UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): March 26, 2010

 

 

ALPHATEC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   000-52024   20-2463898

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

5818 El Camino Real

Carlsbad, CA 92008

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (760) 431-9286

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Item 1.01. Entry Into a Material Definitive Agreement.

The information set forth in Item 2.01 of this Current Report on Form 8-K is incorporated herein by reference into this Item 1.01.

In connection with the closing of our acquisition of Scient’x S.A. (“Scient’x”), on March 26, 2010, we and the former shareholders of Scient’x, including our affiliates HealthpointCapital Partners, L.P. and HealthpointCapital Partners II, L.P. (collectively, the “Registration Rights Holders”), entered into a registration rights agreement pursuant to which the Registration Rights Holders have registration rights with respect to the shares issued in connection with the acquisition and any other of our shares held by such stockholders that constitute “restricted securities” under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”) (referred to as the “Registrable Shares”).

Pursuant to the registration rights agreement, the Registration Rights Holders have demand and piggy-back registration rights with respect to the Registrable Shares. At any time after June 24, 2010, HealthpointCapital may demand that we register all or a portion of the Registrable Shares for sale under the Securities Act, so long as the market value of such securities on the date of such request is at least $10 million or represent 3% of the total outstanding shares of our common stock. We will effect the registration as requested, unless disinterested members of our board of directors determine that such registration would materially interfere with any pending or contemplated acquisition, divestiture, financing, registered primary offering or other transaction, or would be materially detrimental to us and our stockholders, in which case we will have the right to defer such registration for a period of up to 60 days.

In addition, if at any time we register any shares of our capital stock, other than in connection with (i) a registration pursuant to an exercise of demand rights described above, (ii) a registration relating solely to a business combination or merger involving us, (iii) a registration relating solely to our employee benefit plans, (iv) a registration relating to our reorganization or other transaction under Rule 145 of the Securities Act, or (v) any registration on any form that does not include substantially the same information as would be required to be included in a registration covering the sale of Registrable Securities, the Registration Rights Holders are entitled to notice of the registration and to include all or a portion of their Registrable Shares in the registration.

A holder’s right to demand or include Registrable Shares in a registration is subject to the right of the underwriters to limit the number of shares included in the offering.

Subject to certain exceptions and provided our officers and directors enter into similar agreements, in connection with a piggy-back registration, the Registration Rights Holders have agreed that they will not effect any public sale or distribution of our common stock, enter into a transaction which would have the same effect, or enter into any swap, hedge, or other arrangement that transfers, in whole or in part, any economic consequences of ownership of such securities, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or to enter into any such transaction, swap, hedge or other arrangement, during the 10 days prior to and the 90 days after the effective time of any underwritten piggy-back registration in which any of such Registration Rights Holder’s Registrable Shares are included.

The registration rights agreement contains customary provisions allocating rights and responsibilities and obligating us and the Registration Rights Holders to indemnify each other against certain liabilities arising from any registration of securities.

The foregoing summary of the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the full text thereof, a copy of which is filed as Exhibit 4.1 to this Current Report on Form 8-K and incorporated herein by reference.

 

Item 2.01 Completion of Acquisition or Disposition of Assets.

On March 26, 2010, we completed our acquisition of Scient’x S.A., a global medical device company based in France that designs, develops and manufacturers surgical implants to treat disorders of the spine. We had disclosed our entry into a definitive agreement for this acquisition in a Current Report on Form 8-K filed on December 22, 2009. The acquisition was structured as a share purchase transaction, pursuant to the terms of a Share Purchase Agreement, dated December 17, 2009, by and among us, Healthpoint (Luxembourg) I, S.a.r.l., Healthpoint (Luxembourg) II, S.a.r.l., HealthpointCapital Partners, L.P. and HealthpointCapital Partners II, L.P., to acquire, directly or indirectly, approximately 94.8% of the issued and outstanding shares of Scient’x (the “Share Purchase Agreement”). Subsequent to the execution of the Share Purchase Agreement, we entered into separate agreements with the remaining shareholders of Scient’x that allowed us to acquire 100% of the issued and outstanding shares of Scient’x. The aggregate purchase price paid to acquire 100% of Scient’x was 23,730,644 shares of our common stock. The acquisition of Scient’x is referred to as the Share Purchase. Scient’x is now a wholly owned indirect subsidiary of Alphatec Holdings, Inc.

 


As of February 1, 2010, HealthpointCapital Partners, L.P. and HealthpointCapital Partners II, L.P., which we otherwise refer to collectively as HealthpointCapital, and their affiliates in the aggregate held approximately 39.5% of the shares of our common stock and approximately 94.8% of the shares of Scient’x. Accordingly, HealthpointCapital received shares of our common stock in connection with the Share Purchase proportional to its ownership interest in Scient’x. Five of our directors, Mortimer Berkowitz III, John H. Foster, R. Ian Molson, Stephen E. O’Neil and Stephen J. Hochschuler, M.D., are beneficial owners of or affiliated with HealthpointCapital, LLC, which is the ultimate parent of HealthpointCapital, and Messrs. Berkowitz, Foster and Molson are also directors of either Scient’x or any affiliate of Scient’x. Following the Share Purchase, HealthpointCapital owns approximately 54.5% of our common stock based on our shares outstanding at March 31, 2010.

Our board of directors formed a special committee of disinterested directors to evaluate and, if appropriate, negotiate the transaction with Scient’x, and such special committee unanimously recommended that our board of directors and stockholders approve the Share Purchase Agreement and the issuance of our shares contemplated therein. Following such recommendation by the special committee, our board of directors unanimously approved the Share Purchase Agreement.

Pursuant to the terms of the Share Purchase Agreement, the consideration paid for 100% of the shares of Scient’x was fixed at 24,000,000 shares of our common stock, reduced by a certain number of shares calculated at the closing in exchange for our payment of certain fees and expenses incurred by HealthpointCapital in connection with the Share Purchase.

A summary of the Share Purchase Agreement was contained in Item 1.01 of the Current Report on Form 8-K filed on December 22, 2009, and a copy of the agreement was filed as Exhibit 2.1 to that report.

 

Item 3.02 Unregistered Sales of Equity Securities.

The information set forth in Item 2.01 of this Current Report on Form 8-K is incorporated herein by reference into this Item 3.02. The issuance of the shares of common stock in connection with the Share Purchase was not registered under the Securities Act in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act.

 

Item 9.01. Financial Statements and Exhibits.

(a)  Financial statements of businesses acquired . In accordance with Item 9.01(a), the audited consolidated financial statements of Scient’x Groupe S.A.S. for the fiscal years ended December 31, 2009 and 2008 are filed as Exhibit 99.1 to this Current Report on Form 8-K.

(b) Pro Forma Financial Information . In accordance with Item 9.01(b), the pro forma consolidated financial statements of Alphatec Holdings, Inc. and Scient’x Groupe S.A.S. as of the fiscal year ended December 31, 2009 are filed as Exhibit 99.2 to this Current Report on Form 8-K.

(d) Exhibits .

 

Exhibit No.

  

Description

4.1    Registration Rights Agreement, dated March 26, 2010, by and among Alphatec Holdings, Inc. and the other signatories thereto
23.1    Consent of Deloitte & Associes
99.1    Audited consolidated financial statements of Scient’x Groupe S.A.S. for the fiscal years ended December 31, 2009 and 2008
99.2    Pro forma consolidated financial statements of Alphatec Holdings, Inc. and Scient’x Groupe S.A.S. as of the fiscal year ended December 31, 2009


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    ALPHATEC HOLDINGS, INC.
Dated: March 31, 2010    
   

/s/ Ebun S. Garner, Esq.

    Ebun S. Garner, Esq.
    General Counsel and Vice President

 


EXHIBIT INDEX

 

Exhibit Number

  

Description

4.1    Registration Rights Agreement, dated March 26, 2010, by and among Alphatec Holdings, Inc. and the other signatories thereto
23.1    Consent of Deloitte & Associes
99.1    Audited consolidated financial statements of Scient’x Groupe S.A.S. for the fiscal years ended December 31, 2009 and 2008
99.2    Pro forma consolidated financial statements of Alphatec Holdings, Inc. and Scient’x Groupe S.A.S. as of the fiscal year ended December 31, 2009

 

Exhibit 4.1

 

R EGISTRATION R IGHTS A GREEMENT , dated as of March 26, 2010 (this “ Agreement ”), by and among Alphatec Holdings, Inc., a Delaware corporation (the “ Issuer ”), HealthpointCapital Partners, L.P., a Delaware limited partnership (“ HPC ”), HealthpointCapital Partners II, L.P., a Delaware limited partnership (“ HPC II ” and together with HPC, the “ HPC Entities ”), and each additional person who becomes a party hereto pursuant to Section 11(b) or 11(c) by signing a counterpart signature page to this Agreement in the form of Exhibit A attached hereto.

I NTRODUCTION

Reference is made to (i) the Stockholders’ Agreement, dated as of March 17, 2005 (the “ Stockholders’ Agreement ”), among the Issuer, HPC and the Investors party thereto, and (ii) the Subscription Agreement, dated June 4, 2009, by and between the Issuer and HPC II (the “ Subscription Agreement ”). Pursuant to Section 5 of the Stockholders’ Agreement and Article IV of the Subscription Agreement, HPC and HPC II, respectively, have certain registration rights with respect to shares of the Issuer’s common stock, par value $0.0001 per share (“ Issuer Common Stock ”).

Reference is made to the Acquisition Agreement, dated as of December 17, 2009, by and among the Issuer, the HPC Entities, Healthpoint (Luxembourg) I S.à r.l., a Luxembourg société à responsabilité limitée (“ LuxCo I ”), HealthPoint (Luxembourg) II, S.à r.l, a Luxembourg société à responsabilité limitée (“ LuxCo II ”), Coöperatie Alphatec Holdings Europa U.A., a Dutch co-operative association ( coöperatie met uitsluiting van aansprakelijkheid ) (“ AcquisitionCo ”) and Alphatec Holdings International C.V., a Dutch limited partnership ( commanditaire vennootschap ) (“ AcquisitionHoldCo ”), (the “ Acquisition Agreement ”). Pursuant to the Acquisition Agreement, AcquisitionCo acquired ordinary shares of Scient’x, S.A. (“ Scient’x ”) and Scient’x Groupe S.A.S. from Affiliates of the HPC Entities in exchange for a number of shares of Issuer Common Stock determined in accordance with the Acquisition Agreement.

Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Acquisition Agreement.

In connection with the acquisition of such shares of Issuer Common Stock by the HPC Entities, and to induce the HPC Entities and Issuer to consummate the transactions set forth in the Acquisition Agreement, (i) the Issuer has agreed to enter into this Agreement and to grant to the HPC Entities the rights set forth in this Agreement and (ii) the HPC Entities have agreed to enter into this Agreement and to waive or terminate previously granted registration rights under the Stockholders Agreement and the Subscription Agreement as set forth in this Agreement.


A GREEMENT

NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained in this Agreement, the HPC Entities and the Issuer agree as follows:

1. Definitions . For purposes of this Agreement:

Acquisition Closing Date ” means the date on which the closing of the transactions contemplated by the Acquisition Agreement occurs.

Commission ” means the United States Securities Exchange Commission.

Eligible Market ” means (i) The Nasdaq Global Market Select, (ii) The Nasdaq Global Market, (iii) The Nasdaq Capital Market, (iv) The New York Stock Exchange, Inc., (v) the American Stock Exchange or (vi) the OTC Bulletin Board.

Exchange Act ” means the Securities Exchange Act of 1934, as amended.

Excluded Registration ” means until the 135 th day after the Acquisition Closing Date, a resale registration of shares of Issuer Common Stock that are issued and sold by Issuer to third parties in a private placement transaction that is consummated after the signing of the Acquisition Agreement and prior to the Acquisition Closing Date. For the avoidance of doubt, a resale registration that qualifies as an “ Excluded Registration ” pursuant to the previous sentence shall no longer qualify as an “ Excluded Registration ” if such registration has not become effective by the 135 th day after the Acquisition Closing Date.

Holder ” means (i) each of the HPC Entities with respect to shares of Issuer Common Stock held by the HPC Entities and/or any of their Affiliates, (ii) upon becoming a party to this Agreement in accordance with Section 11(c), the Minority Scient’x Shareholders (as defined herein) with respect to shares of Issuer Common Stock held by the Minority Scient’x Shareholders, and (iii) any person to whom the rights or obligations under this Agreement with respect to all or a portion of the Registrable Securities have been transferred or assigned in accordance with Section 11(b).

Post Closing Period ” means the period ending on (a) the 90 th day after the Acquisition Closing Date or (b) if a resale registration statement is filed by the Issuer prior to the Acquisition Closing Date to register shares of Issuer Common Stock that are issued and sold by Issuer to third parties in a private placement transaction that is consummated after the signing of the Acquisition Agreement and prior to the Acquisition Closing Date, the 135 th day after the Acquisition Closing Date.

prospectus ” means any preliminary prospectus, final prospectus or summary prospectus prepared in connection with an offering of any Registrable Securities.

register ,” “ registered ,” and “ registration ” refer to a registration effected by preparing and filing with the Commission a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering by the Commission of effectiveness of such registration statement or document.

 

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Registration Expenses ” means all expenses in connection with the Issuer’s performance of or compliance with its obligations under this Agreement, including, without limitation, all (i) registration, qualification and filing fees; (ii) fees, costs and expenses of compliance with securities or blue sky laws (including reasonable fees, expenses and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities under the laws of such jurisdictions as the managing underwriter or underwriters in a registration may designate); (iii) printing expenses; (iv) messenger, telephone and delivery (including delivery by mail or courier services) expenses; (v) fees, expenses and disbursements of counsel for the Issuer and of all independent certified public accountants retained by the Issuer (including the expenses of any special audit and “cold comfort” letters required by or incident to such performance); (vi) Securities Act liability insurance if the Issuer so desires; (vii) fees, expenses and disbursements of any other individuals or entities retained by the Issuer in connection with the registration of the Registrable Securities; (viii) fees, costs and expenses incurred in connection with the listing of the Registrable Securities on each national securities exchange on which the Issuer has made application for the listing of its Common Stock; (ix) internal expenses of the Issuer (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties and expenses of any annual audit) and (x) fees and expenses of one counsel selected by Holders of a majority of the Registrable Securities. Registration Expenses shall not include selling commissions, discounts or other compensation paid to underwriters or other agents or brokers to effect the sale of Registrable Securities, or counsel fees in addition to those provided for in clause (x) above and any other expenses incurred by Holders in connection with any registration that are not specified in the immediately preceding sentence.

Registrable Securities ” means any shares of Issuer Common Stock owned by any Holder, but only to the extent such shares of Issuer Common Stock constitute “restricted securities” under Rule 144 under the Securities Act or the Holder thereof is deemed to be an “affiliate” of the Issuer under Rule 144; provided, however, that Registrable Securities shall not include any shares of Issuer Common Stock (i) that have been sold to the public pursuant to a registration statement or Rule 144, (ii) that have been sold in a private transaction in which the transferor’s rights under this Agreement are not assigned, or (iii) that cease to be outstanding.

Requestor ” means either of the HPC Entities, until such time as neither of the HPC Entities, nor any of their Affiliates or limited or general partners, holds any Registrable Securities, and thereafter any Holder or Holders who, in the aggregate, beneficially own at least 50% of the securities that constitute Registrable Securities.

Securities Act ” means the Securities Act of 1933, as amended.

2. Demand Registrations.

(a) Request for Registration . At any time and from time to time after the expiration of the Post Closing Period, a Requestor may submit a written request (a “Demand

 

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Notice ”) to the Issuer that the Issuer register Registrable Securities under and in accordance with the Securities Act (a “ Demand Registration ”), of all or any portion of the Registrable Securities; provided that the Registrable Securities to be included in such registration shall have a market value on the date such Demand Notice is received of at least $10 million, based on the closing price of the Issuer Common Stock on the trading day immediately preceding the day on which the Demand Notice is delivered, or shall represent at least three percent (3%) of the total shares of Issuer Common Stock then outstanding, or shall represent all Registrable Securities then outstanding. Such Demand Notice shall specify the number and description of Registrable Securities to be sold. Upon receipt of the Demand Notice, the Issuer shall:

(i) within five Business Days after receipt of such Demand Notice, give written notice of the proposed registration to all other Holders; and

(ii) as soon as commercially practicable after expiration of the notice period set forth in this Section 2(a)(ii), use commercially reasonable efforts to effect such registration as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holders joining in such request as are specified in written requests received by the Issuer and who provide the information required by Section 10 of this Agreement within 20 Business Days after the date the Issuer mails the written notice referred to in clause (i) above. If no request for inclusion from a Holder is received within such specified time, such Holder shall have no further right to participate in such registration.

Notwithstanding the foregoing, if the Issuer shall furnish to the Holders a certificate signed by the chief executive officer or chief financial officer of the Issuer stating that in the good faith judgment of the disinterested members of the board of directors of the Issuer, filing a registration statement on or before the date filing would be required in connection with any Demand Registration would materially interfere with any pending or contemplated acquisition, divestiture, financing, registered primary offering, or other transaction involving the Issuer, or would otherwise be materially detrimental to the Issuer and its stockholders other than the Holders or their Affiliates, the Issuer shall have the right to defer such filing or delay its effectiveness for a reasonable period not to exceed 60 calendar days; provided , that such right shall not be exercised more than twice with respect to a request for registration hereunder during any period of twelve consecutive months. The Issuer will pay all Registration Expenses in connection with such withdrawn request for registration.

(b) Shelf Registration . If at the time the Issuer registers Registrable Securities under the Securities Act pursuant to this Section 2, the sale or other disposition of such Registrable Securities by the Holders may be made on a delayed or continuous basis pursuant to a registration statement on Form S-3 (or any successor form that permits the incorporation by reference of future filings by the Issuer under the Exchange Act), or if Form S-3 is not available for use by the Issuer, Form S-1 (or any successor form that permits the incorporation by reference of future filings by the Issuer under the Exchange Act), then such registration statement, unless otherwise directed by the Requestor, shall be filed as a “shelf” registration statement pursuant to Rule 415 under the Securities Act (or any successor rule). Any such shelf registration shall cover the disposition of all Registrable Securities in one or more underwritten

 

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offerings, block transactions, broker transactions, at-market transactions and in such other manner or manners as may be specified by the Requestor and set forth in the plan of distribution included in the registration statement. Except as provided in Section 6(b) hereof, the Issuer shall use commercially reasonable efforts to keep such “shelf” registration continuously effective as long as the delivery of a prospectus is required under the Securities Act in connection with the disposition of the Registrable Securities registered thereby and in furtherance of such obligation, shall supplement or amend such registration statement if, as and when required by the rules, regulations and instructions applicable to the form used by the Issuer for such registration or by the Securities Act or by any other rules and regulations thereunder applicable to shelf registrations. Upon their receipt of a certificate signed by the chief executive officer or chief financial officer of the Issuer stating that, in the judgment of the Issuer, it is advisable to suspend use of a prospectus included in a registration statement due to pending or contemplated material developments or other events that have not yet been publicly disclosed and as to which the Issuer believes public disclosure would be detrimental to the Issuer, the Holders will refrain from making any sales of Registrable Securities under the shelf registration statement for a period of up to 60 calendar days; provided , that this right to cause the Holders to refrain from making sales shall not be exercised by the Issuer more than twice in any twelve-month period (counting as a permitted exercise any exercise by the Issuer of its right to defer the filing or delay its effectiveness of a registration statement under the last paragraph of Section 2(a)). Each Holder agrees that, upon receipt of such notice from the Issuer, such Holder will forthwith discontinue any disposition of Registrable Securities pursuant to the shelf registration statement until the earlier of (X) the expiration of the period indicated in the certificate, if any, and (Y) the Holders’ receipt of a notice from the Issuer to the effect that such suspension has terminated; and shall treat such notice and any non-public information received in connection therewith in the strictest confidence and shall not disseminate such information. If so directed by the Issuer, each Holder will deliver to the Issuer (at the Issuer’s expense) all copies, other than permanent file copies, then in the Holders’ possession, of the most recent resale prospectus covering such Registrable Securities at the time of receipt of such suspension notice.

(c) Underwriting . In connection with any registration under this Section 2, if the Requestor intends to distribute the Registrable Securities covered by any registration under this Section 2 by means of an underwriting, it shall so advise the Issuer in writing; provided that any such underwritten registration shall be on a firm commitment basis and shall represent gross offering proceeds to the Holders aggregating at least $10 million. In such event, the right of any Holder to include its Registrable Securities in such distribution shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided in this Agreement. The Holders proposing to distribute their securities through such underwriting shall (together with the Issuer) enter into an underwriting agreement with one or more underwriters selected by the Requestor having terms and conditions customary for such agreements (which underwriter or underwriters shall be reasonably acceptable to the Issuer). Notwithstanding any other provision of this Section 2, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit a portion of the number of Registrable Securities to be included in such distribution. The Issuer shall so advise all Holders distributing Registrable Securities through such underwriting, and the number of Registrable Securities that may be included in such underwriting shall be allocated among the Holders in such manner as may be determined by the Requestor.

 

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(d) Limitations .

(i) The Issuer shall not be obligated to effect (A) more than two registrations under this Section 2 in any twelve (12) month period, (B) any Demand Registration covering more than 25 million shares of Registrable Securities, or (C) to have more than one (1) “shelf” registration statement pursuant to Rule 415 effective under the Securities Act at any time (other than shelf registrations filed pursuant to Rule 429 under the Securities Act); provided , that a registration pursuant to this Section 2 shall not be counted (X) unless the registration statement pursuant to which such Registrable Securities are being registered is declared effective by the SEC, or (Y) if following such effectiveness, the Issuer delivers a certificate pursuant to Section 2(b) suspending the use of the related prospectus prior to the sale of at least a majority of the Registrable Securities by the Holders covered by such registration statement.

(ii) The Issuer shall be permitted to exclude such Holder’s Registrable Securities from a registration statement if such Holder fails to timely comply with the Issuer’s request for information pursuant to Section 10; provided , if such Holder provides such information prior to the filing of such registration statement (or prior to the final amendment thereto prior to such registration statement being declared effective) the Issuer shall use commercially reasonable efforts to include such Registrable Securities in such registration statement.

3. Piggy-back Registration .

(a) Notice of Registration . If at any time or from time to time the Issuer shall determine to register any of its capital stock, whether or not for its own account (other than pursuant to a Demand Registration, an Excluded Registration, any registration effected pursuant to Form S-4, S-8 or any successor forms, any registration relating solely to the sale of securities to participants in Issuer employee benefit plans, any registration relating to the reorganization of the Issuer or other transaction under Rule 145 of the Securities Act, or any registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities (other than information relating to the Holders)), the Issuer shall:

(i) provide to each Holder written notice thereof at least 15 Business Days prior to the filing of the registration statement by the Issuer in connection with such registration; and

(ii) include in such registration, and in any underwriting involved therein, all those Registrable Securities specified in a written request by each Holder received by the Issuer within ten Business Days after the Issuer mails the written notice referred to above, subject to the provisions of this Section 3.

 

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Upon their receipt of a certificate signed by the chief executive officer or chief financial officer of the Issuer stating that, in the judgment of the Issuer, it is advisable to suspend use of a prospectus included in a registration statement due to pending or contemplated material developments or other events that have not yet been publicly disclosed and as to which the Issuer believes public disclosure would be detrimental to the Issuer, the Holders will refrain from making any sales of Registrable Securities under the registration statement for a period of up to 60 calendar days; provided , that this right to cause the Holders to refrain from making sales shall not be exercised by the Issuer more than twice in any twelve-month period (counting as a permitted exercise any exercise by the Issuer of its right to defer the filing or delay its effectiveness of a registration statement under the last paragraph of Section 2(a)). Each Holder agrees that, upon receipt of such notice from the Issuer, such Holder will forthwith discontinue any disposition of Registrable Securities pursuant to the shelf registration statement until the earlier of (X) the expiration of the period indicated in the certificate, if any, and (Y) the Holders’ receipt of a notice from the Issuer to the effect that such suspension has terminated; and shall treat such notice and any non-public information received in connection therewith in the strictest confidence and shall not disseminate such information. If so directed by the Issuer, each Holder will deliver to the Issuer (at the Issuer’s expense) all copies, other than permanent file copies, then in the Holders’ possession, of the most recent resale prospectus covering such Registrable Securities at the time of receipt of such suspension notice.

(b) Underwriting . The right of any Holder to registration pursuant to this Section 3 shall be conditioned upon the participation by such Holder in the underwriting arrangements specified by the Issuer in connection with such registration and the inclusion of the Registrable Securities of such Holder in such underwriting to the extent provided in this Agreement. All Holders proposing to distribute their Registrable Securities through such underwriting shall (together with the Issuer) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Issuer and take all other actions, and deliver such opinions and certifications, as may be reasonably requested by such managing underwriter. Notwithstanding any other provision of this Section 3, if the managing underwriter determines that marketing factors require a limitation of a portion of the number of shares to be underwritten, the managing underwriter may limit the number of Registrable Securities to be included in such registration. The Issuer shall so advise all Holders distributing Registrable Securities through such underwriting, and in the event that Registrable Securities in a registration would exceed twenty five percent (25%) of all shares included in such registration, the Issuer may limit the number of Registrable Securities included in such registration to not less than twenty five (25%) of the number of shares included in such registration, and in such case the number of Registrable Securities that may be included in such registration shall be allocated among the Holders in such manner as may be determined by the Requestor.

(c) Right to Terminate Registration . The Issuer shall have the right to terminate or withdraw any registration initiated by it under this Section 3 whether or not any Holder has elected to include Registrable Securities in such registration without incurring any liability to any Holder.

(d) Limitations .

 

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(i) The Issuer shall not be required to include more than 25 million shares of Registrable Securities in any individual registration under this Section 3.

(ii) The Issuer shall be permitted to exclude such Holder’s Registrable Securities from a registration statement if such Holder fails to timely comply with the Issuer’s request for information pursuant to Section 10; provided, if such Holder provides such information prior to the filing of such registration statement (or prior to the final amendment thereto prior to such registration statement being declared effective) the Issuer shall use commercially reasonable efforts to include such Registrable Securities on such registration statement.

(iii) Notwithstanding anything to the contrary contained herein, Registrable Securities which are subject to any lock-up or covered by an effective registration statement on Form S-3 will not be entitled to the registration rights set forth in this Section 3.

4. Holdback Agreements .

(a) Holders of Registrable Securities . Notwithstanding anything contained herein to the contrary and to the extent not inconsistent with applicable law, upon the request of the applicable underwriter, each holder of Registrable Securities shall not effect any public sale or distribution (including sales pursuant to Rule 144 under the Securities Act) of Issuer Common Stock, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any economic consequences of ownership of such securities, whether any such aforementioned transaction is to be settled by delivery of such securities or other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or to enter into any such transaction, swap, hedge or other arrangement, in each case during the 10 days prior to and the 90 days after the effective time of any underwritten piggy-back registration pursuant to Section 3 hereof in which any of such holder’s Registrable Securities are included (except as part of such underwritten piggy back registration) (a “ Stand-off Period ”), except as otherwise agreed to by the underwriter managing any such underwritten registration. If (i) the Issuer issues an earnings release or other material news or a material event relating to the Issuer during the last 17 days of the Stand-off Period or (ii) prior to the expiration of the Stand-off Period, the Issuer announces that it will release earnings results during the 16 day period beginning upon the expiration of the Stand-off Period, then to the extent necessary for a managing or co-managing underwriter of a registered offering required hereunder to comply with NASD Rule 2711(f)(4), the Stand-off Period shall be extended until 18 days after the earnings release or the occurrence of the material news or event, as the case may be. Notwithstanding the foregoing, the provisions of this Section 4(a) shall only apply if (i) all officers and directors of the Issuer enter into similar agreements and (ii) no such officer or director is released in whole or in part from his or her obligations under such agreement unless all Holders are similarly released from the provisions of this Section 4(a) as to the same percentage of their Issuer Common Stock as to which such officer or director is released.

 

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(b) The Issuer . The Issuer shall agree to such limitation on its public sale or distribution of Issuer Common Stock as may be reasonably requested by the managing underwriters in connection with any underwritten registration; provided, that such limitations shall not continue beyond the 135 th day after the effective date of the registration statement in question.

5. Expense of Registration . All Registration Expenses incurred in connection with the registration and other obligations of the Issuer pursuant to Sections 2, 3 and 6 shall be borne by the Issuer, and all underwriting discounts and selling commissions incurred in connection with any such registrations shall be borne by the Holders of the securities so registered pro rata on the basis of the number of shares so registered.

6. Registration Procedures . If and whenever the Issuer is required by the provisions of this Agreement to effect the registration of Registrable Securities, the Issuer shall:

(a) promptly prepare and file with the Commission a registration statement with respect to such Registrable Securities on any form that may be utilized by the Issuer and that shall permit the disposition of the Registrable Securities in accordance with the intended method or methods of disposition thereof, and use all commercially reasonable efforts to cause such registration statement to become effective as promptly as practicable and remain effective thereafter as provided in this Agreement, provided , that if a Holder’s Registrable Securities are covered by such registration statement, then prior to filing a registration statement or prospectus or any amendments or supplements thereto, the Issuer will furnish to the Requestor, its counsel and the underwriters copies of all such documents proposed to be filed sufficiently in advance of filing to provide them with a reasonable opportunity to review such documents and comment thereon;

(b) prepare and file with the Commission such amendments (including post-effective amendments) and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to keep such registration statement effective and current and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Securities covered by such registration statement, including such amendments (including post-effective amendments) and supplements as may be necessary to reflect the intended method of disposition by the prospective seller or sellers of such Registrable Securities, provided , that, (i) except in the case of a shelf registration, such registration statement need not be kept effective and current for longer than 90 days subsequent to the effective date of such registration statement and (ii) in the case of a shelf registration, such shelf registration need not be kept effective and current after the second anniversary of the effective date of such registration statement;

(c) subject to receiving reasonable assurances of confidentiality and subject to limitations reasonably imposed by the Issuer to preserve attorney client privilege, for a reasonable period after the filing of such registration statement, and throughout each period during which the Issuer is required to keep a registration effective, make available for inspection by the Holders of Registrable Securities being offered, and any underwriters, and their respective counsel, such financial and other information and books and records of the Issuer, and cause the

 

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officers, directors, employees, counsel and independent certified public accountants (subject to such reasonable procedures and limitations as such parties may require) of the Issuer to respond to such inquiries as shall be reasonably necessary, in the judgment of such counsel, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act;

(d) promptly notify the Holders of Registrable Securities being offered and any underwriters and confirm such advice in writing, (i) when such registration statement or the prospectus included in such registration statement or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to such registration statement or any post-effective amendment, when the same has become effective, (ii) of any comments by the Commission, by the Financial Industry Regulatory Authority (“ FINRA ”), and by the blue sky or securities commissioner or regulator of any state with respect thereto or any request by any such entity for amendments or supplements to such registration statement or prospectus or for additional information, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of such registration statement or the initiation or threatening of any proceedings for that purpose, (iv) of the receipt by the Issuer of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, or (v) at any time when a prospectus is required to be delivered under the Securities Act, that such registration statement, prospectus, prospectus amendment or supplement or post-effective amendment, or any document incorporated by reference in any of the foregoing, contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, and at the request of any Holder, the Issuer will prepare a supplement or amendment to such prospectus, so that, as thereafter delivered to purchasers of such shares, such prospectus will not contain any untrue statements of a material fact or omit to state any fact necessary to make the statements therein not misleading;

(e) furnish to each Holder of Registrable Securities being offered, a signed counterpart, addressed to such Holder (and, if applicable, any of its Affiliates), of (i) any opinion of counsel to the Issuer delivered to any underwriter and (ii) any comfort letter from the Issuer’s independent public accountants delivered to any underwriter;

(f) furnish to each Holder of Registrable Securities being offered, and any underwriters, prospectuses or amendments or supplements thereto, in such quantities as they may reasonably request and as soon as practicable, that update previous prospectuses or amendments or supplements thereto;

(g) use all commercially reasonable efforts to (i) register or qualify the Registrable Securities to be included in a registration statement under this Agreement under such other securities laws or blue sky laws of such jurisdictions within the United States of America as any Holder of such Registrable Securities being offered or any underwriter of the securities being sold shall reasonably request, (ii) keep such registrations or qualifications in effect for so long as the registration statement remains in effect and (iii) take any and all such actions as may be reasonably necessary or advisable to enable such Holder or underwriter to consummate the disposition in such jurisdictions of such Registrable Securities owned by such Holder; provided ,

 

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however , that the Issuer shall not be required for any such purpose to (x) qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not otherwise be required to qualify but for the requirements of this Section 6(g) or (y) consent to general service of process in any such jurisdiction;

(h) cause all such Registrable Securities to be listed or accepted for quotation on an Eligible Market ( provided , that the Issuer shall use all commercially reasonable efforts to cause such Eligible Market to be one of the stock exchanges identified in clauses (i) through (v) of the definition of “ Eligible Market ”);

(i) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement;

(j) upon the sale of any Registrable Securities pursuant to such registration statement, remove all restrictive legends from all certificates or other instruments evidencing the Registrable Securities; and

(k) otherwise use all commercially reasonable efforts to comply with all applicable provisions of the Securities Act, and rules and regulations of the Commission, and make available to the Holders, as soon as reasonably practicable, an earnings statement covering a period of at least twelve months beginning not later than the first day of the Issuer’s fiscal quarter next following the effective date of the related registration statement, which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.

7. Indemnification . In the event any of the Registrable Securities are included in a registration statement under this Agreement:

(a) To the extent permitted by law, the Issuer agrees to indemnify and hold harmless each Holder, and each of its respective officers, employees, affiliates, directors, partners, members, attorneys and agents, and each person, if any, who controls the Holder within the meaning of the Securities Act (each, a “ Holder Indemnified Party ”), from and against any expenses, losses, judgments, claims, damages, liabilities, charges, actions, proceedings, demands, settlement costs and expenses of any nature whatsoever (including, without limitation, reasonable attorneys’ fees and expenses) (collectively, “ Losses ”), whether joint or several, arising out of or based upon (i) any untrue statement (or allegedly untrue statement) of a material fact contained in any registration statement under which the sale of such Registrable Securities was registered under the Securities Act, any prospectus contained in the registration statement, or any amendment or supplement to such registration statement, offering circular or other document incident to any such registration or compliance, (ii) any omission (or alleged omission) to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (iii) any violation by the Issuer of the Securities Act or any rule or regulation promulgated thereunder applicable to the Issuer, or of any blue sky or other state securities law or any rule or regulation promulgated thereunder applicable to the Issuer, in each case, relating to action or inaction required of the Issuer in connection with any such registration; and the Issuer shall promptly reimburse any Holder Indemnified Party for any legal and any other expenses reasonably incurred by such

 

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Holder Indemnified Party in connection with investigating and defending any such Losses; provided , however , that the Issuer will not be liable in any such case to the extent that any such Losses arises out of or are based upon any untrue statement or allegedly untrue statement or omission or alleged omission made in such registration statement, prospectus, or any such amendment or supplement, in reliance upon and in conformity with information furnished to the Issuer, in writing, by such Holder expressly for use therein. If requested by any underwriter (as defined in the Securities Act) of the Registrable Securities, the Issuer also shall indemnify such underwriter and any of its officers, affiliates, directors, partners, members and agents and each person who controls such underwriter on substantially the same basis as that of the indemnification provided above in this Section 7(a).

(b) Each Holder of Registrable Securities being offered will, in the event that any registration is being effected under the Securities Act pursuant to this Agreement of any Registrable Securities held by such Holder, indemnify and hold harmless the Issuer, each of its directors and officers and each underwriter (if any), and each other selling Holder and each other person, if any, who controls the Issuer, another selling Holder or such underwriter within the meaning of the Securities Act, against any Losses, whether joint or several, insofar as such Losses (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or allegedly untrue statement of a material fact contained in any registration statement under which the sale of such Registrable Securities was registered under the Securities Act, any prospectus contained in the registration statement, or any amendment or supplement to the registration statement, offering circular or other document incident to any such registration or compliance or (ii) any omission or the alleged omission to state a material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances under which they were made, not misleading, in each case if the statement or omission was made in reliance upon and in conformity with information furnished in writing to the Issuer by such selling Holder expressly for use therein, and shall reimburse the Issuer, its directors and officers, and each other selling Holder or controlling person for any legal or other expenses reasonably incurred by any of them in connection with investigation or defending any such Losses. The indemnification obligations hereunder of each Holder of Registrable Securities being offered shall be several and not joint and shall be limited to the amount of any net proceeds actually received by such Holder from the sale of Registrable Securities giving rise to the applicable claim, less all other amounts paid as damages in respect thereof.

(c) In order for a person (the “ Indemnified Party ”) to be entitled to any indemnification provided for under Section 7(a) or (b) in respect of, arising out of or involving a claim made by any person against the Indemnified Party (a “ Third Party Claim ”), such Indemnified Party must notify the party required to provide the indemnification (the “ Indemnifying Party ”) in writing of the Third Party Claim promptly following receipt by such Indemnified Party of written notice of the Third Party Claim; provided , however , that failure to give such notification shall not affect the indemnification provided hereunder except to the extent the Indemnifying Party shall have been actually prejudiced as a result of such failure. Thereafter, the Indemnified Party shall deliver to the Indemnifying Party, promptly following the Indemnified Party’s receipt thereof, copies of all notices and documents (including court papers) received by the Indemnified Party relating to the Third Party Claim.

 

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(d) If a Third Party Claim is made against an Indemnified Party, the Indemnifying Party shall be entitled to participate in the defense thereof and, if it so chooses, to assume the defense thereof by notifying the Indemnified Party in writing to such effect within 30 days of receipt of the Indemnified Party’s notice of such Third Party Claim; provided , however , such Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be that of such Indemnified Party unless (i) the Indemnifying Party has agreed to pay such fees and expenses, (ii) the Indemnifying Party shall have failed to assume the defense of such action or proceeding and employ counsel reasonably satisfactory to such Indemnified Party in any such action or proceeding or (iii) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party and such Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to such Indemnified Party which are different from or additional to those available to the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing of an election to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Party, it being understood, however, that the Indemnifying Party then shall have the right to employ separate counsel at its own expense and to participate in the defense thereof, and shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all Indemnified Parties, which firm shall be designated in writing by a majority of the Indemnified Parties who are eligible to select such counsel); provided , further , that the Indemnifying Party shall not have the right to assume the defense of such Third Party Claim unless (i) the Indemnifying Party acknowledges fully the rights of the Indemnified Party (and does not contest, as a whole or in part) the Indemnified Party’s indemnification rights for the Third Party Claim, (ii) the counsel selected by the Indemnifying Party is reasonably satisfactory to the Indemnified Party, (iii) the Indemnified Party is kept informed of all material developments and is furnished copies of all material papers filed or sent to or from the opposing party or parties and (iv) the Indemnifying Party prosecutes the defense of such Third Party Claim with commercially reasonable diligence in a manner which does not materially prejudice the defense of such Third Party Claim. If the Indemnifying Party does not give timely notice in accordance with the preceding sentence, the Indemnifying Party shall be deemed to have given notice that it does not wish to control the handling of such Third Party Claim. In the event the Indemnifying Party elects (by notice in writing within such 30 day period) to assume the defense of or otherwise control the handling of any such Third Party Claim for which indemnity is sought, the Indemnifying Party shall indemnify and hold harmless the Indemnified Party from and against any and all reasonable professional fees (including attorneys’ fees, accountants, consultants and engineering fees) and investigation expenses incurred by the Indemnified Party prior to such election, notwithstanding the fact that the Indemnifying Party may not have been so liable to the Indemnified Party had the Indemnifying Party not elected to assume the defense of or to otherwise control the handling of such Third Party Claim. If the Indemnifying Party assumes such defense in accordance with this Section 7(d), the Indemnified Party shall have the right to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by the Indemnifying Party, it being understood that the Indemnifying Party shall control such defense.

 

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Notwithstanding the foregoing, the Indemnifying Party shall not be entitled to assume the defense of any Third Party Claim (and shall be liable for the fees and expenses of counsel incurred by the Indemnified Party in defending such Third Party Claim) if the Third Party Claim seeks an order, injunction or other equitable relief or relief for other than money damages against the Indemnified Party that the Indemnified Party reasonably determines, after conferring with its outside counsel, cannot be separated from any related claim for money damages. If such equitable relief or other relief portion of the Third Party Claim can be so separated from that for money damages, the Indemnifying Party shall be entitled to assume the defense of the portion relating to money damages. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, which shall not be unreasonably withheld or delayed, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. No Indemnified Party may consent to entry of any judgment or enter into any settlement without the prior written consent of the Indemnifying Party, which shall not be unreasonably withheld or delayed.

(e) If the Indemnifying Party chooses to defend or prosecute a Third Party Claim, all the Indemnified Parties shall cooperate in the defense or prosecution thereof. Such cooperation shall include the retention and (upon the Indemnifying Party’s request) the provision to the indemnifying party of records and information that are reasonably relevant to such Third Party Claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder.

(f) If the indemnification provided for in this Section 7 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to in this Agreement, then the Indemnifying Party, in lieu of indemnifying the Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party with respect to such loss, liability, claim, damage or expenses in the proportion that is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The contribution obligation of a Holder hereunder, if any, shall be limited to the amount of any net proceeds actually received by such Holder from the sale of Registrable Securities giving rise to the applicable claim, less all other amounts paid as damages in respect thereof.

(g) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with an underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

 

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8. Rule 144 Reporting . With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Securities to the public without registration, the Issuer shall use all commercially reasonable efforts to:

(a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act;

(b) file with the Commission in a timely manner all reports and other documents required of the Issuer under the Securities Act and the Exchange Act; and

(c) furnish to any Holder promptly upon request a written statement as to its compliance with the reporting requirements of Rule 144, and of the Securities Act and the Exchange Act, and a copy of the most recent annual or quarterly report of the Issuer.

The provisions of this Section 8 shall terminate on the date on which there are no Holders of Registrable Securities

9. Termination of Registration Rights . With the exception of Section 8, no Holder shall be entitled to exercise any right provided for in this Agreement after the date on which all Registrable Securities held by such Holder may be sold in a single three-month period under Rule 144 under the Securities Act.

10. Information To Be Provided by and Received from the Holders . Each Holder whose Registrable Securities are to be included in any registration pursuant to this Agreement, as a condition to having such Registrable Securities so included, shall furnish the Issuer, upon at least three Business Days request, such information regarding such Holder and the distribution proposed by such Holder as may be reasonably requested in writing by the Issuer and as shall be required in connection with such registration or the registration or qualification of such securities under any applicable state securities law (including, without limitation, a signed Notice and Questionnaire in the form attached as Exhibit B hereto). Each Holder agrees to provide the Issuer with any updates to such information as promptly as practicable during the effectiveness of the registration statement. The Issuer may exclude from such registration the Registrable Securities of any such Holder who fails to furnish such information at least five (5) Business Days prior to the initial filing of the registration statement (or such shorter period requested by the Issuer). The Holders each agree that information relating to the Issuer obtained by such Holder or by such Holder’s Affiliates or representatives shall be deemed confidential and shall not be used by such Holder as the basis for any market transactions in the securities of the Issuer unless and until such information is made generally available to the public.

11. Miscellaneous .

(a) No Inconsistent Agreements . Except for the registration rights being terminated or waived pursuant to Section 11(k) hereof, the Issuer represents and warrants to the Holders that it has not entered into, and covenants with the Holder that it will not enter into, any agreement with respect to the Issuer Common Stock which is inconsistent with, dilutes or violates the registration rights granted to the Holders under this Agreement.

 

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(b) Transfer of Rights . Each Holder shall be entitled to transfer or assign at any time any of its rights (but only with all related obligations) under this Agreement, in connection with the transfer of all or a portion of its Registrable Securities, to any of the following: (i) any partner (including a general or limited partner) or retired partner of any Holder that is a partnership, (ii) any Affiliate of such Holder, (iii) any stockholder of any Holder that is a corporation, (iv) any member of any Holder that is a limited liability company or (v) any transferee that acquires at least the greater of 10% of the total number of Registrable Securities or 750,000 shares of Registrable Securities (subject to appropriate adjustment for any stock split, stock dividend, recapitalization or similar transaction); provided , that in each such case, the Issuer receives written notice within ten (10) days of any transfer and the transferee agrees to be bound by the terms of this Agreement by signing a counterpart signature page to this Agreement in the form of Exhibit A attached hereto.

(c) Minority Scient’x Shareholders. In the event that any of BROSE PE TREUHAND GmbH, a German Gesellschaft mit beschränkter Haftung (“ Brose ”), MEDICAL STRATEGIES MANAGEMENT & CONSULTING SERVICE LTD., a Cyprus corporation (“ MSM ”) and PRIM, S.A., a Spanish Sociedad Anónima (“ PRIM ” and together with Brose and MSM, the “ Minority Scient’x Shareholders ”) enter into share purchase agreements with Issuer, AcquisitionHoldCo and AcquisitionCo (the “ Minority Purchase Agreements ”) providing for the sale and transfer of their shares in Scient’x to AcquisitionCo for the same consideration per share as contemplated in the Acquisition Agreement and calculated based on the Exchange Ratio set forth in the Acquisition Agreement, then each such Minority Shareholder that has entered into a Minority Purchase Agreement shall have the right to become a party to this Agreement by execution of a counterpart signature page hereto in the form of Exhibit A attached hereto. Upon becoming a party to this Agreement, each such Minority Scient’x Shareholder shall be deemed a Holder for all purposes under this Agreement.

(d) Notices . Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing to the address provided for notices set forth on the signature page hereto, as updated from time to time by written notice from the Holders to the Issuer, and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile or email at the facsimile number or email address specified below prior to 6:30 p.m. (Eastern time) on a Business Day, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile or email at the facsimile number or email address specified below on a day that is not a Business Day or later than 6:30 p.m. (Eastern time) on any Business Day, (c) the Business Day following the date of deposit with a nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given.

(e) Severability . If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

 

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(f) Amendments and Waivers . No provision of this Agreement may be waived or amended except in a written instrument signed by the Issuer and the Requestor; provided, that no amendment is required to effect the inclusion of the Minority Scient’x Shareholders as parties to this Agreement pursuant to Section 11(c). Any amendment or waiver effected in accordance with this Section shall be binding upon each Holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities and the Issuer. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.

(g) Governing Law; Jurisdiction; Waiver of Trial by Jury . This Agreement shall be governed by, and construed in accordance with, the Laws of the State of Delaware applicable to contracts executed in and to be performed in that jurisdiction excluding (to the greatest extent a Delaware court would permit) any rule of Law that would cause the application of the Laws of any jurisdiction other than the State of Delaware. In any action or proceeding between any of the parties arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement, each of the parties: (a) irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of the state courts of the State of Delaware; (b) agrees that all claims in respect of such action or proceeding may be heard and determined exclusively in the state courts of the State of Delaware and (c) consents to service of process in the State of Delaware in the same manner as notice may be delivered in accordance with Section 11(d). Each of the parties hereto agrees that a final judgment in any such action or proceeding may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Nothing in this Agreement shall affect the right of any party to this Agreement to serve process in any other manner permitted by Law. EACH OF THE PARTIES IRREVOCABLY WAIVES ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BETWEEN THE PARTIES ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

(h) Attorneys’ Fees . In the event of any dispute involving the terms hereof, the prevailing parties shall be entitled to collect legal fees and expenses from the other party to the dispute.

(i) Further Assurances . Each party will do and perform, or cause to be done and performed, all such further acts and things, and will execute and deliver all other agreements, certificates, instruments and documents, as another party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

(j) Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns. The Issuer may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Holders of a majority of the Registrable Securities.

 

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(k) Termination and Waiver of Prior Registration Rights . Upon execution of this Agreement by the Issuer and HPC II, the registration rights set forth in Article IV of the Subscription Agreement shall terminate and be of no further force and effect, and HPC II waives any non-compliance therewith. For so long as this Agreement shall remain effective, the HPC Entities hereby waive any registration rights they may have with respect to shares of Issuer Common Stock under Section 5 of the Stockholders’ Agreement. In the event of any conflict between the Stockholders’ Agreement and this Agreement, this Agreement shall govern.

(l) Rule of Construction . The parties hereto acknowledge and agree that (i) each party and its counsel, if so represented, reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision and (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement.

(m) Headings . The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

(n) Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

[ signatures appear on following pages ]

 

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IN WITNESS WHEREOF, the undersigned party has executed this Agreement as of the day and year first above written.

 

ALPHATEC HOLDINGS, INC.
By:  

/s/ Dirk Kuyper

Name:   Dirk Kuyper
Title:   President and CEO
Address for Notice:

Alphatec Holdings, Inc.

5818 El Camino Real

Carlsbad, CA 92008

Attn: Ebun Garner, General Counsel

Fax: 760-431-9083

 

with a copy to:

Mintz Levin

Chrysler Center

666 Third Avenue

New York, NY 10017

Attention: Michael Fantozzi

Facsimile: (212) 983-3115

Email: MLFantozzi@mintz.com

[Issuer Signature Page to Registration Rights Agreement]


IN WITNESS WHEREOF, the undersigned party has executed this Agreement as of the day and year first above written.

 

HEALTHPOINTCAPITAL PARTNERS, L.P.
BY:   HGP, LLC, its general partner
By:  

/s/ John H. Foster

Name:   John H. Foster
Title:   General Partner / Managing Director

 

ADDRESS FOR NOTICE:

505 Park Avenue

12th Floor

New York, NY 10022

Attention: John H. Foster

Facsimile: (1) 212.935.6878

 

with a copy to:

Covington & Burling LLP

265 Strand

London, WC2R 1BH

Attention: Peter Laveran

Facsimile: (20) 7067 2222

Email: plaveran@cov.com

[HPC Signature Page to Registration Rights Agreement]


IN WITNESS WHEREOF, the undersigned party has executed this Agreement as of the day and year first above written.

 

HEALTHPOINTCAPITAL PARTNERS II, LP
BY:   HGP II, LLC, its general partner
By:  

/s/ John H. Foster

Name:   John H. Foster
Title:   General Partner / Managing Director

 

ADDRESS FOR NOTICE:

505 Park Avenue

12th Floor

New York, NY 10022

Attention: John H. Foster

Facsimile: (1) 212.935.6878

 

with a copy to:

Covington & Burling LLP

265 Strand

London, WC2R 1BH

Attention: Peter Laveran

Facsimile: (20) 7067 2222

Email: plaveran@cov.com

[HPC II Signature Page to Registration Rights Agreement]


Exhibit A

Counterpart Signature Page

to Registration Rights Agreement dated as of [ ], 2010

By executing this signature page, the undersigned hereby agrees to become party to and to be bound as a “ Holder ” by all of the terms and conditions of the Registration Rights Agreement, dated as of [ ], 2010 (the “ Agreement ”), by and among Alphatec Holdings, Inc., a Delaware corporation (the “ Issuer ”), and the parties named therein and authorizes this signature page to be attached as a counterpart to such agreement. This counterpart signature page shall take effect and shall become an integral part of the Agreement immediately upon acceptance hereof by the Issuer.

EXECUTED this      day of                 .

 

Holder:  

 

By:  

 

Name:  

 

Title:  

 

Address for Notice:  

 

 

 

 

 

ACCEPTED:

ALPHATEC HOLDINGS, INC.

 

By:  

 

Name:  

 

Title:  

 


Exhibit B

Form of Notice and Questionnaire

Selling Shareholder Notice and Questionnaire

The undersigned beneficial holder of shares of common stock, par value $0.0001 per share (the “ Registrable Securities ”), of Alphatec Holdings, Inc. (the “ Company ”), understands that the Company has filed, or intends to file, with the Securities and Exchange Commission (the “ Commission ”) a registration statement (the “ Registration Statement ”), for the registration and resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement, dated [                    ], 2010 (the “ Registration Rights Agreement ”), between the Company, HealthpointCapital Partners, L.P., HealthpointCapital Partners II, L.P. and certain other shareholders of the Company. A copy of the Registration Rights Agreement is available from the Company upon request at the address set forth below. All capitalized terms not otherwise defined herein have the meaning ascribed thereto in the Registration Rights Agreement.

Each beneficial owner of Registrable Securities is entitled to the benefits of the Registration Rights Agreement. In order to sell or otherwise dispose of any Registrable Securities pursuant to the Registration Statement, a beneficial owner of Registrable Securities generally will be required to be named as a selling shareholder in the related Prospectus, deliver (or cause to be delivered) a Prospectus to purchasers of Registrable Securities and be bound by those provisions of the Registration Rights Agreement applicable to such beneficial owner (including certain indemnification provisions, as described below).

Beneficial owners that do not complete this Notice and Questionnaire and deliver it to the Company as provided below will not be named as selling shareholders in the Prospectus and will not be permitted to sell any Registrable Securities pursuant to the Registration Statement. Beneficial owners are required to complete and deliver this Notice and Questionnaire on or before the third (3 rd ) day prior to the effectiveness of the Registration Statement so that such beneficial owners may be named as selling shareholders in the related Prospectus at the time the Registration Statement becomes effective.

Certain legal consequences arise from being named as a selling shareholder in the Registration Statement and the related Prospectus. Accordingly, holders and beneficial owners of Registrable Securities are advised to consult their own securities law counsel regarding the consequences of being named or not being named as a selling shareholder in the Registration Statement and the related Prospectus.

NOTICE

The undersigned beneficial owner (the “ Selling Shareholder ”) of Registrable Securities hereby gives notice to the Company of its intention to sell or otherwise dispose of Registrable Securities beneficially owned by it and listed below in Item 3 (unless otherwise specified under Item 3) pursuant to the Registration Statement. The undersigned, by signing and returning this Notice and Questionnaire, understands that it will be bound by the terms and conditions of this Notice and Questionnaire and the Registration Rights Agreement.

 

1


Pursuant to the Registration Rights Agreement, the undersigned has agreed to indemnify and hold harmless the Company, each of its directors, each of its officers, each underwriter (if any), each other selling Holder, and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), from and against certain losses arising in connection with statements concerning the undersigned made in the Registration Statement or the related Prospectus in reliance upon the information provided in this Notice and Questionnaire.

The undersigned hereby provides the following information to the Company and represents and warrants that such information is accurate and complete:

QUESTIONNAIRE

1.     (a) Full legal name of Selling Shareholder:

 

 

(b) Full legal name of registered holder (if not the same as (a) above) through which Registrable Securities listed in Item (3) below are held:

 

 

(c) Full legal name of DTC participant (if applicable and if not the same as (b) above) through which Registrable Securities listed in Item (3) are held:

 

 

(d) Taxpayer identification or social security number of Selling Shareholder:

 

 

(e) If the Selling Shareholder is an entity, please state the jurisdiction of formation of the entity, the name of the natural person or persons ultimately controlling the voting and disposition of the entity’s shares, the person’s or persons’ relationship with the entity (including direct and indirect ownership and/or control of the entity), and the name and position of the authorized signatory for the entity:

Type of Entity:                                                                                                                                                                             

Jurisdiction of Formation:                                                                                                                                                          

Natural Person’s or Persons’ Name(s) with control over voting of the shares:

 

 

Natural Person’s or Persons’ Name(s) with control over disposition of the shares:

 

 

 

2


Relationship of Natural Person or Persons with Entity:

 

 

 

Name/Position of Authorized Signatory:   

 

2. Address for notices to Selling Shareholder:

 

Telephone:   

 

Fax:   

 

Email:   

 

Contact Person:   

 

3. Beneficial ownership of Registrable Securities:

(a) Number of Registrable Securities beneficially owned:

 

 

(b) Do you disclaim beneficial ownership of any Registrable Securities?

YES                            NO                        

If “YES,” please identify below the securities of which you are disclaiming beneficial ownership, and provide the name(s) of the person(s) who should be shown as the beneficial owner of such securities and the relationship of such person(s) to you.

 

 

 

 

3


(c) Do you intend to register for resale all of your Registrable Securities in the Prospectus? NOTE : The Registration Rights Agreement contains limitations on the number of shares that you may include in the Registration Statement.

YES                            NO                        

If you answered “NO” to Question 3(c) above, please indicate below the maximum number of Registrable Securities that you request to include in the Registration Statement and the number of shares of Registrable Securities that you would own following the completion of the offering, assuming that you sold the maximum number of shares being included in the Registration Statement.

                                 shares to be included in the Registration Statement

                                 shares beneficially owned following the offering

4. Beneficial ownership of other securities of the Company’s owned by the Selling Shareholder:

EXCEPT AS SET FORTH BELOW IN THIS ITEM (4), THE UNDERSIGNED IS NOT THE BENEFICIAL OR REGISTERED OWNER OF ANY SECURITIES OF THE COMPANY OTHER THAN THE REGISTRABLE SECURITIES LISTED ABOVE IN ITEM (3) (“ OTHER SECURITIES ”).

(a) Type and amount of Other Securities beneficially owned by the Selling Shareholder:

 

 

(b) CUSIP No(s). (if applicable) of such Other Securities beneficially owned:

 

 

(c) Do you disclaim beneficial ownership of any Other Securities?

YES                            NO                        

If “YES,” please identify below the securities of which you are disclaiming beneficial ownership, and provide the name(s) of the person(s) who should be shown as the beneficial owner of such securities and the relationship of such person(s) to you.

 

 

 

 

4


5. Relationship with the Company:

Except as set forth below, neither the undersigned nor any of its affiliates, officers, directors or principal equity holders (5% or more) has held any position or office or has had any other material relationship with the Company (or their predecessors or affiliates) during the past three years.

State any exceptions here:

 

 

 

6. Nature of the Selling Shareholder:

(a) Is the Selling Shareholder:

a reporting company under the Exchange Act?

Yes                    No               

a majority owned subsidiary of a reporting company under the Exchange Act?

Yes                    No               

or a registered investment company under the Investment Company Act?

Yes                    No               

If so, please state which one

 

 

 

If the entity is a majority owned subsidiary of a reporting company, identify the majority shareholder that is a reporting company.

 

 

If the entity is not any of the above, identify the natural person or persons having voting and investment control over the Company’s securities that the entity owns.

 

 

(b) Is the Selling Shareholder a registered broker-dealer?

Yes                    No               

If yes, state whether the Selling Shareholder received the Registrable Securities as compensation for underwriting activities and, if so, provide a brief description of the transaction(s) involved.

 

 

 

 

5


State whether the Selling Shareholder is an affiliate of a broker-dealer and if so, list the name(s) of the broker-dealer affiliate(s). For purposes of this Item 6(b), an “affiliate” of a broker-dealer includes any company that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such broker-dealer, and does not include individuals employed by any such broker-dealers or by any of their affiliates.

Yes                    No               

If the answer is “Yes,” you must answer the following:

If the Selling Shareholder is an affiliate of a registered broker-dealer, the Selling Shareholder purchased the Registrable Securities (i) in the ordinary course of business and (ii) at the time of the purchase of the Registrable Securities, had no agreements or understandings, directly or indirectly, with any person to distribute the Registrable Securities.

Yes                    No               

If the answer is “No,” state any exceptions here:

 

 

 

If the answer is “No,” this may affect your ability to be included in the Registration Statement.

[SIGNATURE PAGE FOLLOWS]

 

6


The undersigned acknowledges that it understands its obligation to comply with the provisions of the Exchange Act and the rules and regulations promulgated thereunder relating to stock manipulation, particularly Regulation M thereunder (or any successor rules or regulations), in connection with any offering of Registrable Securities pursuant to the Registration Statement. The undersigned agrees that neither it nor any person acting on its behalf will engage in any transaction in violation of such provisions.

The Selling Shareholder hereby acknowledges its obligations under the Registration Rights Agreement to indemnify and hold harmless certain persons as set forth therein.

Pursuant to the Registration Rights Agreement, the Company has agreed under certain circumstances to indemnify the Selling Shareholders against certain liabilities.

In accordance with the undersigned’s obligation under the Registration Rights Agreement to provide such information as may be required by law for inclusion in the Registration Statement, the undersigned agrees to promptly notify the Company of any inaccuracies or changes in the information provided herein that may occur subsequent to the date hereof at any time while the Registration Statement remains effective. All notices hereunder and pursuant to the Registration Rights Agreement shall be made in writing at the address set forth below.

By signing below, the undersigned consents to the disclosure of the information contained herein in its answers to Items (1) through (6) above and the inclusion of such information in the Registration Statement and the related Prospectus. The undersigned understands that such information will be relied upon by the Company in connection with the preparation or amendment of the Registration Statement and the related Prospectus.

IN WITNESS WHEREOF, the undersigned, by authority duly given, has caused this Notice and Questionnaire to be executed and delivered either in person or by its duly authorized agent.

Dated:                  , 2010

Name of Beneficial Owner:                                                                  

 

By:  

 

Name:  

 

Title:  

 

Please return the completed and executed Notice and Questionnaire by [                     ], 2010 to:

Ebun S. Garner, Esq.

General Counsel and Vice President

Alphatec Spine, Inc.

5818 El Camino Real | Carlsbad, CA 92008

email:  egarner@alphatecspine.com

phone: (760) 494.6748 | fax: (760) 431.9083

 

7

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-164891 and Form S-8 Nos. 333-144293 and 333-147212) and in the related Prospectuses, of our report dated March 10, 2010, with respect to the consolidated financial statements of Scient’x Groupe S.A.S., appearing in Alphatec Holdings, Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 31, 2010.

 

/s/ Deloitte & Associes
DELOITTE & ASSOCIES
Neuilly-sur-Seine, France

March 31, 2010

Exhibit 99.1

SCIENT’X GROUPE S.A.S.

C ONSOLIDATED F INANCIAL S TATEMENTS

D ECEMBER  31, 2009 AND 2008


SCIENT’X GROUPE S.A.S.

I NDEX TO C ONSOLIDATED F INANCIAL S TATEMENTS

INDEX

 

Report of Independent Registered Public Accounting Firm

   1

Consolidated Balance Sheets at December 31, 2009 and 2008

   2

Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007

   3

Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2009, 2008 and 2007

   4

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2009, 2008 and 2007

   5

Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

   6

Notes to Consolidated Financial Statements

   7


INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of

SCIENT’X GROUPE S.A.S.

We have audited the accompanying consolidated balance sheets of Scient’x Groupe S.A.S. and its subsidiaries (the “Successor”) as of December 31, 2009 and 2008 and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the period from January 1, 2009 to December 31, 2009 and January 25, 2008 to December 31, 2008. We have also audited Ideal Medical Product SA (the “Predecessor”) consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the period from January 1, 2008 to January 24, 2008 and for the year ended December 31, 2007. These financial statements are the responsibility of the Successor and the Predecessor companies’ (collectively referred to as “the Company”) 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 of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 predecessor and successor consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the year ended December 31, 2009, for the period from January 1, 2008 to January 24, 2008, the period from January 25, 2008 to December 31, 2008 and for the year ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1, the consolidated financial statements do not present any operations of subsidiaries of Scient’x Groupe S.A.S. that comprise a medical engineering business which was sold and discontinued on January 24, 2008.

As discussed in Note 1, the successor consolidated financial statements reflects the change in control following the acquisition of the Company by Healthpoint (Luxembourg) II SARL on January 25, 2008.

 

/S/ DELOITTE & ASSOCIES
Neuilly-sur-Seine, France
March 10, 2010

 

1


SCIENT’X GROUPE S.A.S.

C ONSOLIDATED B ALANCE S HEETS

(All amounts stated in thousands of euros except share and par value data)

 

     December 31,  
     2009     2008  
          

ASSETS

    

Cash

   3,117      1,169   

Short term investments

   —        3,269   

Accounts receivable, net of allowance of €1,212 and €908, respectively (including related party transactions of €nil and to €326, respectively)

   9,670      7,394   

Inventory, net of allowance of €2,358 and €1,914, respectively

   12,378      15,056   

Prepaid expenses and other current assets

   1,172      2,224   
            

Total current assets

   26,337      29,112   
            

Goodwill

   12,876      12,876   

Intangible assets, net

   34,382      39,385   

Property and equipment, net

   3,419      2,995   

Deferred tax assets, net of valuation allowance of €9,828 and €6,234, respectively

   3,804      3,036   

Other long-term assets

   252      100   
            

Total non-current assets

   54,733      58,392   
            

Total assets

   81,070      87,504   
            

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current portion of long-term debt

   2,237      3,780   

Current portion of commitment and contingencies

   —        382   

Accounts payable & accrued expenses (including related party transactions of €nil and to €41, respectively)

   6,633      4,910   

Other current liabilities

   2,928      3,210   
            

Total current liabilities

   11,798      12,282   
            

Long-term debt, less current portion

   3,539      347   

Long-term commitments and contingencies

   1,139      1,326   

Deferred tax liabilities

   11,839      13,946   

Other long term liabilities

   323      325   
            

Total non-current liabilities

   16,840      15,944   
            

Scient’x Groupe S.A.S. shareholders’ equity:

    

Common stock : 3,683,931 and 3,500,000 shares of €0.40 par value issued and outstanding as of December 31, 2009 and 2008, respectively

   1,474      1,400   

Additional paid-in capital

   98,312      93,691   

Accumulated other comprehensive income (loss)

   (296   738   

Accumulated deficit

   (53,536   (43,409
            

Total Scient’x Groupe S.A.S. shareholders’ equity

   45,954      52,420   
            

Noncontrolling interest

   6,478      6,858   
            

Total shareholders’ equity

   52,432      59,278   
            

Total liabilities and shareholders’ equity

   81,070      87,504   
            

See accompanying notes.

 

2


SCIENT’X GROUPE S.A.S.

C ONSOLIDATED S TATEMENT OF O PERATIONS

(All amounts stated in thousands of euros)

 

     Year ended
December

31, 2009
    January 25, 2008
through
December 31,
2008
              January 1,
2008 through
January 24,
2008
    Year ended
December 31,
2007
 
     Successor     Successor               Predecessor     Predecessor  
                            

Revenue (including related party transaction of €2,825, €1,781, and €154, respectively)

   36,013      29,103              1,381      29,690   

Cost of goods sold (including related party transaction of nil, €245, and nil, respectively)

   (17,152   (17,671           (530   (11,858
                                

Gross profit

   18,861      11,432              851      17,832   
                                

Research and development expenses

   (4,144   (2,798           (52   (2,222

Selling and marketing expenses

   (12,036   (9,671           (286   (10,001

General and administrative expenses (including related party transaction of nil, €229 and €26, respectively)

   (10,915   (7,661           (183   (8,119

Goodwill impairment charge

   —        (30,916           —        —     

Other operating (expense) income:

                 —     

Restructuring costs

   (152   (653           —        —     

Amortization of intangible assets pushed down

   (4,819   (4,536           —        —     

IPR&D write-off

   —        (6,356           —        —     

Other operating income (expense), net

   (142   8              —        (197
                                

Total operating expenses

   (32,208   (62,583           (521   (20,539
                                

(Loss) income from operations

   (13,347   (51,151           330      (2,707
                                

Interest expense

   (494   (307           (22   (651

Exchange loss

   (174   (534           (45   (277

Other non operating income (expense), net:

                

Alphatec license upfront and buyback (related party)

   —        (1,667           —        2,000   

Other non operating income (expense), net

   (489   70              6      —     
                                

Net (loss) income before income taxes

   (14,504   (53.589           269      (1,635

Income tax benefit (expense)

   2,589      4,591              (66   (1,043
                                

Net (loss) income

   (11,915   (48,998           203      (2,678

Less: Net (loss) income attributable to the noncontrolling interest

   (1,788   (2,631           64      517   
                                

Net (loss) income attributable to Scient’x Groupe S.A.S.

   (10,127   (46,367           139      (3,195
                                

See accompanying notes.

 

3


SCIENT’X GROUPE S.A.S.

C ONSOLIDATED S TATEMENT OF C OMPREHENSIVE (L OSS ) I NCOME

(All amounts stated in thousands of euros)

 

     Year ended
December 31,
2009
    January 25,
2008 through
December 31,
2008
              January 1, 2008
through
January 24,
2008
   Year ended
December 31,
2007
 
     Successor     Successor               Predecessor    Predecessor  
                           

Net (loss) income

   (11,915   (48,998           203    (2,678

Change in cumulative translation adjustment

   (51   416              29    (764
                               

Total other comprehensive (loss) income

   (11,966   (48,582           232    (3,442

Comprehensive (loss) income attributable to the noncontrolling interest

   (805   (4,071           74    (264
                               

Comprehensive (loss) income attributable to Scient’x Groupe S.A.S.

   (11,161   (44,511           158    (3,178
                               

See accompanying notes.

 

4


SCIENT’X GROUPE S.A.S.

C ONSOLIDATED S TATEMENTS OF S HAREHOLDERS ’ E QUITY

(All amounts stated in thousands of euros except share data)

 

     Scient’x Groupe S.A.S. Shareholders              
     Shares    Additional
Paid-in Capital
    Accumulated
Other

Comprehensive
Income (Loss)
    Accumulated
Retained

Earnings (Deficit)
    Noncontrolling
Interest
    Shareholders’
Equity
 
     Number    Amount           
                

   

   

   

 

Predecessor

                

At January 1, 2007

   3,500,000    1,400    12,080      (626   5,907      4,142      22,903   

Acquisition of treasury stock

   —      —      —        —        79      4      83   

Foreign currency translation adjustment

   —      —      —        (511   —        (253   (764

Net loss

   —      —      —        —        (3,198   517      (2,681
                                        

At December 31, 2007

   3,500,000    1,400    12,080      (1,137   2,788      4,410      19,541   
                                        

At January 1, 2008

   3,500,000    1,400    12,080      (1,137   2,788      4,410      19,541   

Acquisition of treasury stock

   —      —      —        —        31      16      47   

Foreign currency translation adjustment

   —      —      —        19      —        10      29   

Net income

   —      —      —        —        139      64      203   
                                        

At January 24, 2008

   3,500,000    1,400    12,080      (1,118   2,958      4,500      19,820   
                                        

Successor

                

At January 25, 2008

   3,500,000    1,400    12,080      (1,118   2,958      4,500      19,820   

Capital contribution related to push down of purchase price resulting from change in control

   —      —      81,177      —        —        —        81,177   

Change in minority interest at Scient’x S.A.

   —      —      —        1,586      —        (1,586   —     

Foreign currency translation adjustment

   —      —      —        270      —        144      414   

Stock based compensation

   —      —      434      —        —        231      665   

Shares issued and subscribed by minority interest at Scient’x S.A.

   —      —      —        —        —        6,200      6,200   

Net loss

   —      —      —        —        (46,367   (2,631   (48,998
                                        

At December 31, 2008

   3,500,000    1,400    93,691      738      (43,409   6,858      59,278   
                                        

At January 1, 2009

   3,500,000    1,400    93,691      738      (43,409   6,858      59,278   

Issuance of shares

   183,931    74    3,891      —        —        —        3,965   

Purchase of additional shares in subsidiaries

   —      —      (111   (1,000   —        1,000      (111

Foreign currency translation adjustment

   —      —      —        (34   —        (17   (51

Stock based compensation

   —      —      841      —        —        425      1,266   

Net loss

   —      —      —        —        (10,127   (1,788   (11,915
                                        

At December 31, 2009

   3,683,931    1,474    98,312      (296   (53,536   6,478      52,432   
                                        

See accompanying notes.

 

5


SCIENT’X GROUPE S.A.S.

C ONSOLIDATED S TATEMENTS OF C ASH F LOWS

(All amounts stated in thousands of euros)

 

     Year ended
December 31,
2009
    January 25,
2008

through
December 31,
2008
              January 1,
2008
through
January 24,
2008
    Year ended
December 31,
2007
 
     Successor     Successor               Predecessor     Predecessor  
                          

Cash flows from operating activities:

              

Net (loss) income before noncontrolling interests

   (11,915   (48,998           203      (2,678

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

                

Stock compensation

   1,266      664              47      —     

Goodwill impairment

   —        30,916              —        —     

Amortization of intangibles assets

   5,000      11,510              43      677   

Depreciation of property and equipment

   1,537      1,516              70      1,702   

Provision for risks and charges

   (57   370              —        4,010   

Inventory step-up

   —        4,254              —        —     

Gain and (losses) on disposals, net

   117      14              —        7   

Retirement benefit obligation

   (32   67              5      —     

Accrued interest expense

   55                 

Deferred taxes

   (2,915   (4,719           14      890   

Increase (decrease) in cash from:

                

Accounts receivable

   (2,685   (643           810      1,254   

Prepaid expenses and other current assets

   912      1,013              (59   (1,462

Inventory

   2,543      (54           140      317   

Accounts payable and accrued expenses

   1,778      347              (243   (2,575

Other current liabilities

   (374   1,186              (375   1,483   
                                

Net cash (used in) provided by operating activities

   (4,770   (2,557           655      3,625   
                                

 

Cash flows from investing activities:

                

Purchase of property and equipment

   (2,182   (1,540           (58   (1,213

Disposal of property and equipment

   71      158              —        1,347   

Sale (purchase) of short term investments

   3,269      (3,269           —        —     

Purchase of others long term assets

   (45   (335           —        (1,938

Disposal of others long term assets

   73      4,174              —        3,005   
                                

Net cash provided by (used in) investing activities

   1,186      (812           (58   1,201   
                                

 

Cash flows from financing activities:

                

Proceeds from loans

   5,295      282              —        999   

Repayment of loans

   (1,694   (960           (56   (1,016

Credit facilities drawdowns

   —        —                407      825   

Repayment of credit facilities drawdowns

   (1,898   (3,553           —        (3,271

Proceeds from issuance of shares

   3,853      —                —        —     

Proceeds from issuance of shares to minority shareholders’ of Scient’x S.A.

   —        6,199              —        —     

Other

   —        (580           —        (2,556
                                

Net cash provided by (used in) financing activities

   5,556      1,388              351      (5,019
                                

Effect of exchange rate changes on cash

   (24   (13           (1   (3
                                

Net increase (decrease) in cash

   1,948      (1,994           947      (196

Cash at beginning of period

   1,169      3,163              2,216      2,412   
                                

Cash at end of period

   3,117      1,169              3,163      2,216   
                              

Supplemental disclosures:

                

Income taxes paid

   (162   19              —        (329

Interest paid

   (440   (329           —        (651

See accompanying notes.

 

6


SCIENT’X GROUPE S.A.S.

N OTES TO THE C ONSOLIDATED F INANCIAL S TATEMENTS

(All amounts stated in thousands of euros except share data or as indicated)

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the business and basis of presentation

Scient’x Groupe S.A.S. (“Scient’x” or “the Company”) is a global medical device company based near Paris, France, that designs, develops and manufactures a broad portfolio of surgical implants for spinal disorders.

In 2007, the Company, formerly known as Ideal Medical Product S.A., was a public listed company in France active in the medical products engineering and spinal implants businesses. On November 16, 2007, a purchase and sales agreement (the “Agreement”) was signed by Olivier Carli, then CEO of the Company, and Healthpoint, involving the sale by Olivier Carli and Christian Carli of their interests totaling 61.32% of the company’s share capital (and 61.14% of the voting rights) at a sale price of €19.72 per share for a total consideration of €75,907. Combined with Healthpoint acquiring a 33.01% interest in June 2004 in Scient’x S.A. for a total consideration of €23,170, as of January 25, 2008, Healthpoint and its affiliates owned 97.05% of the share capital and 96.89% of the voting rights of Scient’x Groupe S.A.S.

The Company’s principal product offering includes surgical implants and systems for use in cervical, thoracolumbar, intervertebral, minimally invasive, cervical disc arthroplasty and other applications. Such implants and systems are made of titanium, titanium alloy, stainless steel, various ceramics, biomaterials and a biocompatible, radiolucent plastic called polyetheretherketone, or PEEK.

Management believes its products have differentiated characteristics that make them attractive to its global surgeon customer base by providing solutions for the safe and successful surgical treatment of spinal disorders. The Scient’x international sales and distribution network consists of a direct sales force in France and the U.K., a hybrid of direct sales force and distributors and agents in Italy and exclusive and non-exclusive worldwide distributors in approximately 50 countries including the United States. The Scient’x global surgeon education and training network augments its global distribution capabilities.

Scient’x management continually evaluates its product development programs, demand for its products and product launch strategies by regularly monitoring technology trends in the spinal implant industry. This includes facilitating discussions with the surgeon community and the Company’s International and United States Scientific Advisory Boards. The Company’s management also considers several variables associated with the ongoing operations of its business, including surgeon and market demand, product life cycle, scheduled manufacturing, purchasing activity and inventory levels and costs associated therewith, head count, research and development and selling, marketing and general and administrative expenses.

The financial statements present the consolidated financial statements of the Company, a holding company, and its operating subsidiaries located in France, the United States of America, the United Kingdom, Italy, Australia and Asia, comprising the spine implant medical products manufacturing and distribution business. The financial statements do not present any operations of subsidiaries of Scient’x Groupe S.A.S. that comprise a medical engineering business which was sold and discontinued on January 24, 2008. The financial statements include all revenues and costs to operate the spine implant medical products manufacturing and distribution business on a standalone basis. The spine implant medical products manufacturing and distribution business and the medical engineering business were managed, financed, and operated autonomously while they were under common control of Scient’x Groupe S.A.S. There were no shared expenses between the two businesses and the two businesses filed separate tax returns. Therefore, no costs were required to be allocated to the Company’s financial statements to present the financial statements of a standalone business. The resulting cash proceeds from the sale of the medical engineering business have been recorded as a capital contribution.

The consolidated financial statements are prepared in euros and have been presented in accordance with U.S. generally accepted accounting principles. All significant intercompany transactions and accounts have been eliminated in the consolidation.

The Company’s business is subject to significant risks, which is consistent with companies that are operating in the medical device industry. These risks include, but are not limited to, uncertainties regarding research and development, access to capital, obtaining and enforcing patents, receiving regulatory approval, and competition with other medical device companies.

 

7


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

Acquisition by Healthpoint (Luxembourg) II SARL (“Healthpoint”) and Predecessor and Successor Reporting

In 2007, the Company, formerly known as Ideal Medical Product S.A., was a public listed company in France active in the medical products engineering and implants businesses. Healthpoint had acquired a 33.01% interest in June 2004 in Scient’x S.A. for a total consideration of €23,170.

On November 16, 2007, a purchase and sales agreement (the “Agreement”) was signed by Olivier Carli, then CEO of the Company, and Healthpoint, involving the sale by Olivier Carli and Christian Carli of their interests totaling 61.32% of the company’s share capital (and 61.14% of the voting rights) at a sale price of €19.72 per share for a total consideration of €75,907. As of January 25, 2008, Healthpoint and its affiliates owned 97.05% of the share capital and 96.89% of the voting rights of Scient’x Groupe S.A.S.

As a result of the change in control, the purchase consideration and related costs paid by Healthpoint were recorded by Scient’x Groupe S.A.S. and resulted in a new basis of accounting. The Company’s consolidated financial statements separate the Company’s 2008 financial year into two distinct periods to indicate the application of two different basis of accounting between the periods presented: (1) the period up to, and including, the January 24, 2008 acquisition date (labeled “Predecessor”) and (2) the period after that date (labeled “Successor”). The accompanying consolidated financial statements include a black line division which indicates that the Predecessor and Successor reporting entities shown are not comparable.

For income statement footnote disclosures, the allocation to the period beginning January 1, 2008 through January 24, 2008 was not deemed material, and therefore has not been provided in the footnotes to the financial statements.

The consideration and related costs paid by Healthpoint in connection with the acquisition have been allocated to the underlying assets acquired and liabilities assumed based on their fair values at that time, with the excess purchase price over fair value allocated to goodwill, and “pushed down” to the Company’s consolidated balance sheet with a balancing entry in additional paid-in capital, for the following amounts:

 

Total consideration paid

   99,077   

Less:

  

Technology-related intangible assets (a)

   36,938   

Customer-related intangible assets (b)

   7,027   

Marketing-related intangible assets (c)

   4,003   

Physician Education and Training Program intangible assets (d)

   1,841   

Inventory step up (e)

   6,267   

Deferred tax liabilities (f)

   (18,690

Other assets acquired and liabilities assumed

   17,899   
      

Goodwill

   43,792   
      

Total consideration paid is composed of the price paid for the acquisitions of the 33.01% interest in Scient’x S.A. and the 61.32% interest in Scient’x Groupe S.A.S., respectively in 2004 and 2008.

a) Technology-related

Technology-related acquired intangible assets are composed of in-process research and development (IPR&D) for €6,356, core technology for €12,122, and developed technology for €18,460. Management estimated that core and developed technology have 15 and 8 years of expected useful life, respectively. The expected lives for the in-process, core and developed technologies were based upon a combination of: (i) historical experience of Scient’x, (ii) anticipated product development and introduction schedules, and (iii) expected substitute or replacement technology from competitors. As the technological feasibility associated with the IPR&D had not been established and no future alternative use exists the Company recorded an IPR&D charge for €6,356 in 2008 as other operating expense.

 

8


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

b) Customer-related

Customer-related acquired intangible assets consist both of customer relationships for €4,866 and distribution network for €2,161. Management estimated that customer relationship and the distribution network have 15 and 10 years of expected useful life, respectively. In particular, customer relationship consists of existing contractual and non-contractual relationships from which the Company is expected to benefit given its history and operating practices while the distribution network is essentially related to the United States market. Management estimates are based on historical experience and on various other assumptions that management believes to be reasonable. Actual results may differ from these estimates.

c) Marketing-related

Marketing-related acquired intangible assets consist of both corporate and key product trademarks for €1,309 and €2,694 with a useful life estimated to be 5 and 9 years, respectively.

d) Physician Education and Training Program

The exclusive training program to train physicians/distributors includes surgical skills courses located throughout world and offered in different languages, basic skills courses on products and surgical skills, access to reference centers and local labs for distributors and physicians to get training near their home as well as web based training programs. The useful life of the acquired intangible asset has been estimated to be 10 years.

e) Inventory step up

The inventory step up has been computed by reference to estimated selling prices minus distribution related costs and a normative distribution profit. Consistent with stock rotation, the inventory step up reversed in within the next 18 months and is included in cost of goods sold.

f) Deferred tax liabilities

Deferred tax liabilities have been computed on the temporary differences arose between book and tax values as a result of the new basis of accounting.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Foreign currency translation

The reporting currency of the Company and its subsidiaries is the Euro.

The Euro is the functional currency for all Scient’x subsidiaries except for its subsidiaries in the United States of America, the United Kingdom, Australia and Asia, for which the functional currencies are the U.S. dollar, the British pound, the Australian dollar and the Singapour dollar, respectively. Foreign currency-denominated assets and liabilities for these units are translated into Euros based on exchange rates prevailing at the end of the period; revenues and expenses are translated at average exchange rates during the period, and shareholders’ equity accounts are translated at historical exchange rates. The effects of foreign exchange gains and losses arising from the translation of assets and liabilities of those entities where the functional currency is not the Euro are included as a component of other comprehensive income.

Gains and losses resulting from foreign currency transactions are reflected in net loss. The Company does not undertake hedging transactions to cover its currency exposure.

 

9


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

Revenue recognition

The Company derives its revenues primarily from the sale of spinal surgery implants used in the treatment of spine disorders. The Company sells its products primarily through its direct sales force in France, Italy and UK, through agents in the United States (with title to the goods passing directly to, and related invoicing to, the hospital), and through independent distributors in the rest of world. 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 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 Revenue topic of the FASB Accounting Standard Codification (formerly included in the Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104, Revenue), which sets forth guidelines for the timing of revenue recognition based upon factors such as passage of title, installation, payment and customer acceptance.

The Company’s revenue from sales of spinal implants is generally recognized upon delivery for direct and indirect sales.

The US subsidiary has inventory at field locations and in the custodial care of distributors and sales agents. Once product is delivered to the 3 rd party hospitals from either the distributors or the sales agents, the Hospital issues a purchase order to the US subsidiary. Revenue is recognized once the purchase order is received from the Hospital.

The Company usually does not provide for extended payment terms, either for hospital or distributors. The Company has no significant history of return regarding spine implants.

Research and development expense and related tax credit

Research and development expenses consist primarily of costs associated with the design, development, testing, and enhancement of the Company’s products. Research and development costs also include salaries and related employee benefits, research-related overhead expenses, fees paid to external service providers. Expenses related to research and developments are expensed as incurred.

In France, such expenses, if eligible, form the basis for a tax credit, which is recorded as a current tax benefit in the period in which the expenses are incurred. If the credit is not used to offset taxes payable in the four years following its generation, the credit is reimbursed by the government in cash.

Short-Term Investments

The Company classifies certain investments with no specific maturity date, known as monetary Société d’Investissement à Capital Variable (“SICAVs”) or Fonds Commun de Placement (“FCP”), similar to money market mutual funds. Such investments are highly liquid investments with financial institutions and represent units of ownership in a portfolio of investments. The underlying investments of monetary SICAVs and FCP are comprised of low risk investments with a short-term fixed maturity date such as government bonds, certificates of deposit and Euro commercial paper.

The Company accounts for its investments in accordance with the Investments—Debt and Equity Securities topic of the FASB Accounting Standard Codification (formerly SFAS 115 Accounting for Certain Investments in Debt and Equity Securities and SFAS 157 Fair value measurements).

The Company classifies all its investments as available-for-sale securities and reports them at fair value with unrealized gains and losses recorded in other comprehensive income until realized. The Company has no short-term investments as of December 31, 2009 and €3,269 as of December 31, 2008.

As of December 31, 2009 and 2008 there were no unrealized gains or losses. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. Realized gains and losses for the period ended December 31, 2009 and 2008 amounted to €8 and to €21, respectively.

As of December 31, 2008, short-term investments were composed of SICAVs classified as Level 1 of the fair value hierarchy as observable inputs that reflect quoted prices for identical assets or liabilities in active markets exist.

 

10


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

A permanent decline in the market value of any available-for-sale security below cost is accounted for as a reduction in the carrying amount to fair value. The impairment is charged to the consolidated statement of income and a new cost base for the security is established. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective interest method and such amortization and accretion is recorded in the consolidated statement of income. As of December 31, 2009 and 2008 there was no impairment charge on short term investments.

Accounts Receivable

Accounts receivable 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. 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 of their ability to make payments, an increase in the provision for doubtful accounts may be required.

The Company from time to time sells trade receivables. The Company applies the guidance included in the Receivables Subtopic of the FASB Accounting Standard Codification (formerly in SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as amended by SFAS No. 133 and as replaced by SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities).

Concentration of Risk and Significant Customers

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, short term investments and accounts receivable. The Company limits its exposure to credit loss by depositing its cash and short term investments with high credit quality financial institutions.

The Company’s customers are primarily hospitals or surgical centers and third party distributors. No single customer represented more than 10 percent of consolidated revenues for any of the periods presented. Credit to customers is granted based on an analysis of the customers’ credit worthiness and credit losses have not been significant.

Fair Value of Financial Instruments

The carrying value of accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses, and current portion of long term debt 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 long-term debts less current portion approximates their carrying values.

Goodwill and Other Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with the Intangibles – Goodwill and Other Subtopic of the FASB Accounting Standard Codification, (formerly SFAS No. 142, Goodwill and Other Intangible Assets ). Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. The Company is amortizing its intangible assets with a definite useful life typically on a straight-line basis over a three to fifteen-year period. Patent prosecution fees are capitalized when management estimates that they meet the alternative future use criteria, and amortized over the patent life.

Goodwill and other intangible assets mostly arose from the push down accounting recorded in 2008 following the Healthpoint acquisition.

 

11


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

Property and equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally ranging from three to five years. Leasehold improvements and assets acquired under capital leases are amortized over the shorter of their useful lives or the terms of the related leases.

The useful life of spinal implant instrumentation toolkit has been determined to be three years, based on a review of internal plans, analyzing and testing the historical useful life of instrumentation, forecasting product life cycles and demand expectations.

Leases

The Company leases its facilities and certain equipment under operating leases, and certain equipment under capital leases. The Company accounts for those leases in accordance with the Broad Transactions – Leases section of the FASB Accounting Standard Codification (formerly SFAS No. 13, Accounting for Leases ).

Impairment of Goodwill and Long-Lived Assets

The Intangibles – Goodwill and Other Subtopics of the FASB Accounting Standard Codification (formerly SFAS No. 142, Goodwill and Other Intangible Assets ) requires intangible assets that are not subject to amortization and goodwill to be tested for impairment on an annual basis and earlier if indication of impairment exists.

Management determined that the Company is composed of only one reporting unit, the spine implant division. Management has performed an impairment analysis during the fourth quarter of fiscal 2009, and has concluded that the fair value of the reporting unit exceeded the carrying value. Therefore no impairment charge has been recorded for 2009. The impairment analysis performed during the fourth quarter of fiscal 2008 resulted in a goodwill impairment charge of approximately €30,916. The goodwill impairment resulted from a combination of factors, including the current global economic downturn and decreases in revenue and earnings multiples of comparable companies. Significant changes in the economic environment and the operating results of the Company may result in future impairment of this reporting unit.

In accordance with the Intangibles – Goodwill and Other Subtopic of the FASB Accounting Standard Codification (formerly FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), recoverability of purchased intangible assets other than goodwill and indefinite-live intangible assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

The Company performed the recognition test based on undiscounted cash flows, and concluded that no impairment charge was required on any of its finite-lived intangible assets as of December 31, 2009 and 2008.

Prepaid expenses and other Current Assets

As of December 31, 2009 and 2008, prepaid expenses and other current assets consisted of employees-related receivables, tax and VAT receivables, advances and other miscellaneous receivables.

Inventories

Inventories are valued under the first-in, first-out (FIFO) method, and stated using the lower of costs or market.

The Company’s business goal is to focus on continual product innovation, which could result in obsolescing the Company’s products. The Company reviews the components of its inventory on a periodic basis for excess, obsolete and impaired inventory, based upon historical and statistical assumptions. The Company’s estimates and assumptions for excess and obsolete inventory are reviewed and updated on a period-end basis. Increases in the reserve for excess and obsolete inventory result in a corresponding expense to cost of goods sold.

 

12


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

Income taxes

The Company accounts for income taxes in accordance with the provisions of the Income Taxes Subtopic of the FASB Accounting Standard Codification (formerly SFAS No. 109, Accounting for Income Taxes and FASB Interpretation Number (“FIN”) No. 48 , Accounting for Uncertainty in Income Taxes ) that requires an asset and liability approach, which requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. In making such determination, a review of all available positive and negative evidence must be considered, including scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. The Income Taxes Subtopic of the FASB Accounting Standard Codification (formerly FIN No. 48) clarifies accounting for uncertainty in tax positions and requires that the Company recognize in its financial statements the impact of a tax position, if that position is more likely than not to be sustained on audit, based on the technical merits of the position.

Scient’x is a French-based Company and files income tax returns in France, UK, Italy and U.S. jurisdictions, including state and local jurisdictions. With few exceptions, Scient’x is no longer subject to domestic or foreign examinations by tax authorities for years before Jan 1, 2007.

Legal and other contingencies

The Company is currently involved in various claims and legal proceedings. Periodical reviews are performed on the status of each significant matter and the Company assesses the potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, an accrual is recorded as the liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, a reassessment of the potential liability related to the pending claims and litigation is made and may revise previous estimates. Such revisions in the estimates of the potential liabilities could have a material impact on the Company’s results of operations and financial position.

Restructuring costs are typically comprised of severance costs, costs of moving or consolidating duplicate facilities or locations and contract termination costs. Restructuring expenses are based upon plans or agreements that have been committed to by management and they are generally based on various estimates and assumptions that may change during final actual execution. This may require a revision of original estimated liabilities and may materially affect the Company’s results of operations and financial position in the period the revision is made.

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of the Stock-Compensation Subtopic and the Equity Topic of the FASB Accounting Standard Codification (formerly included in SFAS, No. 123(R), Share-Based Payment ). It requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. The amount of expense recognized during the period is affected by many complex and subjective assumptions, including: estimates of future volatility, the expected term for stock options, option exercise behavior, the number of options expected to ultimately vest, and the timing of vesting for share-based awards.

The Company uses historical data to estimate the number of future stock option forfeitures. Stock-based compensation recorded in the consolidated statement of operations is based on awards expected to ultimately vest and has been reduced for estimated forfeitures. Estimated forfeiture rates may differ from actual forfeitures which would affect the amount of expense recognized during the period.

 

13


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

Sale of stock issued by a subsidiary

Prior to January 1, 2009, the Company applied the Miscellaneous Accounting Topic of the FASB Accounting Standard Codification (formerly SAB 51) for accounting for sales of stock by a subsidiary, when the parent already has, and will continue to have control. Management adopted the optional treatment allowed by the guidance to record directly in equity, net of tax consequences if any, all sales of stock issued by a subsidiary resulting in a decrease of the parent company’s percentage of ownership. As a consequence no gain or losses have been recognized on these transactions for the difference between the consideration received and the book value of the sold interests.

Effective January 1, 2009 the Company adopted the new accounting guidance in the Consolidation Topic of the FASB Accounting Standard Codification (formerly included in SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51 ) which changes the accounting and reporting for minority interests. In accordance with the new guidance minority interests are characterized as non-controlling interests and are reported as a component of equity separate from the parent’s equity. Purchases or sales of equity interests that do not result in a change in control are accounted for as equity transactions. In addition, net income attributable to the non-controlling interest is included in consolidated net income on the face of the income statement.

Pension and retirement employees benefit

The Company adopted the Compensation-Retirement Benefit Subtopic of the FASB Accounting Standard Codification (formerly FAS 87, FAS 106, FAS 158 and EITF 88-1) for pension accounting. Actuarial gains and losses are recognized in the statement of income as incurred. The retirement benefit that employees have accrued for services to date that is payable immediately upon retirement, is estimated under the projected unit credit method.

The Company maintains an employee savings plan for U.S. employees that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the savings plan, participating employees may contribute a portion of their pre-tax earnings, up to the Internal Revenue Service annual contribution limit. Additionally, the Company may elect to make matching contributions into the savings plan at its sole discretion of up to 3% of each individual’s compensation. Match amounts are immediately vested.

Recent Accounting Pronouncements

In May 2008, the FASB issued the new guidance, The Hierarchy of Generally Accepted Accounting Principles (formerly SFAS No. 162), which identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with generally accepted accounting principles, or GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The FASB believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets, which is effective January 1, 2010. The amendment eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets and requires enhanced disclosures to provide financial statement users with greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

Also in June 2009, the FASB amended the existing accounting and disclosure guidance for the consolidation of variable interest entities, which is effective January 1, 2010. The amended guidance requires enhanced disclosures intended to provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

14


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

In October 2009, the FASB issued new guidance for revenue recognition with multiple deliverables, which is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, although early adoption is permitted. This guidance eliminates the residual method under the current guidance and replaces it with the “relative selling price” method when allocating revenue in a multiple deliverable arrangement. The selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists, otherwise third-party evidence of selling price shall be used. If neither exists for a deliverable, the vendor shall use its best estimate of the selling price for that deliverable. After adoption, this guidance will also require expanded qualitative and quantitative disclosures. The Company is currently assessing the impact of adoption on its financial position and results of operations.

In January 2010, the FASB expanded the disclosure requirements for fair value measurements relating to the transfers in and out of Level 2 measurements and amended the disclosures for the Level 3 activity reconciliation to be presented on a gross basis. In addition, valuation techniques and inputs should be disclosed for both Levels 2 and 3 recurring and nonrecurring measurements. The new requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about the Level 3 activity reconciliation which are effective for fiscal years beginning after December 15, 2010. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

2. ACCOUNTS RECEIVABLE

At December 31, accounts receivable consisted of the following:

 

 

     As of December 31,  
     2009     2008  
          

Trade receivables (including factored receivables)

   10,882      8,302   

Allowance for doubtful accounts

   (1,212   (908
            

Accounts receivables, net

   9,670      7,394   
            

Trade receivables do not bear interest and are generally payable at term.

The rollforward of the allowance for doubtful accounts is as follows:

 

       Balance at
Beginning of
Period
   Additions    Deductions     Balance at
End of
Period
              

Year ended December 31, 2007

   591    340    (321   610

Year ended December 31, 2008

   610    315    (17   908

Year ended December 31, 2009

   908    408    (104   1,212

The Company accounts for the sale of trade receivables under factoring agreements between Scient’x USA and financial institutions in the United States, and Scient’x S.A. .and financial institutions in France as short-term debt and continues to carry the receivables on its consolidated balance sheet as the control of such receivables is not surrendered. As of December 31, 2009 and December 31, 2008, factored trade receivables amounted to nil and €700, respectively.

The Company did not experience losses or delinquencies on factored trade receivables during the reported periods.

 

15


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

3. INVENTORY

At December 31, inventory consisted of the following:

 

     As of December 31,  
     2009     2008  
          

Raw material

   88      92   

Work-in-progress

   95      95   

Finished goods and goods for resale (including € nil in 2009 and €2,364 in 2008 of inventory step-up)

   14,553      16,783   
            

Total gross inventory

   14,736      16,970   
            

Opening inventory reserve

   (1,914   (994

Increase

   (930   (1,205

Decrease

   486      285   
            

Total inventory reserve

   (2,358   (1,914
            

Inventory, net

   12,378      15,056   
            

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

At December 31, other current assets consisted of the following:

 

     As of December 31,
     2009    2008
       

Employees-related receivables

   4    61

Tax receivables

   704    409

VAT receivables

   73    698

Prepaid expenses

   248    317

Costs of Oxford loan

   74    —  

Customer pre-payments

   10    663

Other receivable

   59    76
         

Total other current assets

   1,172    2,224
         

5. INTANGIBLE ASSETS

As of December 31, 2009 and 2008, intangible assets consisted of the following:

 

          As of December 31, 2009    As of December 31, 2008
     Useful life
in years
   Gross    Accumulated
Amortization
    Net    Gross    Accumulated
Amortization
    Net

Technology-related

   8-15    36,938    (12,993   23,945    36,938    (9,562   27,376

Customer-related

   10-15    7,027    (1,120   5,907    7,027    (542   6,485

Marketing related

   5-9    4,003    (1,209   2,794    4,003    (601   3,402

Physician Education and Training program

   10    1,841    (388   1,453    1,841    (188   1,653

Licenses and patents

   5    3,669    (3,407   262    3,682    (3,217   465

Other miscellaneous

   3-5    557    (536   21    557    (553   4
                                  

Total

      54,035    (19,653   34,382    54,048    (14,663   39,385
                                  

 

16


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

The Company recorded amortization expense of €5,000, €11,553 and €677 for the year ended December 31, 2009, 2008 and 2007 respectively.

Based on the intangible assets as of December 31, 2009, the estimated amortization expense for each of the succeeding 5 years is as follows:

 

Year ending December 31,

  

2010

   4,939

2011

   4,838

2012

   4,505

2013

   3,940

2014

   3,834

Thereafter

   12,326
    

Total

   34,382
    

6. PROPERTY AND EQUIPMENT

At December 31, property and equipment consisted of the following:

 

     As of December 31,  
     2009     2008  
          

Plant, tools and equipment

   294      243   

Leased technical equipment

   496      616   

Spinal instrumentation toolkit

   4,326      2,627   

Others

   510      373   
            

Total property and equipment

   5,626      3,859   

Less accumulated depreciation

   (2,207   (864
            

Property and equipment, net

   3,419      2,995   
            

Depreciation expense for the years ended December 31, 2009 and 2008 and 2007 amounted to €1,537 and €1,586 and €1,702, respectively (including amortization expense of assets recorded under capital leases).

The Company leases certain equipment under capital leases and certain equipment and vehicles under operating leases which expire on various dates through 2013. Future minimum annual lease payments under such leases are as follows:

 

     Operating    Capital  
    

  

 

Year ending December 31,

     

2010

   649    121   

2011

   524    111   

2012

   397    110   

2013

   368    24   

Thereafter

   —      —     
           
   1,938    366   
           

Less: amount representing interest

      (20
         

Present value of minimum lease payments

      346   

Current portion of capital leases

      (111
         

Capital leases, less current portion

      235   
         

Rent expense under operating leases for the years ended December 31, 2009, 2008 and 2007 was €828, €964 and €801, respectively.

 

17


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

Accumulated depreciation on leased equipment as of December 31, 2009 and 2008 was €292 and €262, respectively.

7. INCOME TAXES

For financial reporting purposes, net (loss) income before income taxes includes the following components by geographical area:

 

     Year ended December 31,  
     2009     2008     2007  
              

France

   (10,790   (47,835   (135

Italy

   1,320      309      415   

United Kingdom

   430      (1,005   (264

Australia

   (10   (6   (6

Asia

   (15   —        —     

United States

   (5,439   (4,783   (1,645
                  

Total

   (14,504   (53,320   (1,635
                  

Components of income tax expense (benefit) are as follows:

 

     Year ended December 31,  
     2009     2008     2007  
              

France

   152      69      24   

Italy

   174      127      130   

United Kingdom

   —        —        —     

Australia

   —        —        —     

United States

   —        —        —     
                  

Total current

   326      196      154   
                  

France

   (3,088   (4,734   798   

Italy

   14      (1 )   106   

United Kingdom

   —        —        —     

Australia

   —        —        —     

United States

   159      14      (15
                  

Total deferred

   (2,915   (4,721   889   
                  

Income tax expense (benefit)

   (2,589   (4,525   1,043   
                  

 

18


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

The provision for income tax differs from the amount of income tax determined by applying the applicable French statutory income tax rate to pretax income as a result of the following differences:

 

     As of December 31,  
     2009     2008  
     %     %  

Standard income tax rate applicable in France

   33      33   

Adjustments for the tax effects of:

    

Non-taxation of the goodwill impairment charge

   —        (19

Other permanents items

   (1   2   

Difference between tax rates applicable in France and tax rates applicable in other countries

   3      2   

Reassessment of certain of the Group’s tax exposures

   (7   (3

Research and development tax credit in France

   1      1   

Operation taxed at a special rate

   13      (1

Recognition of previously non recognized deferred tax

   1      —     

Valuation allowance

   (25   (7
            

Effective tax rate

   18      8   
            

As of December 31, deferred tax assets and liabilities consisted of the following:

 

     As of December 31,  
     2009     2008  
          

Deferred tax assets:

    

Allowance and reserves

   101      97   

Accrued expenses

   254      182   

Net operating loss carryforwards

   13,117      8,856   

Deferred expenses

   105      99   

Other

   55      36   
            

Total deferred tax assets

   13,632      9,270   

Valuation allowance

   (9,828   (6,234
            

Total deferred tax assets, net of valuation allowance

   3,804      3,036   
            

Deferred tax liabilities:

    

Unrealized exchange gain/loss

   217      134   

Inventory step-up

   —        788   

Intangibles assets

   11,365      12,971   

Depreciation

   124      51   

Transaction costs

   87      —     

Other

   46      2   
            

Total deferred tax liabilities

   11,839      13,946   
            

Total deferred taxes, net

   (8,035   (10,910
            

The realization of deferred tax assets may be dependent on the Company’s ability to generate sufficient income in future years. The increase over the period is mostly due to the increase in net operating losses carried forward of the French and US entities. The increase in the valuation allowance is mostly related to Scient’x Groupe S.A.S., Scient’x UK and Scient’x USA entities for which management concluded that such an increase was appropriate based upon cumulative losses in recent years.

As of December 31, 2009, €5,230 out of the €13,117 net operating loss carry-forwards have no expiration date. The remaining tax loss carry-forwards expire in years 2022 through 2029.

 

19


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

Deferred taxes have not been provided on share premiums and undistributed earnings of domestic and foreign subsidiaries, when applicable, as management considers that these earnings are essentially permanent in duration.

Deferred tax liabilities for the years ended December 31, 2009 and 2008 were €11,839 and €13,946 respectively. The balance of deferred tax liabilities recorded on the fair values of the intangible assets recorded as a result of the push down accounting on January 24, 2008 amounts to €11,365 as of December 31, 2009.

A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:

 

     As of December 31
     2009     2008    2007
           

Balance at January 1,

   957      267    60

Additions based on tax positions related to current year

   —        678    204

Additions for tax positions of prior years

   43      12    3

Reductions for tax positions of prior years

   (91   —      —  

Settlements

   —        —      —  
               

Balance at December 31,

   909      957    267
               

As of December 31, 2009, 2008, 2007, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is €909, €957, €267, respectively, which includes interests and penalties of €93, €61 and €15, respectively. Scient’x does not currently anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease within the next year.

8. OTHER LONG TERM ASSETS

At December 31, other long term assets consisted of the following:

 

     As of December 31,
     2009    2008
       

Costs of Oxford loan

   129    —  

Deposits and collateral

   41    69

Other

   82    31
         

Total other long term assets

   252    100
         

9. SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Shareholders’ equity

As of December 31, 2009, the issued and outstanding share capital of the Company consisted of 3,683,931 ordinary shares with a nominal value of €0.40 per share. Issued shares are all of the same class, offering same voting rights and claims on the appropriation of net income.

On June 3, 2009 Healthpoint Capital LLC entirely subscribed the share capital increase of 178,736 new shares of the Company with a nominal value of €0.40 each, for a total cash consideration of €3,853, or €21.56 per share. Consideration received has been allocated to share capital for a total of €71, or €0.40 per share, and to additional paid-in capital for €3,782.

On June 3, 2009 the Company entirely subscribed the share capital increase of 449,657 new shares of Scient’x S.A., with a nominal value of €0.25, for total cash consideration amounting to €3,854, or €8.57 per share. The company accounted for its increased ownership interest in Scient’x SA as a capital transaction.

 

20


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

Deferred taxes have not been provided on share premiums received upon issuance and sale of Scient’x S.A. stocks as management considers that these earnings are essentially permanent in duration.

On July 30, 2009, the Company changed its legal incorporation form from a Société Anonyme (S.A.) to a Société Anonyme Simplifié (S.A.S.). Such change reflects the simplification of the Company’s legal structure given the change in ownership.

Previously to July 17, 2009 Healthpoint Capital LLC and Scient’x S.A. owned respectively 847 (5,8%) and 13,723 (94.2%) shares of Surgiview S.A (“Surgiview”). shareholders’ capital. Surigiview is a subsidiary of the Group active in the manufacturing and installation of equipment and medical and surgical instruments.

On July 17, 2009, Healthpoint Capital LLC and the Company concluded a transaction by which the Company acquired the 847 shares of Surgiview from Healthpoint Capital LLC in compensation for 5,195 new shares of the Company with nominal value of €0.40, €21.16 per share. Considering received has been allocated to share capital for a total of €2 or €0.40 per share, and to additional paid in capital for €110.

Subsequent to receiving the shares, the Company and Scient’x S.A. concluded a transaction by which the Scient’x S.A. acquired the 847 shares that the Company had received from Healthpoint Capital LLC, in compensation for 13,068 new shares of Scient’x S.A. with nominal value of €0.25, or €8;57 per share. The Company accounted for its increased ownership interest in Scient’x S.A. as a capital transaction. Following the transfer, Scient’x S.A. owns 14,570 shares or 100% of the share capital of Surgiview.

The company’s interest in Scient’x S.A. before and after the share issuances of June 3, 2009 and July 17, 2009 was 65.29% and 66.41% respectively.

On December 17, 2009, a Share Purchase Agreement was executed by and among Alphatec Holdings, Inc., HealthpointCapital Partners, L.P., HealthpointCapital Partners II, L.P., HealthPoint (Luxembourg) I SÀRL, and HealthPoint (Luxembourg) II, SÀRL, for the purpose of the direct or indirect acquisition by Aphatec Holdings, Inc. of approximately 95% of the equity interests in Scient’x from HealthpointCapital and certain of its affiliates through a capital increase of the buyer.

Under the Share Purchase Agreement, Alphatec Holdings, Inc. has agreed to acquire 100% of the issued and outstanding shares of the Company from HealthpointCapital, thereby indirectly acquiring approximately 66.4% of the issued and outstanding shares of Scient’x S.A., and also to acquire approximately 28.4% of the issued and outstanding shares of Scient’x S.A. directly from an affiliate of HealthpointCapital.

Pursuant to the Share Purchase Agreement the acquired Scient’x shares will be owned by two to-be-formed acquisition subsidiaries of Alphatec Holdings, Inc. that will become parties to the Share Purchase Agreement through the execution of a separate joinder agreement. Following the Share Purchase, Scient’x will be an indirectly owned subsidiary of Alphatec. Alphatec expects the closing of the Share Purchase to occur by the end of the first quarter of 2010.

Stock-based compensation

As of December 31, 2009, Scient’x has one share-based compensation plan approved by the shareholder’s Ordinary and Extraordinary Meeting of March 17, 2008. The Board of Directors’ subsequently allocated those stock options as shown below. The beneficiaries of current stock option plans are employees of the Company and its subsidiaries (Scient’x USA, Scient’x UK and Scient’x Italia).

Except for grant-date and exercise price, the grants made under the March 17, 2008 plan have similar features that are described below.

 

21


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

The stock options are valid for a period of up to 10 (ten) years following the grant date (contractual term). Options granted by the Board of Directors vest based on the following schedule:

 

   

on the first anniversary of the grant date, provided that the beneficiary satisfies the continuous eligibility requirement at that time: 1/3 (one-third) of the stock option granted at the grant date;

 

   

on the second anniversary of the grant date, provided that the beneficiary satisfies the continuous eligibility requirement at that time: 2/3 (two-thirds) of the stock option granted at the grant date;

 

   

on the third anniversary of the grant date, provided that the beneficiary satisfies the continuous eligibility requirement at that time: 100% (one hundred percent) of the stock option granted at the grant date;

Outstanding options as of December 31, 2009 and changes during the year are as follows, for each grant date:

 

     March 17,
2008
    July 30,
2008
    October 14,
2008
    February 25,
2009
    April 1,
2009
   Total  

Strike price

   8.07      8.07      8.57      8.77      8.77   

Maturity date

   March 17,
2018
  
  
  July 30,
2018
  
  
  October 14,
2018
  
  
  February 25,
2019
  
  
  April 1,
2019
  
                                   

Outstanding at January 1, 2009

   480,900      174,500      60,000      —        —      715,400   

Granted

   —        —        —        328,500      326,868    655,368   

Cancelled

   (405,900   (2,000   (10,000   (77,000   —      (494,900

Exercised

   —        —        —        —        —      —     
                                   

Outstanding at December 31, 2009

   75,000      172,500      50,000      251,500      326,868    875,868   
                                   

One-third of the stock-options granted by March 17, 2008 plan, July 30, 2008 plan, and October 14, 2008 plan were exercisable as of December 31, 2009, but none were exercised.

The valuation method is based on the Black-Scholes formula, in accordance with the Equity and the Compensation Subtopics of the FASB Accounting Standard Codification (formerly SFAS No. 123(R)). The assumptions used to determine the calculated value of the stock-options at their grant dates are as follows:

 

     March 17,
2008

Grant
    July 30,
2008
Grant
    October 14,
2008

Grant
    February 25,
2009

Grant
    April 1,
2009
Grant
 

Weighted-average risk-free rate

   3.37   4.36   3.92   2.46   2.46

Expected dividends

   —        —        —        —        —     

Expected volatility

   46.00   47.00   49.00   56.00   56.00

Weighted-average estimated term (in years)

   6.00      6.00      6.00      6.00      6.00   

Share price (in € per share)

   8.77      8.77      8.77      8.77      8.77   

Weighted-average fair value of options at grant date (in € per option)

   4.46      4.66      4.58      4.76      4.76   

Since Scient’x is a nonpublic company, it estimates the value of its stocks (share price) at the grant date based on the comparison with parameters of public companies of the same industry sector.

The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The weighted average expected life of options was calculated using the simplified method as prescribed by the Stock Compensation Subtopics of the FASB Accounting Standard Codification (formerly SAB No. 107, Share-Based Payment). This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, the Group being a nonpublic entity, the expected volatility also reflects the application of the guidance, incorporating the historical volatility of comparable companies whose share prices are publicly available.

In application of the straight-line method to recognize compensation costs for award with graded vesting, a €1,266 expense was recorded through the consolidated statement of operations over 2009. The total remaining cost of €2,728 is expected to be recognized over a weighted average period of 2 years.

 

22


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

10. D EBT

The Company’s debt is comprised of the following:

 

     As of December 31,  
     2009     2008  
          

Oxford loan

   5,206      —     

Other bank loans

   —        788   

Credit facility drawdowns

   —        1,833   

Working line of credit

   35      98   

Capitalized lease obligation

   335      509   

Factoring

   —        700   

OSEO Anvar conditional interest-free loan

   145      190   

Accrued interest expense

   55      —     

Others

   —        9   
            

Total

   5,776      4,127   

Less current portion

   (2,237   (3,780
            

Long term debt

   3,539      347   
            

Oxford loan

In May 29, 2009 Scient’x USA obtained a USD 7.5 million (approximately €5,7 million) loan from the U.S. investment company Oxford Finance Corporation with a 12.42% interest rate and maturities of 36 months.

Concurrent with this loan, all credit facility drawdowns have been repaid.

The future expected repayments of the Oxford Finance Corporation loan as of December 31, 2009 are as follows:

 

    

Year ending December 31,

    

2010

   1,891

2011

   2,141

2012

   1,174

2013

   —  

2014

   —  

Thereafter

   —  
    
   5,206
    

OSEO Anvar Conditional interest-free loan

Between April 2006 and August 2007, the Company received three installments of a conditional interest-free loan signed on August 26, 2004 with OSEO Anvar, a French government agency that provides research and development financing to French companies, for an amount of €120, €100 and €60 respectively. The Company fully complied with all loan conditions and was therefore granted the contractual repayment terms. At inception the loan has been accounted for, as other debt, at its present value using an annual interest rate of 4%, which management believes adequately reflects the value of money throughout the term of the facility.

The loan matures starting from March 31, 2008 when a first installment of €60 was paid by the Company, in accordance with the reimbursement plan. The outstanding €150 will be re-paid in three installments throughout the period from March 2010 to March 2011. In particular €70 will be paid in March 2010 and €80 will be paid in March 2011.

 

23


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

11. BENEFIT PLANS

In accordance with the laws and practices of each country where Scient’x is established, the Group participates in employees benefit plans. These plans can either be defined contribution or defined benefit plans.

For the 401(k) plan in the USA (a defined contribution plan) the Group expenses contributions as and when they are due. As the Group is not liable for any legal or constructive obligations under the plans beyond the contributions paid, no provision is made. The contributions related to defined contribution plans paid by the Group were €82 and €75 as of December 31, 2009 and 2008 respectively.

For defined benefit plans such as retirement indemnity in France and Trattamento di Fine Rapporto (“TFR”) in Italy, liabilities are determined using the Projected Unit Credit Method. However, the TFR plan is measured using the undiscounted value of the accrued benefits, in accordance with the Compensation-Retirement Benefits Topic of the FASB Accounting Standard Codification (formerly EITF 88-1). Actuarial gains and losses resulting mainly from changes in actuarial assumptions are recognized fully through the income statement.

The company’s liability for defined benefit plans was €188 and €174 as of December 31, 2009 and 2008 respectively, and is classified in “commitments and contingencies”. The Group has no dedicated plan assets to cover its employee benefit obligation.

The weighted average assumptions used to determine benefit obligations are as follows:

 

     As of December 31,  
     2009     2008  

Discount rate

   4.75   5.00

Average expected rate of salary increase

   4.20   2.50

The change in employee benefit obligation is as follows:

 

     As of December 31,
     2009     2008
        

Benefit obligation at January 1

   174      133

Service cost

   34      32

Interest cost

   7      7

Curtailments

   —        —  

Actuarial gains and losses

   (27   2

Benefits paid

   —        —  

Foreign currency translation and other

   —        —  
          

Benefit obligation at December 31

   188      174
          

For retirement indemnities in France, the accumulated benefit obligation (excluding effect of future salary increase) was €67 and €81 as of December 31, 2009 and 2008 respectively.

The components of the net periodic benefit costs are as follows:

 

     As of December 31,
     2009    2008
       

Service cost

   34    32

Interest cost

   7    7

Actuarial gains and loss component

   —      2

Effect of curtailment and settlements

   —      —  

Amortization of prior service cost

   —      —  
         

Net periodic benefit cost

   41    41
         

 

24


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

The estimated future payments are as follows:

 

2010

   —  

2011

   —  

2012

   —  

2013

   —  

2014

   —  

2015-2019

   55
    
   55
    

12. COMMITMENTS AND CONTINGENCIES

At December 31, commitments and contingencies consisted of the following:

 

 

     As of December 31,  
     2009    2008  
         

Pensions

   188    222   

Separation liabilities

   —      485   

Taxes

   907    955   

Others

   44    46   
           

Total

   1,139    1,708   

Less current portion

   —      (382
           

Long term portion of commitments and contingencies

   1,139    1,326   
           

The Company is party to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, including proceedings and commercial claims, employment and tax assessment claims. In addition the Company faces some uncertainties and risks including tax and legal exposures, commercial risks, product liability risks and intellectual property risks that are periodically assessed by management together with legal proceedings and claims in order to identify its potential financial exposure.

While the outcome of these matters cannot be predicted with certainty, management does not believe that the outcome of any of these claims or any of the above mentioned legal matters will have a materially adverse effect on the Company’s consolidated financial position, results of operations or cash flows. As discussed in paragraph “Legal and other contingencies”, at Note 1. “Nature of business and summary of significant accounting policies”, the Company records a provision when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and when a reliable estimate can be made of the amount of the outflow of resources. The following is a description of the three major litigations:

Orthotec

In 2002, Eurosurgical, a French company operating in the business of spinal implants, entered into a distribution agreement for USA, Mexico, Canada, India and Australia with Orthotec, LLC, a California company. In 2004, Orthotec sued Eurosurgical over a United States intellectual property dispute and a $9 million judgment was entered against Eurosurgical by a California court. At the same time, a Federal Court declared Eurosurgical liable to Orthotec for $30 million.

In 2005, Eurosurgical’s European assets were ultimately acquired by Surgiview, S.A.S. in a liquidation sale approved by a French court. Surgiview S.A.S. then became a subsidiary of Scient’x, S.A. in 2005. Orthotec attempted to recover on Eurosurgical’s obligations by filing a motion in a California court to add Surgiview subsidiary to the judgment against Eurosurgical on theories including successor liability and fraudulent conveyance. In February 2007, the California court dismissed Orthotec’s motion indicating that Orthotec had not carried its burden of proof to establish successor liability. Orthotec then withdrew any subsequent motions in June 2007.

 

25


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

Upon the acquisition of the Company by HealthpointCapital in late 2007, Orthotec reasserted itself by suing the Company, Surgiview, HealthpointCapital and certain Scient’x directors in the California, New York State and Federal courts.

In July 2008, the Federal court dismissed Orthotec on jurisdictional grounds. In April 2009, the California court dismissed Orthotec on jurisdictional grounds. In July 2009, Orthotec dropped the Company from the remaining suit in the New York State court and is targeting HealthpointCapital. In November 2009, the Supreme Court of the State of New York dismissed the pending case filed by Orthotec. Although the judgement might be appealed, the Company believes that the risk of a negative outcome is remote.

For the year ended December 31, 2009, management determined that, also based on an independent legal opinion and other assumptions, the probability of an outcome of resources was not probable and thus has not accrued any amount for this litigation. Although the appeal might fail, the Company believes that the risk of a negative outcome is remote. The company continues to incur legal fees to defend itself against this case.

DAK Surgical, Inc.

On 2003, Scient’x USA Inc. entered into a distribution agreement with DAK Surgical, Inc., an independent USA distributor, for the distribution of certain spinal implants commercialized by Scient’x. On September 24, 2007, shortly after their distribution contract was terminated, DAK Surgical, Inc filed a lawsuit against Scient’x USA, Inc. and Scient’x, SA where it alleges a trigger of a change in control provision in their distribution contract with the announcement of the attempted Alphatec merger in September 2006. This alleged change of control was ultimately not consummated. Three elements of the DAK case against Scient’x, SA have already been dismissed before the Courts. The Company and its attorney believe that the suit has no merit and continue to vigorously defend against the suit.

Matter Related to the Dismissed Qui Tam Matter

On August 13, 2009, a complaint filed under the qui tam provisions of the United States Federal False Claims Act, or the FCA, that had been filed by private parties against Scient’x’s subsidiary, Scient’x USA, Inc., or Scient’x USA, was unsealed by the United States District Court for the Middle District of Florida ( Hudak v. Scient’x USA, Inc., et al. ( Civil Action No. 6:08-cv-1556-Orl-22DAB, U.S. District Court, W.D. Florida )). The complaint alleged violations of the FCA arising from allegations that Scient’x USA engaged in improper activities related to consulting payments to surgeon customers. Under the FCA, the United States Department of Justice, Civil Division, or DOJ, had a certain period of time in which to decide whether to intervene and conduct the action against Scientx’USA, or to decline to intervene and allow the private plaintiff’s to proceed with the case. On August 7, 2009, the DOJ filed a notice informing the court that it was declining to intervene in the case. On December 4, 2009, the private plaintiffs who filed the action moved the court to dismiss the matter without prejudice and the Attorney General consented to such dismissal on December 14, 2009.

The matter was dismissed without prejudice on December 15, 2009. Despite the dismissal of this matter, the DOJ is continuing its review of the facts alleged by the original plaintiffs in this matter. Scient’x USA believes that its business practices were in compliance with the FCA and intends to vigorously defend itself with respect to the allegations contained in the qui tam complaint. To date, Scient’x USA has not been subpoenaed by any governmental agency in connection with this review.

13. RELATED PARTY TRANSACTIONS

For the years ended December 31, 2009 and 2008, the Company entered into transactions with related parties as described below.

 

26


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

Transactions with Alphatec

On January 23, 2007, Scient’x S.A. signed three license agreements with Alphatec Spine to produce, market, sell and distribute (i) a posterior dynamic stabilization rod, (ii) a thin profile cervical plate; and (iii) a plate-cage; based on Scient’x technology in the United States. The agreement provided that Alphatec Spine make an upfront payment of €2 million, pay a royalty on sales (with minimum royalties for a period of three years), and commit to purchase a minimum amount of inventory, at cost, for a period of two years.

In April 2008, the Company and Alphatec Spine mutually agreed to terminate the license agreements they had entered into in January 2007. The termination agreement included the repayment of the license fee originally paid to the Company and a full repayment of sellable inventory that Alphatec Spine returned to the Company.

Under this agreement, the Company recognized revenues of nil and of €95 and cost of goods of nil and 245 in the period ended December 31, 2009 and 2008, respectively, in connection with inventories sold. In addition, the Company recognized other non operating income of €2,000 and expenses of €1,667 in the period ended December 31, 2008 with respect to the buyback and repurchase of inventories. Amounts receivable from Alphatec amounted to nil] and nil as of December 31, 2009 and 2008, respectively. Amounts payable to Alphatec amounted to nil and nil as of December 31, 2009 and 2008, respectively.

Other related parties transactions

In January 4, 1991, the Company entered into a management service agreement with ETEC, a medical device distributor based in Switzerland. Olivier Carli, currently a director of Scient’x Groupe S.A.S., also serves in the board of directors of ETEC. Expenses incurred under this agreement amounted to nil and €165 respectively for the period ended December 31, 2009 and 2008. No open payables under this agreement remained as of December 31, 2009 and 2008.

In December 5, 2005, as amended in November 21, 2007, the Company entered into an exclusive distribution agreement with ETEC. Revenues recorded under this agreement amounted to €176 and €173 respectively for the period ended December 31, 2009 and 2008. Amounts receivables under this agreement amounted to nil and €69 respectively as of December 31, 2009 and 2008.

In November 2007 and in January 2008 the Company received from Olivier Carli two installments of €3,000 and €4,000, respectively, as the total consideration of €7,000 for the sale of IMPE. As of December 31, 2009 IMPE owed the Company a residual €[6] related to certain transaction costs and fees.

In December 19, 2007, the Company entered into a service agreement with IMPE. Olivier Carli, then CEO of Scient’x Groupe S.A.S. and currently a director of Scient’x Groupe S.A.S., is the CEO of IMPE. Expense incurred under this agreement amounted to nil and €90 for the period ended December 31, 2009 and 2008, respectively. Amounts payable under this agreement amounted to nil and €47 respectively as of December 31, 2009 and 2008. This agreement was terminated in June 30, 2008.

In February 2005, the Company entered into an exclusive distribution agreement with PRIM S.A., a Spanish company. PRIM S.A. acquired a 1.74% interest in Scient’x S.A. in July 2008. Revenue recorded under this agreement amounted to €2,649 and €1,667 for the period ended December 31, 2009 and 2008, respectively. No expenses were incurred under this agreement nor in 2009 nor in and 2008. Amounts receivables under this agreement amounted to nil and €257 respectively as of December 31, 2009 and 2008.

 

27


SCIENT’X GROUPE S.A.S.

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS -(Continued)

(All amounts stated in thousands of euros except share data or as indicated)

 

14. SUBSEQUENT EVENTS

In February 2009, the Company received the notification of a tax audit in France followed by a first visit by the tax authorities. As of March 10, 2010, the date of the filing of these consolidated financial statements, the matter remains in a very preliminary stage as no further visits or requests have been received since.

On December 17, 2009, Alphatec Holdings, Inc., a medical device company that designs, develops, manufactures and markets products for the surgical treatment of spine disorders, with a focus on treating conditions affecting the aging spine, entered into a definitive agreement to acquire Scient’x Groupe S.A.S.

The transaction is structured as an all stock transaction such that 100% of outstanding Scient’x stock will be exchanged pursuant to a fixed ratio for 24 million shares of the Alphatec Holdings, Inc. common stock. The transaction is expected to close by the end of the first quarter of 2010 and is subject to the Alphatec Holdings, Inc. shareholder approval.

As a result of the pending transaction, on February 3, 2010, a decision was made to eliminate the Scient’x USA operation and close the facility effective April 30, 2010. All Scient’x USA activities will be absorbed within the Alphatec activities in Carlsbad, California. Pursuant to this announcement, all Scient’x USA employees were notified of the closure of USA operations and provided documentation relative to their employment status.

 

28

Exhibit 99.2

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The accompanying unaudited pro forma condensed combined financial statements present the pro forma consolidated financial position and results of operations of the combined company based upon the historical financial statements of Alphatec and Scient’x, after giving effect to the Scient’x acquisition and adjustments described in the following footnotes, and are intended to reflect the impact of this acquisition on Alphatec on a pro forma basis.

The unaudited pro forma condensed combined balance sheet reflects the acquisition of Scient’x as if it has been consummated on December 31, 2009 and includes pro forma adjustments for preliminary valuations of certain tangible and intangible assets by Alphatec management as of the acquisition date of March 26, 2010. These adjustments are subject to further revision upon finalization of the transaction, the related intangible asset valuations and fair value determinations.

The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2009 combines Alphatec’s historical results for the year ended December 31, 2009 with Scient’x’s historical results for the year ended December 31, 2009. The Scient’x condensed consolidated statement of operations has been converted from Euros to U.S. Dollars at the average daily exchange rate for the year ended December 31, 2009 of 1.3946 U.S. dollars per Euro. The unaudited pro forma statement of operations gives effect of the acquisition as if it had taken place on January 1, 2009.

The accompanying unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and do not reflect the realization of potential cost savings, revenue synergies or any potential restructuring costs. Certain cost savings and revenue synergies may result from the Share Purchase. However, there can be no assurance that these cost savings or revenue synergies will be achieved. Cost savings, if achieved, could result from, among other things, the reduction of overhead, distribution and other operating expenses, manufacturing scale efficiencies, changes in corporate infrastructure, the elimination of duplicative facilities and the leveraging of consolidated annual external purchases. Revenue synergies, if achieved, could result from, among other things, the cross-selling of Alphatec product through Scient’x distribution channels outside the U.S. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the Share Purchase been completed at the date indicated. In addition, the unaudited pro forma combined financial information does not purport to project the future financial position or operating results of the combined company after completion of the Share Purchase.

Pro Forma Adjustments

Pro forma adjustments are necessary to reflect the estimated purchase price and to reflect the amounts related to Scient’x’s net tangible and intangible assets at an amount equal to the preliminary estimate of their fair values. Pro forma adjustments are also necessary to appropriately reflect the amortization expense related to the estimated identifiable intangible assets, stock-based compensation expense, changes in depreciation and amortization expense resulting from the estimated fair value adjustments to net tangible assets and the income tax effect related to the pro forma adjustments. The historical consolidated financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the combined results.

The pro forma adjustments reflecting the completion of the Share Purchase are based upon the acquisition method of accounting in accordance with Section 805 of the FASB Codification and upon the assumptions set forth in the notes to the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined balance sheet has been adjusted to reflect the preliminary allocation of the estimated purchase price to identifiable net assets acquired, including an amount for goodwill representing the difference between the purchase price and the fair value of the identifiable net assets. The estimated purchase price was calculated based upon $6.39, the closing price of Alphatec’s common stock on March 26, 2010. The final allocation of the purchase price is dependent upon certain valuations and other studies that have not progressed to a stage where sufficient information is available to make a definitive allocation. Accordingly, the pro forma purchase price adjustments reflected in the following unaudited pro forma combined financial statements are preliminary and have been made solely for the purpose of preparing these statements.

The pro forma adjustments are based upon available information and certain assumptions that Alphatec believes are reasonable under the circumstances. A final determination of the fair value of the assets acquired and liabilities assumed may differ materially from the preliminary estimates. This final valuation will be based on the actual fair values of tangible and intangible assets and liabilities assumed of Scient’x that are acquired as of the date of completion of the Share Purchase. The final valuation may change the purchase price allocation, which could affect the fair value assigned to the assets acquired and liabilities assumed and could result in a change to the unaudited pro forma combined financial statements.

 

1


Alphatec expects to incur costs associated with integrating Scient’x and its business. The unaudited pro forma condensed combined financial statements do not reflect the cost of any integration activities or benefits that may result from synergies that may be derived from any integration activities.

You should read this information in conjunction with the:

 

   

accompanying notes to the unaudited pro forma combined financial statements contained in this Form 8-K;

 

   

separate historical audited consolidated financial statements of Scient’x as of December 31, 2009 and 2008 and for the three years ended December 31, 2009 included as Exhibit 99.1 to this Form 8-K;

 

   

separate historical audited consolidated financial statements of Alphatec as of December 31, 2009 and 2008 and for the three years ended December 31, 2009 included in Alphatec’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2010; and

 

   

the proxy statement dated February 12, 2010 related to the acquisition of Scient’x by Alphatec.

Scient’x

On March 26, 2010, Alphatec acquired all of the shares of Scient’x, a medical device company that designs, develops and manufactures surgical implants to treat disorders of the spine. The acquisition is accounted for under the acquisition method of accounting.

Under the terms of the acquisition, Alphatec issued an aggregate of 24,000,000 shares of its common stock in consideration for 100% of the outstanding shares of Scient’x. In connection with the acquisition, options to purchase Scient’x common stock that were outstanding at the time of closing were replaced with options to purchase Alphatec common stock, based on the terms of the acquisition agreement. Approximately $1.2 million has been allocated to the purchase price which represents the fair value of the Scient’x stock options that relate to pre-combination service provided by employees of Scient’x. Based on the closing price of Alphatec’s common stock of $6.39 on March 26, 2010, the preliminary aggregate purchase price was approximately $154.6 million.

 

2


ALPHATEC HOLDINGS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF DECEMBER 31, 2009

(in thousands)

 

     Alphatec     Scient’x     Pro Forma
Adjustments
        Pro Forma
Combined
 

Assets

          

Current assets:

          

Cash and cash equivalents

   $ 10,085      $ 4,467      $ —          $ 14,552   

Accounts receivable, net

     24,766        13,859        —            38,625   

Inventories, net

     29,515        17,740        (3,548   (g)     49,361   
         5,654      (h)  

Prepaid expenses and other current assets

     3,128        1,681        —            4,809   

Deferred income tax assets

     128        —          —            128   
                                  

Total current assets

     67,622        37,747        2,106          107,475   

Property and equipment, net

     30,356        4,900        (754   (i)     34,502   

Goodwill

     60,113        18,454        (18,454   (b)     150,526   
         90,413      (e)  

Intangibles, net

     2,296        49,277        (49,277   (a)     61,201   
         58,905      (d)  

Other assets

     1,501        5,813        —            7,314   
                                  

Total assets

   $ 161,888      $ 116,191      $ 82,939        $ 361,018   
                                  

Liabilities and Stockholders’ Equity

          

Current liabilities:

          

Accounts payable

   $ 12,781      $ 7,016      $ —          $ 19,797   

Accrued expenses

     16,439        6,687        —            23,126   

Deferred revenue

     2,135        —          —            2,135   

Current portion of long-term debt

     6,724        3,206        —            9,930   
                                  

Total current liabilities

     38,079        16,909        —            54,988   

Long-term debt, less current portion

     23,631        5,072        —            28,703   

Other long-term liabilities

     1,008        2,095        —            3,103   

Deferred income tax liabilities

     738        16,968        3,166      (j)     20,872   

Redeemable preferred stock

     23,603        —          —            23,603   

Stockholders’ equity:

          

Common stock

     5        2,113        (2,113   (c)     7   
         2      (f)  

Additional paid-in capital

     175,021        140,903        (140,903   (c)     329,619   
         153,358      (f)  
         1,240      (l)  

Accumulated other comprehensive income (loss)

     1,263        (424     424      (c)     1,263   

Accumulated deficit

     (101,460     (76,729     76,729      (c)     (101,460

Non-controlling interest

     —          9,284        (8,964   (k)     320   
                                  

Total stockholders’ equity

     74,829        75,147        79,773          229,749   
                                  

Total liabilities and stockholders’ equity

   $ 161,888      $ 116,191      $ 82,939        $ 361,018   
                                  

See accompanying notes to unaudited pro forma condensed combined financial statements.

 

3


ALPHATEC HOLDINGS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2009

(in thousands, except per share amounts)

 

     Alphatec     Scient’x     Pro Forma
Adjustments
        Pro Forma
Combined
 

Revenues

   $ 132,156      $ 50,225      $ —          $ 182,381   

Cost of goods sold

     44,961        23,921        5,654      (o)     74,536   

Amortization of intangible assets

     3,054        —          3,289      (n)     6,343   
                                  

Total cost of revenues

     48,015        23,921        8,943          80,879   
                                  

Gross profit

     84,141        26,304        (8,943       101,502   

Operating expenses:

          

Research and development

     13,487        5,779        —            19,266   

In-process research and development

     6,383        —          —            6,383   

Sales and marketing

     51,513        16,786        —            68,299   

General and administrative

     22,315        15,420        (639   (p)     31,165   
         (4,519   (q)  
         (1,412   (r)  

Amortization of intangible assets

     —          6,721        (6,721   (m)     2,027   
         2,027      (n)  

Restructuring costs

     —          212        —            212   
                                  

Total operating expenses

     93,698        44,918        (11,264       127,352   
                                  

Operating loss

     (9,557     (18,614     2,321          (25,850

Other income (expense):

          

Interest income

     67        —          —            67   

Interest expense

     (3,470     (689     —            (4,159

Other income (expense), net

     (86     (925     —            (1,011
                                  

Total other income (expense)

     (3,489     (1,614     —            (5,103
                                  

Loss before taxes

     (13,046     (20,228     2,321          (30,953

Income tax (benefit) provision

     243        (3,611     414      (s)     (2,954
                                  

Net loss before noncontrolling interest

     (13,289     (16,617     1,907          (27,999

Net (loss) income attributable to noncontrolling interest

     —          (2,494     2,626      (t)     132   
                                  

Net loss

   $ (13,289   $ (14,123 )(1)    $ (719     $ (28,131
                                  

Net loss per common share:

          

Basic and diluted

   $ (0.27   $ (3.92 )(1)        $ (0.38
                            

Weighted-average shares used in computing net loss per share:

          

Basic and diluted

     49,292        3,606        20,394          73,292   
                                  

 

(1) Amount attributable to Scient’x shareholders.

See accompanying notes to unaudited pro forma condensed combined financial statements.

 

4


ALPHATEC HOLDINGS, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. Basis of Presentation

The unaudited pro forma condensed combined financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and certain footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, management believes that the disclosures are adequate to make the information presented not misleading.

2. Acquisition of Scient’x

On December 17, 2009, Alphatec entered into an acquisition agreement to acquire all of the shares of Scient’x, with Scient’x continuing after the acquisition as an indirect wholly-owned subsidiary of Alphatec. The acquisition, which closed on March 26, 2010, is accounted for under the acquisition method of accounting.

Alphatec issued an aggregate of 24,000,000 shares of its common stock in consideration for 100% of the outstanding shares of Scient’x. Based on the closing price of Alphatec’s common stock of $6.39 on March 26, 2010, and the fair value of the Replacement Options (as defined below), the preliminary aggregate purchase price was approximately $154.6 million. The number of shares issued was reduced by a certain number of shares calculated at the closing in exchange for our payment of certain fees and expenses incurred in the Share Purchase. The proforma financial statements do not reflect the reduction in the number of shares issued.

As required by the acquisition agreement, the holders of both vested and unvested options to purchase shares of Scient’x common stock who became employees of Alphatec were entitled to receive replacement options to purchase shares of Alphatec common stock upon closing of the acquisition, which we refer to as Replacement Options. The $1.2 million included in the purchase price represents the fair value of the Scient’x options attributable to pre-combination service and was estimated using the Black-Scholes option pricing model with market assumptions. Option pricing models require the use of highly subjective market assumptions, including expected stock price volatility, which if changed can materially affect fair value estimates. The assumptions used in estimating the fair value of the Replacement Options include expected volatility of 56.0%, expected term of 6.0 years, and a risk-free interest rate of 2.5%. The difference between the fair value of the replacement options and the amount included in consideration transferred will be recognized as compensation cost in Alphatec’s post-combination financial statements over the requisite service period.

The pro forma condensed combined balance sheet has been adjusted to reflect the preliminary allocation by Alphatec management of the Scient’x purchase price to identifiable tangible and intangible net assets acquired and the excess purchase price to goodwill. The preliminary purchase price allocation is based upon an estimated total purchase price of approximately $154.6 million. This amount is derived from the issuance of 24,000,000 shares of Alphatec common stock at a price of $6.39, the closing price of Alphatec’s common stock on March 26, 2010, and the fair value of the Replacement Options.

The preliminary estimated total purchase price of the acquisition is as follows (in thousands):

 

Fair value of Alphatec common stock issued upon closing

   $ 153,360

Fair value of Scient’x options replaced

     1,240
      

Total preliminary estimated purchase price

   $ 154,600
      

Under the acquisition method of accounting, the total estimated purchase price is allocated to Scient’x’s net tangible and intangible assets based on their estimated fair values at the date of the completion of the acquisition. The following table summarizes the preliminary allocation of the purchase price for Scient’x and the estimated useful lives for the acquired intangible assets (in thousands):

 

Net tangible assets assumed

   $ 5,282

Acquired intangibles:

  

Core technology

     11,466

Developed technology

     20,925

In-process technology

     6,306

Corporate trademarks

     2,293

Key product trademarks

     3,440

Customer-related intangible

     6,163

Distribution network

     5,016

Physician education programs

     3,296

Goodwill

     90,413
      

Total preliminary estimated purchase price

   $ 154,600
      

 

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A preliminary estimate of $5.3 million has been allocated to Scient’x net tangible assets assumed and approximately $58.9 million has been allocated to identifiable intangible assets acquired. The amortization related to the identifiable intangible assets is reflected as a pro forma adjustment to the unaudited pro forma condensed combined statement of operations.

Inventories were increased by Alphatec to their estimated fair value, which represented an amount equivalent to estimated selling prices less distribution related costs and a normative selling profit. The increase to inventory was partially offset by a decrease in estimated fair value of redundant inventory based on the highest and best use of a similar market participant. Consistent with stock rotation, the inventory step up reverses in the next 12 months and has been included in cost of goods sold in the unaudited pro forma condensed combined statement of operations.

Upon completion of the fair value assessment, Alphatec anticipates that the final purchase price allocation will differ from the preliminary assessment provided above. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and the residual amounts will be allocated as an increase or decrease to goodwill.

3. Pro Forma Condensed Financial Statements

The accompanying unaudited pro forma condensed combined financial statements present the pro forma consolidated financial position and results of operations of the combined company based upon the historical financial statements of Alphatec and Scient’x, after giving effect to the Scient’x acquisition and adjustments described in the following footnotes, and are intended to reflect the impact of this acquisition on Alphatec on a pro forma basis.

The unaudited pro forma condensed combined balance sheet reflects the acquisition of Scient’x as if it has been consummated on December 31, 2009 and includes pro forma adjustments for preliminary valuations of certain tangible and intangible assets by Alphatec management as of the acquisition date of March 26, 2010. These adjustments are subject to further revision upon finalization of the transaction, the related intangible asset valuations and fair value determinations.

The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2009 combines Alphatec’s historical results for the year ended December 31, 2009 with Scient’x historical results for the year ended December 31, 2009. The Scient’x condensed consolidated statement of operations has been converted from Euros to U.S. Dollars at the average daily exchange rate for the year ended December 31, 2009 of 1.3946 U.S. dollars per Euro. The unaudited pro forma statement of operations gives effect of the acquisition as if it had taken place on January 1, 2009.

The accompanying unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and do not reflect the realization of potential cost savings, revenue synergies or any potential restructuring costs.

4. Pro Forma Adjustments

Pro forma adjustments are necessary to reflect the estimated purchase price and to reflect amounts related to Scient’x’s net tangible and intangible assets at an amount equal to the preliminary estimate of their fair values. Pro forma adjustments are also necessary to appropriately reflect the amortization expense related to the estimated identifiable intangible assets, stock-based compensation expense, changes in depreciation and amortization expense resulting from the estimated fair value adjustments to net tangible assets and the income tax effect related to the pro forma adjustments.

There were no significant intercompany balances and transactions between Alphatec and Scient’x at the dates and for the period of these pro forma condensed combined financial statements.

The pro forma combined provision for income taxes does not necessarily reflect the amounts that would have resulted had Alphatec and Scient’x filed consolidated income tax returns during the periods presented.

The unaudited pro forma condensed combined financial statements do not include any adjustments for liabilities that will result from integration activities related to the Scient’x acquisition. Additional assets or liabilities may be recorded that could affect amounts in the unaudited pro forma condensed combined financial statements. During the measurement period, any such adjustments to provisional amounts would increase or decrease goodwill. Adjustments that occur after the end of the measurement period will be recognized in the post-combination current period operations. In addition, Alphatec may incur significant restructuring charges upon consummation of the Scient’x acquisition or in subsequent quarters for severance or relocation costs related to Scient’x employees, costs of vacating certain leased facilities, or other costs associated with exiting activities. Any such restructuring charges would be recorded as an expense in the consolidated statement of operations in the period in which they are incurred.

 

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The pro forma adjustments included in the unaudited pro forma condensed combined financial statements are as follows:

a. To eliminate Scient’x’s historical intangible assets.

b. To eliminate Scient’x’s historical goodwill.

c. To eliminate Scient’x’s historical stockholders’ equity accounts.

d. To record the preliminary fair value of Scient’x’s identifiable intangible assets, comprised of the following (dollars in thousands):

 

     Estimated
Useful lives
(in years)
   Preliminary
Asset Fair
Value
   Annual
Amortization
Expense

Core technology

   15    $ 11,466    $ 744

Developed technology

   8      20,925      2,545

In-process technology

   Indefinite      6,306      —  

Corporate trademarks

   5      2,293      446

Key product trademarks

   9      3,440      372

Customer-related intangible

   15      6,163      400

Distribution network

   10      5,016      488

Physician education programs

   10      3,296      321
                

Total

      $ 58,905    $ 5,316
                

The purchase price allocation for the Scient’x acquisition included values assigned to certain specific identifiable intangible assets aggregating approximately $58.9 million.

For the technology related assets, the acquired product families were separated into the following categories: core, developed, and in-process technology. The core, developed, and in-process technology values were determined by estimating the present values of the net cash flows expected to be generated by each category of technology. Thus, the underlying core, developed, and in-process technology classes were valued at $11.5 million, $20.9 million and $6.3 million, respectively.

Trademarks were segregated into the categories of corporate trademarks and key product trademarks and were assigned aggregate values of $2.3 million and $3.4 million, respectively. The trademark values were calculated by estimating the present value of future royalty costs that will be avoided due to our ownership of the trademarks acquired.

The customer-related intangible includes hospitals and distributors that take title to Scient’x’s products. The customer-related intangible was valued at $6.2 million, which was determined by estimating the present value of expected future net cash flows derived from such customers.

The distribution network includes U.S.-based distributors that sell Scient’x products to customers on a consignment basis. Intangibles related to the distribution network were valued at $5.0 million, which was determined by estimating the difference between the present values of expected future net cash flows generated with and without the distribution network in place.

The physician education program was valued at $3.3 million, which was determined by estimating the costs to rebuild such a program.

e. To record goodwill related to the Scient’x acquisition.

A value of $90.4 million, representing the difference between the total purchase price and the aggregate fair values assigned to the net tangible and intangible assets acquired, less liabilities assumed, was assigned to goodwill. Alphatec acquired Scient’x to expand its product offerings, increase its addressable market, increase the size of its international business, and increase its revenues. Alphatec also believes there are significant cost reduction synergies that may be realized when the acquired business is integrated. These are among the factors that contributed to a purchase price for the Scient’x acquisition that resulted in the recognition of goodwill.

f. To record the fair value of Alphatec common stock exchanged in the Scient’x acquisition.

g. To reduce the cost of Scient’x’s redundant inventory to fair value.

h. To increase Scient’x’s inventory to its estimated fair value.

i. To reduce Scient’x’s property and equipment to its estimated fair value.

j. To record the deferred tax liabilities related to the differences between the book and tax bases of Scient’x’s inventory and identifiable intangible assets, based on an effective tax rate of 33%.

k. To reduce non-controlling interest to its estimated fair value.

 

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The estimated fair value of the non-controlling interest was determined by reviewing the value of Scient’x’s Italian subsidiary as of December 31, 2009 and multiplying such amount by 30%, which is the amount of ownership of the non-controlling party. This is the only non-controlling interest that will exist after the acquisition.

l. To record the fair value of the Scient’x options replaced that relate to pre-acquisition service.

m. To eliminate Scient’x’s historical amortization of intangible assets.

n. To record amortization of intangible assets acquired in the Scient’x acquisition.

o. To increase Scient’x’s cost of goods sold resulting from the inventory step-up that will reverse in the next 12 months.

p. To reduce Scient’x’s historical depreciation expense resulting from the reduction in property and equipment to its fair value.

q. To reduce general and administrative expenses for transaction costs incurred for the Scient’x acquisition.

r. To reduce Scient’x’s historical stock-based compensation expense to reflect the fair value of the Replacement Options attributable to post combination service.

s. To record the estimated tax effect of the pro forma adjustments.

t. To reduce the net loss attributable to the non-controlling interest based on the net income of Scient’x’s Italian subsidiary and the 30% ownership of the noncontrolling party.

5. Pro Forma Net Loss per Share

Shares used to calculate unaudited pro forma combined basic and diluted net loss per share are based on the sum of the following:

a. The number of Alphatec weighted-average shares used in computing historical net loss per share, basic and diluted; and

b. The number of Alphatec common shares issued to the former Scient’x shareholders as consideration for the acquisition.

6. Transaction Costs

For the year ended December 31, 2009, transaction costs incurred related to the acquisition of Scient’x totaled $4.5 million, of which $2.6 million was incurred by Alphatec and the remaining $1.9 million by Scient’x. These costs have been recorded as a pro forma adjustment to reduce general and administrative expenses in the statement of operations for the year ended December 31, 2009. The Company expects to incur approximately $5.8 million in direct transaction costs in connection with the Share Purchase. The $1.3 million remaining will be incurred and expensed in the first and second quarters of 2010.

The combined business may incur charges to operations that Alphatec cannot reasonably estimate, in the quarter in which the Share Purchase is completed or the following quarters, to reflect costs associated with integrating the two businesses. In addition, the combined business may incur additional charges relating to the transaction in subsequent periods, which could have a material impact on the Company’s financial position or results of operations.

 

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