are elected to fill vacancies or elected pursuant to the next paragraph, the directors in each class shall hold office until the third successive annual meeting of shareholders after their election and until their successors shall have qualified, such that at each annual meeting of shareholders only one class of directors shall be elected. In the event that a director is elected to fill a vacancy, the term of such director shall expire at the next annual meeting of shareholders. At the meeting of shareholders at which this Restated Certificate of Incorporation was adopted by the shareholders of the corporation, the shareholders of the corporation elected directors and designated which of the elected directors shall serve in each of the classes specified above as of the Effective Date. If, on the Effective Date, a person elected as a director at such meeting remains on the Board, such person shall serve in the class so designated by the shareholders at such meeting. If any person so elected ceases to serve on the Board prior to the Effective Date (such person, a "Vacating Director") and the Board appoints another person (the "New Director") to fill the vacancy of the Vacating Director, the term of the New Director shall expire at the next annual meeting of shareholders. Nothwithstanding any provision herein to the contrary, the provisions of this Article XII, including without limitation this paragraph, shall not be amended unless any such amendment is approved by holders of at least two-thirds of the outstanding capital stock of each class of capital stock entitled to vote thereon. IN WITNESS WHEREOF, Bionix, Inc. has caused this certificate to be signed by David W. Anderson, its President, and Michael J. O'Brien, its Secretary, this ____ day of __________, 1997. ___________________________________ David W. Anderson, President ___________________________________ Michael J. O'Brien, Secretary -6- EX-3.3 4 BYLAWS EXHIBIT 3.3 BIONX IMPLANTS, INC. * * * * * AMENDED AND RESTATED B Y - L A W S (As amended through February 14, 1997) ARTICLE I OFFICES Section 1. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of directors shall be held in the City of Malvern, State of Pennsylvania, at such place as may be fixed from time to time by the board of directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of stockholders, commencing with the year 1997, shall be held on the thirtieth day of March if not a legal holiday, and if a legal holiday, then on the next secular day following, at 1 P.M., or at such other date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a board of directors, and transact such other business as may properly be brought before the meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the president and shall be called by the president or secretary at the request in writing of a majority of the board of directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the office. -2- Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the Stockholders, the Stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question. Section 10. Unless otherwise provided in the certificate of incorporation each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Section 11. At any annual or special meeting of stockholders, proposals by stockholders and persons nominated for election as directors by stockholders shall be considered only if advance notice thereof has been timely given as provided herein and such proposals or nominations are otherwise proper for consideration under applicable law and the certificate of incorporation and by-laws of the corporation. Notice of any proposal to be presented by any stockholder or of the name of any person to be nominated -3- by any stockholder for election as a director of the corporation at any meeting of stockholders shall be delivered to the secretary of the corporation at its principal executive office not less than 60 nor more than 90 days prior to the date of the meeting; provided, however, that if the date of the meeting is first publicly announced or disclosed (in a public filing, in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service, or otherwise) less than 70 days prior to the date of the meeting, such advance notice shall be given not more than ten days after such date is first so announced or disclosed. Public notice shall be deemed to have been given more than 70 days in advance of the annual meeting if the corporation shall have previously disclosed, in these by-laws or otherwise, that the annual meeting in each year is to be held on a determinable date, unless and until the Board determines to hold the meeting on a different date. Any stockholder who gives notice of any such proposal shall deliver therewith the text of the proposal to be presented and a brief written statement of the reasons why such stockholder favors the proposal and setting forth such stockholder's name and address, the number and class of all shares of each class of stock of the corporation beneficially owned by such stockholder and any material interest of such stockholder in the proposal (other than as a stockholder). Any stockholder desiring to nominate any person for election as a director of the corporation shall deliver with such notice a statement in writing setting forth the name of the person to be nominated, the number and class of all shares of each class of stock of the corporation beneficially owned by such person, the information regarding such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission (or the corresponding provisions of any regulation subsequently adopted by the Securities and Exchange Commission applicable to the corporation), such person's signed consent to serve as a director of the corporation if elected, such stockholder's name and address and the number and class of all shares of each class of stock of the corporation beneficially owned by such stockholder. As used herein, shares "beneficially owned" shall mean all shares as to which such person, together with such person's affiliates and associates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934), may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934 ("Exchange Act"), as well as all shares as to which such person, together with such person's affiliates and associates, has the right to become the beneficial owner pursuant to any -4- agreement or understanding, or upon the exercise of warrants, options or rights to convert or exchange (whether such rights are exercisable immediately or only after the passage of time or the occurrence of conditions). The person presiding at the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall determine whether such notice has been duly given and shall direct that proposals and nominees not be considered if such notice has not been given. Nothing in this section shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14A-8 of the Exchange Act. Notwithstanding Article VIII of these by-laws or any provision of the certificate of incorporation or the fact that a lesser percentage may be specified by Delaware law, the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to amend, repeal, or adopt any provision inconsistent with this section. This section shall not take effect until the conversion of all of the corporation's outstanding Series A Preferred Stock ARTICLE III DIRECTORS Section 1. The number of directors which shall constitute the whole board shall be not less than five nor more than nine; provided, however, that while there are any shares of Preferred Stock outstanding, the Board shall consist of not less than six and not more than seven members. The first board shall consist of five directors. Thereafter, within the limits above specified, the number of directors shall be determined by resolution of the board of directors or by the stockholders at the annual meeting. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in -5- office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase) , the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3. The business of the corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these by-laws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS Section 4. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Commencing at such time as the corporation first issues shares of Preferred Stock, the Board shall meet no less frequently than once during each calendar quarter. Section 5. The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter -6- provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. Section 6. Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. Section 7. Special meetings of the board may be called by the president on three days' notice to each director, either personally or by mail or by telegram; special meetings shall be called by the president or secretary in like manner and on like notice (i) on the written request of two directors unless the board consists of only one director; in which case special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the sole director or (ii) on the written request of holders of at least 25% of the outstanding shares of Series A Convertible Participating Preferred Stock. Section 8. At all meetings of the board a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Section 10. Unless otherwise restricted by the certificate of incorporation or these by-laws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons -7- participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. COMMITTEES OF DIRECTORS Section 11. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. -8- Section 12. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. COMPENSATION OF DIRECTORS Section 13. Unless otherwise restricted by the certificate of incorporation or these by-laws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. REMOVAL OF DIRECTORS Section 14. Unless otherwise restricted by the certificate of incorporation or by law, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors. ARTICLE IV NOTICES Section 1. Whenever, under the provisions of the statutes or of the certificate of incorporation or of these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram. -9- Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS Section 1. The officers of the corporation shall be chosen by the board of directors and shall be a president, a vice-president, a secretary and a treasurer. The board of directors may also choose additional vice-presidents, and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these by-laws otherwise provide. Section 2. The board of directors at its first meeting after each annual meeting of stockholders shall choose a president, one or more vice- presidents, a secretary and a treasurer. Section 3. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 4. The salaries of all officers and agents of the corporation shall be fixed by the board of directors; provided, however, if the board has established a compensation committee, no increase in salary of the officers of the corporation shall occur unless such increase is approved by such committee. Section 5. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any office of the corporation shall be filled by the board of directors. THE PRESIDENT -10- Section 6. The president shall be the chief executive officer of the corporation, shall preside at all meetings of the stockholders and the board of directors, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. Section 7. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. THE VICE-PRESIDENTS Section 8. In the absence of the president or in the event of his inability or refusal to act, the vice-president (or in the event there be more than one vice-president, the vice-presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice-presidents shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARY Section 9. The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant -11- secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 10. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURERS Section 11. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. Section 12. He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings, or when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. Section 13. If required by the board of directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. -12- Section 14. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. ARTICLE VI CERTIFICATES FOR SHARES Section 1. The shares of the corporation shall be represented by a certificate or shall be uncertificated. Certificates shall be signed by, or in the name of the corporation by, the chairman or vice-chairman of the board of directors, or the president or a vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers,' designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. -13- Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to Sections 151, 156, 202(a) or 218(a) or a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Any of or all the signatures on a certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. The board of directors may direct a new certificate or certificates or uncertificated shares to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates or uncertificated shares, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFER OF STOCK -14- Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Upon receipt of proper transfer instructions from the registered owner of uncertificated shares such uncertificated shares shall be canceled and issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the corporation. FIXING RECORD DATE Section 5. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such -15- share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII GENERAL PROVISIONS DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. ANNUAL STATEMENT Section 3. The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. CHECKS Section 4. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. -16- FISCAL YEAR Section 5. The fiscal year of the corporation shall be fixed by resolution of the board of directors. SEAL Section 6. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. INDEMNIFICATION Section 7. The corporation shall indemnify to the full extent permitted by law any person made or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person or such person's testator or intestate is or was a director or officer of the corporation or serves or served at the request of the corporation any other enterprise as a director or officer. Expenses, including attorneys' fees, incurred by any such person in defending any such action, suit or proceeding shall be paid or reimbursed by the corporation promptly upon receipt by it of an undertaking of such person to repay such expenses if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation. The rights provided to any person by this by-law shall be enforceable against the corporation by such person who shall be presumed to have relied upon it in serving or continuing to serve as a director or officer as provided above. No amendment of this by-law shall impair the rights of any person arising at any time with respect to events occurring prior to such amendment. For purposes of this bylaw, the term "corporation" shall include any predecessor of the corporation and any constituent corporation (including any constituent of a constituent) absorbed by the corporation in a consolidation or merger; the term "other enterprise" shall include any corporation, partnership, joint venture, trust or employee benefit plan; service "at the request of the corporation" shall include service as a director or officer of the corporation which imposes duties -17- on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; any excise taxes assessed on a person with respect to an employee benefit plan shall be deemed to be indemnifiable expenses; and action by a person with respect to an employee benefit plan which such person reasonably believes to be in the interest of the participants and beneficiaries of such plan shall be deemed to be action not opposed to the best interests of the corporation. ARTICLE VIII AMENDMENTS Section 1. These by-laws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the board of directors, when such power is conferred upon the board of directors by the certificate of incorporation at any regular meeting of the stockholders or of the board of directors or at any special meeting of the stockholders or of the board of directors if notice of such alteration, amendment, repeal or adoption of new by- laws be contained in the notice of such special meeting. If the power to adopt, amend or repeal by-laws is conferred upon the board of directors by the certificate of incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal by-laws. -18- EX-10.1 5 REORGANIZATION AGREEMENT Exhibit 10.1 REORGANIZATION AGREEMENT THIS AGREEMENT (the "Agreement"), made and entered into as of the 5th day of September, 1996, by and among the United States residents listed in Exhibit A --------- annexed hereto (each, a "U.S. Investor" and collectively, the "U.S. Investors"), the residents of Finland listed in Exhibit B annexed hereto (each, a "Finnish --------- Investor" and, collectively, the "Finnish Investors"), BIOSCIENCE, LTD. ("Bioscience"), a corporation organized under the laws of Finland, BIOCON, OY ("Biocon"), a corporation organized under the laws of Finland, ORTHOSORB, INC. ("Orthosorb"), a corporation organized under the laws of New Jersey, BIOSTENT, INC. ("Biostent"), a corporation organized under the laws of New Jersey, and BIONIX, INC. ("Newco"), a corporation organized under the laws of Delaware, WITNESSETH THAT: WHEREAS, the U.S. Investors and the Finnish Investors own all of the capital stock of Bioscience and Biocon, the U.S. Investors and Bioscience own all of the capital stock of Orthosorb, and the U.S. Investors own all of the capital stock of Biostent; WHEREAS, the U.S. Investors and the Finnish Investors desire to raise additional capital to be utilized in connection with the businesses of Bioscience, Biocon, Orthosorb and Biostent; WHEREAS, the U.S. Investors and the Finnish Investors have determined that in order to raise such capital, it is necessary to reorganize the corporate structure of the above-mentioned businesses so that such businesses are controlled by a single corporation, Newco, which, in turn, is owned directly and indirectly by the U.S. Investors and the Finnish Investors; WHEREAS, at present, the shareholdings of each U.S. Investor in Bioscience, Biocon, Biostent and Orthosorb is accurately set forth in Exhibit A ---------- annexed hereto; WHEREAS, at present, the shareholdings of each Finnish Investor in Bioscience and Biocon is accurately set forth in Exhibit B annexed hereto; --------- WHEREAS, it is the intention of the parties hereto that after all of the transactions described herein, the U.S. Investors will own, directly and indirectly, a 61% equity interest in Newco and the Finnish Investors will own indirectly a 39% interest in Newco; and WHEREAS, each of the parties intends that the restructuring of the above- mentioned corporations required in order to effect such reorganization (the "Reorganization") shall be effected in the manner provided for herein, NOW, THEREFORE, in consideration of the mutual covenants set forth herein, the parties hereto hereby agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the following terms ----------- shall have the following meanings: 1.1 "Biocon Class A Shares" shall mean shares of Biocon's Class A Common Stock. 1.2 "Biocon Class B Shares" shall mean shares of Biocon's Class B Common Stock. 1.3 "Bioscience Shares" shall mean shares of Bioscience's common stock . 1.4 "Biostent Shares" shall mean shares of Biostent's common stock, no par value. 1.5 "Dutch Company" shall mean Bionix B.V., a private company with limited liability, which is in the process of being organized under the laws of the Netherlands in accordance with Section 4 hereof. 1.6 "Finnish Representative" shall mean Pertti Tormala or his designee. 1.7 "Investor" shall mean any U.S. Investor or any Finnish Investor and "Investors" shall mean all of the U.S. Investors and all of the Finnish Investors. 1.8 "Newco Common Shares" shall mean shares of common stock of Newco, par value $.001 per share. 1.9 "Operating Companies" shall mean Bioscience, Biocon, Biostent and Orthosorb. 1.10 "Orthosorb Shares" shall mean shares of Orthosorb's common stock, no par value. 1.11 "Shareholders' Agreements" shall mean the shareholders' agreements previously entered into by the U.S. Investors and the Finnish Investors with respect to the capital stock of the Operating Companies. 1.12 "U.S. Representative" shall mean Anthony J. Dimun or his designee. 2. REPRESENTATIONS. The parties hereto hereby represent as follows: --------------- 2.1 Each U.S. Investor represents to each of the other Investors that such U.S. Investor owns the number of shares of capital stock of each of the Operating Companies set forth opposite such U.S. Investor's name in Exhibit A annexed hereto and that such U.S. ---------- Investor owns such shares free and clear of any and all -2- agreements, restrictions, liens and encumbrances (collectively, "Limitations"), has the right and power to transfer such shares hereunder free and clear of all Limitations and shall transfer such shares hereunder free and clear of all Limitations. 2.2 Each Finnish Investor represents to each of the other Investors that such Finnish Investor owns the number of shares of capital stock of Bioscience and Biocon set forth opposite such Finnish Investor's name in Exhibit B annexed hereto and that such Finnish Investor owns --------- such shares free and clear of any and all Limitations, has the right and power to transfer such shares hereunder free and clear of all Limitations and shall transfer such shares hereunder free and clear of all Limitations. 2.3 Each Investor represents to each of the other Investors that such Investor is not aware of any Shareholders' Agreement applicable to the Operating Companies other than the Shareholders' Agreements described in Exhibit C annexed hereto. --------- 2.4 Simultaneous with the execution of this Agreement, each of the Operating Companies has delivered to the U.S. Representative and the Finnish Representative copies of all of their organizational documents and copies of all minutes of such entities reflecting any and all meetings of the directors and shareholders of such companies held since their respective dates of organization. 2.5 Each of the Operating Companies represents that since December 31, 1995, it has not incurred any liabilities outside of the ordinary course of business and none of the events described in Exhibit D --------- annexed hereto has occurred. 2.6 Simultaneous with the execution of this Agreement, each of the Operating Companies has delivered to the U.S. Representative and the Finnish Representative copies of each material contract to which it is subject and copies of each employee benefit plan, if any, which it has adopted. 2.7 Each of the Operating Companies represents that Exhibit E annexed --------- hereto accurately sets forth the aggregate outstanding capital stock of such Operating Company and that Exhibits A and B annexed hereto ---------------- accurately set forth the ownership of such Operating Company's capital stock. Each of the Operating Companies represents that except as set forth in such Exhibit E, there are no options, warrants or other --------- rights or other securities outstanding which entitle any person or entity to acquire any shares of capital stock of such Operating Company. 3. REPURCHASE OF ORTHOSORB SHARES. Immediately prior to the closing ------------------------------ described in Section 5 hereof ( the "First Closing"), Orthosorb shall purchase from Bioscience, and -3- Bioscience shall sell to Orthosorb, the 250 Orthosorb Shares presently owned by Bioscience. At such time, Bioscience shall deliver to Orthosorb stock certificates representing such Orthosorb Shares, duly endorsed for transfer, and Orthosorb shall deliver to Bioscience a promissory note, in the principal amount of $320,000, such note to be in the form and substance of the promissory note annexed hereto as Exhibit F. --------- 4. FORMATION AND INITIAL CAPITALIZATION OF THE DUTCH COMPANY. --------------------------------------------------------- 4.1 FORMATION. Promptly after the execution of this Agreement, the Investors shall cause the Dutch Company to be organized under the laws of the Netherlands under the name Bionix, B.V. The Dutch Company shall have articles of incorporation that shall be in the form and substance of the articles of incorporation annexed hereto as Exhibit ------- G, subject to such changes as shall be approved by the U.S. - Representative and the Finnish Representative. The incorporators of the Dutch Company shall be selected by mutual agreement of the U.S. Representative and the Finnish Representative. Upon formation of the Dutch Company, the managing directors of the Dutch Company shall be David W. Anderson, Terence D. Wall, David H. MacCallum, David J. Bershad, Pertti O. Tormala, Pentti V. Rokkanen and Pertti J. Viitanen, and the officers of the Dutch Company shall be as follows: President: David W. Anderson; Vice President: Pertti O. Tormala; Treasurer: Anthony J. Dimun; and Secretary: Jukka Laitasalo. 4.2 DELIVERY BY FINNISH INVESTORS. Immediately after execution of this Agreement, each Finnish Investor shall deliver to the Finnish Representative all of the Biocon Class A Shares, Biocon Class B Shares and Bioscience Shares owned by such Finnish Investor as set forth on Exhibit B hereto, duly endorsed in blank for transfer. 4.3 DELIVERY BY U.S. INVESTORS. Immediately after execution of this Agreement, each U.S. Investor shall deliver to the U.S. Representative the following number of Biocon Class A Shares, Biocon Class B Shares and Bioscience Shares owned by such U.S. Investor, duly endorsed in blank for transfer:
U.S. INVESTOR BIOCON CLASS A SHARES BIOCON CLASS B SHARES BIOSCIENCE SHARES - ------------- --------------------- --------------------- ----------------- David W. Anderson 62.7 21 24.0 Bershad Investment 115.0 39 44.0 Group, LP BTAR Associates, LP 62.0 21 23.7 David H. MacCallum 46.6 16 18.0 TDW Associates, LP 922.7 314 354.8
-4- 5. FIRST CLOSING. The law firm of Nauta Dutilh shall represent the Dutch ------------- Company in connection with its formation. Such counsel is hereinafter referred to as the "Dutch Counsel". A closing (the "First Closing") shall be held at the offices of the Dutch Counsel on such date immediately after the Dutch Company has been incorporated as shall be agreed upon by the U. S. Representative and the Finnish Representative; provided, however, that the Dutch Company shall not be incorporated and the First Closing shall not be held (i) in the event that, on the date thereof, the U. S. Representative and the Finnish Representative determine that the liabilities of Biocon exceed the basis of Biocon's assets and (ii) in the event that either the U.S. Representative or the Finnish Representative determine that such First Closing shall not be consummated. Prior to the First Closing, the Finnish Representative shall deliver to the Dutch Counsel in escrow certificates representing all of the shares of capital stock delivered to the Finnish Representative pursuant to Section 4.2 hereof. Prior to the First Closing, the U.S. Representative shall deliver to the Dutch Counsel in escrow certificates representing all of the shares of capital stock delivered to the U.S. Representative pursuant to Section 4.3 hereof. In no event shall the Dutch Company be incorporated and in no event shall the First Closing be held unless all of the shares required to be delivered to the Finnish Representative and the U.S. Representative pursuant to Sections 4.2 and 4.3 hereof shall have been delivered to the Finnish Representative and the U.S. Representative by the Investors and shall have been delivered by the Finnish Representative and the U.S. Representative to the Dutch Counsel. Such deliveries by the Finnish Representative and the U.S. Representative shall be made in accordance with escrow arrangements satisfactory to the Finnish Representative and the U.S. Representative. At the First Closing, the parties hereto shall cause the Dutch Company to issue a total of 390,000 shares of the Dutch Company's Class A common stock ("Dutch Company Class A Shares") to the Finnish Investors, such shares to be allocated among the Finnish Investors in accordance with the applicable allocation set forth in Exhibit H annexed hereto. --------- At the First Closing, the parties hereto shall cause the Dutch Company to issue a total of 120,000 shares of the Dutch Company's Class B common stock ("Dutch Company Class B Shares") to the U.S. Investors, such shares to be allocated among the U.S. Investors in accordance with the allocation set forth in Exhibit ------- H annexed hereto. - - 6. FORMATION AND CAPITALIZATION OF NEWCO. ------------------------------------- 6.1 FORMATION. Promptly after the execution of this Agreement, the Investors shall cause Newco to amend its certificate of incorporation and by-laws such that its certificate of incorporation and by-laws shall be in the form and substance of the certificate of incorporation and by-laws annexed hereto as Exhibit J, subject to such --------- changes as shall be approved by the U.S. Representative and the Finnish Representative. The parties hereto shall cause the minutes of Newco to reflect that the directors of Newco shall be David W. Anderson, Terence D. Wall, David J. Bershad, Anthony J. Dimun, David MacCallum, Pertti Tormala and, immediately prior to the infusion of capital by T. Rowe Price or an entity associated with T. Rowe Price, Terral Jordan, and the officers of Newco shall be as follows: President: David W. Anderson; Vice Presidents: Pertti Tormala and Pertti Viitanen; Treasurer: Anthony J. Dimun; and Secretary: Peter H. Ehrenberg. -5- Immediately after the First Closing has been completed, a second closing (the "Second Closing") shall be held at the offices of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A. (counsel to the U. S. Investors), 65 Livingston Avenue, Roseland, New Jersey 07068. 6.2 DELIVERY OF CAPITAL STOCK HELD BY THE DUTCH COMPANY. By execution of this Agreement, the Investors hereby authorize the Dutch Counsel and the officers of the Dutch Company to take any and all steps necessary to contribute to Newco, at the Second Closing, all of the Biocon Class A Shares, Biocon Class B Shares and Bioscience Shares contributed to the Dutch Company at the First Closing, consisting of a total of 5,709 Biocon Class A Shares, 1,911 Biocon Class B Shares and 1,962.5 Bioscience Shares. Upon receipt of such contribution, the parties hereto shall cause Newco to issue to the Dutch Company a total of 5,100,000 Newco Common Shares. At the Second Closing, the U.S. Investors shall contribute to Newco the following number of Biocon Class A Shares, Biocon Class B Shares, Bioscience Shares, Orthosorb Shares and Biostent Shares and Newco shall issue to the U.S. Investors a total of 4,900,000 Newco Common Shares, allocated among the U.S. Investors in accordance with Exhibit K annexed hereto: ---------
U.S. INVESTOR BIOCON CLASS BIOCON CLASS BIOSCIENCE ORTHOSORB BIOSTENT - ------------- A SHARES B SHARES SHARES SHARES SHARES ------------ ------------ ---------- --------- -------- David W. Anderson 256.3 86 98.0 31 31.00 Bershad Investment 470.0 160 180.0 75 100.00 Group, LP BTAR Associates, LP 253.0 85 96.8 40 53.33 David H. MacCallum 190.4 65 73.5 35 46.67 TDW Associates, LP 3,768.3 1,280 1,448.2 600 800.00 At the Second Closing, Biocon shall contribute to Newco 191 Bioscience Shares owned by Biocon.
6.3 FINAL CAPITALIZATION. It is understood that upon completion of the Second Closing and prior to any financing that may be consummated by Newco, the U.S. Investors will directly own a total of 4,900,000 Newco Common Shares and the Dutch Company will directly own a total of 5,100,000 Newco Common Shares. It is further understood that at such time the U.S. Investors will directly own a total of 120,000 Dutch Company Class B Shares (holding 60% of the voting rights of the Dutch Company Shares) and the Finnish Investors will own a total of 390,000 Dutch Company Class A Shares (holding 40% of the voting rights of the Dutch Company Shares). -6- 7. LIQUIDATION OF ORTHOSORB AND BIOSTENT. As soon as practicable after ------------------------------------- the Second Closing is consummated, the parties hereto shall take all steps necessary to cause Orthosorb (at that time, a wholly-owned subsidiary of Newco) and Biostent (at that time, a wholly-owned subsidiary of Newco) to be merged into Newco pursuant to the documentation annexed hereto as Exhibit L, subject to --------- such changes as shall be agreed upon by the U. S. Representative and the Finnish Representative to effect the foregoing mergers. No additional shares of capital stock shall be issued to any party in connection with such mergers, it being understood that the sole purpose of such mergers is to consolidate in Newco all of the business previously performed by Orthosorb and Biostent. 8. MERGER OF BIOSCIENCE AND BIOCON. As soon as practicable after the ------------------------------- mergers described in Section 7 hereof have been consummated, the parties hereto shall cause Biocon (at that time, a wholly-owned subsidiary of Newco) to be merged into Bioscience (then also a wholly-owned subsidiary of Newco). No additional shares of capital stock shall be issued to any party in connection with such merger, it being understood that the purpose of such merger is to consolidate in one corporation all of the business previously performed by Biocon and Bioscience. 9. TERMINATION OF SHAREHOLDERS' AGREEMENTS; NEW ARRANGEMENTS. All of the --------------------------------------------------------- Shareholders' Agreements shall terminate as of the First Closing. Notwithstanding the foregoing, each Investor consents to the transfer by each other Investor of shares of the capital stock of the Operating Companies, the Dutch Company or Newco to a partnership controlled by such transferring Investor and by members of the family of such transferring Investor. At the First Closing, each of the Investors shall enter into a shareholders' agreement in the form of the agreement annexed hereto as Exhibit M. During the period prior to --------- the time that Biostent and Orthosorb are merged into Newco, such entities shall comply with the management guidelines annexed hereto as Exhibit N (the --------- "Guidelines"). During the period prior to the time that Biocon merges into Bioscience, Biocon shall comply with the Guidelines. Until such time as the Board of Newco determines that it is no longer necessary, Bioscience shall comply with the Guidelines. The Board of Newco shall have the right to revise the Guidelines at any time. 10. FURTHER ASSURANCES. The parties hereto agree (i) to furnish upon ------------------ request to each other such further information, (ii) to execute and deliver to each other such other documents and (iii) to do such other acts and things, all as the U.S. Representative and the Finnish Representative may at any time reasonably request for the purpose of carrying out the intent of this Agreement. 11. GOVERNING LAW; JURISDICTION; SERVICE OF PROCESS. This Agreement ----------------------------------------------- shall be governed by and construed in accordance with the laws of the State of Delaware, without application of the conflict of laws principles thereof. Any legal action, suit or other proceeding arising out of, or in any way connected with, the enforcement of any award described in Section 12 hereof may be brought in the courts of the State of New Jersey, or in the United States courts for the District of New Jersey. With respect to any such proceeding in any such court: (a) each party hereto generally and unconditionally submits itself and its property to the nonexclusive -7- jurisdiction of such court; (b) each party hereto waives, to the fullest extent permitted by law, any objection it has or hereafter may have to the venue of such proceeding, as well as any claim it has or may have that such proceeding is in an inconvenient forum; and (c) process may be served on any party hereto anywhere in the world, by regular mail, sent to such party's address as set forth or described in Exhibit O annexed hereto or to such other address as shall --------- be provided by a party to both the U.S. Representative and the Finnish Representative. 12. DISPUTE RESOLUTION. Any controversy or claim arising out of or ------------------ relating to this Agreement, or the alleged breach thereof, shall be resolved by arbitration before a panel of three arbitrators (one of whom shall be selected by the U. S. Representative, one of whom shall be selected by the Finnish Representative and one of whom shall be selected by the other two arbitrators) in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall take place at a mutually acceptable location. The arbitration shall be conducted using the Expedited Procedures of the Commercial Arbitration Rules, regardless of the amount in dispute. The parties hereto shall bear their own attorney fees and costs in connection with any such arbitration, and shall share equally the arbitrators' compensation charges and the administrative fees of the American Arbitration Association. The award rendered by the arbitrator(s) shall be final and binding upon the parties involved in such arbitration, and judgment upon the award may be entered in any court of competent jurisdiction. 13. SURVIVAL. All representations, warranties and agreements contained in -------- this Agreement shall survive the consummation of the transactions contemplated by this Agreement, notwithstanding any investigation conducted, or knowledge acquired, with respect thereto. 14. HEADINGS. All headings in this Agreement are for convenience only and -------- do not affect the meaning of any provision. 15. SUCCESSORS OR ASSIGNS; NO THIRD PARTY RIGHTS. This Agreement is -------------------------------------------- binding upon and inures to the benefit of the parties hereto and their permitted successors and assigns. This Agreement may not be assigned by any party hereto without the prior written consent of the U.S. Representative and the Finnish Representative. Nothing in this Agreement confers, or is intended to confer, expressly or by implication, any rights or remedies upon any person not a party hereto. 16. COMPLETE AGREEMENT; MODIFICATIONS. This Agreement constitutes the --------------------------------- entire agreement among the parties hereto with respect to the transactions contemplated hereby and supersedes all prior agreements and understandings with respect to the subject matter hereof. This Agreement may not be amended or modified in any way, nor may noncompliance with its terms be waived, except pursuant to a written instrument signed by the party to be charged. 17. SEVERABILITY. Any provision of this Agreement that is prohibited or ------------ unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such -8- prohibition or unenforceability without invalidating the remaining provisions hereof; any such prohibition or unenforceability shall not invalidate or render unenforceable such provision in any other jurisdiction. 18. COUNTERPARTS. This Agreement may be executed by the parties hereto in ------------ separate counterparts, each of which when so executed and delivered shall be deemed an original. All such counterparts together constitute but one and the same instrument. 19. CONSTRUCTION. It is understood that this Agreement is not intended to ------------ be construed against the party that drafted this Agreement merely by virtue of the fact that such party was responsible for the drafting hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. BIOSCIENCE, LTD. BIOCON, OY BY: /s/ Bioscience, Ltd. By: /s/ Biocon, OY -------------------------- ------------------------------ ORTHOSORB, INC. BIOSTENT, INC. By: /s/ David W. Anderson By: /s/ David W. Anderson ----------------------------- ------------------------------ BIONIX, INC. /s/ David W. Anderson - ----------------------------- David W. Anderson By: /s/ David W. Anderson ------------------------------ David W. Anderson, President BERSHAD INVESTMENT GROUP, LP By: /s/ David J. Bershad --------------------------------- David J. Bershad, General Partner -9- BTAR ASSOCIATES, LP By: STRATEGIC CONCEPTS, INC., general partner By: /s/ Anthony J. Dimun ------------------------------ Anthony J. Dimun, President /s/ David H. MacCallum - ------------------------------ David H. MacCallum TDW ASSOCIATES, LP By: TDW III, INC., general partner By: /s/ Terence D. Wall ------------------------------ Terence D. Wall, President /s/ Ole Bostman - ------------------------------ Ole Bostman /s/ E. Antero Makela - ------------------------------ E. Antero Makela NAJ VET LTD. By: /s/ NAJ VET LTD. ----------------------------- NOVATOR By: /s/ Pentti Rokkanen ----------------------------- ORTHO SCI LTD. -10- By: /s/ ORTHO SCI LTD. ----------------------------- /S/ Esa Partio - ------------------------------- Esa Partio /s/ Timo Pohjonen - ------------------------------- Timo Pohjonen /s/ Pentti Rokkanen - ------------------------------- Pentti Rokkanen /s/ Matti Suuronen - ------------------------------- Matti Suuronen /s/ Riita Suuronen - ------------------------------- Riita Suuronen /s/ Marrku Tamminmaki - ------------------------------- Marrku Tamminmaki /s/ Matti Tormala - ------------------------------- Matti Tormala /s/ Perrti Tormala - ------------------------------- Perrti Tormala /s/ Seppo Vainiopaa - ------------------------------- Seppo Vainionpaa /s/ Pertti Viitanen - ------------------------------- Pertti Viitanen -11- EXHIBITS EXHIBIT DESCRIPTION A Shareholdings of U.S. Investors B Shareholdings of Finnish Investors C Existing Shareholders' Agreements D Extraordinary Events E Outstanding Shares F Promissory Note G Dutch Company Organizational Documents H Allocation of Dutch Company Shares I Omitted J Newco's Certificate of Incorporation and By-Laws K Allocation of Newco Shares Among U.S. Investors L Orthosorb/ Biostent Merger M Shareholders' Agreement N Guidelines O Addresses EX-10.3 6 FORM OF EMPLOYMENT AGREEMENT WITH DAVID W. ANDERSON Exhibit 10.3 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement"), made as of the 24th day of February, 1997, by and between BIONX IMPLANTS, INC., a Delaware corporation (the "Employer"), and DAVID W. ANDERSON, an individual residing at 1157 Brynllawn Road, Villanova, Pennsylvania 19085 (the "Employee"), W-I-T-N-E-S-S-E-T-H WHEREAS, Employee entered into an employment agreement with Biostent, Inc. dated as of April 1, 1995 which provided for the assignment of that agreement by Biostent, Inc. to a holding company upon the formation of that holding company (the "Prior Agreement"); WHEREAS, pursuant to a reorganization agreement, Employer became the holding company of Biostent, Inc. and, with Employer's consent, the Prior Agreement was assigned to the Employer; WHEREAS, the parties desire to extend the term of the Prior Agreement and restate the Prior Agreement to eliminate certain provisions which are no longer applicable; WHEREAS, the parties intend for this Agreement to amend, restate and thereby supersede the Prior Agreement in all respects; WHEREAS, Employer desires to employ Employee, and Employee desires to accept such employment, all in accordance with the terms and conditions set forth herein, NOW THEREFORE, it is agreed as follows: 1. Employment. Commencing on the date hereof, Employer shall employ ---------- Employee, and Employee shall serve as an employee of Employer, upon the terms and conditions set forth herein. 2. Scope of Employment. During the term of this Agreement, Employee ------------------- shall devote his entire business time, attention and energy to the business, and to seeking improvement in the profitability, of Employer. He shall serve as Chief Executive Officer of Employer and its subsidiaries and shall have the authority to perform and shall perform all of the duties that are customary for the office of Chief Executive Officer, subject at all times to the control and direction of the Board of Directors of the Employer, and shall (i) execute Employer's strategic business plan to maximize global opportunities of Employer's technology, (ii) provide leadership to raise the required equity funding necessary to reach the goals set forth in Employer's business plan and (iii) perform such services as typically are provided by the Chief Executive Officer of a corporation and such other services consistent therewith as shall be assigned to him from time to time by the Chairman of the Board and the Board of Directors of Employer. During the term of this Agreement, Employee shall not engage in any other business activity which, in the reasonable judgment of Employer's Board of Directors. conflicts with the duties of Employee hereunder, whether or not such activity is pursued for gain, profit or other pecuniary advantage; provided. however, that it is understood that this Section 2 shall not preclude Employee from making passive investments in other companies as long as Employer notifies the Chairman of the Board in advance in the event that the Employee intends to make a passive investment with the Employer's industry.. 3. Term. ---- 3.1 The term of this Agreement shall commence on the date hereof and continue until December 31, 1998 (the "Initial Term") and shall be automatically renewable thereafter for consecutive terms of one year each unless and until terminated as of the end of any such period by either party giving notice in writing to the other party not less than ninety (90) before the end of the period in question and subject, however, to earlier termination pursuant to this Article 3. For purposes of this Agreement, the phrase "Agreement Term" shall mean the Initial Term and, if this Agreement is renewed pursuant to its terms, any period for which this Agreement has been renewed and the term "Renewal Term" shall mean any such renewal ter,. 3.2 Notwithstanding the term of employment provided for in Section 3.1, this Agreement shall immediately terminate upon Employee's death or Permanent Disability. For purposes of this Agreement, Permanent Disability shall mean any physical or mental condition which materially interferes with the performance of Employee's customary duties in Employee's capacity as Chief Executive Officer of Employer where such disability has continued for a period of ninety (90) consecutive days or for a total of one hundred and eighty (180) days in any period of three hundred and sixty (365) consecutive days. 3.3 Notwithstanding the term of employment provided for in Section 3.1 hereof, Employer shall have the right to terminate Employee's employment for Cause, upon written notice to Employee. For purposes of this Agreement, "Cause" shall mean (i) the conviction of Employee by a court of competent jurisdiction of a felony or a misdemeanor which, in the reasonable judgment of Employer, is likely to have a material adverse effect on the business of Employer, (ii) Employee's material breach of this Agreement, or (iii) Employee's willful disregard of lawful and proper written instructions of Employer's Board of Directors. 3.4 Notwithstanding the term of employment provided for in Section 3.1 hereof, Employer shall have the right to terminate Employee's employment without Cause, in the sole judgment of Employer, upon written notice to Employee. 3.5 Employee shall have the right to terminate this Agreement for Good Reason (as defined below), upon written notice to Employer. For purposes of this Agreement, "Good Reason" shall mean Employer's material breach of this Agreement, provided that Employee first provides Employer with written notice of such conduct and Employer fails to make substantial efforts to correct such conduct within fifteen (15) business days of its receipt of such notice. A termination of this Agreement by Employer without Cause prior to the expiration of the term hereof shall be treated for all purposes hereunder as if Employee had terminated this Agreement for Good Reason. -2- 3.6 In the event of Employee's termination pursuant to Section 3.2 or Section 3.3 hereof, Employer shall only be obligated to pay Employee any unpaid salary and bonus and benefits accrued to the date of termination. except as otherwise expressly provided in any of Employer's written benefit plans. 3.7 In the event that Employee terminates this Agreement for Good Reason, or Employer terminates this Agreement without Cause, in either case prior to the expiration of the Initial Term, the Employer shall, until the first anniversary of the date of Employee's termination of employment, (i) continue to be obligated to make the salary payments described in Section 4 hereof and (ii) continue to be obligated to provide benefits substantially comparable to the benefits described in Section 7 hereof. In the event that Employee terminates this Agreement for Good Reason, or Employer terminates this Agreement without Cause, in either case during any Renewal Term, the Employer shall, until the six month anniversary of the date of Employee's termination of employment, (i) continue to be obligated to make the salary payments described in Section 4 hereof and (ii) continue to be obligated to provide benefits substantially comparable to the benefits described in Section 7 hereof. While Employee shall have no obligation to mitigate damages, any salary or other benefits actually received by Employee from another employer (or, if Employee shall be self- employed, 75% of the gross compensation received by Employee in such capacity after exclusion of the first $10,000 so received) after such termination shall be applied against amounts payable by Employer to Employee pursuant to this Section 3.7. 3.8 The payments provided for in Sections 3.6 and 3.7, respectively, above shall be Employee's sole and exclusive relief and shall be in lieu of any other termination benefits or payments of any kind whatsoever which are hereby expressly waived, for or in connection with such termination. Appropriate and required withholding for Social Security, federal and state income taxes (or comparable withholdings which may be applicable for employees outside the United States), together with any other deductions authorized by Employee or required by law or court order, shall be made and will reduce the gross amount to be paid under this Agreement. 4. Salary. ------ (a) Subject to Section 4(b) hereof, in consideration for Employee's services hereunder, Employer shall pay Employee a salary at a rate of $160,000 per year. (b) Employee's salary rate shall be reviewed by Employer's Board of Directors on an annual basis but shall not be less than $160,000 per year. 5. Annual Bonus. In addition to the salary described in Section 4 ------------ above, Employee shall be given an opportunity to earn an annual bonus for each calendar year, commencing with the year ending December 31, 1997. The amount of any such bonus shall be determined in the discretion of the Board of Directors of the Employer or the Compensation Committee thereof. -3- 6. Automobile Allowance. Employer will pay Employee an automobile -------------------- allowance of $500 per month. 7. Health Insurance. Employer will enroll Employee in Employer's ---------------- health insurance plan as is from time to time generally made available to other employees of Employer. 8. Intentionally Omitted. --------------------- 9. Other Benefits. --------------- (a) Employee shall be entitled to three (3) weeks of paid vacation each year to be taken at such times as are mutually convenient to Employee and Employer. (b) Employee shall receive from Employer such other benefits as shall be comparable to benefits generally made available from time to time to other employees of Employer. 10. Business Expenses. Employer will reimburse Employee, in ----------------- accordance with any Employer-established policies or guidelines, for all reasonable business expenses actually incurred by Employee in promoting the business of Employer, upon presentation by Employee, from time to time, of an itemized account of such expenses. 11. Trade Secrets and Covenant Against Competition. ---------------------------------------------- 11.1 The trade secrets of Employer are hereby defined as including (i) the processes utilized and to be utilized in Employer's business; (ii) the methods and results of Employer's research; and (iii) any other confidential information or data relating to the business of Employer and its affiliates which is not publicly known. 11.2 Employee agrees that he will not, either during his employment or at any time after cessation of such employment. impart or disclose any of such trade secrets to any person, firm or corporation other than Employer or its affiliates, or use any of such trade secrets, directly or indirectly, for his own benefit or for the benefit of any person, firm or corporation other than Employer or its affiliates. Employee's obligations under this Section 11.2 shall cease with respect to any such trade secret if such trade secret (i) was already known to Employee at the time of disclosure, free of any obligation to keep it confidential, (ii) was at the time of disclosure or thereafter became part of the public domain through no fault of wrongful act of Employee, or (iii) was subsequently disclosed to Employee without breach of this Agreement by a third person who rightfully received and disclosed it without breaching any confidentiality obligation to Employer. It is also understood by the parties that Employee may be required to disclose trade secret information (a) pursuant to subpoena or other court process, (b) at the express direction of any other authorized government agency or (c) otherwise as required by law or regulation. Disclosure of trade secret information or any part thereof in such circumstances will not constitute a breach of the confidentiality provisions set forth in this Agreement, provided that Employee notifies Employer in advance of any such disclosure and cooperates with -4- Employer in any efforts that Employer may make to seek a protective order with respect to such disclosure. 11.3 In addition to the foregoing agreements relating to Employer's trade secrets, during the term of this Agreement (including any renewals thereof) and during the term of the "Post-Employment Period" (as defined herein), Employee will not, without Employer's prior written consent, (i) solicit any of the employees of Employer or Employer's affiliates for the purpose of hiring or retaining any such employees, (ii) hire or retain or cause to be hired or retained any of the employees of Employer or Employer's affiliates or (iii) become involved m any manner, including without limitation as an officer, director, employee, consultant, representative, partner, owner or shareholder (except as a holder of less than a five (5%) percent equity interest in a public entity) in any business located in the United States which is in the business of inventing, developing, manufacturing, marketing. providing or selling products competitive with the products that Employer or its subsidiaries have developed, manufactured, marketed, produced or sold, or are in the process of developing (and reasonably expect to bring to market within one (1) year after the expiration of the Post-Employment Period or longer if required by the F.D.A clearance or approval process), manufacturing, marketing, producing or selling as of the date that Employee's employment terminates. For purposes of this Agreement, the term "Post-Employment Period" shall mean the period commencing on the date that this Agreement is terminated for any reason and ending either (x) two years from the date of termination of this Agreement or (y) if this Agreement is terminated by the Employee for Good Reason or by the Employer without Cause, on the later of (a) two years from the date of such termination or (b) the last date on which Employer makes salary payments to Employee pursuant to Section 3.7 above. 11.4 Employee agrees that all memoranda, lab books, notes, records, charts, formulae, specifications, lists and other documents made, compiled, received, held or used by Employee while employed by Employer, concerning any phase of Employer's business or its trade secrets, shall be Employer's property and shall be delivered by Employee to Employer upon termination of Employee's employment or at any earlier time on the request of Employer. 11.5 Any invention or improvement made or conceived by Employee during the term of Employee's employment by Employer (whether during or after working hours) relating in any manner to the business of Employer, shall be promptly disclosed in writing by Employee to Employer and shall be the sole property of Employer. Upon Employer's request (whenever made), Employee shall execute and assign to Employer all related applications for letters patent to the United States and such foreign countries as Employer may designate and shall execute and deliver to Employer such other instruments as Employer deems necessary. Any invention or improvement made or conceived by Employee prior to termination of Employee's employment shall be deemed to have been made or conceived during Employee's employment hereunder, provided that such invention or improvement relates to an aspect of Employer's business as of the date of termination of Employee's employment. 11.6 Employee acknowledges that given his access to information regarding Employer, the provisions of this Section 11 are reasonable and necessary to protect Employer's -5- business. Employee further acknowledges that he has carefully reviewed the provisions of this Section 11, he fully understands the economic consequences thereof, he has assessed the respective advantages and disadvantages to him of entering into this Agreement and he has concluded that, in light of his education, skills and abilities, the restrictions set forth in this Section 11 will not prevent him from earning a living after the termination of this Agreement. Employee agrees that each of the provisions of this Section 11, including, without limitation, the period of time, geographical area and types and scope of the restrictions on Employee's activities specified herein, are intended to be and shall be divisible. Employee further acknowledges the reasonableness of these provisions as an integral part of the terms of his employment. If any provision of this Section 11 (including any sentence. clause or part thereof) shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. In addition, if any particular provision contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing such provision as to such characteristic so that the provision is enforceable to the fullest extent compatible with the applicable law as it shall then appear. 11.7 As it would be very difficult to measure the damages which would result to Employer from a breach of any of the covenants contained in this Section 11, in the event of such a breach Employer shall have the right to have such covenants specifically enforced by a court of competent jurisdiction. Employee hereby recognizes and acknowledges that irreparable injury or damage shall result to the business of Employer in the event of a breach or threatened breach by Employee of the terms and provisions of this Section 11. Therefore, Employee agrees that Employer shall be entitled to an injunction restraining Employee from engaging in any activity constituting such breach or threatened breach. Nothing contained herein shall be construed as prohibiting Employer from pursuing any other remedies available to Employer at law or in equity for such breach or threatened breach, including, but not limited to, recovery of damages from Employee and, if Employee is still employed by Employer, terminating the employment of Employee in accordance with the terms and provisions hereof. 12. Miscellaneous. -------------- 12.1 Entire Agreement. This instrument contains the entire agreement ---------------- of the parties with respect to the employment of Employee and supersedes all prior agreements or arrangements between the parties concerning Employee's employment by Employer and specifically supersedes and terminates any prior agreement concerning severance to be paid to the Employee in the event of a termination of his employment. This Agreement cannot be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 12.2 Severability. If any provision of this Agreement is declared ------------ invalid by any legal tribunal, then such provision shall be deemed automatically modified to conform to the requirements for validity as declared at such time, and, as so modified, shall be deemed a provision of this Agreement as though originally included herein. In the event that the provision -6- invalidated is of such a nature that it cannot be so modified, the provision shall be deemed deleted from this Agreement as though the provision had never been included herein. In either case, the remaining provisions of this Agreement shall remain in effect. 12.3 Construction. The parties intend that this Agreement shall not ------------ be construed against the party that has drafted all or any portion of this Agreement. 12.4 Notice. Any notice or other communication required or permitted ------ under this Agreement shall be sufficient if in writing and delivered personally, sent by facsimile, or by certified or express mail, or by overnight courier, and shall be deemed given when so delivered except if mailed, in which case then two days after mailing) to the parties as set forth below, unless changed n writing: (a) to Employee at his residence address indicated above, or: -------- (b) to the Employer by notice to: -------- Terry D. Wall 160 Lloyd Road Montclair, New Jersey 07042 with a copy to: Peter H. Ehrenberg Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A. 65 Livingston Avenue Roseland, New Jersey 17068 12.5 Successors. The rights and obligations of Employee under this ---------- Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Employer, including any successors by merger or purchase or otherwise. 12.6 Governing Law. This Agreement shall be interpreted in ------------- accordance with and be governed by the laws of the State of Delaware. 12.7 Paragraph Headings. The paragraph headings used in this ------------------ Agreement are included solely for convenience and shall not affect or be used in connection with the interpretation of this Agreement. 12.8 Arbitration. Any controversy, claim or dispute arising out of or ----------- relating to this Agreement or its construction and interpretation may, at the election of either the Employee or the Employer, be settled by arbitration in New Jersey in accordance with the then-current rules of the American Arbitration Association, and judgment upon the award rendered in such -7- arbitration may be entered in any court having jurisdiction thereof. In addition, any controversy, claim or dispute concerning the scope of this arbitration clause or whether a particular dispute falls within this arbitration clause may also be settled by arbitration in accordance with the rules of the American Arbitration Association. 12.9 Prior Agreement. The Prior Agreement is superseded in all --------------- respects by this Agreement. All stock options granted to Employee pursuant to the Prior Agreement shall be governed by the terms of Employer's 1996 Stock Option/Stock Issuance Plan. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BIONX IMPLANTS, INC. By:_____________________ ______________________ David W. Anderson -8- EX-10.4 7 FORM OF EMPLOYMENT AGREEMENT WITH PERTTI TORMALA EXHIBIT 10.4 EMPLOYMENT AGREEMENT -------------------- 1. Parties: a) Bionx Implants, Inc., a corporation organized under the laws of the State of Delaware, U.S.A. and a manufacturer and marketer of Self- Reinforced, resorbable polymer implants used in a variety of applications including orthopaedic surgery, urology, dentistry and maxillo-facial surgery (the "Corporation"). b) Professor Pertti Tormala ("Tormala") 2. Purpose of the Agreement: In order to maintain the high standard of product development of the Corporation and its subsidiaries, and, further to support the fulfillment of the Corporation's strategic objectives on a worldwide basis, Tormala and Bionix have agreed to the following terms and conditions of employment. This agreement supersedes all previous agreements between the parties hereto and their affiliates or subsidiaries. 3. Status of Tormala: Tormala is appointed as Executive Vice President, Research and Development of the Corporation, with full responsibilities for the research and development staff and facilities of the Corporation. Tormala will report in his capacity as Executive Vice President to the President and Chief Executive Officer of the Corporation. 4. Term: The initial term of this agreement will be five (5) years, terminating on February 23, 2002. The parties may agree that after the initial term, this agreement will automatically renew for one (1) year periods until notice by either party. The notice period in this agreement will be six (6) months. 5. Remuneration: The remuneration of Tormala during the period of this agreement will be the following: Tormala will receive a base salary of FIM 45,000 per month, payable twice monthly by the Corporation's Finish subsidiaries. Tormala and the Corporation agree that Tormala's base salary (which represents an increase over the base salary previously payable to Tormala and a reduction in the amount of time commitment required of Tormala) is intended to provide Tormala with reasonable compensation for Tormala's assignment of all intellectual and industrial property rights to all of the products Tormala develops, creates or invents during the term of this agreement (subject only to the exceptions set forth in Section 11 hereof). Tormala will also eligible for cash bonuses, if and when awarded, when granted by the Compensation Committee of the Board of Directors of Bionix. Tormala will also be eligible to participate in the Bionix 1996 Stock Option/Stock Issuance Plan. Bionix will also provide Tormala with a car, paid for by the Corporation, and will reimburse Tormala for all reasonable travel and entertainment costs required by the Corporation for the performance of this duties. 6. Pension Benefits: Tormala's pension benefits shall be in accordance with the Finnish TEL system. 7. Holiday Benefits: Tormala is entitled to a four week summer holiday and a two-week winter holiday. Tormala will decide the vacation periods and will notify the President and CEO of his plans in advance. 8. Daily working time: Tormala will have no defined daily work period. However, Tormala agrees to use his best efforts and the substantial majority of his time available to the Corporation to further the development of the Corporation's products and to give all his support to the other activities of Bionix. Tormala agrees not to devote more than 16 hours per month during normal business hours to a business which (i) shall be spun off from the Corporation and (ii) shall be engaged in the development, manufacture or sale of polymer-based advanced drug delivery systems. 9. Other employment: The Corporation is aware of Tormala's present activities at the Tampere University and related duties and agrees that the conduct of these duties may continue at their present levels. 10. Non-competition: Tormala undertakes that during a period of 36 months after the termination of this agreement he will not directly or indirectly have an interest in or be engaged, -2- concerned or involved in businesses or scientific activities competing with the business activities of the Corporation or its subsidiaries. The period noted above will not apply if Tormala's employment is terminated without cause by the Corporation. 11. Industrial property rights: Tormala agrees that all patents, patent applications, know-how, technical data and other industrial and intellectual property rights relating to the Corporation's research and development activities in which Tormala may have any interest whatsoever, regardless of the area of application, have been irrevocably transferred by Tormala to, and will continue to be the property of, the Corporation. All such intellectual and industrial rights developed by or under the direction of Tormala during the term of this agreement will also be transferred to the Corporation by Tormala. The only exceptions to this irrevocable transfer are the following agreements: (1) the agreement between Tormala and TEKES covering the use of Ultrasound in Tableting and, (2) the agreement between Tormala and Orion Pharma covering the use of proprietary Polyorthoesters in drug delivery formulations specific to molecular entities that are the proprietary property of Orion. 12. Applicable law and disputes: This Agreement is governed by Finnish law. All disputes concerning the terms and interpretation of this Agreement are to be resolved in accordance with the law on arbitration. The sole arbitrator, if and when the parties cannot reach an agreement, shall be determined by the Finnish Central Chamber of Commerce on request of either of the parties. This Agreement has been prepared in two identical copies, one to each party. Dated: 24 February 1997. BIONX IMPLANTS, INC. By: ________________________ David W. Anderson, President _________________________ Pertti Tormala -3- EX-10.5 8 FORM OF PROPRIETARY INFORMATION & INVENTIONS AGRMT EXHIBIT 10.5 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT BIONIX, INC. 279 B Great Valley Parkway Malvern, PA 19355 Gentlemen: The following confirms, effective December 12, 1996, an agreement between me and Bionix, Inc., a Delaware corporation (the "Company," which term includes Bioscience, Ltd., Biocon, Oy, Orthosorb, Inc., Biostent, Inc. and any other subsidiary or parent of the foregoing entities ), which is a material part of the consideration for my employment by the Company: 1. I recognize that the Company is engaged in a continuous program of research, development and production respecting its business, present and future, including fields generally related to its business, and that the Company possesses and will continue to possess information that has been created, discovered, developed or otherwise become known to the Company (including, without limitation, information created by, discovered or developed by, or made known to, me during the period of or arising out of my employment by the Company) and/or in which property rights have been assigned or otherwise conveyed to the Company , which information has commercial value in the business in which the Company is engaged. All of the aforementioned information is hereinafter called "Proprietary Information". By way of illustration, but not limitation, Proprietary Information includes trade secrets, processes, formulas, data, know-how, software programs, improvements, inventions, techniques, marketing plans, strategies, forecasts, new products, computer programs, designs, copyrightable material and customer lists. 2. I understand that my employment and this Agreement create a relationship of confidence and trust between me and the Company with respect to any information: (i) applicable to the business of the Company; or (ii) applicable to the business of any client or customer of the Company, which may be made known to me by the Company or by any client or customer of the Company, or learned by me during the period of my employment (hereinafter "Confidential Information"). 3. As used in this Agreement, the period of my employment by the Company includes any time in which I may be retained by the Company as a consultant or officer. 4. In consideration of my employment by the Company and the compensation received by me from the Company from time to time, I hereby agree as follows: (a) All Proprietary Information shall be the sole property of the Company and its assigns, and the Company and its assigns shall be the sole owner of all patents and other rights in connection therewith. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information. At all times, both during my employment by the Company and after its termination, I will keep in confidence and trust all Proprietary Information and Confidential Information, and I will not use or disclose, in whole or in part, any Proprietary Information or Confidential Information or anything relating to it without the written consent of the Company, except as may be necessary in the ordinary course of performing my duties on behalf of the Company. Notwithstanding the foregoing, it is understood that, after the termination of my period of employment by the Company, I am free to use information which is or becomes available to the public generally (except as a direct or indirect result of a breach of this Agreement). (b) All documents, records, apparatus, equipment, software programs (commercial or proprietary) and other physical property, whether or not pertaining to Proprietary Information, furnished to me by the Company or produced by myself or others in connection with my employment shall be and remain the sole property of the Company and shall be returned to it immediately as and when requested by the Company. Even if the Company does not so request, I shall return and deliver all such property (including without limitation all copies in my possession) upon termination of my employment by me or by the Company for any reason, and I will not take with me any such property or any reproduction of such property upon such termination. (c) I will promptly disclose to the Company, or any persons designated by it, all improvements, developments, designs, inventions, formulas, ideas, original works of authorship, processes, techniques, know-how and data, whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the term of my employment (all said improvements, developments, designs, inventions, formulas, ideas, original works of authorship, processes, techniques, know-how and data shall be hereinafter collectively called "Inventions"). I hereby acknowledge that all original works of authorship which are made by me, either alone or jointly with others, during the term and within the scope of my employment and which are protectable by copyright are "works made for hire", as that term is defined in the United States Copyright Act (17 U.S.C.A. (S)101). (d) All Inventions which I have developed or may develop (in whole or in part, either alone or jointly with others) (i) using equipment, supplies, facilities, or trade secret information of the Company, or (ii) during the hours for which I received or may receive compensation from the Company, or (iii) which relate, at the time of conception or reduction to practice of the Invention, to the business of the Company or to its actual or demonstrably anticipated research or development, or (iv) which resulted or may result, in whole or in part, from work performed by me for the Company, shall be the sole property of the Company and its assigns, and the Company and its assigns shall be the sole owner of all patents, copyrights and -2- other rights in connection therewith. I shall communicate promptly and disclose to the Company, in such form as the Company requests, all information, details, and data pertaining to the Inventions. I hereby assign to the Company any rights I may have or acquire in such Inventions. I further agree as to all such Inventions to assist the Company in every proper way (but at the Company's expense) to obtain and from time to time enforce patents, copyrights and other rights with respect to said Inventions in any and all countries, and to that end I will execute all documents for use in applying for and obtaining such patents, copyrights and other rights therein and enforcing same, as the Company may desire, together with any assignments thereof to the Company or persons designated by it. My obligation to communicate as set forth above and to assist the Company in obtaining and enforcing patents, copyrights, and other rights for such Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after such termination for time actually spent by me at the Company's request on such assistance. In the event that the Company is unable for any reason whatsoever to secure my signature to any lawful and necessary document required to apply for or execute any applications for patents, copyrights, or other rights with respect to such an Invention (including renewals, extensions, continuations, divisions, or continuations in part thereof), I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents, as my agents and attorneys-in-fact to act for and in my behalf and instead of me, to execute and file any such application and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights and other rights therein with the same legal force and effect as if executed by me. (e) As a matter of record, I attach hereto as Exhibit A a complete list of (i) all inventions, original works of authorship, developments, improvements, and trade secrets relevant to the subject matter of my employment by the Company which have been made or conceived or first reduced to practice by me alone or jointly with others during my employment with the Company, which I desire to remove from the operation of this Agreement, and (ii) all materials and documents of a former employer which I propose to bring to my employment; and I covenant that such list is complete. If no such list is attached to this Agreement, I represent that I have no such inventions, improvements, developments, trade secrets, materials or documents at the time of signing this Agreement. (f) I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree that I will not enter into, any agreement, either written or oral, in conflict herewith. (g) I represent that I did not learn during my prior employment any ideas or information which my employer indicated were considered confidential and proprietary or which were disclosed to me in a manner which should have made me realize they were so considered. (h) If I cannot make the representation provided in paragraph g, I will check the following box: [_] I cannot make the representation in paragraph g above. If I have checked the above box, I hereby represent that I have not brought and will not bring to the Company or make use of any such confidential and proprietary information or ideas -3- during my employment by the Company unless such information or ideas (i) become publicly available for reasons other than actions on my part, (ii) are independently developed by others at or on behalf of the Company who do not receive access to such information from me, or (iii) are received by the Company from a third party who had possession of such information or ideas. (i) I will not bring on to the premises of the Company any unpublished document or any property belonging to my former or concurrent employers or companies, if any, unless consented to in writing by such employers or companies. (j) I recognize that the Company has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. I agree that I owe the Company and such third parties, during the term of my employment and thereafter, a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm, or corporation (except as necessary in carrying out my work for the Company consistent with the Company's agreement with such third party) or to use it for the benefit of any one other than for the Company or such third party (consistent with the Company's agreement with such third party) without the express written authorization of the Board of Directors of Bionix, Inc. (k) I agree to keep and maintain adequate and current written records of all inventions and original works of authorship made by me (solely or jointly with others) during the term of my employment with the Company. The records will be in the form of notes, sketches, drawings, and any other format that may be specified by the Company. The records will be available to and remain the sole property of the Company at all times. (l) I agree to assign to the government of any country all of my right, title and interest in and to any and all inventions, original works of authorship, developments, improvements, or trade secrets whenever such full title is required to be in such government by a contract between the Company and such government or any of its agencies. (m) If I am employed in California, this Agreement does not require me to assign or offer to assign to the Company any invention which an employee cannot be obligated to assign under Section 2870 of the California Labor Code, which provides as follows: (i) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (a) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or -4- (b) Result from any work performed by the employee for the employer. (ii) To the extent a provision in an employment agreement purports to require an employer to assign an invention otherwise excluded from being required to be assigned under subdivision (i), such provision is against the public policy of California and is unenforceable. However, I will disclose any Inventions as required by Section 4.c hereof regardless of whether I believe the Invention is protected by Section 2870, in order to permit the Company to engage in a review process to determine such issues as may arise. Such disclosure shall be received in confidence by the Company. 5. I agree that, during the term of my employment with the Company, I will deliver to the Company (and will not keep in my possession or deliver to anyone else) any and all devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any of the aforementioned items belonging to the Company, its successors or assigns. In the event of the termination of my employment, I agree to sign and deliver the "Termination Certification" attached hereto as Exhibit B. 7. I agree to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. I represent that my performance of all of the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any oral or written agreement in conflict herewith. 8. This Agreement shall be effective as of the date hereof. 9. I agree that it would be difficult to measure damage to the Company from any breach by me of the covenants set forth in Section 4 of this Agreement, that injury to the Company from any such breach would be impossible to calculate, and that money damages would therefore be an inadequate remedy. Accordingly, I agree that if I breach any of such covenants, the Company shall be entitled, in addition to all other remedies it may have, to injunctive relief or other appropriate orders to restrain or remedy any such breach by me without showing or proving any actual damage sustained by the Company. 10. This Agreement sets forth the entire agreement and understanding between the Company and me relating to the subject matter hereof and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this agreement, will be effective unless in writing signed by the party to be charged. Any subsequent change or changes in my duties, salary, or compensation will not affect the validity or scope of this Agreement. 11. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs, and necessary disbursements in addition to any other relief to which such party may be entitled. -5- 12. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way. 13. This Agreement shall be governed by and construed under the laws of the State of Delaware applicable to contracts entered into and to be performed wholly within the State of Delaware. 14. This Agreement shall be binding upon me, my heirs, executors, assigns, administrators and guardians and shall inure to the benefit of the Company, its successors and assigns. _____________________________________ Employee's Signature _____________________________________ Print Name of Employee Here Accepted and Agreed to by Bionix, Inc., a Delaware corporation By:___________________________ David Anderson, President -6- PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT cont'd EXHIBIT A TO PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT 1. The following is a complete list of all inventions or improvements relevant to the subject matter of my employment by ________________ (the "Company"), and the business of the Company that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my employment by the Company. _______ No inventions or improvements _______ See below: Any and all inventions regarding ____________________________________ ____________________________________ ____________________________________ 2. I propose to bring to my employment the following materials and documents of a former employer: ______ No materials or documents. ______ See below: __________________________________ __________________________________ __________________________________ -7- EXHIBIT B TERMINATION CERTIFICATION This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of Bionix, Inc., a Delaware corporation, or its subsidiaries, affiliates, successors, or assigns (together, the "Company"). I further certify that I have complied with all the terms of the Company's Proprietary Information and Inventions Agreement signed by me, including the reporting of any inventions and original works of authorship (as defined therein) conceived or made by me (solely or jointly with others) which are covered by that agreement. I further agree that, in compliance with the Company's Proprietary Information and Inventions Agreement, I will preserve as confidential all trade secrets, confidential knowledge, data, or other proprietary information relating to products, processes, know-how; designs, formulas, developmental or experimental work, computer programs, databases, other original works of authorship, customer lists, business plans, financial information or the subject matter pertaining to any business of the Company or any business of its clients, consultants or licensees. Date: _____________ 19__. _______________________ (Employee's Signature) _________________________ (Print Employee's Name Here) -8- EX-10.6 9 INVESTORS' RIGHTS AGREEMENT EXHIBIT 10.6 INVESTORS' RIGHTS AGREEMENT THIS INVESTORS' RIGHTS AGREEMENT ("Agreement") is made as of the 6th day of September, 1996 by and among BIONIX, INC., a Delaware corporation (the "Company"), the parties designated as "Investors" on the signature pages hereof, each of which is herein referred to as an "Investor," and the parties designated as "Founding Stockholders" on the signature pages hereof, each of whom is herein referred to as a "Founding Stockholder". RECITALS WHEREAS, the Founding Stockholders presently own all but 105,000 of the outstanding shares of capital stock of the Company; WHEREAS, the Company and the Investors have negotiated and shall execute a Stock Purchase Agreement of even date herewith (the "Series A Agreement"); WHEREAS, execution of this Agreement is a condition to the consummation of the Series A Agreement; and WHEREAS, in order to induce the Company to enter into the Series A Agreement and to induce the Investors to invest funds in the Company pursuant to the Series A Agreement, the Investors, the Founding Stockholders and the Company intend that this Agreement shall govern the rights of the Investors to cause the Company to register shares of Common Stock issuable to the Investors and shall govern certain other matters forth herein; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. REGISTRATION RIGHTS. This Section 1 sets forth the Company's ------------------- agreement with respect to the registration of shares of Common Stock that the Investors may acquire upon conversion of any shares of Series A Preferred Stock (as defined in the Series A Agreement) or upon exercise of any Warrants (as defined in the Series A Agreement) purchased by the Investors pursuant to the Series A Agreement. The Company shall have no obligation hereunder to register any shares of Series A Preferred Stock or Warrants. Subject to the foregoing, the Company covenants and agrees with respect to the registration of the Common Stock as follows: 1.1 DEFINITIONS. For purposes of this Section 1: ----------- (a) The term "Act" means the Securities Act of 1933, as amended. (b) The term "Common Stock" shall mean the Company's common stock, par value $.001 per share. (c) The term "Form S-3" means such form under the Act as is in effect on the date hereof or any registration form under the Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (d) The term "Holder" means any person owning or having the right to acquire Registrable Securities (including any Founding Stockholders to the extent that such Founding Stockholders acquire Series A Preferred Stock or Warrants pursuant to the Series A Agreement) or any assignee thereof in accordance with Section 1.13 hereof. (e) The term "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. (f) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document. (g) The term "Registrable Securities" means the Common Stock issuable or issued upon conversion of the Series A Preferred Stock, par value $.001 per share, issued by the Company pursuant to the Series A Agreement, the Common Stock issued or issuable upon exercise of the Warrants issued pursuant to the Series A Agreement, the Common Stock acquired pursuant to Section 2.2 hereof, and any other shares of Common Stock issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events.) (h) The number of shares of "Registrable Securities then outstanding" shall mean, as of a particular date, the number of shares of Common Stock outstanding on such date which are Registrable Securities, the number of shares of Common Stock issuable on such date pursuant to the conversion of shares of Series A Preferred Stock outstanding on such date and the number of shares of Common Stock issuable on such date pursuant to the exercise of Warrants which are outstanding on such date. (i) The term "SEC" shall mean the Securities and Exchange Commission. 1.2 REQUEST FOR REGISTRATION. ------------------------ (a) If the Company shall receive, at any time after the earlier of (i) the date four years from the date hereof or (ii) six (6) months after the effective date of the first registration statement for a public offering of securities of the Company (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or to an SEC Rule 145 transaction), a written request from the Holders of a majority of the Registrable Securities then outstanding that the Company file a registration statement under the Act covering the registration of at least thirty-three and -2- one-third percent (33-1/3%) of the Registrable Securities then outstanding (or a percentage less than 33-1/3% if the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $5,000,000), then the Company shall: (i) within ten (10) days of the receipt thereof, give written notice of such request to all Holders; and (ii) effect as soon as practicable the registration under the Act of all Registrable Securities which the Holders request to be registered, subject to the limitations of subsection 1.2(b), within twenty (20) days of the mailing of such notice by the Company in accordance with Section 3.5. (b) If the Holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to subsection 1.2(a) and the Company shall include such information in the written notice referred to in subsection 1.2(a)(i). The managing underwriter or underwriters will, at the Company's option, either (i) be selected by the Company and be reasonably acceptable to a majority in interest of the Initiating Holders or (ii) be selected by a majority in interest of the Initiating Holders and be reasonably acceptable to the Company. In either such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed upon by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.4(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 1.2, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder; provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities (other than securities offered directly by the Company) are first entirely excluded from the underwriting. (c) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting registration pursuant to this Section 1.2, a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer taking action with respect to such filing for a period of not more than ninety (90) days after receipt of the request of the -3- Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve-month period. (d) In addition, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 1.2: (i) After the Company has effected two registrations pursuant to this Section 1.2 and such registrations have been declared or ordered effective; (ii) During the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a registration subject to Section 1.3 hereof, provided that the Company is actively employing all reasonable efforts to cause such registration statement to become effective; or (iii) If the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 1.12 below. 1.3 COMPANY REGISTRATION. If (but without any obligation to -------------------- do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash (other than a registration relating to the sale of securities to participants in a Company stock option, stock purchase or similar plan or an SEC Rule 145 transaction, a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities or a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of any Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.5, the Company shall, subject to the provisions of Section 1.8, cause to be registered under the Act all of the Registrable Securities that such Holder has requested to be registered. 1.4 OBLIGATIONS OF THE COMPANY. Whenever required under this -------------------------- Section 1 to effect the registration of any Registrable Securities, the Company shall: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, subject to Section 1.17, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or until the distribution contemplated in the Registration Statement has been completed; provided, however, that (i) such 120-day period shall be extended for a period of time equal to the period that the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or -4- other securities) of the Company; and (ii) in the case of any registration of Registrable Securities on Form S-3 that are intended to be offered on a continuous or delayed basis, such 120-day period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment that (I) includes any prospectus required by Section 10(a)(3) of the Act or (II) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference into the registration statement of information (required to be included in (I) and (II) above) contained in periodic reports filed pursuant to Section 13 or 15(d) of the 1934 Act. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process or to submit to the jurisdiction of any taxing authority in any such states or jurisdictions, except as may be required by the Act. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Cause all such Registrable Securities registered hereunder to be listed on any securities exchange on which similar securities issued by the Company are then listed. -5- (h) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereto and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. (i) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.5 FURNISH INFORMATION. ------------------- (a) It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. (b) The Company shall have no obligation with respect to any registration requested pursuant to Section 1.2 or Section 1.12 if, due to the operation of subsection 1.5(a), the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to originally trigger the Company's obligation to initiate such registration as specified in subsection 1.2(a) or subsection 1.12(b)(2), whichever is applicable. 1.6 EXPENSES OF DEMAND REGISTRATION. All expenses other than ------------------------------- underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Section 1.2, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company (including fees and disbursements of counsel for the Company in its capacity as counsel to the selling Holders hereunder and if Company counsel does not make itself available for this purpose, then the Company will pay the reasonable fees and disbursements of one counsel for the selling Holders) shall be borne by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all Holders participating therein shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 1.2; provided further, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable -6- promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 1.2. 1.7 EXPENSES OF COMPANY REGISTRATION. The Company shall bear -------------------------------- and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 1.3 for each Holder (which right may be assigned as provided in Section 1.13), including (without limitation) all registration, filing and qualification fees, printers' fees and accounting fees relating or apportionable thereto and the fees and disbursements of counsel for the Company in its capacity as counsel to the selling Holders hereunder and if Company counsel does not make itself available for this purpose, then the Company will pay the reasonable fees and disbursements of one counsel for the selling Holders selected by them, but excluding underwriting discounts and commissions relating to Registrable Securities. 1.8 UNDERWRITING REQUIREMENTS. In connection with any offering ------------------------- involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 1.3 to include any of the Holders' securities in such underwriting unless such Holders accept the terms of the underwriting as agreed upon between the Company and the underwriters selected in the manner described herein, and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities (other than securities to be sold by the Company) that the managing underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, that the managing underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling stockholders according to the total amount of securities entitled to be included therein owned by each selling stockholder or in such other proportions as shall mutually be agreed to by such selling stockholders),but in no event shall the amount of securities of the selling Holders included in the offering be reduced below thirty percent (30%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities in which case the shares registered on behalf of the Holders may be reduced to zero if the managing underwriters make the determination described above and such reduction is effected on a pro rata basis among all stockholders of the Company requesting or entitled to registration. For purposes of the preceding parenthetical concerning apportionment for any selling stockholder that is a partnership or corporation, the partners, retired partners and stockholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons, shall be deemed to be a single "selling stockholder", and any pro-rata reduction with respect to such "selling stockholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling stockholder", as defined in this sentence. -7- 1.9 DELAY OF REGISTRATION. No Holder shall have any right to --------------------- obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.10 INDEMNIFICATION. In the event that any Registrable --------------- Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, or the 1934 Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company, nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder (severally, not jointly) will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities to which any of the foregoing persons may become subject, under the Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.10(b), in connection with investigating or defending any such loss, claim damage, liability, or -8- action; provided, however, that the indemnity agreement contained in this subsection 1.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder; provided, that, in no event shall any indemnity under this subsection 1.10(b) exceed the net proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel designated by the indemnifying party; provided, however, that an indemnified party (together with all other indemnified parties) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflicting interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.10, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.10. (d) If the indemnification provided for in this Section 1.10 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in any underwriting agreement entered into in connection with any related underwritten public offering are in conflict with the foregoing provisions, the provisions in such underwriting agreement shall control. -9- (f) The obligations of the Company and Holders under this Section 1.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1. 1.11 REPORTS UNDER THE 1934 ACT. With a view to making available -------------------------- to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to use its best efforts to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times commencing ninety (90) days after the effective date of the first registration statement filed by the Company with the SEC for the offering of its securities to the general public; (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the one year anniversary of the date on which the first registration statement filed by the Company with the SEC for the offering of its securities to the general public is declared effective; (c) after the effective date of the first registration statement filed by the Company with the SEC for the offering of its securities to the general public, file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time commencing ninety (90) days after the effective date of the first registration statement filed by the Company with the SEC), the Act and the 1934 Act ( any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualified), (ii) a copy, if applicable, of the most recent annual or quarterly report of the Company and such other reports and documents filed by the Company with the SEC, and (iii) after the effective date of the first registration statement filed by the Company with the SEC for the offering of its securities to the general public, such other information as may be reasonably requested in availing a Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration. 1.12 FORM S-3 REGISTRATION. In case the Company shall receive --------------------- from any Holder or Holders a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to an underwritten offering of all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: -10- (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.12: (1) if Form S-3 is not available for such offering by the Holders; (2) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $1,000,000; (3) if the Company shall furnish to Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than sixty (60) days after receipt of the request of the Holder or Holders under this Section 1.12; provided, however, that the Company shall not utilize this right more than once in any twelve month period; or (4) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process or to submit to the taxing authority of such jurisdiction, in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a registration statement on Form S-3 covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. All expenses incurred in connection with a registration requested pursuant to Section 1.12, including (without limitation) all registration, filing, qualification, printer's and accounting fees and the reasonable fees and disbursements of counsel for the Company (including fees and disbursements of counsel for the Company in its capacity as counsel to the selling Holders hereunder and if Company counsel does not make itself available for this purpose, then the Company will pay the reasonable fees and disbursements of one counsel for the selling Holders), but excluding any underwriters' discounts or commissions associated with Registrable Securities, shall be borne by the Company. Registrations effected pursuant to this Section 1.12 shall not be counted as demands for registration or registrations effected pursuant to Sections 1.2 or 1.3, respectively. 1.13 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the --------------------------------- Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to (i) a partner or shareholder of such Holder or (ii) a transferee or assignee of such securities who acquires at least twenty percent (20%) of the Registrable Securities (as adjusted for stock splits, combinations and the like) owned by such Holder, provided that: (a) the Company is, within a reasonable time after such transfer, furnished -11- with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement, including without limitation the provisions of Section 1.15 below; and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is not a public offering requiring registration under the Act. 1.14 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and --------------------------------------------- after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company that would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.2 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders that is included or (b) to make a demand registration that could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 1.2(a) or within one hundred twenty (120) days of the effective date of any registration effected pursuant to Section 1.2. 1.15 "MARKET STAND-OFF AGREEMENT". Each Investor hereby agrees --------------------------- that, during the period of duration specified by the Company and a managing underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Act, such Investor shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by such Investor at any time during such period except Common Stock included in such registration statement; provided, however, that: (a) all executive officers and directors of the Company and all Founding Stockholders enter into similar agreements; and (b) such market stand-off time period shall not exceed 180 days. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor until the end of such period. Notwithstanding the foregoing, the obligations described in this Section 1.15 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to an SEC Rule 145 transaction on Form S-4 or a similar form that may be promulgated in the future. 1.16 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be ---------------------------------- entitled to exercise any right provided for in this Section 1 after five (5) years following the -12- consummation of a sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the initial firm commitment underwritten offering of its securities to the general public. 1.17 SUSPENSION OF REGISTRATION OBLIGATIONS. Notwithstanding any -------------------------------------- provisions herein to the contrary, the Company shall have the right to suspend the effectiveness of any registration statement or withdraw any registration statement if such action is determined by the Company, upon advice of counsel, to be reasonably necessary to protect the Company against liability under federal or securities laws. In such event, the Company shall use reasonable efforts to terminate such suspension or refile such registration statement as promptly as possible and to maintain the effectiveness of such registration statement for such extended period of time as the Board of Directors shall determine, in its discretion, to be reasonable under the circumstances. 2. COVENANTS. --------- 2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver -------------------------------- to each Investor: (a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, a consolidated income statement, statement of cash flows and statement of changes in stockholders' equity for such fiscal year and a consolidated balance sheet of the Company as of the end of such year, such year-end financial statements to be in reasonable detail, prepared in accordance with generally accepted accounting principles ("GAAP"), and audited and certified by independent public accountants of nationally recognized standing selected by the Company; (b) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited consolidated income statement and statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter; (c) if such Investor holds an aggregate of at least 100,000 shares of Series A Preferred Stock: within thirty (30) days of the end of each month, an unaudited consolidated income statement and statement of cash flows and balance sheet for and as of the end of such month, in reasonable detail, comparing actual performance to budget; (d) if such Investor holds an aggregate of at least 100,000 shares of Series A Preferred Stock: as soon as practicable, but in any event at least thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, including consolidated balance sheets and statement of cash flows for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company; and -13- (e) with respect to the financial statements called for in subsections (b) and (c) of this Section 2.1, an instrument executed by the Chief Financial Officer or President of the Company and certifying that such financial statements were prepared in accordance with GAAP consistently applied with prior practice for earlier periods (with the exception of footnotes that may be required by GAAP) and fairly present, in all material respects, the consolidated financial condition of the Company and its consolidated results of operations for the period specified, subject to year-end audit adjustment. 2.2 RIGHT OF FIRST OFFER. Subject to the terms and conditions -------------------- specified in this Section 2.2, the Company hereby grants to each Holder a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). A Holder shall be entitled to apportion the right of first offer hereby granted it among itself and its partners and affiliates in such proportions as it deems appropriate. Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("Shares"), the Company shall first make an offering of such Shares to each Holder in accordance with the following provisions: (a) The Company shall deliver a notice by certified mail ("Notice") to the Holders stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares. (b) Within fifteen (15) calendar days after receipt of the Notice, the Holder may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Registrable Securities issued and held by such Holder bears to the total number of shares of Registrable Securities issued and held by all Holders. The Company shall promptly, in writing, inform each Holder that purchases all of the shares available to it ("Fully-Exercising Holder") of any other Holder's failure to do likewise. During the ten-day period commencing after receipt of such information, each Fully-Exercising Holder shall be entitled to obtain that portion of the Shares for which Holders were entitled to subscribe but that were not subscribed for by the Holders that is equal to the proportion that the number of shares of the Registrable Securities then held by such Fully-Exercising Holder bears to the total number of shares of the Registrable Securities issued and held by all Fully-Exercising Holders who wish to purchase some of the unsubscribed shares. (c) If all Shares that Holders are entitled to obtain pursuant to subsection 2.2(b) are not elected to be obtained as provided in subsection 2.2(b) hereof, the Company may, during the 180-day period following the expiration of the period provided in subsection 2.2(b) hereof, offer the remaining unsubscribed portion of such Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than, the price and terms specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within 90 days of the -14- execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Holders in accordance herewith. (d) The right of first offer in this Section 2.2 shall not be applicable (i) to the issuance or sale of not to exceed 947,632 shares of Common Stock (or options therefor) to directors, officers, employees, distributors and consultants for the primary purpose of soliciting or retaining their employment or business, or (ii) to the issuance of Series A Preferred Stock and Warrants pursuant to the Series A Agreement, or (iii) to, or after consummation of, a bona fide, firmly underwritten public offering of shares of Common Stock, registered under the Act pursuant to a registration statement, or (iv) to the issuance of securities pursuant to the conversion or exercise of convertible securities, or (v) to the issuance of securities in connection with a business or product acquisition of or by the Company, whether by merger, reincorporation, consolidation, purchase or sale of assets, sale or exchange of stock or otherwise, or (vi) to the issuance of stock, warrants or other securities or rights in connection with the grant of marketing rights or otherwise to persons or entities with which the Company or any of its subsidiaries has business relationships; provided, however, that the exclusions set forth in clauses (v) and (vi) above shall only apply if the issuances are approved by (a) a majority in interest of the Holders and (b) a majority of the members of the Company's Board of Directors other than the "Founding Stockholder Nominees" (as defined herein). (e) The right of first refusal set forth in this Section 2.2 may not be assigned or transferred, except that (i) such right is assignable by each Holder to any wholly owned subsidiary or parent of, or to any corporation or entity that is, within the meaning of the Act, controlling, controlled by or under common control with, any such Holder, and (ii) such right is assignable between and among any of the Holders. 2.3 BOARD OF DIRECTORS. As of the closing under the Series A ------------------ Agreement, the Board of Directors of the Company shall consist of six members: David W. Anderson, David J. Bershad, Anthony J. Dimun, Terral M. Jordan, Pertti Tormala and Terence D. Wall. It is understood that after such closing, a seventh director shall be added by the Board. Each of the Investors and Founding Stockholders shall vote all of their shares of capital stock of the Company in favor of two "Founding Stockholders Nominees" each time that directors of the Company are elected. In the event that any such "Founding Stockholder Nominee" should cease to serve as a member of the Board of Directors of the Company and should his or her replacement be selected by the shareholders of the Company, each of the Investors and Founding Stockholders shall vote all of their shares of capital stock of the Company in favor of a replacement director designated by holders of a majority in interest of the Common Stock held by the Founding Stockholders. For purposes of this Agreement, the term "Founding Stockholder Nominees" shall mean two officers or key employees of the Company designated by the holders of a majority in interest of the Common Stock held by all Founding Stockholders. An individual nominated by the Founding Stockholders to fill a vacancy of any of the Founding Stockholder Nominees shall also be an officer or key employee of the Company. Initially, the Founding Stockholder Nominees shall be David W. Anderson and Pertti Tormala. -15- 2.4 OTHER REGISTRATION RIGHTS. The Company shall not grant ------------------------- registration rights to any shareholder without the approval of a majority in interest of the Holders. 2.5 LIMITATIONS AND TERMINATION OF COVENANTS. The covenants set ---------------------------------------- forth in Sections 2.1, 2.3 and 2.4 hereof shall terminate as to all Investors and be of no further force or effect when the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with a firm commitment underwritten offering of its securities to the general public is consummated or when the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur. The covenants set forth in Section 2.2 hereof shall terminate as to all Investors and be of no further force and effect when the shares of Series A Preferred Stock issued pursuant to the Series A Agreement are no longer outstanding. 3. MISCELLANEOUS. ------------- 3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided ---------------------- herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities, subject to limitations on assignability provided for herein). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.2 GOVERNING LAW. This Agreement shall be governed by and ------------- construed under the laws of the State of Delaware as applied to agreements among Delaware residents entered into and to be performed entirely within Delaware. 3.3 COUNTERPARTS. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.4 TITLES AND SUBTITLES. The titles and subtitles used in this -------------------- Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 3.5 NOTICES. Unless otherwise provided, any notice required or ------- permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or on the fifth (5th) calendar day after deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 3.6 EXPENSES. If any action at law or in equity is necessary to -------- enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable -16- attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 3.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be ---------------------- amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this subsection 3.7 shall be binding upon each Holder of any Registrable Securities then outstanding or securities exercisable for or convertible into Registrable Securities (including Holders of any securities deemed Registrable Securities pursuant to Section 1.1(d) hereof), each future holder of all such Registrable Securities, and the Company. 3.8 SEVERABILITY. If one or more provisions of this Agreement are ------------ held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 3.9 AGGREGATION OF STOCK. All shares of Registrable Securities held -------------------- or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 3.10 ENTIRE AGREEMENT. This Agreement constitutes the full and entire ---------------- understanding and agreement between the parties hereto with regard to the subject matter hereof. 3.11 RULE OF CONSTRUCTION. This Agreement shall not be construed -------------------- against the party that drafted this Agreement merely by virtue of the fact that such party drafted this Agreement. 3.12 LEGEND. The parties hereto shall take all steps necessary to ------ assure that the stock certificates representing all shares of the Company's capital stock owned by Investors and Founding Stockholders bear a legend referencing the agreement set forth in Section 2.3 hereof, such legend to be in such form as the Company shall reasonably determine. 3.13 ATTORNEYS' FEES. In the event of any dispute involving the --------------- terms hereof, the prevailing parties shall be entitled to collect legal fees and expenses from the other parties to the dispute. -17- IN WITNESS WHEREOF, the parties hereto have executed this Investors' Rights Agreement as of the date first above written. BIONIX, INC. By: /s/ David W. Anderson --------------------------------------- David W. Anderson, President Address: 279B Great Valley Parkway Malvern, PA 19355 INVESTORS*: /s/ David J. Bershad ------------------------------------------ David J. Bershad Address: 2 Stonebridge Road Montclair, New Jersey BTAR ASSOCIATES, L.P. By: STRATEGIC CONCEPTS, INC., general partner By: /s/ Anthony J. Dimun --------------------- Anthony J. Dimun Title: President Address: 46 Parsonnage Hills Road Short Hills, New Jersey 07078 *David J. Bershad, BTAR Associates, LP and TDW Associates, LP are deemed to be "Investors" hereunder with respect to securities that they will acquire pursuant to the Series A Agreement. -18- TDW ASSOCIATES, LP By: TDW III, INC., general partner By: /s/ Terence D. Wall ---------------------- Terence D. Wall Title: President Address: 160 Lloyd Road Montclair, New Jersey 07042 T. ROWE PRICE THRESHOLD FUND III, L.P., By: T. Rowe Price Threshold Fund Associates, Inc., General Partner of T. Rowe Price Threshold Fund III, L.P. By: /s/ Junerose C. Sordoni ---------------------------------- Junerose C. Sordoni Address: 100 E. Pratt Street Baltimore, Maryland 21202 H & Q BIONIX INVESTORS, L.P. By: /s/ H & Q BIONIX INVESTORS, L.P. ------------------------------------- Address: HAMBRECHT & QUIST One Bush Street San Francisco, CA 94104 -19- LANDMARK FINANCIAL ASSOCIATES II, L.P. By: /s/ John J. Moroney -------------------------------------- John J. Moroney, General Partner Address: P.O. Box 187 Harrington Park, New Jersey 07640 /s/ Russell Stravitz ---------------------------------------- Russell Stravitz Address: 4181 Harris Trail Atlanta, Georgia 30327 STAGE RIGHT LTD. DEFINED JMS F/B/O RICHARD LANDIS PROFIT BENEFITS PENSION PLAN SHARING KEOGH PLAN By: /s/ Richard Landis By: /s/ Richard Landis -------------------------- -------------------------------------- Address: By: /s/ Gail R. Simon, Esq. Janney Montgomery Scott -------------------------------------- 1801 Market Street Address: Janney Montgomery Scott Philadelphia, Pennsylvania 19103 1801 Market Street Attention: Retirement Plans Philadelphia, Pennsylvania 19103 Department Attention: Retirement Plans Account No. 78814956 Department Account No. 50424025 SAUL N. AND ELAINE S. SCHREIBER FAMILY TRUST By: /s/ Saul Schreiber ------------------------------------- Address: 5501 N. 19th Avenue., Suite 331 Phoenix, Arizona 85015 -20- DELAWARE CHARTER GUARANTEE & TRUST CUSTODIAN FBO DAVID H. MACCALLUM By: /s/ David H. MacCallum ------------------------------------- David H. MacCallum Address: 64 East 66th Street New York, New York 10021 DESERT ORTHOPEDICS AND REHABILITATION LTD. PROFIT SHARING PLAN By: /s/ Saul Schreiber ------------------------------------ Address: 5501 N. 19th Avenue, Suite 331 Phoenix, AZ 85015 /s/ Samuel E. Navarro ------------------------------------ Samuel E. Navarro Address: c/o UBS Securities 299 Park Avenue New York, NY 10171 /s/ Lori Gonye ------------------------------------ Lori Gonye Address: c/o UBS Securities 299 Park Avenue New York, NY 10171 -21- /s/ Kevin Kotler ------------------------------- Kevin Kotler Address: c/o UBS Securities 299 Park Avenue New York, NY 10171 -21A- /s/ Jeffrey O'Donnell ------------------------------- Jeffrey O'Donnell 22 FOUNDING STOCKHOLDERS* BIONIX, B.V. By: /s/ David Anderson ----------------------------------- David Anderson, President Address: 279B Great Valley Parkway Malvern, PA 19355 /s/ David W. Anderson ----------------------------------- David W. Anderson Address: 27B Great Valley Parkway Malvern, PA 19355 /s/ David H. MacCallum ----------------------------------- David H. MacCallum Address: 64 East 66th Street New York, New York 10021 -23- BERSHAD INVESTMENT GROUP, L.P. By: /s/ David J. Bershad --------------------------------------- David J. Bershad Title: General Partner Address: 2 Stonebridge Road Montclair, New Jersey BTAR ASSOCIATES, L.P. By: STRATEGIC CONCEPTS, INC., general partner By: /s/ Anthony J. Dumun ------------------------ Anthony J. Dimun Title: President Address: 46 Parsonage Hills Road Short Hills, New Jersey 07078 TDW ASSOCIATES, LP By: TDW III, Inc., general partner By: /s/ Terence D. Wall ------------------------- Terence D. Wall Title: President Address: 160 Lloyd Road Montclair, New Jersey 07042 *David J. Bershad, LP, BTAR Associates, LP and TDW Associates, LP are deemed to be "Founding Stockholders" hereunder with respect to all shares of Bionix, Inc. owned by them other than shares purchased pursuant to the Series A Agreement. -24- EX-10.7 10 STOCK PURCHASE AGREEMENT Exhibit 10.7 STOCK PURCHASE AGREEMENT ------------------------ THIS STOCK PURCHASE AGREEMENT is made as of the 6th day of September, 1996, by and among BIONIX, INC., a Delaware corporation (the "Company"), BIOSCIENCE, LTD., a Finnish corporation ("Bioscience"), BIOCON, OY, a Finnish corporation ("Biocon"), BIOSTENT, Inc., a New Jersey corporation ("Biostent"), ORTHOSORB, INC., a New Jersey corporation ("Orthosorb", and, collectively with Bioscience, Biocon and Biostent, the "Subsidiaries"), and the parties identified as "Investors" on the signature pages hereof, each of which is herein referred to as an "Investor". For purposes of this Agreement, the term "Corporation" shall refer to the Company and the Subsidiaries collectively. The parties hereto hereby agree as follows: 1. PURCHASE AND SALE OF STOCK AND WARRANTS. --------------------------------------- 1.1 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK AND WARRANTS. ---------------------------------------------------------- 1.1.1 The Company shall adopt and file with the Secretary of State of Delaware on or before the Closing (as defined below) a Certificate of Designation, Number, Powers, Preferences and Relative, Participating, Optional, and Other Special Rights and the Qualifications, Limitations, Restrictions and Other Distinguishing Characteristics (the "Certificate of Designation") setting forth the terms and conditions of the Company's Series A Convertible Participating Preferred Stock (the "Series A Preferred Stock"), such Certificate of Designation to be in the form and substance of the Certificate of Designation annexed hereto as Exhibit A. Such Certificate of Designation will further amend --------- the Company's amended Certificate of Incorporation. Excluding such Certificate of Designation, the Company's amended Certificate of Incorporation (the "Certificate of Incorporation") and the Company's By-laws are set forth in Exhibit B annexed hereto. - --------- 1.1.2 The Company shall issue common stock purchase warrants (the "Warrants") reflecting the terms set forth in the form of the warrant annexed hereto as Exhibit C. Each Warrant provides for the purchase of one share of the --------- Company's Common Stock, par value $.001 per share (the "Common Stock"), at an exercise price of $3.00 per share. 1.1.3 Subject to the terms and conditions of this Agreement, each Investor agrees, severally, to purchase at the Closing, and the Company agrees to sell and issue to each Investor at the Closing, that number of shares of the Company's Series A Preferred Stock set forth opposite each Investor's name on Exhibit D annexed hereto, at a price of $2.49 per share and (b) Warrants --------- to that number of shares of the Company's Common Stock set forth opposite each Investor's name on such Exhibit D, at a price of $.025 per --------- Warrant. At the the Company shall deliver to each Investor certificates representing the number of shares of Series A Preferred Stock that such Investor is purchasing and the Warrants that such Investor is purchasing against payment of the purchase price therefor by certified check, wire transfer, or any combination thereof. Any Investor purchasing Series A Preferred Stock and Warrants pursuant to this Agreement shall become a party to this Agreement and a party to the Investors' Rights Agreement and Co-Sale Agreement referred to herein, all dated as of the date hereof. This Agreement, the Warrants, such Investors' Rights Agreement and such Co-Sale Agreement are collectively referred to herein as the "Transaction Agreements". 1.2 CLOSING. ------- (a) The purchase and sale of the Series A Preferred Stock and Warrants shall take place at the offices of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A., 65 Livingston Avenue, Roseland, New Jersey at 10:00 A.M., on [__________, 1996,] or at such other time and place as the Company and Investors acquiring in the aggregate more than one half of the shares of Series A Preferred Stock and Warrants sold pursuant hereto mutually agree upon orally or in writing (the "Closing"). 2. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION. The Corporation ------------------------------------------------- hereby represents and warrants to each Investor as follows: 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION; REORGANIZATION. ------------------------------------------------------------- 2.1.1 The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted. The Company is duly qualified to do business as a foreign corporation in Pennsylvania and is not required to be qualified to transact business in any other jurisdiction, excepting only jurisdictions in which the failure to so qualify would not have a material adverse effect on its business or properties. 2.1.2 The Company was reorganized in the manner described in Exhibit ------- E annexed hereto (the "Reorganization"). All corporate action with respect to - - the Reorganization, including authorization, execution, delivery and governmental filings required in connection therewith, has been taken and the Reorganization is complete and effective. 2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the -------------------------------- Company consists of the following: 2.2.1 PREFERRED STOCK. 10,000,000 shares of Preferred Stock, of which --------------- 2,000,000 shares have been reserved for sale at the Closing as Series A Preferred Stock and none of which are presently issued and outstanding. The rights, privileges and preferences of the Series A Preferred Stock will be as stated in the Certificate of Designation. 2.2.2 COMMON STOCK. 60,000,000 shares of common stock ("Common ------------ Stock"), of which 10,105,000 shares are issued and outstanding. The existing shareholders of the Company and their current holdings of the Company's capital stock are summarized in Exhibit F annexed hereto. --------- 2.2.3 OUTSTANDING SHARES. The outstanding shares of Common Stock are ------------------ all duly and validly authorized and issued, fully paid and nonassessable, and were issued in accordance -2- with the registration or qualification provisions of the Securities Act of 1933, as amended (the "Act"), and any relevant state securities laws or pursuant to valid exemptions therefrom. 2.2.4 RIGHTS TO PURCHASE. Except for (A) the conversion privileges ------------------ of the Series A Preferred Stock, (B) Warrants to purchase up to 800,000 shares of Common Stock to be issued pursuant to this Agreement, (C) the rights provided under the Transaction Agreements, (D) options to purchase 637,816 shares of Common Stock which have been granted to David W. Anderson and other employees pursuant to the Stock Option Agreements annexed hereto as Exhibit G and (E) --------- 309,816 additional shares of Common Stock reserved for issuance pursuant to the Company's Stock Option/Stock Issuance Plan, a copy of which is annexed hereto as Exhibit H, there are not, and will not be as of the Closing Date, outstanding - --------- any options, warrants, rights (including conversion or pre-emptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. Except with respect to the Company's Certificate of Incorporation and By-laws, the Transaction Agreements, the Company's Reorganization Agreement (a copy of which has previously been furnished to counsel for the Investors) and the Shareholders' Agreement among Bionix, B.V. and its shareholders (a copy of which has previously been furnished to counsel for the Investors), the Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge, there is no agreement or understanding among any persons and/or entities, which affects or relates to the voting or giving of written consents by a director of the Company or the voting or giving of written consents by a director or stockholder with respect to any security of the Company. 2.3 SUBSIDIARIES. The Company does not presently own or control, ------------ directly or indirectly, any interest in any other corporation, association, or other business entity other than (i) Bioscience and Biocon, both of which are Finnish corporations and wholly-owned subsidiaries of the Company, and (ii) Biostent and Orthosorb, both of which are New Jersey corporations and wholly- owned subsidiaries of the Company. The Company plans to merge Biocon with and into Bioscience and to merge Biostent and Orthosorb with and into the Company. The Company is not a participant in any joint venture, partnership, or similar arrangement. 2.4 AUTHORIZATION. All corporate action on the part of the Company ------------- and its officers, directors and stockholders necessary for the authorization, execution and delivery of the Transaction Agreements, the performance of all obligations of the Company hereunder and thereunder, and the authorization, issuance (or reservation for issuance), sale and delivery of the Series A Preferred Stock and Warrants being sold hereunder and any Common Stock issuable upon conversion or exercise thereof, has been taken or will be taken prior to the Closing. The Transaction Agreements constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent that indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. The Series A -------------------------------------------- Preferred Stock that is being purchased by the Investors hereunder, when issued, sold and delivered in -3- accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable. Such Series A Preferred Stock and the Warrants being purchased by the Investors hereunder will be free of restrictions on transfer other than restrictions on transfer under the Transaction Agreements and under applicable state and federal securities laws. The shares of Common Stock issuable upon conversion of the Series A Preferred Stock purchased under this Agreement and upon exercise of the Warrants purchased under this Agreement have been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Certificate of Designation or the Warrants, whichever is applicable, will be duly and validly issued, fully paid, and nonassessable and will be free of restrictions on transfer other than restrictions on transfer under the Transaction Agreements and under applicable state and federal securities laws. 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or --------------------- authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for such filings as may be required by applicable state securities laws. 2.7 OFFERING. Subject in part to the truth and accuracy of each -------- Investor's representations set forth in Section 3 hereof of this Agreement, the offer, sale and issuance of the Series A Preferred Stock and Warrants as contemplated by this Agreement are exempt from the registration requirements of the Act. 2.8 LITIGATION. There is no action, suit, proceeding or ---------- investigation pending or currently threatened against the Corporation that questions the validity of the Transaction Agreements or the right of the Corporation to enter into the Transaction Agreements, or to consummate the transactions contemplated hereby or thereby, or that may reasonably be expected to result, either individually or in the aggregate, in any material adverse change in the consolidated assets, financial condition or results of operations of the Corporation. The Corporation is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 2.9 PATENTS AND TRADEMARKS. ---------------------- (a) Exhibit I annexed hereto includes a true and complete list of all --------- patents, patent applications, trademarks, service marks, trademark and service mark applications, trade names, copyrights and licenses presently owned or held by the Corporation. To the best of the Corporation's knowledge, the Corporation owns or possesses, or can obtain by payment of royalties in amounts which, in the aggregate, do not and will not materially adversely affect the business and the prospects of the Corporation, all of the patents, trademarks, service marks, trade names, copyrights, proprietary rights and processes, trade secrets, and licenses or rights to the foregoing necessary for the conduct of the Corporation's business as now conducted (including any applications therefor) (collectively, the "Proprietary Rights"). To the best of the Corporation's knowledge, the business of the Corporation as now conducted does not infringe or violate any of the patents, trademarks, service marks, trade names, copyrights, licenses or other proprietary rights of any person or entity. -4- (b) The Corporation has taken commercially reasonable actions and made such applicable applications and filings as it deemed commercially reasonable pursuant to applicable laws to perfect or protect its interests in the Proprietary Rights, except where the failure to take such actions or make such applications or filings would not have a material adverse effect on the Corporation's business as currently conducted or as proposed to be conducted or materially interfere with the use or enforcement of such Proprietary Rights in the ordinary course of its business. To the best of the Corporation's knowledge, each consultant to the Corporation has validly assigned all of such consultant's rights in and to the Proprietary Rights to the Company or one of the Subsidiaries. (c) The Reorganization, the execution, delivery and performance of the Transaction Agreements and the performance of the Company's obligations as set forth in the Certificate of Incorporation and the consummation of the transactions contemplated hereby and thereby will not (A) cause the forfeiture or termination or give rise to a right of forfeiture or termination of any Proprietary Right, or (B) in any way impair or adversely affect the right of the Corporation to develop, make, use, sell, license, market or dispose of or to bring any action for the infringement of, any Proprietary Right or any products, services or technology designed, developed, manufactured, licensed, sold, marketed or serviced by the business of the Corporation (collectively, "Products"). (d) Except for any written obligations of the Corporation as set forth in the agreements listed on Exhibits J or K annexed hereto, the development, ---------------- manufacture, marketing, license, sale, use or disposal of any Products does not or would not violate any license or agreement between the Company or any of its Subsidiaries and any third party. To the best knowledge of the Company, neither the Corporation nor any of its consultants has misappropriated any third party trade secrets. There is no claim or litigation pending or, to the best of the Company's knowledge, threatened, contesting the validity, ownership or right to develop, make, use, sell, license, market or dispose of any Proprietary Right. (e) To the best of the knowledge of the Corporation, no third party is infringing on any Proprietary Right where such infringement could materially adversely limit the protection afforded by the Proprietary Rights to the development, manufacture, use, sale, license, sublicense, marketing or disposition of the Products. (f) The Corporation has taken all commercially reasonable steps necessary or appropriate (including, without limitation, entering into appropriate confidentiality and nondisclosure agreements with consultants to the Corporation, in the form attached as Exhibit L annexed hereto (the ---------- "Nondisclosure Agreement")), to safeguard and maintain the secrecy and confidentiality of, and the proprietary rights in, the Proprietary Rights. (g) Neither the Corporation nor, to the best of the Company's knowledge, any of its employees, consultants or independent contractors are making any unauthorized use of any confidential information of third parties or any confidential information in which any of their present or past consultants or independent contractors has claimed a proprietary interest and the Corporation is not aware of any facts that would give rise to any such claim. The Corporation is not aware that any consultant is obligated under any contract (including any license, covenant or commitment of any nature), or subject to any judgment, decree or order of any court or administrative agency, that would -5- interfere with the use of such consultant's best efforts to promote the interests of the Corporation or would conflict with the Corporation's business as now conducted. To the best of the Corporation's knowledge, no prior employer of any consultant of the Corporation has any right to or interest in any inventions, improvements, discoveries or other information assigned to the Corporation by a consultant pursuant to a Nondisclosure Agreement executed by such consultant, or otherwise so assigned. (h) All of the Corporation's consultants or independent contractors whose employment responsibility requires access or who have actual access to confidential or proprietary information of the Company have executed and delivered a Nondisclosure Agreement, and all such agreements are in full force and effect. 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in --------------------------------- violation or default of any provision of its Certificate of Incorporation or By- Laws, and the Corporation is not in material violation or material default of any material instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound, or, to the best of the Company's knowledge, of any provision of any statute, rule or regulation applicable to the Corporation. The execution, delivery and performance of the Transaction Agreements, and the consummation of the transactions contemplated hereby and thereby, will not result in any such violation or be in material conflict with or constitute, with or without the passage of time and giving of notice, either a material default under any such provision, instrument, judgment, order, writ, decree or contract or an event that results in the creation of any material lien, charge or encumbrance upon any assets of the Corporation or the suspension, revocation, impairment, forfeiture or nonrenewal of any material permit, license, authorization, or approval applicable to the Corporation, its business or operations or any of its assets or properties. 2.11 AGREEMENTS; ACTION. ------------------ 2.11.1 Except for the Articles of Association as amended from time to time of Bionix, B.V. and agreements explicitly referred to herein or contemplated hereby or by any of the other Transaction Agreements or by the Shareholders' Agreement among Bionix, B.V. and its shareholders, there are no material agreements of any nature between the Corporation and any of its officers, directors or other affiliates, including without limitation any agreement or other arrangement providing for payments to any such person or entity or regarding voting rights or control over the Corporation. 2.11.2 Except as disclosed in any exhibit or agreement disclosed hereunder, there are no material agreements to which the Corporation is a party or by which it is bound that may involve (i) obligations (contingent or otherwise) of the Corporation in excess of $100,000, or (ii) provisions restricting the development, manufacture or distribution of the Corporation's products or services, or (iii) indemnification by the Corporation with respect to infringements of proprietary rights. 2.11.3 Exhibit J annexed hereto contains the form of the Corporation's --------- material distribution, sales representative and sales agency agreements. Exhibit K annexed hereto contains a description of any material agreement - --------- pursuant to which the Corporation has received an existing license from a third- party or granted an existing license to a third-party. -6- 2.11.4 Exhibit M annexed hereto contains a description of all --------- indebtedness of the Corporation to banks or other lenders (other than lessors under operating leases) and a description of any security interests, pledges or other encumbrances on the Corporation's property which have been given to secure such indebtedness. Except as otherwise set forth in Exhibit E annexed hereto, --------- since January 1, 1996, the Corporation has not declared or paid any dividends or authorized or made any distribution upon or with respect to any class or series of its capital stock and the Corporation has not (i) made any loans or advances to any officer or director of the Corporation, other than ordinary advances for travel expenses, or (ii) entered into any transaction outside of the ordinary course of business. 2.11.5 Except for the sale of the Corporation's products by a subsidiary of Vital Signs, Inc. (which sales effort terminated with the commencement of sales managed by the Corporation) and agreements described in exhibits annexed hereto, (A) the Corporation has not entered into any business transaction with any entity controlled by an officer or director of the Corporation, (B) to the best of the Company's knowledge, no officer, or director of the Company or any of its Subsidiaries or member of his or her immediate family is affiliated with any firm or corporation that competes with the Corporation, except that this representation shall not apply with respect to officers and directors of the Company or any of its Subsidiaries and members of their immediate families that own stock in publicly traded companies (equal to no more than 2% of the outstanding shares of such public companies) that may compete with the Corporation and (C) to the best of the Company's knowledge, no officer or director of the Company and no member of the immediate family of any officer or director of the Company is directly or indirectly interested in any material contract between the Company or any of its Subsidiaries and any of its customers, suppliers, distributors, sales representatives or sales agents. 2.12 BUSINESS PLAN. The Business Plan dated February 1996 previously ------------- delivered to each Investor was prepared in good faith by the Company and, to the best of the Company's knowledge, does not, with respect to any historical matters, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made therein not misleading. It is understood that (A) with respect to projections contained in the Business Plan, the Company represents only that such projections were prepared in good faith and that the Company reasonably believes that there is a reasonable basis for such projections, it being understood that no assurances can be given that actual results of operations will in fact be the same as or even approximate the projected results and (B) all representations regarding such Business Plan are qualified by the disclaimers set forth in Exhibit N annexed hereto. --------- 2.13 PERMITS. The Corporation has all franchises, permits, licenses, ------- and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which would materially and adversely affect the business, consolidated results of operations or consolidated financial condition of the Corporation. To the best of the Corporation's knowledge, the Corporation is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. The Corporation has not received any notices from the U.S. Food and Drug Administration regarding its non-compliance with Good Manufacturing Practices ("GMP") and, to the best of the Corporation's knowledge, is in compliance in all material respects with GMP and has implemented appropriate policies and procedures under GMP. -7- 2.14 ENVIRONMENTAL AND SAFETY LAWS. To the best of the Corporation's ----------------------------- knowledge, the Corporation is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, the violation of which would materially and adversely affect the business, consolidated results of operations or consolidated financial condition of the Corporation. 2.15 MANUFACTURING AND MARKETING RIGHTS. Except as set forth in ---------------------------------- Exhibits J and K annexed hereto, the Corporation has not granted rights to - ---------------- manufacture, produce, assemble, license, market or sell its products to any other person and is not bound by any agreement that affects the Corporation's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 2.16 REGISTRATION RIGHTS. Except as provided in the Investors' ------------------- Rights Agreement, the Corporation has not granted or agreed to grant any registration rights, including piggyback registration rights, to any person or entity. 2.17 TITLE TO PROPERTY AND ASSETS. The Corporation owns its property ---------------------------- and assets free and clear of all mortgages, liens and encumbrances, except such encumbrances and liens that arise in the ordinary course of business and do not materially impair the Corporation's ownership or use of such property or assets. 2.18 FINANCIAL STATEMENTS. The Company has annexed hereto as Exhibit -------------------- ------- O its audited financial statements as of December 31, 1995, and for the fiscal - - year then ended and unaudited financial statements for the six months ended June 30, 1996 (the "Financial Statements"). The Financial Statements fairly present the consolidated financial condition and operating results of the Corporation as of the dates, and for the periods, indicated therein. The Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods indicated and with each other, except that no footnotes have been prepared with respect to the 1996 financial statements. Except as set forth in the Financial Statements, the Corporation has no material liabilities that would be required to be disclosed on the face of a balance sheet prepared in accordance with GAAP other than (i) liabilities incurred in connection with the Reorganization and the offering of the Series A Preferred Stock and Warrants or in the ordinary course of business subsequent to the date of the most recent balance sheet included within the Financial Statements (the "Balance Sheet Date"), and (ii) obligations under contracts and commitments incurred in the ordinary course of business. The Corporation is not a guarantor of any indebtedness of any person, firm or corporation other than an entity affiliated with the Company. 2.19 CHANGES. Since the Balance Sheet Date, there has not been: ------- 2.19.1 any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the consolidated financial condition, results of operations or business of the Corporation; 2.19.2 any material change or amendment to a material contract or arrangement by which the Corporation or any of its assets or properties is bound or subject; -8- 2.19.3 any resignation or termination of employment of any key officer of the Corporation other than Jeffrey O'Donnell; or 2.19.4 to the best of the Company's knowledge, any other event or condition of any character that may reasonably be expected to materially and adversely affect the consolidated financial condition, results of operations or business of the Corporation. 2.20 EMPLOYEE MATTERS. Except as described in Exhibit P annexed ---------------- --------- hereto, the Corporation does not maintain any "employee benefit plan" as such term is defined in the Employee Retirement Income Security Act of 1974. The Corporation has not entered into any written employment agreements other than those described in Exhibit P annexed hereto. None of the Corporation's ---------- employees are represented by any labor union, and there has been no labor strike or other action taken by organized labor with respect to the Corporation (including, without limitation, any organizational drive) or, to the best of the Company's knowledge, threatened. 2.21 TAX RETURNS, PAYMENTS AND ELECTIONS. The Corporation has filed ----------------------------------- (when due) all tax returns and reports as required by law. These returns and reports are true and correct in all material respects. The Corporation has paid all taxes and other assessments when due. 2.22 NON-COMPETITION AGREEMENTS. David W. Anderson's and Pertti -------------------------- Tormala's employment agreements referenced in Exhibit P annexed hereto contain a --------- non-competition agreement. 2.23 NON-DISCLOSURE AND DEVELOPMENT AGREEMENT. Non-Disclosure and ---------------------------------------- Development Agreements in the form of the agreement annexed hereto as Exhibit R --------- have been executed by each of the officers of the Company and by each other employee of the Corporation determined by management to be a key employee of the Corporation. 2.24 BASE SALARY OF CEO. The base salary of David W. Anderson, the ------------------ Company's Chief Executive Officer, is not more than $150,000. 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor hereby ----------------------------------------------- represents and warrants that: 3.1 AUTHORIZATION. Such Investor has full power and authority to ------------- enter into the Transaction Agreements, and each such Agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with --------------------------------- such Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, that the Series A Preferred Stock and Warrants to be received by such Investor and the capital stock issuable upon conversion or exercise -9- thereof (collectively, the "Securities") will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, such Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. 3.3 DISCLOSURE OF INFORMATION. Such Investor believes it has ------------------------- received all the information it considers necessary or appropriate for deciding whether to purchase the Series A Preferred Stock and Warrants. Such Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series A Preferred Stock and Warrants and the business, properties, prospects and financial condition of the Company. 3.4 INVESTMENT EXPERIENCE. Such Investor is an investor in --------------------- securities of private companies and acknowledges that it is able to fend for itself, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Series A Preferred Stock and Warrants, as well as the underlying Common Stock. If other than an individual, such Investor also represents that it has not been organized for the purpose of acquiring the Series A Preferred Stock or the Warrants. 3.5 ACCREDITED INVESTOR. Such Investor is an "accredited investor" ------------------- within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 3.6 RESTRICTED SECURITIES. Such Investor understands that the --------------------- Securities it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations, such securities may not be resold without registration under the Act except in certain limited circumstances. In this connection, such Investor represents that it is aware that it may be required to hold the Securities indefinitely and is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting ---------------------------------- the representations set forth above, such Investor further agrees not to make any disposition of all or any portion of the Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 hereof and the Investors' Rights Agreement and Co-Sale Agreement provided and to the extent that this Section and such Agreements are then applicable, and: 3.7.1 There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or 3.7.2 (i) Such Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if requested by the Company, such Investor shall have furnished the -10- Company with an opinion of counsel, satisfactory to the Company, that such disposition will not require registration of such shares under the Act. 3.7.3 Notwithstanding the provisions of paragraphs 3.7.1 and 3.7.2 above, no such registration statement or opinion of counsel shall be necessary for a transfer by an Investor that is a partnership to a direct successor (by law or otherwise) to such partnership, a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner or the transfer by gift, will or intestate succession of any partner to his or her spouse or to the siblings, lineal descendants or ancestors of such partner or his or her spouse, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if he or she were an original Investor hereunder. 3.8 LEGENDS. It is understood that the certificates evidencing the ------- Securities may bear one or all of the following legends: 3.8.1 "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." 3.8.2 Any legend required by the laws of any State. 3.8.3 The legend set forth under Section 3.8.1 shall be removed from such certificates, at the request of the holder thereof, at such time as the shares represented by such certificate become eligible for resale pursuant to Rule 144(k) under the Act. 3.9 DISCLAIMERS. Each Investor understands and acknowledges that ----------- such Investor has been advised with respect to the following: 3.9.1 The disclaimers set forth in Exhibit N annexed hereto; and --------- 3.9.2 The statement of risk factors set forth in Exhibit S --------- annexed hereto. 4. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING. The obligations of ----------------------------------------------- each Investor under subsection 1.1.3 of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against any Investor who does not consent in writing thereto: 4.1 REPRESENTATIONS AND WARRANTIES. The representations and ------------------------------ warranties of the Company contained in Section 2 hereof shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. -11- 4.2 PERFORMANCE. The Company shall have performed and complied with ----------- all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.3 COMPLIANCE CERTIFICATE. The Company shall deliver to each ---------------------- Investor at the Closing a certificate stating that, to the best of its knowledge, the conditions specified in Sections 4.1 and 4.2 have been fulfilled. 4.4 QUALIFICATIONS. All authorizations, approvals, or permits, if -------------- any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Securities pursuant to this Agreement shall be duly obtained and effective as of the Closing. 4.5 INVESTORS' RIGHTS AGREEMENT. The Company and each Investor shall --------------------------- have entered into the Investors' Rights Agreement in the form annexed hereto as Exhibit T. - --------- 4.6 CO-SALE AGREEMENT. The Company, the Investors, and each of the ----------------- Founding Stockholders (as defined in the Co-Sale Agreement) shall have entered into the Co-Sale Agreement in the form annexed hereto as Exhibit U. --------- 4.7 OPINION OF COUNSEL. Counsel to the Company shall have delivered ------------------ to the Investors an opinion letter in the form annexed hereto as Exhibit V. --------- 4.8 CHARTER AND BYLAWS. The Certificate of Incorporation and ------------------ Certificate of Designation shall have been filed with the office of the Secretary of State of the State of Delaware. The By-laws as set forth in Exhibit B annexed hereto shall remain (as of the Closing) effective without - --------- change. 4.9 COMMITTEES. The Board of Directors of the Company shall have ---------- established an Audit Committee and a Compensation Committee consisting of one or more members. Terral Jordan has been named as a member of each such committee. 4.10 OTHER MATTERS. All corporate and other proceedings in ------------- connection with the Reorganization and the transactions contemplated by the Transaction Agreements and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Investors and their counsel, and the Investors and their counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of -------------------------------------------------- the Company to the Investors under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: -12- 5.1 REPRESENTATIONS AND WARRANTIES. The representations and ------------------------------ warranties of the Investors contained in Section 3 hereof shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 PAYMENT OF PURCHASE PRICE. The Investors shall have delivered ------------------------- the purchase price specified in Section 1.1.3 hereof. A minimum of 800,000 shares of Series A Preferred Stock and 320,000 Warrants shall have been purchased by all Investors at the Closing. 5.3 QUALIFICATIONS. All authorizations, approvals, or permits, if -------------- any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Securities pursuant to this Agreement shall be duly obtained and effective as of the Closing. 5.4 INVESTORS' RIGHTS AGREEMENT. The Company and the Investors shall --------------------------- have entered into the Investors' Rights Agreement described in Section 4.5 hereof. 5.5 CO-SALE AGREEMENT. The Company, the Investors, and each of the ----------------- Founding Stockholders shall have entered into the Co-Sale Agreement described in Section 4.6 hereof. 5.6 OTHER MATTERS. All corporate and other proceedings in connection ------------- with the Reorganization and the transactions contemplated by the Transaction Agreements and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Company and its counsel, and the Company and its counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. 6. KEY MAN INSURANCE; NEW OFFICERS. As soon as practicable after the ------------------------------- Closing, the Company shall purchase and, while shares of Series A Preferred Stock are outstanding, thereafter shall maintain key man insurance in the amount of $1.0 million on the lives of each of David W. Anderson and Pertti Tormala, subject to the following conditions: (i) the purchase of such insurance shall be subject to the approval of the Compensation Committee of the Board, which shall have the discretion to reduce the amount of such insurance if $1.0 million of insurance cannot be obtained by the Company from a reputable insurance company at a premium that is reasonable to, and affordable by, the Company and (ii) the obligation set forth in this Section 6 shall apply with respect to David W. Anderson and Pertti Tormala only while such person is providing services to the Company or one or more of its Subsidiaries. Subsequent to the Closing, the Company shall use reasonable efforts to hire and employ a suitable chief financial officer and a suitable European operating officer. 7. MISCELLANEOUS. ------------- 7.1 SURVIVAL OF WARRANTIES. The warranties, representations and ---------------------- covenants of the Company and the Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investors or the Company. -13- 7.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the ---------------------- terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 7.3 GOVERNING LAW. This Agreement shall be governed by and construed ------------- under the laws of the State of Delaware (without application of principles of conflicts of laws). 7.4 COUNTERPARTS; FACSIMILE. This Agreement may be executed in two ----------------------- or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Signatures hereon may be evidenced by facsimile transmissions. 7.5 CAPTIONS. The captions used in this Agreement are used for -------- convenience only and are not to be considered in construing or interpreting this Agreement. 7.6 NOTICES. Unless otherwise provided, any notice required or ------- permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified, by facsimile transmission upon delivery thereof or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof or in Exhibit D annexed hereto, or at such other --------- address as such party may designate by ten (10) days' advance written notice to the other parties. 7.7 FINDER'S FEE. Each party represents that it neither is nor will ------------ be obligated for any finders' fee or commission in connection with this transaction. Each Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which such Investor or any of its officers, partners, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 7.8 EXPENSES. Irrespective of whether the Closing is effected, the -------- Company shall pay all costs and expenses that it incurs and each Investor shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement, except that the Company shall pay the reasonable fees up to a maximum of $20,000 and expenses of Testa, Hurwitz & Thibeault, LLP (counsel to the Investors). If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement or the Transaction Agreements, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. -14- 7.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be ---------------------- amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Common Stock issued or issuable upon conversion of the Series A Preferred Stock acquired pursuant to this Agreement. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 7.10 SEVERABILITY. If one or more provisions of this Agreement are ------------ held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and such balance shall be enforceable in accordance with its terms. 7.11 ENTIRE AGREEMENT. This Agreement and the documents referred to ---------------- herein constitute the entire agreement with respect to the subject matter hereof among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. 7.12 RULE OF CONSTRUCTION. The parties do not intend that this -------------------- Agreement shall be construed against the party that drafted this Agreement or any portion of this Agreement. IN WITNESS WHEREOF, the parties have executed this Stock Purchase Agreement as of the date first above written. BIONIX, INC. By: /s/ David W. Anderson --------------------------------- David W. Anderson, President Address: 279 B Great Valley Parkway Malvern, PA 19355 Telephone: 610-296-0919 Telecopy: 610-296-2249 INVESTORS: /s/ David J. Bershad ------------------------------------ David J. Bershad -15- BTAR ASSOCIATES, L.P. By: STRATEGIC CONCEPTS, INC., General Partner By: /s/ Anthony J. Dimun --------------------------- Anthony J. Dimun President TDW ASSOCIATES, L.P. By: TDW III, INC., General Partner By: /s/ Terence D. Wall -------------------------------- Terence D. Wall, President DELAWARE CHARTER GUARANTEE & TRUST/Custodian FBO David H. MacCallum By: /s/ David H. MacCallum -------------------------------- David H. MacCallum T. ROWE PRICE THRESHOLD FUND III, L.P., By: T. Rowe Price Threshold Fund Associates, Inc., General Partner of T. Rowe Price Threshold Fund III, L.P. By: /s/ Junerose C. Sordoni -------------------------------- Junerose C. Sordoni H & Q BIONIX INVESTORS, L.P. By: /s/ H & Q BIONIX INVESTORS, L.P. -------------------------------- -16- LANDMARK FINANCIAL ASSOCIATES II, L.P. By: /s/ John J. Moroney ---------------------------------- John J. Moroney, General Partner /s/ Russell Stravitz ------------------------------------- Russell Stravitz STAGE RIGHT LTD. DEFINED JMS F/B/O RICHARD LANDIS PROFIT BENEFITS PENSION PLAN SHARING KEOGH PLAN By: /s/ Richard Landis By: /s/ Richard Landis ---------------------- ---------------------------------- By: /s/ Gail R. Smien, Esq. ---------------------------------- DESERT ORTHOPEDICS AND REHABILITATION LTD. PROFIT SHARING PLAN By: /s/ Saul Schreiber ---------------------------------- SAUL N. and ELAINE S. SCHREIBER FAMILY TRUST By: /s/ Saul Schreiber ---------------------------------- /s/ Samuel E. Navarro ------------------------------------- Samuel E. Navarro /s/ Kevin Kotler /s/ Lori Gonye - ------------------------- ------------------------------------- Kevin Kotler Lori Gonye -17- BIOSCIENCE, LTD. By: /s/ Pertti Viitanen ---------------------------------- BIOCON, OY By: /s/ Pertti Viitanen ---------------------------------- BIOSTENT, INC. By: /s/ David W. Anderson ---------------------------------- ORTHOSORB, INC. By: /s/ David W. Anderson ---------------------------------- -18- EXHIBITS Exhibit Description ------- ----------- A Certificate of Designation of the Series A Preferred Stock B Certificate of Incorporation (as amended, but without the Certificate of Designation) and By-Laws C Common Stock Purchase Warrant D List of Investors E Description of the Reorganization F Existing Shareholders G Stock Option Agreements H Stock Option/Stock Issuance Plan I Patents Agreements J Distribution and Sales Representative Agreements K License Agreements L Nondisclosure Agreement M Indebtedness N Disclaimers O Financial Statements P Employment Agreements and Employee Benefit Plans Q Omitted R Nondisclosure and Development Agreement S Statement of Risk Factors T Investors' Rights Agreement U Co-Sale Agreement V Opinion Letter D-1 EX-10.8 11 LICENSE AGREEMENTS WITH SAUL N. SCHREIBER EXHIBIT 10.8 LICENSE AGREEMENT THIS AGREEMENT dated as of May 1, 1995 (hereinafter the "Effective Date") between Saul N. Schreiber, a citizen of the United States of America, whose address is 5501 19th Avenue, Phoenix, Arizona, U.S.A. 85015 (hereinafter "SCHREIBER") and Biocon Oy, a Finnish corporation, whose address is P. O. BOX 3, FIN-33721 Tampere, Finland (hereinafter "BIOCON"'.). WITNESSETH: WHEREAS, SCHREIBER is the owner of U.S. Patents NOs. 4,873,976 and 4,635,637 and has the right to license others under such patents; and WHEREAS, BIOCON desires to acquire an exclusive license under the patents; NOW THEREFORE, in consideration of the promises and mutual covenants herein contained, SCHREIBER and BIOCON agree as follows: I. Definitions 1.1 "Licensed Patents" means U.S. Patent No. 4,873,976 and any reissue or re-examination thereof, and U. S. Patent No. 4,635,637 and any reissue or re-examination thereof. 1.2 "Subsidiary" means a corporation, company, or other entity more than fifty percent (50%) of whose outstanding shares or securities (representing the right, other than as affected by events of default, to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly, by a party hereto, but such corporation, company, or other entity shall be deemed to be a Subsidiary only as long as such ownership or control exists. 1.3 "Licensed Entity" means Bioscience, Inc., BIOCON and all Subsidiaries of BIOCON sublicensed under Article III and all Sublicensees of BIOCON under Article IV. 1.4 "Relicensed Product" means an insertable suture intended for repairing body tissue and coming within the scope of any of the apparatus claims 1-18 and 24-31 of the Licensed Patent No. 4,873,976 or any claim of Licensed Patent No. 4,635,637. 1.5 "Licensed Method" means a method of repairing a tear in a meniscus and coming within the scope of any of method claims 19-23 of the Licensed Patent No. 4,873,976. 1.6 "Net Selling Price" means the price invoiced by a Licensed Entity to an unaffiliated purchaser for a Licensed Product less the following: any actual discounts, allowances and commissions; any insurance and freight charges and any taxes, customs duties and other government charges included in such invoice price; any amounts repaid or credited because of returned Licensed Products and retroactive price deductions. If the price invoiced by Licensed Entity in any transaction with respect to any Licensed Product is less than its Fair Market Value, the Net Selling Price shall be the Fair Market Value. 1.7 "Fair Market Value" means the Net Selling Price that Licensed Entity would realize (assuming a reasonable and fair recovery of cost to Licensed Entity and a reasonable profit margin) if the relevant Licensed Product were sold to an unaffiliated buyer in an arm's length sale in the same country, in the same quantity, and contemporaneously with the relevant transaction. 1.8 "Approval Date" shall mean the date on the first of the month immediately following the date on which the FDA issues its approval of the sale and use in the United States of America of the Licensed Product and the Licensed Method. 1.9 "Approval Year" shall mean the year commencing with the Approval Date. 2.0 "Reporting Quarter" shall mean each three month period commencing with the Effective Date. II. LICENSES 2.1 Subject to Articles V and VI, SCHREIBER grants to BIOCON and to Bioscience Inc., the parent corporation of BIOCON, an irrevocable, exclusive license under the Licensed Patents to make, have made, import, have imported, use, sell and otherwise dispose of Licensed Products, to practice the Licensed Method. Whenever the term "sold'' is employed, it is intended also to embrace the words ''used'' and the phrase ''otherwise disposed of"; the words "sales" and "selling'' are to be interpreted correspondingly. SCHREIBER also grants to customers of BIOCON and to those in privity with BIOCON an immunity from suit under any of the method claims of Licensed Patent No. 4,873,976. 2.2 SCHREIBER agrees not to assert any claim of infringement of the Licensed Patents against any customer, mediate and immediate, of a Licensed Entity with respect to any Licensed Product and/or with respect to any practice of the Licensed Method in the circumstance in which (a) the Licensed Product has been obtained directly or indirectly from a Licensed Entity and (b) the applicable royalty has been paid pursuant to this agreement. III. EXTENSION OF LICENSE TO SUBSIDIARIES The license granted herein shall include the right of BIOCON to license its Subsidiaries. Each Subsidiary so sublicensed shall be bound by the terms and conditions of this agreement (except to the extent that the obligations of such terms and conditions are fulfilled on its behalf by BIOCON under the provisions of Article V as if it were named herein in place of BIOCON). Any sublicense granted to a Subsidiary shall automatically, and without the requirement of individual notice, terminate on the date such sublicensed Subsidiary ceases to be a -2- Subsidiary of BIOCON, or this agreement is terminated under any of the provisions of Article VI, whichever is earlier. IV. SUBLICENSES 4.1 BIOCON shall have the exclusive right under the Licensed Patents to grant sublicenses to others at royalty rates not less than those required to be paid in accordance with Article V of this Agreement. 4.2 With respect to sublicenses granted by BIOCON under this Article 4.1, BIOCON shall pay over to SCHREIBER that portion of royalties received from its sublicensees necessary to yield SCHREIBER returns on Licensed Products, sold by such sublicensees equal to the amounts which SCHREIBER would have received from BIOCON on equivalent Licensed Products sold by it. 4.3 Termination under any of the provisions of Article VI of the license granted to BIOCON in this Agreement shall terminate all sublicenses which may have been granted by BIOCON, provided that any sublicensee may elect to continue its sublicense by advising SCHREIBER in writing, within (60) sixty days of the sublicensee's receipt of written notice of such termination, of its election, and of its agreement to assume in respect to SCHREIBER all the obligations (including obligations for payment) contained in its sublicensing agreement with BIOCON. Any sublicense granted by BIOCON shall contain provisions corresponding to those of this paragraph respecting termination and the conditions of continuance of sublicenses. V. ROYALTIES 5.1 Within thirty (30) days after the date of execution of this Agreement by SCHREIBER, BIOCON shall pay to SCHREIBER the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] 5.2 BIOCON agrees to pay a sales royalties to SCHREIBER for each Licensed Product sold by a Licensed Entity in the amount of [CONFIDENTIAL PORTION OMITTED AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] 5.3 BIOCON shall calculate the amount of royalties due to Schreiber in accordance with Article 5.2 for each Licensed Product which, when made or sold by Licensed Entity or by a sublicensee of BIOCON would, but for the license granted hereunder, constitute infringement of any claim of the Licensed Patents. Licensed Products which are built and used solely for the purposes of product development, testing, and marketing of Licensed Products, including those used for verification of design, qualification of design, reliability testing, and demonstration units, and also those which are given as samples without charge to physicians, hospitals, and the like for the purpose of promoting sales of the Licensed Products are exempt from royalty. -3- 5.4 Licensed Entity agrees to maintain accurate records of its operations under this license and shall require the maintenance of similar records by its sublicensed Subsidiaries and sublicensees. Within forty-five (45) days after the termination of each Reporting Quarter commencing with the Effective Date and extending throughout the continuance of this agreement, Biocon shall submit to SCHREIBER a report detailing: (a) the receipts for sales of Licensed Products by Licensed Entity and by any sublicensee of Licensed Entity pursuant to Article IV during such Reporting Quarter; b) the product identification applicable to each Licensed Product reported; (c) the deductions allowed under Article 1.6; and (d) the computation of any royalty payable under Article 2 for such Reporting Quarter; and at the same time as submitting such report shall pay the amount due. 5.5 All sums of money specified in Article V are to be paid in lawful money of the United States of America and shall be remitted via wire transfer to [CONFIDENTIAL PORTION OMITTED AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] 5.6 Licensed Entity shall permit the records prescribed under Article 5.4 to be inspected during regular business hours twice during each year of this agreement by auditors paid for by SCHREIBER as to whom BIOCON has no reasonable objection, but only to the extent necessary to verify the sums due and payable. VI. TERM OF AGREEMENT; TERMINATION 6.1 The term of this agreement is from the Effective Date until the expiration date of the Licensed Patent No. 4,873,976, unless terminated earlier under Articles 6.2 or 6.4. 6.2 This agreement shall terminate only in accordance with the following provisions: (a) Termination by BIOCON: BIOCON shall have the right to terminate this agreement only by giving three months prior written notice to SCHREIBER. (b) Termination By Final Adjudication: This agreement will terminate automatically in the event of an adjudication by a court of competent jurisdiction that all relevant claims of the Licensed Patents are invalid, which decision is not timely appealed, or if appealed, is affirmed. -4- 6.3 Any termination pursuant to Article 6.2 shall not relieve Licensed Entity of any obligation or liability accrued prior to such termination, and such termination shall not affect in any manner any rights of SCHREIBER under this agreement prior to such termination. 6.4 SCHREIBER has the right to terminate this agreement: a. forthwith by written notice to BIOCON only if Licensed Entity is in breach of any of its terms or obligations, and, following written notice given by SCHREIBER identifying such breach, fails to rectify that breach; or where the breach is incapable of rectification, fails to make amends to SCHREIBER'S satisfaction within forty-five (45) days beginning with the date of the note; or b. by notice to BIOCON in the event that BIOCON has: (1) failed to submit to the FDA within one year following the Effective Date a request for clearance of the Licensed Product; or (2) failed to secure approval of the Licensed Product from the U.S. Food & Drug Administration within four (4) years after the Effective Date. VII. WARRANTY SCHREIBER represents and warrants that he has the full right and power to grant the license and release of Articles II and III and that there are no outstanding agreements, assignments or encumbrances inconsistent with the provisions of this license and release, and that there are no patents or patent applications owned by him anywhere in the world, other than United States Patent No. 4,873,976 and 4,635,637 and which are directed to insertable sutures intended for repairing body tissue. VIII. NOTICES AND OTHER COMMUNICATIONS Any notice or other communication required or permitted to be given to either party shall be sufficiently given on the date of mailing if sent to such party by registered or certified mail (sent air mail or otherwise by the fastest service available) postage prepaid, addressed to it at its address set forth below, or to such other address as it may designate by written notice given to the other party. -5- In the case of BIOCON: Biocon Oy P. O. Box 3 FIN-33721 Tampere, Finland and David W. Anderson President and C.E.O. Bioscience Inc. 279B Great Valley Parkway Malvern, Pennsylvania 19355 In the case of SCHREIBER: Saul N. Schreiber 5501 19th Avenue, Phoenix, Arizona, U.S.A. 85015 IX. TRANSFERABILITY OF RIGHTS AND OBLIGATIONS 9.1 Any license or release granted in this agreement by a party in respect to the Licensed Patents shall be binding upon any successor of the party in ownership or control of the Licensed Patents. 9.2 The obligations of BIOCON to make reports, pay royalties, and maintain records in respect to any subsisting license under this agreement shall run in favor of any person or legal entity which is a successor or assignee of SCHREIBER in respect to SCHREIBER's benefits under the agreement. 9.3 The licenses received by any party under this agreement shall pass to any assigns for the benefit of creditors of the Licensed Entity and to any receiver of its assets, or to any person or corporation succeeding to its entire business in Licensed Products as a result of sale, consolidation, reorganization, or otherwise, provided such assignee, receiver, person, or legal entity shall, without delay, accept in writing the provisions of this agreement and agree to become in all respects bound thereby in the place and stead of the licensed party, but may not otherwise be transferred without the written consent of the licensed party. X. KNOW-HOW AND TRADE SECRETS No license or other right is granted by this agreement to either party, directly or by implication, estoppel, or otherwise of any trade secrets or know- how. Neither party is required to furnish or disclose to the other any technical information. -6- XI. APPLICABLE LAW Recognizing that there is a large body of law of the state of New York related to commercial transactions, the parties hereto agree that this agreement shall be construed, and the legal relations between the parties hereto be determined in accordance with the laws of the State of New York, United States of America. XII. ARBITRATION Provided the parties hereinafter agree in writing, and then only to the extent agreed in writing, any controversy or claim arising under or related to this Agreement shall be settled by arbitration in accordance with the Center for Public Resources Rules for Non-Administered Arbitration of Patent and Trade Secret Disputes in effect on the date such controversy or claim first arises. Such arbitration shall be conducted by a single arbitrator; however, if either party deems the issue or issues are of major importance, it may elect that the arbitration shall be conducted before a panel of three arbitrators. The arbitrator(s) shall be appointed by the Center for Public Resources. Notwithstanding the choice of law provision of Article XI, the arbitration shall be governed by the United States Arbitration Act, 9 U.S. (S)1-16. The place of the arbitration shall be Washington D.C. Insofar as the proceeding relates to issues of patent validity, or scope of patent claims, as distinct from the terms of this agreement, it shall also be governed by 35 U.S.C. (S)294, to the extent applicable. In the event the parties hereto do not agree that the controversy or claim should be settled by arbitration, then either party may seek resolution of the controversy or claim in a court of competent jurisdiction. XIII. FDA APPROVAL/MARKETING 13.1 BIOCON agrees to keep SCHREIBER reasonably informed regarding BIOCON's efforts to secure approval from the U. S. Food & Drug Administration. 13.2 BIOCON agrees to take reasonable steps to use SCHREIBER's name in connection with the marketing and sale of the Licensed Products. XIV. MISCELLANEOUS 14.1 This agreement becomes operative and binding on the parties as of the Effective Date only when it has been executed by each party. 14.2 No amendment or modification of this agreement shall be valid or binding upon the parties unless made in writing and signed by or on behalf of each party. 14.3 This agreement embodies the entire understanding of the parties and supersedes all previous communications, representations, or understandings, either oral or written, between the parties relating to the subject matter hereof. -7- 14.4 The headings of the several sections are inserted for convenience of reference only and are not intended to be a part of, or to affect the meaning or interpretation of, this agreement. IN WITNESS WHEREOF the parties hereto have caused this agreement to be duly executed as follows: SAUL N. SCHREIBER Date: May 22, 1995 By: /s/ Saul N. Schreiber ------------------------------- ----------------------------- (Seal) BIOCON OY Date: June 6, 1995 By: /s/ Pertti Tormala ------------------------------- ------------------------------ (Seal) -8- EX-10.9 12 TORMALA, TAMMINMAKI, MENIFIX I/S LICENSE AGREEMENT EXHIBIT 10.9 LICENSE AGREEMENT This agreement is made by and between Mr. Pertti Tormala, address Runeberginkatu 3 A 1, 33710 Tampere, Finland, Mr. Markku Tamminmaki, address Kukkolankatu 23, 33400 Tampere, Finland (hereinafter jointly referred to as "the Finnish Team", and Menifix I/S (Peter Albrecht Olsen and Gert Kristensen), address Nivaenge 173, DK-2990 Niva, Denmark (hereinafter jointly referred to as "the Danish Team") and Biocon Oy, whose registered office is at Runeberginkatu 3 A 1 33710 Tampere, Finland (hereinafter jointly referred to as "Biocon") on the other part. 1. BACKGROUND The Finnish and Danish team are developing in cooperation a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]. The invention is based on the [[CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]. Biocon Oy is the owner of patents and know-how relating to said products. The cooperation has proceeded on such a level that the patent shall be applied for the device in Finland during the next months. The parties to this agreement desire to launch industrial production of this device as soon as possible. 2. DEFINITIONS In this agreement: a) [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] invented and developed by the team and any development hereof made by the parties. b) "Exclusive Territory" shall mean the world. c) "Confidential information" shall mean all scientific, commercial or technical data and information including but not limited to information relating to market reports and surveys, customer lists, trade secrets, documents, correspondence, methods, skills, practices, training, procedures, research, machinery, equipment, instruments, expertices, discoveries, inventions, improvements, data drawings, designs, calculations, specifications, techniques and processes regarding the DEVICE. 3. OBJECT OF THE AGREEMENT The team hereby grants to Biocon the exclusive right to make or to have made, use and sell the DEVICE in the Exclusive Territory. The team undertakes to conduct research work and to use its best efforts in order to develop further and improve the characteristics of the DEVICE. The team shall provide Biocon with such information, specifications and data with respect to the DEVICE as shall be necessary to improve Biocon's potentially to carry out the targets in this agreement. The team agrees to keep Biocon continuously informed of all research and development results in regard to the DEVICE during the development process. The rights granted to Biocon include any additional modifications and improvements of the DEVICE. Biocon shall inform the team about any changes and improvements of the DEVICE. After the agreement of Biocon the tram can participate in international congresses and present research results [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] 4. SUBLICENSES Biocon is entitled to grant sublicenses within the Exclusive Territory at its sole discretion. Such sublicensing shall not relieve Biocon of any obligation under this Agreement. Biocon must include in possible license agreements the paragraph that the team is entitled to the royalties of all marketed Products according to this Agreement regardless which company manufactures or markets the products. Biocon is obliged to inform the team of sublicenses. 5. PATENTS Biocon is entitled at its own expense and at its sole discretion to take any and all necessary measures in order to apply for patents for the DEVICE in the Exclusive Territory. In the patent applications the team shall be reported as the inventor and Biocon as the applicant. Biocon is also entitled to register this agreement with the proper patent and other authorities as such time as the registration is possible in accordance with the legislation of the country in question. The team undertakes to provide Biocon with all necessary authorization and documents for these purposes. The team is entitled to receive a copy of all patent applications filed by Biocon. -2- 6. COMMISSION In consideration of the license granted by the team to Biocon in accordance with the terms and conditions in this agreement, Biocon agrees to pay the team a royalty net of any withholding company taxes as follows: (a) an initial sum of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]. This down payment shall be divided within the teams as follows: [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] This payment shall be effected upon after initial presentation of any research group of results in congress or paper which results show that this method is recommendable for surgical use. This payment shall be non-refundable to the Team and shall not be credited against the royalty payments referred to hereinafter. (b) The amount of the royalty shall be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] of the DEVICE sold by Biocon whilst the patent applications are still pending and not a single patent has been granted. This royalty shall be divided within the teams as follows: [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] Provided that the patent in accordance with the above terms shall be granted Biocon agrees retroactively to pay the team an additional royalty of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] of the DEVICE sold by Biocon for the period from signing this agreement until the granting of the said patent. This royalty shall be divided within the team on such a manner that the Danish Team shall receive of the total royalty of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] and the Finnish Team [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]. The term "net selling price" means the gross amount billed for Products less trade or quantity discounts, transportation charges or allowances, credits or allowances, any tax, excise, or other governmental charge upon the production, sale, transportation, delivery or use of said Products. -3- (c) Irrespective of sales actually made by Biocon, the minimum royalties payable to the team shall not be less than [CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] - - [CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] in the first 12 month after initial presentation of any research group of results in a congress or paper which results show that this method is recommendable for surgical use. - - [CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] in the next 12 month - - [CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] in the next 12 month and [CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] in each succeeding 12 months that this agreement subsists. The right to such a part of a minimum royalty which has not accrued as aforesaid shall accrue at the end of each 12 months. (d) The royalty shall be paid quarterly no later than 30 days after the end of such period as evidenced by statements provided by Biocon for the previous period. Delay in payment results in payment of interest of [CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] delay. 7. ACCOUNTS AND RECORDS Biocon will keep at its principal place of business full and accurate accounts and records of all relevant invoices and other documents connected with the manufacture and sale of the DEVICE including all such particulars as will enable the royalty to be determined and will, at reasonable times permit a chartered accountant nominated by the Danish Team to inspect such documents in the possession or control of Biocon which relate in a relevant information relating to such documents and such other information as may be necessary or appropriate to enable the amount of royalties to be calculated. 8. TRADEMARK Biocon is entitled to use any trademark of its choice for the DEVICE upon informing the team. 9. UNFAIR COMPETITION AND INFRINGEMENT OF RIGHTS The parties shall inform one another of all acts of unfair competition and all infringements of patents or similar rights which have come to their notice. Biocon agrees to bear all expenses of any possible defensive action against such acts and infringements. The team agrees to give Biocon all information, assistance and authority to enable Biocon to ensure the necessary legal protection. -4- All damage collected or any profits from any action referred to above shall be for the sole benefit of Biocon. 10. SECRECY AND COMPETITION CLAUSE The parties shall undertake to treat as strictly confidential and not to divulge to any third party any of the Confidential Information disclosed by the other party and not to make use of any such Confidential Information than in co- operation with the other party. Once this agreement has been signed the team shall refrain from any competitive action against Biocon whether direct or indirect as regards the DEVICE or competetive products within the Exclusive Territory. Biocon agrees during the term of this agreement to refrain from manufacturing or selling or distributing directly or indirectly any products competing with the DEVICE. 11. CHANGES IN THE MARKET SITUATION In case the DEVICE despite of the patent granted would face competition and provided further, that this competition would have essential effects on the market situation the parties shall conduct negotiations to agree on a reduced minimum royalty, which, however shall not be reduced below [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] of the DEVICE. On the other hand, if the sale of the DEVICE becomes a great success the parties shall conduct negotiations to agree on an increased royalty. 12. TERMS AND TERMINATION This agreement comes into force once it has been duly signed by the parties. Provided that a patent protecting the exploitation of the DEVICE shall be granted this agreement shall be valid in different countries until the corresponding patent rights have been expired. Provided that the patent applications for the DEVICE shall be rejected, or if only such patents are granted which do not actually protect the industrial exploitation of the DEVICE, this agreement shall be valid for an initial period of twelve (12) years from the date hereof. This agreement may be terminated forthwith for cause by either party if the other party fails to fulfill any of its obligations under this agreement and such default is not -5- remedied within 30 days of the date on which a written notice hereof has been dispatched, the right to ask for damages being reserved. Notice of termination shall be given by registered letter. The team shall have the option to terminate this agreement if Biocon is adjudged bankrupt or placed in the hand of receiver or otherwise enters into any scheme for composition with creditors or makes any assignment of all or substantially all its assets for the benefit of creditors. In case of termination of this agreement all patent rights and know-how belongs to the Team. 13. GOVERNING LAW AND ARBITRATION This agreement shall be governed by the laws of Sweden. Any dispute arising out of or in connection with this agreement shall finally be settled in Stockholm without recourse to any court, in accordance with the rules of conciliation and arbitration of Central Chamber of Commerce of Sweden by one or more arbitrators designated in conformity with the rules of the above Chamber. 14. NOVELTY The Team does not warrant the novelty of DEVICE. 15. QUALITY OF DEVICE Biocon shall manufacture products of high quality. The Team shall be entitled to inspect whether products manufactured under the license are of the required quality. 16. MAINTENANCE IN FORCE OF ANY PATENTS UNDER THIS AGREEMENT Biocon shall keep in force any patents granted for the DEVICE. However, if the team and Biocon find in agreement that the patents have lost their significance e.g. because of several competitive products with equal quality, Biocon can if it desires expire the patents. 17. WIDENING OF RESEARCH Biocon can start to deliver devices, like clamps to surgical research groups for research purposes to other countries than Denmark three (3) months after the first thirty (30) sterile clamps have been delivered to the Danish Team for research purposes. -6- This agreement on 6 numbered pages (1-6), has been executed in three original counterparts, one for Biocon, one for the Danish Team and one for the Finnish Team. Copenhagen 14. 12. 1988 /s/ Pertti Tormala /s/ Peter Albrecht Olson - ----------------------- ----------------------------- (Pertti Tormala) (Peter Albrecht Olson) (Menifix I/S) /s/ Markku Tamminmaki /s/ Gert Kristensen - --------------------------- ------------------------ (Markku Tamminmaki) (Gert Kristensen) BIOCON OY /s/ Pertti Tormala - ----------------------- -7- EX-10.10 13 LICENSING, MANUFACTURING & DISTRIBUTION AGREEMENT EXHIBIT 10.10 LICENSE, MANUFACTURING AND DISTRIBUTION AGREEMENT ------------------------------------------------- This agreement is made between: Mr. Gert Kristensen and Mr. Peter Albrecht Olsen, address Nivavaenge 173, DR-2990 Niva, Denmark and Mr. Klaus Fredskilde, address Staget 24, DK-3070 Snekkeasten, Denmark hereinafter jointly referred to as "Danish Inventors" and Mr. Pertti Tormala, address Runeberginkatu 3 A, SF-33710 Tampere, Finland, Mr. Markku Tamminmaki, address Kukkolankatu 23, SF-33400 Tampere, Finland and Mrs. Marja Pellinen, address Aaltosenkatu 31-33 B 12, SF-33500 Tampere, Finland hereinafter jointly referred to as "Finnish Inventors" and Biocon Oy (including its subsidiaries, daughter companies or corresponding), whose registered office is at Runeberginkatu 3 A, Sf-33710 Tampere, Finland hereinafter referred to as "Biocon". All the above inventors and Biocon are hereinafter jointly referred to as "parties". 1. BACKGROUND The Finnish Inventors, Gert Kristensen, Peter Albrecht Olsen and Biocon Oy are developing in cooperation a [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] The invention is based on [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]. Biocon Oy is the owner of patents and know-how relating to said products. The cooperation has proceeded on such a level that the patent application shall be filed for the device in near future. The Parties are developing together [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] The parties to this agreement define in this agreement the rights and duties of parties to INSTRUMENT. 2. DEFINITIONS In this agreement: a) [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] b) [CONFIDNETIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] c) "Exclusive Territory'' shall mean the world. d) "Confidential information" shall mean all scientific, commercial or technical data and information including but not limited to information relating to market reports and surveys, customer lists, trade secrets, documents, correspondence, methods, skills, practices, training, procedures, research, machinery, equipment, instruments, expertices, discoveries, inventions, improvements, data drawings, designs, calculations, specifications, techniques and processes regarding the INSTRUMENT. 3. OBJECT OF THE AGREEMENT The parties hereby grant to Biocon the exclusive right to manufacture or to have manufactured the INSTRUMENT in the Exclusive Territory. The parties hereby also grant to Biocon the exclusive right to use and sell the INSTRUMENT in the Exclusive Territory. The parties undertake to conduct research and development work and to use their best efforts in order to develop further and improve the characteristics of the instrument. The parties shall provide Biocon with such information, specifications and data with respect to the INSTRUMENT as shall be necessary to improve Biocon's potentiality to carry out the targets in this agreement. The parties agree to keep Biocon continuously informed of all research and development results in regard to the INSTRUMENT during the development process. The rights granted to Biocon include any additional modifications and improvements of the INSTRUMENT. -2- Biocon shall inform the parties about any changes and improvements of the DEVICE and INSTRUMENT. After the agreement of Biocon the parties can participate in international congresses and present research results [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] 4. SUBLICENSES Biocon will negotiate with a manufacturing company (the Company A) to grant for it the exclusive right to manufacture INSTRUMENTS for Biocon. Biocon is also entitled to grant sublicenses at its sole discretion to use and to sell INSTRUMENTS within the Exclusive Territory. Such sublicensing shall not relieve Biocon of any obligation under this Agreement. Biocon must include in possible license agreements the paragraph that the Danish and Finnish Inventors are entitled to the royalties of all marketed INSTRUMENTS according to this Agreement regardless which company manufactures or markets the products. Biocon is obliged to inform the parties of sublicenses. 5. PATENTS Biocon is entitled at its own expense and at its sole discretion to take any and all necessary measures in order to file for patents for the INSTRUMENT in the Exclusive Territory. In the patent applications the Danish and Finnish Inventors shall be reported as the inventor and Biocon as the applicant. Biocon is also entitled to register this agreement with the proper patent and other authorities as such time as the registration is possible in accordance with the legislation of the country in question. The Danish and Finnish Inventors undertake to provide Biocon with all necessary authorization and documents for these purposes. The Danish and Finnish Inventors are entitled to receive a copy of all patent applications filed by Biocon. -3- 6. COMMISSION 6.1. Commission to be paid by Biocon In consideration of the licenses granted by the parties to Biocon in accordance with the terms and conditions in this agreement, Biocon agrees to pay the Danish and Finnish Inventors a royalty net of any withholding company taxes as follows: The amount of the royalty shall be [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] of the INSTRUMENTS sold by Biocon whilst the patent applications are still pending and not a single patent has been granted. This royalty shall be divided within the teams as follows: - [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] - [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] Provided that the patents in accordance with the above terms shall be granted Biocon agrees retroactively to pay the Danish and Finnish Inventors an additional royalty of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] of the INSTRUMENTS sold by Biocon for the period from signing this agreement until the granting of the said patent. This royalty shall be divided within the team on such a manner that the Danish Inventors shall receive of the total royalty of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] and the Finnish Inventors [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]. The term "net selling price" means the gross amount billed for Products less trade or quantity discounts, transportation charges or allowances, credits or allowances, any tax, excise or other governmental charge upon the production, sale, transportation, delivery of use of said Products. 6.2. Commission to be paid by Company A. Biocon is obliged to include in agreement with Company A the paragraph that the Company A shall pay to the Danish and Finnish [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY] -4- WITH THE SECURITIES AND EXCHANGE COMMISSION]. These royalties are defined in the similar way as the royalties to be paid by Biocon defined in paragraph 6.1. The royalties to be paid by Company A will be divided by Danish and Finnish Inventors in the similar way as the royalties to be paid by Biocon. 6.3. Minimum royalty Biocon and Company A are jointly obliged to pay at equal basis to the Danish and Finnish Inventors the following minimum royalty. Irrespective of sales actually made by Biocon and Company A, the minimum royalties payable to the Danish and Finnish Inventors shall not be less than - [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] in the first 12 month after initial presentation by any research group of results in a congress or paper which results show that Instrument is recommendable for surgical use. - [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] US Dollars in the next 12 month - [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] US Dollars in the next 12 month and [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] in each succeeding 12 months that this agreement subsists. The right to such a part of a minimum royalty which has not accrued as aforesaid shall accrue at the end of each 12 months. 6.4. Terms of paying The royalties shall be paid annually no later than 90 days after the end of such period as evidenced by statements provided by Biocon and Company A for the previous period. Delay in payment results in payment of interest of [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] delay. 7. ACCOUNTS AND RECORDS -5- Biocon will keep at its principal place of business full and accurate accounts and records of all relevant invoices and other documents connected with the manufacture and sale of the INSTRUMENT including all such particulars as will enable the royalty to be determined and will, at reasonable times permit a chartered accountant nominated by the Danish or Finnish Inventors to inspect such documents in the possession or control of Biocon which relate in a relevant information relating to such documents and such other information as may be necessary or appropriate to enable the amount of royalties to be calculated. 8. TRADEMARK Biocon is entitled to use any trademark of its choice for the INSTRUMENT upon informing the parties. 9. UNFAIR COMPETITION AND INFRINGEMENT OF RIGHTS The parties shall inform one another of all acts of unfair competition and all infringements of patents or similar rights which have come to their notice. Biocon agrees to bear all expenses of any possible defensive action against such acts and infringements. The Danish and Finnish Investors agree to give Biocon all information, assistance and authority to enable Biocon to ensure the necessary legal protection. All damage collected or any profits from any action referred to above shall be for the sole benefit of Biocon. 10. SECRECY AND COMPETITION CLAUSE The parties shall undertake to treat as strictly confidential and not to divulge to any third party any of the Confidential Information disclosed by the other party and not to make use of any such Confidential Information than in co-operation with the other parties. Once this agreement has been signed the Danish and Finnish Inventors shall refrain from any competitive action against Biocon whether direct or indirect as regards the INSTRUMENT or competitive products within the Exclusive Territory. Biocon agrees during the term of this agreement to refrain from manufacturing or selling or distributing directly or indirectly any products competing with the INSTRUMENT. -6- 11. CHANGES IN THE MARKET SITUATION In case the INSTRUMENT despite of the patent granted would face competition and provided further, that this competition would have essential effects on the market situation the parties shall conduct negotiations to agree on a reduced minimum royalty, which, however shall not be reduced below [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] of the INSTRUMENTS sold by Company A and [CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] of the INSTRUMENTS sold by Biocon. On the other hand, if the sale of the INSTRUMENT becomes a great success the parties shall conduct negotiations to agree on an increased royalty. 12. TERMS AND TERMINATION This agreement comes into force once it has been duly signed by the parties. Provided that a patent protecting the exploitation of the INSTRUMENT shall be granted this agreement shall be valid in different countries until the corresponding patent rights have been expired. Provided that the patent applications for the INSTRUMENT shall be rejected, or if only such patents are granted which do not actually protect the industrial exploitation of the INSTRUMENT, this agreement shall be valid for an initial period of twelve (12) years from the date hereof. This agreement may be terminated forthwith for cause by any party if one of the parties fails to fulfill any of its obligations under this agreement and such default is not remedied within 30 days of the date on which a written notice hereof has been dispatched, the right to ask for damages being reserved. Notice of termination shall be given by registered letter. The Danish and Finnish Investors shall have the option to terminate this agreement if Biocon is adjudged bankrupt or placed in the hand of receiver or otherwise enters -7- into any scheme for composition with creditors or makes any assignment of all or substantially all its assets for the benefit of creditors. In case of the above termination of this agreement all patent rights and know-how belongs to the Danish and Finnish Inventors. 13. GOVERNING LAW AND ARBITRATION This agreement shall be governed by the laws of Sweden. Any dispute arising out of or in connection with this agreement shall finally be settled in Stockholm without recourse to any court, in accordance with the rules of conciliation and arbitration of Central Chamber of Commerce of Sweden by one or more arbitrators designated in conformity with the rules of the above Chamber. 14. NOVELTY The Danish and Finnish Inventors do not warrant the novelty of INSTRUMENT. 15. QUALITY OF INSTRUMENT The Danish and Finnish Inventors shall be entitled to inspect whether products manufactured under the license are of the required quality. 16. MAINTENANCE IN FORCE OF ANY PATENTS UNDER THIS AGREEMENT Biocon shall keep in force any patents granted for the INSTRUMENT. However, if the parties find in agreement that the patents have lost their significance, e.g. because of several competitive products with equal quality, Biocon can if it desires expire the patents. -8- This agreement on 9 numbered pages (1-9), has been executed in seven original counterparts, one for Biocon, three for the Danish Inventors and three for the Finnish Inventors. September 28, 1989 /s/ Pertti Tormala /s/ Peter Albrecht-Olsen ------------------ ------------------------ (Pertti Tormala) (Peter Albrecht-Olsen) /s/ Markku Tamminmaki /s/ Gert Kristensen - --------------------- ------------------- (Markku Tamminmaki) (Gert Kristensen) /s/ Marja Pellinen /s/ Klaus Redskilde - ------------------ ------------------- (Marja Pellinen) (Klaus Redskilde) /s/ Pertti Tormala - ------------------ BIOCON OY -9- EX-10.11 14 SHAREHOLDERS' AGREEMENT EXHIBIT 10.11 SHAREHOLDERS' AGREEMENT ----------------------- This Agreement, dated as of September 5, 1996, by and among Bionix, B.V., a Netherlands corporation (the "Dutch Company"), and each of the shareholders of the Dutch Company identified on the signature page hereof (the "Shareholders"), W I T N E S S E T H T H A T WHEREAS, the Dutch Company has recently been incorporated under the laws of the Netherlands; WHEREAS, certain of the shareholders of the Dutch Company are residents of Finland (the "Finnish Shareholders") and certain of the shareholders of the Dutch Company are residents of the United States (the "U.S. Shareholders", and, collectively with the Finnish Shareholders, the "Shareholders"); WHEREAS, the Finnish Shareholders own, in the aggregate, 390,000 shares of the Class A common stock of the Dutch Company (the "Class A Shares"); WHEREAS, the U.S. Shareholders own, in the aggregate, 120,000 shares of the Class B common stock of the Dutch Company (the "Class B Shares", and, collectively with the Class A Shares, the "Common Shares"); WHEREAS, the principal asset of the Dutch Company is 5,100,000 shares of the Common Stock of Bionix, Inc., a Delaware corporation (the "Company"), such shares being hereinafter referred to as the "Company Common Stock"; and WHEREAS, the parties hereto desire to enter into certain agreements regarding (i) their rights to obtain distributions of shares of Company Common Stock owned by the Dutch Company, (ii) certain restrictions on the transfer of the Common Shares and (iii) certain voting matters, NOW, THEREFORE, in consideration of the mutual covenants set forth herein, the parties hereto hereby agree as follows: 1. Definitions. The following terms shall have the following ----------- meanings: "Assessments Receivable" shall mean amounts which the Dutch Company has assessed the Shareholders pursuant to Section 6 hereof but which have not yet been received by the Dutch Company; provided, however, that any amount which remains unpaid for more than ninety days after an assessment has been made shall be disregarded for purposes of calculating Assessments Receivable hereunder. "Finnish Representative" shall mean Pertti Tormala or such other person as shall be designated as the "Finnish Representative" by holders of a majority in interest of the Class A Shares. "Proportionate Share" shall mean a fraction, the numerator of which shall equal the number of Common Shares owned by a particular Shareholder and the denominator of which shall equal the number of Common Shares owned by all Shareholders. "U.S. Representative" shall mean Anthony J. Dimun or such other person as shall be designated as the "U.S. Representative" by holders of a majority in interest of the Class B Shares. 2. Exchange of Company Common Stock for Class A Shares. Subject --------------------------------------------------- to applicable provisions of the laws of the Netherlands and applicable provisions of the Articles of Association of the Dutch Company as amended from time to time, the following provisions shall apply in the event that any Finnish Shareholder desires to obtain from the Dutch Company a number of shares of Company Common Stock in an amount up to such Shareholder's Proportionate Share of the number of shares of Company Common Stock held by the Dutch Company: 2.1 The Finnish Shareholder desiring to effect such an exchange (the "Exchanging Finnish Shareholder") shall notify the Finnish Representative in writing of such Shareholder's intention to effect an exchange. Such exchange shall not occur unless the Finnish Representative consents in writing to such exchange. No such consent shall be granted in the event that (i) the Dutch Company's assets (including Assessments Receivable but excluding all shares of Company Common Stock owned by the Dutch Company) do not exceed the Dutch Company's liabilities, (ii) there is then outstanding any assessment made by the Dutch Company pursuant to Section 6 hereof which the Exchanging Finnish Shareholder has not paid or (iii) counsel to the Dutch Company advises the Dutch Company that such exchange is prohibited by law or by the provisions of the Dutch Company's Articles of Association as amended from time to time. 2.2 In the event that the Finnish Representative provides such consent in accordance with Section 2.1, a closing shall be held in which the Exchanging Finnish Shareholder shall deliver to the Dutch Company the number of Common Shares that such Shareholder desires to exchange and the Dutch Company shall deliver to such Exchanging Finnish Shareholder such number of shares of Company Common Stock as shall equal the total number of shares of Company Common Stock owned by the Dutch Company multiplied by a fraction, the numerator of which shall equal the number of Class A Shares of the Dutch Company being exchanged by the Exchanging Finnish Shareholder and the denominator of which shall equal the total number of Common Shares owned by all Shareholders. 3. Exchange of Company Common Stock for Class B Shares. Subject --------------------------------------------------- to applicable provisions of the laws of the Netherlands and applicable provisions of the Articles of Association of the Dutch Company as amended from time to time, the following provisions shall -2- apply in the event that any U.S. Shareholder desires to obtain from the Dutch Company a number of shares of Company Common Stock in an amount up to such Shareholder's Proportionate Share of the number of shares of Company Common Stock held by the Dutch Company: 3.1 The U.S. Shareholder desiring to effect such an exchange (the "Exchanging U.S. Shareholder") shall notify the U.S. Representative in writing of such Shareholder's intention to effect an exchange. Such exchange shall not occur unless the U.S. Representative consents in writing to such exchange. No such consent shall be granted in the event that (i) the Dutch Company's assets (including Assessments Receivable but excluding all shares of Company Common Stock owned by the Dutch Company) do not exceed the Dutch Company's liabilities, (ii) there is then outstanding any assessment made by the Dutch Company pursuant to Section 6 hereof which the Exchanging U.S. Shareholder has not paid or (iii) counsel to the Dutch Company advises the Dutch Company that such exchange is prohibited by law or by the provisions of the Dutch Company's Articles of Association as amended from time to time. 3.2 In the event that the U.S. Representative provides such consent in accordance with Section 3.1, a closing shall be held in which the Exchanging U.S. Shareholder shall deliver to the Dutch Company the number of Common Shares that such Shareholder desires to exchange and the Dutch Company shall deliver to such Exchanging U.S. Shareholder such number of shares of Company Common Stock as shall equal the total number of shares of Company Common Stock owned by the Dutch Company multiplied by a fraction, the numerator of which shall equal the number of Class B Shares of the Dutch Company being exchanged by the Exchanging U.S. Shareholder and the denominator of which shall equal the total number of Common Shares owned by all Shareholders. 4. Finnish Cash Out Steps. Subject to the laws of the Netherlands ---------------------- and the provisions of the Dutch Company's Articles of Association as amended from time to time, each Finnish Shareholder shall have the right to cause the Dutch Company to purchase from such Shareholder some or all of such Shareholder's Class A Shares in accordance with the following procedures: 4.1 Such Finnish Shareholder may utilize this Section 4 only in the event that the Finnish Representative grants a written consent to such Finnish Shareholder upon receipt of written notice from such Finnish Shareholder that such Finnish Shareholder seeks to avail himself, herself or itself of this Section 4 procedure. No such consent shall be granted in the event that (i) the Dutch Company's assets (including Assessments Receivable but excluding all shares of Company Common Stock owned by the Dutch Company) do not exceed the Dutch Company's liabilities, (ii) there is then outstanding any assessment made by the Dutch Company pursuant to Section 6 hereof which such Finnish Shareholder has not paid (unless such Finnish Shareholder agrees, in form and substance satisfactory to the Dutch Company, to reduce the amount payable to such Finnish Shareholder pursuant to this Section 4 by the amount of all of such Finnish Shareholder's unpaid assessments), (iii) counsel to the Dutch Company advises the Dutch Company that such Finnish Shareholder's utilization of this Section 4 procedure is prohibited by law or by the provisions of the Dutch Company's Articles of Association as amended from time to time or (iv) the Dutch Company is subject to an agreement prohibiting it -3- from selling any of its Company Common Stock or restricting it from doing so in any material respect. 4.2 If the Finnish Representative grants such consent in accordance with Section 4.1, such Finnish Shareholder shall specify the number of Class A Shares to be exchanged for a cash payment pursuant to this Section 4 (the "Finnish Cash Number"). 4.3 Upon receipt of notification from the Finnish Representative that it has consented to a request from a Finnish Shareholder pursuant to this Section 4, the Dutch Company shall use its reasonable efforts to sell such number of shares of its Company Common Stock as shall equal the total number of shares of Company Common Stock owned by the Dutch Company multiplied by a fraction, the numerator of which shall equal the Finnish Cash Number and the denominator of which shall equal the aggregate number of Common Shares owned by all Shareholders. Promptly, but in no event more than ten days, after the Dutch Company has sold such number of its shares of Company Common Stock and received the proceeds therefrom, a closing shall be held at the Dutch Company's headquarters. At such closing, such Finnish Shareholder shall deliver such number of Class A Shares as shall equal the Finnish Cash Number and the Company shall deliver to such Finnish Shareholder the proceeds of such sales, net of the Dutch Company's expenses and tax liabilities, if any, resulting from such sales. 5. U.S. Cash Out Steps. Subject to the laws of the Netherlands and ------------------- the provisions of the Dutch Company's Articles of Association as amended from time to time, each U.S. Shareholder shall have the right to cause the Dutch Company to purchase from such Shareholder some or all of such Shareholder's Class B Shares in accordance with the following procedures: 5.1 Such U.S. Shareholder may utilize this Section 5 only in the event that the U.S. Representative grants a written consent to such U.S. Shareholder upon receipt of written notice from such U.S. Shareholder that such U.S. Shareholder seeks to avail himself, herself or itself of this Section 5 procedure. No such consent shall be granted in the event that (i) the Dutch Company's assets (including Assessments Receivable but excluding all shares of Company Common Stock owned by the Dutch Company) do not exceed the Dutch Company's liabilities, (ii) there is then outstanding any assessment made by the Dutch Company pursuant to Section 6 hereof which such U.S. Shareholder has not paid (unless such U.S. Shareholder agrees, in form and substance satisfactory to the Dutch Company, to reduce the amount payable to such U.S. Shareholder pursuant to this Section 5 by the amount of all of such U.S. Shareholder's unpaid assessments), (iii) counsel to the Dutch Company advises the Dutch Company that such U.S. Shareholder's utilization of this Section 5 procedure is prohibited by law or by the provisions of the Dutch Company's Articles of Association as amended from time to time or (iv) the Dutch Company is subject to an agreement prohibiting it from selling any of its Company Common Stock or restricting it from doing so in any material respect. 5.2 If the U.S. Representative grants such consent in accordance with Section 5.1, such U.S. Shareholder shall specify the number of Class B Shares to be exchanged for a cash payment pursuant to this Section 5 (the "U.S. Cash Number"). -4- 5.3 Upon receipt of notification from the U.S. Representative that it has consented to a request from a U.S. Shareholder pursuant to this Section 5, the Dutch Company shall use its reasonable efforts to sell such number of shares of its Company Common Stock as shall equal the total number of shares of Company Common Stock owned by the Dutch Company multiplied by a fraction, the numerator of which shall equal the U.S. Cash Number and the denominator of which shall equal the aggregate number of Common Shares owned by all Shareholders. Promptly, but in no event more than ten days, after the Dutch Company has sold such number of its shares of Company Common Stock and received the proceeds therefrom, a closing shall be held at the Dutch Company's headquarters. At such closing, such U.S. Shareholder shall deliver such number of Class B Shares as shall equal the U.S. Cash Number and the Company shall deliver to such U.S. Shareholder the proceeds of such sales, net of the Dutch Company's expenses and tax liabilities, if any, resulting from such sales. 6. Assessments. It is understood that the Dutch Company is a passive ----------- holding company that has no means of generating revenues other than through the sale of its shares of Company Common Stock. It is further understood that while the Dutch Company is not expected to have substantial expenses, it will have certain administrative expenses for which cash will be required in order to make payments. The parties hereto agree that in the event that the Dutch Company requires cash to meet expenses, the Shareholders will pay such expenses in accordance with the following provisions: 6.1 On a quarterly basis, the Dutch Company shall determine the amount of cash it is expected to require in order to meet its expenses. The Dutch Company shall then send a letter to each Shareholder assessing such Shareholder such Shareholder's Proportionate Share of the expected expenses. 6.2 Notwithstanding the foregoing, in no event shall the Dutch Company issue assessments aggregating more than $25,000 per year. In the event that the Dutch Company requires cash in excess of that amount, it will be necessary for the Dutch Company to either borrow such excess or sell shares of Company Common Stock to fund such excess. 6.3 No Shareholder shall be required to pay an assessment with respect to any period after such Shareholder ceases being a shareholder of the Dutch Company. It shall be a condition to any transfer of the Class A Shares or Class B Shares that the transferee execute an agreement, in form and substance satisfactory to the Dutch Company, pursuant to which such transferee agrees to be bound by the terms of this Agreement with respect to periods after such transferee becomes a shareholder of the Dutch Company. 7. Restriction on Pledges. No Shareholder will pledge or encumber ---------------------- any of his Class A Shares or Class B Shares without the approval of the Finnish Representative and the U.S. Representative. 8. Voting. The U.S. Shareholders, the Finnish Shareholders and the ------ Dutch Company agree that with respect to any matter to be voted on by the shareholders of the -5- Company, to the extent legally permissible, they will cause the Dutch Company to vote a certain number of shares of Company Common Stock owned by the Dutch Company (such number of shares hereinafter referred to as the "Specified Number") as directed by the Finnish Representative. The Specified Number shall be determined by taking the percentage of the number of shares of the Dutch Company owned by the Finnish Shareholders (regardless of class) at the time of the vote to the total number of shares of the Dutch Company then outstanding and multiplying that percentage by the total number of shares of Company Common Stock then owned by the Dutch Company. For example, if the Dutch Company owned 5,100,000 shares of Company Common Stock, the Finnish Shareholders owned 390,000 shares of the Dutch Company and there were 510,000 shares of the Dutch Company outstanding, the Specified Number would be calculated as follows: 390,000 ------- = 76.47% 510,000 76.47% x 5,100,000 = 3,900,000 The Specified Number would be 3,900,000, and the Dutch Company would vote 3,900,000 of the 5,100,000 shares of Company Common Stock that it owns as directed by the Finnish Representative. 9. Governing Law; Jurisdiction; Service of Process. This Agreement ----------------------------------------------- shall be governed by and construed in accordance with the laws of the State of Delaware, without application of the conflict of laws principles thereof. Any legal action, suit or other proceeding arising out of, or in any way connected with, the enforcement of any award described in Section 10 hereof may be brought in the courts of the State of New Jersey, or in the United States courts for the District of New Jersey. With respect to any such proceeding in any such court: (a) each party hereto generally and unconditionally submits itself and its property to the nonexclusive jurisdiction of such court; (b) each party hereto waives, to the fullest extent permitted by law, any objection it has or hereafter may have to the venue of such proceeding, as well as any claim it has or may have that such proceeding is in an inconvenient forum; and (c) process may be served on any party hereto anywhere in the world, by regular mail, sent to such party's address as set forth or described (i) on the signature page hereof or (ii) in Exhibit O annexed to the Reorganization Agreement executed by --------- the parties hereto in connection with the formation of the Dutch Company and the Company, or to such other address as shall be provided by a party to both the U.S. Representative and the Finnish Representative. 10. Dispute Resolution. Any controversy or claim arising out of or ------------------ relating to this Agreement, or the alleged breach thereof, shall be resolved by arbitration before a panel of three arbitrators (one of whom shall be selected by the U. S. Representative, one of whom shall be selected by the Finnish Representative and one of whom shall be selected by the other two arbitrators) in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall take place at a mutually acceptable location. The arbitration shall be conducted using the Expedited Procedures of the Commercial Arbitration Rules, -6- regardless of the amount in dispute. The parties hereto shall bear their own attorneys' fees and costs in connection with any such arbitration, and shall share equally the arbitrators' compensation charges and the administrative fees of the American Arbitration Association. The award rendered by the arbitrator(s) shall be final and binding upon the parties involved in such arbitration, and judgment upon the award may be entered in any court of competent jurisdiction. 11. Term. This Agreement shall terminate (i) upon the mutual written ---- consent of the Finnish Representative and the U.S. Representative, (ii) upon the liquidation of the Dutch Company or (iii) at such time as the Dutch Company no longer owns any shares of Company Common Stock. 12. Headings. All headings in this Agreement are for convenience only -------- and do not affect the meaning of any provision. 13. Successors or Assigns; No Third Party Rights. This Agreement is -------------------------------------------- binding upon and inures to the benefit of the parties hereto and their permitted successors and assigns. This Agreement may not be assigned by any party hereto without the prior written consent of the U.S. Representative and the Finnish Representative. Nothing in this Agreement confers, or is intended to confer, expressly or by implication, any rights or remedies upon any person not a party hereto. 14. Complete Agreement; Modifications. This Agreement constitutes --------------------------------- the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings with respect to the subject matter hereof. This Agreement may not be amended or modified in any way, nor may noncompliance with its terms be waived, except pursuant to a written instrument signed by the party to be charged. 15. Severability. Any provision of this Agreement that is prohibited ------------ or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof; any such prohibition or unenforceability shall not invalidate or render unenforceable such provision in any other jurisdiction. 16. Counterparts. This Agreement may be executed by the parties ------------ hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original. All such counterparts together constitute but one and the same instrument. 17. Construction. It is understood that this Agreement is not ------------ intended to be construed against the party that drafted this Agreement merely by virtue of the fact that such party was responsible for the drafting hereof. -7- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. BIONIX, N.V. By: /s/ David W. Anderson -------------------------- David W. Anderson /s/ David W. Anderson - ----------------------------- David W. Anderson BERSHAD INVESTMENT GROUP, LP By: /s/ David J. Bershad ----------------------------- David J. Bershad, General Partner BTAR ASSOCIATES, L.P. By: STRATEGIC CONCEPTS, INC., general partner By: /s/ Anthony J. Dimun ------------------------------ Anthony J. Dimun, President /s/ David H. MacCallum - ------------------------------ David H. MacCallum TDW ASSOCIATES, L.P. By: TDW III, INC., general partner By: /s/ Terence D. Wall ------------------------------ Terence D. Wall, President -8- /s/ Ole Bostman - ------------------------------ Ole Bostman /s/ E. Antero Makela - ------------------------------ E. Antero Makela NAJ VET LTD. By: /s/ NAJ VET LTD. ----------------------------- NOVATOR By: /s/ Pentti Rokkanen ----------------------------- ORTHO SCI LTD. By: /s/ ORTHO SCI LTD. ----------------------------- /s/ Esa Partio - ------------------------------- Esa Partio /s/ Timo Pohjonen - ------------------------------- Timo Pohjonen /s/ Pentti Rokkanen - ------------------------------- Pentti Rokkanen /s/ Matti Suuronen - ------------------------------- Matti Suuronen -9- /s/ Riita Suuronen - ------------------------------- Riita Suuronen /s/ Marrku Tamminmaki - ------------------------------- Marrku Tamminmaki /s/ Matti Tormala - ------------------------------- Matti Tormala /s/ Pertti Tormala - ------------------------------- Perrti Tormala /s/ Seppo Vainionpaa - ------------------------------- Seppo Vainionpaa /s/ Pertti Viitanen - ------------------------------- Pertti Viitanen -10- EX-21.1 15 LIST OF SUBSIDIARIES Exhibit 21.1 SUBSIDIARIES OF BIONX IMPLANTS, INC. (1) NAME OF SUBSIDIARY JURISDICTION OF ORGANIZATION BUSINESS NAME - -------------------- ---------------------------- -------------------- DOMESTIC: Biostent, Inc. New Jersey Bionx Implants, Inc. Orthosorb, Inc. New Jersey Bionx Implants, Inc. INTERNATIONAL: Biocon OY Finland Biocon OY Bioscience OY Finland Bioscience OY _________________ (1) All subsidiaries are wholly-owned by the Registrant. EX-23.1 16 CONSENT OF KPMG PEAT MARWICK EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Bionx Implants, Inc.: The audits referred to in our report dated January 24, 1997, except for the first paragraph of Note 15 which is as of February 24, 1997, included the related financial statement schedule as of December 31, 1996, and for each of the years in the three-year period ended December 31, 1996, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, the 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. We consent to the use of our reports included herein and to the reference of our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Philadelphia, Pennsylvania February 24, 1997 EX-23.3 17 CONSENT OF KENYON & KENYON Exhibit 23.3 CONSENT We hereby consent to the reference to our firm under the caption "Experts" in the Registration Statement on Form S-1 to be filed by Bionx Implants, Inc. with the Securities and Exchange Commission. KENYON & KENYON By: /s/ Richard Mayer ------------------------ Dated: February 25, 1997 EX-27.1 18 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1593131 0 1805757 97325 1030809 4803069 336286 76042 5283653 2756609 0 5000000 0 10105 (3073397) 5283653 5033952 5033952 2105128 2105128 4807703 97325 86906 (1760858) 208390 (1969248) 0 0 0 (1969248) (0.31) (0.31)
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