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ENDOCARE, INC.
COMMON STOCK PURCHASE AGREEMENT
April 15, 1998
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TABLE OF CONTENTS
Page
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1. Purchase and Sale of Stock.................................................. 1
1.1 Closings............................................................. 1
2. Representations and Warranties of the Company............................... 1
2.1 Organization, Good Standing and Qualification........................ 1
2.2 Authorization........................................................ 1
2.3 Valid Issuance of Common Stock....................................... 2
2.4 Governmental Consents................................................ 2
2.5 Compliance with Instruments and Law.................................. 2
2.6 SEC Documents; Financial Statements.................................. 2
2.7 Absence of Certain Developments...................................... 3
2.8 Intellectual Property................................................ 3
2.9 Capitalization....................................................... 3
2.10 Litigation........................................................... 4
3. Representations and Warranties of Investor.................................. 4
3.1 Authorization........................................................ 4
3.2 Purchase Entirely for Own Account.................................... 4
3.3 Disclosure of Information............................................ 4
3.4 Investment Experience................................................ 4
3.5 Accredited Investor.................................................. 4
3.6 Restricted Securities................................................ 4
3.7 Legend............................................................... 5
3.8 Risk Factors......................................................... 5
4. Conditions of Investor's Obligations at Closing............................. 5
4.1 Representations and Warranties....................................... 5
4.2 Performance.......................................................... 5
4.3 Qualifications....................................................... 5
4.4 Proceedings and Documents............................................ 5
5. Conditions of the Company's Obligations at Closing.......................... 6
5.1 Representations and Warranties....................................... 6
5.2 Payment of Purchase Price............................................ 6
5.3 Qualifications....................................................... 6
6. Affirmative Covenants of the Company........................................ 6
6.1 Financial Information................................................ 6
6.2 Registration Requirements............................................ 6
6.3 Indemnification and Contribution..................................... 8
7. Miscellaneous............................................................... 10
7.1 Survival of Warranties............................................... 10
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7.2 Successors and Assigns............................................... 11
7.3 Governing Law........................................................ 11
7.4 Counterparts......................................................... 11
7.5 Titles and Subtitles................................................. 11
7.6 Notices.............................................................. 11
7.7 Expenses; Attorneys' Fees............................................ 11
7.8 Amendments and Waivers............................................... 11
7.9 Severability......................................................... 11
7.10 Entire Agreement..................................................... 11
EXHIBIT A - RISK FACTORS
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COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is made
as of the 15th day of April 1998 by and between ENDOcare, Inc., a Delaware
corporation (the "Company"), and The ▇▇▇▇▇▇▇▇ Fund, Inc. ("Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock. Subject to the terms and
conditions of this Agreement, Investor agrees to purchase, and the Company
agrees to sell and issue to Investor, 1,000,000 shares of the Company's Common
Stock (the "Shares") at a price of $3.50 per share.
1.1 Closings. The purchase and sale of 750,000 of the Shares
shall take place on April 15, 1998, and the purchase and sale of the remaining
250,000 of the Shares shall take place on the same day that Pequot Private
Equity Fund, L.P. and Pequot Offshore Private Equity Fund, Inc. (collectively,
"Pequot") purchase the number of newly issued shares of Common Stock of the
Company they are required to purchase pursuant to the Common Stock Purchase
Agreement dated on or around the date hereof between the Company and Pequot,
such that, after giving effect to Pequot's purchase, Investor's purchase of the
250,000 Shares will not cause Investor to own more than 25% of the outstanding
Common Stock of the Company. The purchase and sale of the initial 750,000 Shares
and the purchase and sale of the remaining 250,000 Shares is each referred to as
a "Closing." At each Closing the Company shall deliver to Investor a certificate
representing the Shares purchased against payment of the purchase price therefor
by wire transfer.
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to Investor that:
2.1 Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Company has all requisite corporate power and
authority to carry on its business as now conducted. The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure to so qualify would have a material adverse effect on its
business or properties.
2.2 Authorization. The Company has the corporate power and
authority to execute, deliver and perform this Agreement, and to consummate the
transactions contemplated hereby and to issue, sell, and deliver to Investor the
Shares pursuant to the terms of this Agreement. All corporate action on the part
of the Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder, and the authorization, issuance (or
reservation for issuance), sale and delivery of the Common Stock being sold
hereunder has been taken or will be taken prior to the Closing, and this
Agreement constitutes the valid and legally binding obligation of the Company,
enforceable in accordance with its respective terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, (b) as
limited by laws
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relating to the availability of specific performance, injunctive relief, or
other equitable remedies and (c) as to those provisions of Section 6.3 relating
to indemnity or contribution.
2.3 Valid Issuance of Common Stock. The Shares being purchased by
Investor hereunder, when issued, sold and delivered in accordance with the terms
of this Agreement for the consideration expressed herein, will be duly and
validly issued, fully paid, and nonassessable, and will be free of restrictions
on transfer other than restrictions on transfer under this Agreement and under
applicable state and federal securities laws. The issuance and delivery of the
Shares is not subject to preemptive, co-sale, right of first refusal or any
other similar rights of the stockholders of the Company or any liens or
encumbrances created by the Company. The Company has not granted any
registration rights with respect to its securities other than the registration
rights set forth (i) herein, (ii) in two Common Stock Purchase Agreements (the
"Other Purchase Agreements") dated on or about the date hereof, one between the
Company and Technology Funding, Inc. and the other, between the Company and
Pequot for the purchase of approximately 142,857 and 857,142 shares of Common
Stock, respectively, and (iii) in the Common Stock Purchase Agreement dated
January 21, 1997 among the Company and the purchasers named therein (the
"January 1997 Agreement"). The Company's Common Stock is quoted on the Nasdaq
Small Cap Market.
2.4 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 the filing of a Form D and any other
filings required be made under the laws of the state in which the Investor
resides, which will be made as required by such laws and the filing of a
registration statement and all amendments thereto with the SEC as contemplated
by this Agreement.
2.5 Compliance with Instruments and Law. To the best of the
Company's knowledge, the Company is not in violation or default in any material
respect of any provision of its Certificate of Incorporation as currently in
effect and as amended or restated through the date hereof, or its Bylaws, or in
any material respect of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound, or of any provision of
any federal or state statute, rule or regulation applicable to the Company. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby will not result in any such violation or be
in conflict with or constitute, with or without the passage of time and giving
of notice, either a default under any such provision, instrument, judgment,
order, writ, decree or contract or an event that results in the creation of any
lien, charge or encumbrance upon any assets of the Company or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to the Company, its business or
operations or its assets or properties.
2.6 SEC Documents; Financial Statements. The Company has filed
each statement, annual, quarterly and other report, registration statement and
definitive proxy statement with the U.S. Securities and Exchange Commission
("SEC") that the Company has been required to file since January 1, 1996 ("SEC
Documents"). As of their respective filing dates, none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact
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required to be stated therein or necessary to make the statements made therein,
in light of the circumstances in which they were made, not misleading. The
financial statements of the Company included in the SEC Documents (the
"Financial Statements") comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles consistently applied (except as may be indicated
in the notes thereto or, in the case of unaudited statements, as permitted by
the SEC) and fairly present the financial position of the Company at the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal, recurring audit
adjustments). There has been no change in the Company's accounting policies
except as may be described in the notes to the Financial Statements. Except as
disclosed in the SEC Documents filed through the date hereof, the Company has
not incurred any liabilities of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, that, individually
or in the aggregate, would have a material adverse effect on the assets,
liabilities, business, financial condition, results of operations or prospects
of the Company other than liabilities under or contemplated by this Agreement.
2.7 Absence of Certain Developments. Since December 31, 1997,
there has been no (a) material adverse change in the condition, financial or
otherwise, of the Company or of the Company's assets, liabilities, properties,
business or operations, (b) declaration, setting aside or payment of any
dividend or other distribution with respect to the capital stock of the Company,
or (c) loss, destruction or damage to any property of the Company, whether or
not insured, which has or may have a material adverse effect on the Company.
2.8 Intellectual Property. Except as set forth in the SEC
Documents, the Company owns or possesses adequate rights to use all material
patents, patent rights, inventions, trade secrets and know-how described or
referred to in the SEC Documents as owned or used by it or that are necessary in
all material respects for the conduct of its business as presently conducted as
described in the SEC Documents. Except as set forth in the SEC Documents, the
Company has not received any notice of, nor has any knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
patent, patent right, invention, trade secret or know-how that, individually or
in the aggregate, if the subject of an unfavorable decision ruling or finding,
would have a material adverse effect on the business, properties, financial
condition or results or operations of the Company.
2.9 Capitalization. All of the Company's outstanding shares of
capital stock have been duly authorized and validly issued and are fully paid
and nonassessable, have been issued in compliance with all Federal and state
securities laws, and were not issued in violation of or subject to any
preemptive right or other rights to subscribe for or purchase securities. The
authorized capital stock of the Company consists of 20,000,000 shares of Common
Stock of which 8,386,167 shares are outstanding as of the date hereof. Except as
set forth in the Other Purchase Agreements and the SEC Documents, there are no
outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell shares of the Company's capital
stock or any such options, rights, convertible securities or obligations.
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2.10 Litigation. Except as set forth in the SEC Documents, there
is no pending or, to the Company's knowledge, threatened action, suit or other
proceeding before any court, governmental body or authority, or arbitration to
which the Company is a party or to which its property or assets are subject,
which, if it resulted in an unfavorable decision ruling or finding, would have a
material adverse effect on the business, properties, financial condition or
results or operations of the Company.
3. Representations and Warranties of Investor. Investor hereby
represents and warrants that:
3.1 Authorization. Investor has full power and authority to enter
into this Agreement and such agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, (b) as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies and (c) as to those provisions of Section
6.3 relating to indemnity or contribution.
3.2 Purchase Entirely for Own Account. This Agreement is made
with Investor in reliance upon Investor's representation to the Company, which
by Investor's execution of this Agreement Investor hereby confirms, that the
Shares to be received by Investor will be acquired for investment for 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 Investor has no present intention of
selling, granting any participation in, or otherwise distributing the same. By
executing this Agreement, Investor further represents that 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 Shares.
3.3 Disclosure of Information. Investor has received all the
information it considers necessary or appropriate for deciding whether to
purchase the Shares. 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 Shares and the business, properties, prospects
and financial condition of the Company.
3.4 Investment Experience. Investor is an investor in securities
of companies in the development stage and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment, and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Shares. Investor also represents
it has not been organized for the purpose of acquiring the Shares.
3.5 Accredited Investor. Investor and each of its partners are
"accredited investors" within the meaning of SEC Rule 501 of Regulation D, as
presently in effect.
3.6 Restricted Securities. Investor understands that the Shares
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
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such laws and applicable regulations such securities may be resold without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), only in certain limited circumstances. In this connection, Investor
represents that it is familiar with Rule 144 promulgated under the Securities
Act ("Rule 144"), as presently in effect, and understands the resale limitations
imposed thereby and by the Securities Act.
3.7 Legend. It is understood that the certificates evidencing the
Shares may bear the following legend:
"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 or unless sold pursuant to Rule
144 of such Act."
3.8 Risk Factors. Investor understands that its purchase of the
Shares involves a high degree of risk and that the Company has given no
assurance, or made any representation or warranty, as to the future value of the
Shares or future performance of the Company. Some of the risks inherent in an
investment in the Shares are set forth in Exhibit A hereto, which Investor
acknowledges it has read and understands.
4. Conditions of Investor's Obligations at Closing. The
obligations of Investor under Section 1 of this Agreement are subject to the
fulfillment on or before each Closing of each of the following conditions, the
waiver of which shall not be effective against Investor unless consented in
writing thereto:
4.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true in all material
respects 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 such
Closing.
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 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 Shares pursuant to this Agreement shall be duly obtained and effective as of
the Closing.
4.4 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Investor's special counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request.
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5. Conditions of the Company's Obligations at Closing. The
obligations of the Company to Investor under this Agreement are subject to the
fulfillment on or before each Closing of each of the following conditions by
Investor:
5.1 Representations and Warranties. The representations and
warranties of Investor contained in Section 3 shall be true in all material
respects 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. Investor shall have delivered the
purchase price specified in Section 1.
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 Shares pursuant to this Agreement shall be duly obtained and effective as of
the Closing.
6. Affirmative Covenants of the Company. The Company hereby
covenants and agrees as follows:
6.1 Financial Information. The Company will mail the following
reports to Investor until Investor transfers, assigns or sells more than fifty
percent (50%) of the Shares purchased by it pursuant to this Agreement;
(a) Within one hundred (100) days after the end of each
fiscal year, a copy of its Annual Report on Form 10-K; and
(b) Within fifty-five (55) days after the end of the
first, second and third quarterly accounting periods of each fiscal year of the
Company, a copy of its Quarterly Report on Form 10-Q.
6.2 Registration Requirements.
(a) The Company shall use its best efforts to prepare and
file a Registration Statement (the "Registration Statement") with the SEC under
the Securities Act to register the resale by Investor of the Shares and, if
requested by Investor, any other shares of Common Stock of the Company held by
Investor as of the date hereof that are not already covered by a registration
statement (collectively, the "Registrable Shares") within twenty-one (21)
business days of the Closing. The Company acknowledges that it has received all
information from Investor necessary to register such shares. Investor agrees to
furnish promptly to the Company in writing all information required from time to
time to be disclosed in order to make the information previously furnished to
the Company by Investor not misleading.
(b) The Company shall pay all Registration Expenses (as
defined below) in connection with any registration, qualification or compliance
hereunder, and Investor shall pay all Selling Expenses (as defined below) and
other expenses that are not Registration Expenses
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relating to the Shares to be resold by Investor. "Registration Expenses" shall
mean all expenses, except for Selling Expenses, incurred by the Company in
complying with the registration provisions set forth herein, including, without
limitation, all registration, qualification and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses and the expense of any special audits incident to or required in
connection with any such registration. Selling Expenses shall mean selling
commissions, underwriting fees and stock transfer taxes applicable to the
Registrable Shares and all fees and disbursements of counsel for Investor.
(c) In the case of the registration effected by the
Company pursuant to these registration provisions, the Company will use its best
efforts to: (i) keep such registration effective until the earlier of (A) such
date as all of the Registrable Shares have been resold or (B) such time as all
of the Registrable Shares held by Investor can be sold within a given three
(3)-month period without compliance with the registration requirements of the
Securities Act pursuant to Rule 144; (ii) prepare and file with the SEC such
amendments and supplements to the Registration Statement and the prospectus used
in connection with the Registration Statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
Registrable Shares covered by the Registration Statement; (iii) furnish such
number of prospectuses and other documents incident thereto, including any
amendment of or supplement to the prospectus, as Investor from time to time may
reasonably request; (iv) cause all Registrable Shares registered as described
herein to be listed on each securities exchange and quoted on each quotation
service on which similar securities issued by the Company are then listed or
quoted; (v) provide a transfer agent and registrar for all Shares registered
pursuant to the Registration Statement and a CUSIP number for all such Shares;
(vi) otherwise use its best efforts promptly to comply with all applicable rules
and regulations of the SEC; (vii) file the documents required of the Company and
otherwise use its best efforts promptly to obtain, if applicable, and maintain
requisite blue sky clearance in (A) all jurisdictions in which any of the
Registrable Shares are originally sold and (B) all other states specified in
writing by Investor, provided as to clause (B), however, that the Company shall
not be required to qualify to do business or consent to service of process in
any state in which it is not now so qualified or has not so consented; (viii)
enter into an underwriting agreement having customary terms and conditions if
requested by Investor in connection with the sale of the Shares; (ix) cooperate
in a normal "due diligence" investigation by Investor or by underwriters acting
on behalf of Investor in connection with the sale of the Registrable Shares; (x)
with respect to the initial filing of the Registration Statement, as of the date
of declaration of effectiveness, each post effective amendment thereto or any
underwritten offering thereunder, obtain opinions of counsel to the Company as
provided in an underwriting agreement applicable to the sale of the Shares or if
there is no underwriters, in the form of Exhibit D the January 1997 Agreement;
and (xi), in the case of an underwritten offering under the Registration
Statement only, obtain a "cold comfort" letter from the Company's independent
certified public accountants, addressed to Investor and, if applicable, an
underwriter. The Company shall use its best efforts to qualify for use of Form
S-3 under the Securities Act to register the resale of the Registrable Shares
and to maintain such qualification during the periods described in clause (i)
above. The Company hereby agrees that, notwithstanding any provisions to the
contrary in the January 1997 Agreement, it will use its best efforts to keep the
Registration Statement on Form S-3 filed previously to register for resale the
shares of Common Stock of the Company acquired by Investor pursuant to such
purchase agreement (the "Prior Shares") effective until the earlier of
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(i) the date all of the Prior Shares have been sold or (ii) such time as all of
the Prior Shares held by Investor can be sold within a given three (3)-month
period without compliance with the registration requirements of the Securities
Act pursuant to Rule 144.
(d) With a view to making available to Investor the
benefits of Rule 144 and any other rule or regulation of the SEC that may at any
time permit Investor to sell Shares to the public without registration or
pursuant to registration, the Company covenants and agrees to: (i) make and keep
public information available, as those terms are understood and defined in Rule
144, until such date as all of the Registrable Shares shall have been resold;
(ii) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); and (iii) furnish to Investor upon request, as long as
Investor owns any Registrable Shares, (A) a written statement by the Company
that it has complied with the reporting requirements of the Exchange Act, (B) a
copy of the most recent annual or quarterly report of the Company, and (C) such
other information as may be reasonably requested in order to avail Investor of
any rule or regulation of the SEC that permits the selling of any such
Registrable Shares without registration.
(e) At any time the Company may refuse to permit Investor
to resell any Registrable Shares pursuant to the Registration Statement;
provided, however, that in order to exercise this right at any time, the Company
must deliver a certificate in writing to Investor to the effect that suspension
of the sale of shares under the Registration Statement, until such time as the
Company can make an appropriate filing with the SEC, is necessary because a sale
pursuant to the Registration Statement, in its then-current form, could
constitute a violation of the Federal securities laws. In such an event, the
Company shall use its best efforts to amend the Registration Statement if
necessary and take all other actions necessary to allow such sale under the
Federal securities laws, and shall notify Investor promptly after it has
determined that such sale has become permissible under the Federal securities
laws. Notwithstanding the foregoing, the Company shall not under any
circumstances be entitled to exercise its right to suspend sales under the
Registration Statement more than two (2) times in any twelve (12)-month period,
and the period during which the Registration Statement may be withdrawn shall
not exceed thirty (30) days; provided, however, that if the Company is required
to amend the Registration Statement and the Company does not qualify for Form
S-3, the period during which the Registration Statement may be withdrawn shall
be increased by fifty (50) days if upon filing such amendment the SEC advised
the Company that it intends to review the amendment. Investor hereby covenants
and agrees that it will not sell any Shares pursuant to the Registration
Statement during the periods the Registration Statement is suspended or
withdrawn as set forth in this Section.
6.3 Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
Investor from and against any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) to which Investor may become subject (under
the Securities Act or otherwise) insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of, or are
based upon, any untrue statement of a material fact contained in the
Registration Statement, on the effective date thereof, or arise out of any
failure by the Company to fulfill any undertaking included in the Registration
Statement, and the Company will, as incurred, reimburse Investor for
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any legal or other expenses reasonably incurred in investigating, defending or
preparing to defend any such action, proceeding or claim; provided, however,
that the Company shall not be liable in any such case to the extent that such
loss, claim, damage or liability arises out of, or is based upon (i) an untrue
statement made in the Registration Statement in reliance upon and in conformity
with written information furnished to the Company by or on behalf of Investor
specifically for use in preparation of the Registration Statement, (ii) the
failure of Investor to comply with the covenants and agreements contained in
Section 6.2 hereof, or (iii) any untrue statement in any Prospectus that is
corrected in any subsequent Prospectus that was delivered to Investor prior to
the pertinent sale or sales by Investor. The Company will reimburse Investor for
any legal or other expenses reasonably incurred in investigating, defending or
preparing to defend any such action, proceeding or claim notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section and the possibility that such payments might
later be held to be improper, provided, that (i) to the extent any such payment
is ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
(b) Investor agrees to indemnify and hold harmless the
Company from and against any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) to which the Company may become subject
(under the Securities Act or otherwise) insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) arise out of, or
are based upon (i) an untrue statement made in the Registration Statement in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of Investor specifically for use in preparation of the
Registration Statement, provided, however, that Investor shall not be liable in
any such case for any untrue statement included in any Prospectus which
statement has been corrected, in writing, by Investor and delivered to the
Company before the sale from which such loss occurred, (ii) the failure of
Investor to comply with the covenants and agreements contained in Section 6.2
hereof, or (iii) any untrue statement in any Prospectus that is corrected in any
subsequent Prospectus that was delivered to Investor prior to the pertinent sale
or sales by Investor. Investor will reimburse the Company for any legal or other
expenses reasonably incurred in investigating, defending or preparing to defend
any such action, proceeding or claim notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section and the possibility that such payments might later be held to be
improper, provided, that (i) to the extent any such payment is ultimately held
to be improper, the persons receiving such payments shall promptly refund them
and (ii) such persons shall provide to Investor, upon request, reasonable
assurances of their ability to effect any refund, when and if due.
(c) Promptly after receipt by any indemnified person of a
notice of a claim or the beginning of any action in respect of which indemnity
to be sought against an indemnifying person pursuant to this Section 6.3, such
indemnified person shall notify the indemnifying person in writing of such claim
or of the commencement of such action, and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and the indemnifying person shall have been notified thereof,
the indemnifying person shall be entitled to participate therein, and, to the
extent that it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to the indemnified person. After notice from the
indemnifying
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person to such indemnified person of the indemnifying person's election to
assume the defense thereof, the indemnifying person shall not be liable to such
indemnified person for any legal expenses subsequently incurred by such
indemnified person in connection with the defense thereof; provided, however,
that if there exists or shall exist a conflict of interest that would make it
inappropriate in the reasonable judgment of the indemnified person for the same
counsel to represent both the indemnified person and such indemnifying person or
any affiliate or associate thereof, the indemnified person shall be entitled to
retain its own counsel at the expense of such indemnifying person.
(d) If the indemnification provided for in this Section
6.3 is unavailable to or insufficient to hold harmless an indemnified party
under subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as result of such losses, claims, damages, or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative fault of the Company on the one hand and Investor on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or labilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
Investor on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and Investor agree that it would not be just and equitable if
contribution pursuant to this subsection (d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, or liabilities (or actions in respect thereof) referred to
above in this subsection (d) shall not be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), Investor shall not be required to contribute
any amount in excess of the amount by which the amount received by Investor from
the sale of the Shares to which such loss relates exceeds the amount of any
damages which such Investor has otherwise been required to pay by reason of
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(e) The obligations of the Company and Investor under this
Section 6.3 shall be in addition to any liability which the Company and Investor
may otherwise have and shall extend, upon the same terms and conditions, to each
person, if any, who controls the Company or Investor within the meaning of the
Securities Act.
7. Miscellaneous.
7.1 Survival of Warranties. The warranties, representations and
covenants of the Company and Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing.
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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 Shares). 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 California as applied to agreements
among California residents entered into and to be performed entirely within
California.
7.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
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 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 at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
7.7 Expenses; Attorneys' Fees. The Company and Investor shall
each pay all of its own costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement or the Certificate, the prevailing party shall be entitled to
reasonable attorney's fees, costs and necessary disbursements in addition to any
other relief to which such party may be entitled.
7.8 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 Investor.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any securities purchased under this Agreement at the
time outstanding, each future holder of all such securities, and the Company.
7.9 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.
7.10 Entire Agreement. This Agreement and the documents referred
to herein constitute the entire agreement among the parties and no party shall
be liable or bound to any other
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party in any manner by any warranties, representations, or covenants except as
specifically set forth herein or therein.
[Signature Page Follows]
16
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
"COMPANY"
ENDOCARE, INC.
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇
---------------------------------------
▇▇▇▇ ▇. ▇▇▇▇▇, President and Chief
Executive Officer
Address: 7 Studebaker
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
"INVESTOR"
THE ▇▇▇▇▇▇▇▇ FUND, INC.
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇
---------------------------------------
Name: ▇▇▇▇ ▇. ▇▇▇▇▇
--------------------------------
Title: President
--------------------------------
Address: ▇▇▇ ▇. ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
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EXHIBIT A
RISK FACTORS
An investment in the Shares involves a high degree of risk. The
Investor should carefully review the following risk factors as well as the other
available information regarding the Company. Information regarding the Company,
including the information set forth below, contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are intended
to be covered by the safe harbors created thereby. Forward-looking statements
include statements regarding the Company's development of new products, its
ability to market and sell existing products and obtain regulatory approvals,
the trends in the markets served by the Company and the Company's ability to
meet its liquidity requirements. The Investor is cautioned that all
forward-looking statements are subject to risks and uncertainties, including,
without limitation, the risks outlined in this section.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company has a limited history of operations as an independent
operating entity. Since its inception, the Company has engaged primarily in
research and development, and the Company has minimal experience in
manufacturing, marketing and selling its products in commercial quantities.
Additionally, the Company has incurred annual operating losses since its
inception, and expects to continue to incur operating losses as new products
will require substantial development, clinical, regulatory, manufacturing and
other expenditures. As of December 31, 1997, the Company's accumulated deficit
was approximately $5.4 million. There can be no assurance that the Company will
successfully develop or commercialize its current or future products, that the
Company will achieve significant revenues from sales, or that the Company will
achieve or sustain profitability in the future. Additionally, successful
completion of the Company's development program and its transition to attaining
profitable operations is dependent upon achieving a level of revenues adequate
to support the Company's cost structure and obtaining additional financing
adequate to fulfill its research and development activities to continue
refinement of existing products and to develop and commercialize new products.
DECLINING SALES OF EXISTING PRODUCTS; UNCERTAIN MARKET ACCEPTANCE OF
THE COMPANY'S NEW PRODUCTS
Sales of certain of the Company's existing products, including
Prolase(R) and Diolase(TM), have declined and are expected to continue to
decline over the next few years. Certain of the Company's products, including
its CRYOcare Systems, which were introduced in the second quarter of 1996, are
in the early stages of development or market introduction. There can be no
assurance that any of the Company's products will be accepted by potential
customers. The Company's ability to successfully market its CRYOcare System is
dependent upon acceptance of cryosurgical procedures in the United States and
certain international markets. Although cryosurgery has existed for many years,
cryosurgery has not been widely accepted due to cost, competing products and
limited reimbursement by third party payers. The acceptance of cryosurgery by
the general population also may be affected adversely by its price, concerns
relating
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to its safety and efficacy, the accepted effectiveness of alternative methods of
correcting urological disorders and lack of reimbursement from third party
payers. Medicare does not currently reimburse for cryosurgical ablation of the
prostate, one of the approved uses of the Company's eight probe CRYOcare System.
In addition, any future reported adverse events or other unfavorable publicity
involving patient outcomes from the use of cryosurgery, whether from the
Company's products or the products of the Company's competitors, could adversely
affect acceptance and reimbursement for cryosurgery. Emerging new technologies
and procedures to treat cancer, prostate enlargement and other prostate
disorders also may adversely affect the market acceptance of cryosurgery. There
can be no assurance that the Company's CRYOcare Systems will gain any
significant degree of market acceptance among physicians, patients and health
care payers.
UNCERTAINTY OF PRODUCT DEVELOPMENT; RISKS RELATED TO CLINICAL TRIALS
The Company's growth is substantially dependent upon its
continued ability to successfully develop, commercialize and market new
products. The Company's future products are in varying stages of development.
There can be no assurance that the Company will be successful in developing and
commercializing new products that achieve market acceptance or that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products. There can be no
assurance that the Company's products in development will prove to be safe and
effective in clinical trials under applicable regulatory guidelines, and
clinical trials may identify significant technical or other obstacles that must
be overcome prior to obtaining necessary regulatory or reimbursement approvals.
Even if a product overcomes these obstacles, the Company's products will not be
used unless they present an attractive alternative to other treatments and the
clinical benefits to the patient and cost savings achieved through use of the
Company's products outweigh the cost of such products. The Company believes that
recommendations and endorsements of physicians and patients and reimbursement by
health care payers will be essential for market acceptance of its products, and
there can be no assurance that any such recommendations, endorsements or
reimbursements will be obtained. Failure of the Company to successfully develop,
commercialize and market new products or the failure of the Company's products
to achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON BOSTON SCIENTIFIC; DISPUTE WITH BOSTON SCIENTIFIC; LIMITED
SALES AND MARKETING EXPERIENCE
The Company has only limited experience marketing and selling its
products, and does not have experience marketing and selling its products in
commercial quantities. In November 1996, the Company entered into an eight year
exclusive distribution agreement whereby Boston Scientific Corporation ("Boston
Scientific") agreed to market and distribute the Company's CRYOcare Systems
worldwide in the field of urology. The Company is currently in a dispute with
Boston Scientific regarding Boston Scientific's performance under the terms of
the agreement. The Company has notified Boston Scientific that the Company
believes Boston Scientific has failed to perform adequately under its agreement
with the Company, but neither party has initiated arbitration or other
proceedings in connection with the dispute. The agreement with Boston
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Scientific requires that any proceedings in connection with the dispute be
conducted through arbitration, and that the party who does not prevail in the
arbitration pay the legal fees and expenses of the prevailing party. In the
event the dispute with Boston Scientific escalates to arbitration, the Company
could incur significant legal fees and expenses and, if the Company does not
prevail, it may additionally have to pay the legal fees and expenses of Boston
Scientific.
A result of the dispute with Boston Scientific, whether or not it
proceeds to arbitration, may be the termination of the agreement with Boston
Scientific. In that case the Company would have to market and distribute its
CRYOcare System for urological applications on its own or enter into an
agreement with a third party or parties to market and distribute these products,
either on an exclusive basis or in conjunction with others. There is no
assurance that in the event the Boston Scientific agreement is terminated, the
Company can successfully market and distribute these products on its own or that
it could find third parties to effectively market or distribute these products.
As an alternative to termination of the Boston Scientific agreement, Boston
Scientific and the Company may resolve their dispute by renegotiating the terms
of the agreement. There is no assurance whether such renegotiation would result
in an agreement whose terms are more favorable to the Company than those in the
current agreement or whether, as a result of such renegotiation, Boston
Scientific's performance would be improved.
Currently, sales of the CRYOcare System for urological
applications are dependent on the marketing efforts of Boston Scientific, and,
if the agreement with Boston Scientific remains in place, future sales of the
CRYOcare System for urological applications will continue to be dependent on the
marketing efforts of Boston Scientific. The Company derives a majority of its
revenues from the sales of CRYOcare Systems and expects that sales of CRYOcare
Systems will continue to constitute a significant portion of net sales for the
foreseeable future. Accordingly, any factor adversely affecting the sales of
CRYOcare Systems would have a material adverse effect on the Company's business,
financial condition and results of its operations. The current distributorship
agreement requires Boston Scientific to purchase a minimum number of products,
however, if and when there were a lack of sales as a result of unforeseen
regulatory or clinical circumstances relating to a product or failure of the
Company to deliver products in a timely manner, the minimum purchase
requirements can be renegotiated. If the Boston Scientific agreement is
renegotiated, this provision may remain in the agreement, or, a provision
similar to this may be a part of any other agreement that is entered into with
another distributor other than Boston Scientific.
Currently, Medicare does not provide reimbursement for
cryosurgical ablation of the prostate, one of the approved uses of the Company's
eight probe CRYOcare System. The Company believes that to become and remain
competitive, it will need to continue to develop third party distribution
channels and/or a substantial direct sales force for its new and other products.
Establishing marketing and sales capabilities sufficient to support sales in
commercial quantities will require significant resources, and there can be no
assurance that the Company will be able to recruit and retain direct sales
personnel, or that the Company will succeed in establishing and maintaining any
third party distribution channels, or that the Company's future sales and
marketing efforts will succeed at all. In addition, under the current
distribution agreement, Boston Scientific has a right of first refusal to match
any offer received by the Company from a third party to purchase the assets
related to the CRYOcare System for urological applications, and a right to buy
16.
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the assets and technology related to the CRYOcare System for urological
applications at purchase dates of twenty-four, thirty-six and forty-eight months
after the date that Medicare provides reimbursement for cryosurgical ablation of
the prostate, for a purchase price of 1.7, 1.5 and 1.3 times net sales for the
product for the preceding twelve months, but not less than $40 million, $50
million and $60 million, respectively. This buyout provision may have the impact
of creating a theoretical cap on the value of the CRYOcare System for urological
applications and, indirectly, the market value of the Company. If the Boston
Scientific agreement is renegotiated, this provision may remain in the
agreement, or, a provision similar to this may be a part of any other agreement
that is entered into with another distributor other than Boston Scientific.
PRIOR RELIANCE ON MEDSTONE; NEED FOR ADDITIONAL FINANCING
The Company operated as a division or wholly owned subsidiary of
Medstone from its commencement of operations until January 1996 and relied upon
Medstone for financial support and for assistance with personnel management and
financial administration. The Company anticipates that its need for working
capital through the end of 1998 should be satisfied with existing working
capital and a $1 million bank line of credit and the current private placement
of Common Stock, both of which are expected to close by the end of March 1998.
There is no assurance, however, that the line of credit and private placement
currently being negotiated will be consummated, or if they are, whether they
will be consummated at lesser amounts than anticipated. Insofar as the Company
may elect to undertake or accelerate significant research and development
projects for new products or may pursue corporate acquisitions, it may require
additional outside financing prior to such time. The Company expects that to
meet its long-term needs it will need to raise substantial additional funds
through the sale of its equity securities, the incurrence of indebtedness or
through funds derived through entering into collaborative arrangements with
third parties. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish rights to certain of its technologies, products or
marketing territories. The failure of the Company to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION; RAPID TECHNOLOGICAL AND INDUSTRY CHANGE
The Company competes in an established field of surgical device
manufacturers, and the competition in this field is intense. Many of the
Company's competitors are significantly larger than the Company and have greater
financial, technical, research, marketing, sales, distribution and other
resources than the Company. Additionally, the Company believes there will be
intense price competition for products developed in the Company's markets. There
can be no assurance that the Company's competitors will not succeed in
developing or marketing technologies and products, including drug-based
treatments, that are more effective or commercially attractive than any that are
being developed or marketed by the Company, or that such competitors will not
succeed in obtaining regulatory approval, introducing or commercializing any
such products prior to the Company. Such developments could have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, there can be no assurance that, even if the Company is able
to compete successfully, it would do so in a profitable manner. The medical
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device industry generally, and the urological disease treatment market in
particular, are characterized by rapid technological change, changing customer
needs, and frequent new product introductions. The Company's future success will
depend upon its ability to develop and introduce new cost effective products in
a timely manner. There can be no assurance that the Company's products will not
be rendered obsolete as a result of future innovations.
LIMITED MANUFACTURING EXPERIENCE
The Company has limited experience in producing its products in
commercial quantities. Manufacturers often encounter difficulties in scaling up
production of new products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. The Company's failure to overcome these manufacturing problems could
materially adversely affect the Company's business, financial condition and
results of operations. The Company uses a combination of internal manufacturing
capacity and third party manufacturers in its manufacturing efforts. Most of the
Company's purchased components and processes are available from more than one
vendor. However, certain components and processes are currently available from
or performed by a single vendor. Any supply interruption from a single source
vendor would have a material adverse effect on the Company's ability to
manufacture its products until a new source of supply was qualified and, as a
result, could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, the ability of third
party manufacturing sources to deliver components or finished goods will affect
the Company's ability to commercialize its products, and the Company's
dependence on third party sources may adversely affect the Company's profit
margins. Additionally, the Company's success will depend in part upon its
ability to manufacture its products in compliance with the FDA's Good
Manufacturing Practices ("GMP") regulations and other regulatory requirements,
in sufficient quantities and on a timely basis, while maintaining product
quality and acceptable manufacturing costs. Failure to increase production
volumes in a timely or cost effective manner or to maintain compliance with GMP
or other regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL
The Company's future success depends to a significant degree upon
the continued service of key technical and senior management personnel,
including ▇▇▇▇ ▇. ▇▇▇▇▇, the President of the Company, none of whom is bound by
an employment agreement or covered by an insurance policy of which the Company
is the beneficiary. The Company's future success also depends on its continuing
ability to attract, retain and motivate highly qualified technical, managerial
and sales personnel. The inability to retain or attract qualified personnel
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
GOVERNMENT REGULATION
Governmental regulations in the United States and other countries
are a significant factor affecting the research and development, manufacture and
marketing of the Company's products. In the United States, the United States
Food and Drug Administration ("FDA") has broad authority under the Federal Food,
Drug and Cosmetic Act and the Public Health Service Act
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to regulate the distribution, manufacture and sale of medical devices. Foreign
sales of drugs and medical devices are subject to foreign governmental
regulation and restrictions which vary from country to country. The process of
obtaining FDA and other required regulatory approvals is lengthy and expensive.
There can be no assurance that the Company will be able to obtain necessary
approvals for clinical testing or for manufacturing or marketing of its
products. Failure to comply with applicable regulatory approvals can, among
other things, result in fines, suspension of regulatory approvals, product
recalls, operating restrictions and criminal prosecution. In addition,
governmental regulation may be established which could prevent, delay, modify or
rescind regulatory approval of the Company's products. There can be no assurance
that any such position by the FDA, or change of position by the FDA, would not
adversely impact the Company's business, financial condition or results of
operations. Regulatory approvals, if granted, may include significant
limitations on the indicated uses for which the Company's products may be
marketed. In addition, to obtain such approvals, the FDA and foreign regulatory
authorities may impose numerous other requirements on the Company. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses. In addition, product approvals can be withdrawn for failure
to comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing. There can be no assurance that the Company will be
able to obtain regulatory approvals for its products on a timely basis or at
all, and delays in receipt of or failure to receive such approvals, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals
and physicians, that purchase medical devices such as the Company's products,
generally rely on third party payers, principally Federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of medical procedures involving the Company's products. Currently, Medicare
does not reimburse for cryosurgical ablation of the prostate, one of the
approved uses of the Company's eight probe CRYOcare System. Without such
reimbursement, market acceptance and use of the product will be limited and may
adversely affect the Company's revenues from sales of the product. There can be
no assurance that the cost of medical procedures involving the Company's
products will be reimbursed by Medicare or other governmental, insurance or
third party payers. In addition, the Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payers, the cost of the Company's
products will be incorporated into the overall cost of the procedure and that
there will be no separate, additional reimbursement for the Company's products.
Separate reimbursement for the Company's products is not expected to be
available in the United States and there can be no assurance that reimbursement
for the Company's products will be available in international markets under
either governmental or private reimbursement systems. Furthermore, the Company
could be adversely affected by changes in reimbursement policies of governmental
or private health care payers, particularly to the extent any such changes
affect reimbursement for procedures in which the Company's products are used.
Failure by physicians, hospitals and other users of the Company's products to
obtain sufficient reimbursement from health care payers for procedures involving
the Company's products, or adverse changes in governmental and private third
party payers' policies toward reimbursement for such procedures,
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could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS RELATED TO ACQUISITIONS
As part of its strategy to develop and market its products, the
Company may acquire a business or businesses that the Company believes might
enhance and speed up the development of its products through clinical trials,
such as a surgical center or related company that would use the Company's
products in clinical applications. There is no assurance, however, that the
Company will be able to identify suitable acquisition candidates, or, if it
identifies such candidates, that it would be able to consummate the acquisition
of such candidates. Furthermore, there is no assurance that if the Company
acquires a suitable acquisition candidate, the Company will be able to
effectively integrate the operations of the company acquired into the operations
of the Company, or effectively utilize the company acquired to develop and
market the Company's products. The failure to integrate an acquired company into
the operations of the Company may cause a drain on the financial and managerial
resources of the Company, and thereby materially adversely effect the financial
results of operations of the Company.
PRODUCT LIABILITY AND RECALL RISKS
The manufacture and sale of medical products entails significant
risk of product liability claims or product recalls. There can be no assurance
that the Company's existing insurance coverage limits are adequate to protect
the Company from any liabilities it might incur in connection with the clinical
trials or sales of its products. In addition, the Company may require increased
product liability coverage as its products are commercialized. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, or a recall of the Company's
products, could have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY RELATED TO HEALTH CARE REFORM
Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. The Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private purchasing groups, price controls and other fundamental
changes to the health care delivery system. Legislative debate is expected to
continue in the future, and market forces are expected to demand reduced costs.
The Company cannot predict what impact the adoption of any Federal or state
health care reform measures, future private sector reform or market forces may
have on its business.
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DEPENDENCE ON PATENT AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to
secure and protect intellectual property rights relating to its technology.
While the Company believes that the protection of patents or licenses is
important to its business, it also relies on trade secrets, know-how and
continuing technological innovation to maintain its competitive position. No
assurance can be given that the Company's patent applications will be approved,
that the Company will develop any additional proprietary products that are
patentable and/or that any issued patents will provide the Company with a
competitive edge or will not be challenged by any third parties. No assurance
can be given that the Company's processes or products will not infringe patents
or proprietary rights of others or that any license required would be made
available under any such patents or proprietary rights, on terms acceptable to
the Company or at all. From time to time, the Company has received
correspondence alleging infringement of proprietary rights of third parties. No
assurance can be given that any relevant claims of third parties would not be
upheld as valid and enforceable, and therefore that the Company could be
prevented from practicing the subject matter claimed or would be required to
obtain licenses from the owners of any such proprietary rights to avoid
infringement. The Company seeks to preserve the confidentiality of its
technology by entering into confidentiality agreements with its employees,
consultants, customers, and key vendors and by other means. No assurance can be
given, however, that these measures will prevent the unauthorized disclosure or
use of such technology.
LIQUIDITY
The Company Common Stock began trading on the Nasdaq SmallCap
Market on February 28, 1997. Between February 20, 1996 and February 28, 1997,
the Common Stock traded on the Nasdaq electronic bulletin board. As a result,
the Common Stock has a limited trading history. If the Company is unable to
maintain the standards for quotation on the Nasdaq Small Cap Market, the ability
of investors to resell their shares after registration with the Securities and
Exchange Commission may be limited. In addition, the Company's securities may be
subjected to so-called "▇▇▇▇▇ stock" rules that impose additional sales practice
and market making requirements on broker-dealers who sell and/or make a market
in such securities. This could affect the ability or willingness of
broker-dealers to sell and/or make a market in the Company's securities and the
ability of holders of the Company's securities to sell their securities in the
secondary market. There can be no assurance regarding the price at which the
Company Common Stock will trade. The market prices for securities of emerging
companies have historically been highly volatile. Future announcements
concerning the Company or its competitors, including the Company's operating
results, technological innovations or new commercial products, corporate
collaborations, government regulations, developments concerning proprietary
rights, litigation or public concern as to safety of the Company's products, as
well as investor perception of the Company and industry and general economic and
market conditions, may have a significant impact on the market price of the
Company's Common Stock. In addition, the stock market is subject to price and
volume fluctuations that affect the market prices for companies in general and
small capitalization, high technology companies in particular, and are often
unrelated to their operating performance.
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SHARES ELIGIBLE FOR FUTURE SALE; DILUTION
Future sales of Common Stock (including shares issued upon the
exercise of outstanding options and warrants) could materially adversely affect
the market price of the Common Stock. Such sales also might make it more
difficult for the Company to sell equity securities or equity-related securities
in the future at a time and price that the Company would deem appropriate. As of
February 28, 1998, the Company had 8,379,396 shares of Common Stock outstanding,
all of which may be freely traded. In addition, as of February 28, 1998 warrants
to purchase 382,497 shares of Common Stock were outstanding. Also, as of
February 28, 1998 stock options to purchase 1,866,480 shares of Common Stock had
been granted under the Company's stock option plans, subject to various vesting
schedules. Stock options to purchase an additional 233,520 shares of Common
Stock may be issued by the Company from time to time under such option plans and
up to 250,000 shares of Common Stock may be purchased under the Company's
Employee Stock Purchase Plan. An aggregate of 2,000,000 shares of Common Stock
may be issued under the Company's 1995 Stock Plan, 150,000 shares of Common
Stock may be issued under the Company's 1995 Director Option Plan and up to
250,000 shares of Common Stock may be issued under the Company's Employee Stock
Purchase Plan. The Company anticipates receiving shareholder approval to amend
and restate the 1995 Stock Plan to increase the number of shares reserved for
issuance thereunder by 1,000,000 shares. Exercise of these options or warrants
may result in substantial dilution to investors. In addition, the Company has
granted certain shareholders and warrantholders piggyback registration rights
with respect to 357,497 shares of Common Stock.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS; POSSIBLE NEGATIVE EFFECT
ON STOCK PRICE
Certain provisions of the Company's Certificate of Incorporation
and the Bylaws may have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common Stock.
For example, certain of these provisions allow the Company to issue Preferred
Stock without any vote or further action by the shareholders, eliminate the
ability of shareholders to act by written consent without a meeting and
eliminate cumulative voting in the election of directors. These provisions may
make it more difficult for shareholders to take certain corporate actions and
may have the effect of delaying or preventing a change in control of the
Company.
22.