As filed with the Securities and Exchange Commission on April 8, 2004
Registration No. 333-113344
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
NuVasive, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization) |
3841
(Primary Standard Industrial Classification Code Number) |
33-0768598
(I.R.S. Employer Identification Number) |
10065 Old Grove Road
San Diego, California 92131
(858) 271-7070
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Alexis V. Lukianov
Chairman, President and Chief Executive Officer
NuVasive, Inc.
10065 Old Grove Road San Diego, California 92131
(858) 271-7070
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Michael S. Kagnoff, Esq.
Ross L. Burningham, Esq. Jason M. Hannon, Esq. Heller Ehrman White & McAuliffe LLP 4350 La Jolla Village Drive, 7 th Floor San Diego, California 92130-2332 (858) 450-8400 |
John A. de Groot, Esq.
Taylor L. Stevens, Esq. Kenji L. Funahashi, Esq. Morrison & Foerster LLP 3811 Valley Centre Drive, Suite 500 San Diego, California 92122-1246 (858) 720-5100 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes 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, check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) 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. o
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. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) 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. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered
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Proposed Maximum Aggregate Offering Price(1)
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Amount of Registration Fee
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Common Stock, par value $.001 per share | $92,000,000 | $11,657 | ||
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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 Section 8(a), may determine.
PROSPECTUS
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion dated April 8, 2004
Shares
Common Stock
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This is our initial public offering of shares of common stock. We are offering shares. No public market currently exists for our common stock.
We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "NUVA." We anticipate that the initial public offering price will be between $ and $ per share.
Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 7.
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Per Share
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Total
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Public offering price | $ | $ | ||||
Underwriting discount and commissions | $ | $ | ||||
Proceeds, before expenses, to NuVasive | $ | $ |
We have granted the underwriters a 30-day option to purchase up to additional shares to cover any over-allotments.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to investors on or about , 2004.
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BANC OF AMERICA SECURITIES LLC | LEHMAN BROTHERS |
THOMAS WEISEL PARTNERS LLC | WILLIAM BLAIR & COMPANY |
, 2004
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Page
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Prospectus Summary | 1 | |
Risk Factors | 7 | |
Special Note Regarding Forward-Looking Statements | 24 | |
Use of Proceeds | 25 | |
Dividend Policy | 25 | |
Capitalization | 26 | |
Dilution | 27 | |
Selected Consolidated Financial Data | 29 | |
Management's Discussion and Analysis of Financial Condition and Results of Operations | 31 | |
Business | 41 | |
Management | 58 | |
Certain Relationships and Related Transactions | 75 | |
Principal Stockholders | 81 | |
Description of Capital Stock | 84 | |
Material U.S. Federal Tax Considerations for Non-U.S. Holders of our Common Stock | 90 | |
Shares Eligible for Future Sale | 93 | |
Underwriting | 96 | |
Legal Matters | 102 | |
Experts | 102 | |
Where You Can Find More Information | 102 | |
Index to Consolidated Financial Statements | F-1 |
About This Prospectus
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. We are not making offers to sell or seeking offers to buy these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus is accurate as of the date on the front of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.
Until , 2004, all dealers that buy, sell or trade the common stock may be required to deliver a prospectus, regardless of whether they are participating in this offering. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and the consolidated financial statements and accompanying notes, before making an investment decision. References in this prospectus to our certificate of incorporation and bylaws refer to our certificate of incorporation and bylaws that will be in effect upon completion of this offering, unless the context requires otherwise.
NuVasive, Inc.
Our Business
We are a medical device company focused on the design, development and marketing of products for the surgical treatment of spine disorders. We offer creative spine technologies that address the over $2 billion U.S. spine fusion market. Our current principal products include a minimally invasive surgical platform that we call maximum access surgery, or MAS, and classic fusion products. All of our currently marketed products have been cleared by the FDA. Our products have been used to date in over 15,000 spine surgeries, including over 10,000 spine fusions.
We believe our MAS platform provides a unique and comprehensive solution for safe and reproducible minimally disruptive surgical treatment of spine disorders. The key components of our MAS platform, NeuroVision, MaXcess and specialized implants, provide a surgeon with enhanced visibility and access to the spine for fusion. The foundation of our MAS platform consists of:
Our MAS platform has broad application in spine surgery procedures. Our products enable an innovative surgical procedure in which surgeons access the spine from the side of the body rather than from the front or back. We believe procedures utilizing our MAS platform provide significant benefits, including reduced surgery times, reduced hospital stays, and less trauma and blood loss, resulting in faster overall patient recovery times.
In addition to our MAS platform, we offer a portfolio of classic fusion products, including spine allografts, which are human bone that has been donated to a tissue bank or other not-for-profit organization, processed and precision shaped for transplant, and spine implants, such as rods, plates and screws, that are necessary for a variety of spine surgery procedures. While NeuroVision and MaXcess are usually the first of our products that a surgeon adopts, our classic fusion product offering expands the revenue opportunity available to us in each spine surgery procedure.
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Market Opportunity
The U.S. market for lumbar and cervical spine fusion, the core focus of our business, is anticipated to grow to over $2.6 billion by 2005. We believe that the market for spine surgery procedures will continue to grow as a result of the following market influences:
Although we believe there is a strong and growing demand for minimally invasive spine surgery procedures, the rate of adoption of traditional minimally invasive surgical procedures has been slow with respect to the spine. We believe that the principal factors contributing to this slow adoption rate are surgeons' inability to directly access the spine and avoid critical nerves, and the difficulties associated with using specialized or complex instrumentation required by most minimally invasive approaches to accomplish surgical goals.
Our MAS platform allows surgeons to perform a wide range of minimally disruptive procedures, while overcoming the shortcomings of alternative minimally invasive surgical techniques. We believe our products improve clinical results, and have both the potential to expand the number of minimally invasive procedures performed and become a standard of care in spine fusion surgery.
Our Strategy
Our goal is to become a leading provider of creative technologies that provide a comprehensive solution for the surgical treatment of spine disorders. To achieve this objective, we are pursuing the following business strategies:
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Risks Affecting Us
Our business is subject to numerous risks as discussed more fully in the section entitled "Risk Factors" immediately following this prospectus summary. If we are unable to convince spine surgeons that our products are an effective alternative to existing treatments of spine disorders, build our infrastructure, continue to obtain reimbursement and obtain necessary regulatory approvals or clearances, we will be unable to achieve our business objectives. From inception through December 31, 2003, we had an accumulated deficit of approximately $64.3 million. We expect to continue to incur significant losses over the next several years, and we may never become profitable.
Corporate Information
Our business was incorporated in Delaware in July 1997. Our principal executive offices are located at 10065 Old Grove Road, San Diego, California 92131, and our telephone number is (858) 271-7070. Our website is located at www.nuvasive.com . The information contained in, or that can be accessed through, our website is not part of this prospectus. Unless the context requires otherwise, as used in this prospectus the terms "NuVasive," "we," "us" and "our" refer to NuVasive, Inc., a Delaware corporation.
NuVasive®, XLIF®, NeuroVision®, Triad, MAS, MaXcess, Absolute Responsiveness, Creative Spine Technology®, INS-1®, SEN®, Spine Evolution Nucleus®, Neurophysiologic Guidance, InStim and Polar Guidance are trademarks of NuVasive, Inc. We have trademark rights in these marks in the United States and have registrations issued and pending in the United States and other countries. This prospectus also refers to brand names, trademarks, service marks, and trade names of other companies and organizations, and these brand names, trademarks, service marks, and trade names are the property of their respective holders.
This prospectus contains market data and industry forecasts that were obtained from industry publications. These publications generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed.
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Common stock offered | shares | |
Common stock outstanding after this offering |
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shares |
Use of proceeds |
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We expect to use a majority of the net proceeds from this offering to expand our sales and marketing activities, to fund research and development relating to potential new products and to repay substantially all of our outstanding debt obligations of approximately $5.0 million. To a lesser extent, we expect to use the net proceeds of this offering to finance regulatory approval activities and for general corporate purposes. We may also use a portion of the net proceeds of this offering to acquire or invest in complementary businesses, products, or technologies, or to obtain the right to use such complementary technologies. |
Proposed Nasdaq National Market symbol |
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NUVA |
The number of shares of our common stock to be outstanding immediately after this offering is based on 40,757,789 shares of common stock outstanding as of December 31, 2003, and assumes the following:
The number of shares of our common stock to be outstanding immediately after this offering excludes as of December 31, 2003:
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Summary Consolidated Financial Data
The following tables summarize our consolidated financial data for the periods presented. The summary consolidated financial data for the years ended December 31, 2001, 2002 and 2003 are derived from our audited consolidated financial statements. You should read the following financial information together with the information under "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this prospectus. See our consolidated financial statements and related notes for a description of the calculation of the historical net loss attributable to common stockholders per common share and the weighted average number of shares used in computing the historical and pro forma per common share data. The pro forma column in the consolidated balance sheet data gives effect to the conversion of all outstanding shares of our preferred stock into 31,810,907 shares of our common stock upon completion of this offering. The pro forma as adjusted column in the consolidated balance sheet data gives effect to the foregoing conversion, to the sale of shares of our common stock at an assumed initial public offering price of $ , the midpoint of the range on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and to the issuance of 4,652,689 shares of our common stock upon the exercise of outstanding warrants that we anticipate will be exercised prior to the closing of this offering.
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Years Ended December 31,
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2001
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2002
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2003
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(In thousands, except per share amounts)
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Consolidated Statement of Operations Data: | |||||||||||||
Revenues: |
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MAS | $ | 1,444 | $ | 5,269 | $ | 12,069 | |||||||
Classic fusion | 1,120 | 6,991 | 10,586 | ||||||||||
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Total revenues | 2,564 | 12,260 | 22,655 | ||||||||||
Cost of goods sold | 1,354 | 5,303 | 6,791 | ||||||||||
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Gross profit | 1,210 | 6,957 | 15,864 | ||||||||||
Operating expenses: |
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Research and development | 7,331 | 6,107 | 6,310 | ||||||||||
Selling and marketing | 6,885 | 10,024 | 12,609 | ||||||||||
General and administrative | 4,458 | 5,568 | 6,185 | ||||||||||
Stock based compensation | 22 | 113 | 743 | ||||||||||
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Total operating expenses | 18,696 | 21,812 | 25,847 | ||||||||||
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Loss from operations | (17,486 | ) | (14,855 | ) | (9,983 | ) | |||||||
Interest and other (expense), net | (416 | ) | (255 | ) | (144 | ) | |||||||
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Net loss | (17,902 | ) | (15,110 | ) | (10,127 | ) | |||||||
Beneficial conversion of convertible debt | (320 | ) | | | |||||||||
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Net income attributable to common stockholders | $ | (18,222 | ) | $ | (15,110 | ) | $ | (10,127 | ) | ||||
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Historical net loss per share: | |||||||||||||
Basic and diluted | $ | (9.56 | ) | $ | (5.28 | ) | $ | (2.52 | ) | ||||
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Weighted average sharesbasic and diluted | 1,907 | 2,863 | 4,018 | ||||||||||
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Pro forma net loss per share: | |||||||||||||
Basic and diluted | $ | (0.30 | ) | ||||||||||
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Weighted average sharesbasic and diluted | 33,947 | ||||||||||||
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As of
December 31, 2003 |
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Actual
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Pro Forma
As Adjusted |
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(In thousands)
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Consolidated Balance Sheet Data: | ||||||
Cash, cash equivalents, and short-term investments | $ | 9,648 | $ | |||
Working capital | 7,775 | |||||
Total assets | 22,371 | |||||
Long term obligations, less current portion | 1,224 | |||||
Total stockholders' equity | 10,070 |
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An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. If any of the following risks actually occurs, our business, financial condition, results of operations and our future growth prospects would be materially and adversely affected. Under these circumstances, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business and Industry
To be commercially successful, we must convince spine surgeons that our products are an attractive alternative to existing surgical treatments of spine disorders.
We believe that spine surgeons will not widely adopt our products unless they determine, based on experience, clinical data and published peer reviewed journal articles, that our products provide benefits or an attractive alternative to conventional modalities of treating spine disorders. Based on feedback we have solicited, surgeons have been slow to change their medical treatment practices for the following reasons, among others:
In addition, we believe that recommendations and support of our products by influential surgeons are essential for market acceptance and adoption. If we do not receive support from such surgeons or from long-term data, surgeons and hospitals may not use our products. In such circumstances, we may not achieve expected revenues and may never become profitable.
If we are unable to create an installed base of our NeuroVision system with spine surgeons, our ability to commercialize our MaXcess system and complementary products will be negatively affected.
A key element of our business plan calls for us to create an installed base of our NeuroVision system with spine surgeons. Once our NeuroVision system is in use and demanded by a large number of spine surgeons, we believe our MaXcess system and other complementary products, all of which can be used in conjunction with NeuroVision, may provide a significant portion of future revenues. If we are unable to convince a significant number of spine surgeons to accept and use our NeuroVision system, we may be deprived of an opportunity to derive revenue from follow-on sales of our MaXcess system and specialized implants. Even if we are successful in creating an installed base of our NeuroVision system, we cannot be certain that hospitals will purchase our MaXcess system and specialized implants for use during surgery, thus depriving us of potential ongoing revenue. Further, we intend to place NeuroVision systems with hospitals, at no up-front cost to them, who commit to perform a minimum number of surgeries per month using our system. We also plan to loan NeuroVision systems to hospitals for use in individual procedures. To date, we have derived less than five percent of our revenues from sales of NeuroVision systems, relying instead on placed and loaned systems to create an installed base. If the number of spine surgeries actually performed is less than what we anticipate, our ability to generate revenues from the sale of our products will be negatively impacted.
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If spine surgeons are unable to obtain sufficient reimbursement for procedures performed with our products, it is unlikely that our products will be widely used.
Successful sales of our products will depend on the availability of adequate reimbursement from third-party payors. Healthcare providers that purchase medical devices for treatment of their patients, generally rely on third-party payors to reimburse all or part of the costs and fees associated with the procedures performed with these devices. Both public and private insurance reimbursement plans are central to new product acceptance. Spine surgeons are unlikely to use our products if they do not receive reimbursement adequate to cover the cost of our products and related procedures.
To the extent we sell our products internationally, market acceptance may depend, in part, upon the availability of reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country, and include both government sponsored healthcare and private insurance. We may not obtain international reimbursement approvals in a timely manner, if at all. Our failure to receive international reimbursement approvals would negatively impact market acceptance of our products in the international markets in which those approvals are sought.
To date, we believe reimbursement for our products has been achieved. The placement of loaner sets of our NeuroVision system typically results in no reimbursement request because the product is received at no up-front cost to the hospital or surgeon. Our disposable instruments and implants have been regularly reimbursed under existing codes and we have not been informed of any problems encountered by persons seeking reimbursement.
We believe that future reimbursement may be subject to increased restrictions both in the United States and in international markets. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets. Future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for our existing products or our products currently under development and limit our ability to sell our products on a profitable basis.
Adverse changes in reimbursement procedures by payors may impact our ability to market and sell our products.
Even if the use of our products is reimbursed by private payors and Medicare, adverse changes in payors' policies toward reimbursement for our procedures would harm our ability to market and sell our products. We are unable to predict what changes will be made in the reimbursement methods used by payors. We cannot be certain that under prospective payment systems, in which healthcare providers may be reimbursed a set amount based on the type of procedure performed, such as those utilized by Medicare and in many privately managed care systems, the cost of our products will be justified and incorporated into the overall cost of the procedure.
To the extent we sell our products internationally, we will face similar risks relating to adverse changes in reimbursement procedures and policies. Reimbursement and healthcare payment systems vary significantly among international markets. Our inability to obtain international reimbursement approval, or any adverse changes in the reimbursement policies of foreign payors, could negatively affect our ability to sell our products.
We are in a highly competitive market segment, face competition from large, well-established medical device manufacturers with significant resources, and may not be able to compete effectively.
The market for spine surgery products and procedures is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. With respect to NeuroVision, our nerve avoidance system, we compete with Medtronic
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Sofamor Danek, Inc., a wholly owned subsidiary of Medtronic, Inc., and Nicolet Biomedical, a VIASYS Healthcare company, among others. With respect to MaXcess, our minimally disruptive surgical system, our largest competitors are Medtronic Sofamor Danek, DePuy Spine, a Johnson & Johnson company, and Synthes-Stratec. We compete with many of the same companies with respect to our other products. At any time, other companies may develop alternative treatments, products or procedures for the treatment of spine disorders that compete directly or indirectly with our products. If alternative treatments prove to be superior to our spine surgery products, adoption of our products could be negatively affected and our future revenues could suffer.
In addition, several of our competitors are either publicly traded or divisions or subsidiaries of publicly traded companies, and enjoy several competitive advantages over us, including:
For these reasons, we may not be able to compete successfully against our current or potential future competitors and sales of our spine surgery products may decline.
We have limited sales and marketing experience and our sales and marketing efforts are largely dependent on third parties.
We currently have limited experience in marketing and selling our products. We have only been selling our products since 2001. We currently sell our products in the United States through distribution arrangements with a network of independent agents and sales representatives managed by our sales managers. As a result, we are dependent upon the sales and marketing efforts of our third-party sales agencies. We pay these agents and sales representatives a commission based on their product placements and sales. To date, none of these agents or sales representatives are required to exclusively sell our products and may freely sell any other products, including products of our competitors.
As we launch new products and increase our marketing efforts with respect to existing products, we will need to expand the reach of our marketing and sales force. We plan to accomplish this by increasing our network of outside sales agencies. The establishment and development of a broader distribution network and sales force will be expensive and time consuming. Because of the intense competition for their services, we may be unable to identify additional qualified sales agencies and contract sales organizations. Further, we may not be able to enter into agreements with them on commercially reasonable terms, if at all. Even if we do enter into agreements with additional sales agencies and/or contract sales organizations, these parties may not commit the necessary resources to effectively market and sell our products and may not ultimately be successful in selling our products. Our financial condition and results of operations will be harmed if the marketing and sales efforts of our own employees, third-party sales agencies and contract sales organizations are unsuccessful.
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We are dependent on single source suppliers and manufacturers for our devices and components, and the loss of any of these suppliers or manufacturers, or their inability to supply us with an adequate supply of materials could harm our business.
We rely on third-party suppliers and manufacturers to manufacture and supply our products. For example, we have a supply agreement with Invibio, Inc., pursuant to which Invibio is our exclusive supplier of polyetheretherketone, which comprises our PEEK cement restrictor product. Pursuant to this agreement, we have agreed to purchase our entire supply of polyetheretherketone from Invibio. Additionally, we have a supply arrangement with Peak Industries, Inc. pursuant to which Peak is our exclusive supplier of NeuroVision systems. The term of this agreement has expired and we have been continuing our relationship with Peak under the same terms. In the event Peak ceases to supply us, which it may do at any time, we would be forced to locate a suitable alternate supplier. We believe that the start-up time to establish a new supply of NeuroVision would be approximately 16 to 20 weeks. Until we are able to engage an alternate supplier, and until such supplier is prepared to supply our required quantity of product, our ability to supply our customers will be severely limited, which could lead to decreased sales and harm to our reputation.
To be successful, our contract manufacturers must be able to provide us with the products and components of our systems in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable cost and on a timely basis. Our anticipated growth would strain the ability of suppliers to deliver an increasingly large supply of products, materials and components. Manufacturers often experience difficulties in scaling up production, including problems with production yields and quality control and assurance. If we are unable to obtain sufficient quantities of high quality components to meet customer demand on a timely basis, we could lose customers, our reputation may be harmed and our business could suffer. We currently use one or two manufacturers for each of our products. If any one or more of our manufacturers cease to provide us with sufficient quantities of our components in a timely manner or on terms acceptable to us, or cease to manufacture components of acceptable quality, we would have to seek alternative sources of manufacturing. We could incur delays while we locate and engage alternative qualified suppliers and we might be unable to engage alternative suppliers on favorable terms. Any such disruption or increased expenses could harm our commercialization efforts and adversely affect our ability to generate revenue.
If we fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals for our future products or product enhancements, our ability to commercially distribute and market our products could suffer.
Our medical devices are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. Our failure to comply with such regulations could lead to the imposition of injunctions, suspensions or loss of regulatory approvals, product recalls, termination of distribution or product seizures. In the most egregious cases, criminal sanctions or closure of our manufacturing facilities are possible. The process of obtaining regulatory approvals to market a medical device, particularly from the FDA, can be costly and time consuming, and there can be no assurance that such approvals will be granted on a timely basis, if at all. In particular, the FDA permits commercial distribution of a new medical device only after the device has received 510(k) clearance or is the subject of an approved premarket approval application, or PMA. The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to other 510(k)-cleared products. The PMA approval process is more costly, lengthy and uncertain than the 510(k) clearance process. Any products we develop that require regulatory clearance may be delayed. In addition, because we cannot assure you that any new products or any product enhancements we develop will be subject to the shorter 510(k) clearance process, the regulatory approval process for our products or product enhancements may take significantly longer than anticipated. There is no assurance that the FDA will not require that a certain new product or
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product enhancement go through the lengthy and expensive PMA approval process. To date, all of our products have been cleared through the 510(k) process. We have no experience in obtaining PMA approval.
Further, pursuant to FDA regulations, we can only market our products for cleared or approved uses. Certain of our products may be used by physicians for indications other than those cleared or approved by the FDA, but we cannot promote the products for such off-label uses. Specifically, we have been informed that our PEEK cement restrictor product is being used by some surgeons as a synthetic allograft. We do not promote such use.
Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent we market and sell our products in foreign countries, we may be subject to rigorous regulation in the future. In such circumstances, we would rely significantly on our foreign independent sales agencies to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products in foreign countries.
The safety of our products is not yet supported by long-term clinical data and may therefore prove to be less safe and effective than initially thought.
We obtained clearance to offer NeuroVision, MaXcess, PEEK and mesh products through the FDA's 510(k) clearance process. The FDA's 510(k) clearance process is less rigorous than the PMA process and requires less in the way of long-term clinical studies. As a result, we currently lack the breadth of published long-term clinical data supporting the safety of our products and the benefits they offer that would have been generated in connection with the PMA process. For these reasons, spine surgeons may be slow to adopt our products, we may not have comparative data that our competitors have or are generating and we may be subject to greater regulatory and product liability risks. Further, future patient studies or clinical experience may indicate that treatment with our products does not improve patient outcomes. Such results would slow the adoption of our products by spine surgeons, significantly reduce our ability to achieve expected revenues and could prevent us from becoming profitable. Accordingly, if future results and experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, we could be subject to significant legal liability and harm to our business reputation. The spinal medical device market is particularly prone to latent and costly product liability litigation.
Modifications to our marketed products may require new 510(k) clearances or premarket approvals, or may require us to cease marketing or recall the modified products until clearances are obtained.
Any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or, possibly, premarket approval. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer's decision. The FDA may not agree with any of our decisions regarding whether new clearances or approvals are necessary. If the FDA requires us to seek 510(k) clearance or premarket approval for any modification to a previously cleared product, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties. Further, our products could be subject to recall if the FDA determines, for any reason, that our products are not safe or effective. Any recall or FDA requirement that we seek additional approvals or clearances could result in delays, fines, costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA.
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If we or our suppliers fail to comply with the FDA's quality system regulations, the manufacture of our products could be delayed.
We and our suppliers are required to comply with the FDA's quality system regulations, which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our products. The FDA enforces the quality system regulation through unannounced inspections. If we or one of our suppliers fail a quality system regulations inspection or if any corrective action plan is not sufficient, the manufacture of our products could be delayed. We underwent an FDA inspection in August 2003 regarding our allograft implant business. Allograft is human bone that has been processed and precision shaped for transplant. During this inspection, the FDA issued a Form FDA 483, which is a notice of inspection observation, noting that our summary of records associated with the allograft implants we distribute failed to include (i) the name of the person or establishment determining the suitability of the human tissue and (ii) the identity of the laboratory performing applicable infectious disease testing. We believe we have taken sufficient corrective actions with respect to our documentation processes to rectify the concerns raised by the FDA, but there can be no assurance that our solution will satisfy the FDA or that we will not be subject to further enforcement action. The FDA may impose additional inspections or audits at any time. In addition, information gathered from this inspection likely will be forwarded to the FDA's Center for Biologics Evaluation and Research, which could conclude that our quality system is improperly validated or not otherwise in compliance with applicable regulations. Such a finding potentially could disrupt our business, harm our reputation and adversely affect our sales.
Any failure in our efforts to train spine surgeons could significantly reduce the market acceptance of our products.
There is a learning process involved for spine surgeons to become proficient in the use of our products. It is critical to the success of our commercialization efforts to train a sufficient number of spine surgeons and to provide them with adequate instruction in the use of our products via trade shows and leads generated by our sales force. This training process may take longer than expected and may therefore affect our ability to increase sales. Following completion of training, we rely on the trained surgeons to advocate the benefits of our products in the broader marketplace. Convincing surgeons to dedicate the time and energy necessary for adequate training is challenging, and we cannot assure you we will be successful in these efforts. If surgeons are not properly trained, they may misuse or ineffectively use our products. This may also result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have an adverse effect on our business.
Although we believe our training methods regarding surgeons are conducted in compliance with FDA and other applicable regulations, if the FDA determines that our training constitutes promotion of an unapproved use, they could request that we modify our training or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalty.
If we fail to properly manage our anticipated growth, our business could suffer.
Rapid growth of our business is likely to place a significant strain on our managerial, operational and financial resources and systems. While we anticipate hiring additional personnel to assist in the commercialization of our current products and the development of future products, there is no certainty that we will be able to successfully commercialize our products and meet our growth goals. We also anticipate that our current 20,000 square foot facility in San Diego, California, which is under lease until November 2004, will be insufficient to accommodate our expected growth. We anticipate needing to secure an additional 20,000 to 40,000 square feet of office, distribution and warehouse space in San Diego by November 2004. We may have difficulty securing this additional space on commercially reasonable terms, if at all.
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To execute our anticipated growth successfully, we must attract and retain qualified personnel and manage and train them effectively. We will be dependent on our personnel and third parties to effectively market our products to an increasing number of surgeons. We will also depend on our personnel to develop next generation technologies. Further, our anticipated growth will place additional strain on our suppliers and manufacturers, resulting in increased need for us to carefully monitor for quality assurance. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.
We depend on a limited number of sources of human tissue for our allograft implants, and any failure to obtain tissue from these sources in a timely manner will interfere with our ability to effectively meet demand for our allograft implants.
Tissue Banks International, Inc. and Intermountain Tissue Center collectively supplied us with all of our allograft implants in 2003, and will continue to be our only sources for the foreseeable future. The processing of human tissue into allograft implants is very labor intensive and it is therefore difficult to maintain a steady supply stream. In addition, due to seasonal changes in mortality rates, some scarce tissues used for our allograft implants are at times in particularly short supply. We cannot be certain that our supply of allograft implants from Tissue Banks International and Intermountain Tissue Center will be available at current levels or will be sufficient to meet our needs. If we are no longer able to obtain allograft implants from these sources in amounts sufficient to meet our needs, we may not be able to locate and engage replacement sources of allograft implants on commercially reasonable terms, if at all. Any interruption of our business caused by the need to locate additional sources of allograft implants would significantly harm our revenues, which could cause the market price of our common stock to decline. We expect our revenues would continue to suffer at least until we are able to obtain a sufficient supply of allograft implants from a qualified new source.
Our allograft implants and technologies could become subject to significantly greater regulation by the FDA, which could disrupt our business.
Since 1997, the FDA has worked to establish a more comprehensive regulatory framework for allograft implants. The framework under FDA consideration would establish criteria for determining whether a particular human tissue-based product will be classified as human tissue, a medical device or a biologic drug. If the FDA decides to adopt and implement its proposed regulatory framework, one or more of our current allograft implants could be regulated to a much greater extent. For allograft implants regulated as medical devices, we may need to obtain clearance through the 510(k) process or approval through the PMA process if a grandfather approval clause is not adopted. For allograft implants regulated as biologics, we may need to obtain approval of a biologics license application.
To obtain the necessary approvals or clearances under the proposed regulatory framework, we would be required to submit premarket notifications, PMA applications and/or biologics license applications. The clinical testing in support of, and the preparation of, required applications would be time consuming and costly. In addition, the FDA could decide not to approve our applications. The FDA could also require us to stop marketing our current allograft implants pending their approval or clearance. The FDA may require post-market testing and surveillance to monitor the effects of approved allograft implants, may restrict the commercial applications of our allograft implants and may conduct periodic inspections of our facility and our suppliers' facilities. The FDA may withdraw our product approvals or clearances if we do not comply with its regulatory standards or if we encounter problems after the initial marketing. If we encounter delays during the FDA approval process, the period during which we have the exclusive right to commercialize any allograft implants for which we have received patent protection would be shortened.
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We may not be able to timely develop new products or product enhancements that will be accepted by the market.
Our success will depend in part on our ability to develop and introduce new products and enhancements to our existing products. We cannot assure you that we will be able to successfully develop or market new products or that any of our future products will be accepted by the surgeons who use our products or the payors who financially support many of the procedures performed with our products. The success of any new product offering or enhancement to an existing product will depend on several factors, including our ability to:
If we do not develop new products or product enhancements in time to meet market demand or if there is insufficient demand for these products or enhancements, our business will suffer.
We are dependent on our senior management team, key clinical advisors and scientific personnel, and the loss of any of them could harm our business.
Our continued success depends in part upon the continued availability and contributions of our senior management team and the continued participation of our key clinical advisors. We have entered into employment agreements with Alexis V. Lukianov, Kevin C. O'Boyle, Keith Valentine, G. Rogan Fry, Patrick Miles, James J. Skinner, G. Bryan Cornwall and Jonathan D. Spangler, all members of our senior management team, but none of these agreements guarantees the services of the individual for a specified period of time. We also rely on the skills and talents of our scientific personnel because of the complexity of our products. The loss of members of our senior management, key clinical advisors or scientific personnel, or our inability to attract or retain other qualified personnel or advisors could have a material adverse effect on our results of operations and financial condition. See "Management" for a more detailed description of our senior management team. We have not obtained and do not expect to obtain key man life insurance on any of our senior managers.
If we choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, we may be unable to complete these acquisitions or to successfully integrate them in a cost effective and non-disruptive manner.
Our success depends on our ability to continually enhance and broaden our product offerings in response to changing customer demands, competitive pressures and technologies. Accordingly, we may in the future pursue the acquisition of complementary businesses, products or technologies instead of developing them ourselves. We have no current commitments with respect to any acquisition or investment. We do not know if we will be able to successfully complete any acquisitions, or whether we will be able to successfully integrate any acquired business, product or technology or retain any key employees. Integrating any business, product or technology we acquire could be expensive and time consuming, disrupt our ongoing business and distract our management. If we are unable to integrate any acquired businesses, products or technologies effectively, our business will suffer. In addition, any amortization or charges resulting from the costs of acquisitions could harm our business and operating results.
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All of our operations are currently conducted at a single location that may be at risk from fire, earthquakes or other natural disasters.
We currently conduct all of our development and management activities at a single location in San Diego, California near known fire areas and earthquake fault zones. Our facility is located a short distance from the recent wildfires that destroyed many homes and businesses in San Diego County. We have taken precautions to safeguard our facilities, including insurance, health and safety protocols, and off-site storage of computer data. However, any future natural disaster, such as a fire or an earthquake, could cause substantial delays in our operations, damage or destroy our equipment or inventory, and cause us to incur additional expenses. A disaster could seriously harm our business and results of operations. The insurance we maintain against fires, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.
Risks Related to Our Financial Results and Need for Financing
We have a limited operating history, have incurred significant operating losses since inception and expect to continue to incur losses, and we cannot assure you that we will achieve profitability.
We were incorporated in Delaware in 1997, and since that time have focused primarily on research and development, clinical trials and seeking regulatory clearances to market our products. We began commercial sales of products in 2001 and we launched NeuroVision in November 2002 and MaXcess in November 2003. We have yet to demonstrate that we can generate sufficient sales of our products to become profitable. The extent of our future operating losses and the timing of profitability are highly uncertain, and we may never achieve profitability. We have incurred significant net losses since our inception, including losses of approximately $18.2 million in 2001, $15.1 million in 2002 and $10.1 million in 2003. At December 31, 2003, we had an accumulated deficit of approximately $64.3 million. It is possible that we will never generate sufficient revenues from product sales to achieve profitability. Even if we do achieve significant revenues from our product sales, we expect that increased operating expenses will result in significant operating losses in the near term as we, among other things:
As a result of these activities, we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.
Our quarterly financial results are likely to fluctuate significantly because our sales prospects are uncertain.
Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period, particularly because our sales prospects are uncertain. The level of our revenues and results of operations at any given time will be based primarily on the following factors:
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Many of the products we may seek to develop and introduce in the future will require FDA approval or clearance, without which we cannot begin to commercialize them. As a result, it will be difficult for us to forecast demand for these products with any degree of certainty. In addition, we will be increasing our operating expenses as we build our commercial capabilities. Accordingly, we may experience significant, unanticipated quarterly losses. Because of these factors, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors, which could cause our stock price to decline significantly.
Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all.
We believe that our current cash and cash equivalents, excluding the proceeds from this offering, together with our short-term investments, the cash to be generated from expected product sales and our ability to draw down on our secured revolving line of credit, will be sufficient to meet our projected operating requirements for at least the next 12 months. However, we may seek additional funds from public and private stock offerings, borrowings under lease lines or other sources. Our capital requirements will depend on many factors, including:
As a result of these factors, we may need to raise additional funds, and such funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. In
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addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. In these events, our ability to achieve our development and commercialization goals would be adversely affected.
Risks Related to Our Intellectual Property and Potential Litigation
Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain.
Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. For example, our pending U.S. and foreign patent applications may not issue as patents in a form that will be advantageous to us or may issue and be subsequently successfully challenged by others and invalidated. In addition, our pending patent applications include claims to material aspects of our products and procedures that are not currently protected by issued patents. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Competitors may be able to design around our patents or develop products which provide outcomes which are comparable to ours. Although we have taken steps to protect our intellectual property and proprietary technology, including entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. Furthermore, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.
In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be difficult and time consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be extensive and time consuming and could divert our management's attention. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge.
The medical device industry is characterized by patent litigation and we could become subject to litigation which could be costly, result in the diversion of management's time and efforts and require us to pay damages.
The medical device industry is characterized by extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Our competitors may assert that our system, its components or the methods we employ in the use of our system are covered by U.S. or foreign patents held by them. In addition, they may claim that their patents have priority over ours because their patents issued first. Because patent applications can take many years to issue, there may be applications now pending of which we are unaware, which may later result in issued patents that our system may infringe. There could also be existing patents that one or more components of our system may inadvertently be infringing, of which we are unaware. As the number of participants in the market for spine disorder treatments grows, the possibility of patent infringement claims against us increases.
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Any litigation or claims against us may cause us to incur substantial costs, could place a significant strain on our financial resources, divert the attention of management from our core business and harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found to infringe, we could be required to pay substantial damages and/or royalties and could be prevented from selling our products unless we could obtain a license or were able to redesign our system to avoid infringement. Any such license may not be available on reasonable terms, if at all. If we fail to obtain any required licenses or make any necessary changes to our products or technologies, we may be unable to commercialize one or more of our products.
If we become subject to product liability claims, we may be required to pay damages that exceed our insurance coverage.
Our business exposes us to potential product liability claims that are inherent in the testing, manufacture and sale of medical devices for spine surgery procedures. Spine surgery involves significant risk of serious complications, including bleeding, nerve injury, paralysis and even death. Currently, we maintain product liability insurance in the amount of $5.0 million. Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure coverage in the future. In addition, we could have to pay an amount in excess of policy limits, which would have to be paid out of cash reserves. If longer-term patient results and experience indicate that our products or any component cause tissue damage, motor impairment or other adverse effects, we could be subject to significant liability. Finally, even a meritless or unsuccessful product liability claim could harm our reputation in the industry, lead to significant legal fees and could result in the diversion of management's attention from managing our business.
We may be subject to litigation regarding cadavers we purchased that originated from the University of California at Los Angeles.
For a period of time, we purchased cadavers from a broker who is now being investigated for his practices in obtaining those cadavers from U.C.L.A. We have received inquiries and document requests from the FDA and the State of California regarding this investigation. Although we are not a party to any associated legal action and have been informed that we are not a subject of this investigation, we are aware that Johnson & Johnson and a subsidiary of that company, who obtained cadavers from the same broker used by us, have been sued in connection with the underlying events. It is possible that we could be sued as well.
We are currently involved in costly employment litigation and an adverse outcome may prevent certain of our employees from working for us or require us to pay significant damages.
We, certain of our officers and one of our directors are currently involved in litigation with Medtronic, Inc. and its subsidiary, Medtronic Sofamor Danek. Medtronic filed suit in Tennessee in March 2001 alleging that we interfered with Medtronic's non-competition agreements and proprietary information and confidentiality agreements by employing three former Medtronic employees: R. Lewis Bennett, our director and former vice president, Keith Valentine, our current executive vice president, and Patrick Miles, our current vice president of marketing.
Messrs. Bennett, Valentine and Miles, who were not named in the suit, filed an action in California against Medtronic in April 2001, seeking a judicial declaration that Medtronic's non-competition agreements were void under California law, and claiming that Medtronic's efforts to enforce such agreements violated California's unfair competition law. We are not a party in the California action, but we agreed to indemnify Messrs. Bennett, Valentine and Miles for their legal expenses incurred in connection with this action. To date, we have made indemnification payments on behalf of Messrs. Bennett, Valentine and Miles in an aggregate amount of approximately $468,000. The Tennessee court has issued an injunction preventing further indemnification by us. In the event this
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injunction is reversed, we are prepared to continue to indemnify Messrs. Bennett, Valentine and Miles to the extent legally permissible.
Each of these lawsuits remains in the discovery phase and may proceed for an extended period of time. These lawsuits have resulted in significant expenses and have been, and are expected to continue to be, a diversion of management's time and other resources. If Medtronic successfully asserts its claims against us, including claims that we encouraged or allowed individuals to bring with them confidential documents or information belonging to Medtronic, our operations could be significantly impacted, especially to the extent that it affects our ability to retain the services of Messrs. Bennett, Valentine and Miles in any meaningful capacity. Further, we will continue to incur expenses related to these lawsuits for their duration.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Many of our employees were previously employed at universities or other medical device companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize product candidates, which could severely harm our business.
Any claims relating to our improper handling, storage or disposal of biological, hazardous and radioactive materials could be time consuming and costly.
Our allograft implants and cadaver lab involve the controlled use of biological, hazardous and/or radioactive materials and waste. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, we could be held liable for damages or penalized with fines, and this liability could exceed our resources and any applicable insurance. We may have to incur significant costs to comply with future environmental laws and regulations.
Because allograft implants entail an inherent risk of injury to human recipients, we may be the subject of product liability claims regarding our allograft implants.
The development of allograft implants and technologies for human tissue repair and treatment entails an inherent risk of product liability claims because of the risk of injury and communicable disease to the human recipients, and substantial product liability claims may be asserted against us. Although we have not been the subject of any material product liability claims to date and have a $5.0 million insurance policy to cover potential claims, claims could arise in the future for which our insurance will not be adequate. Moreover, insurance covering our business may not always be available in the future on commercially reasonable terms, if at all. If our insurance proves to be inadequate to pay a damage award, we may not have sufficient funds to do so which would harm our financial condition. In addition, successful product liability claims made against one of our competitors could cause claims to be made against us or expose us to a perception that we are vulnerable to similar claims. Claims against us, regardless of their merit or potential outcome, may also hurt our reputation and ability to sell our products.
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We or our suppliers may be the subject of claims for non-compliance with FDA regulations in connection with the processing or distribution of allograft implants.
It is possible that allegations may be made against us or against donor recovery groups or tissue banks, including those with which we have a contractual relationship, claiming that the acquisition or processing of tissue for allograft implants does not comply with applicable FDA regulations or other relevant statutes and regulations. Allegations like these could cause regulators or other authorities to take investigative or other action against us, or could cause negative publicity for us or our industry generally. These actions or any negative publicity could cause us to incur substantial costs, divert the attention of our management from our business, harm our reputation and cause the market price of our shares to decline.
Risks Related to the Securities Markets and Ownership of Our Common Stock
There has been no prior public market for our common stock and an active trading market may not develop.
Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following completion of this offering or, if developed, may not be sustained. The lack of an active market may impair the value of your shares and your ability to sell your shares at the time you wish to sell them. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies, products or technologies by using our shares as consideration.
We expect that the price of our common stock will fluctuate substantially and you may not be able to sell your shares at or above the offering price.
The initial public offering price for the shares of our common stock sold in this offering will be determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. In addition, the market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:
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Because of their significant stock ownership, our executive officers, directors and principal stockholders will be able to exert control over us and our significant corporate decisions.
Upon completion of this offering, our executive officers, directors, and stockholders holding more than 5% of our outstanding common stock and their affiliates will, in the aggregate, beneficially own approximately % of our outstanding common stock, or % if the underwriters' over-allotment option is exercised in full. As a result, these persons, acting together, will have the ability to determine the outcome of all matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation, or sale of all or substantially all of our assets. This concentration of ownership may harm the market price of our common stock by, among other things:
We also plan to reserve up to 5% of the shares offered in this offering under a directed share program in which our executive officers and directors, principal stockholders, employees, business associates and related persons may be able to purchase shares in this offering at the initial public offering price. This program may further increase the percentage of stock held by persons whose interests are aligned with our executive officers', directors' and principal stockholders' interests.
Our management team may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return, and the use of the proceeds of this offering will be subject to covenants contained in our debt financing agreements.
Our management will have considerable discretion in the application of the net proceeds of this offering. We expect to use a majority of the net proceeds from this offering to expand our sales and marketing activities, to fund research and development relating to potential new products and to repay substantially all of our outstanding debt obligations of approximately $5.0 million. To a lesser extent, we expect to use the net proceeds of this offering to finance regulatory approval activities and for general corporate purposes. We may also use a portion of the net proceeds of this offering to acquire or invest in complementary businesses, products, or technologies, or to obtain the right to use such complementary technologies, although we are not currently involved in any negotiations and have no commitments with respect to any such transactions. We cannot specify with certainty how we will use the net proceeds of this offering or our existing cash balance. The net proceeds may be used for corporate purposes that do not increase our operating results or market value. Until the net proceeds are used, they may be placed in investments that do not produce income or that lose value.
Future sales of our common stock may depress our stock price.
Our current stockholders hold a substantial number of shares of our common stock that they will be able to sell in the public market in the near future. A significant portion of these shares are held by a small number of stockholders. Sales by our current stockholders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. Moreover, after this offering, the holders of approximately 35,981,399 shares of common stock, including shares issued upon conversion of our preferred stock or shares issued upon the exercise of warrants, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.
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Please see "Description of Capital StockRegistration Rights" for a description of registration rights of these stockholders.
We also intend to register all common stock that we may issue under our existing 1998 Stock Option/Stock Issuance Plan, and our 2004 Equity Incentive Plan and 2004 Employee Stock Purchase Plan adopted in connection with this offering. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in "Underwriting." If any of these holders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. Please see "Shares Eligible for Future Sale" for a description of sales that may occur in the future.
As a new investor, you will experience substantial dilution as a result of this offering and future equity issuances and, as a result, our stock price could decline.
The initial public offering price will be substantially higher than the pro forma, net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $ per share. This dilution is due in large part to earlier investors in our company having paid substantially less than the initial public offering price when they purchased their shares. Investors who purchase shares of common stock in this offering will contribute approximately % of the total amount we have raised to fund our operations but will own only approximately % of our common stock. We believe that our current cash and cash equivalents, excluding the proceeds from this offering, together with our short-term investments, the cash to be generated from expected product sales and our ability to draw down on our secured revolving line of credit, will be sufficient to meet our projected operating requirements for at least the next 12 months. Because we may require additional funds to develop new products and continue to expand our business, we may conduct substantial future offerings of equity securities. The exercise of outstanding options and warrants and future equity issuances, including future public offerings or future private placements of equity securities and any additional shares issued in connection with acquisitions, will result in further dilution to investors.
We may incur increased costs as a result of recently enacted and proposed changes in laws and regulations.
Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the Securities and Exchange Commission and by the Nasdaq Stock Market, could result in increased costs to us. The new rules could make it more difficult or more costly for us to obtain certain types of insurance, including directors' and officers' liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.
We may become involved in securities class action litigation that could divert management's attention and harm our business.
The stock market in general, the Nasdaq National Market and the market for medical device companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities of medical device companies have been particularly volatile. These broad market and industry factors may materially harm the market price of our common stock, regardless of our
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operating performance. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts management's attention and resources, which could materially harm our financial condition and results of operations.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.
Our restated certificate of incorporation and restated bylaws to be in effect upon completion of this offering contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions:
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our restated certificate of incorporation, restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirors to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.
We do not intend to pay cash dividends.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of any future debt or credit facility may preclude us from paying any dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of potential gain for the foreseeable future.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available to us. The forward-looking statements are contained principally in the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." When used in this prospectus, the words "anticipate," "believe," "could," "estimate," "will," "may," "plan," "should," "intend," and "expect" and similar expressions identify forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in any forward-looking statements are reasonable, these plans, intentions, or expectations may not be achieved. Our actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied, by the forward-looking statements contained in this prospectus. Important factors that could cause actual results to differ materially from our forward-looking statements are set forth in this prospectus, including under the heading "Risk Factors." Given these factors, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this prospectus. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this prospectus.
Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
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We estimate that the net proceeds from the sale of the shares of common stock that we are selling in this offering will be approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option in full, based on an assumed offering price to the public of $ per share and after deducting estimated underwriting discounts and commissions and our estimated offering expenses.
The principal purposes of this offering are to obtain additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets. We expect to use a majority of the net proceeds from this offering to expand our sales and marketing activities, to fund research and development relating to potential new products and to repay substantially all of our outstanding debt obligations of approximately $5.0 million. To a lesser extent, we expect to use the net proceeds of this offering to finance regulatory approval activities and for general corporate purposes. We may also use a portion of the net proceeds of this offering to acquire or invest in complementary businesses, products, or technologies, or to obtain the right to use such complementary technologies. We have no commitments with respect to any acquisition or investment, and we are not currently involved in any negotiations with respect to any such transaction.
As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our product development efforts, sales and marketing activities, technological advances, amount of cash generated or used by our operations and competition. Accordingly, our management will have broad discretion in the application of the net proceeds and investors will be relying on the judgment of our management regarding the application of the proceeds of this offering.
A portion of the gross proceeds from this offering, in the form of underwriting discounts and commissions, will be paid to William Blair & Company. Arda M. Minocherhomjee, one of our directors, is a managing director of William Blair Capital Partners, L.L.C., which is affiliated with William Blair & Company. To the extent legally permissible, we may also use some of the net proceeds from this offering to provide indemnification to certain of our current and former officers. See "BusinessLegal Proceedings" for a description of the associated legal proceedings.
Of the approximately $5.0 million of net proceeds that we intend to use to repay outstanding debt, approximately $4.5 million will be paid to our bank to repay a secured credit facility pursuant to which we have drawn down, as of December 31, 2003, $4.5 million out of the maximum limit of $5.0 million. This secured credit facility may be used to borrow against qualified accounts receivable and fixed assets. On March 31, 2004, we amended the terms of this credit facility to restructure all of our debt arrangements and increase our borrowing capacity to $9.6 million. The interest rate on this facility is lender's prime plus one-half of one percent, with maturity dates through December 2007.
Additionally, of the approximately $5.0 million of net proceeds that we intend to use to repay outstanding debt, approximately $300,000 will be paid to GATX Ventures, Inc. as payment in full of all remaining outstanding amounts under an equipment loan and security agreement. Amounts borrowed under this loan bear interest in a range of 10.7% to 11.9% and the loan matures in July 2005.
Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities. We believe that our current cash and cash equivalents, excluding the proceeds from this offering, together with our short-term investments, the cash to be generated from expected product sales and our ability to draw down on our secured revolving line of credit, will be sufficient to meet our projected operating requirements for at least the next 12 months.
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and finance the growth and development of our business and do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors.
25
The following table summarizes our capitalization as of December 31, 2003:
You should read the following table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this prospectus.
|
As of December 31, 2003
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Actual
|
Pro Forma
|
Pro Forma As
Adjusted |
|||||||
|
(in thousands, except share and
per share data) |
|||||||||
Cash, cash equivalents and short-term investments | $ | 9,648 | $ | 9,648 | $ | |||||
|
|
|||||||||
Notes payable, less current portion | $ | 1,202 | $ | 1,202 | ||||||
Obligations under capital leases, less current portion | 22 | 22 | ||||||||
Stockholders' equity: | ||||||||||
Convertible preferred stock, $0.001 par value; 33,346,500 shares authorized, actual; 31,585,248 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted | 32 | | ||||||||
Common stock, $0.001 par value; 49,200,000 shares authorized, actual; 70,000,000 shares authorized, pro forma and pro forma as adjusted; 4,294,193 shares issued and outstanding, actual; shares issued and outstanding pro forma; shares issued and outstanding pro forma as adjusted | 4 | 36 | ||||||||
Additional paid-in-capital | 75,044 | 75,044 | ||||||||
Notes receivable from stockholders | (188 | ) | (188 | ) | ||||||
Deferred compensation | (566 | ) | (566 | ) | ||||||
Accumulated deficit | (64,256 | ) | (64,256 | ) | ||||||
|
|
|
||||||||
Total stockholders' equity | 10,070 | 10,070 | ||||||||
|
|
|
||||||||
Total capitalization | $ | 11,294 | $ | 11,294 | $ | |||||
|
|
|
The number of shares of common stock to be outstanding after this offering is based on 40,757,789 shares outstanding as of December 31, 2003, and includes 4,652,689 shares of common stock that will be issued prior to the closing of this offering upon exercise of outstanding warrants at a weighted average exercise price of $0.40 per share. This number excludes, as of December 31, 2003:
26
Our pro forma net tangible book value as of December 31, 2003 was approximately $ million, or approximately $ per share of our common stock. Pro forma net tangible book value per share is equal to the amount of our total tangible assets less the amount of our total liabilities, divided by the pro forma number of shares of common stock outstanding at December 31, 2003, after giving effect to the issuance of 4,652,689 shares of common stock upon exercise of outstanding warrants that we anticipate will be exercised prior to the closing of this offering at a weighted average exercise price of $0.40 per share. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after the offering.
After giving effect to our sale of the shares offered in this offering at an assumed initial public offering price of $ per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and our estimated offering expenses, our adjusted pro forma net tangible book value as of December 31, 2003 would have been approximately $ , or approximately $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders, and an immediate dilution in pro forma net tangible book value of $ per share to new investors. The following table illustrates this per share dilution:
Assumed initial public offering price per share | $ | ||||||
Historical net tangible book value per share as of December 31, 2003 | $ | 2.35 | |||||
Increase per share due to conversion of all shares of preferred stock | |||||||
Pro forma net tangible book value per share as of December 31, 2003 | $ | ||||||
Increase per share attributable to new investors | |||||||
|
|||||||
Pro forma as adjusted net tangible book value per share after this offering | $ | ||||||
|
|||||||
Dilution per share to new investors | $ | ||||||
|
If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per share would increase to $ per share, and the pro forma dilution per share to new investors would be $ .
The following table summarizes, on a pro forma basis as of December 31, 2003, after giving effect to the issuance of 4,652,689 shares of common stock upon exercise of outstanding warrants that we assume will be exercised prior to the closing of this offering at a weighted average exercise price of $0.40 per share, the differences between our existing stockholders and investors in this offering with respect to the total number of shares of common stock purchased from us, the total consideration paid to us, the average price per share paid by our existing stockholders and the price per share paid by investors in this offering before deducting estimated underwriting discounts and commissions and our estimated offering expenses:
|
Shares Purchased
|
Total Consideration
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Average Price
Per Share |
||||||||||||
|
Number
|
Percent
|
Amount
|
Percent
|
|||||||||
Existing stockholders | 40,757,789 | 100 | % | $ | 76,838,872 | 100 | % | $ | 1.89 | ||||
New investors | $ | ||||||||||||
|
|
|
|
||||||||||
Total | 100.0 | % | $ | 100.0 | % | ||||||||
|
|
|
|
27
If the underwriters exercise their over-allotment option in full, our existing stockholders would own % and our new investors would own % of the total number of shares of our common stock outstanding after this offering.
The preceding discussion and tables above assume the issuance of 4,652,689 shares of common stock upon exercise of outstanding warrants that, by their terms, terminate upon completion of this offering, at a weighted average exercise price of $0.40 per share. The preceding discussion and tables above further assume the conversion of all our outstanding convertible preferred stock into 31,810,907 shares of common stock immediately prior to the consummation of this offering; and no exercise of the following warrants and options outstanding as of December 31, 2003:
Because the exercise prices of the outstanding options and warrants are significantly below the assumed initial offering price, investors purchasing common stock in this offering will suffer additional dilution when and if these options and warrants are exercised. If the 4,275,645 options and 280,842 warrants were exercised prior to this offering, but assuming no exercise of the underwriters' over-allotment option, our existing stockholders would own % and our new investors would own % of the total number of shares of our common stock outstanding after this offering.
28
SELECTED CONSOLIDATED FINANCIAL DATA
In the table below, we provide you with our historical selected consolidated financial data. We derived the consolidated statement of operations data for the years ended December 31, 1999 and 2000 and the consolidated balance sheet data as of December 31, 1999, 2000, and 2001 from our audited consolidated financial statements for such periods and dates, which are not included in this prospectus. We derived the consolidated statement of operations data for the years ended December 31, 2001, 2002 and 2003 and the consolidated balance sheet data as of December 31, 2002 and 2003 from our audited consolidated financial statements for such periods and dates, which appear elsewhere in this prospectus. It is important that you read the selected consolidated financial data set forth below in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. Our historical results are not necessarily indicative of the operating results that may be expected in the future.
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Years Ended December 31,
|
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1999
|
2000
|
2001
|
2002
|
2003
|
||||||||||||||
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(in thousands, except per share data)
|
||||||||||||||||||
Consolidated Statement of Operations Data: | |||||||||||||||||||
Revenues: | |||||||||||||||||||
MAS | $ | | $ | | $ | 1,444 | $ | 5,269 | $ | 12,069 | |||||||||
Classic fusion | | 52 | 1,120 | 6,991 | 10,586 | ||||||||||||||
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|
|
|
|
|||||||||||||||
Total revenues | | 52 | 2,564 | 12,260 | 22,655 | ||||||||||||||
Cost of goods sold |
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|
|
|
87 |
|
|
1,354 |
|
|
5,303 |
|
|
6,791 |
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|||
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|
|
|
|
|||||||||||||||
Gross profit | | (35 | ) | 1,210 | 6,957 | 15,864 | |||||||||||||
Operating expenses: |
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|
|
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|
|
|
|
|
|
|
|||
Research and development | 3,963 | 9,011 | 7,331 | 6,107 | 6,310 | ||||||||||||||
Selling and marketing | | 1,980 | 6,885 | 10,024 | 12,609 | ||||||||||||||
General and administrative | 1,845 | 3,241 | 4,458 | 5,568 | 6,185 | ||||||||||||||
Stock based compensation | | | 22 | 113 | 743 | ||||||||||||||
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|
|
|
|
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Total operating expenses | 5,808 | 14,232 | 18,696 | 21,812 | 25,847 | ||||||||||||||
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|
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|
|||||||||||||||
Loss from operations | (5,808 | ) | (14,267 | ) | (17,486 | ) | (14,855 | ) | (9,983 | ) | |||||||||
Interest and other (expense), net | 70 | 117 | (416 | ) | (255 | ) | (144 | ) | |||||||||||
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|
|
|
|
|||||||||||||||
Net loss | (5,738 | ) | (14,150 | ) | (17,902 | ) | (15,110 | ) | (10,127 | ) | |||||||||
Beneficial conversion of convertible debt | | | (320 | ) | | | |||||||||||||
|
|
|
|
|
|||||||||||||||
Net loss attributable to common stockholders | $ | (5,738 | ) | $ | (14,150 | ) | $ | (18,222 | ) | $ | (15,110 | ) | $ | (10,127 | ) | ||||
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|
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|
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Historical net loss per share(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic and diluted | $ | (3.25 | ) | $ | (7.82 | ) | $ | (9.56 | ) | $ | (5.28 | ) | $ | (2.52 | ) | ||||
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|
|
|
|
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Weighted average sharesbasic and diluted | 1,763 | 1,809 | 1,907 | 2,863 | 4,018 | ||||||||||||||
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|
|
|
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Pro forma net loss per share(1): |
|
|
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|
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|
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|
|
|
|
|
|
|||
Basic and diluted | $ | (0.30 | ) | ||||||||||||||||
|
|||||||||||||||||||
Weighted average sharesbasic and diluted | 33,947 | ||||||||||||||||||
|
29
|
As of December 31,
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
1999
|
2000
|
2001
|
2002
|
2003
|
||||||||||
|
(in thousands)
|
||||||||||||||
Consolidated Balance Sheet Data: | |||||||||||||||
Cash, cash equivalents, and short-term investments | $ | 9,966 | $ | 1,836 | $ | 9,658 | $ | 6,906 | $ | 9,648 | |||||
Working capital | 9,458 | 297 | 8,415 | 7,251 | 7,775 | ||||||||||
Total assets | 11,126 | 4,660 | 16,617 | 14,932 | 22,371 | ||||||||||
Long-term obligations, less current portion | 221 | 2,901 | 1,795 | 329 | 1,224 | ||||||||||
Total stockholders' equity (deficit) | 10,222 | (720 | ) | 9,466 | 9,384 | 10,070 |
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this prospectus. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth under "Risk Factors" and elsewhere in this prospectus.
Overview
Background
We are a medical device company focused on the design, development and marketing of products for the surgical treatment of spine disorders. From our incorporation in 1997 through 2000, we devoted substantially all of our resources to research and development and start-up activities, consisting primarily of identification of potential products, recruiting qualified personnel and raising capital. Our current principal product offering includes a minimally disruptive surgical platform that we call maximum access surgery, or MAS, as well as classic fusion products. MAS combines NeuroVision, MaXcess and our specialized implants. Our classic fusion portfolio is comprised of a range of products, including spine allografts, which are human bone that has been processed and precision shaped for transplant, and spine implants such as rods, plates and screws that are necessary for a variety of spine surgery procedures. Our products are designed to address the fast growing spine market with a focus on minimally disruptive spine surgery techniques. All of our currently marketed products have been cleared by the FDA. In 2001, we began to commercialize our nerve avoidance and classic fusion products. We began commercial distribution of MaXcess in the fourth quarter of 2003.
Since inception, we have been unprofitable. We incurred net losses of approximately $18.2 million in 2001, $15.1 million in 2002 and $10.1 million in 2003. As of December 31, 2003, we had an accumulated deficit of $64.3 million.
Revenues
From inception to December 31, 2003, we have recognized $37.5 million in revenue from sales of our products. As of December 31, 2003, our products have been used in over 15,000 surgeries.
Our revenues are derived from the sale of medical products in two principal categories:
The majority of our revenues are derived from the sale of disposables and implants and we expect this trend to continue in the near term. To date we have derived less than 5% of our revenues from the sale of NeuroVision systems. We do not expect these sales to contribute significantly to our revenues in the future because we intend to continue to loan these systems to hospitals and surgeons who purchase our disposables and implants for use in individual procedures or place these systems with hospitals for an extended period at no up-front cost to them provided they commit to minimum monthly purchases of our disposables and implants. In the event that a hospital or surgeon does not meet its minimum monthly purchase commitments, our sole remedy is to remove our NeuroVision system.
Our implants, disposables and instruments are sold and shipped from inventories at our facility or from limited disposable inventories that are stored at our distributors' sites. We invoice hospitals a fee
31
for using MaXcess instruments and for any disposables or implants upon receiving notice of product use or implantation. For NeuroVision, we generally place the system in hospitals free of charge and allow it to remain on-site provided the hospital orders a minimum monthly quantity of our nerve avoidance disposable products. In addition, we have a program pursuant to which we loan, from a pool of fixed assets, NeuroVision systems to hospitals without charge to support individual surgical procedures. We derive revenue from the sales of disposables and/or implants used in these procedures.
Sales and Marketing
Substantially all of our operations are located in the United States and nearly all of our sales to date have been generated in the United States. We distribute our products through independent agencies. The independent agencies provide a delivery and consultative service to our surgeon and hospital customers and receive commissions based on sales and product placements in their territories. The commissions are reflected in our statement of operations within the selling and marketing expense line. We expect to continue to expand our distribution channel both by adding additional distributors and exploring alternative distribution strategies.
We expect to increase the amounts we spend on sales and marketing for the foreseeable future. These increased amounts will be directed towards expanding our distribution channels, promoting awareness of our products and providing training to surgeons. These amounts will also be used to compensate our independent sales agents related to sales of our products.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates including those related to product returns, bad debts, inventories and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements appearing at the end of this prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. We recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which requires that four basic criteria must be met before revenues can be recognized; (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Specifically, revenue from the sale of our implants and disposables is recognized upon receipt of written acknowledgement that the product has been used in a surgical procedure or upon shipment to customers who immediately accept title. Revenue from the sale of our NeuroVision systems and instrument sets is recognized upon receipt of a purchase order and the subsequent shipment to customers who immediately accept title.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is reviewed quarterly and is estimated based on the aging of account balances, collection history and known trends with current customers. As a result of this review the allowance is
32
adjusted on a specific identification basis. Increases to the allowance for doubtful accounts result in a corresponding expense. We maintain a large customer base that mitigates the risk of concentration with one customer. However, if the overall condition of the healthcare industry were to deteriorate, resulting in an impairment of our customers' ability to make payments, significant additional allowances could be required.
Excess and Obsolete Inventory. We calculate an inventory reserve for estimated obsolescence or excess inventory based upon historical turnover and assumptions about future demand for our products and market conditions. Our allograft implants have a three-year shelf life and are subject to demand fluctuations based on the availability and demand for alternative implant products. Our MAS inventory, which consists primarily of disposables, NeuroVision units and MaXcess instrument sets, is at risk of obsolescence following the introduction and development of new or enhanced products. The inventory reserve at December 31, 2003, reflects an estimated decrease in demand for our allograft product in response to the introduction of an alternative product in the fourth quarter of 2003. Our estimates and assumptions for excess and obsolete inventory are reviewed and updated on a quarterly basis. The estimates we use for demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. Future product introductions and related inventories may require additional reserves based upon changes in market demand or introduction of competing technologies. Increases in the reserve for excess and obsolete inventory result in a corresponding expense to cost of goods sold.
Accounting for Income Taxes. Significant management judgement is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a full valuation allowance on our net deferred tax assets as of December 31, 2002 and 2003 respectively, due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable future. These deferred tax assets primarily consist of certain net operating loss carryforwards and research and development tax credits.
Results of Operations
Our results of operations have fluctuated significantly from period to period in the past and are likely to do so in the future. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including the rate of adoption of our products by surgeons and the revenue mix of our product sales. Due to these fluctuations, we believe that period to period comparisons of our operating results are not a good indication of our future performance.
33
The following table sets forth our results of operations expressed as a percentage of revenues for the years ended December 31, 2001, 2002 and 2003:
|
2001
|
2002
|
2003
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Revenues: | ||||||||||
MAS | 56 | % | 43 | % | 53 | % | ||||
Classic fusion | 44 | 57 | 47 | |||||||
|
|
|
||||||||
Total revenues | 100 | 100 | 100 | |||||||
Cost of goods sold | 53 | 43 | 30 | |||||||
|
|
|
||||||||
Gross profit | 47 | 57 | 70 | |||||||
Operating expenses: |
|
|
|
|
|
|
|
|||
Research and development | 286 | 50 | 28 | |||||||
Selling and marketing | 268 | 82 | 56 | |||||||
General and administrative | 174 | 45 | 27 | |||||||
Stock-based compensation | 1 | 1 | 3 | |||||||
|
|
|
||||||||
Total operating expenses | 729 | 178 | 114 | |||||||
|
|
|
||||||||
Loss from operations | (682 | ) | (121 | ) | (44 | ) | ||||
Interest and other (expense), net | (16 | ) | (2 | ) | (1 | ) | ||||
|
|
|
||||||||
Net loss | (698 | ) | (123 | ) | (45 | ) | ||||
Beneficial conversion of convertible debt | (12 | ) | | | ||||||
|
|
|
||||||||
Net loss attributable to common stockholders | (710 | )% | (123 | )% | (45 | )% | ||||
|
|
|
Comparison of Years Ended December 31, 2001, 2002 and 2003
Revenues
Total revenue from our products increased from $2.6 million in 2001, to $12.3 million in 2002 to $22.7 million in 2003. These increases reflect an increased focus on commercializing our products. We released additional products in our MAS and classic fusion product lines during this time period which contributed to the increase in revenues. The increase in revenues in 2002 over 2001 of $9.7 million was attributable to selling our nerve avoidance system disposables for an entire year amounting to $3.8 million and the expansion of our allograft products to offer additional sizes amounting to $5.9 million.
The increase in revenues in 2003 over 2002 of $10.4 million resulted primarily from an additional $6.8 million in sales of our MAS products, principally our NeuroVision disposables, and an additional $3.6 million in sales of our classic fusion products, which included new product releases of additional implants in the second half of the year contributing $253,000. Our NeuroVision product software platform was upgraded during 2003 allowing us to add additional capabilities to our lumbar and cervical applications. During the fourth quarter of 2003, we launched our new minimally invasive spine surgery products under the product name MaXcess. MaXcess sales were not material to our MAS sales for 2003; however, we expect sales of MaXcess disposables and related products will contribute significantly to our future MAS product revenues. We expect our MAS products to contribute greater than 50% of our total revenues in the future.
Cost of Goods Sold
Cost of goods sold increased from $1.4 million in 2001, to $5.3 million in 2002 to $6.8 million in 2003. Cost of goods sold consists of material and overhead costs. The components of overhead cost are the depreciation on our instrument sets and NeuroVision systems, both of which we depreciate over
34
three years, and the reserve for obsolescence. The increases in the cost of goods sold resulted primarily from increased sales of products, the additional depreciation associated with the purchases of additional NeuroVision and instrument sets, and the recording of an increased obsolescence reserve for our allograft inventory. Costs associated with increased sales of products consist largely of increased material costs. An increase in the obsolescence reserve of $900,000 was recorded in 2002 to account for the remaining shelf life on our allograft, and in 2003 an increase in the reserve of $400,000 to recognize the early signs of a market transition from allograft to accepting alternative material. As a percentage of revenue, costs of goods sold decreased from 53% in 2001, to 43% in 2002, to 30% in 2003, primarily as a result of favorable cost trends due to larger volume purchases of materials and increased sales of NeuroVision disposables which have higher margins.
Gross Margin
Gross margin was 47% of revenues in 2001, 57% in 2002 and 70% in 2003. The improvement in 2002 over 2001 was due primarily to favorable cost trends as we began to purchase implants and our initial nerve avoidance system, INS-1, in larger volumes to support our sales growth. The improvement in 2003 over 2002 primarily reflected the introduction of our NeuroVision nerve avoidance platform during the first quarter of 2003. This introduction resulted in shifting the mix of our MAS products to 53% versus 43% of our total revenue for the prior year. We believe, based on selling prices relative to associated materials cost, that the gross margins on our MAS products are significantly higher than the gross margins on our classic fusion products. As a result of increasing sales of our MAS products as compared to our classic fusion products, we have experienced improvements in our gross margin from 47% in 2001 to 70% in 2003.
Nerve avoidance disposable products have been the primary contributor to our MAS revenues. Our related NeuroVision systems are placed at hospitals without charge, provided the hospital orders a minimum monthly quantity of our nerve avoidance disposable products. In addition, we loan NeuroVision systems to hospitals without charge for use in individual procedures, and derive revenue from the sale of disposables or implants used in those procedures.
Our overall gross margin is subject to fluctuation based on the mix between MAS and classic fusion related products.
Research and Development
Research and development expenses totaled $7.3 million in 2001, $6.1 million in 2002 and $6.3 million in 2003. Research and development expenses consist of costs of product research, product development, regulatory and clinical functions and personnel. The decrease in 2002 over 2001 was due primarily to reductions of $642,000 in fees paid to research and development consultants and $374,000 in patent and legal fees, each resulting largely from completed development of a majority of our nerve avoidance systems and a focus on commercializing our products. We also experienced a decrease of $354,000 in headcount costs in 2002 as compared to 2001 related to our decision to outsource manufacturing of our products. These decreases were partially offset by increased expenditures of $289,000 for materials used for product testing.
The increase in research and development expenses in 2003 over 2002 of $203,000 was due primarily to increased headcount cost of $948,000, lab and office costs of $77,000, patent and legal costs of $73,000 and travel costs totaling approximately $78,000. The increases for all of the above categories were attributable to supporting a ramp in our revenues. These costs were offset by a decrease in consulting fees of $973,000 as we transitioned from consultants to employees who were hired to support our released products. We expect research and development expenses to increase as we continue to develop new products to expand our product offerings.
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Sales and Marketing
Sales and marketing expenses totaled $6.9 million in 2001, $10.0 million in 2002 and $12.6 million in 2003. The increase in expenses in 2002 over 2001 primarily reflected larger commissions paid to sales representatives of $3.1 million and shipping costs of $393,000 as a result of increased sales of our products. These increases were offset by a decrease in headcount and consulting costs of $233,000 in 2002. The increase in expenses in 2003 over 2002 was primarily due to larger commissions paid to sales representatives of $2.3 million, increased marketing costs of $267,000, and increased travel costs of $387,000. These increases were offset by a decrease of $293,000 related to our German subsidiary in 2003. We expect sales and marketing expenses to continue to increase in the future as a result of continued growth in our sales infrastructure to support growth in our product sales.
General and Administrative
General and administrative expenses totaled $4.5 million in 2001, $5.6 million in 2002 and $6.2 million in 2003. The increase in expenses in 2002 over 2001 of $1.1 million was due to headcount additions of $606,000 related to incremental support personnel, insurance premium increases of $245,000 related to higher sales, and increased facility costs related to accommodating the head count and inventory space requirements.
The increase in expenses in 2003 over 2002 of $600,000 was primarily due to increased facility and office costs of $123,000 related to the space requirements to accommodate an expanding inventory, increased product liability insurance premiums of $304,000 related to higher revenues, and additional headcount of $257,000 to support a growing customer base.
Interest and Other Expense, Net
Interest and other expenses totaled $416,000 in 2001, $255,000 in 2002 and $144,000 in 2003. The decrease in 2002 over 2001 was due primarily to a one-time charge in 2001 to interest expense of $320,000 for the fair market value of warrants to purchase preferred stock issued as part of a $4.5 million convertible debt offering that was subsequently converted to equity in 2001, and to lower interest rates paid on our outstanding debt. The decrease in 2003 over 2002 was primarily due to lower interest rates paid on our outstanding debt and a gain on the sale of intellectual property totaling $125,000.
Deferred Stock-Based Compensation
We have accounted for options granted to employees and directors in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation , and related interpretations. As such, compensation expense is recorded on stock option grants based on the fair value of the options granted, which is estimated on the date of grant using an option-pricing model and it is recognized on an accelerated basis over the vesting period (typically four years). Deferred stock-based compensation recorded through December 31, 2003, was approximately $771,000, with accumulated amortization of approximately $209,000. The remaining approximately $562,000 will be
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amortized over the vesting periods of the options, generally four years from the date of grant. We expect to record amortization expense for deferred stock-based compensation as follows:
First quarter of 2004 | $ | 110,000 | ||
Second quarter of 2004 | 85,000 | |||
Third quarter of 2004 | 70,000 | |||
Fourth quarter of 2004 | 59,000 | |||
Fiscal year 2005 | 155,000 | |||
Fiscal year 2006 | 69,000 | |||
Fiscal year 2007 | 14,000 | |||
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Total | $ | 562,000 | ||
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We have accounted for stock options granted to non-employees on a fair-value basis in accordance with SFAS No. 123, Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services , and Financial Accounting Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans an Interpretation of APB Opinion No. 15 and 25 . As a result, the non-cash charge to operations for non-employee options with vesting or other performance criteria is affected each reporting period by changes in the fair value of our common stock. Compensation expense for options granted to non-employees amounted to $22,000, $43,000 and $458,000 for the years ended December 31, 2001, 2002 and 2003, respectively. Compensation expense for options granted to non-employees amounted to $573,000 for the period from July 21, 1997, the date of our inception, to December 31, 2003. The amount of compensation expense to be recorded in the future for options granted to non-employees is subject to change each reporting period based upon changes in the fair value of our common stock, estimated volatility and risk free interest rate until the non-employee completes performance under the option agreement.
In 2001, in connection with a convertible debt offering of $4,500,000, we issued warrants to purchase 206,559 shares of Series D convertible preferred stock at $2.53 per share. We determined the fair value of the warrants at the date of issuance, using the Black-Scholes pricing model, with a resulting aggregate fair value of $320,000, which has been recorded as interest expense for the year ended December 31, 2001, as the related debt was converted during 2001. Additionally, after allocating the proceeds, we determined that there was a beneficial conversion feature for the convertible debt offering of $320,000 for the year ended December 31, 2001, which was included in the consolidated statement of operations.
Liquidity and Capital Resources
Since our inception in 1997, we have incurred significant losses and as of December 31, 2003, we had an accumulated deficit of $64.3 million. We have not yet achieved profitability, and anticipate that we will continue to incur net losses for the foreseeable future. We expect that our research and development, sales and marketing and general and administrative expenses will continue to grow and, as a result, we will need to generate significant net sales to achieve profitability. To date, our operations have been funded primarily with proceeds from the sale of preferred stock. Gross proceeds from our preferred stock sales total $74.4 million to date. We also financed our operations, purchases of equipment and leasehold improvements through leases and loans. As of December 31, 2003, we had outstanding balances under loan and lease agreements of $5.0 million. The outstanding balance under the loan agreement was $4.5 million with an interest rate at lenders' prime plus one and one half percent (4 percent at December 31, 2003) with maturities through 2006. The remaining balance of $500,000 is comprised of a capital lease and a note with interest rates ranging from 5.5 to 11.9 percent with maturities through 2005.
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Cash, cash equivalents and short-term investments decreased from $9.7 million at December 31, 2001, to $6.9 million at December 31, 2002, and increased to $9.6 million at December 31, 2003. The decrease in 2002 over 2001 was due primarily to purchases of other assets of $800,000, property and equipment of $1.3 million, cash used in operating activities of $14.0 million and partially offset by net proceeds from the issuance of preferred stock of $14.8 million and the payment of notes payable of $1.2 million. The increase in 2003 over 2002 was due primarily to $9.9 million of proceeds from the issuance of preferred stock in the second quarter of 2003 and an increase in notes payable of $4.7 million, offset by the cash used to fund our 2003 operations of $7.6 million and capital expenditures of $2.8 million.
Net cash used in operating activities decreased from $18.4 million in 2001 to $14.0 million in 2002. The decrease in net cash used in operating activities of $4.4 million was primarily due to increases in cash collected from customers of $10.1 million, the purchase of inventory of $636,000 and the cash paid for operating expenses of $5.1 million. Net cash used in operating activities decreased from $14.0 million in 2002 to $7.6 million in 2003. The decrease of $6.4 million was primarily due to increases in cash collected from our customers of $9.2 million, the purchase of inventory of $3.4 million and the decrease in cash paid for operating expenses of $613,000. The decrease in cash paid for operating expenses was primarily due to our increase in the accounts payable and accrued liabilities of $3.1 million.
Net cash used in investing activities increased from $790,000 million in 2001 to $2.0 million in 2002 and $6.9 million in 2003. The increase of $1.2 million in net cash used in investing activities from 2001 to 2002 related to the purchase of property and equipment of $500,000 and other assets of $700,000 to support our sales growth. The increase in net cash used in investing activities from 2002 to 2003 of $5.0 million was primarily due to purchases of property and equipment of $1.6 million to support our sales growth, the purchase of short term investments of $4.0 million with the proceeds from our preferred stock financing, and the reduction of other assets of $700,000. In 2004 we estimate that our capital expenditures will total $5.0 million and will consist principally of assets to support our revenue growth and the leasehold improvements needed for a new corporate facility.
Net cash provided by financing activities decreased from $27.0 million in 2001 to $13.2 million in 2002, and remained constant at $13.3 million in 2003. The decrease in net cash provided by financing activities from 2001 to 2002 of $13.8 million was due primarily to the sale of $14.8 million of preferred stock in 2002 as compared to $23.0 million in 2001. In 2001 we issued a note payable amounting to $4.5 million and subsequently converted the note into equity in the same year and paid down the notes payable an additional $300,000. Net cash provided by financing activities from 2002 to 2003 remained constant due to borrowings in 2003 of $4.7 million and the sale of preferred stock of $9.9 million versus $14.8 million in the prior year.
In January 2003, we entered into a revised loan and security agreement with our primary lender. This credit facility provides for borrowings of up to $5.0 million and is collateralized by qualified accounts receivable and fixed assets. As of December 31, 2003, we have borrowed $4.5 million under this credit facility. On March 31, 2004, we amended the terms of this credit facility to restructure all our debt arrangements and increase our credit facility to $9.6 million. The interest rate is lender's prime plus one-half of one percent with maturity dates through December 2007. Our revised loan and security agreement includes several restrictive covenants, including requirements that we maintain an unrestricted cash balance of at least $2,500,000, that we maintain a minimum tangible net worth, that we meet certain revenue goals, and that we obtain the consent of our lender prior to entering into any change of control events.
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The following summarizes our long-term contractual obligations as of December 31, 2003 (in thousands) :
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Capital leases | $ | 349 | $ | 326 | $ | 23 | $ | | $ | | |||||
Operating lease | 323 | 323 | | | | ||||||||||
Notes payable | 4,695 | 3,493 | 1,202 | | | ||||||||||
Other contractual obligations(1) | 1,145 | 160 | 315 | 220 | 450 | ||||||||||
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Total | $ | 6,512 | $ | 4,302 | $ | 1,540 | $ | 220 | $ | 450 | |||||
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We believe that our current cash and cash equivalents, excluding the proceeds from this offering, together with our short-term investments, the cash to be generated from expected product sales and our ability to draw down on our secured revolving line of credit, will be sufficient to meet our projected operating requirements for at least the next 12 months. If existing cash, short-term securities and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain an additional credit facility. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, or at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.
Quantitative and Qualitative Disclosure About Market Risk
Our exposure to interest rate risk at December 31, 2003, is related to our investment portfolio and our borrowings. Fixed rate investments and borrowings may have their fair market value adversely impacted from changes in interest rates. Floating rate investments may produce less income than expected if interest rates fall, and floating rate borrowings will lead to additional interest expense if interest rates increase. Due in part to these factors, our future investment income may fall short of expectations due to changes in U.S. interest rates.
We invest our excess cash in debt instruments of the U.S. government and its agencies and in high quality corporate issuers. Due to the short-term nature of these investments, we have assessed that there is no material exposure to interest rate risk arising from our investments.
We have operated mainly in the United States, and all of our sales were made in U.S. dollars in 2001, 2002 and 2003. Accordingly, we have not had any material exposure to foreign currency rate fluctuations.
Income Taxes
Realization of deferred tax assets is dependent upon the uncertainty of the timing and amount of future earnings, if any. Accordingly, full deferred tax asset valuation allowances have been established as of December 31, 2002 and 2003 to reflect these uncertainties.
As of December 31, 2003, we had federal and state net operating loss carryforwards of approximately $57.5 million and $33.6 million, respectively, and federal and state tax credit
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carryforwards of approximately $1.9 million and $1.4 million, respectively. Federal tax credit carryforwards will begin to expire in 2012 unless previously utilized. The state credit carryforwards do not expire. Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code. This annual limitation may result in the expiration of net operating loss and tax credit carryforwards before utilization.
Recently Issued Accounting Standards
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain costs Incurred in a Restructuring)." The scope of SFAS No. 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. As we have not currently entered into exit, disposal or restructure activities, adoption of SFAS No. 146 did not have a material impact on our consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition Disclosurean amendment of FAS 123" (SFAS No. 148). This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We intend to continue to account for stock-based compensation to employees and directors using the intrinsic value method prescribed by APB Opinion No. 25, and related interpretations. We have made certain disclosures required by SFAS No. 148 in the consolidated financial statements for the year ended December 31, 2003. Accordingly, adoption of SFAS No. 148 did not impact our consolidated financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which is effective on January 1, 2004. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The adoption of FIN 46 is not expected to have a material impact on our consolidated results of operations or the financial position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity . SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective the beginning of the first interim period after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on our consolidated financial statements.
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Overview
We are a medical device company focused on the design, development and marketing of products for the surgical treatment of spine disorders. Our product portfolio is focused on applications in the over $2 billion U.S. spine fusion market. This market is expected to grow at an estimated annual rate of 18% through 2005. Our current principal product offering includes a minimally invasive surgical platform that we call maximum access surgery, or MAS, as well as classic fusion products. MAS combines three of our current product offeringsNeuroVision, a proprietary software-driven nerve avoidance system, MaXcess, a split blade-design minimally invasive surgical system and specialized implantsthat collectively minimize soft tissue disruption during spine surgery. We believe our MAS platform provides a unique and comprehensive solution for safe and reproducible minimally disruptive surgical treatment of spine disorders. Our classic fusion portfolio is comprised of a range of products, including spine allografts, which are human bone that has been processed and precision shaped for transplant, and spine implants such as rods, plates and screws that are necessary for a variety of spine surgery procedures. All of our currently marketed products have been cleared by the FDA. NeuroVision has been used in over 15,000 spine surgeries and our implants have been used in over 10,000 fusions.
We believe our MAS platform, including its key components NeuroVision, MaXcess and implants, provides a surgeon with enhanced access to the spine in a manner that affords direct visibility and avoidance of critical nerves. Using our MAS platform, surgeons are able to perform minimally disruptive surgical procedures. In addition, our MAS platform has enabled innovative procedures such as extreme lateral interbody fusion, or XLIF, which have significant benefits over other minimally invasive procedures. All of the procedures facilitated by our MAS platform provide significant benefits, including reduced operating time, trauma and blood loss to the patient and faster overall patient recovery time.
Our Strategy
Our goal is to become a leading provider of creative medical products that provide comprehensive solutions for the surgical treatment of spine disorders. To achieve this objective, we are pursuing the following business strategies:
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platform expansion, synthetic alternatives to allograft implants and other implants to stabilize the spine. We believe that these additional complementary products will allow us to generate more revenue opportunities from each spine surgery procedure while improving patient care.
Market Opportunity
Back pain is the number one cause of healthcare expenditures in the United States, with a direct cost of more than $50.0 billion annually for diagnosis, treatment and rehabilitation. The U.S. market for lumbar and cervical spine fusion, the focus of our business, was estimated to be over $2.0 billion in 2003, and is anticipated to grow to over $2.6 billion by 2005.
We believe that the market for spine surgery procedures will continue to grow because of the following market dynamics:
Spine Anatomy and Disorders
The spine is the core of the human skeleton, and provides a crucial balance between structural support and flexibility. It consists of 29 separate bones called vertebrae that are connected together by connective tissue to permit a normal range of motion. The spinal cord, the body's central nerve
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conduit, is enclosed within the spinal column. Vertebrae are paired into what are called motion segments that move by means of three joints: two facet joints and one spine disc.
The four major categories of spine disorders are degenerative conditions, deformities, trauma and tumors. The largest market and the focus of our business is degenerative conditions of the facet joints and disc space. These conditions can result in instability and pressure on the nerve roots as they exit the spinal column, causing back pain or radiating pain in the arms or legs.
Current Treatments for Spine Disorders
The prescribed treatment for spine disorders depends on the severity and duration of the disorder. Initially, physicians will prescribe non-operative procedures including bed rest, medication, lifestyle modification, exercise, physical therapy, chiropractic care and steroid injections. In most cases, non-operative treatment options are effective; however, many patients require spine surgery. It is estimated that in excess of one million patients undergo spine surgery each year in the United States, and the number of spine surgery procedures is expected to grow to over 1.2 million per year by 2005. The most common spine surgery procedures are: discectomy, the removal of all or part of a damaged disc; laminectomy, the removal of all or part of a lamina, or thin layer of bone, to relieve pinching of the nerve and narrowing of the spinal canal; and fusion, where two or more adjoining vertebrae are fused together to provide stability. All three of these procedures require access to the spine. Traditional open surgical approaches require large incisions to be made in the back so that surgeons can see the spine and surrounding area. Most open procedures are invasive, lengthy and complex, and may result in significant blood loss, extensive dissection of tissue and lengthy hospitalization and rehabilitation.
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Minimally Invasive Surgical Procedures
The benefits of minimally invasive surgical, or MIS, procedures in other areas of orthopedics have significantly contributed to the strong and growing demand for minimally invasive spine surgery. Surgeons and hospitals seek spine procedures that result in fewer operative complications, shorter surgery times and decreased hospitalization. At the same time, patients seek procedures that cause less trauma and allow for faster recovery times. Despite these benefits, the rate of adoption of minimally invasive surgical procedures has been slow with respect to the spine.
We believe the two principal factors contributing to spine surgeons' slow adoption of minimally invasive alternatives are: (1) the limited or lack of access and visibility of the surgical anatomy, as well as, (2) the associated complex instruments that have been required to perform these procedures. Most minimally invasive systems do not allow the surgeon to directly view the spine and provide only restrictive visualization through a camera system or endoscope, while also requiring the use of complex surgical techniques. In addition, most minimally invasive systems use complex or highly customized surgical instruments that require special training and the completion of a large number of trial cases before the surgeon becomes proficient using the system.
Although a number of minimally invasive surgical approaches exist for spine surgery, virtually all have failed to gain widespread acceptance to date. The three primary minimally invasive surgical approaches are laparoscopic anterior lumbar interbody fusion, or Lap ALIF; MIS posterior lumbar interbody fusion, or MIS PLIF; and MIS transforaminal lumbar interbody fusion, or MIS TLIF. In a Lap ALIF, the surgeon typically accesses the spine from an entry point on the patient's abdomen. This approach has not been widely accepted in part due to the need for a general surgeon to assist the spine surgeon in maneuvering past vascular structures and critical organs. In an MIS PLIF, the surgeon typically accesses the spine from an entry point on the patient's back. MIS TLIF is similar to MIS PLIF except that the surgeon retracts the back muscles to the side in order to avoid the spinal canal and nerves. MIS PLIF and MIS TLIF have not been widely accepted because of the difficulty in avoiding critical nerves.
The NuVasive Solution
Maximum Access Surgery (MAS)
Our MAS platform allows surgeons to perform a wide range of minimally disruptive procedures, while overcoming the shortcomings of alternative minimally invasive surgical techniques. We believe our products improve clinical results, and have both the potential to expand the number of minimally disruptive procedures performed and become a standard of care in spine fusion surgery.
Our MAS platform combines NeuroVision, MaXcess, and complementary implants. NeuroVision enables surgeons to avoid neural anatomy while MaXcess affords direct customized access to the spine for implant delivery. MaXcess also allows surgeons to use well established traditional instruments in a minimally disruptive and less traumatic manner. We also offer a variety of implants that enable sufficient structural support while conforming to the anatomical requirements of the patient.
Our products facilitate primary minimally invasive spine surgery procedures and enable innovative procedures such as an XLIF. The XLIF procedure allows surgeons to access the spine from the side rather than from the front or back, which results in less operating time and reduced patient trauma and blood loss. Notwithstanding these benefits, XLIFs have historically been viewed by most surgeons as too difficult to perform due to the number of critical nerves that must be avoided.
We believe procedures enabled by our MAS platform provide significant benefits, including reduced surgery times, reduced hospital stays, and less trauma and blood loss for the patient, resulting
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in faster overall patient recovery times. According to clinicians involved with one or more of the first 300 MAS procedures performed with our products, our MAS platform provides the following benefits:
MASNeuroVision
NeuroVision utilizes electromyography, or EMG, and proprietary software algorithms and graphical user interfaces to provide surgeons with an enhanced nerve avoidance system. Our system functions by monitoring changes in electrical signals across muscle groups, which allows us to detect underlying changes in nerve activity. We connect the instruments that surgeons use to a computer system that provides real time feedback during surgery. Our system analyzes and then translates complex neurophysiologic data into simple, useful information to assist the surgeon's clinical decision making process. For example, during a pedicle screw test, in which the integrity of an implant is tested, if the insertion of a screw results in a breach of the bone, a red light and corresponding numeric value will result so that the surgeon may reposition the implant to avoid potential nerve impingement or irritation. If no breach of the bone occurs, a green light and corresponding numeric value will result. The initial application of NeuroVision, Screw Test with INS-1, was cleared by the FDA in November 2000 and commercially launched in 2001. NeuroVision has been used in over 15,000 spine surgeries to date.
Surgeons can dynamically link familiar surgical instruments to NeuroVision, thus creating an interactive set of instruments that enable the safe navigation of neural anatomy. NeuroVision can be operated independently by the surgeon eliminating the need for additional technical support. The system's proprietary software and easy to use graphical user interface enables the surgeon to make critical decisions in real time resulting in safer and faster procedures with the potential for improved patient outcomes.
MASMaXcess
Our MaXcess system consists of instrumentation and specialized implants that provide maximum access with minimal soft tissue disruption. MaXcess has a split blade design consisting of three blades that can be positioned to build the surgical exposure in the shape and size specific to the surgical requirements rather than the fixed tube design of other minimally invasive surgical systems. MaXcess' split blade design also provides expanded access to the spine, which allows surgeons to perform surgical procedures using instruments that are similar to those used in open procedures but with a significantly smaller incision. The ability to use familiar instruments reduces the learning curve and facilitates the adoption of our products. Our system's illumination of the operative corridor aids in providing surgeons with direct visualization of the patient's anatomy, without the need for additional technology or other special equipment. Our MaXcess system was commercially launched in October 2003.
MaXcess allows surgeons to perform a wide range of conventional spine procedures through a minimally disruptive approach. MaXcess enables multiple applications designed for each of the
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following surgical approaches: TLIF, XLIF and decompression, which is removal of a portion of bone over the nerve root or disc from under the nerve root to relieve pinching of the nerve. We believe that MaXcess, in combination with NeuroVision and our specialized implants, will allow more surgeons to use innovative procedures that offer important clinical benefits. This includes the new and innovative lateral procedure, XLIF. The XLIF procedure significantly reduces the time of the surgery and also the patient tissue trauma and blood loss, resulting in faster overall patient recovery times. Previously, lateral surgery could only be performed by a handful of very highly skilled surgeons that needed to be accompanied by a general surgeon. Now, with our MAS solution, surgeons can successfully avoid critical nerves and access the spine with minimal soft tissue disruption.
We believe MaXcess provides the following key benefits compared to other existing minimally invasive surgical systems:
MASSpecialized Implants
We have a number of implants designed to be used with our MAS platform. These implants are utilized for interbody disc height restoration for fusion, and stabilization of the posterior part of the spine. These implants include precision-machined lumbar allograft and related instrumentation for TLIF and XLIF surgical procedures. Our implants are available in a variety of heights, widths and lengths to accommodate the anatomical requirements of the patient and the particular fusion procedure. Our implants are designed for insertion into the smallest possible space while maximizing surface area contact for fusion.
Our fixation systems, such as rods, plates, and screw implants, have been uniquely designed to be delivered through our MaXcess system to provide stabilization of the posterior spine. These systems enable minimally disruptive placement of implants and are intended to reduce operating time and patient morbidity.
Our implants can also be used in procedures not employing our MAS platform.
Classic Fusion
We have developed a suite of traditional spine surgery products, which we refer to as classic fusion, including a line of precision-machined cervical and PLIF allograft implants, a titanium surgical mesh system, and related instrumentation. Allograft implant tissue is recovered from deceased human donors, which is processed into specified sizes and shapes and sterilized for implantation. Unlike other suppliers of allograft implants, our proprietary packaging process allows us to provide a ready-to-use structural graft eliminating the need for refrigeration and re-hydration. We package all of our allograft implants in a sterile saline solution. In addition, our allograft packaging and instrumentation are color-coded to assist the surgeon in selecting the proper size instrument for use with the chosen allograft implant.
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Our classic fusion product offerings consist of the following:
While NeuroVision or MaXcess typically are the first of our products that a surgeon adopts, the classic fusion product offerings expand the revenue opportunity available to us in each procedure. In addition to these existing products, we are also developing a synthetic alternative to bone allograft and other implants used to stabilize the spine.
Products Under Development
MAS Platform Expansion
We are developing additional complementary implant and instrument devices to expand our MAS platform, including a novel pedicle screw that will enable easier minimal access insertion and application. Surgeon directed design of this system has helped create a versatile product that excels at both minimal access and open applications. We will also be releasing a MaXcess Cervical System that brings all of the benefits of minimally disruptive surgery to interbody and plating procedures of the cervical spine. As with all of our implant and instrument development initiatives, it is important to create innovative products that assist the surgeon in providing better minimal access alternatives that enable a quicker recovery process for the patient. This goal has driven us to further development of a new MaXcess retraction system that will offer expanded capabilities that incorporate new, time-saving and increased patient safety features.
To further our desire for patient safety, we are continually improving the features and software capabilities of our NeuroVision neural avoidance system. This unique product remains the only surgeon directed nerve avoidance tool in the market. We have developed, but have not yet released, an enhancement to NeuroVision that will allow surgeons to continually monitor the status of retracted nerves during spine surgery. We believe that our continued improvements to our product platform and our development of new surgeon directed enhancements will ensure our continued leadership in this area.
Synthetic Allograft Alternative
We are also developing a number of creative solutions for structural allograft alternative. One novel polymer technology being surgically used today is polyaryletheretherketone, a high performance thermopolymer, or PEEK. We believe PEEK polymer is ideally suited for medical device applications because it exhibits a superior combination of biocompatibility, imaging versatility, and biomechanical load transfer and strength. This synthetic alternative is also attractive because the technology enables greater versatility for shapes and sizes of implants. If a 510(k) clearance cannot be achieved, PEEK material implants will require a premarket approval pathway with clinical trials for certain spine indications.
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Motion PreservationTotal Disc Replacement Products
We are developing proprietary total lumbar disc replacement products, both lateral and anterior, and cervical disc replacement products, anterior only. These products are intended to allow surgeons to address a patient's pain and dysfunction while maintaining normal range of motion and avoiding future adjacent level degeneration that often occurs after spine fusion. We believe that the ability to insert a lumbar total disc replacement from a lateral approach in a MAS procedure will be unique to us, but will require PMA rather than 510(k) clearance. Our total disc replacement products are currently undergoing biomechanical testing. We have filed three patent applications on these products, two in the United States and one internationally. We intend to complete our pre-clinical trials and commence human pilot studies in 2005.
Motion PreservationNucleus Replacement Products
We have acquired patents covering biomaterials that may be used as injectable disc nucleus replacement materials. We believe these products will allow surgeons to address a patient's pain, and restore stability and motion to the disc without fusion or the need for total disc replacement. We expect to complete our pre-clinical trials and commence human pilot studies in 2005.
The U.S. market for total disc and nucleus replacement products is expected to be as high as $750.0 million by 2008.
We expect that our total disc and nucleus replacement products will require premarket approval, which will require considerably more data and FDA review time than the 510(k) clearance process. Obtaining market approval is a process that may require lengthy clinical trials and therefore, even if products are successfully developed, they will not be commercially available for a number of years.
Research and Development
Our research and development efforts are primarily focused in the near term on developing further enhancements to our existing products as well as developing our total disc and nucleus replacement products. Our research and development staff consists of 23 people, including one who holds a Ph.D. degree and three who hold other advanced degrees. Our research and development group has extensive experience in developing products to treat spine pathology, and continues to work closely with our clinical advisors and spine surgeon customers to design products that are intended to improve patient outcomes, simplify techniques, shorten procedures, reduce hospitalization and rehabilitation times and, as a result, reduce costs.
Sales and Marketing
Our sales team is led by our sales vice president and seven regional directors who supervise over 35 independent sales agencies with over 160 independent sales representatives. We invoice products directly to hospitals, generally at list prices, and pay commissions to our sales agencies and representatives. We select our sales agencies and representatives based on their expertise in spine surgery medical device sales, reputation within the surgeon community and sales coverage. Each sales agency and representative is assigned a sales territory for some or all of our products and is subject to periodic performance reviews. These relationships typically provide the representative the exclusive right to sell our products within the sales territory. As our products become more broadly accepted in the market, we intend to convert some of these relationships into exclusive sales agency arrangements whereby the agent would sell only our products. We also require each sales agency and representative to attend periodic sales and product training programs. We also market our products at various industry conferences and through industry organized surgical training courses. In addition, we believe that as patients begin to realize the benefits of our technology, they will accelerate the demand for our products. Substantially all of our products are distributed within the United States.
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As we launch new products and increase our marketing efforts with respect to existing products, we intend to expand the reach of our marketing and sales force. We plan to accomplish this by increasing the number of outside sales agencies and representatives. The establishment and development of a broader sales force will be expensive and time consuming. Because of the intense competition for their services, we may be unable to secure additional qualified sales agencies and representatives. Further, we may not be able to enter into agreements with them on commercially reasonable terms, if at all. Even if we do enter into agreements with additional sales agencies or contract sales organizations, these parties may not commit the necessary resources to effectively market and sell our products or ultimately be successful in selling our products. Promotion and sales of medical devices are also highly regulated not only by the FDA, but also by the Federal Trade Commission, and are subject to federal and state fraud and abuse enforcement activities.
Surgeon Training and Education
We devote significant resources to training and educating surgeons on the specialized skills involved in the proper use of our instruments and implants. We believe that the most effective way to introduce and build market demand for our products is by training leading spine surgeons in the use of our products. We maintain a state-of-the-art cadaver operating theater and training facility at our corporate headquarters to help drive adoption of our products. As of December 31, 2003, we had trained approximately 100 spine surgeons in the use of our products. We intend to continue to focus on training leading spine surgeons in the United States. We believe that a number of these surgeons will become advocates for our products and will be instrumental in generating valuable clinical data and demonstrating the benefits of our products to the medical community.
We believe our training methods are both effective for educating surgeons on the use of our products and conducted in compliance with FDA and other applicable regulations. However, if the FDA determines that our training constitutes promotion of an unapproved use, they could request that we modify our training or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalty.
Manufacturing and Supply
We rely on third parties for the manufacture of our products and their components and servicing, and we do not currently maintain alternative manufacturing sources for NeuroVision, MaXcess or any other finished goods products. Our outsourcing strategy is targeted at companies that meet FDA, International Organization for Standardization (ISO), and quality standards supported by internal policies and procedures. Supplier performance is maintained and managed through a corrective action program ensuring all product requirements are met or exceeded. We believe these manufacturing relationships minimize our capital investment, help control costs, and allow us to compete with larger volume manufacturers of spine surgery products.
Following the receipt of products or product components from our third-party manufacturers, we conduct inspection and packaging and labeling, as needed, at our headquarters facility. Under our existing contracts, we reserve the exclusive right to inspect and assure conformance of each product and product component to our specifications. We may consider manufacturing certain products or product components internally, if and when demand or quality requirements make it appropriate to do so.
We are currently working with our third-party manufacturers to increase manufacturing capabilities as we increase our commercialization efforts. Manufacturers often experience difficulties in scaling-up production, including problems with production yields and quality control and assurance. If our third-party manufacturers are unable to manufacture our products to keep up with demand, we would not meet expectations for growth of our business.
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We seek to obtain inventory just-in-time to satisfy our customer obligations. This strategy minimizes backlogs, while increasing inventory turns and maximizing cash flow. We experienced negligible backlogs in 2003, representing less than 1% of our total revenues. Our pool of loaner equipment, which includes NeuroVision systems that we loan to or place with hospitals, significantly increased in 2003 as we expanded our distribution channels and increased market penetration of our products.
In July 2002, we entered into a contract manufacturing agreement with Peak Industries, Inc., or Peak, as our exclusive supplier of NeuroVision systems and handpieces. The initial term of this agreement has expired. Both parties have continued to perform under the terms of the agreement; however, Peak could cease manufacturing NeuroVision for us at any time. Alternative suppliers for manufacturing have been identified. We believe that the start-up time to establish a new supply of NeuroVision would be approximately 16 to 20 weeks.
We currently rely on Tissue Banks International, Inc. and Intermountain Tissue Center as our only suppliers of allograft implants. Each of these agreements remain in effect through 2004, and then automatically renew for successive one year terms unless otherwise terminated by either party in accordance with the terms of the respective agreement. Because implants are made from human tissue, maintaining a steady supply is difficult.
We and our third-party manufacturers are subject to the FDA's quality system regulations, state regulations, such as the regulations promulgated by the California Department of Health Services, and regulations promulgated by the European Union. For tissue products, we are FDA registered and licensed in the States of California, New York and Florida, the only states that require licenses. For our implants and instruments, we are FDA registered, California licensed, CE marked and ISO certified. CE is an abbreviation for European Compliance. Our facility and the facilities of our third-party manufacturers are subject to periodic unannounced inspections by regulatory authorities, and may undergo compliance inspections conducted by the FDA and corresponding state agencies. For example, we experienced an FDA inspection in August 2003 regarding our allograft implant business. During its inspection, the FDA issued a Form FDA 483, which is a notice of inspection observations. We have taken what we believe to be sufficient corrective actions. However, the FDA may impose additional enforcement, inspections or audits at any time.
Intellectual Property
We rely on a combination of patent, trademark, copyright, trade secret and other intellectual property laws, nondisclosure agreements and other measures to protect our intellectual property rights. We believe that in order to have a competitive advantage, we must develop and maintain the proprietary aspects of our technologies. We require our employees, consultants and advisors to execute confidentiality agreements in connection with their employment, consulting or advisory relationships with us. We also require our employees, consultants and advisors who we expect to work on our products to agree to disclose and assign to us all inventions conceived during the work day, using our property or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.
Patents
As of February 1, 2004, we had 25 issued U.S. patents and 83 pending patent applications, including 50 U.S. applications, seven international applications and 26 foreign national applications. The issued and pending patents cover, among other things:
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Our issued patents begin to expire in 2018. We have multiple patents covering unique aspects and improvements for many of our products. We do not believe that the expiration of any single patent is likely to significantly affect our intellectual property position.
We have undertaken to protect our neurophysiology platform, including NeuroVision, through a comprehensive strategy covering various important aspects of our neurophysiology-enabled instrumentation, including, screw test, nerve root retraction, surgical access and related methodology. Our NeuroVision patent portfolio includes three issued U.S. patents, 18 U.S. patent applications, including nine U.S. utility, eight U.S. provisional, and one U.S. design, four international patent applications, and 16 foreign national applications on this instrumentation.
The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. Patent litigation can involve complex factual and legal questions and its outcome is uncertain. Any claim relating to infringement of patents that is successfully asserted against us may require us to pay substantial damages. Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. Our success will also depend in part on our not infringing patents issued to others, including our competitors and potential competitors. If our products are found to infringe the patents of others, our development, manufacture and sale of such potential products could be severely restricted or prohibited. In addition, our competitors may independently develop similar technologies. Because of the importance of our patent portfolio to our business, we may lose market share to our competitors if we fail to protect our intellectual property rights.
As the number of entrants into our market increases, the possibility of a patent infringement claim against us grows. While we make an effort to ensure that our products do not infringe other parties' patents and proprietary rights, our products and methods may be covered by U.S. patents held by our competitors. In addition, our competitors may assert that future products we may market infringe their patents.
A patent infringement suit brought against us or any strategic partners or licensees may force us or any strategic partners or licensees to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a third party's intellectual property, unless that party grants us or any strategic partners or licensees rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if any strategic partners, licensees or we were able to obtain rights to the third party's intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business.
Trademarks
We have 28 trademark registrations, both domestic and foreign, including the following marks: NuVasive, NeuroVision, Creative Spine Technology, XLIF, INS-1, Spine Evolution Nucleus and SEN. We have ten trademark applications pending, both domestic and foreign, for the following marks:
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Neurophysiologic Guidance, Absolute Responsiveness, InStim, Polar Guidance, Triad, MAS and MaXcess.
Competition
We believe that the principal competitive factors in our markets include:
We are aware of a number of major medical device companies that have developed or plan to develop products for minimally invasive spine surgery in each of our current and future product categories.
Our currently marketed products are, and any future products we commercialize will be, subject to intense competition. Many of our competitors and potential competitors have substantially greater financial, technical and marketing resources than we do, and they may succeed in developing products that would render our products obsolete or noncompetitive. In addition, many of these competitors have significantly greater operating history and reputations than we do in their respective fields. Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner, receive adequate reimbursement and are safer, less invasive and less expensive than alternatives available for the same purpose. Because of the size of the potential market, we anticipate that companies will dedicate significant resources to developing competing products. Below are our primary competitors grouped by our product categories.
MAS Platform
Our NeuroVision system competes with the conventional nerve monitoring systems offered by Nicolet Biomedical and Axon Systems. We believe our system competes favorably with Nicolet's and Axon's systems on both price and ease of use for the spine surgeon. In addition, neither Nicolet's nor Axon's systems were designed to support surgeon directed applications. Several companies offer products that compete with our MaXcess system and implants including competitive offerings by DePuy Spine, Inc., a Johnson & Johnson company, and Medtronic Sofamor Danek.
Classic Fusion
Many companies compete in the fusion product market and competition is intense. We believe that our most significant competitors are Medtronic Sofamor Danek, DePuy Spine and Synthes-Stratec, Inc., each of which has substantially greater sales and financial resources than we do. Medtronic Sofamor Danek, in particular, has a broad classic fusion product line.
Products Under Development
We believe that DePuy Spine, Synthes-Stratec and Medtronic Sofamor Danek are currently developing total disc and nucleus replacement products. We are also aware of several companies that supply allograft implants and companies that are developing synthetic alternatives to allograft implants.
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Government Regulation
Our products are medical devices subject to extensive regulation by the FDA and other regulatory bodies. FDA regulations govern, among other things, the following activities that we or our partners perform and will continue to perform:
FDA's Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either prior 510(k) clearance or prior premarket approval from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risk are placed in either class I or II, which requires the manufacturer to submit to the FDA a premarket notification requesting permission for commercial distribution. This process is known as 510(k) clearance. Some low risk devices are exempt from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device are placed in class III, requiring premarket approval. Both premarket clearance and premarket approval applications are subject to the payment of user fees, paid at the time of submission for FDA review.
510(k) Clearance Pathway
To obtain 510(k) clearance, we must submit a premarket notification demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of premarket approval applications. The FDA's 510(k) clearance pathway usually takes from four to twelve months from the date the application is completed, but it can take significantly longer.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new 510(k) clearance or could require premarket approval. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer's determination. If the FDA disagrees with a manufacturer's determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or premarket approval is obtained. If the FDA requires us to seek 510(k) clearance or premarket approval for any modifications to a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain this clearance or approval. Also, in these circumstances, we may be subject to significant regulatory fines or penalties. We have made and plan to continue to make additional product enhancements to our NeuroVision system that we believe do not require new 510(k) clearances.
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Premarket Approval Pathway
A premarket approval application must be submitted if the device cannot be cleared through the 510(k) process. A premarket approval application must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA's satisfaction the safety and effectiveness of the device for its intended use.
After a premarket approval application is complete, the FDA begins an in-depth review of the submitted information, which generally takes between one and three years, but may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with quality system regulations. New premarket approval applications or premarket approval application supplements are required for significant modifications to the manufacturing process, labeling and design of a device that is approved through the premarket approval process. Premarket approval supplements often require submission of the same type of information as a premarket approval application, except that the supplement is limited to information needed to support any changes from the device covered by the original premarket approval application, and may not require as extensive clinical data or the convening of an advisory panel.
Clinical Trials
A clinical trial is almost always required to support a premarket approval application and is sometimes required for a 510(k) premarket notification. These trials generally require submission of an application for an investigational device exemption to the FDA. The investigational device exemption application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The investigational device exemption application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for more abbreviated investigational device exemption requirements. Clinical trials for a significant risk device may begin once the investigational device exemption application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. Future clinical trials of our motion preservation designs and interbody implants will likely require that we obtain an investigational device exemption from the FDA prior to commencing clinical trials. Our clinical trials must be conducted in accordance with FDA regulations and federal regulations concerning human subject protection and healthcare privacy. The results of our clinical testing may not support or may not be sufficient to obtain approval of our product.
Pervasive and Continuing FDA Regulation
After a device is placed on the market, numerous regulatory requirements apply. These include:
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Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
We are subject to unannounced inspections by the FDA and the Food and Drug Branch of the California Department of Health Services, and these inspections may include the manufacturing facilities of our subcontractors.
International
International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ.
The primary regulatory environment in Europe is that of the European Union, which consists of 15 countries encompassing most of the major countries in Europe. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling, and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear CE conformity marking, indicating that the device conforms with the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a "Notified Body." This third-party assessment may consist of an audit of the manufacturer's quality system and specific testing of the manufacturer's product. An assessment by a Notified Body in one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union. In 2001, we were certified by TUV Product Service, a Notified Body, under the European Union Medical Device Directive allowing the CE conformity marking to be applied.
Third-Party Reimbursement
We expect that sales volumes and prices of our products will continue to be dependent in large part on the availability of reimbursement from third-party payors. Such payors include governmental programs, for example, Medicare and Medicaid, private insurance plans and managed care programs. These third-party payors may deny reimbursement if they determine that a device used in a procedure was not used in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication. Also, third-party payors are increasingly challenging the prices charged for medical products and services. In international markets, reimbursement and healthcare payment systems vary significantly by country and many countries have instituted price ceilings on specific product lines. There can be no assurance that our products will be considered cost-effective by third-party payors, that reimbursement will be available or, if available, that the third-party payors' reimbursement policies will not adversely affect our ability to sell our products profitably.
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Particularly in the United States, third-party payors carefully review, and increasingly challenge, the prices charged for procedures and medical products. In addition, an increasing percentage of insured individuals are receiving their medical care through managed care programs, which monitor and often require pre-approval of the services that a member will receive. Many managed care programs are paying their providers on a capitated basis, which puts the providers at financial risk for the services provided to their patients by paying them a predetermined payment per member per month. The percentage of individuals covered by managed care programs is expected to grow in the United States over the next decade.
We believe that the overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry to reduce the costs of products and services. There can be no assurance that third-party reimbursement and coverage will be available or adequate, or that future legislation, regulation, or reimbursement policies of third-party payors will not adversely affect the demand for our products or our ability to sell these products on a profitable basis. The unavailability or inadequacy of third-party payor coverage or reimbursement could have a material adverse effect on our business, operating results and financial condition.
Clinical Advisory Board
We have established a clinical advisory board led by Randal Betz, M.D. of Philadelphia, Pennsylvania that we call the Spine Evolution Nucleus, or SEN. This group consists of elite orthopedic and neurological spine surgeon thought leaders. The SEN consults with us on long-term product planning, research, development and marketing initiatives. Significant pioneering clinical developments have been contributed to us by Luiz Pimenta, M.D. from Sao Paulo, Brazil and other members of the SEN.
Employees
As of January 1, 2004, we had 76 employees, of which 13 were employed in operations, 21 in research and development, five in clinical and regulatory, 11 in general and administrative and 26 in sales and marketing. None of our employees is represented by a labor union and we believe our employee relations are good.
Facilities
Our operations are headquartered in an approximately 20,000 square foot facility in San Diego, California that is leased to us until November 30, 2004. We believe that our existing facility is adequate for our current needs. We are searching for a new facility of at least 40,000 square feet to support our anticipated expansion.
Legal Proceedings
We, certain of our officers and one of our directors are currently involved in two lawsuits against Medtronic, Inc. and its spine subsidiary, Medtronic Sofamor Danek. On March 13, 2001, Medtronic initiated a civil action against us in the Circuit Court of Shelby County, in Memphis, Tennessee, claiming that we had interfered with Medtronic's contracts (including alleged non-competition agreements and proprietary information and confidentiality agreements) by employing three former Medtronic employees: R. Lewis Bennett, our director and former vice president, Keith Valentine, our executive vice president, and Pat Miles, our vice president, marketing. Medtronic sought, among other relief, an injunction preventing us from employing these individuals for a period of one to two years.
In response to the Medtronic lawsuit against us, and because of its potential impact on their livelihoods, Messrs. Bennett, Valentine and Miles, who were not named in the Tennessee suit, filed an action against Medtronic on April 13, 2001, in the United States District Court for the Southern
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District of California, seeking a judicial declaration that Medtronic's non-compete agreements were void under California law, and claiming that Medtronic's efforts to enforce them within California violated the state's unfair competition law. We are not a party in the California action, but were indemnifying Messrs. Bennett, Valentine and Miles for their legal expenses incurred, until the Tennessee Court issued an injunction preventing further indemnification. Prior to that injunction, we made indemnification payments on behalf of Messrs. Bennett, Valentine and Miles in an aggregate amount of approximately $468,000.
Each of these lawsuits remains in the discovery phase, and may proceed for an extended period of time. Although the outcome of the lawsuits cannot be determined with certainty, we believe that we acted within the relevant law, which we believe to be the law of California, when we hired Messrs. Bennett, Valentine and Miles, two of whom were California residents, to work in our California facility. Because we did not violate California law when these individuals were hired, we intend to continue to vigorously defend ourselves against Medtronic's claims and pursue our claims against Medtronic.
The lawsuits have resulted in significant expenses and are a diversion of management's time and other resources. If Medtronic successfully asserts its claims against us, including claims that we encouraged or allowed individuals to bring with them or to use confidential documents or information belonging to Medtronic, our operations could be significantly impacted, especially to the extent that it affects our ability to retain the services of Messrs. Bennett, Valentine and Miles in any meaningful capacity.
Other than the immediately preceding discussion, we are not currently a party to any material legal proceedings.
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Executive Officers, Significant Employees, and Directors
Set forth below are the name, age, position, and a brief account of the business experience of each of our executive officers, significant employees and directors as of January 31, 2004.
Name
|
Age
|
Position
|
||
---|---|---|---|---|
Alexis V. Lukianov | 48 | President, Chief Executive Officer, and Chairman of the Board | ||
Kevin C. O'Boyle | 48 | Vice President, Finance and Chief Financial Officer | ||
Keith Valentine | 36 | Executive Vice President | ||
G. Rogan Fry | 53 | Senior Vice President, Corporate Development | ||
Patrick Miles | 38 | Vice President, Marketing | ||
James J. Skinner | 42 | Vice President, Sales | ||
G. Bryan Cornwall, Ph.D., P.Eng. | 39 | Vice President, Research and Development | ||
Jonathan D. Spangler | 36 | Chief Patent Counsel | ||
R. Lewis Bennett, Sr. | 77 | Director | ||
Jack R. Blair(1)(3) | 61 | Director | ||
James C. Blair, Ph.D.(2)(3) | 64 | Director | ||
Lesley H. Howe(1) | 59 | Director | ||
Joseph S. Lacob(2)(3) | 48 | Director | ||
Arda M. Minocherhomjee, Ph.D.(1)(2) | 50 | Director |
Alexis V. Lukianov has served as our President, Chief Executive Officer, and as one of our directors since July 1999, and as Chairman of our board of directors since February 2004. Mr. Lukianov has over 20 years of experience in the orthopedic industry with 15 years in senior management. From April 1996 to April 1997, Mr. Lukianov was a founder of and served as Chairman of the Board and Chief Executive Officer of BackCare Group, Inc., a spine physician practice management company. From January 1990 to October 1995, Mr. Lukianov held various positions with Sofamor Danek, Inc., a developer and manufacturer of medical devices to treat disorders of the cranium and spine, and a subsidiary of Medtronic, Inc., a publicly traded medical technology company, and various of its predecessor entities, including as their Vice President, Marketing, Senior Vice President, Sales and Marketing, President and Executive Vice President, Global Corporate Development.
Kevin C. O'Boyle has served as our Chief Financial Officer since January 2003. From December 1996 to December 2002, Mr. O'Boyle served in various positions at ChromaVision Medical Systems, Inc., a publicly traded medical device firm specializing in the oncology market, including as its Chief Financial Officer and Chief Operating Officer. From December 1989 to November 1996, Mr. O'Boyle held various positions with Albert Fisher North America, Inc., a $1.0 billion publicly traded international food company, including Chief Financial Officer and Senior Vice President of Operations. Mr. O'Boyle is a CPA and received a B.S. in Accounting from the Rochester Institute of Technology and successfully completed the Executive Management Program at the University of California at Los Angeles John E. Anderson Graduate Business School.
Keith Valentine has served as our Executive Vice President since January 2002. Prior to that, he served as our Vice President of Marketing from January 2001 to January 2002. From January 2000 to
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December 2000, Mr. Valentine served as Vice President of Marketing at ORATEC Interventions, Inc., a medical device company which was acquired by Smith & Nephew plc, also a medical device company, in 2002. From January 1992 to January 2000, Mr. Valentine served in various capacities at Medtronic Sofamor Danek, including Vice President of Marketing for the Rods Division and Group Director for the BMP Biologics program, the Interbody Sales Development effort and International Sales and Marketing. Mr. Valentine received a B.B.A. in Management and Biomedical Sciences from Western Michigan University.
G. Rogan Fry has held various executive positions with us since March 2000, including serving as our Senior Vice President, Corporate Development, Vice President, International Sales and Marketing and Vice President, Sales and Marketing. From August 1999 to March 2000, he served as a sales and marketing consultant to us and various other medical device companies with Senior Associates, a consulting firm. From August 1997 to August 1999, Mr. Fry provided consulting services to various medical device companies with CrossBorder Management, a consulting firm. From June 1996 to July 1997, Mr. Fry served as the President and Chief Operating Officer of BackCare Group, a spine physician practice management company. Mr. Fry received a B.S. in Business Administration from The Citadel and an M.B.A. from the University of Southern Mississippi.
Patrick Miles has served as our Vice President, Marketing since January 2001. From April 2000 to January 2001, Mr. Miles served as Director of Marketing for ORATEC Interventions, Inc., a medical device company. From June 1997 to March 2000, he served as Director of Marketing for Minimally Invasive Systems and Cervical Spine Systems for Medtronic Sofamor Danek. Mr. Miles received a B.S. in Finance from Mercer University.
James J. Skinner has served as our Vice President, Sales since January 2004. From August 2002 to December 2003, he served as Vice President of Sales for Surgicon, Inc., a medical device manufacturer. From November 2001 to July 2002, he served as Senior Director, Neurosurgery Applications at Stereotaxis, Inc., a medical technology company. From 1994 to April 2001, Mr. Skinner served in various capacities at Medtronic Sofamor Danek, including as a Regional Sales Director for Spinal Implants and Group Director of Sales of Surgical Navigation Technologies. Mr. Skinner received a B.S. in Biology from Northeastern Illinois University.
G. Bryan Cornwall, Ph.D., P.Eng. has served as our Vice President, Research and Development since January 2004. He also served in various capacities with us from April 1999 to February 2000, including as a Manager of Research and as a Project Engineer. Prior to re-joining us, from February 2000 to January 2004, Dr. Cornwall served in various capacities at MacroPore Biosurgery, Inc., a developer and manufacturer of medical devices and therapies, including as its Vice President of Research & Technology and as a Director of Research. From February 1998 to April 1999, Dr. Cornwall served as Senior Product Engineer at DePuy ACE, Inc., a designer and manufacturer of orthopedic trauma devices and a subsidiary of Johnson & Johnson Corporation, a manufacturer of healthcare and hygiene products. Dr. Cornwall received a B.S. in Mechanical Engineering, a Masters of Applied Science in Material Science and a Ph.D. in Mechanical Engineering specializing in Orthopaedic Biomechanics from Queen's University, Ontario, Canada.
Jonathan D. Spangler has served as our Chief Patent Counsel and Group Director of Intellectual Property since September 2001. From August 1999 to August 2001, he served as Chief Patent Counsel for A-Med Systems, Inc., a privately held medical technology company. From September 1997 to July 1999, Mr. Spangler practiced law at the law firm of Arnold White & Durkee, specializing in patent and trade secret litigation involving medical devices. From June 1995 to September 1997, Mr. Spangler practiced with the law firm of Haugen & Nikolai, specializing in patent prosecution involving medical devices. Mr. Spangler also worked at the U.S. Patent and Trademark Office as an entry level examiner. Mr. Spangler is licensed to practice law in the States of California and Minnesota and before the U.S.
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Patent and Trademark Office. Mr. Spangler received a B.S. degree in Biomedical Engineering from Marquette University and a J.D. from the University of Dayton School of Law.
R. Lewis Bennett, Sr. has served as a member of our board of directors since August 2000. From November 2000 to June 2003, Mr. Bennett also served as our Executive Vice President. Prior to that, from August 2000 to November 2000, we retained Mr. Bennett to consult with us regarding sales, marketing and distribution strategies, education and training programs and to provide general guidance and customer feedback to our president. From January 1991 to August 2000, Mr. Bennett was Senior Vice President of Medtronic Sofamor Danek. From time to time, Mr. Bennett also serves as a business advisor and motivational speaker for the American Academy of Orthopedic Surgeons and the Congress of Neurological Surgeons.
Jack R. Blair has been a member of our board of directors since August 2001. From 1980 until his retirement in 1998, Mr. Blair served in various capacities with Smith & Nephew, Inc. and Richards Medical Company, which was acquired by Smith & Nephew in 1986, most recently as group president of its North and South America and Japan operations from 1986 to 1998. From 1982 to 1986, he held the position of President of Richards Medical Company. Mr. Blair currently serves as chairman of the board of directors of dj Orthopedics, Inc., a medical device company, and as chairman of the board of directors of SCB Computer Technology, Inc., a provider of information technology consulting, outsourcing, and staffing services. He holds a B.A. in Government from Miami University and an M.B.A. from the University of California, Los Angeles.
James C. Blair, Ph.D. has served as a member of our board of directors since December 1999. Since 1985, he has served as a general partner and managing member of Domain Associates, L.L.C., a venture capital management company focused on life sciences. Dr. Blair also serves on the board of directors of Vista Medical Technologies, Inc. and Pharmion Corporation, as well as several privately-held healthcare companies. Dr. Blair currently serves as an advisor to the Department of Molecular Biology at Princeton University and an advisor to the Department of Bioengineering at the University of Pennsylvania. He received a B.S.E. degree from Princeton University and an M.S.E. and Ph.D. in Electronic Engineering from the University of Pennsylvania.
Lesley H. Howe has been a member of our board of directors since February 2004. Mr. Howe has over 35 years of experience in accounting, finance and business management within a variety of industries. From December 2001 to present, he has served as Chief Executive Officer of Consumer Networks LLC, a San Diego-based Internet marketing and promotions company. From 1997 to December 2001, Mr. Howe was an independent financial and business consultant advising clients on acquisition due diligence and negotiation strategies, as well as financing strategies. From 1974 to 1997, he was an audit partner of KPMG Peat Marwick LLP, an international accounting and auditing firm, and had been employed by KPMG since 1967. He served as area managing partner/managing partner of the Los Angeles office of KPMG from 1994 to 1997. Mr. Howe currently serves on the board of directors of P.F. Chang's China Bistro, Inc., an owner and operator of restaurants, and dj Orthopedics, Inc., a medical device company. Mr. Howe received a B.S. in business administration from the University of Arkansas.
Joseph S. Lacob has served as a member of our board of directors since November 1998. Since 1987, Mr. Lacob has been a partner of Kleiner Perkins Caufield & Byers, a venture capital partnership. Mr. Lacob currently serves on the boards of directors of Sportsline.com, Inc., Corixa Corporation and Align Technology, Inc., as well as several privately-held companies. Mr. Lacob received a B.S. in Biological Sciences from the University of California, Irvine, an M.S. in Public Health from University of California, Los Angeles and an M.B.A. from the Stanford Graduate School of Business.
Arda M. Minocherhomjee, Ph.D. has served as a member of our board of directors since May 2001. Since 1992, Dr. Minocherhomjee has served in various capacities for William Blair & Company, L.L.C., including, most recently, as a Principal. Since September 1998, Dr. Minocherhomjee has also served as
60
a managing member of William Blair Capital Partners, L.L.C, an affiliate of William Blair & Company, L.L.C. He currently serves on the boards of directors of several privately-held pharmaceutical and medical device companies. Dr. Minocherhomjee received an M.S. in Pharmacology from the University of Toronto, a Ph.D. and M.B.A. from University of British Columbia, and was a post-doctoral fellow in pharmacology at University of Washington Medical School. William Blair & Company is one of the underwriters of this offering.
Board Composition
Our restated certificate of incorporation, which will be in effect upon the closing of this offering, will provide for a classified board of directors consisting of three staggered classes of directors, as nearly equal in number as possible. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the directors will expire upon election and qualification of successor directors at the annual meeting of stockholders to be held during the years 2005 for the Class I directors, 2006 for the Class II directors and 2007 for the Class III directors.
Effective upon the closing of this offering:
Drs. Minocherhomjee and Blair and Messrs. Lacob, Blair and Howe are independent directors as defined by Rule 4200(a)(14) of the National Association of Securities Dealers listing standards.
Our restated bylaws to be in effect upon completion of this offering provide that the authorized number of directors, which will be seven, may be changed by a resolution adopted by at least two-thirds of our directors then in office or by at least two-thirds of our stockholders at our annual meeting of stockholders. Any additional directorships resulting from an increase in the number of directors may only be filled by the directors and will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our board of directors could have the effect of delaying or preventing changes in control or changes in our management.
Board Committees
Our board of directors has established an audit committee, a compensation committee, and a nominating and corporate governance committee.
Audit Committee
Our audit committee is a standing committee of, and operates under a written charter adopted by, our board of directors. The audit committee: reviews and monitors our accounting practices and financial statements; appoints, determines funding for, and oversees our independent auditors; reviews the results and scope of audits; approves the retention of the independent auditors to perform any proposed permissible non-audit services; and reviews and evaluates our audit and control functions. Upon the effective date of this offering, the audit committee will consist of Messrs. Blair and Howe and Dr. Minocherhomjee, each of whom is an independent director. Mr. Howe is an audit committee financial expert under the Securities and Exchange Commission, or SEC, rules and regulations.
Both our independent auditors and internal financial personnel meet privately with our audit committee and have unrestricted access to the audit committee.
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Compensation Committee
Our compensation committee is a standing committee of, and operates under a written charter adopted by, our board of directors. The compensation committee makes decisions and recommendations regarding salaries, benefits and incentive compensation for our directors and executive officers, and administers our incentive compensation and benefit plans, including our 2004 Equity Incentive Plan and 2004 Employee Stock Purchase Plan. Upon the effective date of this offering, our compensation committee will consist of Drs. Blair and Minocherhomjee and Mr. Lacob.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee is a standing committee of, and operates under a written charter adopted by, our board of directors. The nominating and corporate governance committee identifies and approves individuals qualified to serve as members of our board of directors, selects director nominees for our annual meetings of stockholders, evaluates our board's performance and develops and recommends to our board corporate governance guidelines and provides oversight with respect to corporate governance and ethical conduct. Upon the effective date of this offering, our nominating and corporate governance committee will consist of Dr. Blair and Messrs. Blair and Lacob.
Other Committees
Our board of directors may establish other committees as it deems necessary or appropriate from time to time.
Compensation Committee Interlocks and Insider Participation
In fiscal year 2003, we did not have a formal compensation committee. Our entire board of directors performed the functions of a compensation committee. Alexis V. Lukianov, our President, Chief Executive Officer and Chairman of our board of directors, and R. Lewis Bennett, our former Executive Vice President, participated, as members of our board of directors, in deliberations concerning executive officer compensation.
No member of our compensation committee is currently an officer or employee of our company. There is no interlocking relationship between any of our executive officers and compensation committee, on the one hand, and the executive officers and compensation committee of any other companies, on the other hand, nor has any such interlocking relationship existed in the past.
Director Compensation
In 2003, we granted no stock options to our non-employee directors. In February 2004, we granted a non-statutory stock option to purchase 60,000 shares of our common stock to each non-employee director (each, a "Director Option"). Our 2004 Equity Incentive Plan, or the 2004 Plan, provides for an automatic grant of an option to purchase 60,000 shares of our common stock (the "Initial Option") to each non-employee director who first becomes a non-employee director after the date the 2004 Plan becomes effective. The 2004 Plan also provides for an automatic annual grant of an option to purchase 15,000 shares of our common stock (the "Annual Option") to each non-employee director within 30 days after the date of each annual meeting of the stockholders that occurs on or after the date the 2004 Plan first becomes effective. However, a non-employee director granted an Initial Option on, or within a period of six months prior to, the date of an annual meeting of stockholders will not be granted an Annual Option with respect to that annual stockholders' meeting.
Each Director Option, Initial Option and Annual Option will have an exercise price equal to the fair market value of a share of our common stock on the date of grant and will have a term of ten years. Each Initial Option and Director Option will vest and become exercisable in 48 equal
62
installments on each monthly anniversary of the date of grant of the option for so long as the non-employee director continuously remains a director of, or a consultant to, our company. However, in the event of retirement of a non-employee director during the vesting period of his or her Director Option or Initial Option, the Director Option or Initial Option shall automatically vest on an accelerated basis to the extent it would have vested if the non-employee director had remained a director of, or consultant to, our company through the end of the calendar year in which he or she retired. The remaining unvested shares, if any, will be forfeited and returned to the 2004 Plan. The Annual Option will vest and become exercisable in 12 equal installments on each monthly anniversary of the date of the grant of the option for so long as the non-employee director continuously remains a director of, or a consultant to, our company. All automatic non-employee director options granted under the 2004 Plan will be non-statutory stock options. Options must be exercised, if at all, within three months after a non-employee director's termination of service, except in the case of death, in which event the director's estate shall have one year from the date of death to exercise the option. In no event, however, shall any option granted to a director be exercisable later than the expiration of the option's term. In the event of our merger with another corporation or another change of control, all automatic non-employee director options will become fully vested and exercisable. For a description of these plans, see "Stock Option and Stock Purchase Plans" below.
We currently do not pay cash compensation to non-employee directors for their service as directors. Upon completion of this offering, we intend to pay a $10,000 annual retainer to our audit committee chairperson. We also intend to pay our audit committee chairperson $1,000 per meeting attended and each of the other audit committee members $500 per meeting attended. We intend to pay our compensation committee chairperson and our nominating and corporate governance committee chairperson $500 per meeting attended and each of the other members of the compensation and nominating and corporate governance committees $250 per meeting attended. In addition, we intend to promptly reimburse all of our non-employee directors for reasonable expenses incurred to attend meetings of our board of directors and its committees.
Executive Compensation
The following table sets forth all compensation received during the year ended December 31, 2003 by our Chief Executive Officer and our four other most highly compensated executives whose total compensation exceeded $100,000 in such fiscal year. These five officers are referred to as the named executive officers in this prospectus. The compensation described in this table does not include medical, group life insurance, or other benefits which are available generally to all of our salaried employees.
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Summary Compensation Table
|
Annual Compensation
|
Long-Term
Compensation |
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name and Principal Position
|
Salary
|
Bonus
|
Other Annual
Compensation(1) |
Securities
Underlying Options |
All Other
Compensation(4) |
|||||||||
Alexis V. Lukianov
President, Chief Executive Officer and Chairman of the Board |
$ | 370,008 | $ | 175,875 | $ | 49,030 | (2) | 200,000 | $ | 1,440 | ||||
Kevin C. O'Boyle Vice President, Finance and Chief Financial Officer |
|
|
220,817 |
|
|
|
|
|
24,433 |
(3) |
400,000 |
|
|
1,296 |
Keith Valentine Executive Vice President |
|
|
249,996 |
|
|
72,450 |
|
|
|
|
50,000 |
|
|
1,391 |
Patrick Miles Vice President, Marketing |
|
|
200,004 |
|
|
60,000 |
|
|
|
|
50,000 |
|
|
835 |
Jonathan D. Spangler Chief Patent Counsel |
|
|
180,000 |
|
|
33,000 |
|
|
|
|
25,000 |
|
|
720 |
Option Grants in Last Fiscal Year
The following table sets forth information regarding options granted to each of our named executive officers during fiscal year 2003. Potential realizable value is based upon the assumed initial public offering price of $ per share, which is the midpoint of the range on the cover of this prospectus, and is net of the exercise price. These assumed 5% and 10% rates of appreciation comply with the rules of the SEC and do not represent our estimate of future stock price. Actual gains, if any, on stock option exercises will be dependent on the future performance of our common stock. No stock appreciation rights were granted to the named executive officers during 2003. Each of the outstanding options listed below may be exercised at any time, whether vested or unvested. Upon the exercise of an unvested option or the unvested portion of an option, the holder will receive shares of restricted stock with a vesting schedule the same as the vesting schedule previously applicable to the option. The percentage of total options is based upon options to purchase an aggregate of 1,522,000 shares of common stock granted to our employees under our 1998 Stock Option/Stock Issuance Plan, or 1998
64
Plan, during the year ended December 31, 2003. All options granted at the fair market value of our common stock, as determined by our board of directors, on the date of grant.
|
Individual Grants
|
|
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Potential Realizable Value
at Assumed Annual Rates of Appreciation of Stock Price for Option Term |
||||||||||||||
|
Number of Securities Underlying Options Granted
|
% of Total Options Granted to Employees in Fiscal Year
|
|
|
|||||||||||
Name
|
Exercise Price Per Share
|
Expiration Date
|
|||||||||||||
5%
|
10%
|
||||||||||||||
Alexis V. Lukianov | 200,000 | (1) | 13.1 | % | $ | 0.25 | 01/14/13 | $ | $ | ||||||
Kevin C. O'Boyle |
|
400,000 |
(1) |
26.3 |
|
|
0.25 |
|
01/14/13 |
|
$ |
|
|
$ |
|
Keith Valentine |
|
50,000 |
(2) |
3.3 |
|
|
0.25 |
|
01/14/13 |
|
$ |
|
|
$ |
|
Patrick Miles |
|
50,000 |
(2) |
3.3 |
|
|
0.25 |
|
01/14/13 |
|
$ |
|
|
$ |
|
Jonathan D. Spangler |
|
25,000 |
(2) |
1.6 |
|
|
0.25 |
|
01/14/13 |
|
$ |
|
|
$ |
|
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table shows information concerning the number and value of unexercised options held by each of our named executive officers at December 31, 2003. The fiscal year-end value of unexercised in-the-money options listed below has been calculated based on an assumed initial public offering price of $ per share, which is the midpoint of the range on the cover of this prospectus, less the applicable exercise price per share, multiplied by the number of shares underlying such options.
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No options were exercised by the named executive officers during the fiscal year completed December 31, 2003.
|
|
|
Number of Securities Underlying
Unexercised Options at December 31, 2003 |
Value of Unexercised
in-the-Money Options at December 31, 2003 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name
|
Shares
Acquired on Exercise (#) |
Value
Realized ($) |
|||||||||||
Exercisable(1)
|
Unexercisable
|
Exercisable
|
Unexercisable
|
||||||||||
Alexis V. Lukianov | | | 350,000 | | $ | | |||||||
Kevin C. O'Boyle |
|
|
|
|
|
400,000 |
|
|
|
|
|
|
|
Keith Valentine |
|
|
|
|
|
200,000 |
|
|
|
|
|
|
|
Patrick Miles |
|
|
|
|
|
150,000 |
|
|
|
|
|
|
|
Jonathan D. Spangler |
|
|
|
|
|
175,000 |
|
|
|
|
|
|
|
Employment and Change of Control Agreements
In July 1999, we entered into and, in January 2004, subsequently amended an employment agreement with Alexis V. Lukianov to serve as our President and Chief Executive Officer and a member of our board of directors. Under this agreement, Mr. Lukianov was originally granted stock options to purchase 462,000 shares of our common stock at an exercise price of $0.10 per share, subject to certain vesting requirements. In the event that Mr. Lukianov's employment is terminated without cause prior to a change of control or sale of our company, we are required to pay him an amount equal to his compensation earned with respect to the most recently completed calendar year. In addition, in the event that Mr. Lukianov is terminated without cause or constructively terminated following a change of control or sale of our company, we are required to pay him an amount equal to up to two hundred percent of his compensation earned with respect to the most recently completed calendar year. Upon a change of control or sale of our company in which our stock options are assumed by the acquiror, fifty percent of Mr. Lukianov's unvested stock options will vest immediately and the remaining fifty percent will vest upon the earlier of (i) the date Mr. Lukianov is terminated without cause or constructively terminated and (ii) one year following the change or control or sale provided that Mr. Lukianov has not resigned his position. All of Mr. Lukianov's unvested stock options will vest immediately in the event that our stock options are not assumed by an acquiror upon a change of control or sale of our company. Mr. Lukianov's current annual salary is approximately $390,000. Pursuant to the agreement, Mr. Lukianov was reimbursed for approximately $120,000 of moving and related expenses in connection with his relocation to San Diego, California.
In December 2002, we entered into and, in January 2004, subsequently amended an employment agreement with Kevin C. O'Boyle to serve as our Chief Financial Officer. Under this agreement, Mr. O'Boyle was originally granted stock options to purchase 400,000 shares of our common stock at an exercise price of $0.25 per share, subject to certain vesting requirements. In the event that Mr. O'Boyle's employment is terminated without cause prior to a change in control or sale of our company, we are required to pay him an amount equal to his compensation earned with respect to the most recently completed calendar year. In addition, in the event that Mr. O'Boyle is terminated without cause or constructively terminated following a change of control or sale of our company, we are required to pay him an amount equal to up to one hundred and fifty percent of his compensation earned with respect to the most recently completed calendar year. Upon a change of control or sale of
66
our company in which our stock options are assumed by the acquiror, fifty percent of Mr. O'Boyle's unvested stock options will vest immediately the remaining fifty percent will vest upon the earlier of (i) the date Mr. O'Boyle is terminated without cause or constructively terminated and (ii) one year following the change or control or sale provided that Mr. O'Boyle has not resigned his position. All of Mr. O'Boyle's unvested stock options will vest immediately in the event that our stock options are not assumed by an acquiror upon a change of control or sale of our company. Mr. O'Boyle's current annual salary is approximately $225,000. Pursuant to the agreement, Mr. O'Boyle was reimbursed for approximately $70,000 of moving and related expenses in connection with his relocation to San Diego, California and was guaranteed a minimum bonus of $30,000 upon the completion of his first full year of service to our company.
We entered into employment agreements with each of the following members of our management team: Keith Valentine, G. Rogan Fry, Patrick Miles, James J. Skinner, G. Bryan Cornwall and Jonathan D. Spangler. These agreements each provide that in the event that the employee is terminated without cause prior to a change of control or sale of our company, we are required to pay such employee an amount equal to seventy-five percent of his compensation earned with respect to the most recently completed calendar year. In addition, these agreements each provide that in the event that the employee is terminated without cause following a change of control or sale of our company, we are required to pay such employee an amount equal to up to one hundred percent of such employee's compensation earned with respect to the most recently completed calendar year.
Other Agreements
All of our current employees and consultants have entered into agreements with us relating to the protection of our confidential information and the assignment of inventions.
Other than those employees covered by employment agreements, none of our employees are employed for a specified term and each employee's employment with us is subject to termination at any time by either party for any reason, with or without cause.
Stock Option and Stock Purchase Plans
1998 Stock Option/Stock Issuance Plan
Our 1998 Stock Option/Stock Issuance Plan, or the 1998 Plan, was adopted by our board of directors and approved by our stockholders in October 1998. The 1998 Plan provides for the grant of incentive stock options, as defined under Section 422 of the Internal Revenue Code, to employees and for the grant of non-statutory stock options and restricted stock to employees, consultants, and non-employee directors. A total of 9,807,000 shares of our common stock have been authorized and reserved for issuance under the 1998 Plan. As of December 31, 2003, options to purchase a total of 4,275,645 shares of common stock, with a weighted exercise price of $0.27 per share, were outstanding under the 1998 Plan.
Upon the effectiveness of our initial public offering, we will no longer issue any additional options under the 1998 Plan. Although no future options will be granted under this plan, all options previously granted under the 1998 Plan will continue to be outstanding and will be administered under the terms and conditions of the 1998 Plan.
Our board of directors, or a committee thereof, will continue to administer the 1998 Plan. The exercise price of all incentive stock options granted under the 1998 Plan must be at least equal to the fair market value of the common stock on the date of grant. The exercise price of all non-statutory stock options granted under the 1998 Plan shall be determined by our board of directors, but in no event may be less than 85% of the fair market value on the date of grant. With respect to any optionee who owns stock possessing more than 10% of the voting power of all our classes of stock (including
67
stock of any parent or subsidiary or ours), the exercise price of any incentive stock option or non-statutory stock option granted must equal at least 110% of the fair market value on the grant date. The 1998 Plan provides for an option term of up to 10 years, but not to exceed five years for incentive stock options granted to 10% stockholders. The purchase price of restricted stock issued under the 1998 Plan shall be determined by the board, but in no event may be less than 85% of the fair market value on the date of issuance. With respect to 10% stockholders, the purchase price of restricted stock must equal at least 110% of the fair market value on the date of issuance. Generally, options granted under the 1998 Plan vest as to 25% of the shares on the first anniversary of the date of grant and, as to the balance of the shares, in 36 successive equal monthly installments thereafter.
If an optionee's service terminates for any reason other than death, disability or misconduct, the optionee may exercise his or her vested options prior to the earlier of their expiration date or three months following the date of termination. In the event the optionee's service terminates as a result of the optionee's death or disability, the options vested as of the date of death or disability, as applicable, may be exercised prior to the earlier of their expiration date or 12 months from the date of the optionee's death or disability, as applicable. If an optionee's service is terminated by the company for misconduct, all outstanding options shall terminate concurrently with the optionee's termination of service.
Incentive stock options are non-transferable other than by will or the laws of descent and distribution following the optionee's death. Non-statutory stock options may be transferred by will or the laws of descent and distribution and, during the lifetime of the optionee, to one or more members of the optionee's immediate family to the extent permitted by the plan administrator.
In the event of a corporate transaction where the acquiror assumes or replaces options granted under the 1998 Plan, options issued under the 1998 Plan will not be subject to accelerated vesting unless provided otherwise by agreement with the optionee. In the event of a corporate transaction where the acquiror does not assume or replace options granted under the 1998 Plan, such outstanding options will become fully vested and exercisable immediately prior to the consummation of the corporate transaction. In the event of a corporate transaction where the acquiror does not assume options granted under the 1998 Plan, such outstanding options will terminate upon the consummation of the corporate transaction.
The 1998 Plan will terminate automatically in 2008 unless terminated earlier by our board of directors. The board of directors has the authority to amend or terminate the 1998 Plan. To the extent necessary to comply with applicable law, the company will obtain stockholder approval of any amendment to the 1998 Plan in such a manner and to such a degree as required.
Summary of the 2004 Equity Incentive Plan
A copy of our 2004 Equity Incentive Plan, or the 2004 Plan, is attached as an exhibit to the registration statement of which this prospectus forms a part. The following description of the 2004 Plan is a summary and is therefore qualified in its entirety by reference to the complete text of the 2004 Plan.
General
In February 2004, our board of directors approved the 2004 Plan. Our stockholders approved the 2004 Plan in March 2004. Our board of directors and our stockholders previously adopted the 1998 Plan. Upon the effectiveness of our initial public offering, we will no longer issue any options under the 1998 Plan and the issuance of options will be made solely under the 2004 Plan. Although no future options will be granted under the 1998 Plan, all options previously granted under the 1998 Plan will continue to be administered under the 1998 Plan.
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The purpose of the 2004 Plan is to enhance the long-term stockholders' value of our company by offering opportunities to eligible individuals to participate in the growth in value of the equity of our company. Stock options, stock appreciation rights, stock awards and cash awards, which we collectively refer to as Awards, may be granted under the 2004 Plan. Options granted under the 2004 Plan may be either "incentive stock options", as defined under Section 422 of the Internal Revenue Code, or non-statutory stock options.
Share Reserve
We have reserved a total of 2,000,000 shares of our common stock, subject to adjustment, for issuance under the 2004 Plan. In addition, any authorized shares neither issued nor subject to outstanding grants under the 1998 Plan, on the effective date of our initial public offering, as well as any shares that
will be available for grant under the 2004 Plan. All future Awards granted on or after the effective date of our initial public offering will be granted under the 2004 Plan.
Automatic Annual Increase of Share Reserve.
The 2004 Plan provides that the share reserve will be cumulatively increased on January 1 of each year, beginning January 1, 2005, by a number of shares that is equal to the least of:
Administration
The 2004 Plan will be administered by the compensation committee of our board of directors. The compensation committee has delegated to the Chief Executive Officer the authority to grant Awards to non-executive level employees in accordance with guidelines established by our board of directors and in compliance with applicable law, and it may delegate certain responsibilities to an employee of ours (as applicable, the Compensation Committee, Chief Executive Officer or other delegate is referred to as the "Administrator").
Eligibility
Non-statutory stock options, stock appreciation rights, stock awards and cash awards may be granted under the 2004 Plan to employees, directors and consultants of ours, our affiliates and subsidiaries. Incentive stock options may be granted only to employees of ours, our subsidiaries or an affiliate of ours. The Administrator, in its discretion, approves options, stock appreciation rights, stock awards and cash awards to be granted under the 2004 Plan.
Termination of Award
Generally, if an awardee's services to us as an employee, consultant or director terminates other than by reason of death, disability, retirement or for cause, vested options and stock appreciate rights will remain exercisable for a period of three months following the awardee's termination. Unless
69
otherwise provided for by the Administrator in the Award agreement, if an awardee dies or becomes totally and permanently disabled while an employee or consultant or director, the awardee's vested options and stock appreciate rights will be exercisable for twelve months following the awardee's death or disability, or if earlier, the expiration of the term of such Award.
Nontransferability of Awards
Unless otherwise determined by the Administrator, Awards granted under the 2004 Plan are not transferable other than by will, a domestic relations order, or the laws of descent and distribution and may be exercised during the awardee's lifetime only by the awardee.
Stock Options
Exercise Price
The Administrator determines the exercise price of options at the time the options are granted. The exercise price of an incentive stock option may not be less than 100% of the fair market value of our common stock on the date of grant of such option. With respect to any awardee who owns stock possessing more than 10% of the voting power of all our classes of stock (including stock of any parent or subsidiary of ours), the exercise price of any incentive stock option may not be less than 110% of the fair market value of our common stock on the date of grant of such option. The exercise price of a non-statutory stock option may not be less than 85% of the fair market value of our common stock on the date of grant of such option. Certain replacement options with lower exercise prices may be granted to employees of ours or entities that we acquire to replace that employee's existing options. The fair market value of our common stock is generally the closing sales price as quoted on the Nasdaq National Market.
Exercise of Option; Form of Consideration
The Administrator determines when options become exercisable. The means of payment for shares issued on exercise of an option are specified in each Award agreement and the 2004 Plan permits payment to be made by cash, check, wire transfer, other shares of our common stock (with some restrictions), or broker assisted same day sales.
Term of Option
The term of an option may be no more than ten years from its date of grant. No option may be exercised after the expiration of its term. With respect to any incentive stock option granted to an awardee who owns stock possessing more than 10% of the voting power of all our classes of stock (including stock of any parent or subsidiary of ours), the term of the incentive stock option may be no more than five years from its date of grant.
Stock Appreciation Rights
The Administrator may grant stock appreciation rights alone, in addition to, or in tandem with any other Awards under the 2004 Plan. Stock appreciation rights entitle the participant to receive the amount by which the fair market value of a specified number of shares on the exercise date exceeds an exercise price established by the Administrator. The excess amount will be payable in ordinary shares, in cash or in a combination thereof, as determined by the Administrator. The terms and conditions of a stock appreciation right will be found in an Award agreement. The grant of a stock appreciation right may be made contingent upon the achievement of performance conditions, including net order dollars, net profit dollars, net profit growth, net revenue dollars, revenue growth, individual performance, earnings per share, return on assets, return on equity, and other financial objectives, customer
70
satisfaction indicators, and guaranteed efficiency measures, each with respect to our company and/or an individual business unit.
Stock Awards
The Administrator may grant stock awards of restricted shares as payment of a bonus, as payment of any other compensation obligation, upon the occurrence of a special event or as otherwise determined by the Administrator. The terms and conditions of a stock award will be found in an Award agreement. Vesting and restrictions on the ability to exercise such stock awards may be conditioned upon the achievement of one or more goals, including those related to net order dollars, net profit dollars, net profit growth, net revenue dollars, revenue growth, individual performance, earnings per share, return on assets, return on equity, and other financial objectives, customer satisfaction indicators and guaranteed efficiency measures, each with respect to our company and/or an individual business unit, as determined by the Administrator in its discretion. Recipients of restricted shares may have voting rights and may receive dividends on the granted shares prior to the time the restrictions lapse.
Cash Awards
The Administrator may grant cash awards, which entitle the recipient to a cash payment on the satisfaction of performance goals described in the Award. The Administrator determines the terms, conditions and restrictions related to cash awards.
Adjustments on Changes in Capitalization, Merger or Change in Control
Changes in Capitalization
In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, spin-off or similar change to our capital structure, appropriate adjustments will be made to:
Any such adjustments will be made by our board of directors in its absolute discretion, and its decision of will be final, binding and conclusive.
Merger or Change in Control
Generally, in the event of (a) a merger or consolidation in which we are not the surviving corporation, (b) a merger in which we are the surviving corporation but after which our stockholders immediately prior to such merger cease to own their shares or other equity interest in us, (c) the sale of substantially all of our assets, or (d) the acquisition, sale, or transfer of more than 50% of our outstanding shares by tender offer or similar transaction, any or all outstanding Awards may be assumed, converted, replaced or substituted. In the event such successor corporation (if any) does not assume or substitute Awards, the vesting with respect to such Awards will accelerate so that the Awards may be exercised before the closing or completion of one of the transactions described above, but then terminate.
In addition, our board of directors may also specify that other transactions or events constitute a change in control and may provide for the accelerated vesting of shares which are the subject of Awards and take any one or more of the actions described for a merger transaction. Our board of
71
directors need not adopt the same rules for each Award under the 2004 Plan or for each holder of such Awards.
In the event of a proposed dissolution or liquidation of our company, our board of directors may cause Awards to be fully vested and exercisable, but not after their expiration date, before the dissolution is completed but contingent on its completion.
Non-Discretionary Grants to Outside Directors
Under the 2004 Plan, non-employee directors receive a non-statutory option to purchase 60,000 shares of our common stock upon their initial election or appointment to our board of directors. The shares underlying these options vest in equal monthly installments, over a 48 month period, as measured from the grant date. Under the 2004 Plan, non-employee directors who are serving on our board of directors will receive an option to purchase 60,000 shares of our common stock upon the effectiveness of the 2004 Plan. The shares underlying these options will likewise vest in equal monthly installments, over a 48 month period, as measured from the grant date.
Non-employee directors who are re-elected to our board of directors are automatically granted an option to purchase 15,000 shares of our common stock, provided that the director has served on our board of directors for a period of at least six months. The shares underlying these options vest in equal monthly installments over a period of 12 months as measured from the grant date.
Generally, upon a change in our ownership or control or a merger or sale of all or substantially all of our assets, the vesting of options granted to directors, who are then serving on our board of directors, will accelerate, and become immediately exercisable. For more details concerning compensation of directors, see "Director Compensation."
Director Fee Option Grants
The director fee option grant program, which may, in our board of directors' sole discretion, be activated for one or more calendar years and, if so activated, will allow non-employee board members the opportunity to apply a portion of an annual retainer fee (if one is paid), otherwise payable to them in cash each year, to the acquisition of special below-market option grants. The option grant will automatically be made on the first trading day in January in the year for which the retainer fee would otherwise be payable in cash. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of common stock on the grant date. As a result, the fair market value of the option shares on the grant date less the aggregate exercise price payable for those shares will be equal to the portion of the retainer fee invested in that option. The option will vest and become exercisable for the option shares in a series of 12 equal monthly installments over the calendar year for which the election is to be in effect. However, the option will become immediately exercisable and vested for all the option shares upon changes in the ownership or control of our company; or the death or disability of the optionee while serving as a board member. For more details concerning compensation of directors, see "Director Compensation."
Amendment and Termination of the 2004 Plan
Our board of directors may amend, alter, suspend or terminate the 2004 Plan, or any part thereof, at any time and for any reason. However, we will solicit stockholder approval for any amendment to the 2004 Plan to the extent necessary and desirable to comply with applicable laws. Generally, no such action by our board of directors or stockholders may alter or impair any Award previously granted under the 2004 Plan without the written consent of the awardee. The 2004 Plan has a term of 10 years, but it may be terminated by our board of directors at any time.
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Summary of the 2004 Employee Stock Purchase Plan
General
In February 2004, our board of directors adopted the 2004 Employee Stock Purchase Plan, or the Purchase Plan. Our stockholders approved the Purchase Plan in March 2004. The Purchase Plan will become effective on the first day on which price quotations are available for our common stock on the Nasdaq National Market. Copies of the Purchase Plan are attached as exhibits to the registration statement, of which this prospectus forms a part. The following descriptions of the Purchase Plan are summaries and are therefore qualified in their entirety by reference to the complete texts of the Purchase Plan. The Purchase Plan provides our employees with an opportunity to purchase our common stock through accumulated payroll deductions.
Share Reserve
A total of 250,000 shares of common stock have been reserved for issuance under the Purchase Plan. In addition, the Purchase Plan provides for annual increases in the total number of shares available for issuance under this plan on January 1 of each year, by a number of shares that is equal to the least of:
Administration
Our board of directors, or a committee appointed by our board of directors, administers the Purchase Plan and has full and exclusive authority to interpret the terms of the Purchase Plan and determine eligibility, subject to the limitations of Section 423 of the Internal Revenue Code.
Eligibility
Generally, persons are eligible to participate in the Purchase Plan if they have been employed by us or any participating subsidiary for at least 20 hours per week for at least 6 months prior to the first date of the purchase period. However, no person may participate in the Purchase Plan if, immediately after the grant of the stock purchase rights under the Purchase Plan, such person will own stock possessing five percent or more of the total combined voting power or value of all classes of our capital stock or of any subsidiary.
Offering Periods
The Purchase Plan provides for offering periods of 24 months or such shorter period as may be established by our board of directors. Each offering period includes four six-month purchase periods. The offering periods will start on May 15 and November 15 of each year; provided, however, that the initial offering period shall commence on the effective date of this offering and end on November 14, 2005.
Payroll Deductions
The Purchase Plan permits participants to purchase our common stock through payroll deductions of up to 15% of the participant's compensation, up to a maximum of $25,000 per year, and up to a maximum of 2,500 shares per purchase period. Compensation includes regular salary payments, bonuses, incentive compensation, overtime pay and other compensation as determined from time to time by our board of directors, but excludes all other payments including long-term disability or
73
workers' compensation payments, car allowances, relocation payments and expense reimbursements. Initially, all eligible employees will participate in the Purchase Plan at the 15% level. Immediately after the filing of a registration statement on Form S-8 with respect to the shares reserved under the Purchase Plan they may elect to lower their percentage.
Purchase Price
Amounts deducted and accumulated for the participant's account are used to purchase shares of our common stock on the last trading day of each purchase period at a price of 85% of the lower of the fair market values of the common stock at the beginning of the offering period and the end of the purchase period. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions accumulated to that date. Participation ends automatically upon termination of employment.
Qualification under the Code
The Purchase Plan is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code.
Nontransferability
Stock purchase rights granted under the Purchase Plan are not transferable by a participant other than by will or the laws of descent and distribution.
Change in Control
In the event of a merger or other corporate transaction, the Purchase Plan will continue for the remainder of all open offering periods following the merger or other corporate transaction and shares will be purchased based on the fair market value of the surviving corporation's stock on each purchase date (taking account of the exchange ratio where necessary) unless otherwise determined by the committee appointed by our board of directors. In the event of a dissolution or liquidation of our company, the offering period will terminate immediately prior to the event, unless otherwise determined by the committee. In exercising its discretion, the committee could terminate the Purchase Plan after notice to participants.
Amendment and Termination
Our board of directors has the authority to amend or terminate the Purchase Plan at any time, including amendments to outstanding stock purchase rights under these plans, subject to required approvals of our stockholders in order for the Purchase Plan to qualify under Section 423 of the Internal Revenue Code or other applicable law.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 2001, we have not engaged in any transactions valued in excess of $60,000 with any of our executive officers, directors, or holders of more than 5% of our outstanding voting securities, other than the following transactions:
Issuances of Options
We have granted stock options under our 1998 Plan to our directors, executive officers and holders of more than 5% of our outstanding voting securities to purchase the following shares of our common stock:
Year
|
Number of
Shares Underlying Options |
Weighted Average
Exercise Price Per Share |
|||
---|---|---|---|---|---|
January 1, 2001December 31, 2001 | 720,000 | $ | 0.28 | ||
January 1, 2002December 31, 2002 |
|
1,150,000 |
|
|
0.25 |
January 1, 2003December 31, 2003 |
|
825,000 |
|
|
0.25 |
In addition, from January 1, 2004 through February 29, 2004, we granted options to purchase an aggregate of 2,531,250 shares of our common stock to our directors, executive officers and holders of more than 5% of our outstanding voting securities at a weighted average exercise price of $1.90 per share.
The exercise price per share of underlying common stock for each of our issued options is equal to the fair market value per share of our common stock on the date of grant, as determined by our board of directors.
Issuances of Common Stock
The following table summarizes the purchases of our common stock, since January 1, 2001, by our directors, executive officers and security holders who beneficially own more than 5% of any class of our voting securities. We issued and sold the shares of our common stock listed below upon exercise of stock options granted under our 1998 Plan:
Executive Officers
|
Number of Shares
|
Aggregate Purchase Price
|
Date of Purchase
|
||||
---|---|---|---|---|---|---|---|
Alexis V. Lukianov (President, Chief Executive Officer, and Chairman of the Board) | 1,088,000 | $ | 186,300 | 07/10/02 | |||
Keith Valentine (Executive Vice President) |
|
350,000 |
|
|
97,500 |
|
07/10/02 |
Patrick Miles (Vice President, Marketing) |
|
180,000 |
|
|
48,000 |
|
07/10/02 |
G. Rogan Fry (Senior Vice President, Corporate Development) |
|
8,500 172,500 |
|
|
850 46,750 |
|
03/06/01 08/08/02 |
Steven McGowan (former Chief Financial Officer)(1) | 435,000 | 92,250 | 07/10/02 |
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Issuances of Preferred Stock and Warrants
In May 2001, we issued and sold, in a private placement, 11,675,791 shares of our Series D preferred stock at a purchase price of $2.53 per share, for aggregate consideration of approximately $29.5 million. Upon completion of this offering, these shares will convert into 11,675,791 shares of our common stock.
In July 2002 and June and July 2003, we issued and sold, in a private placement, 9,897,640 shares of our Series D-1 preferred stock at a purchase price of $2.53 per share and warrants to purchase 4,155,334 shares of our common stock at a purchase price of $0.001 per share, for aggregate consideration of approximately $25.0 million. Upon completion of this offering, the Series D-1 shares will convert into 9,897,640 shares of our common stock and we expect the warrants that, by their terms, terminate upon completion of this offering, will be exercised.
The purchasers of our Series D and Series D-1 preferred stock include the following directors, executive officers and security holders who beneficially own more than 5% of any class of our voting securities:
|
Shares of Series D(2)
|
Shares of Series D-1(3)
|
Shares of Common
Stock Underlying Warrants |
|||
---|---|---|---|---|---|---|
5% Stockholders(1) | ||||||
Entities affiliated with William Blair Capital Partners, L.L.C.(4) | 3,952,570 | 2,173,914 | 915,217 | |||
Entities affiliated with Kleiner Perkins Caufield & Byers, L.P.(5) | 988,143 | 664,177 | 276,104 | |||
Entities affiliated with Enterprise Management Partners, L.P.(6) | 988,143 | 118,578 | 47,431 | |||
Caisse de depot et placement du Quebec | 2,766,799 | 1,627,738 | 694,790 | |||
Domain Partners IV, L.P. and affiliated entities(7) | 790,514 | 810,277 | 334,545 | |||
A.M. Pappas Life Sciences Ventures II, L.P. | 1,976,285 | 1,007,906 | 423,379 | |||
Johnson & Johnson Development Corporation | | 2,173,914 | 934,782 | |||
Directors & Executive Officers |
|
|
|
|
|
|
Keith Valentine (Executive Vice President) | | 39,526 | | |||
G. Rogan Fry (Senior Vice President, Corporate Development) | | 19,762 | | |||
Jonathan D. Spangler (Chief Patent Counsel) | | 4,941 | |
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more of such entities, and disclaims beneficial ownership of such shares in which he has no pecuniary interest. William Blair & Company, L.L.C. is an underwriter in this offering.
In each of the preferred stock financings referenced above, we entered into various stockholder agreements with the holders of our preferred stock relating to voting rights, information rights, rights of first offer, rights of first refusal and co-sale rights, among other things. We also amended and restated our amended and restated investors' rights agreement to include the participants in these preferred stock financings.
These stockholder agreements and the rights granted therein, will terminate upon the completion of this offering, except for the registration rights granted under our second amended and restated investors' rights agreement, as amended. For a discussion of registration rights, see "Description of Capital StockRegistration Rights."
Sales of Promissory Notes and Warrants
In February and April 2001, we borrowed an aggregate of approximately $4.5 million from existing stockholders. We issued each lending party a convertible promissory note bearing interest at 5% per annum. In addition, we issued and sold each of these parties a warrant to purchase a number of shares of our Series D preferred stock for $0.01 per underlying share, such purchase price to be paid from interest accrued on the parties' notes upon conversion of such notes into our preferred stock. Each warrant has an exercise price of $2.53 per share and terminates upon completion of this offering.
In May 2001, each of the convertible promissory notes referenced above was satisfied in full by converting each note into shares of our Series D preferred stock.
The purchasers of our convertible promissory notes and warrants to purchase our Series D preferred stock included none of our executive officers or directors. However, such purchasers did
77
include the following security holders who beneficially own more than 5% of any class of our voting securities, certain of whom are affiliates of certain of our directors, as described in the footnotes below:
|
Principal Amount of
February 2001 Loan |
Principal Amount of
April 2001 Loan |
Shares of Series D
Underlying Warrants(2) |
|||||
---|---|---|---|---|---|---|---|---|
5% Stockholders(1) | ||||||||
Entities affiliated with Kleiner Perkins Caufield & Byers, L.P.(3) | $ | 1,130,769 | $ | 565,384 | 77,857 | |||
Entities affiliated with Enterprise Management Partners, L.P.(4) | 1,130,769 | 565,384 | 77,856 | |||||
Domain Partners IV, L.P. and affiliated entities(5) | 738,462 | 369,231 | 50,846 |
Loans to Executive Officers
In July 2002, we extended loans to the executive officers in the amounts set forth in the table below in connection with the officers' purchases of shares of our common stock pursuant to exercises of stock options granted under our 1998 Plan. Such loans were evidenced by full recourse promissory notes, bore interest at a fixed annual rate of 6.0%, with the interest compounded annually, and were
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secured by a pledge of the shares of our common stock purchased pursuant to stock pledge agreements between us and the officers executed in July 2002.
Name of Executive Officer
|
Principal Amount of Loan
|
||
---|---|---|---|
Alexis V. Lukianov | $ | 185,212.00 | |
Keith Valentine | 97,150.00 | ||
Steven McGowan | 91,815.00 | ||
Patrick Miles | 47,820.00 | ||
G. Rogan Fry | 46,577.50 |
In November 2002, pursuant to the separation agreement between us and Mr. McGowan, we forgave and cancelled all principal and interest under Mr. McGowan's note. In addition, we forgave in full each of the remaining notes referenced above immediately prior to the filing of this registration statement.
In February 2000, we extended a loan to Alexis V. Lukianov in the principal amount of $500,000, which loan was evidenced by a note and bore interest at a fixed annual rate of 6.56%, with the interest compounded annually. Pursuant to a bonus agreement entered into in February 2000 by us and Mr. Lukianov, we forgave the loan on February 24, 2004, and will assume and pay withholding obligations of approximately $653,000 arising from our forgiveness of the loan and the payment of such withholding obligations.
Consulting and Technology Transfer Arrangements
In August 2001, we entered into a consulting agreement with James F. Marino, M.D., a former director and executive officer of ours, amending an earlier technology transfer and license agreement, dated November 10, 1998, to provide a license to us to any invention submitted by Dr. Marino within the field of minimally invasive spine surgery in exchange for a 5.0% royalty fee to Dr. Marino if the technology is subsequently commercialized (excluding those ideas for which final patent applications were filed on or before August 23, 2001). In September 2003, we entered into a separation agreement with Dr. Marino that terminated all prior agreements between us and Dr. Marino, including the consulting agreement dated August 23, 2001, and in February 2004, we executed a memorandum of understanding to clarify certain terms of the September 23, 2003 separation agreement. No payments were made to Dr. Marino in 2003 pursuant to the consulting agreement.
Employment Arrangements
In November 2000, R. Lewis Bennett, one of our directors, began to serve as our executive vice president. Mr. Bennett was paid $160,000 in 2001, $115,500 in 2002 and $46,450 in 2003 for his services as our executive vice president. Mr. Bennett ceased to serve as our executive vice president in June 2003.
In November 2002, we entered into an employment separation/consulting agreement and general release with Steven McGowan, formerly our chief financial officer. Under this agreement, as of October 15, 2002, Mr. McGowan ceased to be employed by us, but began to provide consulting services to us. We paid Mr. McGowan an aggregate of $207,681 in 2003 under this agreement. In addition, we forgave and cancelled a promissory note issued to us by Mr. McGowan in the principal amount of $91,815. See "Certain Relationships and Related TransactionsLoans to Executive Officers" for additional information regarding the promissory note.
In January 2004, we amended our employment agreements with Alexis V. Lukianov and Kevin C. O'Boyle and we entered into employment agreements with Keith Valentine, G. Rogan Fry, Patrick Miles, James J. Skinner, G. Bryan Cornwall and Jonathan D. Spangler. For information on these
79
employment agreements, please see "ManagementEmployment and Change of Control Arrangements."
Indemnification of Certain Directors and Executive Officers
The Company has accrued, as of December 31, 2003, $247,000 for payment of expenses incurred by R. Lewis Bennett, Keith Valentine and Patrick Miles in connection with a litigation matter in the United States District Court for the Southern District of California against Medtronic, Inc. Although we believe it is our legal duty to indemnify Messrs. Bennett, Valentine and Miles for their legal expenses incurred in this lawsuit, we have been enjoined from providing further indemnification by the Circuit Court of Shelby County in Memphis, Tennessee and, as a result, have not paid any legal expenses in connection with the California action since June 2002. See "Risk FactorsWe are currently involved in costly employment litigation and an adverse outcome may prevent certain of our employees from working for us or require us to pay significant damages" and "BusinessLegal Proceedings" for further detail regarding this action.
Relationship with William Blair & Company, L.L.C.
William Blair Capital Partners VII QP, L.P. and William Blair Capital Partners VII, L.P. are affiliates of William Blair & Company, L.L.C., and collectively hold in excess of 5% of our common stock. Additionally, in July 2001, we granted William Blair Capital Partners, L.L.C. an option to purchase 20,000 shares of our common stock at an exercise price of $0.25 per share under our 1998 Plan. This option is currently exercisable. Arda M. Minocherhomjee, one of our directors, is a managing director of William Blair Capital Partners, L.L.C., which is a member of the general partner of William Blair Capital Partners VII QP, L.P. and William Blair Capital Partners VII, L.P. William Blair & Company, L.L.C. is one of the underwriters in this offering. Please see "Certain Relationships and Related TransactionsIssuances of Preferred Stock and Warrants" and "Underwriting" for information regarding William Blair & Company, L.L.C.
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The following table shows information with respect to the beneficial ownership of our common stock as of January 31, 2004, and as adjusted to reflect the sale of the common stock being offered in this offering, by:
Each stockholder's percentage ownership before the offering is based on 40,757,789 shares of our common stock outstanding as of December 31, 2003 (as adjusted to reflect at that date the conversion of all shares of our preferred stock outstanding and the exercise of warrants that, by their terms, terminate upon the closing of this offering), plus an additional 186,201 shares of our common stock issued upon exercise of outstanding stock options in January 2004. Each stockholder's percentage ownership after the offering is based on shares of our common stock outstanding immediately after the completion of this offering. We have granted the underwriters an option to purchase up to additional shares of our common stock to cover over-allotments, if any, and the table below assumes no exercise of that option.
|
|
Percentage of Shares Beneficially Owned(2)
|
|||||
---|---|---|---|---|---|---|---|
Name of Beneficial Owner(1)
|
Number of Shares
Beneficially Owned(2) |
Before
Offering |
After
Offering |
||||
Five Percent Stockholders | |||||||
Entities affiliated with William Blair Capital Partners, L.L.C.(3) | 7,061,701 | 17.24 | % | ||||
Entities affiliated with Kleiner Perkins Caufield & Byers(4) | 5,854,016 | 14.29 | |||||
Caisse de depot et placement du Quebec(5) | 5,109,327 | 12.47 | |||||
Entities affiliated with Enterprise Management Partners, L.P.(6) | 5,079,743 | 12.41 | |||||
Domain Partners IV, L.P. and affiliated entities(7) | 4,527,388 | 11.05 | |||||
A.M. Pappas Life Sciences Ventures II, L.P.(8) | 3,427,570 | 8.37 | |||||
Johnson & Johnson Development Corporation(9) | 3,128,696 | 7.64 | |||||
Directors and Executive Officers |
|
|
|
|
|
|
|
Alexis V. Lukianov(10) | 2,338,000 | 5.54 | |||||
Kevin C. O'Boyle(11) | 625,000 | 1.50 | |||||
Keith Valentine(12) | 805,336 | 1.95 | |||||
James J. Skinner(13) | 395,000 | * | |||||
Patrick Miles(14) | 550,000 | 1.33 | |||||
G. Bryan Cornwall(15) | 201,250 | * | |||||
G. Rogan Fry(16) | 383,666 | * | |||||
Jonathan D. Spangler(17) | 211,917 | * | |||||
R. Lewis Bennett(18) | 170,102 | * | |||||
Jack R. Blair(19) | 55,000 | * | |||||
James C. Blair(7) | 4,527,388 | 11.05 | |||||
Lesley H. Howe | * | * | |||||
Joseph S. Lacob(4) | 5,854,016 | 14.29 | |||||
Arda M. Minocherhomjee(3) | 7,061,701 | 17.24 | |||||
All executive officers and directors as a group (14 persons)(20) | 23,178,376 | 51.68 |
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Johnson & Johnson Development Corporation. The address for Johnson & Johnson Development Corporation is One Johnson & Johnson Plaza, New Brunswick, New Jersey 08933, attn: John Onopchenko.
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Upon the closing of this offering, our authorized capital stock, after giving effect to the conversion of all outstanding preferred stock into common stock and the effectiveness of our restated certificate of incorporation, will consist of 70,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par value. The following description summarizes the most important terms of our capital stock. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description you should refer to our restated certificate of incorporation and restated bylaws, effective upon completion of this offering, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part, and to the applicable provisions of the Delaware General Corporation Law.
Common Stock
As of December 31, 2003, there were 40,757,789 shares of our common stock outstanding and held by approximately 96 stockholders of record, assuming the conversion of each outstanding share of preferred stock into common stock upon the closing of this offering and the exercise of warrants to purchase 4,652,689 shares that, by their terms, terminate upon completion of this offering. After this offering, based on these assumptions, the issuance of shares of common stock in this offering and assuming no exercise of stock options or other convertible or exercisable securities, there will be shares of our common stock outstanding, or shares if the underwriters exercise their over-allotment option in full.
Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available therefore at the times and in the amounts as our board of directors may from time to time determine. All dividends are non-cumulative. In the event of the liquidation, dissolution, or winding up of our company, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. The holders of common stock are not entitled to cumulative voting for the election of directors, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. Upon effectiveness of our restated certificate of incorporation and restated bylaws, our board of directors will be divided into three classes, with each director elected at an annual stockholders' meeting following the date of this offering serving a three-year term and one class being elected at each year's annual meeting of stockholders. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. There are no sinking fund provisions applicable to our common stock. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable.
Preferred Stock
As of December 31, 2003, there were 31,585,248 shares of preferred stock outstanding. Immediately prior to the closing of this offering, each outstanding share of Series A preferred stock will be converted into one share of common stock, each outstanding share of Series B stock will be converted into approximately 1.0348 shares of common stock, each outstanding share of Series C stock will be converted into approximately 1.0705 shares of common stock, each outstanding share of Series D stock will be converted into one share of common stock and each outstanding share of Series D-1 stock will be converted into one share of common stock. Following the conversion, our certificate of incorporation will be restated to delete all references to the prior series of preferred stock and 5,000,000 shares of undesignated preferred stock, par value $0.001 will be authorized.
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Following this offering, our board of directors will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges, and relative participating, optional, or special rights as well as the qualifications, limitations, or restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, and liquidation preferences, any or all of which may be greater than the rights of the common stock. Our board of directors, without stockholder approval, can issue preferred stock with voting, conversion, or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could be issued quickly with terms calculated to delay or prevent a change of control or make removal of management more difficult. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of our common stock, and may adversely affect the voting and other rights of the holders of common stock. At present, we have no plans to issue any shares of preferred stock following this offering.
Options
As of December 31, 2003, options to purchase a total of 4,275,645 shares of common stock were outstanding. Options to purchase a total of 2,750,162 shares remain available for future issuance as of December 31, 2003 under our 1998 Plan and an additional 2,000,000 shares remain available for future issuance under our 2004 Plan adopted in connection with this offering.
As of December 31, 2003, we have a contingent obligation to issue an option to purchase 50,000 shares of common stock for each subsequent two year term that an existing agreement with one of our consultants is extended. Such agreement extends automatically unless we or the consultant provide written notice of termination to the other prior to the end of the original four year term or any subsequent two year term. The first of such option grants would be in October 2006 and such option grant would be at the fair market value of our common stock at the time of grant.
Warrants
As of December 31, 2003, there were outstanding warrants to purchase the following shares of our capital stock:
Description
|
# of Shares
Before this Offering |
Exercise
Price Before this Offering |
# of Shares of
Common Stock After this Offering(1) |
Exercise
Price After this Offering |
||||||
---|---|---|---|---|---|---|---|---|---|---|
Series A Preferred Stock | 87,500 | $ | 1.00 | 87,500 | $ | 1.00 | ||||
Series B Preferred Stock | 169,564 | 2.75 | 175,462 | 2.66 | ||||||
Series D Preferred Stock | 230,275 | 2.53 | 230,275 | 2.53 | ||||||
Series D-1 Preferred Stock | 59,289 | 2.53 | 59,289 | 2.53 | ||||||
Common Stock | 4,381,005 | 0.25 | 4,381,005 | 0.25 | ||||||
|
|
|||||||||
Total | 4,927,633 | 4,933,531 |
The warrants to purchase our Series A Preferred Stock terminate five years from the effective date of this offering. A warrant to purchase 81,820 shares of our Series B Preferred Stock terminates on June 27, 2007. Warrants to purchase 23,716 shares of our Series D Preferred Stock terminate three years after the closing of this offering. The warrant to purchase 59,289 shares of our Series D-1
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Preferred Stock terminates on January 9, 2013. A warrant to purchase 25,671 shares of common stock terminates on January 9, 2013.
Of these warrants, warrants to purchase a total of 87,744 shares of Series B Preferred Stock, 206,559 shares of Series D Preferred Stock and 4,355,334 shares of Common Stock terminate upon completion of this offering. We expect that all of these warrants will be exercised prior to or in connection with this offering.
Each of the warrants described in the table above, except two warrants to purchase an aggregate of 200,000 shares of our common stock, has a net exercise provision under which its holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of our common stock at the time of exercise of the warrant after deduction of the aggregate exercise price. Each of the warrants described in the table above contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon the exercise of the warrant in the event of stock dividends, stock splits, reorganizations and reclassifications and consolidations.
Registration Rights
Following the completion of this offering, stockholders holding approximately 35,981,399 shares of our common stock, including shares issued upon conversion of our preferred stock and shares issued upon the exercise of warrants, will have the right, subject to various conditions and limitations, to include their shares in registration statements relating to our securities. The holders of at least 30% of the shares subject to these registration rights have the right, beginning no earlier than six months after the effective date of the registration statement filed with respect to this offering, on up to two occasions, to demand that we register shares under the Securities Act, subject to certain limitations, including that the aggregate offering price must be at least $10,000,000. In addition, these holders are entitled to piggyback registration rights with respect to the registration under the Securities Act of shares of common stock. In the event that we propose to register any shares of common stock under the Securities Act either for our account or for the account of other security holders, the holders of shares having piggyback registration rights are entitled to receive notice of such registration and to include shares in any such registration, subject to limitations. Further, at any time after we become eligible to file a registration statement on Form S-3, the holders of at least 30% of the shares subject to these registration rights may require us to file registrations statements under the Securities Act on Form S-3 with respect to shares of common stock having an aggregate offering price of at least $2,500,000. These registration rights are subject to conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares of common stock held by such security holders to be included in such registration. We are generally required to bear all of the expenses of such registrations, including reasonable fees of a single counsel acting on behalf of all selling holders, except underwriting discounts and selling commissions. Registration of any of the shares of common stock held by security holders with registration rights would result in such shares becoming freely tradable without restriction under the Securities Act immediately upon effectiveness of such registration.
Anti-Takeover Provisions
Delaware Law
We are governed by the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly traded Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A business combination includes mergers, asset sales or other transactions resulting
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in a financial benefit to the stockholder. An interested stockholder is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's voting stock, subject to certain exceptions. The statute could have the effect of delaying, deferring or preventing a change in control of our company.
Board of Directors Vacancies
Our restated bylaws to be in effect at closing authorize only our board of directors to fill vacant directorships. In addition, the number of directors constituting our board of directors may be set only by resolution of two-thirds of the incumbent directors or two-thirds of the stockholders that are present at an annual meeting. These provisions may deter a stockholder from increasing the size of our board and gaining control of our board of directors by filling the resulting vacancies with its own nominees.
Staggered Board
Our restated certificate of incorporation and restated bylaws to be in effect at closing provide that our board is classified into three classes of directors. The existence of a staggered board could delay a successful tender offeror from obtaining majority control of our board, and the prospect of such delay may deter a potential offeror. Please see "ManagementBoard Composition" for more information regarding the staggered board.
Stockholder Action; Special Meeting of Stockholders
Our restated certificate of incorporation provides that our stockholders may not take action by written consent, but may only take action at duly called annual or special meetings of our stockholders. Our restated bylaws further provide that special meetings of our stockholders may be called only by the President, Chief Executive Officer or Chairman of the board of directors or a majority of the board of directors.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
Our restated bylaws provide that stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our annual meeting of stockholders, must provide timely notice of their intent in writing. To be timely, a stockholder's notice must be delivered to, or mailed and received at, our principal executive offices not less than 120 days prior to the first anniversary of the date of our notice of annual meeting provided with respect to the previous year's annual meeting of stockholders; provided, that if no annual meeting of stockholders was held in the previous year or the date of the annual meeting of stockholders has been changed to be more than 30 calendar days earlier than such anniversary, notice by the stockholder, to be timely, must be received a reasonable time before the solicitation is made. Our restated bylaws also specify certain requirements as to the form and content of a stockholder's notice. These provisions may preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders.
Authorized But Unissued Shares
Our authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval and may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. If we issue such shares without stockholder approval and in
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violation of limitations imposed by the Nasdaq National Market or any stock exchange on which our stock may then be trading, our stock could be delisted.
Limitation of Liability and Indemnification Matters
Our restated certificate of incorporation to be in effect upon completion of this offering provides that, except to the extent prohibited by Delaware law, our directors shall not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty by our directors. Under Delaware law, our directors have a fiduciary duty to us which is not eliminated by this provision and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each of our directors will continue to be subject to liability under Delaware law for breach of the director's duty of loyalty to us for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or which involve intentional misconduct or knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law. This provision also does not affect the directors' responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws.
Section 145 of the Delaware General Corporation Law empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that this provision shall not eliminate or limit the liability of a director for the following:
Delaware law provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under our restated bylaws, any agreement, a vote of stockholders or otherwise. Our restated certificate of incorporation to be in effect upon completion of this offering eliminates the personal liability of directors to the fullest extent permitted by Delaware law. In addition, our restated certificate of incorporation and our restated bylaws provide that we may fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative), by reason of the fact that such person is or was one of our directors, officers, employees or other agents, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding.
Further, our restated bylaws to be in effect upon completion of this offering provide that we shall indemnify our directors and executive officers to the fullest extent permitted by Delaware law. Our restated bylaws also provide that we are empowered to indemnify our other officers, employees and agents as allowed by Delaware law. We are also empowered under our restated bylaws to enter into indemnification agreements with our directors, officers, employees, and agents and to purchase insurance on behalf of any person we are required or permitted to indemnify.
We have also entered into agreements to indemnify our directors and executive officers, to provide contractual indemnification in addition to the indemnification provided for in our restated certificate of incorporation and restated bylaws. We believe that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. Our restated bylaws also permit us to
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secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions, regardless of whether Delaware law would permit indemnification. We have obtained liability insurance for our officers and directors and intend to obtain greater coverage.
At present, there is no pending litigation or proceeding involving any of our directors, officers, employees, or agents, other than the matters in Tennessee and California involving Medtronic, Inc., where indemnification by us will be required or permitted, and we are not aware of any threatened litigation or proceeding, other than the Medtronic litigation, that may result in a claim for such indemnification. See "Risk FactorsWe are currently involved in costly employment litigation and an adverse outcome may prevent certain of our employees from working for us or require us to pay significant damages," for further detail regarding the Medtronic litigation matters.
We maintain directors' and officers' liability insurance and intend to continue to maintain this insurance in the future. We also have an insurance policy covering our officers and directors with respect to certain liabilities, including liabilities arising under the Securities Act of 1933, as amended, or otherwise.
Nasdaq National Market
We have applied to list our common stock on the Nasdaq National Market under the trading symbol "NUVA."
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is U.S. Stock Transfer Corporation.
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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF OUR COMMON STOCK
The following discussion of certain U.S. federal income and estate tax considerations relevant to Non-U.S. Holders of our common stock is for general information only.
As used in this prospectus, the term "Non-U.S. Holder" is a person who holds our common stock other than:
If a partnership, including any entity treated as a partnership for U.S. federal income tax purposes, is a holder, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A holder that is a partnership, and partners in such partnership, should consult their own tax advisors regarding the tax consequences of the purchase, ownership and disposition of our common stock.
This discussion does not consider:
The following discussion is based on provisions of the Code, applicable Treasury regulations and administrative and judicial interpretations, all as of the date of this prospectus, and all of which are subject to change, retroactively or prospectively. We have not requested a ruling from the United States Internal Revenue Service or an opinion of counsel with respect to the federal income tax consequences of the purchase or ownership of our common stock to a Non-U.S. Holder. There can be no assurance that the U.S. Internal Revenue Service will not take a position contrary to such statements or that any such contrary position taken by the U.S. Internal Revenue Service would not be sustained.
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR SITUATION AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE U.S. FEDERAL
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ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
Dividends
We do not anticipate paying cash dividends on our common stock in the foreseeable future. See "Dividend Policy." If distributions are paid on shares of our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, it will constitute a return of capital that is applied against and reduces, but not below zero, your adjusted tax basis in our common stock. Any remainder will constitute gain on the common stock. The distributions paid to a Non-U.S. Holder of our common stock generally will be subject to withholding of United States federal income tax at a 30% rate on the gross amount of the distribution or such lower rate as may be provided by an applicable income tax treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct of a trade or business in the United States or attributable to a permanent establishment in the United States under an applicable income tax treaty, known as "United States trade or business income," are generally not subject to the 30% withholding tax if the Non-U.S. Holder files the appropriate United States Internal Revenue Service form with the payor. However, such United States trade or business income, net of specified deductions and credits, is taxed at the same graduated rates applicable to United States persons. Any United States trade or business income received by a Non-U.S. Holder that is a corporation may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as specified by an applicable income tax treaty.
A Non-U.S. Holder of our common stock who claims the benefit of an applicable income tax treaty generally will be required to satisfy applicable certification and other requirements prior to the distribution date. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.
A Non-U.S. Holder of our common stock that is eligible for a reduced rate of United States withholding tax or other exclusion from withholding under an income tax treaty but that did not timely provide required certifications or other requirements, or that has received a distribution subject to withholding in excess of the amount properly treated as a dividend, may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for refund with the United States Internal Revenue Service.
Gain on Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to United States federal income tax in respect of gain recognized on a disposition of our common stock unless:
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Generally, a corporation is a "United States real property holding corporation" if the fair market value of its "United States real property interests" equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. The tax relating to stock in a "United States real property holding corporation" generally will not apply to a Non-U.S. Holder whose holdings, direct and indirect, at all times during the applicable period, constituted 5% or less of our common stock, provided that our common stock was regularly traded on an established securities market. We believe we have never been, are not currently and are not likely to become a United States real property holding corporation for United States federal income tax purposes.
Federal Estate Tax
Common stock owned or treated as owned by an individual who is a Non-U.S. Holder at the time of death will be included in the individual's gross estate for United States federal estate tax purposes, unless an applicable estate tax or other treaty provides otherwise.
Information Reporting and Backup Withholding Tax
We must report annually to the United States Internal Revenue Service and to each Non-U.S. Holder the amount of dividends paid to that holder and the tax withheld with respect to those dividends. Copies of the information returns reporting those dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder is a resident under the provisions of an applicable income tax treaty or agreement.
U.S. federal backup withholding, currently at a 28% rate, generally will not apply to payments of dividends made by us or our paying agents, in their capacities as such, to a Non-U.S. Holder of our common stock if the holder has provided the required certification that it is not a U.S. person or certain other requirements are met. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the holder is a U.S. person.
Payments of the proceeds from a disposition or a redemption effected outside the U.S. by a Non-U.S. Holder of our common stock made by or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, information reporting, but not backup withholding, generally will apply to such a payment if the broker has certain connections with the U.S. unless the broker has documentary evidence in its records that the beneficial owner is a Non-U.S. Holder and specified conditions are met or an exemption is otherwise established.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder that result in an overpayment of taxes will be refunded, or credited against the holder's United States federal income tax liability, if any, provided that the required information is furnished to the United States Internal Revenue Service.
Non-U.S. Holders should consult their own tax advisors regarding application of backup withholding in their particular circumstance and the availability of, and procedure for obtaining, an exemption from backup withholding under current U.S. Treasury regulations.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock, and we cannot assure you that a significant public market for our common stock will develop or be sustained after this offering. Future sales of significant amounts of our common stock, including shares of our outstanding common stock and shares of our common stock issued upon exercise of outstanding options and warrants, in the public market after this offering could adversely affect the prevailing market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities.
Sale of Restricted Shares and Lock-Up Agreements
Upon completion of this offering, we will have outstanding shares of common stock based upon our shares outstanding as of December 31, 2003, and assuming:
Of the shares to be outstanding upon completion of this offering, shares of common stock sold in this offering will be freely tradable without restriction under the Securities Act, unless purchased by affiliates of our company, as that term is defined in Rule 144 under the Securities Act.
The remaining 40,757,789 shares of common stock were issued and sold by us in private transactions, and are eligible for public sale if registered under the Securities Act or sold in accordance with Rules 144, 144(k) or 701 of the Securities Act. All 40,757,789 of these remaining shares of common stock are held by officers, directors, and existing stockholders who are subject to various lock-up agreements or market stand-off provisions that prohibit them from offering, selling, contracting to sell, granting an option to purchase, making a short sale or otherwise disposing of any shares of our common stock or any option to purchase shares of our common stock or any securities exchangeable for or convertible into shares of common stock for a period of 180 days after the date of this prospectus without the prior written consent of Banc of America Securities LLC. Banc of America Securities LLC, in its discretion and at any time without notice, may release all or any portion of the common stock held by our officers, directors and existing stockholders subject to these lock-up agreements. Banc of America Securities LLC has agreed with Lehman Brothers that it will not, without the consent of Lehman Brothers, exercise its discretion to release all or any portion of the common stock held by our officers, directors and existing stockholders subject to these lockup agreements.
Beginning 180 days after the date of this prospectus, 36,105,100 of these remaining shares will be eligible for sale in the public market, although all but shares will be subject to certain volume limitations. 4,652,689 of these remaining shares, which we assume will be issued upon exercise of options that, by their terms, terminate upon consummation of this offering, will be eligible for sale in the public market upon the date of completion of their Rule 144 holding period; however, all but shares will be subject to certain volume limitations.
Rule 144
In general, Rule 144 allows a stockholder (or stockholders where shares are aggregated) who has beneficially owned shares of our common stock for at least one year and who files a Form 144 with the
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SEC to sell within any three month period commencing 90 days after the date of this prospectus a number of those shares that does not exceed the greater of:
Sales under Rule 144, however, are subject to specific manner of sale provisions, notice requirements, and the availability of current public information about our company. shares of our common stock will qualify for resale under Rule 144 beginning 90 days after the date of this prospectus.
Rule 144(k)
Under Rule 144(k), in general, a stockholder who has beneficially owned shares of our common stock for at least two years and who is not deemed to have been an affiliate of our company at any time during the immediately preceding three months may sell shares without complying with the manner of sale provisions, notice requirements, public information requirements, or volume limitations of Rule 144. Affiliates of our company, however, must always sell pursuant to Rule 144, even after the otherwise applicable Rule 144(k) holding periods have been satisfied. shares of our common stock will qualify for resale under Rule 144(k) beginning on the date of this prospectus and shares will qualify for resale under Rule 144(k) within 180 days after the date of this prospectus.
Rule 701
Rule 701 generally allows a stockholder who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation, or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required to wait until 90 days after the date of this prospectus before selling such shares pursuant to Rule 701.
As of December 31, 2003, 2,730,519 shares of our outstanding common stock had been issued in reliance on Rule 701 as a result of exercises of stock options. All of these shares, however, are subject to lock-up agreements or market stand-off provisions as discussed above. As a result, these shares will only become eligible for sale at the earlier of the expiration of the 180 day lockup period or upon obtaining the prior written consent of Banc of America Securities LLC to release all or any portion of the shares subject to lockup agreements to which Banc of America Securities LLC is a party. Banc of America Securities LLC has agreed with Lehman Brothers that it will not, without the consent of Lehman Brothers, exercise its discretion to release all or any portion of the shares subject to lockup agreements to which Banc of America Securities LLC is a party.
Registration Rights
As described above in "Description of Capital StockRegistration Rights," upon completion of this offering, the holders of approximately 35,981,399 shares of our common stock, including shares issued upon conversion of our preferred stock and shares issued upon the exercise of warrants, will have the right, subject to various conditions and limitations, to demand the filing of and include their shares in registration statements relating to our securities, subject to the 180 day lock-up arrangement described above. By exercising their registration rights and causing a large number of shares to be
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registered and sold in the public market, these holders could cause the price of the common stock to fall. In addition, any demand to include such shares in our registration statements could have a material adverse effect on our ability to raise needed capital.
Options and Warrants
In addition to the shares of common stock outstanding immediately after this offering, as of December 31, 2003, there were outstanding options to purchase 4,275,645 shares of our common stock and outstanding warrants to purchase 280,842 shares of our common stock, assuming the exercise of warrants to purchase up to 4,652,689 shares of our common stock at a weighted average price of $0.40 per share, which warrants, by their terms, terminate upon completion of this offering. In addition, during January 2004, we granted options to purchase an aggregate of 2,732,500 shares of our common stock.
As soon as practicable after the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of our common stock issued or reserved for issuance under the 1998 Plan, 2004 Plan and Purchase Plan. Accordingly, shares of our common stock registered under such registration statement will be available for sale in the open market upon exercise by the holders, subject to vesting restrictions with us, Rule 144 limitations applicable to our affiliates and the contractual lock-up agreements and market stand-off provisions described above.
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We are offering the shares of common stock described in this prospectus through a number of underwriters. Banc of America Securities LLC, Lehman Brothers Inc., Thomas Weisel Partners LLC and William Blair & Company, L.L.C. are the representatives of the underwriters. We have entered into a firm commitment underwriting agreement with the representatives. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each underwriter has agreed to purchase, the number of shares of common stock listed next to its name in the following table:
Underwriter
|
Number of Shares
|
||
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Banc of America Securities LLC | |||
Lehman Brothers Inc. | |||
Thomas Weisel Partners LLC | |||
William Blair & Company, L.L.C. | |||
|
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Total | |||
|
The underwriting agreement is subject to a number of terms and conditions and provides that the underwriters must buy all of the shares if they buy any of them. The underwriters will sell the shares to the public when and if the underwriters buy the shares from us.
The underwriters initially will offer the shares to the public at the price specified on the cover page of this prospectus. The underwriters may allow a concession of not more than $ per share to selected dealers. The underwriters may also allow, and those dealers may re-allow, a concession of not more than $ per share to some other dealers. If all the shares are not sold at the public offering price, the underwriters may change the public offering price and the other selling terms. The common stock is offered subject to a number of conditions, including:
Over-Allotment Option.
We have granted the underwriters an over-allotment option to buy up to additional shares of our common stock at the same price per share as they are paying for the shares shown in the table above. These additional shares would cover sales of shares by the underwriters which exceed the total number of shares shown in the table above. The underwriters may exercise this option at any time within 30 days after the date of this prospectus. To the extent that the underwriters exercise this option, each underwriter will purchase additional shares from us in approximately the same proportion as it purchased the shares shown in the table above. If purchased, the additional shares will be sold by the underwriters on the same terms as those on which the other shares are sold. We will pay the expenses associated with the exercise of this option.
Discount and Commissions.
The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by us. These amounts are shown assuming no exercise and full exercise of the underwriters' option to purchase additional shares.
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We estimate that the expenses of the offering to be paid by us, not including underwriting discounts and commissions, will be approximately $ .
|
Paid by Us
|
||||||
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No Exercise
|
Full Exercise
|
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Per Share | $ | $ | |||||
Total | $ | $ | |||||
|
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Listing.
We expect our common stock to be approved for quotation on the Nasdaq National Market under the symbol "NUVA."
Stabilization.
In connection with this offering, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our common stock, including:
Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while this offering is in progress. Stabilizing transactions may include making short sales of our common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock from us or on the open market to cover positions created by short sales. Short sales may be "covered" shorts, which are short positions in an amount not greater than the underwriters' over-allotment option referred to above, or may be "naked" shorts, which are short positions in excess of that amount. Syndicate covering transactions involve purchases of our common stock in the open market after the distribution has been completed in order to cover syndicate short positions.
The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the over-allotment option.
A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchased in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.
The representatives also may impose a penalty bid on underwriters and dealers participating in the offering. This means that the representatives may reclaim from any syndicate members or other dealers participating in the offering the underwriting discount, commissions or selling concession on shares sold by them and purchased by the representatives in stabilizing or short covering transactions.
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These activities may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result of these activities, the price of our common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence the activities, they may discontinue them at any time. The underwriters may carry out these transactions on the Nasdaq National Market, in the over-the counter market or otherwise.
IPO Pricing.
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated between us and the representatives of the underwriters. Among the factors to be considered in these negotiations are:
The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions and other factors.
Qualified Independent Underwriter.
Entities related to William Blair & Company have purchased and may hold more than 10% of our outstanding shares of common stock. As a result, William Blair & Company may be deemed to be our "affiliate" under the rules of the National Association of Securities Dealers, Inc., or NASD. This offering, therefore, is being conducted in accordance with the applicable provisions of Rule 2720 of the NASD Conduct Rules. Rule 2720(c)(3) requires that the initial public offering price of the shares of common stock be no higher than that recommended by a "qualified independent underwriter," as defined by the NASD. Accordingly, Lehman Brothers is assuming the responsibilities of acting as the qualified independent underwriter in pricing the offering and conducting due diligence. The initial public offering price of the shares of common stock will be no higher than that recommended by Lehman Brothers. We have agreed to indemnify Lehman Brothers against liabilities incurred in connection with acting as a qualified independent underwriter, including liabilities under the Securities Act.
The underwriters have informed us that they will not confirm sales to accounts over which they exercise discretionary authority without the prior written approval of the customer.
Lock-up Agreements.
We, our directors and executive officers, more than 98% of our existing shareholders and the holders of over 98% of our options have entered into lock-up agreements with the underwriters. Under these agreements, subject to exceptions, we may not issue any new shares of common stock, and those holders of stock and options may not, directly or indirectly, offer, sell, contract to sell, pledge or otherwise dispose of or hedge any common stock or securities convertible into or exchangeable for
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shares of common stock, or publicly announce the intention to do any of the foregoing, without the prior written consent of Banc of America Securities LLC for a period of 180 days from the date of this prospectus. This consent may be given at any time without public notice. In addition, during this 180 day period, we have also agreed not to file any registration statement for, and each of our officers and shareholders has agreed not to make any demand for, or exercise any right of, the registration of, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock without the prior written consent of Banc of America Securities LLC. Banc of America Securities LLC has agreed that it will not, without the prior written consent of Lehman Brothers, exercise its consent to release shares from the lock-up agreements or allow the filing of (or demand for) a registration statement.
Directed Share Program.
At our request, the underwriters have reserved for sale to our employees, directors, families of employees and directors, business associates and other third parties at the initial public offering price up to 5% of the shares being offered by this prospectus. The sale of the reserved shares to these purchasers will be made by Lehman Brothers. The purchasers of these shares will not be subject to a lock-up except as required by the Conduct Rules of the NASD, which require a 90-day lock-up if they are affiliated with or associated with NASD members or if they or members of their immediate families hold senior positions at financial institutions, or to the extent the purchasers are subject to a lock-up agreement with the underwriters as described above. We do not know if our employees, directors, families of employees and directors, business associates and other third parties will choose to purchase all or any portion of the reserved shares, but any purchases they do make will reduce the number of shares available to the general public. If all of these reserved shares are not purchased, the underwriters will offer the remainder to the general public on the same terms as the other shares offered by this prospectus.
Indemnification.
We will indemnify the underwriters against some liabilities, including liabilities under the Securities Act. If we are unable to provide this indemnification, we will contribute to payments the underwriters may be required to make in respect of those liabilities.
Online Offering.
A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters participating in this offering. Other than the prospectus in electronic format, the information on any such web site, or accessible through any such web site, is not part of the prospectus. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters that will make Internet distributions on the same basis as other allocations. In addition, shares may be sold by the underwriters to securities dealers who resell shares to online brokerage account holders.
Conflicts/Affiliates.
The underwriters and their affiliates have provided, and may in the future provide, various investment banking, commercial banking and other financial services for us and our affiliates for which services they have received, and may in the future receive, customary fees.
99
Notice to Canadian Residents
Offers and Sales in Canada
This prospectus is not, and under no circumstances is to be construed as, an advertisement or a public offering of shares in Canada or any province or territory thereof. Any offer or sale of shares in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable provincial securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made.
This prospectus is for the confidential use of only those persons to whom it is delivered by the underwriters in connection with the offering of the shares into Canada. The underwriters reserve the right to reject all or part of any offer to purchase shares for any reason or allocate to any purchaser less than all of the shares for which it has subscribed.
Responsibility
Except as otherwise expressly required by applicable law or as agreed to in contract, no representation, warranty, or undertaking (express or implied) is made and no responsibilities or liabilities of any kind or nature whatsoever are accepted by any underwriter or dealer as to the accuracy or completeness of the information contained in this prospectus or any other information provided by us in connection with the offering of the shares into Canada.
Resale Restrictions
The distribution of the shares in Canada is being made on a private placement basis only and is exempt from the requirement that we prepare and file a prospectus with the relevant Canadian regulatory authorities. Accordingly, any resale of the shares must be made in accordance with applicable securities laws, which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with exemptions from registration and prospectus requirements. Canadian purchasers are advised to seek legal advice prior to any resale of the shares.
Representations of Purchasers
Each Canadian investor who purchases shares will be deemed to have represented to us, the underwriters and any dealer who sells shares to such purchaser that: (i) the offering of the shares was not made through an advertisement of the shares in any printed media of general and regular paid circulation, radio, television or telecommunications, including electronic display, or any other form of advertising in Canada; (ii) such purchaser has reviewed the terms referred to above under "Resale Restrictions" above; (iii) where required by law, such purchaser is purchasing as principal for its own account and not as agent; and (iv) such purchaser or any ultimate purchaser for which such purchaser is acting as agent is entitled under applicable Canadian securities laws to purchase such shares without the benefit of a prospectus qualified under such securities laws, and without limiting the generality of the foregoing: (a) in the case of a purchaser located in a province other than Ontario and Newfoundland and Labrador, without the dealer having to be registered, (b) in the case of a purchaser located in a province other than Ontario or Quebec, such purchaser is an accredited investor as defined in section 1.1 of Multilateral Instrument 45-103 - Capital Raising Exemptions, (c) in the case of a purchaser located in Ontario, such purchaser, or any ultimate purchaser for which such purchaser is acting as agent, is an accredited investor, other than an individual, as that term is defined in Ontario Securities Commission Rule 45-501 - Exempt Distributions and is a person to which a dealer registered as an international dealer in Ontario may sell shares, and (d) in the case of a purchaser located inQuébec, such purchaser is a sophisticated purchaser within the meaning of section 44 or 45 of the Securities Act (Québec).
100
Taxation and Eligibility for Investment
Any discussion of taxation and related matters contained in this prospectus does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase the shares. Canadian purchasers of shares should consult their own legal and tax advisers with respect to the tax consequences of an investment in the shares in their particular circumstances and with respect to the eligibility of the shares for investment by the purchaser under relevant Canadian federal and provincial legislation and regulations.
Rights of Action for Damages or Rescission (Ontario)
Securities legislation in Ontario provides that every purchaser of shares pursuant to this prospectus shall have a statutory right of action for damages or rescission against us in the event this prospectus contains a misrepresentation as defined in the Securities Act (Ontario). Ontario purchasers who purchase shares offered by this prospectus during the period of distribution are deemed to have relied on the misrepresentation if it was a misrepresentation at the time of purchase. Ontario purchasers who elect to exercise a right of rescission against us on whose behalf the distribution is made shall have no right of action for damages against us. The right of action for rescission or damages conferred by the statute is in addition to, and without derogation from, any other right the purchaser may have at law. Prospective Ontario purchasers should refer to the applicable provisions of Ontario securities legislation and are advised to consult their own legal advisers as to which, or whether any, of such rights or other rights may be available to them.
The foregoing summary is subject to the express provisions of the Securities Act (Ontario) and the rules, regulations and other instruments thereunder, and reference is made to the complete text of such provisions contained therein. Such provisions may contain limitations and statutory defenses on which we may rely. The enforceability of these rights may be limited as described herein under "Enforcement of Legal Rights."
The rights of action discussed above will be granted to the purchasers to whom such rights are conferred upon acceptance by the relevant dealer of the purchase price for the shares. The rights discussed above are in addition to and without derogation from any other right or remedy which purchasers may have at law. Similar rights may be available to investors in other Canadian provinces.
Enforcement of Legal Rights
We are organized under the laws of the State of Delaware in the United States of America. All, or substantially all, of our directors and officers, and the experts named herein, may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or such persons. All or a substantial portion of our assets or the assets and such other persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or such persons in Canada or to enforce a judgment obtained in Canadian courts against us or such persons outside of Canada.
Language of Documents
Upon receipt of this document, you hereby confirm that you have expressly requested that all documents evidencing or relating in any way to the sale of the securities described herein (including for greater certainty any purchase confirmation or any notice) be drawn up in the English language only. Par la réception de ce document, vous confirmez par les présentes que vous avez expressément exigé que tous les documents faisant foi ou se rapportant de quelque manière que ce soit à la vente des valeurs mobilières décrites aux présentes (incluant, pour plus de certitude, toute confirmation d'achat ou tout avis) soient rédigés en anglais seulement.
101
The validity of the common stock offered hereby will be passed upon for us by Heller Ehrman White & McAuliffe LLP, San Diego, California. As of the date of this prospectus, certain attorneys of Heller Ehrman White & McAuliffe LLP hold an aggregate of 10,000 shares of our common stock. Certain legal matters in connection with this offering will be passed upon for the underwriters by Morrison & Foerster LLP, San Diego, California.
Ernst & Young LLP, independent auditors, have audited our consolidated financial statements at December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, as set forth in their report. We have included our consolidated financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information with respect to NuVasive and the common stock offered hereby, reference is made to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement.
A copy of the registration statement and the exhibits and schedules filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 450 Fifth Street, N.W., Room 1200, Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov.
Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Exchange Act, and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available for inspection and copying at the public reference room and web site of the SEC referred to above. We also intend to furnish our stockholders with annual reports containing our financial statements audited by an independent public accounting firm and quarterly reports containing our unaudited financial information. We maintain a website at www.nuvasive.com . You may access our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The reference to our web address does not constitute incorporation by reference of the information contained at this site.
102
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
---|---|---|
NUVASIVE, INC. | ||
Report of Ernst & Young LLP, Independent Auditors |
|
F-2 |
Consolidated Balance Sheets as of December 31, 2002 and 2003 |
|
F-3 |
Consolidated Statements of Operations for the years ended December 31, 2001, 2002 and 2003 |
|
F-4 |
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2002 and 2003 |
|
F-5 |
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003 |
|
F-6 |
Notes to Consolidated Financial Statements |
|
F-7 |
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The
Board of Directors
NuVasive, Inc.
We have audited the accompanying consolidated balance sheets of NuVasive, Inc. as of December 31, 2002 and 2003, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NuVasive, Inc. at December 31, 2002 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San
Diego, California
February 20, 2004,
except for paragraph 3 of Note 9, as to which the date is
March 31, 2004
F-2
NUVASIVE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
|
|
|
Pro forma
stockholders' equity at December 31, 2003 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
|
||||||||||
|
2002
|
2003
|
|||||||||
|
|
|
(unaudited)
|
||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 6,906 | $ | 5,631 | |||||||
Short-term investments | | 4,017 | |||||||||
Accounts receivable, net | 1,908 | 3,728 | |||||||||
Inventory, net | 2,460 | 5,048 | |||||||||
Prepaid expenses and other current assets | 1,196 | 428 | |||||||||
|
|
||||||||||
Total current assets | 12,470 | 18,852 | |||||||||
Property and equipment, net | 2,235 | 3,390 | |||||||||
Note receivable from employee | 146 | 21 | |||||||||
Other assets | 81 | 108 | |||||||||
|
|
||||||||||
Total assets | $ | 14,932 | $ | 22,371 | |||||||
|
|
||||||||||
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: | |||||||||||
Accounts payable and accrued liabilities | $ | 1,914 | $ | 5,036 | |||||||
Accrued payroll and related expenses | 1,859 | 2,242 | |||||||||
Current portion of notes payable | 898 | 3,493 | |||||||||
Current portion of obligations under capital leases | 548 | 306 | |||||||||
|
|
||||||||||
Total current liabilities | 5,219 | 11,077 | |||||||||
Notes payable, less current portion | | 1,202 | |||||||||
Obligations under capital leases, less current portion | 329 | 22 | |||||||||
Commitments and contingencies | |||||||||||
Stockholders' equity: | |||||||||||
Preferred stock, $.001 par value; 33,347 shares authorized, 27,637 and 31,586 shares issued and outstanding at December 31, 2002 and 2003, respectively, preference in liquidation of $74,426 at December 31, 2003; no shares issued and outstanding pro forma (unaudited) | 28 | 32 | $ | | |||||||
Common stock, $.001 par value; 49,200 shares authorized, 4,476 and 4,294 shares issued and outstanding at December 31, 2002 and 2003, respectively; 36,658 shares issued and outstanding pro forma (unaudited) | 4 | 4 | 36 | ||||||||
Additional paid-in capital | 63,996 | 75,044 | 75,044 | ||||||||
Notes receivable from stockholders | (435 | ) | (188 | ) | (188 | ) | |||||
Deferred compensation | (80 | ) | (566 | ) | (566 | ) | |||||
Accumulated deficit | (54,129 | ) | (64,256 | ) | (64,256 | ) | |||||
|
|
|
|||||||||
Total stockholders' equity | 9,384 | 10,070 | $ | 10,070 | |||||||
|
|
|
|||||||||
Total liabilities and stockholders' equity | $ | 14,932 | $ | 22,371 | |||||||
|
|
See accompanying notes.
F-3
NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
Years ended December 31,
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2001
|
2002
|
2003
|
||||||||||
Revenues: | |||||||||||||
MAS | $ | 1,444 | $ | 5,269 | $ | 12,069 | |||||||
Classic fusion | 1,120 | 6,991 | 10,586 | ||||||||||
|
|
|
|||||||||||
Total revenues | 2,564 | 12,260 | 22,655 | ||||||||||
Cost of goods sold | 1,354 | 5,303 | 6,791 | ||||||||||
|
|
|
|||||||||||
Gross profit | 1,210 | 6,957 | 15,864 | ||||||||||
Operating expenses: | |||||||||||||
Research and development | 7,331 | 6,107 | 6,310 | ||||||||||
Sales and marketing | 6,885 | 10,024 | 12,609 | ||||||||||
General and administrative | 4,458 | 5,568 | 6,185 | ||||||||||
Stock-based compensation | 22 | 113 | 743 | ||||||||||
|
|
|
|||||||||||
Total operating expenses | 18,696 | 21,812 | 25,847 | ||||||||||
Interest income | 585 | 197 | 138 | ||||||||||
Interest expense | (1,013 | ) | (397 | ) | (418 | ) | |||||||
Other income (expense), net | 12 | (55 | ) | 136 | |||||||||
|
|
|
|||||||||||
Net loss | (17,902 | ) | (15,110 | ) | (10,127 | ) | |||||||
Beneficial conversion of convertible debt | (320 | ) | | | |||||||||
|
|
|
|||||||||||
Net loss attributable to common stockholders | $ | (18,222 | ) | $ | (15,110 | ) | $ | (10,127 | ) | ||||
|
|
|
|||||||||||
Historical net loss per share: | |||||||||||||
Basic and diluted | $ | (9.56 | ) | $ | (5.28 | ) | $ | (2.52 | ) | ||||
|
|
|
|||||||||||
Weighted average sharesbasic and diluted | 1,907 | 2,863 | 4,018 | ||||||||||
|
|
|
|||||||||||
Pro forma net loss per share: | |||||||||||||
Basic and diluted | $ | (0.30 | ) | ||||||||||
|
|||||||||||||
Weighted average sharesbasic and diluted | 33,947 | ||||||||||||
|
|||||||||||||
Stock-based compensation is allocated as follows: | |||||||||||||
Research and development | $ | 18 | $ | 31 | $ | 479 | |||||||
Sales and marketing | | | 148 | ||||||||||
General and administrative | 4 | 82 | 116 | ||||||||||
|
|
|
|||||||||||
Total stock-based compensation | $ | 22 | $ | 113 | $ | 743 | |||||||
|
|
|
See accompanying notes.
F-4
NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share amounts)
|
Preferred stock
|
Common stock
|
|
Notes
receivable from stockholders |
|
|
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Additional
paid-in capital |
Deferred
compensation |
Accumulated
deficit |
Total
stockholders' equity |
||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
||||||||||||||||||||||
Balance at December 31, 2000 | 10,012 | $ | 10 | 1,892 | $ | 2 | $ | 20,065 | $ | | $ | | $ | (20,797 | ) | $ | (720 | ) | ||||||||
Issuance of Series D preferred stock warrants in connection with convertible debt offering and line of credit agreement | | | | | 362 | | | | 362 | |||||||||||||||||
Issuance of Series D preferred stock in May 2001 at $2.53 per share for cash, net of issuance costs of $1,937 | 9,880 | 10 | | | 23,049 | | | | 23,059 | |||||||||||||||||
Issuance of Series D convertible preferred stock for conversion of notes, including interest of $44 | 1,796 | 2 | | | 4,542 | | | | 4,544 | |||||||||||||||||
Beneficial conversion of convertible debt | 320 | (320 | ) | | ||||||||||||||||||||||
Imputed interest on convertible notes payable | | | | | 91 | | | | 91 | |||||||||||||||||
Issuance of stock options to non-employees | | | | | 22 | | | | 22 | |||||||||||||||||
Issuance of common stock for cash | | | 95 | | 9 | | | | 9 | |||||||||||||||||
Issuance of Series D preferred stock warrants for cash | | | | | 1 | | | | 1 | |||||||||||||||||
Net loss and comprehensive loss | | | | | | | | (17,902 | ) | (17,902 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||
Balance at December 31, 2001 | 21,688 | 22 | 1,987 | 2 | 48,461 | | | (39,019 | ) | 9,466 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||
Issuance of Series D-1 convertible preferred stock in July 2002 at $2.53 per share for cash, net of issuance costs of $262 | 5,949 | 6 | | | 14,809 | | | | 14,815 | |||||||||||||||||
Issuance of common stock to non-employees | | | 11 | | 2 | | | | 2 | |||||||||||||||||
Issuance of common stock for cash and notes to employees | | | 2,478 | 2 | 533 | (523 | ) | | | 12 | ||||||||||||||||
Issuance of stock options and warrants to non-employees | | | | | 70 | | | | 70 | |||||||||||||||||
Interest accrued on notes from stockholders | | | | | | (15 | ) | | | (15 | ) | |||||||||||||||
Forgiveness of notes and interest due from stockholders | | | | | | 103 | | | 103 | |||||||||||||||||
Deferred compensation | | | | | 121 | | (121 | ) | | | ||||||||||||||||
Amortization of deferred compensation | | | | | | | 41 | | 41 | |||||||||||||||||
Net loss and comprehensive loss | | | | | | | | (15,110 | ) | (15,110 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||
Balance at December 31, 2002 | 27,637 | 28 | 4,476 | 4 | 63,996 | (435 | ) | (80 | ) | (54,129 | ) | 9,384 | ||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||
Issuance of Series D-1 convertible preferred stock in June and July 2003 at $2.53 per share for cash, net of issuance costs of $78 | 3,949 | 4 | | | 9,911 | | | | 9,915 | |||||||||||||||||
Redemption of common stock for intellectual property | | | (250 | ) | | (125 | ) | | | | (125 | ) | ||||||||||||||
Issuance of common stock for cash | | | 282 | | 57 | | | | 57 | |||||||||||||||||
Issuance of warrants to non-employees | | | | | 33 | | | | 33 | |||||||||||||||||
Compensation expense related to issuance of stock options to non-employees | | | | | 458 | | | | 458 | |||||||||||||||||
Interest on notes from stockholders | | | | | | (13 | ) | | | (13 | ) | |||||||||||||||
Forgiveness of notes and interest due from stockholders | | | (214 | ) | | (57 | ) | 226 | | | 169 | |||||||||||||||
Payment received on note receivable from stockholder | | | | | | 34 | | | 34 | |||||||||||||||||
Deferred stock-based compensation | | | | | 771 | | (771 | ) | | | ||||||||||||||||
Amortization of stock-based compensation | | | | | | | 285 | | 285 | |||||||||||||||||
Net loss and comprehensive loss | | | | | | | | (10,127 | ) | (10,127 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||
Balance at December 31, 2003 | 31,586 | $ | 32 | 4,294 | $ | 4 | $ | 75,044 | $ | (188 | ) | $ | (566 | ) | $ | (64,256 | ) | $ | 10,070 | |||||||
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share amounts)
|
Years ended December 31,
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2001
|
2002
|
2003
|
|||||||||
Operating activities: | ||||||||||||
Net loss | $ | (17,902 | ) | $ | (15,110 | ) | $ | (10,127 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 604 | 1,348 | 1,775 | |||||||||
Interest on convertible notes payable | 497 | | | |||||||||
Amortization of loan fees | 63 | 84 | 21 | |||||||||
Stock-based compensation | | 41 | 285 | |||||||||
Allowance for doubtful accounts | 143 | 258 | 231 | |||||||||
Allowance for excess and obsolete inventory | 119 | 939 | 351 | |||||||||
(Gain) loss on sale of fixed assets and intellectual property | | 55 | (226 | ) | ||||||||
Issuance of common stock and stock options to non-employees | 22 | 43 | 458 | |||||||||
Issuance of warrants | | 29 | 33 | |||||||||
Interest accrued on notes from stockholders | | (15 | ) | (13 | ) | |||||||
Forgiveness of notes and interest due from related parties | 229 | 228 | 295 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (1,171 | ) | (1,102 | ) | (2,051 | ) | ||||||
Inventory | (3,395 | ) | (529 | ) | (2,927 | ) | ||||||
Prepaid expenses and other current assets | 63 | (282 | ) | 768 | ||||||||
Accounts payable and accrued liabilities | 2,116 | (1,356 | ) | 3,122 | ||||||||
Accrued payroll and related expenses | 260 | 1,371 | 383 | |||||||||
|
|
|
||||||||||
Net cash used in operating activities | (18,352 | ) | (13,998 | ) | (7,622 | ) | ||||||
Investing activities: |
|
|
|
|
|
|
|
|
|
|
||
Purchases of property and equipment | (774 | ) | (1,259 | ) | (2,841 | ) | ||||||
Proceeds from disposal of property and equipment | | 53 | | |||||||||
Purchase of short-term investments | | | (4,017 | ) | ||||||||
Other assets | (16 | ) | (757 | ) | (48 | ) | ||||||
|
|
|
||||||||||
Net cash used in investing activities | (790 | ) | (1,963 | ) | (6,906 | ) | ||||||
Financing activities: |
|
|
|
|
|
|
|
|
|
|
||
Proceeds from notes payable | 4,500 | | 4,678 | |||||||||
Payment of notes payable | (893 | ) | (1,209 | ) | (882 | ) | ||||||
Payment of capital leases | (297 | ) | (507 | ) | (549 | ) | ||||||
Proceeds from note receivable from stockholder | | | 34 | |||||||||
Issuance of common stock for cash | 9 | 12 | 57 | |||||||||
Issuance of warrants | 1 | | | |||||||||
Net proceeds from issuance of convertible preferred stock | 23,059 | 14,815 | 9,915 | |||||||||
Proceeds from sale-leaseback of equipment | 585 | 98 | | |||||||||
|
|
|
||||||||||
Net cash provided by financing activities | 26,964 | 13,209 | 13,253 | |||||||||
Increase (decrease) in cash and cash equivalents |
|
|
7,822 |
|
|
(2,752 |
) |
|
(1,275 |
) |
||
Cash and cash equivalents at beginning of year |
|
|
1,836 |
|
|
9,658 |
|
|
6,906 |
|
||
|
|
|
||||||||||
Cash and cash equivalents at end of year | $ | 9,658 | $ | 6,906 | $ | 5,631 | ||||||
|
|
|
||||||||||
Supplemental schedule of cash flow information |
|
|
|
|
|
|
|
|
|
|
||
Cash paid for interest | $ | 427 | $ | 313 | $ | 193 | ||||||
|
|
|
||||||||||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
||
Conversion of notes payable and accrued interest in conjunction with issuance of Series D preferred stock | $ | 4,544 | $ | | $ | | ||||||
|
|
|
||||||||||
Repurchase of unvested common stock by reduction in notes receivable | $ | | $ | | $ | 54 | ||||||
|
|
|
See accompanying notes.
F-6
NUVASIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Description of Business
NuVasive, Inc. (the Company or NuVasive) was incorporated in Delaware on July 21, 1997. The Company designs, develops and markets products for the surgical treatment of spine disorders and operates in one business segment. The Company began commercializing its products in 2001. Its current principal product offerings include a surgical platform called maximum access surgery, or MAS, and classic fusion products. MAS combines NeuroVision, a nerve avoidance system, MaXcess, a minimally invasive surgical system, and specialized implants. The Company places its NeuroVision systems in hospitals and allows them to remain on-site provided the hospital orders a minimum monthly quantity of the Company's nerve avoidance disposable products. MaXcess instruments are sold to hospitals for use in surgery. The classic fusion portfolio includes a range of spine allografts and spine implants such as rods, plates and screws. Classic fusion products are sold from implant sets shipped from the Company's facility. MAS disposable products are shipped from our inventory, some of which is stored at distributor sites.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary NuVasive GmbH. All significant intercompany balances and transactions have been eliminated in consolidation. There has been no material activity by NuVasive GmbH during the year ended December 31, 2003.
The consolidation of foreign subsidiaries requires financial statement translation in accordance with the Statement of Financial Accounting Standards (SFAS) No. 52. Assets and liabilities are translated into U.S. dollars at year-end exchange rates. Statements of operations and cash flows are translated at the average exchange rates for each year. As of December 31, 2002 and 2003, there was no effect of foreign currency translation as the functional currency and the reporting currency are both the U.S. dollar.
Unaudited Pro Forma Stockholders' Equity Presentation
The unaudited pro forma stockholders' equity at December 31, 2003 reflects the effect of the conversion of all shares of convertible preferred stock into 31,812,000 shares of common stock as though the completion of the planned initial public offering occurred on December 31, 2003. Common shares issued in such initial public offering and any related net proceeds are excluded from such pro forma information.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified to conform to current year presentation.
F-7
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds.
Short-term Investments
In accordance with Financial Accounting Standards Board (FASB) SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities , management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation periodically. Equity securities are classified as available-for-sale. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. The amortized cost of debt securities classified as held-to-maturity is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income.
Accounts Receivable and Related Valuation Account
Accounts receivable in the accompanying consolidated balance sheets are presented net of allowance for doubtful accounts.
The Company makes judgments as to its ability to collect outstanding receivables and provides allowance for a portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not specifically reviewed. In determining the provision for invoices not specifically reviewed, the Company analyzes historical collection experience and current economic trends. If the historical data used to calculate the allowance provided for doubtful accounts does not reflect the Company's future ability to collect outstanding receivables or if the financial condition of customers were to deteriorate, resulting in impairment or their ability to make payments, an increase in the provision for doubtful accounts may be required. Below is a summary of the changes in the Company's allowance for doubtful accounts for the years ended December 31, 2001, 2002 and 2003 ( in thousands ):
Allowance for doubtful accounts
|
Balance at
beginning of year |
Additions
|
Write-offs
|
Balance at
end of year |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2001 | $ | | $ | 143 | $ | 20 | $ | 123 | ||||
December 31, 2002 | 123 | 258 | 276 | 105 | ||||||||
December 31, 2003 | 105 | 231 | 16 | 320 |
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. The Company reviews the components of its inventory on a periodic basis for excess, obsolete and impaired inventory, and records a reserve for the identified items.
F-8
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, current portion of notes payable, and current portion of obligations under capital leases are considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on the borrowing rates currently available to the Company for loans with similar terms, management believes the fair value of the long-term debt and long-term portion of capital leases approximates their carrying values.
Concentration of Credit Risk and Significant Customers
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, securities held to maturity and accounts receivable. The Company limits its exposure to credit loss by placing its cash and investments with high credit quality financial institutions. Additionally, the Company has established guidelines regarding diversification of its investments and their maturities, which are designed to maintain safety and maximize liquidity.
No single customer represented greater than 10 percent of sales for any of the periods presented.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation on computer equipment, furniture and fixtures, machinery and equipment, and loaner equipment. Depreciation is calculated using the straight-line method over the shorter of the estimated useful lives of the assets (ranging from two to seven years). Leasehold improvements are amortized using the straight-line method over the estimated useful life of the asset or the lease term, whichever is shorter.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , if indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through the undiscounted future operating cash flows. If impairment is indicated, the Company measures the amount of such impairment by comparing the carrying value of the asset to the undiscounted cash flows associated with the use of the asset. While the Company's current and historical operating losses and cash flows are indicators of impairment, the Company believes the future cash flows to be received from the long-lived assets will exceed the assets' carrying value, and accordingly the Company has not recognized any impairment losses through December 31, 2003.
Revenue Recognition
The Company's revenue from sales of implants and disposables is recognized upon receipt of written acknowledgement that the product has been used in a surgical procedure or upon shipment to third-party customers who immediately accept title.
F-9
The Company recognizes revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured. In addition, the Company follows the provisions of the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition , which sets forth guidelines for the timing of revenue recognition based upon factors such as passage of title, installation, payment and customer acceptance. Specifically, revenue from the sale of implants and disposables is recognized upon receipt of written acknowledgement that the product has been used in a surgical procedure or upon shipment to third-party customers who immediately accept title. Revenue from the sale of NeuroVision units and instrument sets is recognized upon receipt of a purchase order and the subsequent shipment to customers who immediately accept title.
Research and Development
Research and development costs are expensed as incurred.
Product Shipment Costs
Product shipment costs are included in sales and marketing expense in the accompanying consolidated statements of operations and totaled approximately $77,000, $409,000 and $386,000 in 2001, 2002 and 2003, respectively.
Patent Costs
Costs related to filing and pursuing patent applications are expensed to research and development as incurred as recoverability of such expenditures is uncertain.
Marketing Costs
Marketing costs, including advertising expense, are expensed as incurred.
Stock-Based Compensation
The Company records compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to Accounting Principles Board (APB) Opinion No. 25, " Accounting for Stock Issued to Employees ." The Company establishes the exercise price based on the fair value of the Company's stock at the date of grant as determined by the Board of Directors (the Board). In determining the fair value of the common stock, the Board considered (i) the advancement of the Company's technology, (ii) the Company's financial position and (iii) the fair value of the Company's preferred stock as determined in arm's-length transactions. Therefore, the options have no intrinsic value upon grant and no expense is recorded upon issuance. With respect to certain options granted during 2003, the Company has recorded deferred stock-based compensation of $771,000 for the incremental difference at the grant date between the fair value per share determined by the Board and the deemed fair value per share determined solely for financial reporting purposes in conjunction with the Company's initial public offering. Deferred stock-based compensation is recognized and amortized on an accelerated basis in accordance with Financial Accounting Standards Board Interpretation (FIN)
F-10
No. 28 Accounting for Stock Appreciation Rights and Other Variable Stock Option Award Plans , over the vesting period of the related options, generally four years.
Options or stock awards issued to non-employees are recorded at their fair value as determined in accordance with SFAS No. 123, Accounting for Stock-Based Compensation , FIN No. 44, Accounting for Certain Transactions involving Stock Compensation , and are periodically revalued in accordance with Emerging Issues Task Force (EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services , as the options vest, and recognized as an expense over the related service period.
As required under SFAS No. 123, the pro forma effects of stock-based compensation on net loss are estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the years ended December 31, 2001, 2002 and 2003, respectively: risk-free interest rate of 4.5%, 3.0% and 3.2%; dividend yield of 0%; volatility of 60%; and an expected option life of five years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the related options.
The following table illustrates the effect on net losses if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation (in thousands, except per share amounts) :
|
Years ended December 31,
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2001
|
2002
|
2003
|
|||||||
Net loss attributable to common stockholders as reported | $ | (18,222 | ) | $ | (15,110 | ) | $ | (10,127 | ) | |
Add: Stock-based employee compensation expense included in net loss | | | 209 | |||||||
Deduct: Stock-based employee compensation expense determined under fair value method for all awards | (24 | ) | (76 | ) | (365 | ) | ||||
|
|
|
||||||||
Pro forma net loss attributable to common stockholders | $ | (18,246 | ) | $ | (15,186 | ) | $ | (10,283 | ) | |
|
|
|
||||||||
Basic and diluted net loss per share as reported |
|
$ |
(9.56 |
) |
$ |
(5.28 |
) |
$ |
(2.52 |
) |
|
|
|
||||||||
Basic and diluted pro forma net loss per share | $ | (9.57 | ) | $ | (5.30 | ) | $ | (2.56 | ) | |
|
|
|
The pro forma effect on net loss for 2001, 2002 and 2003 may not be representative of the pro forma effect on reported net income or loss in future years because these amounts reflect less than four years of vesting and due to the uncertainty of stock option grant volume and potential change in assumptions driven by market factors.
F-11
Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128 , Earnings Per Share , and SAB No. 98. Under the provisions of SFAS No. 128 basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period and excluding the weighted average common shares subject to repurchase of 45,000 shares, 312,000 shares and 353,000 shares at December 31, 2001, 2002 and 2003, respectively. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period.
Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also gives effect to common equivalent shares arising from preferred stock that will automatically convert upon the closing of the initial public offering contemplated by this prospectus using the as-if converted method as of January 1, 2003 or the date of issuance, if later.
A reconciliation of weighted average shares used in the calculation of historical and pro-forma basic and diluted net loss per share for the year ended December 31, 2003 is as follows ( in thousands ):
Common shares outstanding | 4,018 | |
Adjustment to reflect the assumed conversion of outstanding preferred stock | 29,929 | |
|
||
Shares used in computing pro forma basic and diluted net loss per common share | 33,947 | |
|
The following table summarizes potential common shares that were excluded from historical basic and diluted earnings per share because of their anti-dilutive effect ( in thousands ):
Common stock equivalents
|
2001
|
2002
|
2003
|
||||
---|---|---|---|---|---|---|---|
Options to purchase common stock | 3,803 | 3,343 | 4,276 | ||||
Warrants to purchase common stock | | 2,776 | 4,381 | ||||
Warrants to purchase preferred stock | 493 | 493 | 553 | ||||
Common stock subject to repurchase | 79 | 1,030 | 560 | ||||
Convertible preferred stock | 21,914 | 27,863 | 31,812 | ||||
|
|
|
|||||
Total | 26,289 | 35,505 | 41,582 | ||||
|
|
|
Income Taxes
In accordance with SFAS No. 109, Accounting for Income Taxes , a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.
F-12
Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income, requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss), including foreign currency translation adjustments, shall be reported, net of their related tax effect, to arrive at comprehensive income (loss). Comprehensive loss for the years ended December 31, 2001, 2002 and 2003, did not differ from reported net loss.
Segment Information
The Company adopted the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information . SFAS No. 131 requires public companies to report financial and descriptive information about their reportable operating segments. The Company identifies its operating segments based on how management internally evaluates separate financial information, business activities and management responsibility. The Company believes it operates in a single business segment and this standard did not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Standards
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain costs Incurred in a Restructuring)." The scope of SFAS No. 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. As the Company has not currently entered into exit, disposal or restructure activities, the adoption of SFAS No. 146 did not have a material impact on its consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure . SFAS No. 148 is an amendment to SFAS No. 123 providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and also provides additional disclosures about the method of accounting for stock-based employee compensation. Amendments are effective for the consolidated financial statements of the Company beginning January 1, 2003. The Company has currently chosen not to adopt the voluntary change to the fair value based method of accounting for stock-based employee compensation. If the Company is required to adopt such a method, its implementation on a prospective basis pursuant to SFAS No. 148 would increase the Company's net loss by approximately $156,000 in the Company's consolidated results of operations, which amount represents the difference between the expense calculated under APB 25 and SFAS 123.
F-13
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which is effective for the Company on January 1, 2004. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The adoption of FIN 46 is not expected to have a material impact on the results of operations or the financial position of the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity . SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective the beginning of the first interim period after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company's consolidated financial statements.
2. Balance Sheet Details
Short-term Investments
Short-term investments includes government bonds that are classified as held to maturity ( in thousands ):
|
December 31,
|
||||||
---|---|---|---|---|---|---|---|
|
2002
|
2003
|
|||||
Amortized cost | $ | | $ | 415 | |||
Gross unrealized loss | | (8 | ) | ||||
|
|
||||||
Estimated fair value | $ | | $ | 407 | |||
|
|
Short-term investments also includes auction rate securities that are classified as available-for-sale ( in thousands ):
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2002
|
2003
|
||||
Cost | $ | | $ | 3,602 | ||
|
|
|||||
Estimated fair value | $ | | $ | 3,602 | ||
|
|
All short-term investments are due in one year or less.
F-14
Inventory
Inventories are stated at the lower of cost or market and consisted of the following ( in thousands ):
|
December 31,
|
||||||
---|---|---|---|---|---|---|---|
|
2002
|
2003
|
|||||
Raw materials | $ | 368 | $ | 2,465 | |||
Finished goods | 2,892 | 3,770 | |||||
|
|
||||||
3,260 | 6,235 | ||||||
Less: Allowance for excess and obsolete inventory | (800 | ) | (1,187 | ) | |||
|
|
||||||
$ | 2,460 | $ | 5,048 | ||||
|
|
Property and Equipment
Property and equipment consisted of the following (in thousands) :
|
December 31,
|
||||||
---|---|---|---|---|---|---|---|
|
2002
|
2003
|
|||||
Loaner equipment | $ | 1,743 | $ | 4,167 | |||
Machinery and equipment | 1,037 | 1,166 | |||||
Computer equipment | 883 | 1,016 | |||||
Leasehold improvements | 450 | 450 | |||||
Furniture and fixtures | 278 | 350 | |||||
|
|
||||||
4,391 | 7,149 | ||||||
Less: accumulated depreciation and amortization | (2,156 | ) | (3,759 | ) | |||
|
|
||||||
$ | 2,235 | $ | 3,390 | ||||
|
|
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2002
|
2003
|
||||
Deposit | $ | 819 | $ | | ||
Prepaid expenses | 361 | 426 | ||||
Other current assets | 16 | 2 | ||||
|
|
|||||
$ | 1,196 | $ | 428 | |||
|
|
F-15
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following (in thousands):
|
December 31,
|
|||||
---|---|---|---|---|---|---|
|
2002
|
2003
|
||||
Accounts payable | $ | 973 | $ | 1,594 | ||
Accrued liabilities | 329 | 1,022 | ||||
Accrued purchases | 612 | 2,420 | ||||
|
|
|||||
$ | 1,914 | $ | 5,036 | |||
|
|
3. Notes Payable
During 2000, the Company entered into a loan and security agreement, whereby the Company could borrow up to $3.0 million (the Original Credit Facility). The Original Credit Facility was collateralized by substantially all the assets of the Company. As of December 31, 2002, the Company had borrowed the entire $3.0 million available under the Original Credit Facility and had made subsequent principal payments of approximately $2.1 million to reduce the balance, at December 31, 2002, to $0.9 million. The Original Credit Facility had a stated interest rate of 13.25% per annum. Interest was payable for the first six months and, thereafter, principal and interest was due in 30 equal installments through July 1, 2003.
In January 2003, the Company entered into a new loan and security agreement (the Revised Credit Facility) and paid off the Original Credit Facility in full. The Revised Credit Facility provided for borrowings of up to $5.0 million, is collateralized by qualified accounts receivable and fixed assets of the Company and bears interest at the lender's prime rate (four percent at December 31, 2003) plus one and one-half percent per annum. Under the terms of the revised Credit Facility, the Company is required to maintain a minimum cash balance of the greater of $1.5 million or 50% of the outstanding debt balance, as well as meet certain other financial and non-financial covenants. At December 31, 2003, the Company was in compliance with all of the terms of the Revised Credit Facility.
On February 11, 2004, the Company received a commitment letter renewing the Revised Credit Facility entered into in January 2003 and increasing the amount it can borrow from $5.0 million to $9.6 million. The interest rate is the lender's prime plus one-half of one percent per annum and the maturity dates are through 2008. Under the terms of the commitment, the Company is required to maintain a minimum cash balance of $2.5 million, as well as meet certain other financial and non-financial covenants (Note 9).
4. Commitments and Contingencies
The Company leases its facility under an operating lease, which expires on November 30, 2004. The minimum annual rent on the Company's facility is subject to increases based on stated rental adjustment terms of certain leases, taxes, insurance and operating costs. For financial reporting purposes, rent expense is recognized on a straight-line basis over the term of the lease. Accordingly, rent expense recognized in excess of rent paid is reflected as deferred rent and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. At December 31, 2003,
F-16
the Company has obligations under capital leases, which total $328,000, of which $306,000 is due in 2004.
During 2001, the Company sold certain of its property and equipment for $585,000. Concurrent with the sale, the Company leased the equipment back for a period of three years at an annual rental of $231,000. During 2002, the Company sold certain of its property and equipment for $98,000. Concurrent with the sale, the Company leased the equipment back for a period of three years at an annual rental of $39,000. The leases will continue through the initial terms and thereafter until terminated by either party upon prior written notice. The Company also has an option to repurchase the equipment for its then fair value at the expiration of the leases. As a result, the transactions have been recorded as financing transactions rather than as a sale, and the property and equipment continue to be recognized in the accompanying consolidated financial statements.
The Company's future minimum annual lease payments and long-term contractual obligations for years ending after December 31, 2003 are as follows (in thousands) :
|
Capital
leases |
Operating
lease |
Other
Contractual Obligations |
||||||
---|---|---|---|---|---|---|---|---|---|
2004 | $ | 326 | $ | 323 | $ | 160 | |||
2005 | 23 | | 185 | ||||||
2006 | | | 130 | ||||||
2007 | | | 110 | ||||||
2008 | | | 110 | ||||||
Thereafter | | | 450 | ||||||
|
|
|
|||||||
Total minimum payments | 349 | $ | 323 | $ | 1,145 | ||||
|
|
||||||||
Less: Interest portion | (21 | ) | |||||||
|
|||||||||
Present value of net minimum lease payments | 328 | ||||||||
Less: Current portion of capital lease obligations | (306 | ) | |||||||
|
|||||||||
Long-term capital lease obligations | $ | 22 | |||||||
|
Rent expense was $300,000 for each of the years ended December 31, 2001, 2002 and 2003, respectively.
Property and equipment acquired through capital lease financing have a net book value of $806,000 and $284,000; which is net of accumulated depreciation of $1.1 million and $1.6 million at December 31, 2002 and 2003, respectively. Depreciation expense in the consolidated financial statements includes amortization expense related to assets acquired under capital leases.
The Company has entered into long-term contractual obligations, consisting of certain intellectual property purchase and consulting agreements for which the Company is required to make annual payments.
The Company is party to certain claims and legal actions arising in the normal course of business. The Company is currently involved in a civil action with Medtronic, Inc. and its spine subsidiary, Medtronic Sofamor Danek, Inc. claiming interference with Medtronic's contracts, including alleged non-competition agreements. The lawsuits are in discovery phase and management anticipates that they may proceed for an extended period of time. The Company's management intends to vigorously defend against the charges. The Company has accrued, as of December 31, 2003, $247,000 related to the litigation with Medtronic. Although the ultimate outcome of this and other matters is not presently determinable, management believes that the resolution of all such pending matters will not have a material adverse impact on the Company's financial statements as a whole.
F-17
5. Stockholders' Equity
Convertible Preferred Stock
A summary of preferred stock issued and outstanding at December 31, 2002 and 2003 is as follows ( in thousands ):
|
Shares
authorized |
Shares
issued and outstanding 2002 |
Par value
2002 |
Shares
issued and outstanding 2003 |
Par value
2003 |
Liquidation
value |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Series A | 4,750 | 4,550 | $ | 5 | 4,550 | $ | 5 | $ | 4,550 | ||||||
Series B | 4,635 | 4,462 | 4 | 4,462 | 4 | 12,270 | |||||||||
Series C | 1,000 | 1,000 | 1 | 1,000 | 1 | 3,000 | |||||||||
Series D | 12,962 | 11,676 | 12 | 11,676 | 12 | 29,540 | |||||||||
Series D-1 | 10,000 | 5,949 | 6 | 9,898 | 10 | 25,066 | |||||||||
|
|
|
|
|
|
||||||||||
33,347 | 27,637 | $ | 28 | 31,586 | $ | 32 | $ | 74,426 | |||||||
|
|
|
|
|
|
Each share of preferred stock is convertible, at the option of the holder, into shares of common stock. The outstanding shares of Series B Preferred Stock convert to common stock on a 1.035 to 1 basis. The outstanding shares of Series C Preferred Stock convert to common stock on a 1.070 to 1 basis. All shares of Series A, Series D and Series D-1 Preferred Stock convert to common stock on a 1 to 1 basis. Each share is automatically convertible upon the earlier of (i) the consummation of the Company's sale of its common stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended, for proceeds of not less than $50.0 million in the aggregate and $9.75 per share, or (ii) the date upon which the Company obtains consent of the holders of 80% of the then outstanding shares of preferred stock.
Holders of the Series A, B, and C convertible preferred stock are entitled to receive dividends prior and in preference to any declaration or payment of dividends to holders of common stock. The Series D and D-1 stockholders are entitled to receive dividends, prior and in preference to the Series A, B and C preferred and common stockholders. The dividends shall be at a rate of $0.08 per share for Series A, $0.22 per share for Series B, $0.24 per share for Series C, $0.21 per share for Series D and $0.21 per share for Series D-1 (subject to adjustments for stock splits, dividends, combinations or other recapitalizations) per annum, payable when and if declared by the Board of Directors. Such dividends shall be non-cumulative. As of December 31, 2003, no dividends have been declared.
The holder of each share of convertible preferred stock shall have the right to one vote for each share of common stock into which the preferred stock could be converted. Each holder shall have full voting rights and powers equal to the voting rights and powers of the holders of common stock. Each holder shall be entitled to notice of any stockholders' meeting and shall be entitled to vote, together as a single class with holders of common stock, with respect to any matter upon which holders of common stock have the right to vote with the exception of certain rights related to the election of directors.
In the event of any liquidation, dissolution or winding up of the Company, the holders of Series D and D-1 convertible preferred stock shall be entitled to receive their liquidation value prior and in preference to any distribution of Company assets to holders of common stock and other series of preferred stock. Series A, B and C stockholders are entitled to receive, prior and in preference to any distribution to common stockholders, their liquidation value as noted herein. The liquidation value shall be at a rate of $1.00 per share for Series A, $2.75 per share for Series B, $3.00 per share for Series C,
F-18
and $2.53 per share for Series D and D-1 (subject to appropriate adjustments for stock splits, dividends, combinations or other recapitalizations). If, upon the occurrence of such event, the assets and funds distributed among the holders of Series D and D-1 convertible preferred stock are insufficient to permit full payment, the entire assets and funds of the Company would be distributed ratably among holders of Series D and D-1 convertible preferred stock in proportion to the preferential amount each holder would otherwise be entitled to receive. Thereafter, if upon the occurrence of such event, the assets and funds distributed among the holders of Series A, B and C convertible preferred stock are insufficient to permit full payment, the entire remaining assets and funds of the Company would be distributed ratably among holders of Series A, B and C convertible preferred stock in proportion to the preferential amount each holder would otherwise be entitled to receive.
In July 2002, the Company completed a Series D-1 preferred stock private placement with net cash proceeds of approximately $14.8 million. The offering costs totaled approximately $262,000 and included the granting of preferred stock and warrants to purchase common stock valued at an aggregate of $75,000, as partial consideration for a finders fee. The Company also issued common stock warrants to purchase 2,575,752 shares. The warrants expire in seven years and have an exercise price of $0.25 per share.
In July 2003, the Company completed a Series D-1 preferred stock private placement with net cash proceeds of approximately $9.9 million. The offering costs totaled approximately $78,000. In conjunction with the Series D-1 financing, the Company issued common stock warrants to purchase 1,579,582 shares. The warrants expire in seven years and have an exercise price of $0.25.
Effective with the Series D-1 financing in July 2003, the capitalization of the Company increased to 49,200,000 shares of common stock and 33,346,500 shares of preferred stock.
Warrants
In 1999, in conjunction with a sale-leaseback agreement, the Company issued a warrant to purchase 87,500 shares of Series A convertible preferred stock at $1.00 per share. The warrant was subsequently reissued as two warrants to different parties for the same total shares. The warrants are exercisable at any time prior to the earlier of (i) 10 years from the date of issuance or (ii) five years from the effective date of the Company's initial public offering. The estimated fair value of the warrants determined at issuance using the Black-Scholes pricing model, of $39,000 was included in interest expense in the consolidated statement of operations for the year ended December 31, 1999.
In 1999, in connection with a convertible debt offering, the Company issued warrants to purchase 87,744 shares of Series B convertible preferred stock at $2.75 per share. The warrants are exercisable at any time prior to the earlier of (1) the close of business on October 13, 2004, (2) (i) the closing of the acquisition of the Company by another entity by means of a transaction or series of related transactions or (ii) the closing of the sale of all or substantially all of the assets of the Company, unless the Company's stockholders of record prior to such acquisition or sale shall hold at least fifty percent (50%) of the voting power of the acquiring or surviving entity immediately after such acquisition or sale, or (3) the initial underwritten public offering of the Company's common stock. The estimated fair value of the warrants was determined using the Black-Scholes pricing model and was insignificant.
In 2000, in conjunction with the Original Credit Facility, the Company issued a warrant to purchase 81,820 shares of Series B convertible preferred stock at $2.75 per share. The warrant expires
F-19
in 2007. The Company determined the fair value of the warrant at issuance, using the Black-Scholes pricing model, with a resulting aggregate value of $160,000, which was recorded as other assets and was being amortized as interest expense over the life of the debt. In January 2003, as a result of the payoff of the Original Credit Facility, the remaining unamortized balance related to this warrant was recorded as interest expense.
In 2001, in connection with a convertible debt offering of $4,500,000, the Company issued warrants to purchase 206,559 shares of Series D convertible preferred stock at $2.53 per share. The warrants are exercisable at any time prior to the earlier of (a) five years from the date of issuance, (b) (i) the closing of the acquisition of the Company by another entity by means of a transaction or series of related transactions or (ii) the closing of the sale of all or substantially all of the assets of the Company, unless the Company's stockholders of record prior to such acquisition or sale shall hold at least fifty percent (50%) of the voting power of the acquiring or surviving entity immediately after such acquisition or sale, or (c) the initial underwritten public offering of the Company's common stock. The Company determined the fair value of the warrants at the date of issuance, using the Black-Scholes pricing model, with a resulting aggregate fair value of $320,000, which has been recorded as interest expense for the year ended December 31, 2001, as the related debt was converted during 2001. Additionally, after allocating the proceeds, the Company determined that there was a beneficial conversion feature for the convertible debt offering of $320,000 for the year ended December 31, 2001, which was included in the consolidated statement of operations.
In July 2001, in conjunction with a sale-leaseback agreement, the Company issued warrants to purchase 23,716 shares of Series D convertible preferred stock at $2.53 per share. The warrants are exercisable at any time through the later of (i) seven years after the date of grant or (ii) three years after the closing of the Company's initial public offering. The Company determined the fair value of the warrants at the date of issuance, using the Black-Scholes pricing model, with a resulting aggregate fair value of $42,000 which has been recorded as interest expense in the consolidated statement of operations for the year ended December 31, 2001.
In July 2002, in connection with its Series D-1 private placement, the Company issued warrants to purchase 2,575,752 shares of common stock at $0.25 per share. The warrants are exercisable at anytime prior to (a) seven years from the date of issuance, (b) (i) the closing of the acquisition of the Company by another entity by means of a transaction or series of related transactions or (ii) the closing of the sale of all or substantially all of the assets of the Company, unless the Company's stockholders of record prior to such acquisition or sale shall hold at least fifty percent (50%) of the voting power of the acquiring or surviving entity immediately after such acquisition or sale, or (c) the initial underwritten public offering of the Company's common stock. The Company determined the fair value of the warrants at the date of issuance, using the Black-Scholes pricing model, with a resulting aggregate fair value of $438,000, which had no impact on the consolidated statement of equity at December 31, 2002.
During 2002, the Company issued a warrant to purchase 50,000 shares of common stock at $0.25 per share in conjunction with a consulting agreement. The warrant expires in 2012. The Company determined the fair value of the warrant at issuance, using the Black-Scholes pricing model, with a resulting aggregate fair value of $8,000, which is being amortized to consulting expense over the three-year term of the agreement.
F-20
Also during 2002, the Company issued a warrant to purchase 150,000 shares of common stock at $0.25 per share in conjunction with the acquisition of a patent from an unrelated third party for $250,000. The warrant expires in 2012. The Company determined the fair value of the warrant at issuance, using the Black-Scholes pricing model, with a resulting fair value of $27,000. The total consideration for the patent of $277,000 was expensed as in-process technology during 2002.
In January 2003, in conjunction with the Revised Credit Facility, the Company issued a warrant to purchase 59,289 shares of the Company's Series D-1 convertible preferred stock at $2.53 per share. The warrant expires in January 2013. The Company determined the fair value of the warrant at issuance, using the Black-Scholes pricing model, with a resulting aggregate expense of $93,000, which is being amortized as interest expense over the life of the outstanding balance on the Revised Credit Facility. Also in conjunction with the Revised Credit Facility, the Company issued a warrant to purchase 25,671 shares of the Company's common stock at $0.25 per share. The warrant expires in January 2013. The Company determined the fair value of the warrant at issuance, using the Black-Scholes pricing model, with a resulting aggregate expense of $4,000, which is being amortized as interest expense in the consolidated statement of operations over the term of the Revised Credit Facility.
In July 2003, in connection with its Series D-1 private placement, the Company issued warrants to purchase 1,579,582 shares of common stock at $0.25 per share. The warrants are exercisable at anytime prior to (a) seven years from the date of issuance, (b) (i) the closing of the acquisition of the Company by another entity by means of a transaction or series of related transactions or (ii) the closing of the sale of all or substantially all of the assets of the Company, unless the Company's stockholders of record prior to such acquisition or sale shall hold at least fifty percent (50%) of the voting power of the acquiring or surviving entity immediately after such acquisition or sale, or (c) the initial underwritten public offering of the Company's common stock. The Company determined the fair value of the warrants at the date of issuance, using the Black-Scholes pricing model, with a resulting aggregate fair value of $2,290,000, which had no impact on the consolidated statement of equity at December 31, 2002.
The following table sets forth the assumptions underlying the Black-Scholes pricing model used to determine fair value of warrants at the date of grant:
|
Year ended
December 31, |
||||||
---|---|---|---|---|---|---|---|
|
2001
|
2002
|
2003
|
||||
Risk-free interest rate | 4.5 | % | 3.0 | % | 3.0 | % | |
Expected life in years | 5-7 | 7-10 | 7 | ||||
Expected volatility | 70 | % | 60 | % | 60 | % | |
Dividend yield | 0 | % | 0 | % | 0 | % |
As of December 31, 2003, no shares have been issued pursuant to warrants issued by the Company.
Stock Options
In October 1998, the Company adopted the 1998 Stock Incentive Plan (the Plan) to grant options to purchase common stock to eligible employees, non-employee members of the Board of Directors, consultants and other independent advisors who provide services to the Company. Under the Plan,
F-21
9,807,000 shares of common stock, as amended, were reserved for issuance upon exercise of options granted by the Company. The Board of Directors determines terms of the stock option agreements, including vesting requirements. Options under the Plan have a 10-year term and normally vest over a term not to exceed four years from the date of grant. All options granted under the Plan allow for early exercise prior to the option becoming fully vested. Unvested common shares obtained upon early exercise of options are subject to repurchase by the Company at the original issue price.
In July 2002, certain executives exercised a total of 2,276,115 options, the consideration for which included cash of approximately $2,000 and promissory notes of approximately $523,000 payable to the Company.
In November 2003, the Company amended the Plan to provide for the acceleration of 50% of the unvested options of all employees upon a change in control and the vesting of the remaining unvested options for those employees that are involuntarily terminated within a year of the change in control. Under FIN 44, the modification to the Plan requires the Company to measure, based on the difference between the fair value of the common stock as of the date of the modification and the exercise price of each unvested option, the potential charge that would be recorded as additional compensation expense should the change in control provision be triggered prior to when the employees would have vested in the options under the original terms of the option grants. Based on the unvested employee options as of December 31, 2003, the maximum exposure to the Company related to the modification to the Plan is $5.2 million. The potential charge is reduced as employees continue to vest in their options over the normal four-year vesting period, thereby decreasing the unvested portion of the options on which the potential charge is based. Assuming the acceleration is not triggered, the potential exposure is reduced to zero by September 2007.
The Company recorded expense of $22,000, $43,000 and $458,000 in 2001, 2002 and 2003, respectively, related to the vesting of stock options granted to non-employees under consulting agreements.
Following is a summary of stock option activity (in thousands, except per share data) :
|
Underlying
Shares |
Weighted
Avg. Exercise Price |
||||
---|---|---|---|---|---|---|
Outstanding at December 31, 2000 | 3,068 | $ | 0.18 | |||
Granted | 1,489 | 0.28 | ||||
Exercised | (95 | ) | 0.10 | |||
Cancelled | (659 | ) | 0.22 | |||
|
||||||
Outstanding at December 31, 2001 | 3,803 | 0.22 | ||||
Granted | 2,228 | 0.25 | ||||
Exercised | (2,275 | ) | 0.21 | |||
Cancelled | (426 | ) | 0.24 | |||
|
||||||
Outstanding at December 31, 2002 | 3,330 | 0.24 | ||||
Granted | 1,709 | 0.32 | ||||
Exercised | (282 | ) | 0.20 | |||
Cancelled | (481 | ) | 0.25 | |||
|
||||||
Outstanding at December 31, 2003 | 4,276 | 0.27 | ||||
|
F-22
The weighted average fair value of options granted during the years ended December 31, 2001, and 2002 and 2003, was $0.07, $0.15 and $0.86 per share, respectively. At December 31, 2003, 1,757,878 shares were vested under the Plan. The weighted average remaining contractual life of options outstanding at December 31, 2003, was approximately eight years.
At December 31, 2003, 2,750,162 shares remain available for future issuance or grant under the Plan.
The following table summarizes information about stock options outstanding and exercisable at December 31, 2003 (in thousands, except per share data) :
|
Options Outstanding
|
Options Exercisable
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices
|
Number of
Shares |
Weighted Average
Remaining Contractual Life (Years) |
Weighted
Average Exercise Price |
Number of
Shares |
Weighted
Average Exercise Price |
|||||||
$0.10 to $0.19 | 397 | 5.97 | $ | 0.10 | 387 | $ | 0.10 | |||||
$0.20 to $0.29 | 3,016 | 8.62 | 0.25 | 864 | 0.25 | |||||||
$0.30 to $0.50 | 639 | 6.86 | 0.30 | 507 | 0.30 | |||||||
$0.51 to $0.75 | 224 | 9.89 | 0.75 | | | |||||||
|
|
|||||||||||
4,276 | 8.17 | 0.27 | 1,758 | 0.23 | ||||||||
|
|
Common Stock Reserved for Future Issuance
The following table summarizes common shares reserved for issuance at December 31, 2003, on exercise or conversion of (in thousands) :
Convertible preferred stock | 31,812 | ||
Preferred stock warrants | 553 | ||
Common stock warrants | 4,381 | ||
Common stock options: | |||
Issued and outstanding | 4,276 | ||
Available for future grant | 2,750 | ||
|
|||
Total shares reserved for future issuance | 43,772 | ||
|
6. Related Party Transactions
In February 2000, the Company loaned $500,000 to a key employee in exchange for a promissory note. The promissory note and all accrued but unpaid interest is due within 15 business days of the earliest to occur of the following dates (i) February 25, 2004 or (ii) the termination of employment with the Company. The loan is subject to forgiveness based upon the employee's continued employment with the Company at the earliest of February 25, 2004, the initial public offering of the Company's securities, an acquisition of the Company, or the employee's death. The Company has also agreed to pay all withholding obligations arising from the forgiveness of the loan. For the years ended December 31, 2002 and 2003 respectively, the Company has recognized compensation expense of $454,000 and $619,000, and a liability of $461,000 and $626,000 for the payroll withholding obligations.
In July 2002, certain executives exercised stock options using non-recourse promissory notes payable to the Company totaling approximately $523,000. The notes bear interest at 6% per annum and
F-23
are payable in July 2007. These notes receivable from stockholders are reflected as a contra-equity amount on the balance sheets. In January 2003, the Company decided to forgive the promissory notes and related interest at the earliest of the completion of three additional years of service, the initial public offering of the Company's securities, or an acquisition of the Company. The Company has recorded compensation expense related to the forgiveness of the notes and related interest for the years ended December 31, 2002 and 2003 respectively of approximately $103,000 and $310,000. In July of 2003, upon the resignation of two employees, the Company repurchased $54,000 of stock by adjusting the related notes receivable. Subsequently the Company received full payment of $34,000 from one employee and forgave the remaining balance of $28,000 for the other employee.
As a result of the modification of the original option grants to these executives, in order to provide for the forgiveness of the notes, there was deemed to be a new measurement date for the option grants. The resulting aggregate value of the options, based on the intrinsic value at the date of the modification of approximately $121,000, has been recorded as deferred compensation in the stockholders' equity section of the balance sheets and is being amortized to compensation expense over the term of the promissory notes. Total compensation expense recorded in 2002 and 2003 related to these options was approximately $41,000 and $76,000 respectively.
7. Income Taxes
At December 31, 2003, the Company had federal and California tax net operating loss carryforwards of approximately $57.5 million and $33.6 million, respectively, which will begin to expire in 2012 and 2007, respectively unless utilized in the foreseeable future. The Company also has losses attributable to its foreign subsidiary of approximately $635,000 through December 31, 2003. The Company also has federal and California research and development tax credit carryforwards of approximately $1.9 million and $1.4 million, respectively. The federal research and development tax credit carryforward will begin to expire in 2012 unless utilized in the foreseeable future. The California research and development tax credit carryforward does not expire.
Pursuant to Section 382 and 383 of the Internal Revenue Code, annual use of the Company's net operating loss and credit carryforwards may be limited if cumulative changes in ownership of more than 50% occur during any three-year period.
Significant components of the Company's deferred tax assets as of December 31, 2001, 2002 and 2003 are shown below. A valuation allowance has been established, as realization of such assets is uncertain.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
F-24
purposes. Significant components of the Company's deferred tax assets and liabilities at December 31, 2003 are as follows ( in thousands ):
|
December 31,
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2001
|
2002
|
2003
|
||||||||
Deferred tax assets: | |||||||||||
Net operating loss carryforwards | $ | 14,649 | $ | 19,705 | $ | 22,320 | |||||
Research and development credits | 1,674 | 2,297 | 2,749 | ||||||||
Other | 134 | 490 | 1,789 | ||||||||
Depreciation | | | 24 | ||||||||
|
|
|
|||||||||
Total deferred tax assets | 16,457 | 22,492 | 26,882 | ||||||||
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization | (48 | ) | (219 | ) | (92 | ) | |||||
|
|
|
|||||||||
Total deferred tax liabilities | (48 | ) | (219 | ) | (92 | ) | |||||
|
|
|
|||||||||
Net deferred tax assets | 16,409 | 22,273 | 26,790 | ||||||||
Valuation allowance for deferred tax assets | (16,409 | ) | (22,273 | ) | (26,790 | ) | |||||
|
|
|
|||||||||
Net deferred tax assets | $ | | $ | | $ | | |||||
|
|
|
8. Employee Retirement Plan
The Company administers a retirement plan under Section 401(k) of the Internal Revenue Code for the benefit of all employees meeting minimum eligibility requirements. Under the plan, each employee may contribute up to 25% of his or her annual salary, not to exceed federal limits. The Company does not provide a matching contribution to the plan.
9. Subsequent Events
On January 2, 2004, the Company granted options to purchase 2,732,500 shares of common stock at an exercise price of $1.50 per share. In connection with the issuance of these options, the Company recorded deferred compensation of $5,465,000, which will be amortized on an accelerated basis consistent with 2003.
On February 20, 2004, the Company's Board of Directors:
(a) authorized the filing of a registration statement with the Securities and Exchange Commission that would permit the Company to sell shares of the Company's common stock in connection with an initial public offering ("IPO");
(b) approved an increase in the number of authorized shares of common stock to 70,000,000 shares and authorized 5,000,000 shares of preferred stock at a $0.001 par value. These increases will be effective prior to the closing of the IPO;
(c) adopted the 2004 Equity Incentive Plan (the "2004 Plan"), under which a total of 2,000,000 shares were reserved for future issuance of common stock options (plus all remaining shares reserved for issuance under the Company's 1998 Stock Option/Stock Issuance Plan); and
(d) adopted the 2004 Employee Stock Purchase Plan (the "Purchase Plan"), under which a total of 250,000 common shares are reserved for issuance. The Purchase Plan will become effective on
F-25
the first day on which the price quotations for the Company's stock are available on the Nasdaq National Market.
On March 31, 2004, the Company amended the terms of its debt agreement with its primary lender to restructure such agreement and increase its total borrowing ability to $9.6 million. The interest rate is lender's prime plus one-half of one percent with maturity dates through December 2007. Under the amended agreement, the Company is required to maintain a minimum cash balance of $2.5 million, as well as meet certain other financial and non-financial covenants.
F-26
Shares
Common Stock
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than underwriting discounts and commissions, to be paid by us in connection with the sale of the common stock being registered. All amounts other than the SEC registration fee, the NASD filing fees and the Nasdaq National Market listing fee are estimates.
|
Amount
to be Paid |
|||
---|---|---|---|---|
SEC registration fee | $ | 11,657 | ||
NASD filing fee | 9,700 | |||
Nasdaq National Market application fee | 5,000 | |||
Nasdaq National Market entry fee | 95,000 | |||
Nasdaq National Market annual fee (prorated for 2004) | 19,575 | |||
Legal fees and expenses | 800,000 | |||
Accounting fees and expenses | 500,000 | |||
Printing and engraving | 200,000 | |||
Transfer agent and registrar fees | 20,000 | |||
Miscellaneous | 39,058 | |||
|
||||
Total |
|
$ |
1,700,000 |
|
|
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act").
As permitted by the Delaware General Corporation Law, our restated certificate of incorporation includes a provision that eliminates the personal liability of our directors for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to us or our stockholders, (2) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (3) under section 174 of the Delaware General Corporation Law (regarding unlawful dividends and stock purchases) or (4) for any transaction from which the director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, our restated bylaws provide that (1) we are required to indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions, (2) we may indemnify our other employees and agents as set forth in the Delaware General Corporation Law, (3) we are required to advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions and (4) the rights conferred in the restated bylaws are not exclusive.
We have entered into indemnification agreements with each of our directors and executive officers to give such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in our restated certificate of incorporation and to provide additional procedural protections. We also intend to enter into indemnification agreements with any new directors and executive officers in the future. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees, or agents, other than the matters in Tennessee and California involving Medtronic, Inc., where indemnification by us will be required or permitted, and we are not
II-1
aware of any threatened litigation or proceeding, other than the Medtronic litigation, that may result in a claim for such indemnification. See "Risk FactorsWe are currently involved in costly employment litigation and an adverse outcome may prevent certain of our employees from working for us or require us to pay significant damages," for further detail regarding the Medtronic litigation matters.
Section 8 of the Underwriting Agreement provides for indemnification by the underwriters of the officers, directors and controlling persons of the Registrant against certain liabilities, including liabilities arising under the Securities Act, in connection with matters specifically provided in writing by the underwriters for inclusion in the Registration Statement.
The indemnification provisions in our restated certificate of incorporation, restated bylaws and the indemnification agreements entered into between us and each of our directors and executive officers may be sufficiently broad to permit indemnification of our directors and executive officers for liabilities arising under the Securities Act.
We have obtained liability insurance for our officers and directors.
Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere in this prospectus:
Document
|
Exhibit
Number |
|
---|---|---|
Underwriting Agreement (draft dated , 2004) | 1.1 | |
Form of Restated Certificate of Incorporation of Registrant | 3.3 | |
Form of Restated Bylaws of Registrant | 3.5 | |
Form of Indemnification Agreement for Directors and Officers | 10.36 |
Item 15. Recent Sales of Unregistered Securities
In the three years preceding the filing of this registration statement, we have issued the following securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"). The offers, sales and issuances of these securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, and/or Regulation D and the other rules and regulations promulgated thereunder, or Rule 701 promulated under Section 3(b) of the Securities Act as transactions not involving a public offering or transactions under compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions.
II-2
purchase, at an exercise price of $2.53 per share, the number of shares of our Series D preferred stock set forth in the following table opposite its name:
Investor
|
Number of Shares Underlying Warrants
|
|
---|---|---|
Enterprise Management Partners, L.L.C | * | |
Enterprise Partners Annex Fund IV, L.P. | 64,563 | |
Enterprise Partners Annex Fund IV-A, L.P. | 13,293 | |
Kleiner Perkins Caufield & Byers VIII, L.P. | 73,590 | |
KPCB VIII Founders Fund, L.P. | 4,267 | |
Domain Partners IV, L.P. | 49,655 | |
DP IV Associates, L.P. | 1,191 |
II-3
consideration paid for such shares and warrants was $24,995,165.69. The exercise price per underlying share of the warrants is $0.25.
Enterprise Partners Annex Fund IV, L.P. | SSI Spinal Solutions | |
Enterprise Partners Annex Fund IV-A, L.P. | James Gleason | |
Kleiner Perkins Caufield & Byers VIII, L.P. | Anthony Ross | |
KPCB VIII Founders Fund, L.P. | Jeff Hughes | |
Domain Partners IV, L.P. | R. Jay Thabet, Jr. | |
Caisse de depot et placement du Quebec | Integral Capital Partners VI, L.P. | |
A.M. Pappas Life Science Ventures II, L.P. | Ronald C. Childs | |
William Blair Capital Partners VII, L.P. | Tom L. Meyer III | |
William Blair Capital Partners VII QP, L.P. | Gregg Lacoste | |
Johnson & Johnson Development Corporation | William Houston, Jr. | |
Innovative Orthotics & Rehabilitation Inc. | Behrooz A. Akbarnia | |
David Merrill | Sam & Dawn Maywood | |
Klaus Hagenmeyer | Bruce & Nina Van Dam | |
Frederick J. Thabet | Scot Martinelli & Bobbi-Jo Romanishan | |
Craig Sparks | MLPF&S William Player Barefoot IRA | |
Todd Marinchak | Scott Kitchel | |
Peter A. Guagliano | Rudolph Bertagnoli | |
Regis W. Haid, Jr. | Jonathan Spangler | |
Mark D. Peterson | Anthony Salerni | |
Alexander & Majorie Vaccaro | Kevin Armstrong | |
G. Rogan Fry | Andrew Cappuccino | |
Joe C. Loy | ||
Keith Valentine |
II-4
common stock to our employees and consultants upon exercise of options granted under our 1998 Plan in consideration for an aggregate purchase price of $596,388.46.
Item 16. Exhibits and Financial Statement Schedules
Exhibit
Number |
Description
|
|
---|---|---|
1.1* | Form of Underwriting Agreement | |
3.1** |
|
Amended and Restated Certificate of Incorporation, as currently in effect |
3.2** |
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation, as currently in effect |
3.3** |
|
Form of Restated Certificate of Incorporation (to be filed in connection with the closing of this offering) |
3.4** |
|
Bylaws, as currently in effect |
3.5** |
|
Form of Restated Bylaws (to be effective upon the closing of this offering) |
4.1** |
|
Second Amended and Restated Investors' Rights Agreement, dated July 11, 2002, by and among us and the other parties named therein |
4.2** |
|
Amendment No. 1 to Second Amended and Restated Investors' Rights Agreement, dated June 19, 2003, by and among us and the other parties named therein |
4.3** |
|
Amendment No. 2 to Second Amended and Restated Investors' Rights Agreement, dated February 5, 2004, by and among us and the other parties named therein |
4.4* |
|
Specimen Common Stock Certificate |
5.1* |
|
Opinion of Heller Ehrman White & McAuliffe LLP |
10.1** |
|
Form of Warrant to purchase Series B Preferred Stock, dated October 13, 1999, between us and each of the persons listed on the Schedule of Warrant Holders attached thereto |
10.2** |
|
Warrant Agreement to Purchase Shares of Series A Preferred Stock, dated September 17, 1999, issued by us to Comdisco Ventures, Inc. |
10.3** |
|
Warrant Agreement to Purchase Shares of Series A Preferred Stock, dated September 17, 1999, issued by us to CNC Holdings I LLC |
10.4** |
|
Stock Subscription Warrant to Purchase Series B Preferred Stock, dated June 27, 2000, issued by us to TBCC Funding Trust II |
10.5** |
|
Form of Warrant to purchase Series D Preferred Stock used by us to issue warrants on February 14, 2001 and April 12, 2001 to each of the persons listed on the Schedule of Warrant Holders attached thereto |
10.6** |
|
Warrant to Purchase 22,530 Shares of Series D Preferred Stock, dated December 27, 2001, issued by us to GATX Ventures, Inc. |
10.7** |
|
Warrant to Purchase 1,186 Shares of Series D Preferred Stock, dated December 27, 2001, issued by us to GATX Ventures, Inc. |
10.8** |
|
Warrant to Purchase Common Stock, dated January 9, 2003, issued by us to Comerica BankCalifornia |
10.9** |
|
Warrant to Purchase Series D-1 Preferred Stock, dated January 9, 2003, issued by us to Comerica BankCalifornia |
II-5
10.10** |
|
Form of Warrant to purchase Common Stock used by us to issue warrants in connection with our sale of Series D-1 Preferred Stock to the persons listed on the Schedule of Warrant Holders attached thereto |
10.11**# |
|
1998 Stock Option/Stock Issuance Plan |
10.12**# |
|
Form of Notice of Grant of Stock Option under our 1998 Stock Option/Stock Issuance Plan |
10.13**# |
|
Form of Stock Option Agreement under our 1998 Stock Option/Stock Issuance Plan, and form of addendum thereto |
10.14**# |
|
Form of Stock Purchase Agreement under our 1998 Stock Option/Stock Issuance Plan |
10.15# |
|
2004 Equity Incentive Plan |
10.16# |
|
Form of Stock Option Award Notice under 2004 Equity Incentive Plan |
10.17# |
|
Form of Option Exercise and Stock Purchase Agreement under 2004 Equity Incentive Plan |
10.18# |
|
Forms of Restricted Stock Grant Notice and Restricted Stock Agreement under 2004 Equity Incentive Plan |
10.18.1# |
|
Form of Restricted Stock Unit Award Agreement under 2004 Equity Incentive Plan |
10.19# |
|
2004 Employee Stock Purchase Plan |
10.20** |
|
Standard Industrial/Commercial Multi-Tenant LeaseModified Net, dated July 13, 1999, between us and Michael L. Hightower |
10.21** |
|
Addendum to Lease Between EUS Partners, the Successor to Michael L. Hightower, Lessor, and NuVasive, Inc. as Lessee, dated March 25, 2002 |
10.22 |
|
Equipment Loan and Security Agreement, dated December 27, 2001, between us and GATX Ventures, Inc., Loan Agreement Supplement No. 1, dated December 31, 2001, and Loan Agreement Supplement No. 2, dated July 31, 2002 |
10.23** |
|
Patent Purchase Agreement, dated June 21, 2002, between us and Drs. Anthony Ross and Peter Guagliano |
10.24** |
|
Intellectual Property Purchase Agreement, dated October 10, 2002, between us and Spine Partners, LLC |
10.25 |
|
Development, Production and Marketing Services Agreement, dated December 30, 1999, as amended, by and among us and Tissue Banks International, Inc. |
10.26 |
|
Supply Agreement, dated January 21, 2002, by and among us and Intermountain Tissue Center |
10.27**# |
|
Employment Letter Agreement, dated July 12, 1999, as amended on January 20, 2004, between us and Alexis V. Lukianov |
10.28**# |
|
Bonus Agreement, dated February 25, 2000, between us and Alexis V. Lukianov |
10.29**# |
|
Employment Agreement, dated December 20, 2002, as amended on January 20, 2004, between us and Kevin C. O'Boyle |
10.30**# |
|
Employment Agreement, dated January 20, 2004, between us and Keith Valentine |
II-6
10.31**# |
|
Employment Agreement, dated January 20, 2004, between us and G. Rogan Fry |
10.32**# |
|
Employment Agreement, dated January 20, 2004, between us and Patrick Miles |
10.33**# |
|
Employment Agreement, dated January 20, 2004, between us and James J. Skinner |
10.34**# |
|
Employment Agreement, dated January 20, 2004, between us and G. Bryan Cornwall |
10.35**# |
|
Employment Agreement, dated January 20, 2004, between us and Jonathan D. Spangler |
10.36** |
|
Form of Indemnification Agreement between us and our directors and officers |
10.37 |
|
Common Stock Purchase Warrant, dated January 16, 2002, issued by us to WWIP LLC |
10.38 |
|
Clinical Advisor, Patent Purchase and Development Agreement, dated March 31, 2004, between us and James L. Chappuis |
10.39 |
|
Loan and Security Agreement, dated January 9, 2003, as amended, between us and Comerica Bank |
10.40 |
|
Warrant to Purchase Series D-1 Preferred Stock, dated March 12, 2004, issued by us to Comerica Bank |
21.1** |
|
List of our subsidiaries |
23.1 |
|
Consent of Ernst & Young LLP, independent auditors |
23.2* |
|
Consent of Heller Ehrman White & McAuliffe LLP (included in Exhibit 5.1) |
24.1** |
|
Power of Attorney |
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 for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, 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, 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.
II-7
The undersigned registrant hereby 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; and
(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-8
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 1 to Registration Statement (No. 333-113344) to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, California on this 8th day of April, 2004.
NUVASIVE, INC. | ||||
|
|
By: |
|
|
/s/
KEVIN C. O'BOYLE
Kevin C. O'Boyle Vice President, Finance and Chief Financial Officer |
II-9
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to Registration Statement (No. 333-113344) has been signed by the following persons in the capacities indicated on April 8, 2004:
Signature
|
Title(s)
|
|
---|---|---|
|
|
|
*
|
Alexis V. Lukianov
President, Chief Executive Officer, and Chairman of the Board (principal executive officer) |
|
/s/ KEVIN C. O'BOYLE |
|
Kevin C. O'Boyle Vice President, Finance and Chief Financial Officer (principal financial and accounting officer) |
* |
|
R. Lewis Bennett, Sr. Director |
* |
|
Jack R. Blair Director |
* |
|
James C. Blair, Ph.D. Director |
* |
|
Lesley H. Howe Director |
* |
|
Joseph S. Lacob Director |
* |
|
Arda M. Minocherhomjee, Ph.D. Director |
*By: |
/s/
KEVIN C. O'BOYLE
Kevin C. O'Boyle Attorney-in-fact |
II-10
Exhibit
Number |
Description
|
|
---|---|---|
1.1* | Form of Underwriting Agreement | |
3.1** |
|
Amended and Restated Certificate of Incorporation, as currently in effect |
3.2** |
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation, as currently in effect |
3.3** |
|
Form of Restated Certificate of Incorporation (to be filed in connection with the closing of this offering) |
3.4** |
|
Bylaws, as currently in effect |
3.5** |
|
Form of Restated Bylaws (to be effective upon the closing of this offering) |
4.1** |
|
Second Amended and Restated Investors' Rights Agreement, dated July 11, 2002, by and among us and the other parties named therein |
4.2** |
|
Amendment No. 1 to Second Amended and Restated Investors' Rights Agreement, dated June 19, 2003, by and among us and the other parties named therein |
4.3** |
|
Amendment No. 2 to Second Amended and Restated Investors' Rights Agreement, dated February 5, 2004, by and among us and the other parties named therein |
4.4* |
|
Specimen Common Stock Certificate |
5.1* |
|
Opinion of Heller Ehrman White & McAuliffe LLP |
10.1** |
|
Form of Warrant to purchase Series B Preferred Stock, dated October 13, 1999, between us and each of the persons listed on the Schedule of Warrant Holders attached thereto |
10.2** |
|
Warrant Agreement to Purchase Shares of Series A Preferred Stock, dated September 17, 1999, issued by us to Comdisco Ventures, Inc. |
10.3** |
|
Warrant Agreement to Purchase Shares of Series A Preferred Stock, dated September 17, 1999, issued by us to CNC Holdings I LLC |
10.4** |
|
Stock Subscription Warrant to Purchase Series B Preferred Stock, dated June 27, 2000, issued by us to TBCC Funding Trust II |
10.5** |
|
Form of Warrant to purchase Series D Preferred Stock used by us to issue warrants on February 14, 2001 and April 12, 2001 to each of the persons listed on the Schedule of Warrant Holders attached thereto |
10.6** |
|
Warrant to Purchase 22,530 Shares of Series D Preferred Stock, dated December 27, 2001, issued by us to GATX Ventures, Inc. |
10.7** |
|
Warrant to Purchase 1,186 Shares of Series D Preferred Stock, dated December 27, 2001, issued by us to GATX Ventures, Inc. |
10.8** |
|
Warrant to Purchase Common Stock, dated January 9, 2003, issued by us to Comerica BankCalifornia |
10.9** |
|
Warrant to Purchase Series D-1 Preferred Stock, dated January 9, 2003, issued by us to Comerica BankCalifornia |
10.10** |
|
Form of Warrant to purchase Common Stock used by us to issue warrants in connection with our sale of Series D-1 Preferred Stock to the persons listed on the Schedule of Warrant Holders attached thereto |
10.11**# |
|
1998 Stock Option/Stock Issuance Plan |
10.12**# |
|
Form of Notice of Grant of Stock Option under our 1998 Stock Option/Stock Issuance Plan |
10.13**# |
|
Form of Stock Option Agreement under our 1998 Stock Option/Stock Issuance Plan, and form of addendum thereto |
10.14**# |
|
Form of Stock Purchase Agreement under our 1998 Stock Option/Stock Issuance Plan |
10.15# |
|
2004 Equity Incentive Plan |
10.16# |
|
Form of Stock Option Award Notice under 2004 Equity Incentive Plan |
10.17# |
|
Form of Option Exercise and Stock Purchase Agreement under 2004 Equity Incentive Plan |
10.18# |
|
Forms of Restricted Stock Grant Notice and Restricted Stock Agreement under 2004 Equity Incentive Plan |
10.18.1# |
|
Form of Restricted Stock Unit Award Agreement under 2004 Equity Incentive Plan |
10.19# |
|
2004 Employee Stock Purchase Plan |
10.20** |
|
Standard Industrial/Commercial Multi-Tenant LeaseModified Net, dated July 13, 1999, between us and Michael L. Hightower |
10.21** |
|
Addendum to Lease Between EUS Partners, the Successor to Michael L. Hightower, Lessor, and NuVasive, Inc. as Lessee, dated March 25, 2002 |
10.22 |
|
Equipment Loan and Security Agreement, dated December 27, 2001, between us and GATX Ventures, Inc., Loan Agreement Supplement No. 1, dated December 31, 2001, and Loan Agreement Supplement No. 2, dated July 31, 2002 |
10.23** |
|
Patent Purchase Agreement, dated June 21, 2002, between us and Drs. Anthony Ross and Peter Guagliano |
10.24** |
|
Intellectual Property Purchase Agreement, dated October 10, 2002, between us and Spine Partners, LLC |
10.25 |
|
Development, Production and Marketing Services Agreement, dated December 30, 1999, as amended, by and among us and Tissue Banks International, Inc. |
10.26 |
|
Supply Agreement, dated January 21, 2002, by and among us and Intermountain Tissue Center |
10.27**# |
|
Employment Letter Agreement, dated July 12, 1999, as amended on January 20, 2004, between us and Alexis V. Lukianov |
10.28**# |
|
Bonus Agreement, dated February 25, 2000, between us and Alexis V. Lukianov |
10.29**# |
|
Employment Agreement, dated December 20, 2002, as amended on January 20, 2004, between us and Kevin C. O'Boyle |
10.30**# |
|
Employment Agreement, dated January 20, 2004, between us and Keith Valentine |
10.31**# |
|
Employment Agreement, dated January 20, 2004, between us and G. Rogan Fry |
10.32**# |
|
Employment Agreement, dated January 20, 2004, between us and Patrick Miles |
10.33**# |
|
Employment Agreement, dated January 20, 2004, between us and James J. Skinner |
10.34**# |
|
Employment Agreement, dated January 20, 2004, between us and G. Bryan Cornwall |
10.35**# |
|
Employment Agreement, dated January 20, 2004, between us and Jonathan D. Spangler |
10.36** |
|
Form of Indemnification Agreement between us and our directors and officers |
10.37 |
|
Common Stock Purchase Warrant, dated January 16, 2002, issued by us to WWIP LLC |
10.38 |
|
Clinical Advisor, Patent Purchase and Development Agreement, dated March 31, 2004, between us and James L. Chappuis |
10.39 |
|
Loan and Security Agreement, dated January 9, 2003, as amended, between us and Comerica Bank |
10.40 |
|
Warrant to Purchase Series D-1 Preferred Stock, dated March 12, 2004, issued by us to Comerica Bank |
21.1** |
|
List of our subsidiaries |
23.1 |
|
Consent of Ernst & Young LLP, independent auditors |
23.2* |
|
Consent of Heller Ehrman White & McAuliffe LLP (included in Exhibit 5.1) |
24.1** |
|
Power of Attorney |
2004 EQUITY INCENTIVE PLAN
OF
NUVASIVE, INC.
1. Purpose of this Plan
The purpose of this 2004 Equity Incentive Plan is to enhance the long-term stockholder value of NuVasive, Inc. by offering opportunities to eligible individuals to participate in the growth in value of the equity of NuVasive, Inc.
2. Definitions and Rules of Interpretation
2.1 Definitions.
This Plan uses the following defined terms:
(a) "Administrator" means the Board or the Committee, or any officer or employee of the Company to whom the Board or the Committee delegates authority to administer this Plan.
(b) "Affiliate" means a "parent" or "subsidiary" (as each is defined in Section 424 of the Code) of the Company and any other entity that the Board or Committee designates as an "Affiliate" for purposes of this Plan.
(c) "Applicable Law" means any and all laws of whatever jurisdiction, within or without the United States, and the rules of any stock exchange or quotation system on which Shares are listed or quoted, applicable to the taking or refraining from taking of any action under this Plan, including the administration of this Plan and the issuance or transfer of Awards or Award Shares.
(d) "Award " means a Stock Award (e.g. restricted stock unit award), SAR, Cash Award, or Option granted in accordance with the terms of this Plan.
(e) "Award Agreement" means the document evidencing the grant of an Award.
(f) "Award Shares" means Shares covered by an outstanding Award or purchased under an Award.
(g) "Awardee" means: (i) a person to whom an Award has been granted, including a holder of a Substitute Award, (ii) a person to whom an Award has been transferred in accordance with all applicable requirements of Sections 6.5, 7(h), and 17.
(h) "Board" means the Board of Directors of the Company.
(i) "Cash Award" means the right to receive cash as described in Section 8.3.
(j) "Change in Control" means any transaction or event that the Board specifies as a Change in Control under Section 10.4.
(k) "Code" means the Internal Revenue Code of 1986.
(l) "Committee " means a committee composed of Company Directors appointed in accordance with the Company's charter documents and Section 4.
(m) "Company" means Nuvasive, Inc., a Delaware corporation.
(n) "Company Director" means a member of the Board.
(o) "Consultant" means an individual who, or an employee of any entity that, provides bona fide services to the Company or an Affiliate not in connection with the offer or sale of securities in a capital-raising transaction, but who is not an Employee.
(p) "Director" means a member of the Board of Directors of the Company or an Affiliate.
(q) "Divestiture" means any transaction or event that the Board specifies as a Divestiture under Section 10.5.
(r) " Domestic Relations Order " means a "domestic relations order" as defined in, and otherwise meeting the requirements of, Section 414(p) of the Code, except that reference to a "plan" in that definition shall be to this Plan.
(s) " Effective Date " means the first date of the sale by the Company of shares of its capital stock in an initial public offering pursuant to a registration statement on Form S-1 filed with the SEC.
(t) "Employee" means a regular employee of the Company or an Affiliate, including an officer or Director, who is treated as an employee in the personnel records of the Company or an Affiliate, but not individuals who are classified by the Company or an Affiliate as: (i) leased from or otherwise employed by a third party, (ii) independent contractors, or (iii) intermittent or temporary workers. The Company's or an Affiliate's classification of an individual as an "Employee" (or as not an "Employee") for purposes of this Plan shall not be altered retroactively even if that classification is changed retroactively for another purpose as a result of an audit, litigation or otherwise. An Awardee shall not cease to be an Employee due to transfers between locations of the Company, or between the Company and an Affiliate, or to any successor to the Company or an Affiliate that assumes the Awardee's Options under Section 10. Neither service as a Director nor receipt of a director's fee shall be sufficient to make a Director an "Employee."
(u) "Exchange Act" means the Securities Exchange Act of 1934.
(v) "Executive" means, if the Company has any class of any equity security registered under Section 12 of the Exchange Act, an individual who is subject to Section 16 of the Exchange Act or who is a "covered employee" under Section 162(m) of the Code, in either case because of the individual's relationship with the Company or an Affiliate. If the Company does not have any class of any equity security registered under Section 12 of the Exchange Act, "Executive" means any (i) Director, (ii) officer elected or appointed by the Board, or (iii) beneficial owner of more than 10% of any class of the Company's equity securities.
(w) "Expiration Date" means, with respect to an Award, the date stated in the Award Agreement as the expiration date of the Award or, if no such date is stated in the Award Agreement, then the last day of the maximum exercise period for the Award, disregarding the effect of an Awardee's Termination or any other event that would shorten that period.
(x) "Fair Market Value" means the value of Shares as determined under Section 18.2.
(y) "Fundamental Transaction" means any transaction or event described in Section 10.3.
(z) "Grant Date" means the date the Administrator approves the grant of an Award. However, if the Administrator specifies that an Award's Grant Date is a future date or the date on which a condition is satisfied, the Grant Date for such Award is that future date or the date that the condition is satisfied.
(aa) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option under Section 422 of the Code and designated as an Incentive Stock Option in the Award Agreement for that Option.
(bb) "Nonstatutory Option" means any Option other than an Incentive Stock Option.
2
(cc) "Non-Employee Director" means any person who is a member of the Board but is not an Employee of the Company or any Affiliate of the Company and has not been an Employee of the Company or any Affiliate of the Company at any time during the preceding twelve months. Service as a Director does not in itself constitute employment for purposes of this definition.
(dd) " Objectively Determinable Performance Condition " shall mean a performance condition (i) that is established (A) at the time an Award is granted or (B) no later than the earlier of (1) 90 days after the beginning of the period of service to which it relates, or (2) before the elapse of 25% of the period of service to which it relates, (ii) that is uncertain of achievement at the time it is established, and (iii) the achievement of which is determinable by a third party with knowledge of the relevant facts. Examples of measures that may be used in Objectively Determinable Performance Conditions include net order dollars, net profit dollars, net profit growth, net revenue dollars, revenue growth, individual performance, earnings per share, return on assets, return on equity, and other financial objectives, objective customer satisfaction indicators and efficiency measures, each with respect to the Company and/or an Affiliate or individual business unit.
(ee) "Officer" means an officer of the Company as defined in Rule 16a-1 adopted under the Exchange Act.
(ff) "Option" means a right to purchase Shares of the Company granted under this Plan.
(gg) "Option Price" means the price payable under an Option for Shares, not including any amount payable in respect of withholding or other taxes.
(hh) "Option Shares" means Shares covered by an outstanding Option or purchased under an Option.
(ii) "Plan" means this 2004 Equity Incentive Plan of NuVasive, Inc.
(jj) " Prior Plans " means the Company's 1998 Stock Option/Stock Issuance Plan.
(kk) "Purchase Price" means the price payable under a Stock Award for Shares, not including any amount payable in respect of withholding or other taxes.
(ll) "Rule 16b-3" means Rule 16b-3 adopted under Section 16(b) of the Exchange Act.
(mm) "SAR" or "Stock Appreciation Right" means a right to receive cash based on a change in the Fair Market Value of a specific number of Shares pursuant to an Award Agreement, as described in Section 8.1.
(nn) "Securities Act" means the Securities Act of 1933.
(oo) "Share" means a share of the common stock of the Company or other securities substituted for the common stock under Section 10.
(pp) "Stock Award" means an offer by the Company to sell shares subject to certain restrictions pursuant to the Award Agreement as described in Section 8.2 or, as determined by the Committee, a notional account representing the right to be paid an amount based on Shares.
(qq) "Substitute Award" means a Substitute Option, Substitute SAR or Substitute Stock Award granted in accordance with the terms of this Plan.
(rr) "Substitute Option" means an Option granted in substitution for, or upon the conversion of, an option granted by another entity to purchase equity securities in the granting entity.
3
(ss) "Substitute SAR" means a SAR granted in substitution for, or upon the conversion of, a stock appreciation right granted by another entity with respect to equity securities in the granting entity.
(tt) "Substitute Stock Award" means a Stock Award granted in substitution for, or upon the conversion of, a stock award granted by another entity to purchase equity securities in the granting entity.
(uu) "Termination" means that the Awardee has ceased to be, with or without any cause or reason, an Employee, Director or Consultant. However, unless so determined by the Administrator, or otherwise provided in this Plan, "Termination" shall not include a change in status from an Employee, Consultant or Director to another such status. An event that causes an Affiliate to cease being an Affiliate shall be treated as the "Termination" of that Affiliate's Employees, Directors, and Consultants.
2.2 Rules of Interpretation. Any reference to a "Section," without more, is to a Section of this Plan. Captions and titles are used for convenience in this Plan and shall not, by themselves, determine the meaning of this Plan. Except when otherwise indicated by the context, the singular includes the plural and vice versa. Any reference to a statute is also a reference to the applicable rules and regulations adopted under that statute. Any reference to a statute, rule or regulation, or to a section of a statute, rule or regulation, is a reference to that statute, rule, regulation, or section as amended from time to time, both before and after the Effective Date and including any successor provisions.
3. Shares Subject to this Plan; Term of this Plan
3.1 Number of Award Shares. The Shares issuable under this Plan shall be authorized but unissued or reacquired Shares, including Shares repurchased by the Company on the open market. The number of Shares initially reserved for issuance over the term of this Plan shall be 2,000,000, increased by (i) the number of Shares available for issuance, as of the Effective Date, under the Prior Plans as last approved by the Company's stockholders, including the Shares subject to outstanding options under the Prior Plans, plus (ii) those Shares issued under the Prior Plans that are forfeited or repurchased by the Company or that are issuable upon exercise of options granted pursuant to the Prior Plans that expire or become unexercisable for any reason without having been exercised in full after the Effective Date, (iii) plus those shares that are restored pursuant to the decision of the Board or Committee pursuant to Section 6.4(a) to deliver only such Shares as are necessary to award the net Share appreciation. The maximum number of Shares shall be cumulatively increased on the first January 1 after the Effective Date and each January 1 thereafter for 9 more years, by a number of Shares equal to the least of (a) 4% of the number of Shares issued and outstanding on the immediately preceding December 31, (b) 10,000,000 Shares, and (c) a number of Shares set by the Board. Except as required by applicable law, Shares shall not reduce the number of Shares reserved for issuance under this Plan until the earlier of the date such Shares are vested pursuant to the terms of the applicable Award or the actual date of delivery of the Shares to the Awardee. Also, if an Award later terminates or expires without having been exercised in full, the maximum number of shares that may be issued under this Plan shall be increased by the number of Shares that were covered by, but not purchased under, that Award. By contrast, the repurchase of Shares by the Company shall not increase the maximum number of Shares that may be issued under this Plan.
3.2 Source of Shares. Award Shares may be: (a) Shares that have never been issued, (b) Shares that have been issued but are no longer outstanding, or (c) Shares that are outstanding and are acquired to discharge the Company's obligation to deliver Award Shares.
4
3.3 Term of this Plan
(a) This Plan shall be effective on, and Awards may be granted under this Plan on and after, the earliest the date on which the Plan has been both adopted by the Board and approved by the Company's stockholders.
(b) Subject to the provisions of Section 14, Awards may be granted under this Plan for a period of ten years from the earlier of the date on which the Board approves this Plan and the date the Company's stockholders approve this Plan. Accordingly, Awards may not be granted under this Plan after the earlier of those dates.
4. Administration
4.1 General
(a) The Board shall have ultimate responsibility for administering this Plan. The Board may delegate certain of its responsibilities to a Committee, which shall consist of at least two members of the Board. The Board or the Committee may further delegate its responsibilities to any Employee of the Company or any Affiliate. Where this Plan specifies that an action is to be taken or a determination made by the Board, only the Board may take that action or make that determination. Where this Plan specifies that an action is to be taken or a determination made by the Committee, only the Committee may take that action or make that determination. Where this Plan references the "Administrator," the action may be taken or determination made by the Board, the Committee, or other Administrator. However, only the Board or the Committee may approve grants of Awards to Executives, and an Administrator other than the Board or the Committee may grant Awards only within the guidelines established by the Board or Committee. Moreover, all actions and determinations by any Administrator are subject to the provisions of this Plan.
(b) So long as the Company has registered and outstanding a class of equity securities under Section 12 of the Exchange Act, the Committee shall consist of Company Directors who are "Non-Employee Directors" as defined in Rule 16b-3 and, after the expiration of any transition period permitted by Treasury Regulations Section 1.162-27(h)(3), who are "outside directors" as defined in Section 162(m) of the Code.
4.2 Authority of the Board or the Committee. Subject to the other provisions of this Plan, the Board or the Committee shall have the authority to:
(a) grant Awards, including Substitute Awards;
(b) determine the Fair Market Value of Shares;
(c) determine the Option Price and the Purchase Price of Awards;
(d) select the Awardees;
(e) determine the times Awards are granted;
(f) determine the number of Shares subject to each Award;
(g) determine the methods of payment that may be used to purchase Award Shares;
(h) determine the methods of payment that may be used to satisfy withholding tax obligations;
(i) determine the other terms of each Award, including but not limited to the time or times at which Awards may be exercised, whether and under what conditions an Award is assignable, and whether an Option is a Nonstatutory Option or an Incentive Stock Option;
(j) modify or amend any Award;
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(k) authorize any person to sign any Award Agreement or other document related to this Plan on behalf of the Company;
(l) determine the form of any Award Agreement or other document related to this Plan, and whether that document, including signatures, may be in electronic form;
(m) interpret this Plan and any Award Agreement or document related to this Plan;
(n) correct any defect, remedy any omission, or reconcile any inconsistency in this Plan, any Award Agreement or any other document related to this Plan;
(o) adopt, amend, and revoke rules and regulations under this Plan, including rules and regulations relating to sub-plans and Plan addenda;
(p) adopt, amend, and revoke special rules and procedures which may be inconsistent with the terms of this Plan, set forth (if the Administrator so chooses) in sub-plans regarding (for example) the operation and administration of this Plan and the terms of Awards, if and to the extent necessary or useful to accommodate non-U.S. Applicable Laws and practices as they apply to Awards and Award Shares held by, or granted or issued to, persons working or resident outside of the United States or employed by Affiliates incorporated outside the United States;
(q) determine whether a transaction or event should be treated as a Change in Control, a Divestiture or neither;
(r) determine the effect of a Fundamental Transaction and, if the Board determines that a transaction or event should be treated as a Change in Control or a Divestiture, then the effect of that Change in Control or Divestiture; and
(s) make all other determinations the Administrator deems necessary or advisable for the administration of this Plan.
4.3 Scope of Discretion. Subject to the provisions of this Section 4.3, on all matters for which this Plan confers the authority, right or power on the Board, the Committee, or other Administrator to make decisions, that body may make those decisions in its sole and absolute discretion. Those decisions will be final, binding and conclusive. In making its decisions, the Board, Committee or other Administrator need not treat all persons eligible to receive Awards, all Awardees, all Awards or all Award Shares the same way. Notwithstanding anything herein to the contrary, and except as provided in Section 14.3, the discretion of the Board, Committee or other Administrator is subject to the specific provisions and specific limitations of this Plan, as well as all rights conferred on specific Awardees by Award Agreements and other agreements.
5. Persons Eligible to Receive Awards
5.1 Eligible Individuals. Awards (including Substitute Awards) may be granted to, and only to, Employees, Directors and Consultants, including to prospective Employees, Directors and Consultants conditioned on the beginning of their service for the Company or an Affiliate. However, Incentive Stock Options may only be granted to Employees, as provided in Section 7(g).
5.2 Section 162(m) Limitation.
(a) Options and SARs. Subject to the provisions of this Section 5.2, for so long as the Company is a "publicly held corporation" within the meaning of Section 162(m) of the Code: (i) no Employee may be granted one or more SARs and Options within any fiscal year of the Company under this Plan to purchase more than 1,500,000 Shares under Options or to receive compensation calculated with reference to more than that number of Shares under SARs, subject to adjustment pursuant to Section 10, (ii) Options and SARs may be granted to an Executive only by the Committee (and, notwithstanding anything to the contrary in
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Section 4.1(a), not by the Board). If an Option or SAR is cancelled without being exercised or of the Option Price of an Option is reduced, that cancelled or repriced Option or SAR shall continue to be counted against the limit on Awards that my be granted to any individual under this Section 5.2. Notwithstanding anything herein to the contrary, a new Employee of the Company or an Affiliate shall be eligible to receive up to a maximum of 1,700,000 Shares under Options in the calendar year which they commence employment, or such compensation calculated with reference to such number of Shares under SARs, subject to adjustment pursuant to Section 10.
(b) Cash Awards and Stock Awards. Any Cash Award or Stock Award intended as "qualified performance-based compensation" within the meaning of Section 162(m) of the Code must vest or become exercisable contingent on the achievement of one or more Objectively Determinable Performance Conditions. The Committee shall have the discretion to determine the time and manner of compliance with Section 162(m) of the Code.
6. Terms and Conditions of Options
The following rules apply to all Options:
6.1 Price. Except as specifically provided herein, no nonstatutory Option may have an Option Price less than 85% of the Fair Market Value of the Shares on the Grant Date. No Option intended as "qualified incentive-based compensation" within the meaning of Section 162(m) of the Code may have an Option Price less than 100% of the Fair Market Value of the Shares on the Grant Date. In no event will the Option Price of any Option be less than the par value of the Shares issuable under the Option if that is required by Applicable Law. The Option Price of an Incentive Stock Option shall be subject to Section 7(f).
6.2 Term. No Option shall be exercisable after its Expiration Date. No Option may have an Expiration Date that is more than ten years after its Grant Date. Additional provisions regarding the term of Incentive Stock Options are provided in Sections 7(a) and 7(e).
6.3 Vesting. Options shall be exercisable: (a) on the Grant Date, or (b) in accordance with a schedule related to the Grant Date, the date the Optionee's directorship, employment or consultancy begins, or a different date specified in the Option Agreement. Additional provisions regarding the vesting of Incentive Stock Options are provided in Section 7(c). No Option granted to an individual who is subject to the overtime pay provisions of the Fair Labor Standards Act may be exercised before the expiration of six months after the Grant Date.
6.4 Form and Method of Payment.
(a) The Board or Committee shall determine the acceptable form and method of payment for exercising an Option. So long as variable accounting pursuant to "APB 25" does not apply and the Board or Committee otherwise determines there is no material adverse accounting consequence at the time of exercise, the Board or Committee may require the delivery in Shares for the value of the net appreciation of the Shares at the time of exercise over the exercise price. The difference between full number of Shares covered by the exercised portion of the Award and the number of Shares actually delivered shall be restored to the amount of Shares reserved for issuance under Section 3.1.
(b) Acceptable forms of payment for all Option Shares are cash, check or wire transfer, denominated in U.S. dollars except as specified by the Administrator for non-U.S. Employees or non-U.S. sub-plans.
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(c) In addition, the Administrator may permit payment to be made by any of the following methods:
(i) other Shares, or the designation of other Shares, which (A) are "mature" shares for purposes of avoiding variable accounting treatment under generally accepted accounting principles (generally mature shares are those that have been owned by the Optionee for more than six months on the date of surrender), and (B) have a Fair Market Value on the date of surrender equal to the Option Price of the Shares as to which the Option is being exercised;
(ii) provided that a public market exists for the Shares, consideration received by the Company under a procedure under which a licensed broker-dealer advances funds on behalf of an Optionee or sells Option Shares on behalf of an Optionee (a " Cashless Exercise Procedure "), provided that if the Company extends or arranges for the extension of credit to an Optionee under any Cashless Exercise Procedure, no Officer or Director may participate in that Cashless Exercise Procedure;
(iii) cancellation of any debt owed by the Company or any Affiliate to the Optionee by the Company including without limitation waiver of compensation due or accrued for services previously rendered to the Company; and
(iv) any combination of the methods of payment permitted by any paragraph of this Section 6.4.
(d) The Administrator may also permit any other form or method of payment for Option Shares permitted by Applicable Law.
6.5 Nonassignability of Options. Except as determined by the Administrator, no Option shall be assignable or otherwise transferable by the Optionee except by will or by the laws of descent and distribution. However, Options may be transferred and exercised in accordance with a Domestic Relations Order and may be exercised by a guardian or conservator appointed to act for the Optionee. Incentive Stock Options may only be assigned in compliance with Section 7(h).
6.6 Substitute Options. The Board may cause the Company to grant Substitute Options in connection with the acquisition by the Company or an Affiliate of equity securities of any entity (including by merger, tender offer, or other similar transaction) or of all or a portion of the assets of any entity. Any such substitution shall be effective on the effective date of the acquisition. Substitute Options may be Nonstatutory Options or Incentive Stock Options. Unless and to the extent specified otherwise by the Board, Substitute Options shall have the same terms and conditions as the options they replace, except that (subject to the provisions of Section 10) Substitute Options shall be Options to purchase Shares rather than equity securities of the granting entity and shall have an Option Price determined by the Board.
6.7 Repricings. In furtherance of, and not in limitation of the provisions of Section 10, Options may be repriced, replaced or regranted through cancellation or modification without stockholder approval.
7. Incentive Stock Options.
The following rules apply only to Incentive Stock Options and only to the extent these rules are more restrictive than the rules that would otherwise apply under this Plan. With the consent of the Optionee, or where this Plan provides that an action may be taken notwithstanding any other provision of this Plan, the Administrator may deviate from the requirements of this Section, notwithstanding that
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any Incentive Stock Option modified by the Administrator will thereafter be treated as a Nonstatutory Option.
(a) The Expiration Date of an Incentive Stock Option shall not be later than ten years from its Grant Date, with the result that no Incentive Stock Option may be exercised after the expiration of ten years from its Grant Date.
(b) No Incentive Stock Option may be granted more than ten years from the date this Plan was approved by the Board.
(c) Options intended to be incentive stock options under Section 422 of the Code that are granted to any single Optionee under all incentive stock option plans of the Company and its Affiliates, including incentive stock options granted under this Plan, may not vest at a rate of more than $100,000 in Fair Market Value of stock (measured on the grant dates of the options) during any calendar year. For this purpose, an option vests with respect to a given share of stock the first time its holder may purchase that share, notwithstanding any right of the Company to repurchase that share. Unless the administrator of that option plan specifies otherwise in the related agreement governing the option, this vesting limitation shall be applied by, to the extent necessary to satisfy this $100,000 rule, treating certain stock options that were intended to be incentive stock options under Section 422 of the Code as Nonstatutory Options. The stock options or portions of stock options to be reclassified as Nonstatutory Options are those with the highest option prices, whether granted under this Plan or any other equity compensation plan of the Company or any Affiliate that permits that treatment. This Section 7(c) shall not cause an Incentive Stock Option to vest before its original vesting date or cause an Incentive Stock Option that has already vested to cease to be vested.
(d) In order for an Incentive Stock Option to be exercised for any form of payment other than those described in Section 6.4(b), that right must be stated at the time of grant in the Option Agreement relating to that Incentive Stock Option.
(e) Any Incentive Stock Option granted to a Ten Percent Stockholder, must have an Expiration Date that is not later than five years from its Grant Date, with the result that no such Option may be exercised after the expiration of five years from the Grant Date. A " Ten Percent Stockholder " is any person who, directly or by attribution under Section 424(d) of the Code, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or of any Affiliate on the Grant Date.
(f) The Option Price of an Incentive Stock Option shall never be less than the Fair Market Value of the Shares at the Grant Date. The Option Price for the Shares covered by an Incentive Stock Option granted to a Ten Percent Stockholder shall never be less than 110% of the Fair Market Value of the Shares at the Grant Date.
(g) Incentive Stock Options may be granted only to Employees. If an Optionee changes status from an Employee to a Consultant, that Optionee's Incentive Stock Options become Nonstatutory Options if not exercised within the time period described in Section 7(i) (determined by treating that change in status as a Termination solely for purposes of this Section 7(g)).
(h) No rights under an Incentive Stock Option may be transferred by the Optionee, other than by will or the laws of descent and distribution. During the life of the Optionee, an Incentive Stock Option may be exercised only by the Optionee. The Company's compliance with a Domestic Relations Order, or the exercise of an Incentive Stock Option by a guardian or conservator appointed to act for the Optionee, shall not violate this Section 7(h).
(i) An Incentive Stock Option shall be treated as a Nonstatutory Option if it remains exercisable after, and is not exercised within, the three-month period beginning with the
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Optionee's Termination for any reason other than the Optionee's death or disability (as defined in Section 22(e) of the Code). In the case of Termination due to death, an Incentive Stock Option shall continue to be treated as an Incentive Stock Option if it remains exercisable after, and is not exercised within, the three-month period after the Optionee's Termination provided it is exercised before the Expiration Date. In the case of Termination due to disability, an Incentive Stock Option shall be treated as a Nonstatutory Option if it remains exercisable after, and is not exercised within, one year after the Optionee's Termination.
(j) An Incentive Stock Option may only be modified by the Board.
8. Stock Appreciation Rights, Stock Awards and Cash Awards
8.1 Stock Appreciation Rights. The following rules apply to SARs:
(a) General. SARs may be granted either alone, in addition to, or in tandem with other Awards granted under this Plan. The Administrator may grant SARs to eligible participants subject to terms and conditions not inconsistent with this Plan and determined by the Administrator. The specific terms and conditions applicable to the Awardee shall be provided for in the Award Agreement. SARs shall be exercisable, in whole or in part, at such times as the Administrator shall specify in the Award Agreement. The grant or vesting of a SAR may be made contingent on the achievement of Objectively Determinable Performance Conditions.
(b) Exercise of SARs. Upon the exercise of an SAR, in whole or in part, an Awardee shall be entitled to a payment in an amount equal to the excess of the Fair Market Value of a fixed number of Shares covered by the exercised portion of the SAR on the date of exercise, over the Fair Market Value of the Shares covered by the exercised portion of the SAR on the Grant Date. The amount due to the Awardee upon the exercise of a SAR shall be paid in cash, Shares or a combination thereof, over the period or periods specified in the Award Agreement. An Award Agreement may place limits on the amount that may be paid over any specified period or periods upon the exercise of a SAR, on an aggregate basis or as to any Awardee. A SAR shall be considered exercised when the Company receives written notice of exercise in accordance with the terms of the Award Agreement from the person entitled to exercise the SAR. If a SAR has been granted in tandem with an Option, upon the exercise of the SAR, the number of shares that may be purchased pursuant to the Option shall be reduced by the number of shares with respect to which the SAR is exercised.
(c) Nonassignability of SARs. Except as determined by the Administrator, no SAR shall be assignable or otherwise transferable by the Awardee except by will or by the laws of descent and distribution. Notwithstanding anything herein to the contrary, SARs may be transferred and exercised in accordance with a Domestic Relations Order.
(d) Substitute SARs. The Board may cause the Company to grant Substitute SARs in connection with the acquisition by the Company or an Affiliate of equity securities of any entity (including by merger) or all or a portion of the assets of any entity. Any such substitution shall be effective on the effective date of the acquisition. Unless and to the extent specified otherwise by the Board, Substitute SARs shall have the same terms and conditions as the options they replace, except that (subject to the provisions of Section 9) Substitute SARs shall be exercisable with respect to the Fair Market Value of Shares rather than equity securities of the granting entity and shall be on terms that, as determined by the Board in its sole and absolute discretion, properly reflects the substitution.
(e) Repricings. A SAR may not be repriced, replaced or regranted, through cancellation or modification without stockholder approval.
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8.2 Stock Awards. The following rules apply to all Stock Awards:
(a) General. The specific terms and conditions of a Stock Award applicable to the Awardee shall be provided for in the Award Agreement. The Award Agreement shall state the number of Shares that the Awardee shall be entitled to receive or purchase, the terms and conditions on which the Shares shall vest, the price to be paid, whether Shares are to be delivered at the time of grant or at some deferred date specified in the Award Agreement (e.g. a restricted stock unit award agreement), whether the Award is payable solely in Shares, cash or either and, if applicable, the time within which the Awardee must accept such offer. The offer shall be accepted by execution of the Award Agreement. The Administrator may require that all Shares subject to a right of repurchase or risk of forfeiture be held in escrow until such repurchase right or risk of forfeiture lapses. The grant or vesting of a Stock Award may be made contingent on the achievement of Objectively Determinable Performance Conditions.
(b) Right of Repurchase. If so provided in the Award Agreement, Award Shares acquired pursuant to a Stock Award may be subject to repurchase by the Company or an Affiliate if not vested in accordance with the Award Agreement.
(c) Form of Payment. The Administrator shall determine the acceptable form and method of payment for exercising a Stock Award. Acceptable forms of payment for all Award Shares are cash, check or wire transfer, denominated in U.S. dollars except as specified by the Administrator for non-U.S. sub-plans. In addition, the Administrator may permit payment to be made by any of the methods permitted with respect to the exercise of Options pursuant to Section 6.4.
(d) Nonassignability of Stock Awards. Except as determined by the Administrator, no Stock Award shall be assignable or otherwise transferable by the Awardee except by will or by the laws of descent and distribution. Notwithstanding anything to the contrary herein, Stock Awards may be transferred and exercised in accordance with a Domestic Relations Order.
(e) Substitute Stock Award. The Board may cause the Company to grant Substitute Stock Awards in connection with the acquisition by the Company or an Affiliate of equity securities of any entity (including by merger) or all or a portion of the assets of any entity. Unless and to the extent specified otherwise by the Board, Substitute Stock Awards shall have the same terms and conditions as the stock awards they replace, except that (subject to the provisions of Section 10) Substitute Stock Awards shall be Stock Awards to purchase Shares rather than equity securities of the granting entity and shall have a Purchase Price that, as determined by the Board in its sole and absolute discretion, properly reflects the substitution. Any such Substituted Stock Award shall be effective on the effective date of the acquisition.
8.3 Cash Awards. The following rules apply to all Cash Awards:
Cash Awards may be granted either alone, in addition to, or in tandem with other Awards granted under this Plan. After the Administrator determines that it will offer a Cash Award, it shall advise the Awardee, by means of an Award Agreement, of the terms, conditions and restrictions related to the Cash Award.
9. Exercise of Awards
9.1 In General. An Award shall be exercisable in accordance with this Plan and the Award Agreement under which it is granted.
9.2 Time of Exercise. Options and Stock Awards shall be considered exercised when the Company receives: (a) written notice of exercise from the person entitled to exercise the Option or Stock Award, (b) full payment, or provision for payment, in a form and method approved by the Administrator, for the Shares for which the Option or Stock Award is being exercised, and (c) with respect to Nonstatutory Options, payment, or provision for payment, in a form approved by the
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Administrator, of all applicable withholding taxes due upon exercise. An Award may not be exercised for a fraction of a Share. SARs shall be considered exercised when the Company receives written notice of the exercise from the person entitled to exercise the SAR.
9.3 Issuance of Award Shares. The Company shall issue Award Shares in the name of the person properly exercising the Award. If the Awardee is that person and so requests, the Award Shares shall be issued in the name of the Awardee and the Awardee's spouse. The Company shall endeavor to issue Award Shares promptly after an Award is exercised or after the Grant Date of a Stock Award, as applicable. Until Award Shares are actually issued, as evidenced by the appropriate entry on the stock register of the Company or its transfer agent, the Awardee will not have the rights of a stockholder with respect to those Award Shares, even though the Awardee has completed all the steps necessary to exercise the Award. No adjustment shall be made for any dividend, distribution, or other right for which the record date precedes the date the Award Shares are issued, except as provided in Section 10.
9.4 Termination
(a) In General. Except as provided in an Award Agreement or in writing by the Administrator, including in an Award Agreement, and as otherwise provided in Sections 9.4(b), (c), (d) and (e) after an Awardee's Termination, the Awardee's Awards shall be exercisable to the extent (but only to the extent) they are vested on the date of that Termination and only during the three months after the Termination, but in no event after the Expiration Date. To the extent the Awardee does not exercise an Award within the time specified for exercise, the Award shall automatically terminate.
(b) Leaves of Absence. Unless otherwise provided in the Award Agreement, no Award may be exercised more than three months after the beginning of a leave of absence, other than a personal or medical leave approved by an authorized representative of the Company with employment guaranteed upon return. Awards shall not continue to vest during a leave of absence, unless otherwise determined by the Administrator with respect to an approved personal or medical leave with employment guaranteed upon return.
(c) Death or Disability. Unless otherwise provided by the Administrator, if an Awardee's Termination is due to death or disability (as determined by the Administrator with respect to all Awards other than Incentive Stock Options and as defined by Section 22(e) of the Code with respect to Incentive Stock Options), all Awards of that Awardee to the extent exercisable at the date of that Termination may be exercised for one year after that Termination, but in no event after the Expiration Date. In the case of Termination due to death, an Award may be exercised as provided in Section 17. In the case of Termination due to disability, if a guardian or conservator has been appointed to act for the Awardee and been granted this authority as part of that appointment, that guardian or conservator may exercise the Award on behalf of the Awardee. Death or disability occurring after an Awardee's Termination shall not cause the Termination to be treated as having occurred due to death or disability. To the extent an Award is not so exercised within the time specified for its exercise, the Award shall automatically terminate.
(d) Divestiture. If an Awardee's Termination is due to a Divestiture, the Board may take any one or more of the actions described in Section 10.3 or 10.4 with respect to the Awardee's Awards.
(e) Administrator Discretion. Notwithstanding the provisions of Section 9.4 (a)-(e), the Plan Administrator shall have complete discretion, exercisable either at the time an Award is granted or at any time while the Award remains outstanding, to:
(i) Extend the period of time for which the Award is to remain exercisable, following the Awardee's Termination, from the limited exercise period otherwise in effect for that
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Award to such greater period of time as the Administrator shall deem appropriate, but in no event beyond the Expiration Date; and/or
(ii) Permit the Award to be exercised, during the applicable post-Termination exercise period, not only with respect to the number of vested Shares for which such Award may be exercisable at the time of the Awardee's Termination but also with respect to one or more additional installments in which the Awardee would have vested had the Awardee not been subject to Termination.
(f) Consulting or Employment Relationship. Nothing in this Plan or in any Award Agreement, and no Award or the fact that Award Shares remain subject to repurchase rights, shall: (A) interfere with or limit the right of the Company or any Affiliate to terminate the employment or consultancy of any Awardee at any time, whether with or without cause or reason, and with or without the payment of severance or any other compensation or payment, or (B) interfere with the application of any provision in any of the Company's or any Affiliate's charter documents or Applicable Law relating to the election, appointment, term of office, or removal of a Director.
10. Certain Transactions and Events
10.1 In General. Except as provided in this Section 10, no change in the capital structure of the Company, merger, sale or other disposition of assets or a subsidiary, change in control, issuance by the Company of shares of any class of securities or securities convertible into shares of any class of securities, exchange or conversion of securities, or other transaction or event shall require or be the occasion for any adjustments of the type described in this Section 10. Additional provisions with respect to the foregoing transactions are set forth in Section 14.3.
10.2 Changes in Capital Structure. In the event of any stock split, reverse stock split, recapitalization, combination or reclassification of stock, stock dividend, spin-off, or similar change to the capital structure of the Company (not including a Fundamental Transaction or Change in Control), the Board shall make whatever adjustments it concludes are appropriate to: (a) the number and type of Awards that may be granted under this Plan, (b) the number and type of Options that may be granted to any individual under this Plan, (c) the terms of any SAR, (d) the Purchase Price of any Stock Award, (e) the Option Price and number and class of securities issuable under each outstanding Option, and (f) the repurchase price of any securities substituted for Award Shares that are subject to repurchase rights. The specific adjustments shall be determined by the Board. Unless the Board specifies otherwise, any securities issuable as a result of any such adjustment shall be rounded down to the next lower whole security. The Board need not adopt the same rules for each Award or each Awardee.
10.3 Fundamental Transactions. Except for grants to Non-Employee Directors pursuant to Section 11 herein, in the event of (a) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption shall be binding on all Participants), (b) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (c) the sale of all or substantially all of the assets of the Company, or (d) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction (each, a " Fundamental Transaction "), any or all outstanding Awards may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement shall be binding on all participants under this Plan. In the alternative, the successor corporation may substitute equivalent
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Awards or provide substantially similar consideration to participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares held by the participants, substantially similar shares or other property subject to repurchase restrictions no less favorable to the participant. In the event such successor corporation (if any) does not assume or substitute Awards, as provided above, pursuant to a transaction described in this Subsection 10.3, the vesting with respect to such Awards shall fully and immediately accelerate or the repurchase rights of the Company shall fully and immediately terminate, as the case may be, so that the Awards may be exercised or the repurchase rights shall terminate before, or otherwise in connection with the closing or completion of the Fundamental Transaction or event, but then terminate. Notwithstanding anything in this Plan to the contrary, the Committee may, in its sole discretion, provide that the vesting of any or all Award Shares subject to vesting or right of repurchase shall accelerate or lapse, as the case may be, upon a transaction described in this Section 10.3. If the Committee exercises such discretion with respect to Options, such Options shall become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines, and if such Options are not exercised prior to the consummation of the Fundamental Transaction, they shall terminate at such time as determined by the Committee. Subject to any greater rights granted to participants under the foregoing provisions of this Section 10.3, in the event of the occurrence of any Fundamental Transaction, any outstanding Awards shall be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, or sale of assets.
10.4 Changes of Control. The Board may also, but need not, specify that other transactions or events constitute a " Change in Control ". The Board may do that either before or after the transaction or event occurs. Examples of transactions or events that the Board may treat as Changes of Control are: (a) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Exchange Act, acquires securities holding 30% or more of the total combined voting power or value of the Company, or (b) as a result of or in connection with a contested election of Company Directors, the persons who were Company Directors immediately before the election cease to constitute a majority of the Board. In connection with a Change in Control, notwithstanding any other provision of this Plan, the Board may, but need not, take any one or more of the actions described in Section 10.3. In addition, the Board may extend the date for the exercise of Awards (but not beyond their original Expiration Date). The Board need not adopt the same rules for each Award or each Awardee. Notwithstanding anything in this Plan to the contrary, in the event of an involuntary Termination of services for any reason other than death, disability or Cause, within 18 months following the consummation of a Fundamental Transaction or Change in Control, any Awards, assumed or substituted in a Fundamental Transaction or Change in Control, which are subject to vesting conditions and/or the right of repurchase in favor of the Company or a successor entity, shall accelerate fully so that such Award Shares are immediately exercisable upon Termination or, if subject to the right of repurchase in favor of the Company, such repurchase rights shall lapse as of the date of Termination. Such Awards shall be exercisable for a period of three (3) months following termination.
10.5 Divestiture. If the Company or an Affiliate sells or otherwise transfers equity securities of an Affiliate to a person or entity other than the Company or an Affiliate, or leases, exchanges or transfers all or any portion of its assets to such a person or entity, then the Board may specify that such transaction or event constitutes a " Divestiture ". In connection with a Divestiture, notwithstanding any other provision of this Plan, the Board may, but need not, take one or more of the actions described in Section 10.3 or 10.4 with respect to Awards of Award Shares held by, for example, Employees, Directors or Consultants for whom that transaction or event results in a Termination. The Board need not adopt the same rules for each Award or Awardee.
10.6 Dissolution. If the Company adopts a plan of dissolution, the Board may cause Awards to be fully vested and exercisable (but not after their Expiration Date) before the dissolution is completed
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but contingent on its completion and may cause the Company's repurchase rights on Award Shares to lapse upon completion of the dissolution. The Board need not adopt the same rules for each Award or each Awardee. Notwithstanding anything herein to the contrary, in the event of a dissolution of the Company, to the extent not exercised before the earlier of the completion of the dissolution or their Expiration Date, Awards shall terminate immediately prior to the dissolution.
10.7 Cut-Back to Preserve Benefits. If the Administrator determines that the net after-tax amount to be realized by any Awardee, taking into account any accelerated vesting, termination of repurchase rights, or cash payments to that Awardee in connection with any transaction or event set forth in this Section 10 would be greater if one or more of those steps were not taken or payments were not made with respect to that Awardee's Awards or Award Shares, then, at the election of the Awardee, to such extent, one or more of those steps shall not be taken and payments shall not be made.
11. Automatic Option Grants to Non-Employee Directors and Non-Employee Director Fee Option Grants
11.1 Automatic Option Grants to Non-Employee Directors
(a) Grant Dates. Option grants to Non-Employee Directors shall be made on the dates specified below:
(i) Each Non-Employee Director who is first elected or appointed to the Board at any time after the effective date of this Plan shall automatically be granted, on the date of such initial election or appointment, an Option to purchase 60,000 Shares (the " Initial Grant ").
(ii) Commencing in 2005, on the date of each annual stockholders meeting, each individual who is to continue to serve as a Non-Employee Director shall automatically be granted an Option to purchase 15,000 Shares (the " Annual Grant "), provided, however, that such individual has served as a Non-Employee Director for at least six (6) months.
(b) Exercise Price.
(i) The Option Price shall be equal to one hundred percent (100%) of the Fair Market Value of the Shares on the Option grant date.
(ii) The Option Price shall be payable in one or more of the alternative forms authorized pursuant to Section 6.4. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the Option Price must be made on the date of exercise.
(c) Option Term. Each Option shall have a term of ten (10) years measured from the Option grant date.
(d) Exercise and Vesting of Options. Except as otherwise determined by the whole Board, the Shares underlying each Option granted pursuant to Section 11.1 shall vest and be exercisable as set forth below.
(i) Initial Grant. The Shares underlying each Option issued pursuant to the Initial Grant shall vest and be exercisable as to 2.0833% of the Shares at the end of each full succeeding month from the date of grant, rounded down to the nearest whole Share, for so long as the Non-Employee Director continuously remains a Director of, or a Consultant to, the Company.
(ii) Annual Grant. The Shares underlying each Option issued pursuant to the Annual Grant shall vest and be exercisable as to 8.3333% of the Shares at the end of each full succeeding month from the date of grant, rounded down to the nearest whole Share, for so
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long as the Non-Employee Director continuously remains a Director of, or a Consultant to, the Company.
(e) Termination of Service. The following provisions shall govern the exercise of any Options held by the Awardee at the time the Awardee ceases to serve as a Non-Employee Director, Employee or Consultant:
(i) In General. Except as otherwise provided in Section 10.3, after cessation of service (the " Cessation Date "), the Awardee's Options shall be exercisable to the extent (but only to the extent) they are vested on the Cessation Date and only during the three months after such Cessation Date, but in no event after the Expiration Date. To the extent the Awardee does not exercise an Option within the time specified for exercise, the Option shall automatically terminate.
(ii) Death or Disability. If an Awardee's cessation of service is due to death or disability (as determined by the Board), all Options of that Awardee, to the extent exercisable upon such Cessation Date, may be exercised for one year after the Cessation Date, but in no event after the Expiration Date. In the case of a cessation of service due to death, an Option may be exercised as provided in Section 16. In the case of a cessation of service due to disability, if a guardian or conservator has been appointed to act for the Awardee and been granted this authority as part of that appointment, that guardian or conservator may exercise the Option on behalf of the Awardee. Death or disability occurring after an Awardee's cessation of service shall not cause the cessation of service to be treated as having occurred due to death or disability. To the extent an Option is not so exercised within the time specified for its exercise, the Option shall automatically terminate.
(f) Board Discretion. The Awards under this Section 11.1 are not intended as the exclusive Awards that may be made to Non-Employee Directors under this Plan. The Board may, in its discretion, amend the Plan with respect to the terms of the Awards herein, may add or substitute other types of Awards or may temporarily or permanently suspend Awards hereunder, all without approval of the Company's stockholders.
11.2 Director Fee Option Grants
(a) Option Grants. The Board shall have the sole and exclusive authority to determine the calendar year or years for which the Director fee option grant program (the " Director Fee Option Program ") is to be in effect. For each such calendar year the program is in effect, each Non-Employee Director may elect to apply all or any portion of the annual retainer fee otherwise payable in cash, for his or her service on the Board for that year, to the acquisition of a special Option grant under this Director Fee Option Program. Such election must be filed with the Company's Chief Financial Officer prior to first day of the calendar year for which the annual retainer fee which is the subject of that election is otherwise payable. Each Non-Employee Director who files such a timely election shall automatically be granted an Option under this Director Fee Option Program on the first trading day in January in the calendar year for which the annual retainer fee which is the subject of that election would otherwise be payable in cash.
(b) Option Terms. Each Option shall be a Nonstatutory Option governed by the terms and conditions specified below.
(i) Exercise Price.
A. The Purchase Price shall be thirty-three and one-third percent (33 1 / 3 %) of the Fair Market Value per Share on the Option grant date.
B. The Purchase Price shall become immediately due upon exercise of the Option and shall be payable in one or more of the alternative forms authorized pursuant to
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Section 6.4 of this Plan. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the Purchase Price must be made on the date that the Option is exercised.
(ii) Number of Option Shares. The number of Shares subject to the Option shall be determined pursuant to the following formula (rounded down to the nearest whole number):
X = A ÷ (B × 66 2 / 3 %), where
X is the number of Option Shares,
A is the portion of the annual retainer fee subject to the Non-Employee Director's election, and
B is the Fair Market Value of a Share on the option grant date.
(iii) Exercise and Term of Options. The Option shall become exercisable in a series of twelve (12) equal monthly installments upon the Awardee's completion of each month of Board service over the twelve (12)-month period measured from the grant date. Each Option shall have a maximum term of ten (10) years measured from the Option grant date.
(iv) Termination of Board Service. Should the Awardee cease Board service for any reason (other than death or permanent disability) while holding one or more Options under this Director Fee Option Program, then each such Option shall remain exercisable, for any or all of the Shares for which the Option is exercisable at the time of such cessation of Board service, until the earlier of (x) the expiration of the ten (10)-year Option term or (y) the expiration of the three (3)-year period measured from the date of such cessation of Board service. However, each Option held by the Awardee under this Director Fee Option Program at the time of his or her cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all Shares for which the Option is not otherwise at that time exercisable.
(v) Death or Permanent Disability. Should the Awardee's service as a Board member cease by reason of death or permanent disability, then each Option held by such Awardee under this Director Fee Option Program shall immediately become exercisable for all the Shares at the time subject to that Option, and the Option may be exercised for any or all of those Shares as fully-vested Shares until the earlier of (x) the expiration of the ten (10)-year option term or (y) the expiration of the three (3)-year period measured from the date of such cessation of Board service.
Should the Awardee die after cessation of his or her Board service but while holding one or more Options under this Director Fee Option Program, then each such Option may be exercised, for any or all of the shares for which the Option is exercisable at the time of the Awardee's cessation of Board service (less any Shares subsequently purchased by the Awardee prior to death), by the personal representative of the Awardee's estate or by the person or persons to whom the Option is transferred pursuant to the Awardee's will or in accordance with the laws of descent and distribution or by the designated beneficiary or beneficiaries of such option. Such right of exercise shall lapse, and the Option shall terminate, upon the earlier of (xx) the expiration of the ten (10)-year Option term or (yy) the three (3)-year period measured from the date of the Awardee's cessation of Board service.
11.3 Certain Transactions and Events
(a) In the event of a Fundamental Transaction while the Awardee remains a Non-Employee Director, the Shares at the time subject to each outstanding Option held by such Awardee pursuant to Section 11, but not otherwise vested, shall automatically vest in full so that each such
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Option shall, immediately prior to the effective date of the Fundamental Transaction, become exercisable for all the Shares as fully vested Shares and may be exercised for any or all of those vested Shares. Immediately following the consummation of the Fundamental Transaction, each Option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or Affiliate thereof).
(b) In the event of a Change in Control while the Awardee remains a Non-Employee Director, the Shares at the time subject to each outstanding Option held by such Awardee pursuant to Section 11, but not otherwise vested, shall automatically vest in full so that each such Option shall, immediately prior to the effective date of the Change in Control, become exercisable for all the Shares as fully vested Shares and may be exercised for any or all of those vested Shares. Each such Option shall remain exercisable for such fully vested Shares until the expiration or sooner termination of the Option term in connection with a Change in Control.
(c) Each Option which is assumed in connection with a Fundamental Transaction shall be appropriately adjusted, immediately after such Fundamental Transaction, to apply to the number and class of securities which would have been issuable to the Awardee in consummation of such Fundamental Transaction had the Option been exercised immediately prior to such Fundamental Transaction. Appropriate adjustments shall also be made to the Option Price payable per share under each outstanding Option, provided the aggregate Option Price payable for such securities shall remain the same. To the extent the actual holders of the Company's outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Fundamental Transaction, the successor corporation may, in connection with the assumption of the outstanding Options granted pursuant to Section 11, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Fundamental Transaction.
(d) The grant of Options pursuant to Section 11 shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
(e) The remaining terms of each Option granted pursuant to Section 11 shall, as applicable, be the same as terms in effect for Awards granted under this Plan. Notwithstanding the foregoing, the provisions of Section 9.4 and Section 10 shall not apply to Options granted pursuant to Section 11.
11.4 Limited Transferability of Options. Each Option granted pursuant to Section 11 may be assigned in whole or in part during the Awardee's lifetime to one or more members of the Awardee's family or to a trust established exclusively for one or more such family members or to an entity in which the Awardee is majority owner or to the Awardee's former spouse, to the extent such assignment is in connection with the Awardee's estate or financial plan or pursuant to a Domestic Relations Order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the Option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the Option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Administrator may deem appropriate. The Awardee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding Options under Section 11, and those Options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Awardee's death while holding those Options. Such beneficiary or beneficiaries shall take the transferred Options subject to all the terms and conditions of the applicable Award Agreement evidencing each such transferred Option, including (without limitation) the limited time period during which the Option may be exercised following the Awardee's death.
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12. Withholding and Tax Reporting
12.1 Tax Withholding Alternatives
(a) General. Whenever Award Shares are issued or become free of restrictions, the Company may require the Awardee to remit to the Company an amount sufficient to satisfy any applicable tax withholding requirement, whether the related tax is imposed on the Awardee or the Company. The Company shall have no obligation to deliver Award Shares or release Award Shares from an escrow or permit a transfer of Award Shares until the Awardee has satisfied those tax withholding obligations. Whenever payment in satisfaction of Awards is made in cash, the payment will be reduced by an amount sufficient to satisfy all tax withholding requirements.
(b) Method of Payment. The Awardee shall pay any required withholding using the forms of consideration described in Section 6.4(b), except that, in the discretion of the Administrator, the Company may also permit the Awardee to use any of the forms of payment described in Section 6.4(c). The Administrator, in its sole discretion, may also permit Award Shares to be withheld to pay required withholding. If the Administrator permits Award Shares to be withheld, the Fair Market Value of the Award Shares withheld, as determined as of the date of withholding, shall not exceed the amount determined by the applicable minimum statutory withholding rates.
12.2 Reporting of Dispositions. Any holder of Option Shares acquired under an Incentive Stock Option shall promptly notify the Administrator, following such procedures as the Administrator may require, of the sale or other disposition of any of those Option Shares if the disposition occurs during: (a) the longer of two years after the Grant Date of the Incentive Stock Option and one year after the date the Incentive Stock Option was exercised, or (b) such other period as the Administrator has established.
13. Compliance with Law
The grant of Awards and the issuance and subsequent transfer of Award Shares shall be subject to compliance with all Applicable Law, including all applicable securities laws. Awards may not be exercised, and Award Shares may not be transferred, in violation of Applicable Law. Thus, for example, Awards may not be exercised unless: (a) a registration statement under the Securities Act is then in effect with respect to the related Award Shares, or (b) in the opinion of legal counsel to the Company, those Award Shares may be issued in accordance with an applicable exemption from the registration requirements of the Securities Act and any other applicable securities laws. The failure or inability of the Company to obtain from any regulatory body the authority considered by the Company's legal counsel to be necessary or useful for the lawful issuance of any Award Shares or their subsequent transfer shall relieve the Company of any liability for failing to issue those Award Shares or permitting their transfer. As a condition to the exercise of any Award or the transfer of any Award Shares, the Company may require the Awardee to satisfy any requirements or qualifications that may be necessary or appropriate to comply with or evidence compliance with any Applicable Law.
14. Amendment or Termination of this Plan or Outstanding Awards
14.1 Amendment and Termination. The Board may at any time amend, suspend, or terminate this Plan.
14.2 Stockholder Approval. The Company shall obtain the approval of the Company's stockholders for any amendment to this Plan if stockholder approval is necessary or desirable to comply with any Applicable Law or with the requirements applicable to the grant of Awards intended to be Incentive Stock Options. The Board may also, but need not, require that the Company's stockholders approve any other amendments to this Plan.
14.3 Effect. No amendment, suspension, or termination of this Plan, and no modification of any Award even in the absence of an amendment, suspension, or termination of this Plan, shall impair any
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existing contractual rights of any Awardee unless the affected Awardee consents to the amendment, suspension, termination, or modification. Notwithstanding anything herein to the contrary, no such consent shall be required if the Board determines, in its sole and absolute discretion, that the amendment, suspension, termination, or modification: (a) is required or advisable in order for the Company, this Plan or the Award to satisfy Applicable Law, to meet the requirements of any accounting standard or to avoid any adverse accounting treatment, or (b) in connection with any transaction or event described in Section 10, is in the best interests of the Company or its stockholders. The Board may, but need not, take the tax or accounting consequences to affected Awardees into consideration in acting under the preceding sentence. Those decisions shall be final, binding and conclusive. Termination of this Plan shall not affect the Administrator's ability to exercise the powers granted to it under this Plan with respect to Awards granted before the termination of Award Shares issued under such Awards even if those Award Shares are issued after the termination.
15. Reserved Rights
15.1 Nonexclusivity of this Plan. This Plan shall not limit the power of the Company or any Affiliate to adopt other incentive arrangements including, for example, the grant or issuance of stock options, stock, or other equity-based rights under other plans.
15.2 Unfunded Plan. This Plan shall be unfunded. Although bookkeeping accounts may be established with respect to Awardees, any such accounts will be used merely as a convenience. The Company shall not be required to segregate any assets on account of this Plan, the grant of Awards, or the issuance of Award Shares. The Company and the Administrator shall not be deemed to be a trustee of stock or cash to be awarded under this Plan. Any obligations of the Company to any Awardee shall be based solely upon contracts entered into under this Plan, such as Award Agreements. No such obligations shall be deemed to be secured by any pledge or other encumbrance on any assets of the Company. Neither the Company nor the Administrator shall be required to give any security or bond for the performance of any such obligations.
16. Special Arrangements Regarding Award Shares
16.1 Escrow of Stock Certificates. To enforce any restrictions on Award Shares, the Administrator may require their holder to deposit the certificates representing Award Shares, with stock powers or other transfer instruments approved by the Administrator endorsed in blank, with the Company or an agent of the Company to hold in escrow until the restrictions have lapsed or terminated. The Administrator may also cause a legend or legends referencing the restrictions to be placed on the certificates.
16.2 Repurchase Rights
(a) General. If a Stock Award is subject to vesting conditions, the Company shall have the right, during the seven months after the Awardee's Termination, to repurchase any or all of the Award Shares that were unvested as of the date of that Termination. The repurchase price shall be determined by the Administrator in accordance with this Section 16.2 which shall be either (i) the Purchase Price for the Award Shares (minus the amount of any cash dividends paid or payable with respect to the Award Shares for which the record date precedes the repurchase) or (ii) the lower of (A) the Purchase Price for the Shares or (B) the Fair Market Value of those Award Shares as of the date of the Termination. The repurchase price shall be paid in cash. The Company may assign this right of repurchase.
(b) Procedure. The Company or its assignee may choose to give the Awardee a written notice of exercise of its repurchase rights under this Section 16.2. However, the Company's failure to give such a notice shall not affect its rights to repurchase Award Shares. The Company must, however, tender the repurchase price during the period specified in this Section 16.2 for exercising its repurchase rights in order to exercise such rights.
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17. Beneficiaries
An Awardee may file a written designation of one or more beneficiaries who are to receive the Awardee's rights under the Awardee's Awards after the Awardee's death. An Awardee may change such a designation at any time by written notice. If an Awardee designates a beneficiary, the beneficiary may exercise the Awardee's Awards after the Awardee's death. If an Awardee dies when the Awardee has no living beneficiary designated under this Plan, the Company shall allow the executor or administrator of the Awardee's estate to exercise the Award or, if there is none, the person entitled to exercise the Option under the Awardee's will or the laws of descent and distribution. In any case, no Award may be exercised after its Expiration Date.
18. Miscellaneous
18.1 Governing Law. This Plan, the Award Agreements and all other agreements entered into under this Plan, and all actions taken under this Plan or in connection with Awards or Award Shares, shall be governed by the laws of the State of Delaware.
18.2 Determination of Value. Fair Market Value shall be determined as follows:
(a) Listed Stock. If the Shares are traded on any established stock exchange or quoted on a national market system, Fair Market Value shall be the closing sales price for the Shares as quoted on that stock exchange or system for the date the value is to be determined (the " Value Date ") as reported in The Wall Street Journal or a similar publication. If no sales are reported as having occurred on the Value Date, Fair Market Value shall be that closing sales price for the last preceding trading day on which sales of Shares are reported as having occurred. If no sales are reported as having occurred during the five trading days before the Value Date, Fair Market Value shall be the closing bid for Shares on the Value Date. If Shares are listed on multiple exchanges or systems, Fair Market Value shall be based on sales or bid prices on the primary exchange or system on which Shares are traded or quoted.
(b) Stock Quoted by Securities Dealer. If Shares are regularly quoted by a recognized securities dealer but selling prices are not reported on any established stock exchange or quoted on a national market system, Fair Market Value shall be the mean between the high bid and low asked prices on the Value Date. If no prices are quoted for the Value Date, Fair Market Value shall be the mean between the high bid and low asked prices on the last preceding trading day on which any bid and asked prices were quoted.
(c) No Established Market. If Shares are not traded on any established stock exchange or quoted on a national market system and are not quoted by a recognized securities dealer, the Administrator (following guidelines established by the Board or Committee) will determine Fair Market Value in good faith. The Administrator will consider the following factors, and any others it considers significant, in determining Fair Market Value: (i) the price at which other securities of the Company have been issued to purchasers other than Employees, Directors, or Consultants, (ii) the Company's stockholder's equity, prospective earning power, dividend-paying capacity, and non-operating assets, if any, and (iii) any other relevant factors, including the economic outlook for the Company and the Company's industry, the Company's position in that industry, the Company's goodwill and other intellectual property, and the values of securities of other businesses in the same industry.
18.3 Reservation of Shares. During the term of this Plan, the Company shall at all times reserve and keep available such number of Shares as are still issuable under this Plan.
18.4 Electronic Communications. Any Award Agreement, notice of exercise of an Award, or other document required or permitted by this Plan may be delivered in writing or, to the extent
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determined by the Administrator, electronically. Signatures may also be electronic if permitted by the Administrator.
18.5 Notices. Unless the Administrator specifies otherwise, any notice to the Company under any Option Agreement or with respect to any Awards or Award Shares shall be in writing (or, if so authorized by Section 18.4, communicated electronically), shall be addressed to the Secretary of the Company, and shall only be effective when received by the Secretary of the Company.
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[NUVASIVE, INC. LETTERHEAD]
<<DATE>>
<PR_GIVEN_NAME>
<PR_SURNAME>
<PR_STREET_ADDRESS>
<PR_LOCALITY>, <PR_STATE_OR_PROVINCE> <PR_POSTAL_CODE>
Option Shares: | Grant Date: | |||||
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Price per share: | Vesting Base Date: | |||||
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Fully-Vested Date: | ||||||
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Option control no.: | Expiration Date: | |||||
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Dear <PR_GIVEN_NAME>:
I am pleased to confirm that the Company has granted you an option to purchase shares of our common stock under the NuVasive, Inc. 2004 Equity Incentive Plan. To accept your stock option, please sign the enclosed copy of this letter and return it to {department name, mail-stop}{in the envelope provided}.
General terms
Your option is intended to be [an incentive][a nonstatutory] option. The basic terms of your option grant are identified in the information block at the top of this offer letter, but other important terms and conditions are described in the plan. We encourage you to carefully review the plan, a copy of which is [enclosed] [available on request from our {Stock Administrator}{Human Resources Department}][and on the intranet at ].
Purchase and payment
Subject to the plan, your option vests (becomes exercisable) in equal installments of twenty-five percent (25%) of the Option Shares on and after each of the first four anniversaries of the date hereof, calculated to the closest whole share, so that all shares will become purchasable on the Fully-Vested Date shown above.
If you decide to purchase shares under this option, you will be required to submit a completed exercise agreement on a form approved by the Company, together with payment for the shares. You may pay for the shares (plus any associated withholding taxes) using cash, a check, a wire transfer or any other form of payment listed in section 6.4(c) of the plan and permitted by the Administrator at the time you wish to exercise. Shares available under this option must be purchased, if at all, no later than the Expiration Date.
[ Specify any other special provisions. ]
We value your efforts and look forward to your continued contribution.
Sincerely,
[CEO
name]
[CEO title]
I accept this option and agree to the terms of this offer letter and the plan.
Optionee signature |
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, 200 |
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NuVasive, Inc.
NuVasive, Inc. 2004 Equity Incentive Plan
OPTION EXERCISE
AND
STOCK PURCHASE AGREEMENT
Instructions
NuVasive, Inc.
NuVasive, Inc. 2004 Equity Incentive Plan
OPTION EXERCISE AND
STOCK PURCHASE AGREEMENT
Date:
OPTIONHOLDER / PURCHASER
(A) | Name: | ||
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(B) | Employee number: | ||
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(C) | Residence address: | ||
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STOCK OPTION
(D) | Option Shares (total) subject to this Option: | ||
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(E) | Purchase Price per Share: | ||
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(F) | Grant Date: | ||
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(G) | Option Control Number: | ||
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OPTION SHARES PURCHASED UNDER THIS AGREEMENT
(H) | Shares purchased: | ||
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(I) | Option Price [(E) × (H)]: | |||
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(J) | Tax withholding (if applicable): | ||
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(to be calculated by Company)
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(K) | Purchase Price [(I) + (J)]: | |||
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PAYMENT METHOD (select one or more)
(L) | Cash or check (enclosed): | ||
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Wire transfer: | |||
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(Identify sending bank and wire transfer number)
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"Cashless exercise": | |||
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(Identify approved NASD broker-dealer and attach agreement)
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Other: | |||
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(Attach Company approval for other form of payment)
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1. Exercise of Option.
1.1. I am exercising my right to purchase the number of shares of common stock of NuVasive, Inc. indicated on Line (H) by exercising the option identified on Lines (D) through (G). The per share purchase price of the option is indicated on Line (E) and the aggregate purchase price of the shares I am purchasing is indicated on Line (I). I acknowledge that I may be responsible for tax withholding on the shares, in which case the aggregate purchase price would be as indicated on Line (K) (which the Company will complete). The shares that I am purchasing by exercising my option are referred to in this agreement as the "Shares". The total purchase price of the shares is referred to in this agreement as the "Purchase Price". I acknowledge that the option I am exercising was issued under and is subject to the rules of the 2004 Equity Incentive Plan of NuVasive, Inc. (the "Plan").
1.2. With this signed agreement, I have submitted either (a) cash or a check for the amount of the Purchase Price or (b) irrevocable wire transfer instructions for the Purchase Price, or (c) a certificate or certificates (or designation of such certificates if permitted by the Plan) representing shares of company common stock that I have owned for at least six months if the shares were acquired by me through exercise of an option, and that have a fair market value (as determined in accordance with the Plan) as of this date equal to the Purchase Price.
2. Representations
2.1. Taxes. The Company has made no warranties or representations to me with respect to the income tax consequences of the transactions contemplated by this Agreement and I am not relying on the Company or its representatives for an assessment of such tax consequences. I have had adequate opportunity to consult with my personal tax advisor prior to submitting this Agreement to the Company.
2.2. Repurchase. If the Shares are subject to a right of repurchase in favor of the Company at their original purchase price when I cease to provide services for the Company, or if I could be subject to suit under Section 16(b) of the Securities Exchange Act of 1934 with respect to the purchase of the Shares, I will execute and deliver to the Company a copy of the Acknowledgment and Statement of Decision Regarding Election Pursuant to Section 83(b) of the Internal Revenue Code (the "Acknowledgment") attached as Exhibit A. I acknowledge that I am primarily responsible for filing any Section 83(b) elections although the Company will, as an accommodation to me and without assuming any liability, file a duplicate election if I promptly provide an executed form with the Acknowledgement and Statement of Decision Regarding Section 83(b). I will consult with my own tax advisor to determine if there is a comparable election to file in the state of where I reside and whether filing a federal or state Section 83(b) election is desirable under my circumstances.
2.3. Disqualifying Dispositions of ISO Stock. I acknowledge that if the Stock acquired by exercise of an Incentive Stock Option (as defined in Section 2.1 of the Plan) is disposed of within two years after the Grant Date (as defined in the Option Grant) or within one year after such exercise, immediately prior to the disposition I will promptly notify the Company in writing of the date and terms of the disposition and will provide such other information regarding the disposition as the Company may reasonably require.
3. Miscellaneous Provisions.
3.1. Successors and Assigns. Subject to the limitations set forth in this Agreement, the benefits and obligations of this Agreement will be binding on the executors, administrators, heirs, legal representatives, successors, and assigns of the parties.
3.2. Costs. I will repay the Company for all costs and damages, including incidental and consequential damages and attorney's fees, resulting from any transfer of the Shares which is not in compliance with the provisions of this Agreement.
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3.3. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware excluding those laws that direct the application of the laws of another jurisdiction.
3.4. Notices. All notices and other communications under this Agreement shall be in writing. Unless and until I am notified in writing to the contrary, all notices, communications, and documents directed to the Company and related to the Agreement, if not delivered by hand, shall be mailed, addressed to:
NuVasive, Inc
Attention: Chief Financial Officer
at the Company's published principal office location.
3.5. Communications. Unless and until I notify the Company in writing to the contrary, all notices, communications, and documents intended for me and related to this Agreement, if not delivered by hand, shall be mailed to my last known address as shown on the Company's books. Notices and communications shall be mailed by first class mail, postage prepaid; documents shall be mailed by registered mail, return receipt requested, postage prepaid. All mailings and deliveries related to this Agreement shall be deemed received when actually received, if by hand delivery, and three business days after mailing, if by mail.
3.6. Arbitration. All disputes arising out of this Agreement will be finally settled by arbitration in accordance with the then existing rules of the American Arbitration Association. The arbitration will be conducted in the county of Los Angeles. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction over it; provided that nothing in this Agreement shall prevent a party from applying to a court of competent jurisdiction to obtain temporary relief pending resolution of the dispute through arbitration. The parties agree that service of any notices in the course of such arbitration at their respective addresses as provided for in this agreement shall be valid and sufficient.
3.7. This is not an employment contract. This Agreement is not to be interpreted as a guarantee or contract of continuing employment.
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NUVASIVE, INC. |
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By: |
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Title: | ||
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I hereby agree to be bound by all of the terms and conditions of this Agreement and the Plan.
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Purchaser's signature | |
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Printed name |
The purchaser's spouse indicates by the execution of this Agreement his or her consent to be bound by the terms herein as to his or her interests, whether as community property or otherwise, if any, in the Shares hereby purchased.
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Purchaser's Spouse |
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Exhibits
Exhibit 7A | Acknowledgment and Statement of Decision Regarding Section 83(b) Election | |
Exhibit 7B |
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Section 83(b) Election |
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ACKNOWLEDGEMENT AND
STATEMENT OF DECISION
REGARDING SECTION 83(b) ELECTION
The undersigned, a purchaser of shares of Common Stock of NuVasive, Inc. (the "Company") and a party to a Nonqualified Stock Option Purchase Agreement with the Company (the "Agreement"), hereby states as follows:
1. I acknowledge receipt of a copy of the Agreement and the memorandum entitled "Tax Consequences of Purchasing Restricted Stock; Filing a Section 83(b) Election." I have carefully reviewed the Agreement and the memorandum.
2. I either [check as applicable]:
(a) | have consulted, and have been fully advised by, my tax advisor | |||
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regarding the federal, state, and local tax consequences of purchasing shares under the Agreement, and particularly regarding the advisability of making elections pursuant to Section 83(b) of the Internal Revenue Code of 1986, (the "Code"), and pursuant to any corresponding provisions of applicable state laws; or | ||||
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have knowingly chosen not to consult such a tax advisor. |
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3. I have decided[check as applicable]:
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(a) | to make an election pursuant to Section 83(b) of the Code by filing an election form with the appropriate tax authorities within 30 days of the undersigned's purchase under the Agreement, and am submitting to the Company, together with my executed Agreement, three duplicate copies of executed election forms; or | ||
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not to make an election pursuant to Section 83(b) of the Code. |
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I acknowledge that, even if the Company files, or engages another party to file, a duplicate Section 83(b) election form with the Internal Revenue Service as an accommodation to me, I have the primary responsibility for timely filing any Section 83(b) election with the Internal Revenue Service and any state revenue authorities, and will hold the Company and its agents harmless from any failure to timely file a duplicate copy of the Section 83(b) election.
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EXHIBIT 7A
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE
I hereby elect, under Section 83(b) of the Internal Revenue Code, to include in gross income any excess of the fair market value of the property described in paragraph 2, disregarding any lapse restrictions on that property, over the amount I paid for such property, as described below.
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The spouse of the taxpayer acknowledges the making of this election.
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Regular Election
PROTECTIVE ELECTION UNDER
SECTION 83(b) OF THE INTERNAL REVENUE CODE
(INCENTIVE STOCK OPTION)
I hereby elect, under Section 83(b) of the Internal Revenue Code, to include in gross income, with the effect and under the circumstances described in paragraph 4, any excess of the fair market value of the property described in paragraph 2, disregarding any lapse restrictions on that property, over the amount I paid for such property.
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The spouse of the taxpayer acknowledges the making of this election.
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EXHIBIT 7B
SPOUSAL CONSENT
I acknowledge that I have read the foregoing Option Exercise and Stock Purchase Agreement (the "Agreement") and that I know its contents. I hereby consent to and approve all of the provisions of the Agreement, and agree that the shares of the Common Stock of NuVasive, Inc. purchased thereunder (the "Shares") and any interest I may have in such Shares are subject to all the provisions of the Agreement. I will take no action at any time to hinder operation of the Agreement on these Shares or any interest I may have in or to them.
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Signature of Optionee's spouse | |||
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EXHIBIT 7B
NUVASIVE, INC.
RESTRICTED STOCK GRANT NOTICE
(2004 Equity Incentive Plan)
NuVasive, Inc. (the "Company"), pursuant to its 2004 Equity Incentive Plan (the "Plan"), hereby grants to the participant under the Plan (the "Participant") the right to purchase the number of shares of the Company's common stock (the "Common Stock") set forth below (the "Award"). This Award is subject to all of the terms and conditions as set forth in this Restricted Stock Grant Notice (the "Grant Notice"), the Restricted Stock Agreement, the Plan, the form of Assignment Separate from Certificate and the form of Joint Escrow Instructions, all of which are attached hereto and incorporated herein in their entirety.
Participant: |
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Date of Grant: |
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Vesting Commencement Date: |
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Number of Shares Subject to Award: |
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Purchase Price per Share: |
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Total Purchase Price: |
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Vesting Schedule: |
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Payment: |
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As described in the Restricted Stock Agreement, par value for the shares must be paid in cash or by check. |
Additional Terms/Acknowledgements : The undersigned Participant acknowledges receipt of, and understands and agrees to the terms and conditions of this Grant Notice, the Restricted Stock Agreement, the Plan, the form of Assignment Separate from Certificate and the form of Joint Escrow Instructions. Participant further acknowledges that as of the Date of Grant, this Grant Notice, the Restricted Stock Agreement, the Joint Escrow Instructions and the Plan set forth the entire understanding between Participant and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements relating thereto, with the exception of other awards previously granted and delivered to Participant under the Plan.
NuVasive, Inc. | Participant: | |||||
By: | By: | |||||
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Attachment I: Restricted Stock Agreement
Attachment II: 2004 Equity Incentive Plan
Attachment III: Form of Assignment Separate from Certificate
Attachment IV: Form of Joint Escrow Instructions
Attachment V: Election under Section 83(b) of the Code
Attachment VI: Spousal Consent
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ATTACHMENT I
NUVASIVE, INC.
2004 EQUITY INCENTIVE PLAN
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (the "Agreement"), dated , 200 , is entered into by and between [Name] ("Participant") and NuVasive, Inc., a Delaware corporation (the "Company").
RECITALS
WHEREAS, the Company has adopted the NuVasive, Inc. 2004 Equity Incentive Plan (the "Plan"), which provides for awards of restricted stock to the Company's Employees, Consultants and Directors; and
WHEREAS, Participant is currently serving as an Employee or Director of, or a Consultant to, the Company; and
WHEREAS, the Company desires to issue to Participant, and Participant desires to acquire from the Company, shares of Common Stock, $ par value, of the Company (the "Common Stock"), pursuant to the provisions of the Plan.
NOW THEREFORE, in consideration of the foregoing, and the mutual covenants and agreements set forth herein, the parties hereto agree as follows:
1. Definitions .
Capitalized terms not explicitly defined in this Agreement but defined in the Plan shall have the same meanings ascribed to them in the Plan.
2. Grant of Award .
The Company hereby grants to Participant, pursuant to the terms of the Restricted Stock Grant Notice (the "Grant Notice") and this Agreement (collectively, the "Award"), the right to acquire the number of shares of Common Stock indicated in the Grant Notice (the "Shares").
3. Agreement to Purchase .
Participant hereby agrees to purchase from the Company, and the Company hereby agrees to sell to Participant, the aggregate number of Shares of Common Stock specified in the Grant Notice at the specified Purchase Price per Share. Participant may not purchase less than the aggregate number of Shares specified in the Grant Notice.
4. Payment .
Payment of the Total Purchase Price shall be made as follows:
Cash or check | $ | ||
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5. Delivery of Total Purchase Price and Documents .
The purchase and sale of the Shares shall be consummated as follows:
5.1 Participant may purchase the Shares by delivering the cash for the Total Purchase Price referenced in the Grant Notice to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, on the date Participant executes the Grant Notice (or at such other time and place as Participant and the Company may mutually agree upon in writing), along with such additional documents as the Company may then require.
5.2 Participant agrees to execute three (3) copies of the Assignment Separate from Certificate (with date and number of shares blank) substantially in the form attached to the Grant
Notice as Attachment III and to execute Joint Escrow Instructions substantially in the form attached to the Grant Notice as Attachment IV and to deliver the same in accordance with Section 10 below. Participant shall also deliver to the Company a signed spousal consent substantially in the form attached hereto as Attachment VI if he or she is married on the Date of Grant set forth in the Grant Notice.
6. Vesting .
Subject to the limitations contained herein, the Shares purchased by Participant shall vest as provided in the Grant Notice, provided, however, that vesting shall cease upon the Termination of Participant's service as an Employee, Director or Consultant.
7. Securities Law Compliance .
Notwithstanding anything to the contrary contained herein, Participant may not purchase any Shares under the Award unless the Shares are then registered under the Securities Act or, if such Shares are not then so registered, the Company has determined that such purchase and issuance would be exempt from the registration requirements of the Securities Act. The purchase of Shares also must comply with other applicable laws and regulations governing such Award, and Participant may purchase such Shares if the Company determines that such purchase would not be in material compliance with such laws and regulations.
8. Right of Reacquisition .
In the event of the Termination of Participant's service as an Employee or Director of, or a Consultant to, the Company, the Company shall have a right to reacquire (the "Reacquisition Rights") the Shares received pursuant to an Award that have not yet vested in accordance with the Vesting Schedule in the Grant Notice (the "Unvested Shares"). The Company shall, simultaneously with Participant's Termination of service, as an Employee, Director or Consultant, automatically reacquire all of the Unvested Shares for the original purchase price thereof paid by the Participant unless the Company agrees to waive its Reacquisition Rights to any or all of the Unvested Shares. Any such waiver shall be exercised by the Company by written notice to Participant or his or her representative (with a copy to the Escrow Agent) within 30 days after Participant's Termination. If the Company does not waive its Reacquisition Rights to any or all of the Unvested Shares, the Escrow Agent shall be notified accordingly and instructed to return the Unvested Shares to the Company for cancellation.
9. Corporate Transactions .
In the event of a Fundamental Transaction or Change in Control pursuant to Section 10.3 or Section 10.4 of the Plan, the Reacquisition Rights may be assigned by the Company to the successor of the Company (or such successor's parent company), if any, in connection with such corporate transaction. To the extent the Reacquisition Rights remains in effect following such corporate transaction, it shall apply to the new capital stock or other property received in exchange for the Common Stock in consummation of the corporate transaction, but only to the extent the Common Stock was at the time covered by such right.
10. Escrow of Unvested Common Stock .
As security for Participant's faithful performance of the terms of this Agreement and to insure the availability for delivery of Participant's Common Stock upon execution of the Reacquisition Rights herein provided for, Participant agrees, concurrently herewith, to deliver to and deposit with the Secretary of the Company or the Secretary's designee (the "Escrow Agent"), as Escrow Agent in this transaction, the certificate or certificates evidencing the Shares and three (3) executed blank forms of Assignment Separate from Certificate in the form attached to the Grant Notice as Attachment III. Such documents will be held by the Escrow Agent and delivered by the Escrow Agent pursuant to the Joint Escrow Instructions delivered to the Escrow Agent concurrently herewith.
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11. Rights as Stockholder .
Subject to the provisions of this Agreement, Participant shall exercise all rights and privileges of a stockholder of the Company with respect to the Shares deposited in escrow. Participant shall be deemed to be the holder of the Shares for purposes of receiving any dividends that may be paid with respect to such Shares and for purposes of exercising any voting rights relating to such Shares, even if some or all of the Shares have not yet vested and been released from the Company's Reacquisition Rights.
12. Limitations on Transfer .
In addition to any other limitation on transfer created by applicable securities laws, Participant agrees not to sell, assign, hypothecate, donate, encumber or otherwise dispose of any interest in the Shares, except by will or by the laws of descent and distribution, while the Shares are subject to the Reacquisition Rights.
13. Restrictive Legends .
The stock certificates evidencing the Shares issued under the Award shall bear appropriate legends determined by the Company.
14. Award not a Service Contract .
The Award is not an employment or service contract, and nothing in the Award shall be deemed to create in any way whatsoever any obligation on the Company or an Affiliate to continue Participant's employment or service. In addition, nothing in the Award shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, officers or Employees to continue any relationship that Participant may have as an Employee or Director of, or a Consultant to, the Company or an Affiliate.
15. Withholding Obligations .
15.1 At the time the Award is granted, or at any time thereafter as requested by the Company, Participant authorizes withholding from payroll and any other amounts payable to Participant, and otherwise agrees to make adequate provision for, any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with the Award.
15.2 Unless the tax withholding obligations of the Company or any Affiliate are satisfied, the Company shall have no obligation to issue a certificate for any of the Shares or release the Shares from any escrow provided for herein.
16. Section 83(b) Election .
While it is perhaps unlikely that Participate will make an 83(b) election, Participant hereby acknowledges that he or she has been informed that, with respect to the grant of the Shares, an election may be filed by Participant with the Internal Revenue Service, within 30 days of the Date of Grant, electing pursuant to Section 83(b) of the Code to be taxed currently on the fair market value of the unvested Shares on the Date of Grant. A form of such election is attached hereto as Attachment V.
PARTICIPANT ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO TIMELY FILE THE ELECTION UNDER SECTION 83(b) OF THE CODE, EVEN IF PARTICIPANT REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PARTICIPANT'S BEHALF.
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17. Representations .
Participant has reviewed with his or her own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Participant is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Participant understands that he or she (and not the Company) shall be responsible for any tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement.
18. Notices .
Any notices provided for in the Award or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to Participant, five (5) days after deposit in the United States mail, postage prepaid, addressed to Participant at the last address provided by Participant to the Company.
19. Survival of Terms .
This Agreement shall apply to and bind Participant and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors.
20. Failure to Enforce not a Waiver.
The failure of the Company to enforce at any time any provision of this Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.
21. Amendments .
This Agreement may be amended or modified at any time only by an instrument in writing signed by each of the parties hereto.
22. Authority of the Committee .
The Committee shall have full authority to interpret and construe the terms of this Agreement. The determination of the Committee as to any such matter of interpretation or construction shall be final, binding and conclusive.
23. Miscellaneous .
23.1 The rights and obligations of the Company under Participant's Award shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns.
23.2 Participant agrees upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of the Award.
23.3 Participant acknowledges and agrees that he or she has reviewed the Award in its entirety, has had an opportunity to obtain the advice of counsel prior to executing and accepting the Award and fully understands all provisions of the Award.
23.4 This Agreement may be signed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.
24. Governing Plan Document .
The Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of Participant's Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of the Award and those of the Plan, the provisions of the
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Plan shall control. Participant represents that he or she has read this Agreement, the Grant Notice and the Plan, and is familiar with their terms and provisions. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written.
NuVasive, Inc. | [Participant's Name] | |||||
By: | By: | |||||
Signature |
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[SIGNATURE PAGE TO RESTRICTED STOCK AGREEMENT]
ATTACHMENT II
2004 EQUITY INCENTIVE PLAN
Filed as Exhibit 10.15 to this Registration Statement
ATTACHMENT III
ASSIGNMENT SEPARATE FROM CERTIFICATE
For Value Received and pursuant to that certain Restricted Stock Grant Notice and Restricted Stock Agreement (the "Award"), hereby sells, assigns and transfers unto NuVasive, Inc., a Delaware corporation ("Assignee") ( ) shares of the Common Stock of the Assignee, standing in the undersigned's name on the books of said corporation represented by Certificate No. herewith and do hereby irrevocably constitute and appoint the Company's Secretary as attorney-in-fact to transfer the said stock on the books of the within named Company with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Award, in connection with the reacquisition of shares of Common Stock of the Corporation issued to the undersigned pursuant to the Award, and only to the extent that such shares remain subject to the Corporation's Reacquisition Rights under the Award.
Dated: | ||||
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Instruction: Please do not fill in any blanks other than the signature line. The purpose of this Assignment is to enable execution of the Company's Reacquisition Rights set forth in the Award without requiring additional signatures on your part.
ATTACHMENT IV
JOINT ESCROW INSTRUCTIONS
Date: | ||
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Secretary
NuVasive, Inc.
Dear Sir/Madam:
As Escrow Agent for both NuVasive, Inc., a Delaware corporation (the "Company"), and the undersigned recipient of stock of the Company ("Recipient"), you are hereby authorized and directed to hold the certificate or certificates evidencing the shares of the Company's Common Stock (the "Shares"), granted under an Award issued pursuant to the Company's 32004 Equity Incentive Plan (the "Plan") and the documents delivered to you pursuant to that certain Restricted Stock Grant Notice (the "Grant Notice"), dated , 20 and Restricted Stock Agreement (the "Agreement") of the same date, in accordance with the following instructions:
1. In the event Recipient's service as an employee or director of, or a consultant to, the Company is terminated, under circumstances set forth in Section 8 of the Agreement, the Company or its assignee will deliver to Recipient and you a written notice specifying that the certificate or certificates evidencing the Shares shall be transferred to the Company for cancellation or further transfer pursuant to any waiver of Reacquisition Rights pursuant to Section 8 of the Agreement. Recipient and the Company hereby irrevocably authorize and direct you to complete such transfer in accordance with the terms of such notice.
2. In order to complete the share transfer, you are specifically directed (a) to date any forms of Assignments Separate from Certificate in your possession necessary for the transfer, (b) to insert the number of Shares being transferred in such forms, and (c) to deliver same, together with the certificate or certificates evidencing the Shares to the Company.
3. Recipient irrevocably authorizes the Company to deposit with you any certificates registered in his/her name evidencing the Shares and any additions to and substitutions for the Shares as specified in the Grant Notice. Recipient hereby irrevocably constitutes and appoints you as Recipient's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities and other property all documents of assignment and/or transfer and all stock certificates necessary or appropriate to make all securities negotiable and complete any transaction herein contemplated.
4. This escrow shall terminate upon vesting of the Shares or upon the earlier return of the Shares to the Company.
5. If at the time of termination of this escrow you have in your possession any documents, securities, or other property belonging to Recipient, you shall deliver all of same to Recipient or his or her permitted assigns or representatives and shall be discharged of all further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties or their assignees. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Recipient while acting in good faith and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Grant Notice or any documents or papers deposited or called for hereunder.
10. You shall not be liable for the loss of any rights under any statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you.
11. You shall be entitled to employ such legal counsel, including but not limited to the Company's counsel, and other experts as you may deem necessary to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be an employee of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company may appoint any officer or assistant officer of the Company as successor Escrow Agent and Recipient hereby confirms the appointment of such successor or successors as his attorney-in-fact and agent to the full extent of your appointment.
13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the Shares, you may (but are not obligated to) retain in your possession without liability to anyone all or any part of such securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in any United States Post Box, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties hereunto entitled at
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the following addresses, or at such other addresses as a party may designate by ten (10) days' written notice to each of the other parties hereto:
Company: | NuVasive, Inc. | |
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Attn: President & Chief Executive Officer | ||
Recipient: |
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[Insert Recipient's Name] Insert Address Insert Address |
Escrow Agent: |
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NuVasive, Inc. |
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16. By signing these Joint Escrow Instructions you become a party hereto only for the purpose of the Joint Escrow Instructions; you do not become a party to the Grant Notice.
17. All of your costs and expenses, including without limitation attorneys fees and disbursements and the fees and expenses of other advisors, incurred in performing your duties as Escrow Agent hereunder should be promptly paid by the Company upon submission of appropriate documentation.
18. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. It is understood and agreed that references to "you" or "your" herein refer to the original Escrow Agent and to any and all successor Escrow Agents. It is understood and agreed that the Company may at any time or from time to time assign its rights under the Grant Notice and these Joint Escrow Instructions in whole or in part.
Very truly yours,
NuVasive, Inc. | Recipient | |||||
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ATTACHMENT V
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income for the current taxable year the amount of any compensation taxable to taxpayer in connection with taxpayer's receipt of the property described below:
1. The name address, taxpayer identification number and taxable year of the undersigned are as follows:
NAME OF TAXPAYER: | ||
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ADDRESS: |
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IDENTIFICATION NO. OF TAXPAYER: |
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IDENTIFICATION NO. OF SPOUSE: |
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TAXABLE YEAR: |
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2. The property with respect to which the election is made is described as follows: shares (the "Shares") of the Common Stock of NuVasive, Inc. (the "Company").
3. The date on which the property was transferred is: , 200 .
4. The property is subject to the following restrictions:
The Shares may not be transferred and are subject to forfeiture under the terms of an agreement between the taxpayer and the Company. These restrictions lapse upon the satisfaction of certain conditions in such agreement.
5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $ .
6. The amount paid for such property is: $ .
The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property.
THE UNDERSIGNED UNDERSTANDS THAT THE FOREGOING ELECTION MAY NOT BE REVOKED EXCEPT WITH THE CONSENT OF THE COMMISSIONER.
Dated: | , 200 | |||||
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Taxpayer |
The undersigned spouse of taxpayer joins in this election.
Dated: | , 200 | |||||
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Spouse of Taxpayer |
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ATTACHMENT VI
SPOUSAL CONSENT
CONSENT OF SPOUSE
I, , spouse of , have read and hereby approve the NuVasive, Inc. (the "Company") Restricted Stock Grant Notice, dated , and all attachments thereto (the "Agreement"). In consideration of the granting of securities to my spouse as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact with respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement, or any securities issued thereunder, under the community property laws or similar laws relating to marital property in effect in our state of residence as of the date of execution of the Agreement.
Dated: | Signature: | |||||
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NuVasive, Inc.
2004 Equity Incentive Plan
Restricted Stock Unit Award Agreement
(With Deferrals)
This Restricted Stock Unit Award Agreement (the "Agreement") is dated as of , 200 and is entered into between NuVasive, Inc., a Delaware corporation (the "Company"), and (the "Employee").
Pursuant to the terms of the 2004 Equity Incentive Plan (the "Plan") the Company hereby awards to Employee Restricted Stock Units on the terms and conditions as set forth in this Agreement and the Plan. Capitalized terms used but not defined in this Agreement shall have the meaning specified in the Plan.
In consideration of the mutual promises set forth below, the parties hereto agree as follows:
1. Award of Restricted Stock Units. Subject to the terms and conditions of this Agreement and the Plan (the terms of which are incorporated herein by reference) and effective as of the date set forth above, the Company hereby grants to the Employee ( ) Restricted Stock Units.
2. Vesting. Restricted Stock Units vest [monthly, quarterly, annually] over ( ) years. Thus, to the extent the Employee remains continuously employed by the Company at the end of each such period following the Grant Date (each a "Vesting Date"), percent ( %) of the Restricted Stock Units will vest and become payable in Company shares as set forth in Section 4. [Notwithstanding the foregoing, no Restricted Stock Units will vest prior to the [month, quarter, year] ("Cliff Vesting Date") of the date of this grant. At such time, those Restricted Stock Units that otherwise would have vested prior to the Cliff Vesting Date will vest provided the Employee is still employed on the Cliff Vesting Date.] In the event of a "Corporate Transaction" (as defined in the Plan), the vesting of Restricted Stock Units shall accelerate to the extent, if any, provided in the Plan.
3. Effect of Termination of Service or Leave of Absence. If the Employee's service is terminated by the Employee or by the Company or a Subsidiary for any reason, including Employee's death or Disability before all Restricted Stock Units have vested, the unvested Restricted Stock Units shall be forfeited unless otherwise determined by the Committee. As of the 31st (or 91st if reemployment is guaranteed by statute or contract) day of a leave of absence, vesting credit will no longer accrue unless otherwise determined by the Committee or required by contract or statute. If Employee returns to service immediately after the end of an approved leave of absence, vesting credit shall continue to accrue from that date of continued employment.
4. Stock Certificates. Stock certificates (the "Certificate") evidencing the conversion of Restricted Stock Units into shares of Company Stock shall be issued and registered in the Employee's name as of the later of the Vesting Date or the date elected in Exhibit A (such date being the end of the "Restricted Period"). Subject to Section 7 of this Agreement, Certificates representing the unrestricted shares of Company Stock will be delivered to the Employee as soon as practicable after the end of the Restricted Period.
5. Deferral Election. The Employee may elect to defer delivery of the shares of Company Stock that would otherwise be due by virtue of the lapse or waiver of the vesting requirements as set forth in Section 2. The election must be made on the form attached as Exhibit A.
6. Dividends. Participants holding Restricted Stock Units shall be entitled to receive cash payments equal to any cash dividends and other distributions paid with respect to a corresponding number of shares of Company Stock, provided that if any such dividends or distributions are paid in shares of Company Stock, the Fair Market Value of such shares of Company Stock shall be converted
into Restricted Stock Units, and further provided that such Restricted Stock Units shall be subject to the same forfeiture restrictions and restrictions on transferability as apply to the Restricted Stock Units with respect to which they relate.
7. Tax Withholding Obligations. To meet the obligations of the Company and Employee with respect to any withholding taxes, FICA contributions, or the like under any federal, state, or local statute, ordinance, rule, or regulation in or connection with the award, deferral, or settlement of the Restricted Stock Units, the Committee shall require that the Company withhold a number of shares of Company Stock otherwise deliverable having a Fair Market Value sufficient to satisfy the statutory minimum (or such higher amount as is allowable without adverse accounting consequences) of the Participant's estimated total federal, state, and local tax obligations associated with vesting or settlement of the Restricted Stock Units. The Company may also in lieu of or in addition to the foregoing, at its sole discretion, either require the Employee to deposit with the Company an amount of cash sufficient to meet the withholding requirements and/or, withhold the required amounts from the Employee's pay during the pay periods next following the date on which any such applicable tax liability otherwise arises. The Company shall not deliver any of the shares of Company Stock until and unless the Employee has made the deposit required herein or proper provision for required withholding has been made. Employee hereby consents to any action reasonably taken by the Company to meet the withholding obligations.
8. Restriction on Transferability. Until distribution, the Restricted Stock Units may not be sold, transferred, pledged, assigned, or otherwise alienated at any time. Any attempt to do so contrary to the provisions hereof shall be null and void. Notwithstanding the above, distribution can be made pursuant to will, the laws of descent and distribution, intra-family transfer instruments or to an inter vivos trust.
9. Rights as Shareholder. The Employee shall not have voting or any other rights as a shareholder of the Company with respect to the Restricted Stock Units. Upon settlement of the Restricted Stock Units into shares of Company Stock, the Employee will obtain full voting and other rights as a shareholder of the Company.
10. Administration. The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Employee, the Company, and all other interested persons. No member of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or this Agreement.
11. Effect on Other Employee Benefit Plans. The value of the Restricted Stock Units granted pursuant to this Agreement shall not be included as compensation, earnings, salaries, or other similar terms used when calculating the Employee's benefits under any employee benefit plan sponsored by the Company or any Subsidiary except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Company's or any Subsidiary's employee benefit plans.
12. No Employment Rights. The award of the Restricted Stock Units pursuant to this Agreement shall not give the Employee any right to remain employed by the Company or a Subsidiary. Also, the award is completely within the discretion of the Company. It is not made as a part of any ongoing element of compensation or something which Employee should expect to receive annually or on any other periodic basis. It does not constitute part of Employee's salary or wages and unless specifically agreed to otherwise with the Company is not relevant for purposes of determining any post-employment payment or severance.
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13. Amendment. This Agreement may be amended only by a writing executed by the Company and the Employee which specifically states that it is amending this Agreement. Notwithstanding the foregoing, this Agreement may be amended solely by the Committee by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to the Employee, and provided that no such amendment adversely affects the rights of the Employee (but limiting the foregoing, the Committee reserves the right to change, by written notice to the Employee, the provisions of the Restricted Stock Units or this Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such change shall be applicable only to Restricted Stock Units which are then subject to restrictions as provided herein).
14. Notices. Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Stock Administrator. Any notice to be given to Employee shall be addressed to Employee at the address listed in the Company's records. By a notice given pursuant to this Section, either party may designate a different address for notices. Any notice shall have been deemed given when actually delivered.
15. Severability. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.
16. Construction. The Restricted Stock Units are being issued pursuant to Section 7 of the Plan and are subject to the terms of the Plan. A copy of the Plan has been given to the Employee, and additional copies of the Plan are available upon request during normal business hours at the principal executive offices of the Company. To the extent that any provision of this Agreement violates or is inconsistent with an express provision of the Plan, the Plan provision shall govern and any inconsistent provision in this Agreement shall be of no force or effect.
17. Miscellaneous.
(a) The Board may terminate, amend, or modify the Plan; provided, however, that no such termination, amendment, or modification of the Plan may in any way adversely affect the Participant's rights under this Agreement, without the Participant's written approval.
(b) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.
(c) All obligations of the Company under the Plan and this Agreement, with respect to the Restricted Stock Units, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
(d) By signing this Agreement, the Employee acknowledges that his or her personal employment information regarding participation in the Plan and information necessary to determine and pay, if applicable, benefits under the Plan must be shared with other entities, including companies related to the Company and persons responsible for certain acts in the administration of the Plan. By signing this Agreement employee consents to such transmission of personal data as the Company believes is appropriate to administer the Plan.
(e) To the extent not preempted by federal law, this Agreement shall be governed by, and construed in accordance with, the laws of the State of California.
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement effective as of the day and year first above written.
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NuVasive, Inc. |
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EXHIBIT A
NUVASIVE, INC.
DEFERRAL AGREEMENT
RESTRICTED STOCK UNIT
The following election constitutes an election by the undersigned to defer payment of vested benefits pursuant to the NuVasive, Inc. ("Company") 2004 Equity Incentive Plan Restricted Stock Unit Award Agreement. Please select (1) (2) or (3). You should note however, your distribution shall be made in full by the January 15 after the year in which your service terminates.
Election: I, , hereby elect to receive the distribution (in Company stock) of my vested Restricted Stock Units as follows:
o (1) As my Restricted Stock Units actually vest;
o (2) In one lump sum starting on the January 15 following the year in which my service with the Company terminates, or if earlier, January 15, 20 ; and
o (3) In up to (not to exceed ) annual installments starting on January 15, 20 (however, if my service terminates before this date, all remaining payments will be made on January 15 of the year following the date my service with the Company terminates).
Change of Election: I hereby acknowledge, that except as may be appropriate in the Company's sole discretion because of a change in applicable law, regulation or financial or public disclosure concerns, I may change the above election at any time prior to the end of the calendar year preceding the scheduled date of payment. Such change must be timely filed in writing with the Company's stock option administrator
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2004 EMPLOYEE STOCK PURCHASE PLAN
OF
NUVASIVE, INC.
Table of Contents
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1. | Establishment of Plan. | 1 | ||
2. |
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Number of Shares. |
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3. |
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Purpose. |
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4. |
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Administration. |
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5. |
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Eligibility. |
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6. |
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Offering Dates. |
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7. |
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Participation in this Plan. |
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8. |
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Grant of Option on Enrollment. |
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3 |
9. |
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Purchase Price. |
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4 |
10. |
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Payment Of Purchase Price; Changes In Payroll Deductions; Issuance Of Shares. |
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11. |
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Limitations on Shares to be Purchased. |
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5 |
12. |
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Withdrawal. |
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6 |
13. |
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Termination of Employment. |
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6 |
14. |
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Return of Payroll Deductions. |
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15. |
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Capital Changes. |
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7 |
16. |
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Nonassignability. |
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17. |
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Reports. |
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18. |
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Notice of Disposition. |
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19. |
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No Rights to Continued Employment. |
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20. |
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Equal Rights And Privileges. |
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21. |
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Notices. |
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22. |
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Term; Stockholder Approval. |
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23. |
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Designation of Beneficiary. |
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24. |
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Conditions Upon Issuance of Shares; Limitation on Sale of Shares. |
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25. |
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Applicable Law. |
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26. |
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Amendment or Termination. |
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NUVASIVE, INC.
2004 EMPLOYEE STOCK PURCHASE PLAN
1. Establishment of Plan.
NuVasive, Inc. (the " Company ") proposes to grant options for purchase of the Company's Common Stock (the " Common Stock ") to eligible employees of the Company and its Participating Subsidiaries (as hereinafter defined) pursuant to this 2004 Employee Stock Purchase Plan (this " Plan "). For the purposes of this Plan, "Parent Corporation" and "Subsidiary" shall have the same meanings as "parent corporation" and "subsidiary corporation" in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the " Code "). "Participating Subsidiaries" are Parent Corporations or Subsidiaries that the Board of Directors of the Company (the " Board ") designates from time to time as corporations that shall participate in this Plan. The Company intends this Plan to qualify as an "employee stock purchase plan" under Section 423 of the Code (including any amendments to or replacements of such Section), and this Plan shall be so construed. Any term not expressly defined in this Plan but defined for purposes of Section 423 of the Code shall have the same definition herein.
2. Number of Shares.
The total number of shares of Common Stock initially reserved and available for issuance pursuant to this Plan shall be 250,000 (the " Share Limit "), subject to adjustments effected in accordance with Section 15 of this Plan. Notwithstanding the foregoing and subject to Section 15, the Share Limit shall automatically increase on January 1, 2005 and January 1 of each year thereafter until and including January 1, 2014 (unless the Plan is terminated earlier in accordance with the provisions hereof) by the " Annual Increase " which shall consist of a number of shares equal to the least of (i) 1,500,000, (ii) one percent (1%) of the number of shares of all classes of common stock of the Company outstanding on that date, or (iii) a lesser number determined by the Committee, (as hereinafter defined) prior to such January 1, provided, however, that the total number of shares available for issuance under the Plan shall not exceed the initial Share Limit plus the maximum potential cumulative Annual Increase. The Board may at such time as it deems necessary implement a substantially similar plan for employees resident outside the United States (" Foreign Plan ") in which case the Share Limit shall be reduced by the number of shares issued under the Foreign Plan. Shares issued under this Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares reacquired in private transactions or open market purchases, but all shares issued under this Plan and the Foreign Plan shall be counted against the Share Limit.
3. Purpose.
The purpose of this Plan is to provide eligible employees of the Company and Participating Subsidiaries with a convenient means of acquiring an equity interest in the Company through payroll deductions, to enhance such employees' sense of participation in the affairs of the Company and Participating Subsidiaries, and to provide an incentive for continued employment. For the purposes of this Plan, "employee" shall mean any individual who is an employee of the Company or a Participating Subsidiary. Whether an individual qualifies as an employee shall be determined by the Committee, in its sole discretion. The Committee shall be guided by the provisions of Treasury Regulation Section 1.421-7 and Section 3401(c) of the Code and the Treasury Regulations thereunder, with the intent that the Plan cover all "employees" within the meaning of those provisions other than those who are not eligible to participate in the Plan, provided, however, that any determinations regarding whether an individual is an "employee" shall be prospective only, unless otherwise determined by the Committee (as hereinafter defined). Unless the Committee makes a contrary determination, the employees of the Company shall, for all purposes of this Plan, be those individuals who are carried as employees of the Company or a Participating Subsidiary for regular payroll purposes or are on a leave of absence for not more than 90 days. Any inquiries regarding eligibility to participate in the Plan shall be directed to the Committee, whose decision shall be final.
4. Administration.
This Plan shall be administered by the Compensation Committee of the Board (the " Committee "). Subject to the provisions of this Plan and the limitations of Section 423 of the Code or any successor provision in the Code, all questions of interpretation or application of this Plan shall be determined by the Committee and its decisions shall be final and binding upon all participants. Members of the Committee shall receive no compensation for their services in connection with the administration of this Plan, other than standard fees as established from time to time by the Board for services rendered by Board members serving on Board committees. All expenses incurred in connection with the administration of this Plan shall be paid by the Company.
5. Eligibility.
Any employee of the Company or the Participating Subsidiaries who has been so employed for more than 20 hours per week for at least six months is eligible to participate in an Offering Period (as hereinafter defined) under this Plan except the following:
(a) employees who are not employed by the Company or a Participating Subsidiary prior to the beginning of such Offering Period or prior to such other time period as specified by the Committee, except that employees who are employed on the effective date of the registration statement filed by the Company with the Securities and Exchange Commission (" SEC ") under the Securities Act of 1933, as amended (the " Securities Act ") registering the initial public offering of the Company's Common Stock shall be eligible to participate in the first Offering Period under the Plan;
(b) employees who are customarily employed for twenty (20) hours or less per week;
(c) employees who are customarily employed for five (5) months or less in a calendar year;
(d) employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 424(d) of the Code, own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Subsidiaries or who, as a result of being granted an option under this Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Subsidiaries;
(e) individuals who provide services to the Company or any of its Participating Subsidiaries as independent contractors who are reclassified as common law employees for any reason except for federal income and employment tax purposes; and
(f) employees who reside in countries for whom such employees' participation in the Plan would result in a violation under any corporate or securities laws of such country of residence.
6. Offering Dates.
By resolution of the Committee dated February 20, 2004, the offering periods of this Plan (each, an " Offering Period ") shall be of twenty-four (24) months duration commencing on May 15 and November 15 of each year and ending on May 14 and November 14 of each year; provided, however, that the first such Offering Period shall commence on the first business day on which price quotations for the Company's Common Stock are available on the Nasdaq National Market (the " First Offering Date ") and shall end on November 14, 2005 (the " First Offering Period "). Except for the First Offering Period, each Offering Period shall consist of four (4) six month purchase periods (individually, a " Purchase Period ") during which payroll deductions of the participants are accumulated under this Plan. The First Offering Period shall consist of no more than five and no fewer than three Purchase Periods, any of which may be greater or less than six months as determined by the Committee. The first
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business day of each Offering Period is referred to as the " Offering Date ." The last business day of each Purchase Period is referred to as the " Purchase Date ." The Committee shall have the power to change the Offering Dates, the Purchase Dates and the duration of Offering Periods or Purchase Periods without stockholder approval if such change is announced prior to the relevant Offering Period or prior to such other time period as specified by the Committee.
7. Participation in this Plan.
Eligible employees may become participants in an Offering Period under this Plan on the Offering Date, after satisfying the eligibility requirements, by delivering a subscription agreement to the Company prior to such Offering Date, or such other time period as specified by the Committee, provided, however, that all eligible employees employed on or before the First Offering Date shall be automatically enrolled in the First Offering Period. Notwithstanding the foregoing, (i) after the filing of an effective Registration Statement pursuant to Form S-8 for shares under the Plan, an eligible employee may elect to decrease the number of shares of Common Stock that such employee would otherwise be permitted to purchase pursuant to Section 8 below for the First Offering Period and/or purchase shares of Common Stock for the First Offering Period through payroll deductions by delivering a subscription agreement to the Company within thirty (30) days following the First Offering Date; and (ii) the Committee may set a later time for delivering the subscription agreement authorizing payroll deductions for all eligible employees with respect to a given Offering Period. Except as provided above with respect to the First Offering Period, an eligible employee who does not deliver a subscription agreement to the Company after becoming eligible to participate in an Offering Period shall not participate in that Offering Period or any subsequent Offering Period unless such employee enrolls in this Plan by delivering a subscription agreement with the Company prior to such Offering Period, or such other time period as specified by the Committee. Once an employee becomes a participant in an Offering Period by filing a subscription agreement, such employee shall automatically participate in the Offering Period commencing immediately following the last day of the prior Offering Period unless the employee withdraws or is deemed to withdraw from this Plan or terminates further participation in the Offering Period as set forth in Section 12 below. Such participant is not required to file any additional subscription agreement in order to continue participation in this Plan.
8. Grant of Option on Enrollment.
Enrollment by an eligible employee in this Plan with respect to an Offering Period shall constitute the grant (as of the Offering Date) by the Company to such employee of an option to purchase on the Purchase Date up to that number of shares of Common Stock determined by a fraction, the numerator of which is the amount accumulated in such employee's payroll deduction account during such Purchase Period and the denominator of which is the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Offering Date (but in no event less than the par value of a share Common Stock), or (ii) eighty-five percent (85%) of the fair market value of a share of Common Stock on the Purchase Date (but in no event less than the par value of a share of the Company's Common Stock), provided, however, that for each Purchase Period within the First Offering Period the numerator shall be fifteen percent (15%) of the eligible employee's compensation for such Purchase Period, unless the employee otherwise elected to decrease the percentage of such employee's compensation, and provided, further, that the number of shares of Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (x) the maximum number of shares set by the Committee pursuant to Section 11(c) below with respect to the applicable Purchase Date, or (y) the maximum number of shares which may be purchased pursuant to Section 11(b) below with respect to the applicable Purchase Date. The fair market value of a share of the Company's Common Stock shall be determined as provided in Section 9 below. Notwithstanding the foregoing, in the event of a change in generally accepted accounting principles which would adversely affect the accounting treatment applicable to any current Offering Period, the Committee may make such changes to the number of Shares purchased at the end of Purchase Period or the purchase price paid as are
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allowable under generally accepted accounting principles and as it deems necessary in the sole discretion of the Committee to avoid or minimize adverse accounting consequences.
9. Purchase Price.
The purchase price per share at which a share of Common Stock shall be sold in any Offering Period shall be eighty-five percent (85%) of the lesser of:
(a) the fair market value on the Offering Date; or
(b) the fair market value on the Purchase Date.
For the purposes of this Plan, the term " fair market value " means, as of any date, the value of a share of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal;
(b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal; or
(c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal.
Notwithstanding the foregoing, for purposes of the First Offering Date, fair market value shall be the price per share at which shares of the Company's Common Stock are initially offered for sale to the public by the Company's underwriters in the initial public offering of the Company's Common Stock pursuant to a registration statement filed with the SEC under the Securities Act.
10. Payment Of Purchase Price; Changes In Payroll Deductions; Issuance Of Shares.
(a) The purchase price of the shares is accumulated by regular payroll deductions made during each Offering Period, provided, however, that for the First Offering Period, the purchase price of the shares shall be paid by the eligible employee in cash on each Purchase Date within the First Offering Period unless the eligible employee elects to purchase such shares through payroll deductions, after the filing of an effective Form S-8 registration statement pursuant to the second sentence of Section 7 above, within thirty (30) days following the First Offering Period. The deductions are made as a percentage of the participant's compensation in one percent (1%) increments, not less than one percent (1%), nor greater than fifteen percent (15%), or such lower limit set by the Committee. Compensation shall mean all W-2 cash compensation, including, but not limited to, base salary, wages, bonuses, incentive compensation, commissions, overtime, shift premiums, plus draws against commissions, provided, however that compensation shall not include any long term disability or workmens compensation payments, car allowances, relocation payments or expense reimbursements and further provided, however, that for purposes of determining a participant's compensation, any election by such participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code shall be treated as if the participant did not make such election. Payroll deductions shall commence on the first payday of the Offering Period and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in this Plan.
(b) A participant may increase or decrease the rate of payroll deductions during an Offering Period by filing with the Company a new authorization for payroll deductions, in which case the new rate shall become effective for the next payroll period commencing after the Company's
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receipt of the authorization and shall continue for the remainder of the Offering Period unless changed as described below. Such change in the rate of payroll deductions may be made at any time during an Offering Period, but not more than one (1) change may be made effective during any Purchase Period. A participant may increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing with the Company a new authorization for payroll deductions prior to the beginning of such Offering Period, or such other time period as specified by the Committee.
(c) A participant may reduce his or her payroll deduction percentage to zero during an Offering Period by filing with the Company a request for cessation of payroll deductions. Such reduction shall be effective beginning with the next payroll period after the Company's receipt of the request and no further payroll deductions shall be made for the duration of the Offering Period. Payroll deductions credited to the participant's account prior to the effective date of the request shall be used to purchase shares of Common Stock of the Company in accordance with Section (e) below. A participant may not resume making payroll deductions during the Offering Period in which he or she reduced his or her payroll deductions to zero.
(d) All payroll deductions made for a participant are credited to his or her account under this Plan and are deposited with the general funds of the Company. No interest accrues on the payroll deductions. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions.
(e) On each Purchase Date, for so long as this Plan remains in effect and provided that the participant has not submitted a signed and completed withdrawal form before that date, which notifies the Company that the participant wishes to withdraw from that Offering Period under this Plan and have all payroll deductions accumulated in the account maintained on behalf of the participant, as of that date returned to the participant, the Company shall apply the funds then in the participant's account to the purchase of whole shares of Common Stock reserved under the option granted to such participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date. The purchase price per share shall be as specified in Section 9 of this Plan. Any cash remaining in a participant's account after such purchase of shares shall be refunded to such participant in cash, without interest, provided, however, that any amount remaining in such participant's account on a Purchase Date which is less than the amount necessary to purchase a full share of Common Stock shall be carried forward, without interest, into the next Purchase Period or Offering Period, as the case may be. In the event that this Plan has been oversubscribed, all funds not used to purchase shares on the Purchase Date shall be returned to the participant, without interest. No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in this Plan has terminated prior to such Purchase Date.
(f) As soon as practicable after the Purchase Date, the Company shall issue shares for the participant's benefit representing the shares purchased upon exercise of his or her option.
(g) During a participant's lifetime, his or her option to purchase shares hereunder is exercisable only by him or her. The participant shall have no interest or voting rights in shares covered by his or her option until such option has been exercised.
11. Limitations on Shares to be Purchased.
(a) No participant shall be entitled to purchase stock under this Plan at a rate which, when aggregated with his or her rights to purchase stock under all other employee stock purchase plans of the Company or any Subsidiary, exceeds $25,000 in fair market value, determined as of the Offering Date (or such other limit as may be imposed by the Code) for each calendar year in
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which the employee participates in this Plan. This limit means that the maximum purchase price for shares purchased during a calendar year is $21,250 assuming a 15% discount pursuant to Section 9. The Company shall automatically suspend the payroll deductions of any participant as necessary to enforce such limit provided that when the Company automatically resumes such payroll deductions, the Company must apply the rate in effect immediately prior to such suspension.
(b) No participant shall be entitled to purchase more than the Maximum Share Amount (as defined below) on any single Purchase Date. Prior to the commencement of any Offering Period or prior to such time period as specified by the Committee, the Committee may, in its sole discretion, set a maximum number of shares which may be purchased by any employee at any single Purchase Date (hereinafter the " Maximum Share Amount "). The Maximum Share Amount shall be 2,500 shares. If a new Maximum Share Amount is set, then all participants must be notified of such Maximum Share Amount prior to the commencement of the next Offering Period. The Maximum Share Amount shall continue to apply with respect to all succeeding Purchase Dates and Offering Periods unless revised by the Committee as set forth above.
(c) If the number of shares to be purchased on a Purchase Date by all employees participating in this Plan exceeds the number of shares then available for issuance under this Plan, then the Company shall make a pro rata allocation of the remaining shares in as uniform a manner as shall be reasonably practicable and as the Committee shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares to be purchased under a participant's option to each participant affected.
(d) Any payroll deductions accumulated in a participant's account which are not used to purchase stock due to the limitations in this Section 11 shall be returned to the participant as soon as practicable after the end of the applicable Purchase Period, without interest.
12. Withdrawal.
(a) Each participant may withdraw from an Offering Period under this Plan by signing and delivering to the Company a written notice to that effect on a form provided for such purpose. Such withdrawal may be elected at any time prior to the end of an Offering Period, or such other time period as specified by the Committee.
(b) Upon withdrawal from this Plan, the accumulated payroll deductions shall be returned to the withdrawn participant, without interest, and his or her interest in this Plan shall terminate. In the event a participant voluntarily elects to withdraw from this Plan, he or she may not resume his or her participation in this Plan during the same Offering Period, but he or she may participate in any Offering Period under this Plan which commences on a date subsequent to such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth in Section 7 above for initial participation in this Plan.
(c) If the Fair Market Value on the first day of the current Offering Period in which a participant is enrolled is higher than the Fair Market Value on the first day of any subsequent Offering Period, the Company shall automatically enroll such participant in the subsequent Offering Period. Any funds accumulated in a participant's account prior to the first day of such subsequent Offering Period shall be applied to the purchase of shares on the Purchase Date immediately prior to the first day of such subsequent Offering Period, if any.
13. Termination of Employment.
Termination of a participant's employment for any reason, including retirement, death or the failure of a participant to remain an eligible employee of the Company or of a Participating Subsidiary, shall immediately terminate his or her participation in this Plan. In such event, the payroll deductions
6
credited to the participant's account shall be returned to him or her or, in the case of his or her death, to his or her legal representative, without interest. For purposes of this Section 13, an employee shall not be deemed to have terminated employment or failed to remain in the continuous employ of the Company or of a Participating Subsidiary in the case of sick leave, military leave, or any other leave of absence approved by the Board, provided, however that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute.
14. Return of Payroll Deductions.
In the event a participant's interest in this Plan is terminated by withdrawal, termination of employment or otherwise, or in the event this Plan is terminated by the Board, the Company shall deliver to the participant all payroll deductions credited to such participant's account. No interest shall accrue on the payroll deductions of a participant in this Plan.
15. Capital Changes.
Subject to any required action by the stockholders of the Company, the number and type of shares of Common Stock covered by each option under this Plan which has not yet been exercised and the number and type of shares of Common Stock which have been authorized for issuance under this Plan, including the Annual Increase, but have not yet been placed under option (collectively, the " Reserves "), as well as the price per share of Common Stock covered by each option under this Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock of the Company resulting from a stock split or the payment of a stock dividend (but only on the Common Stock), any other increase or decrease in the number of issued and outstanding shares of Common Stock effected without receipt of any consideration by the Company or other change in the corporate structure or capitalization affecting the Company's present Common Stock, provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Committee, whose determination shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option.
In the event of the proposed dissolution or liquidation of the Company, the Offering Period shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that this Plan shall terminate as of a date fixed by the Committee and give each participant the right to purchase shares under this Plan prior to such termination. In the event of (i) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the options under this Plan are assumed, converted or replaced by the successor corporation, which assumption shall be binding on all participants), (ii) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (iii) the sale of all or substantially all of the assets of the Company, or (iv) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, the Plan shall continue with regard to Offering Periods that commenced prior to the closing of the proposed transaction and shares shall be purchased based on the Fair Market Value of the surviving corporation's stock on each Purchase Date, unless otherwise provided by the Committee.
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The Committee may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, or in the event of the Company being consolidated with or merged into any other corporation.
16. Nonassignability.
Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under this Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by shall, the laws of descent and distribution or as provided in Section 23 below) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be void and without effect.
17. Reports.
Individual accounts shall be maintained for each participant in this Plan. Each participant shall receive, as soon as practicable after the end of each Purchase Period, a report of his or her account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Purchase Period or Offering Period, as the case may be.
18. Notice of Disposition.
Each participant shall notify the Company in writing if the participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within two (2) years from the Offering Date or within one (1) year from the Purchase Date on which such shares were purchased (the " Notice Period "). The Company may, at any time during the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to this Plan requesting the Company's transfer agent to notify the Company of any transfer of the shares. The obligation of the participant to provide such notice shall continue notwithstanding the placement of any such legend on the certificates.
19. No Rights to Continued Employment.
Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Participating Subsidiary, or restrict the right of the Company or any Participating Subsidiary to terminate such employee's employment.
20. Equal Rights And Privileges.
All eligible employees shall have equal rights and privileges with respect to this Plan so that this Plan qualifies as an "employee stock purchase plan" within the meaning of Section 423 or any successor provision of the Code and the related regulations. Any provision of this Plan which is inconsistent with Section 423 or any successor provision of the Code shall, without further act or amendment by the Company, the Committee or the Board, be reformed to comply with the requirements of Section 423. This Section 20 shall take precedence over all other provisions in this Plan.
21. Notices.
All notices or other communications by a participant to the Company under or in connection with this Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.
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22. Term; Stockholder Approval.
After this Plan is adopted by the Board, this Plan shall become effective on the First Offering Date (as defined above). This Plan shall be approved by the stockholders of the Company, in any manner permitted by applicable corporate law, within twelve (12) months before or after the date this Plan is adopted by the Board. No purchase of shares pursuant to this Plan shall occur prior to such stockholder approval. This Plan shall continue until the earlier to occur of (a) termination of this Plan by the Board (which termination may be effected by the Board at any time), (b) issuance of all of the shares of Common Stock reserved for issuance under this Plan, or (c) ten (10) years from the adoption of this Plan by the Board.
23. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under this Plan in the event of such participant's death subsequent to the end of an Purchase Period but prior to delivery to him of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under this Plan in the event of such participant's death prior to a Purchase Date.
(b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under this Plan who is living at the time of such participant's death, the Company shall deliver such shares or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.
24. Conditions Upon Issuance of Shares; Limitation on Sale of Shares.
Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.
25. Applicable Law.
The Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of Delaware.
26. Amendment or Termination.
The Board may at any time amend, terminate or extend the term of this Plan, except that any such termination cannot affect options previously granted under this Plan, nor may any amendment make any change in an option previously granted which would adversely affect the right of any participant, nor may any amendment be made without approval of the stockholders of the Company obtained in accordance with Section 22 above within twelve (12) months of the adoption of such amendment (or earlier if required by Section 22) if such amendment would:
(a) increase the number of shares that may be issued under this Plan; or
(b) change the designation of the employees (or class of employees) eligible for participation in this Plan.
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Notwithstanding the foregoing, the Board may make such amendments to the Plan as the Board determines to be advisable and which do not cause unfavorable accounting treatment, including changes with respect to current Offering Periods or Purchase Period, if the continuation of the Plan or any Offering Period would result in financial accounting treatment for the Plan that is different from the financial accounting treatment in effect on the date this Plan is adopted by the Board.
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EQUIPMENT LOAN AND SECURITY AGREEMENT
Dated as of December 27, 2001
by and between
GATX
VENTURES, INC.
as Lender
and
NUVASIVE, INC.
a Delaware corporation
10065 Old Grove Road
San Diego, California 92131
as Borrower
CREDIT AMOUNT: $1,000,000
|
|
|
Repayment Period: | 36 months | |
Treasury Note Maturity: |
|
36 months |
Loan Margin: |
|
800 basis points |
Commitment Termination Date: |
|
July 31, 2002 |
The terms and information set forth on this cover page are a part of the attached Equipment Loan and Security Agreement, dated as of the date first written above (this " Agreement "), entered into by and between GATX Ventures, Inc. (" Lender ") and NuVasive, Inc. (" Borrower "). The terms and conditions of this Agreement agreed to between the parties hereto are as follows:
1. Definitions and Construction.
1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions:
" Affiliate " means any Person that owns or controls directly or indirectly ten percent or more of the stock of another entity, any Person that controls or is controlled by or is under common control with such Persons or any Affiliate of such Persons or each of such Person's officers, directors, joint venturers or partners.
" Agreement " means this Equipment Loan and Security Agreement, as the same may from time to time be amended or supplemented.
" Basic Rate " means, as of the relevant Funding Date, the per annum rate of interest (based on a year of twelve 30-day months) equal to the sum of (a) the U.S. Treasury note yield to maturity for a term equal to the Treasury Note Maturity as quoted in the Western Edition of The Wall Street Journal on the date the Loan Agreement Supplement is prepared, plus (b) the Loan Margin. Notwithstanding the foregoing, the Basic Rate shall not exceed the highest rate permitted by applicable law to be charged on commercial loans.
" Borrower " has the meaning set forth on the cover page hereof.
" Borrower's Home State " means California.
" Business Day " means any day that is not a Saturday, Sunday, or other day on which banking institutions are authorized or required to close in Borrower's Home State.
" Closing Date " means the date that each of the conditions precedent listed in Section 3.1 has been satisfied or waived in writing by Lender.
" Code " means the Uniform Commercial Code as adopted and in effect in the State of California, as amended from time to time, provided that if by reason of mandatory provisions of law, the creation and/or perfection or the effect of perfection or non-perfection of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than California, the term "Code" shall also mean the Uniform Commercial Code as in effect from time to time in such jurisdiction for purposes of the provisions hereof relating to such creation, perfection or effect of perfection or non-perfection.
" Collateral " has the meaning given that term in Section 4.1 , including, without limitation, all Financed Equipment listed in any Loan Agreement Supplement executed from time to time pursuant to Section 4.2 .
" Commitment Termination Date " means the date following such term on the cover page of this Agreement.
" Credit Amount " means the amount set forth following such term on the cover page of this Agreement.
" Default " means any event which with the passing of time or the giving of notice or both would become an Event of Default hereunder.
" Default Rate " means the per annum rate of interest equal to 5% over the Basic Rate, but such rate shall in no event be more than the highest rate permitted by applicable law to be charged on commercial loans.
" Disclosure Schedule " means Exhibit A attached hereto.
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" Eligible Equipment " means, to the extent reasonably acceptable to Lender, Equipment (excluding any and all freight, installation, taxes and other soft costs relating to such Equipment) consisting of computer equipment, data servers, communications equipment, office equipment and furnishings.
" Environmental Laws " means all foreign, federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Clean Air Act, the Federal Water Pollution Control Act of 1972, the Solid Waste Disposal Act, the Federal Resource Conservation and Recovery Act, the Toxic Substances Control Act and the Emergency Planning and Community Right-to-Know Act.
" Equipment " has the meaning given to such term in Section 4.1 .
" Equity Securities " of any Person shall mean (a) all common stock, preferred stock, participations, shares, partnership interests or other equity interests in and of such Person (regardless of how designated and whether or not voting or non-voting) and (b) all warrants, options and other rights to acquire any of the foregoing.
" Event of Default " has the meaning given to such term in Section 8 .
" Event of Loss " has the meaning given to such term in Section 6.10 .
" Financed Equipment " has the meaning given to such term in Annex A to any Loan Agreement Supplement, as amended or supplemented from time to time.
" Funding Date " means any date on which a Loan is made to or on account of Borrower under this Agreement.
" GAAP " means generally accepted accounting principles as in effect in the United States of America from time to time, consistently applied.
" Governmental Authority " means (a) any federal, state, county, municipal or foreign government, or political subdivision thereof, (b) any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality or public body, (c) any court or administrative tribunal or (d) with respect to any Person, any arbitration tribunal or other non-governmental authority to whose jurisdiction that Person has consented.
" Hazardous Materials " means all those substances which are regulated by, or which may form the basis of liability under, any Environmental Law, including all substances identified under any Environmental Law as a pollutant, contaminant, hazardous waste, hazardous constituent, special waste, hazardous substance, hazardous material, or toxic substance, or petroleum or petroleum derived substance or waste.
" Indebtedness " means, with respect to Borrower or any Subsidiary, the aggregate amount of, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade payables aged less than 180 days), (d) all capital lease obligations of such Person, (e) all obligations or liabilities of others secured by a Lien on any asset of such Person, whether or not such obligation or liability is assumed, (f) all obligations or liabilities of others guaranteed by such Person; and (g) any other obligations or liabilities which are required by GAAP to be shown as debt on the balance sheet of such Person. Unless otherwise
2
indicated, the term " Indebtedness " shall include all Indebtedness of Borrower and the Subsidiaries.
" Interim Payment " means, with respect to each Loan, an amount equal to the initial Loan Amount multiplied by the percentage equal to the product of (i) the quotient derived from dividing the initial Loan Factor with respect to such Loan by 30, and (ii) the number of days from (and including) the Funding Date of such Loan to (but not including) the first Payment Date with respect to such Loan.
" Investment " shall mean the purchase or acquisition of any capital stock, equity interest, or any obligations or other securities of, or any interest in, any Person, or the extension of any advance, loan, extension of credit or capital contribution to, or any other investment in, any Person.
" Landlord Agreement " means an agreement substantially in the form of Exhibit E or such other form as Lender may agree to accept.
" Lender " has the meaning set forth on the cover page hereof.
" Lender's Expenses " means all reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, documentation, administration and funding of the Loan Documents; and Lender's reasonable attorneys' fees, costs and expenses incurred in amending, modifying, enforcing or defending the Loan Documents (including fees and expenses of appeal or review), including the exercise of any rights or remedies afforded hereunder or under applicable law, whether or not suit is brought, whether before or after bankruptcy or insolvency, including without limitation all fees and costs incurred by Lender in connection with Lender's enforcement of its rights in a bankruptcy or insolvency proceeding filed by or against Borrower or its Property.
" Lien " means any voluntary or involuntary security interest, pledge, bailment, lease, mortgage, hypothecation, conditional sales and title retention agreement, encumbrance or other lien with respect to any Property in favor of any Person.
" Loan " means each advance of credit by Lender to Borrower under this Agreement.
" Loan Agreement Supplement " means a supplement to this Agreement in substantially the form of Exhibit C .
" Loan Amount " means, with respect to each Loan, as of any date, the original principal amount of such Loan less prepayments of such Loan paid pursuant to Section 6.10 .
" Loan Documents " means, collectively, this Agreement, each Loan Agreement Supplement, the Warrant, any Landlord Agreement, any Service Provider's Consent and all other documents, instruments and agreements entered into in connection with this Agreement, all as amended or extended from time to time.
" Loan Factor " means, with respect to each Loan, the amount set forth as a percentage in the Loan Terms Schedule with respect to such Loan, which fully amortizes the Loan over the Repayment Period applicable to such Loan in equal periodic installments at the Basic Rate.
" Loan Margin " means the number of basis points set forth following such terms on the cover page of this Agreement.
" Loan Terms Schedule " means, with respect to each Loan, Annex B to the Loan Agreement Supplement prepared by Lender in connection with such Loan.
" Loan Value " means with respect to each Loan, an amount equal to the sum of all remaining unpaid Scheduled Payments discounted to the relevant date at a rate of six percent
3
(6%) per annum, but shall not exceed the Loan Amount for such Loan; the "relevant date" shall be the Payment Date on which payment of such amount is to be made, or if such date is not a Payment Date, on the Payment Date immediately succeeding such date.
" Maturity Date " means, with respect to each Loan, the last day of the Repayment Period for such Loan, or if earlier, the date of acceleration of such Loan following an Event of Default or the date of prepayment, whichever is applicable.
" Minimum Funding Amount " means $50,000.
" Obligations " means all debt, principal, interest, fees, charges, expenses and attorneys' fees and costs and other amounts, obligations, covenants, and duties owing by Borrower to Lender of any kind and description pursuant to or evidenced by the Loan Documents, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, including the Loan Value due with respect to the Loans, and further including all Lender's Expenses.
" Officer's Certificate " shall mean a certificate executed by a Responsible Officer of Borrower substantially in the form of Exhibit G or such other form as Lender may agree to accept.
" Other Equipment " means, to the extent reasonably acceptable to Lender, tenant improvements and buildout costs, software, software licenses, tooling, equipment specially manufactured for Borrower, and freight, installation and sales taxes relating to Eligible Equipment and other soft costs.
" Payment Date " has the meaning given to that term in Section 2.2(a) .
" Permitted Indebtedness " means and includes:
(a) Indebtedness of Borrower to Lender;
(b) Indebtedness of Borrower secured by Liens upon any equipment or other personal property acquired by Borrower after the date hereof to secure (i) the purchase price of such equipment or other personal property or (ii) lease obligations or indebtedness incurred solely for the purpose of financing the acquisition of such equipment or other personal property; provided that (A) such equipment or personal property is not Financed Equipment, (B) such Liens are confined solely to the equipment or other personal property so acquired and the amount secured does not exceed the acquisition price thereof, and (C) no such Lien shall be created, incurred, assumed or suffered to exist in favor of Borrower's officers, directors or shareholders holding five percent (5%) or more of Borrower's Equity Securities;
(c) Indebtedness arising from the endorsement of instruments in the ordinary course of business;
(d) Indebtedness existing on the date hereof and set forth on the Disclosure Schedule;
(e) Indebtedness consisting of a revolving credit facility in which the loans are limited to less than 100% of Borrower's outstanding accounts receivable and which are secured solely by Borrower's accounts receivable (and general intangibles in the nature of rights to payment) and the proceeds thereof,
(f) Subordinated Indebtedness; and
(g) Extensions, refinancings, modifications, amendments and restatements of any of items (a) through (f) above; provided that the principal amount thereof is not increased
4
or the terms thereof are not modified to impose more burdensome terms upon Borrower; and provided, further, that any extension, renewal or replacement of any Lien in connection with this Section shall be limited to the property encumbered by the existing lien.
" Permitted Liens " means (a) the Lien created by this Agreement, and (b) Liens for fees, taxes, levies, imposts, duties or other governmental charges of any kind which are not yet delinquent or which are being contested in good faith by appropriate proceedings which suspend the collection thereof ( provided , however , that such proceedings do not involve any substantial danger of the sale, forfeiture or loss of any item of Financed Equipment and that Borrower has adequately bonded such Lien or reserves sufficient to discharge such Lien have been provided on the books of Borrower).
" Person " means and includes any individual, any partnership, any corporation, any business trust, any joint stock company, any limited liability company, any unincorporated association or any other entity and any domestic or foreign national, state or local government, any political subdivision thereof, and any department, agency, authority or bureau of any of the foregoing.
" Property " means any interest in any kind of property or asset, whether real, personal or mixed, whether tangible or intangible.
" Repayment Period " means the period beginning on the first Payment Date and continuing for the Repayment Period set forth following such term on the cover page of this Agreement.
" Scheduled Payments " has the meaning given to such term in Section 2.2(a) .
" Service Provider's Consent " means an agreement substantially in the form of Exhibit F or such other form as Lender may agree to accept.
" Stated Cost " means (i) with respect to each item of Eligible Equipment, the original cost to Borrower of the item of Eligible Equipment, and (ii) with respect to each item of Other Equipment, the original cost to Borrower of the item of Other Equipment; provided, however, if an item of Eligible Equipment or Other Equipment was delivered to Borrower by the manufacturer or vendor more than 90 days (or, for purposes of the first Loan only, more than 120 days) prior to the Funding Date of the Loan relating to such Equipment, as evidenced by the invoice date of such Equipment, and Lender agrees to fund such item, the Stated Cost of such item shall be equal to Lender's appraised value.
" Subordinated Indebtedness " means Indebtedness subordinated to the Obligations on terms and conditions acceptable to Lender in its sole discretion.
" Subsidiary " means any corporation of which a majority of the outstanding capital stock entitled to vote for the election of directors (otherwise than as the result of a default) is owned by Borrower directly or indirectly through Subsidiaries.
" Term " means the period from and after the date hereof until the payment in full of all amounts and liabilities payable under this Agreement and the other Loan Documents, including principal and interest on the Loans (including all Scheduled Payments with respect to each Loan).
" Treasury Note Maturity " means the periods of months set forth following such term on the cover page of this Agreement.
" Warrant " means the separate warrant in favor of the Lender or its designee to purchase securities of Borrower substantially in the form of Exhibit B .
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1.2 Other Interpretive Provisions. References in this Agreement to "Articles," "Sections," "Exhibits, "Schedules" and "Annexes" are to recitals, articles, sections, exhibits, schedules and annexes herein and hereto unless otherwise indicated. References in this Agreement and each of the other Loan Documents to any document, instrument or agreement shall include (a) all exhibits, schedules, annexes and other attachments thereto, (b) all documents, instruments or agreements issued or executed in replacement thereof, and (c) such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement or any other Loan Document shall refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. The words "include" and "including" and words or similar import when used in this Agreement or any other Loan Document shall not be construed to be limiting or exclusive. Unless otherwise indicated in this Agreement or any other Loan Document, all accounting terms used in this Agreement or any other Loan Document shall be construed, and all accounting and financial computations hereunder or thereunder shall be computed, in accordance with GAAP, and all terms describing Collateral shall be construed in accordance with the Code.
2. Loans; Repayment.
2.1 Commitment.
(a) The Credit Amount. Subject to the terms and conditions of this Agreement and relying upon the representations and warranties herein set forth as and when made or deemed to be made, Lender agrees to lend to Borrower from time to time on or prior to the Commitment Termination Date, the Loans in an amount equal to (i) one hundred percent (100%) of the Stated Cost of Eligible Equipment, and (ii) one hundred percent (100%) of the Stated Cost of Other Equipment; provided that the aggregate principal amount of the Loans shall not exceed the Credit Amount at such time; provided further that the aggregate original principal amount of all Loans relating to the financing of Other Equipment shall not at any time exceed twenty percent (20%) of the aggregate original principal amount of all Loans. Notwithstanding the foregoing, Five Hundred Thousand Dollars ($500,000) of the Credit Amount is available, subject to the terms hereunder, only for Loans with a Funding Date on or before December 31, 2001, and if this portion of the Credit Amount remains unused by December 31, 2001, it will no longer be available; the remaining Five Hundred Thousand Dollars ($500,000) of the Credit Amount shall be available for Loans with a Funding Date on or before July 31, 2002. Loans may not be prepaid except in accordance with Section 2.3 .
(b) Promissory Note. Each Loan Terms Schedule shall be considered a promissory note evidencing the amounts due hereunder for all purposes.
(c) Use of Proceeds. The proceeds of the Loans shall be used solely for the purchase of Eligible Equipment or Other Equipment or reimbursement to Borrower of the Stated Cost of Eligible Equipment or Other Equipment.
(d) Termination of Commitment to Lend. Notwithstanding anything in the Loan Documents, Lender's obligation to lend the undisbursed portion of the Credit Amount to Borrower hereunder shall terminate on the earlier of (1) at Lender's sole election, the occurrence of any Default or Event of Default hereunder, and (ii), except as provided in Section 2.1 (a) above, the Commitment Termination Date. Notwithstanding the foregoing, Lender's obligation to lend the undisbursed portion of the Credit Amount to Borrower shall terminate if, in Lender's sole judgment, there has been a material adverse change in the general affairs, management, results of operations, condition (financial or otherwise) or prospects of Borrower, whether or not arising from transactions in the ordinary course of
6
business, or there has been any material adverse deviation by Borrower from the business plan of Borrower presented to Lender on or before the date of this Agreement.
2.2 Payments.
(a) Scheduled Payments. Borrower shall make payments of principal and accrued interest in advance for each Loan (collectively, " Scheduled Payments ") as set forth in the Loan Terms Schedule, commencing on the date set forth on the Loan Terms Schedule applicable to such Loan and continuing thereafter during the Repayment Period on the first Business Day of each calendar month (each a " Payments Date "), in an amount equal to the Loan Factor multiplied by the Loan Amount for such Loan as of such Payment Date. In any event, all unpaid principal and accrued interest shall be due and payable in full on the last Payment Date with respect to such Loan.
(b) Interim Payment. Unless the Funding Date for a Loan is a Payment Date, Borrower shall pay the Interim Payment payable with respect to such Loan on the Funding Date, as specified in the Loan Terms Schedule applicable to such Loan.
(c) Payments of Interest. Borrower shall pay interest on each Loan at a per annual rate of interest equal to the Basic Rate. All computations of interest on Loans shall be based on a year of twelve 30-day months. Notwithstanding any other provision hereof, the amount of interest payable hereunder shall not in any event exceed the maximum amount permitted by the law applicable to interest charged on commercial loans.
(d) Application of Payments. All payments received by Lender prior to an Event of Default shall be applied as follows: (1) first, to Lender's Expenses then due and owing; and (2) second to all Scheduled Payments then due and owing, provided, however, that if such payments are not sufficient to pay the whole amount then due, such payments shall be applied first to unpaid interest at the Basic Rate, then to the remaining amount then due. After an Event of Default, all payments and application of proceeds shall be made as set forth in Section 9.7 .
(e) Default Rate. Borrower shall pay interest at a per annum rate equal to the Default Rate on any amounts required to be paid by Borrower under this Agreement or the other Loan Documents (including Scheduled Payments, accrued and unpaid interest, and any fees or other amounts) which remain unpaid after such amounts are due. If an Event of Default has occurred and the Obligations have been accelerated (whether automatically or by Lender's election), Borrower shall pay interest on the aggregate, outstanding accelerated balance hereunder from the date of the Event of Default until all Events of Default are cured, at a per annum rate equal to the Default Rate. All computations of interest at the Default Rate shall be based on a year of twelve 30-day months.
2.3 Prepayments.
(a) Prepayment Upon an Event of Loss. If any Financed Equipment is subject to an Event of Loss and Borrower is required to or elects to prepay the Loan with respect to such Financed Equipment, then such Loan shall be prepaid to the extent and in the manner provided in Section 6.10 .
(b) Mandatory Prepayment Upon an Acceleration. If the Loans are accelerated following the occurrence of an Event of Default or otherwise (other than following an Event of Loss), then Borrower shall immediately pay to Lender (i) all accrued and unpaid Scheduled Payments with respect to each Loan due prior to the date of prepayment, (ii) any accrued and unpaid interest, (iii) the Loan Value of each Loan, and (iv) all other sums, if any, that shall have become due and payable hereunder.
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(c) Optional Prepayment. Upon ten (10) Business Days' prior written notice to Lender, Borrower may, at its option, at any time more than twelve (12) months after the last Funding Date on which a Loan is funded, prepay all, and not less than all, of the Loans in full by paying to Lender an amount equal to (i) all accrued and unpaid Scheduled Payments with respect to each Loan due prior to the date of prepayment; (ii) any accrued and unpaid interest; (iii) the Loan Value of each Loan, and (iv) all other sums, if any, that shall have become due and payable hereunder.
(d) Prepayment Upon Merger, Acquisition or Change of Ownership. If Borrower desires to effect a merger, acquisition or change of ownership otherwise prohibited by Section 7.6 or Section 7.7 below, and Lender, after reasonable notice and opportunity to evaluate such transaction, does not consent to such transaction, then Borrower shall have the night, concurrent with the closing of such transaction, to prepay all, but not less than all, of the Loans in full by paying to Lender an amount equal to: (i) all accrued and unpaid Scheduled Payments with respect to each Loan due prior to the date of prepayment; (ii) any accrued and unpaid interest; (iii) the Loan Value of each Loan; and (iv) all other sums, if any, that shall have become due and payable hereunder.
(e) No Other Prepayment. Borrower may not prepay any Loan except as set forth in Section 2.3(a), (b), (c) or (d) above, in which event the prepayment shall be made as described in such sections.
2.4 Other Payment Terms.
(a) Place and Manner. Borrower shall make all payments due to Lender in lawful money of the United States. All payments of principal, interest, fees and other amounts payable by Borrower hereunder shall be made, in immediately available funds not later than 10:00 a.m. California time, on the date on which such payment is made. Borrower shall, make payments to Lender via wire transfer or by check as follows:
Wire Transfer Payment | |||
Credit: | GATX Capital Corporation | ||
Bank Name: | Bank of America | ||
Bank Address: | Dallas, Texas 75202 | ||
Account No.: | 3750878673 | ||
ABA Routing No.: | 111-000012 | ||
Reference: | NuVasive Invoice # | ||
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Check Payment |
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Bank of America | |||
P.O. Box 198592 | |||
Atlanta, GA 30384-8592 | |||
Credit: | GATX Capital Corporation | ||
Reference: | NuVasive Invoice # | ||
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(b) Date. Whenever any payment due hereunder shall fall due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of interest or fees, as the case may be.
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2.5 Procedure for Making Loans.
(a) Notice. Whenever Borrower desires that Lender makes a Loan, Borrower shall be responsible for providing Lender with a list of equipment proposed to be financed with such Loan together with such additional information with respect to the Loan and the Eligible Equipment and the Other Equipment as Lender shall reasonably request. Following the receipt by Lender of such information in form and substance reasonably satisfactory to it, Lender shall notify Borrower that the conditions set forth in Sections 3.2(b) and 3.2(c) have been met and Borrower may then notify Lender of the date on which Borrower desires Lender to make such Loan. Borrower's notice shall be made at least five (5) Business Days in advance of the desired Funding Date, unless Lender elects at its sole discretion to allow the Funding Date to be within five (5) Business Days of the notice. Borrower's execution and delivery to Lender of the Loan Agreement Supplement with the attached Loan Terms Schedule shall be Borrower's agreement to the terms and calculations thereunder. Subject to the terms and conditions of this Agreement, as soon as practicable on the Funding Date specified in the Loan Terms Schedule, Lender shall transfer an amount equal to the Loan to the account specified in the Loan Agreement Supplement in immediately available funds. Lender's obligation to make the Loan shall be expressly subject to the satisfaction of the conditions set forth in Sections 3.1 and 3.2 .
(b) Loan Factor and Loan Value Calculation. Prior to each Funding Date, Lender shall establish the Basic Rate and the Loan Factor with respect to such Loan, which shall be set forth in the Loan Agreement Supplement to be executed by Borrower with respect to each Loan and shall be conclusive in the absence of a manifest error.
(c) Disbursement. Lender shall disburse such Loan by wire transfer to Borrower at the account specified in the Loan Agreement Supplement for the relevant Loan.
2.6 Minimum Funding Amount; Maximum Number of Fundings. Except with the prior consent of Lender, in Lender's sole discretion, (i) there shall not be more than one funding of a Loan in any one calendar month; and (ii) the aggregate amount of the requested Loans shall not be less than the Minimum Funding Amount.
2.7 Good Faith Deposit; Facility Fee.
(a) Good Faith Deposit. Borrower has paid a good faith deposit in the amount of Ten Thousand Dollars ($10,000) (the " Good Faith Deposit "). The Good Faith Deposit shall be used to pay Lender's Expenses in connection with its due diligence and negotiation and documentation of this Agreement and the Loan Documents. Any remaining balance of the Good Faith Deposit shall be applied to the first Scheduled Payment due after the determination of Lender's Expenses. It is agreed that Lender shall be entitled to retain $4,500 as payment for its legal expenses in connection with the negotiation and documentation of this Agreement and the Loan Documents.
(b) Facility Fee. Borrower shall pay concurrently with its execution and delivery of this Agreement a facility fee in the amount of Ten Thousand Dollars ($10,000) (the " Facility Fee "). The Facility Fee shall be retained by Lender and shall be deemed fully earned upon receipt.
3. Conditions of Loans.
3.1 Conditions Precedent to Closing. At the time of the execution and delivery of this Agreement, Lender shall have received, in form and substance reasonably satisfactory to Lender, all of the following (unless Lender has agreed to waive such condition or document, in which case
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such condition or document shall be a condition precedent to all Loans and deemed added to Section 3.2 ):
(a) This Agreement duly executed by Borrower and Lender.
(b) The separate Warrant to be issued to Lender or its designee, duly executed by Borrower and Lender.
(c) A certificate of the secretary or assistant secretary of Borrower with copies of the following documents attached: (i) the certificate of incorporation and bylaws of Borrower certified by Borrower as being in full force and effect on the date thereof, (ii) incumbency and representative signatures, and (iii) resolutions authorizing the execution and delivery of this Agreement and each of the other Loan Documents.
(d) A good standing certificate from Borrower's state of incorporation and the state in which Borrower's principal place of business is located, together with certificates of the applicable governmental authorities stating that Borrower is in compliance with the franchise tax laws of each such state, each dated as of a recent date
(e) Evidence of the insurance coverage required by Section 6.9 of this Agreement.
(f) All necessary consents of shareholders and other third parties with respect to the execution, delivery and performance of this Agreement, the Warrant and the other Loan Documents.
(g) Such other documents, and completion of such other matters, as Lender may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to All Loans. The obligation of Lender to make each Loan, including the initial Loan, is further subject to the following conditions:
(a) No Default or Event of Default shall have occurred and be continuing.
(b) Borrower shall have provided to Lender, with respect to the Eligible Equipment which is requested to be financed with the proceeds of the Loan to be made on such Funding Date, such invoices, purchase orders, bills of sale, serial numbers, agreements, canceled checks, and other documents as Lender shall reasonably request to evidence the ownership by Borrower of, and the payment in full by Borrower of the purchase price of such Eligible Equipment, each in form and substance reasonably satisfactory to Lender.
(c) Borrower shall have provided to Lender, with respect to the Other Equipment which is requested to be financed with the proceeds of the Loan to be made on such Funding Date, such invoices, purchase orders, bills of sale, agreements, canceled checks, and other documents as Lender shall reasonably request to evidence the ownership by Borrower of, and the payment in full of the purchase price by Borrower of such Other Equipment, each in form and substance reasonably satisfactory to Lender.
(d) Borrower shall have provided Lender with the location of each item of Financed Equipment and a Landlord Agreement for each such location (unless Borrower is the fee owner thereof) or a Service Provider's Consent if Financed Equipment is located at a third party service provider, as appropriate, which has been duly executed by each of the parties thereto.
(e) Borrower and Lender shall have executed a Loan Agreement Supplement, including a Loan Terms Schedule and a list of Financed Equipment with respect to the proposed Loan.
(f) Lender shall have received such documents, instruments and agreements, including UCC financing statements or amendments to UCC financing statements, as Lender shall
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reasonably request to evidence the perfection and priority of the security interests granted to Lender, pursuant to Section 4 .
(g) Borrower shall have delivered to Lender a release, or estoppel letter, as appropriate, from any Person having an existing Lien on any item of Eligible Equipment or Other Equipment which is requested to be financed.
(h) Such other documents, and completion of such other matters, as Lender may reasonably deem necessary or appropriate.
3.3 Covenant to Deliver. Borrower agrees (not as a condition but as a covenant) to deliver to Lender each item required to be delivered to Lender as a condition to each Loan, if such Loan is advanced. Borrower expressly agrees that the extension of such Loan prior to the receipt by Lender of any such item shall not constitute a waiver by Lender of Borrower's obligation to deliver such item, and any such extension in the absence of a required item shall be in Lender's sole discretion.
4. Creation of Security Interest.
4.1 Grant of Security Interest. Borrower grants to Lender (subject only to Permitted Liens) a valid, first priority, continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt, full and complete payment of any and all Obligations and in order to secure prompt, full and complete performance by Borrower of each of its covenants and duties under each of the Loan Documents. The " Collateral " shall mean and include all right, title, interest, claims and demands of Borrower in and to all of the following:
All right, title, interest, claims. and demands of Borrower in and to each and every item of goods (and embedded computer programs and supporting information included within the definition of "goods" under the Code), equipment, fixtures or personal property, whether now owned or hereafter acquired, which is financed with or is designated as "Collateral" for the Obligations on and after the date of this Agreement by designating such goods, equipment, fixtures and personal property on an annex or exhibit to a Loan Agreement Supplement executed by Borrower, together with all substitutions, renewals or replacements of and additions, improvements, accessions, replacement parts and accumulations to any and all of such goods, equipment, fixtures or personal property (collectively, the " Financed Equipment "), together with all proceeds thereof, including, without limitation, insurance, condemnation, requisition or similar payments, and all proceeds from sales, renewals, releases or other dispositions thereof; together with a non-exclusive, irrevocable, perpetual, fully paid, royalty-free license or other right to use, without charge, Borrower's intellectual property now or hereafter acquired, provided, however, that such license shall only be exercisable to the extent necessary or appropriate in connection with the disposition of Collateral upon Lender's exercise of its remedies hereunder.
4.2 After-Acquired Property. All Financed Equipment which is financed through Loans and any and all other Property generally described or referred to as Collateral or Financed Equipment which is hereafter acquired by Borrower shall ipso facto, and without any further conveyance, assignment or act on the part of Borrower or Lender, become and be subject to the security interest herein granted as fully and completely as though specifically described herein. The list of Financed Equipment shall be amended and supplemented on each Funding Date by a Loan Agreement Supplement to incorporate all Financed Equipment financed with the Loan advanced on such Funding Date; provided, however, the failure to so amend and supplement the list of Financed Equipment shall not affect the grant by Borrower to Lender of the security interest in such Financed Equipment pursuant to this Section 4 . This Agreement and the other documents in connection herewith may be otherwise supplemented and amended from time to time, as required
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by Lender, to reflect additional Collateral to be subject to the security interest granted pursuant to this Section 4 .
4.3 Duration of Security Interest. Lender's security interest in the Collateral shall continue until the payment in full and the satisfaction of all Obligations and termination of the Commitments, whereupon such security interest shall terminate; provided, however, if any item of Financed Equipment is subject to an Event of Loss, then following the prepayment of the Loan with respect to such item pursuant to Section 2.3 , Lender shall release its security interest in such item of Financed Equipment. Lender shall, at Borrower's sole cost and expense, execute such further documents and take such further actions as may be reasonably necessary to effect the release contemplated by this Section 4.3 , including duly executing and delivering termination statements for filing in all relevant jurisdictions under the Code.
4.4 Location and Possession of Collateral. The Collateral is and shall remain in the possession of Borrower at its location listed on the cover page hereof, or if Lender subsequently agrees to any additional location, as set forth in a Loan Agreement Supplement. Borrower shall remain in full possession, enjoyment and control of the Collateral (except only as may be otherwise required by Lender for perfection of its security interest therein) and so long as no Event of Default has occurred, shall be entitled to manage, operate and use the same and each part thereof with the rights and franchises appertaining thereto; provided , however , that the possession enjoyment, control and use of the Collateral shall at all time be subject to the observance and performance of the terms of this Agreement.
4.5 Markings on the Collateral. At Lender's request at any time during the Term of the Loan (including any extension thereof), Borrower shall place in a conspicuous location on each item of Financed Equipment a plaque or other marking to be supplied by Lender which reads substantially as follows:
GATX VENTURES, INC., Lienholder.
Such plaque or other marking shall not be removed (or if removed or damaged such plaque or other marking shall be replaced) until the security interest in favor of Lender in such item of Collateral is terminated pursuant to this Agreement.
4.6 Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Lender, at the request of Lender, all financing statements and other documents Lender may reasonably request, in form satisfactory to Lender, to perfect and continue Lender's perfected security interests in the Collateral and in order to consummate fully all of the transactions contemplated under the Loan Documents.
4.7 Right to Inspect. Lender (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's books and records and to make copies thereof and to inspect, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral.
5. Representations and Warranties. Except as set forth in the Disclosure Schedule, Borrower represents, warrants and covenants as follows:
5.1 Organization and Qualification. Borrower is a corporation duly organized and validly existing and in good standing under the laws of its state of incorporation and qualified and licensed (if any licenses are required for the operation of Borrower's business) to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of Property requires that it be so qualified or in which the Collateral is located, except for such states
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as to which any failure to so qualify would not have a material adverse effect on Borrower. Borrower has no Subsidiaries.
5.2 Authority. Borrower has all necessary power and authority to execute, deliver, and perform in accordance with the terms thereof, the Loan Documents to which it is a party. Borrower has all requisite power and authority to own and operate its Property and to carry on its businesses as now conducted.
5.3 Conflict with Other Instruments, etc. Neither the execution and delivery of any Loan Document to which Borrower is a party nor the consummation of the transactions therein contemplated nor compliance with the terms, conditions and provisions thereof will materially conflict with or result in any material breach of any of the terms, conditions or provisions of the certificate of incorporation and the by-laws, or other organizational documents of Borrower or any law or any regulation, order, writ, injunction or decree of any court or governmental instrumentality or any material agreement or instrument to which Borrower is a party or by which it or any of its Property is bound or to which it or any of its Property is subject, or constitute a default thereunder or result in the creation or imposition of any Lien, other than Permitted Liens.
5.4 Authorization, Enforceability. The execution and delivery of this Agreement, the granting of the security interest in the Collateral, the incurring of the Loans, the execution and delivery of the other Loan Documents to which Borrower is a party and the consummation of the transactions herein and therein contemplated have each been duly authorized by all necessary action on the part of Borrower. The Loan Documents have been duly executed and delivered and constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws of general application relating to or affecting the enforcement of creditors' rights or by general principles of equity.
5.5 No Prior Encumbrances. Borrower has good and marketable title to the Collateral, free and clear of Liens except for Permitted Liens.
5.6 Name; Location of Chief Executive Office, Principal Place of Business and Collateral. Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office, principal place of business, and the place where Borrower maintains its records concerning the Collateral are presently located at the address set forth on the cover page of this Agreement. The Collateral is presently located at the address set forth on the cover page hereof, or if Lender subsequently agrees to any other locations, as set forth in a Loan Agreement Supplement which is executed by Lender.
5.7 Litigation. There are no actions or proceedings pending by or against Borrower before any court or administrative agency in which an adverse decision could have a material adverse effect on Borrower or the aggregate value of the Collateral. Borrower does not have knowledge of any such pending or threatened actions or proceedings. Borrower will promptly notify Lender in writing if any action, proceeding or governmental investigation involving Borrower is commenced that is reasonably expected to result in damages or costs to Borrower of Fifty Thousand Dollars ($50,000) or more.
5.8 Financial Statements. All financial statements relating to Borrower or any Affiliate that have been or may hereafter be delivered by Borrower to Lender present fairly in all material respects Borrower's financial condition as of the date thereof and Borrower's results of operations for the period then ended.
5.9 Security Interest. Assuming the proper filing of one or more financing statement(s) identifying the Collateral with the proper federal, state and/or local authorities, the security interests in the Collateral granted to Lender pursuant to this Agreement (i) constitute and will
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continue to constitute first priority security interests (except to the extent any Permitted Liens may have a superior priority to Lender's Lien under this Agreement) and (ii) are and will continue to be superior and prior to the rights of all other creditors of Borrower (except to the extent of such Permitted Liens).
5.10 No Material Adverse Effect. No event has occurred and no condition exists which could reasonably be expected to have a material adverse effect on the financial condition, business or operations of Borrower since [insert date of last audited financials].
5.11 Full Disclosure. No representation, warranty or other statement made by Borrower in any Loan Document (including the Disclosure Schedule), certificate or written statement furnished to Lender contains, as of the date such representation, warranty or other statement is made, any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. There is no fact known to Borrower which materially adversely affects, or which could in the future be reasonably expected to materially adversely affect, its ability to perform its obligations under this Agreement.
5.12 Solvency, Etc. Borrower is Solvent (as defined below) and, after the execution and delivery of the Loan Documents and the consummation of the transactions contemplated thereby, Borrower will be Solvent. " Solvent " shall mean, with respect to any Person on any date, that on such date (a) the fair value of the property of such Person is greater than the fair value of the liabilities (including, without limitation, contingent liabilities) of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature and (d) such Person is not engaged in business or a transaction, and is not about in business or a transaction, for which such Person's property would constitute an unreasonably small capital.
6. Affirmative Covenants. Borrower covenants and agrees that, until the full and complete payment of the Obligations, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its corporate existence and its good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could reasonably be expected to have a material adverse effect on the financial condition, operations or business of Borrower. Borrower shall maintain in force all licenses, approvals and agreements, the loss of which could reasonably be expected to have a material adverse effect on its financial condition, operations or business.
6.2 Government Compliance. Borrower shall comply with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could reasonably be expected to materially adversely affect the financial condition, operations or business of Borrower.
6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to Lender: (a) as soon as available, but in any event within thirty (30) days after the end of each month, a company prepared balance sheet, income statement and cash flow statement covering Borrower's operations during such period; (b) as soon as available, but in any event within one-hundred twenty (120) days after the end of Borrower's fiscal year, audited financial statements of Borrower prepared in accordance with GAAP, together with an opinion on such financial statements of a nationally recognized or other independent public accounting firm reasonably acceptable to Lender; and (c) such other financial information as Lender may reasonably request from time to time. From and after such time as Borrower becomes a publicly reporting company, promptly as they are available and in any event: (x) at the time of filing of Borrower's Form 10-K with the
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Securities and Exchange Commission after the end of each fiscal year of Borrower, the financial statements of Borrower filed with such Form 10-K; and (y) at the time of filing of Borrower's Form 10-Q with the Securities and Exchange Commission after the end of each of the first three fiscal quarters of Borrower, the financial statements of Borrower filed with such Form 10-Q. In addition, Borrower shall deliver to Lender (i) promptly upon becoming available, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders; (ii) immediately upon receipt of notice thereof, a report of any material legal actions pending or threatened against Borrower; and (iii) such other financial information as Lender may reasonably request from time to time.
6.4 Certificates of Compliance. Each time financial statements are furnished pursuant to Section 6.3 above, there shall be delivered to Lender an Officer's Certificate signed by the president, treasurer or chief financial officer of Borrower (a "Responsible Officer") in the form of, and certifying to the matters set forth in, Exhibit G hereto.
6.5 Notice of Event of Loss. As soon as possible, and in any event within ten (10) days after Borrower has knowledge thereof, Borrower shall notify Lender in writing in reasonable detail of any Event of Loss.
6.6 Notice of Defaults. As soon as possible, and in any event within five (5) days after the discovery of a Default or an Event of Default, provide Lender with an Officer's Certificate of Borrower setting forth the facts relating to or giving rise to such Default or Event of Default and the action which Borrower proposes to take with respect thereto.
6.7 Taxes. Borrower shall make due and timely payment or deposit of all federal, state, and local taxes, assessments, or contributions required of it by law or imposed upon any Property belonging to it, including the Financed Equipment, and will execute and deliver to Lender, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Lender with proof satisfactory to Lender indicating that Borrower has made such payments or deposits; provided that Borrower need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings which suspend the collection thereof ( provided , however , that such proceedings do not involve any substantial danger of the sale, forfeiture or loss of any item of Financed Equipment, any material item of Collateral or Collateral which in the aggregate is material to Borrower and that Borrower has adequately bonded such amounts or reserves sufficient to discharge such amounts have been provided on the books of Borrower).
6.8 Use; Maintenance.
(a) Borrower, at its expense, shall make all necessary site preparations and cause the Collateral to be operated in accordance with any applicable manufacturer's manuals or instructions. So long as no Default or Event of Default has occurred, Borrower shall have the right to quietly possess and use the Collateral as provided herein without interference by Lender.
(b) Borrower, at its expense, shall maintain the Collateral in good condition, reasonable wear and tear excepted, and will comply in all material respects with all laws, rules and regulations to which the use and operation of the Collateral may be or become subject. Such obligation shall extend to repair and replacement of any partial loss or damage to the Collateral which does not constitute an Event of Loss, regardless of the cause. If maintenance is mandated by manufacturer, Borrower shall obtain and keep in effect, at all times during the Term maintenance service contracts with suppliers approved by Lender, such approval not to
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be unreasonably withheld. All parts furnished in connection with such maintenance or repair shall immediately become part of the Collateral. All such maintenance, repair and replacement services shall be immediately paid for and discharged by Borrower with the result that no Lien will attach to the Collateral.
6.9 Insurance. Borrower shall, obtain and maintain for the Term, at its own expense:
(a) "All risk" insurance against loss or damage to the Collateral. The coverage limit shall be the greater of the replacement cost of the Equipment or the Loan Value applicable to each Loan. The deductible shall not exceed $25,000. The policy shall name Lender, as sole loss payee with respect to the Collateral, shall not be invalidated by any action of or breach of warranty by Borrower of any provision thereof and waive subrogation against Lender.
(b) Commercial general liability insurance (including contractual liability, products liability and completed operations coverages) reasonably satisfactory to Lender. The limit of liability shall be at least $3,000,000 per occurrence. The policy shall be without deductible, except for products liability coverage which may have a deductible up to $25,000. The policy(ies) shall name Lender as additional insured in the full amount of Borrower's liability coverage limits (or the coverage limits of any successor to Borrower or such successor's parent which is providing coverage), be primary and without contribution as respects any insurance carried by Lender and contain cross liability and severability of interest clauses.
(c) Such other insurance against risks of loss and with terms as shall be reasonably required by Lender.
All policies of insurance shall be placed with financially sound, commercial insurers reasonably satisfactory to Lender. All policies of insurance shall provide that Lender shall be given 30 days' notice of cancellation of coverage. This notice provision shall be without qualification. On or prior to the first Funding Date and prior to each policy renewal, Borrower shall furnish to Lender, certificates of insurance or other evidence satisfactory to Lender that insurance complying with all of the above requirements is in effect.
6.10 Loss; Damage; Destruction and Seizure.
(a) Borrower shall bear the risk of the Financed Equipment being lost, stolen, destroyed, damaged beyond repair, rendered permanently unfit for use, or seized by a Governmental Authority for any reason whatsoever at any time until the expiration or termination of the Term.
(b) If during the Term any item of Financed Equipment is lost, stolen, destroyed, damaged beyond repair, rendered permanently unfit for use, or seized by a Governmental Authority for any reason whatsoever for a period equal to at least the remainder of the Term (an " Event of Loss "), then in each case Lender shall receive from the proceeds of insurance maintained pursuant to Section 6.9 , from any award paid by the seizing Governmental Authority or, to the extent not received from the proceeds of insurance or award or both, from Borrower, on or before the Payment Date next succeeding such Event of Loss, an amount equal to the sum of: (i) all accrued and unpaid Scheduled Payments with respect to such Loan due prior to the next such Payment Date, (ii) an amount equal to the Loan Value with respect to such Loan multiplied by the aggregate Stated Cost of each affected item of Financed Equipment divided by the Loan Amount, and (iii) all other sums, if any, that shall have become due and payable hereunder with respect to such Loan, including interest at the Default Rate with respect to any past due amounts. On the date of receipt by Lender the amount specified above with respect to each such item of Financed Equipment subject to an Event of Loss, this Agreement shall terminate as to such Financed Equipment. Except as provided in Section 6.10(c) , any proceeds of insurance maintained by Borrower pursuant to
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Section 6.9 and received by Borrower shall be paid to Lender promptly upon their receipt by Borrower. If any proceeds of insurance or awards received from governmental authorities are in excess of the amount owed under this Section 6.10 , Lender shall promptly remit to Borrower the amount in excess of the amount owed to Lender.
(c) So long as no Event of Default has occurred, any proceeds of insurance maintained pursuant to Section 6.9 received by Lender or Borrower with respect to an item of Financed Equipment, the repair of which is practicable, shall, at the election of Borrower, be applied either to the repair or replacement of such Financed Equipment or, upon Lender's receipt of evidence of the repair or replacement of the Financed Equipment reasonably satisfactory to Lender, to the reimbursement of Borrower for the cost of such repair or replacement. All replacement parts and equipment acquired by Borrower in replacement of Financed Equipment pursuant to this Section 6.10(c) shall immediately become part of the Financed Equipment upon acquisition by Borrower. Borrower shall take such actions and provide such documentation as may be reasonably requested by Lender to protect and preserve its first priority security interest and otherwise to avoid any impairment of Lender's rights under the Loan Documents in connection with such repair or replacement.
6.11 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Lender to effect the purposes of this Agreement, including without limitation, the continued perfection and priority of Lender's security interest in the Collateral.
7. Negative Covenants. Borrower covenants and agrees that until the full and complete payment of the Obligations, Borrower will not do any of the following:
7.1 Chief Executive Office. Change its name, chief executive office, principal place of business or any of the items set forth in Section 1 of the Disclosure Schedule without thirty (30) days' prior written notice to Lender.
7.2 Collateral Control. Subject to its rights under Section 4 , (i) terminate, waive or release any material right with respect to any Collateral, (ii) remove any items of Collateral from Borrower's facility located at the address set forth on the cover page hereof or such other address agreed to in writing by Lender, or (iii) affix or attach or permit to be affixed or attached to any item of Collateral any other item of property owned by Borrower or any other lender, lesser or financing party which is not readily identifiable or separable without any damage to such item of Collateral, without Lender's prior written consent.
7.3 Liens. Create, incur, assume or suffer to exist any Lien of any kind upon any Collateral, whether now owned or hereafter acquired, except Permitted Liens.
7.4 Other Dispositions of Collateral. Convey, sell, lease or otherwise dispose of (collectively, a "Transfer") all or any part of the Collateral to any Person except for Transfers of Financed Equipment in which Lender shall have released its security interest pursuant to Section 4.3 .
7.5 Distributions. (i) Pay any dividends or make any distributions on its Equity Securities; (ii) purchase, redeem, retire, decease or otherwise acquire for value any of its Equity Securities (other than repurchases pursuant to the terms of employee stock purchase plans, employee restricted stock agreements or similar arrangements in an aggregate amount not to exceed $100,000); (iii) return any capital to any holder of its Equity Securities as such; (iv) make any distribution of assets, Equity Securities, obligations or securities to any holder of its Equity Securities as such; or (v) set apart any sum for any such purpose; provided, however, that Borrower may pay dividends payable solely in common stock.
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7.6 Mergers or Acquisitions. Merge or consolidate with or into any other Person or acquire all or substantially all of the capital stock or assets of another Person.
7.7 Change in Ownership. Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or reasonably related thereto or have a material change in its ownership of greater than 25% (other than by the sale of Borrower's Equity Securities in a public offering or to venture capital investors so long as Borrower identifies the venture capital investors prior to the closing of the investment).
7.8 Transactions With Affiliates. Enter into any contractual obligation with any Affiliate or engage in any other transaction with any Affiliate except upon terms at least as favorable to Borrower as an arms-length transaction with Persons who are not Affiliates of Borrower.
7.9 Indebtedness Payments. (i) Prepay, redeem, purchase, decease or otherwise satisfy in any manner prior to the scheduled repayment thereof any Indebtedness for borrowed money (other than amounts due under this Agreement) or lease obligations, (ii) amend, modify or otherwise change the terms of any Indebtedness for borrowed money or lease obligations so as to accelerate the scheduled repayment thereof or (iii) repay any notes to officers, directors or shareholders; provided, however, that Borrower shall not be prohibited from prepaying, redeeming or otherwise satisfying any Indebtedness or lease obligations or repaying any notes to the extent the same is accomplished by the conversion of such obligations into equity securities of Borrower.
7.10 Indebtedness. Create, incur, assume or permit to exist any Indebtedness except Permitted Indebtedness.
7.11 Compliance. Become an "investment company" or a company controlled by an "investment company," under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Loan for that purpose; fail to meet the minimum funding requirements of the Employment Retirement Income Security Act of 1974, and its regulations, as amended from time to time (" ERISA "), permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect on Borrower's business or operations or could reasonably be expected to cause a material adverse change, or permit any of its Subsidiaries to do so.
8. Events of Default. Any one or more of the following events shall constitute an "Event of Default" by Borrower under this Agreement:
8.1 If Borrower fails to pay when due and payable or when declared due and payable in accordance with the Loan Documents: (i) any Scheduled Payment on the relevant Payment Date; or (ii) any other portion of the Obligations within five (5) days after receipt of written notice from Lender that such payment is due.
8.2 If Borrower fails to perform any obligation under Sections 6.9 or 6.10 or violates any of the covenants contained in Section 7 of this Agreement.
8.3 If Borrower fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement (other than as set forth in Sections 8.1, 8.2 or 8.4 through 8.13 ), in any of the other Loan Documents and Borrower has failed to cure such default within fifteen (15) days of the occurrence of such default. During this 15-day period, the failure to cure the default is not an Event of Default (but no Loans will be made during the cure period).
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8.4 If there occurs a material adverse change in Borrower's business, or if there is a material impairment of the prospect of repayment of any portion of the Obligations owing to Lender or a material impairment of the value or priority of Lender's security interest in the Collateral.
8.5 If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or Person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contesting by Borrower.
8.6 The service of process upon any Lender seeking to attach by a trustee or other process any funds of the Borrower on deposit or otherwise held by Lender, or the delivery upon Lender of a notice of foreclosure by any Person seeking to attach or foreclose on any funds of the Borrower on deposit or otherwise held by Lender, or the delivery of a notice of foreclosure or exclusive control to any entity holding or maintaining Borrower's deposit accounts or accounts holding securities by any Person (other than Lender) seeking to foreclose or attach any such accounts or securities.
8.7 One or more defaults shall exist under any agreements with any third party or parties which consists of the failure to pay any Indebtedness at maturity or which results in a right by such third party or parties, whether or not exercised, to accelerate the maturity of Indebtedness of Borrower in an aggregate amount in excess of One Hundred Thousand Dollars ($100,000) or a default shall exist under any financing agreement with Lender or any of Lender's Affiliates.
8.8 If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least One Hundred Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days or more.
8.9 If any material misrepresentation or material misstatement exists now or hereafter in any warranty, representation, statement, certification, or report made to Lender by Borrower or any officer, employee, agent, or director of Borrower.
8.10 If Borrower shall breach any term of the Warrant.
8.11 If any Loan Document shall in any material respect cease to be, or Borrower shall assert that any Loan Document is not, a legal, valid and binding obligation of Borrower enforceable in accordance with its terms.
8.12 If a proceeding shall have been instituted in a court having jurisdiction in the premises seeking a decree or order for relief in respect of Borrower in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or for the appointment of a receiver, liquidator, assignee, custodian, trustee (or similar official) of Borrower or for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of thirty (30) consecutive days or such court shall enter a decree or order granting the relief sought in such proceeding.
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8.13 If Borrower shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian (or other similar official) of Borrower or for any substantial part of its property, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action in furtherance of any of the foregoing.
9. Lender's Rights and Remedies.
9.1 Rights and Remedies. Upon the occurrence of any Default or Event of Default, Lender shall not have any further obligation to advance money or extend credit to or for the benefit of Borrower. In addition, upon the occurrence of an Event of Default, Lender shall have the rights, options, duties and remedies of a secured party as permitted by law and, in addition to and without limitation of the foregoing, Lender may, at its election, without notice of election and without demand, do any one or more of the following, all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, including (i) all accrued and unpaid Scheduled Payments with respect to each Loan, (ii) any accrued and unpaid interest, (iii) the Loan Value with respect to each Loan, and (iv) all other sums, if any, that shall have become due and payable hereunder, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.12 or 8.13 all Obligations shall become immediately due and payable without any action by Lender);
(b) Make such payments and do such acts as Lender considers necessary or reasonable to protect Lender's security interest in the Collateral. Borrower agrees to assemble the Collateral if Lender so requires, and to make the Collateral available to Lender as Lender may designate. Borrower authorizes Lender to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any Lien which in Lender's determination appears or is claimed to be prior or superior to their security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Lender a license to enter into possession of such premises and to occupy the same, without charge, for up to one hundred twenty (120) days in order to exercise any of Lender's rights or remedies provided herein, at law, in equity, or otherwise;
(c) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Lender and its agents and any purchasers at or after foreclosure are hereby granted a non-exclusive, irrevocable, perpetual, fully paid, royalty-free license or other right, solely pursuant to the provisions of this Section 9.1 , to use, without charge, Borrower's intellectual property, including without limitation, labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any Property of a similar nature, now or at any time hereafter owned or acquired by Borrower or in which Borrower now or at any time hereafter has any rights, provided, however, that such license shall only be exercisable in connection with the disposition of Collateral upon Lender's exercise of its remedies hereunder;
(d) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Lender determines are commercially reasonable; and
(e) Credit bid and purchase all or any portion of the Collateral at any public sale.
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Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower.
9.2 Set Off Right. Upon an Event of Default, Lender may set off and apply to the Obligations any and all indebtedness at any time owing to or for the credit or the account of Borrower.
9.3 Effect of Sale. Any sale, whether under any power of sale hereby given or by virtue of judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either at law or in equity, of Borrower in and to the Property sold, and shall be a perpetual bar, both at law and in equity, against Borrower, its successors and assigns, and against any and all Persons claiming the Property sold or any part thereof under, by or through Borrower, its successors or assigns.
9.4 Power of Attorney in Respect of the Collateral. Borrower does hereby irrevocably appoint Lender (which appointment is coupled with an interest), the true and lawful attorney in fact of Borrower with full power of substitution, for it and in its name to file any notices of security interests, financing statements and continuations and amendments thereof pursuant to the Code or federal law, as may be necessary to perfect, or to continue the perfection of Lender's security interests in the Collateral. Borrower does hereby irrevocably appoint Lender (which appointment is coupled with an interest) on the occurrence of an Event of Default, the true and lawful attorney in fact of Borrower with full power of substitution, for it and in its name: (a) to ask, demand, collect, receive, receipt for, sue for, compound and give acquaintance for any and all rents, issues, profits, avails, distributions, income, payment draws and other sums in which a security interest is granted under Section 4 with full power to settle, adjust or compromise any claim thereunder as fully as if Lender were a Borrower itself, (b) to receive payment of and to endorse the name of Borrower to any items of Collateral (including checks, drafts and other orders for the payment of money) that come into Lender's possession or under Lender's control, (c) to make all demands, consents and waivers, or take any other action with respect to, the Collateral, (d) in Lender's discretion to file any claim or take any other action or proceedings, either in its own name or in the name of Borrower or otherwise, which Lender may reasonably deem necessary or appropriate to protect and preserve the right, title and interest of Lender in and to the Collateral, (e) endorse Borrower's name on any checks or other forms of payment or security; (f) sign Borrower's name on any invoice or bill of lading for any account or drafts against account debtors, (g) make, settle, and adjust all claims under Borrower's insurance policies; (h) settle and adjust disputes and claims about the accounts directly with account debtors, for amounts and on terms Lender determines reasonable; (i) transfer the Collateral into the name of Lender or a third party as the Code permits, or (j) to otherwise act with respect thereto as though Lender were the outright owner of the Collateral.
9.5 Lender's Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Lender may do any or all of the following: (a) make payment of the same or any part thereof; or (b) obtain and maintain insurance policies of the type discussed in Section 6.9 of this Agreement, and take any action with respect to such policies as Lender deems prudent. Any amounts paid or deposited by Lender shall constitute Lender's Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Lender shall not constitute an agreement by Lender to make similar payments in the future or a waiver by Lender of any Event of Default under this Agreement. Borrower shall pay all reasonable fees and expenses, including without limitation, Lender's Expenses incurred by Lender in the enforcement or attempt to enforce any of the Obligations hereunder not performed when due.
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9.6 Remedies Cumulative. Lender's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Lender shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Lender of one right or remedy shall be deemed an election, and no waiver by Lender of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Lender shall constitute a waiver, election, or acquiescence by it.
9.7 Application of Collateral Proceeds. The proceeds and/or avails of the Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder (as well as any other amounts of any kind held by Lender at the time of or received by Lender, after, the occurrence of an Event of Default hereunder) shall be paid to and applied as follows:
(a) First, to the payment of out-of-pocket costs and expenses, including all amounts expended to preserve the value of the Collateral, of foreclosure or suit, if any, and of such sale and the exercise of any other rights or remedies, and of all proper fees, expenses, liability and advances, including reasonable legal expenses and attorneys' fees, incurred or made hereunder by Lender, including without limitation, Lender's Expenses;
(b) Second, to the payment to Lender of the amount then owing or unpaid on the Loans for Scheduled Payments, any accrued and unpaid interest, the Loan Value of the Loans, and all other Obligations with respect to all Loans, provided, however, that if such proceeds shall be insufficient to pay in full the whole amount so due, owing or unpaid upon the Loans, then to the unpaid interest thereon, then to the Loan Value of the Loans, and then to the payment of other amounts then payable to Lender under any of the Loan Documents; and
(c) Third, to the payment of the surplus, if any, to Borrower, its successors and assigns, or to whomsoever may be lawfully entitled to receive the same.
9.8 Reinstatement of Rights. If Lender shall have proceeded to enforce any right under this Agreement or any other Loan Document by foreclosure, sale, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then and in every such case (unless otherwise ordered by a court of competent jurisdiction), Lender shall be restored to its former position and rights hereunder with respect to the Property subject to the security interest created under this Agreement.
10. Waivers; Indemnification.
10.1 Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Lender on which Borrower may in any way be liable.
10.2 Lender's Liability for Collateral. So long as Lender complies with its obligations, if any, under the Code, Lender shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause other than Lender's gross negligence or willful misconduct; (c) any diminution in the value thereof or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower.
10.3 Indemnification and Waiver. Whether or not any Loans are made hereunder:
(a) General Indemnity. Borrower agrees upon demand to pay or reimburse Lender for all liabilities, obligations and out-of-pocket expenses, including Lender's Expenses and reasonable fees and expenses of counsel for Lender, from time to time arising in connection with the enforcement or collection of sums due under the Loan Documents, and in
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connection with any amendment or modification of the Loan Documents or any "work-out" in connection with the Loan Documents. Borrower shall indemnify, reimburse and hold Lender and each of its respective successors, assigns, agents, attorneys, officers, directors, shareholders, servants, agents and employees (each an " Indemnified Person ") harmless from and against all liabilities, losses, damages, actions, suits, demands, claims of any kind and nature (including claims relating to environmental discharge, cleanup or compliance), all costs and expenses whatsoever to the extent they may be incurred or suffered by such Indemnified Person in connection therewith (including reasonable attorneys' fees and expenses), fines, penalties (and other charges of applicable governmental authorities), licensing fees relating to any item of Collateral, damage to or loss of use of property (including consequential or special damages to third parties or damages to Borrower's property), or bodily injury to or death of any person (including any agent or employee of Borrower) (each, a " Claim "), directly or indirectly relating to or arising out of the use of the proceeds of the Loans or otherwise, the falsity of any representation or warranty of Borrower or Borrower's failure to comply with the terms of this Agreement or any other Loan Document during the Term. The foregoing indemnity shall cover, without limitation, (i) any Claim in connection with a design or other defect (latent or patent) in any item of equipment included in the Collateral, (ii) any Claim for infringement of any patent, copyright, trademark or other intellectual property right, (iii) any Claim resulting from the presence on or under or the escape, seepage, leakage, spillage, discharge, emission or release of any Hazardous Materials on the premises owned, occupied or leased by Borrower, including any Claims asserted or arising under any Environmental Law, (iv) any Claim for negligence or strict or absolute liability in tort, or (v) any Claim asserted as to or arising under any Landlord Agreement or any Service Provider's Consent; provided , however , that Borrower shall not indemnify any Indemnified Person for any liability incurred by such Indemnified Person as a direct and sole result of such Indemnified Person's gross negligence or willful misconduct. Such indemnities shall continue in full force and effect, notwithstanding the expiration or termination of this Agreement. Upon Lender's written demand, Borrower shall assume and diligently conduct, at its sole cost and expense, the entire defense of Lender, each of its partners, and each of their respective, agents, employees, directors, officers, shareholders, successors and assigns against any indemnified Claim described in this Section 10.3 . Borrower shall not settle or compromise any Claim against or involving Lender without first obtaining Lender's written consent thereto, which consent shall not be unreasonably withheld.
(b) Waiver. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT OR ANYWHERE ELSE, BORROWER AGREES THAT IT SHALL NOT SEEK FROM LENDER UNDER ANY THEORY OF LIABILITY (INCLUDING ANY THEORY IN TORTS), ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES.
(c) Survival; Defense. The obligations in this Section 10.3 shall survive payment of all other Obligations pursuant to Section 12.8 of this Agreement. At the election of any Indemnified Person, Borrower shall defend such Indemnified Person using legal counsel satisfactory to such Indemnified Person in such Person's reasonable discretion, at the sole cost and expense of Borrower. All amounts owing under this Section 10.3 shall be paid within thirty (30) days after written demand.
11. Notices.
(a) Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by certified mail, postage prepaid,
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return receipt requested, or by prepaid facsimile to Borrower or to Lender, as the case may be, at their respective addresses set forth below:
If to Borrower: |
NuVasive, Inc.
10065 Old Grove Road San Diego, CA 92131 Attention: Steve McGowan, CFO Fax: (858) 271-7101 PH: (858) 527-1957 |
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If to Lender: |
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GATX Ventures, Inc. 3687 Mt. Diablo Blvd., Suite 200 Lafayette, CA 94549 Attention: Contract Administration Fax: (925) 258-6020 PH: (925) 258-6000 |
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With a copy to: |
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GATX Ventures, Inc. 16 Munson Road Farmington, CT 06032 Attention: Contract Administration Fax: (860) 284-4350 PH: (860) 284-4300 |
The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other.
12. General Provisions.
12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Lender's prior written consent, which consent may be granted or withheld in Lender's sole discretion. Lender shall have the right without the consent of or notice to Borrower to sell, transfer, assign, negotiate, or grant participations in all or any part of, or any interest in Lender's rights and benefits hereunder.
12.2 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement.
12.3 Severabilily of Provisions. Each provision of this Agreement shall be several from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.
12.4 Entire Agreement; Construction; Amendments and Waivers.
(a) This Agreement and each of the other Loan Documents dated as of the date hereof, taken together, constitute and contain the entire agreement between Borrower and Lender and supersede any and all prior agreements, negotiations, correspondence, understandings and communications between the parties, whether written or oral, respecting the subject matter hereof. Borrower acknowledges that it is not relying on any representation or agreement made by Lender or any employee, attorney or agent thereof, other than the specific agreements set forth in this Agreement and the Loan Documents.
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(b) This Agreement is the result of negotiations between and has been reviewed by each of Borrower and Lender executing this Agreement as of the date hereof and their respective counsel; accordingly, this Agreement shall be deemed to be the product of the parties hereto, and no ambiguity shall be construed in favor of or against Borrower or Lender. Borrower and Lender agree that they intend the literal words of this Agreement and the other Loan Documents and that no parol evidence shall be necessary or appropriate to establish Borrower's or Lender's actual intentions.
(c) Any and all amendments, modifications, discharges or waivers of, or consents to any departures from any provision of this Agreement or of any of the other Loan Documents shall not be effective without the written consent of Lender. Any waiver or consent with respect to any provision of the Loan Documents shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Borrower in any case shall entitle Borrower to any other or further notice or demand in similar or other circumstances. Any amendment, modification, waiver or consent effected in accordance with this Section 12.4 shall be binding upon Lender and on Borrower.
12.5 Reliance by Lender. All covenants, agreements, representations and warranties made herein by Borrower shall be deemed to be material to and to have been relied upon by Lender, notwithstanding any investigation by Lender.
12.6 No Set-Offs by Borrower. All sums payable by Borrower pursuant to this Agreement or any of the other Loan Documents shall be payable without notice or demand and shall be payable in United States Dollars without set-off or reduction of any manner whatsoever.
12.7 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement.
12.8 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations and Commitment to fund remain outstanding. The obligations of Borrower to indemnify Lender with respect to the expenses, damages, losses, costs and liabilities described in Section 10.3 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Lender has run.
13. Relationship of Parties. Borrower and Lender acknowledge, understand and agree that the relationship between Borrower, on the one hand, and Lender on the other, is, and at all time shall remain solely that of a borrower and lender. Lender shall not under any circumstances be construed to be a partner or joint venturer of Borrower or any of its Affiliates; nor shall Lender under any circumstances be deemed to be in a relationship of confidence or trust or a fiduciary relationship with Borrower or any of its Affiliates, or to owe any fiduciary duty to Borrower or any of its Affiliates. Lender does not undertake or assume any responsibility or duty to Borrower or any of its Affiliates to select, review, inspect, supervise, pass judgment upon or otherwise inform Borrower or any of its Affiliates of any matter in connection with its or their Property, any Collateral held by Lender or the operations of Borrower or any of its Affiliates. Borrower and each of its Affiliates shall rely entirely on their own judgment with respect to such matters, and any review, inspection, supervision, exercise of judgment or supply of information undertaken or assumed by Lender in connection with such matters is solely for the protection of Lender and neither Borrower nor any Affiliate is entitled to rely thereon.
14. Confidentiality. All information (other than periodic reports filed by Borrower with the Securities and Exchange Commission) disclosed by Borrower to Lender in writing or through inspection pursuant to this Agreement that is marked confidential shall be considered confidential. Lender agrees to use the same degree of care to safeguard and prevent disclosure of such confidential information as
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Lender uses with its own confidential information, but in any event no less than a reasonable degree of care. Lender shall not disclose such information to any third party (other than to Lender's partners, attorneys, governmental regulators, or auditors, or to a Lender's subsidiaries and affiliates and prospective transferees and purchasers of the Loans, all subject to the same confidentiality obligation set forth herein or as required by law, regulation, subpoena or other order to be disclosed) and shall use such information only for purposes of evaluation of its investment in Borrower and the exercise of Lender's rights and the enforcement of its remedies under this Agreement and the other Loan Documents. The obligations of confidentiality shall not apply to any information that (a) was known to the public prior to disclosure by Borrower under this Agreement, (b) becomes known to the public through no fault of Lender, (c) is disclosed to Lender by a third party having a legal right to make such disclosure, or (d) is independently developed by Lender. Notwithstanding the foregoing, Lender's agreement of confidentiality shall not apply to the extent necessary in connection with any enforcement or exercise of Lender's rights and remedies under this Agreement following an Event of Default, including the enforcement of Lender's security interest in the Collateral, or to confidential information relating to any Collateral as to which Lender has acquired indefeasible title.
15. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF BORROWER AND LENDER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE NORTHERN DISTRICT OF CALIFORNIA. BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.
BORROWER: | ||||
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NUVASIVE, INC. |
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By: |
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/s/ STEVE MCGOWAN |
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Title: |
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Chief Financial Officer |
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GATX VENTURES, INC. |
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By: |
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/s/ PATRICIA W. LEICHER |
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Title: |
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SVP |
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EXHIBIT A
DISCLOSURE SCHEDULE
Borrower hereby certifies the following information to Lender:
Section 1. Information For UCC Financing Statements and Searches .
(a) The exact corporate name of the Borrower as it appears in its Certificate of Incorporation, as amended to date is: NuVasive, Inc.
(b) Borrower's state of incorporation is: Delaware.
(c) The organizational ID number of the Borrower from its jurisdiction of incorporation is 2775617.
(d) The Borrower's taxpayer identification number is 33-0768598.
(e) The following is a list of all Corporate names, dba or trade names used by Borrower in the past five years: NuVasive, Inc. and Nuvasive, Inc.
(f) The following is a list of all Subsidiaries of Borrower: NuVasive (Europe) GmbH.
(g) The address of Borrower's headquarters and chief executive office is 10065 Old Grove Road, San Diego, CA 9213 1. The following is a list of all States where Borrower's headquarters and chief executive office has been located in the past five years: California.
(h) The following is a list of all States where Borrower's property and assets have been located in the past five years: California and Utah.
DISCLOSURE SCHEDULE
The section numbers in this Disclosure Schedule correspond to the section numbers in that certain Equipment Loan and Security Agreement (the "Agreement") dated December 27, 2001 by and between NuVasive, Inc., a Delaware Corporation (the "Company"), and GATX Ventures, Inc. ("GATX"); however, any information disclosed herein under any section number shall be deemed to be disclosed and incorporated into any other section number under the Agreement where such disclosure would otherwise be appropriate. Where the terms of a contract or other disclosure item have been summarized or described in this Disclosure Schedule, such summary or description does not purport to be a complete statement of the material terms of such contract or other item. Capitalized terms used herein but not defined herein shall have the meaning assigned to such terms in the Agreement.
Nothing herein constitutes an admission of any liability or obligation on the part of the Company nor an admission against the Company's interest. The inclusion of any schedule herein or any exhibit hereto should not be interpreted as indicating that the Company has determined that such an agreement or other matter is necessarily material to the Company. The GATX acknowledges that certain information contained in these schedules may constitute material confidential information relating to the Company which may not be used for any purpose other than that contemplated in the Agreement.
Section 1.1
Definitions
With respect to subsection (d) of " Permitted Indebtedness ," the following Indebtedness exists as of the date of the Agreement:
(a) Reference is made to that certain Master Lease Agreement by and between the Company and Comdisco, Inc. dated September 17, 1999, including all schedules and addenda thereto; and
(b) Reference is made to that certain Loan and Security Agreement by and between Transamerica Business Credit Corporation and/or its affiliates ("TBCC") and the Company dated June 27, 2000, and all document referred to therein including the promissory note executed by the Company as of June 27, 2000 in favor of TBCC, the Intellectual Property Security Agreement
executed by the Company in favor of TBCC dated as of June 27, 2000, the Stock Subscription Warrant granted to TBCC dated as of June 27, 2000, and all other documents referenced therein.
Section 5.1
Organization and Qualification
The Company owns a 100% interest in the German entity NuVasive (Europe) GmbH.
Section 5.7
Litigation
Reference is made to the following litigation:
Medtronic, Inc. and Medtronic Sofamor Danek, Inc. v. NuVasive, Inc., Rufus L. Bennett, Keith Valentine and Patrick Miles , Case No. CT-001579-01, in the Circuit Court of Shelby County, Tennessee.
Rufus L. Bennett, Keith Valentine and Patrick Miles v. Medtronic, Inc. and Medtronic Sofamor Danek, Inc. , Case No. 01 CV 00684 JM (JFS), in United States District Court for the Southern District of California.
Ronald G. Barnett v. James Francis Marino, M.D.;Healthsouth UTC Surgicenter; NuVasive, Inc. and Does I through 100, inclusive , Case No. GIC 774481, Superior Court of California, County of San Diego.
Susan L. Klug v. James F. Marino, M.D.; Nick Zelinsky; Jeff Blewett; Curt Stone; Palomar-Pomerado Health System; NuVasive, Inc.; and Does 1 - 50 inclusive , Case No. GIC 777380, Superior Court of California, County of San Diego.
Kenneth Dixon, Jean Dixon v. James F. Marino, M.D.; Nick Zelensky; Palomar-Pomerado Health System; NuVasive, Inc.; Stryker Corporation and Does 1 - 50, inclusive , Case No. GIC 777906, Superior Court of California, County of San Diego.
Filed as Exhibits 10.6 and 10.7 to this Registration Statement
EXHIBIT C
Form of Loan Agreement Supplement
EXHIBIT C
FORM OF LOAN AGREEMENT SUPPLEMENT
LOAN AGREEMENT SUPPLEMENT NO. [ ]
LOAN AGREEMENT SUPPLEMENT No. [ ], dated , (" Supplement "), to the Equipment Loan and Security Agreement dated as of December 27, 2001 (the " Loan Agreement ") by and among NuVasive, Inc., a Delaware corporation (" Borrower "), and GATX Ventures, Inc. ("Lender").
Unless otherwise defined herein, capitalized terms have the meanings given to such terms in the Loan Agreement.
1. To secure the prompt payment by Borrower of the principal of and interest on, and all other amounts from time to time outstanding under the Loan Agreement, and the performance and observance by Borrower of all the agreements, covenants and provisions contained in the Loan Agreement, Borrower does hereby grant unto Lender, its respective successors and assigns, a first priority security interest in all of Borrower's right, title and interest in each item of equipment and other property described in Annex A hereto, which equipment and other property shall be deemed to be additional "Financed Equipment." The list of Financed Equipment in Annex A hereto shall be construed as a supplement to, and deemed part of, the Collateral listed in Section 4.1 of the Loan Agreement and shall form a part thereof, and the Loan Agreement is hereby incorporated by reference herein and is hereby ratified, approved and confirmed.
2. The Financed Equipment shall be located at the following address: .
3. Attached as Annex B hereto is the Loan Terms Schedule with respect to the Loan the proceeds of which will be used to finance the Financed Equipment listed in Annex A hereto. The proceeds for the above referenced Agreement should be disbursed as follows:
Disbursement from Lender: | |||||
Loan Amount | $ | ||||
Less: | |||||
Interim Payment | $ | ||||
First payment in Advance | $ | ||||
Net Proceeds due from Lender: |
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$ |
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4. The aggregate net proceeds of the Loan in the amount of $ shall be transferred to Borrower's account as follows:
Account Name:
Bank Name:
Bank Address:
Attention:
Telephone:
Account Number:
ABA Number:
5. Borrower hereby certifies that (a) the foregoing information is true and correct and authorizes Lender to endorse in its books and records, the Basic Rate applicable to the Funding Date of the Loan contemplated in this Loan Agreement Supplement and the principal amount set forth in the Loan Terms Schedule; (b) the representations and warranties made by Borrower in Section 5 of the Loan Agreement and in the other Loan Documents are true and correct on the date hereof and will be true and correct on such Funding Date; (c) Borrower has met or will by such Funding Date meet all conditions set forth in Section 3 of the Loan Agreement; (d) Borrower is now, and on such Funding Date will be, in compliance with the covenants and the requirements contained in Sections 4.4, 4.8, 6
and 7 of the Loan Agreement; and (e) no Default or Event of Default has occurred under the Loan Agreement.
6. This Supplement is being delivered in the State of California.
7. This Supplement may be executed by Borrower and Lender in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.
[Remainder of page intentionally left blank.]
IN WITNESS WHEREOF, Borrower and Lender have caused this Supplement to be duly executed and delivered as of this day and year first above written.
NUVASIVE, INC. | ||
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GATX VENTURES, INC. |
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Annex ADescription of Financed Equipment
Annex BLoan Terms Schedule
ANNEX A
to
EXHIBIT C
Debtor: NuVasive, Inc.
Secured Party: GATX Ventures, Inc.
The Collateral shall mean and include all of NuVasive, Inc.'s right, title, interest, claims and demands in and to the listed goods (and embedded computer programs and supporting information included within the definition of "goods" under the Code), equipment, fixtures or personal property on the pages attached hereto, whether now owned or hereafter acquired, together with all substitutions, renewals or replacements of and additions, improvements, accessions, replacement parts and accumulations to any and all of such goods, equipment, fixtures or personal property, together with all proceeds thereof, including, without limitation, insurance, condemnation, requisition or similar payments, and all proceeds from sales, renewals releases or other dispositions thereof, automatically shall be deemed to be a part of the Collateral listed in the Equipment Loan and Security Agreement (the "Loan Agreement") and as to which NuVasive, Inc. has granted a security interest to GATX Ventures, Inc., together with a non-exclusive, irrevocable, perpetual, fully paid, royalty-free license or other right to use, without charge, NuVasive, Inc.'s intellectual property now or hereafter acquired, provided, however, that such license shall only be exercisable in connection with the disposition of Collateral upon Lender's exercise of its remedies hereunder. Capitalized terms not otherwise defined herein have the meaning given such terms in the Loan Agreement.
NUVASIVE, INC. | ||
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FINANCED EQUIPMENT
See Attached Pages.
LOAN TERMS SCHEDULE
Loan Funding Date: , 200
Date of First Scheduled Payment:
Maturity Date:
Original Loan Amount: $
Basic Rate: %
Loan Factor: %
Original Scheduled Payment Amount *: $
Borrower shall pay to Lender an Interim Payment in the amount of $ . The Interim Payment is due and payable on the Funding Date and will be deducted from the disbursement to Borrower.
*/The amount of each Scheduled Payment will change if the Loan Amount changes.
NUVASIVE, INC. | ||
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[Intentionally Omitted]
EXHIBIT E
Form of Landlord Agreement
EXHIBIT E
LANDLORD AGREEMENT
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
GATX Ventures, Inc.
3687 Mt. Diablo Blvd., Suite 200
Lafayette, California 94549
CONSENT TO REMOVAL OF PERSONAL PROPERTY
KNOW ALL PERSONS BY THESE PRESENTS:
(a) The undersigned has an interest as owner and landlord in the following described real property (the "Real Property"):
That certain real property in the County of [ ], State of California, described as:
SEE ATTACHMENT 1 ATTACHED HERETO FOR FULL LEGAL DESCRIPTION, commonly known as [street address].
(b) NuVasive, Inc., a Delaware corporation ("Borrower"), has entered into or will enter into an Equipment Loan and Security Agreement with GATX Ventures, Inc. ("Lender") dated as of December 27, 2001 (as amended and supplemented from time to time, the "Loan Agreement").
(c) Lender, as a condition to entering into the Loan Agreement, require that the undersigned consent to the removal by Lender of the equipment and other assets covered by the Loan Agreement (hereinafter called "Equipment") from the Real Property, no matter how it is affixed thereto, and to the other matters set forth below.
NOW, THEREFORE, for good and sufficient consideration, receipt of which is hereby acknowledged, the undersigned consents to the placing of the Equipment on the Real Property, and agrees with Lender as follows:
1. The undersigned waives and releases each and every right which undersigned now has, under laws of the State of California or by virtue of the lease for the Real Property now in effect, to levy or distrain upon for rent, in arrears, in advance or both, or to claim or assert title to the Equipment that is already on said Real Property, or may hereafter be delivered or installed thereon.
2. The Equipment shall be considered to be personal property and shall not be considered part of the Real Property regardless of whether or by what means it is of may become attached or affixed to the Real Property.
3. The undersigned will permit Lender, or its agent or representative, to enter upon the Real Property for the purpose of exercising any right they may have under the terms of the Loan Agreement or otherwise, including, without limitation, the right to remove the Equipment; provided, however, that if Lender, in removing the Equipment damage any improvements of the undersigned on the Real Property, Lender will, at its expense, cause same to be repaired.
4. This agreement shall be binding upon the heirs, successors and assigns of the undersigned and shall inure to the benefit of Lender and its respective successors and assigns.
IN WITNESS WHEREOF, the undersigned has executed this instrument at , this day of , 2001.
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OWNER/LESSOR |
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The foregoing Consent must be acknowledged before a Notary Public.
STATE OF | ) | |||||
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COUNTY OF | ) | |||||
On the day of 200 before me, Notary Public, personally appeared
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personally known to me | |
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proved to me on the basis of satisfactory evidence |
to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal
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SIGNATURE OF NOTARY PUBLIC |
(S E A L) |
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EXHIBIT F
Form of Service Provider's Consent
EXHIBIT F
SERVICE PROVIDER'S WAIVER AND CONSENT
THIS SERVICE PROVIDERS WAIVER AND CONSENT (this "Waiver"), dated as of , 200 , is executed by and between ("Service Provider") and GATX Ventures, Inc., ("Lender") as lender under that certain Equipment Loan and Security Agreement dated as of December 27, 2001 by and between Lender and NuVasive, Inc. ("Borrower").
RECITALS
A. Service Provider is the lessee of real property commonly known as [street address] the ("Premises"). Service Provider provides certain services to Borrower and in connection with such provision of services Service Provider will maintain on the Premises certain equipment (the "Equipment") which is collateral security for certain loans made by Lender to Borrower.
B. It is a condition to the making of such loans that Borrower deliver to Lender this Service Provider's Waiver and Consent.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Service Provider and Lender hereby agree as follows:
1. Waiver and Consent. Service Provider hereby consents to the location of the Equipment on the Premises and does irrevocably waive, disclaim and relinquish and assign to Lender any and all rights to impose, receive, assert or enforce any lien, encumbrance, charge, security interest, ownership interest, claim or demand of any kind against or involving the Equipment, whether arising by common law, statute or consensually. Service Provider further agrees that (a) neither the Equipment nor any item thereof shall become part of, or otherwise be or become a fixture attached to, the Premises, notwithstanding the manner of the Equipment's annexation, the Equipment's adaptability to the uses and purposes for which the Premises are used, and the intentions of the party making the annexation; (b) the Equipment (or any item thereof) may be repossessed by Lender; and (c) in connection with such repossession or otherwise, Lender, and any of its agents and employees, may subject to Service Provider's Rules and Regulations that require among other things, that Lender be accompanied at all times by a representative of Service Provider, enter upon the premises for the purposes of preparing for transport, disassembling, dismantling, loading and/or removing the Equipment (or any item thereof).
2. Miscellaneous. This Waiver and all rights hereby granted to Lender hereunder shall remain in effect so long as there are any obligations owing by Borrower under the Loan Agreement or any present or future agreement between Borrower and Lender which involves the Equipment. All the terms and provisions of this Waiver shall be binding on and inure to the benefit of the respective successors and assigns of Service Provider and Lender. The rights and benefits of this Waiver may be assigned or transferred by Lender to third parties who may become a lender, directly or indirectly, to Borrower. This Waiver shall be governed by and construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, Service Provider and Lender have executed this Waiver as of the date and year first written above.
LENDER: | SERVICE PROVIDER: | |||||
GATX Ventures, Inc. |
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EXHIBIT G
Form of Officer's Certificate
EXHIBIT G
FORM OF OFFICER'S CERTIFICATE
GATX Ventures, Inc.
Reference is made to the Equipment Loan and Security Agreement dated as of December 27, 2001 (as it may be amended from time to time, the " Loan Agreement ") by and between NuVasive, Inc. (" Borrower ") and GATX Ventures, Inc. (" Lender "). Unless otherwise defined herein, capitalization terms have the meanings given such terms in the Loan Agreement.
The undersigned Responsible Officer of Borrower hereby certifies to Lender that:
NOTES TO ABOVE CERTIFICATIONS:
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NUVASIVE, INC. |
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LOAN AGREEMENT SUPPLEMENT No. 1
LOAN AGREEMENT SUPPLEMENT No. 1, dated December 31, 2001 (" Supplement "), to the Equipment Loan and Security Agreement dated as of December 27, 2001 (the " Loan Agreement ") by and among NuVasive, Inc., a Delaware corporation (" Borrower "), and GATX Ventures, Inc. (" Lender ").
Unless otherwise defined herein, capitalized terms have the meanings given to such terms in the Loan Agreement.
1. To secure the prompt payment by Borrower of the principal of and interest on, and all other amounts from time to time outstanding under the Loan Agreement, and the performance and observance by Borrower of all the agreements, covenants and provisions contained in the Loan Agreement, Borrower does hereby grant unto Lender, its respective successors and assigns, a first priority security interest in all of Borrower's right, title and interest in each item of equipment and other property described in Annex A hereto, which equipment and other property shall be deemed to be additional "Financed Equipment." The list of Financed Equipment in Annex A hereto shall be construed as a supplement to, and deemed part of, the Collateral listed in Section 4.1 of the Loan Agreement and shall form a part thereof, and the Loan Agreement is hereby incorporated by reference herein and is hereby ratified, approved and confirmed.
2. The Financed Equipment shall be located at the addresses as outlined on Schedule No. 1-Annex A attached hereto.
3. Attached as Annex B hereto is the Loan Terms Schedule with respect to the Loan the proceeds of which will be used to finance the Financed Equipment listed in Annex A hereto. The proceeds for the above referenced Agreement should be disbursed as follows:
Disbursement from Lender:
Loan Amount | $ | 585,418.03 | |
Less: |
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Interim Payment | $ | 641.03 | |
First payment in Advance | $ | 19,230.87 | |
Facility Fee | $ | 10,000.00 | |
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Net Proceeds due from Lender: | $ | 555,546.13 |
4. The aggregate net proceeds of the Loan in the amount of $555,546.13 shall be transferred to Borrower's account as follows:
Account Name: | NuVasive, Inc. | |
Bank Name: | Wells Fargo Bank | |
Bank Address: | ||
Attention: | ||
Telephone: | ||
Account Number: | 2018618025 | |
ABA Number: | 121000248 |
5. Borrower hereby certifies that (a) the foregoing information is true and correct and authorizes Lender to endorse in its books and records, the Basic Rate applicable to the Funding Date of the Loan contemplated in this Loan Agreement Supplement and the principal amount set forth in the Loan Terms Schedule; (b) the representations and warranties made by Borrower in Section 5 of the Loan Agreement and in the other Loan Documents are true and correct on the date hereof and will be true and correct on such Funding Date; (c) Borrower has met or will by such Funding Date meet all conditions set forth in Section 3 of the Loan Agreement; (d) Borrower is now, and on such Funding Date will be, in compliance with the covenants and the requirements contained in Sections 4.4, 4.8, 6
and 7 of the Loan Agreement; and (e) no Default or Event of Default has occurred under the Loan Agreement.
6. This Supplement is being delivered in the State of California.
7. This Supplement may be executed by Borrower and Lender in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.
8. Borrower has requested that Lender advance to NuVasive, Inc. on December 31, 2001 a Loan in the amount of $585,418.03 with a Soft Cost allocation of 14% (or $99,521.07) above the 20% Soft Cost allocation permitted by Section 2.1 of the Loan Agreement (the "Excess Amount"). Lender will agree to the advance with such Excess Amount provided that, not later than the Commitment Termination Date, Borrower will cause the aggregate original principal amount of all Loans relating to the financing of Other Equipment to equal not more than 20% of the aggregate original principal amount of all Loans advanced to Borrower under the Loan Agreement. More specifically, if by such date Lender has not advanced additional Loans relating to Eligible Equipment to Borrower in an amount sufficient to bring the percentage of Loans relating to Other Equipment back to 20%, then Borrower will pay to Lender on such date, in addition to any other amounts it owes to Lender under the Loan Agreement, an amount equal to the differential between the outstanding principal amount of Loans relating to Other Equipment and 20% of the outstanding principal amount of all Loans. Borrower's failure to pay such amount in accordance with this letter shall constitute an Event of Default under the Loan Agreement.
IN WITNESS WHEREOF, Borrower and Lender have caused this Supplement to be duly executed and delivered as of this day and year first above written.
BORROWER: | |||
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NUVASIVE, INC. |
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By: |
/s/ Steve McGowan |
Title: |
Chief Financial Officer
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GATX VENTURES, INC. |
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By: |
/s/ Patricia W. Leicher |
Title: |
SVP
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ANNEX
ADescription of Financed Equipment
ANNEX BLoan Terms Schedule
ANNEX B
LOAN TERMS SCHEDULE
Loan Funding Date: December 31, 2001
Date of First Scheduled Payment: January 1, 2002
Maturity Date: December 31, 2004
Original Loan Amount: $585,418.03
Basic Rate: 11.92 %
Loan Factor: 3.2850 %
Original Scheduled Payment Amount *: $19,230.87
Borrower shall pay to Lender an Interim Payment in the amount of $641.03. The Interim Payment is due and payable on the Funding Date and will be deducted from the disbursement to Borrower.
*/The amount of each Scheduled Payment will change if the Loan Amount changes.
NUVASIVE, INC. | |||
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By: |
/s/ Steve McGowan |
Title: |
Chief Financial Officer
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LOAN TERMS SCHEDULE
BORROWER: | NuVasive, Inc. | MATURITY DATE: | 12/31/04 | |||
TOTAL COMMITMENT: | $1,000,000.00 | DATE OF FUNDING: | 12/31/01 | |||
LOAN: | $585,418.03 | SCHEDULE NUMBER: | 1 |
ANNEX B TO LOAN AGREEMENT SUPPLEMENT
Loan Amount | $585,418.03 | |||||
Basic Rate | 11.920% | |||||
Treasury Rate | 3.92 | % | Spread | 8.000% | ||
Loan Factor | 3.2850% | |||||
Scheduled Payment Amount | $19,230.87 |
Interim Payment Amount | An additional amount equal to $641.03 for each day from the Funding Date through December 31, 2001 ($641.03 assuming a Funding Date of December 31, 2001) is payable an the Funding Date. | |
Final Payment Amount: |
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An additional amount equal to 0% of the original loan amount shall be paid on the maturity date with respect to such loan. |
Payment
Number |
Payment
Date |
Total
Payment |
Prepayment
Value* |
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1 | 1/1/02 | $ | 19,230.87 | 100.00 | % | |||
2 | 2/1/02 | $ | 19,230.87 | 100.00 | % | |||
3 | 3/1/02 | $ | 19,230.87 | 99.70 | % | |||
4 | 4/1/02 | $ | 19,230.87 | 96.92 | % | |||
5 | 5/1/02 | $ | 19,230.87 | 94.12 | % | |||
6 | 6/1/02 | $ | 19,230.87 | 91.30 | % | |||
7 | 7/1/02 | $ | 19,230.87 | 88.47 | % | |||
8 | 8/1/02 | $ | 19,230.87 | 85.63 | % | |||
9 | 9/1/02 | $ | 19,230.87 | 82.78 | % | |||
10 | 10/1/02 | $ | 19,230.87 | 79.90 | % | |||
11 | 11/1/02 | $ | 19,230.87 | 77.02 | % | |||
12 | 12/1/02 | $ | 19,230.87 | 74.12 | % | |||
13 | 1/1/03 | $ | 19,230.87 | 71.20 | % | |||
14 | 2/1/03 | $ | 19,230.87 | 68.28 | % | |||
15 | 3/1/03 | $ | 19,230.87 | 65.33 | % | |||
16 | 4/1/03 | $ | 19,230.87 | 62.37 | % | |||
17 | 5/1/03 | $ | 19,230.87 | 59.40 | % | |||
18 | 6/1/03 | $ | 19,230.87 | 56.41 | % | |||
19 | 7/1/03 | $ | 19,230.87 | 53.41 | % | |||
20 | 8/1/03 | $ | 19,230.87 | 50.39 | % | |||
21 | 9/1/03 | $ | 19,230.87 | 47.36 | % | |||
22 | 10/1/03 | $ | 19,230.87 | 44.31 | % | |||
23 | 11/1/03 | $ | 19,230.87 | 41.25 | % | |||
24 | 12/1/03 | $ | 19,230.87 | 38.17 | % | |||
25 | 1/1/04 | $ | 19,230.87 | 35.07 | % | |||
26 | 2/1/04 | $ | 19,230.87 | 31.96 | % | |||
27 | 3/1/04 | $ | 19,230.87 | 28.84 | % | |||
28 | 4/1/04 | $ | 19,230.87 | 25.70 | % | |||
29 | 5/1/04 | $ | 19,230.87 | 22.54 | % | |||
30 | 6/1/04 | $ | 19,230.87 | 19.37 | % | |||
31 | 7/1/04 | $ | 19,230.87 | 16.18 | % | |||
32 | 8/1/04 | $ | 19,230.87 | 12.98 | % | |||
33 | 9/1/04 | $ | 19,230.87 | 9.76 | % | |||
34 | 10/1/04 | $ | 19,230.87 | 6.52 | % | |||
35 | 11/1/04 | $ | 19,230.87 | 3.27 | % | |||
36 | 12/1/04 | $ | 19,230.87 | 0.00 | % | |||
37 | 1/1/05 | $ | | 0.00 | % |
Note 1 The amount of the scheduled payment will change if the loan amount changes.
*Each prepayment value assumes payment of all scheduled payments due on or before the indicated payment date.
LOAN AGREEMENT SUPPLEMENT No. 2
LOAN AGREEMENT SUPPLEMENT No.2, dated July 31, 2002 (" Supplement "), to the Equipment Loan and Security Agreement dated as of December 27, 2001 (the " Loan Agreement ") by and among NuVasive, Inc., a Delaware corporation (" Borrower "), and GATX Ventures, Inc. ("Lender").
Unless otherwise defined herein, capitalized terms have the meanings given to such terms in the Loan Agreement.
1. To secure the prompt payment by Borrower of the principal of and interest on, and all other amounts from time to time outstanding under the Loan Agreement, and the performance and observance by Borrower of all the agreements, covenants and provisions contained in the Loan Agreement, Borrower does hereby grant unto Lender, its respective successors and assigns, a first priority security interest in all of Borrower's right, title and interest in each item of equipment and other property described in Annex A hereto, which equipment and other property shall be deemed to be additional "Financed Equipment." The list of Financed Equipment in Annex A hereto shall be construed as a supplement to, and deemed part of, the Collateral listed in Section 4.1 of the Loan Agreement and shall form a part thereof, and the Loan Agreement is hereby incorporated by reference herein and is hereby ratified, approved and confirmed.
2. The Financed Equipment shall be located at
10065 Old Grove Road, San Diego, CA 92131
3. Attached as Annex B hereto is the Loan Terms Schedule with respect to the Loan the proceeds of which will be used to finance the Financed Equipment listed in Annex A hereto. The proceeds for the above referenced Agreement should be disbursed as follows:
Disbursement from Lender:
Loan Amount | $ | 101,500.00 | |
Less: |
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Interim Payment | $ | 109.24 | |
First payment in Advance | $ | 3,277.10 | |
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Net Proceeds due from Lender: | $ | 98,113.66 |
4. The aggregate net proceeds of the Loan in the amount of $98,113.66, shall be transferred to Borrower's account as follows:
Account Name: | NuVasive, Inc. | |
Bank Name: | Wells Fargo Bank | |
Bank Address: | ||
Attention: | ||
Telephone: | ||
Account Number: | 2018618025 | |
ABA Number: | 121000248 |
5. Borrower hereby certifies that (a) the foregoing information is true and correct and authorizes Lender to endorse in its books and records, the Basic Rate applicable to the Funding Date of the Loan contemplated in this Loan Agreement Supplement and the principal amount set forth in the Loan Terms Schedule; (b) the representations and warranties made by Borrower in Section 5 of the Loan Agreement and in the other Loan Documents are true and correct on the date hereof and will be true and correct on such Funding Date; (c) Borrower has met or will by such Funding Date meet all conditions set forth in Section 3 of the Loan Agreement; (d) Borrower is now, and on such Funding Date will be, in compliance with the covenants and the requirements contained in Sections 4.4, 4.8, 6 and 7 of the Loan Agreement; and (e) no Default or Event of Default has occurred under the Loan Agreement.
6. This Supplement is being delivered in the State of California.
7. This Supplement may be executed by Borrower and Lender in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, Borrower and Lender have caused this Supplement to be duly executed and delivered as of this day and year first above written.
NUVASIVE, INC. | |||
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By: |
/s/ Steve McGowan |
Title: |
CFO
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GATX VENTURES, INC. |
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By: |
/s/ [ILLEGIBLE] |
Title: |
President
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Annex
ADescription of Financed Equipment
Annex BLoan Terms Schedules
EXHIBIT A
Debtor: | NuVasive, Inc. |
Secured Party: | GATX Ventures, Inc. |
The Collateral shall mean and include all of NuVasive, Inc.'s right, title, interest, claims and demands in and to the listed goods (and embedded computer programs and supporting information included within the definition of "goods" under the Code), equipment, fixtures or personal property on the pages attached hereto, whether now owned or hereafter acquired, together with all substitutions, renewals or replacements of and additions, improvements, accessions, replacement parts and accumulations to any and all of such goods, equipment, fixtures or personal property, together with all proceeds thereof, including, without limitation, insurance, condemnation, requisition or similar payments, and all proceeds from sales, renewals, releases or other dispositions thereof, automatically shall be deemed to be a part of the Collateral listed in the Equipment Loan and Security Agreement (the "Loan Agreement") and as to which NuVasive, Inc. has granted a security interest to GATX Ventures, Inc., together with a non-exclusive, irrevocable, perpetual, fully paid, royalty-free license or other right to use, without charge, NuVasive, Inc.'s intellectual property now or hereafter acquired, provided, however, that such license shall only be exercisable in connection with the disposition of Collateral upon Lender's exercise of its remedies hereunder. Capitalized terms not otherwise defined herein have the meaning given such terms in the Loan Agreement.
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NUVASIVE, INC. |
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By: |
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/s/ Steve McGowan |
Title: |
CFO
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FINANCED
EQUIPMENT
See Attached Pages.
ANNEX B
LOAN TERMS SCHEDULE
Loan Funding Date: July 31, 2002
Date of First Scheduled Payment: August 1, 2002
Maturity Date: July 31, 2005
Original Loan Amount: $101,500.00
Basic Rate: 10.65%
Loan Factor: 3.2287%
Original Scheduled Payment Amount*: $3,277.10
Borrower shall pay to Lender an Interim Payment in the amount of $109.24. The Interim Payment is due and payable on the Funding Date and will be deducted from the disbursement to Borrower.
*/The amount of each Scheduled Payment will change if the Loan Amount changes.
NUVASIVE, INC. | |||
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By: |
/s/ Steve McGowan |
Title: |
CFO
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Amortization Schedule
Borrower: | NuVasive, Inc. | MATURITY DATE: | 07/31/05 | |||
Total Commitment: | $1,000,000.00 | DATE OF FUNDING: | 07/31/02 | |||
LOAN: | $101,500.00 | SCHEDULE NUMBER: | 2 |
Amortization Table at All-in-Rate = 10.65%
Date
|
Period
|
Payment
|
Principal
|
Interest
|
Principal Balance
|
||||||
---|---|---|---|---|---|---|---|---|---|---|---|
08/01/02 | 1 | 3,277.10 | 3,277.10 | | 98,222.90 | ||||||
09/01/02 | 2 | 3,277.10 | 2,405.37 | 871.73 | 95,817.53 | ||||||
10/01/02 | 3 | 3,277.10 | 2,426.72 | 850.38 | 93,390.82 | ||||||
11/01/02 | 4 | 3,277.10 | 2,448.25 | 828.84 | 90,942.56 | ||||||
12/01/02 | 5 | 3,277.10 | 2,469.98 | 807.12 | 88,472.58 | ||||||
01/01/03 | 6 | 3,277.10 | 2,491.90 | 785.19 | 85,980.68 | ||||||
02/01/03 |
|
7 |
|
3,277.10 |
|
2,514.02 |
|
763.08 |
|
83,466.66 |
|
03/01/03 | 8 | 3,277.10 | 2,536.33 | 740.77 | 80,930.33 | ||||||
04/01/03 | 9 | 3,277.10 | 2,558.84 | 718.26 | 78,371.49 | ||||||
05/01/03 | 10 | 3,277.10 | 2,581.55 | 695.55 | 75,789.94 | ||||||
06/01/03 | 11 | 3,277.10 | 2,604.46 | 672.64 | 73,185.47 | ||||||
07/01/03 | 12 | 3,277.10 | 2,627.58 | 649.52 | 70,557.90 | ||||||
08/01/03 | 13 | 3,277.10 | 2,650.90 | 626.20 | 67,907.00 | ||||||
09/01/03 | 14 | 3,277.10 | 2,674.42 | 602.67 | 65,232.58 | ||||||
10/01/03 | 15 | 3,277.10 | 2,698.16 | 578.94 | 62,534.42 | ||||||
11/01/03 | 16 | 3,277.10 | 2,722.10 | 554.99 | 59,812.32 | ||||||
12/01/03 | 17 | 3,277.10 | 2,746.26 | 530.83 | 57,066.05 | ||||||
01/01/04 | 18 | 3,277.10 | 2,770.64 | 506.46 | 54,295.42 | ||||||
02/01/04 | 19 | 3,277.10 | 2,795.23 | 481.87 | 51,500.19 | ||||||
03/01/04 | 20 | 3,277.10 | 2,820.03 | 457.06 | 48,680.16 | ||||||
04/01/04 | 21 | 3,277.10 | 2,845.06 | 432.04 | 45,835.10 | ||||||
05/01/04 | 22 | 3,277.10 | 2,870.31 | 406.79 | 42,964.79 | ||||||
06/01/04 | 23 | 3,277.10 | 2,895.79 | 381.31 | 40,069.00 | ||||||
07/01/04 | 24 | 3,277.10 | 2,921.49 | 355.61 | 37,147.52 | ||||||
08/01/04 | 25 | 3,277.10 | 2,947.41 | 329.68 | 34,200.10 | ||||||
09/01/04 | 26 | 3,277.10 | 2,973.57 | 303.53 | 31,266.53 | ||||||
10/01/04 | 27 | 3,277.10 | 2,999.96 | 277.14 | 28,226.57 | ||||||
11/01/04 | 28 | 3,277.10 | 3,026.59 | 250.51 | 25,199.98 | ||||||
12/01/04 | 29 | 3,277.10 | 3,053.45 | 223.65 | 22,146.53 | ||||||
01/01/05 | 30 | 3,277.10 | 3,080.55 | 196.55 | 19,065.99 | ||||||
02/01/05 | 31 | 3,277.10 | 3,107.89 | 169.21 | 15,958.10 | ||||||
03/01/05 | 32 | 3,277.10 | 3,135.47 | 141.63 | 12,822.63 | ||||||
04/01/05 | 33 | 3,277.10 | 3,163.30 | 113.80 | 9,659.33 | ||||||
05/01/05 | 34 | 3,277.10 | 3,191.37 | 85.73 | 6,467.96 | ||||||
06/01/05 | 35 | 3,277.10 | 3,219.69 | 57.40 | 3,248.27 | ||||||
07/01/05 | 36 | 3,277.10 | 3,248.27 | 28.83 | (0.00 | ) |
LOAN TERMS SCHEDULE
BORROWER: | NuVasive, Inc. | MATURITY DATE: | 7/31/05 | |||
TOTAL COMMITMENT: | $1,000,000.00 | DATE OF FUNDING: | 07/31/02 | |||
LOAN: | $101,500.00 | SCHEDULE NUMBER: | 2 |
ANNEX B TO LOAN AGREEMENT SUPPLEMENT
Loan Amount | $101,500.00 | |||||
Basic Rate | 10.650% | |||||
All in Rate | 10.650% | |||||
Treasury Rate | 2.65 | % | Spread | 8.000% | ||
Loan Factor | 3.2287% | |||||
Scheduled Payment Amount | $3,277.10 |
Interim Payment Amount | An additional amount equal to $109.24 for each day from the Funding Date through July 31, 2002 ($109.24 assuming a Funding Date of July 31, 2002) is payable on the Funding Date. | |
Final Payment Amount: |
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An additional amount equal to 0% of the original loan amount shall be paid on the maturity date with respect to such loan. |
Payment
Number |
Payment
Date |
Total
Payment |
Prepayment
Value* |
|||||
---|---|---|---|---|---|---|---|---|
1 | 8/1/02 | $ | 3,277.10 | 100.00 | % | |||
2 | 9/1/02 | $ | 3,277.10 | 100.00 | % | |||
3 | 10/1/02 | $ | 3,277.10 | 97.99 | % | |||
4 | 11/1/02 | $ | 3,277.10 | 95.26 | % | |||
5 | 12/1/02 | $ | 3,277.10 | 92.50 | % | |||
6 | 1/1/03 | $ | 3,277.10 | 89.74 | % | |||
7 | 2/1/03 | $ | 3,277.10 | 86.96 | % | |||
8 | 3/1/03 | $ | 3,277.10 | 84.16 | % | |||
9 | 4/1/03 | $ | 3,277.10 | 81.36 | % | |||
10 | 5/1/03 | $ | 3,277.10 | 78.53 | % | |||
11 | 6/1/03 | $ | 3,277.10 | 75.70 | % | |||
12 | 7/1/03 | $ | 3,277.10 | 72.85 | % | |||
13 | 8/1/03 | $ | 3,277.10 | 69.98 | % | |||
14 | 9/1/03 | $ | 3,277.10 | 67.10 | % | |||
15 | 10/1/03 | $ | 3,277.10 | 64.21 | % | |||
16 | 11/1/03 | $ | 3,277.10 | 61.30 | % | |||
17 | 12/1/03 | $ | 3,277.10 | 58.38 | % | |||
18 | 1/1/04 | $ | 3,277.10 | 55.45 | % | |||
19 | 2/1/04 | $ | 3,277.10 | 52.49 | % | |||
20 | 3/1/04 | $ | 3,277.10 | 49.53 | % | |||
21 | 4/1/04 | $ | 3,277.10 | 46.55 | % | |||
22 | 5/1/04 | $ | 3,277.10 | 43.55 | % | |||
23 | 6/1/04 | $ | 3,277.10 | 40.54 | % | |||
24 | 7/1/04 | $ | 3,277.10 | 37.51 | % | |||
25 | 8/1/04 | $ | 3,277.10 | 34.47 | % | |||
26 | 9/1/04 | $ | 3,277.10 | 31.42 | % | |||
27 | 10/1/04 | $ | 3,277.10 | 28.34 | % | |||
28 | 11/1/04 | $ | 3,277.10 | 25.26 | % | |||
29 | 12/1/04 | $ | 3,277.10 | 22.16 | % | |||
30 | 1/1/05 | $ | 3,277.10 | 19.04 | % | |||
31 | 2/1/05 | $ | 3,277.10 | 15.90 | % | |||
32 | 3/1/05 | $ | 3,277.10 | 12.75 | % | |||
33 | 4/1/05 | $ | 3,277.10 | 9.59 | % | |||
34 | 5/1/05 | $ | 3,277.10 | 6.41 | % | |||
35 | 6/1/05 | $ | 3,277.10 | 3.21 | % | |||
36 | 7/1/05 | $ | 3,277.10 | 0.00 | % | |||
37 | 8/1/05 | $ | | 0.00 | % |
Note 1 The amount of the scheduled payment will change if the loan amount changes.
* Each Prepayment value assumes payment of all scheduled payments due on or before the indicated payment date.
DEVELOPMENT, PRODUCTION
AND
MARKETING SERVICES AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into by Tissue Banks International, Inc. ("TBI"), a Maryland non-profit corporation, and NuVasive Inc. ("NuVasive"), a Delaware corporation as of the 30th day of December, 1999, to be effective as of October 15, 1999 (the "Effective Date").
RECITALS
WHEREAS , TBI procures, processes and distributes certain human tissues for transplantation;
WHEREAS , NuVasive and TBI desire to develop proprietary tissue processing methods and to process certain allograft materials for use in minimally invasive spinal surgery procedures;
WHEREAS , TBI and NuVasive, in recognition of the need for and benefits that result from the availability of tissues for transplantation, desire to cooperate with each other in the provision, processing and distribution of such tissue;
NOW, THEREFORE , in consideration of the mutual covenants and agreements contained herein, the parties agree as follows:
1. Term. This Agreement shall become effective as of October 15th, 1999 ("Effective Date") and shall remain in effect for a period (the "Initial Term") that includes a development period ("Development Period") and a five year commercialization period ("Commercialization Period") (as further defined in Section 3(b)). Following the expiration of the Initial Term, this Agreement shall be subject to automatic successive renewal terms of one year each, unless either of the parties provides the other party with written notice, at least three months prior to the expiration of the Initial Term or any successive term, of its intent to modify the terms of, or terminate, this Agreement.
2. Definitions. Unless otherwise stated in this Agreement:
a. "Donor" means a Tissue donor; and
b. "Material" means blocks made from allograft materials pursuant to specifications determined by NuVasive and mutually agreed upon by NuVasive and TBI for the maintenance of intervertebral space, which can be inserted using NuVasive's proprietary cannulas.
c. References to TBI in this Agreement shall also include all TBI-owned and affiliated network locations including TBI's primary processing center in San Rafael, CA.
d. "Tissue" means human musculoskeletal tissue including bone and connective tissue;
3. Development Period, Commercialization Period. (a) The Development Period will commence with the Effective Date. During this period NuVasive will work with TBI personnel to determine a mutually acceptable and commercially and economically viable method of processing and packaging Material, including planning for and completing the build-out of processing space at TBI in San Rafael, the acquisition of processing tools and machinery, producing test quantities of the Material and developing and documenting the procedures to be used during the Commercialization Period (the "Development Project"). NuVasive will pay for TBI's Development Project costs as set forth in a mutually approved budget. The initial budget shall be prepared by the Steering Committee established pursuant to Section 12 hereof on or before March 1, 2000. The initial budget may be revised, from
1
time to time, at the request of either party, with the approval of the Steering Committee. Budgeted costs incurred by TBI will be billed to NuVasive as incurred on a monthly basis and will be payable upon receipt of invoice. All tenant improvements and fixtures installed at TBI's facility in San Rafael shall become the property of TBI upon installation. All equipment, tools, instruments and machinery ("Equipment") purchased for the Development Project and paid for by NuVasive and used by TBI at TBI's San Rafael facility shall become the property of TBI upon delivery. NuVasive hereby further grants to TBI the option, at any time, to acquire any such Equipment which is acquired by lease or finance-lease for an amount equal to the amount payable by NuVasive under said lease. TBI understands that NuVasive has arranged a sale/leaseback facility with Comdisco and will cooperate with NuVasive in providing necessary documentation of expenditures and labeling of assets, if required by Comdisco, to permit NuVasive to avail itself of this means of financing the Development Project expenditures. NuVasive may abandon the Development Project at any time by giving TBI thirty (30) days advance written notice, provided that NuVasive has paid all costs incurred for which NuVasive has responsibility pursuant to the most recent budget.
(b) The Commercialization Period will begin with the processing of the first Material intended for commercial distribution.
4. Recovery. TBI shall procure Tissue in compliance with the American Association of Tissue Banks ("AATB") standards and regulations set forth by the United States Food and Drug Administration ("FDA") and/or applicable state or federal laws or regulations.
5. TBI Processing, NuVasive Forecasts. During the Commercialization Period, TBI will process Tissue into Material; provided, however, that the specifications for the Material do not conflict with federal or state laws or regulations or AATB standards applicable to human tissue. During the Commercialization Period, TBI shall use commercially reasonable efforts to maintain at all times a minimum number of Units of Material in stock equal to the amount forecast by NuVasive to be needed by surgeons in the coming three months, which minimum number may be limited by donor availability, TBI capacity and mutually agreed upon upper limits for Tissue processing by TBI. During the Commercialization Period, NuVasive shall provide rolling twelve-month forecasts every three months of the amount of Material anticipated to be shipped to customers. TBI shall perform processing on tissue procured by TBI and shall have the right to secure additional Donor tissue from other AATB accredited tissue banks. TBI processing may include donor screening, physical handling, cutting, sizing, grinding, sterilization, quality control and packaging. Processing of Tissue for NuVasive shall not prevent TBI's processing of Tissue for its own distribution. TBI shall, however, utilize the processing facility and Equipment financed by NuVasive and constructed during the Development Period at its San Rafael location on a first priority basis for the processing of Material sufficient to maintain the minimum supply set forth in forecasts prepared by NuVasive during the Commercialization Period.
6. Distribution. TBI shall be responsible for the distribution of all Material processed pursuant to this Agreement directly to customers. All Material processed by TBI during the Commercialization Period shall be maintained in TBI distribution facilities for direct shipment by TBI to customers.
7. Mutual Covenants. During the Initial Term and any subsequent Term hereof, TBI shall supply Material only for use in NuVasive's minimally-invasive spinal surgery systems. During the Initial Term and any subsequent Term hereof, TBI shall not supply processed Tissue substantially similar to the Material in intended use to any third party for use in any minimally invasive surgical system substantially similar to the NuVasive proprietary system. Provided that TBI supplies all of NuVasive's requirements for Material as forecast pursuant to Section 5 hereof, NuVasive shall not advocate or endorse for use with NuVasive's minimally-invasive spinal surgery systems Material from any other party. In the event TBI is not permitted to, or elects not to, furnish Material in any state within the United States, NuVasive may arrange to procure necessary supplies of Material from another tissue bank within such state or states. The foregoing provisions shall not prevent TBI from processing and
2
distributing its own processed Tissue allografts, including those of the type currently processed by TBI, and any future similar allografts, whether or not similar to the Material, which are not designed and processed by TBI for use in a minimally invasive surgical system substantially similar to the NuVasive proprietary system.
8. Promotion, Marketing, Billing and Compensation.
(a) The parties will cooperate in the development of, and have the right to approve, each other's marketing brochures and methods relating to the distribution and marketing of the Materials, which approval right shall not be unreasonably withheld. Promotion and marketing includes advertising and other medical promotion and the use of medical representatives.
(b) NuVasive is primarily responsible for the promotion and marketing of the Material, and physician education and training. TBI shall maintain the right to market and distribute processed Tissue, including Material, directly (co-market) in geographic areas where TBI has in place as of the date of this Agreement a Tissue recovery and distribution program provided that such marketing and distribution shall not hinder NuVasive's marketing or distribution programs or in any way reduce NuVasive's marketing and distribution fees resulting from medical use of the Material so distributed.
(c) NuVasive shall be responsible for customer invoicing, and related accounts receivable and collection functions for Material orders taken or received by NuVasive. TBI shall be responsible for such functions when it co-markets the Materials. NuVasive shall bill and collect for Materials ordered through NuVasive in TBI's name and shall deposit all funds collected from such orders directly in a TBI account specified by TBI. TBI shall deliver to NuVasive all amounts due pursuant to subsection (d) below in consideration of NuVasive's services performed hereunder, and shall retain for itself all remaining funds as compensation for its services provided hereunder. The parties agree to cooperate with each other and to take all actions necessary or appropriate to carry out their obligations hereunder.
(d) In consideration of NuVasive's services performed here under, TBI shall pay to NuVasive, solely from the amounts collected from orders for Material: (1) Third Party Fees (as defined below) that NuVasive is contracted to pay, for which amounts NuVasive shall invoice TBI monthly, and (2) *** percent (***%) of the revenues collected by both TBI and NuVasive after first deducting therefrom applicable Third Party Fees. For purposes of this Agreement, Third Party Fees means such fees as NuVasive and/or TBI has contracted to pay unrelated third parties to provide distribution and promotional services in connection with the Material, which such fees in the aggregate shall not exceed *** percent (***%) of the total revenues collected by TBI and NuVasive hereunder. Third Party Fees shall not be payable hereunder until the revenues attributable to the Material to which the Third Party Fees relate have been collected. On or before the fifth day of each month TBI will make such payment to NuVasive from the revenues collected by the Parties during the immediately preceding month.
9. Foundation Contribution. NuVasive shall contribute one dollar ($1) for every Unit of Material distributed by NuVasive from TBI provided allograft to the Frederick N. Griffith Foundation. The commitment to provide this contribution is made in support of the Foundation's promotion of tissue banking and in recognition of the unique circumstances related to providing human allograft: a gift of human tissue. Contributions to the Frederick N. Griffith Foundation shall be made quarterly by NuVasive.
10. Compliance with Laws. It is explicitly understood by both parties that the buying and selling of human tissue is prohibited by federal and state law and any fees associated with the provision of
3
human tissue are related to the cost of recovery, processing, distribution and related operating costs of providing human tissue for implantation.
11. Intellectual Property.
(a) (i) All inventions, original works of authorship, developments, concepts, improvements, designs, discoveries, ideas or trade secrets, whether or not patentable or registrable under copyright or similar laws conceived, made or discovered by either party, solely or in collaboration with others while working on this commercial effort, during the term of this Agreement, which relate in any manner to the acquisition or processing of Tissue ("TBI Agreement IP"), are the sole property of TBI. NuVasive agrees to assign (or cause to be assigned) and does hereby assign fully to TBI all such TBI Agreement IP and any copyrights, patents or other intellectual property rights relating thereto. TBI may, in its sole discretion, obtain patent or other intellectual property protection for the TBI Agreement IP.
(ii) NuVasive agrees to assist TBI, or its designee, at TBI's expense, in every proper way to secure TBI's rights in the TBI Agreement IP and any copyrights, patents or other intellectual property rights relating thereto in any and all countries, including the disclosure to TBI of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments and all other instruments which TBI shall deem necessary in order to apply for and obtain such rights and in order to assign and convey to TBI, its successors, assigns and nominees the sole and exclusive right, title and interest in and to such TBI Agreement IP, and any copyrights, patents or other intellectual property rights relating thereto. NuVasive further agrees that, notwithstanding anything to the contrary, NuVasive's obligation to execute or cause to be executed, when it is in NuVasive's power to do so, any such instrument or papers shall continue after the termination of this Agreement. NuVasive hereby irrevocably designates and appoints TBI and its duly authorized officers and agents as NuVasive's agents and attorneys-in-fact to act for and on NuVasive's behalf and instead of NuVasive, to execute and file any documents and to do all other lawfully permitted acts to apply for or to pursue any of TBI's rights in the TBI Agreement IP assigned to TBI above and any copyrights, patents, or other intellectual property rights relating thereto, with the same legal force and effect as if executed by NuVasive.
(iii) TBI shall grant NuVasive a non-exclusive royalty-free, non-transferable, non-sublicensable, worldwide license to use the TBI Agreement IP in the course of its business of designing, using or otherwise applying the Materials. NuVasive agrees that if NuVasive incorporates into any TBI Agreement IP any invention, improvement, development, concept, discovery or other proprietary information owned by NuVasive or in which NuVasive has an interest related to the specific processing of the Materials, TBI is hereby granted and shall have a non-exclusive, royalty-free, perpetual, irrevocable, worldwide license to make, have made, modify, use and sell such item as party of or in connection with such TBI Agreement IP.
(b) (i) Except for TBI Agreement IP, all inventions, original works of authorship, developments, concepts, improvements, designs, discoveries, ideas or trade secrets, whether or not patentable or registrable under copyright or similar laws conceived, made or discovered by either party, solely or in collaboration with others while working on this commercial effort, during the term of this Agreement, which relate in any manner to the subject matter hereof ("NuVasive Agreement IP"), are the sole property of NuVasive. TBI agrees to assign (or cause to be assigned) and does hereby assign fully to NuVasive all such NuVasive Agreement IP and any copyrights, patents or other intellectual property rights relating thereto. NuVasive may, in its sole discretion, obtain patent or other intellectual property protection for the NuVasive Agreement IP.
(ii) TBI agrees to assist NuVasive, or its designee, at NuVasive's expense, in every proper way to secure NuVasive's rights in the NuVasive Agreement IP and any copyrights, patents or other intellectual property rights relating thereto in any and all countries, including the disclosure to
4
NuVasive of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments and all other instruments which NuVasive shall deem necessary in order to apply for and obtain such rights and in order to assign and convey to NuVasive, its successors, assigns and nominees the sole and exclusive right, title and interest in and to such NuVasive Agreement IP, and any copyrights, patents or other intellectual property rights relating thereto. TBI further agrees that, notwithstanding anything to the contrary, TBI's obligation to execute or cause to be executed, when it is in TBI's power to do so, any such instrument or papers shall continue after the termination of this Agreement. TBI hereby irrevocably designates and appoints NuVasive and its duly authorized officers and agents as TBI's agents and attorneys-in-fact to act for and on TBI's behalf and instead of TBI, to execute and file any documents and to do all other lawfully permitted acts to apply for or to pursue any of NuVasive's rights in the NuVasive Agreement IP assigned to NuVasive above and any copyrights, patents, or other intellectual property rights relating thereto, with the same legal force and effect as if executed by TBI.
(iii) NuVasive shall grant TBI a non exclusive royalty-free, non-transferable, non-sublicensable, worldwide license to use the NuVasive Agreement IP in the course of its business in the distribution, processing or packaging of other materials not similar in purpose to the Materials. TBI agrees that if TBI incorporates into any NuVasive Agreement IP any invention, improvement, development, concept, discovery or other proprietary information owned by TBI or in which TBI has an interest related to the specific processing of the Materials, NuVasive is hereby granted and shall have a non-exclusive, royalty-free, perpetual, irrevocable, worldwide license to make, have made, modify, use and sell such item as party of or in connection with such NuVasive Agreement IP.
12. Quality Assurance.
(a) TBI and NuVasive shall agree upon, implement and maintain a quality control program relating to the processing, storage and distribution of the Materials.
(b) Each party shall permit the other access to their respective facilities and staff for the purpose of quality assurance. Any such inspections shall: (i) be performed upon reasonable notice during normal business hours; (ii) identify the staff that will perform such inspection; (iii) maintain as confidential any information or observation made as part of such inspection; (iv) conduct themselves in an appropriate manner; (v) not unnecessarily interfere with operations; and (v) as applicable, provide a written report to the other party of the inspection.
(c) NuVasive shall provide TBI with copies of applicable procedures and specifications. NuVasive will provide training as appropriate. TBI shall provide Materials to NuVasive that meet NuVasive's specifications, subject to Section 4, above. Each of NuVasive and TBI shall provide copies of applicable documentation to the other party as it relates to Materials provided to NuVasive from TBI including donor information, donor testing results, tissue production records, tissue release records, audit reports, FDA inspection reports, AATB inspection reports and shipping records.
(d) As appropriate, each party will inform the other of complaints and suspected adverse reactions or outcomes in a timely manner and agree to coordinate the evaluation of such events.
(e) NuVasive and TBI will be responsible for Materials and applicable Tissue tracing and TBI will provide NuVasive with a copy of all returned tracing cards for any Donor.
13. Steering Committee, Emergency Meetings. There will be appointed a steering committee comprised of Two representatives from each party that will meet regularly to discuss matters of mutual concern. Pricing of the Materials will be reviewed at least annually by such steering committee prior to the parties' budget cycles. Either party to this Agreement may call an emergency meeting of the parties
5
at any time. Such meetings may be called to discuss changes in pricing and the allocation of proceeds between the parties pursuant to Exhibit A as a result of unanticipated and significant changes in any of the parties' costs relating to the Materials or market price pressures and competitive issues.
14. Insurance and Indemnification. Both parties understand and acknowledge that TBI shall not maintain any insurance for the benefit of NuVasive and NuVasive shall not maintain any insurance for the benefit of TBI; accordingly, each party must maintain its own insurance for all risks related to each party's activities.
(a) Each party hereto ("Indemnitor") agrees to defend, indemnify, and hold harmless, the other party (the "Indemnitee") and its officers, directors, and employees, from any claims, demands or legal proceedings (including without limitation the costs, expenses, and reasonable attorney's fees incurred in connection with the defense of any such matter) which may be made or brought against the Indemnitee by any third party by reason of or arising out of the Indemnitor's breach of the duties and obligations required by this Agreement to be performed by it or the Indemnitor's gross negligence, or willful misconduct.
(b) Commencing not later than the first date of implantation of Material into a living human, each party shall maintain a separate policy or policies of insurance in amounts customary in the industry for businesses engaged in similar activities for insuring against liability which may be imposed arising out of its acts or omissions to include: i) comprehensive general liability providing coverage for personal injury, bodily injury, property damage and product liability; and ii) professional liability.
15. Governing Law. This Agreement shall be governed by and construed in a accordance with the laws in the State of California.
16. Public Disclosure. Neither TBI nor NuVasive shall make any public release of information regarding the matters contemplated herein except, that joint press releases in agreed form may be issued by TBI and NuVasive and that TBI and NuVasive may each continue such communications with employees, customers, suppliers, lenders, lessors and other particular groups as may be legally required, necessary or appropriate and not inconsistent with the best interests of the other party without disclosing the details of the Agreement, and as required by law.
17. Termination. Either party may terminate the Agreement upon material breach of the Agreement by the other party upon ninety (90) days prior written notice, unless the breaching party has cured the applicable breach within such period.
18. Entire Agreement. This Agreement and attachments contain the entire understanding of the parties with respect to the matters contained herein. In case one or more amendments, modifications or alterations of this Agreement become necessary, the parties shall negotiate in good faith on such amendments, modifications or alterations. This Agreement may be amended, modified or altered only by an instrument in writing duly executed by both parties.
19. Force Majeure. The parties hereto shall not be liable in any manner for the failure or delay in fulfillment of all or part of this Agreement, directly or indirectly, owing to governmental orders or restrictions, war, war-like conditions, revolution, riot, looting, strike, lockout, fire, flood or other external causes or circumstances beyond the parties' control.
20. Confidentiality. Each party agrees to treat any confidential and proprietary information concerning the other party which is received from the other party in connection with the Development Project and the commercial distribution of the Material, provided that the information is either: (a) disclosed in writing and clearly marked confidential, or (b) disclosed orally and promptly after disclosure confirmed in writing to be confidential ("Confidential Information"). Confidential Information does not include information which: (i) is or becomes generally available to the public
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other than as a result of a breach of this nondisclosure agreement by the receiving party or its agents; (ii) was within the receiving party's possession prior to its being furnished by or on behalf of the disclosing party; (iii) is or becomes available to the receiving party on a confidential basis from a source other than the disclosing party or its agents; (iv) is disclosed by the disclosing party to a third party without a duty of confidentiality; (v) is independently developed by the receiving party without use of Confidential Information of the disclosing party; or (vi) is disclosed by the receiving party or its agents with the discloser's prior written approval. Each party agrees that it and its agents will use the other party's Confidential Information solely for the purpose of performing its obligations hereunder, and that the disclosing party's Confidential Information will be kept confidential and not disclosed to any person other than agents of the receiving party who require the Confidential Information to assist the receiving party in performing its obligations hereunder. Notwithstanding the foregoing, a party may disclose any Confidential Information of the other party to the extent required by law or legal proceedings, provided that the party releasing the Confidential Information shall use all reasonable efforts to provide advance notice to the other party of the required disclosure.
22. Assignability. Neither party to this Agreement may assign any rights or obligations under this Agreement to any other entity or person without the advance written consent of the other party.
23. Severability. If any one or more of the provisions of this Agreement shall for any reason be held to be illegal or unenforceable, such invalidity or unenforceability shall not affect any other provisions of this Agreement or the validity or enforceability of such provision. The unenforceable provision shall be treated as severable and the remaining provisions shall nevertheless continue in full force and effect, giving maximum effect to the intent of the parties in entering this Agreement.
24. Notices. Any notice or report required or permitted to be given or made under this Agreement by one of the parties hereto to the other shall be in writing and shall be deemed to have been sufficiently given for all purposes, and effective as of the date of mailing, if mailed by registered or certified mail, postage prepaid, addressed to such other party as its respective address as follows:
25. Attorneys' Fees. The prevailing party in any legal dispute arising hereunder shall be entitled to payment of its reasonable attorneys' fees and court costs by the other party.
TISSUE BANKS INTERNATIONAL | NUVASIVE, INC. | |||||
By: |
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/s/ GERALD J. COLE 12/30/99 Gerald J. Cole, Executive Vice President |
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By: |
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/s/ ALEX LUKIANAV 1/10/00 Alex Lukianov, President and CEO |
Attest: |
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/s/ illegible, Pres/CEO 1/03/00 |
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Attest: |
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/s/ illegible, Exec. Assist. 1/10/00 |
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FIRST AMENDMENT TO
DEVELOPMENT, PRODUCTION
AND
MARKETING SERVICES AGREEMENT
This First Amendment to development, Production and Marketing Services Agreement (the "First Amendment") is entered into effective October 1st, 2001, by and between Tissue Banks International, Inc. ("TBI"), a Maryland non-profit corporation, and NuVasive, Inc. ("NuVasive"), a Delaware corporation, and amends that certain Development, Production and Marketing Services Agreement entered into between the parties dated December 30, 1999 (the "Agreement").
Now, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties agree as follows:
The amount that TBI bills to NuVasive for the transfers of Material to finished inventory is based on amounts that NuVasive will bill to final end users of the Material. For Material which is delivered, and Marketed by NuVasive or its representative the value of revenues that are billed the end users shall be apportioned with ***% being ultimately retained by NuVasive as reimbursement for their services performed and ***% to TBI as its processing fee. The ***% to TBI will be paid within 30 days from receipt of invoices that TBI provides NuVasive for the transfer of Material to TBI's finished inventory.
For materials delivered or transferred to finished inventory prior to August 31, 2001, payment will be made to TBI within 10 days of receipt of invoice except that NuVasive may deduct from such transfers its prior payments to YOH Scientific for personnel used by TBI, with such payments to YOH Scientific substantiated by copies of invoices.
NuVasive may direct the movement of Materials from TBI's finished inventory to customers or its facilities or other locations, as it deems appropriate. TBI will use best efforts to ship Materials quickly. Shipping will be paid by NuVasive
IN WITNESS WHEREOF, the parties have executed this First Amendment affective the date set forth above.
TISSUE BANKS INTERNATIONAL | NUVASIVE, INC. | |||||
By: |
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/s/ GERALD J. COLE 9/25/01 President/CEO |
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By: |
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/s/ ALEX LUKIANAV |
THIS SUPPLY AGREEMENT (the "Agreement") is made and entered into as of this 21st day of January, 2002 (the "Effective Date"), by and between NuVasive, Inc. ("NuVasive"), a Delaware corporation having its principal offices at 10065 Old Grove Road, San Diego, California 92131; and Intermountain Tissue Center ("ITC"), a division of Ohio Valley Tissue & Skin Center, non-profit organization, with said division having its principal place of business at 615 Arapeen Drive, Suite 105, Salt Lake City, Utah 84108, facsimile number (801) 583-0957 and e-mail address jpierce@itcutah.org. ITC and NuVasive are sometimes individually referred to as a "Party" and together referred to herein as the "Parties."
RECITALS:
WHEREAS , ITC procures, processes and distributes certain human allograft tissues for transplantation;
WHEREAS , NuVasive desire to engage ITC to develop, process and distribute certain allograft bone for NuVasive, all subject to and in accordance with specifications and other terms of this Agreement.
WHEREAS , ITC and NuVasive, in recognition of the need for and benefits that may result from the availability of human allograft bone tissues for transplantation, desire to cooperate with each other in the provision, processing and distribution of such tissue.
AGREEMENT:
NOW THEREFORE, in consideration of the mutual covenants and promises contained herein and for other good and valuable consideration (the receipt, adequacy and legal sufficiency of which are hereby acknowledged) the parties hereto hereby agree as follows:
1. Processing and Transfer Responsibilities of ITC.
(A) Processing. ITC shall from time to time use its best efforts to process, package, label, store and transfer to NuVasive the human allograft bone listed and more particularly described on Exhibit A hereto (the "Tissues"), as such Exhibit may be amended by the Parties from time to time, in accordance with the specifications pertaining to the Tissues imposed by NuVasive set forth on Exhibit A (the "Specifications").
(B) Change of Specifications. NuVasive may modify, change or supplement the Specifications upon 60 days' written notice to ITC or upon the mutual agreement of the parties; provided, however, that any requested modifications, changes or supplements shall not affect existing firm purchase orders unless both parties agree to such changes. ITC shall notify NuVasive at least 30 days in advance of any change in any processing procedures or protocols.
(C) Forecast and Inventory. NuVasive shall provide ITC with a month-by-month forecast of its anticipated Tissue requirements for each calendar year, beginning with the 2002 calendar year, not later than 30 days prior to the commencement of the applicable calendar year. Within 10 days of ITC's receipt of each calendar year forecast, ITC shall indicate whether it anticipates being able to meet such forecast. NuVasive may at any time update any such forecast for any monthly period(s) beginning 30 days or more following the date NuVasive provides written notice of such update. Such update(s) may be contained in any writing, including a purchase order or an MRP report. ITC shall use its best efforts to maintain in inventory a stock of a minimum amount of Tissue material equal to the amount forecast by NuVasive for the next month's forecasted volume. For instance, if the forecast for January through March is 10, 12 and 14 units respectively, then ITC shall keep 12 units on the shelf in January (February's forecast) and 14 units in February (March's forecast). ITC shall use FIFO (first in, first out) inventory procedures with respect to the Tissues so that older stock is used up first.
(D) Inspection of Facilities. NuVasive shall have the right to inspect the processing facility where the Tissues are to be processed (the "Facility") between the hours of 9:00 a.m. and 5:00 p.m. on any business day upon giving no less than 24 hours written notice during the term of this Agreement in order to ensure ITC's continuing compliance with the terms and conditions of this Agreement. The performance of NuVasive's obligations under this Agreement is expressly conditioned upon NuVasive's ability to regularly inspect the Facility, NuVasive's ability to regularly review ITC's processing practices, and NuVasive's being reasonably satisfied that the Facility and ITC's processing practices conform to all of requirements set forth in this Agreement and imposed by Governing Law (as defined in Section 4(A)) and all applicable regulations.
(E) Milling Machine. Subsequent to the execution of this Agreement, but prior to any obligation to perform on the part of ITC, NuVasive shall provide to ITC at no cost to ITC a milling machine (the "Machine") for use by ITC during the term of this Agreement in the processing of the Tissues and for other use by ITC in its operations generally. ITC shall maintain the Machine in good working condition while in ITC's use, care or possession, shall perform all maintenance and repairs required to keep the Machine in such condition, and hereby assumes all responsibility and liability for any loss, theft or destruction of the Machine prior to its return to NuVasive, as well as any damage, injury or harm caused by the Machine or ITC's use thereof prior to its return to NuVasive. Upon any termination of this Agreement, ITC shall promptly return to NuVasive the Machine in good working condition, ordinary wear and tear excepted.
2. Responsibilities of NuVasive.
(A) Payments. NuVasive shall promptly pay for the Tissues shipped to it as per the terms of paragraph 3 below.
(B) Specifications. NuVasive shall provide the written Specifications to ITC in sufficient detail to enable ITC to process the Tissues as efficiently as possible.
(C) Inspection of Facilities. ITC shall have the right to inspect the handling and storage facility where the Tissues are to be stored by NuVasive pending further shipment by NuVasive (the "NuVasive Facility") between the hours of 9:00 a.m. and 5:00 p.m. on any business day upon giving no less than 24 hours written notice during the term of this Agreement in order to ensure NuVasive's continuing compliance with the terms and conditions of this Agreement. The performance of ITC's obligations under this Agreement is expressly conditioned upon ITC's ability to regularly inspect the NuVasive Facility, ITC's ability to regularly review NuVasive's handling and storing practices, and 1TC's being reasonably satisfied that the NuVasive Facility and NuVasive's handling and storage practices conform to all of requirements set forth in this Agreement and imposed by Governing Law (as defined in Section 12) and all applicable regulations.
3. Professional Fees, Purchase Orders, and Terms of Payment.
(A) Professional Fees. In consideration of services performed by ITC and the Tissues to be sold by ITC, NuVasive shall pay to ITC per particular type of Tissue as set forth in detail on Exhibit A attached hereto and made a part hereof. ITC will invoice NuVasive for all Tissues shipped to NuVasive as of the date of each shipment and payment from NuVasive shall be due within 30 days from the date of invoice.
(B) Purchase Orders and Terms of Payment. NuVasive shall place orders for Tissues by transmitting a written purchase order via facsimile, e-mail or First Class Mail to ITC at the address, e-mail address or facsimile number identified in the Preamble of this Agreement. The terms and conditions set forth in such purchase orders shall apply to ITC's fee-for-service to NuVasive and delivery of the Tissues to the end users of the Tissues (the "Customers") designated by NuVasive, unless any such term or condition conflicts with any term or condition of this Agreement, in which event the terms and conditions of this Agreement shall govern. Except as otherwise set forth under this
2
Agreement, payment for the Tissues shall be due to ITC no later than 30 days following date of shipment to NuVasive. NuVasive shall be responsible for invoicing hospitals and collecting payment from its Customers. NuVasive's obligation to pay ITC shall not be dependent upon to NuVasive's actual collection of revenues from its Customers.
4. Delivery and Title.
(A) Timing and Place of Delivery. The Parties acknowledge and agree that, ITC will ship the Tissues directly to NuVasive and that NuVasive will maintain an inventory of such Tissues for distribution by NuVasive to its customers. ITC shall use its best efforts to ship the Tissues within twenty-four (24) hours of the time the purchase order is received if NuVasive requests expedited delivery. If expedited delivery is not requested, ITC shall ship the Tissues in accordance with the time period specified in the purchase order. ITC shall provide adequate insurance for the Tissues until such Tissues(s) have been received by NuVasive. Title and risk of loss and damage with respect to all Tissues purchased by NuVasive under this Agreement shall remain with ITC until NuVasive has received the Tissues at its designated address.
(B) Packaging. All Tissues shall be suitably packed for shipment in containers adequate to insure safe arrival of the Tissues at NuVasive's designated delivery destination. ITC shall supply all packaging and labeling materials for the Tissues; provided, however, such packaging and labeling must be in accordance with specifications and format provided by NuVasive. ITC shall mark all containers with necessary shipping and handling information, purchase order numbers and date of shipment. An itemized packing list shall accompany each shipment, which will also contain customer purchase order number(s), catalog numbers, and serial numbers of the Tissues.
(C) Defective Products/Return. Within five days of receipt NuVasive will inspect the Tissues in order to determine their suitability and their compliance with the terms of this Agreement and Governing Law. If NuVasive determines within such limited time that any Tissues do not comply with the Specifications, Governing Law, or any representation, warranty or other provisions of this Agreement (any such Tissue, a ("Returned Tissue"), NuVasive shall notify ITC of the Returned Tissue, identify the defects in the Returned Tissue and return the same to ITC at ITC's expense. If at any time the Parties agree, are deemed to agree, or a nonappellable order determines, that any Returned Tissue does not comply with the Specifications, Governing Law, or any representation, warranty or other provisions of this Agreement, such Returned Tissue shall be deemed to be a "Defective Tissue". ITC shall have a period of thirty (30) days from receipt of any Returned Tissue during which to evaluate and respond to NuVasive's claim that the Tissue is a Defective Tissue. If NuVasive has not received a written notice of disagreement from ITC by the end of such thirty (30) day period, the Returned Tissue shall be deemed to be a Defective Tissue. If NuVasive receives a written notice of disagreement by the end of such thirty (30) day period, the Parties agree to negotiate in good faith regarding whether and/or to what extent the Returned Tissue is a Defective Tissue for a period of thirty (30) days from NuVasive's receipt of such notice prior to commencing any legal action or pursuing any other remedy with respect to the Returned Tissue. With respect to any Tissues sold or supplied under this Agreement, ITC shall be prepared to promptly address corrective actions and determine root causes of defects. ITC will report in writing (or by form supplied by NuVasive) how the root causes have been addressed and corrected within 30 days of being notified of the defect.
(D) Payment of Fee-for-Service of Returned Product. If NuVasive returns to ITC a Returned Tissue prior to paying for such Returned Tissue, NuVasive shall have no obligation to pay for the Returned Tissue unless and until the Parties agree or a nonappellable order determines that the Tissue was not a Defective Tissue. If NuVasive returns a Returned Tissue after paying for such Returned Tissue, NuVasive may, in its discretion (i) offset the fees paid for the Returned Tissue against any yet unpaid invoice received from ITC, or (ii) require ITC to reimburse NuVasive for the fees paid with respect to the Returned Tissue. If following either (i) or (ii) above, the Returned Tissue is determined
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by agreement of the Parties or a nonappellable order not to be a Defective Tissue, NuVasive shall promptly pay to ITC the fees for the Returned Tissue.
5. ITC's Representations, Warranties, and Covenants. In addition to the other matters set forth herein, ITC hereby represents, warrants, and covenants, on a continuing basis, to NuVasive as follows:
(A) Compliance with Laws and Specifications. ITC shall comply fully with the American Association of Tissue Banks ("AATB") standards and all federal and state laws, regulations, rules and orders (including without limitation those of the Federal Food and Drug Administration (the "FDA")) governing the recovery of human tissues for, processing, storage, packaging, shipping, labeling and aspects of the production and handling of the Tissues ("Governing Laws"), including, without limitation, the Good Tissue Banking Practices and labeling requirements contained in 21 C.F.R. Parts 1270 and 1271. ITC represents and warrants that all Tissues will be recovered, processed, stored, packaged, shipped, labeled and otherwise produced and handled in accordance with all applicable federal and state laws and regulations, AATB standards applicable to human tissues, as well as the Specifications.
(B) Approvals. ITC shall obtain and maintain, at its cost, all governmental, administrative and other approvals, licenses, permits and other authorizations and registrations necessary for the operation and conduct of its business and performance of its obligations under this Agreement, including, without limitation, its accreditation from the American Association of Tissue Banks, FDA tissue establishment registration and listing and all required state licenses.
(C) Due Authorization; Validity. The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate or other action on the part of ITC, and upon execution and delivery, this Agreement will constitute a valid and binding obligation of ITC enforceable against ITC in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency and other similar laws affecting claims and rights generally or by general equitable principles.
(D) Litigation. ITC has not been served with or otherwise notified in writing of any judgment, suit, claim, action, arbitration, legal, administrative, or other proceeding or government investigation, nor to ITC's knowledge are any such actions pending or threatened, with respect to the Tissues or ITC's assets or business which would materially adversely affect ITC's ability to conduct business or to perform its obligations under this Agreement.
6. NuVasive's Representations, Warranties and Covenants.
(A) Compliance with Laws and Specifications. NuVasive shall comply fully with the American Association of Tissue Banks ("AATB") standards and all federal and state laws, regulations, rules and orders (including without limitation those of the Federal Food and Drug Administration (the "FDA")) governing the recovery of human tissues for, storage, packaging, shipping, labeling and aspects of the handling of the Tissues ("Governing Laws"), including, without limitation, the Good Tissue Banking Practices and labeling requirements contained in 21 C.F.R. Parts 1270 and 1271. NuVasive represents and warrants that all Tissues will be stored, packaged, shipped, labeled and otherwise handled in accordance with all applicable federal and state laws and regulations, AATB standards applicable to human tissue, as well as the Specifications.
(B) Approvals. NuVasive shall obtain and maintain, at its cost, all governmental, administrative and other approvals, licenses, permits and other authorizations and registrations necessary for the operation and conduct of its business and performance of its obligations under this Agreement, including, without limitation, FDA tissue establishment registration and listing and all required state licenses.
(C) Due Authorization; Validity. The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate or other action on the part of NuVasive, and upon
4
execution and delivery, this Agreement will constitute a valid and binding obligation of NuVasive enforceable against NuVasive in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency and other similar laws affecting claims and rights generally or by general equitable principles.
(D) Litigation. NuVasive has not been served with or otherwise notified in writing of any judgment, suit, claim, action, arbitration, legal, administrative, or other proceeding or government investigation, nor to NuVasive's knowledge are any such actions pending or threatened, with respect to the Tissues or NuVasive's assets or business which would materially adversely affect NuVasive's ability to conduct business or to perform its obligations under this Agreement.
(E) Specifications. The Specifications as set forth on Exhibit A and as amended from time to time by NuVasive do not infringe upon the patent or other property rights of third party and NuVasive shall defend against any such claims asserted by such third party against ITC.
7. Indemnification.
(A) Each party (the "Indemnifying Party") shall indemnify, defend and hold harmless the other (The "Indemnified Party"), its shareholders, subsidiaries and affiliates, and its and their respective officers, directors, members, trustees, agents, employees and customers, and their successors and assigns, from and against any and all claims, demands, actions, liabilities, fees, suits, causes of action, damages, penalties, recoveries and deficiencies, costs and expenses (including, without limitation, attorneys' fees) (collectively "Damages") which arise out of or relate to (1) any breach by the Indemnifying Party of any of its representations, covenants or warranties set forth in this Agreement, or (2) any negligence by the Indemnifying Party arising out of, in connection with or resulting from the processing, supply, or transfer of any Tissue. Such indemnification shall not be limited to claims brought by third parties.
8. Insurance and Notice of Claims.
(A) ITC represents and warrants that it is currently insured and covenants that at all times during the term of this Agreement it will maintain a comprehensive general liability insurance policy (including products liability coverage and payment of attorneys fees coverage) with a financially sound and reputable insurer which is sufficient to adequately protect against the risks associated with its ongoing business, including the risks which might possibly arise in connection with the transactions contemplated by this Agreement, and including without limitation, professional liability insurance, with minimum coverage amounts of *** per occurrence and *** in the aggregate. ITC agrees to provide NuVasive a copy of its insurance policy upon request and to provide thirty (30) days advanced written notice prior to terminating any such policy.
(B) NuVasive represents and warrants that it is currently insured and covenants that at all times during the term of this Agreement it will maintain a comprehensive general liability insurance policy (including products liability coverage and payment of attorneys fees coverage) with a financially sound and reputable insurer which is sufficient to adequately protect against the risks associated with its ongoing business, including the risks which might possibly arise in connection with the transactions contemplated by this Agreement, and including without limitation, professional liability insurance, with minimum coverage amounts of *** per occurrence and *** in the aggregate. NuVasive agrees to provide ITC a copy of its insurance policy upon request and to provide thirty (30) days advanced written notice prior to terminating any such policy.
(C) Notification of Claims. Each of the Parties shall promptly notify the other Party after becoming aware of any liability claims regarding the Tissues and any customer complaints or suspected
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adverse reactions or outcomes concerning the Tissues. Each party agrees to coordinate the evaluation of such events.
9. Confidentiality.
(A) Confidential Information. The "Confidential Information" of any Party shall mean any information of a confidential or proprietary nature of such Party and shall include, without limitation, all business, strategy, pricing and marketing information of such Party, all patents, copyrights, trademarks, service marks, trade dress and other proprietary rights and applications for or with respect to any of the foregoing of such Party, and all discoveries, inventions, improvements, documents, know-how, proprietary rights and ideas related to any process, method, formula, machine, device, manufacture, composition of matter, plan or design owned or developed by such Party, whether patentable or not, that the other Party acquires under, through, as a result of or during the term of this Agreement. Notwithstanding the foregoing, a Party's Confidential Information shall not include any information which: (i) has been published or otherwise becomes a matter of public knowledge by any means other than the other Party's default in the observance or performance of any term or provision of this Agreement or any other obligation on its part to be observed and performed; (ii) was known to the other Party at the time of such disclosure without a requirement of confidentiality, as evidenced by its written business records; (iii) is at any time disclosed to the other Party by any person or entity not a party hereto whom the other Party believes, after reasonable inquiry, has the right to so disclose the same; or (iv) is required to be disclosed in compliance with any law governmental regulation, or court order, provided that the Party disclosing the same shall notify the Party to which such information belongs ten (10) days in advance of any such disclosure, if feasible.
(B) NuVasive's Confidential Information.
(i) ITC hereby confirms that NuVasive has and shall retain the sole right, title and interest in and to NuVasive's Confidential Information. Subject to the conditions, restrictions and obligations contained in this Agreement, NuVasive hereby grants to ITC a limited, non-exclusive, worldwide, royalty free license (without the right to sublicense or transfer) to use NuVasive's Confidential Information solely for the purposes of performing ITC's obligations under this Agreement. No other rights or licenses are granted by NuVasive to ITC relating to NuVasive's Confidential Information or any other proprietary rights of NuVasive. Upon the termination or expiration of this Agreement, the licenses granted herein by NuVasive shall terminate, and ITC shall cease all further use of NuVasive's Confidential Information or any other proprietary rights of NuVasive except with respect to Tissues that conform to the Specifications and which were being held by ITC in its inventory at the time of termination. Such inventory may be sold by ITC after the expiration of this Agreement in the ordinary course of its business.
(ii) ITC shall maintain NuVasive's Confidential Information in confidence and shall not disclose same to any person or entity not a party hereto or use the same for its benefit or the benefit of any person or entity other than NuVasive. ITC shall maintain complete and accurate written records of NuVasive's Confidential Information, mark same with such legends as NuVasive may reasonably direct, and promptly deliver the same to NuVasive upon written request upon the expiration or termination hereof or at such other times as NuVasive may request, except that in any such event, counsel for ITC may retain one copy thereof solely for use should any dispute between the Parties arise. In addition, both during the term and after the expiration or termination of this Agreement, ITC shall take such other reasonable actions as NuVasive may request to enable NuVasive to publish, protect by litigation or otherwise, or further its title to any of NuVasive's Confidential Information.
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(C) ITC's Confidential Information.
(i) NuVasive hereby confirms that ITC has and shall retain the sole right, title and interest in and to ITC's Confidential Information. Subject to the conditions, restrictions and obligations contained in this Agreement, ITC hereby grants to NuVasive a limited, non-exclusive, worldwide, royalty free license to use ITC's Confidential Information solely for the purposes of exercising NuVasive's rights and performing NuVasive's obligations under this Agreement and using the Tissues for their intended purpose. No other rights or licenses are granted by ITC to NuVasive relating to ITC's Confidential Information or any other proprietary rights of ITC. Upon the termination or expiration of this Agreement, the licenses granted herein by ITC shall terminate, and NuVasive shall cease all further use of ITC's Confidential Information or any other proprietary rights of ITC except with respect to Tissues that conform to the Specifications and which were being held by NuVasive in its inventory at the time of termination. Such inventory may be sold by NuVasive after the expiration of this Agreement in the ordinary course of its business.
(ii) NuVasive shall maintain ITC's Confidential Information in confidence and will not disclose same to any person or entity not a party hereto or use same for its benefit or the benefit of any person or entity other than ITC. NuVasive shall maintain complete and accurate written records of ITC's Confidential information, mark the same with such legends as ITC may reasonably direct, and promptly deliver the same to ITC upon written request upon the expiration or termination hereof or at such other times as ITC may request, except that in any such event, counsel for NuVasive may retain one copy thereof solely for use should any dispute between the Parties arise. In addition, both during the term and after the expiration or termination of this Agreement, NuVasive shall take such other reasonable actions as ITC may request to enable ITC to publish, protect by litigation or otherwise, or further its title to any of ITC's Confidential Information.
10. Term and Termination.
(A) Term. The term of this Agreement shall commence on the Effective Date and continue for a period of three years following the Effective Date and, unless earlier terminated as provided herein, shall automatically renew for an additional one-year term on each anniversary of the Effective Date unless either party gives written notice to terminate 60 days prior to completion of the first three year term or additional one-year anniversary date.
(B) Early Termination. This Agreement may be terminated as otherwise provided in this Agreement, and as follows:
(i) By either party if the other party fails to perform or otherwise breaches any of its obligations hereunder, by giving notice of its intent to terminate and stating the grounds therefore. The party receiving such notice shall have thirty (30) days from the receipt thereof to cure the failure or breach, at which time this Agreement shall terminate if such failure or breach has not been cured. In no event, however, shall such notice of intention to terminate be deemed to waive any rights to damages or any other remedy which the party giving notice of breach may have as a consequence of such failure or breach.
(ii) By NuVasive, if ITC sells all or substantially all of its assets or securities to another person or entity or merges into another person or entity, which termination shall not be unreasonably exercised by NuVasive.
(C) Effect of Termination. If this Agreement is terminated, the parties shall be released from all obligations, duties imposed or assumed hereunder, except as otherwise provided in this Agreement. Termination of this Agreement, for whatever reason, shall not affect the obligation of either party to make payments for which such party is liable prior to such termination, any remedies of NuVasive
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under Section 5, any Party's indemnification obligations under Section 7 or the obligations of confidentiality specified in Section 9 hereof.
11. Notices. All notices required or permitted to be given under this Agreement shall be in writing and shall be addressed to the Party at the address and/or facsimile number first set forth above (which either party may change at any time upon five days written notice). Notices may be served by certified or registered mail, postage paid, with return receipt requested, by private courier, prepaid, by telex, facsimile, or other telecommunication device capable of transmitting or creating a written record, or personally. Mailed notices shall be deemed delivered five days after mailing, properly addressed.
12. Governing Law; Venue. The parties intend that this Agreement shall be governed by and construed in accordance with the laws of the state of Utah applicable to contracts made and wholly performed within Utah by persons domiciled in Utah and exclusive of choice of law rules. The parties hereby consent and submit to the exclusive jurisdiction and venue of State of Utah and federal courts located in the Salt Lake County, State of Utah for any litigation arising out of this Agreement.
13. Integration; Amendment. This Agreement and the other documents contemplated hereby constitute the entire agreement of the parties relating to the subject matter hereof. There are no promises, terms, conditions, obligations, or warranties other than those contained in this Agreement or in such other agreements and documents. No modification of this Agreement (by purchase order, invoice or otherwise (except as provided in Section 2(C)) shall be of any force or effect unless such modification is in writing, refers specifically to this Agreement, contains language indicating it is a modification of this Agreement and is signed the party alleged to be bound thereby.
14. Waiver. No provision of this Agreement shall be deemed to have been waived unless such waiver is in writing signed by the waiving Party. No failure by any Party to insist upon the strict performance of any provision of this Agreement, or to exercise any right or remedy consequent upon a breach thereof, shall constitute a waiver of any such breach of such provision or of any other provision. No waiver of any provision of this Agreement shall be deemed a waiver of any other provision of this Agreement or a waiver of such provision with respect to any subsequent breach, unless expressly provided in writing.
15. Attorney's Fees. If any suit or action arising out of or related to this Agreement is brought by any Party, the prevailing Party shall be entitled to recover the costs and fees (including reasonable attorneys' fees) incurred by such Party in such suit or action, including without limitation any post-trial or appellate proceeding.
16. Exhibits. Each Exhibit to this Agreement shall be considered a part hereof as if set forth herein in full.
17. Continuing Agreement; Binding Effect. This Agreement is a continuing agreement and shall remain in full force and effect until all obligations of the parties hereunder have been fully performed or otherwise discharged, and shall bind and inure to the benefit of, and be enforceable by, the Parties hereto and their respective successors, heirs, and permitted assigns.
18. Assignment. No Party may assign this Agreement, in whole or in part, without the written consent of the other party.
19. No Third-Party Beneficiary Rights. No person not a party to this Agreement is an intended beneficiary of this Agreement, and no person not a party to this Agreement shall have any right to enforce any term of this Agreement.
20. Counterparts. This Agreement may be executed in any number of counterparts, all of which when taken together shall constitute one agreement binding on all parties, notwithstanding that all parties are not signatories to the same counterpart.
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21. Invalidity. The invalidity or unenforceability of any term or provision of this Agreement shall not affect the other terms and provisions, and such invalid or unenforceable term or provision will, in all events, be construed and enforced to the fullest extent permissible under applicable law.
22. Force Majeure. Neither Party shall be responsible for any loss or damage resulting from any delay in performing or failure to perform any provisions of this Agreement, so long as any such failure or delay arises from a fire, explosion, flood, storm, earthquake, tidal wave, war, military operation, national emergency, civil commotion, strike or other difference with workers or unions that is beyond the control of the Parties hereto.
23. Relationship. The Parties are acting independently and shall at all times act as independent contractors of each other in the manufacture and sale of the Products and are not partners, joint venturers, agents, or legal representatives of each other, for any purpose. Neither Party shall have any right or power to act for or bind the other, in any respect, to pledge its credit, to accept any service of process upon it, or to receive any notices of any nature whatsoever.
24. Publicity. Neither Party shall initiate any publicity, news release or other announcement, written or oral, whether to the public or press, to stockholders or otherwise, relating to this Agreement, to any amendment hereto or to performance hereunder without the prior written consent of the other, except as may be required, in the judgment of either parties legal counsel, to comply with the requirements of any applicable law, including, but not limited to, any disclosures required by state or federal securities laws.
IN WITNESS WHEREOF, the parties hereto have caused this Supply Agreement to be duly executed and effective as of the date and year first written above.
"NuVasive" |
NuVasive, Inc.,
a Delaware corporation |
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President and CEO
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"ITC" |
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Intermountain Tissue Center; a Non-profit Corporation |
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/s/ illegible |
Its: |
Executive Director
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Exhibit A
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Products
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NuVasive
Price |
ITC
Price |
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Cervical Allograft | *** | *** | ||
Biportal Lumbar Allograft | *** | *** | ||
Uniportal Lumbar Allograft | *** | *** |
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THIS WARRANT AND THE SECURITIES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND IN COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAW OR (B) THE HOLDER SHALL DELIVER TO THE ISSUER AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE ISSUER THAT SUCH TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND OF ANY APPLICABLE STATE SECURITIES LAW.
NUVASIVE, INC.
Common Stock Purchase Warrant
CS - 1
To Subscribe for and Purchase 50,000 Shares of Common Stock of NuVasive, Inc. |
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January 16, 2002 |
This certifies that, for value received, WWIP LLC, a Delaware limited liability company ("WWIP"), or its registered assigns (the "Holder"), is entitled to subscribe for and purchase from NuVasive, Inc., a Delaware corporation (the "Company"), up to 50,000 shares (subject to adjustment as hereinafter provided) (each, a "Warrant Share" and collectively, the "Warrant Shares") of fully paid and non-assessable Common Stock of the Company (the "Common Stock"), subject to the provisions and upon the terms and conditions hereinafter set forth, at an exercise price of $0.25 per share (such price as from time to time to be adjusted as provided herein is called the "Exercise Price"), at or prior to 5:00 p.m. California time on January 16, 2012 (the "Exercise Period). This Warrant and any Warrant subsequently issued upon exchange or transfer hereof are hereinafter collectively called the "Warrant." This Warrant is issued to the Holder in connection with that certain Clinical Advisor and Development Agreement by and between the Holder and the Company dated January 16, 2002 (the "Development Agreement").
Section 1. Vesting in Warrant Shares. Holder shall acquire a vested interest in (i) twenty-five percent (25%) of the Warrant Shares upon WWIP's completion of one (1) year of Consulting Services (as defined in the Development Agreement) measured from the date hereof and (ii) the balance of the Warrant Shares in a series of thirty-six (36) successive equal monthly installments upon WWIP's completion of each additional month of Consulting Services over the thirty-six (36)-month period measured from the first anniversary of the date hereof. In no event shall any additional Warrant Shares vest after WWIP's cessation of Consulting Services; provided, however, WWIP's Consulting Services shall not cease until WWIP fails to make itself or its employees available to perform such Consulting Services.
Section 2. Exercise of Warrant. This Warrant may only be exercised for vested shares ("Vested Warrant Shares"). This Warrant is exercisable with respect to any or all of the Vested Warrant Shares, at the option of the Holder, at any time and from time to time during the Exercise Period, upon surrender of this Warrant to the Company together with (a) a duly completed Notice of Exercise, in the form attached hereto as Exhibit A , and (b) payment of an amount equal to the Exercise Price multiplied by the number of Vested Warrant Shares with respect to which this Warrant is being exercised as provided in Section 3. If the Holder exercises this Warrant with respect to less than all of the Warrant Shares represented by this Warrant, the Company shall cancel this Warrant upon the
surrender thereof and shall execute and deliver to the Holder a new Warrant for the balance of the Warrant Shares.
Section 3. Payment. Payment of the Exercise Price for the Vested Warrant Shares with respect to which this Warrant is being exercised shall be made, at the option of the Holder, (a) by delivery of cash payable by wire transfer of immediately available funds, (b) by the delivery of a cashier's or certified check, or (c) by any combination of items (a)-(b).
Section 4. Mechanics of Exercise. In the event of any exercise of this Warrant, a certificate or certificates for the shares of Common Stock so purchased, registered in the name of the Holder, or its nominee or other party designated in the Notice of Exercise by the Holder hereof, shall be delivered to the Holder within thirty (30) business days after the date on which this Warrant shall have been so exercised. The person in whose name any certificate for shares of Common Stock is issued upon exercise of this Warrant shall for all purposes be deemed to have become the holder of record of such shares on the date on which this Warrant was surrendered and payment of the Warrant is made, except that, if the date of such surrender and payment is a date on which the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. No payment or adjustment shall be made upon any exercise on account of any cash dividends on the Common Stock issued upon such exercise. Fractional shares shall be treated as set forth in Section 9 hereof.
Section 5. Representations and Warranties of the Holder. The Holder hereby represents and warrants to and for the benefit of the Company, with knowledge that the Company is relying thereon in issuing this Warrant to the Holder, as follows:
(a) Purchase Entirely for Own Account. By the Holder's execution of this Warrant, the Holder hereby confirms that this Warrant, and the Warrant Shares issuable upon exercise of this Warrant (collectively, the "Securities") shall be acquired for investment for the Holder'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 the Holder has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Warrant, the Holder further represents that the Holder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of the Securities. The Holder represents that it has full power and authority to enter into this Warrant.
(b) Investment Experience. The Holder 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 Securities.
(c) Accredited Investor. The Holder is an "accredited investor" within the meaning of Securities and Exchange Commission Rule 501 of Regulation D, as now in effect.
(d) Restricted Securities. The Holder understands that the Securities it is and shall be 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 be resold without registration under the Act, only in certain limited circumstances. In this connection, the Holder represents that it is familiar with Rule 144 promulgated under the Act, as now in effect, and understands the resale limitations imposed thereby and by the Act.
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(e) Legends. The Holder understands that the certificates evidencing the Securities may bear one or all of the following or other legends:
(i) "The securities evidenced by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act") or the securities laws of any state of the United States. The securities evidenced by this certificate may not be offered, sold or transferred for value directly or indirectly, in the absence of such registration under the Act and qualification under applicable state laws, or pursuant to an exemption from registration under the Act and qualification under applicable state laws, the availability of which is to be established to the reasonable satisfaction of the Company."
(ii) Any legend required by the laws of the State of California, including any legend required by the California Department of Corporations and Sections 417 and 418 of the California Corporations Code.
(iii) Any legend required to be placed on the Securities purchased by investors in any future sale or offering of any Securities, but only to the extent that such legend is required to be placed on all other shares of Common Stock.
(iv) Any legend required by any future stockholders, voting or other agreement to which the Holder or Securities may be subject, but only to the extent that such legend is required to be placed on all other shares of Common Stock.
Section 6. Restrictions on Disposition. Without in any way limiting the representations set forth in Section 5 above, the Holder 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 6, and in addition thereto, one of the following conditions is satisfied:
(a) Securities Registered. 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.
(b) Registration Not Required. The Holder shall have (i) 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 reasonably requested by the Company, furnished the Company with an opinion of counsel, satisfactory to the Company, that such disposition will not require registration of the Securities under the Act; provided , however, that the Company will not require opinions of counsel for transactions made pursuant to Rule 144, except in unusual circumstances.
Section 7. Market Stand-Off.
(a) Market-Standoff Period; Agreement. Holder hereby agrees that, during the period of duration (such period not to exceed 180 days) specified by the Company and an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Act, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration.
(b) Stop-Transfer Instructions. In order to enforce the foregoing covenants, the Company may impose stop-transfer instructions with respect to the securities of each Holder (and the securities of every other person subject to the restrictions in this Section 7).
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(c) Transferees Bound. Each Holder agrees that prior to the Company's initial public offering it will not transfer securities of the Company unless each transferee agrees in writing to be bound by all of the provisions of this Section 7.
Section 8. Adjustment. The number of shares of Common Stock (or any shares of stock or other securities which may be) issuable upon the exercise of this Warrant and the Exercise Price hereunder shall be subject to adjustment from time to time upon the happening of certain events, as follows:
(a) Subdivisions, Combinations and Other Issuances. If the Company shall at any time prior to the expiration of this Warrant subdivide its Common Stock, by split-up or otherwise, or combine its Common Stock, or issue additional shares of its Common Stock as a dividend with respect to any shares of its Common Stock, the number of Warrant Shares issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the Exercise Price payable per share, but the aggregate Exercise Price payable for the total number of Warrant Shares purchasable under this Warrant (as adjusted) shall remain the same. Any adjustment under this Section 8(a) shall become effective at the close of business on the date the subdivision or combination becomes effective, or as of the record date of such dividend, or in the event that no record date is fixed, upon the making of such dividend.
(b) Reclassification, Reorganization and Consolidation. In case of any reclassification, capital reorganization, or change in the Common Stock of the Company (other than as a result of a subdivision, combination, or stock dividend provided for in Section 8(a) above), then, as a condition of such reclassification, reorganization, or change, lawful provision shall be made, and duly executed documents evidencing the same from the Company or its successor shall be delivered to the Holder, so that the Holder shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant, the kind and amount of shares of stock and other securities and property receivable in connection with such reclassification, reorganization, or change by a holder of the same number of shares of Common Stock as were purchasable by the Holder immediately prior to such reclassification, reorganization, or change. In any such case appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof, including the provisions set forth in Section 1, shall thereafter be applicable with respect to any shares of stock or other securities and property deliverable upon exercise hereof, and appropriate adjustments shall be made to the Exercise Price per share payable hereunder, provided the aggregate Exercise Price shall remain the same.
(c) Notice of Adjustments and Record Dates. The Company shall promptly notify the Holder in writing of each adjustment or readjustment of the Exercise Price hereunder and the number of shares of Common Stock (or any shares of stock or other securities which may be) issuable upon the exercise of this Warrant. Such notice shall state the adjustment or readjustment and show in reasonable detail the facts on which that adjustment or readjustment is based. In the event of any taking by the Company of a record of the holders of Common Stock for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, the Company shall notify the Holder in writing of such record date at least ten (10) days prior to the date specified therein.
(d) No Impairment. The Company shall not avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but shall at all times in good faith assist in the carrying out of all the provisions of this Warrant. Without limiting the generality of the foregoing, the Company (a) shall at all times reserve and keep available a number of its authorized shares of Common Stock which shall be sufficient to permit the exercise of this Warrant and (b) shall take all such action as may be necessary or
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appropriate in order that all shares of Common Stock as may be issued pursuant to the exercise of this Warrant shall, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof.
Section 9. Fractional Shares. No fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction.
Section 10. Early Termination. In the event of, at any time during the Exercise Period, an initial public offering of securities of the Company under the Act, the Company shall provide to the Holder thirty (30) days advance written notice of such public offering, and this Warrant shall terminate unless exercised prior to the date such public offering is closed.
Section 11. No Stockholder Rights. This Warrant in and of itself shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company.
Section 12. Transfer of Warrant. Subject to applicable laws and the restrictions on transfer set forth pursuant to Section 6 of this Warrant, this Warrant and all rights hereunder are transferable, by the Holder in person or by duly authorized attorney, upon delivery of this Warrant and the Form of Assignment attached hereto as Exhibit B to any transferee designated by Holder. The transferee shall sign an investment letter in form and substance satisfactory to the Company.
Section 13. Lost, Stolen, Mutilated, or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company may, on such terms as to indemnify or otherwise as it may reasonably impose (which shall, in the case of a mutilated warrant, include the surrender thereof), issue a new warrant of like denomination and tenor as the warrant so lost, stolen, mutilated or destroyed.
Section 14. Notices, Etc. All notices and other communications required or permitted hereunder shall be in writing and shall be sent by telex, telegram, express mail or other form of rapid communications, if possible, and if not then such notice or communication shall be mailed by first-class mail, postage prepaid, addressed in each case to the party entitled thereto at the following addresses: (a) if to the Company, to NuVasive, Inc., Attention: Chief Executive Officer, 10065 Old Grove Road, San Diego, CA 92131, and (b) if to the Holder, to WWIP LLC, Attention: Dr. Lytton A. Williams, 1510 San Pablo Street, Suite 700, Los Angeles, CA 90033, or at such other address as one party may furnish to the other in writing. Notice shall be deemed effective on the date dispatched if by personal delivery, telecopy, telex or telegram, two days after mailing if by express mail, or three days after mailing if by first-class mail.
Section 15. Acceptance. Receipt of this Warrant by the Holder shall constitute acceptance of and agreement to all of the terms and conditions contained herein.
Section 16. Governing Law. This Warrant and all rights, obligations and liabilities hereunder shall be governed by the laws of the state of California as applied to agreements among California residents entered into an to be performed entirely within California.
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The Company has caused this Warrant to be duly executed and delivered on and as of the day and year first above written.
NUVASIVE, INC., | |||
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/S/ ALEX LUKIANOV |
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The undersigned Holder agrees and accepts this Warrant and acknowledges that it has read and confirms each of the representations contained in Section 5.
WWIP LLC, | |||
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/S/ ILLEGIBLE |
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[SIGNATURE PAGE TO COMMON STOCK PURCHASE WARRANT]
(1) The undersigned hereby elects to purchase shares of the Common Stock of NuVasive, Inc. (the "Company") pursuant to the terms of the attached Warrant, and tenders herewith payment of the Exercise Price in full, together with all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below:
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(3) The undersigned represents that (i) the aforesaid shares of Common Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares; (ii) the undersigned is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision regarding its investment in the Company; (iii) the undersigned is experienced in making investments of this type and has such knowledge and background in financial and business matters that the undersigned is capable of evaluating the merits and risks of this investment and protecting the undersigned's own interest; (iv) the undersigned understands that the shares of Common Stock issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of a specific exemption from the registration provisions of the Securities Act, which exemption depends upon, among other things, the bona fide nature of the investment intent as expressed herein, and, because such securities have not been registered under the Securities Act, they must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available; (v) the undersigned is aware that the aforesaid shares of Common Stock may not be sold pursuant to Rule 144 adopted under the Securities Act unless certain conditions are met and until the undersigned has held the shares for the number of years prescribed by Rule 144, that among the conditions for use of Rule 144 is the availability of current information to the public about the Company and the Company has not made such information available and has no present plans to do so; and (vi) the undersigned agrees not to make any disposition of all or any part of the aforesaid shares of Common Stock unless and until there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with said registration statement, or the undersigned has provided the Company with an opinion of counsel satisfactory to the Company, stating that such registration is not required.
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[SIGNATURE PAGE TO NOTICE OF EXERCISE OF COMMON STOCK PURCHASE WARRANT OF NUVASIVE, INC.]
(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)
For value received, the foregoing Warrant and all rights evidenced thereby are hereby assigned to
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Holder's Signature: |
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NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
CLINICAL ADVISOR, PATENT PURCHASE, AND DEVELOPMENT AGREEMENT
THIS AGREEMENT ("Agreement") is entered into as of March 31, 2004 (the "Effective Date"), by and between James L. Chappuis ("Dr. Chappuis") and NuVasive, Inc., a Delaware corporation ("NuVasive"). Dr. Chappuis and NuVasive agree as follows:
1. Description of Services. NuVasive hereby retains Dr. Chappuis with respect to the field of neurophysiology (e.g. pedicle screw testing, and nerve root retraction), posterior fixation, and cervical plate systems ("Field") and Dr. Chappuis hereby agrees to perform the following services: (a) advising NuVasive regarding the design, development and testing NuVasive products within the Field; (b) organizing and developing clinical studies to engage other physicians to evaluate the design of, and facilitate gathering clinical information regarding, NuVasive products within the Field; (c) suggesting new concepts or directions that might be appropriate for further investigation or development; (d) educating other physicians about NuVasive products within the Field; (e) testing or directing the testing of NuVasive products within the Field, including bench lab testing, and/or animal lab testing, and/or clinical testing; (f) serving on the Clinical Advisory Board of NuVasive, which includes meeting periodically with other clinicians to provide input on NuVasive product direction and attending the annual Clinical Advisory Board meeting; and (g) preparing scientific papers on NuVasive products within the Field for publication and presentation by Dr. Chappuis ("Services"). Dr Chappuis' Services may be rendered telephonically or at mutually convenient locations. Should Dr. Chappuis' Services exceed 16 hours per month, NuVasive shall pay Dr. Chappuis a consulting fee of $150/hour, to be invoiced monthly by Dr. Chappuis. Dr. Chappuis agrees that the exclusivity of this Agreement prohibits Dr. Chappuis from working with any other party with respect to systems or methods in the Field.
2. Compensation
A. Stock Options. In exchange for the services set forth in Section 1 above, NuVasive shall issue non-statutory stock options to purchase *** shares of Common Stock pursuant to its 1998 Stock Option Plan to Dr. Chappuis, subject to the Stock Option Agreements attached hereto as Exhibit A. These Stock options shall vest over a four-year period.
B. Publication Fee. For each scientific publication approved in advance by NuVasive and submitted for publication by Dr. Chappuis during the term of the Agreement, NuVasive shall pay Dr. Chappuis a Publication Fee of *** Dollars ($***) payable within thirty (30) days of submission for publication.
C. Other Expenses. NuVasive shall reimburse Dr. Chappuis for all reasonable expenses actually incurred and reasonably documented which are incidental to the services performed hereunder.
3. Chappuis Pressure Sensing Nerve Retractor:
A. Patent Purchase. Dr. Chappuis agrees to and hereby does sell and transfer to NuVasive his entire right, title, and interest in U.S. Patent No. 5,769,781 entitled "Protector Retractor" ("the '781 Patent"). As a precondition to this transfer, Dr. Chappuis warrants that he is the owner of the entire right, title, and interest in the '781 Patent and that he has not previously assigned or licensed the '781 Patent and is not aware of any infringement issues or adverse claims of ownership to the '781 Patent. Subject to the preceding warrant, NuVasive agrees to: (1) purchase the '781 Patent from Dr. Chappuis for *** Dollars ($***); and (2) pay on a quarterly basis to Dr. Chappuis a royalty of *** percent (*** %) of Net Sales of any NuVasive nerve root retractor having EMG and pressure sensing capabilities ("Combination Nerve Root Retractor") and be based on both the EMG and pressure sensing functionalities. As used herein, "Net Sales" shall be defined as the actual invoiced price billed to the hospital and/or other professional end-users of
the Combination Nerve Root Retractor, net of: sales commissions, returns, transportation charges and any applicable taxes. The royalty shall be paid to Dr. Chappuis within thirty (30) days of the end of each calendar quarter, and shall remain payable and due Dr. Chappuis for the period during which all patent claims in the '781 Patent, or any, later acquired patent rights to the Combination Nerve Root Retractor developed under this Agreement, remain valid and enforceable. The acceptance by Dr. Chappuis of any of the statements furnished or payments hereunder shall not preclude Dr. Chappuis from questioning the correctness at any time of any payments or statements. Upon reasonable notice and during regular business hours, NuVasive shall from time to time (but no more frequently than twice a year) make available its records of Net Sales and its calculations or payments to Dr. Chappuis (including its records of returns, transportation charges and any applicable taxes) for audit at Dr. Chappuis' expense by independent representatives selected by Dr. Chappuis to verify the accuracy of the payments provided to Dr. Chappuis. If such inspection reveals an underpayment of payments to Dr. Chappuis, NuVasive shall immediately pay to Dr. Chappuis the amount owing to him in accordance with the results of the inspection. Upon discovery of an understatement in the payments of ten percent (10%) or more, NuVasive shall reimburse Dr. Chappuis for expenses connected with such inspection, including but not limited to, reasonable accounting, auditing, and legal fees and costs, as well as interest on the unreported and unpaid payment.
B. Proof of Concept. NuVasive shall have a period of *** days from the Effective Date to perform (with the assistance of Dr. Chappuis) clinical proof-of-concept testing ("Proof of Concept Period") regarding the Combination Nerve Root Retractor. In the event the Combination Nerve Retractor successfully passes the Proof of Concept (as determined by NuVasive in good faith), NuVasive agrees to pay Dr. Chappuis *** Dollars ($***).
C. Commercialization Period and Reversion of Patent Rights. NuVasive shall have a period of *** months from the Effective Date to commercialize a Combination Nerve Root Retractor ("Commercialization Period"), unless mutually agreed upon by the Parties in writing to extend the Commercialization Period or unless the lack of commercialization is caused by delays in obtaining FDA clearance for the Combination Nerve Root Retractor. In the instance NuVasive fails to introduce a Combination Nerve Root Retractor within the Commercialization Period (as may be extended), NuVasive agrees to grant the '781 Patent back to Dr. Chappuis. Dr. Chappuis agrees that, as a precondition to the grant back of the '781 Patent, NuVasive shall be entitled to receive a patent reversion fee of *** *** Dollars ($***).
4. Independent Contractor. Dr. Chappuis' relationship with NuVasive shall be that of an independent contractor and nothing in this Agreement shall be construed to create an employer-employee relationship between NuVasive and Dr. Chappuis.
5. No Conflict with Existing Agreements. NuVasive hereby states that NuVasive does not desire to acquire from Dr. Chappuis any secret or confidential know-how or information which Dr. Chappuis may have acquired from others. Accordingly, Dr. Chappuis represents and warrants that Dr. Chappuis is free to divulge to NuVasive, without any obligation to, or violation of any right of others, any and all information, practice or techniques which Dr. Chappuis will describe, demonstrate, divulge or in any other manner make known to NuVasive during Dr. Chappuis' performance of services hereunder.
6. Inventions/Copyrights.
A. Improvement Inventions Within Field. Dr. Chappuis warrants that Dr. Chappuis shall promptly and fully disclose and assign to NuVasive all inventions made by Dr. Chappuis which are improvements on current NuVasive products and/or products in development (Improvement Inventions) resulting from or arising out of Dr. Chappuis' Services hereunder and relating to the
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Field, and Dr. Chappuis will, if NuVasive shall so request, assist in every proper way (at the expense of NuVasive) to obtain for the benefit of NuVasive patents on such Improvement Inventions in any and all countries); all such Improvement Inventions to be and remain the sole property of NuVasive whether or not disclosed, assigned or patented. Dr. Chappuis represents and warrants that, Dr. Chappuis has no contractual or other obligations to any third party which preclude or in any way encumber the right to assign to NuVasive the full and exclusive right, title and interest in and to any and all Improvement Inventions made by Dr. Chappuis resulting from or arising out of Dr. Chappuis' Services hereunder. As used in this Agreement, the term "Improvement Inventions" means any and all inventions, discoveries, designs, formulas, technology, improvements, trade secrets, processes, techniques and know-how, related to the Field, whether or not patentable, which are invented, conceived, discovered, developed or reduced to practice by Dr. Chappuis, either alone or jointly with others, and result from or arise out of Dr. Chappuis' Services hereunder and which amount to improvements to current NuVasive products and/or products in development. Dr. Chappuis agrees that any copyrightable works created by: Dr. Chappuis (in whole or in part, either alone or jointly with others) resulting from or arising out of Dr. Chappuis' Services hereunder and relating to the Field are "works made for hire" for NuVasive as that term is defined and used in the United States Copyright Act, Title 17 of the United States Code. In the event that such "work made for hire" designation is challenged, Dr. Chappuis hereby assigns any and all of his rights to such copyrightable works to NuVasive, which assignment shall be effective for any such copyrightable work as of the date of its creation. Dr. Chappuis further agrees that if NuVasive is unable because of Dr. Chappuis' unavailability, dissolution, mental or physical incapacity, or for any other reason, to secured Dr. Chappuis' signature to apply for or to pursue any application for any United States or foreign patents or mask work or copyright registrations covering the Inventions assigned to NuVasive above, then Dr. Chappuis hereby irrevocably designates and appoints NuVasive and its duly authorized officers and agents as its agent and attorney in fact, to act for and in its behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyright and mask work registrations thereon with the same legal force and effect as if executed by Dr. Chappuis, as the case may be.
B. Other Inventions Outside Field. Dr. Chappuis warrants and agrees to provided NuVasive a right of first negotiation regarding each Other Invention developed or conceived during the course of this Agreement ("Right of First Negotiation"). As used in this Agreement, the term "Other Invention" means any and all inventions, discoveries, designs, formulas, technology, improvements, trade secrets, processes, techniques and know-how outside the Field, whether or not patentable, which are invented, conceived, discovered, developed or reduced to practice by Dr. Chappuis, either alone or jointly with others or which otherwise fall outside the term Improvement Inventions as set forth in Section 6.B above. As part of this Right of First Negotiation, Dr. Chappuis shall provide written notice ("Notice") promptly following the invention, conception, discovery, development, or reduction to practice of each Other Invention, including a written disclosure of the Other Invention in sufficient detail to convey an adequate understanding of said Other Invention. NuVasive shall have an exclusive evaluation period of sixty (60) days ("Evaluation Period") following receipt of the Notice to render a due diligence assessment, project evaluation and reach a separate and final royalty agreement with Dr. Chappuis concerning the Other Invention. During the Evaluation Period, Dr. Chappuis agrees: (i) to act in good faith and provide full cooperation to NuVasive to facilitate completion of its due diligence assessment and project evaluation; (ii) to maintain confidentiality as to the existence of the Evaluation Period and/or Right of First Negotiation with NuVasive; and (iii) to refrain from discussing, contacting, and/or negotiating with any third-party regarding the Other Invention.
7. NuVasive Materials and Confidentiality. Dr. Chappuis recognizes that all NuVasive Materials received by Dr. Chappuis during the period of this Agreement are and shall be the exclusive property of NuVasive. Dr. Chappuis agrees to keep the same at all times in strict confidence and under his custody and control. Dr. Chappuis shall surrender such materials to NuVasive immediately upon
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request or termination under paragraph 8. "NuVasive Materials" are documents or other media or tangible items that contain or embody proprietary information or any other information concerning the business, operations, or plans of NuVasive, whether such documents have been prepared by Dr. Chappuis or by others, and shall be treated with strict confidentiality by Dr. Chappuis. Dr. Chappuis further agrees to treat as confidential and secret all NuVasive Proprietary Information that has been or may hereafter be disclosed, directly or indirectly, to the Dr. Chappuis, either orally, in writing or through inspection. Dr. Chappuis agrees not to use NuVasive Proprietary Information in any way for their own purpose or benefit or those of any third party, nor disclose to anyone any Proprietary Information received. Nothing in this Agreement is intended to grant or transfer any rights to Recipient under any patent or copyright, or any rights in or to the NuVasive Proprietary Information "NuVasive Proprietary Information" is any information, data and know-how relating to the design, development, manufacturing and marketing of the NuVasive's products as well as operational, financial and business information about the NuVasive. Nothing contained in this Agreement shall in any way restrict or impair the Dr. Chappuis' right to use, disclose or otherwise deal with, any NuVasive Proprietary Information which: (a) at the time of disclosure is generally available to the public or after the time of disclosure becomes generally available to the public through no wrongful act of the Dr. Chappuis; (b) was in the Dr. Chappuis' possession prior to the time of disclosure and was not acquired, directly or indirectly, from NuVasive; and (c) is made available to the Dr. Chappuis by others who did not acquire such Proprietary Information, directly or indirectly, from NuVasive.
8. Term and Termination. The term of this Agreement shall be for ten (10) years. Dr. Chappuis and NuVasive agree that this Agreement may be terminated by either NuVasive or Dr. Chappuis in the event of a breach which is not remedied within a reasonable time period, by giving thirty (30) days written notice of such termination to the other party per paragraph 8. Upon termination of this Agreement, NuVasive's obligation to pay any compensation, except for services or expenses already accrued or incurred, shall forthwith cease and terminate. Termination of this Agreement for any reason shall not affect Dr. Chappuis' obligations under paragraphs 5, 6 and 7.
9. Notices. All payments, notices and other communications made hereunder shall be in writing and sent by First Class mail, facsimile, or email to the parties at such address as set forth below.
10. Governing Law. This agreement shall be governed by and construed in accordance with the laws of the state of California.
11. Entire Agreement. This Agreement (together with documents and agreements entered into herewith) constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements have been made by any party, or any one acting on behalf of any party, that are not embodied in this Agreement with respect to the subject matter hereof.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
NuVasive, Inc. | Dr. Chappuis | |||||
By |
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/s/ ALEXIS LUKIANOV Alexis V. Lukianov President and CEO NuVasive, Inc. 10065 Old Grove Road San Diego, CA 92131 |
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By |
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/s/ JAMES L. CHAPPUIS James L. Chappuis, M.D. |
Date: |
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3-31-04 |
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Date: |
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3/31/04 |
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NUVASIVE, INC.
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of January 9, 2003, by and between COMERICA BANKCALIFORNIA ("Bank") and NUVASIVE, INC., a Delaware corporation ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement all capitalized terms shall have the definitions set forth on Exhibit A. Any term used in the Code and not defined herein shall have the meaning given to the term in the Code.
1.2 Accounting Terms. Any accounting term not specifically defined on Exhibit A shall be construed in accordance with GAAP and all calculations shall be made in accordance with GAAP when applicable. The term "financial statements" shall include the accompanying notes and schedules.
2. LOAN AND TERMS OF PAYMENT.
2.1 Credit Extensions.
(a) Promise to Pay. Borrower promises to pay to Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower, together with interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof.
(b) Revolving Advances.
(i) Amount. Subject to and upon the terms and conditions of this Agreement (1) Borrower may request Advances in an aggregate outstanding amount not to exceed the lesser of (A) the Committed Revolving Line less any amounts outstanding under Sublimit A, Sublimit B and Sublimit C, or (B) with respect to Advances other than Sublimit A Advances, the Take-Out Advance or the Equipment Advances, the Borrowing Base; and (2) amounts borrowed pursuant to this Section 2.1(b) may be repaid and reborrowed at any time prior to the Revolving Maturity Date, at which time all Advances under this Section 2.1(b) shall be immediately due and payable. Borrower may prepay any Advances without penalty or premium.
(ii) Form of Request. Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit C . Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages
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or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1(b) to Borrower's deposit account.
(iii) Sublimit A: Non-Formula Revolving Line. Subject to the availability under the Committed Revolving Line, and in reliance on the representations and warranties of Borrower set forth herein, Bank agrees to make advances (each a "Sublimit A Advance" and collectively, the "Sublimit A Advances") to Borrower at any time and from time to time from the date hereof through the Business Day immediately prior to the Revolving Maturity Date. Borrower may request Sublimit A Advances up to the Sublimit A Amount on a non-formula basis. Borrower shall not be required to submit a Borrowing Base Certificate with any request for a Sublimit A Advance. The outstanding amount of Sublimit A Advances shall be deemed to constitute Advances for the purpose of calculating availability under the Committed Revolving Line.
(iv) Sublimit B: Non-Formula Take-Out Advance.
a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make an advance (the "Take-Out Advance") on the Closing Date. The Take-Out Advance shall not exceed the Sublimit B Amount, nor shall the Take-Out Advance exceed the Payoff Demand Amount. The Take-Out Advance shall be made on a non-formula basis. Borrower shall not be required to submit a Borrowing Base Certificate in connection with the Take-Out Advance.
b) Interest shall accrue from the date of the Take-Out Advance at the rate specified in Section 2.3(a), and shall be payable in accordance with Section 2.3(c). The Take-Out Advance shall be payable as follows: the Take-Out Advance shall be payable in 12 equal monthly installments of principal, plus all accrued interest, beginning on January 31, 2003 and continuing on the same day of each month thereafter through the Take-Out Maturity Date, at which time all amounts due in connection with the Take-Out Advance made under this Section 2.1(c) shall be immediately due and payable. Borrower may prepay the Take-Out Advance without penalty or premium.
c) Bank is authorized to make the Take-Out Advance under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer. Such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit C . Bank shall be entitled to rely on any telephonic notice given by a person whom Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will wire the Take-Out Advance in accordance with the instructions specified in the Payoff Demand.
(v) Sublimit C: Non-Formula Equipment Advances.
a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make advances (each an "Equipment Advance" and, collectively, the "Equipment Advances") to Borrower in four tranches, Tranche A, Tranche B, Tranche C and Tranche D. Borrower may request Equipment Advances under Tranche A at any time from the date hereof through the Tranche A Availability End Date. Borrower may request Equipment Advances under Tranche B at any time from the Tranche A Availability End Date through the Tranche B Availability End Date. Borrower may request Equipment Advances under Tranche C at any time from the Tranche B Availability End Date through the Tranche C Availability End Date.
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Borrower may request Equipment Advances under Tranche D at any time from the Tranche C Availability End Date through the Tranche D Availability End Date. Borrower may request Advances for Equipment Soft Costs up to 60% of the Equipment Line. The aggregate outstanding amount of Tranche A Equipment Advances, Tranche B Equipment Advances, Tranche C Equipment Advances and Tranche D Equipment Advances (including any Advances for Equipment Soft Costs) shall not exceed the Sublimit C Amount. The minimum draw for any Equipment Advance shall be $50,000. Each Equipment Advance shall not exceed 100% of the invoice amount of equipment approved by Bank from time to time (which Borrower shall, in any case, have purchased within 90 days of the date of the corresponding Equipment Advance), excluding taxes, shipping, warranty charges, freight discounts and installation expense. The Equipment Advances shall be made on a non-formula basis. Borrower shall not be required to submit a Borrowing Base Certificate in connection with any Equipment Advance.
b) Interest shall accrue from the date of each Equipment Advance at the rate specified in Section 2.3(a), and shall be payable in accordance with Section 2.3(c). Any Equipment Advances that are outstanding under Tranche A on the Tranche A Availability End Date shall be payable in 33 equal monthly installments of principal, plus all accrued interest, beginning on April 30, 2003, and continuing on the same day of each month thereafter through the Tranche A Maturity Date, at which time all amounts due in connection with Tranche A Equipment Advances made under this Section 2.1(v) shall be immediately due and payable. Any Equipment Advances that are outstanding under Tranche B on the Tranche B Availability End Date shall be payable in 33 equal monthly installments of principal, plus all accrued interest, beginning on July 31, 2003, and continuing on the same day of each month thereafter through the Tranche B Maturity Date, at which time all amounts due in connection with Tranche B Equipment Advances made under this Section 2.1(v) shall be immediately due and payable. Any Equipment Advances that are outstanding under Tranche C on the Tranche C Availability End Date shall be payable in 33 equal monthly installments of principal, plus all accrued interest, beginning on October 30, 2003, and continuing on the same day of each month thereafter through the Tranche C Maturity Date, at which time all amounts due in connection with Tranche C Equipment Advances made under this Section 2.1(v) shall be immediately due and payable. Any Equipment Advances that are outstanding under Tranche D on the Tranche D Availability End Date shall be payable in 33 equal monthly installments of principal, plus all accrued interest, beginning on January 31, 2004, and continuing on the same day of each month thereafter through the Tranche D Maturity Date, at which time all amounts due in connection with Tranche D Equipment Advances made under this Section 2.1(v) and any other amounts due under this Agreement shall be immediately due and payable. Equipment Advances, once repaid, may not be reborrowed except to the extent such repayment results in availability under the Revolving Line. Borrower may prepay any Equipment Advances without penalty or premium.
(c) When Borrower desires to obtain an Equipment Advance, Borrower shall notify Bank by facsimile transmission to be received no later than 3:00 p.m. Pacific time three Business Days before the day on which the Equipment Advance is to be made. Such notice shall be substantially in the form of Exhibit C . The notice shall be signed by a Responsible Officer or its designee and include a copy of the invoice for any Equipment to be financed.
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2.2 Overadvances. If the aggregate amount of the outstanding Advances exceeds the lesser of (i) the Committed Revolving Line or (ii) with respect to Advances other than Sublimit A Advances, the Take-Out Advance or the Equipment Advances, the Borrowing Base at any time, Borrower shall immediately pay to Bank, in cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rates. Except as set forth in Section 2.3(b), the Advances shall bear interest, on the outstanding daily balance thereof, at a variable rate equal to one and one-half percent (1.5%) above the Prime Rate.
(b) Late Fee; Default Rate. If any payment is not made within ten days after the date such payment is due, Borrower shall pay Bank a late fee equal to the lesser of (i) 5% of the amount of such unpaid amount or (ii) the maximum amount permitted to be charged under applicable law. All Obligations shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a rate equal to five percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default
(c) Payments. Interest hereunder shall be due and payable on the last calendar day of each month during the term hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower's deposit accounts or against the Committed Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased, effective as of the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies, except that to the extent Borrower uses the Advances to purchase Collateral, Borrower's repayment of the Advances shall apply on a "first-in-first-out" basis so that the portion of the Advances used to purchase a particular item of Collateral shall be paid in the chronological order the Borrower purchased the Collateral. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. On or before the Closing Date, a Facility Fee equal to $20,000, which shall be nonrefundable. Borrower has made a good faith deposit in the amount of $10,000, which shall be applied toward the Facility Fee;
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(b) Bank Expenses. On the Closing Date, all Bank Expenses incurred through the Closing Date, and, after the Closing Date, all Bank Expenses, within thirty (30) days after Bank provides written evidence and demand for payment to Borrower of such Bank Expenses.
2.6 Term. This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions under this Agreement. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default.
3. CONDITIONS OF LOANS.
3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) an officer's certificate of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement;
(c) a financing statement (Form UCC-1);
(d) a Payoff Demand from Transamerica Business Credit Corporation in the form attached hereto as Exhibit H ;
(e) a landlord waiver in the form attached hereto as Exhibit G ;
(f) agreement to provide insurance;
(g) payment of the fees and Bank Expenses then due specified in Section 2.5;
(h) current SOS Reports indicating that except for Permitted Liens, there are no other security interests or Liens of record in the Collateral;
(i) current financial statements in accordance with Section 6.2;
(j) a warrant to purchase $150,000 worth of Borrower's Series D-1 Preferred Stock at an exercise price of $2.53 per share in the form attached hereto as Exhibit I;
(k) a warrant to purchase 25,671 shares of Borrower's common stock at an exercise price of $0.25 per share in the form attached hereto as Exhibit J ;
(l) Borrower shall have established deposit accounts at Bank, including but not limited to Borrower's operating accounts, with balances sufficient to satisfy the Minimum Cash covenant set forth in Section 6.7(a) of this Agreement after taking into account the amount of the initial Credit Extension; and
(m) such other documents or certificates, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to Initial Advance Against Borrower's Accounts Receivable. The obligation of Bank to make the initial Credit Extension under the Revolving Facility (other than Advances under Sublimit A, Sublimit B and Sublimit C) is subject to the further condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following:
(a) an audit of the Collateral, the results of which shall be satisfactory to Bank;
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(b) a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto, together with aged listings of accounts receivable and accounts payable.
3.3 Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1;
(b) if the Advance is other than an Advance under Sublimit A, Sublimit B or Sublimit C, timely receipt by Bank of a current Borrowing Base Certificate showing availability under the Revolving Facility; and
(c) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would exist after giving effect to such Credit Extension (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date). The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2.
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in the Collateral to secure prompt repayment of any and all Obligations and to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in later-acquired Collateral. Notwithstanding any termination, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding.
4.2 Perfection of Security Interest. Borrower authorizes Bank to file at any time financing statements, continuation statements, and amendments thereto that describe the Collateral and to describe the Collateral as all assets of Borrower of the kind pledged hereunder and which contain any other information required by the Code for the sufficiency of filing office acceptance of any financing statement, continuation statement, or amendment, including whether Borrower is an organization, the type of organization and any organizational identification number issued to Borrower, if applicable. Any such financing statements may be signed by Bank on behalf of Borrower, as provided in the Code, and may be filed at any time in any jurisdiction whether or not Revised Article 9 of the Code is then in effect in that jurisdiction. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. Borrower shall have possession of the Collateral, except where expressly otherwise provided in this Agreement or where Bank is required by applicable law to perfect its security interest by possession, or where Bank takes and/or maintains possession of the Collateral in the exercise of Bank's rights and remedies under Section 9 of this Agreement. Where Collateral is in possession of a third party bailee, Borrower shall take such steps as Bank reasonably requests for Bank to (i) obtain an acknowledgment, in form and substance satisfactory to Bank, of the bailee that the bailee holds such Collateral for the benefit of Bank, (ii) obtain "control" of any Collateral consisting of investment property, deposit
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accounts, letter-of-credit rights or electronic chattel paper (as such items and the term "control" are defined in Revised Article 9 of the Code), with any agreements establishing control to be in form and substance satisfactory to Bank. Borrower will not create any chattel paper without placing a legend on the chattel paper acceptable to Bank indicating that Bank has a security interest in the chattel paper.
4.3 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours but no more than twice a year (unless an Event of Default has occurred and is continuing), to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants (except as set forth in the Schedule, which exceptions shall be deemed to be representations and warranties as if made hereunder) as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing under the laws of the Debtor State and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement by which it is bound, except to the extent such default would not reasonably be expected to cause a Material Adverse Effect.
5.3 Collateral. Borrower has rights in or the power to transfer the Collateral, and its title to the Collateral is free and clear of Liens, adverse claims, and restrictions on transfer or pledge except for Permitted Liens. All Collateral is located solely in the Collateral States. The Eligible Accounts are bona fide existing obligations. The property or services giving rise to such Eligible Accounts has been delivered or rendered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor whose accounts are included in any Borrowing Base Certificate as an Eligible Account. All Inventory is in all material respects of good and merchantable quality, free from all material defects, except for Inventory for which adequate reserves have been made. Except as set forth in the Schedule, none of the Collateral is maintained or invested with a Person other than Bank or Bank's affiliates.
5.4 Intellectual Property. Borrower is the sole owner of the Intellectual Property, except for licenses granted by Borrower to its customers in the ordinary course of business. To the best of Borrower's knowledge (but without having conducted any investigation or search), each of the Copyrights, Trademarks and Patents is valid and enforceable, and no part of the Intellectual Property has been judged invalid or unenforceable, in whole or in part, and no claim has been made to Borrower that any part of the Intellectual Property violates the rights of any third party except to the extent such claim would not reasonably be expected to cause a Material Adverse Effect.
5.5 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof, and its exact legal name is as set forth in the first paragraph of this Agreement. The chief executive
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office of Borrower is located in the Chief Executive Office State at the address indicated in Section 10 hereof.
5.6 Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which a likely adverse decision would reasonably be expected to have a Material Adverse Effect, or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral.
5.7 No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower and any Subsidiary that are delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank.
5.8 Solvency, Payment of Debts. Borrower is able to pay its debts (including trade debts) as they mature; the fair saleable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; and Borrower is not left with unreasonably small capital after the transactions contemplated by this Agreement.
5.9 Compliance with Laws and Regulations. Borrower and each Subsidiary have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the Board of Governors of the Federal Reserve System). To its knowledge, Borrower has complied in all material respects with all the provisions of the Federal Fair Labor Standards Act, violation of which would have a Material Adverse Effect. To its knowledge, Borrower is in compliance with all environmental laws, regulations and ordinances except where the failure to comply is not reasonably likely to have a Material Adverse Effect. To its knowledge, Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. Borrower and each Subsidiary have filed or caused to be filed all tax returns required to be filed, and have paid, or have made adequate provision for the payment of, all taxes reflected therein except those being contested in good faith with adequate reserves under GAAP or where the failure to file such returns or pay such taxes would not reasonably be expected to have a Material Adverse Effect.
5.10 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments.
5.11 Government Consents. To its knowledge, Borrower and each Subsidiary have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect.
5.12 [Intentionally omitted.]
5.13 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank in connection with the transactions contemplated by the Loan Documents, taken together with all such certificates and written statements furnished to Bank, contains any untrue statement of a material fact or omits to state a
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material fact necessary in order to make the statements contained in such certificates or statements not misleading, it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not to be viewed as facts and that actual results during the period or periods covered by any such projections and forecasts may differ from the projected or forecasted results.
6. AFFIRMATIVE COVENANTS.
Borrower covenants that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing and Government Compliance. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation, shall maintain qualification and good standing in each jurisdiction in which the failure to so qualify would reasonably be likely to have a Material Adverse Effect, and shall furnish to Bank the organizational identification number issued to Borrower by the authorities of the state in which Borrower is organized, if applicable. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA, except where the failure to meet such requirements would not reasonably be expected to have a Material Adverse Effect. Borrower shall comply in all material respects with all applicable Environmental Laws, and maintain all material permits, licenses and approvals required thereunder where the failure to do so would have a Material Adverse Effect. Borrower shall comply, in all material respects, and shall cause each Subsidiary to comply, in all material respects, with all statutes, laws, ordinances and government rules and regulations to which it is subject, except where the failure to meet such requirements would not reasonably be likely to have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which or failure to comply with which would reasonably be expected to have a Material Adverse Effect, or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral.
6.2 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (a) as soon as available, but in any event within 30 days after the end of each calendar month, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during such period, in a form reasonably acceptable to Bank and certified by a Responsible Officer; (b) as soon as available, but in any event within 120 days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an opinion which is unqualified or otherwise consented to in writing by Bank on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) if applicable, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of $100,000 or more; and (e) such budgets, sales projections, operating plans or other financial information generally prepared by Borrower in the ordinary course of business as Bank may reasonably request from time to time.
(a) Within 20 days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto, together with aged listings of accounts receivable and accounts payable.
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(b) Within 30 days after the last day of each month, Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit E hereto.
(c) As soon as possible and in any event within five calendar days after becoming aware of the occurrence or existence of an Event of Default hereunder, a written statement of a Responsible Officer setting forth details of the Event of Default, and the action which Borrower has taken or proposes to take with respect thereto.
(d) Bank shall have a right from time to time hereafter to audit Borrower's Accounts and appraise Collateral at Borrower's expense (not to exceed $2,500 per audit except for Bank's initial audit, which shall not exceed $3,500), provided that such audits will be conducted no more often than every 6 months unless an Event of Default has occurred and is continuing. Based on Bank's review of such audit, Bank may adjust the Borrower Base percentage in its sole and reasonable discretion.
6.3 Inventory; Returns. Borrower shall keep all Inventory in good and merchantable condition, free from all material defects except for Inventory for which adequate reserves have been made. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist on the Closing Date. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims involving more than $100,000.
6.4 Taxes. Borrower shall make, and cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, including, but not limited to, those laws concerning income taxes, F.I.C.A., F.U.T.A. and state disability, and will execute and deliver to Bank, on demand, proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits and any appropriate certificates attesting to the payment or deposit thereof; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower.
6.5 Insurance.
(a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain liability and other insurance in amounts and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee, and all liability insurance policies shall show Bank as an additional insured and specify that the insurer must give at least 20 days notice to Bank before canceling its policy for any reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of the policies of insurance and evidence of all premium payments. If no Event of Default has occurred and is continuing, proceeds payable under any casualty policy will, at Borrower's option, be payable to Borrower to replace the property subject to the claim, provided that any such replacement property shall be deemed Collateral in which Bank has been granted a first priority security interest, subject to Permitted Liens. If an Event of Default has occurred and
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is continuing, all proceeds payable under any such policy shall, at Bank's option, be payable to Bank to be applied on account of the Obligations.
6.6 Primary Depository. Borrower shall maintain its primary depository, operating and at least 50% of its investment accounts with Bank or Bank's affiliates.
6.7 Financial Covenants. Borrower shall at all times maintain the following financial ratios and covenants, measured as of the last day of each calendar month unless stated otherwise:
(a) Minimum Cash. Borrower to maintain minimum Unrestricted Cash of not less than the greater of: (i) 50% of all Indebtedness owed to Bank, or (ii) $1,500,000.
6.8 [Intentionally omitted.]
6.9 Continued Investor Support. Until such time that Borrower has achieved two consecutive quarters of profitability, Borrower shall provide Bank from time to time, within five (5) business days following any request by Bank, a written certification (such form of certification to be in substantially the form attached hereto as Exhibit F ) from the managing director of Enterprise Partners Venture Capital serving on Borrower's board of directors at the time of such certification.
6.10 [Intentionally omitted.]
6.11 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Credit Extensions, Borrower will not do any of the following without Bank's prior written consent, which shall not be unreasonably withheld:
7.1 Dispositions. Convey, sell, lease, license, transfer or otherwise dispose of (collectively, to "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of the Collateral, other than Permitted Transfers.
7.2 Change in Name, Location or Executive Office, Change in Business; Change in Fiscal Year: Change in Control. Change its name, the Borrower State, or relocate its chief executive office without 30 days prior written notification to Bank; engage in any business, or permit any of its Subsidiaries to engage in any business, other than or reasonably related or incidental to the businesses currently engaged in by Borrower; change its fiscal year end; have a Change in Control.
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7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization (other than mergers or consolidations of a Subsidiary into another Subsidiary or into Borrower), or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person except where (i) such transactions do not in the aggregate exceed $100,000 and (ii) no Event of Default has occurred, is continuing or would exist after giving effect to the transactions.
7.4 Indebtedness. Create, incur, assume, guarantee or be or remain liable with respect to any indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness, or prepay any Indebtedness (other than the Indebtedness to Transamerica Business Credit Corporation to be paid with the Take-Out Advance) or take any actions which impose on Borrower an obligation to prepay any Indebtedness, except Indebtedness to Bank.
7.5 Intellectual Property. (a) Transfer or encumber any interest in the Intellectual Property, except for non-exclusive licenses granted by Borrower in the ordinary course of its business; or (b) create or permit to exist any agreement or covenant in favor of any Person other than Bank that restricts Borrower's ability to transfer or encumber any interest in the Intellectual Property, except for licenses entered into by Borrower in the ordinary course of its business.
7.6 Encumbrances. Create, incur, assume or allow any Lien with respect to any of the Collateral, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens, or covenant to any other Person that Borrower in the future will refrain from creating, incurring, assuming or allowing any Lien with respect to any of the Collateral.
7.7 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock, except that Borrower may repurchase stock in connection with Permitted Investments.
7.8 Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments, or maintain or invest any of its funds or financial assets with a Person other than Bank or Bank's affiliates unless such Person has entered into a control agreement with Bank, in form and substance satisfactory to Bank, or suffer or permit any Subsidiary to be a party to, or be bound by, an agreement that restricts such Subsidiary from paying dividends or otherwise distributing property to Borrower.
7.9 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for Permitted Investments and except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person.
7.10 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision affecting Bank's rights contained in any documentation relating to the Subordinated Debt without Bank's prior written consent.
7.11 Inventory and Equipment. Store the Inventory or the Equipment with a bailee, warehouseman, or similar third party unless the third party has been notified of Bank's security interest and Bank (a) has received an acknowledgment from the third party that it is holding or will hold the Inventory or Equipment for Bank's benefit or (b) is in possession of the warehouse receipt, where negotiable, covering such Inventory or Equipment. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory and Equipment only at the location set forth in Section 10 and
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such other locations of which Borrower gives Bank prior written notice and as to which Bank files a financing statement where needed to perfect its security interest.
7.12 No Investment Company. Become or be controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement:
8.1 Payment Default. If borrower fails to pay any of the Obligations within ten (10) days of the date when due;
8.2 Covenant Default.
(a) If Borrower fails to perform any obligation under Article 6 (subject to Section 8.2(b) below as to Sections 6.1, 6.2 and 6.3) or violates any of the covenants contained in Article 7 of this Agreement; or
(b) If Borrower fails to perform any obligation under Section 6.1, 6.2 or 6.3 of this Agreement, or fails or neglects to perform or observe any other material term, provision, condition, covenant contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition or covenant that can be cured, has failed to cure such default within ten days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten day period or cannot after diligent attempts by Borrower be cured within such ten day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed 30 days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default but no Credit Extensions will be made;
8.3 Defective Perfection. If Bank shall receive at any time following the Closing Date an SOS Report indicating that except for Permitted Liens, Bank's security interest in the Collateral is not prior to all other security interests or Liens of record reflected in the report;
8.4 Material Adverse Change. Effective from and after such time that Borrower has achieved two consecutive quarters of profitability, if there occurs a material adverse change in Borrower's business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations or a material impairment of the value or priority of Bank's security interests in the Collateral;
8.5 Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is
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stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period);
8.6 Insolvency. If Borrower becomes insolvent; or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within 45 days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding);
8.7 Other Agreements. If there is a default or other failure to perform in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of $100,000 or that could have a Material Adverse Effect;
8.8 Subordinated Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent the payment is allowed under any subordination agreement entered into with Bank;
8.9 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least $100,000 shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of 10 days (provided that no Credit Extensions will be made prior to the satisfaction or stay of the judgment); or
8.10 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document; it being recognized by Bank that projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not to be viewed as facts, and that actual results during the period or periods covered by any such projections and forecasts may differ from the projected or forecasted results.
9. BANK'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.6, all Obligations shall become immediately due and payable without any action by Bank);
(b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable;
(d) Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in
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order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or other wise;
(e) Set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit;
(g) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate. Bank may sell the Collateral without giving any warranties as to the Collateral. Bank may specifically disclaim any warranties of title or the like. This procedure will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. If Bank sells any of the Collateral upon credit, Borrower will be credited only with payments actually made by the purchaser, received by Bank, and applied to the indebtedness of the purchaser. If the purchaser fails to pay for the Collateral, Bank may resell the Collateral and Borrower shall be credited with the proceeds of the sale;
(h) Bank may credit bid and purchase at any public sale; and
(i) Apply for the appointment of a receiver, trustee, liquidator or conservator of the Collateral, without notice and without regard to the adequacy of the security for the Obligations and without regard to the solvency of Borrower, any guarantor or any other Person liable for any of the Obligations; and
(j) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower.
Bank may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.
9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; (g) to file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; provided Bank may exercise such power of attorney
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to sign the name of Borrower on any of the documents described in clause and (g) above regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. At any time after the occurrence and during the continuation of an Event of Default, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following after reasonable notice to Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Facility as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.5 of this Agreement, and take any action with respect to such policies as Bank deems prudent Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. Bank has no obligation to clean up or otherwise prepare the Collateral for sale. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 No Obligation to Pursue Others. Bank has no obligation to attempt to satisfy the Obligations by collecting them from any other person liable for them and Bank may release, modify or waive any collateral provided by any other Person to secure any of the Obligations, all without affecting Bank's rights against Borrower. Borrower waives any right it may have to require Bank to pursue any other Person for any of the Obligations.
9.7 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. Borrower expressly agrees that this Section 9.7 may not be waived or modified by Bank by course of performance, conduct, estoppel or otherwise.
9.8 Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except
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for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below:
If to Borrower: |
Nuvasive, Inc.
10065 Old Grove Road San Diego, California 92131 Attn: President FAX: (858) 271 7101 |
|
If to Bank: |
|
Comerica BankCalifornia 9920 La Cienega Boulevard, Suite 1401 Inglewood, California 90301 Attn: Manager FAX: (310)338 6110 |
with a copy to: |
|
Comerica BankCalifornia Technology and Life Sciences Division 11512 El Camino Real, Suite 350 San Diego, California 92130 Attn: Peter M. Drees FAX: (858) 509 2365 |
The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of San Diego, State of California. BANK AND BORROWER EACH ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH OF THEM, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT, WITH COUNSEL OF THEIR CHOICE, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY RELATED INSTRUMENT OR LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTION OF ANY OF THEM. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY BANK OR BORROWER, EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY EACH OF THEM.
12. GENERAL PROVISIONS.
12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties and shall bind all persons who become bound as a debtor to this Agreement; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may not be unreasonably withheld. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder.
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12.2 Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) an obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank, its officers, employees and agents as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement
12.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. All amendments to or terminations of this Agreement must be in writing. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run.
12.8 Confidentiality. In handling any confidential information Bank and all employees and agents of Bank shall exercise the same degree of care that Bank exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, provided that they are institutional lenders and in no way competitors of Borrower, and provided further that such prospective transferees and purchasers have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. Confidential information of Borrower shall not be used by Bank except as expressly permitted by this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.
NUVASIVE, INC. | ||||
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By: |
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/s/ KEVIN O'BOYLE |
Title: |
CFO
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COMERICA BANKCALIFORNIA |
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By: |
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/s/ PETER M. DREES |
Title: |
Vice President
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19
DEFINITIONS
"Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing.
"Advance" or "Advances" means a cash advance or cash advances under the Revolving Facility.
"Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding, whether or not suit is brought.
"Borrower State" means Delaware, the state under whose laws Borrower is organized.
"Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information.
"Borrowing Base" means an amount up to 80% of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower; provided, that Bank may change the foregoing percentage in its sole and reasonable discretion as set forth in Section 6.2(d) of this Agreement.
"Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close.
"Change in Control" shall mean a transaction in which any "person" or "group" (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of shares of all classes of stock then outstanding of Borrower ordinarily entitled to vote in the election of directors, empowering such "person" or "group" to elect a majority of the Board of Directors of Borrower, who did not have such power before such transaction.
"Chief Executive Office State" means California, where Borrower's chief executive office is located.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code as amended or supplemented from time to time.
"Collateral" means the property described on Exhibit B attached hereto and all Negotiable Collateral to the extent not described on Exhibit B , except to the extent any such property (i) is nonassignable by its terms without the consent of the licensor thereof or another party (but only to the extent such prohibition on transfer is enforceable under applicable law, including, without limitation,
1
Sections 9406 and 9408 of the Code), or (ii) the granting of a security interest therein is contrary to applicable law, provided that upon the cessation of any such restriction or prohibition, such property shall automatically become part of the Collateral.
"Collateral State" means the state or states where the Collateral is located, which is California.
"Committed Revolving Line" means a Credit Extension of up to $5,000,000 (inclusive of any amounts outstanding under Sublimit A, Sublimit B and Sublimit C).
"Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement.
"Copyrights" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held.
"Credit Extension" means each Advance, Equipment Advance, or any other extension of credit by Bank to or for the benefit of Borrower hereunder.
"Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.3; provided, that Bank in the exercise of its reasonable business judgment may change the standards of eligibility by giving Borrower 30 days prior written notice. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following:
2
"Eligible Foreign Accounts" means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that (i) are supported by one or more letters of credit in an amount and of a tenor, and issued by a financial institution, acceptable to Bank, or (ii) that Bank approves on a case-by-case basis.
"Environmental Laws" means all laws, rules, regulations, orders and the like issued by any federal state, local foreign or other governmental or quasi-governmental authority or any agency pertaining to the environment or to any hazardous materials or wastes, toxic substances, flammable, explosive or radioactive materials, asbestos or other similar materials.
"Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest.
"Equipment Advance" has the meaning set forth in Section 2.1(b)(v).
"Equipment Line" means a Credit Extension of up to $1,000,000.
"Equipment Soft Costs" means tenant improvements, software, and demonstration equipment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning assigned in Article 8.
"GAAP" means generally accepted accounting principles, consistently applied, as in effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.
3
"Intellectual Property" means all of Borrower's right, title, and interest in and to the following:
"Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing.
"Investment" means any beneficial ownership of (including stock, partnership or limited liability company interest or other securities) any Person, or any loan, advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other document, instrument or agreement entered into between Borrower and Bank in connection with this Agreement, all as amended or extended from time to time.
"Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents.
"Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, drafts, instruments (including promissory notes), securities, documents of title, and chattel paper, and Borrower's Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an
4
Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise.
"Patents" means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.
"Payoff Demand" means a written demand in the form attached hereto as Exhibit H.
"Payoff Demand Amount" means the amount set forth in the Payoff Demand.
"Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank
"Permitted Indebtedness" means:
"Permitted Investment" means:
5
"Permitted Liens" means the following:
6
"Permitted Transfer" means the conveyance, sale, lease, transfer or disposition by Borrower or any Subsidiary of:
"Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank.
"Responsible Officer" means each of the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer and the Controller of Borrower.
"Revolving Facility" means the facility under which Borrower may request Bank to issue Advances, as specified in Section 2.1(b) hereof
"Revolving Maturity Date" means December 31, 2003.
"Schedule" means the schedule of exceptions attached hereto and approved by Bank, if any.
"SOS Reports" means the official reports from the Secretaries of State of each Collateral State, Chief Executive Office State and the Borrower State and other applicable federal, state or local government offices identifying all current security interests filed in the Collateral and Liens of record as of the date of such report.
"Sublimit A" means a sublimit for non-formula Advances under the Committed Revolving Line not to exceed $750,000.
"Sublimit A Amount" means $750,000.
"Sublimit B" means a sublimit for a Take-Out Advance under the Committed Revolving Line not to exceed $1,500,000.
"Sublimit B Amount" means $1,500,000.
"Sublimit C" means a sublimit for Equipment Advances under the Committed Revolving Line not to exceed $1,000,000.
"Sublimit C Amount" means $1,000,000.
"Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms reasonably acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation, partnership or limited liability company or joint venture in which (i) any general partnership interest or (ii) more than 50% of the stock, limited liability company interest or joint venture of which by the terms thereof ordinary voting power to elect the Board of
7
Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned by Borrower, either directly or through an Affiliate.
"Take-Out Advance" has the meaning set forth in Section 2.1(b)(iv).
"Take-Out Availability End Date" means December 31, 2002.
"Take Out Maturity Date" means December 31, 2003.
"Trademarks" means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks.
"Tranche A" has the meaning assigned in Section 2.1(b)(v).
"Tranche B" has the meaning assigned in Section 2.1(b)(v).
"Tranche A Equipment Advance" or "Tranche A Equipment Advances" means any Equipment Advances(s) made under Tranche A.
"Tranche B Equipment Advance" or "Tranche B Equipment Advances" means any Equipment Advances(s) made under Tranche B.
"Tranche C Equipment Advance" or "Tranche C Equipment Advances" means any Equipment Advances(s) made under Tranche C.
"Tranche D Equipment Advance" or "Tranche D Equipment Advances" means any Equipment Advances(s) made under Tranche D.
"Tranche A Availability End Date" means March 31, 2003.
"Tranche B Availability End Date" means June 30, 2003.
"Tranche C Availability End Date" means September 30, 2003.
"Tranche D Availability End Date" means December 31, 2003.
"Tranche A Maturity Date" means December 31, 2005.
"Tranche B Maturity Date" means March 31, 2006.
"Tranche C Maturity Date" means June 30, 2006.
"Tranche D Maturity Date" means September 30, 2006.
"Unrestricted Cash" means cash and cash equivalents at Bank or Bank's affiliates subject to applicable control agreements.
8
DEBTOR | NUVASIVE, INC. | |
SECURED PARTY: |
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COMERICA BANKCALIFORNIA |
COLLATERAL
DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT
All personal property of Borrower (herein referred to as "Borrower" or "Debtor") whether presently existing or hereafter created or acquired, and wherever located, including, but not limited to:
Notwithstanding the foregoing, the Collateral shall not be deemed to include: (i) any copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held (herein collectively referred to as "Copyrights"); any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks (herein collectively referred to as "Trademarks"); any patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same (herein collectively referred to as "Patents"); any trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; any design rights which may be available to Borrower now or hereafter existing, created, acquired or held; any claim for damages by way of past, present and future infringement of any of the rights included above; any licenses or other rights to use any of the Copyrights, Patents or Trademarks; any amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents, including all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing; or (ii) any property subject to a security interest or lien arising out of that certain Master Lease Agreement by and between Borrower and Comdisco, Inc. dated September 17, 1999, including all schedules and addendums thereto; or (iii) any property subject to a security interest or lien arising out of that certain Equipment Loan and Security Agreement dated December 27, 2001, between Borrower and GATX Ventures, Inc.
9
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: COMERICA BANKCALIFORNIALOAN COMPLIANCE DEPARTMENT | DATE: | |
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FAX #: (650) 846 6830 |
TIME: |
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FROM: | NUVASIVE, INC. | |
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CLIENT NAME (BORROWER)
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REQUESTED BY: | |
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AUTHORIZED SIGNER'S NAME | |
AUTHORIZED SIGNATURE: |
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PHONE NUMBER: | |
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FROM ACCOUNT: | TO ACCOUNT: | |||
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REQUESTED TRANSACTION TYPE | REQUEST DOLLAR AMOUNT | |
$ | ||
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PRINCIPAL INCREASE (ADVANCE) | $ | |
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PRINCIPAL PAYMENT (ONLY) | $ | |
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INTEREST PAYMENT (ONLY) | $ | |
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PRINCIPAL AND INTEREST (PAYMENT) | $ | |
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OTHER INSTRUCTIONS: | ||
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All representations and warranties of Borrower stated in the Loan and Security Agreement are true, correct and complete in all material respects as of the date of the telephone request for an Advance confirmed by this Borrowing Certificate; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date.
BANK
USE ONLY
TELEPHONE REQUEST
The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me.
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Authorized Requester | Phone # | |
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Received By (Bank) | Phone # | |
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Authorized Signature (Bank) |
10
EXHIBIT D
BORROWING BASE CERTIFICATE
Borrower: NUVASIVE, INC. | Lender: Comerica BankCalifornia | |
Commitment Amount: $5,000,000 (less Sublimits) |
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COMMITTED REVOLVING LINE: | $ | 5,000,000 | |||||||
LESS | |||||||||
Outstanding on Sublimit A (Non-Formula Revolving Line up to $750M) | $ | ||||||||
Outstanding on Sublimit B (Take-Out Advance up to $1.5MM) | $ | ||||||||
Outstanding on Sublimit C (Equipment Advances up to $1 MM) | $ | ||||||||
MAXIMUM LOAN AVAILABILITY [Insert on Line 16 below] | $ | ||||||||
ACCOUNTS RECEIVABLE |
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1. | Accounts Receivable Book Value as of | $ | |||||||
2. | Additions (please explain on reverse) | $ | |||||||
3. | TOTAL ACCOUNTS RECEIVABLE | $ | |||||||
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) |
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$ |
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4. | Amounts over 90 days due | $ | |||||||
5. | Balance of 25% over 90 day accounts | $ | |||||||
6. | Concentration Limits | $ | |||||||
7. | Foreign Accounts | $ | |||||||
8. | Governmental Accounts | $ | |||||||
9. | Contra Accounts | $ | |||||||
10. | Demo Accounts | $ | |||||||
11. | Intercompany/Employee Accounts | $ | |||||||
12. | Other (please explain on reverse) | $ | |||||||
13. | TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS | $ | |||||||
14. | Eligible Accounts (#3 minus #13) | $ | |||||||
15. | LOAN VALUE OF ACCOUNTS ( % of #14) | $ | |||||||
BALANCES |
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16. | Maximum Loan Availability | $ | |||||||
17. | Total Funds Available [Lesser of #16 or #15] | $ | |||||||
18. | Present balance owing on Line of Credit | $ | |||||||
19. | RESERVE POSITION (#17 minus #18) | $ |
The undersigned represents and warrants that the foregoing is true, complete and correct in all material respects, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Comerica BankCalifornia.
NUVASIVE, INC. | ||||
By: |
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Authorized Signer |
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11
EXHIBIT E
COMPLIANCE CERTIFICATE
TO: | COMERICA BANKCALIFORNIA | |
FROM: | NUVASIVE, INC. |
The undersigned authorized officer of NUVASIVE, INC. hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending with all required covenants, except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.
Please indicate compliance status by circling Yes/No under "Complies" column.
Reporting Covenant
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Required
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Complies
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Monthly financial statements | Monthly within 30 days | Yes | No | |||
Annual (CPA Audited) | FYE within 90 days | Yes | No | |||
10K and 10Q | (as applicable) | Yes | No | |||
A/R & A/P Agings, Borrowing Base Cert. | Monthly within 20 days | Yes | No | |||
A/R Audit | Initial and Semi-Annual | Yes | No |
Financial Covenant |
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Required |
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Actual |
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Complies |
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Maintain on a Monthly Basis: | |||||||||
Minimum Unrestricted Cash | Greater of: (i) 0.50 times all Indebtedness owed to Bank or (ii) $1,500,000 | $ | Yes | No |
Comments Regarding Exceptions: See Attached |
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BANK USE ONLY |
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Sincerely, |
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Received by: |
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AUTHORIZED SIGNER | |||
SIGNATURE |
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Date: | |||
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Verified: | |||
TITLE |
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AUTHORIZED SIGNER | |||
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Date: |
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DATE |
Compliance Status Yes No |
12
EXHIBIT F
Investor Support Letter
Comerica
BankCalifornia
11512 El Camino Real, suite 350
San Diego, CA 92130
Attn: Peter M. Drees
Dear Peter:
We understand that Comerica BankCalifornia (the "Bank") has agreed to provide Nuvasive, Inc. (the "Company") with a financing arrangement as evidenced by that certain Loan and Security Agreement dated January 9, 2003 (the "Agreement") and agreed to delay the effectiveness of the "Material Adverse Change" default provision in exchange for this statement.
[Name/Title] , presently serves on the Board of Directors of the Company, and currently expects to remain actively involved as a Board member in its business for the reasonably foreseeable future.
[If applicable] We currently expect to participate in the next round of equity financing of the Company, currently planned to close in [specify general timing of next round] (the "Next Equity Financing"). The Next Equity Financing is currently projected to raise $ , of which our fund currently plans to invest between $ and $ . Based on our current understanding of the Company's [date] business plan and cash requirements, we believe the Next Equity Financing will provide sufficient funds for the Company through [specify general time].
This letter is not a guaranty of the Company's obligations under the Agreement, nor is it a commitment to provide additional funds to the Company. It is, however, an expression of our current support of the Company.
Very truly yours,
[SIGNATURE]
13
Lessor's Acknowledgment and Subordination
As of , the undersigned, ("Lessor"), under the terms of a lease, a copy of which is attached hereto (the "Lease"), acknowledges that, ("Lessee"), has or will receive from Comerica Bank- California ("Bank") certain credit accommodations.
Notice Lessor agrees to notify Bank in writing (at the address specified below or at any other address given by Bank in writing to Lessor) not less than thirty (30) days before commencing any proceedings or otherwise taking any action to terminate the Lease or to enforce its remedies thereunder.
Subordination Lessor agrees that all of Lessee's machinery, equipment, inventory, fixtures or other property ("Lessee's Property") which may be located on the leased premises shall remain the personal property of the Lessee and shall not become a fixture or part of the realty notwithstanding anything that may be implied by law from the mode of attachment, installation or otherwise. Lessor further agrees that any lien or security interest Lessor may claim against any of Lessee's Property is subordinated to any lien or security interest now or subsequently held by Bank in any of such property.
Limited Right of Entry Lessor acknowledges that, notwithstanding any noncompliance with or default by Lessee under the Lease, the Bank shall have the limited right to enter into and remain in possession of the leased premises for a reasonable period not to exceed ninety (90) consecutive days for the purpose of enforcing its liens and security interests in Lessee's Property, including the sale and/or detachment and/or removal from the leased premises of such property. Bank shall pay to Lessor, on a monthly basis in advance (pro rata, depending on the number of days Bank is in possession), the amount equal to the current monthly rent accruing under the Lease during the period while Bank is in possession of the leased premises; provided however , that Bank shall not assume or be deemed to have assumed any obligations of Lessee under such Lease and shall not incur any liabilities or obligations whatsoever with respect to the Lease other than the payments described in this paragraph. Furthermore, Bank shall have no responsibility whatsoever for any back rent or other obligations which have accrued under the Lease prior to Bank's entry into possession under this paragraph.
No Assumption Lessor further agrees that Bank's rights have been given for security purposes only, and that unless and until Bank agrees expressly and in writing to do so, Bank shall have no obligations whatsoever under the Lease.
14
TRANSAMERICA | Transamerica | |||
TECHNOLOGY FINANCE |
Finance Corporation
9399 West Higgins Road Suite 600 Rosemont, IL 60018 |
December 30, 2002
VIA FACSIMILE: (858) 720 2555
Peter
M. Drees
Comerica BankCalifornia
Technology and Life Sciences Division
11512 El Camino Real, Suite 350
San Diego, California 92130
Re: Nuvasive, Inc. Payoff of Transamerica Loan Facility
Dear Peter:
This letter sets forth the amounts of principal and interest due as of January 15, 2003 to pay off Transamerica's loan facility. The per diem for this loan is $338.01. Please add this amount to the total payoff for each day after January 15, 2003 that payment is received by Transamerica.
TOTAL PRINCIPAL & INTEREST DUE @ 1/15/03 $918,356.12
This letter and the amounts set forth herein shall be void if the above payment is not received by Transamerica by January 31, 2003.
Wire Instructions :
Bank Name: | Bank One, NA | |
Bank Address: | One Bank One Plaza | |
Chicago, Illinois 60670 | ||
Account No: | 55-75427 | |
ABA Routing No.: | 071-000-013 | |
Reference: | Nuvasive, Inc. | |
Customer No. 1457 | ||
Account Name: | Transamerica Technology Finance |
If you need anything additional, please do not hesitate to contact me.
Sincerely,
/s/ Andrake Collins
Andrake Collins (847) 685-1101 |
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EXHIBIT I
Series D-1 Preferred Stock Warrant
Filed as Exhibit 10.9 to this Registration Statement
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EXHIBIT J
Common Stock Warrant
Filed as Exhibit 10.8 to this Registration Statement
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The section numbers in this Schedule correspond to the section numbers in the Agreement; however, any information disclosed herein under any section number shall be deemed to be disclosed and incorporated into any other section number under the Agreement where such disclosure would otherwise be appropriate. Where the terms of a contract or other disclosure item have been summarized or described in this Schedule, such summary or description does not purport to be a complete statement of the material terms of such contract or other item. Any terms defined in the Agreement shall have the same meaning when used in this Schedule as when used in the Agreement unless the context otherwise requires.
Nothing herein constitutes an admission of any liability or obligation on the part of Borrower nor an admission against Borrower's interest. The inclusion of any schedule herein or any exhibit hereto should not be interpreted as indicating that Borrower has determined that such an agreement or other matter is necessarily material to Borrower. The Bank acknowledges that certain information contained in this Schedule may constitute material confidential information relating to Borrower which may not be used for any purpose other than that contemplated in the Agreement.
Permitted Indebtedness (Exhibit A)
Reference is made to the Indebtedness arising from that certain Master Lease Agreement by and between Borrower and Comdisco, Inc. dated September 17, 1999, including all schedules and addendums thereto. (the "Comisdico Agreement").
Reference is made to the Indebtedness arising from that certain Equipment Loan and Security Agreement dated December 27, 2001, between Borrower and GATX Ventures, Inc. (the "GATX Agreement").
Reference is made to the Payoff Demand Amount, which shall be paid in accordance with instructions from Transamerica Business Credit Corporation set forth in the Payoff Demand. Permitted Investments (Exhibit A)
Permitted Investments (Exhibit A)
Reference is made to Borrower's ownership interests in NuVasive (Europe) GmbH.
Reference is made to that certain Promissory Note in the principal amount of $500,000 made by Alexis Lukianov and payable to Borrower dated as of February 25, 2000 (the "Lukianov Note") and that certain Bonus Agreement by and between the Company and Mr. Lukianov dated as of February 25, 2000 (the "Bonus Agreement"), each executed in connection with Borrower's relocation loan to Mr. Lukianov.
Permitted Liens (Exhibit A)
Reference is made to the Liens securing the Payoff Demand, which shall be released in connection with the payment of the Payoff Demand.
Reference is made to the Liens securing the Indebtedness evidenced by the GATX Agreement.
Reference is made to the Liens securing the Indebtedness evidenced by the Comdisco Agreement.
Due Organization and Qualification (Section 5.1)
Borrower's subsidiary, NuVasive (Europe) GmbH, is existing under the laws of Germany.
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Due Authorization: No Conflict (Section 5.2)
The GATX Agreements requires consent of GATX, Inc. prior to the consummation of the transactions contemplated by the Loan Documents.
Collateral (Section 5.3)
One or more notes payable to the Borrower are currently in the possession of Transamerica Business Credit Corporation. These notes will be returned to Borrower upon Bank's payment of the Payoff Demand Amount to Transamerica Business Credit Corporation.
Prior names (Section 5.5)
Nuvasive, Inc. (as opposed to NuVasive, Inc.)
Litigation (Section 5.6)
Reference is made to a lawsuit filed against the Borrower in the Circuit Court of Shelby County, Tennessee, Case No. CT-001579-01, by Medtronic, Inc. and Medtronic Sofamor Danek, Inc. (collectively referred to herein as "Medtronic"). The Tennessee Lawsuit seeks declaratory and injunctive relief for what it alleges to be the Company's interference with Medtronic's contractual relations with its employeesin particular, with certain non-competition covenants that Medtronic alleges exist between it and three former Medtronic (and current Borrower) employees: Lew Bennett, Keith Valentine and Patrick Miles (the "Individuals"). Reference is made to a lawsuit filed by the Individuals in San Diego Superior Court, Case No. GIC 765710 (the "California Lawsuit"), seeking declaratory relief, temporary and permanent injunctions, and claiming statutory unfair competition against Medtronic, on the grounds that Medtronic's attempt to enforce non-compete agreements against California residents and their California employer (the Borrower) violates fundamental California policy barring such agreements, and constitutes an unfair business practice under California Business & Professions Code § 17200. The California Lawsuit has been removed to United States District Court for the Southern District of California, Case No. 01 CV 00684 JM (JFS).
Reference is made to the following litigation related to product liability claims:
Ronald G. Barnett v. James Francis Marino, M.D.; Healthsouth UTC Surgicenter; NuVasive, Inc. and Does 1 through 100, inclusive, Case No. GIC 774481, Superior Court of California, County of San Diego.
Susan L. Klug v. James F. Marino, M.D.; Nick Zelinsky; Jeff Blewett; Curt Stone; Palomar-Pomerado Health System; NuVasive, Inc.; and Does 1-50 inclusive, Case No. GIC 777380, Superior Court of California, County of San Diego.
Kenneth Dixon, Jean Dixon v. James F. Marino, M.D.; Nick Zelensky; Palomar-Pomerado Health System; NuVasive, Inc.; Stryker Corporation and Does 1-50, inclusive, Case No. GIC 777906, Superior Court of Califonria, County of San Diego.
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AMENDED AND RESTATED
AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Amended and Restated Amendment to Loan and Security Agreement ("Amendment") is entered into as of March 31, 2004 ("Closing Date") by and between Comerica Bank (" Bank "), and Nuvasive, Inc., a Delaware corporation ("Borrower"). This Agreement amends and restates in its entirety the Amendment to Loan and Security Agreement between Bank and Borrower dated as of May 21, 2003, and is made with reference to the facts recited therein as follows:
WHEREAS, Borrower and Bank are parties to, among other things, that certain Loan and Security Agreement dated as of January 9, 2003 (as amended, restated, modified, supplemented or revised from time to time, the "Loan Agreement"); capitalized terms used in this Amendment without definition shall have the meanings ascribed to such terms in the Loan Agreement;
WHEREAS, Bank has completed its initial audit of Borrower's Accounts and has approved an initial advance rate of up to 80% of Eligible Accounts based upon that initial audit, and Borrower has acknowledged that, pursuant to Section 6.2(d) of the Loan Agreement, Bank may adjust the Borrowing Base percentage in its sole discretion based upon Bank's review of future audits of Borrower's Accounts;
WHEREAS, Borrower has requested that Bank amend certain provisions of the Loan Agreement, including, among other things, to extend certain maturity dates, to increase the Equipment Line, and to amend and reduce the existing minimum cash covenant;
WHEREAS, Bank is willing to amend certain provisions of the Loan Agreement on the terms and conditions set forth in this Amendment;
NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and upon execution and delivery of this Amendment by Borrower and Bank, it is hereby agreed as follows:
The unpaid principal balance of the Take-Out Advance shall be payable in 14 equal monthly installments of principal, plus all accrued interest, beginning on May 31, 2003 and continuing on the last day of each month thereafter through the Take-Out Maturity Date, at which time all amounts due in connection with the Take-Out Advance made under Section 2.1(iv) of the Loan Agreement shall be immediately due and payable. Borrower may prepay the Take-Out Advance without penalty or premium.
Borrower to maintain, at all times, minimum Unrestricted Cash of 40% of all Indebtedness owed to Bank (the "Liquidity Covenant"). Borrower has prepared its Revised Base Case 2003 Budget Spreadsheet, a copy of which is on file with Bank ("2003 Projections"). If, as of September 30, 2003, Borrower is within 85% of its revenue and 115% of its net loss forecast in Borrower's 2003 Projections for (i) Borrower's fiscal year
to date and (ii) the trailing 3 month period ending August 31, 2003, the Liquidity Covenant will be reduced to 25% of all Indebtedness owed to Bank as of September 30, 2003.
"Revolving Maturity Date" means June 30, 2004.
"Sublimit C" means a sublimit for Equipment Advances under the Committed Revolving Line not to exceed $2,000,000.
"Sublimit C Amount" means $2,000,000.
"Take Out Maturity Date" means June 30, 2004.
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"the Loan and Security Agreement," "the Loan Agreement," thereof," therein," or words of similar meaning referring to the Loan Agreement, shall mean and be a reference to the Loan Agreement as amended hereby.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written.
NUVASIVE, INC. | ||||
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By: |
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/s/ KEVIN O'BOYLE |
Title: | CFO | |||
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COMERICA BANK |
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By: |
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/s/ [ILLEGIBLE] |
Title: | Senior Vice President |
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AMENDED AND RESTATED SECOND AMENDMENT
TO LOAN AND SECURITY AGREEMENT
This Amended and Restated Second Amendment to Loan and Security Agreement ("Agreement") is entered into as of March 31, 2004 ("Amendment Closing Date") by and between Comerica Bank ("Bank"), and Nuvasive, Inc., a Delaware corporation ("Borrower"). This Agreement amends and restates in its entirety the Second Amended to Loan and Security Agreement between Bank and Borrower dated as of March 12, 2004, and is made with reference to the following facts:
A. Bank and Borrower are parties to that certain Loan and Security Agreement dated as of January 9, 2003, which has been amended by an Amendment to Loan and Security Agreement dated as of May 21, 2003 (as amended, the "Loan Agreement").
B. The Loan Agreement provides for a Revolving Line, a Take-Out Advance and an Equipment Line of Credit. Borrower's obligations to Bank with respect to the Take-Out Advance and the Equipment Line of Credit are presently amortized as set forth in the Loan Agreement.
C. The parties desire to amend the Loan Agreement in order to (i) remove all remaining sublimits with respect to the Committed Revolving Line and extend the Revolving Maturity Date; (ii) provide for a new equipment line of credit up to $2,500,000; (iii) consolidate the amounts owing by Borrower with respect to the Take-Out Advance and the Equipment Line of Credit into a single term loan; and (iv) add certain additional financial covenants.
NOW, THEREFORE, for good valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed as follows:
1. Defined Terms.
Unless defined otherwise herein, all capitalized terms used in this Agreement shall have the meanings attributed to those terms in the Loan Agreement.
2. Amendment of Loan Agreement.
"Tangible Net Worth" means at any date as of which the amount thereof shall be determined, the sum of the capital stock, partnership interest or limited liability company interest and additional paid-in capital plus retained earnings (or minus accumulated
1
deficit) of Borrower and its Subsidiaries minus intangible assets, plus Subordinated Debt, on a consolidated basis determined in accordance with GAAP.
"Term Loan Maturity Date" means August 31, 2006.
Amount. Subject to and upon the terms and conditions of this Agreement (1) Borrower may request Advances in an aggregate outstanding amount not to exceed the lesser of (A) the Committed Revolving Line, or (B) the Borrowing Base; and (2) amounts borrowed pursuant to this Section 2.1(b) may be repaid and reborrowed at any time prior to the Revolving Maturity Date, at which time all Advances under this Section 2.1(b) shall be immediately due and payable. Borrower may prepay any Advances without penalty or premium.
New Equipment Line of Credit.
a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make advances (each an "Equipment Advance" and, collectively, the "Equipment Advances") to Borrower in four tranches, Tranche A, Tranche B, Tranche C and Tranche D. Borrower may request Equipment Advances under Tranche A at any time from the date hereof through the Tranche A Availability End Date. Borrower may request Equipment Advances under Tranche B at any time from the Tranche A Availability End Date through the Tranche B Availability End Date. Borrower may request Equipment Advances under Tranche C at any time from the Tranche B Availability End Date through the Tranche C Availability End Date. Borrower may request Equipment Advances under Tranche D at any time from the Tranche C Availability End Date through the Tranche D Availability End Date. Borrower may request Advances for Equipment Soft Costs up to 60% of the Equipment Line. The aggregate outstanding amount of Tranche A Equipment Advances, Tranche B Equipment Advances, Tranche C Equipment Advances and Tranche D Equipment Advances (including any Advances for Equipment Soft Costs) shall not exceed $2,500,0000; provided, however, that no more than $1,750,000 will be available during the first six months of the draw period ( i.e. , through the Tranche B Availability End Date), with the remainder available during the second six months. Each Equipment Advance shall not exceed 100% of the invoice amount of equipment approved by Bank from time to time (which Borrower shall, in any case, have purchased within 90 days of the date of the corresponding Equipment Advance), excluding taxes, shipping, warranty charges, freight discounts and installation expense. The Equipment Advances shall be made on a non-formula basis. Borrower shall not be required to submit a Borrowing Base Certificate in connection with any Equipment Advance.
b) Interest shall accrue from the date of each Equipment Advance at the rate specified in Section 2.3(a), and shall be payable in accordance with Section 2.3(c). Any Equipment Advances that are outstanding under Tranche A on the Tranche A Availability End Date shall be payable in 33 equal monthly installments of principal, plus all accrued interest, beginning on July 31, 2004, and continuing on the same day of each month thereafter through the Tranche A Maturity Date, at which time all amounts due in connection with Tranche A Equipment Advances made under this Section 2.1(vi) shall be immediately due and payable. Any Equipment Advances that are outstanding under Tranche B on the Tranche B Availability End Date shall be payable in 33 equal monthly installments of principal, plus all accrued
2
interest, beginning on October 31, 2004, and continuing on the same day of each month thereafter through the Tranche B Maturity Date, at which time all amounts due in connection with Tranche B Equipment Advances made under this Section 2.1(vi) shall be immediately due and payable. Any Equipment Advances that are outstanding under Tranche C on the Tranche C Availability End Date shall be payable in 33 equal monthly installments of principal, plus all accrued interest, beginning on January 31, 2005, and continuing on the same day of each month thereafter through the Tranche C Maturity Date, at which time all amounts due in connection with Tranche C Equipment Advances made under this Section 2.1(vi) shall be immediately due and payable. Any Equipment Advances that are outstanding under Tranche D on the Tranche D Availability End Date shall be payable in 33 equal monthly installments of principal, plus all accrued interest, beginning on April 30, 2005, and continuing on the same day of each month thereafter through the Tranche D Maturity Date, at which time all amounts due in connection with Tranche D Equipment Advances made under this Section 2.1(vi) and any other amounts due under this Agreement shall be immediately due and payable. Equipment Advances, once repaid, may not be reborrowed. Borrower may prepay any Equipment Advances without penalty or premium.
c) When Borrower desires to obtain an Equipment Advance, Borrower shall notify Bank by facsimile transmission to be received no later than 3:00 p.m. Pacific time three Business Days before the day on which the Equipment Advance is to be made. Such notice shall be substantially in the form of Exhibit C . The notice shall be signed by a Responsible Officer or its designee and include a copy of the invoice for any Equipment to be financed.
Term Loan.
a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make a single advance ("Term Loan") to Borrower. The amount of the Term Loan shall be equal to the sum of Borrower's principal Obligations owed to Bank pursuant to the Take-Out Advance and the Equipment Advances under the Equipment Line, plus all accrued interest thereon as of the date of the Term Loan.
b) Interest shall accrue from the date of the Term Loan at the rate specified in Section 2.2(a), and shall be payable in accordance with Section 2.2(c). The Term Loan shall be payable in equal monthly installments of principal, plus all accrued interest, beginning on the first day of the calendar month following the date of the Term Loan, and continuing on the same day of each month thereafter through the Term Loan Maturity Date, at which time all amounts due in connection with the Term Loan made under this Section 2.1(b)(vii) shall be immediately due and payable. Borrower may prepay the Term Loan without penalty or premium.
2.3(a) Interest Rates . Except as set forth in Section 2.3(b), the Advances shall bear interest, on the outstanding daily balance thereof, at a variable rate equal to one-half of one percent (0.5%) above the Prime Rate.
2.5(c) Non-Usage Fee . Borrower shall pay to Bank a non-usage fee at the rate of 0.5% per annum on the average quarterly amount by which the maximum amount available under the Committed Revolving Line exceeds the aggregate amount of all outstanding Advances under the Committed Revolving Line from time to time (i.e. , the final line item on the Borrowing Base Certificate entitled "Reserve Position"). Such non-usage fee shall be payable
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quarterly in arrears on the last day of April, July, October and January, commencing April 30, 2004.
6.7(a) Minimum Cash . Borrower to maintain at all times minimum Unrestricted Cash of not less than $2,500,000.
6.7(b) Tangible Net Worth . Borrower's Tangible Net Worth shall not be less than $3,750,000, less any non-cash adjustments in 2004 for stock transactions, or unless otherwise approved by Bank.
6.7(c) Minimum Monthly Revenue . Borrower to maintain, on a three-month rolling average, minimum monthly revenue of 75% of Borrower's plan for 2004, entitled "Nuvasive Cash Flow and BS," dated 3/3/2004, a copy of which is on file with Bank.
8.4 Material Adverse Change . If there occurs a material adverse change in Borrower's business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations or a material impairment of the value or priority of Bank's security interests in the Collateral
3. Borrower Reaffirmation. Borrower acknowledges that the Loan Agreement, as amended by this Agreement, and all notes and documents related thereto ("Loan Documents") constitute duly authorized, valid, binding, fully perfected and continuing agreements and obligations of Borrower to Bank, enforceable in accordance with their respective terms; and that Borrower has no claims, cross-claims, counterclaims, setoffs or defenses of any kind or nature which would in any way reduce or offset its obligations to Bank under the Loan Documents as of the date of this Agreement. Borrower ratifies and reaffirms the continuing effectiveness of the Loan Documents all other instruments, documents and agreements entered into with Bank in connection with the Loan Documents. Borrower hereby confirms and ratifies Bank's first priority lien and security interest in all Collateral including all presently existing and hereafter acquired Collateral, except as otherwise specified in the Loan Agreement, as amended by this Agreement. Borrower reaffirms that it shall execute such security agreements, control agreements, financing statements and other documents as Bank may from time to time reasonably request to carry out the terms of the Loan Documents. Such liens and security interests shall secure all of the obligations of Borrower under the Loan Documents, including this Agreement.
4. Limited Scope of Agreement.
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5. Reimbursement of Bank's Fees and Costs. Pursuant to the Loan Agreement, Borrower shall pay Bank (i) a Facility Fee in the amount of $6,250, and (ii) all Bank Expenses incurred in connection with the negotiation, preparation and documentation of this Agreement and all accompanying documents. By execution of this Agreement, Borrower authorizes Bank to collect the amounts set forth in this Section by charging Borrower's demand deposit account number 1892-03444-6.
6. Conditions to Effectiveness. The effectiveness of the amendments to the Loan Agreement set forth in this Amendment are subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following:
7. Remedies. If an Event of Default shall occur under the Loan Documents, this Agreement or any other agreement executed in connection herewith, Bank may exercise, at its election, and without notice, demand, protest or presentment (which notice, demand, protest and presentment are expressly waived) all rights and remedies granted to it in the Loan Documents or according to applicable law. Borrower acknowledges and agrees that all rights and remedies granted to Bank under the Loan Documents and this Agreement are cumulative, and Bank shall have the right to exercise any one or more of such rights and remedies alternatively, successively or concurrently as Bank may, in its sole and absolute discretion, deem advisable.
8. Representations and Warranties. Borrower hereby represents and warrants that all representations and warranties contained in the Loan Agreement, as amended by this Agreement, are true and correct as of the date of this Agreement. No Event of Default has occurred and/or is continuing under any of the Loan Documents. No representation or warranty of Borrower contained in this Agreement or in any documents provided to Bank in connection herewith (including any financial statements and/or financial information) misstates any material fact or omits to state a material fact, the absence of which makes such representation, warranty or statement misleading.
9. Authority. Each party hereto represents and warrants to each other party that (i) it has authority to execute this Agreement; (ii) the execution, delivery and performance of this Agreement does not require the consent or approval of any person, entity, governmental body, trust, trustor or other authority; (iii) this Agreement is a valid, binding and legal obligation of the undersigned enforceable in accordance with its terms, and does not contravene or conflict with any other agreement, indenture or undertaking to which any party hereto is a party; and (iv) each party hereto is the sole and lawful owner of all right, title, and interest in and to every claim and other matter which the party purports to settle or compromise herein.
10. Payment of Expenses. In the event any action (whether or not in a court proceeding) shall be required to interpret, implement, modify, or enforce the terms and provisions of this Agreement, or to declare rights under same, the prevailing party in such action shall recover from the losing party all of
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its fees and costs, including, but not limited to, the reasonable attorneys' fees and costs (if applicable) of Bank's outside counsel.
11. Governing Law. This Agreement shall be construed and interpreted in accordance with and shall be governed by the laws of the state of California. The parties also hereby agree to submit to the jurisdiction of the California courts with respect to all matters relating to this Agreement.
12. Successors, Assigns. This Agreement shall be binding on and inure to the benefit of all of the parties hereto, and upon the heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, and each of them. The terms and provisions of this Agreement are for the exclusive benefit of Borrower and Bank, and may not be transferred, assigned, pledged, set over or negotiated to any person or entity without the prior express written consent of Bank. Notwithstanding any other provisions contained herein, Bank may sell, transfer, negotiate, assign or grant participations in all or a portion of its rights in any of the Loan Documents, in this Agreement, to any person or entity without prior notice to Borrower, provided, however, that any such assignee shall be bound by the terms and provisions of the Loan Documents and this Agreement.
13. Jury Trial Waiver.
BORROWER AND BANK EACH ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH OF THEM, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT, WITH COUNSEL OF THEIR CHOICE, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTION OF ANY OF THEM. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY BANK OR BORROWER, EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY EACH OF THEM.
14. Complete Agreement of Parties. This Agreement constitutes the entire agreement between Bank and Borrower arising out of, related to or connected with the subject matter of this Agreement. Any supplements, modifications, waivers or terminations of this Agreement shall not be binding unless executed in writing by the parties to be bound thereby. No waiver of any provision of this Agreement shall constitute a waiver of any other provisions of this Agreement (whether similar or not), nor shall such waiver constitute a continuing waiver unless otherwise expressly so provided. However, this Agreement does not alter or amend any provision of any of the Loan Documents except to the extent of the provisions expressly set forth herein.
15. Execution In Counterparts. This Agreement may be executed in any number of counterparts each of which, when so executed and delivered, shall be deemed an original, and all of which together shall constitute but one and the same agreement.
16. Contradictory Terms/Severability. In the event that any term or provision of this Agreement contradicts any term or provision of any other document, instrument or agreement between the parties including, but not limited to, any of the Loan Documents, the terms of this Agreement shall control. If any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, such provision shall be severable from all other provisions of this Agreement, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not be adversely affected or impaired, and shall thereby remain in full force and effect.
17. Headings. All headings contained herein are for convenience purposes only, and shall not be considered when interpreting this Agreement.
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18. Continuing Cooperation. The parties hereto shall cooperate with each other in carrying out the terms and intent of this Agreement, and shall execute such other documents, instruments and agreements as are reasonably required to effectuate the terms and intent of this Agreement.
19. Consultation With Counsel. Each party hereto acknowledges that (i) it has been represented by counsel of its own choice at each stage in the negotiation of this Agreement; (ii) it has relied on such counsel's advice throughout all of the negotiations which preceded the execution of this Agreement, and in connection with the preparation and execution of this Agreement; (iii) such counsel has read this Agreement; (iv) such counsel has advised such party concerning the validity and effectiveness of this Agreement, and the transactions to be consummated in accordance therewith and/or each party has had the opportunity to consult with counsel and has voluntarily waived doing so; and (v) each party hereto is freely and voluntarily entering into this Agreement.
[The remainder of this page is intentionally left blank.]
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AGREED AND ACCEPTED: | |||
COMERICA BANK |
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By: |
/s/ ILLEGIBLE |
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Dated: 3/31/04 |
Title: | Senior Vice President | ||
NUVASIVE, INC. |
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By: |
/s/ KEVIN O'BOYLE |
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Dated: 3/31/04 |
Title: | CFO |
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Files as Exhibit 10.40 to this Registration Statement
1
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1930, AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAWS THEY MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation. | NuVasive, Inc., a Delaware corporation | |
Number of Shares: | 45,000 | |
Class of Stock. | Series D-1 Preferred | |
Initial Exercise Price: | $4.30 per share | |
Issue Date | March 12, 2004 | |
Expiration Date: | March 12, 2014 |
THIS WARRANT CERTIFIES THAT, for good and valuable consideration, the receipt of which is hereby acknowledged, COMERICA BANK or its assignee ("Holder") is entitled to purchase the number of fully paid and unassessable shares of the class of securities (the "Shares") of the corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this warrant, subject to the provisions and upon the terms and conditions set forth in this warrant.
ARTICLE 1. EXERCISE.
1.1 Method of Exercise. Holder may exercise this warrant by delivering this warrant and a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased.
1.2 Conversion Right. In lieu of exercising this warrant as specified in Section 1.1, Holder may from time to time convert this warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.3.
1.3 Fair Market Value. If the Shares are traded regularly in a public market, the fair market value of the Shares shall be the average closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the ten business days immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not regularly traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment.
1.4 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this warrant has not been fully exercised or converted and has not expired, a new warrant representing the Shares not so acquired.
1.5 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in
1
the case of mutilation, on surrender and cancellation of this warrant, the Company at its expense shall execute and deliver, in lieu of this warrant, a new warrant of like tenor.
1.6 Sale, Merger, or Consolidation of the Company.
1.6.1 " Acquisition ." For the purpose of this warrant, "Acquisition" means any sale, exclusive license, or other disposition of all or substantially all of the assets (including intellectual property) of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction.
1.6.2 Assumption of Warrant. If upon the closing of any Acquisition the successor entity assumes the obligations of this warrant, then this warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. The Company shall use reasonable efforts to cause the surviving corporation to assume the obligations of this warrant.
1.6.3 Nonassumption. If upon the closing of any Acquisition the successor entity does not assume the obligations of this warrant and Holder has not otherwise exercised this warrant in full, then this warrant shall be deemed to have been automatically converted pursuant to Section 1.2 immediately prior to the closing of the Acquisition and thereafter Holder shall participate in the Acquisition on the same terms as other holders of the same class of securities of the Company.
1.7 Right to Call Warrant. At Company's option, Company shall have the right to require the Holder to sell the warrant to Company under the circumstances set forth on Exhibit A .
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its Series D-1 Preferred Stock payable in Series D-1 Preferred Stock, or other securities, subdivides the outstanding Series D-1 Preferred Stock into a greater amount of Series D-1 Preferred Stock, then upon exercise of this warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this warrant, Holder shall be untitled to receive, upon exercise or conversion of this warrant, the number and kind of securities and property that Holder would have received for the Shares if this warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Certificate of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new warrant for such new securities or other property. The new warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number or shares, the Warrant Price shall be
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proportionately increased. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a greater number of shares, the Warrant Price shall be proportionately decreased.
2.4 Adjustments for Diluting Issuances. The Company's Certificate of Incorporation, as such may be amended from time to time, sets forth the anti-dilution rights of the Series D-1 Preferred Stock issuable upon exercise of the warrant.
2.5 No Impairment. The Company shall not, by amendment of its Certificate of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this warrant by the Company, but shall at all times in good faith assist in carrying out all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. Notwithstanding the above, nothing in this Section 2.5 shall prohibit the Company from treating Holder in the same manner as all other holders of the class of securities for which this warrant is exercisable.
2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price.
2.7 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of this warrant and the Number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of this warrant, the Company shall eliminate such fractional share interest by paying Holder amount computed by multiplying the fractional interest by the fair market value of a full Share.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company hereby represents and warrants to the Holder as follows:
(a) All Shares which may be issued, upon the exercise of the purchase right represented by this warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions an transfer provided for herein or under applicable federal and state securities laws.
(b) The Company's capitalization table attached to this warrant is true and complete as of the Issue Date.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to effect any reclassification or recapitalization of common stock; or (c) to merge or consolidate with or into any other corporation (such that the holders of the Company's securities before the transaction own less than 50% of the outstanding voting securities of the surviving entity after the transaction), or sell, lease, exclusively license, or convey all or substantially all of its assets, or to liquidate, dissolve or windup, then, in connection with each such event, the Company shall give Holder (1) at least 10 days prior written notice of the date on which a record will be taken for such dividend or distribution rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (a) above; and (2) in the case of the matters referred to in (b) and (c) above at least 10 days prior written notice of the date when the same will take place (and specifying the date on which the holders
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of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event).
3.3 Information Rights. So long as the Holder holds this warrant and/or any of the Shares, the Company shall deliver to the Holder (a) within one hundred twenty (120) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (b) within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF HOLDER. Holder (and its affiliates) hereby represents and warrants to and for the benefit of the company, with knowledge that the company is relying thereon in entering into this warrant and issuing this warrant to holder, as follows:
4.1 Purchase Entirely for Own Account. By Holder's (and its affiliates') execution of this Warrant, Holder (and its affiliates) hereby confirms that this Warrant, the Shares issuable upon exercise of this Warrant, and any shares of the Company's common stock issued upon conversion of the Shares (collectively, the "Securities") shall be acquired for investment for Holder's (and its affiliates') own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Holder (and its affiliates) has no present intention of selling, granting any participation in, or otherwise distributing the same; provided , however , that Holder (and its affiliates) may transfer all or part of this Warrant, the Shares issuable upon exercise of this Warrant and any shares of the Company's common stock issued upon conversion of the Shares to its affiliates. By executing this Warrant, Holder (and its affiliates) further represents that Holder (and its affiliates) does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person, or to any third person, with respect to any of the Securities. Holder (and its affiliates) represents that it has full power and authority to enter into this Warrant.
4.2 Investment Experience. Holder (and its affiliates) 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 Securities.
4.3 Accredited Investor. Holder (and its affiliates) is an "accredited investor" within the meaning of Securities and Exchange Commission Rule 501 of Regulation D, as now in effect.
4.4 Restricted Securities. Holder (and its affiliates) understands that the Securities it is and shall be 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 be resold without registration under the Securities Act of 1933, as amended (the "Act"), only in certain limited circumstances. In this connection, Holder (and its affiliates) represents that it is familiar with Rule 144 promulgated under the Act, as now in effect, and understands the resale limitations imposed thereby and by the Act.
ARTICLE 5. MISCELLANEOUS.
5.1 Term: Notice of Expiration. This warrant is exercisable in whole or in part at any time and from time to time on or before the Expiration Date set forth above. If this warrant has not been exercised prior to the Expiration Date, this warrant shall be deemed to have been automatically exercised on the Expiration Date by "cashless" conversion pursuant to Section 1.2.
5.2 Legends. This warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS, AND MAY NOT
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BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
THIS SECURITY IS SUBJECT TO THE RESTRICTIONS ON TRANSFER OF A CERTAIN WARRANT DATED JANUARY 09, 2003 BY AND BETWEEN THE CORPORATION AND THE HOLDER THEREOF, INCLUDING WITHOUT LIMITATION SECTION 5.10 PROVIDING FOR MARKET STAND-OFF RIGHTS.
In addition, the Securities shall be imprinted with any legend required by the laws of the State of California, including any legend required by the California Department of Corporations and Sections 417 and 418 of the California Corporations Code.
5.3 Compliance with Securities Laws on Transfer. This warrant and the Shares issuable upon exercise of this warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part (i) unless and until the transferee has agreed in writing for the benefit of the Company to be bound by all of the provisions of this warrant as if such transferee were the original Holder hereof, and (ii) without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinion reasonably satisfactory to the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate (as such term is defined under the Act) of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale.
5.4 Transfer Procedure. Subject to the provisions of Section 5.3, Holder may transfer all or part of this warrant or the Shares issuable upon exercise of this warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this warrant to the Company for reissuance to the transferee(s) (and Holder, if applicable); provided , however , subject to the provisions of Section 5.3, that Holder may transfer all or part of this warrant to its affiliates, including, without limitation, Comerica Incorporated, at any time without notice to the Company, and such affiliate shall then be entitled to all the rights of Holder under this warrant and any related agreement, and the Company shall cooperate fully in ensuring that any stock issued upon exercise of this warrant is issued in the name of the affiliate that exercises the warrant. The terms and conditions of this warrant shall inure to the benefit of, and be binding upon, the Company and the holders hereof and their respective permitted successors and assigns. Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this warrant to any person who directly competes with the Company.
5.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address, as may have been furnished to the Company or the
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Holder, as the case may be, in writing by the Company or such Holder from. time to time. All notices to the Holder shall be addressed as follows:
Comerica Bank
Attn: Warrant Administrator Technology and, Life Sciences Division P.O. Box 7279 San Francisco, CA 94120 7279 |
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Comerica Bank Attn Warrant Administrator Technology and Life Sciences Division 5 Palo Alto Square,, Suite 800 3000 El Camino Real Palo Alto, CA 943 06 |
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5.6 Amendments. This warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.
5.7 Attorneys' Fees. In the event of any dispute between the parties concerning the terms and provisions of this warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees.
5.8 Governing Law. This warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law.
5.9 No Stockholder Rights. Except as expressly set forth herein, this warrant in and of itself shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company.
5.10 Market Stand-off. Holder hereby agrees that, during the period of duration specified by the Company and an underwriter of common stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Act, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of any securities of the Company held by it at any time during such period except common stock included in such registration; provided, however, that such agreement shall only apply to the first such registration statement of the Company which covers common stock (or other securities) to be sold on its behalf to the public in an underwritten offering and that such agreement shall not exceed 180 days after the effective date for such registration statement. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the securities of Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period.
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5.11 Counterparts. This warrant may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
NUVASIVE, INC. | ||||||
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Kevin O'Boyle |
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/s/ KEVIN O'BOYLE |
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CFO |
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Robert A. Daniel |
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/s/ ROBERT A. DANIEL |
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Controller |
Authorized signatories under Corporate Resolutions to Borrow or an authorized signer(s) under a resolution covering warrants must sign the warrant. |
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ACKNOWLEDGED AND AGREED: |
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COMMERCIA BANK |
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/s/ PETER M. DREES |
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Peter M. Drees |
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VP |
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Upon written notice to the Holder, Company shall have the right (the "Call Right") to require that the Holder sell the warrant to Company in consideration of the Company's payment to Holder (due upon delivery of Company's written notice) of $10,000. The foregoing notwithstanding, Company may only exercise the Call Right during the period commencing on the Issue Date and ending one hundred and eighty days (180) thereafter.
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1. The undersigned hereby elects to purchase shares of the stock of NuVasive, Inc. pursuant to the terms of the attached warrant, and tenders herewith payment of the purchase price of such shares in full.
1. The undersigned hereby elects to convert the attached warrant into shares in the manner specified in the warrant. This conversion is exercised with respect to of the shares covered by the warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below:
Comerica
Bank
Attn: Warrant Administrator
Technology and Life Sciences Division
11.0. Box 7279
San Francisco, CA 941204279
3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws.
COMERICA BANK , or Registered Assignee | ||
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Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 20, 2004 (except for paragraph 3 of Note 9, as to which the date is March 31, 2004) in Amendment No. 1 to the Registration Statement on Form S-1 (No. 333-113344) and related Prospectus of NuVasive, Inc. expected to be filed on April 8, 2004.
/s/ ERNST & YOUNG LLP
San
Diego, California
April 8, 2004