<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1998
REGISTRATION NO. 333-58313
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
ARIZONA 3842 86-0752231
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
15990 N. GREENWAY-HAYDEN LOOP, SUITE 100
SCOTTSDALE, ARIZONA 85260
(602) 596-4066
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
D. RONALD YAGODA
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
15990 N. GREENWAY-HAYDEN LOOP, SUITE 100
SCOTTSDALE, ARIZONA 85260
(602) 596-4066
FAX: (602) 596-2180
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN D. PIDGEON, ESQ. FAYE H. RUSSELL, ESQ.
SAMUEL C. COWLEY, ESQ. MICHAEL S. KAGNOFF, ESQ.
MICHAEL B. MALEDON, ESQ. MICHAEL A. BARMETTLER, ESQ.
SNELL & WILMER L.L.P. BROBECK, PHLEGER & HARRISON LLP
ONE ARIZONA CENTER 550 WEST C STREET, SUITE 1300
PHOENIX, ARIZONA 85004-0001 SAN DIEGO, CA 92101
(602) 382-6000 (619) 234-1966
FAX: (602) 382-6070 FAX: (619) 234-3848
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) FEE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value..... 2,300,000 $8.00 $18,400,000 $ (3)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 300,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
(3) $5,937 previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
SUBJECT TO COMPLETION DATED , 1998
2,000,000 SHARES
[ORTHOPAEDIC BIOSYSTEMS LTD, INC. LOGO]
COMMON STOCK
All of the 2,000,000 shares of Common Stock offered hereby are being sold
by Orthopaedic Biosystems Ltd., Inc. ("OBL" or the "Company"). Prior to this
offering (the "Offering"), there has been no public market for the Common Stock
of the Company. Application has been made for listing of the Common Stock on the
American Stock Exchange under the symbol "OBL." It is currently estimated that
the initial public offering price will be between $7.00 and $8.00 per share. See
"Underwriting," for a discussion of the factors considered in determining the
initial public offering price.
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...........................
- ---------------------------------------------------------------------------------------------------------------------------
Total(3)............................
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes additional compensation to the Underwriters in the form of warrants
(the "Representatives' Warrants") to purchase up to 200,000 shares of Common
Stock to be granted to the representatives for the several underwriters (the
"Representatives"). In addition, the Company has agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933,
as amended, in connection with this Offering. See "Underwriting."
(2) Before deducting expenses of the Offering, payable by the Company estimated
at $1,000,000, including the Representative's non-accountable expense
allowance. See "Underwriting."
(3) The Company has granted the Underwriters a 45-day option to purchase up to
300,000 additional shares of Common Stock on the same terms and conditions
as the securities offered hereby solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $ ,
$ , and $ , respectively. See "Underwriting."
------------------------------
The shares of Common Stock are being offered by the Underwriters named
herein, subject to prior sale, when, as, and if delivered to and accepted by the
Underwriters and, subject to the right of the Underwriters to reject any order
in whole or in part and certain other conditions. It is expected that delivery
of the shares will be made against payment therefor at the offices of Cruttenden
Roth Incorporated, or the facilities of the Depository Trust Company, on or
about , 1998.
------------------------------
CRUTTENDEN ROTH JOSEPHTHAL & CO. INC.
I N C O R P O R A T E D
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
This page includes an enlarged drawing of one of the Company's suture anchors.
This page also includes four small drawings of the OBL RC5, PEBA C 6.5 mm, PEBA
C 4.0mm, and PEBA S 2.8mm suture anchors. This page also includes a drawing of
a rotator cuff with a suture anchor being passed through the tissue.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
OBL(TM), PeBA(R), RC5(TM), AND DRYKnot(TM), AMONG OTHER MARKS, ARE TRADEMARKS OF
THE COMPANY. OTHER TRADEMARKS APPEARING HEREIN ARE TRADEMARKS OF THEIR
RESPECTIVE OWNERS.
EXCEPT WHERE OTHERWISE NOTED, ALL STATISTICS REGARDING THE ORTHOPAEDIC MARKET
ARE DERIVED FROM MEDICAL DATA INTERNATIONAL.
3
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise specified, all information in this Prospectus assumes (i) a
two-for-three reverse split of outstanding shares of Common Stock to be effected
prior to the consummation of the Offering, (ii) conversion of all outstanding
shares of Class A Convertible Preferred Stock (the "Preferred Stock") of the
Company into 581,541 shares of Common Stock and conversion of warrants to
purchase shares of Preferred Stock into warrants to purchase an aggregate of
300,003 shares of Common Stock, which will occur simultaneously with the payment
to the Company of the purchase price of the Common Stock sold in this Offering,
and (iii) no exercise of the Underwriters' over-allotment option, the
Representatives' Warrants or currently outstanding options or warrants.
Investors should carefully consider the information set forth herein under the
heading "Risk Factors" and are urged to read this Prospectus in its entirety.
THE COMPANY
Orthopaedic Biosystems Ltd., Inc. designs, develops and markets innovative
medical devices that are primarily used in orthopaedic surgery, including sports
medicine and minimally invasive arthroscopic procedures. The Company's current
product offerings consist of a variety of suture anchors, an array of
arthroscopic instruments and a system of surgical screws, all of which are
designed for specific orthopaedic surgical applications. The Company believes
that its suture anchors, which have been primarily used for rotator cuff repair
of the shoulder and feature a patented high/low thread pattern, provide surgeons
with a variety of intra-operative options and lead to improved surgical
outcomes. By leveraging the competitive advantages of its shoulder products, the
Company will be positioned to further penetrate markets for orthopaedic
procedures involving the knee, hand and foot. In addition, the Company is
applying its technology to opportunities outside of orthopaedics through
strategic partnerships for applications in urology and dentistry, and is also
pursuing other strategic opportunities in plastic surgery, spinal surgery and
trauma.
The Company believes its suture anchors, which are used by surgeons to
reattach torn or loose soft tissue, such as ligaments and tendons, to bones,
deliver a unique combination of competitive advantages including (i) enhanced
pull-out strength, (ii) ease of insertion, (iii) multiple sutures per anchor,
and (iv) revisability. The Company's suture anchors use a proprietary high/low
thread pattern that provides superior pull-out strength and low insertion torque
in soft, cancellous bone. The enhanced pull-out strength allows the Company's
anchors to support multiple sutures, which distributes the load of the suture
over a greater area of tissue, providing the surgeon the option to use fewer
anchors per procedure. Also, unlike many competitive products, the Company's
anchors are fully revisable which is a significant advantage when a suture
breaks and needs to be replaced or when the anchor needs to be adjusted or
repositioned. Further, certain of the Company's suture anchors are pre-loaded in
an insertion instrument to facilitate ease of use and to reduce surgery time and
associated costs.
The Company believes that the brand awareness associated with its suture
anchor products will accelerate the introduction and acceptance of additional
products now under development. The Company is developing a variety of
innovative medical devices including (i) a knot substitute that could eliminate
the difficult and time-consuming task of remote surgical knot-tying, (ii)
bio-absorbable suture anchors which would gradually degrade and absorb into
surrounding tissue, (iii) a comprehensive line of knee products for use in
meniscal and anterior cruciate ligament ("ACL") repair procedures, and (iv)
"next-generation" fixation products that will be designed to facilitate the
re-attachment of soft tissue to other soft tissue.
The orthopaedic industry is estimated to generate sales in 1998 of $8.3
billion worldwide, with over $4.4 billion in the United States. Market segments
within this industry consist of trauma devices, reconstructive implants, bone
rehabilitation, and spinal implants as well as sports medicine and arthroscopy
devices. The sports medicine/arthroscopic surgery market segment, in which the
Company currently competes, is estimated to generate sales in 1998 of $1.3
billion worldwide, with $785 million in the United States. The Company believes
that growth in the sports medicine/arthroscopic segment will be driven primarily
by the
4
<PAGE> 5
introduction of new arthroscopic procedures and increased physical activity by a
growing and increasingly active adult population. The United States Consumer
Products Safety Commission estimates that the age group between 45 and 54 is
likely to increase by 73% between 1990 and 2010. This growth, coupled with
increased physical activity among adults, has led to a 60% rise in emergency
room visits resulting from injuries related to athletic activity from 1986 to
1996.
The sports medicine/arthroscopy market segment focuses on tissue-to-bone
and tissue-to-tissue repair. Some of the most common injuries within this
segment include torn rotator cuffs of the shoulder and ACLs. When ligaments or
tendons are detached from the bone as a result of trauma, physical activity, or
degenerative disease, a tissue-to-bone repair may be necessary. When the injury
involves a tear or rupture of the ligament or tendon, repair can often be
achieved by suturing these tissues or completely replacing these tissue
structures with tissue grafts. Tissue fixation devices have been developed to
perform repairs to the shoulder, knee, elbow, wrist and ankle. As a result of
the size, density and number of bones in these joints, a wide variety of tissue
fixation devices are required.
The Company's objective is to achieve leading positions in selected markets
within the sports medicine/arthroscopy segment of the orthopaedic industry. The
Company intends to pursue this objective by increasing the number and types of
surgical procedures using the Company's products, such as procedures involving
the knee, hand and foot, and by increasing the number of the Company's products
used in each surgical procedure. To accomplish this, the Company intends to
pursue the following strategies: (i) expand its core suture anchor business by
increasing sales and marketing efforts directed to its core shoulder surgery
market segment, (ii) continue to develop brand awareness with leading surgeons
by developing or acquiring rights to additional complementary products, (iii)
apply the Company's technology to additional applications both within and
outside of the sports medicine/arthroscopy market segments, (iv) develop new
technologies and materials to address specific surgical needs in tissue
fixation, and (v) pursue strategic alliances and acquisitions to facilitate
product development and distribution.
The Company was originally formed in Arizona as a limited partnership in
July 1993 and was subsequently incorporated in Arizona in February 1994. The
Company's principal executive offices are located at 15990 N. Greenway-Hayden
Loop, Suite 100, Scottsdale, Arizona 85260, and its telephone number is (602)
596-4066.
THE OFFERING
Common Stock Offered................ 2,000,000 shares
Common Stock Outstanding after the
Offering............................ 5,523,365 shares(1)
Use of Proceeds..................... Research and development, increased
sales and marketing efforts, potential
future acquisitions, capital
expenditures, repayment of related
party indebtedness and working capital
and general corporate purposes. See
"Use of Proceeds."
Risk Factors........................ Investment in the Common Stock involves
a high degree of Risk. See "Risk
Factors."
Proposed American Stock Exchange
symbol.............................. OBL
- ---------------
(1) Excludes 516,690 and 300,003 shares of Common Stock issuable upon exercise
of stock options and warrants, respectively, outstanding as of July 17,
1998, at a weighted average exercise price of $2.47 and $3.00, respectively,
per share, of which options and warrants to purchase 305,683 and 300,003
shares, respectively, were then exercisable. Includes 26,667 shares of
Common Stock issued upon exercise of options subsequent to June 30, 1998.
See "Capitalization," "Management -- Summary of Executive Compensation" and
"Description of Capital Stock -- Warrants and Stock Options."
5
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------- ----------------
1996 1997 1997 1998
------ ------- ------ ------
<S> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Net revenues........................................... $ 783 $ 1,482 $ 695 $1,208
Cost of revenues....................................... 486 825 340 538
------ ------- ------ ------
Gross profit......................................... 297 657 355 670
Research and development expenses...................... 152 273 91 183
General and administrative expenses.................... 376 821 290 760
Sales and marketing expenses........................... 264 979 429 529
------ ------- ------ ------
Operating loss....................................... (495) (1,416) (455) (802)
Other income (expense), net............................ 277 30 (3) (73)
------ ------- ------ ------
Net loss............................................... $ (218) $(1,386) $ (458) $ (875)
====== ======= ====== ======
Basic and diluted net loss per share................... $(0.08) $ (0.49) $(0.16) $(0.30)
Weighted average shares outstanding.................... 2,728 2,803 2,776 2,910
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
DECEMBER 31, PRO FORMA
1997 ACTUAL AS ADJUSTED(1)
------------ ------ --------------
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash.................................................... $ 741 $ 25 $11,725
Working capital (deficit)............................... 590 (392) 12,382
Total assets............................................ 2,284 2,193 13,893
Total liabilities....................................... 1,230 1,993 919
Shareholders' equity.................................... 1,053 201 12,974
</TABLE>
- ---------------
(1) On a pro forma basis, giving effect to the conversion of all outstanding
shares of Preferred Stock into 581,541 shares of Common Stock and adjusted
to reflect the sale by the Company of 2,000,000 shares of Common Stock in
this Offering at an assumed initial offering price of $7.50 per share and
the application of the net proceeds therefrom, including the application of
$1,100,000 of the proceeds for repayment of related party indebtedness of
$1,073,750, net of discount, of the Company. See "Use of Proceeds,"
"Capitalization," and Notes to Financial Statements.
6
<PAGE> 7
RISK FACTORS
Investment in the Common Stock offered hereby involves certain risks. In
addition to the other information contained in this Prospectus, the following
risk factors should be carefully considered in evaluating the Company and its
business prospects before purchasing shares of the Common Stock offered hereby.
HISTORY OF LOSSES; ACCUMULATED DEFICIT; PROBABILITY OF SUBSTANTIAL ADDITIONAL
FUTURE LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has been in existence less than five years and has incurred a
net loss in each year since inception. The Company incurred operating losses of
$356,000, $495,000, and $1,416,000 for the years 1995, 1996 and 1997,
respectively. In addition, the Company expects to incur a net loss in 1998. Such
losses are due in part to expenses associated with the Company's sales and
marketing, overhead, research and development, prosecution of patents, and
compliance with United States Food and Drug Administration ("FDA") and other
regulatory requirements. As a result, accumulated deficit has increased from
$706,000 at December 31, 1995 to $3,185,000 at June 30, 1998. The Company's
financial statements for the year ended December 31, 1997 were audited by the
Company's independent auditors, whose report includes an explanatory paragraph
which describes an uncertainty about the Company's ability to continue as a
going concern. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes to Financial Statements.
The Company's future net revenue is difficult to predict as a result of
several factors including rapidly changing technology, regulatory restrictions,
the Company's limited time in business, and fluctuations in the number of
surgical procedures performed. The Company's future revenue and profitability
will be critically dependent on its ability to expand applications for its
current product lines both within the sports medicine and arthroscopy segments
of the orthopaedic market and other related specialities and to develop new
products. There is no assurance the Company will successfully expand the
applications of its current product lines or develop new products. Expenses
associated with developing unsuccessful products are not recoverable. See
"-- Uncertainty of Market Acceptance" and "-- Limited Product Line; Customer
Concentration." The Company is likely to continue to incur significant operating
losses in the future as the Company continues its product development efforts
and expands its marketing, sales and distribution capabilities and there is no
assurance the Company will ever be profitable.
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's future success depends significantly on increasing
penetration of existing markets, acceptance of the Company's products in new
markets, and the development of new products for its existing and future
markets. There can be no assurance that any of the Company's existing or future
products will achieve or maintain market acceptance among surgeons, patients or
healthcare payors, even if reimbursement and necessary regulatory clearances or
approvals are obtained. Failure of some or all of the Company's products to
achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. To date,
the Company's marketing efforts have been directed mainly to the sports
medicine/arthroscopy market for bone-to-bone and tissue-to-bone fixation
devices. The Company has limited experience in establishing marketing or
distribution channels in other clinical areas. With respect to its current
products, the Company was not the first to market devices for the attachment of
soft tissue to bone. To succeed, the Company must both take market share away
from its existing competitors and create new demand for its products. The size
of the market for the Company's products will depend in part on the Company's
ability to persuade surgeons that its products offer advantages over existing
means of attaching soft tissue to other tissue or bone and that its fixation
devices could be used for a wider variety of clinical applications. In addition,
the Company will need to demonstrate that its products are cost-effective and
convenient to use and that the techniques for their use are relatively
straightforward and simple. There can be no assurance the market for the
Company's products will grow or that the Company's products will be accepted for
orthopaedic procedures not currently using fixation devices and in markets
outside of the sports medicine/arthroscopy market. See "Business."
7
<PAGE> 8
COMPETITION
The medical device industry is highly competitive and characterized by
innovation and rapid technological change. Among the Company's principal
competitors are Mitek Surgical Products, Inc., a division of Johnson & Johnson,
Inc.; Zimmer, Inc., a division of Bristol-Myers Squibb Company; Dyonics, Inc., a
subsidiary of Smith & Nephew, Inc.; Innovasive Devices, Inc.; Arthrotek Inc., a
division of Biomet, Inc.; Arthrex, Inc.; Linvatec Corporation, a division of
Conmed Corporation; and Bionx Implants, Inc. Each of these competitors has
significantly greater financial, manufacturing, marketing, distribution, and
technical resources than the Company and a greater share of the tissue fixation
market. These companies are better capitalized for extended research and
development, and may be able to withstand price pressures and deep discounting
over extended periods of time better than the Company. In order for the Company
to meet its projected future sales, the Company will have to take market share
away from the market leaders. There can be no assurance that the Company will be
able to gain such market share. Moreover, there can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective or less costly than those developed by the Company, or
that any such products would not render the Company's products obsolete or not
competitive.
The healthcare industry is undergoing rapid change and consolidation as
healthcare systems merge to effect cost savings and operating efficiencies. In
addition, a number of large, national buying consortiums have formed to engage
in group purchasing of medical supplies and services in an effort at cost
containment for member hospital systems and healthcare providers. These
consolidated systems and large purchasing organizations are likely to apply
pressure to manufacturers and distributors of medical devices to reduce the
purchase prices of their goods. As a result, the Company may be forced to lower
prices in response to those pressures in order for its products to be approved
for purchase by those organizations, which could have a material adverse effect
on the Company's business, financial condition, and results of operations. See
"Business -- Competition."
LIMITED PRODUCT LINE; CUSTOMER CONCENTRATION
A substantial portion of the Company's revenues to date have been derived
from the Company's core suture anchor products for use in open shoulder repair
applications. As of the date of this Prospectus, the uses of the PeBA and OBL
RC5 suture anchor line have been cleared by the FDA for certain applications
involving the shoulder, knee, ankle, wrist, elbow, and pelvis. To date, however,
the Company has had relatively little clinical experience with joints other than
the shoulder. In addition, while the Company's future prospects depend in part
on the use of its products in arthroscopic and less invasive procedures, most of
the clinical experience involving the Company's products has been in open
surgery procedures. For the fiscal year ended December 31, 1997, and the six
months ended June 30, 1998, the Company's suture anchors and related instruments
accounted for approximately 85.5% and 88.1%, respectively, of the Company's
revenues. In addition, for the fiscal year ended December 31, 1997, and the six
months ended June 30, 1998, approximately 20.9% and 12.5%, respectively, of the
Company's net revenues were derived from sales to Mentor. The Company expects
that most of its revenue in the foreseeable future will continue to be derived
from sales of its suture anchor products. Failure of the suture anchor products
to maintain and gain market acceptance or the loss of any material customer,
such as Mentor, would have a material adverse affect on the Company's business,
financial condition, and results of operations. See "-- Uncertainties Relating
to Strategic Partners," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Products and Technology," and
"Business -- Strategic Relationships."
NO ASSURANCE OF SUCCESSFUL IMPLEMENTATION OF BUSINESS STRATEGY
The Company's business strategy is to (i) expand its core suture anchor
business by increasing sales and marketing efforts directed to its core shoulder
surgery market segment, (ii) continue to develop brand awareness with leading
surgeons by developing or acquiring rights to additional complementary products,
(iii) apply the Company's technology to additional applications both within and
outside of the sports medicine/arthroscopy market segments, (iv) develop new
technologies and materials to address specific surgical needs in tissue
fixation, and (v) pursue strategic alliances and acquisitions to facilitate
product
8
<PAGE> 9
development and distribution. Implementation of the Company's strategy will be
dependent upon various factors such as actual market growth, technological
advances, competitive pressures, and general economic conditions. There can be
no assurance that the Company will be successful in implementing its strategy.
The Company's inability to achieve any of these goals could have a material
adverse effect on the Company's business, financial condition, and results of
operations. See "Business -- Business Strategy."
LIMITED SALES, MARKETING AND DISTRIBUTION CAPABILITY; RELIANCE ON THIRD-PARTY
DISTRIBUTORS
In the United States, the Company relies solely on a third-party
distribution channel, consisting of independent sales agents and stocking
dealers, that collectively employ approximately 180 sales representatives.
Accordingly, the Company's ability to effectively market its products to
surgeons and hospitals is dependent in large part on the strength and financial
condition of its third-party distributors, the expertise and relationships of
its distributors with customers and the interest of its distributors in selling
the Company's products. The failure by the Company to attract and retain
qualified distributors or the failure of such distributors to generate
substantial sales for the Company would have a material adverse effect on the
Company's business, financial condition, and results of operations.
Additionally, the Company's strategy will focus in part on increasing its
international sales. Currently, the Company is represented outside the United
States by 14 distributors that collectively employ approximately 80 sales
representatives in 14 countries. The failure of the Company's foreign
distributors to generate substantial sales for the Company could have a material
adverse effect on the Company's business, financial condition, and results of
operations. The loss of such distributors or the inability of the Company to
develop and maintain an alternative foreign distribution network could have a
material adverse impact on the Company's international sales. The Company will
depend in part on its international distributors' ability to obtain and maintain
regulatory approval for the sale of the Company's products in overseas markets.
The failure of its international distributors to obtain or maintain the
necessary regulatory approvals could have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Business -- Sales and Marketing."
The Company's distribution agreements with its stocking dealers generally
allow for a limited right of return on sales. Stocking dealers may request
credit for returned inventory for up to six months subsequent to the sale less
restocking fees. To date, the Company has had limited returns on sales. There
can be no assurance, however, that returns on sales will not increase in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes to Financial Statements.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT INNOVATION
The medical device market is subject to rapid technological change and new
product introductions and enhancements. The Company's ability to be competitive
in this market will depend in significant part on its ability to develop and
introduce new products and enhancements on a timely and cost effective basis.
The ability of the Company to develop new and enhanced tissue fixation devices
depends on a number of factors, including product selection, timely and
efficient completion of product design, development of new materials and
manufacturing processes, timely regulatory clearance or approval, and effective
sales and marketing activities. There can be no assurance that the Company will
be successful in identifying, developing and marketing such products or
enhancing its existing products. If the Company experiences quality or
reliability problems with new products, or reductions in demand, then higher
manufacturing costs may result. Because new product development commitments must
be made well in advance of sales, new product decisions must anticipate both
future demand and the availability of technology to satisfy that demand. The
Company's experience to date has been limited mainly to the sports
medicine/arthroscopy market. The Company anticipates that its future success
will be dependent in part on expanding applications for its suture anchor
product line within orthopaedics and in other clinical applications such as
dentistry, urology/obgyn, plastic surgery, spinal surgery, and trauma. There can
be no assurance that the Company will successfully develop and introduce new
products or that such products or enhancements will achieve market acceptance.
The failure of the Company to successfully introduce new products into the
market could have a material adverse effect on the Company's business, financial
condition, and results of operations. See "Business -- Business Strategy" and
"Business -- Products Under Development."
9
<PAGE> 10
DEPENDENCE ON THIRD-PARTY MANUFACTURING ARRANGEMENTS AND SUPPLIERS; NO
MANUFACTURING EXPERIENCE
The Company is dependent on third-party arrangements for the manufacture of
all of its products and components. The Company is substantially dependent on
the ability of its manufacturers, among other things, to satisfy design and
quality specifications, to comply with all governmental regulations, to dedicate
sufficient production capacity for components and devices within scheduled
delivery times and to produce components and devices on a basis which is
cost-effective to the Company. Failure by such manufacturers to continue to
supply the Company with satisfactory components or devices on commercially
reasonable terms, or at all, in the absence of readily available alternative
sources, would have a material adverse effect on the Company. There can be no
assurance that the Company's suppliers will be able to satisfy the Company's
existing or future component or device requirements or comply with the Company's
quality assurance requirements. The Company does not maintain supply contracts
with any of its manufacturers and purchases components and devices pursuant to
purchase orders placed from time to time in the ordinary course of business. The
Company is also dependent on the availability at reasonable prices of the
materials used in the manufacture of the component parts of its products. No
assurance can be given that interruptions in supplies of the materials used in
the manufacture of the component parts of the Company's products will not occur
in the future. The Company's inability to obtain sufficient products or
components or to develop alternative manufacturing sources could result in
delays in product introductions or shipments, which could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
The Company contemplates that in the future it may engage in limited
manufacturing of the components of its products, consisting primarily of
prototyping capabilities and early stage manufacturing. The Company has no
manufacturing experience and there can be no assurance that the Company will be
successful in prototyping or early stage manufacturing of components on a
cost-effective basis or at all. See "Business -- Manufacturing and Quality
Control."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company may require additional financing to fund its operations,
including its ongoing research and development programs. The Company's future
capital requirements will depend on many factors, including the progress of the
Company's research and development efforts, the scope and results of preclinical
studies and clinical trials, the cost, timing and outcome of regulatory reviews,
the rate of technological advances, the market acceptance of the Company's
products, administrative and legal expenses, competitive products, and
manufacturing and marketing arrangements. There can be no assurance that
additional equity or debt financing will not be required prior to the time, if
ever, the Company achieves and sustains sufficient profitability to fund
operations and growth. Any additional financing could result in dilution to the
Company's stockholders. There can be no assurance that funds will be available
on favorable terms, if at all. If adequate funds are not available, the Company
may be required to cut back or discontinue one or more of its product
development programs, reduce operating expenses, or obtain funds through
strategic alliances that may require the Company to relinquish rights to certain
of its technologies or products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RELIANCE ON AND UNCERTAINTY RELATING TO PATENTS AND PROPRIETARY TECHNOLOGY; RISK
OF INFRINGEMENT
The Company's success will depend in part upon its ability to preserve its
trade secrets, obtain and maintain patent protection for its technologies,
products and processes, and operate without infringing the proprietary rights of
other parties. As of April 30, 1998, the Company owned six issued United States
patents, four pending United States patent applications, and nine pending
foreign patent applications covering various aspects of its devices, one
federally registered trademark and three pending federal trademark applications.
The Company intends to file additional patent applications in the future. The
patent positions of medical device companies, including the Company, are
generally uncertain and involve complex legal and factual questions. There can
be no assurance that patents will issue from any patent applications owned by or
licensed to the Company, and, if patents do issue, that the claims allowed will
be sufficiently broad to protect the Company's technology, or that any patents
issued to the Company (including existing patents) will not be
10
<PAGE> 11
circumvented or invalidated. Failure to obtain or maintain patent and trade
secret protection, for any reason, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Patents issued to and patent applications filed relating to medical devices
are numerous and there can be no assurance that current and potential
competitors and other third parties have not filed or in the future will not
file applications for, or have not received or in the future will not receive,
patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by the Company. There can also be no
assurance that third parties will not assert infringement claims against the
Company in the future or that any such assertions will not result in costly
litigation or require the Company to obtain a license to intellectual property
rights of such parties. In this regard, the medical device industry has been
characterized by extensive litigation regarding patents and other intellectual
property rights, and certain companies in the medical device industry have
employed intellectual property litigation to gain a competitive advantage. The
Company's competition consists of companies which are better capitalized and may
be able to withstand higher patent enforcement costs. Litigation, which would
result in substantial expense to the Company, may be necessary to enforce any
patents issued or licensed to the Company and/or to determine the scope and
validity of proprietary rights of third parties or whether the Company's
products, processes or procedures infringe any such third-party proprietary
rights. The Company may also have to participate in interference proceedings
declared by the United States Patent and Trademark Office, which could result in
substantial expense to the Company, to determine the priority of inventions
covered by the Company's issued United States patents or pending patent
applications. Furthermore, the Company may have to participate at substantial
cost in International Trade Commission proceedings to enjoin importation of
products which would compete unfairly with products of the Company. Any adverse
outcome of any patent litigation (including interference proceedings) could
subject the Company to significant liabilities to third parties, or require the
Company to cease using the technology in dispute or require disputed rights to
be licensed from or to third parties. There can be no assurance that any such
licenses would be available on terms acceptable to the Company, if at all.
Patent applications in the United States are maintained in secrecy until a
patent issues, and patent applications in foreign countries are maintained in
secrecy for a period of time after filing. After such period of time, and
usually before the grant of the patent, patent applications in foreign countries
are published. While publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries and the filing of related
patent applications, such publication may enable the Company's competitors to
ascertain what areas of research or development the Company is engaged in prior
to the Company's receipt of patent protection in the United States or foreign
countries relating to such research or development.
The Company also relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire the same or substantially equivalent
technologies or otherwise gain access to the Company's proprietary technology or
disclose such technology or that the Company can ultimately protect its rights
to such unpatented proprietary technology. No assurance can be given that third
parties will not obtain patent rights to such unpatented trade secrets, which
patent rights could be used to assert infringement claims against the Company.
The Company generally enters into confidentiality agreements with its
collaborators, employees, advisors, and consultants in an effort to protect its
proprietary technology. There can be no assurance that these agreements will not
be breached, that the Company would have adequate remedies for any breach, that
parties not subject to such agreements will not disclose confidential
information, or that the Company's trade secrets will not otherwise become known
or be independently developed by competitors. Certain agreements with employees
and consultants require disclosure to the Company of ideas, developments,
discoveries or inventions pertaining to the proprietary rights relating to the
technology and products of the Company which are conceived during employment or
consulting, as the case may be, and grant the Company ownership to such
proprietary rights. In addition, the Company has entered into agreements with
certain strategic partners governing their various rights to technologies
developed by the parties. There can be no assurance that, notwithstanding these
agreements with its employees, consultants, and strategic partners, disputes
will not arise as to ownership of these proprietary rights or that the Company
will not be required to defend and indemnify strategic partners for the alleged
infringement by the Company's products. See "-- Uncertainties
11
<PAGE> 12
Relating to Strategic Partners." Further, the extent to which efforts by others
will result in patents and the effect on the Company of the issuance of such
patents is unknown. See "Business -- Patents and Proprietary Rights" and
"Business -- Competition."
Although the Company does not know of any facts or circumstances affecting
the validity or enforceability of any of its issued or pending patents, neither
the Company nor its patent counsel had made any independent evaluation of the
validity or enforceability of any of the Company's patents, patent counsel has
expressed no opinion as to whether any patent will issue from any pending
application, and patent counsel has not made any assessment of the
enforceability of information or processes the Company considers to be a trade
secret or otherwise proprietary.
RISKS THAT THE COMPANY WILL BE UNABLE TO MANAGE GROWTH
As the Company expands, it may from time to time experience constraints
that will adversely affect its ability to satisfy customer demand in a timely
fashion. There can be no assurance that the Company will anticipate all of the
changing demands that expansion may place on the Company's operational,
managerial and financial systems and controls or that the Company will be able
to continue to improve such systems and controls. Additionally, there can be no
assurance that the Company will not encounter difficulties in meeting increased
production needs, maintaining quality control, and recruiting and retaining
qualified personnel. If the Company's management is not able to manage growth
effectively, the Company's business, financial condition and results of
operations could be materially and adversely affected. The Company currently
contracts out all of its manufacturing to a variety of approved vendors.
However, there can be no assurance that the Company will continue to meet
production through the use of third-party manufacturing or that the Company will
be able to successfully implement in-house manufacturing. See "-- Dependence on
Third Party Manufacturing Arrangements and Suppliers; No Manufacturing
Experience."
RISKS OF POTENTIAL ACQUISITIONS
The Company may acquire or make substantial investments in complementary
businesses, technologies, or products in the future, although there are
currently no negotiations for such acquisitions. Each acquisition would involve
several risk factors, including the difficulty of assimilating technologies,
operations, and personnel of an acquired business, the potential disruption of
the Company's ongoing business, and the possibility the Company will not be able
to derive any operational or financial benefits from the acquisition. Future
acquisitions and investments by the Company also could result in substantial
cash expenditures, potentially dilutive issuances of equity securities, the
incurrence of additional debt and contingent liabilities, and amortization
expenses related to goodwill and other intangible assets, which could adversely
affect the Company's business, operating results and financial condition. There
is no assurance that the Company will complete any such acquisitions or, upon
such an acquisition, be able to successfully integrate new product lines and
entities into its present operations. See "Use of Proceeds" and
"Business -- Business Strategy."
BROAD DISCRETION OF MANAGEMENT WITH REGARD TO USE OF PROCEEDS
The proceeds allocated to each category under "Use of Proceeds" are
estimates only and the Company's management will have broad discretion in the
application of such funds without any action or approval of the Company's
shareholders. The uses to which the Company will actually allocate the funds
from the Offering will depend on various factors such as the availability of
complementary businesses, products or technologies for sale, technological
advances in manufacturing, the availability of qualified employees, changes in
the markets in which the Company competes, and the economy in general. See "Use
of Proceeds."
REGULATORY RISKS
Clinical testing, manufacture, and sale of the Company's products are
subject to regulation by numerous governmental authorities, primarily the FDA
and corresponding state and foreign regulatory agencies. The FDA regulates
preclinical and clinical testing, manufacturing, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions,
12
<PAGE> 13
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals and
criminal prosecution. The FDA also has the authority to request repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
Before a new device can be introduced in the market, the Company must
generally obtain FDA clearance or approval through either the 510(k) clearance
process or the costlier, lengthier and less certain Premarket Approval
Application ("PMA") approval process. Several of the Company's products have
been cleared through the 510(k) process. The Company has not submitted 510(k)
notices or PMAs for many of its proposed devices. There can be no assurance that
the FDA will not determine that these or other future products must be approved
through the 510(k) or PMA approval process. The FDA may also require the 510(k)
submissions or PMAs for any of the Company's devices to be supported by clinical
data, which would lengthen the clearance or approval process. In addition, the
Company believes that a number of devices that it currently markets or intends
to market are exempt from the FDA's premarket clearance and approval
requirements. However, there can be no assurance that the FDA would agree with
the Company's determinations, or that the FDA would not require that the devices
be cleared or approved by the FDA before they could be marketed or continue to
be marketed. There can be no assurance that the Company will be able to obtain
necessary regulatory approvals or clearances on a timely basis, if at all, for
any of its products and delays in receipt of or failure to receive such
approvals or clearances, the loss of previously received approvals or
clearances, limitations on intended use imposed as a condition of such approvals
or clearances, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company's business,
financial condition, and results of operation.
For any of the Company's devices that are cleared through the 510(k)
process, modifications or enhancements that could significantly affect the
safety or effectiveness of the device or that constitute a major change to the
intended use of the device will require a new 510(k) submission. The Company has
made certain modifications to its principal 510(k) cleared and exempt devices
which the Company believes do not require the submission of new 510(k) notices.
There can be no assurance, however, that the FDA would agree with any of the
Company's determinations not to submit a new 510(k) notice for any changes made
to the devices. If the FDA requires the Company to submit a new 510(k) notice
for any device modification, the Company may be prohibited from marketing the
modified device until the 510(k) notice is cleared by the FDA. There can be no
assurance that any 510(k) notice regarding a modification will be cleared on a
timely basis, if at all.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to extensive and continuing regulation by the
FDA and certain state agencies. Manufacturers of medical devices for marketing
in the United States are required to adhere to applicable regulations setting
forth detailed Quality System Regulation ("QSR") and Medical Device Reporting
("MDR") requirements. Labeling and promotion activities are subject to scrutiny
by the FDA and, in certain circumstances, by the Federal Trade Commission.
Current FDA enforcement policy prohibits the marketing of approved or cleared
medical devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements, and other
applicable regulations. Certain of the Company's third party suppliers may also
be subject to inspection by the FDA for compliance with applicable regulations.
There can be no assurance that the Company or such third party suppliers will be
found by the FDA to be in compliance with applicable regulations. A finding of
non-compliance could adversely affect the Company's ability to obtain products
from such suppliers or to continue marketing products. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition, or results of operations.
There can be no assurance that the Company will not incur significant costs to
comply with laws and regulations in the future or that laws and regulations will
not have a material adverse effect upon the Company's business, financial
condition or results of operations. In addition, the Company is subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. There can
be no assurance that the Company will not be
13
<PAGE> 14
required to incur significant costs to comply with such laws and regulations in
the future or that such laws or regulations will not have a material adverse
effect on the Company's business, financial condition or results of operations.
International regulatory bodies establish regulations governing product
standards, packaging requirements, labeling requirements, import restrictions,
tariff regulations, duties and tax requirements. As a result of the Company's
sales in Europe, the Company is required to receive and maintain a "CE" marking
certification, an international symbol of quality and compliance with the
applicable European medical device directive. The Company has successfully
obtained its CE mark certification. However, there can be no assurance that the
Company will be able to maintain the proper certification. To the extent that
the Company obtains regulatory approval to sell its products in foreign
countries, it relies on independent distributors to comply with certain of the
foreign regulatory requirements. The inability or failure of the Company's
independent distributors to comply with applicable regulatory requirements could
materially and adversely affect the Company's business, financial condition or
results of operations. See "Business -- Government Regulation."
UNCERTAINTIES RELATING TO STRATEGIC PARTNERS
The Company has entered and intends to enter into additional arrangements
with corporate partners, licensees or others, to market, sell and distribute
certain of its products. For instance, the Company's anchor products are
currently being sold outside of the orthopaedic market by Mentor Urology
Corporation ("Mentor") for female urinary stress incontinence and its
proprietary technology has been licensed to Imcor, Inc. ("Imcor") for the
development of dental implants. The success of such products will be dependent
in part upon the financial stability and marketing efforts of such third
parties. There can be no assurance that the Company will be able to maintain its
current arrangements or negotiate additional acceptable arrangements with
strategic partners or that the Company will realize any meaningful revenues
pursuant to such arrangements. See "Business -- Business Strategy."
On June 22, 1998, Mentor was sued for alleged patent infringement by Boston
Scientific Corporation ("Boston Scientific") arising out of the marketing and
distribution of Mentor's bladder neck suspension anchor system, which uses the
Company's suture anchors. The complaint alleges that Mentor's marketing
techniques include the teaching of a surgical procedure that is subject to a
patent owned by Boston Scientific, and that Mentor's product infringes a patent
that covers a suture anchor assembly. The complaint seeks to enjoin Mentor from
continuing to sell its bladder neck suspension system, as well as treble
damages. A hearing on a preliminary injunction motion has been tentatively
scheduled for August 1998. The Company is not a party to the lawsuit. Further,
Mentor has advised the Company that it intends to defend the suit, and to
continue to market the products subject to the lawsuit. There can be no
assurance, however, that the lawsuit will not adversely affect sales of Mentor's
products, that Mentor will be successful in the suit, that the Company will not
be added as a party at a later date, or that the Company will not be requested
to defend and/or indemnify Mentor in respect of this action. Any of these events
or other matters that may arise out of the lawsuit could have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Strategic Relationships."
PRODUCT LIABILITY RISK
The Company markets medical devices used in surgical procedures, and
therefore operates solely in the medical industry. The Company's products are
sold to hospitals and healthcare providers, and they are eventually used in
surgical procedures. The development, manufacture and sale of medical devices
entail significant risks of product liability claims. There can be no assurance
that the amount of the Company's insurance coverage will be adequate to protect
it from product liability claims, that the Company will be able to obtain
adequate coverage at competitive rates in the future, or that the Company's
product liability experience in the future will enable it to obtain insurance
coverage in the future. A successful product liability suit not covered by such
insurance would have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business -- Product Liability
and Insurance."
14
<PAGE> 15
POSSIBLE LIMITATIONS ON THIRD-PARTY REIMBURSEMENT; HEALTHCARE REFORM
The Company's products are generally purchased directly or indirectly by
hospitals and other healthcare providers, which in turn bill third-party payors
such as Medicare, Medicaid and private insurance companies. Many of these payors
are attempting to control healthcare costs by authorizing fewer surgical
procedures and by limiting reimbursement for procedures to fixed amounts.
Failure by physicians, hospitals and other users of the Company's products to
obtain sufficient reimbursement from third-party payors for procedures in which
the Company's products are used, or adverse changes in government and private
third-party payors' policies toward reimbursement for such procedures, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Since the Company only markets devices used in medical procedures, all of
the Company's revenues and accounts receivable are concentrated in the
healthcare market. The Company expects that there will continue to be a number
of federal and state proposals to implement government controlled pricing and
profitability in the healthcare market. Any change or occurrence which adversely
effects the healthcare market could have a material impact on the Company's
revenue growth, and upon the collectibility of the Company's accounts receivable
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISK OF APPLICABILITY OF ANTI-KICKBACK AND SELF-REFERRAL LAWS
Federal anti-kickback laws and regulations and certain state regulations
prohibit payment of remuneration in return or as an inducement for (i) referrals
of an individual for a product for which payment may be made by Medicare,
Medicaid or another government-sponsored healthcare program or (ii) purchasing
or recommending the purchase of a product for which payment may be made by a
government-sponsored healthcare program. Subject to certain exceptions, these
laws prohibit Medicare or Medicaid payments for services or products furnished
by an entity pursuant to a referral by a physician who had a financial
relationship with the entity through ownership, investment or a compensation
arrangement and otherwise regulate related activities. Possible sanctions for
violation of these anti-kickback and self-referral laws include monetary fines,
civil and criminal penalties, exclusion from Medicare and Medicaid programs and
forfeiture of amounts collected in violation of such prohibitions. The scope and
enforcement of these laws is uncertain and subject to rapid change. Accordingly,
there can be no assurance that federal or state regulatory authorities will not
challenge the Company's current or future activities, including the activities
of the members of the Company's scientific advisory board, under these current
or future laws and any such challenge could have a material adverse effect on
the Company.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon a number of key management and technical
personnel. The Company's future success depends, in large part, on the efforts
and abilities of its management team, including D. Ronald Yagoda, the Chief
Executive Officer and Chairman of the Company, and James W. Hart, the President
and Chief Operating Officer of the Company. The loss of the services of one or
more of such employees could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's success
will also depend on its ability to attract and retain additional highly
qualified management and technical personnel. The Company faces intense
competition for qualified personnel, many of whom are often subject to competing
employment offers. There can be no assurance that the Company will be able to
attract and retain such personnel. See "Management."
The Company also has several key scientific advisors and consultants upon
which the Company relies for developing new products and improving existing
products. Accordingly, the Company is dependent, in part, on the Company's
ability to attract and retain highly qualified advisors and consultants. The
Company's advisors devote only a small portion of their time to the affairs of
the Company. There can be no assurance that such advisors will devote sufficient
time and attention to the development of the Company's products. Although the
Company has entered into consulting agreements, with terms ranging from twelve
months to three years, including confidentiality provisions with each of the
members of the Company's scientific advisory board,
15
<PAGE> 16
there can be no assurance that the consulting and confidentiality agreements
between the Company and each member of the scientific advisory board will not be
breached or terminated. In addition, there can be no assurance that any of such
agreements will be renewed upon termination. See "Management -- Scientific
Advisory Board."
RISKS ASSOCIATED WITH INTERNATIONAL SALES; CURRENCY FLUCTUATIONS
The Company's international sales efforts are subject to the customary
risks of doing business abroad, including regulatory requirements, political and
economic instability, barriers to trade, trade and tariff restrictions, foreign
taxes, restrictions on transfer of funds, difficulty in obtaining distribution
and support, and export licensing requirements, any of which could have a
material adverse effect on the Company's operations. To date, all foreign
transactions have been U.S. dollar denominated. As such, a weakening in the
value of foreign currencies relative to the U.S. dollar and fluctuations in
foreign currency exchange rates could have an adverse impact on the price of the
Company's products in its international markets. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that a regular trading market will develop
and continue after this Offering or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price has been determined through negotiations between the Company and
the representatives of the Underwriters and may not be indicative of the market
price of the Common Stock following this Offering. See "Underwriting."
In recent years, the stock market in general, and particularly the market
for healthcare device stocks in which the Company belongs, has experienced
extreme price fluctuations. The market price of the Common Stock may be
significantly affected by various factors such as quarterly variations in the
Company's operating results, changes in revenue growth rates for the Company,
earnings estimates or changes in estimates by market analysts, speculation in
the press or analyst community, the announcement of new products or product
enhancements by the Company or its competitors, and general market conditions or
market conditions specific to particular industries. There can be no assurance
that the market price of the Common Stock will not experience significant
fluctuations in the future.
POTENTIAL ADVERSE EFFECTS OF ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws may have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. Such provisions could limit
the price that certain investors may be willing to pay in the future for shares
of the Common Stock. Certain of these provisions allow the Company to issue
Preferred Stock and to determine the price, rights, preferences, privileges, and
restrictions, including voting rights of those shares, without any vote or
further action by the stockholders. Certain provisions also provide for a
classified Board of Directors and regulate nominations for the Board of
Directors. These provisions may make it more difficult for shareholders to take
certain corporate actions and could have the effect of delaying or preventing a
change in control of the Company. In addition, certain provisions of Arizona law
applicable to the Company also could delay or make more difficult a merger,
tender offer, or proxy contest involving the Company. See "Description of
Capital Stock -- Certain Charter and Bylaw Provisions."
CONCENTRATION OF OWNERSHIP
Upon completion of this Offering, the Company's executive officers and
directors, and their affiliates, will beneficially own approximately 51.40% of
the Company's outstanding Common Stock (48.91% assuming the exercise of the
Underwriters' over-allotment option in full). This concentration of ownership
and voting control may have the effect of delaying or preventing a change in
control of the Company, or causing a change
16
<PAGE> 17
in control of the Company which may not be favored by the Company's other
shareholders. There can be no assurance that these individuals' ability to
prevent or cause a change in control of the Company will not have a material
adverse effect on the market price of the Common Stock. See "Principal
Stockholders" and "Underwriting."
LIMITED LIABILITY OF DIRECTORS
The Company's Amended and Restated Articles of Incorporation provide, with
certain exceptions, that the Company's directors will not be personally liable
for monetary damages for breach of the directors' fiduciary duty of care to the
Company or its shareholders. Accordingly, even if a director were found liable
for a breach, the Articles would preclude a monetary remedy arising from the
breach. This provision does not eliminate the duty of care, and, in appropriate
circumstances, equitable remedies such as an injunction or other forms of
nonmonetary relief would remain available under Arizona law. This provision also
does not affect a director's responsibilities under any other laws, such as the
federal securities laws or state or federal environmental laws. See "Description
of Capital Stock -- Limitation of Liability and Indemnification of Directors and
Officers."
LACK OF DIVIDENDS
The Company has never declared or paid cash dividends on its capital stock
and does not anticipate paying any cash dividends in the foreseeable future. In
addition, the Company intends to enter into a credit facility which would
restrict the ability of the Company to pay dividends. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DILUTION
Purchasers of shares of Common Stock offered hereby will suffer an
immediate and substantial dilution in the net tangible book value per share of
the Common Stock from the initial public offering price and will incur
additional dilution upon the exercise of outstanding stock options and warrants.
See "Dilution."
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 hardware and software issues. The Company
intends to confirm its compliance regarding Year 2000 issues for both internal
and external information systems by the end of 1998. This process will entail
communicating with significant suppliers, financial institutions, insurance
companies and other parties that provide significant services to the Company.
There can be no assurance that the Company's primary service providers will
properly address and resolve such provider's Year 2000 issues. Although
expenditures to make the Company Year 2000 compliant are not expected to be
material to the Company's consolidated financial position or results of
operations, there can be no assurance in that regard. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Common Stock in the public
market following this offering or the prospect of such sales could adversely
affect the market price of the Common Stock. Upon completion of this Offering,
the Company will have outstanding 5,523,365 shares of Common Stock (assuming no
exercise of the Underwriter's over-allotment option). Of these shares, the
2,000,000 shares of Common Stock offered hereby are immediately eligible for
sale in the public market without restriction, except for shares purchased at
any time by any "affiliate" of the Company, as such term is defined in Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"). Directors,
officers and certain shareholders of the Company owning a total of 2,816,009
shares of Common Stock and outstanding options and warrants to purchase 546,009
shares of Common Stock have signed lock-up agreements under which such holders
will agree not to offer, sell, or otherwise dispose of any of their shares of
Common Stock that might otherwise be
17
<PAGE> 18
eligible for sale for a period of 180 days after the date of this Prospectus
without the prior written consent of the Representatives. Upon the expiration of
the lock-up agreements, these securities will become eligible for sale in the
public market, subject to the provisions of Rule 144. In addition, the Company
intends to file registration statements under the Securities Act, after the date
of this Prospectus, covering the sale of shares to be issued pursuant to certain
currently outstanding options. See "Shares Eligible for Future Sale."
In addition, upon the consummation of this Offering, the Company will sell
to the Representatives for nominal consideration the Representatives' Warrants
to purchase up to 200,000 shares of Common Stock. The Representatives' Warrants
will have a term of five years and will be exercisable commencing one year after
the effective date of this Offering, at an exercise price per share of 120% of
the price per share of the Common Stock sold in this Offering. For the term of
the Representatives' Warrants, the holders thereof will have, at nominal cost,
the opportunity to profit from a rise in the market price of the Common Stock
without assuming the risk of ownership, with a resulting dilution in the
interest of other shareholders. As long as the Representatives' Warrants remain
unexercised, the Company's ability to obtain additional capital might be
adversely affected. Moreover, the Representative may be expected to exercise the
Representatives' Warrants at a time when the Company would, in all likelihood,
be able to obtain any needed capital through a new offering of its securities on
terms more favorable than those provided by the Representatives' Warrants. See
"Underwriting."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus may contain forward-looking statements including statements
regarding, among other items, the Company's business strategies, expected growth
in the Company's markets, and anticipated trends in the Company's business and
the industry in which it operates. The words "believe," "expect," "anticipate,"
"intends," "forecast," "project," and similar expressions identify
forward-looking statements. These forward-looking statements are based largely
on the Company's expectations and are subject to a number of risks and
uncertainties, certain of which are beyond the Company's control. Actual results
could differ materially from these forward-looking statements, as a result of
the factors described under "Risk Factors" and elsewhere herein, including
regulatory or economic influences. In light of these risks and uncertainties,
there can be no assurance that the forward-looking information contained in this
Prospectus will in fact transpire or prove to be accurate. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by this
section.
18
<PAGE> 19
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby are estimated to be approximately $12.8 million
($14.8 million if the Underwriters' over-allotment option is exercised in full)
based upon an assumed initial public offering price of $7.50 per share and after
deducting estimated Offering expenses and underwriting discounts and commissions
payable by the Company.
The Company anticipates that such net proceeds will be used substantially
as follows: (i) approximately $2.5 million to increase research and development
efforts; (ii) approximately $2.0 million to increase sales and marketing
efforts; (iii) approximately $2.0 million to fund future acquisitions; (iv)
approximately $1.2 million to re-pay indebtedness to certain related parties;
(v) approximately $1.0 million for capital expenditures; and (vi) the balance,
approximately $4.1 million, for working capital and general corporate purposes.
There are no present agreements or arrangements for any such potential or future
acquisitions.
The Company believes that the net proceeds from this Offering, plus the
Company's existing capital resources, together with interest income thereon,
will be sufficient to fund its operations through at least the next twelve
months. Until applied as set forth above, all proceeds will be invested in
short-term, interest bearing, investment grade or equivalent securities or bank
certificates of deposit. The foregoing represents the Company's present
intentions with respect to the allocation of proceeds of this Offering based
upon its current plans and existing business conditions. However, the occurrence
of certain unforeseen events or changed business conditions could result in the
application of the proceeds of this Offering in a manner other than as described
in this Prospectus.
The Company intends to use approximately $1.2 million of the estimated net
proceeds of the Offering to pay in full the outstanding balance of related party
indebtedness of $1,073,750 and $1,173,750 as of June 30, 1998 and July 17, 1998,
respectively. In December 1997 and January 1998, the Company borrowed $900,000
from certain officers, directors and shareholders of the Company. The loans bear
interest at the prime rate of interest plus two percent and are due on December
31, 1998. In connection with the loans, the Company issued warrants to purchase
an aggregate amount of 300,003 shares of the Common Stock. In May 1998, the
Company borrowed an additional $200,000 from the Company's Chairman. This loan
bears interest at the prime rate of interest plus four percent and is due April
30, 1999. See "Certain Relationships and Related Transactions." In July 1998,
the Company borrowed an additional $100,000 from a shareholder. This loan bears
interest at the prime rate of interest plus four percent as is due June 30,
1999.
DIVIDEND POLICY
The Company intends to retain any earnings to finance the operations and
expansion of the Company's business and does not anticipate paying cash
dividends in the foreseeable future. In addition, the Company intends to enter
into a credit facility that would contain a covenant restricting the ability of
the Company to pay dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
19
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998: (i) on an actual basis; (ii) on a pro forma basis giving effect to the
conversion of 872,300 shares of Preferred Stock into 581,541 shares of Common
Stock; and (iii) on a pro forma as adjusted basis to reflect the sale of the
2,000,000 shares of Common Stock offered hereby, after deducting the
underwriting discount and estimated offering expenses, at an assumed initial
public offering price of $7.50 per share, and the initial application of the
estimated net proceeds therefrom. See "Use of Proceeds." The table should be
read in conjunction with the Company's Financial Statements and the related
Notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Short-term debt to related parties, net of discount of
$26,250............................................... $ 1,074 $ 1,074 $ --
Long-term debt, including current portion................ 20 20 20
------- ------- -------
Total debt............................................... 1,094 1,094 20
Shareholders' equity:
Class A Convertible Preferred Stock, no par value;
5,000,000 shares authorized; 872,300 shares issued and
outstanding, actual; no shares issued and outstanding
pro forma and pro forma as adjusted(1)................ 1,713 -- --
Common Stock, no par value; 20,000,000 shares authorized;
2,915,157 shares issued and outstanding, actual;
3,496,698 shares issued and outstanding, pro forma;
and 5,496,698 shares issued and outstanding, pro forma
as adjusted(1)(2)..................................... 1,585 3,298 16,098
Additional paid-in capital................................. 97 97 97
Accumulated deficit...................................... (3,185) (3,185) (3,212)
Unearned compensation.................................... (9) (9) (9)
------- ------- -------
Total shareholders' equity............................... 201 201 12,974
------- ------- -------
Total short term debt and capitalization......... $ 1,295 $ 1,295 $12,994
======= ======= =======
</TABLE>
- ---------------
(1) Upon the consummation of the Offering, the Company anticipates filing an
Amended and Restated Articles of Incorporation increasing its authorized
capital stock to 25,000,000 shares, of which 20,000,000 shares will be
Common Stock, no par value, and 5,000,000 shares will be Preferred Stock, no
par value.
(2) Excludes up to 843,360 shares of Common Stock issuable upon exercise of
stock options and warrants outstanding at June 30, 1998. Excludes 26,667
shares of Common Stock issued upon exercise of options subsequent to June
30, 1998. See "Management" and "Description of Capital Stock."
20
<PAGE> 21
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1998,
was approximately $3,065, or less than $0.01 per share of Common Stock. Pro
forma net tangible book value per common share represents the net book value of
the Company's tangible assets less total liabilities divided by the number of
shares of Common Stock outstanding, after giving effect to the conversion of all
outstanding shares of Preferred Stock into 581,541 shares of Common Stock upon
completion of this Offering, but without giving effect to the possible exercise
of outstanding stock options and warrants.
Without taking into account any changes in such pro forma net tangible book
value subsequent to June 30, 1998, other than to give effect to the sale by the
Company of 2,000,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $7.50 per share (after deducting the underwriting
discounts and commission and other estimated Offering expenses) and the
application of the estimated net proceeds thereof, the as adjusted pro forma net
tangible book value of the Company as of June 30, 1998 would have been $12.8
million, or $2.32 per share. This represents an immediate increase in pro forma
net tangible book value of $2.32 per share to existing stockholders and the
immediate dilution of $5.18 per share to new investors purchasing Common Stock
pursuant to this Offering. Dilution per share to new investors represents the
difference between the amount per share paid by purchasers of Common Stock of
the Company pursuant to this Offering and the as adjusted pro forma net tangible
book value per share of Common Stock immediately after completion of this
Offering. The following table illustrates the per share effect of this dilution
on an investor's purchase of shares:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per common share...... $7.50
Pro forma net tangible book value per common share as of
June 30, 1998.......................................... $ --
Increase in pro forma net tangible book value per common
share attributable to new investors.................... $2.32
-----
As adjusted pro forma net tangible book value per common
share after Offering...................................... $2.32
-----
Dilution per common share to new investors.................. $5.18
=====
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of June
30, 1998, the number of shares of Common Stock purchased from the Company, the
total price paid, and the average price per share paid by existing stockholders
and by new investors purchasing shares of Common Stock offered hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION PAID AVERAGE
-------------------- ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 3,496,698 63.6% $ 3,394,686 18.5% $0.97
New investors.................. 2,000,000 36.4 15,000,000 81.5 $7.50
--------- ----- ----------- -----
Total................ 5,496,698 100.0% $18,394,686 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables exclude up to 300,000 shares of Common Stock that may
be sold by the Company upon the exercise of the Underwriters' over-allotment
option and give effect to the conversion of all outstanding shares of Preferred
Stock into 581,541 shares of Common Stock upon completion of this Offering. The
tables also exclude 843,360 shares of Common Stock issuable upon exercise of
options and warrants outstanding at June 30, 1998 and 26,667 shares of Common
Stock issued upon exercise of options subsequent to June 30, 1998. Further
dilution may result from the exercise of such options and warrants. See
"Description of Capital Stock," "Underwriting" and "Management."
21
<PAGE> 22
SELECTED FINANCIAL DATA
The following selected financial data for the year ended December 31, 1996
are derived from financial statements of the Company which have been audited by
Coopers & Lybrand, L.L.P., independent auditors. The selected financial data for
the year ended December 31, 1997 are derived from the financial statements of
the Company which have been audited by Ernst & Young LLP, independent auditors.
Ernst & Young LLP's report on the financial statements for the year ended
December 31, 1997, which appears elsewhere herein, includes an explanatory
paragraph which describes an uncertainty about the Company's ability to continue
as a going concern. The financial data for the six months periods ended June 30,
1997 and 1998 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the six months ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 1998.
The following data is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements of the Company and
related Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------- ----------------
1996 1997 1997 1998
------ ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Net revenues......................................... $ 783 $ 1,482 $ 695 $1,208
Cost of revenues..................................... 486 825 340 538
------ ------- ------ ------
Gross profit...................................... 297 657 355 670
Research and development expenses.................... 152 273 91 183
General and administrative expenses.................. 376 821 290 760
Sales and marketing expenses......................... 264 979 429 529
------ ------- ------ ------
Operating loss.................................... (495) (1,416) (455) (802)
Other income (expense), net.......................... 277 30 (3) (73)
------ ------- ------ ------
Net loss............................................. $ (218) $(1,386) $ (458) $ (875)
====== ======= ====== ======
Basic and diluted net loss per share................. $(0.08) $ (0.49) $(0.16) $(0.30)
Shares used in computation........................... 2,728 2,803 2,776 2,910
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
DECEMBER 31, PRO FORMA
1997 ACTUAL AS ADJUSTED(1)
------------ ------ --------------
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash.................................................... $ 741 $ 25 $11,725
Working capital (deficit)............................... 590 (392) 12,382
Total assets............................................ 2,284 2,193 13,893
Total liabilities....................................... 1,230 1,993 919
Shareholders' equity.................................... 1,053 201 12,974
</TABLE>
- ---------------
(1) On a pro forma basis, giving effect to the conversion of all outstanding
shares of Preferred Stock into 581,541 shares of Common Stock and adjusted
to reflect the sale by the Company of 2,000,000 shares of Common Stock in
this Offering at an assumed initial offering price of $7.50 per share and
the application of the net proceeds therefrom, including the application of
$1,100,000 of the proceeds for repayment of related party indebtedness of
$1,073,750, net of discount, of the Company. See "Use of Proceeds,"
"Capitalization," and Notes to Financial Statements.
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations should be read in conjunction with the Company's Financial Statements
and Notes thereto, and the other financial information included elsewhere in
this Prospectus.
OVERVIEW
The Company was incorporated in 1994 to design, develop and market
innovative medical devices for use in orthopaedic surgery, including sports
medicine and minimally invasive arthroscopic procedures. The Company's current
product offerings consist of suture anchors and related insertion instruments,
manual arthroscopic instrumentation, and a complete system of surgical screws.
In previous periods, the Company's focus has been on the development and sale of
its proprietary PeBA suture anchors, and more recently, the OBL RC5, a
pre-loaded suture anchor with a disposable insertion device. For the year ended
December 31, 1997, and the six months ended June 30, 1998, sales of suture
anchors and related instruments accounted for approximately 85.5% and 88.1%,
respectively, of net revenues. The Company intends to expand its line of suture
anchors and related instruments and expects that these products will continue to
represent a significant portion of its future revenues.
The Company's products are typically sold through a network of third-party
distributors, consisting of domestic and international stocking dealers and U.S.
sales agents. Sales to stocking dealers, both within the U.S. and
internationally, are at retail prices net of sales discounts. Sales discounts
vary according to certain factors such as volume orders and competition within
certain geographic regions. Stocking dealers purchase inventory for their own
account and sell product directly to hospitals at retail prices. Revenues from
sales to stocking dealers are recorded upon shipment to the dealer. The
Company's U.S. sales agents maintain inventories of the Company's products on a
consignment basis. The Company records revenue at retail prices at the time of
sale to hospitals. Related sales commissions to the sales agents are recorded as
a cost of revenues. Stocking dealer agreements allow for a limited right of
return on sales which has been provided for as part of the Company's allowance
for bad debts and sales returns.
The Company intends to pursue an aggressive product development strategy to
continue expanding the breadth of its product offerings. Following the Offering,
the Company intends to significantly increase its development staff, pursue
internal product development efforts, and seek collaborative development
arrangements with other medical device companies. The Company does not expect
research and development expenses to increase materially as a percentage of net
revenues. However, it expects a significant increase in the gross dollar amount
of such expenditures as compared to prior periods.
As of June 30, 1998, the Company had operating loss carryovers of
approximately $2.7 million, the income tax benefit of which has been offset
fully by a valuation allowance. Ownership changes, as defined in the Internal
Revenue Code, including those resulting from the issuance of Common Stock in
connection with this Offering, may limit the amount of net operating loss and
tax credit carryforwards that can be utilized to offset future taxable income
and reduce its tax liability.
23
<PAGE> 24
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net revenues represented by certain items included in the Company's financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------- ----------------
1996 1997 1997 1998
----- ----- ----- ------
<S> <C> <C> <C> <C>
Net revenues........................ 100.0% 100.0% 100.0% 100.0%
Gross profit........................ 37.9 44.3 51.1 55.4
Research and development expenses... 19.4 18.4 13.1 15.1
General and administrative
expenses.......................... 48.0 55.4 41.7 62.9
Sales and marketing expenses........ 33.7 66.1 61.7 43.8
----- ----- ----- ------
Operating loss...................... (63.2) (95.6) (65.4) (66.4)
Other income/(expense), net......... 35.4 2.1 (0.4) (6.1)
----- ----- ----- ------
Net loss............................ (27.8)% (93.5)% (65.8)% (72.5)%
===== ===== ===== ======
</TABLE>
Six Months Ended June 30, 1998 and 1997
Net revenues increased $513,000, or 73.7%, to $1,208,000 for the six months
ended June 30, 1998 from $695,000 for the six months ended June 30, 1997. The
increase in revenues reflects increased sales of suture anchors and related
instruments resulting from the expansion of the Company's distribution network
as well as sales of manual arthroscopic instrumentation.
Gross profit increased $314,000, or 88.3%, to $669,000 for the six months
ended June 30, 1998 from $355,000 for the six months ended June 30, 1997,
representing gross margins of 55.4% and 51.1%, respectively. The increases in
gross profit and gross margins were primarily attributable to improved vendor
pricing and an increase in the sale of suture anchors which carry higher margins
than the Company's other products.
Research and development expenses consist primarily of compensation and
consulting fees, prototype development and sample inventory, and lab testing.
Research and development expenses increased $92,000, or 100.8%, to $183,000 for
the six months ended June 30, 1998 from $91,000 for the six months ended June
30, 1997. Research and development expenses as a percentage of net revenue
increased to 15.1% from 13.1% during the respective periods. These increases
were primarily attributable to the development of products including the OBL RC5
pre-loaded suture anchor, the SB anchor, and the DRYKnot.
General and administrative expenses consist primarily of compensation,
regulatory certification costs, and general corporate overhead including rent,
insurance, and other operating expenses. General and administrative expenses
increased $470,000, or 162.3%, to $760,000 for the six months ended June 30,
1998 from $290,000 for the six months ended June 30, 1997. As a percentage of
net revenues, general and administrative expenses increased to 62.9% for the six
months ended June 30, 1998 from 41.7% for the six months ended June 30, 1997.
These increases were primarily attributable to an increase in salaries
associated with hiring key management personnel, consulting fees incurred
related to ISO 9001 certification, and increased operating expenses incurred as
result of the Company's growth.
Sales and marketing expenses consist primarily of compensation, sales
workshops and seminars, international consulting fees, and other related
expenses. Sales and marketing expenses increased $100,000, or 23.3%, to $529,000
for the six months ended June 30, 1998 from $429,000 for the six months ended
June 30, 1997. Sales and marketing expenses as a percentage of net revenues
decreased to 43.8% from 61.7% during these respective periods as a result of the
increase in sales. These increases in sales and marketing expenses resulted from
workshops held by the Company for key surgeons as well as members of its
scientific advisory board, increased participation in industry meetings, and the
hiring of additional in-house sales and marketing personnel.
24
<PAGE> 25
Net other expense increased $70,000 to $73,000 for the six months ended
June 30, 1998 from $3,000 for the six months ended June 30, 1997. This increase
was primarily attributable to interest expense incurred on related party
borrowings incurred in the fourth quarter of 1997 to fund the Company's
operations.
Net loss increased $418,000 or 91.5% to $876,000 for the six months ended
June 30, 1998 from $457,000 for the six months ended June 30, 1997 as a result
of the factors discussed above.
Years Ended December 31, 1997 and 1996
Net revenues increased $699,000 or 89.4% to $1,482,000 for the year ended
December 31, 1997 from $783,000 for the year ended December 31, 1996. The
increase in revenues was primarily attributable to increased sales of the
Company's proprietary suture anchors, including sales to Mentor.
Gross profit increased $361,000, or 121.8%, to $658,000 for the year ended
December 31, 1997 from $297,000 for the year ended December 31, 1996. As a
percentage of net revenues, gross profit was 44.3% and 37.9% in 1997 and 1996,
respectively. The improvement in gross profit was primarily attributable to
increased sales of suture anchors which carry higher margins than the Company's
other products.
Research and development expenses increased $121,000, or 79.6%, to $273,000
for the year ended December 31, 1997 from $152,000 for the year ended December
31, 1996. Research and development expenses as a percentage of net revenues
decreased to 18.4% from 19.4% during the respective periods. These increases in
dollar amount were primarily attributable to the development of new products
including the SB suture anchor as well as initial development costs for an ACL
repair screw and bio-absorbable implant materials.
General and administrative expenses increased $445,000, or 118.4%, to
$821,000 for the year ended December 31, 1997 from $376,000 for the year ended
December 31, 1996. As a percentage of net revenues, general and administrative
expenses increased to 55.4% for the year ended December 31, 1997 from 48.0% for
the year ended December 31, 1996. These increases were primarily attributable to
increased administrative and managerial compensation and increased costs
incurred as result of the Company's growth.
Sales and marketing expenses increased $716,000, or 271.5%, to $980,000 for
the year ended December 31, 1997 from $264,000 for the year ended December 31,
1996. Sales and marketing expenses as a percentage of net revenues increased to
66.1% from 33.7% during the respective periods. These increases resulted from
costs associated with the hiring of additional regional sales managers, expenses
associated with the expansion of the Company's distribution network particularly
in international markets, and expenses related to increased participation in
industry trade shows and sales meetings.
Net other income decreased $247,000, or 89.0%, to $30,000 for the year
ended December 31, 1997 from $277,000 for the year ended December 31, 1996. In
1996, net other income included an initial one-time payment by Mentor of
$300,000 for the exclusive marketing and distribution rights from the Company of
the 4.0 mm PeBA(R)C suture anchor for urology applications in the United States
and in other defined foreign markets. The Company also records ongoing revenue
from sales of suture anchor products to Mentor under this arrangement.
Net loss increased $1,168,000 to $1,386,000 for the year ended December 31,
1997 from $218,000 for the year ended December 31, 1996 as a result of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily from the private sale of
equity securities, from which it has raised $3.3 million since inception. The
Company has also financed its operations through borrowings from related
parties, and, at June 30, 1998, had borrowings outstanding of approximately
$1,073,750, net of discount. As a result of the operating losses incurred by the
Company since inception, the accumulated deficit was approximately $3.2 million
at June 30, 1998. The Company's financial statements for the year ended December
31, 1997, include an explanatory paragraph which describes an uncertainty about
the Company's
25
<PAGE> 26
ability to continue as a going concern. Upon consummation of the Offering, the
Company expects that the uncertainty will be eliminated.
As of June 30, 1998, the Company had cash of $25,000 as compared to
$741,000 on December 31, 1997. Operating activities required approximately
$779,000 and $1,966,000, respectively, during the six months ended June 30, 1998
and the year ended December 31, 1997. The changes in cash used in operations
were due primarily to the impact of increased revenues offset by higher expenses
associated with the expanded sales and marketing organization as well as the
Company's investment in its preloaded suture anchor product line. Such amounts
were greater than the loss incurred during each of the respective periods
primarily due to increases in accounts receivable and inventory relating to the
Company's increased operating levels. Investment activities required
approximately $192,000 and $267,000, respectively, during the six months ended
June 30, 1998 and the year ended December 31, 1997. Investment activities
included computer and other equipment and instrumentation required by the
Company in its research and development and operations activities. The Company
does not expect a material increase in the rate of capital expenditures for the
balance of 1998. Financing activities contributed approximately $256,000 and
$2,576,000, respectively, during the six months ended June 30, 1998 and the year
ended December 31, 1997.
The Company intends to establish a bank credit facility and may attempt to
establish an equipment leasing facility to finance a portion of its working
capital requirements and capital expenditures. The Company does not have any
commitments or understandings pertaining to any lease facilities at this time.
The bank credit facility would provide for a line of credit up to $300,000
collateralized by substantially all of the Company's assets. The line would bear
interest at the prime rate plus 2 1/2% and would require the Company to satisfy
ongoing financial covenants including specified working capital and
debt-to-equity ratios and would restrict the Company's ability to pay dividends.
The Company's future liquidity and capital requirements will depend on,
among other factors, the extent to which the Company's products gain market
acceptance and the success of its research and development programs and timely
regulatory clearances of new products. The Company believes that the net
proceeds from this Offering, together with interest income thereon, plus the
Company's existing capital resources, will be sufficient to fund its operations
and growth strategy for at least 12 months. See "Use of Proceeds." However, the
Company cannot provide any assurances that it will not require additional
financing during this time frame. If additional financing is necessary, the
Company would seek to raise these funds through credit facilities or debt or
equity offerings. There can be no assurance that such funds would be available
on terms acceptable to the Company or at all.
BACKLOG
The Company fills orders for its products promptly. Accordingly, backlog is
not a significant factor in its business.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 hardware and software issues. The Company
intends to confirm its compliance regarding Year 2000 issues for both internal
and external information systems by the end of 1998. This process will entail
communicating with significant suppliers, financial institutions, insurance
companies and other parties that provide significant services to the Company.
There can be no assurance that the Company's primary service providers will
properly address and resolve such provider's Year 2000 issues. Expenditures to
make the Company Year 2000 compliant will be expensed as incurred and are not
expected to be material to the Company's consolidated financial position or
results of operations.
CHANGE IN AUDITOR
The Board of Directors of the Company on December 2, 1997, terminated the
Company's relationship with Coopers & Lybrand, L.L.P. and engaged Ernst & Young
LLP as its new independent auditors to audit
26
<PAGE> 27
the Company's financial statements. The report of Coopers & Lybrand, L.L.P. on
the Company's financial statements for the year ended December 31, 1996 did not
contain an adverse opinion or a disclaimer of opinion nor was it qualified or
modified as to uncertainty, audit scope or accounting principles. During this
period and thereafter there were no disagreements between the Company and
Coopers & Lybrand, L.L.P. on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Coopers & Lybrand, L.L.P.,
would have caused it to make reference to the subject matter of the
disagreements in connection with its report. The Company has authorized Coopers
& Lybrand, L.L.P. to respond fully to inquiries from Ernst & Young LLP
concerning all matters relating to prior audits conducted by Coopers & Lybrand,
L.L.P.
The Company did not consult with Ernst & Young LLP on the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's financial
statements before engaging Ernst & Young LLP to perform its audit.
The Company has supplied a copy of this disclosure to both Coopers &
Lybrand, L.L.P. and Ernst & Young LLP and neither has indicated to the Company
that it objects or disagrees with this disclosure.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130), issued by
the FASB in June 1997, is effective for periods beginning after December 15,
1997. Under the new requirements for calculating income, this statement requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The impact
of SFAS No. 130 on the calculation of comprehensive income for these periods was
not material.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997. The adoption of SFAS No. 131 will have no impact on the
Company's consolidated results of operations, financial position or cash flows.
27
<PAGE> 28
BUSINESS
OVERVIEW
The Company designs, develops and markets innovative medical devices that
are primarily used in orthopaedic surgery, including sports medicine and
minimally invasive arthroscopic procedures. The Company's current product
offerings consist of a variety of suture anchors, an array of arthroscopic
instruments and a system of surgical screws, all of which are designed for
specific orthopaedic surgical applications. The Company believes that its suture
anchors, which have been primarily used for rotator cuff repair of the shoulder
and feature a patented high/low thread pattern, provide surgeons with a variety
of intra-operative options and lead to improved surgical outcomes. By leveraging
the competitive advantages of its shoulder products, the Company will be
positioned to further penetrate markets for orthopaedic procedures involving the
knee, hand and foot. In addition, the Company is applying its technology to
opportunities outside of orthopaedics through strategic partnerships for
applications in urology and dentistry, and is also pursuing other strategic
opportunities in plastic surgery, spinal surgery and trauma.
The Company believes its suture anchors, which are used by surgeons to
reattach torn or loose soft tissue, such as ligaments and tendons, to bones,
deliver a unique combination of competitive advantages including (i) enhanced
pull-out strength, (ii) ease of insertion, (iii) multiple sutures per anchor,
and (iv) revisability. The Company's suture anchors use a proprietary high/low
thread pattern that provides superior pull-out strength and low insertion torque
in soft, cancellous bone. The enhanced pull-out strength allows the Company's
anchors to support multiple sutures, which distributes the load of the suture
over a greater area of tissue, providing the surgeon the option to use fewer
anchors per procedure. Also, unlike many competitive products, the Company's
anchors are fully revisable which is a significant advantage when a suture
breaks and needs to be replaced or when the anchor needs to be adjusted or
repositioned. Further, certain of the Company's suture anchors are pre-loaded in
an insertion instrument to facilitate ease of use and to reduce surgery time and
associated costs.
The Company intends to achieve leading positions within the sports
medicine/arthroscopy segment of the orthopaedic industry by increasing the
aggregate number of surgical procedures using the Company's products and
increasing the number of the Company's products used in each surgical procedure.
The Company believes that the brand awareness that it is developing with the
advantages of its suture anchor products will accelerate the introduction and
acceptance of additional products now under development. The Company is also
developing of a variety of other innovative medical devices including (i) a knot
substitute that could eliminate the difficult and time-consuming task of remote
surgical knot-tying, (ii) bio-absorbable suture anchors which would gradually
degrade and absorb into surrounding tissue, (iii) a comprehensive line of knee
products for use in miniscal and ACL repair procedures, and (iv) the
"next-generation" of fixation products that will be designed to facilitate the
re-attachment of soft tissue to other soft tissue.
The Company's products generally are selected by surgeons and then
purchased by hospitals or surgical facilities for use by the surgeon.
Accordingly, the Company's primary focus in developing and marketing its
products is to establish relationships with orthopaedic surgeons who specialize
in arthroscopic procedures. The Company's scientific advisory board, made up of
leading surgeons, assists the Company in marketing its products to other
surgeons through educational seminars, workshops, clinical studies and published
articles, as well as in generating new product ideas and providing input in
clinical evaluations. The Company distributes its products domestically and
internationally through a network of sales agents and stocking dealers. Within
the United States, the Company utilizes approximately 34 third-party
distributors, consisting of independent sales agents and stocking dealers that
collectively employ approximately 180 sales representatives. Internationally,
the Company distributes its products through a network of 14 stocking dealers in
14 countries consisting of independent stocking dealers that collectively employ
approximately 80 sales representatives, including Japan where the Company
recently signed a distribution agreement with Mizuho Medical Co., Ltd., a
leading medical device company.
28
<PAGE> 29
INDUSTRY BACKGROUND AND MARKET DATA
The orthopaedic industry is estimated to generate sales in 1998 of $8.3
billion worldwide, with over $4.4 billion in the United States. Market segments
within this industry consist of trauma devices, reconstructive implants, bone
rehabilitation, and spinal implants as well as sports medicine and arthroscopy
devices. The sports medicine/arthroscopic surgery market segment, in which the
Company currently competes, is estimated to generate sales in 1998 of $1.3
billion worldwide, with $785 million in the United States. The Company believes
that growth in the sports medicine/arthroscopic segment will be driven primarily
by the introduction of new arthroscopic procedures and increased physical
activity by a growing and increasingly active adult population. The United
States Consumer Products Safety Commission estimates that the age group between
45 and 54 is likely to increase by 73% between 1990 and 2010. This growth,
coupled with increased physical activity among adults, has led to a 60% rise in
emergency room visits related to athletic activity from 1986 to 1996.
Common Tissue Injuries
The sports medicine/arthroscopy market segment focuses on tissue-to-bone
and tissue-to-tissue repair. Some of the most common injuries within this
segment include torn rotator cuffs of the shoulder and ACLs. When ligaments or
tendons are detached from the bone as a result of trauma, physical activity, or
degenerative disease, a tissue-to-bone repair may be necessary. When the injury
involves a tear or rupture of the ligament or tendon, repair can often be
achieved by suturing these tissues or completely replacing these tissue
structures with tissue grafts. Tissue fixation devices have been developed to
perform repairs to the shoulder, knee, elbow, wrist and ankle. As a result of
the size, density and number of bones in these joints, a wide variety of tissue
fixation devices are required.
Methods of Treatment
Severe tissue and joint injuries have historically been treated using open
surgery involving hospital admittance, large incisions, associated trauma and
lengthy rehabilitation. These procedures are complex, highly invasive,
time-consuming and technically challenging. A typical open procedure involves
the reattachment of soft tissue to bone using metal surgical screws or staples.
These devices are placed through the tissue to secure it directly to the bone.
Metal screws and staples generally require large incisions, are difficult to
implant and protrude above the surface of the bone, creating potential damage to
healthy tissue. If a revision or corrective surgery is required, it is difficult
to remove the previously attached devices without additional tissue damage. As a
result, the device is often left in place, which can lead to less than optimal
placement of the revision devices.
To address the limitations of the traditional methods of reattaching soft
tissue to bone, the suture anchor was introduced in 1989. A suture anchor is
deployed in the bone and becomes secured below the outer surface. A suture is
attached to the anchor and used to secure soft tissue structures to the bone. A
suture anchor is inserted arthroscopically allowing for a smaller incision than
traditional methods of reattachment. When using such arthroscopic techniques,
the surgeon makes a small incision through which he passes a fiber optic
illuminated imaging tube, called an arthroscope, to allow the surgeon to see the
injury. Through another small incision, the surgeon typically inserts another
tube, called a cannula. The surgeon passes certain surgical instruments and
sutures through the cannula to make the necessary repairs. Such arthroscopic
techniques minimize the trauma and complications associated with surgery for the
repair of orthopaedic joint injuries.
Many current products available in the suture anchor market have
significant limitations. The most popular suture anchor is held in place by
barbs and may require pre-drilling even for placement in soft bone. The
potential risks are a lack of pull-out strength and possible migration of the
anchor. Also, these anchors generally are not revisable in instances when the
suture breaks or the anchor needs to be replaced or repositioned. As a result,
in such instances, surgeons typically leave the non-functioning anchor in place
and insert an additional anchor or damage surrounding bone in order to retrieve
the anchors. Additional anchors often are also required to be inserted if more
than one suture is necessary or desirable in surgery.
29
<PAGE> 30
THE OBL SOLUTION
The Company's suture anchors are designed to provide exceptional
performance, addressing certain limitations of competitive suture anchors. As a
result of its proprietary high/low thread pattern, the Company's anchors have
superior pull-out strength in soft, cancellous bone. This significantly greater
pull-out strength reduces possible migration of the anchor and allows for
multiple sutures to be used with a single anchor thus distributing the load of
the suture over a greater area of tissue. The thread pattern of the Company's
anchors allows for easy insertion and retrieval and may not require pre-drilling
in soft bone. Because pre-drilling may not be required for insertion of the
Company's suture anchors in soft bone, the Company's suture anchors produce
reduced insertion torque which results in less bone damage and promotes quicker
healing. The Company believes these features lead to improved surgical outcomes.
Further, certain of the Company's suture anchors are pre-loaded in an insertion
instrument to facilitate ease of use and to reduce surgery time and associated
costs.
BUSINESS STRATEGY
The Company's objective is to achieve leading positions in selected markets
within the sports medicine/arthroscopy segment of the orthopaedic industry. The
Company intends to pursue this objective by increasing the number of surgical
procedures using the Company's products and increasing the number of the
Company's products used in each surgical procedure. The Company's business
strategy consists of the following key elements:
Expand Core Suture Anchor Business. The Company intends to increase its
market share for suture anchors by increasing sales and marketing efforts
directed to its core shoulder surgery market segment. The Company believes that
its recently introduced OBL RC5 pre-loaded anchor product (which combines an
anchor, multiple pre-loaded sutures, and a disposable insertion device)
addresses certain limitations of other anchors presently on the market. The
Company intends to continue to increase market acceptance of its core suture
anchor products by expanding its network of domestic and international
distributors. In addition, through the efforts of its scientific advisory board,
the Company will continue to focus on featuring its core suture anchor products
in educational training programs directed at leading surgeons within the sports
medicine/arthroscopy market.
Continue to Develop Brand Awareness. The Company believes that it is
beginning to develop brand awareness with leading surgeons through its suture
anchor products. The Company intends to leverage this brand awareness by
developing or acquiring rights to additional complementary products for sale
through the Company's expanding distribution network. Toward this end, the
Company is in the process of developing a comprehensive line of knee products
for use in meniscal and ACL repair procedures. The Company is also developing an
arthroscopic instrumention system that will include a variety of instruments
designed to facilitate knee and shoulder surgeries and be fully compatible with
and complementary to the Company's other suture anchor products. Through this
system, the Company expects to improve the effectiveness of the surgeon and to
increase the number of its products used in each surgical procedure.
Apply the Company's Technologies to Additional Applications. The Company
intends to continue to pursue additional opportunities to apply its proprietary
technologies both within and outside of the sports medicine/arthroscopy markets.
Within the sports medicine/arthroscopy market, the Company intends to focus on
expansion of sales and marketing activities to further penetrate markets, such
as the knee, hand, and foot. Within the broader orthopaedic market, the Company
is pursuing licensing opportunities for its technology for applications in the
areas of trauma and spine. The Company is also pursuing opportunities outside
the orthopaedics industry. For example, the Company's anchor technology is
currently being licensed to Imcor for the development of dental implants.
Develop New Technologies and Materials. The Company is continuing to
pursue the development of new technologies and products that address specific
surgical needs. In this regard, the Company is currently pursuing the
development of (i) a knot substitute that could eliminate the difficult and
time-consuming task of remote surgical knot-tying, (ii) bio-absorbable suture
anchors which would gradually degrade and absorb into surrounding tissue causing
the surrounding bone to be stronger than bones with more permanent anchors,
30
<PAGE> 31
(iii) a comprehensive line of knee products including a meniscal repair device
and an interference screw for ACL reconstruction which will utilize the
Company's proprietary high/low thread design, and (iv) the "next-generation" of
fixation products that would be designed to facilitate the re-attachment of soft
tissue to other soft tissue. The Company anticipates developing additional
technologies through its internal resources as well as through licensing
agreements.
Pursue Strategic Alliances and Acquisitions. The Company will continue to
pursue strategic alliances and acquisitions as a means of facilitating
additional product development and expanded distribution. In this regard, the
Company intends to identify key foreign distributors to promote the Company's
products in international markets. For instance, the Company recently signed a
distribution arrangement with Mizuho, a leading medical device company serving
the Japanese market. In addition, the Company plans to develop alliances that
will facilitate new product introductions such as the Company's distribution
arrangement with T.A.G. Medical Products. The Company also intends to
commercialize applications of its technology outside of sports
medicine/arthroscopy through arrangements such as with Mentor and Imcor. There
are no present agreements or arrangements for any potential or future
acquisitions.
PRODUCTS AND TECHNOLOGY
The Company's current product offerings are described below and consist of
a variety of suture anchors, an array of arthroscopic instruments and a system
of surgical screws, all of which are designed for specific orthopaedic surgical
applications. Each of the following products have received FDA 510(k) clearance,
are modifications to 510(k) cleared devices that the Company believes do not
require additional clearance, or are devices the Company believes have been
exempted by the FDA from the 510(k) clearance process. See
"Business -- Government Regulation."
31
<PAGE> 32
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------- -----------
<S> <C>
PRE-LOADED SUTURE ANCHORS
OBL RC5 Pre-Loaded Suture Anchor Pre-loaded RC5 anchor in a disposable
inserter with two braided polyester sutures.
Reduces amount of handling time needed to
prepare the anchor for implantation. Used
for rotator cuff reattachment.
2.8 mm Pre-Loaded Suture Anchor Pre-loaded PeBA S anchor in a disposable
inserter with one braided polyester suture.
Reduces amount of handling time needed to
prepare the anchor for implantation. Used
for repairs of the shoulder and for ulnar
ligament reattachments.
INDIVIDUAL SUTURE ANCHORS
5.0 mm RC5 Anchor Used for rotator cuff reattachment.
2.8 mm PeBA S Anchor Small profile is ideal for small, dense
bones. Use includes repairs of the shoulder
and ulnar ligament reattachments.
4.0 mm PeBA C Anchor Primary fastener for soft bone. Use includes
repairs in the shoulder, elbow, knee and
foot. Also sold through an OEM arrangement
with Mentor for use in female urinary stress
incontinence.
6.5 mm PeBA C Anchor Use includes shoulder, elbow, knee and foot.
INSTRUMENTS
Manual Arthroscopic Instruments Manufactured by T.A.G. Medical Products and
distributed in the United States exclusively
by OBL. Used in various types of
arthroscopic procedures.
Instrumentation Systems A selection of arthroscopic instruments used
to facilitate implantation of the Company's
anchor products; offered in a variety of
configurations; components include
inserters, bone drills, drill guides, and
sterilization trays.
SURGICAL SCREWS
Facet Screw System Designed for reconstructive surgery of small
bones, primarily in foot and ankle. Includes
a range of screws from 1.8 mm to 6.8 mm in
diameter.
Forefoot Reconstructive Screw System A system of cannulated cortical and
cancellous screws ranging in size from 2.7
mm to 3.5 mm in diameter.
</TABLE>
- ---------------
Suture Anchors
The Company currently markets a selection of suture anchor products which
provide the surgeon with distinctly different soft tissue suture anchors
designed for specific applications.
Proprietary High/Low Thread Design. Each of the Company's suture anchors
are made from titanium alloy and utilize the Company's patented high/low double
helix thread design. This unique thread pattern is designed to (i) increase bone
density between the threads resulting in superior pull-out strength, (ii)
minimize radial stress on the bone which limits bone damage, and (iii) produce
low insertion torque allowing for ease of insertion. Unlike many suture anchors
currently on the market which cannot be removed or revised by the surgeon, the
Company's anchors may be removed if necessary where, for instance, the suture
has broken or where the anchor needs to be repositioned. In addition, because of
the anchor's enhanced holding capability, each of the Company's suture anchors
can accept multiple sutures. Multiple sutures distribute the load of each suture
over a greater area of tissue, resulting in a stronger repair at the
reattachment site. Using multiple sutures per anchor also allows the surgeon to
reduce the number of anchors needed per procedure, which may reduce the time of
the procedure and overall surgical costs.
32
<PAGE> 33
Pre-Loaded Suture Anchors. The Company recently introduced the OBL RC5
pre-loaded suture anchor. Developed as a result of surgeon demand for a complete
anchor deployment system, the OBL RC5 is a 5.0 mm titanium suture anchor which
comes pre-loaded in a disposable inserter and pre-threaded with two braided
polyester sutures. The sutures are colored differently for easy intra-operative
identification. The OBL RC5 comes sterile packed and is designed to
significantly reduce the amount of handling time needed to implant the anchor,
thereby likely reducing surgical costs. The OBL RC5 inserter can also be used as
an extraction tool for suture repair or anchor repositioning. The Company also
recently introduced a 2.8 mm suture anchor which comes pre-loaded and sterile
packed with a disposable inserter and one braided polyester suture.
Individual Suture Anchors. While many surgeons prefer the convenience of a
pre-loaded anchor deployment system, individual suture anchors are still widely
used in many surgical procedures where speed is less important to the surgeon or
where the surgeon desires a particular type or size of suture that does not come
in a pre-loaded system. The PeBA family of suture anchors is the Company's
original line of anchors. These suture anchors must be loaded by the surgeon
into a manually driven insertion driver. The PeBA anchors come in varying sizes
which offers the surgeon intra-operative flexibility to choose the type, size
and amount of suture used for each procedure. The Company also markets its RC5
as an individual anchor. Each of the Company's individual suture anchors
utilizes its unique proprietary high-low thread design.
Private Label Suture Anchors. The Company is also the exclusive provider
of anchor products for Mentor. These anchors are marketed by Mentor and are used
primarily in treatment for female urinary stress incontinence.
Instrumentation
The Company recently secured a marketing alliance with and became an
exclusive distributor within the U.S. for T.A.G. Medical Products, a
manufacturer of high quality manual arthroscopic instrumentation. These
instruments are used by the surgeon in various arthroscopic procedures,
including procedures which utilize the Company's suture anchors.
The Company offers a selection of arthroscopic instruments compatible with
and used to deploy the Company's anchor products and manage tissue and sutures
during repair in surgery. The instruments are offered in a variety of kits,
which include inserters, bone drills, drill guides, and sterilization trays.
Each instrument may also be customized as requested by an individual surgeon.
Screw Systems
The Facet Screw System is a system of self-drilling cannulated screws which
are offered in varying sizes, from 1.8 mm to 6.8 mm in diameter, and in various
lengths. The Forefoot Reconstructive Screw System is a system of cannulated and
non-cannulated cortical and cancellous screws which are offered in varying
sizes, from 1.8 mm to 3.5 mm. These screws are designed to be used for
reconstructive surgery of smaller bones. The intended surgical audience is foot
and ankle orthopaedists and podiatrists. The unique feature of these screw
systems is the proprietary facet head of the screw which is designed to allow
maximum bone contact with minimal soft tissue irritation.
PRODUCTS UNDER DEVELOPMENT
The Company's product development efforts focus upon expanding the use of
its platform technology to increase the applications of existing products, as
well as the development of new products and technologies that address specific
needs identified by the surgical community. The Company currently has a number
of new products in various stages of development. Except as noted below, the
Company has not received the necessary regulatory clearance to market its
products under development and there can be no assurance that the Company will
obtain such clearances. See "Risk Factors -- Regulatory Risks" and "Business --
Government Regulation."
33
<PAGE> 34
SB Titanium Suture Anchor
The SB Anchor is a toggle type anchor that is for use in osteoporotic bone
where the bone density cannot support a traditional threaded anchor. Inserted
either in a pre-drilled hole or by direct impact, the SB Anchor works by
rotating in the cancellous bone or medullary void. The Company's scientific
advisory board is currently considering the use of the SB Anchor for knee, hip
and trauma applications. The Company has received FDA 510(k) clearance for its
SB Anchor.
SB Non-Metallic Suture Anchor
The Company also intends to introduce its SB Anchor in a high-density
plastic material as well as a bio-absorbable material which degrades and absorbs
into surrounding tissue. Non-clinical testing is currently being conducted by
the Company.
Interference Screw
As part of the Company's strategy to expand its surgical procedure base,
the Company intends to introduce an interference screw for ACL reconstruction.
The ACL interference screw will utilize the Company's proprietary high/low
thread design.
Complete Instrument System -- Shoulder and Knee
The Company, in consultation with its scientific advisory board, is
developing comprehensive instrument systems for both the knee and shoulder.
These instrument systems will include a full complement of instruments designed
to facilitate knee and shoulder surgeries and will be fully compatible with the
Company's other suture anchor products. Such instruments will focus on tissue
and suture management and repair.
DRYKnot
One of the most difficult and time-consuming processes of arthroscopic
fixation surgery is suture knot-tying which must been done remotely by the
surgeon through a straw-like device known as a cannula. Difficulties in
arthroscopic knot-tying limit the number of surgeons capable or willing to
perform arthroscopic surgery. The DRYKnot would enable the suture to fixate
tissue to the bone without the complexity of normal knot-tying. The DRYKnot
could be used wherever a remote suture knot needs to be intra-operatively tied.
The Company's first generation of the DRYKnot is expected to be introduced in a
high density plastic. The Company also intends to introduce the DRYKnot in a
bio-absorbable material.
SALES AND MARKETING
The Company's products are typically selected by surgeons and then
purchased by hospital and surgical facilities for use by the surgeon.
Accordingly, the Company's marketing efforts are primarily directed toward
orthopaedic surgeons who specialize in sports medicine/arthroscopic procedures.
The American Academy of Orthopaedic Surgeons currently estimates that there are
15,600 board certified orthopaedic surgeons in the United States, of which
approximately 37% consider arthroscopy to be a major practice area. To reach
these surgeons, the Company's sales efforts include a combination of direct
sales calls, clinical workshops and presentations at medical trade shows and
education conferences.
The Company's products are sold through a network of sales agents and
stocking dealers both domestically and internationally. Within the United
States, the Company currently utilizes approximately 34 third-party distributors
consisting of independent sales agents and stocking dealers that collectively
employ approximately 180 sales representatives. The Company typically provides
inventories of its products to its United States sales agents until sold or
returned by the agent, and the Company pays the agents a commission based on net
revenues. Stocking dealers typically purchase product inventory from the Company
for their use in marketing and filling customer orders.
Internationally, the Company is represented by approximately 14 dealers who
employ over 80 sales representatives. The Company currently has distribution
arrangements covering parts of Europe, Canada,
34
<PAGE> 35
Israel, New Zealand, and Japan where the Company recently signed an agreement
with Mizuho, a leading medical device company. The Company is also currently
pursuing further global distribution in Australia, India and certain Asian
countries. Under the Company's contractual arrangements with foreign
distributors, the distributor is granted the exclusive right to market the
Company's products in the specified territory, but must meet sales quotas to
maintain its relationship with the Company. Foreign distributors typically
purchase product inventory from the Company for their use in marketing and
filling customer orders.
While the Company's independent sales representatives typically sell
orthopaedic devices for a number of other manufacturers, the Company seeks
representatives who are committed to making sales of the Company's products a
priority in the product niches they address. The Company is dedicated to
continually training and educating the sales force in order to enhance the
representatives' ability to effectively market the Company's products. For
instance, the Company sponsors an annual national sales meeting for its
principal dealers and agents which serves to educate the sales force on the
technical aspects of the OBL product line. The Company also provides these sales
representatives with a monthly newsletter from the Company which includes sales
success stories, surgical tips from surgeons, letters from various employees and
general product updates.
The Company's scientific advisory board is also instrumental in developing
relationships within the arthroscopic medical community. For instance, the
scientific advisors participate in presentations of the Company's products at
medical trade shows and educational conferences. The Company also sponsors
weekend workshops that are led by its scientific advisors for six to eight of
their peers. These workshops are held in the Company's headquarters in
Scottsdale, Arizona, and target new users for the Company's products.
The Company uses print advertising for its products in arthroscopic
journals to support its suture anchors and manual arthroscopic instruments. See
"Risk Factors -- Limited Sales, Marketing and Distribution Capability; Reliance
on Third-Party Distributors."
STRATEGIC RELATIONSHIPS
The Company has an exclusive marketing and distribution agreement with
Mentor which grants an exclusive license for use of the Company's suture anchors
for treatment of urological conditions and disorders. Under the agreement,
Mentor has paid a one time licensing fee of $300,000 and has minimum purchase
requirements. The term of the agreement is for seven years with additional
options to extend the term of the agreement. In addition, the agreement includes
certain representations and warranties as well as indemnification provisions
relating to infringement by the Company of intellectual property rights of
others (unless the infringement arises from the combination of the Company's
product with Mentor's products).
The Company also has an exclusive licensing agreement with Imcor for use of
its suture anchors in connection with dental implants. Imcor is obligated to pay
minimum royalties to the Company beginning in 1999. The term of the agreement is
for the duration of the relevant patent. In addition, the Company has a
marketing and distribution agreement with T.A.G. Medical Products whereby the
Company serves as the exclusive distributor in the U.S. for T.A.G. manual
arthroscopic instruments. The agreement expires December 31, 2002 and may be
extended for an additional five year term upon the mutual agreement of the
parties. The Company is required to meet certain mutually agreed upon purchase
targets. The agreement is subject to termination for failure to meet the minimum
purchase targets.
For certain risks relating to the Company's arrangements with its strategic
partners, see "Risk Factors -- Uncertainties Relating to Strategic Partners."
MANUFACTURING AND QUALITY CONTROL
The manufacture of the Company's devices and instruments consists of
design, inspection, testing and packaging of components that have been molded,
machined or manufactured to the Company's specifications by a variety of outside
contractors. Most purchased components are available from more than one vendor.
Manufactured products are received, inspected, and warehoused in the Company's
headquarters in Scottsdale, Arizona. There can be no assurance that the
Company's suppliers will be able to satisfy the Company's existing or future
component requirements.
35
<PAGE> 36
In order to maintain compliance with the FDA's Quality Systems Regulation
("QSR"), ISO 9001 and the requirements of foreign regulatory agencies, the
Company has established a quality control system. Under this system, samples
from each lot of finished goods are inspected to ensure that they comply with
the Company's specifications.
Although the Company believes that its subcontractors and component
suppliers are in material compliance with applicable regulations, there can be
no assurance that the FDA, or a state, local or foreign regulatory authority,
will not take action against a subcontractor or a component supplier found to be
violating such regulations or that the Company will be able to continue to
secure products in a timely manner from its suppliers, or replace any supplier
in a timely manner as necessary. See "Risk Factors -- Limited Sales, Marketing
and Distribution Capability; Reliance on Third-Party Distributors."
RESEARCH AND DEVELOPMENT
The Company's research and development expenses for the years ended
December 31, 1996 and 1997 were $152,000 and $273,000, respectively. Research
and development is done through a combination of its in-house staff of two
full-time employees, supplemented by the Company's scientific advisory board, as
well as outside design firms. The Company intends to use a portion of the
proceeds of this Offering to add additional full-time employees committed to
research and development and to establish a facility dedicated to prototyping
products under development. See "Use of Proceeds."
The Company's research and development efforts focus on designing superior
products and developing advanced delivery systems alternative materials. The
Company believes that its core high/low thread technology is applicable to a
range of soft-tissue surgical applications and intends to continue to develop
products to meet those applications utilizing such technology. The Company is
also continually engaged in assessing new tissue repair device technologies and
techniques, including efforts to develop alternative materials. In the future,
the Company's research and development efforts may include the identification of
new technologies developed by others and the acquisition or in-licensing of new
technologies and product lines or extensions. See "Use of Proceeds." In addition
to the products it currently has under development, the Company has identified
potential strategic partners for polymer technology and tissue-to-tissue
fixation products. The Company intends to maintain a balance of internal
development for core competencies and partnerships with external experts in new
technologies.
PATENTS AND PROPRIETARY RIGHTS
As of April 30, 1998, the Company owned six issued United States patents,
four pending United States patent applications, and nine pending foreign patent
applications covering various aspects of its devices, one federally registered
trademark and three pending federal trademark applications. There can be no
assurance that the patents that have been issued to the Company, or any patents
which may be issued as a result of the Company's patent applications, will
provide any competitive advantages for the Company's products or that they will
not be successfully challenged, invalidated or circumvented in the future. In
addition, there can be no assurance that competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use and sell its products
either in the United States or in international markets. See "Risk
Factors -- Reliance on and Uncertainty Relating to Patents and Proprietary
Technology; Risk of Infringement."
The Company generally enters into confidentiality agreements with its
collaborators, employees, advisors, and consultants in an effort to protect its
proprietary technology. There can be no assurance that these agreements will not
be breached, that the Company would have adequate remedies for any breach, that
parties not subject to such agreements will not disclose confidential
information, or that the Company's trade secrets will not otherwise become known
or be independently developed by competitors. Certain agreements with its
employees and consultants require disclosure to the Company of ideas,
developments, discoveries or inventions pertaining to the proprietary rights
relating to the technology and products of the Company which are conceived
during employment or consulting, as the case may be, and grant the Company
ownership to such proprietary rights. In addition, the Company has entered into
agreements with certain strategic partners governing their various rights to
technologies developed by the parties. There can be no assurance that,
36
<PAGE> 37
notwithstanding these agreements with its employees, consultants, and strategic
partners, disputes will not arise as to ownership of these proprietary rights or
that the Company will not be required to defend and indemnify strategic partners
for the alleged infringement of the Company's products. See "Risk Factors --
Uncertainties Relating to Strategic Partners." Further, the extent to which
efforts by others will result in patents and the effect on the Company of the
issuance of such patents is unknown.
GOVERNMENT REGULATION
United States. Clinical testing, manufacture and sale of the Company's
products are subject to regulation by numerous governmental authorities,
principally the FDA and corresponding state and foreign regulatory agencies.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the preclinical and clinical testing,
manufacture, labeling, distribution and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing clearances
or approvals and criminal prosecution. The FDA also has the authority to request
repair, replacement, or refund of the cost of any device manufactured or
distributed by the Company.
In the United States, medical devices are classified into one of three
classes (i.e., Class I, II, or III) on the basis of the controls deemed
necessary by the FDA to reasonably ensure their safety and effectiveness. Class
I devices are subject to general controls (e.g., labeling, premarket
notification (unless exempt) and adherence to QSR requirements) and Class II
devices are subject to general and special controls (e.g., performance
standards, post-market surveillance, patient registries and FDA guidelines).
Generally, Class III devices are those which must receive pre-market approval by
the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices, or new devices which have been found
not to be substantially equivalent to legally marketed devices).
Before a new device can be introduced in the market, the Company must
generally obtain clearance from the FDA under the premarket notification
provisions of Section 510(k) of the FDC Act ("510(k)") or approval of a PMA from
the FDA. A 510(k) clearance will be granted if the submitted information
establishes that the proposed device is "substantially equivalent" to a legally
marketed Class I or Class II medical device or a Class III medical device for
which the FDA has not called for PMAs. The FDA recently has been requiring more
rigorous demonstration of substantial equivalence than in the past, including in
some cases requiring submission of clinical trial data. The FDA may determine
that the proposed device is not substantially equivalent to a predicate device
or that additional information is needed before a substantial equivalence
determination can be made. It generally takes from four to 12 months from
submission to obtain 510(k) premarket clearance, but the process may take
longer. A "not substantially equivalent" determination or a request for
additional information could prevent or delay the market introduction of new
products that fall into this category and could have a material adverse effect
on the Company's business, financial condition or results of operations. For any
of the Company's devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
effectiveness of the device or that constitute a major change to the intended
use of the device will require a new 510(k) submission.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
preamendments Class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence which typically
includes extensive information (including relevant bench tests, laboratory and
animal studies and clinical trial data) to demonstrate the safety and
effectiveness of the device. The PMA application also must contain a complete
description of the device and its components; a detailed description of the
methods, facilities and controls used to manufacture the device; and the
proposed labeling, advertising literature and training materials (if any). The
PMA process can be expensive, uncertain and lengthy. The FDA review of a PMA
application generally takes one to three years from the date the PMA is accepted
for filing, but may take significantly longer. A number of devices for which FDA
approval has been sought by other companies have never been approved for
marketing. Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements of new PMAs.
37
<PAGE> 38
If human clinical trials of a device are required for a 510(k) or a PMA and
the device presents a "significant risk," the sponsor of the trial (usually the
manufacturer or the distributor of the device) will have to file an IDE
application prior to commencing human clinical trials. The IDE application must
be supported by data, typically including the results of animal and laboratory
testing. If the IDE application is approved by the FDA and one or more
appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs without the need for FDA approval.
Submission of an IDE does not give assurance that FDA will approve the IDE and,
if it is approved, there can be no assurance that FDA will determine that the
data derived from these studies support the safety and efficacy of this device
or warrant continuation of clinical studies.
Sponsors of clinical trials are permitted to sell investigational devices
distributed in the course of the study provided that compensation does not
exceed recovery of the costs of manufacture, research, development and handling.
An IDE supplement must be submitted to and approved by the FDA before a sponsor
or investigator may make a change to the investigational plan that may affect
its scientific soundness or the rights, safety or welfare of human subjects.
The Company has not submitted 510(k)s or PMAs for certain of its proposed
devices. There can be no assurance that FDA will not determine that these or
other future products must be approved through the 510(k) or PMA approval
process. FDA may also require the 510(k) submissions or PMAs for any of the
Company's devices to be supported by clinical data, which would lengthen the
clearance or approval process. Several of the Company's products have been
cleared through the 510(k) process. In addition, the Company believes that a
number of devices that it currently markets or intends to market are exempt from
FDA's premarket clearance and approval requirements. However, there can be no
assurance that the FDA would agree with the Company's determinations, or that
the FDA would not require that the devices be cleared or approved by the FDA
before they could be marketed or continue to be marketed.
There can be no assurance that the Company will be able to obtain necessary
regulatory approvals or clearances on a timely basis, if at all, and delays in
receipt of or failure to receive such approvals or clearances, the loss of
previously received approvals or clearances, limitations on intended use imposed
as a condition of such approvals or clearances, or failure to comply with
existing or future regulatory requirements could have a material adverse effect
on the Company's business, financial condition and results of operation.
For any of the Company's devices that are cleared through the 510(k)
process, modifications or enhancements that could significantly affect the
safety or effectiveness of the device or that constitute a major change to the
intended use of the device will require a new 510(k). The Company has made
certain modifications to its principal 510(k) cleared and exempt devices which
the Company believes do not require the submission of new 510(k) notices. There
can be no assurance, however, that the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice for any of these changes made
to the devices. If the FDA requires the Company to submit a new 510(k) notice
for any device modification, the Company may be prohibited from marketing the
modified device until the 510(k) notice is cleared by the FDA. There can be no
assurance that any 510(k) notice regarding a modification will be cleared on a
timely basis, if at all.
Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Manufacturers of medical devices for
marketing in the United States are required to adhere to applicable regulations
setting forth detailed Quality System Regulation ("QSR") requirements, which
include testing, control and documentation requirements. Manufacturers must also
comply with Medical Devices Reporting ("MDR") requirements that a firm report to
the FDA any incident in which its product may have caused or contributed to a
death or serious injury, or in which its product malfunctioned and, if the
malfunction were to recur, it would be likely to cause or contribute to a death
or serious injury. Labeling and promotional activities are subject to scrutiny
by the FDA and, in certain circumstances, by the Federal Trade Commission.
Current FDA enforcement policy prohibits the marketing of approved or cleared
medical devices for unapproved uses.
38
<PAGE> 39
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements, and other
applicable regulations. Certain of the Company's third party suppliers may also
be subject to inspection by the FDA for compliance with applicable regulations.
There can be no assurance that the Company or such third party suppliers will be
found by the FDA to be in compliance with applicable regulations. A finding of
noncompliance could adversely affect the Company's ability to obtain product
from such suppliers or to continue marketing products. The FDA Modernization
Act, which was enacted in November of 1997, will affect the IDE, 510(k) and PMA
processes, and also will affect device standards and data requirements,
procedures relating to humanitarian and breakthrough devices, tracking and
postmarket surveillance, accredited third party review, and the dissemination of
off-label information. The Company cannot predict how or when these changes will
be implemented or what effect the changes will have on the regulation of the
Company's products. Changes in existing requirements or adoption of new
requirements could have a material adverse effect on the Company's business,
financial condition or results of operation. There can be no assurance that the
Company will not incur significant costs to comply with laws and regulations in
the future or that laws and regulations will not have a material adverse effect
upon the Company's business, financial condition or result of operations.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon the Company's business, financial condition or
results of operations.
International. The Company is also subject to regulation in each of the
foreign countries in which it sells its products in the areas of product
standards, packaging requirements, labeling requirements, import restrictions,
tariff regulations, duties and tax requirements. Many of the regulations
applicable to the Company's products in these countries are similar to those of
the FDA. The national health organization of some countries require the
Company's products to be qualified before they can be marketed in those
countries. The Company relies on its international distributors to comply with
these requirements. To date, the Company has not experienced significant
difficulty in complying with these regulations.
For European distribution, the Company has received ISO 9001 certification
and the CE mark. ISO 9001 certification standards for quality operations have
been developed to ensure that companies know, on a worldwide basis, the
standards of quality to which they will be held. The European Union has
promulgated rules which require that medical products receive the CE mark by
mid-1998. The CE mark is an international symbol of quality and compliance with
applicable European medical device directives. Failure to maintain the CE mark
will prohibit the Company from selling its products in Europe. ISO 9001
certification in conjunction with demonstrated performance to the medical device
directive is one of the CE mark certification requirements. There can be no
assurance that the Company will be successful in maintaining the certification
requirements. See "Risk Factors -- Regulatory Risks."
COMPETITION
The medical device industry is highly competitive and characterized by
innovation and rapid technological change. Among the Company's principal
competitors are Mitek Surgical Products, Inc., a division of Johnson & Johnson,
Inc.; Zimmer, Inc., a division of Bristol-Myers Squibb Company; Dyonics, Inc., a
subsidiary of Smith & Nephew, Inc.; Innovasive Devices, Inc.; Arthrotek Inc., a
division of Biomet, Inc.; Arthrex, Inc.; Linvatec Corporation, a division of
Conmed Corporation; and Bionx Implants, Inc. Each of these competitors has
significantly greater financial, manufacturing, marketing, distribution, and
technical resources than the Company and a greater share of the tissue fixation
market. These companies are better capitalized for extended research and
development, and may be able to withstand price pressures and deep discounting
over extended periods of time better than the Company. In order for the Company
to meet its projected future sales, the Company will have to take market share
away from the market leaders. There can be no assurance that the Company will be
able to gain such market share. Moreover, there can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are
39
<PAGE> 40
more effective or less costly than those developed by the Company, or that any
such products would not render the Company's products obsolete or not
competitive.
The healthcare industry is undergoing rapid change and consolidation as
healthcare systems merge to effect cost savings and operating efficiencies. In
addition, a number of large, national buying consortiums have formed to engage
in group purchasing of medical supplies and services in an effort at cost
containment for member hospital systems and healthcare providers. These
consolidated systems and large purchasing organizations are likely to apply
pressure to manufacturers and distributors of medical devices to reduce the
purchase prices of their goods. As a result, the Company may be forced to lower
prices in response to those pressures in order for its products to be approved
for purchase by those organizations, which could have a material adverse effect
on the Company's business, financial condition, and results of operations.
Overall, the Company believes that the primary competitive factors in the
markets for its products are design, material, sizing options, pull-out
strength, revision options, quality and reliability, customer service, and
pricing. The Company believes that it competes favorably with respect to these
factors, although there can be no assurance that it will continue to do so.
PRODUCT LIABILITY AND INSURANCE
The Company's business is subject to product liability risks inherent in
the testing, manufacturing and marketing of the Company's products. There can be
no assurance that product liability claims will not be asserted against the
Company or its licensees. While the Company maintains product liability
insurance, there can be no assurance that this coverage will be adequate to
protect the Company against future product liability claims. In addition,
product liability insurance is expensive and there can be no assurance that
product liability insurance will be available to the Company in the future, on
terms satisfactory to the Company, if at all. A successful product liability
claim or series of such claims brought against the Company in excess of its
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Product
Liability Risk."
EMPLOYEES
As of June 30, 1998, the Company had 19 employees of which two are engaged
in research and development activities, seven are engaged in sales and marketing
activities, one is engaged in regulatory affairs and quality assurance and nine
are engaged in administration and accounting. The Company considers its employee
relations to be good. None of the Company's employees are represented by unions.
The Company is dependent upon a number of key management and technical
personnel. The loss of the services of one or more key employees or consultants
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's success will also depend on
its ability to attract and retain additional highly qualified management and
technical personnel. The Company faces intense competition for qualified
personnel, many of whom are often subject to competing employment offers. There
can be no assurance that the Company will be able to attract and retain such
personnel. See "Risk Factors -- Dependence on Key Personnel."
FACILITIES
The Company operates its corporate headquarters, its executive offices and
worldwide marketing and sales operations from an approximately 6,000 square foot
office space in Scottsdale, Arizona. The Company's lease for this facility
extends through 2002. The Company believes that its existing facilities will be
sufficient for its operational purposes through 1998 and that any additional
space needed thereafter will be available on commercially reasonable terms.
LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party.
40
<PAGE> 41
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
D. Ronald Yagoda.......................... 54 Chairman, Chief Executive Officer and
Treasurer
James W. Hart............................. 39 President and Chief Operating Officer
Gary R. Scheel............................ 50 Vice President, Sales & Marketing
Jeffry B. Skiba........................... 44 Vice President, Engineering &
Manufacturing
Jennifer L. Guelich....................... 26 Vice President and Chief Financial Officer
Steven P. Davis........................... 60 Secretary and Director
Michael D. Greenbaum...................... 55 Director
Robert F. Lusch, Ph.D..................... 48 Director
Leslie S. Matthews, M.D................... 46 Director
Gary A. Peterson.......................... 49 Director
Richard Previte........................... 63 Director
Kerry Zang, D.P.M......................... 55 Director
</TABLE>
- ---------------
Mr. Yagoda, a co-founder of the Company, has served as Chairman, Chief
Executive Officer, and Treasurer of the Company since its incorporation in 1994.
From 1988 to 1993, he served as President of Pinnacle Consultant Corp., an
independent investment banking consulting firm. From 1976 to 1988, Mr. Yagoda
was employed by Marcus Schloss & Company, a registered broker-dealer, in his
most recent capacity as Executive Vice-President and Director. Mr. Yagoda
received a B.A. in history and journalism from the University of Oklahoma.
Mr. Hart joined the Company as President and Chief Operating Officer in
January 1998. Prior to joining the Company, Mr. Hart served from 1986 to 1998 in
various management capacities, most recently as Vice President -- Strategic
Marketing, at Zimmer, Inc., a subsidiary of Bristol-Myers Squibb Company. Prior
to 1986, Mr. Hart served three years in numerous sales and management capacities
at Johnson & Johnson, Inc. Mr. Hart received a B.A. in economics from DePauw
University.
Mr. Scheel joined the Company in October 1996 as Vice President, Sales &
Marketing. Prior to joining the Company, Mr. Scheel was with Smith & Nephew
Richards from 1988 through 1996, most recently as Vice President of Sales. Mr.
Scheel received a B.A. in sociology from Lakeland College.
Mr. Skiba has served as Vice President, Engineering & Manufacturing of the
Company since its incorporation in 1994. From September 1991 to September 1993,
Mr. Skiba was employed as technical manager by International Polymer Engineering
Inc., a subsidiary of Impra, Inc., a medical device manufacturer. Mr. Skiba
received a B.S. in biomechanical engineering from Arizona State University and a
B.S. in business administration from the University of Phoenix.
Ms. Guelich joined the Company in October 1997 as Vice President and Chief
Financial Officer. Prior to joining the Company, Ms. Guelich was an Assistant
Controller for Eagle River Interactive, Inc., a public interactive media based
company, from May 1997 to October 1997. From 1993 to 1997, Ms. Guelich held
various positions at Ernst & Young LLP and at Price Waterhouse, LLP, both
independent auditors. Ms. Guelich received a B.S. in Accounting from the
University of Arizona and is a Certified Public Accountant.
Mr. Davis has served as Secretary and a Director since the inception of the
Company. He was a partner of the law firm Aronberg Goldgehn Davis & Garmisa,
Chicago, Illinois from 1969 to 1997, and has been Of Counsel to the law firm
since 1997. Mr. Davis received a J.D. from the University of Michigan and a
B.B.A. from the University of Michigan.
41
<PAGE> 42
Mr. Greenbaum has served as a Director of the Company since 1994. Since
1993, Mr. Greenbaum has served in various capacities with the Scottsdale
Healthcare Foundation and currently serves as Chairman and Treasurer. Mr.
Greenbaum has also served since 1994 in various capacities with the Phoenix Art
Museum where he currently serves as President of the Board of Trustees. In
addition, Mr. Greenbaum serves as a Director of Scottsdale Healthcare Systems,
Inc. Mr. Greenbaum received a B.S. in mathematics from Rensselaer Polytechnic
Institute.
Dr. Lusch has served as a Director of the Company since 1994. Since 1992,
Dr. Lusch has served as a Professor of Marketing and Accounting and the Helen
Robson Walton Chair in Marketing at the University of Oklahoma. From 1987 to
1992, Dr. Lusch served as Dean of the College of Business Administration at the
University of Oklahoma. Dr. Lusch also currently serves on the boards of
Heartland Capital, Security National Bank, Ward Petroleum, and MediCenter, Inc.
Dr. Lusch received a B.S. in business and an M.B.A. from the University of
Arizona, and a Ph.D. from the University of Wisconsin.
Dr. Matthews has served as a Director of the Company since 1998 and is
Chairman of the Company's Scientific Advisory Board. Dr. Matthews is currently
the Chief of Orthopaedic Surgery at Union Memorial Hospital in Baltimore,
Maryland, and has served in that capacity since 1992. Dr. Matthews is the
President of the Arthroscopic Association of North America ("AANA"). Dr.
Matthews also currently serves as a managing partner of the Greater Chesapeake
Orthopaedic Association and is a member of the Board of Directors of the
Specialty Care Network. Dr. Matthews received a B.A. in natural sciences from
Johns Hopkins University and a M.D. from the Baylor College of Medicine.
Mr. Peterson has served as a Director of the Company since May 1997. Mr.
Peterson has also served since 1996 as President and Chief Executive Officer of
BATON Development Inc., a virtual incubator for medical products, and since 1993
as a general partner PSF Health Care Fund L.P., a venture capital fund. From
1991 to 1995, Mr. Peterson served as the President and Chief Executive Officer
of Peterson-Spencer-Fansler Investment, Inc., a capital sourcing and operational
consulting firm, and from 1986 to 1994, served as President of Genesis Venture
Development, Inc., a venture capital fund management company. Mr. Peterson
received a B.A. in biology and psychology from Gustavus Adolphus College and is
a registered broker dealer and a registered investment advisor.
Mr. Previte has served as a Director of the Company since 1994. Since 1969,
Mr. Previte has served in various capacities at Advanced Micro Devices, a public
semiconductor manufacturer. He currently serves as its President and Chief
Operating Officer, and is a director. Mr. Previte received a B.S. in business
and finance and a M.B.A. from San Jose State University.
Dr. Zang, a co-founder of the Company, has served as a Director of the
Company since its inception. Dr. Zang is a Board Certified Podiatric Surgeon and
has been in private practice since 1973. Dr. Zang is currently a Director of
Education at Humana Hospital in Phoenix and a Clinical Professor of the
California College of Podiatric Medicine. Dr. Zang also serves as a Diplomate of
the American Board of Podiatric Surgery and a Fellow of the American College of
Foot and Ankle Surgeons. Dr. Zang received a B.S. from Fairleigh Dickinson
University and a D.P.M. from the New York College of Podiatric Medicine.
INVOLVEMENT OF MANAGEMENT IN CERTAIN LEGAL PROCEEDINGS
In 1988, Mr. D. Ronald Yagoda and Marcus Schloss & Co, a broker dealer of
which Mr. Yagoda was then a principal, executive officer and director, were
indicted on several charges related to insider trading. Mr. Yagoda was
subsequently acquitted on all counts raised against him; however, Marcus Schloss
& Co. was convicted on two of the charges. Subsequent to Mr. Yagoda's acquittal,
in order to settle a related civil and administrative action filed by the
Securities and Exchange Commission, Mr. Yagoda, without admitting or denying any
liability, consented to a one-year suspension from the securities industry.
SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board composed of
individuals with demonstrated expertise in the field of orthopaedic surgery. The
Scientific Advisory Board meets periodically to review the Company's research,
development and operations activities and to identify potential applications of
the Company's technology. In addition, members of the Scientific Advisory Board
are available on an individual
42
<PAGE> 43
basis to consult with the Company as needed. The members of the Scientific
Advisory Board are consultants rather than employees and have substantial
constraints on the amount of time they can devote to the Company.
Each member of the Scientific Advisory Board has entered into a consulting
agreement with the Company that contains confidentiality and nondisclosure
provisions that prohibit the disclosure of confidential information to anyone
outside the Company. These agreements contain exclusivity provisions restricting
the clinical advisors from providing services to or investing in any competitor
of the Company without the Company's consent.
The current members of the Scientific Advisory Board are as follows:
<TABLE>
<CAPTION>
ADVISOR INSTITUTION
- ------- -----------
<S> <C>
Champ L. Baker, Jr., M.D. .................. Chief of Surgery and President of the
Columbia HCA Hughston Sports Medicine
Hospital in Columbus, Georgia
Donald E. Baxter, M.D. ..................... Director of Foot and Ankle Fellowship,
Clinical Professor of Orthopedic Surgery at
University of Texas Medical School; Past
President of the American Orthopaedic Foot
and Ankle Society
Brian J. Cole, M.D. ........................ Member of Rush Arthritis and Orthopaedics
Institute in Chicago, Illinois
James C. Esch, M.D. ........................ Assistant Clinical Professor at the
Department of Orthopaedics at the University
of California, San Diego; Founder and Chair
of the San Diego Shoulder Arthroscopy
Meeting; Former President of AANA,
Oceanside, California
Larry Field, M.D. .......................... Co-Director Upper Extremity Service MSMC;
Clinical Instructor, Department of
Orthopaedic Surgery, University of
Mississippi School of Medicine
Gary M. Gartsman, M.D. ..................... Clinical Associate Professor of Orthopaedic
Surgery, Baylor College of Medicine,
Houston, Texas
Warren D. King, M.D. ....................... Director of Orthopaedic Surgery, Oakland
Raiders Professional Football Team, the San
Francisco Giants Professional Baseball Team,
and the San Jose Sharks Professional Hockey
Team, Palo Alto Medical Foundation for
Sports Medicine
Mark S. Myerson, M.D. ...................... Assistant Professor of Orthopaedics at Johns
Hopkins University; Board Member American
Orthopaedic Foot and Ankle Society
Patrick A. Ruwe, M.D. ...................... Assistant Professor, Department of
Orthopaedics and Rehabilitation at the Yale
Sports Medicine Center
James P. Tasto, M.D. ....................... Associate Clinical Professor of Orthopaedic
Surgery at the University of California, San
Diego; Director of the Alvarado Hospital
Knee Research Institute
Arthur Ting, M.D. .......................... Palo Alto Medical Foundation for Sports
Medicine
Leslie S. Matthews, M.D. ................... Chief of Orthopaedic Surgery specializing in
sports medicine and arthroscopic surgery and
Director of the Orthopaedic Residency
Training Program at Union Memorial Hospital;
Assistant Professor of Orthopaedic Surgery
at Johns Hopkins Hospital
</TABLE>
43
<PAGE> 44
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the fiscal
year ended December 31, 1997 by (i) the Company's Chief Executive Officer and
(ii) the two most highly compensated other executive officers who received
annual compensation in excess of $100,000 (collectively, the "Named Executive
Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
- --------------------------- -------- ------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
D. Ronald Yagoda............... $ 60,000 -- $6,000(2) -- --
Chief Executive Officer
Gary R. Scheel................. $120,000 $ 5,000 -- -- --
Vice President Sales &
Marketing
Jeffry B. Skiba................ $101,667 $10,000 -- -- --
Vice President Engineering &
Manufacturing
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those instances where the aggregate amount of such
perquisites and other personal benefits constituted the lesser of $50,000 or
10% of the total of annual salary and bonuses for the Named Executive
Officer for 1997.
(2) Consists of car allowance pursuant to Mr. Yagoda's employment agreement.
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of stock options to the Named Executive Officers
during 1997.
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning the number
and value of unexercised stock options held by each of the Named Executive
Officers as of December 31, 1997. No Named Executive Officer exercised any
options in fiscal 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
D. Ronald Yagoda........................... -- -- -- --
Gary R. Scheel............................. 16,667 -- $ 75,002 --
Jeffry B. Skiba............................ 53,334 13,334 $338,471 $74,937
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, as permitted by the rules of the Securities and Exchange
Commission, these values have been calculated on the basis of an assumed
market value of $7.50 per share.
1998 STOCK INCENTIVE PLAN
The Orthopaedic Biosystems Ltd., Inc. 1998 Stock Incentive Plan, as amended
(the "Incentive Plan"), became effective January 1998 and was amended and
restated in June 1998. The Company believes that the Incentive Plan promotes the
success and enhances the value of the Company by linking the personal interests
of its employees, officers, consultants and advisors to those of its
shareholders and by providing such individuals with an incentive for outstanding
performance.
44
<PAGE> 45
Under the Incentive Plan, the Company may grant incentive stock options or
non-qualified stock options to employees, officers of, and consultants and
advisors to, the Company, including employees who are members of the Board, but
excluding directors who are not employees. Following the Offering, the Incentive
Plan will be administered by a committee appointed by the Board, consisting of
at least two non-employee directors. The committee will have the exclusive
authority to administer the Incentive Plan, including the power to determine
eligibility, the types and sizes of options, the price and timing of options,
and any vesting (and acceleration of vesting) of options. Although the intention
stated in the Incentive Plan is to price an option at a price not less than the
Fair Market Value (as defined in the Incentive Plan) of the Common Stock at the
date of the grant, the committee, in its discretion may grant options at less
than Fair Market Value. The exercise price for any incentive option shall be set
by the committee, provided that the exercise price is not less than the Fair
Market Value. No stock option may be granted under the Incentive Plan after
December 31, 2007. The committee may at any time offer to exchange or buy out
any previously granted option for a payment in cash, stock, or another option,
based on terms and conditions set by the committee.
An aggregate of 333,334 shares of the Company's Common Stock are available
for grant under the Incentive Plan, subject to a proportionate increase or
decrease in the event of a stock split, reverse stock split, stock dividend, or
other adjustment to the Company's shares of Common Stock. Under the Incentive
Plan, the maximum number of shares of Common Stock that may be subject to one or
more options to a single participant during any fiscal year is 200,000. As of
July 17, 1998, the Company had granted options to purchase 160,674 shares of
Common Stock under the Incentive Plan.
The committee, with Board approval, may terminate or amend the Plan to the
extent shareholder approval is not required by law. Termination or amendment
will not adversely affect options previously granted under the Plan.
In the event of a change of control of the Company (as defined in the
Incentive Plan), all options under the Incentive Plan become immediately
exercisable.
401(k)
Under the Company's 401(k) plan, adopted in March 1998, eligible employees
may direct that a portion of their compensation, up to a legally established
maximum, be withheld by the Company and contributed to their account. All 401(k)
plan contributions are placed in a trust fund to be invested by the 401(k)
plan's trustee, except that the 401(k) plan may permit participants to direct
the investment of their account balances among mutual or investment funds
available under the plan. The Company may, at management's discretion, make
matching contributions under the 401(k) plan.
To date, the Company has not made any matching contributions under the
401(k) plan. Amounts contributed to participant accounts under the 401(k) plan
and any earnings or interest accrued on the participant accounts are generally
not subject to federal income tax until distributed to the participant and may
not be withdrawn until death, retirement, or termination of employment.
COMMITTEES OF THE BOARD OF DIRECTORS
Effective upon the closing of the Offering, the Company will establish a
Compensation Committee and an Audit Committee. The Compensation Committee, all
the members of which will be independent directors, will review executive
salaries and administer any bonus, incentive compensation, and stock option
plans of the Company. In addition, the Compensation Committee will consult with
management of the Company regarding compensation policies and practices of the
Company. The Audit Committee, all the members of which will also be independent
directors, will review the professional services provided by the Company's
independent auditors, the annual financial statements of the Company, and the
Company's system of internal controls. The Company anticipates that the
Compensation Committee will consist of Gary Peterson, Steven P. Davis, Michael
D. Greenbaum, and Robert F. Lusch, and that the Audit Committee will consist of
Gary Peterson, Steven P. Davis, and Michael D. Greenbaum.
45
<PAGE> 46
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the year ended December 31, 1997, the Company's Board of Directors
established levels of compensation for certain of the Company's executive
officers without the involvement of the Compensation Committee, which had not
yet been formed.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
D. Ronald Yagoda, the Company's Chief Executive Officer, is employed under
an agreement which expires on December 31, 1998. The term of the agreement will
be automatically extended for one year terms unless otherwise terminated by
either party. Mr. Yagoda's agreement provides for his compensation to be
determined by the Company's Board of Directors. Mr. Yagoda's current annual
salary is $100,000. In addition, Mr. Yagoda is entitled to receive an automobile
allowance of $500 per month. In the event that Mr. Yagoda is terminated by the
Company without cause or by reason of permanent disability, Mr. Yagoda will
receive an amount equal to his base salary at the time of termination for a
period of 18 months following termination. Mr. Yagoda is entitled to participate
in all of the Company's benefit plans. The agreement also contains
confidentiality and non-compete covenants.
James W. Hart, the Company's President and Chief Operating Officer, is
employed under an agreement that expires July 1, 1999. Pursuant to the
agreement, Mr. Hart receives minimum annual compensation of $140,000 and is
entitled to participate in all of the Company's benefit plans generally made
available to other employees. In addition, Mr. Hart is entitled to receive an
incentive based cash bonus of up to $22,500, an automobile allowance of $400 per
month, and a temporary living allowance of $370 per week for up to 26 weeks from
the initial date of his employment. In the event that Mr. Hart is terminated by
the Company without cause (as defined therein), or is not offered employment
following a change of control of the Company, Mr. Hart will receive an amount
equal to his annual base salary (currently $140,000) for a period of one year
following termination. Pursuant to the agreement, Mr. Hart was also granted
options to purchase 100,000 shares of Common Stock at an exercise price of $3.00
per share. The options vest at a rate of 25% per year beginning January 1, 1999.
Mr. Hart's outstanding options which have not yet vested will accelerate upon a
merger or sale of substantially all of the Common Stock or assets of the
Company. The agreement also contains confidentiality and non-compete covenants.
Gary R. Scheel, the Company's Vice President, Sales and Marketing, is
employed under an agreement which may be terminated by the Company upon 10 days
notice. Under the agreement, Mr. Scheel is entitled to salary determined by the
Board of Directors, a cash bonus based upon Company revenues, and is entitled to
participate in all of the Company's benefit plans generally made available to
other employees. Mr. Scheel's current annual salary is $120,000. Pursuant to the
agreement, Mr. Scheel was also granted options to purchase 16,667 shares of
Common Stock at an exercise price of $3.00 per share. The options are fully
vested. In addition, Mr. Scheel is entitled to receive a cash bonus based upon
the Company's revenues. Mr. Scheel's outstanding options which have not yet
vested will accelerate upon a merger or sale of substantially all of the Common
Stock or assets of the Company. The agreement also contains confidentiality and
non-complete covenants.
Jeffry B. Skiba, the Company's Vice President, Engineering & Manufacturing,
is employed under an agreement that expires December 31, 1998. Pursuant to the
agreement, Mr. Skiba receives minimum annual compensation of $100,000 and is
also entitled to participate in all of the Company's benefit plans generally
made available to other employees. Mr. Skiba's current annual salary is
$100,000. The agreement also contains confidentiality and non-compete covenants.
DIRECTOR COMPENSATION
Director Fees. The Company's independent directors will be reimbursed for
reasonable travel expenses incurred in connection with attendance at each Board
and committee meeting. Directors who are also officers of the Company will not
be compensated for their services as directors.
1998 Director Option Plan. In June 1998, the Company's Board of Directors
and shareholders adopted the Orthopaedic Biosystems Ltd., Inc. 1998 Director
Option Plan (the "Director Plan") to attract and retain
46
<PAGE> 47
qualified independent directors. The Director Plan is administered by a
committee appointed by the Board and provides for automatic grants of
non-qualified stock options to all non-employee directors of the Company.
Pursuant to the Director Plan, each person who first becomes a non-employee
director of the Company on or after the effective date of the Director Plan will
automatically be granted 3,334 shares of Common Stock as of the date they become
a director. Additionally, each individual who is a non-employee director on the
third business day following the public release of the Company's year-end
earnings information will automatically be granted an option to purchase 1,000
shares of Common Stock. The option price for each of the grants is the fair
market value of the Common Stock per share on the relevant grant date. Each
option granted is fully vested and exercisable immediately and each option is
scheduled to expire on the tenth anniversary of the date of its grant, unless
the option is earlier terminated, forfeited, or surrendered as discussed below.
If a director granted options under the Director Plan ceases to be a director
for any reason, the options previously granted will remain exercisable for one
year after the director ceases to be a director, or until its scheduled
expiration date, whichever is earlier.
The total number of shares of Common Stock available for grants under the
Director Plan is 66,667, subject to a proportionate increase or decrease in the
event of a stock split, reverse stock split, stock dividend, or other adjustment
to the Company's shares of Common Stock. As of July 17, 1998, no options had
been granted under the Director Plan.
47
<PAGE> 48
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of July 17, 1998, the number and
percentage of outstanding shares of Common and Preferred Stock beneficially
owned by: (i) each director of the Company; (ii) the Named Executive Officers of
the Company; (iii) all directors and executive officers of the Company as a
group; and (iv) each beneficial owner of more than 5% of the outstanding Common
and Stock. To the knowledge of the Company, all persons listed below have sole
voting and investment power with respect to their shares, except to the extent
that authority is shared by their respective spouses under applicable law.
<TABLE>
<CAPTION>
PERCENT OF TOTAL(1)
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(2) BENEFICIALLY OWNED(1) OFFERING OFFERING
- --------------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Kerry Zang, D.P.M.(3).................................. 1,158,334 32.57% 20.85%
D. Ronald Yagoda(4).................................... 1,120,835 31.37 20.11
Joan Yagoda(5)......................................... 1,054,168 29.92 19.09
Michael D. Greenbaum(6)................................ 296,669 8.21 5.29
Vertical Fund Associates, L.P.(7)...................... 216,667 6.06 3.89
Gary Peterson(8)....................................... 206,669 5.75 3.69
Steven P. Davis(9)..................................... 107,501 3.02 1.93
Jeffry B. Skiba(10).................................... 60,001 1.67 1.07
Robert F. Lusch(11).................................... 33,334 * *
Richard Previte(12).................................... 23,334 * *
Leslie Matthews, M.D.(13).............................. 21,334 * *
Gary R. Scheel(14)..................................... 16,667 * *
All directors and executive officers as a group (12
persons)............................................. 3,044,678 77.58% 51.40%
</TABLE>
- ---------------
* Represents less than one percent of the outstanding Common Stock.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant, right, or conversion privilege. Shares of Common
Stock subject to options, warrants, rights, or conversion privileges which
are currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage of the person holding such
options, warrants, rights, or conversion privileges, but are not deemed
outstanding for computing the percentage of any other person. Shares and
percentages beneficially owned are based upon 3,523,365 shares of Common
Stock outstanding before the Offering, assuming conversion of all Preferred
Stock, which will be automatically converted into 581,541 shares of Common
Stock upon the completion of the Offering. Accordingly, shares and
percentages beneficially owned after the Offering are based upon 5,523,365
shares of Common Stock.
(2) Unless otherwise noted, the address of each of the listed stockholders is
15990 N. Greenway-Hayden Loop, Suite 100, Scottsdale, Arizona 85260.
(3) The total number of shares beneficially owned by Mr. Zang includes: (i)
250,000 shares of Common Stock owned by Yagoda & Zang, Inc., of which Mr.
Zang may be deemed a beneficial owner; and (ii) 33,334 shares of Common
Stock issuable upon the exercise of warrants.
(4) The total number of shares beneficially owned by Mr. Yagoda includes: (i)
250,000 shares of Common Stock owned by Yagoda & Zang, Inc., of which Mr.
Yagoda may be deemed a beneficial owner; (ii) 50,000 shares of Common Stock
issuable upon the exercise of warrants; and (iii) 804,168 shares of Common
Stock owned with Joan Yagoda.
(5) The total number of shares beneficially owned by Mrs. Yagoda include: (i)
250,000 shares of Common Stock owned by Yagoda & Zang, Inc., of which Mrs.
Yagoda may be deemed a beneficial owner; and (ii) 804,168 shares of Common
Stock owned with D. Ronald Yagoda.
48
<PAGE> 49
(6) The total number of shares beneficially owned by Mr. Greenbaum includes:
(i) 206,668 shares of Common Stock owned by the Greenbaum Family Trust of
which Mr. Greenbaum is trustee; (ii) 6,667 shares of Common Stock issuable
upon the exercise of options owned by the Greenbaum Family Trust; and (iii)
83,334 shares of Common Stock issuable upon the exercise of warrants owned
by the Greenbaum Family Trust.
(7) The total number of shares beneficially owned by Vertical Fund Associates,
L.P. includes 50,000 shares of Common Stock issuable upon the exercise of
warrants. The address of Vertical Fund Associates, L.P. is 18 Bank Street,
Summit, New Jersey 07901.
(8) The total number of shares beneficially owned by Mr. Peterson, includes (i)
6,667 shares of Common Stock issuable upon the exercise of options; (ii)
133,334 shares of Common Stock owned by Affinity Ventures of which Mr.
Peterson is a general partner, (iii) 33,334 shares of Common Stock issuable
upon the exercise of warrants owned by Affinity Ventures; and (iv) 33,334
shares of Common Stock issuable upon the exercise of warrants owned by
Peterson Spencer-Fensler Health Care Fund of which Mr. Peterson is a
general partner.
(9) The total number of shares beneficially owned by Mr. Davis includes 33,334
shares of Common Stock issuable upon the exercise of options. Also includes
37,500 shares of Common Stock owned by the Lisa D. Yagoda Irrevocable Trust
of which Mr. Davis is the trustee.
(10) The total number of shares beneficially owned by Mr. Skiba includes 60,001
shares of Common Stock issuable upon exercise of the options.
(11) The total number of shares beneficially owned by Mr. Lusch includes 6,667
shares of Common Stock issuable upon exercise of options.
(12) The total number of shares beneficially owned by Mr. Previte includes
23,334 shares of Common Stock issuable upon exercise of options.
(13) The total number of shares beneficially owned by Dr. Matthews includes
21,334 shares of Common Stock issuable upon exercise of options.
(14) The total number of shares beneficially owned by Mr. Scheel includes 16,667
shares of Common Stock issuable upon exercise of options.
49
<PAGE> 50
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November and December 1997, and January 1998, the Company sold for cash
$900,000 principal amount of subordinated promissory notes (the "Series B
Notes") to certain investors. Each Series B Note bears interest at a rate equal
to 2% per annum in excess of the prime rate adjusted quarterly. The Series B
Notes mature on December 31, 1998. In addition, the Company issued to the
holders of the Series B Notes warrants to purchase an aggregate of 450,000
shares of Preferred Stock which, upon the consummation of the Offering, will be
converted into warrants to purchase an aggregate of 300,003 shares of Common
Stock at an exercise price of $3.00 per share. Purchasers of the Series B Notes
and related warrants included: (i) Vertical Fund Associates, L.P., a principal
shareholder of the Company; ($150,000 principal amount of the Series B Notes and
warrants to purchase 50,000 shares of Common Stock); (ii) the Greenbaum Family
Trust, of which Michael D. Greenbaum, a Director of the Company, is trustee
($250,000 principal amount of the Series B Notes and warrants to purchase 83,334
shares of Common Stock); (iii) Affinity Venture II, L.L.C., of which Gary A.
Peterson, a Director of the Company, is a general partner ($100,000 principal
amount of the Series B Notes and warrants to purchase 33,334 shares of Common
Stock); (iv) PSF Healthcare Fund, L.P., of which Mr. Peterson is a general
partner ($100,000 principal amount of the Series B Notes and warrants to
purchase 33,334 shares of Common Stock); (v) D. Ronald Yagoda, the Company's
Chairman and Chief Executive Officer ($150,000 principal amount of the Series B
Notes and warrants to purchase 50,000 shares of Common Stock); (vi) the Kerry
Zang and Virginia Zang Revocable Trust, of which Kerry Zang, a Director of the
Company, is trustee ($75,000 principal amount of the Series B Notes and warrants
to purchase 25,000 shares of Common Stock); and (vii) The Podiatric Physicians
Profit Sharing Money Market Account, of which Kerry Zang, a Director of the
Company, has an interest ($25,000 principal amount of the Series B Notes and
warrants to purchase 8,334 shares of Common Stock).
In May 1998, the Company sold for cash $200,000 principal amount of Series
B Notes to D. Ronald Yagoda, the Company's Chairman and Chief Executive Officer.
The note bears interest at a rate equal to 4% per annum in excess of the prime
rate adjusted quarterly, and matures on April 30, 1999. No warrants were issued
in connection with this note.
In May 1997, the Company issued for cash 872,300 shares of Preferred Stock
to 14 investors at a price of $2.00 per share. Each share of Preferred Stock is
convertible into two-thirds of a share of Common Stock simultaneously with the
payment to the Company of the purchase price of the Common Stock sold in this
Offering. These purchasers included: (i) Gary A. Peterson, a Director of the
Company who is deemed beneficial owner of stock held by Affinity Ventures,
L.L.C. (200,000 shares of Preferred Stock); (ii) Michael D. Greenbaum, a
Director of the Company who is deemed beneficial owner of stock held by The
Greenbaum Family Trust (140,000 shares of Preferred Stock); (iii) Vertical Fund
Associates, L.P., a principal shareholder of the Company (250,000 shares of
Preferred Stock); and (iv) D. Ronald Yagoda, the Company's Chairman and Chief
Executive Officer (25,000 shares of Preferred Stock).
In March 1996, the Company sold for cash $90,000 principal amount of
14 1/2% subordinated promissory notes (the "Series A Notes") to three investors.
In addition, the Company issued to the holders of the Series A Notes warrants to
purchase, in the aggregate, 10,002 shares of the Company's Common Stock at an
exercise price of $1.50 per share. The purchasers of the Series A Notes and
holders of the related warrants included Mr. Greenbaum, a director of the
Company ($30,000 principal amount of the Series A Notes and warrants to purchase
3,334 shares). In addition, during March 1996, the Company sold for cash a
$50,000 principal amount subordinated promissory note with terms equivalent to
the Series A Notes to Mr. Yagoda, the Company's Chairman and Chief Executive
Officer. Mr. Yagoda was not issued warrants in connection with such transaction.
The Company paid in full all amounts outstanding under these notes on March 31,
1997.
The Company believes that the foregoing transactions were consummated on
terms that would otherwise prevail in arms-length transactions.
In the future, any transactions between the Company and its affiliated
entities, executive officers, directors, or significant stockholders will
require the approval of a majority of the independent directors of the Company
and will be on terms that will be no less favorable to the Company than the
Company could obtain from non-affiliated parties.
50
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Arizona law and to
the provisions of the Company's Amended and Restated Articles of Incorporation
and Amended and Restated Bylaws, copies of which have been filed as exhibits to
the Registration Statement of which this Prospectus is a part.
Immediately following the completion of this Offering, the authorized
capital stock of the Company will consist of 20,000,000 shares of Common Stock,
no par value, and 5,000,000 shares of Preferred Stock, no par value. Immediately
following the completion of this Offering, 5,523,365 shares of Common Stock will
be issued and outstanding (assuming no exercise of outstanding options or
warrants), and no shares of Preferred Stock will be issued and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying cash dividends in the
foreseeable future. In the event of liquidation, dissolution, or winding up of
the Company, the holders of Common Stock are entitled to share ratably in any
corporate assets remaining after payment of all debts, subject to any
preferential rights of any outstanding Preferred Stock. See "Dividend Policy."
Holders of Common Stock have no preemptive, conversion, or redemption
rights and are not subject to further calls or assessments by the Company. All
of the outstanding shares of Common Stock are, and the shares offered by the
Company hereby will be, if issued, validly issued, fully paid, and
nonassessable. As of the date of this Prospectus, there are 2,941,824 shares of
Common Stock issued and outstanding.
PREFERRED STOCK
Immediately following the completion of this Offering, the Board of
Directors of the Company will have the authority, without further action by the
Company's stockholders, to issue from time to time up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the number of shares,
designations, voting powers, preferences, optional and other special rights, and
the restrictions or qualifications thereof. The rights, preferences, privileges,
and restrictions or qualifications of different series of Preferred Stock may
differ with respect to dividend rates, amounts payable on liquidation, voting
rights, conversion rights, redemption provisions, sinking fund provisions, and
other matters. The issuance of Preferred Stock could: (i) decrease the amount of
earnings and assets available for distribution to holders of Common Stock; (ii)
adversely affect the rights and powers, including voting rights, of holders of
Common Stock; and (iii) have the effect of delaying, deferring, or preventing a
change in control of the Company. The Company has no present plans to issue any
shares of Preferred Stock.
WARRANTS AND STOCK OPTIONS
As of July 17, 1998, the Company had outstanding warrants to purchase
shares of its Preferred Stock which, upon the consummation of the Offering, will
be converted into warrants to purchase 300,003 shares of Common Stock with an
exercise price of $3.00. In addition, the Company had outstanding options to
purchase an aggregate of 516,690 shares of its Common Stock with exercise prices
ranging from $1.05 to $3.00. See "Management" and "Certain Relationships and
Related Transactions."
REGISTRATION RIGHTS
The holders of the Preferred Stock have been granted certain rights with
respect to the registration under the Securities Act of the shares of Common
Stock issued upon exercise of the Preferred Stock. Beginning 180 days after
completion of this offering, the Company must, within 90 days of receipt of
requests for registration from holders of at least 50% of the Preferred Stock,
use its best efforts to effect the registration under the Securities Act of such
securities. In addition, holders of the Preferred Stock have been granted
51
<PAGE> 52
"piggy-back" rights to register their shares of converted Common Stock, subject
to certain limitations, in connection with a registration initiated by the
Company.
Certain members of the Company's Scientific Advisory Board have been
granted certain rights with respect to the registration under the Securities Act
of the shares of Common Stock issuable upon exercise of options granted under
their consulting agreements. These advisors have been granted rights to register
the shares of Common Stock underlying their options in connection with a
registration initiated by the Company. The Company anticipates that it will
register such shares on a Form S-8 as soon as practicable after the closing of
the Offering.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Articles of Incorporation provide that,
to the fullest extent permitted by Arizona law, a director of the Company shall
not be personally liable to the Company or its stockholders for monetary damages
for breach of such director's fiduciary duty, except for liability: (i) for any
breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases; and (iv) for any
transaction from which the director derives an improper benefit. The effect of
the provision of the Company's Amended and Restated Articles of Incorporation is
to eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of the fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior), except in the situations described in clauses (i) through (iv) above.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek nonmonetary relief such as an injunction or recision in the
event of a breach of a director's duty of care. In addition, the Company's
Amended and Restated Articles of Incorporation provides that the Company shall
indemnify any person who is or was a director, officer, employee, or agent of
the Company, or who is or was serving at the request of the Company as a
director, officer, employee, or agent of another corporation or entity, against
expenses, liabilities, and losses incurred by any such person by reason of the
fact that such person is or was acting in such capacity. The Company's Amended
and Restated Articles of Incorporation also permits it to secure insurance on
behalf of any director, officer, employee, or agent of the Company for any
liability arising out of such person's actions in such capacity.
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Amended and Restated Articles of Incorporation and Amended
and Restated Bylaws contain a number of provisions relating to corporate
governance and the rights of stockholders. These provisions: (i) establish a
classified Board of Directors; (ii) permit the removal of Directors only for
cause and only by vote of stockholders owning a majority of the voting power of
the Company; (iii) impose conditions on the ability of stockholders to nominate
persons for the position of Director; and (iv) prohibit stockholders from
calling special meetings.
The Company believes that these provisions promote the stability and
continuity of the Board of Directors of the Company and assure that stockholders
will receive adequate notice of and an opportunity to consider actions by
stockholders that could materially affect the Company. However, these provisions
could have the effect of deterring unsolicited takeovers or delaying or
preventing changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then-current market prices.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock of the Company is
.
52
<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
5,523,365 shares of Common Stock (assuming the Underwriter's over-allotment is
not exercised). These shares exclude 816,693 shares of Common Stock issuable
upon exercise of currently outstanding options and warrants. The Company has an
additional 239,327 shares of Common Stock available for grant under its existing
option plans. Of the outstanding shares, the 2,000,000 shares of Common Stock
sold in the Offering, plus any additional shares sold upon exercise of the
Underwriters' over-allotment option, will be freely tradeable without
restriction under the Securities Act (except for any shares purchased by an
"affiliate" of the Company as that term is defined in the Securities Act, which
will be subject to the limitations of Rule 144 adopted under the Securities
Act). Commencing 90 days following the date of this Prospectus, 3,411,359 shares
of Common Stock held by existing stockholders will become eligible for sale
under Rule 144, subject to compliance with the requirements of such rule.
However, directors, officers and certain shareholders of the Company owning a
total of 2,816,009 shares of Common Stock and outstanding warrants to purchase
546,009 shares of Common Stock have agreed with the Underwriters that, except in
certain circumstances, they will not issue, offer to sell, sell, contract to
sell, or otherwise dispose of any shares of Common Stock or other securities of
the Company for a period of 180 days after the date of this Prospectus without
the prior written consent of the Representative. Upon the expiration of such
180-day period, these securities will become eligible for sale under Rule 144,
subject to compliance with the volume limitations and other requirements of Rule
144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted" shares for
at least one year, including persons who may be deemed "affiliates" of the
Company, as that term is defined under Rule 144, would be entitled to sell (in
accordance with the provisions specified in the rule) within any three-month
period a number of shares that does not exceed the greater of (i) one percent of
the then outstanding shares of the Company's Common Stock (approximately 55,234
shares immediately following the offering assuming no exercise of the
Underwriters' over-allotment option) or (ii) the average weekly trading volume
of the Common Stock during the four calendar weeks preceding the date on which
notice of the sale is filed with the Commission. Sales pursuant to Rule 144 are
subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. An "affiliate" of
the Company may sell securities that are not "restricted" without regard to the
period of beneficial ownership but subject to the volume limitations described
above and other conditions of Rule 144. A person (or persons whose shares are
aggregated) who is not deemed an "affiliate" of the Company (and has not been at
any time during the three months immediately preceding the sale) and who has
beneficially owned his or her shares for at least two years would be entitled to
sell such shares under Rule 144(k) without regard to the volume limitations
described above, manner of sale provisions, notice requirements, or availability
of public information.
Prior to this Offering, there has been no public market for the Company's
Common Stock and no prediction can be made of the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of the Common Stock in the public market could adversely affect prevailing
market conditions and could impair the Company's future ability to raise capital
through the sale of its equity securities. See "Risk Factors -- Shares Eligible
for Future Sale."
53
<PAGE> 54
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Cruttenden Roth
Incorporated ("Cruttenden Roth") and Josephthal & Co. Inc. are acting as
Representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock indicated below opposite their respective
names at the public offering price less underwriting discounts and commissions
set forth on the cover page of this Prospectus. The Underwriting Agreement
provides that the obligations of the Underwriters are subject to certain
conditions, and that the Underwriters are committed to purchase all of such
shares (other than those covered by the over-allotment options described below),
if any such shares are purchased.
<TABLE>
<CAPTION>
UNDERWRITER PARTICIPATION
----------- -------------
<S> <C>
Cruttenden Roth Incorporated................................
Josephthal & Co. Inc........................................
---------
Total............................................. 2,000,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price reflected on the cover page of this Prospectus and to selected securities
dealers at such price less a concession not exceeding $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not exceeding
$ per share to other dealers. After the public offering of the shares of
Common Stock, the public offering price and other offering terms may be changed.
No change in such terms shall change the amount of proceeds to be received by
the Company as set forth on the cover page of this Prospectus.
The Company has granted the Underwriters an over-allotment option,
exercisable during the 45-day period after the date of this Prospectus, to
purchase up to 300,000 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus less the underwriting
discounts and commissions. The Underwriters may exercise the option only to
cover over-allotments in the sale of the Common Stock offered hereby. If the
Underwriters exercise the over-allotment option, each Underwriter will purchase
additional shares from the Selling Shareholders in approximately the same
proportion as the shares set forth in the table above.
In connection with the Offering, the Company has agreed to issue the
Representatives a warrant to purchase up to 200,000 shares of Common Stock (the
"Representatives' Warrant"). The Representatives' Warrant will have a term of
five years, and will be exercisable commencing one year after the effective date
of this Offering, at an exercise price per share of 120% of the initial price of
the Common Stock being offered hereby to the public. The Representatives'
Warrant is not transferable except to (i) officers of the Representatives, (ii)
general partnerships, the general partners of which are the Representatives and
one or more persons, each of whom on the date of transfer is an officer of the
Representatives, (iii) a successor to the Representatives in any merger or
consolidation or a purchase of all or substantially all of the Representatives'
assets, (iv) any person receiving the Warrant from any of the persons listed in
(i)-(iii), upon such persons death, by will, trust or intestate succession or
(v) after one year from the effective date of this Prospectus, any person
receiving the Warrant from the persons listed in (i)-(iv). During the exercise
period, the holders of the Warrant are entitled to certain demand and incidental
registration rights which will expire five years after the date of this
Prospectus and which may require the Company to register for public resale the
shares of Common Stock issuable under the Warrant. The number of shares covered
by the Warrant and the exercise price thereof are subject to adjustment in
certain events to prevent dilution. Any profit realized by the Representatives
on the sale of securities issuable upon exercise of the Warrant may be deemed to
be additional underwriting compensation.
The Company has also agreed to pay the Representatives a non-accountable
expense allowance equal to 3% of the aggregate public offering price of the
shares of Common Stock sold in the Offering. The Representatives expenses in
excess of the non-accountable expense allowance, including its legal expenses,
54
<PAGE> 55
will be borne by the Representatives. To the extent that the expenses of the
Representative are less than the non-accountable expense allowance, the excess
shall be deemed to be compensation to the Representatives.
In addition, the Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, and to
contribute in certain events to any liabilities incurred by the Underwriters in
connection with the sale of shares of Common Stock.
Prior to this Offering, there has been no public market for the Common
Stock and there can be no assurance that a regular trading market will develop
upon the completion of this Offering. The public offering price has been
determined by arms-length negotiations between the Company and the
Representatives and will not necessarily bear any relationship to assets, book
value, earnings history or other investment criteria. The primary factors
considered in determining such offering price included the history of and
prospects for the industry in which the Company competes, market valuation of
comparable companies, market conditions for public offerings, the history of and
prospects for the Company's business, the Company's past and present operations
and earnings and the trend of such earnings, the prospects for future earnings
of the Company, the Company's current financial position, an assessment of the
Company's management, the general condition of the securities markets, the
demand for similar securities of comparable companies and other relevant
factors. There can be no assurance, however, that the prices at which the Common
Stock will trade in the public market following the Offering will not be lower
than the initial public offering price.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
In connection with the offering, certain Underwriters and selling group
members and their respective affiliates may overallot or engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Stock. Such transactions may include stabilization transactions effected in
accordance with the Securities Exchange Act of 1934 pursuant to which such
persons may bid for or purchase Common Stock for the purpose of stabilizing its
market price. The Underwriters also may create a short position for the account
of the Underwriters by selling more Common Stock in connection with the offering
than they are committed to purchase from the Company, and in such case may
purchase Common Stock in the open market following completion of the offering to
cover all or a portion of such shares of Common Stock or may exercise the
Underwriter's over-allotment option referred to above. In addition, the
Representatives, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby they may reclaim from an
Underwriter (or dealers participating in he offering), for the account of the
other Underwriters, the selling concession with respect to Common Stock that is
distributed in the offering but subsequently purchased for the account of the
Underwriters in stabilization or syndicate covering transactions or otherwise.
Any of these activities may stabilize or maintain the price of the Common Stock
at a level above that which might otherwise prevail in the open market. None of
the transactions described in this paragraph is required, and if they are
undertaken they may be discontinued at any time.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement but does not purport to be a complete statement of the
terms and conditions thereof. Copies of the Underwriting Agreement are on file
at the offices of the Representative, the Company and the SEC. See "Additional
Information."
LEGAL MATTERS
The validity of the shares offered hereby is being passed upon for the
Company by Snell & Wilmer L.L.P., Phoenix, Arizona. Certain legal matters will
be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, San
Diego, California.
55
<PAGE> 56
EXPERTS
The Financial Statements of Orthopaedic Biosystems Ltd., Inc. at December
31, 1997 and for the year then ended, appearing in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which contains an explanatory
paragraph describing conditions that raise substantial doubt about the Company's
ability to continue as a going concern as described in Note 1 to the financial
statements), appearing elsewhere herein, and is included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The statement of operations, shareholders' equity and cash flows for the
period ended December 31, 1996 included in this Prospectus, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The statements in this Prospectus under the captions "Risk
Factors -- Reliance on and Uncertainty Relating to Patents and Proprietary
Technology; Risk of Infringement" and "Business -- Patents and Proprietary
Rights" have been reviewed and approved by Snell & Wilmer L.L.P., patent counsel
to the Company, as experts in such matters, and are included herein in reliance
on such review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act of 1933 with respect to the Common Stock offered
hereby. This Prospectus constitutes a part of the Registration Statement and
does not contain all of the information set forth therein and in the exhibits
thereto, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is hereby made to such
Registration Statement and exhibits. Statements contained in this Prospectus as
to the contents of any document are not necessarily complete and in each
instance are qualified in their entirety by reference to the copy of the
appropriate document filed with the Commission. The Registration Statement,
including the exhibits thereto, may be examined without charge at the
Commission's public reference facility at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, copies of all or any part of
the Registration Statement, including such exhibits thereto, may be obtained
from the Commission at its principal office in Washington, D.C., upon payment of
the fees prescribed by the Commission. The Commission maintains a World Wide Web
site (http://www.sec.gov) that contains reports, proxy statements, and other
information regarding registrants, such as the Company, that file electronically
with the Commission.
The Registration Statement and the reports and other information to be
filed by the Company following the offering in accordance with the Securities
and Exchange Act of 1934, as amended, can be inspected and copied at the
principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington D.C. 20549, and at the following regional offices of
the Commission: 7 World Trade Center, New York, NY 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60601. Copies of
such material may be obtained from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Washington D.C.
20549, upon payment of the fees prescribed by the Commission.
56
<PAGE> 57
INDEX TO FINANCIAL STATEMENTS
ORTHOPAEDIC BIOSYSTEMS LTD. INC.
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Report of Coopers & Lybrand L.L.P., Independent
Accountants............................................... F-3
Financial Statements
Balance Sheets as of December 31, 1997 and June 30, 1998
(unaudited)............................................... F-4
Statements of Operations for the years ended December 31,
1996 and 1997, and the six months ended June 30, 1997
(unaudited) and June 30, 1998 (unaudited)................. F-5
Statements of Shareholders' Equity for the years ended
December 31, 1996 and 1997 and the six months ended June
30, 1998 (unaudited)...................................... F-6
Statements of Cash Flows for the years ended December 31,
1996 and 1997, and the six months ended June 30, 1997
(unaudited) and June 30, 1998 (unaudited)................. F-7
Notes to the Financial Statements........................... F-8
</TABLE>
F-1
<PAGE> 58
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Orthopaedic Biosystems Ltd., Inc.
We have audited the accompanying balance sheet of Orthopaedic Biosystems
Ltd., Inc. as of December 31, 1997, and the related statements of operations,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Orthopaedic Biosystems Ltd., Inc. for the
year ended December 31, 1996, were audited by other auditors whose report dated
May 21, 1997, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the financial position of Orthopaedic
Biosystems Ltd., Inc. at December 31, 1997, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming
Orthopaedic Biosystems Ltd., Inc. will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring losses and has
limited working capital. These conditions raise substantial doubt about the
Company's ability to continue as a going concern (management's plans in regard
to those matters are also described in Note 1). The financial statements do not
include any adjustments to reflect the possible future effect on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Phoenix, Arizona
April 22, 1998, except for Note 14 as
to which the date is July , 1998
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the restatement of the capital accounts described in Note 14 to the financial
statements.
Phoenix, Arizona
July 17, 1998
/s/ ERNST & YOUNG LLP
F-2
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS
The following is the report we are prepared to issue upon effectiveness of
the Registration Statement on Form SB-2 and completion of the related
disclosures for the stock split described in Note 14 to the financial
statements.
PRICEWATERHOUSECOOPERS LLP
Phoenix, Arizona
July 17, 1998
To the Board of Directors and Shareholders
Orthopaedic Biosystems Ltd., Inc.
We have audited the statement of operations, shareholders' equity and cash
flows of Orthopaedic Biosystems Ltd., Inc. for the year ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of operations, shareholders'
equity and cash flows are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement of operations, shareholders' equity and cash flows. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the statement
of operations, shareholders' equity and cash flows. We believe that our audit of
the statement of operations, shareholders' equity and cash flows provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly,
in all material respects, the results of operations and cash flows of
Orthopaedic Biosystems Ltd., Inc. for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
May 21, 1997,
except for Note 14,
Subsequent Events - Stock Split
as to which the date is , 1998
F-3
<PAGE> 60
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 740,715 $ 25,216
Accounts receivable, net of allowance for bad debts and
sales returns of $103,000 in 1997 and $107,000 in
1998................................................... 368,856 496,961
Inventories, net of inventory valuation allowance of
$300,000 in 1997 and $346,000 in 1998.................. 657,912 843,870
Prepaid expenses and deposits............................. 38,605 226,372
----------- -----------
Total current assets................................... 1,806,088 1,592,419
Property and equipment, net................................. 250,206 375,864
Patent rights, net.......................................... 196,316 197,533
Deposits and other assets................................... 30,961 27,681
----------- -----------
Total assets...................................... $ 2,283,571 $ 2,193,497
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 236,857 $ 689,918
Accrued expenses.......................................... 72,664 206,281
Advance payments from customer............................ 95,500 3,000
Related party notes, net of discount of $49,000 in 1997
and $26,250 in 1998.................................... 801,000 1,073,750
Current portion of capital lease obligation............... 10,554 11,485
----------- -----------
Total current liabilities.............................. 1,216,575 1,984,434
Capital lease obligation.................................... 13,638 8,465
----------- -----------
Total liabilities................................. 1,230,213 1,992,899
Shareholders' equity:
Class A convertible preferred stock -- no par value;
3,000,000 shares authorized; 872,300 issued and
outstanding............................................ 1,713,464 1,713,464
Common stock, no par value; 12,000,000 shares authorized;
2,908,489 issued and outstanding in 1997 and 2,915,157
issued and outstanding in 1998......................... 1,574,632 1,584,632
Additional paid-in capital................................ 82,590 96,590
Accumulated deficit....................................... (2,309,486) (3,185,195)
Unearned compensation..................................... (7,842) (8,893)
----------- -----------
Total shareholders' equity............................. 1,053,358 200,598
----------- -----------
Total liabilities and shareholders' equity........ $ 2,283,571 $ 2,193,497
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 61
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- --------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues.......................... $ 782,835 $ 1,482,320 $ 695,039 $ 1,207,559
Cost of revenues...................... 486,325 824,715 339,684 538,476
----------- ----------- ----------- -----------
Gross profit........................ 296,510 657,605 355,355 669,083
Operating expenses:
Research and development expenses... 152,005 272,960 91,055 182,863
General and administrative
expenses......................... 375,918 820,892 289,708 759,822
Sales and marketing expenses........ 263,685 979,675 429,101 528,870
----------- ----------- ----------- -----------
Total operating expenses......... 791,608 2,073,527 809,864 1,471,555
----------- ----------- ----------- -----------
Operating loss................... (495,098) (1,415,922) (454,509) (802,472)
Other income (expenses)
Interest expense.................... (23,385) (14,745) (6,841) (78,706)
Interest income..................... -- 17,929 4,033 5,469
Other............................... 300,565 27,199 -- --
----------- ----------- ----------- -----------
Other income (expense) net............ 277,180 30,383 (2,808) (73,237)
----------- ----------- ----------- -----------
Net loss.............................. $ (217,918) $(1,385,539) $ (457,317) $ (875,709)
=========== =========== =========== ===========
Basic and diluted net loss per
share............................... $ (0.08) $ (0.49) $ (0.16) $ (0.30)
=========== =========== =========== ===========
Weighted average shares outstanding... 2,727,513 2,802,590 2,775,912 2,909,852
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 62
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- --------------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
------- ---------- --------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1995...................... -- $ -- 2,725,353 $1,240,267 $ -- $ (706,029) $ -- $ 534,238
Fair value of options
granted for consulting
services................ -- -- -- -- 18,800 -- (6,020) 12,780
Stock issued for product
design work, $1.875 per
share................... -- -- 4,462 8,365 -- -- -- 8,365
Stock issued for
employment
agency fees, $3.00 per
share................... -- -- 10,000 30,000 -- -- -- 30,000
Net loss.................. -- -- -- -- -- (217,918) -- (217,918)
------- ---------- --------- ---------- ------- ----------- ------- -----------
BALANCE, DECEMBER 31,
1996...................... -- -- 2,739,815 1,278,632 18,800 (923,947) (6,020) 367,465
Fair value of options
granted for consulting
services................ -- -- -- -- 12,790 -- (7,842) 4,948
Amortization of
compensation............ -- -- -- -- -- -- 6,020 6,020
Fair value of warrants
issued in connection
with related party
notes................... -- -- -- -- 51,000 -- -- 51,000
Issuance of common stock
upon exercise of stock
options................. -- -- 30,001 37,000 -- -- -- 37,000
Issuance of common stock
upon exercise of
warrants................ -- -- 138,673 259,000 -- -- -- 259,000
Preferred stock issuances,
less $31,136 expenses... 872,300 1,713,464 -- -- -- -- -- 1,713,464
Net loss.................. -- -- -- -- -- (1,385,539) -- (1,385,539)
------- ---------- --------- ---------- ------- ----------- ------- -----------
BALANCE, DECEMBER 31,
1997...................... 872,300 1,713,464 2,908,489 1,574,632 82,590 (2,309,486) (7,842) 1,053,358
Fair value of options
granted for consulting
services (unaudited).... -- -- -- -- 11,000 -- (6,048) 4,952
Fair value of warrants
issued in connection
with related party notes
(unaudited)............. -- -- -- -- 3,000 -- -- 3,000
Amortization of
compensation
(unaudited)............. -- -- -- -- -- -- 4,997 4,997
Issuance of common stock
upon exercise of
warrants................ -- -- 6,668 10,000 -- -- -- 10,000
Net loss (unaudited)...... -- -- -- -- -- (875,709) -- (875,709)
------- ---------- --------- ---------- ------- ----------- ------- -----------
BALANCE, JUNE 30, 1998
(UNAUDITED)............... 872,300 $1,713,464 2,915,157 $1,584,632 $96,590 $(3,185,195) $(8,893) $ 200,598
======= ========== ========= ========== ======= =========== ======= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 63
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- ----------------------
1996 1997 1997 1998
--------- ----------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................... $(217,918) $(1,385,539) $ (457,317) $(875,709)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization............... 33,358 62,450 21,231 68,361
Accretion of debt discount.................. -- 2,000 -- 25,750
Services exchanged for common stock......... 38,365 -- -- --
Services exchanged for common stock
options.................................. 12,780 4,948 2,893 4,952
Inventory valuation allowance............... 125,000 217,812 108,906 72,870
Provision for bad debts and sales returns... 22,000 62,788 31,394 48,115
Amortization of unearned compensation....... -- 6,020 1,393 4,997
Changes in operating assets and liabilities,
net:
Accounts receivable...................... (14,647) (319,685) (141,701) (176,220)
Inventories.............................. (86,465) (419,312) (276,685) (258,828)
Prepaid expenses......................... (18,508) (12,475) (64,957) (187,767)
Deposits................................. -- (23,890) (22,587) --
Accounts payable......................... 125,211 (105,161) 9,405 453,061
Accrued expenses......................... 17,798 48,867 55,687 133,617
Advance payments from customer........... 200,000 (104,500) (132,957) (92,500)
--------- ----------- ---------- ---------
Net cash provided by (used in) operating
activities.................................. 236,974 (1,965,677) (865,295) (779,301)
CASH FLOWS FROM INVESTING ACTIVITIES
Equipment and leasehold improvements
purchased................................... (4,991) (228,728) (60,729) (182,414)
Investment in patent rights................... (45,497) (38,389) (31,510) (9,542)
--------- ----------- ---------- ---------
Net cash used in investing activities......... (50,488) (267,117) (92,239) (191,956)
FINANCING ACTIVITIES
Borrowings on bank line of credit............. 65,000 -- -- --
Payments on bank line of credit............... -- (135,000) (135,000) --
Proceeds from related party notes............. 140,000 850,000 -- 250,000
Payments on related party notes............... -- (140,000) (140,000) --
Payments on capital lease obligations......... -- (8,686) (5,280) (4,242)
Net proceeds from issuance of preferred
stock....................................... -- 1,713,464 1,715,912 --
Net proceeds from issuance of common stock.... -- 296,000 135,750 10,000
--------- ----------- ---------- ---------
Net cash provided by financing activities..... 205,000 2,575,778 1,571,382 255,758
--------- ----------- ---------- ---------
Net increase (decrease) in cash............... 391,486 342,984 613,848 (715,499)
Cash, beginning of period..................... 6,245 397,731 397,731 740,715
--------- ----------- ---------- ---------
Cash, end of period........................... $ 397,731 $ 740,715 $1,011,579 $ 25,216
========= =========== ========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest...................... $ 7,338 $ 25,406 $ 22,888 $ 1,039
Noncash financing activities:
Services exchanged for common stock...... 38,365 -- -- --
Services exchanged for common stock
options................................ 12,780 4,948 2,893 4,952
Capital lease obligation entered into.... -- 32,878 32,878 --
Warrants issued for related party
notes.................................. -- 51,000 -- 3,000
</TABLE>
See accompanying notes.
F-7
<PAGE> 64
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
Orthopaedic Biosystems Ltd., Inc. (the "Company") was incorporated on
February 1, 1994, and at that date the net assets of Orthopaedic Biosystems Ltd.
(the "Partnership") were transferred to the Company in exchange for 2,000,000
shares of common stock. The Company designs, develops, and manufactures
innovative medical devices that are primarily used in orthopaedic surgery for
sports medicine and arthroscopy. The principal markets for these devices are
medical equipment distributors and hospitals located within the United States.
The Company contracts its manufacturing with various independent entities.
These financial statements have been prepared assuming the Company will
continue as a going concern. The Company has suffered losses from operations and
had limited working capital as of December 31, 1997. Management is continuing to
develop products and to market existing products. The Company plans to generate
a higher level of sales in 1998 while controlling costs. Additionally, principal
officers and shareholders have previously provided loans and contributed capital
to the Company when working capital requirements necessitated it. In addition,
the Company has plans to raise capital through equity offerings. The financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Financial Information
The financial statements for the six months ended June 30, 1997 and 1998
are unaudited but include all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of
financial position, results of operations and cash flows. Operating results for
the six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for any future periods.
Cash
For purposes of the statements of cash flows, the Company considers all
cash and highly liquid investments with an original maturity of three months or
less to be cash equivalents.
Inventories
Inventories consist of finished medical devices, supplies, and related
implements and are stated at the lower of first-in, first-out cost or market.
The Company provides inventory allowances for excess and obsolete inventory as
well as lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated on a
straight-line basis over useful lives ranging from three to ten years. Assets
purchased under capital leases are depreciated over the lesser of their
estimated useful lives or the term of the lease.
F-8
<PAGE> 65
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
Intangible Assets
Patent costs are recorded at cost and are amortized using the straight-line
method over their useful lives of fifteen years. The carrying value of
intangible assets is periodically reviewed by the Company based on expected
future undiscounted operating cash flows.
Revenue Recognition
Revenue is recognized at the time of shipment, including sales made to
distributors under agreements that allow limited right of return. An allowance
is recorded monthly based on sales and estimated returns.
Research and Development
Substantially all research and development expenditures relate to the
development and improvement of the Company's line of orthopaedic fixation
devices. Research and development costs consist of salaries, consultants,
supplies, and lab and prototype expense, which are expensed as incurred.
Income Taxes
Income taxes are accounted for by the asset/liability approach in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred taxes represent the expected future tax consequences
when the reported amounts of assets and liabilities are recovered or paid. They
arise from differences between the financial reporting and tax bases of assets
and liabilities and are adjusted for changes in tax laws and tax rates when
those changes are enacted.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at date of grant.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation," and
accordingly, recognizes no compensation expense for the employee stock option
grants. Stock option grants to nonemployees are charged to expense based upon
the fair value of the options granted.
Advertising Costs
All advertising costs are expensed when incurred. Advertising expenses were
$2,529, $12,027, $10,105, and $5,619 for the years ended December 31, 1996 and
1997 and the six months ended June 30, 1997 and 1998, respectively.
Net Loss Per Share
The Company computes net loss per share in accordance with Financial
Accounting Standards No. 128, "Earnings Per Share." Basic net loss per share
excludes any dilutive effects of options, warrants and convertible securities
and common shares outstanding during each period. Dilutive net loss per share
includes the dilutive effects of common share equivalents outstanding during the
year. Common share equivalents which were antidilutive were not included in the
computation of net loss per share. For the periods presented, because the
Company had operated at a loss, basic and diluted net loss per share are
identical.
The Company had options to purchase 399,011, 386,018, 404,013 and 543,357
shares of common stock outstanding at December 31, 1996 and 1997 and June 30,
1997 and 1998, and warrants to purchase 156,676, 6,668, and 96,674 shares of
common stock outstanding at December 31, 1996 and 1997 and June 30, 1997,
F-9
<PAGE> 66
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
respectively. Warrants to purchase Class A Convertible Preferred Stock were
425,000 and 450,000 at December 31, 1997 and June 30, 1998, respectively. Upon
the consummation of the Company's initial public offering, warrants to purchase
Class A Convertible Preferred Stock will be converted to warrants to purchase
Common Stock at a ratio of two common shares to three preferred shares. While
such options and warrants could potentially dilute future earnings per share,
none represented dilutive securities for the periods presented given that the
Company had net losses. Preferred shares convertible to 581,541 shares of common
stock outstanding at December 31, 1997 and June 30, 1998 were not included in
the computation of diluted earnings per share because their inclusion would be
antidilutive.
Impact of Recently Issued Accounting Standards
SFAS No. 130 "Reporting Comprehensive Income" (SFAS No. 130), issued by the
FASB in June 1997, is effective for periods beginning after December 15, 1997.
Under the new requirements for calculating income, this statement requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The impact
of SFAS No. 130 on the calculation of comprehensive income for these periods was
not material.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997. The adoption of SFAS No. 131 did not have an impact on
the Company's results of operations, financial position or cash flows.
Reclassification
Certain prior year balances have been reclassified to conform to the
current year presentation.
3. CONCENTRATIONS OF CREDIT RISK
The Company has no significant off-balance sheet concentrations of credit
risk such as foreign exchange contracts, option contracts, or other foreign
hedging arrangements. The Company maintains the majority of its cash balances
with one financial institution in the form of demand deposits.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for estimated credit losses. Its accounts receivable balances are
primarily domestic. In 1996, no single customer accounted for 10 percent or more
of total revenue. During the year ended December 31, 1997 and the six months
ended June 30, 1998, one customer accounted for 20.9% and 12.5% of revenues,
respectively.
F-10
<PAGE> 67
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Computers and equipment.............................. $107,158 $138,713
Instrumentation...................................... 75,521 184,401
Furniture............................................ 45,748 46,938
Leasehold improvements............................... 63,158 63,158
Equipment under capital lease........................ 32,878 32,878
Purchased software................................... 7,862 35,977
Other................................................ 6,841 19,516
-------- --------
339,166 521,581
Less accumulated depreciation........................ 88,960 145,717
-------- --------
$250,206 $375,864
======== ========
</TABLE>
5. PATENT RIGHTS
The Company acquired various patents and systems with a net book value of
$140,337 from the Partnership, for the design and manufacture of orthopaedic
fixation devices. Subsequent to February 1, 1994, the Company capitalized costs
consisting of legal fees and other costs to maintain the rights to the domestic
patents and costs associated with the application for international patent
rights. Patent rights consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Cost of patents and systems.......................... $249,720 $259,261
Less amortization.................................... 53,404 61,728
-------- --------
$196,316 $197,533
======== ========
</TABLE>
6. DEBT
Related Party Notes
During 1996, the Company received loans totaling $140,000 from three
shareholders including the Company's chief executive officer. Principal and
interest bearing a rate of 14 1/2 percent were paid in full during 1997.
During 1997, the Company received loans totaling $850,000 from three
directors/shareholders, and two additional shareholders, including the Company's
chief executive officer. Principal and interest at prime plus two percent are
due and payable on December 31, 1998. At December 31, 1997, the interest rate
was 10.5%. Warrants were issued to purchase 283,336 shares of the Company's
Class A Convertible Preferred Stock at an exercise price of $3.00 per share in
conjunction with the notes (see Note 10). The warrants expire on December 31,
2002. Interest expense related to these notes was $5,385 for the year ended
December 31, 1997.
On January 20, 1998, the Company received a loan in the amount of $50,000
from a shareholder. Principal and interest at prime plus two percent are due and
payable on December 31, 1998. At December 31, 1997, the interest rate was 10.5%.
Warrants were issued to purchase 16,667 shares of the Company's Class A
Convertible Preferred Stock at an exercise price of $3.00 per share in
conjunction with the note. The warrants expire on December 31, 2002.
F-11
<PAGE> 68
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
On May 4, 1998, the Company received $200,000 from the Chief Executive
Officer in exchange for a note payable bearing interest at the prime rate of
interest plus four percent which is due April 30, 1999.
On July 2, 1998, the Company received $100,000 from a shareholder in
exchange for a note payable bearing interest at the prime rate of interest plus
four percent which is due June 30, 1999.
Bank Line of Credit
At December 31, 1996, the Company had available a $150,000 revolving line
of credit with a bank. This bank line of credit was collateralized by two
certificates of deposit owned by the Company's chief executive officer and a
principal shareholder and accrued interest at the current yield paid on 60 day
certificates of deposit plus 4.64 percent. The line was paid off on January 3,
1997 and was closed January 10, 1997. The Company has not renewed the line of
credit.
7. OTHER INCOME
On August 22, 1996, the Company entered into an agreement with Mentor
Urology Corporation ("Mentor"), a Delaware corporation. Under terms of the
agreement, Mentor paid the Company $300,000 during the year ended December 31,
1996 for the exclusive marketing and distribution rights of the 4.0 mm PeBA(R) C
anchor for urology applications both in the United States and in defined foreign
markets for an initial term of seven years. These amounts are nonrefundable and
have been included in the financial statements as other income.
Also under terms of the agreement, Mentor has agreed to purchase, as a
condition of preserving its exclusive distribution rights under the agreement, a
contractually defined number of anchors during each specified computational
period. Mentor paid the Company $200,000 in December 1996 for advance purchases
of inventory. The entire amount was carried as an advanced payment from customer
at December 31, 1996 and recognized as revenue during 1997. The $95,500 and
$3,000 in advance payments from customer at December 31, 1997 and June 30, 1998,
respectively, are related to another customer of the Company whereby the Company
received $100,000 in advances against future purchases in 1997 and subsequently
recognized revenue in 1998.
8. CAPITAL LEASES
The Company leases equipment under a noncancelable capital lease
obligation. Accordingly, the fair value of the equipment has been capitalized
and the related obligation recorded. The average implicit rate on the lease was
14.1 percent at December 31, 1997. Interest is charged to expense at a level
rate applied to declining principal over the period of the obligation.
Future minimum lease payments under the capital lease as of December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $13,873
1999........................................................ 13,873
2000........................................................ 1,157
-------
Total minimum lease payments................................ 28,903
Less amount representing interest........................... 4,711
-------
Obligations under capital leases............................ 24,192
Less current portion........................................ 10,554
-------
Obligations under capital leases noncurrent................. $13,638
=======
</TABLE>
F-12
<PAGE> 69
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
Interest expense on the outstanding obligations under such leases was
$4,031 for the year ended December 31, 1997, and $1,882 for the six months ended
June 30, 1998.
9. STOCK OPTION PLAN
The Company's Board of Directors granted options for directors, officers,
scientific advisory board members, and employees of the Company or of any
affiliate thereof, entitling the holders to purchase shares of common stock.
Options generally vest and become exercisable over a period of three years.
Options expire over a four to five year period from the date of issuance.
Option activity during the years ended December 31, 1996 and 1997 and the
six months ended June 30, 1998 (after giving effect to the two-for-three reverse
stock split discussed in Note 14) is as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES RANGE
--------- -------------
<S> <C> <C>
Outstanding at January 1, 1996............................ 315,675 $1.05 - $1.88
Granted, employees...................................... 96,668 1.88 - 3.00
Granted, advisory board................................. 40,002 1.88 - 3.00
Forfeited............................................... (53,334) 1.88
--------- -------------
Outstanding at December 31, 1996.......................... 399,011 1.05 - 3.00
Granted, employees...................................... 35,004 3.00
Granted, directors...................................... 33,335 3.00
Granted, advisory board................................. 71,339 3.00
Exercised............................................... (30,001) 1.05 - 1.88
Forfeited............................................... (122,670) 1.05 - 1.88
--------- -------------
Outstanding at December 31, 1997.......................... 386,018 1.05 - 3.00
Granted, advisory board................................. 38,336 3.00
--------- -------------
Granted, directors...................................... 23,334 3.00
Forfeited............................................... (65,005) 3.00
--------- -------------
Outstanding at June 30, 1998.............................. 382,683 $1.05 - $3.00
========= =============
Exercisable at December 31, 1997.......................... 299,000
=========
Exercisable at June 30, 1998.............................. 315,683
=========
Weighted average exercise price of options outstanding.... $ 2.17
=========
Weighted average remaining life of options outstanding in
years................................................... 2.78
=========
</TABLE>
During the first quarter of 1998, the Company's Board of Directors adopted
an incentive stock option plan (the "1998 Incentive Stock Option Plan") for
employees of the Company, entitling the holders to purchase shares of common
stock. Options generally vest and become exercisable over a period of four
years. Options expire over an eight to ten year period from the date of
issuance.
F-13
<PAGE> 70
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
Option activity under the 1998 Incentive Stock Option Plan during the six
months ended June 30, 1998 (after giving effect to the two-for-three reverse
stock split discussed in Note 14) is as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES RANGE
--------- -----
<S> <C> <C>
Granted, employees.......................................... 160,674 $3.00
-------- -----
Outstanding at June 30, 1998................................ 160,674 $3.00
======== =====
Exercisable at June 30, 1998................................ 16,667
========
Weighted average exercise price of options outstanding...... $ 3.00
========
Weighted average remaining life of options outstanding in
years..................................................... 7.42
========
</TABLE>
The Company has adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) for its transactions with
non-employees. Accordingly, compensation cost has been recognized for the
options granted to non-employees in exchange for consulting and advisory
services. During 1996, 1997 and the six months ended June 30, 1998, the Company
granted to non-employees options on 40,002, 71,339 and 38,336 shares,
respectively. The weighted average grant date estimated fair value of these
options was $18,800, $12,790, and $11,000 in 1996, 1997 and 1998, respectively.
The Company has adopted the disclosure-only provisions of SFAS No. 123 for
its transactions with employees. Accordingly, no compensation cost has been
recognized for the options granted to employees under the stock option plan. Had
the Company elected to adopt the recognition provision of SFAS No. 123, net loss
would have been increased by $2,250, $35,000, $36,871, and $5,700 for the years
ended December 31, 1996, and 1997, and during the six months ended June 30, 1997
and 1998, respectively. The Company further believes that, based on the models
required to be used by SFAS No. 123, pro forma amounts derived under such
methodologies would not be representative, if material, since such models are
not designed for use on stock options of the type issued by the Company.
The fair value of each option grant is estimated on the date of grant using
the minimum value calculation prescribed by SFAS No. 123. The following
assumptions were used for options granted during the years ended December 31,
1996, 1997 and the six months ended June 30, 1998: no dividends, risk-free
interest rates ranging from 5.29 percent to 6.60 percent, and expected lives of
three to five years.
10. CAPITAL SHARES
In June 1997, the Company completed a private placement of Series A
Convertible Preferred Stock. The Company issued 872,300 shares at a price of
$2.00 per share and received net proceeds of $1,713,464. There are no specified
dividends on Series A Convertible Preferred Stock; however, holders are entitled
to dividends declared on common stock on an as-converted basis. In the event of
liquidation, the holders of Series A Convertible Preferred Stock shall be
entitled to receive, prior and in preference to holders of common stock, an
amount per share equal to $2.00 for each outstanding share.
Each share of Series A Convertible Preferred Stock shall convert,
automatically and without any action on the part of the holder, into two-thirds
of a share of Common Stock (after giving effect to the two-for-three reverse
stock split discussed in Note 14) simultaneously with the closing of the
Company's first underwritten public offering yielding proceeds of $10.0 million
at a price per share of at least $4.00. Holders of the Series A Convertible
Preferred Stock may, at their option, convert any or all of the their preferred
shares into common shares.
F-14
<PAGE> 71
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
In connection with loans made by shareholders and the Company's chief
executive officer in 1997, warrants for 425,000 shares were issued. The warrants
allow the holder the right to purchase one share of Class A Convertible
Preferred Stock at a price of $2.00 per share. The warrants expire in 2002, if
not earlier redeemed. The value of the warrants was computed to be $51,000. This
amount is accounted for as a discount to the debt proceeds and is being
amortized over the term of the related debt.
In connection with a loan made by a shareholder in 1998, warrants to
purchase 25,000 shares of Class A Convertible Preferred Stock at $2.00 per share
were issued. The warrants expire in 2002, if not earlier redeemed. The value of
the warrants was computed to be $3,000. This amount is accounted for as a
discount to the debt proceeds and is being amortized over the term of the
related debt.
In connection with loans made by shareholders and the Company's chief
executive officer in 1996, the Company issued warrants to purchase 10,002 common
shares at $1.50 per share. The warrants have been exercised by June 30, 1998.
The warrants were determined to have an immaterial value, and accordingly, no
discount of debt was recorded.
In connection with the Company's 1995 stock offering, warrants to purchase
146,674 common shares were issued. The warrants allow the holder the right to
purchase shares at a price of $1.88 per share. Unexercised warrants to purchase
8,001 common shares were forfeited at December 31, 1997.
Warrant activity during the years 1996 and 1997 and the six months ended
June 30, 1998 is as follows:
<TABLE>
<CAPTION>
CLASS A CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- --------------------------
NUMBER OF PRICE NUMBER OF PRICE
SHARES RANGE SHARES RANGE
---------- ------ --------- -------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1996......... -- -- 146,674 $1.88
Granted.............................. -- -- 10,002 1.50
------- ----- -------- -------------
Outstanding at December 31, 1996....... -- -- 156,676 1.50 - 1.88
Granted.............................. 425,000 $2.00 -- --
Exercised............................ -- -- (138,673) 1.50 - 1.88
Forfeited............................ -- -- (11,335) 1.88
------- ----- -------- -------------
Outstanding at December 31, 1997....... 425,000 2.00 6,668 1.50
Granted.............................. 25,000 2.00 --
Exercised............................ -- -- (6,668) 1.50
------- ----- -------- -------------
Outstanding at June 30, 1998........... 450,000 $2.00 -- --
======= ========
Exercisable at December 31, 1997....... 425,000 6,668
======= ========
Exercisable at June 30, 1998........... 450,000 --
======= ========
</TABLE>
Upon consummation of the Company's initial public offering, warrants to
purchase Class A Convertible Preferred Stock will be converted to warrants to
purchase Common Stock at a ratio of two common shares to three preferred shares.
11. 401(k)
In 1998, the Company adopted a 401(k) retirement savings plan (the Plan),
effective April 1998. All of the Company's employees who have provided one year
of service are eligible to participate and may elect to
F-15
<PAGE> 72
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
contribute up to 15 percent of their annual compensation to the Plan. The
Company may make discretionary matching contributions. The Company's matching
contributions, if made, will vest over a four-year period.
12. INCOME TAXES
The Company has incurred losses since inception for both financial
statement and income tax purposes, and accordingly, the income tax benefit has
been offset fully by a valuation allowance. At December 31, 1997, the Company
had federal and Arizona state tax net operating loss (NOL) carryovers of
approximately $1,920,000. The federal NOLs expire in 2009 through 2011. The
state NOLs expire in 1999 through 2001. Ownership changes as defined in the
Internal Revenue Code may limit the amount of net operating loss and tax credit
carryforwards that can be utilized to offset future taxable income or tax
liability.
The temporary differences between financial and income tax reporting that
give rise to deferred income tax assets and valuation allowances are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
<S> <C> <C>
Current deferred tax assets:
Accounts receivable allowance........................... $ 41,000 $ 43,000
Inventory allowance..................................... 120,000 138,000
--------- -----------
161,000 181,000
Noncurrent deferred tax assets:
Net operating tax loss carryover........................ 768,000 1,100,000
--------- -----------
Total deferred tax assets................................. 929,000 1,281,000
Valuation allowance for deferred tax assets............... (914,000) (1,259,000)
--------- -----------
Net deferred assets....................................... 15,000 22,000
Noncurrent deferred tax liability:
Depreciation............................................ 15,000 22,000
--------- -----------
15,000 22,000
--------- -----------
Net deferred tax.......................................... $ -- $ --
========= ===========
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into noncancelable operating lease agreements,
primarily related to the rental of office space. As of December 31, 1997, future
minimum lease payments required under such operating leases are as follows:
<TABLE>
<S> <C>
1998.................................................... $ 89,629
1999.................................................... 89,629
2000.................................................... 90,806
2001.................................................... 93,160
2002.................................................... 49,471
Thereafter.............................................. --
--------
$412,695
========
</TABLE>
F-16
<PAGE> 73
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
Rent expense for the years ended December 31, 1996 and 1997 and the six
months ended June 30, 1998 was $33,680, $62,483, and $46,254, respectively.
Employment Agreement
The Company has entered into employment agreements with certain key
employees. One such employment agreement provides for bonus payments or stock
option grants upon the attainment of certain criteria, primarily related to
sales. No bonuses were paid in 1997 under the agreement and the minimum sales
threshold under which a bonus will be paid for 1998 is $6 million at which level
bonuses start at 1/2 percent of sales and can be up to 1 1/2 percent of sales.
Stock option grants under the agreement are at $3.00 per share and the number of
shares, if any, to be granted are subject to minimum sales levels. In accordance
with APB 25, the Company will record expense for the excess of the fair market
value at the date of grant and $3.00 when the number of shares to be granted are
known. Options on up to 150,000 shares could be granted through 2000 under the
agreement.
14. SUBSEQUENT EVENTS
Capital Structure
In July 1998, the Company obtained shareholder approval to file the
Company's amended and restated articles of incorporation. The amendment
authorizes the Company to issue 25,000,000 shares, of which 20,000,000 shares
shall be common stock, no par value, and 5,000,000 shares shall be preferred
stock, no par value.
Stock Option Plans
In July 1998, the Company obtained shareholder approval to adopt amendments
to the 1998 Incentive Stock Option Plan and to adopt the 1998 Directors' Plan.
The 1998 Incentive Stock Option Plan, as amended, authorizes up to 333,334
options to purchase shares of common stock and incorporates the options
previously granted under the 1998 Incentive Stock Option Plan. The 1998
Directors' Plan authorizes up to 66,667 options to purchase shares of common
stock to be granted.
Stock Split
The Company's board of directors authorized a two-for-three reverse stock
split of the Company's common stock which was approved by the shareholders on
, 1998. All share and per share amounts in the accompanying financial
statements have been adjusted to reflect the split.
F-17
<PAGE> 74
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS, OR ANY OTHER
PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 4
Risk Factors.............................. 7
Use of Proceeds........................... 19
Dividend Policy........................... 19
Capitalization............................ 20
Dilution.................................. 21
Selected Financial Data................... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 23
Business.................................. 28
Management................................ 41
Principal Stockholders.................... 48
Certain Relationships and Related
Transactions............................ 50
Description of Capital Stock.............. 51
Shares Eligible for Future Sale........... 53
Underwriting.............................. 54
Legal Matters............................. 55
Experts................................... 56
Additional Information.................... 56
Index to Financial Statements............. F-1
Report of Independent Auditors............ F-2
Financial Statements...................... F-4
</TABLE>
UNTIL , 1998 (25 CALENDAR DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF THE DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,000,000 SHARES
[ORTHOPAEDIC BIOSYSTEMS LTD, INC. LOGO]
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
CRUTTENDEN ROTH
I N C O R P O R A T E D
JOSEPHTHAL & CO. INC.
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Amended and Restated Articles of Incorporation eliminate
personal liability of directors, to the Company or its shareholders, for
monetary damages for breach of their fiduciary duty as a director except for
liability for any of the following: (1) any breach of the director's duty of
loyalty to the Company or its shareholders; (2) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law; (3)
authorizing the unlawful payment of a dividend or other distribution on the
Company's capital stock or the unlawful purchase of its capital stock (4) any
transaction from which the director derived an improper personal benefit or (5)
a violation of Arizona Revised Statutes, Sections 10-860, 10-861, or 10-862. In
addition, the Company's Amended and Restated Articles of Incorporation and its
Amended and Restated Bylaws provide that the Company may indemnify any and all
of its directors and officers, to the fullest extent permitted by the Arizona
Revised Statutes, as the same exists or may be amended from time to time against
claims and liabilities to which such persons may become subject. Arizona general
corporation law provides that indemnification is permissible only when the
director or officer acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interests of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe the
conduct was unlawful. Arizona general corporation law also precludes
indemnification in respect of any claim, issue or matter as to which an officer
or director has been adjudged to be liable to the corporation.
The Registrant has agreed to indemnify the Underwriters and their
controlling persons and the Underwriters have agreed to indemnify the Registrant
and its controlling persons, against certain liabilities including liabilities
under the Securities Act. Reference is made to the Underwriting Agreement filed
as part of Exhibit 1 hereto.
For information regarding the Registrant's undertaking to submit to
adjudication the issue of indemnification for violation of the securities laws,
see Item 28 hereof.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
registrant, will be substantially as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
- ------------------------------------------------------------ ----------
<S> <C>
SEC Registration Fee....................................... $ 5,937
*AMEX Filing Fee............................................ $ 37,500
*Blue Sky Fees and Expenses (including legal fees).......... $ 15,000
*Accounting Fees and Expenses............................... $ 100,000
*Legal Fees and Expenses.................................... $ 215,000
*Printing and Engraving..................................... $ 115,000
*Registrar and Transfer Agent's Fees........................ $ 5,000
*Underwriters' Non-Accountable Expense Allowance............ $ 450,000
*Miscellaneous Expenses..................................... $ 56,563
Total............................................. $1,000,000
==========
</TABLE>
- ---------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the preceding three years, the Company sold to accredited or
sophisticated investors Common Stock for cash at the price and during the
periods given: during the third quarter of 1996, 4,462 shares at an aggregate
offering price of $8,365; and during the fourth quarter of 1996, 10,000 shares
at an aggregate
II-1
<PAGE> 76
offering price of $30,000; during the first quarter of 1997, 20,668 shares at an
aggregate offering price of $33,500; during the second quarter of 1997, 62,668
shares at an aggregate offering price of $115,000; during the fourth quarter of
1997, 85,338 shares at an aggregate offering price of $160,000; and during the
second quarter of 1998, 6,668 shares at an aggregate offering price of $10,000.
In May 1997, the Company issued for cash 872,300 shares of Class A
Convertible Preferred Stock (the "Preferred Stock") to 14 accredited or
sophisticated investors at an aggregate offering price of $1,744,600. All
outstanding Preferred Stock is convertible into 581,541 shares of Common Stock.
During the period July 1995 through June 1998, the Company granted to
directors, executive officers, employees, advisors, and consultants 498,692
options to purchase Common Stock for an aggregate offering price of $1,368,500.
In March 1996, the Company sold for cash $90,000 principal amount of
14 1/2% subordinated promissory notes (the "Series A Notes") to three accredited
or sophisticated investors. In addition, the Company issued to the holders of
the Series A Notes warrants to purchase, in the aggregate, 10,002 shares of the
Company's Common Stock at an exercise price of $1.50 per share 3,334 of which
were exercised during the second quarter of 1997 and 6,668 of which were
exercised during the second quarter of 1998.
In November 1997, December 1997, and January 1998, the Company sold for
cash $900,000 principal amount of subordinated promissory notes (the "Series B
Notes") to eight accredited or sophisticated investors. Each note bears an
interest rate equal to 2% per annum in excess of the prime commercial lending
rate adjusted quarterly. The Notes mature on December 31, 1998. In addition, the
Company issued to the holders of the Series B Notes, warrants to purchase shares
of Preferred Stock which will be converted into warrants to purchase 300,003
shares of Common Stock upon the consummation of this Offering at an exercise of
$3.00 per share.
In May and July 1998, the Company sold for cash $300,000 principal amount
of Series B Notes. The notes bear interest at a rate equal to 4% per annum in
excess of the prime rate adjusted quarterly, and mature one year from the date
of issuance. No warrants were issued in connection with the notes.
All information above reflects a two-for-three reverse stock split to be
effected by the Company prior to the consummation of the Offering.
Each transaction described above was deemed exempt from registration under
the Securities Act pursuant to Section 4(2) of the Act regarding transactions
not involving in any public offering.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
1 *Form of Underwriting Agreement by and between the
Representatives and the Company
3.1 Form of Amended and Restated Articles of Incorporation of
the Company (to be filed prior to consummation of the
Offering)
3.2 Amended and Restated Bylaws of the Company
4.1 Form of Amended and Restated Articles of Incorporation of
the Company (filed as Exhibit 3.1)
4.2 *Form of Common Stock certificate
4.3 Form of Stock Purchase Warrant Certificate
4.4 Agreement dated as of May 5, 1997, by and among the Company
and certain investors in the Company regarding Registrations
Rights
5 *Opinion of Snell & Wilmer L.L.P. regarding the legality of
the common stock being registered
10.1 Exclusive Marketing and Distribution Agreement, dated as of
August 1, 1996, by and between the Company and Mentor
Urology Corporation+
10.2 International Distribution Agreement, dated as of August 4,
1997, between the Company and Mizuho Medical Co., Ltd.
10.3 Agreement dated as of January 1, 1998, by and between the
Company and Imcor, Inc.+
</TABLE>
II-2
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.4 Form of Series B Promissory Note
10.5 Series B Promissory Note, dated May 4, 1998, by and between
the Company and D. Ronald Yagoda
10.6 Employment Agreement by and between the Company and James W.
Hart
10.7 Employment Agreement by and between the Company and D.
Ronald Yagoda
10.8 Employment Agreement by and between the Company and Gary
Scheel
10.9 Employment Agreement by and between the Company and Jeffry
Skiba
10.10 1998 Stock Incentive Plan
10.11 1998 Director Option Plan
16 Letter on change in certifying accountant
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2 Consent of Ernst & Young LLP, independent auditors
23.3 *Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
27 Financial data schedule
27.1 Financial data schedule
</TABLE>
- ---------------
* To be filed by amendment.
+ Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the Commission without the Mark pursuant to
the Company's Application Requesting Confidential Treatment under Rule 406
under the Securities Act.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denomination and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(b) Under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Phoenix, State of Arizona, on July 20,
1998.
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
By: /s/ D. RONALD YAGODA
------------------------------------
D. Ronald Yagoda
Chairman and Chief Executive Officer
Each person whose signature appears below hereby constitutes and appoints
D. Ronald Yagoda and James W. Hart, and each of them, as his or her
attorney-in-fact and agent, with the power of substitutions, for and in the
name, place, and stead of the undersigned, to sign any and all amendments to
this Registration Statement, and to file the same with exhibits thereto, and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact or
his substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
<C> <S> <C>
/s/ D. RONALD YAGODA Chairman, Chief Executive Officer July 20, 1998
- ------------------------------------------------ (Principal executive officer)
D. Ronald Yagoda
/s/ JENNIFER L. GUELICH Vice President and Chief Financial July 20, 1998
- ------------------------------------------------ Officer (Principal financial and
Jennifer L. Guelich accounting officer)
* Director July 20, 1998
- ------------------------------------------------
Steven P. Davis
* Director July 20, 1998
- ------------------------------------------------
Michael D. Greenbaum
* Director July 20, 1998
- ------------------------------------------------
Robert F. Lusch, Ph.D.
* Director July 20, 1998
- ------------------------------------------------
Leslie S. Matthews, M.D.
* Director July 20, 1998
- ------------------------------------------------
Gary A. Peterson
* Director July 20, 1998
- ------------------------------------------------
Richard Previte
* Director July 20, 1998
- ------------------------------------------------
Kerry Zang, D.P.M.
*By: /s/ D. RONALD YAGODA
- ------------------------------------------------
D. Ronald Yagoda
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
1 *Form of Underwriting Agreement by and between the
Representatives and the Company
3.1 Form of Amended and Restated Articles of Incorporation of
the Company (to be filed prior to consummation of the
Offering)
3.2 Amended and Restated Bylaws of the Company
4.1 Form of Amended and Restated Articles of Incorporation of
the Company (filed as Exhibit 3.1)
4.2 *Form of Common Stock certificate
4.3 Form of Stock Purchase Warrant Certificate
4.4 Agreement dated as of May 5, 1997, by and among the Company
and certain investors in the Company regarding Registrations
Rights
5 *Opinion of Snell & Wilmer L.L.P. regarding the legality of
the common stock being registered
10.1 Exclusive Marketing and Distribution Agreement, dated as of
August 1, 1996, by and between the Company and Mentor
Urology Corporation+
10.2 International Distribution Agreement, dated as of August 4,
1997, between the Company and Mizuho Medical Co., Ltd.
10.3 Agreement dated as of January 1, 1998, by and between the
Company and Imcor, Inc.+
10.4 Form of Series B Promissory Note
10.5 Series B Promissory Note, dated May 4, 1998, by and between
the Company and D. Ronald Yagoda
10.6 Employment Agreement by and between the Company and James W.
Hart
10.7 Employment Agreement by and between the Company and D.
Ronald Yagoda
10.8 Employment Agreement by and between the Company and Gary
Scheel
10.9 Employment Agreement by and between the Company and Jeffry
Skiba
10.10 1998 Stock Incentive Plan
10.11 1998 Director Option Plan
16 Letter on change in certifying accountant
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2 Consent of Ernst & Young LLP, independent auditors
23.3 *Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
27 Financial data schedule
27.1 Financial data schedule
</TABLE>
- ---------------
* To be filed by amendment.
+ Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the Commission without the Mark pursuant to
the Company's Application Requesting Confidential Treatment under Rule 406
under the Securities Act.
II-5
<PAGE> 1
Exhibit 3.1
STATE OF ARIZONA
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
Pursuant to the provisions of Arizona Revised Statutes, Section 10-1003
and Section 10-1007, the undersigned corporation, pursuant to a resolution duly
adopted by its Board of Directors and adopted by the shareholders of the
corporation in the manner prescribed by law, hereby adopts the amended and
restated articles of incorporation as follows:
FIRST: The name of the corporation is Orthopaedic Biosystems Ltd., Inc.
SECOND: The purposes for which the corporation is organized include the
transaction of any or all lawful business for which corporations may be
incorporated under Chapter 1 of Title 10, Arizona Revised Statutes, at any time.
The character of business which the corporation initially intends actually to
conduct in the State of Arizona is the manufacture, distribution and sale of
medical products consisting primarily of orthopaedic fixation and implant
devices.
THIRD: The aggregate number of shares that the Corporation shall have
authority to issue is 25,000,000 shares, of which 20,000,000 shares shall be
Common Stock, no par value, and 5,000,000 shares shall be Preferred Stock, no
par value.
On the effective date of these Amended and Restated Articles of
Incorporation (the "Effective Date"), the Common Stock of the corporation will
be split on a two-for-three basis so that each share of Common Stock issued and
outstanding immediately prior to the Effective Date shall automatically be
converted into and reconstituted as two-thirds of a share of Common Stock (the
"Reverse Split"). Each holder of a certificate or certificates which immediately
prior to the Effective Date represented outstanding shares of Common Stock (the
"Old Common Stock") shall be entitled to receive upon surrender of such
certificates a certificate or certificates representing the number of shares of
Common Stock (the "New Common Stock") into which and for which the shares of the
Old Common Stock are split under the terms hereof. From and after the Effective
Date, Old Common Stock certificates shall represent only the right to receive
New Common Stock certificates. No fractional shares shall be issued by the
Corporation as a result of the Reverse Split. In lieu thereof, each shareholder
whose shares of Common Stock are not evenly divisible will receive one
additional share of Common Stock for the fractional share that such shareholder
would otherwise be entitled to as a result of the Reverse Split.
Until automatic conversion simultaneously with the payment to the
Corporation of the purchase price of the Corporation's Common Shares sold by the
Corporation in its first underwritten public offering, made pursuant to a
registration statement filed on Form S-1 (or on such other form for which the
Corporation and the offering qualify), all Preferred Stock is designated Class A
<PAGE> 2
Convertible Preferred Stock, the rights, preferences, restrictions and other
matters relating to which are as follows:
1. Dividends. There are no dividends (cumulative or non-cumulative) on
Class A Convertible Preferred Stock, however, Class A Convertible Preferred
Stock shall be entitled to all dividends declared on Common Stock on an
as-converted basis, as if the Class A Convertible Preferred Stock had been
converted into Common Stock.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of this Corporation, either voluntary or involuntary, the holders of Class A
Convertible Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets of this Corporation to the
holders of Common Stock by reason of their ownership thereof, an amount per
share equal to $2.00 for each outstanding share of Class A Convertible Preferred
Stock before any payment shall be made on any assets distributed to the holders
of Common Stock. If, upon the occurrence of such event, the assets and funds
thus distributed among the holders of the full aforesaid preferential amounts,
then, the entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the Class A
Convertible Preferred Stock in proportion to the amount of such stock owned by
each such holder.
(b) Upon the completion of the distribution required by
Subparagraph (a) of this Section 2, if assets remain in this Corporation, the
holders of the Common Stock of this Corporation shall next receive an amount
equal to $1.50 per Share before any further payment be made on any assets
distributed to the holders of the Class A Convertible Preferred Stock.
(c) After the distributions described in Subparagraphs (1) and
(b) above have been paid, the remaining assets of the Corporation available for
distribution to Shareholders shall be distributed among the holders of Class A
Convertible Preferred Stock and Common Stock pro rata based on the number of
shares of Common Stock held by each (assuming full conversion of all such Class
A Convertible Preferred Stock).
(d) The liquidation preferences set forth in this Section 2
shall cease to apply if the Corporation (i) sells additional equity securities
in a private financing or financings in the aggregate amount of $3,000,000 or
more, or (ii) receives payment of the purchase price for the Corporation's
Common Stock sold by the Corporation in its first underwritten public offering
("IPO"), as defined more completely in Section 3 of this Article Third,
whichever shall first occur.
3. Automatic Conversion Upon Public Offering. Each share (or warrant to
purchase shares) of Class A Convertible Preferred Stock shall convert,
automatically and without any action on the part of the holder thereof, into
that number of fully paid and non-assessable Common Shares
2
<PAGE> 3
(or warrants to purchase Common Shares) for each share (or warrant to purchase
shares) of Class A Convertible Preferred Stock as determined in accordance with
Section 5 below, simultaneously with the payment to the Corporation of the
purchase price of the Corporation's Common Shares sold by the Corporation in its
first underwritten public offering, made pursuant to a registration statement
filed on Form S-1 (or on such other form for which the Corporation and the
offering qualify) with the Securities and Exchange Commission under the
Securities Act of 1933, as amended. The Corporation shall provide prior written
notice to each holder of Class A Convertible Preferred Stock of its intention to
undertake a public offering of its Common Stock. Such notice shall include a
statement notifying the holder thereof of the automatic conversion of the Class
A Convertible Preferred Stock upon consummation of the public offering. The
Corporation may require that the holder of Class A Convertible Preferred Stock
surrender the certificates evidencing such holder's Class A Convertible
Preferred Stock prior to delivery to the holder of certificates evidencing the
Common Shares issued upon the foregoing automatic conversion. Notwithstanding
the foregoing, no automatic conversion shall occur unless (i) the Corporation
sells $10,000,000 or more of its Common Stock at a price of $4.00 or more per
share in the IPO described above, or (ii) more than 50% of the Class A
Convertible Preferred stock is converted into Common Stock in accordance with
the optional conversion rights conferred under Section 4 of this Article Third.
4. Conversion at Option of Holders. Holders of Class A Convertible
Preferred Stock may, at their option, upon surrender of the certificates
therefor, convert any or all of their shares of Class A Convertible Preferred
Stock into fully paid and non-assessable Common Shares at any time after
issuance thereof. Each share of Class A Convertible Preferred Stock shall be
convertible at the office of the Corporation or the office of any transfer agent
designated by the Corporation into that number of fully paid and non-assessable
Common Shares (calculated as to each conversion to the nearest 1/100th of a
share) as shall be equal to the number obtained by dividing the Issuance Price
(as hereinafter defined) per share of Class A Convertible Preferred Stock by the
Conversion Price computed as hereinafter set forth (the "Conversion Price") in
effect of the Class A Convertible Preferred Stock. The "Issuance Price" for the
Class A Convertible Preferred Stock is $2.00 per share and the initial
Conversion Price of the Class A Convertible Preferred Stock is $2.00. The
Conversion Price is subject to adjustment from time to time as provided in
Section 5 hereof.
No fractional Common Shares shall be issued upon conversion of the
Class A Convertible Preferred Stock, but, in lieu of any fraction of Common
Shares which would otherwise be issuable in respect of the aggregate number of
such shares surrendered for conversion at one time by the same holder, the
Corporation shall pay in cash an amount equal to the product of (a) the fair
market value of one common share on such day as determined in good faith by the
Board of Directors of the Corporation, and (b) such fraction of one share.
A number of authorized but unissued Common Shares sufficient to provide
for the conversion of the Class A Convertible Preferred Stock outstanding upon
the basis hereinbefore provided shall at all times be reserved by the
Corporation, free from preemptive rights, for such conversion. If the
Corporation shall issue any securities or make any change in its capital
structure which would change the number of Common Shares into which each share
of the Class A
3
<PAGE> 4
Convertible Preferred Stock shall be convertible as herein provided, the
Corporation shall at the same time also make proper provision so that thereafter
there shall be a sufficient number of Common Shares authorized and reserved,
free from preemptive rights, for conversion of the outstanding Class A
Convertible Preferred Stock on the new basis. The Corporation shall comply with
all securities laws regulating the offer and delivery of Common Shares upon
conversion of the Class A Convertible Preferred Stock and shall use its best
efforts to list such shares on each national securities exchange on which the
Common Shares are listed or to have such shares admitted for quotation on the
NASDAQ National Market System if the Common Shares are admitted for quotation
thereon.
5. Adjustments to Conversion Price. Notwithstanding anything in this
Section 5 to the contrary, no change in the Conversion Price shall be made until
the cumulative effect of the adjustments called for by this Section 5, since the
date of the last change in the Conversion Price, would change the Conversion
Price by more than 1%. However, once the cumulative effect would result in such
a change, then the Conversion Price shall be changed to reflect all adjustments
called for by this Section 5 and not previously made. Subject to the foregoing,
the Conversion Price shall be adjusted from time to time as follows:
(a) In the event of any consolidation of merger of the
Corporation with any other corporation (other than a wholly owned
subsidiary of the Corporation), or in case of any sale or transfer of
all or substantially all of the assets of the Corporation, or in case
of any share exchange pursuant to which all of the outstanding Common
Shares are converted into other securities or property, the Corporation
shall, prior to or at the time of such transaction, make appropriate
provision or cause appropriate provision to be made so that holders of
each share of Class A Convertible Preferred Stock then outstanding
shall have the right thereafter to convert such shares of Class A
Convertible Preferred Stock in the kind and amount of shares of stock
and other securities and property receivable upon such consolidation,
merger, sale, transfer or share exchange. If in connection with any
such consolidation, merger, sale, transfer or share exchange, each
holder of Common Shares is entitled to elect to receive either
securities, cash or other assets upon completion of such transaction,
the Corporation shall provide or cause to be provided to each holder of
Class A Convertible Preferred Stock the right to elect the securities,
cash or other assets into which the Class A Convertible Preferred Stock
held by such holder shall be convertible after completion of any such
transaction on the same terms and subject to the same conditions
applicable to holders of the Common Shares (including without
limitation, notice of the right to elect, limitations on the period in
which such election shall be made and the effect of failing to exercise
the election).
(b) In the event that the Corporation shall (i) pay a dividend
or make a distribution on its Common Shares in shares of its capital
stock, (ii) subdivide its outstanding Common Shares into a greater
number of shares, (iii) combine the outstanding Common Shares into a
smaller number of shares, or (iv) issue by reclassification of its
Common Shares any shares of its capital stock, then in each such case
the Conversion Price in effect immediately prior thereto shall be
proportionately adjusted so that the holder of any Class
4
<PAGE> 5
A Convertible Preferred Stock thereafter surrendered for conversion
shall be entitled to receive, to the extent permitted by applicable
law, the number and kind of shares of capital stock of the Corporation
which such holder would have owned or have been entitled to receive
after the happening of such event had such Class A Convertible
Preferred Stock been converted immediately prior to the record date for
such event (or if no record date is established in connection with such
event, the effective date for such action). An adjustment pursuant to
this Subparagraph (b) shall become effective immediately after the
record date in the case of a stock dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or reclassification.
(c) In the event that the Corporation shall at any time or
from time to time prior to April 30, 1999 (i) issue or sell any of its
Common Shares, or any security convertible into Common Shares,
including the sale by the Corporation of any Common Shares in an
underwritten public offering described in Section 3 above, or (ii)
issue or sell any right or option to purchase Common Shares or any
security convertible into Common Shares, for a consideration per share
less than the Conversion Price for any of the Class A Convertible
Preferred Stock in effect immediately prior to the time of such
issuance or sale, then, forthwith upon such issuance or sale, the
Conversion Price for the Class A Convertible Preferred Stock shall be
reduced to the price at which such Common Shares are being issued or
sold by the Corporation or the price at which such other securities are
exercisable or convertible into Common Shares of the Corporation. Upon
each adjustment of the Conversion Price, the holder of Class A
Convertible Preferred Stock shall thereafter, or, in the event of an
automatic conversion pursuant to Section 3, prior to such conversion,
be entitled to acquire, at the Conversion Price resulting from such
adjustment, the number of shares obtained by multiplying the Conversion
Price in effect immediately prior to such adjustment by the number of
shares such holder may acquire pursuant hereto immediately prior to
such adjustment and dividing the product thereof by the Conversion
Price resulting from such adjustment. Notwithstanding the foregoing,
the conversion of any declared and unpaid dividends on the Class A
Convertible Preferred Stock shall be governed by the terms set forth in
Section 5 hereof. This subparagraph (c) shall be of no force and effect
with respect to any transaction that takes place after April 30, 1999.
(d) All calculations hereunder shall be made to the nearest
cent or to the nearest 1/100th of a share, as the case may be.
(e) In the event that at any time, as a result of an
adjustment made pursuant to subparagraph (a) or (b) above, the holder
of any Class A Convertible Preferred Stock thereafter surrendered for
conversion shall become entitled to receive securities, cash or assets
other than Common Shares, the number or amount of such securities or
property so receivable upon conversion shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to he Common Shares
contained in Subparagraphs (a) through (d) above.
5
<PAGE> 6
Except as otherwise provided above in this Section 5, no adjustment in the
Conversion Price shall be made for share distributions or dividends theretofore
declared and paid or payable on the Common Shares of the Corporation.
The anti-dilution provisions of this Section 5 may be waived or modified
by the affirmative vote of the holders (acting together as a class) of all of
the then-outstanding shares of Class A Convertible Preferred Stock, provided,
however, that such holders may not modify the provisions of this Section 5 in
any manner that would adversely affect the Corporation, without the written
consent of the Corporation.
Whenever the Corporation shall propose to take any of the actions
specified in Subparagraphs (a), (b) or (c) of the first paragraph of this
Section 5 which would result in any adjustment in the Conversion Price, the
Corporation shall cause a notice to be mailed at least thirty (30) days prior to
the date on which the books of the Corporation will close or on which a record
will be taken for such action to the holders of record of the outstanding Class
A Convertible Preferred Stock on the date of such notice. Such notice shall
specify the action proposed to be taken by the Corporation and the date as of
which holders of record of the Common Shares shall participate in any such
actions or be entitled to exchange their Common Shares for securities or other
property, as the case may be. Failure by the Corporation to give such notice or
any defect in such notice shall not affect the validity of the transaction.
Upon any adjustment of the Conversion Price of the Class A Convertible
Preferred Stock, the Corporation shall give written notice thereof, by
first-class mail, postage prepaid, addressed to the registered holders of the
Class A Convertible Preferred Stock, at the addresses of such holders as shown
on the books of the Corporation, which notice shall state the Conversion Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares receivable at such price upon the conversion of the Class A
Convertible Preferred Stock, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
6. Voting Rights. The holders of Class A Convertible Preferred Stock shall
be entitled to notice of and to attend all meetings of shareholders of the
Corporation and shall be entitled to vote together with the holders of Common
Shares, voting as a single class, on all matters presented to the Corporation's
shareholders for approval. The holders of Class A Convertible Preferred Stock
shall be entitled to the number of votes for each share of Class A Convertible
Preferred Stock held equal to the number of shares of Common Stock into which
such share of Class A Convertible Preferred Stock is then convertible as
determined in accordance with Section 5. The holders of the Class A Convertible
Preferred Stock shall only be entitled to vote as a class or as a distinct
voting group when such rights are mandated by the Arizona Business Corporation
act or as specifically provided herein.
Following automatic conversion of the Preferred Stock simultaneously with
the payment to the Corporation of the purchase price of the Corporation's Common
Shares sold by the Corporation in its first underwritten public offering, made
pursuant to a registration statement filed on Form S-1
6
<PAGE> 7
(or on such other form for which the Corporation and the offering qualify), the
rights, preferences, restrictions and other matters relating to the Preferred
Stock are as follows:
(a) The shares of Preferred Stock may be issued from time to time in one
or more series, each of which series may have voting powers, full or
limited, or no voting powers, and such designations, preferences and
relative, participating, optional or other special rights and
qualifications, limitations and restrictions, as shall be stated and
expressed in the resolution or resolutions adopted providing for the
issuance of such Preferred Stock of each such series adopted by the Board
of Directors of the Corporation, and authority to adopt such resolutions
stating and expressing any or all of the foregoing be and hereby is
expressly vested in the Board of Directors of the Corporation.
(b) In particular and without limitation of the foregoing, the Board of
Directors may establish, designate and fix the following with respect to
each such series of Preferred Stock: the voting rights, if any, of the
stock of any such series which may, without limiting the generality of the
foregoing, include: (i) the right to more or less than one vote per share
on any or all matters voted upon by the stockholders; and (ii) the right
to vote, as a series by itself or together with other series of Preferred
Stock or together with all series of Preferred Stock as a class, upon such
matters, under such circumstances and upon such conditions as the Board of
Directors may fix, including, without limitation, the right, voting as a
series by itself or together with other series of Preferred Stock or
together with all series of Preferred Stock as a class, to elect one or
more directors of the Corporation; (iii) the dividend rights, if any, of
holders of stock of each such series; (iv) the terms on which stock of
each such series may be redeemed, if the stock of such series is to be
redeemable; (v) the rights of holders of stock of each such series upon
dissolution or any distribution of assets; (vi) the terms or amounts of
the sinking fund, if any, to be provided for the purchase or redemption of
stock of each such series; (vii) the terms upon which the stock of each
such series may be converted into or exchanged for stock of any other
class or classes or any one or more series of Preferred Stock, if the
stock of such series is to be convertible or exchangeable; and (viii) such
other designations, preferences and relative, participating, optional or
other special rights and qualifications, limitations or restrictions
thereof, as shall be desired to be so fixed.
(c) The number of authorized shares of Preferred Stock may be increased or
decreased (but not below the number of shares thereof then outstanding or
reserved for issuance) by the affirmative vote of the holders of a
majority of the then-outstanding shares of Common Stock, without a vote of
the holders of the Preferred Stock, or of any series thereof, unless a
vote of any such holders is required pursuant to the certificate or
certificates establishing the series of Preferred Stock.
FOURTH: The name and address of the statutory agent of the corporation is
General Investment Company, 400 E. Van Buren, One Arizona Center, 19th Floor,
Phoenix, AZ 85004. The address of the place of business of the corporation is
15990 N. Greenway-Hayden Loop, Suite 100, Scottsdale, Arizona 85260.
7
<PAGE> 8
FIFTH: The directors, other than those who may be elected by the holders
of any series of Preferred Stock then outstanding, shall be divided into three
classes effective upon the filing hereof, with the term of the first class to
expire at the 1999 annual meeting of stockholders, the term of office of the
second class to expire at the 2000 annual meeting of stockholders and the term
of office of the third class to expire at the 2001 annual meeting of
stockholders. At each annual meeting of stockholders following such initial
classification and election, directors elected to succeed those directors whose
terms expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election.
1. Removal of Directors. Notwithstanding any other provision of these
Articles of Incorporation or the Bylaws of the Corporation (and notwithstanding
the fact that some lesser percentage may be specified by law, these Articles of
Incorporation or the Bylaws of the Corporation), and subject to the rights of
the holders of any series of Preferred Stock then outstanding, any director, or
the entire Board of Directors, may be removed from office at any time but only
for cause by the affirmative vote of the holders of a majority of the voting
power of all of the shares of the Corporation entitled to vote generally in the
election of directors, voting together as a single class.
2. Current Board of Directors. The number of directors constituting the
current Board of Directors of the Corporation shall not be less than five (5)
nor more than ten (10). The names and addresses of the persons who are the
current directors until their successors be elected and qualified are:
Name Address
- ---- -------
CLASS III
Steven P. Davis 264 Cedar Lane
Glencoe, IL 60022
D. Ronald Yagoda 10040 East Happy Valley Road, #917
Scottsdale, AZ 85255
Kerry Zang, D.P.M. Footcare Physicians
736 N. Country Club
Mesa, AZ 85201
CLASS II
Michael D. Greenbaum 5315 Paradise Canyon Road
Paradise Valley, AZ 85253
8
<PAGE> 9
Robert F. Lusch 2433 Smoking Oak Road
Norman, OK 73072
Richard Previte Advanced Micro Devices
Mail Stop 54, P.O. Box 3453
Sunnyvale, CA 94088-3453
CLASS I
Leslie S. Matthews Department of Orthopaedics
Union Memorial Hospital
3333 N. Calvert Street, #400
Baltimore, MD 21218
Gary Peterson Baton Development, Inc.
10040 E. Happy Valley Road, Lot 37
Scottsdale, AZ 85255
SEVENTH: The Corporation may create and issue rights or options (without
limitation) to directors, officers, or employees or the Corporation or of any
affiliate thereof, entitling the holders thereof to purchase from the
Corporation shares of any class or classes, and no shareholder approval or
ratification thereof shall be required.
EIGHTH: The Corporation shall have the right to purchase, directly or
indirectly, its own shares to the extent of the unreserved and unrestricted
earned and capital surplus available therefor.
NINTH: The Board of Directors may, from time to time, distribute on a pro
rata basis to its shareholders out of capital surplus of the Corporation a
portion of its assets, in cash or property, and no shareholder authorization
shall be required.
TENTH: A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability for any of the following:
(a) any breach of the director's duty of loyalty to the Corporation or its
shareholders,
(b) acts or omissions which are not in good faith or which involve
intentional misconduct or a knowing violation of law,
(c) authorizing the unlawful payment of a dividend or other distribution
on the Corporation's capital stock or the unlawful purchase of its capital
stock,
(d) any transaction from which the director derived an improper personal
benefit, or
9
<PAGE> 10
(e) a violation of Arizona Revised Statutes, Sections 10-860, 10-861 or
10-862.
Any repeal or modification of the foregoing paragraph shall not adversely
affect any right or protection of a director of the corporation existing
hereunder with respect to any act or omission occurring prior to or at the time
of such repeal or modification.
ELEVENTH: The Corporation shall indemnify its directors and officers to
the fullest extent authorized or permitted by Arizona Revised Statutes, as the
same exists or may hereafter be amended, and such right to indemnification shall
continue as to a person who has ceased to be a director or officer of the
Corporation and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except for proceedings to enforce
rights to indemnification, the Corporation shall not be obligated to indemnify
any director of officer (or his or her heirs, executors or administrators) in
connection with a proceeding (or part thereof) initiated by such person unless
such proceeding (or part thereof) was authorized or consented to by the Board of
Directors of the Corporation. The right to indemnification conferred in this
Article shall include the right to receive from the Corporation advances in
respect of the expenses incurred in defending or otherwise participating in any
proceeding in advance of its final disposition, subject to any written
undertaking to repay such advances that may be required by Arizona Revised
Statutes.
1. Additional Rights to Indemnification. The Corporation may, to the
extent authorized from time to time by the Board of Directors, provide rights to
indemnification and to the advancement of expenses to employees and agents of
the Corporation who are not directors or officers similar to those conferred in
this Article to directors and officers of the Corporation. The rights to
indemnification and to the advancement of expenses conferred in this Article
shall not be exclusive of any other right which any person may have or hereafter
acquire under these Articles of Incorporation, the Bylaws, any statute
agreement, vote of stockholders or disinterested directors, or otherwise.
2. Repeal. Any repeal or modification of this Article by the stockholders
of the Corporation shall not adversely affect any rights to indemnification and
advancement of expenses of a director or officer of the Corporation existing
pursuant to this Article with respect to any acts or omissions occurring prior
to such repeal or modification.
3. Insurance. The Corporation shall have the power to purchase and
maintain insurance, at its expense, to protect itself and any director, officer,
employee or agent of the Corporation or another corporation, partnership, joint
venture, trust or other enterprise (including an employee benefit plan) against
any expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under the
Arizona Revised Statutes.
TWELFTH: The Corporation elects not to be subject to the control share
acquisition provisions set forth in Arizona Revised Statutes, Section 10-2721.
10
<PAGE> 11
The amended and restated articles of incorporation set forth above
correctly set forth the provisions of the articles of incorporation as
heretofore amended and as amended hereby, and supersedes the original articles
of incorporation and all amendments thereto.
Dated: July __, 1998.
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
By:___________________________________
Chairman/Chief Executive Officer
ATTEST:
____________________________________
Secretary
11
<PAGE> 1
Exhibit 3.2
AMENDED AND RESTATED
BYLAWS
OF
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
I. CORPORATION ARTICLES
1.01 References to Articles. Any reference herein made to the
corporation's articles will be deemed to refer to its articles of incorporation
and all amendments thereto as at any given time on file with the Arizona
Corporation Commission, together with any and all certificates filed by the
corporation with the Arizona Corporation Commission (or any successor to its
functions) pursuant to applicable law.
1.02 Seniority. The articles and Title 10 of the Arizona Revised
Statutes will in all respects be considered senior and superior to these bylaws,
with any inconsistency to be resolved in favor of the articles and such law, and
with these bylaws to be deemed automatically amended from time to time to
eliminate any such inconsistency which may then exist.
II. CORPORATION OFFICES
2.01 Known Place of Business. The known place of business of the
corporation in the State of Arizona shall be the office of its statutory agent
unless otherwise designated in the articles or in a written statement or
document duly executed and filed with the Arizona Corporation Commission. The
corporation may have such other offices, either within or without the State of
Arizona, as the Board of Directors may designate or as the business of the
corporation may require from time to time.
2.02 Change Thereof. The Board of Directors may change the
corporation's known place of business or its statutory agent from time to time
by filing a statement with the Arizona Corporation Commission pursuant to
applicable law.
III. SHAREHOLDERS
3.01 Annual Meetings. Each annual meeting of the shareholders is to
be held on the such date, time and place as determined by the Board of Directors
or, in the absence of action by the Board, as set forth in the notice given, or
waiver signed, with respect to such meeting pursuant to Section 3.04 below. At
the annual meeting, shareholders shall elect a Board of Directors and transact
such other business as may be properly brought before the meeting. If any annual
meeting is for any reason not held on the date determined as aforesaid, a
deferred annual meeting may thereafter be called and held in lieu thereof, at
which the same proceedings may be conducted. Any
<PAGE> 2
Director elected at any annual meeting, deferred annual meeting, or special
meeting will continue in office until the election of his or her successor,
subject to his or her earlier resignation pursuant to Section 7.01 below.
3.02 Special Meetings. Special meetings of the shareholders may be
held whenever and wherever called for by the Chairman of the Board, the
President, or the Board of Directors.
3.03 Notice of Shareholder Nominations and Business.
(a) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be considered by the
shareholders may be made at an annual meeting of shareholders: (1) pursuant to
the Corporation's notice of meeting; (ii) by or at the direction of the Board of
Directors; or (iii) by any shareholder of the Corporation who was a shareholder
of record at the time of giving of notice provided for in this Section, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Section. For nominations or other business to be properly brought
before an annual meeting by a shareholder pursuant to this Section, the
shareholder must have given timely notice thereof in writing to the Secretary of
the Corporation, and such business must be a proper subject for shareholder
action under Title 10 of the Arizona Revised Statutes. To be timely, a
shareholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not less than 60 days nor more than 90 days
prior to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is more than 30
days before or more than 60 days after such anniversary date, notice by the
shareholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting, and not later than the close of business on the
later of the 60th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made.
(b) Nominations of persons for election to the Board of Directors
may be made at a special meeting of shareholders at which directors are to be
elected pursuant to the Corporation's notice of meeting: (i) by or at the
direction of the Board of Directors; or (ii) by any shareholder of the
Corporation who is a shareholder of record at the time of giving of notice
provided for in this Section, who shall be entitled to vote at the meeting and
who complies with the notice procedures set forth in this Section. Nominations
by shareholders of persons for election to the Board of Directors may be made at
such a special meeting of shareholders if the shareholder's notice required by
this section shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the 90th day prior to such special
meeting and not later than the close of business on the later of the 60th day
prior to such special meeting or the 10th day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting.
(c) Any shareholder's notice required by this Section shall set
forth: (i) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, (A) the name, age, business address and
residence address of such person, (B) the principal occupation or
-2-
<PAGE> 3
employment of such person and (C) the class and number of shares of the
Corporation owned beneficially by such person and shall include such person's
written consent to being named as a nominee and to serving as a director if
elected; (ii) as to any other business that the shareholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such shareholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (iii) as to the
shareholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal, is made (A) the name and address of such
shareholder, as they appear on the Corporation's books, and of such beneficial
owner, and (B) the class and number of shares of the Corporation which are owned
beneficially and of record by such shareholder and such beneficial owner.
(d) Only such persons who are nominated in accordance with the
procedures set forth in this Section shall be eligible for election as directors
at any meeting of shareholders. Only such business shall be conducted at a
meeting of shareholders as shall have been brought before the meeting in
accordance with procedures set forth in this Section. The chairman of the
meeting shall have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made in accordance with
the procedures set forth in this Section and, if any proposed nomination or
business is not in compliance with this Section, to declare that such defective
proposal shall be disregarded.
(e) For purposes of this Section, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Securities Exchange Act of 1934, as amended, the ("Exchange
Act").
(f) Notwithstanding the foregoing provisions of this Section, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section. Nothing in this Section shall be deemed to affect any
rights of shareholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
3.04 Notices. Not less than ten (10) nor more than sixty (60) days
(inclusive of the date of meeting) before the date of any meeting of the
shareholders and at the direction of the person or persons calling the meeting,
the Secretary of the corporation shall cause a written notice setting forth the
time, date, place, and general purposes of the meeting to be personally
delivered or deposited in the mail, with first class or airmail postage prepaid,
addressed to each shareholder of record at his, her, or its last address as it
appears on the corporation's records on the applicable record date. Any
shareholder may waive call or notice of any annual, deferred annual, or special
meeting (and any adjournment thereof) at any time before, during, or after it is
held. Attendance of a shareholder at any such meeting in person or by proxy will
automatically evidence his, her, or its waiver of call and notice of such
meeting (and any adjournment thereof) unless such shareholder or
-3-
<PAGE> 4
such shareholder's proxy is attending the meeting for the express purpose of
objecting to the transaction of business because the meeting has not been
properly called or noticed.
3.05 Shareholders of Record. For each meeting, or consent to
corporate action without a meeting, of shareholders (and at any adjournment of
such meeting), or in order to make a determination of shareholders for
determining those shareholders entitled to receive payment of any dividend, or
for any other lawful action, the Board of Directors may fix in advance a record
date, which shall not be more than seventy (70) nor less than ten (10) days
prior to the date of such meeting or other action. If no record date is fixed by
the Board of Directors for determining shareholders entitled to notice of, and
to vote at, a meeting of shareholders, the record date shall be at four o'clock
in the afternoon on the day before the day on which notice is given, or, if
notice is waived, at the commencement of the meeting. If no record date is fixed
for determining shareholders entitled to express written consent to corporate
action without a meeting, the record date shall be the time of the day on which
the first written consent is served upon an officer or Director of the
corporation. A determination of shareholders of record entitled to notice of,
and to vote at, a meeting of shareholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting, and further provided that the adjournment or
adjournments of any such meeting do not exceed thirty (30) days in the
aggregate.
3.06 Shareholder Record. The officer or agent having charge of the
stock ledger books for the corporation shall make, at least ten (10) days before
every meeting of shareholders, a complete record of the shareholders entitled to
vote at the meeting (and at any adjournment thereof), arranged in alphabetical
order, showing the address and the number of shares registered in the name of
each shareholder. Such record shall be produced and kept open (i) at the office
of the corporation prior to the time of the meeting, and (ii) at the time and
place of the meeting; such record shall be subject to the inspection of any
shareholder during such times for any purpose germane to the meeting.
3.07 Proxies. Any shareholder entitled to vote thereat may vote by
proxy at any meeting of the shareholders (and at any adjournment thereof) that
is specified in such proxy, provided that such shareholder's proxy is executed
in writing by such shareholder or such shareholder's duly authorized
attorney-in-fact. No proxy shall be valid after eleven months from the date of
its execution, unless otherwise specifically provided therein. The burden of
proving the validity of any undated, irrevocable, or otherwise contested proxy
at a meeting of the shareholders will rest with the person seeking to exercise
the same. A facsimile appearing to have been transmitted by a shareholder or by
such shareholder's duly authorized attorney-in-fact may be accepted as a
sufficiently written and executed proxy.
3.08 Voting. Except for the election of Directors (which will be
governed by cumulative voting pursuant to applicable law) and except as may
otherwise be required by the corporation's articles, these bylaws, or by
statute, each issued and outstanding share of capital stock of the corporation
(specifically excluding shares held in the treasury of the corporation)
represented at any meeting of the shareholders in person or by a proxy, will be
entitled to one vote on each matter
-4-
<PAGE> 5
submitted to a vote of the shareholders at such meeting. Unless otherwise
required by the corporation's articles or by applicable law, any question
submitted to the shareholders will be resolved by a majority of the votes cast
thereon, provided that if the shares then represented are less than required to
constitute a quorum, the affirmative vote must be such as would constitute a
majority if a quorum were present.
3.09 Quorum. At any meeting of the shareholders, the presence in
person or by proxy of the holders of a majority of the shares of the capital
stock of the corporation issued, outstanding, and entitled to vote at the
meeting will constitute a quorum of the shareholders for all purposes. In the
absence of a quorum, any meeting may be adjourned from time to time by its
chair, without notice other than by announcement at the meeting, until a quorum
is formed. At any such adjourned meeting at which a quorum is present, any
business may be transacted that might have been transacted at the meeting as
originally noticed. Once a quorum has been formed at any meeting, the
shareholders from time to time remaining in attendance may continue to transact
business until adjournment, notwithstanding the prior departure of enough
shareholders to leave less than a quorum. If an adjournment is for more than
thirty (30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the meeting.
3.10 Election Inspectors. The Board of Directors, in advance of any
meeting of the shareholders, may appoint an election inspector or inspectors to
act at such meeting (and at any adjournment thereof). If an election inspector
or inspectors are not so appointed, the chairman of the meeting may, or upon
request of any person entitled to vote at the meeting will, make such
appointment. If any person appointed as an inspector fails to appear or to act,
a substitute may be appointed by the chairman of the meeting. If appointed, the
election inspector or inspectors (acting through a majority of them if there be
more than one) will determine the number of shares outstanding, the
authenticity, validity, and effect of proxies and the number of shares
represented at the meeting in person and by proxy; will receive and count votes,
ballots, and consents and announce the results thereof; will hear and determine
all challenges and questions pertaining to proxies and voting; and, in general,
will perform such acts as may be proper to conduct elections and voting with
complete fairness to all shareholders. No such election inspector need be a
shareholder of the corporation.
3.11 Organization and Conduct of Meetings. Each meeting of the
shareholders will be called to order and thereafter chaired by the Chairman of
the Board of Directors if there is one; or, if not, or if the Chairman of the
Board is absent or so requests, then by the President; or if both the Chairman
of the Board and the President are unavailable, then by such other officer of
the corporation or such shareholder as may be appointed by the Board of
Directors, or if no such officer is designated, by a chair to be elected at the
meeting. The corporation's Secretary will act as secretary of each meeting of
the shareholders; in his or her absence, the chair of the meeting may appoint
any person (whether a shareholder or not) to act as secretary for the meeting.
The order of business shall be as determined by the chair of the meeting.
-5-
<PAGE> 6
3.12 Shareholder Approval or Ratification. The Board of Directors
may submit any contract or act for approval or ratification of the shareholders,
either at a duly constituted meeting of the shareholders or by unanimous written
consent to corporate action without a meeting pursuant to Section 3.14 below. If
any contract or act so submitted is approved or ratified by a majority of the
votes cast thereon at such meeting or by such unanimous written consent, the
same will be valid and as binding upon the corporation and all of its
shareholders as it would be if it were the act of its shareholders.
3.13 Informalities and Irregularities. All informalities or
irregularities in any call or notice of a meeting of the shareholders or in the
areas of credentials, proxies, quorums, voting, and similar matters, will be
deemed waived if no objection is made at the meeting.
3.14 Action by Shareholders Without a Meeting. Any action required
or permitted to be taken at a meeting of the shareholders of the corporation may
be taken without a meeting if a consent in writing, setting forth the action so
taken, is signed by all of the shareholders entitled to vote with respect to the
subject matter thereof. Such consent shall have the same effect as a unanimous
vote of the shareholders of the corporation at a meeting duly called and
noticed.
IV. BOARD OF DIRECTORS
4.01 Membership. The Board of Directors shall be comprised of not
less than two (2) nor more than ten (10) members who need not, but may, be
shareholders of the corporation. The directors shall be divided into three
classes, with the term of office of the first class to expire at the 1999 annual
meeting of shareholders, the term of office of the second class to expire at the
2000 annual meeting of shareholders and the term of office of the third class to
expire at the 2001 annual meeting of shareholders. At each annual meeting of
shareholders following such initial classification and election, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of shareholders
after their election. If the office of any director, member of a committee or
other officer becomes vacant, the remaining directors in office, though less
than a quorum, by a majority vote may appoint any qualified person to fill such
vacancy, who shall hold office for the unexpired term and until his successor
shall be duly chosen, or until his earlier resignation or removal.
4.02 Regular Meetings. A regular annual meeting of the Board of
Directors is to be held as soon as practicable after the adjournment of each
annual meeting of the shareholders, either at the place of the shareholders
meeting or at such other place as the Directors elected at the shareholders
meeting may have been informed of at or prior to the time of their election.
Additional regular meetings may be held at regular intervals at such places and
at such times as the Board of Directors may determine.
-6-
<PAGE> 7
4.03 Special Meetings. Special meetings of the Board of Directors
may be held whenever and wherever called for by the Chairman of the Board, the
President, or the number of Directors that would be required to constitute a
quorum.
4.04 Notices. No notice need be given of regular meetings of the
Board of Directors. Written notice of the time and place (but not necessarily
the purpose or all of the purposes) of any special meeting will be given to each
Director in person or via mail or facsimile addressed to him or her at his or
her latest address or facsimile number appearing on the corporation's records.
Notice to any Director of any such special meeting will be deemed given
sufficiently in advance when (i) if given by mail, the same is deposited in the
mail, with first class or airmail postage prepaid, at least four (4) days before
the meeting date, or (ii) if personally delivered or given by facsimile, the
same is transmitted and electronic confirmation of successful transmission is
received at least 24 hours prior to the convening of the meeting. Any Director
may waive call or notice of any meeting (and any adjournment thereof) at any
time before, during, or after it is held. Attendance of a Director at any
meeting will automatically evidence his or her waiver of call and notice of such
meeting (and any adjournment thereof) unless he or she is attending the meeting
for the express purpose of objecting to the transaction of business because the
meeting has not been properly called or noticed. Any meeting, once properly
called and noticed (or as to which call and notice have been waived as
aforesaid) and at which a quorum is formed, may be adjourned to another time and
place by a majority of those in attendance.
4.05 Quorum. A quorum for the transaction of business at any meeting
or adjourned meeting of the Board of Directors will consist of a majority of
those then in office. Once a quorum has been formed, the Directors from time to
time remaining in attendance at such meeting prior to its adjournment will
continue to be legally competent to transact business properly brought before
the meeting, notwithstanding the prior departure from the meeting of enough
Directors to leave less than a quorum.
4.06 Voting. Any matter submitted to a meeting of the Board of
Directors will be resolved by a majority of the votes cast thereon. In case of
an equality of votes, the chair of the meeting will have a second or deciding
vote.
4.07 Executive Committee. The Board of Directors, by resolution
adopted by a majority of the entire Board, may name one or more of its members
as an executive committee. Such executive committee shall have and may exercise
the powers of the Board of Directors in the management of the business and
affairs of the corporation while the Board is not in session, subject to such
limitations as may be included in the Board's resolution; provided, however,
that such executive committee shall not have the authority of the Board of
Directors in reference to the following matters: (l) the submission to
shareholders of any action that requires shareholders' authorization or approval
under applicable law; (2) the filling of vacancies on the Board of Directors or
in any committee of the Board of Directors; (3) the amendment or repeal of the
bylaws, or the adoption of new bylaws; and (4) the fixing of compensation of
Directors for serving on the Board or on any committee of the Board of
Directors. Any member of the executive committee may be
-7-
<PAGE> 8
removed, with or without cause, by the Board of Directors. In the event any
vacancy occurs in the executive committee, it shall be filled by the Board of
Directors.
4.08 Other Committees. The Board of Directors, from time to time, by
resolution adopted by a majority of the entire Board, may appoint other standing
or temporary committees from its membership and vest such committees with such
powers as the Board may include in its resolution; provided, however that such
committees shall be restricted in their authority as specifically set forth with
respect to the executive committee in Section 4.07 above.
4.09 Presumption of Assent. A Director of the corporation who is
present at a meeting of the Board of Directors or of any committee at which
action is taken on any matter will be presumed to have assented to the action
taken unless his or her dissent is entered in the minutes of the meeting or
unless he or she files a written dissent or abstention to such action with the
person acting as secretary of the meeting before the adjournment thereof or
forwards such dissent by registered or certified mail to the Secretary of the
corporation within two (2) business days after the adjournment of the meeting. A
right to dissent will not be available to a Director who voted in favor of the
action.
4.10 Compensation. By resolution of the Board of Directors, each
Director may be paid his or her expenses, if any, of attendance at each meeting
of the Board of Directors or of any committee, and may be paid a fixed sum for
attendance at each such meeting and/or a stated salary as a Director or
committee member. No such payment will preclude any Director from serving the
corporation in any other capacity and receiving compensation therefor.
4.11 Action by Directors Without a Meeting. Any action required or
permitted to be taken at a meeting of the Board of Directors or of any committee
thereof may be taken without a meeting if all Directors or committee members, as
the case may be, consent thereto in writing. Such consent shall have the same
effect as a unanimous vote of the Directors or committee members of the
corporation at a meeting duly called and noticed.
4.12 Meetings by Conference Telephone. Any member of the Board of
Directors or of a committee thereof may participate in any meeting of the Board
or such committee by means of a conference telephone or similar communication
equipment whereby all members participating in such meeting can hear one
another. Such participation shall constitute attendance in person, unless
otherwise stated as provided in Section 4.04 above.
V. OFFICERS - GENERAL
5.01 Elections and Appointments. The Board of Directors will elect
or appoint a President, one or more Vice Presidents, a Secretary, and a
Treasurer, and may choose a Chairman of the Board. The regular election or
appointment of officers will take place at each annual meeting of the Board of
Directors, but elections of officers may be held at any other meeting of the
Board.
-8-
<PAGE> 9
A person elected or appointed to any office will continue to hold that office
until the election or appointment of his or her successor, subject to action
earlier taken pursuant to Sections 5.04 or 7.01 below. Any two or more offices
may be held by the same person, except the offices of President and Secretary.
5.02 Additional Appointments. In addition to the officers
contemplated in Section 5.01 above, the Board of Directors may elect or appoint
other corporate or divisional officers or agents with such authority to perform
such duties as may be prescribed from time to time by the Board of Directors, by
the President, or by the superior officer of any person so elected or appointed.
Each of such persons (in the order designated by the Board) will be vested with
all of the powers and charged with all of the duties of his or her superior
officer in the event of such superior officer's absence or disability.
5.03 Bonds and Other Requirements. The Board of Directors may
require any officer to give bond to the corporation (with sufficient surety and
conditioned for the faithful performance of the duties of his or her office) and
to comply with such other conditions as may from time to time be required of him
or her by the Board.
5.04 Removal; Delegation of Duties. The Board of Directors may,
whenever in its judgment the best interests of the corporation will be served
thereby, remove any officer or agent of the corporation or temporarily delegate
his or her powers and duties to any other officer or to any Director. Such
removal or delegation shall be without prejudice to the contract rights, if any,
of the person so removed or whose powers and duties have been delegated.
Election or appointment of an officer or agent shall not of itself create
contract rights.
5.05 Salaries. The salaries of officers may be fixed from time to
time by the Board of Directors or (except as to the President's own) left to the
discretion of the President. No officer will be prevented from receiving a
salary by reason of the fact that he or she is also a Director of the
corporation.
VI. SPECIFIC OFFICERS
6.01 Chairman of the Board. The Board of Directors may elect a
Chairman to serve as a general executive officer of the corporation, and, if
specifically designated as such by the Board, as the chief executive officer of
the corporation. If elected, the Chairman will preside at all meetings of the
Board of Directors and be vested with such other powers and duties as the Board
may from time to time delegate to him or her.
6.02 President and Vice Presidents. Unless otherwise specified by
resolution of the Board of Directors, the President will be the chief executive
officer of the corporation. The President will supervise the business and
affairs of the corporation and the performance by all of its other officers of
their respective duties, subject to the control of the Board of Directors (and
of its Chairman, if the Chairman has been specifically designated as chief
executive officer of the
-9-
<PAGE> 10
corporation). One or more Vice Presidents shall be elected by the Board of
Directors to perform such duties as may be designated by the Board or as may be
assigned or delegated to them by the chief executive officer. Any one of the
Vice Presidents as authorized by the Board will be vested with all of the powers
and charged with all of the duties of the President in the event of his or her
absence or inability to act. Except as may otherwise be specifically provided in
a resolution of the Board of Directors, the President or any Vice President will
be a proper officer to sign on behalf of the corporation any deed, bill of sale,
assignment, option, mortgage, pledge, note, bond, evidence of indebtedness,
application, consent (to service of process or otherwise), agreement, indenture,
or other instrument of any significant importance to the corporation. The
President or any Vice President may represent the corporation at any meeting of
the shareholders or members of any other corporation in which the corporation
then holds shares of capital stock or has an interest, and may vote such shares
of capital stock or other interest in person or by proxy appointed by him or
her, provided that the Board of Directors may from time to time confer the
foregoing authority upon any other person or persons.
6.03 Secretary. The Secretary will keep the minutes of meetings of
the shareholders, Board of Directors, and any committee of the Board of
Directors, and all unanimous written consents of the shareholders, Board of
Directors, and any committee of the Board of Directors of the corporation, and
will see that all notices are duly given in accordance with the provisions of
these bylaws or as required by law. The Secretary will be custodian of the
corporate seal, if any, and corporate records, and, in general, perform all
duties incident to the office. Except as may otherwise be specifically provided
in a resolution of the Board of Directors, the Secretary and each assistant
secretary will be a proper officer to take charge of the corporation's stock
transfer books and to compile the voting record pursuant to Section 3.05 above,
and to impress the corporation's seal, if any, on any instrument signed by the
President, any Vice President, or any other duly authorized person, and to
attest to the same.
6.04 Treasurer. The Treasurer will keep full and accurate accounts
of receipts and disbursements in books belonging to the corporation, and will
cause all money and other valuable effects to be deposited in the name and to
the credit of the corporation in such depositaries, subject to withdrawal in
such manner, as may be designated by the Board of Directors. He or she will
render to the President, the Directors and the shareholders at proper times an
account of all his or her transactions as Treasurer and of the financial
condition of the corporation. The Treasurer shall be responsible for preparing
and filing such financial reports, financial statements, and returns as may be
required by law.
VII. RESIGNATIONS AND VACANCIES
7.01 Resignations. Any Director, committee member, or officer may
resign from his or her office at any time by written notice delivered or
addressed to the corporation at its known place of business. Any such
resignation will be effective upon its receipt by the corporation unless some
later time is therein fixed, and then from that time. The acceptance of a
resignation will not be required to make it effective.
-10-
<PAGE> 11
7.02 Vacancies. If the office of any Director, committee member, or
officer becomes vacant by reason of his or her death, resignation,
disqualification, removal, or otherwise, the Board of Directors may choose a
successor to hold office for the unexpired term.
VIII. SEAL
8.01 Form Thereof. The Board of Directors may provide for a seal of
the corporation that will have inscribed thereon the name of the corporation,
the state and year of its incorporation, and the words "Corporate Seal."
IX. CERTIFICATES REPRESENTING SHARES
9.01 Form Thereof. Each certificate representing shares of the
capital stock of the corporation will be in such form as may from time to time
be approved by the Board of Directors, will be consecutively numbered, and will
exhibit such information as may be required by applicable law.
9.02 Signatures and Seal Thereon. All certificates issued for shares
of the capital stock of the corporation (whether new, reissued, or transferred)
will bear the signatures of the President or a Vice President, and of the
Secretary or an assistant secretary, and the impression of the corporation's
corporate seal, if any. The signatures of such officers of the corporation and
the impression of its corporate seal may be in facsimile form on any certificate
to the extent allowable by law from time to time. If a supply of unissued
certificates bearing the facsimile signature of a person remains when that
person ceases to hold the office of the corporation indicated on such
certificates, they may still be countersigned, registered, issued, and delivered
by the corporation's transfer agent and/or registrar thereafter, as though such
person had continued to hold the office indicated on such certificate.
9.03 Ownership. The corporation will be entitled to treat the
registered owner of any share of the capital stock of the corporation as the
absolute owner thereof and, accordingly, will not be bound to recognize any
beneficial, equitable, or other claim to, or interest in, such share on the part
of any other person, whether or not it has notice thereof, except as may
expressly be provided by applicable law.
9.04 Transfers. Transfers of shares of the corporation may be made
on the stock transfer books of the corporation only at the direction of the
person named in the certificate therefor (or by his or her duly authorized
attorney-in-fact) and upon the surrender of such certificate.
9.05 Lost Certificates. In the event of the loss, theft, or
destruction of any certificate representing shares of the corporation or of any
predecessor corporation, the corporation may issue (or, in the case of any such
shares as to which a transfer agent and/or registrar have been
-11-
<PAGE> 12
appointed, may direct such transfer agent and/or registrar to countersign,
register, and issue) a new certificate, and cause the same to be delivered to
the owner of the shares represented thereby; provided that such owner shall have
submitted such evidence showing the circumstances of the alleged loss, theft, or
destruction, and his, her, or its ownership of the certificate, as the
corporation considers satisfactory, together with any other facts that the
corporation considers pertinent; and further provided that, if so required by
the corporation, the owner shall provide a bond in form and amount satisfactory
to the corporation (and to its transfer agent and/or registrar, if applicable).
The corporation may act through its President or any Vice President for any
purpose of this Section 9.05.
X. DIVIDENDS
10.01 Subject to such restrictions or requirements as may be imposed
by applicable law or the corporation's articles or as may otherwise be binding
upon the corporation, the Board of Directors may from time to time declare and
the corporation may pay dividends on shares of the capital stock of the
corporation outstanding on the dates of record fixed by the Board or as
otherwise provided herein, to be paid in cash, in property, or in shares of the
capital stock of the corporation on or as of such payment or distribution dates
as the Board may prescribe.
XI. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
11.01 Right to Indemnification. The Corporation shall indemnify its
directors and officers to the fullest extent authorized or permitted by Arizona
Revised Statutes, as the same exists or may hereafter be amended, and such right
to indemnification shall continue as to a person who has ceased to be a director
or officer of the Corporation and shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that, except for
proceedings to enforce rights to indemnification, the Corporation shall not be
obligated to indemnify any director of officer (or his or her heirs, executors
or administrators) in connection with a proceeding (or part thereof) initiated
by such person unless such proceeding (or part thereof) was authorized or
consented to by the Board of Directors of the Corporation. The right to
indemnification conferred in this Section shall include the right to receive
from the Corporation advances in respect of the expenses incurred in defending
or otherwise participating in any proceeding in advance of its final
disposition, subject to any written undertaking to repay such advances that may
be required by Arizona Revised Statutes.
11.02 Additional Rights to Indemnification. The Corporation may, to
the extent authorized from time to time by the Board of Directors, provide
rights to indemnification and to the advancement of expenses to employees and
agents of the Corporation who are not directors or officers similar to those
conferred in this Section to directors and officers of the Corporation. The
rights to indemnification and to the advancement of expenses conferred in this
Section shall not be exclusive of any other right which any person may have or
hereafter acquire under the articles of incorporation, these Bylaws, any statute
agreement, vote of stockholders or disinterested directors, or otherwise.
-12-
<PAGE> 13
11.03 Repeal. Any repeal or modification of this Section by the
Board of Directors of the Corporation shall not adversely affect any rights to
indemnification and advancement of expenses of a director or officer of the
Corporation existing pursuant to this Section with respect to any acts or
omissions occurring prior to such repeal or modification.
11.04 Insurance. The Corporation shall have the power to purchase
and maintain insurance, at its expense, to protect itself and any director,
officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise (including an employee
benefit plan) against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Arizona Revised Statutes.
XII. AMENDMENTS
12.01 These bylaws may be altered, amended, supplemented, repealed,
or temporarily or permanently suspended, in whole or in part, or new bylaws may
be adopted, at any duly constituted meeting of the Board of Directors (the
notice of which meeting either includes mention of the proposed action relative
to the bylaws or is waived pursuant to Section 4.04 above) or, alternatively, by
unanimous written consent to corporate action without a meeting of the Board of
Directors pursuant to Section 4.11 above. If, however, any such action arises as
a matter of necessity at any such meeting and is otherwise proper, no notice
thereof will be required.
-13-
<PAGE> 1
Exhibit 4.3
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
STOCK PURCHASE WARRANT CERTIFICATE
Warrant No. W-_________ Warrants
VOID AFTER 5:00 P.M., PHOENIX, ARIZONA TIME
December 31, 2002
THIS CERTIFIES THAT _____________________________________ ( the
"Holder") is the owner of the number of Warrants set forth above, each of which
represents the right to purchase one fully-paid and nonassessable share of the
capital stock ("Stock") of ORTHOPAEDIC BIOSYSTEMS LTD., INC., an Arizona
corporation (the "Corporation"), at an exercise price per share (the "Purchase
Price") equal to the lesser of (i) $2.00 or (ii) the lowest price at which the
Corporation shall offer its capital stock of any series or class (including but
not limited to its no par value common stock or its Class A Convertible
Preferred Stock) in any private placement between January 1, 1998 and December
31, 1998 (a "Private Placement"). The Stock that is subject to this Warrant will
be the Corporation's Class A Convertible Preferred Stock provided, however that
if the Corporation issues capital stock pursuant to a Private Placement, the
Holder shall have the option to receive the series or class of capital stock
that is subject to such Private Placement. The right to purchase granted
hereunder is exercisable at any time prior to 5:00 p.m., Phoenix, Arizona time,
on December 31, 2002, at the principal office of the Corporation in Scottsdale,
Arizona.
In the event that the Corporation shall (i) pay a dividend or make a
distribution with respect to the Stock in shares of such stock, (ii) subdivide
its outstanding Stock into a greater number of shares, (iii) combine the
outstanding Stock into a smaller number of shares, or (iv) issue by
reclassification of its Stock any additional shares of such stock, or (v) engage
in any similar transaction which changes the number of issued and outstanding
shares of Stock, other than an issuance of such shares by the Corporation for
fair value, then in each such case the number of shares of Stock subject to this
Warrant Certificate immediately prior thereto shall be proportionately adjusted
so that the Holder of this Warrant Certificate shall be entitled, upon exercise
hereof, to receive, to the extent permitted by applicable law, the number of
shares of Stock of the Corporation which such Holder would have been entitled to
receive after the happening of such event had such Warrant Certificate been
exercised immediately prior to the record date for such event (or if no record
date is established in connection with such event, the effective date for such
action). An adjustment pursuant to the foregoing sentence shall become effective
immediately after the record date in the case of a stock dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or reclassification.
This Warrant Certificate may be exercised, in whole at any time or in
part from time to time, by the Holder upon presentation and surrender of this
Warrant Certificate with the form of election to purchase set forth hereon duly
executed with signatures guaranteed by a member firm of a national
<PAGE> 2
securities exchange, a commercial bank (not a savings bank or a savings or loan
association) or a trust company located in the United States, or a member of the
National Association of Securities Dealers, Inc., and by payment in full of the
aggregate Purchase Price, plus transfer taxes, if any, for the shares being
purchased. Payment for the shares may be made in United States currency, by
check or money order made payable to the order of the Corporation and upon
compliance with and subject to the conditions set forth herein.
No warrant may be exercised after 5:00 p.m., Phoenix, Arizona time, on
December 31, 2002, and all Warrants not theretofore exercised shall
automatically be canceled.
The Holder may not sell, assign, transfer or otherwise make disposition
(hereinafter collectively called "Disposition") of this Warrant Certificate, in
whole or in part, unless and until the Holder has (i) presented evidence
satisfactory to the Corporation prior to any Disposition that such Disposition
is permissible under and does not violate the Securities Act of 1933 or any
other federal or state securities laws or rules or regulations thereunder, and
(ii) received written consent from the Corporation for such Disposition. Upon
receipt of such consent, the Holder may transfer this Warrant Certificate, but
only in strict compliance with the procedures set forth in the written consent.
If this Warrant Certificate shall be exercised or transferred in part
only, the Holder shall be entitled to receive upon surrender, at the principal
office of the Corporation, another Warrant Certificate or Certificates of like
tenor and date for the balance of the shares purchasable pursuant to this
Warrant.
No fractional shares will be issued upon exercise of this Warrant
Certificate.
The Holder shall not be, nor be deemed to be, the holder of any Warrant
Shares unless and until a Certificate for such shares shall have been issued.
Except as provided in this Certificate, the existence of this Warrant
Certificate shall not affect in any way the right or power of the Corporation or
its stockholders to make or authorize any or all adjustments, recapitalizations,
reorganization or other changes in the Corporation's capital structure or its
business, or any merger or consolidation of the Corporation, or any issue of
bonds, debentures, preferred or prior preference stock ahead of or affecting the
Stock or the rights thereof, or dissolution or liquidation of the Corporation,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.
Every Holder of this Warrant Certificate, by accepting the same,
consents and agrees with the Corporation and with every other holder of a
Warrant Certificate that:
(a) the Warrant Certificates are transferable only on the registry
books of the Corporation if surrendered at the principal
office of the Corporation in strict compliance with the
transfer restrictions set forth herein; and
2
<PAGE> 3
(b) the Corporation may deem and treat the person in whose name
the Warrant Certificate is registered as the absolute owner
thereof and of the Warrants evidenced thereby (notwithstanding
any notations of ownership or writing on the Warrant
Certificate made by any one other than the Corporation) for
all purposes whatsoever, and the Corporation shall not be
affected by any notice to the contrary.
The Company hereby agrees that at all times there shall be reserved for
issuance and delivery upon exercise of this Warrant such number of shares of
Common Stock or other shares of capital stock of the Company from time to time
issuable upon exercise of this Warrant. All such shares shall be duly
authorized, and when issued upon such exercise, shall be validly issued, fully
paid and nonassessable, free and clear of all liens, security interests, charges
and other encumbrances or restrictions on sale and free and clear of all
preemptive rights.
This Warrant Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Warrant Certificate
to be duly executed.
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
By _________________________________
Title: President
ATTEST:
___________________________
Title: Assistant Secretary
Dated: December ___, 1997
3
<PAGE> 4
ELECTION TO PURCHASE
(To be executed only if Holder desires to
exercise the Warrant Certificate.)
To: Orthopaedic Biosystems Ltd., Inc.
The undersigned hereby irrevocably elects to exercise ______________
Warrants represented by Warrant Certificate No. W-_________ to purchase the
shares of ___________ issuable upon exercise of such Warrants and requests that
certificates for such shares to be issued in the name of:
________________________________________________________________________________
(Please insert social security or other identification number)
________________________________________________________________________________
________________________________________________________________________________
(Please print name and address)
If such number of Warrants shall not be all the Warrants evidenced by
said Warrant Certificate, a new Warrant Certificate for the balance remaining of
such Warrants shall be registered in the name of the Holder and delivered to the
Holder at the address specified below:
________________________________________________________________________________
(Please print address of Holder)
Dated: ________________________ ____________________________________________
Signature
(Signature must conform in all respects to
name of holder as specified on the face of
this Warrant Certificate.)
____________________________________________
Signature Guaranteed
4
<PAGE> 1
EXHIBIT 4.4
AGREEMENT BY AND AMONG ORTHOPAEDIC
BIOSYSTEMS LTD., INC. AND CERTAIN INVESTORS
IN ORTHOPAEDIC BIOSYSTEMS LTD., INC.
REGARDING REGISTRATION RIGHTS
THIS AGREEMENT, by and among Orthopaedic Biosystems Ltd., Inc. (the
"Company") and certain investors in the Company is entered into as of this 5th
day of May, 1997.
W I T N E S S E T H: THAT,
WHEREAS, the investors set forth in Schedule A attached hereto (the
"Investors") are the purchasers of the shares of the Class A Preferred Stock of
the Company ("Preferred Stock") reflected on said Schedule A; and
WHEREAS, the Company has agreed to grant registration rights to the
Investors as provided herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the Investors and the Company agree as follows:
A. Definitions
As used herein:
1. The term "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, and the declaration or ordering of
the effectiveness of such registration statement.
2. The term "Registrable Securities" means the shares of the Preferred
Stock of the Company, but only after conversion into the common shares of the
Company into which such Preferred Stock has been converted, purchased by the
Investors and listed on Schedule A.
3. The term "Initiating Holders" means any holder or holders of not less
than 50% of the Registrable Securities.
4. The term "Holders" means any holder or holders of Registrable Shares.
<PAGE> 2
-2-
B. Requested Registration
1. Request for Registration. In case the Company shall receive from
Initiating Holders a written request that the Company effect any registration,
qualification, or compliance with respect to all or a part of the Registrable
Securities the Company will: (a) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and (b) as soon
as practicable, use its diligent best efforts to effect all such registrations,
qualifications and compliances (including, without limitations, the execution of
an undertaking to file post-effective amendments, appropriate qualifications
under the applicable blue sky or other state securities laws and appropriate
compliance with exemptive regulations issued under the Securities Act and any
other governmental requirements or regulations) as may be so requested and as
would permit or facilitate the sale and distribution of all or such portion of
such Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any Holder or Holders
joining in such request as are specified in a written request given within
thirty days after receipt of such written notice from the Company; provided that
the Company shall not be obligated to take any action to effect such
registration, qualification or compliance pursuant to this paragraph (b):(i) at
any time prior to the Company's first registered offering to the general public
of its securities for its own account, or May 1, 2001, whichever shall first
occur; (ii) within 180 days following the effective date of the Company's first
registered offering to the general public of its securities for its own account;
(iii) after the Company has effected one such registration pursuant to this
subparagraph (b)(1) and such registration has been declared or ordered
effective; (iv) if the amount of securities being offered for sale is less than
50% of the Registrable Securities, and the expected price to the public is less
than $2,000,000; (v) when the Investors or their assignees have sold 60 percent
or more of the Registrable Securities in transactions on a national securities
exchange or in the over-the-counter market; or (vi) after the first to occur of
May 1, 2003, or more than two years following the effective date of the
Company's first registered offering to the general public of its securities for
its own account.
Subject to the foregoing clauses (i) through (iv), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practical, but in any event within ninety days, after
receipt of the request or requests of the Initiating Holders; provided, however,
that if the Company shall furnish to such Holders a certificate signed by the
President of the Company stating that in the good faith judgment of the Board of
Directors it would be seriously detrimental to the Company and its stockholders
for such registration statement to be filed at the date filing would be required
and it is therefore essential to defer the filing of such registration
statement, the Company shall have an additional period of not more than ninety
days within which to file such registration statement.
2. Underwriting. If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the
<PAGE> 3
-3-
Company as a part of their request made pursuant to paragraph B and the
Company shall include such information in the written notice referred to in
subparagraph B(1)(a). In such event, if so requested in writing by the Company,
the Initiating Holders shall negotiate with an underwriter selected by the
Company with regard to the underwriting of such requested registration;
provided, however, that if a majority in interest of the Initiating Holders have
not agreed with such underwriter as to the terms and conditions of such
underwriting within twenty days following commencement of such negotiations, a
majority in interest of the Initiating Holders may select an underwriter of
their choice. The right of any Holder to registration pursuant to paragraph B
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the Initiating
Holders and such Holder to the extent provided herein. The Company shall
(together with all Holders proposing to distribute their securities through
such underwriting) enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Holders. Notwithstanding any other provision of this
paragraph B, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, the Initiating Holders shall so advise all holders of Registrable
Securities, and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all
Holders thereof in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities entitled to inclusion in such registration
held by such Holders at the time of filing the registration statement. If any
Holder of Registrable Securities disapproves of the terms of the underwriting,
he may elect to withdraw therefrom by written notice to the Company, the
underwriter and the Initiating Holders. Any Registrable Securities which may be
withdrawn under the preceding sentence from such underwriting shall, unless the
Holder requests otherwise, be included in such registration but shall not be
transferred in a public distribution prior to ninety days after the effective
date of the registration statement relating thereto.
C. Company Registration
1. If at any time or from time to time, the Company shall determine to
register any of its securities, either for its own account or the account of a
security holder or holders, in a registration statement pursuant to an
underwritten public offering, the Company will: (a) promptly give to each
Holder written notice thereof (which shall include a list of the jurisdictions
in which the Company intends to attempt to qualify such securities under the
applicable blue sky or other state securities laws); and (b) include in such
registration (and any related qualification under blue sky laws or other
compliance) and in any underwriting involved therein, all the Registrable
Securities specified in a written request or requests, made within thirty days
after receipt of such written notice from the Company, by any Holder or
Holders, except as set forth in subparagraph C(2) below.
<PAGE> 4
-4-
2. Underwriting. The right of any Holder to registration pursuant to
paragraph C shall be conditioned upon such Holder's participation in the
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company and
the other holders distributing their securities through such underwriting)
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by the Company. Notwithstanding any
other provision of this paragraph C, if the underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, and (a) if such registration is the first registered offering of
the sale of the Company's securities to the general public, the underwriter may
limit the number of Registrable Securities to be included in the registration
and underwriting, or any exclude Registrable Securities entirely from such
registration and underwriting, or (b) if such registration is other than the
first registered offering of the sale of the Company's securities to the
general public, the underwriter may limit the number of Registrable Securities
to be included in the registration and underwriting; provided, however, that
with respect to a registration within the category described in clause (b) of
this sentence, the underwriter may not limit the amount of Registrable
Securities included in such registration and underwriting to less than an
amount equal to 20 percent of the amount of all of the Company's securities
included within such registration and underwriting. The Company shall so advise
all Holders of Registrable Securities which would otherwise be registered and
underwritten pursuant hereto, and the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all Holders thereof in proportion, as nearly as practicable, to
the respective amounts of Registrable Securities entitled to inclusion in such
registration held by such Holders at the time of filing the registration
statement. If any Holder disapproves of the terms of any such underwriting, he
may elect to withdraw therefrom by written notice to the Company and the
underwriter. Any Registrable Securities excluded or withdrawn from such
underwriting shall, unless the Holder requests otherwise, be included in such
registration but shall not be transferred in a public distribution prior to
ninety days after the effective date of the registration statement relating
thereto.
D. Expenses of Registration
All expenses incurred in connection with any registration, qualification
or compliance pursuant to this Agreement, including without limitation, all
registration, filing, and qualification fees, printing expenses, fees and
disbursements of counsel for the Company, and expenses of any special audits
incidental to or required by such registration, shall be borne by the Company;
provided, however:
(1) The Company shall not be required to pay for expenses of any
registration begun pursuant to paragraph B, the request for which has been
subsequently withdrawn by the Initiating Holders, in which case, such
expenses shall be borne by the Holders requesting such withdrawal;
<PAGE> 5
-5-
(2) The Company shall not be required to pay fees of legal counsel of
Holder, or underwriters' fees, discounts, or commissions relating to
Registrable Securities.
E. Registration Procedures
In the case of each registration, qualification, or compliance effected by
the Company pursuant to this Agreement, the Company will keep each Holder
participating therein advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion thereof. At
its expense, the Company will:
(1) Keep such registration, qualification or compliance pursuant to
subparagraphs B or C effective for a period of 180 days or until the
Holder or Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs; and
(2) Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request.
F. Indemnification
1. To the extent permitted by law, the Company will indemnify each
Holder of Registrable Securities, each of the Holder's officers and directors,
and each person controlling such Holder, with respect to such registration,
qualification, or compliance effected pursuant to this paragraph, and each
underwriter, if any, and each person who controls any underwriter of the
Registrable Securities held by or issuable to such Holder, against all claims,
losses, damages, and liabilities (or actions in respect thereto) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any prospectus, offering circular or other document
(including any related registration statement, notification or the like)
incident to any such registration, qualification, or compliance, or based on
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
or any violation by the Company of any rule or regulation promulgated under the
Securities Act applicable to the Company and relating to action or inaction
required of the Company in connection with any such registration,
qualification, or compliance, and will reimburse each such Holder, each of the
Holder's officers and directors, and each person controlling such Holder, each
such underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action,
provided that the Company will not be liable in any such case to the extent
that any such claim, loss, damage or liability arises out of or is based on any
untrue statement or omission based upon information furnished to the Company by
such Holder or underwriter.
<PAGE> 6
-6-
2. Each Holder will, if Registrable Securities held by or issuable to such
Holder are included in the securities as to which such registration,
qualification, or compliance is being effected, indemnify the Company, each of
its directors and officers who sign such registration statement, each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company within the meaning of the
Securities Act, and each other such Holder, each of such Holder's officers and
directors and each person controlling such Holder, against all claims, losses,
damages, and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement of a material fact
contained in any such registration statement, prospectus, offering circular, or
other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company, such Holders, such
directors, officers, persons, or underwriters for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability, or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular, or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder specifically for use therein.
3. Each party entitled to indemnification under this paragraph F (the
Indemnified Party) shall give notice to the party required to provide
indemnification (the Indemnifying Party) promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and
shall permit the Indemnifying party to assume the defense of any such claim or
any litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this paragraph. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of each
Indemnified Party, 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.
G. Information by Holder
The Holder or Holders of Registrable Securities included in any
registration shall furnish to the Company such written information regarding
such Holder or Holders and the distribution proposed by such Holder or Holders
as the Company may request in writing and as shall be required in connection
with any registration, qualification, or compliance referred to in this
paragraph.
<PAGE> 7
H. Rule 144 Reporting
With a view to making available to the Investors the benefits of certain
rules and regulations of the SEC which may permit the sale of the Purchased
Shares to the public without registration, the Company agrees when required by
law to:
(1) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety days
after the effective date of the first registration filed by the Company for
an offering of its securities to the general public;
(2) Use its best efforts to file with the SEC in a timely manner all
reports and other documents required of the Company under the Securities
Act and the Securities Exchange Act;
(3) To furnish to the Investors forthwith upon request a written
statement by the Company as to its compliance with the reporting
requirements of said Rule 144 (at any time after ninety days after the
effective date of the first registration statement filed by the Company for
an offering of its securities to the general public), and of the Securities
Act and the Securities Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual
or quarterly report of the Company, and such other reports and documents so
filed by the Company as may reasonably be requested in availing an Investor
of any rule or regulation of the SEC allowing the sale of any such
securities without registration.
I. Transfer of Registration Rights
The rights to cause the Company to register securities granted to an
Investor by the Company under subparagraphs B and C may be assigned by such
Investor to a transferee or assignee of any of said Investor's Registrable
Securities, provided, that the Company is given written notice by an Investment
at the time of or within a reasonable time after said transfer, stating the name
and address of said transferee or assignee and identifying the securities with
respect to which such registration rights are being assigned.
J. Assignability
This Agreement shall be binding upon and inure to the benefit of the
respective heirs, successors and assigns of the parties hereto.
<PAGE> 8
-8-
K. Law
This Agreement shall be governed by and construed in accordance with the
laws of Arizona.
L. Amendment
Any modification, amendment, or waiver of this Agreement or any provision
hereof shall be in writing and executed by the Company and Holders of not less
than 66-2/3 percent of the outstanding Registrable Securities; provided,
however, that no such modification, amendment or waiver shall reduce the
aforesaid percentage of outstanding Registrable Securities without the consent
of the record or beneficial holders of no less than 90 percent of said
Registrable Securities.
M. Counterparts
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which together shall constitute one instrument.
IN WITNESS WHEREOF, the undersigned holders of securities and the Company
have executed this Agreement on the day and year first above written.
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
By: D. Ronald Yagoda
--------------------------------
---------------------------------
---------------------------------
<PAGE> 1
EXHIBIT 10.1
THIS EXHIBIT CONTAINS CONFIDENTIAL INFORMATION WHICH HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
CONFIDENTIAL TREATMENT REQUEST UNDER RULE 406 OF THE SECURITIES ACT OF 1933, AS
AMENDED. THE CONFIDENTIAL INFORMATION ON PAGES 2, 5, 6, AND 7 HAVE BEEN REPLACED
WITH ASTERISKS.
EXCLUSIVE MARKETING AND DISTRIBUTION AGREEMENT
BETWEEN
ORTHOPAEDIC BIOSYSTEMS, LTD., INC.
AND
MENTOR UROLOGY CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
1. DEFINITIONS ....................................................... 1
1.1 Affiliate ............................................... 1
1.2 Agreed Purchase Commitment .............................. 2
1.3 Anchor................................................... 2
1.4 Anchor System ........................................... 2
1.5 Ancillary Products....................................... 2
1.6 Clinical Trials ......................................... 2
1.7 Clinical Trials Protocol................................. 2
1.8 Commercial Sale ......................................... 2
1.9 Computation Period ...................................... 2
1.10 Confidential Information ................................ 2
1.11 Control ................................................. 3
1.12 Defective Product ....................................... 3
1.13 Deficiency Notice ....................................... 3
1.14 Direct Production Costs ................................. 3
1.15 Documented Cost ......................................... 3
1.16 Effective Date .......................................... 3
1.17 European Union .......................................... 3
1.18 FDA ..................................................... 3
1.19 Field of Use ............................................ 4
1.20 Force Majeure ........................................... 4
1.21 Improvement ............................................. 4
1.22 Initial Computation Period .............................. 4
1.23 Involuntary Business Disruption ......................... 4
1.24 Products ................................................ 4
1.25 Product Specifications .................................. 4
1.26 Proportionate Share ..................................... 4
1.27 Quota Commencement Date ................................. 5
1.28 Third Party ............................................. 5
2. GRANT OF MARKETING AND DISTRIBUTION RIGHTS ........................ 5
2.1 Scope of Distribution Rights ............................ 5
2.2 Sublicenses ............................................. 5
2.3 Improvements and New Products .......................... 5
2.4 Rights to Product Improvements .......................... 5
3. CONSIDERATION FOR DISTRIBUTION RIGHTS ............................. 6
3.1 Distribution Fee ........................................ 6
3.2 Conduct of Clinical Trials .............................. 6
3.3 Product Research and Development ........................ 6
3.4 Option to Terminate after Clinical Trials ............... 7
4. TERM OF AGREEMENT ................................................. 7
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS (CONT'D)
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
4.1 Term of Distribution Rights .......................... 7
4.2 Option to Extend ..................................... 7
4.3 Deficiency Notices ................................... 8
4.4 Termination of Distribution Rights ................... 8
4.5 Exclusive Remedy ..................................... 8
4.6 Abatement ............................................ 8
5. REQUIREMENTS AND SUPPLY ......................................... 9
5.1 Requirements ......................................... 9
5.2 Specifications ....................................... 9
5.3 Transfer Prices ...................................... 9
5.4 Samples and Promotional Product ...................... 10
5.5 Duty to Manufacture .................................. 10
5.6 Inventory Support .................................... 10
5.7 Purchase Orders and Forecasts ........................ 10
5.8 Order Fulfillment .................................... 11
5.9 Product Acceptance ................................... 11
5.10 Nonconforming Goods .................................. 11
5.11 Replacement .......................................... 11
5.12 Packaging ............................................ 11
5.13 Patent Information ................................... 12
5.14 Invoicing ............................................ 12
5.15 Title and Risk of Loss ............................... 12
5.16 Monthly Statements; Payment .......................... 12
5.17 Product Warranty ..................................... 12
5.18 Warranty Disclaimers ................................. 13
5.19 Product Recalls ...................................... 13
5.20 Customer Returns ..................................... 14
5.21 Customer Complaints .................................. 14
5.22 Country of Origin .................................... 14
5.23 Taxes ................................................ 15
6. ADDITIONAL COVENANTS OF THE PARTIES ............................. 15
6.1 Covenants of ORTHOBIO ................................ 15
6.2 Covenants of MENTOR .................................. 18
6.3 Mutual Covenants ..................................... 20
7. TRADE NAMES AND TRADEMARKS ...................................... 22
7.1 Acknowledgment of Source ............................. 22
7.2 Infringement Proceedings ............................. 22
7.3 Marks Owned by MENTOR ................................ 22
8. INFRINGEMENT CLAIMS ............................................. 22
</TABLE>
-ii-
<PAGE> 4
TABLE OF CONTENTS (CONT'D)
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
8.1 Warranties of ORTHOBIO ...................................... 22
8.2 Claims against Third Parties ................................. 23
8.3 Claims by Third Parties ...................................... 23
8.4 Preventing Further Infringement .............................. 24
8.5 Limitation on Infringement Claims ............................ 24
8.6 Obligation to Make Payments .................................. 25
9. INSURANCE, INDEMNIFICATION AND LIMITATIONS ON LIABILITY ............. 25
9.1 ORTHOBIO's Liability Insurance ............................... 25
9.2 Policy Requirements .......................................... 25
9.3 Indemnification by ORTHOBIO .................................. 26
9.4 Indemnification by MENTOR .................................... 26
9.5 Limitation of Liability ...................................... 27
10. TERM AND TERMINATION ............................................... 27
10.1 Commencement ................................................. 27
10.2 Termination Prior to Term Commencement Date .................. 27
10.3 Termination for Cause......................................... 27
10.4 Rights and Duties upon Termination............................ 28
11. GENERAL ............................................................ 29
11.1 Notices ...................................................... 29
11.2 Binding Effect ............................................... 29
11.3 Force Majeure ................................................ 30
11.4 Governing Law ................................................ 30
11.5 Resolution of Disputes ....................................... 30
11.6 Costs of Enforcement ......................................... 30
11.7 Independent Contractors ...................................... 30
11.8 Offset Rights ................................................ 30
11.9 Severability ................................................. 31
11.10 No Rights by Implication ..................................... 31
11.11 Waiver ....................................................... 31
11.12 Complete Agreement ........................................... 31
</TABLE>
-iii-
<PAGE> 5
EXCLUSIVE MARKETING AND DISTRIBUTION AGREEMENT
THIS EXCLUSIVE MARKETING AND DISTRIBUTION AGREEMENT ("Agreement"),
dated for reference purposes as of August 1, 1996, is entered into by and
between ORTHOPAEDIC BIOSYSTEMS, LTD., INC., an Arizona corporation ("ORTHOBIO"),
and MENTOR UROLOGY CORPORATION, a Delaware corporation ("MENTOR"), with
reference to the following facts:
RECITALS:
A. ORTHOBIO has developed and has United States and foreign patent
applications pending for certain proprietary, innovative bone fixation anchors
that are characterized by superior holding strength and ease of use which,
together with associated devices, are marketed for use in orthopedic
applications under the tradename of PeBA C Soft Tissue(TM) Anchor (herein,
collectively the "Products").
B. The Products also have potential application in the treatment of
female urinary stress incontinence and other urological disorders, and ORTHOBIO
has obtained FDA approval to market and sell the Products for urological
applications.
C. MENTOR is engaged in the business of manufacturing, marketing and
distributing medical equipment and devices, including products used in the
treatment of urinary incontinence and other urological disorders. ORTHOBIO and
MENTOR believe that ORTHOBIO's Anchors can provide benefits in the treatment of
female urinary stress incontinence and other urological disorders by reason of
(1) their greater holding and pull-out strength, (2) the resulting reduction in
anchor migration, and (3) their ease of insertion.
A. MENTOR therefore desires to obtain the exclusive right to market and
distribute the Products both in the United States and in all foreign markets in
the Field of Use (as hereinafter defined), and ORTHOBIO desires to grant such
rights to MENTOR for such purposes on the terms and conditions of this
Agreement.
AGREEMENTS:
NOW, THEREFORE, the parties, intending to be legally bound, hereby
agree as follows:
1. DEFINITIONS
Except as otherwise expressly defined in this Agreement, the following
words and phrases shall have the meanings set forth below:
1.1 AFFILIATE. A person or entity that directly or indirectly through
one or more intermediaries controls, is controlled by, or is under common
control with, the designated party, but only for as long as such control
relationship exists.
-1-
<PAGE> 6
* Confidential information has been omitted and filed separately with the
Securities and Exchange Commission pursuant to a confidential treatment request.
1.2 AGREED PURCHASE COMMITMENT. The quantity of Anchors that MENTOR has
agreed to purchase as a condition to preserving its exclusive distribution
rights under this Agreement. The Agreed Purchase Commitment shall be *
Anchors during the Initial Computation Period, and * Anchors during each
succeeding Computation Period thereafter.
1.3 ANCHOR. A bone fixation anchor suitable for use in affixing to
human bones sutures utilized in surgical procedures.
1.4 ANCHOR SYSTEM. ORTHOBIO's PeBA C Soft Tissue(TM) Anchor, which is
comprised of (a) an Anchor and (b) an instrumentation package which, in the case
of urological applications, currently consists only of a re-usable inserter
device, together with (c) associated packaging and sterilization.
1.5 ANCILLARY PRODUCTS. Instruments, supplies and materials
manufactured by or for ORTHOBIO that are designed or are suitable for use with
an Anchor or the Anchor System in the Field of Use, including (by way of example
and not in limitation), inserter guns, drill bits, drill guides and sterilizer
trays.
1.6 CLINICAL TRIALS. The clinical studies and evaluations to be carried
out by MENTOR in accordance with the Clinical Trial Protocols to be developed by
MENTOR and approved by ORTHOBIO as provided in Section 3.2 of this Agreement.
1.7 CLINICAL TRIALS PROTOCOL. Regimens, specifications and procedures
established pursuant to Section 3.2 of this Agreement for the conduct of
Clinical Trials to (a) implant the Anchors on an experimental basis in up to
sixty (60) human patients, and (b) to monitor such patients in order to identify
and evaluate the outcomes and effects of the use of the Products in the Field of
Use.
1.8 COMMERCIAL SALES. A sale of Product by MENTOR to a customer in the
ordinary course of business (excluding sales of samples or for education and
training purposes) after the Products are both commercially available and
legally marketable in the United States pursuant to a marketing approval issued
by the FDA.
1.9 COMPUTATION PERIOD. The eighteen (18)-month period commencing on
the Quota Commencement Date, and each subsequent twelve (12)-month period
thereafter.
1.10 CONFIDENTIAL INFORMATION. All information of a confidential or
proprietary nature disclosed by MENTOR to ORTHOBIO or by ORTHOBIO to MENTOR in
connection with or pursuant to this Agreement. As used in this Agreement,
"Confidential Information" shall not include any information or data disclosed
to a party (the "Recipient") that (a) was in the Recipient's possession prior to
the Recipient's receipt of the same pursuant to this Agreement, or (b) which at
the time of the disclosure is or thereafter becomes, through no act or failure
to act on the part of the Recipient, known within the industry or part of the
public domain, or (c) is furnished to the Recipient by a Third Party without
breaching any confidentiality or nondisclosure agreements to which such Third
Party was subject, or (d) which the Recipient independently develops.
-2-
<PAGE> 7
1.11 CONTROL. With respect to any Person or group of Persons,
possession, directly or indirectly, of the power to direct or cause the
direction of management and policies of such Person, whether through the
ownership of voting securities or by contract or otherwise, including (a) in the
case of a corporation, ownership of more than fifty percent (50%) of the shares
of stock entitled to vote for the election of directors and, (b) in the case of
any other business entity, ownership of more than fifty percent (50%) of the
beneficial interest in capital or profits.
1.12 DEFECTIVE PRODUCT. Product that was not manufactured and produced
in accordance with the requirements of Section 5.17 of this Agreement or that
otherwise fails to conform to the product warranties set forth in that Section.
1.13 DEFICIENCY NOTICE. A written notice given by ORTHOBIO to MENTOR
pursuant to Section 4.3, below, which (a) sets forth (i) the number of Anchors
required to be purchased during the Computation Period in question in order to
satisfy the Agreed Purchase Commitments for such Period and (ii) the aggregate
number of Anchors during such Period; and (iii) the number of Anchors remaining
to be purchased in order to satisfy the Agreed Purchase Commitment for such
Period Year and (b) is accompanied by appropriate documentation corroborating
the information contained in such notice.
1.14 DIRECT PRODUCTION COSTS. The direct costs of labor employed (based
on labor hours at the then prevailing standard rates) and amounts paid to
independent contractors and/or suppliers for supplies, materials, components and
services consumed or utilized in manufacturing, assembling, inspecting and
testing the Products, including (a) payroll taxes and employee benefits for
direct labor and (b) the costs incurred in satisfying the requirements of
federal, state and local government regulatory agencies with resect to Product
testing and labelling. Direct Production Costs shall be computed on a per-unit
basis, exclusive of any overhead allocations, general or administrative expense,
the costs and expense of obtaining marketing or pre-marketing approvals, or
other indirect expense.
1.15 DOCUMENTED COST. The sum of (a) the price paid by MENTOR to
ORTHOBIO for units of the Products purchased by MENTOR pursuant to this
Agreement plus (b) taxes, freight and insurance paid by MENTOR in order to take
possession of such Products FOB ORTHOBIO's factory.
1.16 EFFECTIVE DATE. The later of date on which (a) the last party to
execute this Agreement affixes its signature hereto or (b) the parties have
agreed upon the initial Product Specifications and the Clinical Trials Protocol
to be established pursuant to Section 3.2 of this Agreement.
1.17 EUROPEAN UNION. The European Economic Community formed pursuant to
the 1975 Treaty of Rome, as modified by the Single European Act of 1987, the
member states of which currently consist of Belgium, the Netherlands,
Luxembourg, France, Germany, Italy, the United Kingdom, Ireland, Denmark, Spain,
Portugal, Greece, Sweden, Finland and Austria.
1.18 FDA. The United States Food and Drug Administration.
-3-
<PAGE> 8
1.19 FIELD OF USE. The surgical treatment of urological conditions or
disorders, including by way of example and not as a limitation, the treatment of
female urinary stress incontinence through bladder neck suspension and
pubovaginal sling procedures.
1.20 FORCE MAJEURE. The occurrence of an act of God or other events
beyond the reasonable ability of the party affected thereby to control, such as
wars or insurrection, strikes, fires, vandalism, floods, earthquakes, work
stoppages, embargoes, labor shortages, lack of materials or other similar
circumstances.
1.21 IMPROVEMENT. Any change in the components of the Products, or in
the processes, procedures, methods or techniques used in their manufacture,
production or assembly, that enhances the performance of the Products or that
makes them quicker, easier or less expensive to manufacture, assemble,
distribute, store, use or dispose of.
1.22 INITIAL COMPUTATION PERIOD. The eighteen (18) month period
beginning on the Quota Commencement Date.
1.23 INVOLUNTARY BUSINESS DISRUPTION. An interruption in the marketing
and distribution activities of MENTOR caused by, resulting from or attributable
to (a) the failure or inability of ORTHOBIO to supply MENTOR in any month with
the number of units of the Products equal to MENTOR's Firm Order for such month,
(b) the pendency of any claim that the Products or the Technology utilized in
their manufacture and production violates the intellectual property rights of
Third Parties, or (c) the absence of a requisite permit, approval or license or
other governmental authorization necessary in order to market and sell the
Products for use in the Field of Use in the United States without violating the
laws of the state in which such sale is proposed to be made, or (d) the
occurrence of an event of Force Majeure as defined in Section 11.3 of this
Agreement.
1.24 PRODUCTS. ORTHOBIO's (a) proprietary Anchors, (b) the Anchor
System, (c) any Ancillary Products manufactured by or for ORTHOBIO and marketed
for use with the Anchors, (d) any Improvements to such Products, and (e) any
other product or component hereafter developed or manufactured by or for
ORTHOBIO that performs the same or a substantially identical function (i.e., the
attachment of a sling or similar device to a bone) as the Products or a Product
component.
1.25 PRODUCT SPECIFICATIONS. The product specifications, quality
control tests and inspection procedures for the Products that are to be set
forth in a separate schedule prepared by ORTHOBIO and approved by MENTOR for
attachment as Exhibit A to this Agreement concurrently with the execution of
this Agreement, as they may be amended by the mutual written agreement of the
parties from time to time.
1.26 PROPORTIONATE SHARE. The ratios in which MENTOR and ORTHOBIO
shall share (a) the costs and expenses of certain actions or proceedings under
Section 8 of this Agreement and (b) any recoveries resulting therefrom, if both
parties elect to participate in any such actions or proceedings. Each party's
Proportionate Share shall be the percentage obtained by multiplying 100% by a
fraction, (a) the numerator of which is the lost profits attributable to lost
sales of the Product by such party and (b) the denominator of which is the
aggregate lost profits of both parties attributable to lost sales of the
Product.
-4-
<PAGE> 9
*Confidential information has been omitted and filed separately with
the Securities and Exchange Commission pursuant to a confidential
treatment request.
1.27 QUOTA COMMENCEMENT DATE. The first day of the first month
following the date on which MENTOR'S cumulative Commercial Sales of the Products
since the Effective Date equal or exceed * .
1.28 Third Party. Any person other than the legal entity that is a
party to this Agreement. As used in this Agreement, "Third Party" shall include
agents and employees of a party to this Agreement.
2. GRANT OF MARKETING AND DISTRIBUTION RIGHTS
2.1 SCOPE OF DISTRIBUTION RIGHTS. Subject to its paying the fee
referred to in Section 3.1, below, MENTOR shall have an exclusive license to
market and sell the Products for use in the Field of Use both in the United
States and in all foreign markets, including North American markets other than
the United States, other than the Country of Japan, for an initial term of seven
(7) years, commencing on the Quota Commencement Date as provided by Section 4.
1, below.
2.2 SUBLICENSES. The rights granted hereunder are personal to MENTOR
and may not be assigned or sublicensed except that:
2.2.1 MENTOR may grant a sublicense to any Affiliate to MENTOR
for as long as (a) MENTOR continues to own at least eighty percent (80%) of the
voting and beneficial ownership interest of such Affiliate, and (b) such
sublicense is on terms and conditions consistent with this Agreement and
expressly provides that it shall terminate simultaneously with the termination
of this Agreement; and
2.2.2 MENTOR shall be entitled to sell the Products for resale
by subdistributors and marketing representatives who are engaged in the sale and
distribution of MENTOR's products on a regular basis provided that such sales
are made in accordance with the provisions of this Agreement.
2.3 IMPROVEMENTS AND NEW PRODUCTS. All Improvements or modifications to
the Products that are intended for use or that can be adapted for use in
urological applications are included in this Agreement and subject to the
distribution rights granted to MENTOR hereunder. New or additional products
developed or licensed by ORTHOBIO are not covered by this Agreement unless such
new or additional products perform the same or a substantially identical
function (i.e., the attachment of a sling or similar device to a bone) as the
Products, but if any such new or additional product has urological applications,
ORTHOBIO shall not license any other person to market or sell such product for
urology applications without first having advised MENTOR of its availability and
negotiating with MENTOR in good faith for sixty (60) days with respect to an
exclusive distribution arrangement for such new or additional product.
2.4 RIGHTS TO PRODUCT IMPROVEMENTS. Subject to the provisions of
Section 6.1.9, below, In any Improvements to the Product developed by ORTHOBIO
during the term of this Agreement that do not incorporate, modify or improve
technology that is proprietary to MENTOR shall be and remain the property solely
of ORTHOBIO. MENTOR shall not acquire any interest in ORTHOBIO's proprietary
technology or any such Improvements unless such technology or
-5-
<PAGE> 10
* Confidential information has been omitted and filed separately with the
Securities and Exchange Commission pursuant to a confidential treatment request.
Improvements are made or developed jointly by the parties pursuant to a written
development agreement, but all Improvements or modifications to the Products
that are intended for use or that can be adapted for use in urological
applications are included in this Agreement and subject to the distribution
rights granted to MENTOR hereunder.
3. CONSIDERATION FOR DISTRIBUTION RIGHTS
3.1 DISTRIBUTION FEE. On the Effective Date of this, Agreement, MENTOR
shall pay ORTHOBIO a non-refundable distribution fee of * . Thereafter,
MENTOR shall pay to ORTHOBIO:
3.1.1 An additional distribution fee in the amount of *
upon completion of the Clinic Trials as provided by Section 3.2, below; and
3.1.2 Simultaneously with the payment called for by Section 3.
1, above, the additional sum of * which shall be credited as an advance
payment for purchases of Product by MENTOR. Such credit shall be applied against
the unpaid balance shown on invoices submitted by ORTHOBIO to MENTOR until such
credit has been exhausted.
3.2 CONDUCT OF CLINICAL TRIALS. Concurrently with the execution of this
Agreement, or as soon thereafter as practicable, (a) MENTOR shall complete and
deliver to ORTHOBIO for its approval an appropriate Clinical Trials Protocol,
and (b) shall thereafter conduct Clinical Trials in accordance with the approved
Clinical Trials Protocol for a period of time, not to exceed six full calendar
months, sufficient, to (a) demonstrate the efficacy of the Products in the Field
of Use, and (b) to determine whether and the extent to which modifications to
the Products or the associated surgical instructions may be necessary to assure
commercial acceptance of the Products.
3.2.1 ORTHOBIO shall promptly review and provide comments to
MENTOR regarding any proposed Clinical Trials Protocol submitted by MENTOR and
shall not unreasonably withhold its approval of any such proposed Protocol.
3.2.2 MENTOR shall pay all costs and expense of such Clinical
Trials as provided by Section 6.2.1, below.
3.2.3 All data arising from the conduct of the Clinical Trials
shall be owned jointly by MENTOR and ORTHOBIO. MENTOR shall keep ORTHOBIO fully
advised on a continuing basis of the progress of and the data being obtained
from such Clinical Trials, and shall provide ORTHOBIO with copies of all
reports, studies and other data resulting from such Clinical Trials.
3.3 PRODUCT RESEARCH AND DEVELOPMENT. If during the course of the
Clinical Trials the parties mutually agree that further research and/or
development is necessary to adapt the Products for use in the Field of Use, or
to enhance their performance in the Field of Use, then ORTHOBIO shall perform
such additional research and development and make such alterations or
Improvements to the Products as the parties mutually agree in writing to be
appropriate to assure commercial acceptance of the Products for use in the Field
of Use. MENTOR shall reimburse the costs
-6-
<PAGE> 11
* Confidential information has been omitted and filed separately with the
Securities and Exchange Commission pursuant to a confidential treatment request.
ORTHOBIO incurs in performing any such additional research and development work
to the extent provided by Section 6.2.2, below.
3.4 OPTION TO TERMINATE AFTER CLINICAL TRIALS. MENTOR shall be entitled
to terminate this Agreement by giving written notice of termination to ORTHOBIO
at any time during the thirty (30) day period following the completion of the
Clinical Trials called for by Section 3.2 if the Clinical Trials disclose or
provide a reasonable basis for concluding that (a) use of the Products in the
Field of Use poses an undue risk of post-operative infection or other acute
complications, or (b) the Products are unlikely to gain market acceptance for
use in the Field of Use, or (c) ORTHOBIO is unable to make such alterations or
Improvements to the Products as MENTOR requests for the purpose of adapting the
Products for use in the Field of Use.
3.4.1 Should MENTOR elect to terminate this Agreement pursuant
to this Section 3.4, then (a) no portion of the Distribution Fee paid by MENTOR
pursuant to Section 3.1, above, and no funds expended by MENTOR in the conduct
of the Clinical Trials or product research and development, shall be refundable
to MENTOR, (b) ORTHOBIO shall be entitled to market and sell the Products for
use in the Field of Use, or to license Third Parties to distribute and sell the
Products, without further duty or obligation to MENTOR, and (c) MENTOR shall not
disclose to any Third Party its reasons for terminating this Agreement.
3.4.2 Unless MENTOR exercises it termination right under
Section 3.4.1, above, then upon completion of the Clinical Trials MENTOR shall
pay to ORTHOBIO the additional * called for by Section 3.1, above.
4. TERM OF AGREEMENT
4.1 TERM OF DISTRIBUTION RIGHTS. The term of the exclusive marketing
and distribution rights granted to MENTOR hereunder shall begin on the Quota
Commencement Date and, subject to the provisions of Section 4.4, below, shall
continue for a period of seven (7) years thereafter.
4.2 OPTION TO EXTEND. Provided that (a) this Agreement has not
previously been terminated by either party and (b) MENTOR has attained its
Agreed Purchase Commitment in the United States for the initial term of this
Agreement (or has remedied its failure to do so as provided by Section 4.3.2,
below):
4.2.1 MENTOR shall have the option to extend the term of this
Agreement for an additional five (5) years by giving written notice of its
desire to do so within six (6) months prior to the expiration of the initial
term. provided; however, that:
4.2.2 This option to extend shall not expire or lapse by
reason of MENTOR's failure to give such notice within such six (6)-month period
unless, not more than six (6) months prior to the expiration of the then current
term, ORTHOBIO gives MENTOR a written reminder that such option will expire and
terminate unless it is exercised (the "Reminder") and MENTOR thereafter fails to
give written notice of its intent to exercise such option within fifteen (15)
days after its receipt of such Reminder.
-7-
<PAGE> 12
4.3 DEFICIENCY NOTICES. ORTHOBIO shall have the right to terminate
MENTOR's marketing and distribution rights under this Agreement if MENTOR fails
to purchase a sufficient quantity of Anchors to fulfill its Agreed Purchase
Commitment for any Computation Period. In determining whether MENTOR has
satisfied its Agreed Purchase Commitment for a Computation Period, (a) purchases
in a single Computation Period that exceed the Agreed Purchase Commitment for
that Computation Period shall be credited against the Agreed Purchase Commitment
for the following Computation Period, and (b) MENTOR shall be deemed to have
satisfied its Agreed Purchase Commitment for any Computation Period if the
cumulative purchases by MENTOR from and after the Quota Commencement Date
through the end of such Computation Period equal or exceed the cumulative Agreed
Purchase Commitment from such Date through the end of such Computation Period.
4.3.1 Prior to terminating MENTOR's rights under this
Agreement, and as a condition precedent thereto, ORTHOBIO shall give MENTOR a
Deficiency Notice setting forth the information called for by Section 1.13,
above. Any such notice, to be effective, must be given by ORTHOBIO to MENTOR
within ninety (90) days following the expiration of the Computation Period for
which the deficiency is alleged to exist.
4.3.2 MENTOR shall have a period of sixty (60) days following
its receipt of a Deficiency Notice within which to purchase a sufficient number
of Anchors to fulfill its Agreed Purchase Commitment for such Computation
Period. Any such purchases made pursuant to this Section 4.3.2 shall be credited
only against the Agreed Purchase Commitment for the Computation Period covered
by the Deficiency Notice, and shall not be credited against the Agreed Purchase
Commitment for the Computation Period in which actually made.
4.4 TERMINATION OF DISTRIBUTION RIGHTS. Unless its duty to fulfill its
Agreed Purchase Commitment is abated pursuant to Section 4.6, below, the failure
of MENTOR to purchase a sufficient number of Anchors to remedy the deficiency
shall constitute a material default by MENTOR in the performance of its
obligations under this Agreement and, upon the occurrence of any such default,
ORTHOBIO shall be entitled to terminate this Agreement by giving written notice
of termination as provided, in Section 10.3, below.
4.5 EXCLUSIVE REMEDY. The right granted to ORTHOBIO to terminate the
exclusive marketing and distribution rights of MENTOR for the Products shall be
the sole and exclusive remedy for the failure of MENTOR to fulfill its the
Agreed Purchase Commitment, and in no event shall MENTOR be liable for damages
or any other amount by reason of its failure to fulfill its Agreed Purchase
Commitment
4.6 ABATEMENT. If by reason of an Involuntary Business Disruption
during the term of this Agreement, MENTOR (a) is unable to begin or to continue
marketing and distributing the Products in the United States, or (b) would incur
an unreasonable risk of civil or criminal liability by continuing to do so,
then:
4.6.1 The term of MENTOR's distribution rights under this
Agreement shall be extended a period of time equal to such time as the
Involuntary Business Disruption continues to exist; and
-8-
<PAGE> 13
4.6.2 The Quota Commencement Date shall be postponed for such
period of time as the Involuntary Business Disruption continues to exist; and
4.6.3 MENTOR's Agreed Purchase Commitment shall be reduced to
an amount mutually agreed to by ORTHOBIO and MENTOR that reflects both (a) the
impact of the Involuntary Business Disruption on (i) the supply of Product
available to MENTOR for distribution and sale, (ii) the period of time during
which MENTOR was unable to market and sell the Products or would incur an
unreasonable risk in doing so, and (iii) the size of the market to which MENTOR
was denied access, and (b) the impact of such Involuntary Business Disruption on
MENTOR's future marketing and sales of the Products due to such factors as loss
of customers, purchase orders or credibility, any impact on seasonal orders and
the like.
4.6.4 If MENTOR and ORTHOBIO are unable to agree on the extent
to which MENTOR's Agreed Purchase Commitment shall be reduced pursuant to this
Section 4.6, then upon the request of either party such dispute shall be
resolved by binding arbitration in accordance with the commercial arbitration
rules of the American Arbitration Association (the "AAA"). Any such arbitration
proceeding shall be conducted in Chicago, Illinois before a panel of three
arbitrators appointed in accordance with the customary procedures of the AAA, at
least one of whom shall have a reasonable level of experience in the marketing
and distribution of medical devices. Each of the parties shall bear its own
costs and expense in any such arbitration proceeding and shall pay in equal
one-half shares the costs and fees of the arbitrators.
5. REQUIREMENTS AND SUPPLY
5.1. REQUIREMENTS. ORTHOBIO shall supply to MENTOR and its Affiliates
each month the number of units of the Products for which MENTOR and its
Affiliates submit Firm Orders pursuant to Section 5.7, below.
5.2 SPECIFICATIONS. All Products supplied by ORTHOBIO hereunder shall
in all material respects meet the Product Specifications applicable to such
Product when intended for use in the Field of Use. As soon as practicable after
the execution of this Agreement, ORTHOBIO and MENTOR shall agree on the Product
Specifications for the Products and shall attach a Schedule setting forth such
Specifications as Exhibit A to this Agreement. The Product Specifications shall
constitute an integral part of this Agreement and, for as long as MENTOR has
exclusive marketing and distribution rights in the Products, shall not be
modified by ORTHOBIO without the prior written consent of MENTOR, which shall
not be unreasonably withheld. If ORTHOBIO and MENTOR do not reach agreement on
the Product Specifications within sixty (60) days after their execution of this
Agreement, then either party shall be entitled to terminate this Agreement by
giving written notice of intention to terminate, specifying the effective date
of termination, not less than ten (10) business days prior to such effective
date of termination.
5.3 TRANSFER PRICES. The transfer price initially payable by MENTOR
shall be the amount set forth on the Terms Sheet attached as Schedule I to this
Agreement. The transfer price shall be subject to adjustment effective as of the
second anniversary of the Quota Commencement Date and on the corresponding date
each year thereafter as provided in the Terms Sheet.
-9-
<PAGE> 14
5.3.1 The Transfer Price being charged to MENTOR for the
Products shall not be greater than the Transfer Price charged by ORTHOBIO to any
other distributor of the Products for applications involving human patients in
hospitals or surgical centers, whether or not in the Field of Use.
5.3.2 Notwithstanding the provisions of Section 5.3.1. above,
ORTHOBIO shall be entitled to establish and maintain a tiered pricing schedule
based on the quantity purchased so long as such pricing schedule is applied on a
uniform basis with respect to all purchasers to whom ORTHOBIO sells the
Products.
5.4 SAMPLES AND PROMOTIONAL PRODUCT. ORTHOBIO will provide MENTOR with
samples and promotional units of the Products for use as samples, physician
demos and similar promotional or educational purposes in the quantities, at the
prices and for the period set forth in the Terms Sheet attached as Schedule 1 to
this Agreement.
5.5 DUTY TO MANUFACTURE. ORTHOBIO shall establish and maintain the
capacity necessary to produce in any thirty (30)-day period a quantity of the
Products sufficient to satisfy the greater of (a) twelve percent (12%) of
MENTOR's Agreed Purchase Commitment for the Products for the then-current
Computation Period or (b) ten percent (10%) of MENTOR's actual purchases during
the preceding calendar year. MENTOR's Firm Order pursuant to Section 5.7, below,
for any given month shall not exceed ORTHOBIO's then-existing production
capacity unless ORTHOBIO agrees otherwise.
5.6 INVENTORY SUPPORT. ORTHOBIO shall establish and maintain an
inventory of the Products sufficient (after taking into account its obligations
to supply the requirements of other distributors of the Products) to fill a
purchase order from MENTOR for up to (a) ten percent (10%) of MENTOR's Agreed
Purchase Commitment for the Products for the then current Computation Period or
(b) ten percent (10%) of MENTOR's actual purchases during the preceding calendar
year, within fifteen (15) business days of the receipt of such order.
5.7 PURCHASE ORDERS AND FORECASTS. By the fifteenth (15th) day of each
calendar month following the Effective Date of this Agreement, MENTOR will
furnish ORTHOBIO with an order (a "Firm Order") specifying quantities and
delivery dates for units of the Products, if any, to be delivered during the
month following the month in which the Firm Order is furnished to ORTHOBIO.
Concurrently therewith, MENTOR will provide ORTHOBIO a nonbinding rolling
forecast of MENTOR's projected requirements for the three (3) calendar months
following the delivery month for which the Firm Order has been placed. During
each calendar month, ORTHOBIO shall furnish the requested quantity of Product
specified by MENTOR in its Firm Order for such month, but ORTHOBIO shall not be
legally obligated to furnish quantities that exceed the quantities that ORTHOBIO
is able to supply when ORTHOBIO's production capacity and inventory levels
satisfy the requirements of Sections 5.5 and 5.6, above.
5.7.1 All purchase orders shall be submitted on forms that are
acceptable to ORTHOBIO.
-10-
<PAGE> 15
5.7.2 The provisions of this Agreement shall govern the
purchase and sale of the Products between ORTHOBIO and MENTOR, and any
inconsistency or conflict between the terms set forth in any form of purchase
order submitted by MENTOR with the provisions of this Agreement shall be
resolved in favor of the provisions of this Agreement.
5.8 ORDER FULFILLMENT. ORTHOBIO will timely fill all purchase orders
submitted by MENTOR, and will afford all purchase orders for the Products
received from MENTOR equal priority with ORTHOBIO's own supply requirements and
orders from other distributors licensed to distribute the Products for use in
other applications or fields of use. ORTHOBIO will ship all orders for the
Products in the priority in which such orders were received, regardless of the
field of use to which such orders relate, and ORTHOBIO will not place any
purchase orders received from MENTOR on a back-order status if ORTHOBIO is then
shipping Products to its own customers or to any other purchaser or distributor.
5.9 PRODUCT ACCEPTANCE. MENTOR does not intend and shall not be
required to inspect or test any Product supplied by ORTHOBIO, it being the
intention of the parties that (a) the Products shall be supplied to MENTOR in a
ready-to-sell condition without further testing or inspection and that (b)
MENTOR shall be entitled to immediately distribute all such Products. The
acceptance and resale of Products by MENTOR shall not alter or diminish
ORTHOBIO's warranties contained elsewhere in this Agreement.
5.10 NONCONFORMING GOODS. Should it come to the attention of MENTOR
that any lot or shipment of the Products does not conform to the Product
Specifications, then MENTOR shall not be obligated to pay for such Defective
Product. MENTOR shall promptly advise ORTHOBIO of any Product delivered to
MENTOR that is being rejected as nonconforming. Any such notice (a) shall be in
writing, (b) shall specify the shipment or lots being rejected, and (c) shall be
accompanied by appropriate information substantiating the claim that such
Products were Defective Product. The costs and expense of returning Defective
Product rejected by MENTOR or Defective Product returned by a customer to MENTOR
shall be borne by ORTHOBIO.
5.11 REPLACEMENT. ORTHOBIO shall promptly replace at its own cost and
expense any Products that are properly rejected by MENTOR or whose acceptance
MENTOR has properly revoked or, if MENTOR so requests, shall credit MENTOR with
an amount equal to the Documented Cost of any such rejected Products. MENTOR
shall not be entitled to recover damages, lost profits or other amounts from
ORTHOBIO with respect to any such Defective Product, but nothing in this
sentence shall be construed to limit MENTOR's abatement rights under Section
4.6, above, or its indemnification rights under Section 9.3, below, with respect
to any such Defective Product.
5.12 PACKAGING. The Products will be supplied in sealed containers
meeting the Product Specifications, and all Anchors and related Product
components comprising the Anchor System, other than the inserters, shall be
supplied in sterile condition. All Products shall be delivered in packaging of a
design specified in the Product Specifications, together with all applicable
product literature and instructions for use. MENTOR shall provide ORTHOBIO with
camera-ready art work for all trademarks, labels or markings that MENTOR desires
to have imprinted on all packaging and product insert data sheets, and ORTHOBIO
shall not make any changes in such art work or in the specifications for such
packaging materials without the prior written consent of MENTOR.
-11-
<PAGE> 16
MENTOR shall pay all costs associated with any and all changes to the design of
the packaging after such design has been agreed to by the parties.
5.13 PATENT INFORMATION. The Product packaging shall identify all
patents and pending patent applications under which the Product is manufactured
by ORTHOBIO.
5.14 INVOICING. ORTHOBIO shall invoice MENTOR, 30-days net, for the
Products upon shipment FOB ORTHOBIO's manufacturing plant. MENTOR shall be
entitled to make partial or complete payment of any such invoice by offsetting
against such invoice any credits to which MENTOR is entitled pursuant to Section
5.11, above, or Section 5.20, below, on account of the return of Defective
Product.
5.15 TITLE AND RISK OF LOSS. Title to the Products shall transfer to
MENTOR and risk of loss to the Products shall transfer to MENTOR upon removal of
the Products from ORTHOBIO's manufacturing plant.
5.16 MONTHLY STATEMENTS; PAYMENT. ORTHOBIO shall issue a monthly
statement within ten (10) days after the end of each month, reflecting all
outstanding invoices and any unused credits to which MENTOR is entitled under
Section 5.11, above or Section 5.20, below. MENTOR shall pay the balance owing
on each monthly statement within thirty (30) days after its receipt of such
statement. Amounts not timely paid shall thereafter bear interest at a rate
equal to the lesser of (a) twelve percent (12%) per annum or (b) the maximum
rate permitted by law.
5.17 PRODUCT WARRANTY. ORTHOBIO warrants to MENTOR that:
5.17.1 The Products to be supplied to MENTOR hereunder shall
be manufactured and produced:
A. In plants that: (1) have been registered with and
are in compliance with the requirements of the FDA; and (2) satisfy the
applicable requirements established under ISO 9001 and ISO 9002; and
B. In accordance with: (1) applicable Good
Manufacturing Practices as promulgated by the FDA; and (2) applicable standard
established by ISO 9001 and ISO 9002; and (3) applicable laws and regulations of
the United States and each of the fifty states in which MENTOR is marketing and
distributing the Products; and
5.17.2 The use of the Products for their intended purpose in
the Field of Use will not violate any federal, state or local laws applicable to
the use of the Products in the United States; and
5.17.3 At the time of its delivery to MENTOR, the Products
will: (a) conform to the then-current Product Specifications; (b) be fit for use
in the intended Field of Use; (c) have a remaining shelf life of not less than
twenty-seven (27) full calendar months from the date on which tendered to
MENTOR; (d) be free of all liens, security interests and encumbrances; (e) not
be proscribed by federal or state law from being introduced into interstate or
intrastate commerce in the
-12-
<PAGE> 17
United States; and (f) not be adulterated within the meaning of the Federal
Food, Drug and Cosmetic Act and regulations promulgated thereunder, nor within
the meaning of any substantially similar law of any state within the United
States or any Member State in the European Community.
5.17.4 If ORTHOBIO has obtained a CE Mark for the Products,
then the Products to be supplied to MENTOR hereunder shall be manufactured and
produced (a) in plants that have been audited and certified by the applicable
Notified Body to satisfy the standards established by EN 46001 and 46002 and any
other requirements promulgated by the European Commission for manufacturing
facilities for medical devices in order to qualify for the CE Mark, and (b) in
accordance with the standards established by the applicable Medical Device
Directive promulgated by the European Commission or the European Council in
order to qualify for a CE Mark
5.18 WARRANTY DISCLAIMERS. EXCEPT AS EXPRESSLY PROVIDED IN SECTION
8.1, BELOW, THE LIMITED WARRANTY SET FORTH IN SECTION 5.17, ABOVE, IS THE ONLY
WARRANTY BEING MADE BY ORTHOBIO WITH RESPECT TO THE PRODUCTS. ALL OTHER
WARRANTIES, WHETHER WRITTEN OR ORAL, EXPRESSED OR IMPLIED, CONTRACTUAL OR
STATUTORY, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR ANY PARTICULAR PURPOSE ARE SPECIFICALLY EXCLUDED AND DISCLAIMED.
5.18.1 MENTOR agrees and understands that it shall be solely
responsible for any warranties or representations made by it to its customers
which are inconsistent with or in addition to any warranties made by ORTHOBIO to
the ultimate purchasers and users of the Products, and MENTOR shall, at its own
expense, defend, indemnify and hold ORTHOBIO harmless from and against any
claims thereon of any nature whatsoever in the manner but only to the extent
provided by Section 9.4, below (it being the intention of the parties that the
indemnity obligation contained in this Section 5.18.1 shall be subject to the
terms and conditions of Section 9.3, below, and that this Section not be
construed to increase MENTOR's indemnification obligation beyond the obligations
set forth in Section 9.4).
5.18.2 The Warranties given by ORTHOBIO pursuant to Section
5.17, above, (a) shall cease to be in effect with respect to any defective
condition that results from or is attributable to the failure of MENTOR to
store, ship or otherwise handle the Products in accordance with ORTHOBIO's
instructions for handling, and (b) shall not apply to any components supplied by
MENTOR for the purpose of marketing the Products in kit form as contemplated by
Section 6.1.9, below.
5.19 PRODUCT RECALLS. ORTHOBIO shall bear all costs and direct
out-of-pocket expense incurred by either of the parties on account of any recall
of or any device notification or safety alert given with respect to the
Products, whether pursuant to a request of the FDA or otherwise, including
without limitation any expenses or obligations to Third Parties and any costs
associated with the shipment of recalled Product from customers to MENTOR or
ORTHOBIO; provided, however, that the obligation of ORTHOBIO hereunder shall not
extend to any recall, notification or alert that is necessitated by an act,
error or omission of MENTOR, in which case MENTOR shall bear all costs and
out-of-pocket expenses incurred by either MENTOR or ORTHOBIO. MENTOR shall
maintain
-13-
<PAGE> 18
complete and accurate records for such periods as may be required by applicable
law of all Products sold by it.
5.20 CUSTOMER RETURNS. Defective Product supplied to MENTOR and
returned by the customer to MENTOR will be forwarded to ORTHOBIO with all
associated paperwork, including sufficient documentation to establish the date
of original sale to the customer. The costs and expense of returning to ORTHOBIO
Defective Product returned by a customer shall be borne by ORTHOBIO. ORTHOBIO
shall promptly replace at its own cost and expense any Defective Products that
are returned to ORTHOBIO or, if Mentors so requests, shall credit to MENTOR on a
monthly basis an amount equal to the Documented Cost of any such returned
Defective Product, if such Defective Product (a) is Defective Product that has
been properly returned by Mentor or any customer of MENTOR or (b) has been
replaced on a no-charge basis by MENTOR in accordance with the established
customer complaint and returned goods policies of MENTOR for the return and
replacement of Defective Product.
5.21 CUSTOMER COMPLAINTS. MENTOR shall promptly refer to ORTHOBIO for
review and evaluation any complaints received by it that are subject to the
provisions of Part 820 of Title 21 of the Code of Federal Regulations (Good
Manufacturing Practice for Medical Devices).
5.21.1 With respect both to complaints referred to ORTHOBIO by MENTOR
and complaints received directly by ORTHOBIO:
A. ORTHOBIO shall (1) give such notices (including any Medical
Device Reports required by the FDA), (2) conduct such investigations, (3)
maintain such records, and (4) take such other actions as in each case are
required by the FDA and any state regulatory agency having jurisdiction with
respect thereto unless ORTHOBIO is contesting the matter with the FDA or other
regulatory agency in good faith and with due diligence.
B. ORTHOBIO shall keep MENTOR advised on a continuing basis with
respect to (1) the nature of such complaints, (2) the results of any
investigations conducted by it with respect thereto, and (3) the corrective
action, if any, initiated as a result of or in response thereto.
5.21.2 MENTOR shall promptly refer to ORTHOBIO any complaints, demands
or notices delivered to or made upon MENTOR by or on behalf of a customer or any
Third Party who is seeking damages or other compensation on account of any
injury, illness or death of a person or damage to property that is alleged to
have resulted from or to be attributable to the use of the Products, and
ORTHOBIO shall indemnity, defend and hold MENTOR free and harmless with respect
to any such claim or demand in the manner but only to the extent provided in
Section 9.3, below (it being the intention of the parties that the indemnify
obligation contained in this Section 5.21.2 shall be subject to the terms and
conditions of Section 9.3, below, and that this Section not be construed to
increase ORTHOBIO's indemnification obligation beyond the obligations set forth
in Section 9.3).
5.22 COUNTRY OF ORIGIN. At MENTOR's request, ORTHOBIO shall provide
MENTOR with a signed affidavit of the country of origin of any Products
delivered to MENTOR pursuant to this Agreement.
-14-
<PAGE> 19
5.23 TAXES. Taxes, whether in the United States or any other country,
now or hereafter imposed with respect to the transactions contemplated hereunder
(with the exception of income taxes imposed upon ORTHOBIO and measured by the
gross or net income of ORTHOBIO) shall be the responsibility of MENTOR, and if
paid or required to be paid by ORTHOBIO, the amount thereof shall be added to an
become a part of the amounts payable by MENTOR hereunder.
6. ADDITIONAL COVENANTS OF THE PARTIES
6.1 COVENANTS OF ORTHOBIO. ORTHOBIO covenants, warrants and represents
to MENTOR that:
6.1.1 FDA MARKETING APPROVAL. ORTHOBIO now has and shall maintain in
full force and effect throughout the term of this Agreement all FDA Marketing
Approvals necessary to the sale and distribution of the Products and any
Improvements thereto for use in the Field of Use in the United States.
6.1.2 REGISTRATION IN EUROPEAN COMMUNITY. As soon as practicable after
the execution of this Agreement (if it has not previously done so), ORTHOBIO
shall prepare at its Own cost all documents necessary to apply for a CE Mark
for the sale and distribution of the Products and any Improvements thereto for
use in the Field of Use in any of the Member States of the European Union, and
shall exercise due diligence in pursuing the issuance of a CE Mark for the
Product, but delays in ORTHOBIO's receipt of a CE Mark, or its inability to
obtain a CE Mark after making diligent efforts to do so, shall not constitute an
Involuntary Business Disruption under this Agreement.
6.1.3 COMPLIANCE WITH LAW. ORTHOBIO shall at all times (a) keep and
maintain all records necessary or appropriate to evidence such compliance or
that are otherwise mandated by the laws, rules, standards and requirements
identified in Sections 5.17 and 6.1.2, above, and (b) shall make such records
available to MENTOR (subject to the restrictions imposed by Section 6.3.3,
below) and its duly authorized representatives for inspection and copying at
reasonable times during regular business hours upon reasonable prior notice, and
(c) shall promptly comply with the orders or directives of (1) any cognizant
governmental authority within the United States or any of the fifty states
pertaining to the production of the Products and (ii) the laws, rules and
regulations adopted for the European Community the European Commission or the
European Council, to the extent necessary to procure and maintain in effect
a CE Mark for the sale and distribution of the Products and any Improvements
thereto for use in the Field of Use in any Member State of the European Union.
6.1.4 PRODUCT DEVELOPMENT. ORTHOBIO shall commit on a commercially
reasonable basis the necessary human and technical resources and provide
sufficient funding to assure prompt completion of the design configuration for
the Products and their packaging, associated product literature and information,
Product insert data sheets and the like resulting from changes agreed to by the
parties during the Clinical Studies promptly after the completion of such
Studies.
6.1.5 COVENANT BY ORTHOBIO NOT TO COMPETE. Unless and until MENTOR's
marketing, and distribution rights; are terminated pursuant to Section 10.3,
below:
-15-
<PAGE> 20
A. Neither ORTHOBIO nor any of its Affiliates shall market or
distribute the Products for use in the Field of Use, other than marketing and
distribution of the Product for use in the Field of Use in Japan through
independent distributors who are not Affiliates of ORTHOBIO.
B. ORTHOBIO shall not knowingly or intentionally suffer or permit
any Person to sell the Products for use in the Field of Use in violation of the
exclusive marketing and distribution rights held by MENTOR under this Agreement.
C. ORTHOBIO shall take such actions as may be reasonable and
necessary to assure that any Persons authorized to market and distribute the
Product for use in the Field of Use in Japan do not market and sell the Product
in any other country or to Persons who are likely to distribute the Product for
use in the Field of Use in any other country.
6.1.6 MARKETING SUPPORT. ORTHOBIO shall from time to time provide such
scientific and Technical Information regarding the Products and their clinical
performance as MENTOR may reasonably request for the purpose of supporting
MENTOR's clinical study and marketing activities, including such information as
may be necessary to assist MENTOR in marketing the Products in kit form. In
addition, ORTHOBIO shall make its technical and marketing personnel available to
MENTOR for reasonable periods of time to provide technical support, to respond
to technical inquiries, and to participate in marketing and sales strategy
sessions. However, MENTOR shall pay ORTHOBIO for all travel and out-of-pocket
expenses incurred by ORTHOBIO in making such personnel available.
6.1.7 MANUFACTURING MODIFICATIONS. ORTHOBIO shall give MENTOR not less
than sixty (60) days' prior written notice (or such lesser period of time as may
be reasonable under the circumstances) of any modifications proposed to made by
ORTHOBIO or its suppliers to the manufacturing processes or procedures for the
Products or to any quality control test and/or compliance procedures relating to
the Products or the supplies and components embodied therein, whether resulting
from governmental inspection, customer complaints or for any other reason. Such
notice shall be accompanied by a written report setting forth in reasonable
detail the reasons for and the nature of the proposed change and all relevant
technical data, and no such proposed change shall be implemented without the
prior approval of MENTOR, which shall not be unreasonably withheld.
6.1.8 PRODUCT IMPROVEMENTS. ORTHOBIO shall (a) consult with MENTOR
regarding proposed changes to the Products, (b) make such Improvements to the
Product as may be reasonably necessary to meet the needs of the market and to
keep the Products current and commercially acceptable, and (c) make reasonable
efforts consistent with its available resources and its other contractual
commitments and business objectives to incorporate into the Products any
features or Improvements that are recommended by MENTOR as the result of its
clinical studies and its marketing and customer support activities, including
such modifications and additions as MENTOR may reasonably request for the
purpose of marketing and distributing the Products in kit form.
6.1.9 MARKETING OF PRODUCTS IN KIT FORM. MENTOR shall have the right to
combine or assemble the Products with other devices, instruments or materials,
including biological materials that mimic the desirable characteristics of
autologous tissue or are otherwise substantially
-16-
<PAGE> 21
equivalent to human tissue, for the purpose of marketing and distributing the
products in kit form, including by way of example and not in limitation, starter
kits and procedure kits.
A. MENTOR shall bear all costs and expense of packaging the
Products in kit form.
B. Subject to the provisions of Section 7.1, below, MENTOR shall
have the right to distribute any such kits under its own name and marks. MENTOR
shall own all intellectual and other property rights with respect to kit
configuration and trade dress for any of the kits that are designed or marketed
by MENTOR, and ORTHOBIO shall not have any rights with respect thereto.
C. Any proprietary technology or Improvements developed or
acquired by MENTOR for the purpose of marketing the Products in kit form shall
be and remain the intellectual property of MENTOR. ORTHOBIO shall have a
nonexclusive, royalty-free license in any such technology or Improvements solely
for the purpose of performing its obligations any such proprietary improvements
under this Agreement, and any such license shall terminate simultaneously with
the termination of this Agreement.
D. Should any such kits include additional devices or products to
be supplied by ORTHOBIO, then ORTHOBIO shall supply such devices and products on
the terms and conditions set forth in Section 5, above, at a transfer price that
is established by the mutual agreement of the parties, but nothing herein shall
be construed to require MENTOR to procure any kit components from ORTHOBIO.
E. Except as provided in Section 6.1.9.D, above, ORTHOBIO shall
not be entitled to any increase in the transfer price for the Products by reason
of (a) their being packaged and marketed in kit form or (b) any increase in the
selling price attributable to the value added by MENTOR by packaging the
Products in kit form, it being intended that the transfer price for the Products
will remain constant, regardless of the manner in which they are marketed and
distributed by MENTOR.
6.1.10 GOVERNMENTAL INSPECTIONS. ORTHOBIO shall promptly notify MENTOR
of any inspection made of its facilities or its operations by any regulatory
agency or Notified Body, or of those of any of its suppliers or contract
manufacturers of which it receives notice, that relates in any manner to the
production, distribution or use of the Products or any component of the
Products. ORTHOBIO shall promptly provide MENTOR with a written report of any
such inspection. In addition. ORTHOBIO shall immediately request an unexpurgated
copy of the inspection report from the inspecting governmental agency, and,
unless prohibited from doing so under applicable law, shall forward a copy
thereof to MENTOR immediately upon its receipt.
6.1.11 LABELLING CLAIMS. ORTHOBIO shall consult with MENTOR with
respect to any labelling claims for which ORTHOBIO intends to seek FDA approval,
and shall include in its applications for FDA approval such labelling claims as
MENTOR may reasonably request.
-17-
<PAGE> 22
6.1.12 VENDOR'S AUDIT. ORTHOBIO shall permit MENTOR or its authorized
representatives to enter and inspect, during normal business hours, the plants
and facilities in which the Products are manufactured, packaged, labeled or held
in order to (a) permit MENTOR to verify that the Products are being produced in
conformity with applicable Good Manufacturing Practices, ISO 9001 and/or 9002
and the applicable Medical Device Directive of the European Commission. During
any such inspection, MENTOR's quality control or compliance inspectors shall be
entitled to inspect the manufacturing and quality control procedures of ORTHOBIO
relating to the Products, and all records relating thereto, provided that such
inspections are carried out in a manner that does not unreasonably interfere
with ORTHOBIO's manufacturing operations.
A. MENTOR shall give ORTHOBIO prior notice of its intention to
conduct any such audit at least five (5) business days prior to the scheduled
commencement thereof, and shall cooperate with ORTHOBIO in the scheduling of any
such audit so as to minimize to the extent practicable any disruption to
ORTHOBIO's business operations, but MENTOR shall not be obligated to postpone
the conduct of such audit for more than fifteen (15) days.
B. MENTOR shall furnish ORTHOBIO with a written report of the
results of any such audit as soon as practicable after its completion, and
ORTHOBIO shall promptly take any action suggested or recommended in such report
to the extent that such action is necessary to cure a default by ORTHOBIO in the
performance of its obligations under this Agreement.
6.1.13 CONVERSION TO NONEXCLUSIVE RIGHTS. If at any time the
distribution rights held by MENTOR have become nonexclusive rights, all terms
and conditions of this Agreement that are not rendered inapplicable by the
change in the nature of the rights held by MENTOR shall continue in full force
and effect and, in addition:
A. The transfer price charged to MENTOR shall not exceed the most
favorable Transfer Price charged by ORTHOBIO to any other distributor of the
Products for use in the Field of Use.
B. For as long as this Agreement remains in effect, ORTHOBIO shall
not enter into agreements for the marketing and distribution of the Products for
use in the Field of Use with any other person or entity on terms and conditions
that are more favorable than the terms and conditions of this Agreement without
giving to MENTOR the benefit thereof as of the date upon which any such more
favorable agreement becomes effective. Should ORTHOBIO enter into any such more
favorable agreement, it will promptly notify MENTOR to that effect and advise
MENTOR concerning the change in the terms and conditions affecting this
Agreement and the provision made by ORTHOBIO to effectuate such chances.
6.2 COVENANTS OF MENTOR. MENTOR covenants to and agrees with ORTHOBIO
that:
6.2.1 CONDUCT AND FUNDING OF CLINICAL TRIALS. MENTOR shall
exercise due diligence in developing and implementing the Clinical Trials called
for by Section 3.2, above, and shall bear all of the costs and expense incurred
by MENTOR in connection therewith.
-18-
<PAGE> 23
6.2.2 FUNDING OF PRODUCT DEVELOPMENT. MENTOR shall reimburse ORTHOBIO
the costs ORTHOBIO incurs in performing additional research and development work
requested by MENTOR pursuant to Section 3.3, above. For purposes of this Section
6.2.2, ORTHOBIO's costs shall include (a) the direct costs of ORTHOBIO's
engineering, technical and support personnel actively engaged in the additional
work, computed at ORTHOBIO's standard hourly rates for such personnel, together
with all payroll and benefit costs, and (b) the costs of all materials and
services procured from unrelated third parties.
6.2.3 PHYSICIAN TRAINING. During the conduct of the Clinical Trials and
thereafter, MENTOR shall establish and implement a physician training program
for the purpose of standardizing procedures for use of the Products for use in
the Field of Use, and promoting and providing physician education regarding the
Products and their use in the Field of Use. All costs and expense that MENTOR
incurs in providing physician training or education in the use of the Products,
including (a) fees paid to physicians or others to write articles concerning the
Products or the results of clinical studies for publication in professional and
trade journals or periodicals, and (b) the incremental costs of including
information and training with respect to the Products in professional seminars
and training programs conducted by MENTOR, shall be borne by MENTOR.
6.2.4 MARKETING, PROGRAM. MENTOR shall consult with ORTHOBIO on a
continuing basis with respect to (a) the design and development of kit
configurations for the marketing of the Products in kit form as contemplated by
Section 6.1.9, above, and (b) the development and registration of tradenames to
differentiate the Products when used in the Field of Use from Product readily
available from other distributors and suppliers for orthopedic applications and
procedures.
6.2.5 SALES CAPACITY. MENTOR shall maintain adequate warehouses and
other facilities and shall train and equip sufficient staff to effectively
promote, sell and distribute the Products, but nothing herein shall be construed
to make MENTOR liable for any failure or alleged failure to purchase or sell the
Products.
6.2.6 COVENANT BY MENTOR TO OBSERVE RESTRICTIONS. Neither MENTOR nor
any of its Affiliates shall market or distribute the Products for any use other
than applications in the Field of Use, and MENTOR will not knowingly or
intentionally suffer or permit any Person purchasing the Products from MENTOR or
its Affiliates to resell the Products for use in any application other than the
Field of Use.
6.2.7 LABELLING AND WARRANTY CLAIMS. MENTOR shall not make any
expressed warranties or other claims with respect to the Products that have not
been authorized by the FDA or ORTHOBIO or that are inconsistent with any
labelling claims that have been approved by the FDA and ORTHOBIO with respect to
the Products.
6.2.8 FOREIGN REGISTRATION. Subject to the performance by ORTHOBIO of
its obligations under Section 6.1.2, above, MENTOR shall prepare at its own cost
and expense all documents necessary for registration, sale and distribution of
the Products and any Improvements thereto for use in the Field of Use in any
foreign country into which MENTOR elects to begin marketing and distribution
activities, and shall secure and maintain in full force and effect all other
-19-
<PAGE> 24
permits, licenses and approvals required in order to sell the Products for use
in the Field of Use in such foreign countries.
6.2.9 FOREIGN LANGUAGE TRANSLATIONS. MENTOR shall, at its own
expense, translate all user and technical manuals and advertising and marketing
information into the language of its customers and shall provide ORTHOBIO with
advance copies of all such materials for approval by ORTHOBIO, which approval
shall not be unreasonably withheld and shall be deemed to have been given unless
ORTHOBIO makes a written objection to such translations, setting forth the
reasons therefor, within ten (10) days after its receipt thereof. MENTOR shall
assign to ORTHOBIO the copyrights for any such translations of product
information data, instructions for use or other materials that are supplied by
ORTHOBIO, but MENTOR shall have a nonexclusive, royalty-free right to use any
such translations during the term of this Agreement in connection with its
activities pursuant to this Agreement.
6.2.10 COMPLIANCE WITH LAW. MENTOR shall comply with all
applicable federal, state and local laws and regulation in its promotion and
sale of the Products, and the laws of any foreign jurisdiction in which it
distributes the Products.
6.2.11 DELIVERY OF CLINICAL DATA. MENTOR shall from time to time
at the request of ORTHOBIO provide ORTHOBIO with such scientific and technical
information regarding the Products and their clinical performance as becomes
available to MENTOR by reason of any Clinical Trials conducted by MENTOR.
6.2.12 REPORTING. During the term of this Agreement MENTOR shall
provide ORTHOBIO no less frequently than annually with a written report
regarding its marketing and distribution activities, which shall include
customer call reports, business trends, production planning of MENTOR's primary
customers in the Field or Use, market forecasts and other reports reasonably
requested by ORTHOBIO, but nothing herein shall be construed to require MENTOR
to furnish ORTHOBIO with the names of MENTOR's customers or to otherwise provide
ORTHOBIO with any Confidential or Proprietary information regarding its
customers or its marketing plans or strategy.
6.3 MUTUAL COVENANTS. Each of the parties covenants to and agrees with
the other that:
6.3.1 AUTHORITY TO CONDUCT BUSINESS. It is duly organized and in
good standing under the laws of the jurisdiction in which it is incorporated and
has all requisite corporate power and authority and the permits, consents, and
qualifications necessary to operate its business as it is currently being
conducted.
6.3.2 EXCHANGE OF INFORMATION. It shall promptly furnish to the
other party a complete and correct copy of any notice, report or other
communication that it receives from the FDA or from any other governmental
agency concerning the Products.
6.3.3 CONFIDENTIAL INFORMATION. Any Confidential Information
gained by either of the parties or their representatives by reason of
association with the other party in connection with the performance of any
obligations under this Agreement, whether or not such Confidential
-20-
<PAGE> 25
Information was directly or intentionally communicated, is and shall at all
times remain confidential. Each of the parties agrees that:
A. It shall not disclose any Confidential Information or other
material which is deemed confidential pursuant to this Agreement to any other
person unless such disclosure is (a) specifically authorized in writing by the
other party or (b) required by law or judicial process.
(1) In the event that any such written authorization to make
disclosure is given, disclosure shall be made only within the limits and to the
extent of such of authorization.
(2) Each party shall give the other at least fifteen (15)
days prior written notice of its intention to make a disclosure of Confidential
Information it believes to be required by law to a Third Party who does not
agree to be bound by the confidentiality provisions of this Agreement, setting
forth (a) the nature of the information proposed to be disclosed and (b) the
basis for the disclosing party's conclusion that such disclosure is required by
law.
B. It shall use its best efforts to prevent any inadvertent
disclosure of any Confidential Information deemed confidential hereunder to any
Third Party by using the same care and/or discretion that it uses with similar
data of its own that it deems confidential in the operation of its business.
C. It shall not use the Confidential Information in any manner
except to satisfy its obligations hereunder.
6.3.4 BOOKS AND RECORDS. Each party shall at all times during the
continuance of this Agreement keep books and records in sufficient detail to
permit verification of its compliance with the terms and conditions of this
Agreement. All such books and records shall be available for inspection and
copying by the other party or its designated representative at the principal
place of business of the party keeping such books and records at reasonable
times during regular business hours for purposes reasonably related to this
Agreement.
6.3.5 IMPAIRMENT OF OBLIGATION. Neither party has entered into, and
neither party will hereafter enter into any agreement, the execution or
performance of which would violate or interfere with this Agreement or have an
adverse effect on such party's ability to perform its obligations under this
Agreement.
6.3.6 ADVERSE INFORMATION. Each party will promptly notify the other in
writing of any fact, condition or information which may hereinafter come to the
attention of such party and which may adversely affect the reliability, utility
or marketability of the Products, including but not limited to, adverse
scientific or technical studies or evaluations and threatened litigation or
claims. If such adverse information requires that corrective or protective
action be taken related to the Products, including, but not limited to, a
recall, market withdrawal, stock recovery or label clarification, MENTOR will
immediately notify ORTHOBIO of such requirement in writing, provide ORTHOBIO
with complete copies of all documentation related thereto, and provide all
commercially reasonable assistance to ORTHOBIO necessary to take such action or
to satisfy such requirements.
-21-
<PAGE> 26
6.3.7 FURTHER ASSURANCES. Each of the parties shall take such acts
and execute and deliver such documents and instruments as may reasonably be
requested by the other party to enable the other party to perfect any of its
rights under this Agreement, including any assignments, notices of assignment,
or other registrations with applicable domestic and foreign governmental
agencies.
7. TRADE NAMES AND TRADE DEMANDS
7.1 ACKNOWLEDGMENT OF SOURCE. MENTOR will acknowledge in its Product
literature that the Anchor System is manufactured and supplied by ORTHOBIO, and
(b) include in the packaging or the associated Product literature a statement
(a) to the effect that the Product is patented, or that patent protection is
pending or has been applied for, and (b) setting forth the registration
number(s) of all patents identified by ORTHOBIO as being applicable to the
Product. ORTHOBIO hereby grants to MENTOR a nonexclusive, royalty-free license
to use its tradename and the PeBA C Soft Tissue trademark solely for the
purposes authorized by this Section 7.1.
7.1.1 The license granted hereunder shall (a) commence on the
Effective Date of this Agreement, (b) be nontransferable except to Affiliates of
MENTOR in connection with the subdistributor activities of such Affiliates in
accordance with the provisions of this Agreement, (c) be coterminous with
MENTOR's distribution rights and, (d) subject to the provisions of Section
10.4.3. belong, shall terminate upon the expiration or termination of MENTOR's
distribution rights.
7.1.2 During the term of this Agreement, MENTOR may indicate in
signs, advertising, publicity, or other sales, promotional or marketing media or
materials that MENTOR is an authorized dealer or distributor of ORTHOBIO's
Products.
7.2 INFRINGEMENT PROCEEDINGS. MENTOR agrees to use reasonable efforts
to notify ORTHOBIO of any unauthorized use by others of any trademark or
tradename owned by ORTHOBIO promptly as such unauthorized use comes to MENTOR's
attention. ORTHOBIO shall have the sole right and discretion to bring
infringement or unfair competition proceedings involving the unauthorized use of
its trademark or tradename.
7.3 MARKS OWNED BY MENTOR. MENTOR shall be entitled to develop,
register and promote the use its own tradenames and trademarks for the purpose
of marketing and distributing the Products for uses within the Field of Use. Any
such names and marks shall constitute the proprietary property of MENTOR;
ORTHOBIO shall not have any rights in any such names and marks, and MENTOR shall
be entitled to continue to use such names and marks after the expiration of
MENTOR's exclusive distribution rights under this Agreement. ORTHOBIO agrees to
respect the exclusive rights of MENTOR in and to all of MENTOR's trademarks,
tradenames, labels or markings.
8. INFRINGEMENT CLAIMS
8.1 WARRANTIES OF ORTHOBIO. ORTHOBIO warrants and represents to MENTOR
that:
-22-
<PAGE> 27
8.1.1 ORTHOBIO is the owner of the technology utilized to
manufacture and produce the Products and has full power and authority to enter
into this Agreement without the approval or consent of any other person.
8.1.2 ORTHOBIO has not granted any other person the right to
market or distribute the Products for use in the Field of Use.
8.1.3 The manufacture, sale or use of the Products as they exist
on the Effective Date of this Agreement (including but not limited to the
process and materials used to produce the Products), does not infringe any
existing patent or other intellectual property rights of any Third Party.
8.1.4 In the performance of this Agreement, ORTHOBIO will not
knowingly or willfully infringe any intellectual property rights of any Third
Party including, without limitation, any now existing or subsequently issued
patents.
8.1.5 There are no claims, disputes, or litigation proceedings
pending or threatened as of the Effective Date with respect to the Products or
the Technology sed by ORTHOBIO in their manufacture.
8.2 CLAIMS AGAINST THIRD PARTIES. Should any actual or possible
infringement or other violation by any Third Party of any technology or other
proprietary rights owned by ORTHOBIO come to the attention of either party to
this Agreement, such party shall promptly notify the other party of the alleged
infringement or violation. The parties hereto shall consult with one another
with a view to reaching agreement as to the best means of eliminating the
infringement or violation. If the parties are unable to agree with respect to a
proposed course of action, then:
8.2.1 DISCRETIONARY LITIGATION. Either party shall have the right,
but shall not be obligated, to elect to commence litigation or other enforcement
action or proceedings. If either party (an "Enforcing Party") elects to initiate
litigation or other enforcement proceedings, the other party (a "Participating
Party") shall be entitled to elect to pay its Proportionate Share of the costs
and expense hereof and to receive its Proportionate Share of any net recovery
resulting therefrom. If the other party elects not to participate in any such
action or proceeding, then the Enforcing Party shall bear the entire cost and
expense thereof, and shall be entitled to retain the entirety of any resulting
recovery.
8.2.2 DUTY TO COOPERATE. If an Enforcing Party elects to initiate
litigation or any other action or proceeding on account of an alleged
infringement of any technology owned by ORTHOBIO, and the other party elects not
to participate in the costs and expense of prosecuting such action or
proceeding, such party shall nonetheless cooperate with the Enforcing Party in
the prosecution of such action or proceeding provided satisfactory provisions
have been made for the reimbursement by the Enforcing Party of all costs and
expenses that it incurs in doing so.
8.3 CLAIMS BY THIRD PARTIES. In the event of any threatened or actual
suits against MENTOR by reason of its distribution and sale of the Products or
the exercise by MENTOR of any license ranted to MENTOR hereunder based on an
allegation that the Products or the use of the
-23-
<PAGE> 28
technology infringes on the intellectual property rights of a Third Party,
MENTOR shall promptly inform ORTHOBIO and the parties shall jointly decide on
steps to be taken under the circumstances. If the parties are unable to agree on
a mutually acceptable course of action with respect to the defense of any such
claim within sixty (60) days after it is first brought to the attention of
ORTHOBIO, then:
8.3.1 ORTHOBIO shall be responsible for the defense of such
action, including the defense of MENTOR with counsel reasonably acceptable to
MENTOR, and shall bear the cost and expense thereof, but MENTOR, at its
election, shall be entitled to be represented in any such proceeding by
independent counsel of its choosing at its own cost and expense.
8.3.2 ORTHOBIO shall indemnify and hold MENTOR harmless with
respect to any amounts becoming payable as damages to the claimant by reason of
past infringement attributable to the sale of the Products or the use of any
Technology owned by ORTHOBIO on the rights of the claimant.
8.3.3 If the settlement or satisfaction of any such infringement
claim requires the payment by MENTOR to any Third Party of damages or royalties
on account of the sale or distribution of the Products, then MENTOR shall be
entitled to deduct any such amounts paid to any such Third Party from any
amounts thereafter becoming payable to ORTHOBIO under this Agreement.
8.4 PREVENTING FURTHER INFRINGEMENT. If MENTOR's use of the Product is
in any action or proceeding held to constitute an infringement on the
intellectual property rights of a Third Party, then ORTHOBIO shall at its own
cost and expense either (a) procure for MENTOR the right to continue using such
Product, or (b) modify such Product (with MENTOR's approval of such
modifications) so that its use becomes non-infringing. Should ORTHOBIO be unable
to eliminate the infringement or to procure the right to continue to distribute
the Product on commercially reasonable terms, then ORTHOBIO shall be entitled to
terminate this Agreement by giving written notice of termination to MENTOR,
effective upon the giving of such notice or on such later date as is specified
therein. In such event, ORTHOBIO shall, within thirty (30) days after the
effective date of such termination:
8.4.1 Repurchase any Product then in MENTOR's possession at its
Documented Cost; and
8.4.2 Pay to MENTOR an amount equal to the sum of (a) the
unamortized portion of the Distribution Fee received by ORTHOBIO from MENTOR
pursuant to Section 3.1, above, assuming such Fee was being amortized over a
period of seven years, plus (b) the unamortized portion of MENTOR's documented
marketing and promotional expense during the first two (2) years of this
Agreement, assuming that such costs were being amortized over a period of five
(5) years.
8.5 LIMITATION ON INFRINGEMENT CLAIMS. ORTHOBIO shall have no
obligation for any claim of infringement arising from: (i) the combination by
MENTOR or its customers of any product with a product not supplied by ORTHOBIO,
where the Product, by itself, would not have been infringing; (ii) the
application by MENTOR or its customers of a Product for a use for which it was
-24-
<PAGE> 29
not designed or intended; or (iii) the infringements on any intellectual
property rights owned by MENTOR or any of its Affiliates.
8.6 OBLIGATION TO MAKE PAYMENTS. Except as otherwise expressly provided
by this Section 8, threatened or actual claims of infringement made against
MENTOR by a Third Party, or possible or actual infringement claims asserted by
ORTHOBIO or MENTOR against Third Parties, shall not excuse the obligation of
MENTOR to continue to pay the transfer price for any Products being purchased
from ORTHOBIO, but any such threat or claim shall constitute an Involuntary
Business Disruption during:
8.6.1 Any period during which the sale of the Products is
restrained by an injunction or a temporary restraining order, or
8.6.2 The pendency of any action or proceeding in which damages
are sought from ORTHOBIO or any of its distributors on account of the alleged
infringement of the intellectual property rights of a Third Party by reason of
the sale of the Products or the use of the Technology unless such action or
proceeding (a) is manifestly frivolous or without merit or (b) does not expose
MENTOR to an unreasonable risk of liability.
9. INSURANCE, INDEMNIFICATION AND LIMITATIONS ON LIABILITY
9.1 ORTHOBIO'S LIABILITY INSURANCE. Beginning on the Quota Commencement
Date and continuing for a period of five (5) years from the date on which the
last sale of a Product occurs, ORTHOBIO shall maintain (a) product liability
insurance (containing both a Vendor's Additional Insured Endorsement and a
Products Contractual Liability Endorsement) on the Products in amounts that are
consistent with the amount of products liability insurance that are maintained
by similarly situated companies selling comparable products for similar or
related purposes, but in no event less than One Million Dollars ($1,000,000)
first dollar coverage per occurrence and Five Million Dollars ($5,000,000) in
the aggregate; and (b) general business liability insurance with minimum limits
of One Million Dollars ($1,000,000) first dollar coverage per occurrence and
Five Million Dollars ($5,000,000) in the aggregate. MENTOR shall be named as an
additional insured in each policy of insurance required to be maintained by
ORTHOBIO hereunder.
9.2 POLICY REQUIREMENTS. The issuer of each policy of insurance
required under this Agreement shall be a standard company licensed to issue
insurance having a Best's rating of B+ or higher and a policy holder surplus of
not less than Twenty-Five Million Dollars ($25,000,000). Each such policy shall
provide for (a) the issuance of a reporting or tail coverage endorsement upon
termination of (i) the base policy, (ii) the production, manufacturing,
marketing and sale of the Products or (iii) the corporate existence of the
insured and (b) for not less than thirty (30) days' prior written notice to
MENTOR of any proposed change in the nature, scope or amount of coverage.
ORTHOBIO shall provide MENTOR with certificates of such insurance and evidence
of the payment of premiums therefor, promptly upon request.
9.2.1 The insurance coverage required to be maintained hereunder
shall be subject to review and adjustment from time to the time at the request
of either party to limits of liability that are mutually agreeable in order to
assure a continuing level of insurance protection that, as nearly
-25-
<PAGE> 30
as practicable after taking relative costs and benefits into account, is
consistent with the level of protection contemplated by the parties at the time
they execute this Agreement, but no such adjustment shall be made more than once
in any consecutive twelve-month period.
9.2.2 Should the parties be unable to agree with respect to the
nature or amount of such insurance coverage, then the dispute shall be resolved
by an independent insurance consultant who has not previously performed services
for either party. If the parties cannot agree on any such independent
consultant, then such consultant shall be selected by the President of the
Independent Insurance Brokers Association in Minneapolis, Minnesota.
9.3 INDEMNIFICATION BY ORTHOBIO. ORTHOBIO shall promptly indemnify,
defend and hold MENTOR (including its officers, directors, employees, and
agents) harmless from and against any and all claims by Third Parties (whether
based in contract or tort or otherwise arising by operation of law), losses,
damages, penalties, expenses, settlements, or attorneys' fees arising out of or
resulting from (a) any breach of a representation or warranty or failure to
perform any covenant or obligation under this Agreement; and (b) any written
representations or warranties made by ORTHOBIO regarding the Products.
ORTHOBIO's contractual obligations to indemnify, defend and hold MENTOR harmless
shall extend to all such third-party allegations or claims except to the extent
that such allegations or claims have been established by a court of competent
jurisdiction or other dispute resolution tribunal (including an arbitration
panel) to have resulted from or to be attributable (a) to the fault or neglect
of MENTOR or (b) the use of the product in combination with other kit components
not supplied by ORTHOBIO if by reason of such combination the Product (i) is
modified or altered or (ii) is used in a manner that is inconsistent with the
instructions for use supplied by ORTHOBIO.
9.4 INDEMNIFICATION BY MENTOR. MENTOR shall promptly indemnify defend
and hold ORTHOBIO (including its officers, directors, employees, and agents)
harmless from and against any and all claims by Third Parties (whether based in
contract or tort or otherwise arising by operation of law), losses, damages,
penalties, expenses, settlements, or attorneys' fees arising out of or resulting
from (a) a breach of a written representation or warranty given by MENTOR under
this Agreement or (b) any negligent acts or omissions of MENTOR in connection
with its marketing and distribution of the Products. MENTOR's contractual
obligations to indemnify, defend and hold ORTHOBIO harmless shall extend to all
such third-party allegations or claims except to the extent that such
allegations or claims have been established by a court of competent jurisdiction
or other dispute resolution tribunal (including an arbitration panel) to have
resulted from or to be attributable to the fault or neglect of ORTHOBIO.
9.4.1 JOINT DEFENSE OF CLAIMS. In any action or proceeding in
which liability for personal injury resulting the use of the Products is alleged
to exist both against ORTHOBIO and MENTOR based in whole or in part upon
theories of negligent manufacturing, defective product, product liability,
strict liability, or any other theory of liability, each party shall provide its
own defense at its own cost and expense, but each party shall be entitled to be
indemnified by the other with respect to any damages, liabilities, costs or
expense established by a court of competent jurisdiction or other dispute
resolution tribunal (including an arbitration panel) to have resulted from or to
be attributable to the fault or neglect of the other party.
-26-
<PAGE> 31
9.4.2 DEFENSE PROCEDURE. Each party shall promptly notify the
other in writing within ten (10) days of the assertion of any claim or discovery
of any fact upon which such party intends to base a claim for defense and/or
indemnification under this Agreement. The failure to so notify the other party
shall not relieve the other party of the duty to defend and indemnify the
notifying party with respect to such claim except to the extent the defense of
such claim is actually prejudiced thereby.
9.4.3 PARTICIPATION IN AND CONTROL OF DEFENSE. If either party is
obligated to defend the other in a lawsuit, arbitration, negotiation, or other
proceeding concerning a claim pursuant to this Agreement, the indemnified party
shall have the right to engage separate counsel, at its own cost and expense, to
monitor and advise such indemnified party about the status and progress of the
defense or to otherwise represent the interests of the indemnified party. To be
entitled to sole control of the defense, upon request by the indemnified party,
the indemnifying party shall demonstrate, to the reasonable satisfaction of the
indemnified party the financial ability of the indemnifying party to carry out
its defense obligations (and its indemnity obligations, if any).
9.5 LIMITATION OF LIABILITY. WITH RESPECT TO CLAIMS MADE BY ONE PARTY
(A "CLAIMANT") AGAINST THE OTHER (A "DEFENDANT") UNDER THIS AGREEMENT, THE
DEFENDANT SHALL NOT BE LIABLE FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL,
EXEMPLARY OR PUNITIVE DAMAGES, INCLUDING WITHOUT LIMITATION, LOST PROFITS, IN
CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT, REGARDLESS OF WHETHER A CLAIM
AGAINST THE DEFENDANT SOUNDS IN CONTRACT OR TORT (INCLUDING, BUT NOT LIMITED TO,
ACTIONS BASED ON ANY ALLEGED JOINT OR SOLE NEGLIGENCE OR THE DEFENDANT) EVEN IF
MANUFACTURER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR LOSSES.
10. TERM AND TERMINATION
10.1 COMMENCEMENT. This Agreement shall commence on the Effective Date
hereof and, unless (a) extended pursuant to Section 4.2 of this Agreement or (b)
sooner terminated as provided by this Agreement, shall continue for a term of
seven (7) years from the Quota Commencement Date.
10.2 TERMINATION PRIOR TO QUOTA COMMENCEMENT DATE. MENTOR shall be
entitled to terminate this Agreement by giving written notice to ORTHOBIO of its
election pursuant to Section 3.4, above, to not proceed with the marketing and
distribution arrangement contemplated by this Agreement due to a determination
by MENTOR at the conclusion of the Clinical Trials that the use of the Products
in the Field of Use poses a risk of acute complications or undue risk of
post-operative infection or that the Products will not be commercially feasible.
10.3 TERMINATION FOR CAUSE. ORTHOBIO shall be entitled to terminate
MENTOR's marketing and distribution rights under this Agreement as provided in
Section 4.4, above, due to the failure of MENTOR to satisfy its Agreed Purchase
Commitment in any Computation Period unless MENTOR has remedied its failure to
do so within the time and in the manner provided by Section 4.3.2, above. In
addition, any party who is not in material default in the performance of its
obligations under this Agreement shall be entitled to terminate this Agreement
for cause by giving written notice of intention to terminate upon the occurrence
of any of the following events:
-27-
<PAGE> 32
10.3.1 The other party (herein, a "defaulting party") has
committed a material breach of any warranty, representation or covenant under
this Agreement, including the obligation to pay any amount owing under this
Agreement when due, and such breach remains uncured after written notice of
default, specifying the nature thereof, has been given to the defaulting party
unless, prior to the expiration of the applicable cure period, the defaulting
party has commenced and thereafter pursues with diligence to completion those
actions necessary to cure within the applicable cure period any such breach or
default. The applicable cure period shall be thirty (30) days, but shall be
subject to extension for a reasonable period of time if the default (a) is not
curable by the payment of amounts owing to the other party that are past due,
and (b) is of such a nature that it cannot reasonably be cured with due
diligence within thirty (30) days.
10.3.2 The other party becomes bankrupt or insolvent or a receiver
is appointed for the business and/or assets of such other party or an assignment
is made by such other party for the benefit of its creditors, in each case
whether by voluntary act or otherwise and, in the case of any such proceeding
that is involuntary, if such proceeding is not terminated within thirty (30)
days thereafter.
10.4 RIGHTS AND DUTIES UPON TERMINATION. Upon termination of this
Agreement for any reason:
10.4.1 Any subdistributorships entered into by MENTOR with respect
to the affected country or Geographic Market Area shall automatically terminate.
10.4.2 Unless MENTOR continues to hold marketing and distribution
rights that have not then been terminated, each party shall return to the
providing party all copies of any Confidential Information that was provided by
one party to the other during the course of this Agreement, and shall continue
to respect and observe the provisions regarding the use and disclosure of
Confidential Information set forth in Section 6.3.3, above.
10.4.3 MENTOR shall be entitled (a) to continue to market and sell
its existing inventory of the Products to the extent permitted by law until such
inventory has been exhausted provided that such sales are made at prices and on
terms that are consistent with MENTOR's past practices, but in no case shall the
term be longer than six (6) months, and (b) to continue to display the ORTHOBIO
tradename on Products being distributed by MENTOR for (i) as long as MENTOR has
a non-exclusive right to continue to market and sell the Products for such
period or (ii) until its inventory of the Products bearing such tradename or
packaged in materials bearing such tradename have been exhausted, whichever
first occurs.
10.4.4 ORTHOBIO shall continue to accept Product returns made
pursuant to Section 5.20, above, and shall, at its option, either replace or
issue a credit directly to the customer for Defective Product.
10.4.5 Each party shall continue to be bound by the provisions of
this Agreement which, by their nature, extend beyond or cannot be fully
performed prior to the effective date of termination, including without
limitation the provisions Articles 8, 9 and 11 of this Agreement.
-28-
<PAGE> 33
10.4.6 If this Agreement is terminated by ORTHOBIO pursuant to
Section 10.3 upon the occurrence of an unresolved breach by MENTOR, then MENTOR
shall make available to ORTHOBIO within forty-five (45) days thereafter such
information then in MENTOR's possession that ORTHOBIO may reasonably request for
the purpose of obtaining approval of applicable government regulatory agencies
to manufacture and market the Products for use in the Field of Use. ORTHOBIO may
share such data with its other licensees.
10.5 SURVIVAL OF REMEDIES. The termination of this Agreement for cause
pursuant to this Section 10.3 shall be without prejudice to any rights or any
remedies to which the terminating party is entitled, if any, due to the material
breach by one of the parties of any warranty, representation or covenant given
by the defaulting party under this Agreement.
10.6 REPURCHASE OF INVENTORY. Upon either termination of expiration of
this Agreement, as the case met be, ORTHOBIO shall have the option, but not the
obligation, to repurchase Distributor's inventory of Products.
10.6.1 Within thirty (30) days after such termination or
expiration, ORTHOBIO shall elect in writing to either, (a) permit MENTOR to sell
off its remaining inventory of Products; provided, however, that MENTOR shall
comply with all terms and conditions of this Agreement restricting such
reselling activities in effect immediately prior to termination or expiration;
or (b) repurchase MENTOR's inventory of Products which are saleable and in the
original packages and unaltered from their original form and design, subject to
ORTHOBIO's inspection, test and acceptance.
10.6.2 Any such repurchase of MENTOR's inventory of Products shall
be at MENTOR's Documented Cost less a five percent (5%) handling charge.
Repurchased inventory shall be shipped by MENTOR, freight pre-paid, according to
ORTHOBIO's instructions. ORTHOBIO shall pay MENTOR for such repurchased Products
within thirty (30) days after ORTHOBIO receives those Products in one of its
facilities.
11. GENERAL PROVISIONS
11.1 NOTICES. Any notices permitted or required hereunder shall be in
writing and shall be deemed to have been given (a) on the date of delivery if
delivery of a legible copy was made personally or by facsimile transmission, or
(b) on the third (3rd) business day after the date on which mailed by registered
or certified mail, return receipt requested, addressed to the party for whom
intended at the address set forth on the signature page of this Agreement or
such other address, notice of which is given as provided herein.
11.2 BINDING EFFECT. This Agreement shall be binding upon and shall
inure to the benefit of each of the parties and their respective heirs,
successors, assigns and legal representatives. No party hereto shall have the
right to transfer or assign its interest in this Agreement, without the prior
written authorization of the other party hereto, which permission shall not be
unreasonably withheld, except that (a) MENTOR can freely assign this Agreement
to any Affiliate of MENTOR and (b) either party shall have the right to assign
its rights and licenses and to delegate its duties under this
-29-
<PAGE> 34
Agreement to any third party who purchases substantially all of the business
assets of the assignor or who succeeds to the business of the assignor by reason
of a merger or consolidation.
11.3 FORCE MAJEURE. Neither of the parties shall be liable for any
delay or default in performing its obligations hereunder if such delay or
default is caused by Force Majeure, provided that the party so affected (a)
promptly gives written notice of the occurrence of such event and the likely
effects thereof, and (b) resumes the performance of its obligations with due
diligence as soon as practicable after the effects of any such event have been
alleviated.
11.4 GOVERNING LAW. This Agreement, the construction and enforcement of
its terms, and the interpretation of the rights and duties of the parties
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Arizona, excluding (i) its conflicts of law principles, (ii) the
United Nations Convention on Contracts for the International Sale of Goods,
(iii) the 1974 Convention on the Limitation Period in the International Sale of
Goods (the "1974 Convention"), and (iv) the Protocol amending the 1974
Convention, done at Vienna April 11, 1980.
11.5 RESOLUTION OF DISPUTES. The parties hereto (a) mutually consent
and submit to the jurisdiction of any state or federal court of competent
jurisdiction located in the City of San Francisco, State of California, in any
action or proceeding arising out of or relating in any manner to this Agreement,
(b) each waive any claim that any such state or federal court is an inconvenient
forum, and (c) each irrevocably agree that any and all actions or proceedings
arising out of or relating to this Agreement or from transactions contemplated
herein shall be exclusively heard only in such state or federal court.
11.6 COSTS OF ENFORCEMENT. Should any action or proceeding be necessary
to construe or enforce this Agreement, then the party prevailing, in any such
action or proceeding shall be entitled to recover all court costs and reasonable
attorneys' fees, to be fixed by the court and taxed as part of any judgment
entered therein, and the costs and fees incurred in enforcing or collecting any
such judgment.
11.7 INDEPENDENT CONTRACTORS. Each of the parties to this Agreement
understood and stipulate that they are independent contractors, and that this
Agreement is not intended and shall not be construed to make either party an
employee, agent, franchisee or legal representative of the other party for any
purpose whatsoever. MENTOR shall be entitled to develop and implement its own
marketing and distribution plans free of control by or interference from
ORTHOBIO, and the parties agree that this agreement shall not constitute a
franchise agreement under California or Minnesota law. Neither party is granted
any right or authority to assume or create any obligation or responsibility,
express or implied, on behalf of or in the name of the other party hereto or to
bind the other party hereto in any manner or thing whatsoever.
11.8 OFFSET RIGHTS. MENTOR shall be entitled to offset against any
amounts accruing for the benefit of ORTHOBIO under this Agreement any damages
that have been awarded to MENTOR in any stipulated agreement or by any
arbitration award or judgment that has become final and is no longer subject to
any right of appeal.
-30-
<PAGE> 35
11.9 SEVERABILITY. If for provision of this Agreement is declared
invalid or unenforceable by a court having competent jurisdiction, it is
mutually agreed that this Agreement shall endure except for the part declared
invalid or unenforceable by order of such court. The parties shall consult and
use their best efforts to agree upon a valid and enforceable provision which
shall be a reasonable substitute for such invalid or unenforceable provision in
light of the intent of this Agreement.
11.10 NO RIGHTS BY IMPLICATION. No rights or licenses with respect to
the Products, trademarks, or tradenames are granted or deemed granted hereunder
or in connection herewith, other than those rights expressly granted in this
Agreement.
11.11 WAIVER. None of the conditions of this Agreement shall be held to
have been waived by any act or knowledge on the part of either party, except by
an instrument in writing signed by a duly authorized officer or representative
of such party. Further, the waiver by either party of any right hereunder or the
failure to enforce at any time any of the provisions of this Agreement, or any
rights with respect thereto, shall not be deemed to be a waiver of any rights
hereunder or any breach or failure of performance of the other party.
11.12 COMPLETE AGREEMENT. This written instrument, together with any
exhibits or appendices referred to herein, constitutes the entire understanding
of the parties with respect to subject matter of this Agreement and it may not
be amended except by an instrument in writing signed by the party alleged to be
bound thereby.
IN WITNESS WHEREOF, both parties have executed this Exclusive Marketing
and Distribution Agreement to be duly executed on the dates set forth below.
ORTHOBIO: MENTOR:
Date: 8/21/96 Date: Aug. 22, 1996
--------------------------- -------------------------
ORTHOPAEDIC BIOSYSTEMS, INC., MENTOR UROLOGY CORPORATION,
an Arizona corporation a Delaware corporation
By /s/ D. Ronald Yagoda By /s/ Anthony R. Gette
------------------------------ ----------------------------
D. Ronald Yagoda Anthony R. Gette
Its President Its President
ADDRESS FOR NOTICES: ADDRESS FOR NOTICES:
Orthopaedic Biosystems LTD. Inc. Mentor Urology Corporation
320 East Butherus, Suite 206 5425 Hollister Avenue
Scottsdale, Arizona 85260 Santa Barbara, California 93111
TEL: (602) 596-4066 TEL: (805) 681-6000
FAX: (602) 596-2180 FAX: (713) 967-3362
-31-
<PAGE> 1
EXHIBIT 10.2
INTERNATIONAL DISTRIBUTOR AGREEMENT
This International Distributor Agreement (the "Agreement") is entered
into in Scottsdale, Arizona, as of August 4,1997, between ORTHOPAEDIC
BIOSYSTEMS, LTD., INC., a corporation organized under the laws of Arizona,
United States of America, with principal offices at 15990 N. Greenway-Hayden
Loop, Suite 100, Scottsdale, Arizona 85260, United States of America ("OBL"),
and Mizuho Medical Co., Ltd., a company organized under the laws of Japan with
principal offices at MRK Building, 5F, 27-17,2-Chome, Hongo, Bunkyo-ku Tokyo
113, Japan ("Distributor").
In consideration of the mutual promises contained herein, the parties
agree as follows:
1. DEFINITIONS
(a) "Products" shall mean those products listed in Exhibit A
attached hereto. Products may be changed, abandoned or added by OBL, at OBL's
sole discretion, provided that OBL gives ninety (90) days' prior written notice
to Distributor. OBL shall be under no obligation to continue the production of
any Product, except as provided herein.
(b) "Territory" shall mean that geographic area identified in
Exhibit B attached hereto.
2. APPOINTMENT AND AUTHORITY OF DISTRIBUTOR
(a) Appointment. Subject to the terms and conditions set forth
herein, OBL hereby appoints Distributor as OBL's exclusive distributor for the
Products in the Territory, and Distributor hereby accepts such appointment. For
so long as Distributor is performing in compliance with this Agreement, OBL
shall not appoint any other distributor with responsibility for sale of the
Products in the Territory, provided, however, that OBL shall incur no liability
for any sales or use of Products within the Territory by others. Notwithstanding
the foregoing, OBL may sell direct within the Territory to any customer that has
been designated by OBL as a "house account" pursuant to prior notice given to
the Distributor. OBL shall not claim house account status for any account first
solicited and developed by Distributor.
(b) Territorial Responsibility. Distributor shall not promote
the Products outside the Territory or establish a facility for purposes
relating to the Products outside the Territory. Distributor shall forward to OBL
all unsolicited inquiries relating to the Products from customers or potential
customers outside the Territory.
(c) Referrals. In the event that OBL receives requests for
information relating to, or purchase orders for, the Products from customers or
potential customers within the Territory, OBL shall forward such requests or
orders to Distributor.
<PAGE> 2
(d) Subdistributors. Distributor shall not appoint
subdistributors of Products without OBL's specific consent.
(e) Conflict of Interest. Distributor warrants to OBL that
Distributor does not currently represent or promote any other soft tissue suture
anchors. During the term of this Agreement, Distributor shall not, without OBL's
prior written consent, represent, promote or otherwise try to sell within the
Territory any other soft tissue suture anchors that, in OBL's judgment, compete
with the Products covered by this Agreement.
(f) Independent Contractors. The relationship of OBL and
Distributor established by this Agreement is that of independent contractors,
and nothing contained in this Agreement shall be construed to give either party
the power to direct and control the day-to-day activities of the other or allow
one party to create or assume any obligation on behalf of the other for any
purpose whatsoever. All financial obligations associated with Distributor's
business are the sole responsibility of Distributor. All sales and other
agreements between Distributor and Distributor's customers are Distributor's
exclusive responsibility and shall have no effect on Distributor's obligations
under this Agreement.
3. TERMS OF PURCHASE Of PRODUCTS BY DISTRIBUTOR
(a) Terms and Conditions. All purchases of Products by
Distributor from OBL during the term of this Agreement shall be subject to the
terms and conditions of this Agreement.
(b) Prices. All prices of Products are F.O.B. OBL's
Scottsdale, Arizona facility or as provided by written notice to Distributor
(the "Distribution Site"). The purchase price to Distributor for each of the
Products ("Purchase Price") shall be as set forth in Exhibit A attached hereto.
The difference between Distributor's Purchase Price and Distributor's selling
price to Distributor's customers shall be Distributor's sole remuneration for
sale of the Products. OBL has the right at any time to revise the prices in
Exhibit A with thirty (30) days' advance written notice to Distributor. Such
revisions shall apply to all orders received after the effective date of
revision. Price changes shall not affect unfulfilled purchase orders accepted by
OBL prior to the effective date of the price change.
(c) Taxes. Distributor's Purchase Price does not include any
foreign, federal, state or local taxes that may be applicable to the Products.
In the event that such taxes are applicable and OBL has the legal obligation to
collect such taxes, OBL shall be entitled to add to Distributor's invoice the
amount of such taxes and Distributor shall pay such amount unless Distributor
provides OBL with a valid tax exemption certificate authorized by the
appropriate taxing authority.
-2-
<PAGE> 3
(d) Order and Acceptance. All orders for Products submitted by
Distributor shall be initiated by written purchase orders sent to OBL by mail,
telecopy, or private courier and requesting a delivery date during the term of
this Agreement; provided, however, that an order may initially be placed orally
if a confirmational written purchase order is received by OBL within five (5)
days after said oral or telecopy order. To facilitate OBL's production
scheduling, Distributor is requested to submit purchase orders to OBL at least
thirty (30) days prior to the first day of the requested month of delivery. No
order shall be binding upon OBL until accepted by OBL in writing and notice of
acceptance sent to Distributor by mail, telecopy or private courier, and OBL
shall have no liability to Distributor with respect to purchase orders that are
not accepted. No partial shipment of an order shall constitute the acceptance of
the entire order, absent the written acceptance of such entire order. OBL shall
use OBL's reasonable best efforts to deliver Products at the times specified
either in OBL's quotation or in OBL's written acceptance of Distributor's
purchase orders.
(e) Terms of Purchase Orders. Distributor's purchase orders
submitted to OBL from time to time with respect to Products to be purchased
hereunder shall be governed by the terms of this Agreement and OBL's published
Standard Terms and Conditions of Sale, if any, as in effect at the time of such
purchase, provided that, in the event of any conflict between the terms of this
Agreement and the Standard Terms and Conditions of Sale of OBL then in effect,
this Agreement shall be controlling. Nothing contained in any purchase order of
Distributor shall in any way modify such terms of purchase of OBL or add any
additional terms or conditions.
(f) Payment. Full payment of Distributor's Purchase Price for
the Products (including any freight, taxes or other applicable costs initially
paid by OBL but to be borne by Distributor) shall be in United States of America
dollars. All exchange, interest, banking, collection, and other charges shall be
at Distributor's expense. Payment terms shall be net 30 days from date of
shipment, with the exception of Exhibit C. Payment shall be made by wire
transfer, irrevocable letter of credit drawn on a U.S. bank, or other instrument
approved by OBL.
(g) Shipping. All Products delivered pursuant to the terms of
this Agreement shall be suitably packed for air freight shipment in OBL's
standard shipping cartons, marked for shipment to Distributor's address set
forth above or on Distributor's purchase order, and delivered to Distributor or
Distributor's carrier agent F.O.B. OBL's Distribution Site, at which time title
to such Products and risk of loss shall pass to Distributor. All shipments of
Products shall include a Certification by OBL that the Products meet
specifications. OBL shall deliver Products to the carrier selected by
Distributor. In the event that Distributor does not provide written notice of
such carrier, OBL shall select the carrier. All freight, insurance, and other
shipping expenses, as well as any special packing expense, shall be paid by
Distributor. Distributor shall also bear all applicable taxes, duties, and
similar charges that may be assessed against the Products after delivery to the
carrier at OBL's Distribution Site.
-3-
<PAGE> 4
(h) Deposit. Distributor agrees to pay OBL_____________ US as
a deposit for inventory to be purchased under Exhibit C upon execution of this
contract.
4. TRAINING, INSTALLATION, AND SERVICE
(a) Services by Distributor. Distributor shall have the
responsibility to deliver the Products and train the customers with respect to
the Products sold. The services shall (i) be performed only by specially and
properly trained personnel of Distributor, (ii) be of the highest quality, and
(iii) be performed promptly.
(b) Training by OBL. OBL shall provide sales and technical
training, and technical support, to Distributor's personnel at periodic
intervals, with the frequency and content of the training to be determined by
agreement between Distributor and OBL. The costs of training, including travel,
food and lodging during the training period, shall be divided equally between
OBL and Distributor. In addition to sales and technical training, OBL shall
cooperate with Distributor in establishing efficient promotional procedures and
policies. OBL shall promptly respond to Distributor's reasonable technical
questions relating to Product.
(c) Sales Meetings. Distributor agrees to send representatives
to at least one OBL sales meeting per year at a location to be determined by
OBL.
5. WARRANTY FOR PRODUCTS
(a) Standard Limited Warranty. Distributor shall pass on to
its customers OBL's standard limited warranty for Products, including
limitations set forth in Subsection 5(c) below. This warranty is contingent upon
proper use of a Product in the application for which such Product was intended
and does not cover Products that were modified without OBL's approval, that have
expired or that were subjected to unusual physical, chemical or electrical
stress.
(b) Rejection of Products.
(i) Distributor shall inspect all products promptly
upon receipt thereof and may reject any product that fails in any material way
to meet the specifications set forth in OBL's current brochure or related
literature for that product. Any product not properly rejected within thirty
(30) days of receipt of that product by Distributor (the "Rejection Period")
shall be deemed accepted. To reject a product, Distributor shall, within the
Rejection Period, notify OBL in writing of its rejection. Within seven (7) days
after rejection, Distributor shall return to OBL the rejected product, freight
prepaid, in its original shipping carton with clear written identification on
the carton that a rejected Product is contained therein. As promptly as possible
but no later than thirty (30) working days after receipt of properly rejected
products, OBL shall, at its option and expense, replace the products. OBL shall
pay the shipping charges back to
-4-
<PAGE> 5
at its option and expense, replace the products. OBL shall pay the shipping
charges back to Distribution for properly rejected products; otherwise,
Distributor shall be responsible for the shipping charges.
(ii) After the Rejection Period, Distributor may not
return a product to OBL for any reason without OBL's prior written consent.
Such consent may be withheld by OBL for any reason that OBL deems appropriate in
its sole discretion. For any product for which OBL gives such consent, OBL shall
charge twenty-five percent (25%) of Distributor's purchase price for that
product and shall credit the balance of the purchase price to Distributor's
account within thirty (30) days upon receipt of returned product. Distributor
shall be responsible for all shipping charges.
(iii) Products which are found not to conform to
OBL's specifications at an end-user's site shall be replaced by the Distributor.
OBL shall replace Distributor's inventory within thirty (30) days after receipt
of the defective product and a completed customer complaint form. The final
decision concerning product non-conformance rests solely with OBL.
(c) Limitation of Liability and Warranty. OBL'S LIABILITY
ARISING OUT OF THIS AGREEMENT AND/OR SALE OF THE PRODUCTS SHALL BE LIMITED AS
FOLLOWS: IN NO EVENT SHALL OBL BE LIABLE FOR COSTS OF PROCUREMENT OF SUBSTITUTE
GOODS BY ANYONE. IN NO EVENT SHALL OBL BE LIABLE TO DISTRIBUTOR OR ANY OTHER
ENTITY FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR INDIRECT DAMAGES, HOWEVER
CAUSED, ON ANY THEORY OF LIABILITY OR BREACH OF WARRANTY, WHETHER OR NOT OBL HAS
BEEN ADVISED ON THE POSSIBILITY OF SUCH DAMAGE. EXCEPT FOR THE EXPRESS LIMITED
WARRANTY SET FORTH IN SUBSECTION 5(a) ABOVE, OBL GRANTS NO IMPLIED WARRANTIES
FOR THE PRODUCTS, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE, OR
OTHERWISE.
6. ADDITIONAL OBLIGATIONS OF DISTRIBUTOR
(a) Health and Safely Laws and Regulations. Distributor shall
comply fully, at its expense, with any and all applicable health and safety laws
and regulations of the territory.
(b) Preclinical and Clinical Trials. Distributor shall assist
and support OBL in organizing and conducting any preclinical and clinical trials
required to obtain registrations, licenses and permits required to comply with
the laws and regulations of the Territory for sale and distribution of the
Products; provided, however, that no activities in connection with organizing
and conducting such trials shall be initiated by Distributor without OBL's prior
Written approval.
(c) Registrations Licenses and Permit. Distributor agrees to
use its best efforts to investigate, obtain any required government approval
for, promote and distribute the
-5-
<PAGE> 6
Products, at its own expense, in the Territory as soon as feasible after the
date of this Agreement, using generally the same channels and methods,
exercising the same diligence and adhering to the same standards which it
employs with respect to other clinical and diagnostic products sold by
Distributor, as well as Distributor's own products. Unless prohibited by local
law, all such registrations and approvals obtained by Distributor shall be in
the name of OBL. In particular, Distributor shall, at its own expense:
(i) Exercise due diligence to promptly obtain and
maintain required government approvals to import, register and market the
Products in each jurisdiction in the Territory and to diligently proceed to
secure and maintain, as may be required from time to time, government importing,
registration and marketing approvals, customs clearances and currency
authorizations and any permits necessary in each jurisdiction in the Territory.
Distributor shall keep OBL generally informed of the regulatory requirements in
each jurisdiction in the Territory and shall submit to the government health
authorities in each jurisdiction in the Territory where sale of the Products is
planned, as required by governmental authorities, a complete application for
registration and marketing approval of the Products. Distributor shall file for
required regulatory approval for the sale of Products in the Territory as soon
as practicable. If OBL so requests, Distributor shall notify OBL each time it
submits an application for government registration and marketing approval for
the Products and shall, at OBL's request, supply OBL with copies of or access to
Distributor's filings and clinical data and shall keep OBL fully informed of the
progress of each such application. OBL and Distributor agree to disclose
promptly to the other all reports and any information which they have available
or which become available to them relating to performance of, or any significant
deleterious physiological effects caused by or related to, the Products.
(ii) Within a reasonable time after the date of this
Agreement, submit to OBL a marketing plan for the Products in each jurisdiction
in the Territory. Such plan shall be updated and delivered to OBL annually and
shall include information on competitive products; proposed labeling; estimated
sales volume; anticipated quantities of the Products to be purchased from OBL;
distribution and promotional plans; schedule for submission of applications for
government registration and marketing approval; and marketing program. All
Product labels, package inserts and claims, which are prepared for or by
Distributor, shall meet all legal requirements of the jurisdiction in which the
Products are marketed and shall be subject to OBL's prior review and approval.
(iii) Commence marketing of the Products throughout
the Territory immediately after receipt of government health registration
approvals, if applicable. Distributor shall be deemed to have commenced the
marketing of the Products only when it shall have offered the Products regularly
for sale.
(iv) Use its best efforts to distribute and sell the
Products for use only by qualified individuals, as appropriate in the Territory,
in compliance with local laws and
-6-
<PAGE> 7
regulations and good commercial practice and for uses and applications
reasonably approved by OBL for the Products.
In the event that all necessary registrations, licenses and permits required to
sell and distribute the products in the Territory for clinical use (if
applicable) are not obtained within nine (9) months after the effective date of
this Agreement, OBL may, in its sole discretion, terminate this Agreement upon
Written notice to Distributor.
(d) Purchase Commitment. Distributor hereby agrees to purchase
from OBL during the first two consecutive twelve month periods following the
effective date of this Agreement (the "Annual Purchase Commitment") the number
of Products set forth on Exhibit C. Throughout the term of this Agreement, if
Distributor fails to purchase Distributor's Annual Purchase Commitment in any
given period, then, without prejudice to OBL's other rights under this
Agreement, OBL may appoint one or more additional distributors for sale of the
Products in the Territory or terminate this Agreement immediately upon notice to
Distributor. Products returned to OBL under the provisions of Subsection 5(b)
above shall not count towards the fulfillment of Distributor's relevant Annual
Purchase Commitment. If Distributor fails to purchase at least ninety (90)
percent of its Annual Purchase Commitment in any given period, OBL may terminate
this Agreement on 45 days prior written notice.
(e) Promotion of the Products. Distributor shall use its best
efforts to promote demand for and sale of the Products by utilizing advertising
and publicity at Distributor's own expense, and shall maintain adequate sales
personnel for such purpose. All promotional materials prepared by Distributor
relating to the Products must be consistent with applicable law and promotional
materials used by OBL in connection with the Products. Distributor agrees not to
promote, or solicit orders for, the Products outside the Territory.
(f) Representations. Distributor shall not make any false or
misleading representations to customers or others regarding OBL or the Products.
Distributor and its employees and agents shall not make any representations,
warranties or guarantees with respect to the specifications, features or
capabilities of the Products that are not consistent with OBL's documentation
accompanying the Products or OBL's literature describing the Products, including
OBL's standard limited warranty and disclaimers.
(g) Inventory. Distributor shall, at Distributor's own
expense, maintain a sufficient inventory of the Products at all times during the
term of this Agreement as necessary in order to meet the requirements of any
customer or potential customer within the Territory.
(h) Customer and Sales Reporting. Distributor shall, at
Distributor's own expense and consistent with the sales policies of OBL:(i)place
the Products in Distributor's literature as soon as possible; (ii) provide
adequate contact with existing and potential customers within the Territory on a
regular basis, consistent with good business practice; (iii) assist OBL in
-7-
<PAGE> 8
assessing customer requirements for the Products, including modifications and
improvements thereto, in terms of quality, design, functional capability, and
other features; and (iv) provide OBL on a quarterly basis with a list of
customers who have used Products and a list of institutions which have purchased
Products, and (4) a summary of the number of Products held by Distributor at the
end of such quarter.
(i) Audits. OBL reserves the right to authorize a
representative of OBL, at OBL's expense, to audit Distributor's records relating
to the Products, inventories and sales. Upon prior written notice, Distributor
shall provide reasonable access to such records during normal business hours at
Distributor's business locations. Distributor shall maintain all such records at
Distributor's location for a minimum of two (2) years after termination of this
Agreement.
(j) Import and Export Requirements. Distributor shall, at
Distributor's own expense, obtain and pay for import and export licenses and
permits, pay customers charges and duty fees, and take all other actions
required to accomplish the export and import of the Products purchased by
Distributor. Distributor understands that OBL is subject to regulation by
agencies of the United States of America government, including the United States
of America Department of Commerce, which prohibit export or diversion of certain
technical products to certain countries. Distributor warrants that Distributor
will comply in all respects with the export and re-export restrictions set forth
in the export license for every Product shipped to Distributor.
(k) Assignment of Products Rights. Upon termination of this
Agreement for any reason whatsoever, Distributor agrees, to the full extent
allowed by law in each jurisdiction of the Territory, to assign, transfer,
convey and set over unto OBL, for no additional consideration, all
registrations, licenses, permits and other rights relating to sale, distribution
and use of the Products in the Territory.
(l) Limitation on Distributor's Rights to the Products.
Distributor shall have no right to copy, modify or remanufacture any Product or
part thereof. Distributor shall not make any changes, alterations, modifications
or additions to the Products without prior written approval of OBL.
7. ADDITIONAL OBLIGATIONS OF OBL.
(a) OBL's Support. OBL shall promptly provide Distributor with
OBL's core materials relating to promotion of the Products. Such core materials
shall be provided in the English language. OBL shall promptly respond to all
reasonable inquiries from Distributor concerning matters pertaining to this
Agreement. OBL shall refrain from giving quotations to exporters for Products to
be shipped to the Territory. OBL shall inform Distributor of new product
developments relating to the Products.
-8-
<PAGE> 9
8. TERM AND TERMINATION
(a) Term. This Agreement shall commence on the date hereof and
continue in full force and effect for a fixed term of five (5) years from such
date, unless terminated earlier under the provisions of this Section 8. OBL
shall also have the right to terminate this Agreement upon written notice to
Distributor as provided in Section 6 hereof.
(b) Termination for Cause. If either party defaults in the
performance of any provision of this Agreement, then the nondefaulting party may
give written notice to the defaulting party that if the default is not cured
within thirty (30) days the Agreement will be terminated. If the non-defaulting
party gives such notice and the default is not cured during such thirty (30) day
period, then the Agreement shall automatically terminate at the end of that
period.
(c) Termination for Insolvency. This Agreement shall
terminate, without notice (i) upon the institution by or against Distributor of
insolvency, receivership or bankruptcy proceedings or any other proceedings for
the settlement of Distributor's debts, (ii) upon Distributor's making an
assignment for the benefit of creditors, or (iii) upon Distributor's dissolution
or ceasing to do business.
(d) Return of Materials, Records and Intellectual Property.
All trademarks, trade names, patents, copyrights, designs, drawings, formulas or
other data, photographs, samples, literature and sales aids of every kind (the
"Intellectual Property") shall remain the property of OBL. Within thirty (30)
days after the termination of this Agreement, Distributor shall prepare all
Intellectual Property in Distributor's possession for shipment, as OBL may
direct, at OBL's expense. Distributor shall not make, use, dispose of or retain
any copies of any Intellectual Property or other confidential items or
information which may have been entrusted to Distributor during the term of this
Agreement. Effective upon the termination of this Agreement, Distributor shall
cease to use all Intellectual Property of OBL. Distributor shall promptly turn
over to OBL all customer lists and records relating to Products and OBL is
hereby granted and shall have a special property interest therein.
(e) Limitation on Liability. In the event of termination by
either party in accordance with any of the provisions of this Agreement, neither
party shall be liable to the other, because of such termination, for
compensation, reimbursement or damages on account of the loss of prospective
profits or anticipated sales or on account of expenditures, inventory,
investments, leases or commitments in connection with the business or goodwill
of OBL or Distributor. Termination shall not, however, relieve either party of
obligations incurred prior to the termination.
(f) Post-Termination Use of Materials. After termination of
this Agreement, Distributor shall not use any signs, equipment, advertising
matter or material which refer to or are related to OBL and from acts and
omissions that indicate or suggest a relationship with OBL
-9-
<PAGE> 10
and shall immediately return to OBL all OBL property, promotional material, and
proprietary information.
(g) Repurchase of Products. Upon any termination of this
Agreement, OBL may buy back, in its sole discretion, from Distributor, at landed
cost, any and all unsold, unopened OBL products in Distributor's possession that
have been purchased from OBL, which are in marketable condition and are of a
product designation currently included in the products being offered for sale by
OBL. Products no longer being offered for sale by OBL will not be repurchased.
Only current products shipped within the most recent twelve (12) month period
will be repurchased and will be subject to a restocking charge of twenty five
percent (25%) of the invoice price. The aggregate amount to be paid to
Distributor under this provision may be offset by OBL against any claims it has
against Distributor, including for payment of goods supplied under this
Agreement. Notwithstanding anything herein to the contrary, OBL shall have no
obligation to repurchase OBL products that exceed in value the aggregate
purchase price of all OBL products purchased by Distributor in the six (6) month
period preceding the date of termination.
(h) Survival of Certain Terms. The provisions of Sections 5,
6(f), 6(i), 6(l), 8, 9, 10, 11, 12 and 13 shall survive the termination of this
Agreement for any reason. All other rights and obligations of the parties shall
cease upon termination of this Agreement.
9. PROPERTY RIGHTS AND CONFIDENTIALITY
(a) Property Rights. Distributor agrees that OBL owns all
right, title, and interest in the product lines that include the Products and in
all of OBL's patents, trademarks, trade names, inventions, copyrights, know-how,
and trade secrets relating to the design, manufacture, operation or service of
the Products. The use by Distributor of any of these property rights is
authorized only for the purposes herein set forth, and upon termination of this
Agreement for any reason such authorization shall cease.
(b) Sale Conveys No Right to Manufacture or Copy. The Products
are offered for sale and are sold by OBL subject in every case to the condition
that such sales does not convey any license, expressly or by implication, to
manufacture, duplicate or otherwise copy or reproduce any of the Products.
Distributor shall take appropriate steps with Distributor's customers, as OBL
may request, to inform them of and assure compliance with the restrictions
contained in this Subsection 9(b).
(c) Confidentiality. The Distributor acknowledges that the
Products have been developed and obtained by OBL at great expense and contain
information and processes proprietary to OBL and that the product and related
packaging and literature contain trade secrets of OBL and, in general,
constitute proprietary information of OBL. The Distributor agrees not to
disclose or divulge to a third party any such information it may receive about
the Products. All
-10-
<PAGE> 11
information relating to the Products or designated as confidential by OBL and
provided to the Distributor, including but not limited to sales and financial
data, customer information, manufacturing processes and specifications for the
Products, shall be confidential information and Distributor shall not at any
time, whether directly or indirectly, use (other than in the performance of its
obligations hereunder) or disclose such information to any third party without
the prior written consent of OBL. All such information, know-how and trade
secretS shall remain the sole property of OBL. Distributor agrees to obtain from
its employees, agents or subdistributors who have access to such information
appropriate confidentiality or proprietary rights agreements. The parties agree
that the foregoing agreements and restrictions contained in this Subsection 9(c)
shall survive termination or expiration of this Agreement and, in the event of
the Distributor's breach of any of the foregoing provisions, OBL shall be
entitled to equitable and injunctive relief against the Distributor in addition
to other remedies available pursuant to this Agreement or applicable law.
10. TRADEMARKS AND TRADENAMES
(a) Use. During the term of this Agreement, Distributor shall
have the right to indicate to the public that Distributor is an authorized
distributor of OBL's Products and to advertise within the Territory such
Products under the trademarks, marks, and trade names that OBL may adopt from
time to time ("OBL's Trademarks"). Distributor shall not alter or remove any
OBL's Trademark applied to the Products or packages at the factory or at OBL's
distribution facility. Except as set forth in this Section 10, nothing contained
in this Agreement shall grant to Distributor any right, title or interest in
OBL's Trademarks. At no time during or after the term of this Agreement shall
Distributor challenge or assist others to challenge OBL's Trademarks or the
registration thereof or attempt to register any trademarks, marks or trade names
confusingly similar to those of OBL.
(b) Approval of Representations. All representations of OBL's
Trademarks that Distributor intends to use shall first be submitted to OBL for
approval, which shall not be unreasonably withheld, of design, color, and other
details or shall be exact copies of those used by OBL. If any of OBL's
Trademarks are to be used in conjunction with another trademark on or in
relation to the Products, then OBL's mark shall be presented equally legibly,
equally prominently, and of equal or greater size than the other but
nevertheless separated from the other so that each appears to be a mark in its
own right, distinct from the other mark.
11. PATENT, COPYRIGHT. AND TRADEMARK INDEMNITY
(a) Indemnification. Distributor agrees that OBL has the right
to defend, or at OBL's option to settle, and OBL agrees, at OBL's own expense,
to defend or at OBL's option to settle, any claim, suit or proceeding brought
against Distributor or Distributor's customers on the issue of infringement of
any United States America patent, copyright or trademark by the Products sold
hereunder or the use thereof, subject to the limitations hereinafter set forth.
-11-
<PAGE> 12
Distributor agrees to promptly notify OBL of any alleged infringement of
patents, copyrights or trademarks, and to fully cooperate in any investigation,
defense or settlement of such alleged infringement. OBL shall have sole control
of any such action or settlement negotiations, and OBL agrees to pay, subject to
the limitations hereinafter set forth, any final judgment entered against
Distributor or Distributor's customer on such issue in any such suit or
proceeding defended by OBL. Distributor agrees that OBL at OBL's sole option
shall be relieved of the foregoing obligations unless Distributor or
Distributor's customer notifies OBL promptly in writing of such claim, suit or
proceeding and gives OBL authority to proceed as contemplated herein, and, at
OBL's expense, gives OBL proper and full information and assistance to settle
and/or defend any such claim, suit or proceeding. OBL shall not be liable for
any costs or expenses incurred without OBL's prior written authorization.
(b) Limitation. Notwithstanding the provisions Of Subsection
11 (a) above, OBL assumes no liability for (i) infringements covering completed
equipment or any composition, assembly, circuit, combination, method or process
in which any of the Products may be used but not covering the Products when used
alone; (ii) trademark infringements involving any marking or branding not
applied by OBL or involving any marking or branding applied at the request of
Distributor; or (iii) infringements involving the modification or servicing of
the Products, or any part thereof, unless such modification or servicing was
done by OBL.
(c) Entire Liability. THE FOREGOING PROVISIONS OF THIS SECTION
11 STATE THE ENTIRE LIABILITY AND OBLIGATIONS OF OBL AND THE EXCLUSIVE REMEDY
OF DISTRIBUTOR AND DISTRIBUTOR'S CUSTOMERS, WITH RESPECT TO ANY ALLEGED
INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS OR OTHER INTELLECTUAL PROPERTY
RIGHTS BY THE PRODUCTS OR ANY PART THEREOF.
12. INDEMNIFICATION. OBL and Distributor each agree to indemnify
and hold the other party harmless from and against any and all claims made by
any person or entity arising out of the processing, marketing, distribution and
sale of the Products, where and to the extent such damages have been caused by
the fault of such party or its employees or agents. The indemnifying party shall
have the right to defend or, at its option, to settle such claims, and if it
chooses to exercise such right, it shall have control over any such claim or
settlement negotiations. The indemnifying party shall be relieved of the
foregoing obligations unless the indemnified party gives prompt notice in
writing of any such claim, suit or proceeding and, at the indemnifying party's
expense, gives the indemnifying party proper and full information and assistance
to settle and/or defend any such claim, suit or proceeding.
-12-
<PAGE> 13
13. GENERAL PROVISIONS
(a) Governing Law and Jurisdiction. This Agreement shall be
governed by, and construed and interpreted in accordance with, the laws of the
State of Arizona, United States of America, without reference to conflict of
laws principles or statutory rules of arbitration. The federal and state courts
within the State of Arizona, United States of America, shall have exclusive
jurisdiction to adjudicate any dispute arising out of this Agreement.
Distributor hereby expressly consents to (i) the personal jurisdiction of the
federal and state courts within Arizona, (ii) service of process being effected
upon Distributor by registered mail sent to the address set forth at the
beginning of this Agreement, and (iii) the uncontested enforcement of a final
judgment from such court in any other jurisdiction wherein Distributor or any of
Distributor's assets are present.
(b) Entire Agreement. This Agreement sets forth the entire
agreement and understanding of the parties relating to the subject matter herein
and merges all prior discussions between them. No modification of or amendment
to this Agreement, nor any waiver of any rights under this Agreement, shall be
effective unless in writing signed by the party to be charged.
(c) Notices. Any notice required or permitted by this
Agreement shall be in writing (in the English language) and shall be sent by
telex, telecopier or telegram, by overnight courier, or by prepaid registered or
certified mail, return receipt requested, addressed to the other party at the
address shown at the beginning of this Agreement or at such other address for
which such party gives notice hereunder. Such notice shall be deemed to have
been given upon the earlier of receipt by the party to whom notice was sent or
three (3) days after deposit in the mail.
(d) Force Majeure. Nonperformance of either party shall be
excused to the extent that performance is rendered impossible by strike, fire,
flood, governmental acts or orders or restrictions, failure of suppliers, or any
other reason where failure to perform is beyond the reasonable control of and is
not caused by the negligence of the non-performing party.
(e) Non-assignability and Binding Effect. A mutually agreed
consideration for OBL's entering into this Agreement is the reputation, business
standing, and goodwill already honored and enjoyed by Distributor under
Distributor's present ownership, and, accordingly, Distributor agrees that
Distributor's rights and obligations under this Agreement may not be transferred
or assigned directly or indirectly without the prior written consent of OBL.
Subject to the foregoing sentence, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their successors and assigns.
(f) Legal Expenses. The prevailing party in any legal action
brought by one party against the other and arising out of this Agreement shall
be entitled, in addition to any
-13-
<PAGE> 14
other rights and remedies that such prevailing party may have, to reimbursement
for expenses incurred by such prevailing party, including court costs and
reasonable attorneys' fees.
(g) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(h) Partial Invalidity. If any provision of this Agreement is
held to be invalid, then the remaining provisions shall nevertheless remain in
full force and effect. The parties agree to renegotiate in good faith any term
held invalid and to be bound by the mutually agreed substitute provision.
(i) Headings. The designation of a title, caption or heading
for the sections or subsections of this Agreement is for the purpose of
convenience only and are not intended to be used to limit or construe any of the
terms of this Agreement.
(j) Mutual Representations and Warranties. OBL and Distributor
each represent and warrant that this Agreement has been duly authorized and
executed and constitutes a binding obligation of it and enforceable against it
in accordance with its terms.
(k) Exhibits. All exhibits referred to in this Agreement are
attached hereto and made a part of this Agreement for all purposes.
(l) Controlling Language. This Agreement has been written,
and all discussions leading to this Agreement have been conducted, in the
English language, which both parties thoroughly understand. Each party
represents that it has read and fully understands this Agreement and further
agrees that all notices and other correspondence and communications between the
parties relating to or pursuant to this Agreement shall be made solely in the
English language.
IN WITNESS WHEREOF, the undersigned are duly authorized to execute this
Agreement on behalf of OBL and Distributor, as applicable.
ORTHOPAEDIC BIOSYSTEMS LTD., INC. MIZUHO MEDICAL CO., LTD,
("OBL") ("Distributor")
By: /s/ D. Ronald Yagoda By: /s/ Tohru Nemoto
---------------------------- ----------------------------
Print Name: D. RONALD YAGODA Print Name: TOHRU NEMOTO
Title: CHAIRMAN & CEO Title: PRESIDENT, MIZUHO MEDICAL
-14-
<PAGE> 1
Exhibit 10.3
THIS EXHIBIT CONTAINS CONFIDENTIAL INFORMATION WHICH HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
CONFIDENTIAL TREATMENT REQUEST UNDER RULE 406 OF THE SECURITIES ACT OF 1933, AS
AMENDED. THE CONFIDENTIAL INFORMATION ON PAGES 3 AND 4 HAVE BEEN REPLACED WITH
ASTERISKS.
AGREEMENT
(as amended and restated)
This AGREEMENT (the "Agreement") is made as of this 1st day of
January, 1998 by and between ORTHOPAEDIC BIOSYSTEMS LTD., INC. with a principal
place of business at 15990 N. Greenway-Hayden Loop, Suite 100, Scottsdale,
Arizona 85260 ("OBL"), and IMCOR, INC., with a principal place of business at 74
Northeastern Boulevard Building 19, Nashua, New Hampshire 03062 ("License").
WHEREAS, OBL has developed the design of a dual thread for use in
connection with various orthopaedic devices in order to anchor them in bone
tissue (the "Thread Design").
WHEREAS, Licensee is engaged in, among other things, the business of
designing, marketing and selling dental implants;
WHEREAS, OBL and Licensee have heretofore worked jointly, and intend
to work jointly, in connection with the design of a dental implant
incorporating the Thread Design (the "Licensed Implant");
WHEREAS, Licensee desires to obtain an exclusive license for the use
of the Thread Design in the design, manufacture, marketing, sale and
distribution of the Licensed Implant; and
WHEREAS, OBL is willing to license and permit the use of the Thread
Design upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter set forth, the parties agree as follows:
1. License. Subject to the terms hereof, OBL hereby grants to
Licensee an exclusive right and license to manufacture, use, market and sell
Licensed Implants throughout the world (collectively, the "Territory"). The
exclusive right and license herein granted shall apply to all patent
applications and letters patent which OBL now, or hereafter during the term of
this Agreement, owns, controls or has the right to License, which relate to the
Thread Design or the Licensed Implant (the "Patents"). The license hereby
granted also includes the right to subcontract on Licensee's behalf, and not as
an agent for OBL, with subcontractors to manufacture dental implants, subject
to the terms of this Agreement, to sublicense the manufacture, marketing and
sale of the Licensed Implants, subject to the terms of this Agreement and to
assign the Initial Agreement or grant sublicensees to third parties or
co-ventures with respect to distribution in foreign countries only, provided
that OBL shall be given notice of any such assignment or sublicense at least
thirty (30) days prior to the effective date thereof. Except as otherwise
provided herein, the license granted to Licensee hereunder is nontransferable.
2. Product Development. OBL will be responsible for engineering and
prototype design costs incurred in connection with the incorporation of the
Thread Design into Licensed Implants to be manufactured by the Licensee.
Licensee will be responsible for all prototype manufacturing costs. If the
parties agree that new designs or changes in the design of dental
<PAGE> 2
implants to be manufactured by the Licensee are desireable, the costs of
producing additional prototypes will be shared by the parties in accordance
with the foregoing provisions of this Section 2. Licensee shall have a right of
first refusal as to future design developments of OBL, that are applicable to
dental implants, including but not limited to any internal thread fastening
application for the restorative system ("New Design"). Accordingly, OBL shall
enter into good faith negotiations with Licensee concerning the licensing of
rights to use any New Design in the manufacture and sale of dental implants
prior to licensing any such rights to third parties. Except as provided below,
all Patents and letters patent issued with respect to the Thread Design and
improvements in the Thread Design or any New Design conceived of or reduced to
practice during the term of this Agreement shall be and remain the exclusive
property of OBL, subject to the license herein granted. To the extent Licensee
or any employee thereof is an inventor of any invention relating to the
Licensed Implant, such patent or patent applications shall be jointly owned by
OBL and Licensee. The Licensee shall promptly prepare, in OBL's name, or
jointly in OBL's and Licensee's names if jointly invented, a patent application
or applications directed to the Licensed Implant for filing the United States
for the Licensed Implants, all developments and improvements relating to the
Licensed Implants and any New Designs during term hereof, regardless of whether
the invention is made by OBL or Licensee, or both. The expense for filing and
processing the application and preparation of all foreign and U.S. patents
directed to the Licensed Implant shall be allocated between the parties in such
manner as the parties shall agree, in writing, prior to the incurring of any
such expense. In the event no such prior agreement is reached, the expense
shall be shared 50/50.
3. Term. This Agreement and the license and rights granted hereunder
shall continue until the expiration of the last Patent, subject to the
termination provisions of Section 8 hereof.
4. Performance by Licensee and Quality Control
(a) Licensee shall manufacture and sell Licensed Implants of good
and uniform workmanship and first class quality. The design, composition, and
quality of Licensed Implants packaging used in connection with the Licensed
Implants, advertising and marketing materials, maintenance of production and
sales records, recall and return procedures, and safety and health procedures
will, in all respects: (a) comply with the Quality System Regulations of the
Federal Drug Administration (21 CAR Section 820), as in effect from time to
time, with respect to all Licensed Implants sold and distributed in the United
States by Licensee or any Subcontractor, Sublicensee or Assignee, and (b)
comply with the domestic laws and regulations of any foreign country in which
the Licensed Implants are distributed with respect to all distribution outside
the United States by Licensee or any Subcontractor, Sublicensee or Assignee of
Licensee.
(b) It shall be Licensee's responsibility to obtain FDA approval for
the manufacturing, packaging, sterilization, marketing and distribution of all
Licensed Implants. Licensee shall resolve, respond to, comply with or
appropriately defend as its own expense any regulatory agency inquiries,
directives, challenges or formal proceedings relative to the Licensed
2
<PAGE> 3
*Confidential information has been omitted and filed separately with the
Securities and Exchange Commission pursuant to a confidential treatment request.
Implant. Notwithstanding the foregoing, Licensee shall not enter into any
compromise, settlement or resolution of any such matter, which would prejudice
the rights of, or operate, to the detriment of, OBL without notifying and
consulting in good faith with OBL as to the impact of the activity. At its
election, OBL may, at OBL's expense, undertake to intervene in any such matter
or to assume control of the matter. In such case, Licensee shall render all
reasonable assistance that may be required by OBL.
(c) To the extent practicable, Licensee shall cause appropriate patent
related notices satisfactory to OBL to be replaced on all Licensed Implants
embodying the Thread Design.
5. Royalties.
(a) Amount. In consideration of the license granted hereby, and except as
provided below, Licensee agrees to pay OBL royalties in accordance with the
following schedule:
Cumulative Sales
(Number of Units) Royalty Amount
First 20,000 Licensed Implants * per implant
Next 20,000 Licensed Implants * per implant
Over 40,000 Licensed Implants * per implant
For this purpose, the first * prototypes manufactured by Licensee shall be
excluded from a royalty payment. The royalty shall be due and payable as set
forth in (b) below.
If within four (4) years from the date of this Agreement the Licensed
Implants are not covered by at least one claim of the Patents, all royalty
obligation under this Section 5 and under Section 6 below shall cease.
(b) Royalty Payment and Books. Licensee agrees to keep full, accurate and
complete books of accounts and other records in sufficient detail so that the
royalty payable hereunder may be ascertained properly. Within fifteen (15) days
after the end of each two-month period, Licensee shall furnish OBL with a report
from Licensee specifying the quantity and description of all Licensed Implants
sold by Licensee during such preceding two months certified to be accurate by
the chief financial officer or president of Licensee, with adjustments for
returns. No deduction shall be made for uncollectible accounts receivable
generated by the sale of Licensed Implants. Each such report shall be
accompanied by a check for the amount of royalty payments due. At the request of
OBL, Licensee shall permit such books and records to be examined by OBL and its
representatives during normal business hours, upon reasonable advance notice by
OBL. Licensee shall retain such records for at least five (5) years following
the close of the calendar year to which they pertain.
3
<PAGE> 4
* Confidential information has been omitted and filed separately with the
Securities and Exchange Commission pursuant to a confidential treatment
request.
6. Licensee's Performance Goals and Minimum Royalties. No minimum royalties
shall be payable for the calendar year 1998. The minimum royalty for each
subsequent year of this Agreement shall be as follows:
<TABLE>
<S> <C>
1999 through 2001 *
2002 *
2003 *
2004 and each subsequent year *
</TABLE>
In the event the royalties payable pursuant to Section 5(a) in any one year do
not equal or exceed the above stated minimums, Licensee shall have the right to
pay OBL the difference. If Licensee fails to pay the difference within two (2)
months following the end of such calendar year, OBL shall have the right to
terminate the Agreement under Section 8(f). The above defines the performance
standard of Licensee.
7. Intangible Property Rights. Licensee acknowledges (i) OBL's exclusive
right, title and interest in and to the Thread Design and the Patents (whether
created, modified or enhanced by OBL or Licensee and except as provided in
Section 2 above), (ii) the validity of any filing thereof, (iii) that OBL is the
sole owner of the same and all goodwill relating thereto, and (iv) that Licensee
and subcontractors or sublicensees manufacturing Licensed Implants for Licensee
shall not, by reason of this Agreement or otherwise, acquire any right, title or
other ownership interest therein other than the license contemplated by this
Agreement. Any agreement between Licensee and each of its subcontractors, or
sublicensees shall provide that such subcontractor acknowledges and agrees that
it does not acquire any right, title or interest in the Thread Design or the
Patents or any improvements relating to the Thread Design. Licensee agrees and
undertakes not to contest, challenge or infringe the Patents either during or
after the termination of this Agreement. On termination, any and all rights
granted to Licensee in connection with the use of the Patents shall
automatically cease and terminate, and Licensee shall cease and desist from the
use of the Patent and the Thread Design in any manner except as otherwise
expressly provided in this Agreement.
8. OBL's Right to Terminate. Except as expressly otherwise provided below,
OBL shall have the right at its option, without waiving any right or remedy it
may otherwise have, to terminate this Agreement.
(a) Upon 30 days notice, if Licensee breaches any of its obligations under
Section 2 or 4 hereof and such default is not cured within such thirty (30) day
notice period.
(b) Upon 30 days notice, if a default exists in the payment of any sum(s)
due OBL from Licensee and such default shall not be cured within such thirty
(30) day notice period.
(c) Upon 30 days notice, if a breach or default exists in the due
observance or performance by Licensee under any other covenant, condition or
agreement contained in this Agreement if such breach or default shall continue
unremedied during such 30-day period.
(d) Immediately, if a petition in bankruptcy, an arrangement for the
benefit of creditors or a petition for reorganization is filed by or against
Licensee, if Licensee shall make any assignment for the benefit of creditors, of
if a receiver or trustee is appointed for Licensee or its business.
4
<PAGE> 5
(e) Immediately, if Licensee discontinues its business or discontinues the
business contemplated by this Agreement or, except as provided above, if
Licensee assigns its interest under this Agreement without OBL's prior written
approval.
(f) Immediately if Licensee fails to pay minimum royalties or to pay the
difference as provided in Section 6 above.
9. Obligations on Termination. On expiration of this Agreement or its
termination for any reason:
(a) Any indebtedness for royalties which may then be owing or which is to
become due and owing by one party to the other shall become due and payable
immediately;
(b) All rights, license and privileges granted to Licensee under this
Agreement shall immediately cease and terminate, except as specifically
preserved, extended or imposed by a provision of this Section.
(c) Licensee shall discontinue and cause its subcontractors to discontinue
the manufacture of the Licensed Implants and use of the Patents and any items
incorporating the Thread Design, except that Licensee may sell its remaining
finished product inventory of the Licensed Implants which comply with the terms
of this Agreement in the Territory for ninety (90) days, but solely in
accordance with the terms of this Agreement. Licensee shall pay OBL the royalty
provided for in this Agreement with respect to any such sales.
(d) The indemnity provisions of Section 10 hereof shall survive the
termination or expiration of this Agreement.
10. Indemnity and Insurance.
(a) Licensee shall indemnify, defend and hold OBL and its officers,
directors, employees and agents harmless from any and all liability, loss,
expense (including reasonable attorneys fees and disbursements) or claim made
against OBL based upon, arising out of, or in any way related to claims of third
parties involving the manufacture, sale, use, advertisement or promotion of the
Licensed Implant by the Licensee.
(b) OBL shall indemnify, defend and hold Licensee and its officers,
directors, employees and agents harmless from any liability, loss, expense
(including reasonable attorneys' fees and disbursements) resulting from or
arising out of a claim that Licensee's use of the Patents, as contemplated in
this Agreement, infringes or violates any valid rights of any third party. In
the event any Licensed Implants held to infringe any Patent of any third party
or is enjoined, OBL shall use commercially reasonable efforts (which may take
into account the economic value of this Agreement) to procure for Licensee the
right to continue marketing and selling such Licensed Implants. Notwithstanding
the foregoing provisions of this Section 10(b),
5
<PAGE> 6
OBL's obligation hereunder shall in no way require defense or indemnification
regarding any liability, loss, expense or claim to the extent that same arises
from any act or omission of Licensee.
(c) At its own expense, Licensee shall maintain, with insurers reasonably
acceptable to OBL, commercial general liability insurance on an occurrence
basis, including, but not limited to, product liability and contract liability
for liability assumed under this Agreement of minimum limits of not less than
one million dollars ($1,000,000.00) for each person and three million dollars
($3,000,000.00) for each accident or occurrence, with OBL named as an
additional insured. The policy shall provide OBL with primary coverage with
respect to any claim under this Agreement and shall not require the application
or contribution of any other insurance policy that may be maintained by OBL
regardless of how such other insurance is structured to apply in other
insurance situations. The policies for such insurance shall require the insurer
to give OBL thirty (30) days prior written notice of any cancellation or
termination of such insurance. Certificates of such insurance shall be sent to
OBL and, upon OBL's request, duplicate copies of such policies shall be
delivered to OBL.
11. Damages. OBL represents that it has the right to grant the License
herein granted, but makes no other representation or warranty of any kind,
including but not limited to any warranty of results which licensee may obtain
from the use of the license granted by this Agreement. In no event shall OBL be
liable to licensee for indirect, special or consequential damages, including
without limitation loss profits. LICENSEE HEREBY ACKNOWLEDGES AND AGREES THAT
OBL'S AGGREGATE TOTAL LIABILITY, IN ANY EVENT, FOR ANY COST, LOSS OR DAMAGE, OR
OTHER POTENTIAL OR ACTUAL EXPENSE WHICH IS IN ANY WAY RELATED TO THE EXECUTION,
PERFORMANCE, OR SUBJECT MATTER OF THIS AGREEMENT SHALL NOT EXCEED THE AMOUNT OF
THE ROYALTIES PAID BY LICENSEE TO OBL HEREUNDER, REGARDLESS OF THE FORM OF THE
ACTION EMPLOYED.
12. Relationship of the Parties. The parties' relationship is that of
independent contractors. Nothing in this Agreement shall create between OBL and
Licensee the relationship of principal and agent, joint venturers, partners, or
any other similar or representative relationships, and neither party shall hold
itself out as an agent, representative, partner or joint venture of the other.
No party shall make for or on behalf of the other, or subject the other to, any
contract, agreement, warranty, guarantee, representations, assurance or other
obligation.
13. Restrictions on Transfer. Neither this Agreement nor any right, duty
or authority granted or created hereunder may be transferred, encumbered,
assigned or delegated by Licensee, whether by operation of law or otherwise,
without prior written consent of OBL, which consent shall not unreasonably be
withheld, delayed or denied except that Licensee may, without OBL's consent,
(i) assign this Agreement to Licensee's successor in interest in the case of
the sale of all or substantially all of Licensee's assets or business or the
sale of 66 per cent or more of Licensee's voting stock, or (ii) assign specific
distribution rights in a foreign country or countries
6
<PAGE> 7
if Licensee deems such assignment to be reasonably necessary to effect better
world-wide distribution of the Licensed Implants.
14. Notices. For the purposes of this Agreement, notices and all other
communications provided for or relating to the Agreement shall be in writing
and shall be deemed to have been duly given when personally delivered, sent by
facsimile with a facsimile confirmation of transmission, delivered by overnight
courier, or mailed by United States certified or express mail, return receipt
requested, postage prepaid, addressed as follows:
If to OBL: Orthopaedic Biosystems, Inc.
15990 N. Greenway-Hayden Loop
Suite 100
Scottsdale, Arizona 85260
If to Licensee: IMCOR, Inc.
74 Northeastern Boulevard, Building 19
Nashua, New Hampshire 03062
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
15. Entire Agreement. This Agreement constitutes the entire agreement and
understanding between the parties and supersedes and cancels all prior
agreements with respect to the subject matter hereof. No change or modification
of any of the provisions of this Agreement shall be effective unless in writing
signed by the duly authorized representatives of the parties and any such
change or modification shall not be effective until executed by OBL and
Licensee. Any failure by any party hereto to exercise any of its rights
hereunder shall not be construed as a waiver of such rights, nor shall any such
failure preclude exercise of such rights at any later time.
16. Governing Law. This Agreement is entered into in the State of Arizona
and the validity, construction and effect of this Agreement and any other
agreement or contract between the parties with respect to the subject matter
hereof (and all performance related thereto) shall be governed, enforced and
interpreted under the substantive laws (and not the conflicts laws) of the
State of Arizona applicable to agreements made and to be performed therein. The
language used in this Agreement shall be deemed to be the language chosen by
the parties hereto to express their mutual intent, and no rule of strict
construction shall be applied against either party hereto.
17. Legal Proceedings. In the event any legal proceeding is initiated by
either party regarding the construction or enforcement of this Agreement, the
prevailing party shall be entitled to recover its reasonable attorneys' fees,
costs and expenses incurred in such proceeding.
7
<PAGE> 8
18. Headings. The headings contained in this Agreement are not to be used
for interpretation of this Agreement, but rather have been placed herein solely
for the convenience of the parties.
19. Authority. Each party represents and warrants to the other that it has
full power and authority to enter into this Agreement and that execution and
performance of this Agreement shall not conflict with any existing agreements
with other parties.
IT WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective authorized officers as of the date first written above.
LICENSEE: OBL:
IMCOR, INC. ORTHOPAEDIC BIOSYSTEMS, INC.
By /s/ illegible By /s/ James W. Hart
-------------------- ------------------------
Title President Title President
----------------- ---------------------
8
<PAGE> 1
EXHIBIT 10.4
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
SERIES B PROMISSORY NOTE
Scottsdale, Arizona
______________ 1997
FOR VALUE RECEIVED, Orthopaedic Biosystems Ltd, Inc., an Arizona
corporation with offices at 15990 N. Greenway Hayden Loop, Suite 100,
Scottsdale, Arizona 85260 (hereinafter called the "Maker") does hereby promise
to pay __________________________ (the "Holder"), at _________________________,
the principal sum of __________________________________ Dollars ____________ in
lawful money of the United States, together with interest as set out herein.
This Note shall bear simple interest at a rate equal to two percent (2%) per
annum in excess of the prime commercial lending rate published in the Wall
Street Journal as of the date hereof adjusted as of January 1, 1998, April 1,
1998, and quarterly thereafter. Payment of the entire unpaid principal amount
hereof together with all outstanding interest hereunder shall be due and payable
on December 31, 1998 (the "Maturity Date"). In the event payment of all
principal and interest is not made by the Maker within fifteen (15) business
days of the Maturity Date, Maker shall pay to the Holder interest on such
overdue amount from the date it was due at a default rate of eighteen percent (
18%) per annum.
The Holder hereof, in consideration of the purchase of this Note for a
price equal to its principal amount, is also entitled to be issued a Warrant to
purchase shares of the Maker's capital stock for an exercise price of not more
than $2.00 per share at any time prior to 5:00 p.m., Phoenix, Arizona time, on
December 31, 2002 in accordance with the terms and conditions specified in the
Warrant Certificate. The number of shares of the Maker's capital stock subject
to such Warrant shall be equal to the principal amount of this Note divided by
two (2).
The Maker may prepay this Note at any time without penalty. No
prepayment of this Note shall be made except to the extent that a proportional
prepayment is made at the same time with respect to all Series B Promissory
Notes, the aggregate principal amount of which notes shall not exceed One
Million and 00/100 Dollars ($1,000,000) without the prior written approval of
the holders of $666,666 or more, face value, in the aggregate, of the Series B
Promissory Notes. This Note shall be prepaid by Maker in the event of a Change
of Control. For purposes of this Note, a Change of Control shall mean (i) the
purchase or other acquisition by any person, or entity, or group of persons not
currently shareholders of the Maker of beneficial ownership of fifty percent
(50%) or more of the combined voting power of the Maker's then outstanding
voting securities, or (ii) the approval by the Maker's shareholders of a
reorganization, merger or consolidation resulting, as to persons who were
shareholders of the Maker immediately prior to such reorganization, merger or
consolidation, in such persons owning less than fifty percent (50%) of the
combined voting power of the Maker's then outstanding voting securities, or
(iii) the sale or other transfer of all or substantially all of the Maker's
assets.
<PAGE> 2
All payments on account of the indebtedness evidenced by this Note
shall be first applied to interest on the unpaid principal balance and the
remainder to principal.
The indebtedness of Maker evidenced by this Note is subordinated to the
prior payment when due of the principal, any collection expenses and premium,
and interest on any Senior Debt. Upon maturing of any Senior Debt, payment in
full on such Senior Debt must be made before any payment is made with respect to
principal or interest due under this Note. During any period of default of
payment relating to the Senior Debt, no payment may be made by maker with
respect to this Note. Upon distribution of the assets of maker in any
dissolution, winding up, liquidation or reorganization of Maker, payment with
respect to interest and principal under this Note will be subordinated to the
prior payment in full of the Senior Debt. "Senior Debt" for this purpose means
only secured debt incurred for working capital or operating needs in the
ordinary course of Maker's business.
No indebtedness of Maker other than Senior Debt and the indebtedness
evidenced by this Note may be incurred without the prior written approval of the
holders of $666,666 or more, face value, in the aggregate, of the Series B
Promissory Notes.
In the event that the Maker shall default in the payment of this Note,
the Holder shall notify the Maker in writing of such default by certified mail,
return receipt requested. and unless payment is received by the Holder within
fifteen (15) business days after the Maker received such notice, the Holder may,
by notice in writing by certified mail, return receipt requested, declare this
Note to be immediately due and payable without presentment for payment, protest
and notice of protest or further notice of any kind.
The Maker of this Note, except as otherwise specifically provided for
herein hereby: waives presentment for payment, demand, notice of non-payment or
dishonor, protest and notice of protest, waives a trail by jury in any action or
proceedings arising on, out of, under or by reason of this Note; consents to any
renewals, extensions and partial payments of this Note and of the indebtedness
for which it is given without notice; and consents that no such renewals,
extensions, or partial payments shall discharge the Maker from liability herein
in whole or in part. If a petition under any provision of the Bankruptcy Act or
any other insolvency statute for any relief thereunder shall be held by or
against the Maker, and same shall remain undischarged for a period of thirty
(30) consecutive days, then this Note shall become immediately due and payable.
No delay or failure on the part of the Holder in exercising any right,
privilege or option hereunder shall operate as a waiver thereof or of any event
of default, nor shall any single or partial exercise of any such right,
privilege or option preclude any further exercise thereof, or the exercise of
any other right, privilege or option.
If suit is brought by Holder to collect any payment of principal or of
interest on this Note which is not paid when due, Holder shall be entitled to
recover and the undersigned agrees to pay
2
<PAGE> 3
the expense of Holder, including but not limited to reasonable attorney fees and
disbursements.
This Note shall be construed and enforced under the laws of the State
of Arizona.
IN WITNESS WHEREOF, the Maker has caused this Note to be executed on
its behalf by a duly authorized officer as of the date first written above.
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
By:______________________________________
D. Ronald Yagoda, Chairman
3
<PAGE> 1
EXHIBIT 10.5
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
SERIES B PROMISSORY NOTE
($200,000.00) Scottsdale, Arizona
May 4, 1998
FOR VALUE RECEIVED, Orthopaedic Biosystems Ltd, Inc., an Arizona
corporation with offices at 15990 N. Greenway Hayden Loop, Suite 100,
Scottsdale, Arizona 85260 (hereinafter called the "Maker") does hereby promise
to pay D. Ronald Yagoda (the "Holder"), at 10040 Happy Valley Road #917,
Scottsdale, AZ 85255 the principal sum of Two Hundred Thousand Dollars
($200,000.00) in lawful money of the United States, together with interest as
set out herein. This Note shall bear simple interest at a rate equal to four
percent (4%) per annum in excess of the prime commercial lending rate published
in the Wall Street Journal as of the date hereof adjusted as of June 30, 1998,
and quarterly thereafter. Payment of the entire unpaid principal amount hereof
together with all outstanding interest hereunder shall be due and payable on
April 30, 1999, (the "Maturity Date"). In the event payment of all principal
and interest is not made by the Maker within fifteen (15) business days of the
Maturity Date, Maker shall pay to the Holder interest on such overdue amount
from the date it was due at a default rate of eighteen percent (18%) per annum.
The Maker may prepay this Note at any time without penalty. No prepayment
of this Note shall be made except to the extent that a proportional prepayment
is made at the same time with respect to all Series B Promissory Notes, the
aggregate principal amount of which notes shall not exceed Two Million and
00/100 Dollars ($2,000,000) without the prior written approval of the holders
of $1,332,000 or more, face value, in the aggregate, of the Series B Promissory
Notes. This Note shall be prepaid by Maker in the event of a Change of Control.
For purposes of this Note, a Change of Control shall mean (i) the purchase or
other acquisition by any person, or entity, or group of persons not currently
shareholders of the Maker of beneficial ownership of fifty percent (50%) or
more of the combined voting power of the Maker's then outstanding voting
securities, or (ii) the approval by the Maker's shareholders of a
reorganization, merger or consolidation resulting, as to persons who were
shareholders of the Maker immediately prior to such reorganization, merger or
consolidation, in such persons owning less than fifty percent (50%) of the
combined voting power of the Maker's then outstanding voting securities, or
(iii) the sale or other transfer of all or substantially all of the Maker's
assets.
All payments on account of the indebtedness evidenced by this Note shall
be first applied to interest on the unpaid principal balance and the remainder
to principal.
-1-
<PAGE> 2
The indebtedness of Maker evidenced by this Note is subordinated to the
prior payment when due of the principal, any collection expenses and premium,
and interest on any Senior Debt. Upon maturing of any Senior Debt, payment in
full on such Senior Debt must be made before any payment is made with respect
to principal or interest due under this Note. During any period of default of
payment relating to the Senior Debt, no payment may be made by maker with
respect to this Note. Upon distribution of the assets of maker in any
dissolution, winding up, liquidation or reorganization of Maker, payment with
respect to interest and principal under this Note will be subordinated to the
prior payment in full of the Senior Debt. "Senior Debt" for this purpose means
only secured debt incurred for working capital or operating needs in the
ordinary course of Maker's business.
No indebtedness of Maker other than Senior Debt and the indebtedness
evidenced by this Note may be incurred without the prior written approval of
the holders of $1,332,000 or more, face value, in the aggregate, of the Series
B Promissory Notes.
In the event that the Maker shall default in the payment of this Note, the
Holder shall notify the Maker in writing of such default by certified mail,
return receipt requested, and unless payment is received by the Holder within
fifteen (15) business days after the Maker received such notice, the Holder
may, by notice in writing by certified mail, return receipt requested, declare
this Note to be immediately due and payable without presentment for payment,
protest and notice of protest or further notice of any kind.
The Maker of this Note, except as otherwise specifically provided for
herein hereby: waives presentment for payment, demand, notice of non-payment or
dishonor, protest and notice of protest, waives a trial by jury in any action
or proceedings arising on, out of, under or by reason of this Note: consents to
any renewals, extensions and partial payments of this Note and of the
indebtedness for which it is given without notice; and consents that no such
renewals, extensions, or partial payments shall discharge the Maker from
liability herein in whole or in part. If a petition under any provision of the
Bankruptcy Act or any other insolvency statute for any relief thereunder shall
be held by or against the Maker, and same shall remain undischarged for a
period of thirty (30) consecutive days, then this Note shall become immediately
due and payable.
No delay or failure on the part of the Holder in exercising any right,
privilege or option hereunder shall operate as a waiver thereof or of any event
of default, nor shall any single or partial exercise of any such right,
privilege or option preclude any further exercise thereof, or the exercise of
any other right, privilege or option.
If suit is brought by Holder to collect any payment of principal or of
interest on this Note which is not paid when due, Holder shall be entitled to
recover and the undersigned agrees to pay the expense of Holder, including but
not limited to reasonable attorney fees and disbursements.
This Note shall be construed and enforced under the laws of the State of
Arizona.
-2-
<PAGE> 3
IN WITNESS WHEREOF; the Maker has caused this Note to be executed on its
behalf by a duly authorized officer as of the date first written above.
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
By: /s/ D. Ronald Yagoda
------------------------------
D. Ronald Yagoda, Chairman
-3-
<PAGE> 1
Exhibit 10.6
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
EMPLOYMENT AGREEMENT
(Amended and Restated as of July 6, 1998)
THIS AGREEMENT is made as of the 5th day of January, 1998, by and
between ORTHOPAEDIC BIOSYSTEMS LTD., INC., an Arizona corporation with its
principal place of business at 15990 N. Greenway-Hayden Loop, Suite 100,
Scottsdale, Arizona 85260 (hereinafter the "Company"), and JAMES W. HART
(hereinafter the "Employee").
WHEREAS, the Company is engaged in the business of developing and
marketing medical products, including orthopaedic devices and equipment; and
WHEREAS, the Employee desires to be employed by the Company as its
President and Chief Operating Officer, and the Company desires to employ the
Employee in such capacity in accordance with the terms hereof;
NOW, THEREFORE, in consideration of such employment, and other good and
valuable consideration, it is agreed:
1. Definitions.
As used in this Agreement:
(a) "Company" means Orthopaedic Biosystems Ltd., Inc. and its
successors and assigns, and any of its present or future subsidiaries, or
organizations controlled by, controlling or under common control with it.
(b) "Confidential Information" means information developed by,
disclosed to, or otherwise known by the Employee as a consequence of or through
his employment by the Company which is comprised of or relates in any way to (i)
the processes used and to be used in Company's business; (ii) the methods and
results of Company's research and development activities; (iii) any Invention,
discovery, technological development, manufacturing design or technique,
process, system, machine, device or improvement, computer software program,
composition, or data and information which Employee, alone or jointly with
others, produces, discovers, compiles, fixes in a tangible medium, or reduces to
practice, and (iv) any other technical and non-technical information and data
relating to Company's business, except such items which Employee can prove by
clear and convincing evidence were (x) publicly and openly known prior to the
date of Employee's initial employment by the Company, and therefore in the
public domain, or (y) subsequent to the date of Employee's initial employment by
the Company became publicly and openly known through no fault or wrongful act of
the Employee.
<PAGE> 2
-2-
(c) "Inventions" mean discoveries, concepts, works of
authorship, and ideas, whether or not patentable, copyrightable or subject to
any other form of protection, including but not limited to processes, methods,
formulas, techniques, as well as improvements thereof or know-how related
thereto, concerning any present or prospective activities of the Company with
which the Employee becomes acquainted as a result of his employment by the
Company.
2. Employment.
Commencing on the date hereof, the Company shall employ Employee, and
Employee shall serve as an employee of the Employer upon the terms and
conditions herein set forth.
3. Scope of Employment.
During the term of this Agreement, Employee shall devote such time,
attention and energy to the business of the Company as shall be required for him
to carry out his duties hereunder. He shall serve as President and Chief
Operating Officer of the Company and shall have the authority to perform and
shall perform all of the duties that are customary for the office of President,
subject at all times to the control and direction of the Board of Directors of
the Company, and shall (i) execute the Company's strategic business plan to
maximize opportunities of the Company's technology, (ii) provide leadership to
raise the required equity funding necessary to reach the goals set forth in the
Company's business plan, and (iii) perform such services as typically are
provided by the chief operating officer of a corporation in supervising the
day-to-day conduct of the Company's business, and such other services consistent
therewith as shall be assigned to Employee from time to time by the Board of
Directors of the Company. During the term of this Agreement, Employee shall not
engage in any other business activity which, in the reasonable judgment of the
Company's Board of Directors conflicts with the duties of Employee hereunder,
whether or not such activity is pursued for gain, profit or other pecuniary
advantage; provided, however, that it is understood that this Section 3 shall
not preclude Employee from making passive investments in other business entities
as long as Employee notifies the Board of Directors in advance in the event that
the Employee intends to make a passive investment in the Company's industry.
4. Term.
4.1 The term of this Agreement shall commence on the date hereof and
continue until July 2, 1998. This Agreement shall expire as of the close of
business on July 2, 1998 unless the parties agree in writing to extend the term
for an additional one (1) year period, in which case this Agreement shall expire
as of the close of business on July 1, 1999.
<PAGE> 3
-3-
4.2 Notwithstanding the term of employment provided for in Section 4.1,
this Agreement shall immediately terminate upon Employee's death or Permanent
Disability. For purposes of this Agreement, Permanent Disability shall mean any
physical or mental condition which materially interferes with the performance of
Employee's customary duties in Employee's capacity as President of the Company
where such disability has continued for a period of one hundred eighty (180)
consecutive days. This Agreement may be terminated at any time at the
convenience of either party hereto.
5. Compensation
5.1 Employee shall be paid a base salary at a rate of One Hundred Forty
Thousand Dollars ($140,000.00) per year with respect to periods of his
employment hereunder. Such base salary shall be payable in equal installments
coinciding with the Company's customary pay periods, and shall be subject to
withholding and other deductions as required by law.
5.2 Subject to the provisions of Section 4 hereof, Employee will be
entitled to be paid a bonus by the Company if the Company attains its quarterly
sales goals during calendar year 1998. The bonus amounts and the Company's sales
goals are as follows:
<TABLE>
<CAPTION>
1998 Period Company Sales Bonus
<S> <C> <C>
January 1 - March 31 $ 350,000 $ 10,000
April 1 - June 30 $ 835,000 12,500
July 1 - September 30 $1,150,000 15,000
October 1 - December 31 $1,390.000 22,500
----------
$3,725,000
</TABLE>
The Company's sales for this purpose mean gross sales revenues reduced by
returns and products repurchased from distributors for the quarter in question
reflected on the Company's books and records, and shall be determined as soon as
practicable following the close of a calendar quarter. Sales goals will be
determined on a cumulative as well as a quarterly basis so that the goal of one
quarter may be met with excess sales from a subsequent quarter. Consequently, if
the sales goal is not met in the first quarter, but the total sales for the
first and second quarters exceed the sum of the sales goals for both quarters,
the Employee will be entitled to receive payment of his bonus for both the first
quarter and the second quarter, which amount will be payable following the close
of the second quarter. Any bonus payable to Employee will be paid as soon as
practicable following the close of a calendar quarter, and will be paid all in
cash.
<PAGE> 4
-4-
5.3 The Employee is hereby granted options to purchase 150,000 shares
of the Company's common stock at a purchase price of $2.00 per share on the
conditions set forth in this Section 5.3. The options will be issued to Employee
pursuant to the Company's 1998 Incentive Stock Option Plan to the extent such
plan is not inconsistent with the provisions of this Section 5.3. The Employee's
right to such options will vest at a rate of 37,500 shares per year commencing
January 1, 1999. The options may be exercised in whole or in part at any time
following their respective vesting dates. but will expire seven years after each
such date. No option may be exercised by the Employee unless he is employed by
the Company on both the date the option vests and on the date of exercise. All
options granted hereunder are non transferable. If the assets or capital stock
of the Company are acquired by or merged into another corporation, and Employee
is employed by the Company as of the date of such transaction, the Employee's
options granted pursuant to this Section 5.3 shall immediately vest and the
Employee shall have the right to exercise any vested stock options as of the
date of such transaction. All options shall be exercised by written notice to
the Company accompanied by payment in full of the option price. The option price
shall be paid to the Company by cashier's or certified check. The parties agree
to enter into a Stock Option Agreement reflecting the terms of this Section 5.3.
The number of shares of common stock subject to the option will be
proportionately adjusted, as determined by the Board of Directors, in the event
of any extraordinary dividend or other distribution, recapitalization, forward
or reverse split, reorganization, merger, consolidation, spin off, combination,
repurchase, or share exchange, or other similar corporate transaction or event
effecting the Company's common stock.
5.4 Employee will be eligible to participate in any group health plan,
life insurance plan and any other employee benefit or incentive compensation
plan or arrangement now in effect or hereafter adopted by the Company; provided,
however, that the Company reserves the right to modify or discontinue any such
plan or arrangement at any time for any reason it deems appropriate, and the
Company may do so for reasons other than financial necessity. Employee's
participation in any such plan or arrangement shall be commensurate with the
Employee's compensation and position with the Company, and will otherwise be
subject to the provisions of any document setting forth the terms and conditions
of any such plan or arrangement. Notwithstanding any contrary provision hereof,
this Agreement does not modify the provisions of any such plan or arrangement.
5.5 Employee shall be entitled to a number of paid vacation days as
shall be determined by the Company in accordance with its policy or practices
with respect to other senior officers of the Company. Company will reimburse the
Employee. in accordance with its policies in effect from time to time, for
reasonable business expenses incurred by Employee in promoting the business of
the Company upon presentation by Employee of an itemized account of such
expenses. Company will provide Employee with an automobile allowance of Four
Hundred Dollars ($400.00) per month.
<PAGE> 5
-5-
5.6 The Company will reimburse Employee for the reasonable expenses of
moving his family from Warsaw, Indiana to the Phoenix, Arizona metropolitan area
upon presentation of suitable evidence of such expenses. Further, the Company
will pay Employee an allowance for temporary living expenses in the Phoenix area
in the amount of $370 per week for up to 26 weeks, and will reimburse Employee
for transportation expenses of up to $1,000 for each of two trips by his wife
for visits to the Phoenix area prior to her move.
6. Discharge by Company.
The Company shall be entitled to terminate this Agreement and to
discharge the Employee at any time, but only for "cause." The term "cause" shall
be limited to the following grounds:
(a) The Employee's failure (for reasons other than disability)
or refusal to perform the Employee's duties and responsibilities as set
forth in Section 3 hereof, continuing after written warning from the
Company;
(b) Dishonesty affecting the Company;
(c) Excessive use of illegal drugs, or excessive use of
alcohol that is not being medically treated as alcoholism, which
materially interferes with performance of the Employee's obligations
under this Agreement and which continues after written warning from the
Company;
(d) Conviction of a felony or of any crime involving moral
turpitude, fraud or misrepresentation;
(e) The commission by the Employee of any willful or
intentional act which could reasonably be expected to materially injure
the reputation, business or business relationships of the Company; and
(f) Any material breach (not covered by any of the clauses (a)
through (e)) of any of the provisions of this Agreement, if such breach
is not cured within ten (10) days after written notice thereof to the
Employee by the Company.
7. Severance Pay.
In the event that the Board of Directors shall terminate this Agreement
pursuant to Section 4.2 (unless such termination is for cause), Employee shall
be paid a Severance Payment equal to
<PAGE> 6
-6-
twelve (12) months base salary set forth in Section 5.2 hereof. Such Severance
Payment shall be paid in equal monthly installments commencing on the first day
of the month following the date of termination. Notwithstanding the foregoing
provisions of this Section 7, (i) in the event the assets or capital stock of
the Company are acquired by or merged into another corporation, and Employee is
not offered a position with the Company's successor that is reasonably
commensurate with his employment hereunder, then Employee shall be entitled to
receive the Severance Payment provided by this Section 7, and (ii) in the event
Employee's employment expires or terminates prior to July 3, 1998 for any
reason, no Severance Payment shall be made by the Company.
8. Employee's Representations and Warranties.
Employee covenants, represents and warrants to the Company that (i)
Employee has not entered into, and will not enter into, any agreement or
obligation that may interfere with Employee's full compliance with the terms of
this Agreement, and (ii) Employee currently has no property rights or claims
relating to any invention, discovery, concept or idea, or any improvement
thereof, or know-how related thereto, acquired at any time which has not been
disclosed to the Company in writing by the Employee prior to the date hereof.
9. Inventions.
With respect to Inventions made or conceived by the Employee, whether
or not during the hours of his employment or with the use of the Company
facilities, materials, or personnel, either solely or jointly with others during
his employment by the Company, or within two (2) years after termination of such
employment if based on or related to Confidential Information:
(a) The Employee shall inform the Company promptly and fully
of such Inventions by a written report, setting forth in detail a description of
the invention and any processes associated with its promotion. A detailed
written report also will be submitted by the Employee upon completion of any
studies or research projects undertaken on the Company's behalf, whether or not
in the Employee's opinion a given project has resulted in an Invention.
(b) The Employee shall apply, at the Company's request and
expense, for United States and foreign letters patent either in the Employee's
name or otherwise as the Company shall desire.
(c) The Employee hereby assigns and agrees to assign to the
Company or its nominee, without further consideration, all of Employee's rights
to such Inventions, and to applications for United States and/or foreign letters
patent and to United States and/or foreign letters patent granted upon such
Inventions. Any copyrightable works involving Employee
<PAGE> 7
-7-
(including separate contributions by Employee to collective works) will be
deemed to be "works for hire" under the copyright laws of the Unites States.
(d) The Employee shall acknowledge and deliver promptly to the
Company, without charge to the Company but at its expense, such written
instruments and do such other acts, such as giving testimony in support of any
patent application, as may be necessary in the opinion of the Company to obtain
and maintain United States and/or foreign letters patent and to vest the entire
right and title thereto in the Company.
(e) The Company shall also have the royalty-free right to use
in its business, and to make, use and sell products, processes and/or services
derived from any inventions, discoveries, concepts, and ideas, whether or not
patentable, including but not limited to processes, methods, formulas, and
techniques, as well as improvements thereof or know-how related thereto, which
are not within the scope of Inventions as defined herein but which are conceived
or made by the Employee during the hours which he is employed by the Company or
with the use or assistance of the Company's facilities, materials or personnel.
10. Restrictive Covenants.
10.1 Employee agrees that he will not, either during his employment or
at any time after cessation of such employment, impart or disclose any of the
Confidential Information to any person, firm or corporation other than Company,
or use any of such Confidential Information, directly or indirectly for the
Employee's own benefit or for the benefit of any person, firm or corporation
other than Company or its affiliates. Employee's obligations under this Section
10.1 shall cease with respect to any such Confidential Information if such
information (i) was already known to Employee at the time of disclosure, free of
any obligation to keep it confidential, or (ii) was subsequently disclosed to
Employee without breach of this Agreement by a third person who rightfully
received and disclosed it without breaching any confidentiality obligation to
the Company. It is also understood by the parties that Employee may be required
to disclose Confidential Information (a) pursuant to subpoena or other court
process, (b) at the express direction of any other authorized government agency
or (c) otherwise as required by law or regulation. Disclosure of Confidential
Information or any part thereof in such circumstances will not constitute a
breach of the confidentiality provisions set forth in this Agreement, provided
that Employee notifies Company in advance of any such disclosure and cooperates
with Company in any efforts that Company may make to seek a protective order
with respect to such disclosure.
10.2 In addition to the foregoing agreements relating to the Company's
Confidential Information, during the term of this Agreement (including any
renewals thereof) and during the term of the "Post-Employment Period" (as
defined herein), Employee will not, without the
<PAGE> 8
-8-
Company's prior written consent, (i) solicit any of the employees of Company for
the purpose of hiring or retaining any such employees, (ii) hire or retain or
cause to be hired or retained any of the employees of Company or (iii) become
involved in any manner, including without limitation as an officer, director,
employee. consultant, representative, partner, owner or shareholder (except as a
holder of less than a two percent (2%) equity interest in a public entity) in
any business located in the United States which is in the business of inventing,
developing, manufacturing, marketing, providing or selling products competitive
with the products that the Company has developed, manufactured, marketed,
produced or sold, or is in the process of developing (and reasonably expect to
bring to market within one (1) year after the expiration of the Post-Employment
Period or longer if required by the U.S. Food and Drug Administration clearance
or approval process), manufacturing, marketing, producing or selling as of the
date that Employee's employment terminates. For purposes of this Agreement, the
term "PostEmployment Period" shall mean. the period commencing on the date that
this Agreement is terminated for any reason and ending one (1) year from the
date of such termination; provided, however, that in the event this Agreement
expires or terminates for any reason prior to July 3, 1998, the restrictive
provisions of this Section 10.9 shall not apply and there will be no
"Post-Employment Period."
10.3 Employee agrees that all memoranda, lab books, notes, records,
charts, formulae, specifications, lists and other documents made, compiled,
received, held or used by Employee while employed by Company, concerning any
phase of Company's business or its Confidential Information, shall be Company's
property and shall be delivered by Employee to Company upon termination of
Employee's employment or at any earlier time on the request of Company.
10.4 Employee acknowledges that given his access to information
regarding Company, the provisions of this Section 10 are reasonable and
necessary to protect Company's business. Employee further acknowledges that
Employee has carefully reviewed the provisions of this Section 10, that Employee
fully understands the economic consequences thereof, that Employee has assessed
the respective advantages and disadvantages to Employee of entering into this
Agreement and Employee has concluded that. in light of Employee's education,
skills and abilities, the restrictions set forth in this Section 10 will not
prevent Employee from earning a living after the termination of this Agreement.
Employee agrees that each of the provisions of this Section 10, including,
without limitation, the period of time, geographical area and types and scope of
the restrictions on Employee's activities specified herein, are intended to be
and shall be divisible. Employee further acknowledges that reasonableness of
these provisions as an integral part of the terms of Employee's employment. If
any provision of this Section 10 (including any sentence, clause or part
thereof) shall be adjudicated to be invalid or unenforceable, such provision
shall be deemed amended to delete therefrom the portion thus adjudicated to be
invalid or unenforceable, such deletion to apply only with respect to the
operation of such provision in the particular jurisdiction in which such
adjudication is made. In addition, if any particular
<PAGE> 9
-9-
provision contained in this Agreement shall for any reason be held to be
excessively broad as to duration, geographical scope, activity or subject, it
shall be construed by limiting and reducing such provision as to such
characteristic so that the provision is enforceable to the fullest extent
compatible with the applicable law as it shall then appear.
10.5 As it would be very difficult to measure the damages which would
result to Employer from a breach of any of the covenants contained in this
Section 10 in the event of such a breach, Company shall have the right to have
such covenants specifically enforced by a court of competent jurisdiction.
Employee hereby recognizes and acknowledges that irreparable injury or damage
shall result to the business of Company in the event of a breach or threatened
breach by Employee of the terms and provisions of this Section 10. Therefore,
Employee agrees that Company shall be entitled to an injunction restraining
Employee from engaging in any activity constituting such breach or threatened
breach. Nothing contained herein shall be construed as prohibiting Company from
pursuing any other remedies available to Company at law or in equity for such
breach or threatened breach, including, but not limited to, recovery of damages
from Employee and, if Employee is still employed by Company, terminating the
employment of Employee in accordance with the terms and provisions hereof.
10.6 Employee agrees that during his employment hereunder and for six
(6) months thereafter, Employee will not attempt to solicit or induce any other
employee of the Company to leave his or her employment with the Company or
interfere with the business relationship between the Company and its suppliers
or customers.
11. Notices.
For the purposes of this Agreement, notices and all other
communications provided for or relating to the Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered, sent by
facsimile with a facsimile confirmation of transmission, delivered by overnight
courier, or mailed by United States certified or express mail, return receipt
requested, postage prepaid, addressed as follows:
If to Employee: At the Employee's most recent residence
address reflected on the Company's records.
If to the Company: Orthopaedic Biosystems Ltd., Inc.
15990 N. Greenway-Hayden Loop
Suite 100
Scottsdale, Arizona 85260
<PAGE> 10
-10-
with a copy to: Steven P. Davis
Aronberg Goldgehn Davis & Garmisa
One IBM Plaza, Suite 3000
Chicago, Illinois 60611
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
12. General.
12.1 No modification, amendment, extension or waiver of this Agreement
shall be binding upon the Company or Employee unless made in a writing signed by
an officer of the Company and Employee which expressly purports to modify this
Agreement.
12.2 This Agreement is the entire agreement between the parties
involving the subject hereof and supersedes any discussion, negotiations,
representations or prior or similar agreements upon the same subject. Company
has offered Employee no inducements to enter into this Agreement other than as
fully disclosed herein.
12.3 This Agreement is personal to and not assignable by Employee
without the Company's advance written consent. This Agreement shall inure to the
benefit of, be binding upon and be enforceable by the Company, its successors
and assigns, and shall be binding upon Employee and Employee's heirs, permitted
assigns and legal representatives.
12.4 This Agreement shall be governed by and construed in accordance
with the internal laws of the State of Arizona, without reference to principles
of conflicts of law.
12.5 The language set forth in this Agreement shall be deemed to be the
language chosen by both parties to express their mutual intent, and no rule of
strict construction shall be applied against either party hereto.
12.6 If a court of competent jurisdiction determines that any specific
provision hereof is invalid and unenforceable and refuses to any reason to
reform such provision as contemplated by the parties, the validity and
enforceability of the remaining provisions of this Agreement shall not be
affected, and the Agreement shall thereafter be construed as if the invalid
provision had not been included in the Agreement, unless the elimination of such
provision destroys the underlying business purpose of this Agreement.
<PAGE> 11
-11-
12.7 Any claims to enforce any right of either party arising out of the
employment relationship or seeking damages pertaining thereto or to an alleged
breach hereof shall be filed in a court of competent jurisdiction within twelve
(12) months after the claim arises or the breach occurs, or such claim shall
thereafter be barred from adjudication. In the event a dispute relating to this
Agreement is litigated, the prevailing party shall be entitled to recover the
costs and fees incurred in prosecuting such action, including, but not limited
to, reasonable attorneys fees and the fees of any expert witnesses.
12.8 This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
By: /s/ D. Ronald Yagoda
-----------------------------------------
ATTEST:
- ---------------------------
Secretary
EMPLOYEE:
/s/ James W. Hart
--------------------------------------------
Signature
/s/ James W. Hart
--------------------------------------------
Printed Name
<PAGE> 1
Exhibit 10.7
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made this 5th day of May, 1997, by and between
ORTHOPAEDIC BIOSYSTEMS LTD., INC., an Arizona corporation with its principal
place of business at 7320 East Butherus, Suite 206, Scottsdale, Arizona 85260
(hereinafter the "Company"), and D. RONALD YAGODA (hereinafter the "Employee").
WHEREAS, the Company is engaged in the business of developing and
marketing medical products, including orthopaedic devices and equipment;
WHEREAS, Employee has served as the Company's chief executive officer
since its inception; and
WHEREAS, the Employee desires to be employed by the Company and the
Company desires to employ the Employee in a capacity in which the Employee will
be given access to Confidential Information;
NOW, THEREFORE, in consideration of such employment, and other good and
valuable consideration, it is agreed:
1. DEFINITIONS.
As used in this Agreement:
(a) "Company" means Orthopaedic Biosystems Ltd., Inc. and its
successors and assigns, and any of its present or future subsidiaries, or
organizations controlled by, controlling or under common control with it.
<PAGE> 2
-2-
(b) "Confidential Information" means information developed by, disclosed
to, or otherwise known by the Employee as a consequence of or through his
employment by the Company which is comprised of or relates in any way to (i)
the processes used and to be used in Company's business; (ii) the methods and
results of Company's research and development activities; (iii) any invention,
discovery, technological development, manufacturing design or technique,
process, system, machine, device or improvement, computer software program,
composition, or data and information which Employee, alone or jointly with
others, produces, discovers, compiles, fixes in a tangible medium, or reduces
to practice, and (iv) any other technical and non-technical information and data
relating to Company's business, except such items which Employee can prove by
clear and convincing evidence were (x) publicly and openly known prior to the
date of Employee's initial employment by the Company, and therefore in the
public domain, or (y) subsequent to the date of Employee's initial employment
by the Company became publicly and openly known through no fault or wrongful
act of the Employee.
(c) "Inventions" mean discoveries, concepts, works of authorship, and
ideas, whether or not patentable, copyrightable or subject to any other form of
protection, including but not limited to processes, methods, formulas,
techniques, as well as improvements thereof or know-how related thereto,
concerning any present or prospective activities of the Company with which the
Employee becomes acquainted as a result of his employment by the Company.
<PAGE> 3
-3-
2. Employment.
Commencing on or continuing from the date hereof, the Company shall employ
Employee (or shall continue to employ Employee, as the case may be), and
Employee shall serve as an employee of the Employer upon the terms and
conditions herein set forth.
3. Scope of Employment.
During the term of this Agreement, Employee shall devote such time,
attention and energy to the business of the Company as shall be required for him
to carry out his duties hereunder. He shall serve as President of the Company
and shall have the authority to perform and shall perform all of the duties that
are customary for the office of President, subject at all times to the control
and direction of the Board of Directors of the Company, and shall (i) execute
the Company's strategic business plan to maximize opportunities of the Company's
technology, (ii) provide leadership to raise the required equity funding
necessary to reach the goals set forth in the Company's business plan, and (iii)
perform such services as typically are provided by the chief executive officer
of a corporation and such other services consistent therewith as shall be
assigned to Employee from time to time by the Board of Directors of the Company.
During the term of this Agreement, Employee shall not engage in any other
business activity which, in the reasonable judgment of the Company's Board of
Directors conflicts with the duties of Employee hereunder, whether or not such
activity is pursued for gain, profit or other pecuniary advantage; provided,
however, that it is understood that this Section 3 shall not preclude Employee
from making passive investments in other business entities as long as Employee
notifies the Board of
<PAGE> 4
-4-
Directors in advance in the event that the Employee intends to make a passive
investment in the Company's industry.
4. Term.
4.1 The term of this Agreement shall commence on the date hereof and
continue until December 31, 1997 and shall be automatically renewable
thereafter for consecutive terms of one year each unless and until terminated
as of the end of any such period by either party giving notice of termination
in writing to the other party not less than sixty (60) days before the end of
the period in question and subject, however, to earlier termination pursuant to
Section 4.2 or Section 6 hereof.
4.2 Notwithstanding the term of employment provided for in Section 4.1,
this Agreement shall immediately terminate upon Employee's death or Permanent
Disability. For purposes of this Agreement, Permanent Disability shall mean any
physical or mental condition which materially interferes with the performance
of Employee's customary duties in Employee's capacity as President of the
Company where such disability has continued for a period of one hundred eighty
(180) consecutive days.
5. Compensation.
5.1 Employee shall be paid a base salary in such amounts as shall be
determined by the Company's Board of Directors, in its sole discretion, from
time to time. Such base salary shall be payable no less often than in monthly
installments and shall be subject to withholding and other deductions as
required by law.
<PAGE> 5
-5-
5.2 Employee will be eligible to participate in any group health plan,
life insurance plan and any other employee benefit or incentive compensation
plan or arrangement now in effect or hereafter adopted by the Company;
provided, however, that the Company reserves the right to modify or discontinue
any such plan or arrangement at any time for any reason it deems appropriate,
and the Company may do so for reasons other than financial necessity.
Employee's participation in any such plan or arrangement shall be commensurate
with the Employee's compensation and position with the Company, and will
otherwise be subject to the provisions of any document setting forth the terms
and conditions of any such plan or arrangement. Notwithstanding any contrary
provision hereof, this Agreement does not modify the provisions of any such
plan or arrangement.
5.3 Employee shall be entitled to a number of paid vacation days as shall
be determined by the Company in its sole discretion.
5.4 Company will reimburse the Employee, in accordance with its policies
in effect from time to time, for reasonable business expenses incurred by
Employee in promoting the business of the Company upon presentation by Employee
of an itemized account of such expenses.
5.5 Company will provide Employee with an automobile allowance of Five
Hundred Dollars ($500.00) per month.
<PAGE> 6
-6-
6. Discharge by Company.
The Company shall be entitled to terminate this Agreement and to discharge
the Employee at any time, but only for "cause." The term "cause" shall be
limited to the following grounds:
(a) The Employee's failure (for reasons other than disability) or
refusal to perform the Employee's duties and responsibilities as set forth
in Section 3 hereof, continuing after written warning from the Company;
(b) Dishonesty affecting the Company;
(c) Excessive use of illegal drugs, or excessive use of alcohol that
is not being medically treated as alcoholism, which materially interferes
with performance of the Employee's obligations under this Agreement and
which continues after written warning from the Company;
(d) Conviction of a felony or of any crime involving moral turpitude,
fraud or misrepresentation;
(e) The commission by the Employee of any willful or intentional act
which could reasonably be expected to materially injure the reputation,
business or business relationships of the Company; and
(f) Any material breach (not covered by any of the clauses (a)
through (e)) of any of the provisions of this Agreement, if such breach is
not cured within ten (10) days after written notice thereof to the Employee
by the Company.
<PAGE> 7
-7-
7. Severance Pay.
In the event (a) the Board of Directors shall terminate this Agreement
pursuant to Section 4.1 (unless such termination is for cause) or (b) this
Agreement is terminated because of Employee's Permanent Disability under
Section 4.2 hereof, Employee shall be paid a Severance Payment equal to
eighteen (18) months salary at the rate payable as of such date of termination.
Such Severance Payment shall be paid in equal monthly installments commencing
on the first day of the month following the date of termination.
8. Employee's Representations and Warranties.
Employee covenants, represents and warrants to the Company that (i)
Employee has not entered into, and will not enter into, any agreement or
obligation that may interfere with Employee's full compliance with the terms of
this Agreement, and (ii) Employee currently has no property rights or claims
relating to any invention, discovery, concept or idea, or any improvement
thereof, or know-how related thereto, acquired at any time which has not been
disclosed to the Company in writing by the Employee prior to the date hereof.
9. Inventions.
With respect to Inventions made or conceived by the Employee, whether or
not during the hours of his employment or with the use of the Company
facilities, materials, or personnel, either solely or jointly with others
during his employment by the Company, or within two (2) years after termination
of such employment if based on or related to Confidential Information:
<PAGE> 8
-8-
(a) The Employee shall inform the Company promptly and fully of such
Inventions by a written report, setting forth in detail a description of the
Invention and any processes associated with its promotion. A detailed written
report also will be submitted by the Employee upon completion of any studies or
research projects undertaken on the Company's behalf, whether or not in the
Employee's opinion a given project has resulted in an Invention.
(b) The Employee shall apply, at the Company's request and expense, for
United States and foreign letters patent either in the Employee's name or
otherwise as the Company shall desire.
(c) The Employee hereby assigns and agrees to assign to the Company or its
nominee, without further consideration, all of Employee's rights to such
Inventions, and to applications for United States and/or foreign letters patent
and to United States and/or foreign letters patent granted upon such Inventions.
Any copyrightable works involving Employee (including separate contributions by
Employee to collective works) will be deemed to be "works for hire" under the
copyright laws of the United States.
(d) The Employee shall acknowledge and deliver promptly to the Company,
without charge to the Company but at its expense, such written instruments and
do such other acts, such as giving testimony in support of any patent
application, as may be necessary in the opinion of the Company to obtain and
maintain United States and/or foreign letters patent and to vest the entire
right and title thereto in the Company.
<PAGE> 9
-9-
(e) The Company shall also have the royalty-free right to use in its
business, and to make, use and sell products, processes and/or services derived
from any inventions, discoveries, concepts, and ideas, whether or not
patentable, including but not limited to processes, methods, formulas, and
techniques, as well as improvements thereof or know-how related thereto, which
are not within the scope of Inventions as defined herein but which are
conceived or made by the Employee during the hours which he is employed by the
Company or with the use or assistance of the Company's facilities, materials or
personnel.
10. Restrictive Covenants.
10.1 Employee agrees that he will not, either during his employment or
at any time after cessation of such employment, impart or disclose any of the
Confidential Information to any person, firm or corporation other than Company,
or use any of such Confidential Information, directly or indirectly for the
Employee's own benefit or for the benefit of any person, firm or corporation
other than Company or its affiliates. Employee's obligations under this Section
10.1 shall cease with respect to any such Confidential Information if such
information (i) was already known to Employee at the time of disclosure, free
of any obligation to keep it confidential, or (ii) was subsequently disclosed
to Employee without breach of this Agreement by a third person who rightfully
received and disclosed it without breaching any confidentiality obligation to
the Company. It is also understood by the parties that Employee may be required
to disclose Confidential Information (a) pursuant to subpoena or other court
process, (b) at the express direction of any other authorized government agency
or (c) otherwise
<PAGE> 10
-10-
as required by law or regulation. Disclosure of Confidential Information or any
part thereof in such circumstances will not constitute a breach of the
confidentiality provisions set forth in this Agreement, provided that Employee
notifies Company in advance of any such disclosure and cooperates with Company
in any efforts that Company may make to seek a protective order with respect to
such disclosure.
10.2 In addition to the foregoing agreements relating to the Company's
Confidential Information, during the term of this Agreement (including any
renewals thereof) and during the term of the "Post-Employment Period" (as
defined herein), Employee will not, without the Company's prior written
consent, (i) solicit any of the employees of the Company for the purpose of
hiring or retaining any such employees, (ii) hire or retain or cause to be
hired or retained any of the employees of Company or (iii) become involved
in any manner, including without limitation as an officer, director, employee,
consultant, representative, partner, owner or shareholder (except as a holder
of less than a two percent (2%) equity interest in a public entity) in any
business located in the United States which is in the business of inventing,
developing, manufacturing, marketing, providing or selling products competitive
with the products that the Company has developed, manufactured, marketed,
produced or sold, or is in the process of developing (and reasonably expect to
bring to market within one (1) year after the expiration of the Post-Employment
Period or longer if required by the U.S. Food and Drug Administration clearance
or approval process), manufacturing, marketing, producing or selling as of the
date that Employee's employment terminates. For purposes of this Agreement,
the term "Post-
<PAGE> 11
-11-
Employment Period" shall mean the period commencing in the date that this
Agreement is terminated for any reason and ending two (2) years from the date
of such termination.
10.3 Employee agrees that all memoranda, lab books, notes, records,
charts, formulae, specifications, lists and other documents made, compiled,
received, held or used by Employee while employed by Company, concerning any
phase of Company's business or its Confidential Information, shall be Company's
property and shall be delivered by Employee to Company upon termination of
Employee's employment or at any earlier time on the request of Company.
10.4 Employee acknowledges that given his access to information regarding
Company, the provisions of this Section 10 are reasonable and necessary to
protect Company's business. Employee further acknowledges that Employee has
carefully reviewed the provisions of this Section 10, that Employee fully
understands the economic consequences thereof, that Employee has assessed the
respective advantages and disadvantages to Employee of entering into this
Agreement and Employee has concluded that, in light of Employee's education,
skills and abilities, the restrictions set forth in this Section 10 will not
prevent Employee from earning a living after the termination of this Agreement.
Employee agrees that each of the provisions of this Section 10, including,
without limitation, the period of time, geographical area and types and scope of
the restrictions on Employee's activities specified herein, are intended to be
and shall be divisible. Employee further acknowledges that reasonableness of
these provisions as an integral part of the terms of Employee's employment. If
any provision of this Section 10 (including any sentence, clause or part
thereof) shall be adjudicated to be invalid or unenforceable, such
<PAGE> 12
-12-
provision shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such provision in the particular jurisdiction in
which such adjudication is made. In addition, if any particular provision
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, geographical scope, activity or subject, it shall be construed
by limiting and reducing such provision as to such characteristic so that the
provision is enforceable to the fullest extent compatible with the applicable
law as it shall then appear.
10.5 As it would be very difficult to measure the damages which would
result to Employer from a breach of any of the covenants contained in this
Section 10 in the event of such a breach, Company shall have the right to have
such covenants specifically enforced by a court of competent jurisdiction.
Employee hereby recognizes and acknowledges that irreparable injury or damage
shall result to the business of Company in the event of a breach or threatened
breach by Employee of the terms and provisions of this Section 10. Therefore,
Employee agrees that Company shall be entitled to an injunction restraining
Employee from engaging in any activity constituting such breach or threatened
breach. Nothing contained herein shall be construed as prohibiting Company from
pursuing any other remedies available to Company at law or in equity for such
breach or threatened breach, including, but not limited to, recovery of damages
from Employee and, if Employee is still employed by Company, terminating the
employment of Employee in accordance with the terms and provisions hereof.
<PAGE> 13
-13-
11. Notices.
For the purposes of this Agreement, notices and all other communications
provided for or relating to the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered, sent by facsimile
with a facsimile confirmation of transmission, delivered by overnight courier,
or mailed by United States certified or express mail, return receipt requested,
postage prepaid, addressed as follows:
If to Employee: At the Employee's most recent residence address
reflected on the Company's records.
If to the Company: Orthopaedic Biosystems Ltd., Inc.
7320 East Butherus, Suite 206
Scottsdale, Arizona 85260
with a copy to: Steven P. Davis
Aronberg Goldgehn Davis & Garmisa
One IBM Plaza, Suite 3000
Chicago, Illinois 60611
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
12. General.
12.1 No modification, amendment, extension or waiver of this Agreement
shall be binding upon the Company or Employee unless made in a writing signed
by an officer of the Company and Employee which expressly purports to modify
this Agreement.
12.2 This Agreement is the entire agreement between the parties involving
the subject hereof and supersedes any discussion, negotiations, representations
or prior or similar
<PAGE> 14
-14-
agreements upon the same subject. Company has offered Employee no inducements to
enter into this Agreement other than as fully described herein.
12.3 This Agreement is personal to and not assignable by Employee without
the Company's advance written consent. This Agreement shall inure to the benefit
of, be binding upon and be enforceable by the Company, its successors and
assigns, and shall be binding upon Employee and Employee's heirs, permitted
assigns and legal representatives.
12.4 This Agreement shall be governed by and construed in accordance with
the internal laws of the State of Arizona, without reference to principles of
conflicts of law.
12.5 The language set forth in this Agreement shall be deemed to be the
language chosen by both parties to express their mutual intent, and no rule of
strict construction shall be applied against either party hereto.
12.6 If a court of competent jurisdiction determines that any specific
provision hereof is invalid and unenforceable and refuses to any reason to
reform such provision as contemplated by the parties, the validity and
enforceability of the remaining provisions of this Agreement shall not be
affected, and the Agreement shall thereafter be construed as if the invalid
provision had not been included in the Agreement, unless the elimination of such
provision destroys the underlying business purpose of this Agreement.
12.7 In the event a dispute relating to this Agreement is litigated, the
prevailing party shall be entitled to recover the costs and fees incurred in
prosecuting such action, including, but not limited to, reasonable attorneys
fees and the fees of any expert witnesses.
<PAGE> 15
-15-
12.8 This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
By: /s/ D. RONALD YAGODA
-------------------------
ATTEST:
/s/ STEVEN P. DAVIS
- -------------------------
Secretary
EMPLOYEE:
/s/ D. RONALD YAGODA
-----------------------------
Signature
D. Ronald Yagoda
-----------------------------
Printed Name
<PAGE> 1
Exhibit 10.8
EMPLOYMENT AGREEMENT
(Amended and restated as of July 16, 1998)
THIS AGREEMENT is made and entered into this 28th day of October, 1996,
by and between ORTHOPAEDIC BIOSYSTEMS LTD., INC., an Arizona corporation
("OBL"), and GARY SCHEEL ("Employee").
In consideration of the mutual covenants and promises herein contained,
OBL and Employee agree as hereinafter set forth.
1. Term. This Agreement shall begin on the date hereof and shall
continue until terminated by written notice delivered to a party by the other
parry not less than ten (10) days prior to the date of termination.
2. Duties. Employee shall serve OBL as Executive Vice President of
Sales and Marketing and shall perform such services for OBL as are consistent
with said position. Employee shall report directly to OBL's President. Employee
shall devote his full time, energy, technical knowledge, know-how and skill
during regular business hours to OBL's affairs and to the promotion of its
interests in a manner consistent with the highest standards customarily
applicable to persons occupying similar positions. Without the prior written
consent of the Board of Directors of OBL, Employee shall not engage in any other
business or accept any other employment during the term of this Agreement.
3. Compensation. Employee will be paid a base salary at the annual rate
of $120,000 for the period commencing October 28, 1996 and ending December 31,
1997. Salary shall be payable in installments in accordance with OBL's salary
payment policy in effect from time to time. Employee s base salary, in all
subsequent calendar years, will be determined by the Board of Directors of OBL,
subject to the approval of Employee, and will be based upon Employee's
performance during the prior period.
4. Fringe Benefits. Employee will be eligible to participate in all
corporate benefit programs in accordance with OBL's benefit policies. Employee
will be eligible for three (3) weeks annual vacation after six (6) months of
employment, provided, however, that the three weeks vacation may not be taken at
one time. OBL will pay Employee's reasonable moving expenses to the Phoenix
metropolitan area, including two (2) house-hunting trips for Employee's spouse.
OBL will also pay customary seller's closing expenses and commissions in
connection with the sale of Employee's residence in the Memphis area and
customary closing expenses in connection with Employee's acquisition of a
residence in the Phoenix metropolitan area.
5. Definitions. As used in this Agreement:
<PAGE> 2
-2-
(a) The term "Corporate Revenues" means gross sales revenues
less returns and product and product repurchased from distributors, for the
period in question less (i) revenues recorded from Mentor, and (ii) revenues
generated from businesses hereinafter acquired by OBL; and
(b) The term "Incremental Revenues," as used herein, is
defined as (i) OBL's Corporate Revenues (as defined above) for 1997 reduced by
(ii) OBL's gross sales revenues, less returns, generated in 1996.
6. Cash Bonus. Employee will be eligible to receive a cash bonus for
calendar years 1997 through 1999 based upon the following formula. To be
eligible to collect a bonus for any calendar year, Employee must be employed by
OBL for the entire year. All bonuses payable with respect to revenues generated
by OBL in any year will be paid within the first seventy-five (75) days of the
subsequent year:
1997- Bonus equals 2% of Incremental Revenues in excess of 4 million
plus 3 % of Incremental Revenues in excess of $6 million. For
example, if 1996 gross sales revenues equal $1.2 million and
1997 Corporate Revenues equal $6 million, the bonus would
equal $16,000 (2% of [($6 million - $1.2 million) - $4
million]). If 1997 Corporate Revenues equal $7.5 million, the
total bonus would be $55,000 (Incremental Revenue of $6.3
million, reduced by the SA million base, equals 52.3 million x
2%, or $46,000, plus 3% of #300,000 (the amount of incremental
Revenue that exceeds $6 million), or $9,000, for a total bonus
of $55,000).
1998- Bonus shall equal the following percentage of 1998 Corporate
Revenues:
Bonus as Percentage
1998 Corporate Revenues of Corporate Revenues
$6 million - $8 million 1/2%
$8 million - $10 million 1%
Over $10 million 1 1/2%
No bonus payable if Corporate Revenues do not exceed $6
million.
<PAGE> 3
-3-
l999- Bonus shall equal the following percentages of 1999 Corporate
Revenues:
Bonus as Percentage
1999 Corporate Revenues of Corporate Revenues
$12 million - $15 million 3/8%
$15 million - $20 million 3/4%
Over $20 million 1 1/2%
No bonus payable if Corporate Revenues do not exceed $12
million.
7. Stock Options. Effective as of this date, Employee is granted the
option to purchase 25,000 shares of the common stock of OBL at 52.00 per share
which option may be exercised at any time after October 28, 1997, provided
Employee remains in the employ of OBL until October 28, 1997. If OBL is acquired
or merged into another corporation before October 28, 1997, and if Employee is
employed by OBL on the date of such acquisition or merger, Employee shall be
given the right to exercise the stock option as of the data of such merger or
acquisition.
<PAGE> 4
-4-
All option shares may be exercised at any time from the date upon which
the option vests until December 31, 2002.
Notwithstanding anything herein to the contrary, if at any time OBL
shall (i) sell all or substantially all of its assets, (ii) substantially all of
the common stock of OBL shall be sold by its shareholders, or (iii) OBL shall
merge with another company and shall not be the surviving entity in such merger,
then all options previously granted but not vested may nevertheless be exercised
by Employee prior to the closing of any such transaction. OBL agrees to give
Employee as much prior notice as is practicable prior to such closing to enable
Employee to make arrangements to exercise any options that become exercisable as
a result of any-such sale or merger.
8. Non-Disclosure. OBL and Employee mutually acknowledge that Employee
will have access to and become familiar with confidential, privileged and secret
information belonging to OBL, including but not limited to customers lists and
records, pricing and cost information, marketing and other sales promotion
materials, product specifications and designs, drawings, photos and other
materials relating to proposed new products and other similar materials, all
specifically designed to promote and maintain the business and good will of OBL
(the "Proprietary Information").
Employee acknowledges that dissemination, publication or use of the
Proprietary Information by any person except in connection with furthering OBL's
business would have a substantial adverse affect on OBL. OBL has advised the
Employee and the Employee acknowledges that the compensation to be paid to him
under this Agreement
<PAGE> 5
-5-
is in substantial part in consideration of his willingness to make and carry out
the obligations of this Paragraph 8 during the term of his employment and
thereafter. In specific recognition of the foregoing, and in consideration of
the compensation to be paid to Employee by OBL, Employee agrees during the term
of his employment and thereafter to keep all of OBL's Proprietary Information
that may be disclosed or delivered to him or learned by him at any time or from
time to time during the course of his employment, fully private and
confidential, and he agrees not to disclose or deliver the same to any third
party under any circumstances.
9. Non-Competition. Employee further agrees that during the term of his
employment and for a period of six (6) months following the date of termination
of his employment by OBL, whatever may be the cause of such termination, he will
not anywhere within the United States:
(a) of his own right or in concern with any other person,
corporation or business entity, knowingly, either for himself or for
any person, firm or corporation, call upon, solicit, divert or take
away, or attempt to solicit, divert or take away any of OBL's
customers; and
(b) of his own right or in concern with any person,
corporation or other business entity, knowingly engage, for himself or
on account of or as an agent or servant of another, directly or
indirectly, in the business of distributing, wholesaling, selling or
marketing of medical products or in the marketing or selling of
products designed to compete with the products then being sold or
offered for sale by OBL.
Employee acknowledges that the foregoing non-solicitation and
non-competition restriction placed upon Employee is necessary and that in the
event Employee's services for OBL should terminate for any reason, Employee will
BC in a position to earn a livelihood without violating the foregoing
restriction, and that it has been made clear to Employed by OBL that Employee's
ability to earn a livelihood without violating such restriction is a material
condition to Employee's continued employment by OBL.
Employee further acknowledges and agrees that OBL has attempted to
limit Employee's right to compete with OBL only to the extent necessary to
protect OBL
<PAGE> 6
-6-
from unfair competition. However, should the scope or enforceability of the
covenants contained herein be disputed at any time, Employee specifically agrees
that a court may modify or enforce the covenant to the full extent such court
believes to be reasonable under the circumstances existing at the time.
10. Covenant Not to Interfere with OBL's Business. Employee agrees that
during Employee's employment hereunder and for six (6) months thereafter
Employee will not attempt to solicit or induce any other employee of OBL to
leave his or her employment with OBL or interfere with the business relationship
between between OBL and its suppliers or customers.
11. Return of Materials. Upon termination of his employment with OBL,
Employee agrees that he will promptly return to OBL all documents, records,
notebooks, customers' lists or other written material and/or computer software
containing Proprietary Information, including all copies of such materials then
in his possession, whether prepared by him or others. In addition, Employee will
return all instruments, sample kits or other samples of OBL Products that may be
in his possession.
12. Enforcement. In the event that Employee shall breach this
Agreement, or in the event that such breach appears to be an imminent
possibility, OBL shall be entitled to all legal and equitable remedies afforded
by it as a result of the breach and may, in addition to all other forms of
relief. recover from Employee all reasonable costs and attorneys' fees
encountered by it in seeking any such remedy. Employee acknowledges that the
remedies at law for any breach will be inadequate and, therefore, in addition to
its legal remedies, OBL will be entitled to injunctive relief in the event of
any such breach or threatened breach, without showing or proving any actual
damage or the posting of any bond, the requirements of which are hereby waived
by Employee.
13. Applicable Law and Severability. This Agreement shall be governed
for all purposes by the laws of the State of Arizona. If any provision,
paragraph or portion of a paragraph of this Agreement is in any way contrary to
the public policy of a state wherein it is sought to be enforced, or for other
reasons is held to be unenforceable, then such provision, paragraph or
subparagraph shall be deemed severed
<PAGE> 7
-7-
and stricken from this Agreement, but all remaining portions of this Agreement
shall remain in effect and be fully enforceable.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
By: /s/ D. Ronald Yagoda
---------------------------------
/s/ Gary R. Scheel
------------------------------------
GARY SCHEEL
<PAGE> 1
Exhibit 10.9
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 29 day of April, 1997, by and between
ORTHOPAEDIC BIOSYSTEMS LTD., INC., an Arizona corporation with its principal
place of business at 7320 East Butherus, Suite 206, Scottsdale, Arizona 85260
(hereinafter the "Company"), and JEFFRY SKIBA (hereinafter the "Employee").
WHEREAS, the Company is engaged in the business of developing and
marketing medical products, including orthopaedic devices and equipment;
WHEREAS, the Employee has particular expertise in the engineering and
manufacture of biomedical devices; and
WHEREAS, Employee desires to be employed by the Company and the Company
desires to employ the Employee in a capacity in which the Employee will be given
access to Confidential Information:
NOW, THEREFORE, in consideration of such employment, and other good and
valuable consideration, it is agreed:
1. Definitions.
As used in this Agreement:
(a) "Company" means Orthopaedic Biosystems Ltd., Inc. and its
successors and assigns, and any of its present or future subsidiaries, or
organizations controlled by, controlling or under common control with it.
<PAGE> 2
-2-
(b) "Confidential Information" means information developed by,
disclosed to, or otherwise known by the Employee as a consequence of or through
his employment by the Company which is comprised of or relates in any way to (i)
the processes used and to be used in Company's business; (ii) the methods and
results of Company's research and development activities; (iii) any invention
(whether or not patentable), discovery, technological development, manufacturing
design or technique, process, system, machine, device or improvement, computer
software program, composition, or data and information which Employee produces,
discovers or compiles, and (iv) any other technical and non-technical
information and data relating to Company's business, except such items which
Employee can prove by clear and convincing evidence were (x) publicly and openly
known prior to the date of Employee's initial employment by the Company, and
therefore in the public domain, or (y) subsequent to the date of Employee's
initial employment by the Company became publicly and openly known through no
fault or wrongful act of the Employee.
(c) "Inventions" mean discoveries, concepts, and ideas,
whether patentable or not, including but not limited to processes, methods,
formulas, techniques, as well as improvements thereof or know-how related
thereto, concerning any present or prospective activities of the Company with
which the Employee becomes acquainted as a result of his employment by the
Company.
<PAGE> 3
-3-
2. Employment.
Commencing on or continuing from the date hereof, the Company shall
employ Employee (or shall continue to employ Employee, as the case may be), and
Employee shall serve as an employee of the Employer upon the terms and
conditions herein set forth.
3. Scope of Employment.
During the term of this Agreement, Employee shall devote the Employee's
entire business time, attention and energy to the business, and to seeking
improvement in the profitability, of the Company. He shall serve as vice
president of engineering and manufacturing for the Company and shall have the
authority and responsibility for all of the Company's research and development
activities, including developing and supervising the manufacture of the
Company's orthopaedic devices, instruments, equipment and related medical
products, and Employee shall perform all duties incident to such position.
Employee shall have such other powers and duties, and shall perform such other
services as shall be assigned to Employee from time to time by the Company.
During the term of this Agreement, Employee shall not engage in any other
business activity which, in the reasonable judgment of the Company's Board of
Directors conflicts with the duties of Employee hereunder, whether or not such
activity is pursued for gain, profit or other pecuniary advantage; provided,
however, that it is understood that this Section 3 shall not preclude Employee
from making passive investments in other business entities as long as Employee
notifies the Board of Directors in advance in the event that the Employee
intends to make a passive investrnent in the Company's industry.
<PAGE> 4
-4-
4. Term.
4.1 The term of this Agreement shall commence on the date hereof and
continue until December 31, 1997 and shall be automatically renewable thereafter
for consecutive terms of one year each unless and until terminated as of the end
of any such period by either party giving notice of termination in writing to
the other parry not less than sixty (60) days before the end of the period in
question and subject, however, to earlier termination pursuant to Section 4.2 or
Section 6 hereof.
4.2 Notwithstanding the term of employment provided for in Section 4.1,
this Agreement shall immediately terminate upon Employee's death or Permanent
Disability. For purposes of this Agreement, Permanent Disability shall mean any
physical or mental condition which materially interferes with the performance of
Employee's customary duties in Employee's capacity as President of the Company
where such disability has continued for a period of ninety (90) consecutive
days.
5. Compensation.
5.1 Employee shall be paid a base salary of one hundred thousand
dollars ($100,000.00) per year, subject to review and adjustment by the Company
at its sole discretion from time to time. Such base salary shall be payable no
less often than in monthly installments and shall be subject to withholding and
other deductions as required by law.
5.2 Employee will be eligible to participate in any group health plan,
life insurance plan and any other employee benefit or incentive compensation
plan or arrangement now in
<PAGE> 5
-5-
effect or hereafter adopted by the Company; provided, however, that the Company
reserves the right to modify or discontinue any such plan or arrangement at any
time for any reason it deems appropriate, and the Company may do so for reasons
other than financial necessity. Employee's participation in any such plan or
arrangement shall be commensurate with the Employee's compensation and position
with the Company, and will otherwise be subject to the provisions of any
document setting forth the terms and conditions of any such plan or arrangement.
Notwithstanding any contrary provision hereof, this Agreement does not modify
the provisions of any such plan or arrangement.
5.3 Employee shall be entitled to a number of paid vacation days as
shall be determined by the Company in its sole discretion.
5.4 Company will reimburse the Employee, in accordance with its
policies in effect from time to time, for reasonable business expenses incurred
by Employee in promoting the business of the Company upon presentation by
Employee of an itemized account of such expenses.
6. Discharge by Company.
The Company shall be entitled to terminate this Agreement and to
discharge the Employee, but only for "cause." The term "cause" shall be limited
to the following grounds:
(a) The Employee's failure (for reasons other than disability)
or refusal to perform the Employee's duties and responsibilities as set
forth in Section 3 hereof, continuing after written warning;
<PAGE> 6
-6-
(b) Dishonesty affecting the Company;
(c) Excessive use of illegal drugs or alcohol that is not
being medically treated as alcoholism which materially interfere with
performance of the Employee's obligations under this Agreement which
continue after written warning from the Company;
(d) Conviction of a felony or of any crime involving moral
turpitude, fraud or misrepresentation;
(e) The commission by the Employee of any willful or
intentional act which could reasonably be expected to materially injure
the reputation, business or business relationships of the Company; and
(f) Any material breach (not covered by any of the clauses (a)
through (e)) of any of the provisions of this Agreement, if such breach
is not cured within 10 days after written notice thereof to the
Employee by the Company.
7. Employee's Representations and Warranties.
Employee covenants, represents and warrants to the Company that (i)
Employee has not entered into, and will not enter into, any agreement or
obligation that may interfere with Employee's full compliance with the terms of
this Agreement, and (ii) Employee currently has no property rights or claims
relating to any invention, discovery, concept or idea, or any improvement
thereof, or know how related thereto, acquired at any time which has not been
disclosed to the Company in writing by the Employee prior to the date hereof.
<PAGE> 7
-7-
8. Inventions.
With respect to Inventions made or conceived by the Employee, whether
or not during the hours of his employment or with the use of the Company
facilities, materials, or personnel, either solely or jointly with others during
his employment by the Company, or within two (2) years after termination of such
employment if based on or related to Confidential Information:
(a) The Employee shall inform the Company promptly and fully
of such Inventions by a written report, setting forth in detail a description of
the Invention and any processes associated with its promotion. A detailed
written report also will be submitted by the Employee upon completion of any
studies or research projects undertaken on the Company's behalf, whether or not
in the Employee's opinion a given project has resulted in an Invention.
(b) The Employee shall apply, at the Company's request and
expense, for United States and foreign letters patent either in the Employee s
name or otherwise as the Company shall desire.
(c) The Employee hereby assigns and agrees to assign without
further consideration to the Company or its nominee all of his rights to such
Inventions, and to applications for United States and/or foreign letters patent
and to United States and/or foreign letters patent granted upon such Inventions.
(d) The Employee shall acknowledge and deliver promptly to the
company, without charge to the Company but at its expense, such written
instruments and do such other acts, such as giving testimony in support of any
patent application, as may be necessary in the
<PAGE> 8
-8-
opinion of the Company to obtain and maintain United States and/or foreign
letters patent and to vest the entire right and title thereto in the Company.
(e) The Company- shall also have the royally-free right to use
in its business, and to make, use and sell products, processes and/or services
derived from any inventions, discoveries, concepts, and ideas, whether or not
patentable, including but not limited to processes, methods, formulas, and
techniques, as well as improvements thereof or know-how related thereto, which
are not within the scope of Inventions as defined herein but which are conceived
or made by the Employee during the hours which he is employed by the Company or
with the use or assistance of the Company's facilities, materials or personnel.
9. Restrictive Covenants.
9.1 Employee agrees that he will not, either during his employment or
at any time after cessation of such employment, impart or disclose any of the
Confidential Information to any person, firm or corporation other than Company,
or use any of such Confidential Information, directly or indirectly for the
Employee's own benefit or for the benefit of any person, firm or corporation
other than Company or its affiliates. Employee's obligations under this Section
9.1 shall cease with respect to any such Confidential Information if such
information (i) was already known to Employee at the time of disclosure, free of
any obligation to keep it confidential, or (ii) was subsequently disclosed to
Employee without breach of this Agreement by a third person who rightfully
received and disclosed it without breaching any confidentiality obligation to
the Company. It is also understood by the parties that Employee may be required
to
<PAGE> 9
-9-
disclose Confidential Information (a) pursuant to subpoena or other court
process, (b) at the express direction of any other authorized government agency
or (c) otherwise as required by law or regulation. Disclosure of Confidential
Information or any part thereof in such circumstances will not constitute a
breach of the confidentiality provisions set forth in this Agreement, provided
that Employee notifies Company in advance of any such disclosure and cooperates
with Company in any efforts that Company may make to seek a protective order
with respect to such disclosure.
9.2 In addition to the foregoing agreements relating to the Company's
Confidential Information, during the term of this Agreement (including any
renewals thereof) and during the term of the "Post-Employment Period" (as
defined herein), Employee will not, without the Company's prior written consent,
(i) solicit any of the employees of Company for the purpose of hiring or
retaining any such employees, (ii) hire or retain or cause to be hired or
retained any of the employees of Company or (iii) become involved in any manner,
including without limitation as an officer, director, employee, consultant,
representative, xxanner, owner or shareholder (except as a holder of less than a
two percent (2%) equity interest in a public entity) in any business located in
the United States which is in the business of inventing, developing,
manufacturing, marketing, providing or selling products competitive with the
products that the Company has developed, manufactured, marketed, produced or
sold, or is in the process of developing (and reasonably expect to bring to
market within one (1) year after the expiration or the Post-Employment Period or
longer if required by the U.S. Food and Drug Administration
<PAGE> 10
-10-
clearance or approval process), manufacturing, marketing, producing or selling
as of the date that Employee's employment terminates. For purposes of this
Agreement, the term "Post Employment Period" shall mean the period commencing on
the date that this Agreement is terminated for any reason and ending two (2)
years from the date of such termination.
9.3 Employee agrees that all memoranda, lab books, notes, records,
charts, formulae, specifications, lists and other documents made, compiled,
received, held or used by Employee while employed by Company, concerning any
phase of Company's business or its Confidential Information, shall be Company's
property and shall be delivered by Employee to Company upon termination of
Employee's employment or at any earlier time on the request of Company.
9.4 Employee acknowledges that given his access to information
regarding Company, the provisions of this Section 9 are reasonable and necessary
to protect Company's business. Employee further acknowledges that Employee has
carefully reviewed the provisions of this Section 9, that Employee fully
understands the economic consequences thereof, that Employee has assessed the
respective advantages and disadvantages to Employee of entering into this
Agreement and Employee has concluded that, in light of Employee's education,
skills and abilities, the restrictions set forth in this Section 9 will not
prevent Employee from earning a living after the termination of this Agreement.
Employee agrees that each of the provisions of this Section 9, including,
without limitation. the period of time, geographical area and types and scope of
the restrictions on Employee's activities specified herein, are intended to be
and shall be divisible. Employee further acknowledges that reasonableness of
these provisions as an integral
<PAGE> 11
-11-
part of the terms of Employee's employment. If any provision of this Section 9
(including any sentence, clause or part thereof) shall be adjudicated to be
invalid or unenforceable, such provision shall be deemed amended to delete
therefrom the portion thus adjudicated to be invalid or unenforceable such
deletion to apply only with respect to the operation of such provision in the
particular jurisdiction in which such adjudication is made. In addition, if any
particular provision contained in this Agreement shall for any reason be held to
be excessively broad as to duration, geographical scope, activity or subject, it
shall be construed by limiting and reducing such provision as to such
characteristic so that the provision is enforceable to the fullest extent
compatible with the applicable law as it shall then appear.
9.5 As it would be very difficult to measure the damages which would
result to Employer from a breach of any of the covenants contained in this
Section 9, in the event of such a breach, Company shall have the right to have
such covenants specifically enforced by a court of competent jurisdiction.
Employee hereby recognizes and acknowledges that irreparable injury or damage
shall result to the business of Company in the event of a breach or threatened
breach by Employee of the terms and provisions of this Section 9. Therefore,
Employee agrees that Company shall be entitled to an injunction restraining
Employee from engaging in any activity constituting such breach or threatened
breach. Nothing contained herein shall be construed as prohibiting Company from
pursuing any other remedies available to Company at law or in equity for such
breach or threatened breach, including, but not limited to, recovery of damages
from
<PAGE> 12
-12-
Employee and, if Employee is still employed by Company, terminating the
employment of Employee in accordance with the terms and provisions hereof.
10. Notices.
For the purposes of this Agreement, notices and all other
communications provided for or relating to the Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered, sent by
facsimile with a facsimile confirmation of transmission, delivered by overnight
courier, or mailed by United States certified or express mail, return receipt
requested, postage prepaid, addressed as follows:
If to Employee: At the Employee's most recent residence
address reflected on the Company's records.
If to the Company: Orthopaedic Biosystems Ltd., Inc.
7320 East Butherus, Suite 206
Scottsdale, Arizona 85260
with a copy to: Steven P. Davis
Aronberg Goldgehn Davis & Garmisa
One IBM Plaza, Suite 3000
Chicago, Illinois 60611
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
11. General.
11.1 No modification, amendment, extension or waiver of this Agreement
shall be binding upon the Company or Employee unless made in a writing signed by
an officer of the Company and Employee which expressly purports to modify this
Agreement.
<PAGE> 13
-13-
11.2 This Agreement is the entire agreement between the parties
involving the subject hereof and supersedes any discussion, negotiations,
representations or prior or similar agreements upon the same subject. Company
has offered Employee no inducements to enter into this Agreement other than as
fully disclosed herein.
11.3 This Agreement is personal to and not assignable by Employee
without the Company's advance written consent. This Agreement shall inure to the
benefit of, be binding upon and be enforceable by the Company, its successors
and assigns, and shall be binding upon Employee and Employee's heirs, permitted
assigns and legal representatives.
11.4 This Agreement shall be governed by and construed in accordance
with the internal laws of the State of Arizona, without reference to principles
of conflicts of law.
11.5 The language set forth in this Agreement shall be deemed to be the
language chosen by both parties to express their mutual intent, and no rule of
strict construction shall be applied against either party hereto.
11.6 If a court of competent jurisdiction determines that any specific
provision hereof is invalid and unenforceable and refuses to any reason to
reform such provision as contemplated by the parties, the validity and
enforceability of the remaining provisions of this Agreement shall not be
affected, and the Agreement shall thereafter be construed as if the invalid
provision had not been included in the Agreement, unless the elimination of such
provision destroys the underlying business purpose of this Agreement.
<PAGE> 14
-14-
11.7 In the event a dispute relating to this Agreement is litigated,
the prevailing party shall be entitled to recover the costs and fees incurred in
prosecuting such action, including, but not limited to, reasonable attorneys
fees and the fees of any expert witnesses.
11.8 This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
By: /s/ D. Ronald Yagoda
-----------------------------
ATTEST:
/s/ Steven Davis
- -----------------
Secretary
EMPLOYEE:
/s/JEFFRY B. SKIBA
---------------
Signature
JEFFRY B. SKIBA
---------------
Printed Name
<PAGE> 1
Exhibit 10.10
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
1998 STOCK INCENTIVE PLAN
(as amended and restated through July 8, 1998)
ARTICLE 1. PURPOSE
1.1 GENERAL. The Company originally established the Orthopaedic
Biosystems Ltd., Inc. 1998 Incentive Stock Option Plan ("Former Plan") effective
January 1, 1998. The purpose of the Orthopaedic Biosystems Ltd., Inc. 1998 Stock
Incentive Plan (the "Plan") is to amend and restate the Former Plan and to
promote the success, and enhance the value, of Orthopaedic Biosystems Ltd., Inc.
(the "Company") by linking the personal interests of its officers, employees and
consultants or independent contractors to those of Company stockholders and by
providing such individuals with an incentive for outstanding performance. The
Plan is further intended to provide flexibility to the Company in its ability to
motivate, attract, and retain the services of officers, employees and
consultants or independent contractors upon whose judgment, interest, and
special effort the successful conduct of the Company's operation is largely
dependent.
ARTICLE 2 EFFECTIVE DATE
2.1 EFFECTIVE DATE. The Plan as amended and restated is effective as of
July 8, 1998 (the "Effective Date").
ARTICLE 3 DEFINITIONS AND CONSTRUCTION.
3.1 DEFINITIONS. When a word or phrase appears in this Plan with the
initial letter capitalized, and the word or phrase does not commence a sentence,
the word or phrase shall generally be given the meaning ascribed to it in this
Section or in Sections 1.1 or 2.1 unless a clearly different meaning is required
by the context. The following words and phrases shall have the following
meanings:
(a) "Board" means the Board of Directors of the Company.
(b) "Change of Control" means and includes each of the
following:
(1) Any merger or consolidation of the Company;
(2) The stockholders of the Company approve any plan
or proposal for the liquidation or dissolution of the Company; or
(3) Substantially all of the assets of the Company
are sold or otherwise transferred to parties that are not within a
"controlled group of corporations" (as defined in Section 1563 of the
Code) of which the Company is a member.
1
<PAGE> 2
(c) "Code" means the Internal Revenue Code of 1986, as
amended.
(d) "Committee" means the committee of the Board described in
Article 4.
(e) "Covered Employee" means an Employee who is a "covered
employee" within the meaning of Section 162(m) of the Code.
(f) "Disability" shall mean any illness or other physical or
mental condition of a Participant which renders the Participant
incapable of performing his customary and usual duties for the Company,
or any medically determinable illness or other physical or mental
condition resulting from a bodily injury, disease or mental disorder
which in the judgment of the Committee is permanent and continuous in
nature. The Committee may require such medical or other evidence as it
deems necessary to judge the nature and permanency of the Participant's
condition.
(g) "Exchange Act" shall mean the Security Exchange Act of
1934, as amended.
(h) "Fair Market Value" means the fair market value of such
Stock as determined by the Board in its discretion, under one of the
following methods: (i) the closing price for the Stock as reported on
any national securities exchange on which the Stock is then listed
(which shall include the Nasdaq National Market) for that date or, if
no price is so reported for that date, such price on the next preceding
date for which the closing price was reported; or (ii) the price as
determined by such methods or procedures as may be established from
time to time by the Board.
(i) "Incentive Stock Option" means an Option that is intended
to meet the requirements of Section 422 of the Code or any successor
provision thereto.
(j) "Non-Employee Director" means a member of the Board who
qualifies as a "Non-Employee Director" as defined in Rule 16b-3(b)(3)
of the Exchange Act, or any successor definition adopted by the Board.
(k) "Non-Qualified Stock Option" means an Option that is not
intended to be an Incentive Stock Option.
(l) "Option" means a right granted to a Participant under
Article 7 of the Plan to purchase Stock at a specified price during
specified time periods. An Option may be either an Incentive Stock
Option or a Non-Qualified Stock Option.
(m) "Option Agreement" means any written agreement, contract,
or other instrument or document evidencing an Option.
2
<PAGE> 3
(n) "Participant" means a person who, as an officer, employee
and consultant or independent contractor of the Company or any
Subsidiary, has been granted an Option under the Plan.
(o) "Plan" means the Orthopaedic Biosystems Ltd., Inc. 1998
Stock Incentive Plan, as amended from time to time.
(p) "Stock" means the common stock of the Company and such
other securities of the Company that may be substituted for Stock
pursuant to Article 8.
(q) "Subsidiary" means any corporation of which a majority of
the outstanding voting stock or voting power is beneficially owned
directly or indirectly by the Company.
ARTICLE 4 ADMINISTRATION
4.1 COMMITTEE. The Plan shall be administered by a Committee that is
appointed by, and shall serve at the discretion of, the Board. If the Stock of
the Company is registered under the Exchange Act, the Committee shall consist of
at least two individuals, each of whom qualifies as (i) a Non-Employee Director,
and (ii) an "outside director" under Code Section 162(m) and the regulations
issued thereunder.
4.2 ACTION BY THE COMMITTEE. A majority of the Committee shall
constitute a quorum. The acts of a majority of the members present at any
meeting at which a quorum is present and acts approved in writing by a majority
of the Committee in lieu of a meeting shall be deemed the acts of the Committee.
Each member of the Committee is entitled to, in good faith, rely or act upon any
report or other information furnished to that member by any officer or other
employee of the Company or any Subsidiary, the Company's independent certified
public accountants, or any executive compensation consultant or other
professional retained by the Company to assist in the administration of the
Plan.
4.3 AUTHORITY OF COMMITTEE. The Committee has the exclusive power,
authority and discretion to:
(a) Designate Participants to receive Options;
(b) Determine the type or types of Options to be granted to
each Participant;
(c) Determine the number of Options to be granted and the
number of shares of Stock to which an Option will relate;
(d) Determine the terms and conditions of any Option granted
under the Plan including but not limited to, the exercise price, grant
price, or purchase price, any restrictions or limitations on the
Option, any schedule for lapse of forfeiture restrictions
3
<PAGE> 4
or restrictions on the exercisability of an Option, and accelerations
or waivers thereof, based in each case on such considerations as the
Committee in its sole discretion determines;
(e) Determine whether, to what extent, and under what
circumstances an Option may be settled in, or the exercise price of an
Option may be paid in, cash, Stock, other Options, or other property,
or an Option may be canceled, forfeited, or surrendered;
(f) Prescribe the form of each Option Agreement, which need
not be identical for each Participant;
(g) Decide all other matters that must be determined in
connection with an Option;
(h) Establish, adopt or revise any rules and regulations as it
may deem necessary or advisable to administer the Plan; and
(i) Make all other decisions and determinations that may be
required under the Plan or as the Committee deems necessary or
advisable to administer the Plan.
4.4 DECISIONS BINDING. The Committee's interpretation of the Plan, any
Options granted under the Plan, any Option Agreement and all decisions and
determinations by the Committee with respect to the Plan are final, binding, and
conclusive on all parties.
ARTICLE 5 SHARES SUBJECT TO THE PLAN
5.1 NUMBER OF SHARES. Subject to adjustment provided in Section 9, the
aggregate number of shares of Stock reserved and available for grant under the
Plan shall be 500,000.
5.2 LAPSED OPTIONS. To the extent that an Option terminates, expires or
lapses for any reason, any shares of Stock subject to the Option will again be
available for the grant of an Option under the Plan.
5.3 STOCK DISTRIBUTED. Any Stock distributed pursuant to an Option may
consist, in whole or in part, of authorized and unissued Stock, treasury Stock
or Stock purchased on the open market.
5.4 LIMITATION ON NUMBER OF SHARES SUBJECT TO OPTIONS. If the
Stock of the Company is registered under Section 12 of the Exchange Act,
notwithstanding any provision in the Plan to the contrary, and subject to the
adjustment in Section 9, the maximum number of shares of Stock with respect to
one or more Options that may be granted to any one Covered Employee during the
Company's fiscal year shall be 300,000.
4
<PAGE> 5
ARTICLE 6 ELIGIBILITY AND PARTICIPATION
6.1 ELIGIBILITY. Persons eligible to participate in this Plan include
all officers, employees and consultants or independent contractors of the
Company or a Subsidiary, as determined by the Committee, including employees who
are also members of the Board.
6.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from among all eligible individuals,
those to whom Options shall be granted and shall determine the nature and amount
of each Option. No individual shall have any right to be granted an Option under
this Plan.
ARTICLE 7 STOCK OPTIONS
7.1 GENERAL. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per share of Stock
under an Option shall be determined by the Committee and set forth in the Option
Agreement. It is the intention under the Plan that the exercise price for any
Option shall not be less than the Fair Market Value as of the date of grant.
(b) TIME AND CONDITIONS OF EXERCISE. The Committee shall
determine the time or times at which an Option may be exercised in whole or in
part. The Committee also shall determine the performance or other conditions, if
any, that must be satisfied before all or part of an Option may be exercised.
(c) PAYMENT. The Committee may provide that the exercise price
of an Option be paid in cash or shares of Stock (including broker-assisted
"cashless exercise" arrangements), which method shall be elected by the
Participant, subject to the Company's approval.
(d) EVIDENCE OF GRANT. All Options shall be evidenced by a
written Option Agreement between the Company and the Participant. The Option
Agreement shall include such provisions as may be specified by the Committee.
7.2 INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be granted
only to employees and the terms of any Incentive Stock Options granted under the
Plan must comply with the following additional rules:
(a) EXERCISE PRICE. The exercise price per share of Stock
shall be set by the Committee, provided that the exercise price for any
Incentive Stock Option may not be less than the Fair Market Value as of the date
of the grant.
5
<PAGE> 6
(b) EXERCISE. In no event, may any Incentive Stock Option be
exercisable for more than ten years from the date of its grant.
(c) LAPSE OF OPTION. An Incentive Stock Option shall lapse
under the following circumstances:
(1) The Incentive Stock Option shall lapse ten
years from the date it is granted, unless an earlier time is set
in the Option Agreement.
(2) The Incentive Stock Option shall lapse
upon the earlier of its expiration date or three months after
the Participant's termination of employment for any reason other
than death or Disability.
(3) If the Participant terminates employment
on account of death or Disability, the Incentive Stock Option
shall lapse, unless it is previously exercised, on the earlier
of (i) the Option expiration date; or (ii) 12 months after the
date of the Participant's Disability or three months after
termination of employment on account of death (or if provided in
the Option Agreement up to 12 months after termination of
employment on account of death). Upon the Participant's death or
Disability, any Incentive Stock Options exercisable at the
Participant's death or Disability may be exercised by the
Participant's legal representative or representatives, by the
person or persons entitled to do so under the Participant's last
will and testament, or, if the Participant shall fail to make
testamentary disposition of such Incentive Stock Option or shall
die intestate, by the person or persons entitled to receive said
Incentive Stock Option under the applicable laws of descent and
distribution.
(d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair
Market Value (determined as of the time an Option is made) of
all shares of Stock with respect to which Incentive Stock
Options are first exercisable by a Participant in any calendar
year may not exceed $100,000.00 or such other limitation as
imposed by Section 422(d) of the Code, or any successor
provision. To the extent that Incentive Stock Options are first
exercisable by a Participant in excess of such limitation, the
excess shall be considered Non-Qualified Stock Options.
(e) TEN PERCENT OWNERS. An Incentive Stock Option shall
be granted to any individual who, at the date of grant, owns
stock possessing more than ten percent of the total combined
voting power of all classes of Stock of the Company only if such
Option is granted at a price that is not less than 110% of Fair
Market Value on the date of grant and the Option is exercisable
for no more than five years from the date of grant.
6
<PAGE> 7
(f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Option of
an Incentive Stock Option may be made pursuant to this Plan
after December 31, 2007.
(g) RIGHT TO EXERCISE. During a Participant's lifetime,
an Incentive Stock Option may be exercised only by the
Participant.
ARTICLE 8 PROVISIONS APPLICABLE TO OPTIONS
8.1 EXCHANGE PROVISIONS. The Committee may at any time offer to
exchange or buy out any previously granted Option for a payment in cash, Stock,
or another Option, based on the terms and conditions the Committee determines
and communicates to the Participant at the time the offer is made.
8.2 TERM OF OPTION. The term of each Option shall be for the period as
determined by the Committee, provided that in no event shall the term of any
Incentive Stock Option or a Stock Appreciation Right granted in tandem with the
Incentive Stock Option exceed a period of ten years from the date of its grant.
8.3 FORM OF PAYMENT FOR OPTIONS. Subject to the terms of the Plan and
any applicable law or Option Agreement, payments or transfers to be made by the
Company or a Subsidiary on the grant or exercise of an Option may be made in
such forms as the Committee determines at or after the time of grant, including
without limitation, cash, Stock, other Options, or other property, or any
combination, and may be made in a single payment or transfer, in installments,
or on a deferred basis, in each case determined in accordance with rules adopted
by, and at the discretion of, the Committee.
8.4 LIMITS ON TRANSFER. No right or interest of a Participant in any
Option may be pledged, encumbered, or hypothecated to or in favor of any party
other than the Company or a Subsidiary, or shall be subject to any lien,
obligation, or liability of such Participant to any other party other than the
Company or a Subsidiary. Except as otherwise provided by the Committee, no
Option shall be assignable or transferable by a Participant other than by will
or the laws of descent and distribution.
8.5 BENEFICIARIES. Notwithstanding Section 8.4, a Participant may, in
the manner determined by the Committee, designate a beneficiary to exercise the
rights of the Participant and to receive any distribution with respect to any
Option upon the Participant's death. A beneficiary, legal guardian, legal
representative, or other person claiming any rights under the Plan is subject to
all terms and conditions of the Plan and any Option Agreement applicable to the
Participant, except to the extent the Plan and Option Agreement otherwise
provide, and to any additional restrictions deemed necessary or appropriate by
the Committee. If the Participant is married, a designation of a person other
than the Participant's spouse as his beneficiary with respect to more than 50
percent of the Participant's interest in the Option shall not be effective
7
<PAGE> 8
without the written consent of the Participant's spouse. If no beneficiary has
been designated or survives the Participant, payment shall be made to the person
entitled thereto under the Participant's will or the laws of descent and
distribution. Subject to the foregoing, a beneficiary designation may be changed
or revoked by a Participant at any time provided the change or revocation is
filed with the Committee.
8.6 STOCK CERTIFICATES. All Stock certificates delivered under the Plan
are subject to any stop-transfer orders and other restrictions as the Committee
deems necessary or advisable to comply with Federal or state securities laws,
rules and regulations and the rules of any national securities exchange or
automated quotation system on with the Stock is listed, quoted, or traded. The
Committee may place legends on any Stock certificate to reference restrictions
applicable to the Stock.
8.7 ACCELERATION UPON A CHANGE OF CONTROL. If a Change of Control
occurs, all outstanding Options shall become fully exercisable and all
restrictions on outstanding Options shall lapse. To the extent that this
provision causes Incentive Stock Options to exceed the dollar limitation set
forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified
Stock Options. Upon, or in anticipation of, such an event, the Committee may
cause every Option outstanding hereunder to terminate at a specific time in the
future and shall give each Participant the right to exercise Options during a
period of time as the Committee, in its sole and absolute discretion, shall
determine.
ARTICLE 9 CHANGES IN CAPITAL STRUCTURE
9.1 GENERAL. In the event a stock dividend is declared upon the Stock,
the shares of Stock then subject to each Option (and the number of shares
subject thereto) shall be increased proportionately without any change in the
aggregate purchase price therefor. In the event the Stock shall be changed into
or exchanged for a different number or class of shares of Stock or of another
corporation, whether through reorganization, recapitalization, stock split-up,
combination of shares, merger or consolidation, there shall be substituted for
each such share of Stock then subject to each Option (and for each share of
Stock then subject thereto) the number and class of shares of Stock into which
each outstanding share of Stock shall be so exchanged, all without any change in
the aggregate purchase price for the shares then subject to each Option.
ARTICLE 10 AMENDMENT, MODIFICATION AND TERMINATION
10.1 AMENDMENT, MODIFICATION AND TERMINATION. With the approval of the
Board, at any time and from time to time, the Committee may terminate, amend or
modify the Plan; provided, however, that to the extent necessary and desirable
to comply with any applicable law, regulation, or stock exchange rule, the
Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required.
10.2 OPTIONS PREVIOUSLY GRANTED. No termination, amendment, or
8
<PAGE> 9
modification of the Plan shall adversely affect in any material way any Option
previously granted under the Plan, without the written consent of the
Participant.
ARTICLE 11 GENERAL PROVISIONS
11.1 NO RIGHTS TO OPTIONS. No Participant , employee, or other person
shall have any claim to be granted any Option under the Plan, and neither the
Company nor the Committee is obligated to treat Participants, employees, and
other persons uniformly.
11.2 NO STOCKHOLDERS RIGHTS. No Option gives the Participant any of the
rights of a stockholder of the Company unless and until shares of Stock are in
fact issued to such person in connection with such Option.
11.3 WITHHOLDING. The Company or any Subsidiary shall have the
authority and the right to deduct or withhold, or require a Participant to remit
to the Company, an amount sufficient to satisfy Federal, state, and local taxes
(including the Participant's FICA obligation) required by law to be withheld
with respect to any taxable event arising as a result of this Plan.
11.4 NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Option
Agreement shall interfere with or limit in any way the right of the Company or
any Subsidiary to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employ of the Company or any
Subsidiary.
11.5 UNFUNDED STATUS OF OPTIONS. The Plan is intended to be an
"unfunded" plan for incentive compensation. With respect to any payments not yet
made to a Participant pursuant to an Option, nothing contained in the Plan or
any Option Agreement shall give the Participant any rights that are greater than
those of a general creditor of the Company or any Subsidiary.
11.6 INDEMNIFICATION. To the extent allowable under applicable law,
each member of the Committee or of the Board shall be indemnified and held
harmless by the Company from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by such member in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action or failure
to act under the Plan and against and from any and all amounts paid by him or
her in satisfaction of judgment in such action, suit, or proceeding against him
or her provided he or she gives the Company an opportunity, at its own expense,
to handle and defend the same before he or she undertakes to handle and defend
it on his or her own behalf. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such persons may be
entitled under the Company's Articles of Incorporation or By-Laws, as a matter
of law, or otherwise, or any power that the Company may have to indemnify them
or hold them harmless.
9
<PAGE> 10
11.7 RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be
taken into account in determining any benefits under any pension, retirement,
savings, profit sharing, group insurance, welfare or other benefit plan of the
Company or any Subsidiary.
11.8 EXPENSES. The expenses of administering the Plan shall be borne by
the Company and its Subsidiaries.
11.9 TITLES AND HEADINGS. The titles and headings of the Sections in
the Plan are for convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles or headings, shall
control.
11.10 FRACTIONAL SHARES. No fractional shares of stock shall be issued
and the Committee shall determine, in its discretion, whether cash shall be
given in lieu of fractional shares or whether such fractional shares shall be
eliminated by rounding up.
11.11 SECURITIES LAW COMPLIANCE. With respect to any person who is, on
the relevant date, obligated to file reports under Section 16 of the 1934 Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any
provision of the Plan or action by the Committee fails to so comply, it shall be
void to the extent permitted by law and voidable as deemed advisable by the
Committee.
11.12 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company
to make payment of Options in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by government
agencies as may be required. The Company shall be under no obligation to
register under the Securities Act of 1933, as amended (the "1933 Act"), any of
the shares of Stock paid under the Plan. If the shares paid under the Plan may
in certain circumstances be exempt from registration under the 1933 Act, the
Company may restrict the transfer of such shares in such manner as it deems
advisable to ensure the availability of any such exemption.
11.13 GOVERNING LAW. The Plan and all Option Agreements shall be
construed in accordance with and governed by the laws of the State of Arizona.
10
<PAGE> 1
Exhibit 10.11
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
1998 DIRECTOR OPTION PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 Establishment of the Plan. Orthopaedic Biosystems Ltd., Inc., an
Arizona corporation (the "Company"), establishes the "Orthopaedic Biosystems
Ltd., Inc. 1998 Director Option Plan" (the "Plan") for its Nonemployee
Directors, as set forth in this document. The Plan grants Nonqualified Stock
Options to Nonemployee Directors, subject to the terms below.
Subject to the approval of the Plan by the Company's shareholders, the
Plan will become effective July 8, 1998 (the "Effective Date"). However, Options
granted under the Plan will be canceled if the Plan is not approved by the
Company's shareholders.
1.2 Purpose of the Plan. The purpose of the Plan is to further the
Company's short- and long-term objectives by attracting and retaining the
services of Nonemployee Directors of outstanding competence and by linking the
personal interests of Nonemployee Directors to those of the Company's
shareholders.
1.3 Duration of the Plan. The Plan will begin on the Effective Date and
shall remain in effect until all Stock under the Plan has been granted or
purchased according to the Plan's provisions or until the Board of Directors
exercises its right to terminate the Plan. However, no shares of Stock or Option
may be granted under the Plan after July 8, 2008.
ARTICLE 2. DEFINITIONS AND CONSTRUCTION
2.1 Definitions. Whenever used in the Plan, the following terms shall
have the meanings set forth below and, when the meaning is intended, the initial
letter of the word is capitalized:
(a) "Annual Grant Date" means the third business day following
the public release of the Company's fiscal year-end earnings
information.
(b) "Board" or "Board of Directors" means the Board of
Directors of Orthopaedic Biosystems Ltd., Inc., and includes any
committee of the Board of Directors designated by the Board to
administer part or all of this Plan.
(c) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(d) "Committee" means the committee of the Board of Directors
appointed by the Board to administer this Plan.
1
<PAGE> 2
(e) "Company" means Orthopaedic Biosystems Ltd., Inc., an
Arizona corporation, or any successor thereto as provided in Section
9.2 herein.
(f) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, or any successor Act thereto.
(g) "Fair Market Value" means the fair market value of such
Stock as determined by the Board in its discretion, under one of the
following methods: (i) the closing price for the Stock as reported on
any national securities exchange on which the Stock is then listed
(which shall include the Nasdaq National Market) for that date or, if
no price is so reported for that date, such price on the next preceding
date for which the closing price was reported; or (ii) the price as
determined by such methods or procedures as may be established from
time to time by the Board.
(h) "Nonemployee Director" means any individual who is a
member of the Board of Directors, but who is not otherwise an employee
of the Company.
(i) "Nonqualified Stock Option" or "NQSO" means an option to
purchase Shares, granted under Article 7, which is not intended to be
an incentive stock option qualifying under Code Section 422.
(j) "Option" means a Nonqualified Stock Option under this
Plan.
(k) "Participant" means a Nonemployee Director of the Company
who has outstanding an award granted under the Plan.
(l) "Stock" means the shares of common stock of Orthopaedic
Biosystems Ltd., Inc.
2.2 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
2.3 Severability. In the event that a court of competent jurisdiction
determines that any portion of this Plan is in violation of any statute, common
law, or public policy, then only such portion shall be stricken. All portions of
this Plan that do not violate any statute or public policy shall continue in
full force and effect.
ARTICLE 3. ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Board or a
Committee of two or more Nonemployee Directors appointed by the Board to
administer the Plan, subject to the
2
<PAGE> 3
restrictions set forth in this Plan. Except as otherwise provided, reference to
the Committee shall refer to the Board if the Board does not appoint a Committee
to administer the Plan.
3.2 Administration by the Committee. The Committee shall have full
power, discretion, and authority to interpret and administer this Plan in a
manner which is consistent with the Plan's provisions. However, in no event
shall the Committee have the power to take any action that would result in the
Plan not being treated as a formula plan under Section 16 of the Exchange Act.
3.3 Decisions Binding. All decisions made by the Committee pursuant to
the provisions of the Plan, and all related orders or resolutions of the
Committee shall be final, conclusive, and binding on all persons, including the
Company, its stockholders, employees, Participants, and their estates and
beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in Section 4.3
herein, the total number of shares of Stock available for grant under the Plan
may not exceed 100,000. The Stock issued may be authorized and unissued Stock or
Stock reacquired by the Company, as determined by the Committee.
4.2 Lapsed Awards. If any Option granted under this Plan terminates,
expires, or lapses for any reason, any Stock subject to purchase pursuant to
such Option again shall be available for grant under the Plan.
4.3 Adjustments in Authorized Shares. In the event of any merger,
reorganization, consolidation, recapitalization, separation, liquidation, stock
dividend, split-up, Stock combination, or other change in the corporate
structure of the Company affecting the Stock, the number and/or type of Stock
subject to any outstanding Award, the Option exercise price per share under any
outstanding Option, will be automatically adjusted so that the proportionate
interests of the Participants will be maintained as before the occurrence of
such event. Any adjustment pursuant to this Section 4.3 will be conclusive and
binding for all purposes of this Plan.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 Eligibility. Persons eligible to participate in this Plan are
limited to Nonemployee Directors.
5.2 Actual Participation. All eligible Nonemployee Directors shall
receive Option grants pursuant to Article 6.
3
<PAGE> 4
ARTICLE 6. OPTION GRANTS
6.1 Annual Grant of Options. Subject to the limitation on the number
of shares that may be awarded under this Plan, each Nonemployee Director shall
be granted an Option to purchase 1,500 shares of Stock on each Annual Grant
Date. The Option granted pursuant to this Section 6.1 shall be immediately
vested and exercisable as of the relevant Annual Grant Date.
6.2 Initial Grant. Subject to the limitation on the number of shares
that may be awarded under this Plan, each Nonemployee Director who first becomes
a Director after the Effective Date shall be granted an Option to purchase 5,000
shares of Stock as of such date. The Option granted pursuant to this Section 6.2
shall be immediately vested and exercisable.
6.3 Individual Award Agreement. Each Option grant shall be evidenced by
an individual agreement that will not include any terms or conditions that are
inconsistent with the terms and conditions of this Plan.
6.4 Option Price. The purchase price per share available for purchases
under an Option granted pursuant to this Article 6 shall be equal to the Fair
Market Value on the Annual Grant Date or on the date the Director first becomes
a Director, as the case may be.
6.5 Duration of Options. Unless earlier terminated, forfeited, or
surrendered pursuant to a provision of this Plan, each Option granted under this
Article 6 shall expire on the tenth anniversary date of its grant.
6.6 Payment. Options shall be exercised by the delivery of a written
notice of exercise to the Secretary of the Company, setting forth the number of
shares with respect to which the Option is to be exercised, accompanied by full
payment for the Stock. The Option price upon exercise of any Option shall be
payable to the Company in full either: (a) in cash or its acceptable equivalent,
or (b) by tendering previously acquired Stock having a Fair Market Value at the
time of exercise equal to the total Option price (provided that the Stock
tendered upon Option exercise have been held by the Participant for at least six
(6) months prior to their tender to satisfy the Option price), or (c) by a
combination of (a) and (b). The proceeds from such a payment shall be added to
the general funds of the Company and shall be used for general corporate
purposes.
6.7 Restrictions on Share Transferability. To the extent necessary to
ensure that Options granted under this Article 6 comply with applicable law, the
Board shall impose restrictions on any Stock acquired pursuant to the exercise
of an Option under this Article 6, including, without limitation, restrictions
under applicable Federal securities laws, under the requirements of any stock
exchange or market upon which such Stock is then listed and/or traded, and under
any blue sky or state securities laws applicable to such Stock.
6.8 Termination of Service on the Board of Directors. If the service of
a Participant on the Board terminates for any reason any outstanding Options
that are not vested as of such date shall
4
<PAGE> 5
be forfeited. The Options that are otherwise exercisable as of the date of such
termination shall be exercisable by the Participant for one year after such
termination, unless the Options expire earlier under Section 6.5.
6.9 Nontransferability of Options. No Option granted under this Article
6 may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
Further, all Options granted to a Participant under this Article 6 shall be
exercisable during his or her lifetime only by such Participant.
ARTICLE 7. AMENDMENT, MODIFICATION, AND TERMINATION
7.1 Amendment, Modification, and Termination. The Board may, at any
time and from time to time, terminate, amend or modify the Plan; provided,
however that to the extent necessary and desirable to comply with any applicable
law, regulation or stock exchange rule, the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
7.2 Awards Previously Granted. Unless required by law, no termination,
amendment, or modification of this Plan shall in any manner adversely affect any
Option previously granted under this Plan, without the written consent of the
Participant holding such Option.
ARTICLE 8. MISCELLANEOUS
8.1 Beneficiary Designation. Each Participant under this Plan may, from
time to time, name any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under this Plan is to be paid
in the event of his or her death. Each designation will revoke all prior
designations by the same Participant, shall be in a form prescribed by the
Committee, and will be effective only when filed by the Participant in writing
with the Committee during his or her lifetime. In the absence of any such
designation, benefits remaining unpaid at the Participant's death shall be paid
to the Participant's estate.
8.2 Successors. All obligations of the Company under this Plan, with
respect to Options, cash or Stock granted hereunder, shall be binding on any
successor to the Company, whether the existence of such successor is the result
of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.
8.3 Requirements of Law. The granting of Options, cash and Stock under
the Plan shall be subject to all applicable laws, rules, and regulations, and to
such approvals by any governmental agencies or national securities exchanges as
may be required. Notwithstanding any other provision set forth in this Plan, the
Committee may, at its sole discretion, terminate, amend, or modify this Plan in
any way necessary to comply with the applicable requirements of Rule 16b-3
promulgated by the Securities and Exchange Commission as interpreted pursuant to
no-action letters and interpretive releases.
5
<PAGE> 6
8.4 Governing Law. This Plan, and all agreements hereunder, shall be
governed by the laws of the State of Arizona.
6
<PAGE> 1
EXHIBIT 16
June 29, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We have read the statements made by Orthopaedic Biosystems Ltd., Inc. (in the
first paragraph of the section entitled "Change in Auditors" included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"), which we understand will be included in the Company's filing with
the Commission, on Form SB-2, on or about July 1, 1998. We agree with the
statements concerning our Firm in such Form SB-2.
Very truly yours,
/s/COOPERS & LYBRAND L.L.P
COOPERS & LYBRAND L.L.P
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 (file
No. 333-58313) of our report dated May 21, 1997, which includes a legend
relating to a reverse stock split, dated July 17, 1998, on our audit of the
statement of operations, shareholders' equity and cash flows of Orthopaedic
Biosystems Ltd., Inc. We also consent to the references to our firm under the
captions "Experts" and "Selected Financial Data."
PRICEWATERHOUSECOOPERS LLP
Phoenix, Arizona
July 17, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts" and
"Selected Financial Data," and to the use of our report dated April 22, 1998,
except for Note 14 as to which the date is July , 1998 in the Amendment No. 1
to Registration Statement (Form SB-2) and related Prospectus of Orthopaedic
Biosystems Ltd., Inc. for the registration of shares of its common stock.
ERNST & YOUNG LLP
Phoenix, Arizona
July , 1998
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
completion of the restatement of capital accounts described in Note 14 to the
financial statements.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
July 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 25
<SECURITIES> 0
<RECEIVABLES> 604
<ALLOWANCES> 107
<INVENTORY> 844
<CURRENT-ASSETS> 1,592
<PP&E> 522
<DEPRECIATION> 146
<TOTAL-ASSETS> 2,193
<CURRENT-LIABILITIES> 1,984
<BONDS> 0
1,713
0
<COMMON> 1,585
<OTHER-SE> (3,097)
<TOTAL-LIABILITY-AND-EQUITY> 2,193
<SALES> 1,208
<TOTAL-REVENUES> 1,208
<CGS> 538
<TOTAL-COSTS> 538
<OTHER-EXPENSES> 1,472
<LOSS-PROVISION> 48
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> (876)
<INCOME-TAX> 0
<INCOME-CONTINUING> (876)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (876)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 741
<SECURITIES> 0
<RECEIVABLES> 472
<ALLOWANCES> 103
<INVENTORY> 658
<CURRENT-ASSETS> 1,806
<PP&E> 339
<DEPRECIATION> 89
<TOTAL-ASSETS> 2,284
<CURRENT-LIABILITIES> 1,217
<BONDS> 0
1,713
0
<COMMON> 1,575
<OTHER-SE> (2,235)
<TOTAL-LIABILITY-AND-EQUITY> 2,284
<SALES> 1,482
<TOTAL-REVENUES> 1,482
<CGS> 825
<TOTAL-COSTS> 825
<OTHER-EXPENSES> 2,074
<LOSS-PROVISION> 63
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> (1,386)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,386)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,386)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
