<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1998
REGISTRATION NO. 333-58313
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ORTHOPAEDIC BIOSYSTEMS LTD., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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)
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COPIES TO:
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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>
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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. [ ]
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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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
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Common Stock, no par value..... 2,300,000 $7.75 $17,825,000 $ (3)
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(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.
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<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 SEPTEMBER 9, 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 $6.75 and $7.75 per share. See
"Underwriting," for a discussion of the factors considered in determining the
initial public offering price.
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 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.
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PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share...........................
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Total(3)............................
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</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 $1,050,000, 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; the following language is printed below: "The recently released
OBLRC5(TM) preloaded suture anchor, featuring the Company's proprietary
double-helix high/low thread pattern." This page also includes a drawing of an
inserted anchor with sutures attached; the following language is printed below:
"The Company's suture anchors are designed to provide enhanced pull-out
strength, thus allowing multiple sutures per anchor." This page also includes a
drawing of a rotator cuff with a suture anchor being passed through the tissue;
the following language is printed below: "The shoulder area: Depicts a rotator
cuff repair."
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.
<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 which was
effected on August 10, 1998, (ii) a two-for-three reverse split of outstanding
shares of Common Stock to be effected prior to the consummation of the Offering,
(iii) conversion of all outstanding shares of Class A Convertible Preferred
Stock (the "Preferred Stock") of the Company into 387,677 shares of Common Stock
and conversion of warrants to purchase shares of Preferred Stock into warrants
to purchase an aggregate of 200,785 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 (iv) 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
3
<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 Outstanding before the
Offering............................ 2,348,929 shares(1)
Common Stock Offered................ 2,000,000 shares
Common Stock Outstanding after the
Offering............................ 4,348,929 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
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(1) Excludes 344,486 and 200,785 shares of Common Stock issuable upon exercise
of stock options and warrants, respectively, outstanding as of September 9,
1998, at a weighted average exercise price of $3.70 and $4.50, respectively,
per share, of which options and warrants to purchase 217,495 and 200,785
shares, respectively, were then exercisable. Includes 17,779 shares of
Common Stock issued upon exercise of options subsequent to June 30, 1998.
Gives effect to the conversion of all outstanding shares of Preferred Stock
into 387,677 shares of Common Stock. See "Capitalization,"
"Management -- Summary of Executive Compensation" and "Description of
Capital Stock -- Warrants and Stock Options."
4
<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
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SELECTED STATEMENT OF OPERATIONS DATA:
Net revenues........................................... $ 783 $ 1,482 $ 695 $1,208
Cost of revenues....................................... 486 825 340 538
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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
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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................... $(0.12) $ (0.74) $(0.25) $(0.45)
Weighted average shares outstanding.................... 1,818 1,868 1,851 1,940
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
DECEMBER 31, PRO FORMA
1997 ACTUAL AS ADJUSTED(1)
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SELECTED BALANCE SHEET DATA:
Cash.................................................... $ 741 $ 25 $11,215
Working capital (deficit)............................... 590 (392) 11,872
Total assets............................................ 2,284 2,193 13,383
Total liabilities....................................... 1,230 1,993 919
Shareholders' equity.................................... 1,053 201 12,464
</TABLE>
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(1) On a pro forma basis, giving effect to the conversion of all outstanding
shares of Preferred Stock into 387,677 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 $7.25 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.
5
<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."
6
<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
7
<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 Company, through its Japanese distributors, is in the process of seeking
regulatory approval for its products in Japan and expects to receive such
approval in the near future. However, there can be no assurance that such
approval will be obtained in a timely manner, if at all. 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
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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."
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. The Company has historically financed
operations, in part, through ongoing investments by shareholders. In this
regard, the Company borrowed $300,000 from two shareholders in May and July
1998, with each loan bearing interest at the prime rate plus four percent.
However, 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. Additional debt
financing will have several important effects on the Company's future
operations, including, without limitation, (i) a portion of the Company's cash
flow from operations will need to be dedicated to the payment of principal and
interest on indebtedness, thereby reducing funds available for operations and
for capital expenditures, including acquisitions, (ii) borrowing facilities will
likely contain covenants which will require the Company to meet certain
financial tests which may affect the Company's flexibility in planning for, or
reacting to, changes in its business, including possible acquisition activities,
and (iii) increased leverage will substantially increase the Company's
vulnerability to adverse changes in general economic, industry, and competitive
conditions. Any additional equity financing will 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."
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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 June 30, 1998, the Company owned six issued United States
patents, five 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 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.
Numerous current and potential competitors have acquired patents or have filed
patent applications relating to medical devices and there can be no assurance
that such 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.
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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 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."
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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, 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
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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 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 September 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
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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."
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.
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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. Although the Company maintains
key-man life insurance in the amount of $1 million on each of these individuals,
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, 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.
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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 44.00% of
the Company's outstanding Common Stock (41.74% 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 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's credit facility restricts 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
16
<PAGE> 18
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 4,348,929 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 1,895,123
shares of Common Stock and outstanding options and warrants to purchase 351,131
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 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, 1,875,122 of
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 140% 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.
17
<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 $12.3 million
($14.2 million if the Underwriters' over-allotment option is exercised in full)
based upon an assumed initial public offering price of $7.25 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:
<TABLE>
<CAPTION>
PERCENTAGE OF
APPLICATION OF NET PROCEEDS DOLLAR AMOUNT NET PROCEEDS
--------------------------- ------------- -------------
<S> <C> <C>
Increase research and development efforts................... $ 2,500,000 20%
Increase sales and marketing efforts........................ 2,000,000 16
Fund future acquisitions(1)................................. 2,000,000 16
Repay indebtedness to certain related parties(2)............ 1,200,000 10
Capital expenditures........................................ 1,000,000 9
Working capital and general corporate purposes(3)........... 3,590,000 29
----------- ---
Total............................................. $12,290,000 100%
=========== ===
</TABLE>
- ---------------
(1) There are no agreements or arrangements currently in place for any potential
or future acquisitions. Any merger or consolidation would require the
consent of the Company's lender under its credit facilities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(2) 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
September 8, 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 200,007
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 and is due June 30, 1999.
(3) Working capital includes the funding of general and administrative expenses,
such as salaries, the payment of any interest expense, and other operating
expenses.
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.
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's credit facility
restricts the ability to pay dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
18
<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 387,677 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 $7.25 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;
1,943,473 shares issued and outstanding, actual;
2,331,150 shares issued and outstanding, pro forma;
and 4,331,150 shares issued and outstanding, pro forma
as adjusted(1)(2)..................................... 1,585 3,298 15,588
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 12,464
------- ------- -------
Total short term debt and capitalization......... $ 1,295 $ 1,295 $12,484
======= ======= =======
</TABLE>
- ---------------
(1) On August 10, 1998, the Company filed 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 562,272 shares of Common Stock issuable upon exercise of
stock options and warrants outstanding at June 30, 1998. Excludes 17,779
shares of Common Stock issued upon exercise of options subsequent to June
30, 1998. See "Management" and "Description of Capital Stock."
19
<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 387,677 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 $7.25 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 $12.2
million, or $2.83 per share. This represents an immediate increase in pro forma
net tangible book value of $2.83 per share to existing stockholders and the
immediate dilution of $4.42 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...... $7.25
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.................... $2.83
-----
As adjusted pro forma net tangible book value per common
share after Offering...................................... $2.83
-----
Dilution per common share to new investors.................. $4.42
=====
</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.......... 2,331,150 53.8% $ 3,394,686 19.0% $1.46
New investors.................. 2,000,000 46.2 14,500,000 81.0 $7.25
--------- ----- ----------- -----
Total................ 4,331,150 100.0% $17,894,686 100.0%
========= ===== =========== =====
</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 387,677 shares of Common Stock upon completion of this Offering. The
tables also exclude 562,272 shares of Common Stock issuable upon exercise of
options and warrants outstanding at June 30, 1998 and 17,779 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."
20
<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
PricewaterhouseCoopers LLP, independent accountants. 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................. $(0.12) $ (0.74) $(0.25) $(0.45)
Shares used in computation........................... 1,818 1,868 1,851 1,940
</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 $11,215
Working capital (deficit)............................... 590 (392) 11,872
Total assets............................................ 2,284 2,193 13,383
Total liabilities....................................... 1,230 1,993 919
Shareholders' equity.................................... 1,053 201 12,464
</TABLE>
- ---------------
(1) On a pro forma basis, giving effect to the conversion of all outstanding
shares of Preferred Stock into 387,677 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 $7.25 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.
21
<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.
22
<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. The Company's revenues
for the first six months of 1998 include an initial sale to the Company's newly
established Japanese distributor totaling $188,000, or 16% of revenues, of which
$117,500 related to the stocking of instrumentation and demonstration kits,
which is expected to satisfy the distributor's needs for these kits over the
next several months. The kits are used in the sale of suture anchors. Future
sales to the Company's Japanese distributor are dependant upon the Company's
products receiving regulatory approval in Japan, the occurrence or timing of
which is uncertain.
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
23
<PAGE> 25
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.
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
24
<PAGE> 26
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 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 anticipates that it may establish an equipment leasing facility
to finance a portion of its capital expenditures. The Company does not have any
commitments or understandings pertaining to any lease facilities at this time.
During July 1998, the Company entered into a bank credit facility. The bank
credit facility provides for a line of credit up to $300,000 collateralized by
substantially all of the Company's assets. The line bears interest at the prime
rate plus 2 1/2% and requires the Company to satisfy ongoing financial covenants
including specified working capital and debt-to-equity ratios and restricts the
Company's ability to pay dividends, to merge and consolidate with other
entities, and to repay subordinated indebtedness. There can be no assurance that
the lender would consent to any proposed merger or consolidation. The Company
has not drawn on the line of credit and will be unable to draw on the line of
credit until certain financial covenants are met. The Company issued to the bank
that is providing the credit facility a warrant to purchase shares of Preferred
Stock which, upon the consummation of the Offering, will be converted into a
warrant to purchase 778 shares of Common Stock at an exercise price of $4.50 per
share.
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
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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 PricewaterhouseCoopers, LLP and engaged Ernst &
Young LLP as its new independent auditors to audit the Company's financial
statements. The report of PricewaterhouseCoopers, LLP 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
PricewaterhouseCoopers, LLP 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 PricewaterhouseCoopers,
LLP, would have caused it to make reference to the subject matter of the
disagreements in connection with its report. The Company has authorized
PricewaterhouseCoopers, LLP to respond fully to inquiries from Ernst & Young LLP
concerning all matters relating to prior audits conducted by
PricewaterhouseCoopers, LLP.
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
PricewaterhouseCoopers, LLP 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.
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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 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, and is awaiting final Japanese regulatory
approval.
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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.
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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,
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<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."
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<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
is made from titanium alloy and utilizes 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.
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<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."
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<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,
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<PAGE> 35
Israel, New Zealand, and Japan where the Company recently signed an agreement
with Mizuho, a leading medical device company, and is awaiting final Japanese
regulatory approval. 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.
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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 June 30, 1998, the Company owned six issued United States patents,
five 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 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
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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/or 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 or new PMAs.
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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
Investigational Device Exemption (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 many 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 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.
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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 products
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
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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 affect 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.
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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....................... 27 Vice President and Chief Financial Officer
Steven P. Davis........................... 60 Secretary and Director
Michael D. Greenbaum...................... 55 Director
Robert F. Lusch, Ph.D..................... 49 Director
Leslie S. Matthews, M.D................... 46 Director
Gary A. Peterson.......................... 47 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.
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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, 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 is the President and Chief Executive Officer of BATON Development Inc.,
a virtual incubator for medical products as well as the Managing Member of BATON
Ventures L.L.C. and the Venture Partner in Affinity Ventures II L.L.C., both
venture capital funds. Mr. Peterson has also been the President of
Peterson-Spencer-Fansler Company, a capital sourcing and operational consulting
company since 1991 and a General Partner of PSF Advisors, the General Partner of
PSF Health Care Fund L.P., a venture capital limited partnership. He was also
President of Peterson-Spencer-Fansler Investments, Inc., a registered broker
dealer and a registered investment advisor. From 1986 through 1994, Mr. Peterson
served as President of Genesis Venture Development, Inc., a venture capital fund
management company. Mr. Peterson was a founder of Angiomedics Incorporated and
served in the capacities of Chief Operating Officer and Executive Vice President
from its inception in 1983 to 1986 at which time Angiomedics was acquired by
Pfizer, Inc. Mr. Peterson received a B.A. in biology and psychology from
Gustavus Adolphus College.
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.
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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 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 consulting agreements
typically have three year terms. Members of the Scientific Advisory Board are
typically granted options to purchase shares of Company Common Stock as
compensation for their services.
42
<PAGE> 44
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. ........................ Assistant Professor at the Section of Sports
Medicine at the Rush Presbyterian St. Lukes
Medical Center
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> 45
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............................. 11,112 -- $ 30,558 --
Jeffry B. Skiba............................ 35,557 8,889 $215,788 $39,378
</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 $7.25 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> 46
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 222,223 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 133,334. As of
September 8, 1998, the Company had granted options to purchase 107,124 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> 47
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 $60,000, 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 66,667 shares of Common Stock at an exercise price of $4.50
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 11,112 shares of
Common Stock at an exercise price of $4.50 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.
46
<PAGE> 48
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 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 2,223 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 667
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 44,445, 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 September 8, 1998, no options had
been granted under the Director Plan.
47
<PAGE> 49
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 9, 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).................................. 772,224 32.57% 17.67%
D. Ronald Yagoda(4).................................... 747,225 31.37 17.05
Joan Yagoda(5)......................................... 702,781 29.92 16.16
Michael D. Greenbaum(6)................................ 197,781 8.21 4.49
Vertical Fund Associates, L.P.(7)...................... 144,444 6.06 3.30
Gary Peterson(8)....................................... 137,780 5.76 3.14
Steven P. Davis(9)..................................... 71,670 3.02 1.64
Jeffry B. Skiba(10).................................... 40,002 1.67 *
Robert F. Lusch(11).................................... 22,224 * *
Leslie Matthews, M.D.(12).............................. 17,336 * *
Richard Previte(13).................................... 15,557 * *
Gary R. Scheel(14)..................................... 11,112 * *
All directors and executive officers as a group (12
persons)............................................. 2,035,578 77.49% 44.00%
</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 2,348,929 shares of Common
Stock outstanding before the Offering, assuming conversion of all Preferred
Stock, which will be automatically converted into 387,677 shares of Common
Stock upon the completion of the Offering. Accordingly, shares and
percentages beneficially owned after the Offering are based upon 4,348,929
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)
166,667 shares of Common Stock owned by Yagoda & Zang, Inc., of which Mr.
Zang may be deemed a beneficial owner; and (ii) 22,223 shares of Common
Stock issuable upon the exercise of warrants.
(4) The total number of shares beneficially owned by Mr. Yagoda includes: (i)
166,667 shares of Common Stock owned by Yagoda & Zang, Inc., of which Mr.
Yagoda may be deemed a beneficial owner; (ii) 33,334 shares of Common Stock
issuable upon the exercise of warrants; and (iii) 536,114 shares of Common
Stock owned with Joan Yagoda.
(5) The total number of shares beneficially owned by Mrs. Yagoda include: (i)
166,667 shares of Common Stock owned by Yagoda & Zang, Inc., of which Mrs.
Yagoda may be deemed a beneficial owner; and (ii) 536,114 shares of Common
Stock owned with D. Ronald Yagoda.
(6) The total number of shares beneficially owned by Mr. Greenbaum includes:
(i) 137,780 shares of Common Stock owned by the Greenbaum Family Trust of
which Mr. Greenbaum is trustee; (ii) 4,445
48
<PAGE> 50
shares of Common Stock issuable upon the exercise of options; and (iii)
55,557 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., a venture capital fund, includes 33,334 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)
4,445 shares of Common Stock issuable upon the exercise of options; (ii)
88,890 shares of Common Stock owned by Affinity Ventures of which Mr.
Peterson is a general partner, (iii) 22,224 shares of Common Stock issuable
upon the exercise of warrants owned by Affinity Ventures II, L.L.C., a
venture capital fund; and (iv) 22,223 shares of Common Stock issuable upon
the exercise of warrants owned by Peterson Spencer-Fansler Health Care Fund
of which Mr. Peterson is a general partner.
(9) The total number of shares beneficially owned by Mr. Davis includes 22,224
shares of Common Stock issuable upon the exercise of options. Also includes
25,000 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 40,002
shares of Common Stock issuable upon exercise of the options.
(11) The total number of shares beneficially owned by Mr. Lusch includes 4,445
shares of Common Stock issuable upon exercise of options.
(12) The total number of shares beneficially owned by Dr. Matthews includes
17,336 shares of Common Stock issuable upon exercise of options.
(13) The total number of shares beneficially owned by Mr. Previte includes
15,557 shares of Common Stock issuable upon exercise of options.
(14) The total number of shares beneficially owned by Mr. Scheel includes 11,112
shares of Common Stock issuable upon exercise of options.
49
<PAGE> 51
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 200,007 shares of Common
Stock at an exercise price of $4.50 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 33,334 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 55,557
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 22,224 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 22,223 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 33,334 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 16,667 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 5,556 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 four-ninths 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, 6,669 shares of the Company's Common Stock at an
exercise price of $2.25 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
2,223 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> 52
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.
The authorized capital stock of the Company consists 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, 4,348,929 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 1,961,252 shares of
Common Stock issued and outstanding.
PREFERRED STOCK
The Board of Directors of the Company has 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 September 8, 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 200,785 shares of Common Stock with an
exercise price of $4.50. In addition, the Company had outstanding options to
purchase an aggregate of 344,486 shares of its Common Stock with exercise prices
ranging from $1.58 to $4.50. 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
"piggy-back" rights to register their shares of converted Common Stock, subject
to certain limitations, in connection with a registration initiated by the
Company.
51
<PAGE> 53
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
Harris Trust Company of California.
52
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
4,348,929 shares of Common Stock (assuming the Underwriter's over-allotment is
not exercised). These shares exclude 545,271 shares of Common Stock issuable
upon exercise of currently outstanding options and warrants. The Company has an
additional 159,544 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). Directors, officers and certain shareholders of the Company owning a total
of 1,895,123 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 Representatives. Upon the
expiration of the 180-day lock up period, 1,875,122 of these shares will become
eligible for sale under Rule 144, subject to compliance with the requirements of
such rule.
Immediately upon commencement of the Offering, 281,224 shares of Common
Stock not subject to lock-up arrangements will be available for sale pursuant to
Rule 144(k). Commencing 90 days following the date of this Prospectus, an
additional 96,571 shares of Common Stock not subject to lock-up arrangements
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 43,490
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> 55
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 140% of the initial price of
the Common Stock being offered hereby to the public. The Representatives'
Warrant cannot be transferred for a period of one year from the date of issuance
except to the Underwriters, selling group members and their officers or
partners. 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
54
<PAGE> 56
Representatives expenses in excess of the non-accountable expense allowance,
including its legal expenses, 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> 57
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 PricewaterhouseCoopers LLP, 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> 58
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> 59
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 September , 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.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
September 8, 1998
F-2
<PAGE> 60
REPORT OF COOPERS & LYBRAND L.L.P., 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
September 8, 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 September , 1998
F-3
<PAGE> 61
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;
5,000,000 shares authorized; 872,300 issued and
outstanding............................................ 1,713,464 1,713,464
Common stock, no par value; 20,000,000 shares authorized;
1,939,027 issued and outstanding in 1997 and 1,943,473
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> 62
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..... $ (0.12) $ (0.74) $ (0.25) $ (0.45)
========== =========== ========== ==========
Weighted average shares outstanding...... 1,818,366 1,868,422 1,850,635 1,939,936
========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 63
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...................... -- $ -- 1,816,926 $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, $2.813 per
share................... -- -- 2,975 8,365 -- -- -- 8,365
Stock issued for
employment
agency fees, $4.50 per
share................... -- -- 6,667 30,000 -- -- -- 30,000
Net loss.................. -- -- -- -- -- (217,918) -- (217,918)
------- ---------- --------- ---------- ------- ----------- ------- -----------
BALANCE, DECEMBER 31,
1996...................... -- -- 1,826,568 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................. -- -- 20,002 37,000 -- -- -- 37,000
Issuance of common stock
upon exercise of
warrants................ -- -- 92,457 259,000 -- -- -- 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 1,939,027 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................ -- -- 4,446 10,000 -- -- -- 10,000
Net loss (unaudited)...... -- -- -- -- -- (875,709) -- (875,709)
------- ---------- --------- ---------- ------- ----------- ------- -----------
BALANCE, JUNE 30, 1998
(UNAUDITED)............... 872,300 $1,713,464 1,943,473 $1,584,632 $96,590 $(3,185,195) $(8,893) $ 200,598
======= ========== ========= ========== ======= =========== ======= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 64
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> 65
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 1,333,339
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> 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)
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 266,023, 257,366, 269,359 and 362,265
shares of common stock outstanding at December 31, 1996 and 1997 and June 30,
1997 and 1998, and warrants to purchase 104,459, 4,446, and 64,454 shares of
common stock outstanding at December 31, 1996 and 1997 and June 30, 1997,
F-9
<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)
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 four common shares to nine 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 387,677 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.
During the years ended December 31, 1996 and 1997 and the six months ended
June 30, 1997, the Company had less than 10% of its revenues made
internationally. During the six months ended June 30, 1998, revenues to Japan
were 16% of total revenues and other international revenues were an additional
7% of total revenues.
F-10
<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)
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 425,000 shares of the Company's
Class A Convertible Preferred Stock at an exercise price of $2.00 per share and
are convertible into warrants to purchase 188,895 shares of common stock 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 25,000 shares of the Company's Class A
Convertible Preferred Stock at an exercise price of $2.00 per share and are
convertible into warrants to purchase 11,112 shares of common stock in
conjunction with the note. The warrants expire on December 31, 2002.
F-11
<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)
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> 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)
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 reverse stock splits
discussed in Note 14) is as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES RANGE
--------- -------------
<S> <C> <C>
Outstanding at January 1, 1996............................. 210,462 $1.58 - $2.82
Granted, employees....................................... 64,448 2.82 - 4.50
Granted, advisory board.................................. 26,670 2.82 - 4.50
Forfeited................................................ (35,557) 2.82
-------- -------------
Outstanding at December 31, 1996........................... 266,023 1.58 - 4.50
Granted, employees....................................... 23,340 4.50
Granted, directors....................................... 22,225 4.50
Granted, advisory board.................................. 47,565 4.50
Exercised................................................ (20,002) 1.58 - 2.82
Forfeited................................................ (81,785) 1.58 - 2.82
-------- -------------
Outstanding at December 31, 1997........................... 257,366 1.58 - 4.50
Granted, advisory board.................................. 25,560 4.50
Granted, directors....................................... 15,557 4.50
Forfeited................................................ (43,342) 4.50
-------- -------------
Outstanding at June 30, 1998............................... 255,141 $1.58 - $4.50
======== =============
Exercisable at December 31, 1997........................... 190,469
========
Exercisable at June 30, 1998............................... 210,471
========
Weighted average exercise price of options outstanding..... $ 3.25
========
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> 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)
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 splits discussed in Note 14) is as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES RANGE
--------- -----
<S> <C> <C>
Granted, employees.......................................... 107,124 $4.50
-------- -----
Outstanding at June 30, 1998................................ 107,124 $4.50
======== =====
Exercisable at June 30, 1998................................ 11,112
========
Weighted average exercise price of options outstanding...... $ 4.50
========
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 26,670, 47,565 and 25,560 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.
Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model. 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.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options (principally vesting,
transfer and trading restrictions) and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The fair value 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
F-14
<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)
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 four-ninths
of a share of Common Stock (after giving effect to the two-for-three reverse
stock splits 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.
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 6,669 common
shares at $2.25 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
97,790 common shares were issued. The warrants allow the holder the right to
purchase shares at a price of $2.82 per share. Unexercised warrants to purchase
7,557 common shares were forfeited at December 31, 1997.
F-15
<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)
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......... -- -- 97,790 $2.82
Granted.............................. -- -- 6,669 2.25
------- ----- -------- -------------
Outstanding at December 31, 1996....... -- -- 104,459 2.25 - 2.82
Granted.............................. 425,000 $2.00 -- --
Exercised............................ -- -- (92,456) 2.25 - 2.82
Forfeited............................ -- -- (7,557) 2.82
------- ----- -------- -------------
Outstanding at December 31, 1997....... 425,000 2.00 4,446 2.25
Granted.............................. 25,000 2.00 --
Exercised............................ -- -- (4,446) 2.25
------- ----- -------- -------------
Outstanding at June 30, 1998........... 450,000 $2.00 -- --
======= ========
Exercisable at December 31, 1997....... 425,000 4,446
======= ========
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 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.
F-16
<PAGE> 74
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)
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>
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 $4.50 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 $4.50 when
F-17
<PAGE> 75
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)
the number of shares to be granted are known. Options on up to 100,000 shares
could be granted through 2000 under the agreement.
14. SUBSEQUENT EVENTS
Capital Structure
On August 10, 1998, the Company filed 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 222,223
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 44,445 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
July 31, 1998 and an additional two-for-three reverse stock split to be effected
by the Company on September , 1998. All share and per share amounts in the
accompanying financial statements have been adjusted to reflect the split.
F-18
<PAGE> 76
This page includes three drawings which depict suture anchors fastened to
bones in the hand and the shoulder. The language next to the first picture reads
as follows: "The Thumb Area: Depicts the Game Keeper's (Skiers) Thumb repair."
The language next to the second picture reads as follows: "The Shoulder Area:
Depicts the Bankart Lesion repair." The language next to the third picture reads
as follows: "The Wrist Area: Depicts the Scapholunate Ligament repair." The page
also includes a drawing of one of the Company's suture anchors; the following
language is printed below: "The Company's proprietary suture anchors facilitate
tissue-to-bone reattachment."
<PAGE> 77
- ------------------------------------------------------
- ------------------------------------------------------
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........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 18
Dividend Policy........................... 18
Capitalization............................ 19
Dilution.................................. 20
Selected Financial Data................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 22
Business.................................. 27
Management................................ 40
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> 78
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............................................ $ 32,500
*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..................................... $ 160,000
*Registrar and Transfer Agent's Fees........................ $ 5,000
*Underwriters' Non-Accountable Expense Allowance............ $ 435,000
*Miscellaneous Expenses..................................... $ 81,563
Total............................................. $1,050,000
==========
</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, 2,975 shares at an aggregate
offering price of $8,365; and during the fourth quarter of 1996, 6,667 shares at
an aggregate offering
II-1
<PAGE> 79
price of $30,000; during the first quarter of 1997, 13,780 shares at an
aggregate offering price of $33,500; during the second quarter of 1997, 41,783
shares at an aggregate offering price of $115,000; during the fourth quarter of
1997, 56,896 shares at an aggregate offering price of $160,000; and during the
second quarter of 1998, 4,446 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 387,677 shares of Common Stock.
During the period July 1995 through June 1998, the Company granted to
directors, executive officers, employees, advisors, and consultants 332,489
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, 6,669 shares of the
Company's Common Stock at an exercise price of $2.25 per share 2,223 of which
were exercised during the second quarter of 1997 and 4,446 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 200,007
shares of Common Stock upon the consummation of this Offering at an exercise of
$4.50 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 which
was effected on August 10, 1998 and an additional 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 Amended and Restated Articles of Incorporation of the
Company (previously filed)
3.2 Amended and Restated Bylaws of the Company (previously
filed)
4.1 Amended and Restated Articles of Incorporation of the
Company (previously filed as Exhibit 3.1)
4.2 Form of Common Stock certificate (previously filed)
4.3 Form of Stock Purchase Warrant Certificate (previously
filed)
4.4 Agreement dated as of May 5, 1997, by and among the Company
and certain investors in the Company regarding Registrations
Rights (previously filed)
4.5 Form of Representatives' Warrant
5 Opinion of Snell & Wilmer L.L.P. regarding the legality of
the common stock being registered (previously filed)
10.1 Exclusive Marketing and Distribution Agreement, dated as of
August 1, 1996, by and between the Company and Mentor
Urology Corporation+ (previously filed)
</TABLE>
II-2
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.2 International Distribution Agreement, dated as of August 4,
1997, between the Company and Mizuho Medical Co., Ltd.
(previously filed)
10.3 Agreement dated as of January 1, 1998, by and between the
Company and Imcor, Inc.+ (previously filed)
10.4 Form of Series B Promissory Note (previously filed)
10.5 Series B Promissory Note, dated May 4, 1998, by and between
the Company and D. Ronald Yagoda (previously filed)
10.6 Employment Agreement by and between the Company and James W.
Hart (previously filed)
10.7 Employment Agreement by and between the Company and D.
Ronald Yagoda (previously filed)
10.8 Employment Agreement by and between the Company and Gary
Scheel (previously filed)
10.9 Employment Agreement by and between the Company and Jeffry
Skiba (previously filed)
10.10 1998 Stock Incentive Plan (previously filed)
10.11 1998 Director Option Plan (previously filed)
10.12 Form of Consulting Agreement with Addendum listing
signatories (previously filed)
10.13 Office Lease by and between SEOC I Limited Partnership
("SEOC") and the Company, dated as of May 6, 1997
(previously filed)
10.14 First Amendment to Office Lease by and between SEOC and the
Company, dated as of July 1997 (previously filed)
10.15 Form of the Company lock-up letter with Addendum listing
signatories (previously filed)
10.16 Loan and Security Agreement by and between the Company and
Silicon Valley Bank
16 Letter on change in certifying accountant (previously filed)
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>
- ---------------
+ 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.
II-3
<PAGE> 81
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-4
<PAGE> 82
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. 3 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
September 9, 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 September 9, 1998
- ------------------------------------------------ Officer
D. Ronald Yagoda (Principal executive officer)
/s/ JENNIFER L. GUELICH Vice President and Chief September 9, 1998
- ------------------------------------------------ Financial Officer (Principal
Jennifer L. Guelich financial and accounting
officer)
* Director September 9, 1998
- ------------------------------------------------
Steven P. Davis
* Director September 9, 1998
- ------------------------------------------------
Michael D. Greenbaum
* Director September 9, 1998
- ------------------------------------------------
Robert F. Lusch, Ph.D.
* Director September 9, 1998
- ------------------------------------------------
Leslie S. Matthews, M.D.
* Director September 9, 1998
- ------------------------------------------------
Gary A. Peterson
* Director September 9, 1998
- ------------------------------------------------
Richard Previte
* Director September 9, 1998
- ------------------------------------------------
Kerry Zang, D.P.M.
*By: /s/ D. RONALD YAGODA
- ------------------------------------------------
D. Ronald Yagoda
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 83
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 Amended and Restated Articles of Incorporation of the
Company (previously filed)
3.2 Amended and Restated Bylaws of the Company (previously
filed)
4.1 Amended and Restated Articles of Incorporation of the
Company (previously filed as Exhibit 3.1)
4.2 Form of Common Stock certificate (previously filed)
4.3 Form of Stock Purchase Warrant Certificate (previously
filed)
4.4 Agreement dated as of May 5, 1997, by and among the Company
and certain investors in the Company regarding Registrations
Rights (previously filed)
4.5 Form of Representatives' Warrant
5 Opinion of Snell & Wilmer L.L.P. regarding the legality of
the common stock being registered (previously filed)
10.1 Exclusive Marketing and Distribution Agreement, dated as of
August 1, 1996, by and between the Company and Mentor
Urology Corporation+ (previously filed)
10.2 International Distribution Agreement, dated as of August 4,
1997, between the Company and Mizuho Medical Co., Ltd.
(previously filed)
10.3 Agreement dated as of January 1, 1998, by and between the
Company and Imcor, Inc.+ (previously filed)
10.4 Form of Series B Promissory Note (previously filed)
10.5 Series B Promissory Note, dated May 4, 1998, by and between
the Company and D. Ronald Yagoda (previously filed)
10.6 Employment Agreement by and between the Company and James W.
Hart (previously filed)
10.7 Employment Agreement by and between the Company and D.
Ronald Yagoda (previously filed)
10.8 Employment Agreement by and between the Company and Gary
Scheel (previously filed)
10.9 Employment Agreement by and between the Company and Jeffry
Skiba (previously filed)
10.10 1998 Stock Incentive Plan (previously filed)
10.11 1998 Director Option Plan (previously filed)
10.12 Form of Consulting Agreement with Addendum listing
signatories (previously filed)
10.13 Office Lease by and between SEOC I Limited Partnership
("SEOC") and the Company, dated as of May 6, 1997
(previously filed)
10.14 First Amendment to Office Lease by and between SEOC and the
Company, dated as of July 1997 (previously filed)
10.15 Form of the Company lock-up letter with Addendum listing
signatories (previously filed)
10.16 Loan and Security Agreement by and between the Company and
Silicon Valley Bank
16 Letter on change in certifying accountant (previously filed)
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 (previously filed)
27.1 Financial data schedule (previously filed)
</TABLE>
- ---------------
+ 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-6
<PAGE> 1
EXHIBIT 1
2,000,000 SHARES(1)
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
COMMON STOCK
UNDERWRITING AGREEMENT
__________________, 1998
CRUTTENDEN ROTH INCORPORATED
JOSEPHTHAL & CO., INC.
As Representatives of the several Underwriters
c/o CRUTTENDEN ROTH INCORPORATED
18301 Von Karman, Suite 100
Irvine, California 92715
Ladies and Gentlemen:
Orthopaedic Biosystems Ltd., Inc., an Arizona corporation (the "Company"),
addresses you as the Representatives of each of the persons, firms and
corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreement with the several Underwriters
as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
2,000,000 shares of its authorized and unissued Common Stock, no par value per
share, (the "Firm Shares") to the several Underwriters. The Company also
proposes to grant to the Underwriters an option to purchase up to 300,000
additional shares of the Company's Common Stock, no par value per share (the
"Option Shares"), as provided in Section 7 hereof. As used in this Agreement,
the term "Shares" shall mean the Firm Shares and the Option Shares. Further, the
Company proposes to issue to the Representatives warrants for the purchase of a
total of 200,000 shares of its authorized and unissued Common Stock, no par
value per share (the "Warrants"). The Shares of Common Stock issuable upon
exercise of the Warrants are referred to as the "Warrant Shares." All shares of
Common Stock of the Company to be outstanding after giving effect to the sales
contemplated hereby, including the Shares and Warrant Shares, are hereinafter
referred to as "Common Stock."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The
Company represents and warrants to, and agrees with, each Underwriter that:
- ----------
(1) Plus an option to purchase up to 300,000 additional shares from the
Company to cover overallotments.
-1-
<PAGE> 2
(a) A registration statement on Form SB-2 (File No. 333-58313) with
respect to the Shares, including a prospectus, has been prepared and filed by
the Company in conformity in all material respects with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; amendments to such registration statement, such prospectuses and
abbreviated registration statements pursuant to Rule 462(b) of the Rules and
Regulations ("462 Registration Statement") as may have been required prior to
the date hereof have been similarly prepared and filed with the Commission; and
the Company will file such additional amendments to such registration statement,
such amended prospectuses and such abbreviated registration statements as may
hereafter be required. Copies of such registration statement and amendments
together with each exhibit filed therewith, of each related prospectus contained
or filed as part of any pre-effective amendment to such registration statement
or filed pursuant to Rule 424(a) (the "Preliminary Prospectuses") and of any
abbreviated registration statement pursuant to Rule 462(b) of the Rules and
Regulations have been delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if the Representatives, on behalf of the several
Underwriters, shall agree to the utilization of Rule 434 of the Rules and
Regulations, the information required to be included in any term sheet filed
pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations
pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if the
Representatives, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits (including exhibits incorporated by
reference), in the form in which it became or becomes, as the case may be,
effective (including, if the Company omitted information from the registration
statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of
the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment
thereto or the filing of any 462 Registration Statement after the effective date
of such registration statement, shall also mean (from and after the
effectiveness of such amendment or the filing of such abbreviated registration
statement) such registration statement as so amended, together with any such 462
Registration Statement. The term "Prospectus" as used in this Agreement shall
mean the prospectus relating to the Shares as included in such Registration
Statement at the time it becomes effective (including, if the Company omitted
information from the Registration Statement pursuant to Rule 430A(a) of the
Rules and Regulations, the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 430A(b) of the Rules
and Regulations); provided, however, that if in reliance on Rule 434 of the
Rules and Regulations and with the consent of the Representatives on behalf of
the several Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that
a confirmation is sent or
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<PAGE> 3
given for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall
mean the "prospectus subject to completion" (as defined in Rule 434(g) of the
Rules and Regulations) last provided to the Underwriters by the Company and
circulated by the Underwriters to all prospective purchasers of the Shares
(including the information deemed to be a part of the Registration Statement at
the time it became effective pursuant to Rule 434(d) of the Rules and
Regulations). Notwithstanding the foregoing, if any revised prospectus shall be
provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and, with the consent of
the Representatives on behalf of the several Underwriters, the Company shall
have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c),
as applicable, prior to the time that a confirmation is sent or given for
purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet,
together, will not be materially different from the prospectus in the
Registration Statement.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof. The information set
forth on the front cover of the Prospectus (insofar as such information relates
to the Underwriters), the inside front cover page of the Prospectus (insofar as
such information relates to the Underwriters) concerning stabilization,
over-allotment and passive market making by the Underwriters, and under the 1st,
2nd, and 9th paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and in the Prospectus constitutes the only information furnished by
the Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement.
(c) The Company is duly incorporated and validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation with full power and authority
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<PAGE> 4
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company is duly qualified to do
business as a foreign corporation and in good standing in each jurisdiction in
which the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or be
in good standing would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company (hereinafter, a "Material Adverse Effect"); no proceeding has
been instituted in any such jurisdiction revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or qualification;
the Company is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities that are material to the conduct of its
business, all of which are valid and in full force and effect. The Company is
not in violation of its charter or bylaws and no event has occurred which, with
notice or lapse of time or both, would constitute a breach or violation of any
of the terms and provisions of, or constitute a default under, any obligation,
agreement, covenant or condition contained in any bond, debenture, note or other
evidence of indebtedness, or in any lease, contract, indenture, mortgage, deed
of trust, loan agreement, joint venture or other agreement or instrument to
which the Company is a party or by which its properties may be bound where such
violation, breach, or default is reasonably likely to have a Material Adverse
Effect. The Company is not in violation of any law, order, rule, regulation,
writ, injunction, judgment or decree of any court, administrative agency,
regulatory body, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or its properties where such violation,
breach, or default is reasonably likely to have a Material Adverse Effect. The
Company does not own or control, directly or indirectly, any corporation,
association or other entity.
(d) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and,
upon due execution and delivery by the Representatives, is a valid and binding
agreement on the part of the Company, enforceable in accordance with its terms,
except insofar as indemnification and contribution provisions may be limited by
applicable law or public policy and except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles and rules of law governing specific performance, estoppel,
waiver, injunctive relief, and other equitable remedies (regardless of whether
enforcement is sought in a proceeding at law or in equity). The making,
execution and performance of this Agreement by the Company and the consummation
of the transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute a
default under, (i) any bond, debenture, note or other evidence of indebtedness,
or under any lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument to which the Company
is a party or by which its properties may be bound, (ii) the charter or bylaws
of the Company or (iii) any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, administrative agency, regulatory body,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or its properties. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or its properties is required for the execution and delivery of this
Agreement and the consummation by the Company of the transactions herein
contemplated, except as have been obtained or such as may be required under the
Act, the Exchange Act, by the National Association of
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<PAGE> 5
Securities Dealers, Inc. (the "NASD"), the rules of the American Stock Exchange
or under applicable state or other securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters, all of
which requirements have been satisfied in all material respects.
(e) There is not pending or, to the Company's knowledge, threatened,
any action, suit, claim or proceeding against the Company, any of its officers,
any of its properties, assets or rights before any court, administrative agency,
regulatory body, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company, its officers, its properties, or otherwise
which (i) would reasonably be expected to individually or in the aggregate,
result in any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company (hereinafter
a "Material Adverse Change") or have a Material Adverse Effect, (ii) would
reasonably be expected to prevent consummation of the transactions contemplated
hereby or (iii) is required to be disclosed in the Registration Statement or
Prospectus and is not so disclosed. There are no agreements, contracts, leases
or documents of the Company of a character required to be described or referred
to in the Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement by the Act or the Rules and Regulations which have
not been accurately described in all material respects in the Registration
Statement or Prospectus or filed as exhibits to the Registration Statement. The
Company is not a party or subject to the provisions of any injunction, judgment,
decree or order of any court, administrative agency, regulatory body, government
or governmental agency or body, domestic or foreign, that could reasonably be
expected to result in a Material Adverse Change. The Company has conducted and
is conducting its business in compliance with all applicable Federal, State,
local and foreign statutes, laws, rules, regulations, ordinances, codes,
decisions, decrees, directives and orders, except where the failure to do so
would not, singly or in the aggregate, have a Material Adverse Effect on the
Company.
(f) All outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities. The Company has an authorized, issued and
outstanding capitalization as set forth in the Prospectus under the caption
"Capitalization." The capital stock of the Company conforms to the description
thereof contained in the Registration Statement and the Prospectus (and such
statements correctly state the substance of the instruments defining the
capitalization of the Company). The Shares to be issued and sold by the Company
hereunder have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement, and, when issued and delivered by the Company
against payment therefor in accordance with the terms of this Agreement, will be
duly and validly issued and fully paid and nonassessable, and will be sold free
and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest. No preemptive right, co-sale right, registration right,
right of first refusal or other similar right of shareholders exists with
respect to any of the Shares or the issuance and sale thereof other than those
that have been satisfied or expressly waived prior to the date hereof and those
that will automatically expire upon and will not apply to the consummation of
the transactions contemplated on or before the Closing Date. No further approval
or authorization of any shareholder, the Board of Directors of the Company or
others is required for the issuance and sale or transfer of the Shares except as
may be required under the Act or under state or other securities or Blue Sky
laws. Except as disclosed in the Registration Statement, Prospectus and the
financial statements of the Company,
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<PAGE> 6
and the related notes thereto included in the Prospectus, the Company has no
outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus fairly and accurately presents the information
required to be shown with respect to such plans, arrangements, options and
rights. All outstanding options of the company have been duly authorized and
issued in compliance with all federal and state securities laws and Arizona
general corporate law.
(g) The Warrants and the Warrant Shares have been duly authorized.
The Warrants, when issued and delivered to you, will constitute valid and
binding obligations of the Company in accordance with their terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditor's rights generally or by general equitable principles and rules of law
governing specific performance, estoppel, waiver, injunctive relief, and other
equitable remedies (regardless of whether enforcement is sought in a proceeding
at law or in equity). The Warrant Shares when issued and delivered by the
Company in accordance with the terms of this Agreement and pursuant to the
Warrants, will be duly and validly issued and fully paid and non-assessable,
will be free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest, and will not be subject to any preemptive rights or
similar rights on the party of any person or entity. A sufficient number of
shares of Common Stock, no par value per share, of the Company have been
reserved for issuance by the Company upon exercise of the Warrants.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
Material Adverse Change, (ii) any transaction that is material to the Company,
(iii) any obligation, direct or contingent, incurred by the Company, except
obligations incurred in the ordinary course of business, (iv) any change in the
capital stock or outstanding indebtedness of the Company, (v) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company, (vi) any default in the payment of principal of or interest on any
outstanding debt obligations, or (vii) any loss or damage (whether or not
insured) to the property of the Company which has been sustained which has a
Material Adverse Effect.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) the Company has good and marketable title to all properties and
assets described in the Registration Statement and Prospectus as owned by it,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, other than as described in the Registration Statement and
such as would not have a Material Adverse Effect on the Company, (ii) the
agreements to which the Company is a party described in, or filed as exhibits
to, the Registration Statement and Prospectus are valid agreements, enforceable
by the Company, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles and rules of law governing specific performance, estoppel, waiver,
injunctive relief, and other equitable remedies (regardless of whether
enforcement is sought in a proceeding at law or in equity), and, to the
Company's knowledge, the other contracting party or parties thereto are not in
breach or default under any of such agreements, and (iii) the Company has valid
and enforceable leases for all
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<PAGE> 7
properties described in the Registration Statement and Prospectus as leased by
it, except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles and
rules of law governing specific performance, estoppel, waiver, injunctive
relief, and other equitable remedies (regardless of whether enforcement is
sought in a proceeding of law or in equity), and with such exceptions as do not
materially affect the value or use of such property. Except as set forth in the
Registration Statement and Prospectus, the Company owns or leases all properties
as are necessary to its operations as now conducted or as proposed to be
conducted.
(j) Ernst & Young LLP, Independent Auditors, which has examined the
financial statements of the Company, together with the related schedules and
notes, as of December 31, 1997 and for the year ended December 31, 1997, and
PricewaterhouseCoopers, LLP, Independent Auditors, which has examined the
financial statements of the Company, together with the related schedules and
notes, as of December 31, 1996, and for the year ended December 31, 1996, filed
with the Commission as a part of the Registration Statement, which are included
in the Prospectus, are independent accountants within the meaning of the Act and
the Rules and Regulations. The audited financial statements of the Company,
together with the related schedules and notes, and the unaudited financial
information, forming part of the Registration Statement and Prospectus, fairly
present the financial position and the results of operations of the Company in
accordance with GAAP at the respective dates and for the respective periods to
which they apply; and all audited financial statements of the Company, together
with the related schedules and notes, and the unaudited financial information,
filed with the Commission as part of the Registration Statement, have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be otherwise
stated therein. The selected and summary financial and statistical data included
in the Registration Statement fairly present the information shown therein and
have been compiled on a basis consistent with the audited financial statements
presented therein. No other financial statements or schedules are required to be
included in the Registration Statement.
(k) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(l) The Company and its subsidiaries have timely filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown thereon as due, and there is no tax deficiency that has been or, may
be reasonably likely to be asserted against the Company that might have a
Material Adverse Effect. All tax liabilities are adequately provided for on the
books of the Company.
(m) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
reasonable for its business and consistent with insurance coverage maintained by
similar companies in similar businesses or as
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<PAGE> 8
otherwise required by any agreement to which the Company is a party, including,
but not limited to, insurance covering real and personal property owned or
leased by the Company against theft, damage, destruction, acts of vandalism,
products liability, errors and omissions, and all other risks customarily
insured against, all of which insurance is in full force and effect. The Company
has not been refused any insurance coverage applied for; and the Company does
not have any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business at a
cost that would not have a Material Adverse Effect.
(n) To the knowledge of the Company, no labor dispute with the
employees of the Company exists or is imminent. The Company is not aware of any
existing or imminent work stoppage or labor strike by the employees of any of
its principal suppliers, subcontractors, stocking dealers, or distributors
(domestic or foreign) that might be expected to result in a Material Adverse
Change. No collective bargaining agreement exists with any of the Company's
employees and, to the Company's knowledge, no such agreement is imminent.
(o) The Company has provided to the Representatives copies of all
non-competition, non-disclosure, confidentiality or other similar agreement with
any party other than the Company. To the Company's knowledge, no consultant or
scientific advisor of the Company (individually, a "Consultant" and
collectively, "Consultants") is in violation of any noncompetition,
non-disclosure, confidentiality or similar agreements between such consultant or
scientific advisor and any party other than the Company. Each Consultant engaged
by or on behalf of the Company to render services for the Company has entered
into an agreement with the Company providing for terms and conditions of
non-disclosure, non-competition and confidentiality in connection with such
services ("Consulting Agreements"). Assuming due authorization, execution and
delivery of the Consulting Agreements by each Consultant, the Consulting
Agreements are the legal, valid, binding and enforceable instruments of the
Consultants, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditor's rights generally or by general equitable principles and
rules of law governing specific performance, estoppel, waiver, injunctive
relief, and other equitable remedies (regardless of whether enforcement is
sought in a proceeding at law or in equity).
(p) The Common Stock is registered (or will be concurrent with the
effectiveness of the Registration Statement) pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is
approved for listing on the American Stock Exchange ("AMEX"). The Company has
taken no action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from AMEX, nor has the Company received any notification that the
Commission or AMEX is contemplating terminating such registration or listing,
respectively.
(q) Except as disclosed in the Registration Statement, the Company
owns or possesses sufficient rights to use all inventions, trade secrets,
trademarks, service marks, trade names, copyrights, service names, mask works,
technology, know-how and other proprietary intellectual property rights which
are necessary to conduct its business as now conducted and as described in the
Registration Statement and Prospectus. Except as disclosed in the Registration
Statement, the Company owns or possesses sufficient rights to enforce its
patents and trademarks against third parties. The Company or its assignor has
duly and properly filed with the U.S. Patent
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<PAGE> 9
and Trademark Office all pending patent applications (the "Patent Applications")
and trademark applications referred to in the Registration Statement and
Prospectus. The information contained in the Registration Statement and
Prospectus concerning the Patent Applications, patents trade secrets,
trademarks, service marks, tradenames, copyrights, technology and know-how owned
by or licensed to the Company is accurate in all material respects. Except as
disclosed in the Registration Statement, the Company has not received any notice
of, nor has it any knowledge of, any infringement of or conflict with asserted
rights of the Company by others with respect to any patents, patent rights,
inventions, trade secrets, trademarks, service marks, trade names copyrights,
technology or know-how. Except as disclosed in the Registration Statement, the
Company has not received any notice of, nor has it any knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
patents, patent rights, inventions, trade secrets, trademarks, service marks,
trade names, copyrights, mask works, technology or know how which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
might have a Material Adverse Effect. Except as disclosed in the Registration
Statement, the Company has no knowledge of any facts or circumstances that would
affect the validity or enforceability of any of the Company's issued patents or
pending patent applications. The Company takes security measures which it
believes are adequate to assure trade secret protection in its non-patented
technology.
(r) The Company is conducting business in compliance with all
applicable statutes, rules, regulations and orders administered or issued by any
domestic or foreign administrative agency, regulatory body, government or
governmental agency in the jurisdictions in which it is conducting business
except where such noncompliance would not result in a Material Adverse Effect.
Without limiting the foregoing, the Company is in compliance with the provisions
of the Federal Food, Drug, and Cosmetic Act ("FDC Act") relating to medical
devices except where such noncompliance would not result in a Material Adverse
Effect. Each device that the Company manufactures, causes to be manufactured and
distributes or causes to be distributed (the "Company Devices") is the subject
of a 510(k) premarket notification which resulted in a finding of substantial
equivalence by FDA or the Company believes such device qualifies for exemption
from 510(k) premarket notification requirements. The Company believes that none
of the Company Devices found substantially equivalent by the FDA have been
modified in such a manner as to require the submission of a new 510(k) premarket
notification. The Company believes that none of the Company Devices have been
labeled or promoted in such a manner as to require the submission of a new
510(k) notification. All the Company Devices are listed with the FDA and have
been manufactured in a facility registered by the Company with FDA. All the
Company Devices are manufactured in accordance with the Quality Systems
Regulations and current Good Manufacturing Practices Regulations, 21 C.F.R. Part
820, except where such failure to be in accordance would not have a Material
Adverse Effect. The Company believes it has submitted all reports necessary to
be submitted in accordance with the Medical Device Reporting regulations, 21
C.F.R. Part 803. The Company has labeled and promoted the Company Devices in
accordance with the provisions of the FDC Act and FDA's implementing
regulations. The Company believes that the Company Devices are not misbranded,
adulterated, or otherwise in violation of the FDC Act or FDA's regulations, or
any foreign regulatory law, regulation, order or rule governing the Company's
current business except where such misbranding, adulteration or other violation
would not have a Material Adverse Effect.
(s) The Company is in compliance in all material respects, with ISO
9001
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<PAGE> 10
certification standards and all CE mark certification requirements. The Company
has submitted all reports and other documentation necessary to be submitted in
accordance with all foreign regulatory orders, laws and regulations in
jurisdictions in which the Company is conducting business except where such
failure would not have a Material Adverse Effect. The Company has not received
notification of violation of any applicable statute, rule, regulation or order
administered or issued by any foreign administrative agency, regulatory body,
government or governmental agency in foreign jurisdictions in which it is
conducting business.
(t) There are no actions, suits, or proceedings pending or, to the
knowledge of the Company, threatened by the FDA against the Company seeking
limitations, suspension or revocation of any license, permit, approval or
authorization required by the Company to conduct its business as described in
the Registration Statement and the Prospectus.
(u) To the Company's knowledge, there are no-rule-making or similar
proceedings before the FDA or comparable Federal, state, local or foreign
government bodies which involve or affect the Company which, if the subject of
an action unfavorable to the Company, would have a Material Adverse Effect on
the Company.
(v) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance with all laws, orders, rules and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business except where failure to do so would have a
Material Adverse Effect, (ii) the Company has received no notice from any
administrative agency, regulatory body, government, governmental authority or
third party of an asserted claim under Environmental Laws, (iii) the Company
believes it will not be required to make material capital expenditures to comply
with Environmental Laws in the foreseeable future and (iv) no property which is,
or has been, owned, leased or occupied by the Company has been designated as a
Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended, or otherwise designated as a contaminated
site under applicable state or local law.
(w) The Company has been advised concerning the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it is not and will not become an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the 1940 Act and such rules and regulations.
(x) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(y) The Company has not at any time during the last five (5) years
(i) made any unlawful contribution to any candidate for foreign office or failed
to disclose fully any contribution in violation of law, or (ii) made any payment
to any federal or state governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments required
or
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<PAGE> 11
permitted by the laws of the United States or any jurisdiction thereof.
(z) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares (except for any action taken by the
Underwriters).
(aa) Except as otherwise set forth in the Registration Statement and
the Prospectus, each officer and director of the Company, and each person listed
on Schedule I attached hereto, has agreed in writing that such person will not,
except as described below, for a period of 180 days from the date of the final
Prospectus (the "Lock-Up Period"), sell, offer to sell, solicit an offer to buy,
contract to sell, loan, pledge, grant any option to purchase, or otherwise
transfer or dispose of (collectively, a "Disposition"), any shares of Common
Stock, or any securities convertible into or exercisable or exchangeable for
Common Stock (collectively, "Securities"), now owned or hereafter acquired by
such person or with respect to which such person has or hereafter acquires the
power of disposition otherwise than (i) on exercise (on a cash or cashless
basis, whether in a tradition cashless exercise or in a "brokers" cashless
exercise) of Common Stock options or warrants outstanding, it being understood,
however, that the shares of Common Stock received (net of shares sold by or on
behalf of such person in a "brokers" cashless exercise or shares delivered to
the Company in a traditional cashless exercise thereof) by such person upon
exercise thereof shall be subject to the terms of the Lock-Up Agreement (as
defined below), (ii) on the transfer of shares of Common Stock or Securities
during such person's lifetime by bona fide gifts, transfers to trusts,
partnerships or limited liability companies for estate planning purposes, or
upon death by will or intestacy, provided that any transferee agrees to be bound
by the Lock-Up Agreement, and (iii) on the transfer or other disposition of
shares of Common Stock or Securities as a distribution to limited partners or
shareholders of such person, provided that the distributees thereof agree to be
bound by the terms of the Lock-Up Agreement. The foregoing restriction has been
expressly agreed to preclude the holder of the Securities from engaging in any
hedging, pledge or other transaction which is designed to or may reasonably be
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than such
shareholder. Such prohibited hedging, pledge or other transactions would
include, without limitation, any short sale (whether or not against the box),
any pledge of shares covering an obligation that matures, or could reasonably
mature during the Lock-Up Period, or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect to any
Securities or with respect to any security (other than a broad-based market
basket or index) that includes, relates to or derives any significant part of
its value from Securities. Furthermore, such person has also agreed and
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with the restrictions described in this subsection (aa).
(bb) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any shareholder who owns beneficially more than five
percent (5%) of the Common Stock or any of the members of the families of any of
them, except as disclosed in the Registration Statement and the Prospectus.
(cc) Other than the Representatives, on behalf of the several
Underwriters, no
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person is or will be owed any finder's fee or commission or similar payment in
connection with the transactions contemplated by this Agreement.
(dd) All offers and sales of capital stock of the Company prior to
the date hereof were at all relevant times duly registered or exempt from the
registration requirements of the Act and were duly registered or subject to an
available exemption from the registration requirements of the applicable state
securities or Blue Sky laws. There are no persons with registration or other
similar rights to have any securities registered pursuant to the Registration
Statement or otherwise registered by the Company under the Act, other than those
which have been waived or complied with.
(ee) No relationship, direct or indirect, exists between or among
the Company on the one hand and the directors, officers, shareholders, customers
or suppliers of the Company on the other hand, that is required by the Act or
the 1934 Act or the Rules and Regulations to be described in the Registration
Statement and the Prospectus that is not described as so required.
(ff) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government of Cuba
or with any person or affiliate located in Cuba.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares which is set forth opposite the name of such
Underwriter in Schedule A hereto (subject to adjustment as provided in Section
10).
(a) Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 4 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in same-day funds, payable to the order
of the Company or by wire transfer in same day funds, at the offices of Snell &
Wilmer, L.L.P., One Arizona Center, Phoenix, Arizona (or at such other place as
may be agreed upon between the Representative and the Company), at 7:00 A.M.
Pacific daylight savings time, (a) on the third (3rd) full business day
following the first day that Shares are traded or (b) if this Agreement is
executed and delivered after 1:30 P.M. Pacific daylight savings time, the fourth
(4th) full business day following the day that this Agreement is executed and
delivered or (c) at such other time and date not later than seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 10 hereof),
such time and date of payment and delivery being herein called the "Closing
Date;" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than two (2) full business days following delivery
of copies of the Prospectus to the Representative. The certificates for the Firm
Shares to be so delivered will be made available to you at such office or such
other location, as you may reasonably request for checking at least one (1) full
business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date. If the Representatives so elect,
delivery of the Firm Shares may be made by
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<PAGE> 13
credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representatives.
(b) It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
(c) After the Registration Statement becomes effective, the several
Underwriters intend to make a public offering (as such term is described in
Section 11 hereof) of the Firm Shares at a public offering price of $_____ per
share. After the public offering, the several Underwriters may, in their
discretion, vary the public offering price.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
with each of Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible. The Company will use its best efforts to
cause any 462 Registration Statement as may be required subsequent to the date
the Registration Statement is declared effective to become effective as promptly
as possible. The Company will notify you, promptly after it shall receive notice
thereof, of the time when the Registration Statement, any subsequent amendment
to the Registration Statement or any 462 Registration Statement has become
effective or any supplement to the Prospectus has been filed. If the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission. If the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations. If for any reason the filing of
the Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it
will provide evidence satisfactory to you that the Prospectus contains such
information and has been filed with the Commission within the time period
prescribed. The Company will notify you promptly of any request by the
Commission for the amending or supplementing of the Registration Statement or
the Prospectus or for additional information. Promptly upon your request, the
Company will prepare and file with the Commission any amendments or supplements
to the Registration Statement or Prospectus which, in the opinion of counsel for
the several Underwriters ("Underwriters' Counsel"), may be necessary or
advisable in connection with the distribution of the Shares by the Underwriters.
The Company will promptly prepare and file with the Commission, and promptly
notify you of the filing of, any amendments or supplements to the Registration
Statement or Prospectus which may be necessary to correct any
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<PAGE> 14
statements or omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have occurred
as a result of which the Prospectus or any other prospectus relating to the
Shares as then in effect would include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. In
case any Underwriter is required to deliver a prospectus nine (9) months or more
after the effective date of the Registration Statement in connection with the
sale of the Shares, it will prepare promptly upon request, but at the expense of
such Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act. The Company will file no
amendment or supplement to the Registration Statement or Prospectus which shall
not previously have been submitted to you a reasonable time prior to the
proposed filing thereof or to which you shall reasonably object in writing,
subject, however, to compliance with the Act and the Rules and Regulations and
the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to arrange for
qualification (including by providing full cooperation with Underwriter's
counsel, whose services in this matter are required and which you and the
Company will seek to expedite) of the Shares for offering and sale under the
securities laws of such jurisdictions as you may designate and to continue such
qualifications in effect for so long as may be required for purposes of the
distribution of the Shares, provided, however, that the Company shall not be
required in connection therewith or as a condition thereof to qualify as a
foreign corporation or to execute a general consent to service of process in any
jurisdiction in which it is not otherwise required to be so qualified or to so
execute a general consent to service of process. In each jurisdiction in which
the Shares shall have been qualified as above provided, the Company will make
and file such statements and reports in each year as are or may be required by
the laws of such jurisdiction for such purpose.
(d) The Company will furnish to you, as soon as available, and, in
the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first full business day following the first
day that Shares are traded, copies of each Registration Statement (two of which
will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if the Representatives, on behalf of the several
Underwriters, shall agree to the utilization of Rule 434 of the Rules and
Regulations, the Company shall provide to you copies of a Preliminary Prospectus
updated in all respects through the date specified by you in such quantities as
you may from time to time reasonably request.
(e) The Company will make generally available to its securityholders
as soon as practicable, but in any event not later than the forty-fifth (45th)
day following the end of the fiscal
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<PAGE> 15
quarter first occurring after the first anniversary of the effective date of the
Registration Statement, an earnings statement (which will be in reasonable
detail but need not be audited) complying with the provisions of Section 11(a)
of the Act and covering a twelve (12) month period beginning after the effective
date of the Registration Statement.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to its shareholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and, upon request by a shareholder,
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to its
shareholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's shareholders, (ii)
concurrently with furnishing to its shareholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
shareholders' equity, and of cash flows of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants, (iii) as soon as they are available, copies of all
reports (financial or other) mailed to shareholders, (iv) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, any securities exchange or the NASD, (v) every material
press release and every material news item or article in respect of the Company
or its affairs which was generally released to shareholders or prepared by the
Company, and (vi) any additional information of a public nature concerning the
Company, or its business which you may reasonably request. During such five (5)
year period, if the Company shall have active subsidiaries, the foregoing
financial statements shall be on a consolidated basis to the extent that the
accounts of the Company and such subsidiaries are consolidated, and shall be
accompanied by similar financial statements for any significant subsidiary which
is not so consolidated to the extent required by GAAP.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(i) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, (i) consult with you concerning the propriety of disseminating a press
release or other public statement responding to or commenting on such rumor,
publication or event and (ii) if the Company and you mutually determine to
disseminate such a release or statement, prepare, consult with you concerning
the substance of and disseminate such release or statement reasonably
satisfactory to you.
(j) During the Lock-up Period, the Company will not, without the
prior written consent of the Representatives, effect the Disposition of,
directly or indirectly, any Securities other
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<PAGE> 16
than the sale of the Firm Shares and the Option Shares hereunder and the
Company's issuance of options or Common Stock (i) under the Company's presently
authorized stock option plans described in the Registration Statement and the
Prospectus, (ii) pursuant to presently outstanding warrants and (iii) in
connection with an acquisition of technology or companies or a corporate
partnering transaction.
(k) The terms of subparagraphs (a), (g) and (h) of paragraph 9 of
that certain Letter of Intent dated as of May 18, 1998 by and between the
Company and Cruttenden Roth Incorporated, are hereby incorporated by reference
and made obligations of the Company and Cruttenden Roth Incorporated as part of
this Agreement notwithstanding that the Letter Agreement shall have ceased to be
of full force or effect for any other purpose.
(l) The Company shall reimburse and pay to Representatives a
non-accountable expense allowance equal to three percent (3.0%) of the total
Price to Public relating to the Firm Shares shown on the front cover of the
Prospectus. The Representatives acknowledge that $______ of the amount payable
pursuant to this paragraph has already been paid.
(m) The Company will use its best efforts to cause the Securities to
be included for listing on AMEX or another nationally recognized exchange or
quotation system following the Firm Closing Date.
5. EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto; the
printing of this Agreement, the Agreement Among Underwriters, the Selected
Dealer Agreement, all Blue Sky filing fees and related expenses, the
Underwriters' Questionnaire and Power of Attorney, and any instruments related
to any of the foregoing; the issuance and delivery of the Shares hereunder to
the several Underwriters, including transfer taxes, if any, the cost of all
certificates representing the Shares and transfer agents' and registrars' fees;
the fees and disbursements of counsel for the Company; all fees and other
charges of the Company's independent certified public accountants; the cost of
furnishing to the several Underwriters copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectus and the Prospectus, and
any amendments or supplements to any of the foregoing; NASD filing fees and the
cost of qualifying the Shares under the laws of such jurisdictions as you may
designate (including filing fees and fees and disbursements of Underwriters'
Counsel in connection with such NASD filings and Blue Sky qualifications such
Blue Sky Fees not to exceed $20,000); and all other expenses directly incurred
by the Company in connection with the performance of its obligations hereunder.
The provisions of this Section 5(a)(i) are intended to relieve the Underwriters
from the payment of the expenses and costs which the Company hereby agrees to
pay.
(ii) In addition to its other obligations under Section 8(a)
hereof, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a
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<PAGE> 17
monthly basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Company
together with interest, compounded daily, determined on the basis of the prime
rate (or other commercial lending rate for borrowers of the highest credit
standing) listed from time to time in The Wall Street Journal which represents
the base rate on corporate loans posted by a substantial majority of the
nation's thirty (30) largest banks (the "Prime Rate"). Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(b) In addition to their other obligations under Section 8(b)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(b) hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
(c) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in Sections 5(a)(ii) and
5(b) hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for arbitration or
a written notice of intention to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration does not make such
designation of an arbitration tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do so. Any such arbitration
will be limited to the operation of the interim reimbursement provisions
contained in Sections 5(a)(ii) and 5(b) hereof and will not resolve the ultimate
propriety or enforceability of the obligation to indemnify for expenses which is
created by the provisions of Sections 8(a) and 8(b) hereof or the obligation to
contribute to expenses which is created by the provisions of Section 8(d)
hereof.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company herein, to the performance by
the Company of its obligations hereunder and to the following additional
conditions:
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<PAGE> 18
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., Pacific Standard time, on the date following the date of this
Agreement, or such later date and time as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the reasonable satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares, shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may have
requested to enable them to pass upon the matters referred to in this Section.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of Snell & Wilmer LLP, counsel for the Company, dated the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be, addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation;
(ii) The Company has the corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Registration Statement and Prospectus;
(iii) The Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction, if any, in
which, to such counsel's knowledge the ownership or leasing of its properties or
the conduct of its business requires such qualification, except where the
failure to be so qualified or be in good standing would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company. To such counsel's knowledge, the
Company does not own or control, directly or indirectly, any corporation,
association or other entity;
(iv) The authorized capital stock of the Company is as set
forth in the Prospectus under the caption "Capitalization" as of the dates
stated therein; the issued and
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outstanding shares of capital stock of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and have not have been
issued, to such counsel's knowledge, in violation of or subject to any
preemptive rights contained in the Company's charter or bylaws or under Arizona
corporation law or, to the knowledge of such counsel, similar rights that
entitle or will entitle any person to acquire any shares upon issuance of such
Shares of capital stock by the Company. The outstanding options of the Company
have been duly authorized;
(v) The Firm Shares or the Option Shares, as the case may be,
to be issued by the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully paid
and nonassessable and will not have been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first refusal
or, to such counsel's knowledge, other similar right contained in the Company's
charter or bylaws or in any other agreement or contract to which the Company is
a party; and the forms of certificates evidencing the Shares comply with Arizona
law;
(vi) The Company has the corporate power and authority to
enter into this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and, assuming due authorization, execution and delivery
by you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification and contribution
provisions may be limited by applicable law or public policy and except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting creditors'
rights generally or by general equitable principles and rules of law governing
specific performance, estoppel, waiver, injunctive relief and other equitable
remedies (regardless of whether enforcement is sought in a proceeding at law or
in equity);
(viii) The Registration Statement has become effective under
the Act and to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or, to such counsel's
knowledge, overtly threatened under the Act;
(ix) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements (including
supporting schedules), financial data derived therefrom and other financial and
statistical information included therein as to which such counsel need express
no opinion), as of the effective date of the Registration Statement, complied as
to form in all material respects with the requirements of the Act and the
applicable Rules and Regulations;
(x) The information in the Prospectus under the caption
"Description of Capital Stock" and "Shares Eligible For Future Sale" to the
extent that it constitutes matters of law or legal conclusions, has been
reviewed by such counsel and is a fair summary of such matters and conclusions;
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<PAGE> 20
(xi) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which are
not described or referred to therein or filed as required;
(xii) The performance of this Agreement and the consummation
of the transactions herein contemplated (other than performance of the Company's
indemnification and contribution obligations hereunder, concerning which no
opinion need be expressed) will not (a) result in any violation of the charter
or bylaws of the Company or (b) conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute a default under, any bond,
debenture, note or other evidence of indebtedness, or any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument that is filed as an exhibit to the Registration
Statement to which the Company is a party or by which its properties are bound,
or any applicable statute, rule or regulation known to such counsel and
generally applicable to transactions of the type contemplated hereunder (except
that such counsel need not express any opinion with respect to state securities
or Blue Sky laws) or any order, writ or decree of any court, government or
governmental agency or body having jurisdiction over the Company or any of its
properties or operations, which such conflict, breach, violation or default is
reasonably likely to have a material adverse effect upon the consummation of
Offering;
(xiii) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company or any of its properties or operations is
necessary in connection with the consummation by the Company of the transactions
herein contemplated, except such as have been obtained under the Act or such as
may be required under state or other securities or Blue Sky laws in connection
with the purchase and the distribution of the Shares by the Underwriters and
except for those consents, approvals, authorizations, orders or qualifications,
which, if not secured, would not have a material adverse effect upon the
consummation of the Offering;
(xiv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or overtly threatened against the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus by the Act or the Rules and Regulations, other than those described
therein;
(xv) The Company is not, and upon the sale of the Shares as
herein contemplated will not be, an "investment company," as defined under the
Investment Company Act of 1940, as amended;
(xvi) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, no holders of securities of the Company having rights to
registration of such shares of Common Stock or other securities, have the right
to require the Company to include such securities in the securities registered
pursuant to the Registration;
(xvii) Except as set forth in the Registration Statement and
the Prospectus, there is no actual or, to the knowledge of such counsel, overtly
threatened action, suit, claim or
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proceeding relating to patents, patent rights or licenses, trademarks or
trademark rights, copyrights, collaborative research, licenses or royalty
arrangements or agreements or trade secrets, know-how or proprietary techniques
or technology, including, processes and substances, owned by or affecting the
business operations of the Company which are pending or threatened against the
Company and which action, suit, claim or proceeding would, with respect to any
of the foregoing, have a Material Adverse Effect; and
In addition, such counsel shall state that such counsel has acted as
outside corporate legal counsel to the Company and participated in conferences
with officials and other representatives of the Company, the Representatives,
Underwriters' Counsel and the independent certified public accountants of the
Company, at which such conferences the contents of the Registration Statement
and Prospectus and related matters were discussed, and although they do not
assume any responsibility for, and have not verified the accuracy or
completeness of, the statements contained in the Registration Statement or the
Prospectus, nothing has come to the attention of such counsel which leads such
counsel to believe that, at the time the Registration Statement became effective
and at all times subsequent thereto up to and on the Closing Date and on any
later date on which Option Shares are to be purchased, the Registration
Statement and any amendment or supplement thereto (other than the financial
statements including supporting schedules, other financial information derived
therefrom and other financial and statistical information included therein, as
to which such counsel need express no opinion) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely, as to matters of fact,
to the extent such counsel deems proper, upon certificates of responsible
officers of the Company, and of government officials, in which case their
opinion is to state that they are so relying and that they have no knowledge of
any material misstatement or inaccuracy in any such opinion, representation or
certificate. Counsel shall not be required to express any opinion regarding the
FDC Act or regulations regarding medical devices or related matters. References
to the Registration Statement and the Prospectus in this subsection (d) shall
include any amendment or supplement thereto at the date of such opinion. Copies
of any opinion, representation or certificate so relied upon shall be delivered
to you, as Representatives of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, an opinion
of Brobeck, Phleger & Harrison LLP, in form and substance reasonably
satisfactory to you, with respect to the sufficiency of all such corporate
proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as they may have reasonably
requested for the purpose of enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinions of regulatory and
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intellectual property counsel for the Company, dated the Closing Date or such
later date on which Option Shares as the case may be, are to be purchased and
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters:
(i) from Hogan and Hartson LLP., regulatory counsel for the
Company, an opinion that:
(A) The statements in the Registration Statement and
the Prospectus under the captions "Risk Factors -- Regulatory Risks" and
"Business -- Government Regulation," insofar as such statements purport to
summarize provisions of the FDC Act and the regulations promulgated thereunder
are accurate summaries in all material respects of the provisions purported to
be summarized under such captions.
In addition, regulatory counsel shall state that such counsel has
represented the Company in regulatory-related matters and during the course of
preparation of the Registration Statement and Prospectus, have participated in
certain discussions with officers and employees of the Company as to the FDA
regulatory matters dealt with under the captions "Risk Factors - Regulatory
Risks" and "Business - Government Regulation" in the Registration Statement and
Prospectus, and that no facts have come to such counsel's attention that cause
it to believe that (i) the statements under the captions "Risk Factors
Regulatory Risks" and "Business - Government Regulation," insofar as such
statements relate to FDA regulatory matters, (a) in the Registration Statement
at the time the Registration Statement became effective, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein no misleading, or (b)
in the Prospectus, as of its date and as of the date hereof, contained or
contains an untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or (ii) there are any actions, suits, or proceedings
pending or threatened by the FDA against the Company seeking limitation,
suspension, or revocation of any license, permit, approval or authorization
required by the Company to conduct its business as described in the Registration
Statement and the Prospectus, other than those described therein.
(ii) from Snell & Wilmer, L.L.P., intellectual property
counsel for the Company, an opinion that:
(A) Each of the patents listed in such opinion
(herein called the "Patents") and each of the patent applications listed in such
opinion (herein called the "U.S. Applications") were properly executed by the
named inventor. Each of the foreign applications listed in such opinion (herein
called the "Foreign Applications") were properly executed by such counsel as
attorney of record for the Company. The Patents and the U.S. Applications have
been properly filed in the United States Patent and Trademark Office (the
"PTO"). The Foreign Applications have been properly filed in the respective
appropriate foreign patent office.
(B) Each of the National Stage Applications listed in
such opinion (herein called the "National Stage Applications") have all been
properly filed in the respective patent offices.
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<PAGE> 23
(C) The Patents and the U.S. Applications were
properly assigned to the Company by the respective inventors of the Patents or
the U.S. Applications, as the case may be. Except as otherwise stated in such
opinion, the Company is listed in the records of the U.S. Patent and Trademark
Office ("PTO") as the sole assignee of record of each of the Patents and each of
the U.S. Applications. The Company is listed in the records of the appropriate
foreign patent offices as the sole assignee of record of each of the Foreign
Applications.
(D) To such counsel's knowledge, all pertinent prior
art known to the Company or its counsel during the prosecution of the Patents or
U.S. Applications were disclosed to the PTO and, to our knowledge, neither we
nor the Company made any representation to, or concealed any relevant prior art
from the PTO during such prosecution.
(E) To such counsel's knowledge, there are no
asserted, unasserted or threatened claims of any persons relating to the scope
or ownership of the Patents or the U.S. Applications, there are no liens which
have been filed against any of the Patents or the U.S. Applications, there are
no material defects of form in the preparation or filing of the Patents or the
U.S. Applications, the currently pending U.S. Applications are being diligently
prosecuted, and none of the U.S. Applications has been finally rejected or
abandoned.
(G) To such counsel's knowledge, there are no
asserted or unasserted claims of any persons relating to the scope or ownership
of the Foreign Applications, there are no liens which have been filed against
any of the Foreign Applications, there are no material defects of form in the
preparation or filing of the Foreign Applications, the Foreign Applications are
being diligently prosecuted, and none of the Foreign Applications has been
finally rejected or abandoned.
(H) Nothing has come to such counsel's attention that
leads such counsel to believe that the pending U.S. Applications or National
Stage Applications will not eventually result in issued patents, or that any
patents issued in respect thereto will not be valid or will not afford the
Company any reasonable patent protection relative to the subject matter thereof.
(I) Except as set forth in the Registration
Statement, to such counsel's knowledge, there are no actual or threatened legal,
governmental or other third party action, suit, claim or proceeding (including
those relating to infringement) relating to patents or patent rights, which are
pending or threatened against the Company and which action, suit, claim or
proceeding would, with respect to any of the foregoing, have a material adverse
effect on the condition (financial or other), earnings, operations, business or
business prospects of the Company.
(J) Except as set forth in the Registration
Statement, to such counsel's knowledge, the Company is not infringing or
otherwise violating any patents or patent rights of any persons, and, to such
counsel's knowledge, no person is infringing or otherwise violating any of the
Company's patents or patent rights in a way in which would have a material
adverse effect on the condition (financial or other), earnings, operations,
business or business prospects of the Company.
(K) The information in the Registration Statement and
the 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,"
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<PAGE> 24
have been reviewed by such counsel and are a fair and accurate summary of
such matters.
(L) To such counsel's knowledge, there are no facts
or circumstances which would require the Company to obtain licenses under third
party patents which are necessary to allow the Company to conduct the business
now being conducted or proposed to be conducted by the Company as described in
the Prospectus.
(g) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, a letter, or
letters from each of Ernst & Young LLP, Independent Auditors ("E&Y") and
PricewaterhouseCoopers LLP, Independent Auditors, ("PWC"), addressed to the
Underwriters, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be (in each case, the "Bring Down
Letters"), confirming that they are independent certified public accountants
with respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations and based upon the procedures described in
letters delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letters"), dated the date hereof, or such later
date on which Option Shares are to be purchased, as the case may be, (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letters are accurate as of the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set forth in
the Original Letters that are necessary to reflect any changes in the facts
described in the Original Letters since its date, or to reflect the availability
of more recent financial statements, data or information. The Bring Down Letters
shall not disclose any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company from that
set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus. The Original Letters from E&Y and PWC shall
be addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) refer to their respective opinions with respect to their audit
of the consolidated balance sheet of the Company as of December 31, 1997 and
December 31, 1996, respectively and related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the twelve (12)
months ended December 31, 1997 and December 31, 1996, respectively, (iii) state
that nothing came to their attention that caused them to believe that the
financial statements included in the Registration Statement and Prospectus do
not comply as to form in all material respects with the applicable accounting
requirements, (iv) with respect to E&Y, state that E&Y has performed the
procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a
review of interim
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<PAGE> 25
financial information on the financial statements for the period ended June 30,
1998 (the "Quarterly Financial Statements"), (v) state that in the course of
such review, nothing came to their attention that leads them to believe that any
material modifications need to be made to any of the Quarterly Financial
Statements in order for them to be in compliance with generally accepted
accounting principles consistently applied across the periods presented, and
(vi) address other matters agreed upon by E&Y and you. In addition, you shall
have received from E&Y a letter addressed to the Company and made available to
you for the use of the Underwriters stating that their review of the Company's
system of internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements as of December 31, 1997, and as of June 30, 1998, did not disclose
any weaknesses in internal controls that they considered to be material
weaknesses.
(h) You shall have received on the Closing Date and on such later
date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct in all material respects, as if made on and as of
the Closing Date or any later date on which Option Shares are to be purchased,
as the case may be, and the Company has complied in all material respects with
all the agreements and satisfied all the conditions on its part to be performed
or satisfied at or prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein by
the Act and the Rules and Regulations, and in all material respects conformed to
the requirements of the Act and the Rules and Regulations; the Registration
Statement, and any amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, the Prospectus and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects
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<PAGE> 26
of the Company, (b) any transaction that is material to the Company, except
transactions entered into in the ordinary course of business, (c) any
obligation, direct or contingent, that is material to the Company, incurred by
the Company, except obligations incurred in the ordinary course of business, (d)
any change in the capital stock or outstanding indebtedness of the Company that
is material to the Company or is out of the ordinary course of business of the
Company, (e) any dividend or distribution of any kind declared, paid or made on
the capital stock of the Company, or (f) any loss or damage (whether or not
insured) to the property of the Company which has been sustained or will have
been sustained which has a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company.
(i) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each shareholder listed
on Schedule I and each entity that is a shareholder and is affiliated with an
officer or director of the Company in writing prior to the date hereof that such
person will not, except as described below, during the Lock-up Period, effect
the Disposition of any Securities now owned or hereafter acquired by such person
or with respect to which such person has or hereafter acquires the power of
disposition, otherwise than (i) on exercise (on a cash or cashless basis,
whether in a traditional cashless exercise or in a "brokers" cashless exercise)
of Common Stock options or warrants outstanding, it being understood, however,
that the shares of Common Stock received (net of shares sold by or on behalf of
such person in a "brokers" cashless exercise or shares delivered to the Company
in a traditional cashless exercise thereof) by such person upon exercise thereof
shall be subject to the terms of the Lock-Up Agreement, (ii) on the transfer of
shares of Common Stock or Securities during such person's lifetime by bona fide
gift, transfers to trusts, partnerships or limited liability companies for
estate planning purposes, or upon death by will or intestacy, provided that any
transferee agrees in writing to be bound by the Lock-Up Agreement, and (iii) on
the transfer or other disposition of shares of Common Stock or Securities as a
distribution to limited partners or shareholders of such person, provided that
the distributees thereof agree in writing to be bound by the terms of the
Lock-Up Agreement. The foregoing restriction shall have been expressly agreed to
preclude the holder of the Securities from engaging in any hedging, pledge or
other transaction which is designed to or may reasonably be expected to lead to
or result in a Disposition of Securities during the Lock-Up Period, even if such
Securities would be disposed of by someone other than the such holder. Such
prohibited hedging, pledge or other transactions would include, without
limitation, any short sale (whether or not against the box), any pledge of
shares covering an obligation that matures or could reasonably mature during the
Lock-Up Period, or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will have also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with
this restriction.
(j) The Company shall have furnished you a warrant for the purchase
of up to 200,000 shares of Common Stock at an exercise price per share equal to
140% of the offering price per share of the Shares, in the form attached hereto
as Exhibit A.
(k) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company) as to
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<PAGE> 27
the accuracy of the representations and warranties of the Company herein, as to
the performance by the Company of its obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the Underwriters
hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
7. OPTION SHARES.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to the several Underwriters, for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm Shares
only, a nontransferable option to purchase up to an aggregate of 300,000 Option
Shares at the purchase price per share for the Firm Shares set forth in Section
3 hereof. Such option may be exercised by the Representatives on behalf of the
several Underwriters on one (1) or more occasions in whole or in part during the
period of forty-five (45) days after the date on which the Firm Shares are
initially offered to the public by giving written notice (the "Option Notice")
to the Company. The number of Option Shares to be purchased by each Underwriter
upon the exercise of such option shall be the same proportion of the total
number of Option Shares to be purchased by the several Underwriters pursuant to
the exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representative in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be purchased
by the several Underwriters pursuant to the exercise of the option granted by
this Section 7 shall be made against payment of the purchase price therefor by
the several Underwriters by certified or official bank check or checks drawn in
same day funds, payable to the order of the Company, or by wire transfer in same
day funds. In the event of any breach of the foregoing, the Company shall
reimburse the Underwriters for the interest lost and any other expenses borne by
them by reason of such breach. Such delivery and payment shall take place at the
offices of Snell & Wilmer L.L.P., One Arizona Center, Phoenix, Arizona or at
such other place as may be agreed upon between the Representative and the
Company (i) on the Closing Date, if written notice of the exercise of such
option is received by the Company at least two (2) full business days prior to
the Closing Date, or (ii) on a date which shall not be later than the third
(3rd) full business day following the date the Company receives written Notice
of the Option, if such notice is received by the Company after the date two (2)
full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location, as you may reasonably
request for checking at least one (1) full business day prior to the date of
payment and delivery and will be in such names and denominations as you may
request, such request to be made at least two (2) full business days prior to
such date of payment and delivery. If the Representative so elects, delivery of
the Option Shares may be made by credit through full fast transfer to the
accounts at The Depository Trust Company designated by the Representatives.
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<PAGE> 28
It is understood that each of you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a) hereof,
the obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, to the conditions set forth in Section 6 hereof, and to the condition
that all proceedings taken at or prior to the payment date in connection with
the sale and transfer of such Option Shares shall be reasonably satisfactory in
form and substance to you and to Underwriters' Counsel, and you shall have been
furnished with all such documents, certificates and opinions as you may
reasonably request in order to evidence the accuracy and completeness of any of
the representations, warranties or statements, the performance of any of the
covenants or agreements of the Company or the satisfaction of any of the
conditions herein contained.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, and each person, if any, who controls any Underwriter within the
meaning of the Act or the Exchange Act, against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter or such controlling
person may become subject with respect to this transaction (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD) under
the Act, the Exchange Act or otherwise arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of the Company
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
such Preliminary Prospectus or the Prospectus, or any such amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof and, provided further, that the indemnity agreement
provided in this Section 8(a) with respect to any Preliminary
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<PAGE> 29
Prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any losses, claims, damages, liabilities or actions based upon
any untrue statement or alleged untrue statement of material fact or omission or
alleged omission to state therein a material fact purchased Shares, if a copy of
the Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected had not been sent or given to such
person within the time required by the Act and the Rules and Regulations, unless
such failure is the result of noncompliance by the Company with Section 4(d)
hereof. This indemnity agreement shall be in addition to any liabilities which
the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, to which the Company may become subject under the
Act, Exchange Act, or otherwise, specifically including, but not limited to,
losses, claims, damages or liabilities (or actions in respect thereof) arising
out of or based upon (i) any breach of any representation, warranty, agreement
or covenant of such Underwriter herein contained, (ii) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, in the case of subparagraphs (ii) and (iii) of
this Section 8(b) to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter, directly or through the Representatives,
specifically for use in the preparation thereof, and agrees to reimburse the
Company for any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 8(b) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each officer of the
Company who signed the Registration Statement and each director of the Company,
and each person, if any, who controls the Company within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8 except to the extent that it has been
prejudiced by such omission. In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party
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<PAGE> 30
shall have reasonably concluded that there may be legal defenses available to it
which are different from or additional to those available to the indemnifying
party and which pose a conflict of interest for legal counsel, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 8(a)
hereof who are parties to such action), (ii) the indemnifying party shall not
have employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action or (iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party. In no event
shall any indemnifying party be liable in respect of any amounts paid in
settlement of any action unless the indemnifying party shall have approved the
terms of such settlement; provided that such consent shall not be unreasonably
withheld. No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened proceeding
in respect of which any indemnified party is or would have been a party and
indemnification could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on all claims that are the subject matter of such
proceeding.
(d) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 8
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the public offering
price, and the Company is responsible for the remaining portion, provided,
however, that (i) no Underwriter shall be required to contribute any amount in
excess of the amount by which the underwriting discount applicable to the Shares
purchased by such Underwriter exceeds the amount of damages which such
Underwriter has otherwise been required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8 shall
extend upon the same terms and conditions to, and shall inure to the benefit of,
each person, if any, who controls any Underwriter or the Company within the
meaning of the Act or the Exchange Act and each officer of the Company who
signed the Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions
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<PAGE> 31
hereof including, without limitation, the provisions of this Section 8, and are
fully informed regarding said provisions. They further acknowledge that the
provisions of this Section 8 fairly allocate the risks in light of the ability
of the parties to investigate the Company and its business in order to assure
that adequate disclosure is made in the Registration Statement and Prospectus as
required by the Act and the Exchange Act.
9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter within the meaning of the Act or the Exchange Act, or by or on
behalf of the Company, or any of its officers, directors or controlling persons
within the meaning of the Act or the Exchange Act, and shall survive the
delivery of the Shares to the several Underwriters hereunder or termination of
this Agreement.
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall
fail to take up and pay for the number of Firm Shares agreed by such Underwriter
or Underwriters to be purchased hereunder upon tender of such Firm Shares in
accordance with the terms hereof, and if the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate number of
Firm Shares which such defaulting Underwriter or Underwriters agreed but failed
to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or underwriters
shall have been substituted as aforesaid by such postponed Closing Date, the
Closing Date may, at the option of the Company, be postponed for a further
twenty-four (24) hours, if necessary, to allow the Company the privilege of
finding another underwriter or underwriters, satisfactory to you, to purchase
the Firm Shares which the defaulting Underwriter or Underwriters so agreed but
failed to purchase. If it shall be arranged for the remaining Underwriters or
substituted underwriter or underwriters to take up the Firm Shares of the
defaulting Underwriter or Underwriters as provided in this Section 10, (i) the
Company shall have the right to postpone the time of delivery for a period of
not more than seven (7) full business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement, supplements to the Prospectus
or other such documents which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining Underwriters
and substituted underwriter or underwriters shall be taken as the basis of
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<PAGE> 32
their underwriting obligation. If the remaining Underwriters shall not take up
and pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters as
aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, then, the Company shall not be liable to
any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of (i) 6:30
A.M., Pacific Standard time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the public offering shall mean the time
of the release by you, for publication, of the first newspaper advertisement
relating to the Shares, or the time at which the Shares are first generally
offered by the Underwriters to the public by letter, telephone, telegram or
telecopy, whichever shall first occur. By giving notice as set forth in Section
12 before the time this Agreement becomes effective, you, as Representatives of
the several Underwriters, or the Company, may prevent this Agreement from
becoming effective without liability of any party to any other party, except as
provided in Section 8 hereof.
(b) You, as Representatives of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
shall have failed, refused or been unable to perform in all material respects
any agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
from that set forth in the Registration Statement or Prospectus, which, in your
sole judgment, is material and adverse, or (ii) if additional governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall
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<PAGE> 33
have been insured, or (iv) if there shall have been a material adverse change in
the general political or economic conditions or financial markets as in your
judgment makes it inadvisable or impracticable to proceed with the offering,
sale and delivery of the Shares, or (v) if there shall have been an outbreak or
escalation of hostilities or of any other insurrection or armed conflict or the
declaration by the United States of a national emergency which, in the opinion
of the Representatives, makes it impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. In the
event of termination pursuant to subparagraph (i) above, the Company shall
remain obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8
hereof. Any termination pursuant to any of subparagraphs (ii) through (v) above
shall be without liability of any party to any other party except as provided in
Section 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, or telecopied (and confirmed by letter) to you c/o Cruttenden
Roth Incorporated, 18301 Von Karman, Suite 100, Irvine, California 92715,
telecopier number (714) 852-9603, Attention: General Counsel, with a copy to
Brobeck, Phleger & Harrison LLP, 550 West "C" Street, Suite 1300, San Diego, CA
92101-3532, telecopier number (619) 234-3848, Attention: Faye H. Russell, Esq.;
if sent to the Company, such notice shall be mailed, delivered, telegraphed or
telecopied (and confirmed by letter) to Orthopaedic Biosystems Ltd., Inc.,
telecopier number (602) 596-2180, Attention: President, with a copy to Snell &
Wilmer L.L.P, One Arizona Center, Phoenix, Arizona 85004-0001, telecopier number
(602) 382-6070, Attention: Steven D. Pidgeon, Esq.
13. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and their respective executors,
administrators, successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or entity, other
than the parties hereto and their respective executors, administrators,
successors and assigns, and the controlling persons within the meaning of the
Act or the Exchange Act, officers and directors referred to in Section 9 hereof,
any legal or equitable right, remedy or claim in respect of this Agreement or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective executors, administrators,
successors and assigns and said controlling persons and said officers and
directors, and for the benefit of no other person or entity. No purchaser of any
of the Shares from any Underwriter shall be construed a successor or assign by
reason merely of such purchase.
In all dealings with the Company under this Agreement, you shall act on
behalf of each of the several Underwriters, and the Company shall be entitled to
act and rely upon any statement, request, notice or agreement made or given by
you jointly or by Cruttenden Roth Incorporated on behalf of you.
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<PAGE> 34
14. APPLICABLE LAW. The validity and interpretation of this Agreement, and
the terms and conditions set forth herein, shall be governed by, and construed
in accordance with, the laws of the State of California.
15. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which will constitute an original.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 35
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement between the Company and the several Underwriters.
Very truly yours,
Orthopaedic Biosystems Ltd., Inc.
By _____________________________________
D. Ronald Yagoda
Chief Executive Officer
Accepted as of the date first above written:
CRUTTENDEN ROTH INCORPORATED
JOSEPHTHAL & CO., INC.
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By: CRUTTENDEN ROTH INCORPORATED
By _____________________________________
Authorized Signatory
For and on behalf of the Representatives
[UNDERWRITING AGREEMENT SIGNATURE PAGE]
<PAGE> 36
SCHEDULE A
Number of
Underwriters Firm
Shares
To Be
Purchased
Cruttenden Roth Incorporated
Josephthal & Co., Inc.
Total......................................................
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<PAGE> 1
Exhibit 4.5
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
COMMON STOCK WARRANT
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT.
This certifies that, for good and valuable consideration, receipt of which
is hereby acknowledged, __________________ ("Holder") is entitled to purchase,
subject to the terms and conditions of this Warrant, from Orthopaedic Biosystems
Ltd., Inc., an Arizona corporation (the "Company"), _________________ fully paid
and nonassessable shares of the Company's Common Stock no par value per Share.
("Common Stock") of the Company, in accordance with Section 2 during the period
commencing on ______ 1999 [one year from the date of the Prospectus] and ending
at 5:00 p.m. California time, ______, 2003 (the "Expiration Date"), at which
time this Warrant will expire and become void unless earlier terminated as
provided herein. The shares of Common Stock of the Company for which this
Warrant is exercisable, as adjusted from time to time pursuant to the terms
hereof, are hereinafter referred to as the "Shares."
1. Exercise Price. The initial purchase price for the Shares
shall be $_________ per share [140% of the price to the public]. Such price
shall be subject to adjustment pursuant to the terms hereof (such price, as
adjusted from time to time, is hereinafter referred to as the "Exercise Price").
2. Exercise and Payment.
(a) Cash Exercise. At any time after ____, 1999, this Warrant
may be exercised, in whole or in part, from time to time by the Holder, during
the term hereof, by surrender of this Warrant and the Notice of Exercise annexed
hereto duly completed and executed by the Holder to the Company at the principal
executive offices of the Company, together with payment in the amount obtained
by multiplying the Exercise Price then in effect by the number of Shares thereby
purchased, as designated in the Notice of Exercise. Payment may be in cash or by
check payable to the order of the Company.
(b) Net Issuance. In lieu of payment of the Exercise Price
described in Section 2(a), the Holder may elect to receive, without the payment
by the Holder of any additional consideration, shares equal to the value of
this Warrant or any portion hereof by the surrender of this Warrant or such
portion to the Company, with the net issue election notice annexed hereto (the
"Net Issuance Election") duly executed, at the principal executive offices of
the Company. Thereupon, the Company shall issue to the Holder such number of
fully paid and nonassessable shares of Common Stock as is computed using the
following formula:
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<PAGE> 2
where: X = Y (A-B)
-------
A
X = the number of shares to be issued to the Holder pursuant to this
Section 2.
Y = the number of shares covered by this Warrant in respect of which
the net issuance election is made pursuant to this Section 2.
A = the fair market value of one share of Common Stock, as
determined in accordance with the provisions of this Section 2.
B = the Exercise Price in effect under this Warrant at the time the
net issuance election is made pursuant to this Section 2.
For purposes of this Section 2, the "fair market value" per share of the Common
Stock shall mean:
i. If the Common Stock is traded on a national securities exchange
or admitted to unlisted trading privileges on such an exchange, or is listed on
the National Market (the "National Market") of the National Association of
Securities Dealers Automated Quotations System (the "Nasdaq") or other
over-the-counter quotation system, the fair market value shall be the last
reported sale price of the Common Stock on such exchange or on the Nasdaq
National Market on the last business day before the effective date of exercise
of the Net Issuance Election or if no such sale is made on such day, the mean of
the closing bid and asked prices such day on such exchange, the Nasdaq National
Market or over-the-counter quotation system; and
ii. If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and ask prices are not reported, the fair market
value shall be the price per share which the Company could obtain from a willing
buyer for shares sold by the Company from authorized but unissued shares, as
such price shall be determined in good faith by the Company.
3. Reservation of Shares. 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 non-assessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale and
free and clear of all preemptive rights.
4. Delivery of Stock Certificates. Within a reasonable time after
exercise, in whole or in part, of this Warrant, the Company shall issue in the
name of and deliver to the Holder a certificate or certificates for the number
of fully paid and nonassessable shares of Common Stock which the Holder shall
have requested in the Notice of Exercise or Net Issuance Election, as
applicable. If this Warrant is exercised in part, the Company shall deliver to
the Holder a new Warrant for the unexercised portion of this Warrant at the time
of delivery of such stock certificate or certificates.
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<PAGE> 3
5. No Fractional Shares. No fractional shares or scrip
representing fractional shares will be issued upon exercise of this Warrant. If
upon any exercise of this Warrant a fraction of a share results, the Company
will pay the Holder the difference between the cash value of the fractional
share and the portion of the Exercise Price allocable to the fractional share.
6. Listing. Prior to the issuance of any shares of Common Stock
upon exercise of this Warrant, the Company shall secure the listing of such
shares of Common Stock upon each national securities exchange or automated
quotation system, if any, upon which shares of Common Stock are then listed
(subject to official notice of issuance upon exercise of this Warrant) and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all shares of Common Stock from time to time issuable upon the
exercise of this Warrant; and the Company shall so list on each national
securities exchange or automated quotation system, and shall maintain such
listing of, any other shares of capital stock of the Company issuable upon the
exercise of this Warrant if and so long as any shares of the same class shall be
listed on such national securities exchange or automated quotation system.
7. Charges, Taxes and Expenses. The Company shall pay all
transfer taxes or other incidental charges, if any, in connection with the
transfer by the Company to the Holder of the Shares purchased pursuant to the
exercise hereof; provided, however, the Company shall not be required to pay any
costs in respect of any transfer of the Shares by the Holder.
8. Loss, Theft, Destruction or Mutilation of Warrant. Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to the Company,
and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new Warrant of like tenor and dated as of such
cancellation, in lieu of this Warrant.
9. Saturdays, Sundays, Holidays, Etc. If the last or appointed
day for the taking of any action or the expiration of any right required or
granted herein shall be a Saturday or a Sunday or shall be a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
weekday which is not a legal holiday.
10. Adjustment of Exercise Price and Number of Shares. The
Exercise Price and the number of and kind of securities purchasable upon
exercise of this Warrant shall be subject to adjustment from time to time as
follows:
(a) Subdivisions, Combinations and Other Issuances. If the
Company shall at any time after the date hereof but prior to the expiration of
this Warrant subdivide its outstanding securities as to which purchase rights
under this Warrant exist, by split-up or otherwise, or combine its outstanding
securities as to which purchase rights under this Warrant exist, the number of
Shares as to which this Warrant is exercisable as of the date of such
subdivision, split-up or combination shall forthwith be proportionately
increased in the case of a subdivision, or proportionately decreased in the case
of a combination. Appropriate adjustments
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<PAGE> 4
shall also be made to the Exercise Price, but the aggregate purchase price
payable for the total number of Shares purchasable under this Warrant as of such
date shall remain the same.
(b) Stock Dividend. If at any time after the date hereof the
Company declares a dividend or other distribution on Common Stock payable in
Common Stock or other securities or rights convertible into Common Stock
("Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon exercise or
conversion thereof), then the number of shares of Common Stock for which this
Warrant may be exercised shall be increased as of the record date (or the date
of such dividend distribution if no record date is set) for determining which
holders of Common Stock shall be entitled to receive such dividend, in
proportion to the increase in the number of outstanding shares (and shares of
Common Stock issuable upon conversion of all such securities convertible into
Common Stock) of Common Stock as a result of such dividend, and the Exercise
Price shall be adjusted so that the aggregate amount payable for the purchase of
all the Shares issuable hereunder immediately after the record date (or on the
date of such distribution, if applicable), for such dividend shall equal the
aggregate amount so payable immediately before such record date (or on the date
of such distribution, if applicable).
(c) Other Distributions. If at any time after the date hereof
the Company distributes to holders of its Common Stock, other than as part of
its dissolution or liquidation or the winding up of its affairs, any shares of
its capital stock, any evidence of indebtedness or any of its assets (other than
cash, Common Stock or Common Stock Equivalents), then the Company may, at its
option, either (i) decrease the Exercise Price of this Warrant by an appropriate
amount based upon the value distributed on each share of Common Stock as
determined in good faith by the Company's Board of Directors or (ii) provide by
resolution of the Company's Board of Directors that on exercise of this Warrant,
the Holder hereof shall thereafter be entitled to receive, in addition to the
shares of Common Stock otherwise receivable on exercise hereof, the number of
shares or other securities or property which would have been received had this
Warrant at the time been exercised.
(d) Merger. If at any time after the date hereof there shall
be a merger or consolidation of the Company with or into another corporation
when the Company is not the surviving corporation, then the Holder shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified herein and upon payment of the aggregate Exercise Price then in
effect, the number of shares or other securities or property of the successor
corporation resulting from such merger or consolidation, which would have been
received by Holder for the shares of stock subject to this Warrant had this
Warrant at such time been exercised.
(e) Reclassification, Etc. If at any time after the date
hereof there shall be a change or reclassification of the securities as to which
purchase rights under this Warrant exist into the same or a different number of
securities of any other class or classes, then the Holder shall thereafter be
entitled to receive upon exercise of this Warrant, during the period specified
herein and upon payment of the Exercise Price then in effect, the number of
shares or other securities or property resulting from such change or
reclassification, which would have been received by Holder for the shares of
stock subject to this Warrant had this Warrant at such time been exercised.
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<PAGE> 5
11. Notice of Adjustments; Notices. Whenever the Exercise Price or
number of Shares purchasable hereunder shall be adjusted pursuant to Section 10
hereof, the Company shall execute and deliver to the Holder a certificate
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated and
the Exercise Price and number of and kind of securities purchasable hereunder
after giving effect to such adjustment, and shall cause a copy of such
certificate to be mailed (by first class mail, postage prepaid) to the Holder.
12. Rights As Stockholder; Notice to Holders. Nothing contained in
this Warrant shall be construed as conferring upon the Holder or his or its
transferees the right to vote or to receive dividends or to consent or to
receive notice as a shareholder in respect of any meeting of shareholders for
the election of directors of the Company or of any other matter, or any rights
whatsoever as shareholders of the Company. The Company shall give notice to the
Warrantholder by registered mail if at any time prior to the expiration or
exercise in full of the Warrants, any of the following events shall occur:
a. a dissolution, liquidation or winding up of the Company
shall be proposed;
b. a capital reorganization or reclassification of the Common
Stock (other than a subdivision or combination of the outstanding Common Stock
and other than a change in the par value of the Common Stock) or any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and that does not result in any reclassification or change of Common
Stock outstanding) or in the case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety; or
c. a taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) for other
distribution, any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other rights.
Such giving of notice shall be simultaneous with the giving of
notice to holders of Common Stock. Such notice shall specify the record date or
the date of closing the stock transfer books, as the case may be. Failure to
provide such notice shall not affect the validity of any action taken in
connection with such dividend, distribution or subscription rights, or proposed
merger, consolidation, sale, conveyance, dissolution, liquidation or winding up.
13. Restricted Securities. The Holder understands that this
Warrant and the Shares purchasable hereunder constitute "restricted securities"
under the federal securities laws inasmuch as they are, or will be, acquired
from the Company in transactions not involving a public offering and accordingly
may not, under such laws and applicable regulations, be resold or transferred
without registration under the Securities Act of 1933, as amended (the "1933
Act") or an applicable exemption from such registration. Unless the Shares are
subsequently registered
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<PAGE> 6
pursuant to Section 16, the Holder further acknowledges that the securities
legend on Exhibit A to the Notice of Exercise attached hereto shall be placed on
any Shares issued to the Holder upon exercise of this Warrant.
14. Certification of Investment Purpose. Unless a current
registration statement under the 1933 Act shall be in effect with respect to the
securities to be issued upon exercise of this Warrant, the Holder covenants and
agrees that, at the time of exercise hereof, it will deliver to the Company a
written certification executed by the Holder that the securities acquired by him
upon exercise hereof are for the account of such Holder and acquired for
investment purposes only and that such securities are not acquired with a view
to, or for sale in connection with, any distribution thereof.
15. Disposition of Shares; Transferability.
(a) Holder hereby agrees not to make any disposition of any Shares
purchased hereunder unless and until:
i. Holder shall have notified the Company of the proposed
disposition and provided a written summary of the terms and conditions of the
proposed disposition; and
ii. Holder shall have complied with all requirements of this Warrant
applicable to the disposition of the Shares;
The Company shall not be required (i) to transfer on its books any
Shares which have been sold or transferred in violation of the provisions of
this Section 15 or (ii) to treat as the owner of the Shares, or otherwise to
accord voting or dividend rights to, any transferee to whom the Shares have been
transferred in contravention of the terms of this Warrant.
(b) Transfer. This Warrant shall be transferable only on the books
of the Company maintained at its principal office in Scottsdale, Arizona or
wherever its principal office may then be located, upon delivery thereof duly
endorsed by the Holder or by its duly authorized attorney or representative,
accompanied by proper evidence of succession, assignment or authority to
transfer. Upon any registration of transfer, the Company shall execute and
deliver new Warrants to the person entitled thereto.
(c) Limitations on Transfer. This Warrant shall not be sold,
transferred, assigned or hypothecated (any such action, a "Transfer") by the
Holder except to (i) one or more persons, each of whom on the date of transfer
is an officer of the Holder; (ii) a general partnership or general partnerships,
the general partners of which are the Holder and one or more persons, each of
whom on the date of transfer is an officer of the Holder; (iii) a successor to
the Holder in any merger or consolidation; (iv) a purchaser of all or
substantially all of the Holder's assets; (v) any person receiving this Warrant
from one or more of the persons listed in this Section 15(c) at such person's or
persons' death pursuant to will, trust or the laws of intestate succession, or
(vi) after one year from the date of this Warrant, any person receiving the
Warrant from the persons listed in this Section 15. This Warrant may be divided
or combined, upon request to the Company by the Holder, into a certificate or
certificates representing the right to purchase the same aggregate number of
Shares. If at the time of a Transfer, a Registration Statement is not in effect
to register this Warrant, the Company may require the Holder to make
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<PAGE> 7
such representations, and may place such legends on certificates representing
this Warrant, as may be reasonably required in the opinion of counsel to the
Company to permit a Transfer without such registration.
16. Registration Rights.
(a) Piggyback Registration. If at any time during the
four-year period commencing ____ , 1999 and ending on ____ , 2003, the Company
shall determine to register for its own account or the account of others under
the 1933 Act any of its equity securities, other than on Form S-4 or Form S-8 or
their then equivalents relating to equity securities to be issued solely in
connection with any acquisition of any entity or business, or equity securities
issuable in connection with stock option or other employee benefit plans, the
Company shall send to each Holder of Warrants or Shares written notice of such
determination and, if within twenty (20) days after receipt of such notice, such
Holder shall so request in writing (hereafter a "Selling Holder"), the Company
shall include in such Registration Statement all or any part of the Shares
issuable or issued upon exercise of the Warrants (the "Registrable Securities")
such Selling Holder requests to be registered. The obligations of the Company
under this Section 16(a) may be waived by Holders holding a majority in interest
of the Registrable Securities. In the event that the managing underwriter for
said offering advises the Company in writing that the inclusion of such
securities in the offering would be materially detrimental to the offering, such
securities shall nevertheless be included in the Registration Statement,
provided that the Holder and each holder of Shares desiring to have their Shares
included in the Registration Statement agree in writing, for a period of 90 days
following such offering, not to sell or otherwise dispose of such Shares
pursuant to such Registration Statement, which Registration Statement the
Company shall keep effective for a period of at least nine months following the
expiration of such 90-day period.
(b) Demand Registration. In addition to any Registration
Statement pursuant to subparagraph (a) above, during the four-year period
beginning on ______, 1999 and ending on __________, 2003, the Company will, as
promptly as practicable (but in any event within sixty (60) days), after written
request (the "Request") by the Holder, or by a person or persons holding (or
having the right to acquire by virtue of holding the Warrants) at least 50% of
the Registrable Securities (such Holder or Holders to be included in the
definition of "Selling Holder" for the purposes of Section 16(c) hereof), use
best efforts to prepare and file at its own expense a Registration Statement
with the Commission and appropriate "blue sky" authorities sufficient to permit
the public offering of the Registrable Securities and will use its best efforts
at its own expense through its officers, directors, auditors and counsel, in all
matters necessary or advisable, to cause such Registration Statement to become
effective as promptly as practicable and to maintain such effectiveness so as to
permit resale of the Shares covered by the Request until the earlier of the time
that all such Shares have been sold or the expiration of 90 days from the
effective date of the Registration Statement, provided, however, that the
Company shall only be obligated to file one such Registration Statement under
this Section 16(b).
(c) Obligations of the Holders. In connection with the
registration of the Registrable Securities pursuant to either Sections 14(a) or
(b), the Selling Holders shall have the following obligations:
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<PAGE> 8
i. It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Agreement with respect to each
Selling Holder that such Selling Holder shall furnish to the Company such
information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of the Registrable Securities
and shall execute such documents in connection with such registration as the
Company may reasonably request. At least fifteen (15) days prior to the first
anticipated filing date of the Registration Statement, the Company shall notify
each Selling Holder of the information the Company requires from each such
Selling Holder (the "Requested Information") in the case of a Registration
Statement being prepared pursuant to Section 16(b) or if such Selling Holder
elects to have any of such Selling Holder's Registrable Securities included in
the Registration Statement in the case of a Registration Statement being
prepared pursuant to Section 16(a).
ii. Each Selling Holder by such Selling Holder's acceptance of the
Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Selling Holder has notified the
Company in writing of such Selling Holder's election to exclude all of such
Selling Holder's Registrable Securities from the Registration Statement; and
iii. No Selling Holder may participate in any underwritten
registration hereunder unless such Selling Holder (i) agrees to sell such
Selling Holder's Registrable Securities on the basis provided in any
underwriting arrangements approved by the Selling Holders entitled hereunder to
approve such arrangements, (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements, and (iii)
agrees to pay its pro rata share of all underwriting discounts and commissions
and other fees and expenses of investment bankers and any manager or managers of
such underwriting, except as provided in Section 16(d) below.
(d) Obligations of the Company. If and whenever the Company is
required to use its best efforts to take action pursuant to any Federal or state
law or regulation to permit the sale or other disposition of any Shares
purchasable upon exercise of this Warrant that are then held or that may be
acquired upon exercise of the Warrants in order to effect or cause the
registration of any Registrable Securities under the Securities Act as provided
in this Section 16, the Company shall, as expeditiously as practicable:
i. Prepare and file with the SEC, as soon as practicable within
ninety (90) days after the end of the period within which requests for
registration may be given to the company a Registration Statement or
Registration Statements relating to the registration on any appropriate form
under the Securities Act, which form shall be available for the sale of the
Registrable Securities in accordance with the intended method or methods of
distribution thereof, and use its best efforts to cause such Registration
Statements to become effective; provided that before filing a Registration
Statement or Prospectus or any amendment or supplements thereto, including
documents incorporated by reference after the initial filing of any Registration
Statement, the Company will furnish to the Holders of the Registrable Securities
covered by such Registration Statement and the underwriters, if any, copies of
all
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<PAGE> 9
such documents provided to be filed, which documents will be subject to the
review of such Holders and underwriters;
ii. prepare and file with the SEC such amendments and post-effective
amendments to a Registration Statement as may be necessary to keep such
Registration Statement effective for a reasonable period not to exceed 45 days;
cause the related Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424 under the
Securities Act; and comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such Registration
Statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such Registration Statement or
supplement to such Prospectus;
iii. notify the selling Holders of Registrable Securities and the
managing underwriters, if any, promptly, and (if requested by any such Person)
confirm such advice in writing, (A) when a Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and, with respect to a
Registration Statement or any post-effective amendment, when the same has become
effective; (B) of any request by the SEC for amendments or supplements to a
Registration Statement or related Prospectus or for additional information; (C)
of the issuance by the SEC of any stop order suspending the effectiveness of a
Registration Statement or the initiation of any proceedings for that purpose;
(D) if at any time the representations and warranties of the Company
contemplated by paragraph (xiv) below ceases to be true and correct in all
material respects; (E) of the receipt by the Company of any notification with
respect to the suspension of the qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose; and (F) of the happening of any event that makes
any statement of a material fact made in the Registration Statement, the
Prospectus or any document incorporated therein by reference untrue or which
requires the making of any changes in the Registration Statement or Prospectus
so that they will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading;
iv. make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement at the earliest
possible moment;
v. if reasonably requested by the managing underwriters, immediately
incorporate in a Prospectus supplement or post-effective amendment such
information as the managing underwriters believe (on advice of counsel) should
be included therein as required by applicable law relating to such sale of
Registrable Securities, including, without limitation, information with respect
to the purchase price being paid for the Registrable Securities by such
underwriters and with respect to any other terms of the underwritten (or
"best-efforts" underwritten) offering; and make all required filings of such
Prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment;
vi. furnish to each selling Holder of Registrable Securities and
each managing underwriter, without charge, at least one signed copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
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<PAGE> 10
vii. deliver to each selling Holder of Registrable Securities and
the underwriters, if any, without charge, as many copies of the Prospectus or
Prospectuses (including each preliminary Prospectus) any amendment or supplement
thereto as such Persons may reasonably request; the company consents to the use
of such Prospectus or any amendment or supplement thereto by each of the selling
Holders of Registrable Securities and the underwriters, if any, in connection
with the offering and sale of the Registrable Securities covered by such
Prospectus or any Amendment or supplement thereto;
viii. prior to any public offering of Registrable Securities,
cooperate with the selling Holders of Registrable Securities, the underwriters,
if any, and their respective counsel in connection with the registration or
qualification of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any selling Holder or underwriter reasonably requests in writing, keep each such
registration or qualification effective during the period such Registration
Statement is required to be kept effective and do any and all other acts or
things necessary or advisable to enable the disposition in such jurisdictions of
the Registrable Securities covered by the applicable Registration Statement;
provided that the Company will not be required to qualify to do business in any
jurisdiction where it is not then so qualified or to take any action which would
subject the Company to general service of process in any jurisdiction where it
is not at the time so subject;
ix. cooperate with the selling Holders of Registrable Securities and
the managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold and not
bearing any restrictive legends; and enable such Registrable Securities to be in
such denominations and registered in such names as the managing underwriters may
request at least two Business Days prior to any sale of Registrable Securities
to the underwriters;
x. use its best efforts to cause the Registrable Securities covered
by the applicable Registration Statement to be registered with or approved by
such other governmental agencies or authorities within the United States as may
be necessary to enable the seller or sellers thereof or the underwriters, if
any, to consummate the disposition of such Registrable Securities;
xi. upon the occurrence of any event contemplated by Section
16(d)(iii)(F) above, prepare a supplement or post-effective amendment to the
applicable Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Securities being
sold thereunder, such Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading;
xii. with respect to each issue or class of Registrable Securities,
use its best efforts to cause all Registrable Securities covered by the
Registration Statements to be listed on each securities exchange, if any, on
which similar securities issued by the Company are then listed if requested by
the Holders of a majority of such issue or class of Registrable Securities;
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<PAGE> 11
xiii. enter into such agreements (including an underwriting
agreement) and take all such other action reasonably required in connection
therewith in order to expedite or facilitate the disposition of such Registrable
Securities and in such connection, if the registration is in connection with an
underwritten offering (A) make such representations and warranties to the
underwriters, in such form, substance and scope as are customarily made by
issuers to underwriters in underwritten offering and confirm the same if and
when requested; (B) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions in form, scope and substance shall be
reasonably satisfactory to the underwriters) addressed to the underwriters
covering the matters customarily covered in opinions requested in underwritten
offerings and such other matters as may be reasonably requested by such
underwriters; (C) obtain "cold comfort" letters and updates thereof from the
Company's accountants addressed to the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in "cold
comfort" letters by underwriters in connection with underwritten offerings; (D)
set forth in full in any underwriting agreement entered into the indemnification
provisions and procedures of Section 16(f) hereof with respect to all parties to
be indemnified pursuant to said Section; and e. deliver such documents and
certificates as may be reasonably requested by the underwriters to evidence
compliance with clause (i) above and with any customary conditions contained in
the underwriting agreement or other agreement entered into by the Company; the
above shall be done at each closing under such underwriting or similar agreement
or as and to the extent required hereunder;
xiv. make available for inspection by one or more representatives of
the Holders of Registrable Securities being sold, any underwriter participating
in any disposition pursuant to such registration, and any attorney or accountant
retained by such Holders or underwriter, all financial and other records,
pertinent corporate documents and properties of the Company, and cause the
Company's officers, directors and employees to supply all information reasonably
requested by any such representatives, in connection with such; and
xv. otherwise use its best efforts to comply with all applicable
Federal and state regulations; and take such other action as may be reasonably
necessary to or advisable to enable each such Holder and each such underwriter
to consummate the sale or disposition in such jurisdiction or jurisdiction in
which any such Holder or underwriter shall have requested that the Registrable
Securities be sold.
Except as otherwise provided in this Agreement, the Company shall have sole
control in connection with the preparation, filing, withdrawal, amendment or
supplementing of each Registration Statement, the selection of underwriters, and
the distribution of any preliminary prospectus included in the Registration
Statement, and may include within the coverage thereof additional shares of
Common Stock or other securities for its own account or for the account of one
or more of its other security holders.
The Company may require each Seller of Registrable Securities as to which
any registration is being effected to furnish to the Company such information
regarding the distribution of such securities and such other information as may
otherwise be required by the Securities Act to be included in such Registration
Statement.
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<PAGE> 12
(e) Expenses of Registration. All expenses, other than
underwriting discounts and commissions and other fees and expenses of investment
bankers and other than brokerage commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 16(a) or 16(b),
including, without limitation, all registration, listing and qualifications
fees, printers and accounting fees and the fees and disbursements of counsel for
the Company and the Selling Holders, shall be borne by the Company; provided,
however, that the Company shall only be required to bear the fees and
out-of-pocket expenses of one legal counsel selected by the Selling Holders in
connection with such registration.
(f) Indemnification. In the event any Registrable Securities
are included in a Registration Statement under this Agreement:
i. To the extent permitted by law, the Company will indemnify and
hold harmless each Selling Holder who holds such Registrable Securities, the
directors, if any, of such Selling Holder, the officers, if any, of such Selling
Holder, each person, if any, who controls any Selling Holder within the meaning
of the 1933 Act, any underwriter (as defined in the 1933 Act) for the Selling
Holders, the directors, if any, of such underwriter and the officers, if any, of
such underwriter, and each person, if any, who controls any such underwriter
within the meaning of the 1933 Act (each, an "Indemnified Person"), against any
losses, claims, damages, expenses or liabilities (joint or several)
(collectively, "Claims") to which any of them may become subject under the 1933
Act or otherwise, insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement when it first became effective, or any related final
prospectus, amendment or supplement thereto, or the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which the
statements therein were made, not misleading (a "Violation"). The Company shall
reimburse the Selling Holders and each such underwriter or controlling person,
promptly as such expenses are incurred and are due and payable, for any legal
fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 16(f)(i) shall not apply in such case to the extent any such Claim
arising out of or based upon a Violation which occurs in reliance upon and in
conformity with information furnished in writing to the Company by any
Indemnified Person or underwriter for such Indemnified Person expressly for use
in connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto, and shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld.
ii. In connection with any Registration Statement in which a Selling
Holder is participating, each such Selling Holder agrees to indemnify and hold
harmless, to the same extent and in the same manner set forth in Section
16(f)(i), the Company, each of its directors, each of its officers who signs the
Registration Statement, each person, if any, who controls the Company within the
meaning of the 1933 Act, any underwriter and any other stockholder selling
securities pursuant to the Registration Statement or any of its directors or
officers or any person who controls such stockholder or underwriter within the
meaning of the 1933 Act
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<PAGE> 13
(collectively and together with an Indemnified Person, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the 1933 Act or
otherwise, insofar as such Claim arises out of or is based upon any Violation,
in each case to the extent (and only to the extent) that such Violation occurs
in reliance upon and in conformity with written information furnished to the
Company by such Selling Holder expressly for use in connection with such
Registration Statement, and such Selling Holder will reimburse any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 16(f)(ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of such Selling Holder, which consent shall not be unreasonably
withheld.
iii. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution to the same extent as provided
above, with respect to information furnished in writing by such persons
expressly for inclusion in the Registration Statement.
iv. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 16(f) of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is made against any indemnifying
party under this Section 16(f), deliver to the indemnifying party a written
notice of the commencement thereof and the indemnifying party shall have the
right to participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume control
of the defense thereof with counsel mutually satisfactory to the indemnifying
parties; provided, however, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel, with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. The Indemnifying Party shall pay for only one
separate legal counsel for the Indemnified Parties; such legal counsel shall be
selected by the Indemnified Parties holding a majority in interest of the
Registrable Securities. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 16(f), except to the
extent that the indemnifying party is prejudiced in its ability to defend such
action. The indemnification required by this Section 16(f) shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as such expense, loss, damage or liability is incurred and is due
and payable.
v. Notwithstanding any of the foregoing, if, in connection with an
underwritten public offering of Registrable Securities, the Company, the Selling
Holders and the underwriter(s) enter into an underwriting or purchase agreement
relating to such offering which contains provisions covering indemnification and
contribution among the parties, the indemnification and contribution provisions
of this Section 16(f) shall be deemed inoperative for purposes of such offering.
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<PAGE> 14
(g) Contribution. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 14(e) to the fullest extent permitted by
law; provided, however, that (i) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 16(f), (ii) no seller of
Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any seller of Registrable Securities who was not guilty of such fraudulent
misrepresentation, and (iii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.
(h) Reports Under Exchange Act. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the 1933 Act
or any other similar rule or regulation of the SEC that may at any time permit
the Holders to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
i. make and keep public information available, as those terms are
understood and defined in Rule 144; and
ii. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"); and
iii. furnish to each Holder so long as such Holder owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, (ii) a copy of the
most recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested to permit the Holders to sell such securities without
registration pursuant to Rule 144.
(i) Assignment of the Registration Rights. The rights to have the
Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Holders to transferees or assignees of all or any
portion of such securities only if: (i) the Holder agrees in writing with the
transferee or assignee to assign such rights, (ii) the Company is, within a
reasonable time after such transfer or assignment, furnished with written notice
of the name and address of such transferee or assignee (iii) such assignment is
in accordance with and permitted by law and all other agreements between the
transferor or assignor and the Company, including without limitation,
stockholder's agreements, warrants and subscription agreements, and the
transferor or assignor otherwise is not in material default of any obligation to
the Company under any such other agreement, and (iv) at or before the time the
Company received the written notice contemplated by clause (ii) of this
sentence, the transferee or assignee agrees in writing with the Company to be
bound by all of the provisions contained herein.
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<PAGE> 15
17. Miscellaneous.
(a) Construction. Unless the context indicates otherwise, the
term "Holder" shall include any transferee or transferees of this Warrant
pursuant to Section 15(b), and the term "Warrant" shall include any and all
warrants outstanding pursuant to this Agreement, including those evidenced by a
certificate or certificates issued upon division, exchange, substitution or
transfer pursuant to Section 15.
(b) Restrictions. By receipt of this Warrant, the Holder makes
the same representations with respect to the acquisition of this Warrant as the
Holder is required to make upon the exercise of this Warrant and acquisition of
the Shares purchasable hereunder as set forth in the Form of Investment Letter
attached as Exhibit A to the Notice of Exercise attached hereto.
(c) Notices. Unless otherwise provided, any notice required or
permitted under this Warrant shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or three
(3) days following deposit with the United States Post Office, by registered or
certified mail, postage prepaid and addressed to the party to be notified (or
one (1) day following timely deposit with a reputable overnight courier with
next day delivery instructions), or upon confirmation of receipt by the sender
of any notice by facsimile transmission, at the address indicated below or at
such other address as such party may designate by ten (10) days' advance written
notice to the other parties.
To Holder: ________________________________________
________________________________________
________________________________________
Attention:______________________________
To the Company: Orthopaedic Biosystems Ltd., Inc.
15990 N. Greenway-Hayden Loop, Suite 100
Scottsdale, Arizona 85260
Attention:______________________________
(d) Governing Law. This Warrant shall be governed by and
construed under the laws of the State of Arizona as applied to agreements among
Arizona residents entered into and to be performed entirely within Arizona.
(e) Entire Agreement. This Warrant, the exhibits and schedules
hereto, and the documents referred to herein, constitute the entire agreement
and understanding of the parties hereto with respect to the subject matter
hereof, and supersede all prior and contemporaneous agreements and
understandings, whether oral or written, between the parties hereto with respect
to the subject matter hereof.
(f) Binding Effect. This Warrant and the various rights and
obligations arising hereunder shall inure to the benefit of and be binding upon
the Company and its successors and assigns, and Holder and its successors and
assigns.
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<PAGE> 16
(g) Waiver; Consent. This Warrant may not be changed, amended,
terminated, augmented, rescinded or discharged (other than by performance), in
whole or in part, except by a writing executed by the parties hereto, and no
waiver of any of the provisions or conditions of this Warrant or any of the
rights of a party hereto shall be effective or binding unless such waiver shall
be in writing and signed by the party claimed to have given or consented
thereto.
(h) Severability. If one or more provisions of this Warrant
are held to be unenforceable under applicable law, such provision shall be
excluded from this Warrant and the balance of the Warrant shall be interpreted
as if such provision were so excluded and the balance shall be enforceable in
accordance with its terms.
(i) Counterparts. This Warrant may be signed in several
counterparts, each of which shall constitute an original.
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<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed this Common
Stock Warrant effective as of the date hereof.
DATED: _______, 1998 THE COMPANY:
Orthopaedic Biosystems Ltd., Inc.
___________________________________
By:
Its:
HOLDER:
___________________________________
By:
Its:
<PAGE> 18
NOTICE OF EXERCISE
To: ORTHOPAEDIC BIOSYSTEMS LTD., INC.
1. The undersigned hereby elects to purchase _____________ shares of
Common Stock no par value per Share ("Stock") of Orthopaedic Biosystems Ltd.,
Inc., an Arizona corporation (the "Company") pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price pursuant to
the terms of the Warrant.
2. Attached as Exhibit A is an investment representation letter
addressed to the Company and executed by the undersigned as required by Section
14 of the Warrant.
3. Please issue certificates representing the shares of Stock
purchased hereunder in the names and in the denominations indicated on Exhibit A
attached hereto.
4. Please issue a new Warrant for the unexercised portion of the
attached Warrant, if any, in the name of the undersigned.
Holder:____________________________
Dated: _______________ ___________________________________
By:________________________________
Its:_______________________________
<PAGE> 19
NET ISSUANCE ELECTION NOTICE
To: ORTHOPAEDIC BIOSYSTEMS LTD., INC. Date:_____________
The undersigned hereby elects under Section 2 of the attached
Warrant to surrender the right to purchase ___________ shares of Common Stock
pursuant to the attached Warrant. The Certificate(s) for the shares issuable
upon such net issuance election shall be issued in the name of the undersigned
or as otherwise indicated below.
Signature:
___________________________________
Name for Registration
___________________________________
Mailing Address
___________________________________
___________________________________
<PAGE> 20
INVESTMENT REPRESENTATION
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
AN ARIZONA CORPORATION
I am purchasing the number of shares of common stock of Orthopaedic
Biosystems Ltd., Inc., an Arizona corporation, indicated below (the
"Securities") in my own name and for my own account (or for a trust account if I
am a trustee), and no other person has any interest in or right with respect to
the Securities, nor have I agreed to give any person any such interest or right
in the future except as follows:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(If none, so state)
I am acquiring the Securities for investment and not with a view to or for
sale in connection with any distribution of the Securities. I recognize that the
Securities have not been registered under the Federal Securities Act of 1933 or
qualified under the securities laws of any state, that any disposition of the
Securities is subject to restrictions imposed by federal and state law, and that
the certificates representing the Securities will bear the following restrictive
legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
<PAGE> 21
I also recognize that I cannot dispose of the Securities absent
registration and qualification, or an available exemption from registration and
qualification, and that no undertaking has been made with regard to registering
or qualifying the Securities in the future. I understand that the availability
of any exemption in the future will depend in part on circumstances outside my
control and that I may be required to hold the Securities for a substantial
period. I recognize that no public market exists with respect to the Securities
and no representation has been made to me that such a public market will exist
at a future date. I understand that neither the California Commissioner of
Corporations nor any other state commissioner of corporations has made any
finding or determination relating to the fairness for investment of the
Securities offered by the Company and that no commissioner of corporations of
any state has or will recommend or endorse the Securities.
___________________________________ ___________________________________
Signature (and Title, if applicable) Taxpayer Identification or Social
Security Number
Date: _______________
Name and Residence Address (Post Mailing Address if different from
Office address not acceptable): residence address:
___________________________________ ___________________________________
Name (Please print) Name (Please print)
___________________________________ ___________________________________
Number and Street Number and Street
___________________________________ ___________________________________
Suite or Unit Number Suite or Unit Number
___________________________________ ___________________________________
City State ZIP Code City State ZIP Code
Number of Shares purchased: _______
<PAGE> 1
Exhibit 10.16
- -------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
ORTHOPAEDIC BIOSYSTEMS LTD., INC.
- -------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
Page
1 ACCOUNTING AND OTHER TERMS............................................... 4
2 LOAN AND TERMS OF PAYMENT................................................ 4
2.1 Advances.......................................................... 4
2.2 Overadvances...................................................... 4
2.3 Interest Rate, Payments........................................... 4
2.4 Fees.............................................................. 5
3 CONDITIONS OF LOANS...................................................... 5
3.1 Conditions Precedent to Initial Advance........................... 5
3.2 Conditions Precedent to all Advances.............................. 5
4 CREATION OF SECURITY INTEREST............................................ 5
4.1 Grant of Security Interest........................................ 5
5 REPRESENTATIONS AND WARRANTIES........................................... 5
5.1 Due Organization and Authorization................................ 5
5.2 Collateral........................................................ 6
5.3 Litigation........................................................ 6
5.4 No Material Adverse Change in Financial Statements................ 6
5.5 Solvency.......................................................... 6
5.6 Regulatory Compliance............................................. 6
5.7 Subsidiaries...................................................... 6
5.8 Full Disclosure................................................... 7
6 AFFIRMATIVE COVENANTS.................................................... 7
6.1 Government Compliance............................................. 7
6.2 Financial Statements, Reports, Certificates....................... 7
6.3 Inventory; Returns................................................ 7
6.4 Taxes............................................................. 8
6.5 Insurance......................................................... 8
6.6 Primary Accounts.................................................. 8
6.7 Financial Covenants............................................... 8
6.8 Registration of Intellectual Property Rights...................... 8
6.9 Further Assurances................................................ 8
7 NEGATIVE COVENANTS....................................................... 8
7.1 Dispositions...................................................... 8
7.2 Changes in Business, Ownership, Management or Business Locations.. 9
7.3 Mergers or Acquisitions........................................... 9
7.4 Indebtedness...................................................... 9
7.5 Encumbrance....................................................... 9
7.6 Distributions; Investments........................................ 9
7.7 Transactions with Affiliates...................................... 9
7.8 Subordinated Debt................................................. 9
7.9 Compliance........................................................ 9
8 EVENTS OF DEFAULT........................................................ 10
8.1 Payment Default................................................... 10
8.2 Covenant Default.................................................. 10
8.3 Material Adverse Change........................................... 10
2
<PAGE> 3
8.4 Attachment........................................................ 10
8.5 Insolvency........................................................ 10
8.6 Other Agreements.................................................. 10
8.7 Judgments......................................................... 10
8.8 Misrepresentations................................................ 11
9 BANK'S RIGHTS AND REMEDIES............................................... 11
9.1 Rights and Remedies............................................... 11
9.2 Power of Attorney................................................. 11
9.3 Accounts Collection............................................... 12
9.4 Bank Expenses..................................................... 12
9.5 Bank's Liability for Collateral................................... 12
9.6 Remedies Cumulative............................................... 12
9.7 Demand Wavier..................................................... 12
10 NOTICES.................................................................. 12
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER............................... 12
12 GENERAL PROVISIONS....................................................... 13
12.1 Successors and Assigns............................................ 13
12.2 Indemnification................................................... 13
12.3 Time of Essence................................................... 13
12.4 Severability of Provision......................................... 13
12.5 Amendments in Writing, Integration................................ 13
12.6 Counterparts...................................................... 13
12.7 Survival.......................................................... 13
12.8 Confidentiality................................................... 13
12.9 Attorneys' Fees, Costs and Expenses............................... 14
13 DEFINITIONS.............................................................. 14
13.1 Definitions....................................................... 14
3
<PAGE> 4
THIS LOAN AND SECURITY AGREEMENT dated June 19, 1998, between SILICON
VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara,
California 95054 with a loan production office located at 4455 East Camelback
Road, Suite E-290, Phoenix, Arizona 85018 and ORTHOPAEDIC BIOSYSTEMS LTD., INC.
("Borrower"), whose address is 15990 N. Greenway-Hayden Loop, Suite 100,
Scottsdale, Arizona 85260 provides the terms on which Bank will lend to
Borrower and Borrower will repay Bank. The parties agree as follows:
1 ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be construed following
GAAP Calculations and determinations must be made following GAAP. The term
"financial statements" includes the notes and schedules. The terms "including"
and "includes" always mean "including (or includes) without limitation," in
this or any Loan Document. This Agreement shall be construed to impart upon
Bank a duty to act reasonably at all times.
2 LOAN AND TERMS OF PAYMENT
2.1 ADVANCES.
Borrower will pay Bank the unpaid principal amount of all Advances and
interest on the unpaid principal amount of the Advances.
2.1.1 REVOLVING ADVANCES.
(a) Bank will make Advances not exceeding the lesser of (A) the Committed
Revolving Line or (B) the Borrowing Base, whichever is less. Amounts borrowed
under this Section may be repaid and reborrowed during the term of this
Agreement.
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit B. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have
become due. Bank may rely on any telephone notice given by a person whom Bank
believes is a Responsible Officer or designee. Borrower will indemnify Bank for
any loss Bank suffers due to reliance.
(c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances and other Amounts due under this Agreement are
immediately payable.
2.2 OVERADVANCES.
If Borrower's Obligations under Section 2.1.1 exceed the lesser of
either (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower
must immediately pay Bank the excess.
2.3 INTEREST RATE, PAYMENTS.
(a) Interest Rate. Advances accrue interest on the outstanding principal
balance at a per annum rate of 2.5 percentage points above the Prime Rate.
After an Event of Default, Obligations accrue interest at 5 percent above the
rate effective immediately before the Event of Default. The interest rate
increases or decreases when the Prime Rate changes. Interest is computed on a
360 day year for the actual number of days elapsed.
(b) Payments. Interest due on the Committed Revolving Line is payable on
the 18th of each month. Bank may debit any of Borrower's deposit accounts
including Account Number ______________________ for principal and interest
payments or any amounts Borrower owes Bank. Bank will notify Borrower when it
debits Borrower's accounts. These debits are not a set-off.
4
<PAGE> 5
Payments received after 12:00 noon Pacific time are considered received at the
opening of business on the next Business Day. When a payment is due on a day
that is not a Business Day, the payment is due the next Business Day and
additional fees or interest accrue.
2.4 FEES.
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of $1,000
due on the Closing Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and expenses) incurred through and after the date of this Agreement, are
payable when due.
3 CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE.
Bank's obligation to make the initial Advance is subject to the condition
precedent that it receive the agreements, documents and fees it requires and
verification by Bank of Borrower's compliance of the financial covenants as
stated in Section 6.7.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES.
Bank's obligations to make each Advance, including the initial Advance,
is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Advance and no Event of Default may have occurred and be continuing, or result
from the Advance. Each Advance is Borrower's representation and warranty on that
date that the representations and warranties of Section 5 remain true.
4 CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and
performance of each of Borrower's duties under the Loan Documents. Except for
Permitted Liens, any security interest will be a first priority security
interest in the Collateral. Bank my place a "hold" on any deposit account
pledged as Collateral.
5 REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in its
state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower
is bound. Borrower is not in default under any agreement to which or by which
it is bound in which the default could cause a Material Adverse Change.
5
<PAGE> 6
5.2 COLLATERAL.
Borrower has good title to the Collateral, free of Liens except Permitted
Liens. The Accounts are bona fide, existing obligations, and the service or
property has been performed or delivered to the account debtor or its agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has no notice of any actual or imminent Insolvency Proceeding of any
account debtor whose accounts are an Eligible Account in any Borrowing Base
Certificate. All Inventory is in all material respects of good and marketable
quality, free from material defects. Borrower is the sole owner of the
Intellectual Property, except for non-exclusive licenses granted to its
customers in the ordinary course of business. Each Patent is valid and
enforceable and no part of the Intellectual Property has been judged invalid or
unenforceable, in whole or in part, and no claim has been made that any part of
the Intellectual Property violates the rights of any third party.
5.3 LITIGATION.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision could cause a Material Adverse Change.
5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 SOLVENCY.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as
they mature.
5.6 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has
complied with the Federal Fair Labor Standards Act. Borrower has not violated
any laws, ordinances or rules, the violation of which could cause a Material
Adverse Change. None of Borrower's or any Subsidiary's properties or assets has
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge
by previous Persons, in disposing, producing, storing, treating, or
transporting any hazardous substance other than legally. Borrower and each
Subsidiary has timely filed all required tax returns and paid, or made adequate
provision to pay, all taxes, except those being contested in good faith with
adequate reserves under GAAP. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all government authorities that are necessary
to continue its business as currently conducted.
5.7 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
6
<PAGE> 7
5.8 FULL DISCLOSURE.
No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements contained in the certificates or statements not misleading.
6 AFFIRMATIVE COVENANTS
Borrower will do all of the following:
6.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and good
standing in its jurisdiction of formation and maintain qualification in each
jurisdiction in which the failure to so qualify could have a material adverse
effect on Borrower's business or operations. Borrower will comply, and have
each Subsidiary comply, with all laws, ordinances and regulations to which it
is subject, noncompliance with which could have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change.
6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower will deliver to Bank: (i) prior to the initial Advance and as
soon as available, but no later than 30 days after the last day of each month, a
company prepared consolidated balance sheet and income statement covering
Borrower's consolidated operations during the period, in a form and certified by
a Responsible Officer acceptable to Bank; (ii) as soon as available, but no
later than 90 days after the last day of Borrower's fiscal year, audited
consolidated financial statements prepared under GAAP, consistently applied,
together with an unqualified opinion on the financial statements from an
independent certified public accounting firm acceptable to Bank; (iii) a prompt
report of any legal actions pending or threatened against Borrower or any
Subsidiary that could result in damages or costs to Borrower or any Subsidiary
of $100,000 or more; (iv) budgets, sales projections, operating plans or other
financial information Bank requests; and (v) prompt notice of any material
change in the composition of the Intellectual Property, including any subsequent
ownership right of Borrower in or to any Copyright, Patent or Trademark not
shown in any intellectual property security agreement between Borrower and Bank
or knowledge of an event that materially adversely affects the value of the
Intellectual Property.
(b) Prior to the initial Advance and within 30 days after the last day of
each month, Borrower will deliver to Bank a Borrowing Base Certificate signed
by a Responsible Officer in the form of Exhibit C, with aged listings of
accounts receivable and accounts payable.
(c) Prior to the initial Advance and within 30 days after the last day of
each month, Borrower will deliver to Bank with the monthly financial statements
a Compliance Certificate signed by a Responsible Officer in the form of Exhibit
D.
(d) Bank has the right to audit Borrower's Accounts at Borrower's expense.
The initial audit shall be completed no later than 90 days after the initial
Advance and subsequent audits will be conducted no more often than every year
thereafter, unless an Event of Default has occurred and is continuing.
6.3 INVENTORY; RETURNS.
Borrower will keep all Inventory in good and marketable condition, free
from material defects. Returns and allowances between Borrower and its account
debtors will follow Borrower's customary practices as they exist at execution
of this Agreement. Borrower must promptly notify Bank of all returns,
recoveries, disputes and claims, that involve more than $50,000.
7
<PAGE> 8
6.4 TAXES.
Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal, state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.
6.5 INSURANCE.
Borrower will keep its business and the Collateral insured for risks and
in amounts, as Bank requests. Insurance policies will be in a form, with
companies, and in amounts that are satisfactory to Bank. All property policies
will have a lender's loss payable endorsement showing Bank as an additional
loss payee and all liability policies will show the Bank as an additional
insured and provide that the insurer must give Bank at least 20 days notice
before canceling its policy. At Bank's request, Borrower will deliver certified
copies of policies and evidence of all premium payments. Proceeds payable under
any policy will, at Bank's option, be payable to Bank on account of the
Obligations.
6.6 PRIMARY ACCOUNTS.
Borrower will maintain its primary depository and operating accounts with
Bank.
6.7 FINANCIAL COVENANTS.
Borrower will maintain as of the last day of each month:
(i) QUICK RATIO. A ratio of Quick Assets to Current Liabilities of at
least 1.25 to 1.00.
(ii) DEBT/TANGIBLE NET WORTH RATIO. A ratio of Total Liabilities less
Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more
than 0.50 to 1.00.
6.8 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS.
Borrower will register with the United States Patent and Trademark Office
or the United States Copyright Office Intellectual Property rights on Exhibits
A, B, C, and D to the Intellectual Property Security Agreement within 30 days
of the date of this Agreement, and additional Intellectual Property rights
developed or acquired including revisions or additions with any product before
the sale or licensing of the product to any third party.
Borrower will (i) protect, defend and maintain the validity and
enforceability of the Intellectual Property and promptly advise Bank in
writing of material infringements and (ii) not allow any Intellectual Property
to be abandoned, forfeited or dedicated to the public without Bank's written
consent.
6.9 FURTHER ASSURANCES.
Borrower will execute any further instruments and take further action as
Bank requests to perfect or continue Bank's security interest in the Collateral
or to effect the purposes of this Agreement.
7 NEGATIVE COVENANTS
Borrower will not do any of the following:
7.1 DISPOSITIONS.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part
of its business or property, other than Transfers (i) of Inventory in the
ordinary course of business; (ii) of non-exclusive licenses and similar
arrangements for the use of the
8
<PAGE> 9
property of Borrower or its Subsidiaries in the ordinary course of business; or
(iii) of worn-out or obsolete Equipment.
7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.
Engage in or permit any of its Subsidiaries to engage in any business other
than the businesses currently engaged in by Borrower or have a material change
in its ownership of greater than 25%. Borrower will not, without at least 30
days prior written notice, relocate its chief executive office or add any new
offices or business locations.
7.3 MERGERS OR ACQUISITIONS.
(i) Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, provided no Event of Default has occurred and is
continuing or would result from such action during the term of this Agreement
and result in a decrease of more than 25% of Tangible Net Worth; or (ii) merge
or consolidate a Subsidiary into another Subsidiary or into Borrower.
7.4 INDEBTEDNESS.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
7.5 ENCUMBRANCE.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest
granted here.
7.6 DISTRIBUTIONS; INVESTMENTS.
Directly or indirectly acquire or own any Person, or make any Investment
in any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so. Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock.
7.7 TRANSACTIONS WITH AFFILIATES.
Directly or indirectly enter or permit any material transaction with any
Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an
arm's length transaction with a non-affiliated Person.
7.8 SUBORDINATED DEBT.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
7.9 COMPLIANCE.
Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Advance for that purpose; fail to meet the minimum funding
requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as
defined in ERISA, to occur; fail to comply with the Federal Fair Labor
Standards Act or violate any other law or regulation, if the violation could
have a material adverse effect on Borrower's business or operations or cause a
Material Adverse Change, or permit any of its Subsidiaries to do so.
9
<PAGE> 10
8 EVENTS OF DEFAULT
Any one of the following is an Event of Default:
8.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations;
8.2 COVENANT DEFAULT.
If Borrower does not perform any obligation in Section 6 or violates any
covenant in Section 7 or does not perform or observe any other material term,
condition or covenant in this Agreement, any Loan Documents, or in any
agreement between Borrower and Bank and as to any default under a term,
condition or covenant that can be cured, has not cured the default within 10
days after it occurs, or if the default cannot be cured within 10 days or
cannot be cured after Borrower's attempts within 10 day period, and the default
may be cured within a reasonable time, then Borrower has an additional period
(of not more than 30 days) to attempt to cure the default. During the
additional time, the failure to cure the default is not an Event of Default
(but no Advances will be made during the cure period);
8.3 MATERIAL ADVERSE CHANGE.
(i) If there occurs a material impairment in the perfection or priority of
the Bank's security interest in the Collateral or in the value of such
Collateral which is not covered by adequate insurance or (ii) if the Bank
determines, based upon information available to it and in its reasonable
judgment, that there is a reasonable likelihood that Borrower will fail to
comply with one or more of the financial covenants in Section 6 during the next
succeeding financial reporting period.
8.4 ATTACHMENT.
If any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion
of Borrower's assets, or if a notice of lien, levy, or assessment is filed
against any of Borrower's assets by any government agency and not paid within
10 days after Borrower receives notice. These are not Events of Default if
stayed or if a bond is posted pending contest by Borrower (but no Advances will
be made during the cure period);
8.5 INSOLVENCY.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Advances will be made before any
Insolvency Proceeding is dismissed);
8.6 OTHER AGREEMENTS.
If there is a default in any agreement between Borrower and a third party
that gives the third party the right to accelerate any Indebtedness exceeding
$100,000 or that could cause a Material Adverse Change;
8.7 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Advances
will be made before the judgment is stayed or satisfied); or
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<PAGE> 11
8.8 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
9 BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES.
When an Event of Default occurs and continues Bank may, without notice or
demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an Event
of Default described in Section 8.5 occurs all Obligations are immediately due
and payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit under
this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors for
amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or reasonable
to protect its security interest in the Collateral. Borrower will assemble the
Collateral if Bank requires and make it available as Bank designates. Bank may
enter premises where the Collateral is located, take and maintain possession of
any part of the Collateral, and pay, purchase, contest, or compromise any Lien
which appears to be prior or superior to its security interest and pay all
expenses incurred. Borrower grants Bank a license to enter and occupy any of
its premises, without charge, to exercise any of Bank's rights or remedies;
(e) Apply to the Obligations any (i) balances and deposits of Borrower it
holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral. Bank is granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower's labels, Patents, Copyrights, Mask Works, rights of use of any name,
trade secrets, trade names, Trademarks, service marks, and advertising matter,
or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section, Borrower's
rights under all licenses and all franchise agreements inure to Bank's benefit;
and
(g) Dispose of the Collateral according to the Code.
9.2 POWER OF ATTORNEY.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's
name on any checks or other forms of payment or security; (ii) sign Borrower's
name on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts
directly with account debtors, for amounts and on terms Bank determines
reasonable; and (v) transfer the Collateral into the name of Bank or a third
party as the Code permits. Bank may exercise the power of attorney to sign
Borrower's name on any documents necessary to perfect or continue the
perfection of any security interest regardless of whether an Event of Default
has occurred. Bank's appointment as Borrower's attorney in fact, and all of
Bank's rights and powers, coupled with an interest, are irrevocable until all
Obligations have been fully repaid and performed and Bank's obligation to
provide Advances terminates.
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9.3 ACCOUNTS COLLECTION.
When an Event of Default occurs and continues, Bank may notify any Person
owing Borrower money of Bank's security interest in the funds and verify the
amount of the Account. Borrower must collect all payments in trust for Bank
and, if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.
9.5 BANK'S LIABILITY FOR COLLATERAL.
If Bank complies with reasonable banking practices it is not liable for:
(a) the safekeeping of the Collateral; (b) any loss or damage to the
Collateral; (c) any diminution in the value of the Collateral; or (d) any act
or default of any carrier, warehouseman, bailee, or other person. Borrower
bears all risk of loss, damage or destruction of the Collateral.
9.6 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
under the Code, by law, or in equity. Bank's exercise of one right or remedy is
not an election, and Bank's waiver of any Event of Default is not a continuing
wavier. Bank's delay is not a waiver, election, or acquiescence. No waiver is
effective unless signed by Bank and then is only effective for the specific
instance and purpose for which it was given.
9.7 DEMAND WAIVER.
Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10 NOTICES
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A Party may change its notice address by giving the other Party
written notice.
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS.
THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS
AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
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12 GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
12.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other provision
in determining the enforceability of any provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing and signed by Borrower
and Bank. This Agreement represents the entire agreement about this subject
matter, and supersedes prior negotiations or agreements. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of this Agreement merge into this Agreement
and the Loan Documents.
12.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
12.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The
obligations of Borrower in Section 12.2 to indemnify Bank will survive until
all statutes of limitations for actions that may be brought against Bank have
run.
12.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, (iii) as required by
law, regulation, subpoena, or other order, (iv) as required in connection with
Bank's examination or audit and (v) as Bank considers appropriate exercising
remedies under this Agreement. Confidential information does not include
information that
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either: (a) is in the public domain or in Bank's possession when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank; or (b) is
disclosed to Bank by a third party, if Bank does not know that the third party
is prohibited from disclosing the information.
12.9 ATTORNEYS' FEES, COSTS AND EXPENSES.
In any action or proceeding between Borrower and Bank arising out of the
Loan Documents, the prevailing party will be entitled to recover its reasonable
attorneys' fees and other costs and expenses incurred, in addition to any other
relief to which it may be entitled.
13 DEFINITIONS
13.1 DEFINITIONS.
In this Agreement:
"ACCOUNTS" are all existing and later arising accounts, contract rights,
and other obligations owed Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all
merchandise returned or reclaimed by Borrower and Borrower's Books relating to
any of the foregoing.
"ADVANCE" or "ADVANCES" is a loan advance (or advances) under the
Committed Revolving Line.
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"BORROWER'S BOOKS" are all Borrower's books and records including ledgers,
records regarding Borrower's assets or liabilities, the Collateral, business
operations or financial condition and all computer programs or discs or any
equipment containing the information.
"BORROWING BASE" is (i) 75% of Institutional Eligible Accounts plus (ii)
50% of Dealer Eligible Accounts, each as determined by Bank from Borrower's
most recent Borrowing Base Certificate.
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which
the Bank is closed.
"CLOSING DATE" is the date of this Agreement.
"CODE" is the California Uniform Commercial Code.
"COLLATERAL" is the property described on Exhibit A.
"COMMITTED REVOLVING LINE" is an Advance of up to $300,000.
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of
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business. The amount of a Contingent Obligation is the stated or determined
amount of the primary obligation for which the Contingent Obligation is made
or, if not determinable, the maximum reasonably anticipated liability for it
determined by the Person in good faith; but the amount may not exceed the
maximum of the obligations under the guarantee or other support arrangement.
"COPYRIGHTS" are all copyright rights, applications or registrations and
like protections in each work or authorship or derivative work, whether
published or not (whether or not it is a trade secret) now or later existing,
created, acquired or held.
"CURRENT LIABILITIES" are the aggregate amount of Borrower's Total
Liabilities which mature within one (1) year.
"DEALER ACCOUNTS" are those Accounts in which the invoice is issued by a
third party.
"DEALER ELIGIBLE ACCOUNTS" are those Accounts which are both (a) Eligible
Accounts and (b) Dealer Accounts.
"ELIGIBLE ACCOUNTS" are Accounts in the ordinary course of Borrower's
business that meet all Borrower's representations and warranties in Section
5.2; but Bank may change eligibility standards by giving Borrower notice.
Unless Bank agrees otherwise in writing, Eligible Accounts will not include:
(a) Institutional Accounts that account debtor has not paid within 90 days
of invoice date;
(b) Dealer Accounts that the account debtor has not paid within 60 days of
invoice date;
(c) Dealer Accounts that the account debtor has not paid within 90 days
during the previous 12 months;
(d) Accounts for an account debtor, 50% or more of whose Accounts have not
been paid within 90 days of invoice date;
(e) Credit balances over 90 days from invoice date;
(f) Accounts for an account debtor, including Affiliates, whose total
obligations to Borrower exceed 25% of all Accounts, for the amounts that
exceed that percentage, unless the Bank approves in writing;
(g) Accounts for which the account debtor does not have its principal place
of business in the United States;
(h) Accounts for which the account debtor is a federal, state or local
government entity of any department, agency, or instrumentality;
(i) Accounts for which Borrower owes the account debtor, but only up to the
amount owed (sometimes call "contra" accounts, accounts payable, customer
deposits or credit accounts);
(j) Accounts for demonstration or promotional equipment, or in which goods
are consigned, sales guaranteed, sale or return, sale on approval, bill and
hold, or other terms if account debtor's payment may be conditional;
(k) Accounts for which the account debtor is Borrower's Affiliate, officer,
employee, or agent;
(l) Accounts in which the account debtor disputes liability or makes any
claim and Bank believes there may be a basis for dispute (but only up to
the disputed or claimed amount), or if the Account Debtor is subject to an
Insolvency Proceeding, or becomes insolvent, or goes out of business;
(m) Accounts for which Bank reasonably determines collection to be
doubtful.
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"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INSTITUTIONAL ACCOUNTS" are those Accounts in which the invoice is issued
by Borrower.
"INSTITUTIONAL ELIGIBLE ACCOUNTS" are those Accounts which are both (a)
Eligible Accounts and (b) Institutional Accounts.
"INTELLECTUAL PROPERTY" is:
(a) Copyrights, Trademarks, Patents, and Mask Works including amendments,
renewals, extensions, and all licenses or other rights to use and all license
fees and royalties from the use;
(b) Any trade secrets and any intellectual property rights in computer
software and computer software products now or later existing, created,
acquired or held;
(c) All design rights which may be available to Borrower now or later
created, acquired or held;
(d) Any claims for damages (past, present or future) for infringement of
any of the rights above, with the right, but not the obligation, to sue and
collect damages for use or infringement of the intellectual property rights
above;
All proceeds and products of the foregoing, including all insurance,
indemnity or warranty payments.
"INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody
or possession or in transit and including returns on any accounts or other
proceeds (including insurance proceeds) from the sale or disposition of any of
the foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.
"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or
guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
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"MASK WORKS" are all mask works or similar rights available for the
protection of semiconductor chips, now owned or later acquired.
"MATERIAL ADVERSE CHANGE" is defined in Section 8.3.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and
Exchange Contracts and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned to Bank.
"PATENTS" are patents, patent applications and like protections, including
improvements, divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the same.
"PERMITTED INDEBTEDNESS" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other Loan
Document;
(b) Indebtedness existing on the Closing Date and shown on the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Indebtedness secured by Permitted Liens.
"PERMITTED INVESTMENTS" are:
(a) Investments shown on the Schedule and existing on the Closing Date; and
(b) (i) marketable direct obligations issued or unconditionally guaranteed
by the United States or its agency or any State maturing within 1 year from its
acquisition, (ii) commercial paper maturing no more than 1 year after its
creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates
of deposit issued maturing no more than 1 year after issue.
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority
over any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower or
its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business and any interest or title of a lessor,
licensor or under any lease or license, if the leases, subleases, licenses and
sublicenses permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
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"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or government agency.
"PRIME RATE" is Bank's most recently announced "prime rate," even if it is
not Bank's lowest rate.
"QUICK ASSETS" is, on any date, the Borrower's consolidated, unrestricted
cash, cash equivalents, net billed accounts receivable and investments with
maturities of fewer than 12 months determined according to GAAP.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" is June 18, 1999.
"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is for any Person, or any other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by the Person or one or more Affiliates of the Person.
"TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities plus Subordinated Debt.
"TOTAL LIABILITIES" is on any day, obligations that should, under GAAP, be
classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
"TRADEMARKS" are trademark and servicemark rights, registered or not,
applications to register and registrations and like protections, and the entire
goodwill of the business of Assignor connected with the trademarks.
BORROWER:
Orthopaedic Biosystems LTD., Inc.
By: /s/ D. Ronald Yagoda
------------------------------------
Title: Chairman & CEO
--------------------------------
BANK:
SILICON VALLEY BANK
By: /s/ Amy Lou Blunt
-----------------------------------
Title: Assistant Vice President
--------------------------------
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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 September 8, 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
September 8, 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 September , 1998 in the Amendment
No. 3 to Registration Statement (Form SB-2) and related Prospectus of
Orthopaedic Biosystems Ltd., Inc. for the registration of 2,300,000 shares of
its common stock.
ERNST & YOUNG LLP
Phoenix, Arizona
September , 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
September 8, 1998
