AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST , 1998
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
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ORTHOLOGIC CORP.
(Exact name of Registrant as specified in its charter)
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DELAWARE 86-058310
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1275 WEST WASHINGTON STREET, TEMPE, ARIZONA 85251 (602) 286-5520
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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THOMAS R. TROTTER WITH A COPY TO:
CHIEF EXECUTIVE OFFICER P. ROBERT MOYA, ESQ.
ORTHOLOGIC CORP. QUARLES & BRADY
1275 WEST WASHINGTON STREET ONE EAST CAMELBACK, SUITE 400
TEMPE, ARIZONA 85251 PHOENIX, ARIZONA 85012
(602) 437-5520 (602) 230-5500
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service
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Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box.[ ]
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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.[X]
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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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
Proposed Proposed
Maximum Maximum
Title Of Each Class Of Amount To Be Offering Price Aggregate Amount Of
Securities To Be Registered Registered (1) Per Share Offering Price Registration Fee
- --------------------------------------------------------------------------------------------------------
Common Shares 9,142,440 $ 3.25(2) $29,712,930(2) $8,765.32
Warrants To Purchase Common Shares 0 0 0 0
Common Shares Issuable Upon
Exercise Of Warrants 1,200,000 $ 3.25(3) $ 3,900,000.00(3) $1,150.50
Total 10,342,440 $33,612,930.00 $9,915.82
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</TABLE>
(1) The Company agreed to register 200% of the Common Shares issuable upon
conversion of shares of its Series B Convertible Preferred Stock and
exercise of the Warrants privately placed with the Series B Preferred
Shares. Additionally, in the event of a stock split, stock dividend, or
similar transaction involving the Common Stock of the Company, in order to
prevent dilution, the number of shares registered shall be automatically
increased to cover the additional shares in accordance with Rule 416(a)
under the Securities Act of 1933, as amended.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based upon the last reported sales price of the
Common Shares on August 21, 1998, as reported by the Nasdaq National
Market.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(g), based upon the last reported sales price of the
Common Shares on August 21, 1998, as reported by the Nasdaq National
Market.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
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 ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 21, 1998.
PROSPECTUS
10,342,440 COMMON SHARES
ORTHOLOGIC CORP.
All of the shares (the "Common Shares") of the $.0005 par value common
stock (the "Common Stock") of OrthoLogic Corp. ("OrthoLogic" or the "Company")
offered hereby (the "Offering") may be sold by certain selling security holders
(the "Selling Security Holders") of the Company. The number of Common Shares
offered hereby includes such presently indeterminate number of Common Shares as
may be issued on conversion of the Company's Series B Convertible Preferred
Stock (the "Series B Preferred Shares"), as a dividend, payment of a redemption
price or otherwise pursuant to the provisions thereof regarding determination of
the applicable conversion price, such number of Common Shares as may be issued
on exercise of warrants (the "Warrants") issued by the Company in connection
with the Series B Preferred Shares, and pursuant to Rule 416 under the
Securities Act of 1933, as amended (the "Securities Act"), to prevent dilution
resulting from stock splits, stock dividends or similar transactions.
Accordingly, the Company has agreed to register 200% of the Common Shares
issuable upon conversion of the Series B Preferred Shares and exercise of the
related warrants (the "Warrants") issued on July 13, 1998. See "Description of
Securities." The Series B Preferred Shares generally may not be converted into
Common Shares until 300 days after issuance. However, upon an early conversion,
the applicable conversion price would be the average of the 10 lowest closing
bid prices for the Common Stock occurring during the 30 trading days immediately
prior to the date of conversion (the "Floating Conversion Price"). If the
Floating Conversion Price of the Common Shares had been used to determine the
maximum number of Common Shares issuable on the date hereof, the Company would
have been obligated to issue 4,571,220 Common Shares. An additional 600,000
Common Shares may be purchased upon exercise of the Warrants and may also may be
offered by the Selling Security Holders. See "Selling Security Holders." The
Company will not receive any of the proceeds from the sale of Common Shares by
the Selling Security Holders, although the Company will receive up to $3,300,000
upon exercise of Warrants. The Selling Security Holders may elect to sell all, a
portion or none of the Common Shares registered hereby. The Common Shares are
traded on the Nasdaq National Market ("Nasdaq") under the symbol "OLGC." The
Common Shares being registered under the Registration Statement of which this
Prospectus is a part may be offered for sale from time to time by or for the
account of such Selling Security Holders in the open market, on Nasdaq, in
privately negotiated transactions, in an underwritten offering, or a combination
of such methods, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. The Common
Shares are intended to be sold through broker-dealers or directly to purchasers.
Broker-dealers may receive compensation in the form of commissions, discounts or
concessions from the Selling Security Holders and purchasers of the Common
Shares for whom such broker-dealers may act as agent, or to whom they may sell
as principal, or both (which compensation as to a particular broker-dealer maybe
in excess of customary concessions). All expenses of registration incurred in
connection with this Offering are being borne by the Company, but the Selling
Security Holders will pay any brokerage and other expenses of sale incurred by
them. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY.
EACH SELLING SECURITY HOLDER AND ANY BROKER EXECUTING SELLING ORDERS ON BEHALF
OF A SELLING SECURITY HOLDER MAY BE DEEMED TO BE AN "UNDERWRITER" WITHIN THE
MEANING OF THE SECURITIES ACT. COMMISSIONS RECEIVED BY SUCH BROKERS MAY BE
DEEMED TO BE UNDERWRITING COMMISSIONS UNDER THE SECURITIES ACT.
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.
THE DATE OF THIS PROSPECTUS IS AUGUST ____, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement (the
"Registration Statement") with respect to the Common Shares offered hereby. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information contained in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Common Shares offered hereby, reference is made to the Registration Statement,
including the exhibits thereto. Statements contained herein concerning the
provisions of any documents filed as an exhibit to the Registration Statement or
otherwise filed with the Commission are not necessarily complete and, in each
instance, reference is made to the copy of such document as so filed. Each such
statement is qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at its regional offices located at World Trade
Center, 13th Floor, New York, New York 10048 and at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a web site (http://www.sec.gov) that contains reports,
proxy, and information statements and other information regarding registrants,
such as the Company, that file electronically with the Commission. The Company's
Common Stock is listed on Nasdaq and similar information can be inspected and
copied at the offices of the National Association of Securities Dealers,
Inc.,1735 K Street, N.W., Washington, D.C. 20006.
No person is authorized to give any information or make any representation
other than those contained or incorporated by reference in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized. This Prospectus does not constitute an offer to sell or
a solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. 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.
INFORMATION INCORPORATED BY REFERENCE
The following documents have been filed by the Company with the Commission
and are hereby incorporated by reference into this Prospectus: (1)Annual Report
on Form 10-K for the fiscal year ended December 31, 1997; (2) Quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998; (3) the
Proxy Statement for the 1998 Annual Meeting of security holders; (4) Current
Report on Form 8-K filed on July 13, 1998; (5) Current Report on Form 8-K filed
on July 13, 1998; and (6) Description of Capital Stock contained in the
Company's registration statement on Form 8-A, including all amendments or
reports filed for the purpose of updating such description. All other documents
and reports filed pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act subsequent to the date of this Prospectus and prior to the termination of
this Offering shall be deemed to be incorporated by reference in this Prospectus
and to be made a part hereof from the date of the filing of such reports and
documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
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The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any or all documents incorporated herein by
reference. Requests for such documents should be directed to Secretary,
OrthoLogic Corp., 1275 West Washington Street, Tempe, Arizona 85281, (602)
286-5520.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including all documents incorporated herein by reference,
contains forward-looking statements including statements regarding, among other
items, the Company's business strategy, growth strategy, and anticipated trends
in the Company's business. Additional written or oral forward-looking statements
may be made by the Company from time to time in filings with the Commission or
otherwise. The words "believe," "expect," "anticipate," and "project" and
similar expressions identify forward-looking statements, which speak only as of
the date the statement is made. These forward-looking statements are based
largely on the Company's expectations and are subject to a number of risks and
uncertainties, some of which cannot be predicted or quantified and are beyond
the Company's control. Future events and actual results could differ materially
from those set forth in, contemplated by, or underlying the forward-looking
statements. Statements in this Prospectus, including those set forth in "Risk
Factors," and the documents incorporated herein by reference, describe factors,
among others, that could contribute to or cause such differences. In light of
these risks and uncertainties, there can be no assurance that the
forward-looking information contained in or incorporated into this Prospectus
will in fact transpire or prove to be accurate. All written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the foregoing.
THE COMPANY
Investors should carefully consider the information set forth under the
heading "Risk Factors" commencing on page 6 of this Prospectus.
GENERAL
The Company was incorporated as a Delaware corporation in July 1987 as
IatroMed, Inc. and changed its name to OrthoLogic Corp. in July 1991. The
Company's executive offices are located at 1275 West Washington Street, Tempe,
Arizona 85281, and its telephone number is (602) 286-5520.
OrthoLogic develops, manufactures and markets proprietary, technologically
advanced orthopedic products and packaged services for the orthopedic health
care market including bone growth stimulation devices, continuous passive motion
("CPM") devices and ancillary orthopedic recovery products. OrthoLogic's
products are designed to enhance the healing of diseased, damaged, degenerated
or recently repaired musculoskeletal tissue. The Company's products focus on
improving the clinical outcomes and cost-effectiveness of orthopedic procedures
that are characterized by compromised healing, high-cost, potential for
complication and long recuperation time.
PRODUCTS AND OTHER PRODUCT DEVELOPMENT
OrthoLogic's product line includes bone growth stimulation and fracture
fixation devices, CPM devices and related products and Hyalgan. The Company's
product line is sold primarily through the Company's direct sales force.
ORTHOLOGIC(R) 1000; OL-1000 SC. The ORTHOLOGIC 1000 is a portable,
noninvasive physician prescribed magnetic field bone growth stimulator designed
for home treatment of patients who have a non-healing fracture. The ORTHOLOGIC
1000 comprises two magnetic field treatment transducers (coils) and a
microprocessor-controlled signal generator that delivers highly specific, low
energy combined static and alternating magnetic fields.
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In 1989, the Company received U.S. Food and Drug Administration ("FDA")
clearance of an Investigational Device Exemption ("IDE") to conduct a clinical
trial of the ORTHOLOGIC 1000 for the treatment of patients with a specific
variety of non-healing fracture, called a nonunion fracture, of certain long
bones. For purposes of the study, a nonunion fracture was defined as a fracture
that remained unhealed for at least nine months post injury. In 1990, the
Company received supplemental IDE clearance to conduct human clinical trials of
the ORTHOLOGIC 1000 on patients with delayed union fractures (a non-healing
fracture five to nine months post injury). In March 1994, the FDA granted the
Company Pre-Market Approval (PMA) approval to market the ORTHOLOGIC 1000 for
treatment of nonunion fractures. In June 1998, the Company received FDA approval
for its PMA Supplement to change the label for the ORTHOLOGIC 1000. A fracture
is now considered "nonunion" when the fracture site shows no visibly progressive
signs of healing. The former reference on the label to the nine-month
post-injury time frame has been removed.
In July 1997, the Company received a PMA supplement from the FDA for a
single-coil model of the ORTHOLOGIC 1000, and the Company began marketing the
OL-1000 SC in the first quarter of 1998. The OL-1000 SC utilizes the same
magnetic fields as the ORTHOLOGIC 1000 but is designed to be more comfortable
for patients with fractures of some long bones, such as the upper femur or the
scaphoid.
CONTINUOUS PASSIVE MOTION. CPM devices provide controlled, continuous
movement to joints and limbs without requiring the patient to exert muscular
effort and are intended to be applied immediately following orthopedic trauma or
surgery. The products are designed to reduce swelling, increase joint range of
motion, reduce the length of hospital stay and reduce the incidence of
post-trauma and post-surgical complication. The primary use of CPM devices
occurs in the hospital and home environments, but they are also utilized in
skilled nursing facilities, sports medicine and rehabilitation centers.
ANCILLARY ORTHOPEDIC PRODUCTS. The Company offers a complete line of
bracing, electrotherapy, cryotherapy and dynamic splinting products. The bracing
line incudes post-operative, custom and pre-sized functional and osteoarthritis
models. Post-operative braces are used in the early phases of post-surgical
rehabilitation while functional braces are applied as the patient returns to
work or sports activities. The electrotherapy line consists of TENS, NMES, high
volt pulsed current, interferential and biofeedback units. Cryotherapy is used
to cool the operative or injured site in order to prevent pain and swelling.
OrthoLogic produces its own motorized cryotherapy device, the Blue Artic, which
provides temperature-controlled cold therapy using a reservoir of ice water and
a pump that circulates the water through a pad over the injury/surgical site.
HYALGAN. The Company began marketing Hyalgan during July 1997 under a
Co-Promotion Agreement with Sanofi Pharmaceuticals, Inc. (the "Co-Promotion
Agreement"). Hyalgan is used for relief of pain from osteoarthritis of the knee
for those patients who have failed to respond adequately to conservative
non-pharmacological therapy and to simple analgesics, such as acetaminophen.
Orthopedic surgeons administer Hyalgan in their offices, with each patient
receiving five injections over a period of four weeks. Hyalgan is a preparation
of highly purified sodium hyaluronate, a chemical found in the body and present
in high amounts in joints and synovial fluid. The body's own hyaluronate plays a
number of key roles in normal joint function, and in osteoarthritis, the quality
and quantity of hyaluronate in the joint fluid and tissues may be deficient.
CHRYSALIN. In January 1998, the Company announced it had made a minority
equity investment in Chrysalis BioTechnology, Inc. As part of the transaction,
the Company has been awarded a nine-month, world-wide exclusive option to
license the orthopedic applications of Chrysalin, a patented 23-amino acid
peptide that has shown promise in accelerating the healing process of fractured
bones. In pre-clinical animal studies, Chrysalin was shown to double the rate of
fracture healing with a single injection into the fracture gap. The Company
intends to conduct pre-clinical studies during 1998, and, depending on the
results, an application may be filed with the FDA to conduct human clinical
trials. However, there can be no assurance that the Company will do so or that
it would receive such approval if sought.
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SPINALOGIC(R) 1000. The SPINALOGIC 1000 is a portable, noninvasive magnetic
field bone growth stimulator being developed to enhance the healing process as
either an adjunct to spinal fusion surgery or as treatment for a failed spinal
fusion surgery. The Company believes that the SPINALOGIC 1000 offers benefits
similar to those of the ORTHOLOGIC 1000 in that it is relatively easy to use,
requires a small power supply and requires only 30 minutes of treatment per day.
The SPINALOGIC 1000 consists of one magnetic field treatment transducer and a
microprocessor-controlled signal generator, both of which are positioned near
the spine through use of an adjustable belt which the patient places around the
torso. The Company received approval of an IDE from the FDA in August 1992 and
commenced clinical trials for the SPINALOGIC 1000 as an adjunct to spinal fusion
surgery in February 1993. The Company received approval of an IDE supplement
from the FDA in September of 1995 to conduct a clinical trial of the SPINALOGIC
1000 as a noninvasive treatment for a failed spinal fusion surgery. The Company
commenced this on-going clinical trial in the fourth quarter of 1995. The
Company is in the process of evaluating the results of the clinical trial for
use of the SPINALOGIC 1000 as an adjunct to spinal fusion surgery. The Company
has not yet applied for FDA approval to market the SPINALOGIC 1000, and there
can be no assurance that the Company will receive such approval if sought.
BIOLOGIC(R) MAGNETIC FIELD TECHNOLOGY. The natural process of
musculoskeletal tissue healing involves a complex interaction of several
physiological processes, which include the stimulation of specific cells such as
osteoblasts, fibroblasts and endothelial cells. When an injury occurs, growth
factors are produced at the healing site which stimulate selected cells to
initiate the healing cascade. In most cases, these cells are able to initiate
repair in response to an injury and restore the musculoskeletal tissue to its
original strength and structure. Cell stimulation is a necessary component of
tissue regeneration and is dependent upon certain triggering events that
activate the production of connective tissue. The BIOLOGIC technology is a
second generation magnetic field technology licensed to the Company and used in
the ORTHOLOGIC 1000, OL-1000 SC and SPINALOGIC 1000. The technology utilizes a
specific combination of a low energy static magnetic field with a low-energy
alternating magnetic field, which the Company believes increases cell
stimulation. The technologies employed in first generation electromagnetic bone
growth stimulators produce only an alternating magnetic field. The Company
believes the use of combined static and alternating magnetic fields in its
BIOLOGIC technology increases the potency of the treatment and therefore reduces
the required daily treatment time. The BIOLOGIC technology is also a low-energy
technology. The strength of the BIOLOGIC magnetic fields are in the range of the
earth's magnetic field. By comparison, the strength of the magnetic fields
produced by competitive technologies is many times greater than that of the
earth's magnetic field. The Company is engaged in research of additional
applications of the proprietary BIOLOGIC technology, including cartilage
regeneration and osteoporosis treatment.
ORTHOSOUND.(TM) The Company currently is conducting preclinical and a pilot
clinical trial relating to the design, development and testing of diagnostic and
therapeutic devices utilizing its nonthermal ultrasound technology
("ORTHOSOUND") for use in medical applications that relate to bone, cartilage,
ligament or tendon diagnostics and healing. In the area of diagnostics, the
ORTHOSOUND research projects address the potential use of ultrasound for the
assessment of bone strength and fracture risk in osteoporotic patients and the
assessment of fracture healing. In therapeutic applications, the focus of the
ORTHOSOUND research is on the potential use of ultrasound for the treatment of
at-risk fractures to increase the healing rate and reduce the need for
subsequent surgical procedures. The Company has not yet applied for FDA approval
to market ORTHOSOUND based products, and there can be no assurance that the
Company will do so or that it would receive such approval if sought.
ORTHOFRAME; ORTHONAIL.(TM) ORTHOFRAME products are external fixation
devices constructed of non-metallic carbon fiber-epoxy composite material. The
ORTHOFRAME offers a versatile design which can be utilized for immobilization of
a wide array of fracture types, including tibia, femur, ankle, elbow and pelvic
fractures. The ORTHOFRAME/MAYO Wrist Fixator is a specialized device developed
in cooperation with the Orthopaedic Department of the Mayo Clinic, Rochester,
Minnesota, for the treatment of complex wrist (Colles) fractures. The
Orthopeadic Department of the Mayo Clinic has agreed to provide ongoing clinical
input on future design enhancements for the ORTHOFRAME/MAYO Wrist Fixator. Both
products utilize non-metallic carbon fiber-epoxy materials to reduce device
weight and are radiolucent (I.E., eliminate the blocking of x-rays caused by
metallic devices). The Company believes that the patented fracture alignment
mechanism of the ORTHOFRAME products allows for simpler application, and the
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radiolucency and light weight composite materials of the ORTHOFRAME products
provide benefits to both surgeon and patient. ORTHOFRAME products are shipped
pre-assembled in sterile packaging to increase ease-of-use for the surgeon and
to reduce handling and inventory expenses for the hospital. The ORTHONAIL is an
internal fixation device used to treat fractures of the humerus and tibia. The
Company does not actively market the ORTHONAIL.
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the factors discussed below in
evaluating the Company and its business before purchasing any of the Common
Shares offered hereby. This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Prospectus. See "Disclosure Regarding
Forward-Looking Statements."
LIMITED HISTORY OF PROFITABILITY; QUARTERLY FLUCTUATIONS IN OPERATING
RESULTS. The Company has experienced significant operating losses since its
inception and had an accumulated deficit of approximately $47.8 million at June
30, 1998. The Company was first profitable in the fourth quarter of 1997, and
the Company experienced losses during the first two quarters of 1998. There can
be no assurance that the Company will ever generate sufficient revenues to
attain operating profitability or retain net profitability on an on-going annual
basis. In addition, the Company may experience fluctuations in revenues and
operating results based on such factors as seasonal demand for the Company's
products, the timing, cost and acceptance of product introductions and
enhancements made by the Company or others, levels of third party payment,
alternative treatments which currently exist or may be introduced in the future,
completion of acquisitions, changes in practice patterns, competitive
conditions, regulatory announcements and changes affecting the Company's
products in the industry and general economic conditions. The development and
commercialization by the Company of additional products will require substantial
product development and regulatory, clinical and other expenditures.
POTENTIAL ADVERSE OUTCOME OF LITIGATION. The Company is a defendant in a
number of investor lawsuits relating generally to correspondence received by the
Company from the FDA in mid-1996 regarding the promotion and configuration of
the ORTHOLOGIC 1000. The Company intends to defend these lawsuits vigorously.
However, an adverse litigation outcome would have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON SALES FORCE. A substantial portion of the Company's sales are
generated through the Company's internal sales force of approximately 140
employees. The Company's marketing success depends in large part upon the
ability of sales and marketing personnel to demonstrate to potential customers
the benefits of the Company's products and their advantages over competing
products and surgical procedures. During 1996 the Company shifted its primary
focus from sales through independent orthopedic specialty dealers to an internal
sales force. The internal sales force has not yet been able to achieve the
Company's historic sales of the ORTHOLOGIC 1000 through independent specialty
dealers. In January 1998 the sales management was restructured so that
territories are determined based only on geography and not on geography and
devices. As a result, certain members of sales management are now responsible
for devices not previously within their area of responsibility. There can be no
assurance that these individuals will be able to manage their new
responsibilities successfully.
DEPENDENCE ON KEY PERSONNEL; RECENT MANAGEMENT CHANGES. The success of the
Company is dependent in large part on the ability of the Company to attract and
retain its key management, operating, technical, marketing and sales personnel
as well as clinical investigators who are not employees of the Company. Such
individuals are in high demand, and the identification, attraction and retention
of such personnel could be lengthy, difficult and costly. The Company competes
for its employees and clinical investigators with other companies in the
orthopedic industry and research and academic institutions. There can be no
assurance that the Company will be able to attract and retain the qualified
personnel necessary for the expansion of its business. In the fourth quarter of
1997, the Chief Executive Officer of the Company created a Corporate Management
Committee and charged the Committee with implementing the
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Company's strategic goals. A loss of the services of one or more members of this
Committee, or the Company's inability to hire additional personnel as necessary,
could have an adverse effect on the Company's business, financial condition and
results of operations.
HISTORICAL DEPENDENCE ON PRIMARY PRODUCT; FUTURE PRODUCTS. During 1997 and
the first two quarters of 1998, revenues from CPM devices reduced the Company's
dependence on revenues from bone growth stimulation products. However, the
Company believes that, to sustain long-term growth, it must develop, or acquire,
and introduce additional products and expand approved indications for its
existing products. The development and commercialization by the Company of
additional products will require substantial product development, regulatory,
clinical and other expenditures. There can be no assurance that the Company's
technologies or financial resources will allow it to develop, or acquire, new
products or expand indications for existing products in the future or that the
Company will be able to manufacture or market such products successfully. Any
failure by the Company to develop new products or expand indications could have
a material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company believes that the demand for
bone growth stimulators is still developing and that the Company's success will
depend in part upon the growth of this demand. There can be no assurance that
this demand will develop. The long-term commercial success of the ORTHOLOGIC
1000 and OL-1000 SC will also depend in significant part upon its widespread
acceptance by a significant portion of the medical community as a safe,
efficacious and cost-effective alternative to invasive procedures. The Company
is unable to predict how quickly, if at all, its products may be accepted by
members of the orthopedic medical community. The widespread acceptance of the
Company's primary products represents a significant change in practice patterns
for the orthopedic medical community and in reimbursement policy for third party
payors. Historically, some orthopedic medical professionals have indicated
hesitancy in prescribing bone growth stimulator products such as those
manufactured by the Company. The use of CPM is more widely accepted. However,
the Company must continue to prove that the products are safe, efficacious and
cost-effective in order to maintain and grow its market share. Hyalgan is a new
therapeutic treatment for relief of pain from osteoarthritis of the knee. The
long-term commercial success of that product will depend upon its widespread
acceptance by a significant portion of the medical community and third party
payors as a safe, efficacious and cost-effective alternative to other treatment
options such as simple analgesics. Failure of the Company's products to achieve
widespread market acceptance by the orthopedic medical community and third party
payors would have a material adverse effect on the Company's business, financial
condition and results of operations.
INTEGRATION OF ACQUISITIONS. The Company acquired Sutter Corporation
("Sutter") in August 1996 and certain assets of two other CPM businesses in
March 1997. Successful integration of such acquisitions is critical to the
future financial performance of the combined Company. Complete integration of
any acquisition can take several quarters or more to accomplish and require,
among other things, integration of product offerings and coordination of sales
and marketing, reimbursement, manufacturing and research and development
efforts. The process of integrating companies may also cause management's
attention to be diverted from operating the Company, and any difficulties
encountered in the transition process could have an adverse impact on the
business, financial condition and operating results of the Company. In addition,
the process of combining organizations could cause the interruption of, or a
loss of momentum in, the activities of either or both of the companies'
businesses, which could have an adverse effect on their combined operations. In
the first quarter of 1997, the Company commenced the consolidation of the recent
acquisitions. The administrative operations, manufacturing and servicing
operations were consolidated by the end of 1997. The sales force management was
consolidated in early 1998 and computer hardware and software systems are
expected to be completed in mid 1998.
LIMITED COMBINED OPERATING HISTORY AND RESULTS. The results of acquired
businesses before the acquisitions may not be indicative of future operating
results. Although the Company does not anticipate incurring significant
additional operating costs associated with its 1996 and 1997 acquisitions, there
can be no assurance that such costs will not be incurred or that these
purchases, or any other acquisition, will not have an adverse effect upon the
Company's operating results while the operations are being integrated into the
Company's operations. There can be no assurance that, following any acquisition,
the Company will be able to operate the purchased business on a profitable
basis.
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CONDITION OF ACQUIRED FACILITIES. The Company has determined that the
leased California facilities acquired in the acquisition of Sutter had several
physical problems, primarily resulting from excessive moisture and water leaks.
Two Sutter employees have filed related worker's compensation claims, and these
two claims are being processed by Sutter's worker's compensation carrier. In
addition, the lack of maintenance has allegedly caused some structural problems
at one facility, and employee complaints based upon these problems have led to
two informal complaints by the California Department of Industrial Relations and
Division of Occupational Safety and Health. Sutter has responded to both
complaints and continues to work with its landlord to correct the problems. In
addition, Sutter has notified the prior owners of Sutter of the problems because
the prior owners may be the responsible party under the acquisition agreement
for any required remedies. Sutter has vacated the leasehold premises of both
California facilities. Sutter vacated a manufacturing facility in conjunction
with a negotiated lease termination. Sutter also vacated a mixed use facility
and notified that landlord of its termination of the lease due to acts and
omissions of the landlord. That landlord claims that rent remains unpaid and has
commenced a lawsuit seeking to recover such amounts. The Company intends to
defend such lawsuit vigorously. The outcome of such suit, as well as damages,
claims and future discoveries regarding the maintenance of the facilities by
prior occupants, could have a material adverse effect on the Company's business,
financial condition and results of operations.
MANAGEMENT OF GROWTH. The Company has experienced a period of rapid growth
in the expansion of its product line with the CPM devices, Hyalgan and
investment in Chrysalin technology. This growth has placed, and could continue
to place, a significant strain on the Company's financial, management and other
resources. The Company's future performance will depend in part on its ability
to manage change in its operations, including integration of acquired
businesses. In addition, the Company's ability to manage its growth effectively
will require it to continue to improve its manufacturing, operational and
financial control systems and infrastructure and management information systems,
and to attract, train, motivate, manage and retain key employees. If the
Company's management were to become unable to manage growth effectively, the
Company's business, financial condition, and results of operations could be
adversely affected.
LIMITATIONS ON THIRD PARTY PAYMENT; UNCERTAIN EFFECTS OF MANAGED CARE. The
Company's ability to commercialize its products successfully in the United
States and in other countries will depend in part on the extent to which
acceptance of payment for such products and related treatment will continue to
be available from government health administration authorities, private health
insurers and other payors. Cost control measures adopted by third party payors
in recent years have had and may continue to have a significant effect on the
purchasing and practice patterns of many health care providers, generally
causing them to be more selective in the purchase of medical products. In
addition, payors are increasingly challenging the prices and clinical efficacy
of medical products and services. Payors may deny reimbursement if they
determine that the product used in a procedure was experimental, was used for a
nonapproved indication or was unnecessary, inappropriate, not cost-effective,
unsafe, or ineffective. The Company's products are reimbursed by most payors,
however there are generally specific product usage requirements or documentation
requirements in order for the Company to receive reimbursement. In certain
circumstances the Company is successful in appealing reimbursement coverage for
those applications which are not in compliance with the payor requirements.
Medicare has very strict guidelines for reimbursement, and until the second
quarter 1997, the Company had some success in appealing claims for applications
of the ORTHOLOGIC 1000 which were outside the coverage guidelines. During the
second quarter of 1997 the Company determined that Medicare would no longer
reimburse for such cases, and the Company wrote off all Medicare receivables
which did not meet their guidelines. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, such as Hyalgan,
and there can be no assurance that adequate third party coverage will continue
to be available to the Company at current levels. Although the Company has
recognized some fee revenue under the Co-Promotion Agreement for Hyalgan, the
level of fees recognized under the Co-Promotion Agreement will ultimately be
dependent on Medicare's assigned billing code and reimbursement amount. Failure
to continue to obtain reimbursement from payors at levels acceptable to the
Company could have a material adverse effect on the Company's business,
financial condition and results of operations.
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UNCERTAINTY AND POTENTIAL NEGATIVE EFFECTS OF HEALTH CARE REFORM. The
health care industry is undergoing fundamental changes resulting from political,
economic and regulatory influences. In the United States, comprehensive programs
have been proposed that seek to (i) increase access to health care for the
uninsured, (ii) control the escalation of health care expenditures within the
economy and (iii) use health care reimbursement policies to help control the
federal deficit. The Company anticipates that Congress and state legislatures
will continue to review and assess alternative health care delivery systems and
methods of payment, and public debate of these issues will likely continue. Due
to uncertainties regarding the outcome of reform initiatives and their enactment
and implementation, the Company cannot predict which, if any, of such reform
proposals will be adopted and when they might be adopted. Other countries also
are considering health care reform. The Company's plans for increased
international sales are largely dependent upon other countries' adoption of
managed care systems and their acceptance of the potential benefits of the
Company's products and the belief that managed care plans will have a positive
effect on sales. For the reasons identified in this and in the preceding
paragraph, however, those assumptions may be incorrect. Significant changes in
health care systems are likely to have a substantial impact over time on the
manner in which the Company conducts its business and could have a material
adverse effect on the Company's business, financial condition and results of
operations and ability to market its products as currently contemplated.
INTENSE COMPETITION. The orthopedic industry is characterized by intense
competition. Currently, there are three major competitors other than the Company
selling electromagnetic bone growth stimulation products approved by the FDA for
the treatment of nonunion fractures, one large domestic and several foreign
manufacturers of CPM devices and one competitor selling a therapeutic injectable
for treatment of osteoarthritis of the knee. The Company also competes with many
independent owners/lessors of CPM devices in addition to the providers of
traditional orthopedic immobilization products and rehabilitation services. The
Company estimates that one of its competitors has a dominant share of the market
for electromagnetic bone growth stimulation products for non-healing fractures
in the United States and that another has a dominant share of the market for use
of their device as an adjunct to spinal fusion surgery. In addition, there are
several large, well-established companies that sell fracture fixation devices
similar in function to those sold by the Company. Many participants in the
medical technology industry, including the Company's competitors, have
substantially greater capital resources, research and development staffs and
facilities than the Company. Such participants have developed or are developing
products that may be competitive with the products that have been or are being
developed or researched by the Company. Other companies are developing a variety
of other products and technologies to be used in CPM devices, the treatment of
fractures and spinal fusions, including growth factors, bone graft substitutes
combined with growth factors, and nonthermal ultrasound. One company has
received FDA approval for a nonthermal ultrasound device to treat nonsevere
fresh fractures of the lower leg and lower forearm. There can be no assurance
that products marketed by these or other companies will not be sold for use in
treating non-healing fractures or spinal fusions, even in the absence of
regulatory approval to do so. Any such sales could have a material adverse
effect on the Company. Many of the Company's competitors have substantially
greater experience than the Company in conducting research and development,
obtaining regulatory approvals, manufacturing and marketing and selling medical
devices. Any failure by the Company to develop products that compete favorably
in the marketplace would have a material adverse effect on the Company's
business, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE. The medical device industry is characterized by
rapid and significant technological change. There can be no assurance that the
Company's competitors will not succeed in developing or marketing products or
technologies that are more effective or less costly, or both, and which render
the Company's products obsolete or non-competitive. In addition, new
technologies, procedures and medications could be developed that replace or
reduce the value of the Company's products. The Company's success will depend in
part on its ability to respond quickly to medical and technological changes
through the development and introduction of new products. There can be no
assurance that the Company's new product development efforts will result in any
commercially successful products. A failure to develop new products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
GOVERNMENT REGULATION. The Company's current and future products and
manufacturing activities are and will be regulated under the Medical Device
Amendments Act of 1976 to the Food, Drug and Cosmetic Act, the 1990
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Safe Medical Devices Act and the Food and Drug Administration Modernization Act
of 1997. The Company's current BIOLOGIC technology-based products and Hyalgan
are classified as Class III Significant Risk Devices, which are subject to the
most stringent level of FDA review for medical devices and are required to be
tested under IDE clinical trials and approved for marketing under a PMA. The
Company's fracture fixation devices are Class II devices that are marketed
pursuant to 510(k) clearance from the FDA.
The Company received approval of an IDE for the SPINALOGIC 1000 for use as
an adjunct to spinal fusion surgery in August 1992 and commenced clinical trials
for this product in February 1993. The Company is in the process of evaluating
the results of the clinical trial for use of the SPINALOGIC 1000 as an adjunct
to spinal fusion surgery. In September 1995, the Company received an approval of
an IDE supplement for the SPINALOGIC 1000 for treatment of failed spinal
fusions. The Company commenced this study in the fourth quarter of 1995. There
can be no assurance that any such clinical trials will be successfully completed
or that, if completed, the results of such studies will demonstrate clinical
benefits. Any significant delay in receiving or failure to receive regulatory
approval of the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations.
The FDA and comparable agencies in many foreign countries and in state and
local governments impose substantial limitations on the introduction of medical
devices through costly and time-consuming laboratory and clinical testing and
other procedures. The process of obtaining FDA and other required regulatory
approvals is lengthy, expensive and uncertain. Moreover, regulatory approvals,
if granted, typically include significant limitations on the indicated uses for
which a product may be marketed. In addition, approved products may be subject
to additional testing and surveillance programs required by regulatory agencies,
and product approvals could be withdrawn and labeling restrictions may be
imposed for failure to comply with regulatory standards or upon the occurrence
of unforeseen problems following initial marketing.
The Company is also required to adhere to applicable requirements for FDA
Good Manufacturing Practices, to engage in extensive record keeping and
reporting and to make available its manufacturing facilities for periodic
inspections by governmental agencies, including the FDA and comparable agencies
in other countries. Failure to comply with these and other applicable regulatory
requirements could result in, among other things, significant fines, suspension
of approvals, seizures or recalls of products, or operating restrictions and
criminal prosecutions. The Company has received letters from the FDA regarding
its regulatory compliance. The Company believes that all issues raised in the
letters have been resolved.
Changes in existing regulations or interpretations of existing regulations
or adoption of new or additional restrictive regulations could prevent the
Company from obtaining, or affect the timing of, future regulatory approvals. If
the Company experiences a delay in receiving or fails to obtain any governmental
approval for any of its current or future products or fails to comply with any
regulatory requirements, the Company's business, financial condition and results
of operations could be materially adversely affected.
DEPENDENCE ON KEY SUPPLIERS. The Company purchases the microprocessor used
in the ORTHOLOGIC 1000 and OL-1000 SC from a sole source supplier, Phillips N.V.
In addition, there are two suppliers for another component used in the
ORTHOLOGIC 1000 and OL-1000 SC and two suppliers for the composite material
components of the ORTHOFRAME products. Establishment of additional or
replacement suppliers for the components cannot be accomplished quickly. In
addition, Hyalgan is manufactured by a single company, Fidia S.p.A. The Company
purchases several CPM components, including microprocessors, motors and custom
key panels from sole-source suppliers. The Company believes that its CPM
products are not dependent on these components and could be redesigned to
incorporate comparable components. While the Company maintains a supply of
certain ORTHOLOGIC 1000 and OL-1000 SC components to meet sales forecasts for
one year and ORTHOFRAME components to meet sales forecasts for three months and
the distributor of Hyalgan maintains a supply of product to last several months,
any delay or interruption in supply of these components or products could
significantly impair the Company's ability to deliver its
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products in sufficient quantities, and therefore, could have a material adverse
effect on its business, financial condition and results of operations.
DEPENDENCE ON PATENTS, LICENSES AND PROPRIETARY RIGHTS. The Company's
success will depend in significant part on its ability to obtain and maintain
patent protection for products and processes, to preserve its trade secrets and
proprietary know-how and to operate without infringing the proprietary rights of
third parties. While the Company holds title to numerous United States and
foreign patents and patent applications, as well as licenses to numerous United
States and foreign patents, no assurance can be given that any additional
patents will be issued or that the scope of any patent protection will exclude
competitors or that any of the patents held by or licensed to the Company will
be held valid if subsequently challenged. The validity and breadth of claims
covered in medical technology patents involves complex legal and factual
questions and therefore may be highly uncertain. In addition, although the
Company holds or licenses patents for certain of its technologies, others may
hold or receive patents which contain claims having a scope that covers products
developed by the Company. There can be no assurance that licensing rights to the
patents of others, if required for the Company's products, will be available at
all or at a cost acceptable to the Company.
The Company licenses covering the BIOLOGIC and ORTHOFRAME technologies
provide for payment by the Company of royalties. The Co-Promotion Agreement
provides the Company with exclusive marketing rights for Hyalgan to orthopedic
surgeons in the United States. The Company is paid a commission which is based
upon the number of units sold at the wholesale acquisition cost less amounts for
distribution costs, discounts, rebates, returns, product transfer price,
overhead factor and a royalty factor. Each license may be terminated if the
Company breaches any material provision of such license. The termination of any
license would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company also relies on unpatented trade secrets and know-how. The
Company generally requires its employees, consultants, advisors and
investigators to enter into confidentiality agreements which include, among
other things, an agreement to assign to the Company all inventions that were
developed by the employee while employed by the Company that are related to its
business. There can be no assurance, however, that these agreements will protect
the Company's proprietary information or that others will not gain access to, or
independently develop similar trade secrets or know-how.
There has been substantial litigation regarding patent and other
intellectual property rights in the orthopedic industry. Litigation, which could
result in substantial cost to, and diversion of effort by, the Company may be
necessary to enforce patents issued or licensed to the Company, to protect trade
secrets or know-how owned by the Company or to defend the Company against
claimed infringement of the rights of others and to determine the scope and
validity of the proprietary rights of others. There can be no assurance that the
results of such litigation would be favorable to the Company. In addition,
competitors may employ litigation to gain a competitive advantage. Adverse
determinations in litigation could subject the Company to significant
liabilities and could require the Company to seek licenses from third parties or
prevent the Company from manufacturing, selling or using its products, any of
which determinations could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISK OF PRODUCT LIABILITY CLAIMS. The Company faces an inherent business
risk of exposure to product liability claims in the event that the use of its
technology or products is alleged to have resulted in adverse effects. To date,
no product liability claims have been asserted against the Company for its
fracture healing and Hyalgan products, and there have been only limited claims
for its CPM products. The Company maintains a product liability and general
liability insurance policy with coverage of an annual aggregate maximum of $2.0
million. The Company's product liability and general liability policy is
provided on an occurrence basis. The policy is subject to annual renewal. In
addition, the Company maintains an umbrella excess liability policy which covers
product and general liability with coverage of an additional annual aggregate
maximum of $25.0 million. There can be no assurance that liability claims will
not exceed the coverage limits of such policies or that such insurance will
continue to be available on commercially reasonable terms or at all. If the
Company does not or cannot maintain sufficient liability insurance,
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its ability to market its products may be significantly impaired. In addition,
product liability claims could have a material adverse effect on the business,
financial condition and results of operations of the Company.
VOLATILITY IN PRICE OF COMMON SHARES; STOCK REPURCHASE PLAN; NASDAQ LISTING
MATTERS. The market price of the Company's Common Stock is likely to be highly
volatile. Factors such as fluctuations in the Company's operating results,
developments in Company litigation, announcements and timing of potential
acquisitions, announcements of technological innovations or new products by the
Company or its competitors, FDA and international regulatory actions, actions
with respect to reimbursement matters, developments with respect to patents or
proprietary rights, public concern as to the safety of products developed by the
Company or others, changes in health care policy in the United States and
internationally, changes in stock market analyst recommendations regarding the
Company, other medical device companies or the medical device industry generally
and general market conditions may have a significant effect on the market price
of the Common Stock. In addition, the stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock.
The Company's Common Stock is quoted on Nasdaq, which imposes various
requirements for ongoing listing. Among other matters, rules applicable to
Nasdaq issuers require stockholder approval of certain stock issuances. The
Company does not believe stockholder approval is required and therefore has not
pursued stockholder approval for the issuance of Common Shares pursuant to
conversion of the Series B Preferred Shares and the exercise of the related
Warrants. There can be no assurance that Nasdaq will not require such approval
or will not seek to delist the Company's Common Stock if such approval is not
obtained.
DILUTION. Certain events, including the issuance of additional shares of
preferred stock or Common Shares, including upon the exercise or conversion of
outstanding options, warrants and shares of preferred stock of the Company, or
in connection with the payment of dividends on the Series B Preferred Shares,
could result in substantial dilution of the Common Stock. The Company's Series B
Preferred Shares are generally not convertible into Common Shares until 300 days
after issuance (the "Initial Conversion Period"). However, upon an Early
Conversion Event, as defined in the Certificate of Designation for the Series B
Preferred Shares (the "Certificate of Designation"), the applicable conversion
price would be the average of the 10 lowest closing bid prices for the Common
Stock occurring during the 30 trading days immediately prior to the date of
conversion (the "Floating Conversion Price"). Following the Initial Conversion
Period, the conversion price will be the lesser of: (i) the Floating Conversion
Price; or (ii) a fixed conversion price equal to 103% of the average closing bid
price for the Common Stock during the 10 trading days immediately prior to the
end of the Initial Conversion Period (the "Fixed Conversion Price"). Because the
applicable conversion prices, and thus the number of Common Shares that may be
issued upon conversion are dependent upon presently unknown future market prices
for the Common Stock, the number of Common Shares to be issued upon conversion
is not presently determinable. If the Floating Conversion Price had been used to
determine the number of Common Shares issuable on the date hereof, the Company
would have been obligated to issue a total of 4,571,220 Common Shares if all
15,000 Series B Preferred Shares were converted. The issuance of such amount of
Common Shares, and the potential "overhang" of such shares on the market, could
adversely affect the prevailing market price of the Company's Common Stock. In
addition, the Company may from time to time issue additional shares of Common
Stock or other series of preferred stock exercisable for or convertible into
shares of Common Stock to finance the expansion of its business, for
acquisitions, or for other corporate purposes.
ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation, as
amended (the "Certificate"), contains certain provisions that could have the
affect of delaying, deferring or preventing a change in control of the Company.
In addition, certain provisions of the Delaware General Corporation Law restrict
business combinations with any "interested stockholder" as defined in such law.
These provisions may discourage, delay, or prevent certain types of transactions
involving actual or potential change in control of the Company, including
transactions in which the stockholders might otherwise receive a premium for
their Common Stock over then-current market prices, and may limit the ability of
the Company's stockholders to approve transactions which they may deem to be in
their best interests. These provisions may have the affect of delaying or
preventing a change in control of the Company without
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action by the stockholders and, therefore, could adversely affect the price of
the Company's Common Stock. See "Description of Securities -- Anti-Takeover
Provisions."
The Company's Board of Directors has the authority to issue a total of up
to 2,000,000 shares of Preferred Stock and to fix the rates, preferences,
privileges, and restrictions, including voting rights, of such preferred stock,
without any further vote or action by the stockholders. The rights of the
holders of the Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of the preferred stock that have been issued, or
might be issued in the future. The issuance of preferred stock, while providing
desired flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company, thereby
delaying, deferring, or preventing a change in control of the Company.
Furthermore, holders of such preferred stock may have other rights, including
economic rights senior to the Common Stock, and, as a result, the existence and
issuance thereof could have a material adverse affect on the market value of the
Common Stock. The Company has in the past issued, and may from time to time in
the future issue, preferred stock for financing or other purposes with rights,
preferences, or privileges senior to the Common Stock.
On February 21, 1997, the Company's Board of Directors declared a dividend
distribution of one Right for each outstanding share of Common Stock to
stockholders of record at the close of business on March 12, 1997. Each Right,
generally, entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A Preferred Stock, par value $.0005 per share
("Series A Shares"), at a price of $25.00, subject to adjustment to prevent
dilution. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and Bank of New York, as
Rights Agent. Initially, no separate Right Certificates will be distributed.
Until the date of a triggering event (the "Separation Date"), the Rights will be
evidenced by the certificates representing the Common Stock. As soon as
practicable following the Separation Date, separate certificates evidencing the
Rights will be mailed to holders of record of the Common Stock as of the close
of business on the Separate Date. The Rights are not exercisable until the
Separation Date and will expire on March 11, 2007, unless earlier redeemed by
the Company as described below.
In the event that, at any time following the Separation Date, (a) the
Company is the surviving corporation in a merger with an Acquiring Person (as
defined in the Rights Agreement) and the Common Stock is not changed or
exchanged, (b) a person (other than the Company and its affiliates) becomes the
beneficial owner of 20% or more of the then outstanding Common Stock, (c) an
Acquiring Person engages in one or more "self-dealing" transactions as set forth
in the Rights Agreement or (d) during such time as there is an Acquiring Person,
an event occurs that results in such Acquiring Person's ownership interest being
increased by more than one percent, the Rights Agreement provides that proper
provision shall be made so that each holder of a Right will thereafter be
entitled to receive, upon exercise, Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a value equal to two
times the exercise price of the Right. Rights beneficially owned by an Acquiring
Person would become void in these circumstances.
In the event that, at any time following the first date of public
announcement by the Company or an Acquiring Person indicating that an Acquiring
Person has become such (the "Shares Acquisition Date"), (a) the Company engages
in a merger or other business combination transaction in which the Company is
not the surviving corporation, (b) the Company engages in a merger or other
business combination transaction with another person in which the Company is the
surviving corporation, but in which its Common Stock is changed or exchanged or
(c) 50% or more of the Company's assets or earning power is sold or transferred,
the Rights Agreement provides that proper provision shall be made so that each
holder of a Right shall thereafter have the right to receive, upon the exercise
thereof at the then current exercise price of the Right, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right. Rights beneficially owned by an Acquiring Person would become void in
these circumstances.
The Board may, at its option, at any time after the right of the Board to
redeem the Rights has expired or terminated (with certain exceptions), exchange
all or part of the then outstanding and exercisable Rights) other than
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those held by the Acquiring Person and Affiliates and Associates of the
Acquiring Person) for Common Stock at a ratio of one share of Common Stock per
Right, as adjusted. Until ten business days following a Shares Acquisition Date,
the Board of Directors may redeem the Rights at a price of $0.01 per Right,
subject to adjustment. Thereafter, the Board may only redeem the Rights in
certain specified circumstances.
RESTRICTIONS ON DIVIDENDS AND REDEMPTIONS. The Company has not paid any
dividends on its Common Stock and does not plan to pay any dividends on its
Common Stock for the foreseeable future. In addition, the provisions of the
Series B Preferred Shares prohibit the payment of dividends on the Common Stock
for two years after the issuance of the Series B Preferred Shares and between
two and four years after issuance except for dividends out of retained earnings
accrued during the prior fiscal year. Further, although the Company's credit
facility does not include any specific prohibitions on the payment of dividends,
it does include various financial covenants that could have the effect of
limiting cash dividend or redemption payments. The Delaware General Corporation
Law includes limitations on the ability of corporations to pay dividends on or
to purchase or redeem their own stock.
SHARES ELIGIBLE FOR FUTURE SALE. In addition to the Common Stock issuable
upon conversion of the 15,000 Series B Preferred Shares and Warrants for 600,000
Common Shares, as of August 14, 1998, the Company had 25,300,190 shares of
Common Stock outstanding. The Company also had outstanding, as of the same date,
options for 3,748,950 shares of Common Stock under Company stock option plans
and warrants to acquire an additional 10,000 shares of Common Stock.
Substantially all of the shares underlying the outstanding options have been
registered for resale by the holders thereof. Future sales of such shares of
Common Stock and the additional presently indeterminate shares of Common Stock
that may be issued by the Company in the future, including the Common Stock
subject to outstanding options, warrants and conversion rights, could adversely
affect the prevailing market price of the Common Stock.
The Company has one outstanding grant of registration rights to a holder of
a warrant for shares of the Company's Common Stock. In addition, the Company may
from time to time issue additional Common Stock or securities exercisable for or
convertible into Common Stock to finance the expansion of its business, for
acquisitions, or for other corporate purposes.
USE OF PROCEEDS
The Selling Security Holders will receive all of the proceeds and the
Company will not receive any of the proceeds from the sale of the Common Shares
offered hereby. If all of the outstanding Warrants were exercised, the Company
would receive gross proceeds of approximately $3,300,000, which the Company
expects to use for general corporate purposes. There is no assurance that any of
the Warrants will be exercised.
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SELLING SECURITY HOLDERS
The following table provides information regarding the beneficial ownership
of the Common Shares as of August 14, 1998, and as adjusted to reflect the sale
of the securities offered hereby, by the Selling Security Holders. Except as
otherwise indicated, to the knowledge of the Company, all persons listed below
have sole voting and investment power with respect to their securities.
<TABLE>
<CAPTION>
Common
Shares
Beneficially Common
Owned Prior Shares To Be Common Shares
To The Sold In The Beneficially Owned
Offering (1) Offering (1) After The Offering (2)
------------ ------------ ----------------------
Name Of Selling Security Holder Number Number Number Percent
- ------------------------------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Marshall Capital Management, Inc. 2,285,610 2,285,610 0 0
Capital Ventures International 2,285,610 2,285,610 0 0
</TABLE>
(1) Includes such number of Common Shares estimated to be issuable upon
conversion of the Series B Preferred Shares, assuming the Floating
Conversion Price of $3.2814 per share (calculated on the date hereof) is
used to determine the Common Shares issuable on such conversion. See
"Description of Securities." The actual number of such Common Shares may be
greater than the indicated amount as a result of the application of the
conversion price provisions at the actual date of conversion. See
"Description of Securities." The Series B Preferred Shares were purchased
by the Selling Security Holders in a private placement by the Company on
July 13, 1998. The Series B Preferred Shares are convertible commencing May
10, 1999, except upon the occurrence of an Early Conversion Event. The
figures above also include up to 600,000 Common Shares issuable upon
conversion of Warrants sold in connection with the private placement of the
Series B Preferred Shares.
No holder of the Series B Preferred Shares is entitled to convert such
securities to the extent that the shares to be received by such holder upon
such conversion would cause the Company to issue more than 5,000,000 Common
Shares (the "Cap Amount") upon conversion of Series B Preferred Shares
without the Company having gained the prior approval of a majority of its
stockholders for issuances in excess of the Cap Amount. Unless stockholder
approval is obtained to issue Common Shares to the Selling Security Holders
in excess of the Cap Amount, none of the Selling Security Holders will be
entitled to acquire more than its proportionate share of the Cap Amount.
The Company may be required to redeem Series B Preferred Shares which may
not be converted and any Warrants which may not be exercised because of
such limitation.
Except under certain limited circumstances, no holder of Series B Preferred
Shares or Warrants may convert or exercise such securities to the extent
that the Common Shares to be received by such holder upon such conversion
or exercise would cause such holder to beneficially own more than 4.99% of
the Company's outstanding Common Stock. Moreover, due to the Cap Amount and
because the holders of Series B Preferred Shares may not convert the Series
B Preferred Shares into Common Shares, or exercise Warrants for Common
Shares, before May 10, 1999 absent circumstances which have not occurred as
of the date of this Prospectus and which are beyond the control of the
holders of the Series B Preferred Shares, the number of shares set forth
herein which a Selling Security Holder may sell pursuant to this Prospectus
may exceed the number of Common Shares such Selling Security Holder would
otherwise beneficially own as determined pursuant to Section 13(d) of the
Exchange Act.
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<PAGE>
(2) Assumes that the Selling Security Holder disposes of all of the Common
Shares covered by this Prospectus and does not acquire any additional
Common Shares. Except as set forth in footnote (1), assumes no other
exercise of options, warrants or conversion rights or issuances of
additional securities.
DESCRIPTION OF SECURITIES
The Company has authorized 40,000,000 shares of Common Stock and 2,000,000
shares of Preferred Stock ("Preferred Stock"). As of August 14, 1998, 25,300,190
Common Shares were issued and outstanding, 300,000 shares of Series A Preferred
Stock were authorized for issuance under the Company's Rights Plan (see "Risk
Factors -- Anti-Takeover Provisions") and a total of 15,000 Series B Preferred
Shares were issued and outstanding.
The Company's Board of Directors has the authority, without further action
by the stockholders, to issue a total of up to 2,000,000 shares of Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions granted to or imposed upon any series of unissued Preferred Stock
and to fix the number of shares constituting any series and the designation of
such series, without any further vote or action by the stockholders. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders, may discourage bids for the Company's Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of and other rights of the holders of Common Stock.
The following summary of certain provisions of the Common Stock, the Series
B Preferred Shares and Warrants does not purport to be complete and is subject
to, and is qualified in its entirety by, the Certificate, the Bylaws of the
Company and by the provisions of applicable law.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Stockholders are not entitled to
cumulate their votes for the election of directors. Subject to preferences that
may be applicable to any outstanding shares of preferred stock, including the
Series B Preferred Shares, the holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available for that purpose. See "Risk
Factors -- Restrictions on Dividends and Redemption." In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The Common Stock has no preemptive, conversion or subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock.
SERIES B CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 20,000 shares of its Series B
Convertible Preferred Stock (the "Series B Preferred Shares"), of which 15,000
Series B Preferred Shares were outstanding as of August 14, 1998. In the event
of any liquidation, dissolution or winding up of the Company, holders of the
Series B Preferred Shares are entitled to receive, prior and in preference to
any distribution of any assets of the Company to the holders of Common Stock,
the Stated Value ($1,000) per share, plus any accrued but unpaid dividends (the
"Series B Liquidation Preference").The Series B Preferred Shares generally may
not be converted into shares of Common Stock until 300 days after issuance (the
"Initial Conversion Period"). However, upon an Early Conversion Event (as
defined in the Certificate of Designation) before the end of the Initial
Conversion Period, the applicable conversion price would be the average of the
10 lowest closing bid prices for the Common Stock occurring during the 30
trading days immediately prior to the date of conversion (the "Floating
Conversion Price"). Commencing 300 days after the date of issuance of the Series
B Preferred Shares, each holder may convert its Series B Preferred Shares into
Common Shares, subject to certain limitations and procedures described in the
Certificate of Designation. See "Selling Security Holders." Following the
Initial Conversion Period, the conversion price will be the lesser of: (i) the
Floating Conversion Price; or (ii) a fixed conversion price equal to 103% of the
average closing bid price for the Common
16
<PAGE>
Stock during the 10 trading days immediately prior to the end of the Initial
Conversion Period (the "Fixed Conversion Price").
On the fourth anniversary of the date of issuance, or July 13, 2002, all
Series B Preferred Shares then outstanding will be automatically converted into
the number of Common Shares equal to the Stated Value of the Series B Preferred
Shares being converted divided by the applicable Conversion Price. In the event
of certain Mandatory Redemption Events, which events the Company believes are
within its control, each holder of Series B Preferred Shares will have the right
to require the Company to redeem those shares for cash at the Mandatory
Redemption Price, which will be equal to the greater of (i) Liquidation
Preference of the Series B Preferred Shares being redeemed multiplied by 117%
and (ii) an amount determined by dividing (A) the Stated Value of the Series B
Preferred Shares being redeemed by (B) the Conversion Price then in effect and
multiplying the resulting quotient by the average closing price for the Common
Stock for the five days preceding the Mandatory Redemption Date, subject to
increase for a failure to pay the Mandatory Redemption Price timely. Mandatory
Redemption Events include, but are not limited to, the failure of the Company to
timely deliver Common Shares as required under the terms of the Series B
Preferred Shares or Warrants, the Company's failure to obtain stockholder
approval of an increase in the authorized number of shares of Common Stock and
of an increase in the number of Common Shares reserved for issuance upon
conversion of the Series B Preferred Shares, the Company's failure to satisfy
registration requirements applicable to such securities, the failure by the
Company to maintain the listing of its Common Shares on the Nasdaq National
Market or another national securities exchange, and certain transactions
involving the sale of assets or business combinations involving the Company.
The Company privately placed the Series B Preferred Shares at a closing
designated as Tranche A. If the closing bid price for the Company's Common Stock
is at or above $8.00 per share for 10 consecutive days before May 10, 1999, the
Company will sell an additional $5,000,000 of Series B Preferred Shares and
Warrants at a Tranche B closing. Additionally, if the Company has not privately
placed the additional Series B Preferred Shares and Warrants by May 10, 1999,
and if the closing bid price for the Company's Common Stock is at or above $8.00
per share for 10 consecutive days between May 11, 1999 and July 13, 2000, the
Company may sell an additional $5,000,000 of Series B Preferred Shares and
related Warrants at a Tranche B closing. Series B Preferred Shares privately
placed in Tranche B would also be subject to the rights, privileges and
preferences in the Certificate of Designation.
The Securities Purchase Agreement (as defined below) requires the Company
to seek stockholder approval, at or before its 1999 annual meeting of
stockholders, for an increase in the number of authorized shares of Common Stock
and to reserve, out of such increased number, no less than the greater of
7,500,000 shares of Common Stock and 150% of the number of shares of Common
Stock issuable upon conversion of all of the Series B Preferred Shares and
exercise of the Warrants outstanding on the date of the proxy statement relating
to such meeting of stockholders. If the Company fails to obtain such stockholder
approval prior to May 31, 1999, the Company may be required, from time to time,
to redeem the sufficient number of Series B Preferred Shares to permit the
Company to maintain the required reserve of shares of Common Stock for
conversion of Series B Preferred Shares and exercise of related Warrants. The
Company's line of credit restricts the Company's ability to redeem stock without
such lender's approval. If the Company were required to redeem Series B
Preferred Shares and was unable to obtain such lender's consent, an event of
default would likely be created with respect to the line of credit. An event of
default under the line of credit could have a material adverse effect on the
Company's business, financial condition and results of operations.
WARRANTS RELATED TO SERIES B PREFERRED SHARES
Holders of the Series B Preferred Shares also received Warrants to purchase
40 Common Shares for each Series B Preferred Share purchased by such holders,
for an aggregate of 600,000 Common Shares underlying Warrants. The exercise
price of the Warrants is $5.50. Each Warrant has a five year term. The Company
may sell additional Warrants under certain conditions. See "--Series B
Convertible Preferred Stock."
17
<PAGE>
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Bank of New York.
DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, this statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. The term "business combination"
generally includes a merger, asset or stock sale, or other transaction resulting
in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's voting
stock.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Certificate and Bylaws which are summarized below
may discourage or have the effect of delaying or deferring potential changes in
control of the Company. The cumulative effect of these terms may be to make it
more difficult to acquire and exercise control of the Company and to make
changes in management. Furthermore, these provisions may make it more difficult
for stockholders to participate in a tender or exchange offer for Common Stock
and is so doing may diminish the market value of the Common Stock.
The Certificate provides for the approval of the holders of two-thirds of
the outstanding voting stock of the Company for a merger or a consolidation
with, or a sale by the Company of all or substantially all of its assets to, any
person, firm or corporation, or any group thereof, which owns, directly or
indirectly, 5% or more of any class of voting securities of the Company (an
"Interested Person"). In addition, such two-thirds approval is required with
respect to other transactions involving any such Interested Person, including
among other things, purchase by the Company or any of its subsidiaries of all or
substantially all of the assets or stock of an Interested Person and any other
transaction with an Interested Person which requires stockholder approval under
Delaware law. The two-thirds voting requirement is not applicable to any
transaction approved by the Company's Board of Directors if a majority of the
members of the Board of Directors voting to approve such transaction were
elected prior to the date of which the other party became an Interested Person
or whose initial election as a director succeeds a continuing director or is a
newly created directorship.
The Certificate provides that each director will serve for a three-year
term and that approximately one-third of the directors are to be elected
annually. Candidates for directors shall be nominated only by the Board of
Directors or by a stockholder who gives written notice to the Company at least
20 days before the annual meeting. The Company may have three to nine directors
as determined from time to time by the Board. Between stockholder meetings, the
Board may appoint new directors to fill vacancies or newly created
directorships. The Certificate does not provide for cumulative voting at
stockholder meetings for election of directors. A director may be removed from
office only for cause by the affirmative vote of a majority of the combined
voting power of the then outstanding shares of stock entitled to vote generally
in the election of directors.
The Certificate further provides that stockholder action must be taken at a
meeting of stockholders and may not be effected by any consent in writing.
Special meetings of stockholders may be called only by the President or a
majority of either the Board of Directors or the holders of at least 35% of the
outstanding shares of capital stock entitled to vote. If a stockholder wishes to
propose an agenda item for consideration, such stockholder must give a brief
description of each item and written notice to the Company not less than 60 nor
more than 90 days prior to the meeting, or if less than 70 days prior disclosure
of the meeting date is given within 15 days of such disclosure, or such other
period of time necessary to comply with applicable federal proxy solicitation
rules or other regulations. Stockholders may need to present their proposals in
advance of the time they receive their notice of meeting since the
18
<PAGE>
Company's Bylaws provide that notice of a stockholders' meeting must ben given
not less than ten or more than 60 days prior to the meeting date. If a
stockholder wishes to nominate a candidate for director, a written notice
setting forth designated information must be furnished at least 20 days in
advance of an annual meeting or within 15 days after notice of a special meeting
is given.
The Certificate provides further that the foregoing provisions of the
Certificate and Bylaws may be amended or repealed only with the affirmative vote
of at least two-thirds of the shares entitled to vote, unless the amendment is
recommended for stockholder approval by a majority of the Continuing Directors.
These provisions exceed the usual majority vote requirement of Delaware law and
are intended to prevent the holders of less than two-thirds of the voting power
from circumventing the foregoing terms by a amending the Certificate or Bylaws.
These provisions, however, enable the holders of more than one-third of the
voting power to prevent amendments to the foregoing anti-takeover provisions of
the Certificate or Bylaws even if they were favored by the holders of a majority
of the voting power.
PLAN OF DISTRIBUTION
The Common Shares are being offered on behalf of the Selling Security
Holders, and, except for the exercise price of the Warrants, the Company will
not receive any proceeds from the Offering. The Common Shares may be sold or
distributed from time to time by the Selling Security Holders, directly to one
or more purchasers (including pledgees) or through brokers, dealers or
underwriters who may act solely as agents or may acquire Common Shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices, at negotiated prices, or at fixed prices,
which may be changed. The distribution of the Common Shares may be effected in
one or more of the following methods: (i) ordinary brokers' transactions, which
may include long or short sales (subject to certain limitations, as described in
the Securities Purchase Agreement (as defined below)); (ii) transactions
involving cross or block trades or otherwise on the Nasdaq National Market;
(iii) purchases by brokers, dealers or underwriters as principal and resale by
such purchasers for their own accounts pursuant to this Prospectus; (iv) "at the
market" to or through market makers or into an existing market for the Common
Shares; (v) in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through agents;
(vi) through transactions in options, swaps or other derivatives (whether
exchange-listed or otherwise); (vii) pursuant to Rule 144 under the Securities
Act; or (viii) any combination of the foregoing, or by any other legally
available means except as may be limited by the Securities Purchase Agreement
with respect to the Series B Preferred Shares and related Warrants (the
"Securities Purchase Agreement"). In addition, the Selling Security Holders or
their successors in interest may enter into hedging transactions with
broker-dealers who may engage in short sales of Common Shares in the course of
hedging the positions they assume with the Selling Security Holders (subject to
certain limitations, as described in the Securities Purchase Agreement). The
Selling Security Holders or their successors in interest may also enter into
option or other transactions with broker-dealers that require the delivery by
such broker-dealers of the Common Shares, which Common Shares may be resold
thereafter pursuant to this Prospectus. Selling Security Holders will be subject
to applicable provisions of the Exchange Act and rules and regulations
thereunder, including without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of any of the Shares of Common Stock by
the Selling Security Holders.
Brokers, dealers, underwriters or agents participating in the distribution
of the Common Shares as agents may receive compensation in the form of
commissions, discounts or concessions from the Selling Security Holders and/or
purchasers of the Common Shares for whom such broker-dealers may act as agent,
or to whom they may sell as principal, or both (which compensation as to a
particular broker-dealer may be less than or in excess of customary
commissions). The Selling Security Holders and any broker-dealers who act in
connection with the sale of the Common Shares hereunder may be deemed to be
"Underwriters" within the meaning of the Securities Act, and any commissions
they receive and proceeds of any sale of Common Shares may be deemed to be
underwriting discounts and commissions under the Securities Act. Neither the
Company nor any Selling Security Holder can presently estimate the amount of
such compensation. The Company knows of no existing arrangements between any
Selling Security Holder, any other stockholder, broker, dealer, underwriter or
agent relating to the sale or distribution of the Common Shares.
19
<PAGE>
The Company will pay substantially all of the expenses incident to the
registration, offering and sale of the Common Shares to the public other than
commissions or discounts of underwriters, broker-dealers or agents. The Company
has also agreed to indemnify the Selling Security Holders and certain related
persons against certain liabilities, including liabilities under the Securities
Act.
LEGAL OPINIONS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Quarles & Brady, Phoenix, Arizona.
EXPERTS
The consolidated financial statements of OrthoLogic Corp. incorporated in
this Prospectus by reference from OrthoLogic Corp's Annual Report on Form 10-K
for the year ended December 31, 1997 have been audited by Deloitte & Touche LLP,
independent auditors, as set forth in their report, which is incorporated herein
by reference and have been so incorporated herein by reference in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
20
<PAGE>
================================================================================
NO DEALER, SALES REPRESENTATIVE, 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, THE SELLING SECURITY HOLDERS, OR ANY
OTHER PERSON. 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. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER AND THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANYTIME
SUBSEQUENT TO THE DATE HEREOF.
--------------------------------------------
TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION.......................................................2
INFORMATION INCORPORATED BY REFERENCE.......................................2
DISCLOSURE REGARDING FORWARD LOOKING
STATEMENTS...............................................................3
THE COMPANY.................................................................3
RISK FACTORS................................................................6
USE OF PROCEEDS............................................................14
SELLING SECURITY HOLDERS...................................................15
DESCRIPTION OF SECURITIES..................................................16
PLAN OF DISTRIBUTION.......................................................18
LEGAL OPINIONS.............................................................19
EXPERTS....................................................................19
10,342,440 COMMON SHARES
ORTHOLOGIC CORP.
---------------
PROSPECTUS
---------------
AUGUST ___, 1998
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the costs and expenses in connection with the issuance
and distribution of the securities being registered, all of which expenses will
be paid by the Company:
SEC Filing Fees ...................................................... $ 9,916
Nasdaq Listing Fees .................................................. 17,500
Printing and Engraving Expense ....................................... 500
Legal Fees ........................................................... 30,000
Accounting Fees ...................................................... 3,000
Miscellaneous Fees and Expenses ...................................... 1,000
--------
Total $ 61,916
========
All costs and expenses (other than the SEC Filing Fees and Nasdaq Listing
Fees) are estimates.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he 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 cause to believe his conduct was unlawful.
Section 145(b) provides that a Delaware corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect to any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the court in which such action or suit was brought shall
determine that despite the adjudication of liability, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) or in the defense or any claim, issue or
matter therein, he shall be indemnified against expenses actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and that the corporation may purchase and
maintain insurance on behalf of a director or officer of the corporation against
any liability asserted against him or incurred by him in any such capacity
II-1
<PAGE>
or arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liabilities under such Section 145.
Section 102(b)(7) of the DGCL provides that a corporation in its original
certificate of incorporation or an amendment thereto validly approved by
stockholders may eliminate or limit personal liability of members of its board
of directors or governing body for violations of a director's duty of care.
However, no such provision may eliminate or limit the liability of a director
for breaching his duty of loyalty, acting or failing to act in good faith,
engaging in intentional misconduct or knowingly violating a law, paying an
unlawful dividend or approving an unlawful stock repurchase, or obtaining an
improper personal benefit. A provision of this type has no effect on the
availability of equitable remedies, such as injunction or rescission, for breach
of fiduciary duty. The Company's Certificate contains such a provision.
The Company's Bylaws provide that the Company shall indemnify officers and
directors to the full extent permitted by and in the manner permissible under
the laws of the State of Delaware.
The Company has a directors' and officers' liability insurance policy with
a policy limit of $2,000,000 and coverage for, among other things, liability for
violations of federal and state securities laws.
The Company has entered into indemnity agreements with its directors and
officers for indemnification of and advance of expenses to such persons to the
full extent permitted by law. The Company intends to execute such indemnity
agreements with its future officers and directors.
The holders of the Company's capital stock or warrants to purchase capital
stock who have contractual registration rights are required to be indemnified by
the Company against losses, claims, damages or liabilities arising out of any
untrue statement of a material fact or omission thereof in a Registration
Statement under the Securities Act. The Company's obligation to indemnify such
holders includes the officers, directors and partners of such holders. The
Company shall not be liable for any such indemnity to the extent that any such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or material omission in reliance upon and in conformity with written
information furnished by such person to the Company, specifically for use
therein.
The indemnification provided as set forth above is not exclusive of any
rights to which a director or officer of the Company may be entitled. The
general effect of the forgoing provisions may be to reduce the circumstances in
which a director or officer may be required to bear the economic burdens of the
forgoing liabilities and expenses.
The Company has agreed to indemnify the Selling Security Holders, including
its officers, directors, or controlling persons, against certain liabilities,
including liabilities under the Act.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, or persons controlling the registrant pursuant
to the foregoing provisions, the registrant has been informed that, in the
opinion of the Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
ITEM 16. EXHIBITS.
3.1 Certificate of Designation (incorporated herein by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K filed on July
13, 1998)
4.1 Form of Warrant (incorporated herein by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K filed on July 13, 1998)
4.2 Registration Rights Agreement (incorporated herein by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed on July
13, 1998)
II-2
<PAGE>
5.1 Form of Opinion of Quarles & Brady
10.1 Securities Purchase Agreement (incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July
13, 1998)
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Quarles & Brady (contained in Exhibit 5.1)
24.1 Power of Attorney (included in the Signatures page to this
Registration Statement)
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes: (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement, (i) to include any prospectus required by section
10(a)(3) of the Securities Act of 1933, (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement, (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement; (2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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; (3) to remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the Registrant's Annual
Report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange of
1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") that is incorporated by reference in the
registration statement 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.
Insofar as indemnification for liabilities arising under the 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 Securities and Exchange Commission such
indemnification is against public policy as expressed in the 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 Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
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 S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tempe, State of Arizona, on August 24, 1998.
ORTHOLOGIC CORP.
By /s/ Thomas R. Trotter
-------------------------------------
Thomas R. Trotter
Chief Executive Officer and President
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Thomas R. Trotter and Terry D. Meier, and each of
them, his attorneys-in-fact, each with a power of substitution, for him in any
and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments), and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may lawfully
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 below by the following persons in the
capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas R. Trotter
- ----------------------------
Thomas R. Trotter President, Chief Executive August 24, 1998
Officer and Director
/s/ Stuart H. Altman
- ----------------------------
Stuart H. Altman, Ph.D. Director August 24, 1998
/s/ Fredric J. Feldman
- ----------------------------
Fredric J. Feldman, Ph.D. Director August 24, 1998
/s/ John M. Holliman, III
- ----------------------------
John M. Holliman, III Director August 24, 1998
/s/ Elwood D. Howse, Jr.
- ----------------------------
Elwood D. Howse, Jr. Director August 24, 1998
/s/ Augustus A. White, III
- ----------------------------
Augustus A. White, III, M.D. Director August 24, 1998
/s/ Terry D. Meier
- ----------------------------
Terry D. Meier Senior Vice President and August 24, 1998
Chief Financial Officer
II-4
Exhibit 5.1
August __, 1998
Re: Issuance of Common Shares
Gentlemen:
You have requested our opinion in connection with the Registration
Statement on Form S-3 (the "Registration Statement") to be filed by OrthoLogic
Corp., a Delaware corporation (the "Company"), under the Securities Act of 1933,
as amended, relating to the registration of up to an aggregate of 10,342,440
shares of the Company's Common Stock, $.0005 par value per share (the "Shares"),
that may be issued upon the conversion of the Company's Series B Convertible
Preferred Stock (the "Series B Preferred Shares") and upon the exercise of the
Company's outstanding warrants issued as of July 13, 1998 (the "Warrants").
In rendering the opinion set forth herein, we have limited our factual
inquiry to (i) reliance on a certificate of the Secretary of the Company, (ii)
reliance on the facts and representations contained in the Registration
Statement, including, without limitation, those relating to the number of the
Company's Common Shares, $.0005 par value per share, which are authorized,
issued or reserved for issuance upon the conversion of the Series B Preferred
Shares or the exercise of the Warrants, and (iii) such documents, corporate
records and other instruments as we have deemed necessary or appropriate as a
basis for the opinion expressed below.
In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies, and the authenticity of the originals of such copies. In rendering the
opinion expressed below, we have assumed that the Shares will conform, and that
the Series B Preferred Shares and the Warrants do conform, in all material
respects, to the description thereof set forth in the Registration Statement.
Based upon the foregoing, and subject to the qualifications set forth
herein, we are of the opinion that, when the following events have occurred:
(a) the Registration Statement has become effective under the
Securities Act of 1933, as amended;
(b) the registration and delivery of the certificate or certificates
evidencing the Shares have occurred; and
(c) the Shares have been issued and sold upon the conversion of the
Series B Preferred Shares or the exercise of the Warrants, as the
case may be, in the manner specified in the Registration
Statement, and the Company has received the consideration
therefor as described in the Registration Statement;
then the Shares will be validly issued, fully paid and nonassessable.
The foregoing opinion is limited to the Delaware General Corporation Law
(without giving effect to any conflict of law principles), and we have not
considered, and express no opinion on, the laws of any other jurisdiction. This
opinion is based on the laws in effect and facts in existence on the date of
this letter, and we assume no obligation to revise or supplement this letter
should the law or facts, or both, change.
This opinion is intended solely for the use of the Company in connection
with the registration of the Shares. It may not be relied upon by any other
person or for any other purpose or reproduced or filed publicly by any person,
without the written consent of Quarles & Brady; provided, however, that we
hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration
Statement and to the references to Quarles & Brady contained in the Registration
Statement.
Very truly yours,
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
OrthoLogic Corp. on Form S-3 of our report dated January 29, 1998, appearing in
the Annual Report on Form 10-K of OrthoLogic Corp. for the year ended December
31, 1997 and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
August 21, 1998
