<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1998
REGISTRATION NO. 333-51689
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ORTHOVITA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
----------------
PENNSYLVANIA 3841 232813867
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
45 GREAT VALLEY PARKWAY
MALVERN, PA 19355
(610) 640-1775
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DAVID S. JOSEPH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
45 GREAT VALLEY PARKWAY
MALVERN, PA 19355
(610) 640-1775
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
STEPHEN M. GOODMAN, ESQ. LAWRENCE M. LEVY, ESQ.
MORGAN, LEWIS & BOCKIUS LLP BROWN, RUDNICK, FREED & GESMER
2000 ONE LOGAN SQUARE ONE FINANCIAL CENTER
PHILADELPHIA, PA 19103 BOSTON, MA 02111
(215) 963-5000 (617) 856-8200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
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, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SUCH 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
JUNE 23, 1998
2,000,000 SHARES
[LOGO OF OTHOVITA APPEARS HERE]
COMMON STOCK
-----------
A total of 2,000,000 shares of Common Stock are being offered hereby (the
"Offering") through a retail public offering in Belgium, a placement to a
limited number of qualified institutional investors in the United States, and
private placements to institutional investors within and outside Belgium. In
the Offering, 1,500,000 shares of Common Stock will be sold by Orthovita, Inc.
(the "Company") and 500,000 shares of Common Stock will be sold by certain
shareholders of the Company (the "Selling Shareholders"). The Company will not
realize any proceeds from the sale of Common Stock by the Selling Shareholders.
It is currently anticipated that the initial public offering price will be
between US$9.00 and US$11.00 per share. On June 22, 1998, the exchange rate for
one US$ was 1.1033 ECU.
Prior to this Offering, there has been no public market for the Common Stock.
For factors considered in determining the initial public offering price, see
"Offering and Subscription." Application has been made for admission to trading
of the Common Stock on the European Association of Securities Dealers'
Automated Quotation System ("EASDAQ") under the symbol "VITA."
-----------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE U.S. SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................
- --------------------------------------------------------------------------------
Total(3)...................
================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses for this Offering, payable by the Company,
estimated at US$800,000.
(3) The Company has granted the Underwriters a 30-day option (the "Over-
allotment Option") to purchase up to 300,000 additional shares of Common
Stock on the same terms as set forth above solely to cover over-allotments,
if any. If the Over-allotment Option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be US$ , US$ and US$ , respectively. See "Underwriting."
-----------
The shares of Common Stock offered hereby are offered severally by the
Underwriters, subject to prior sale, when, as and if issued to and accepted by
them, and subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is anticipated that shares of Common Stock will be ready for delivery
in New York, New York, on or about , 1998, against payment therefor in
immediately available funds.
QUARTZ CAPITAL PARTNERS LIMITED
ARTESIA BANK N.V. BANK BRUSSELS LAMBERT
The date of this Prospectus is , 1998
<PAGE>
Appearing here is a picture of the Company's packaged BIOGRAN product,
including the following description: "BIOGRAN(R) Commercialized in 1995,
Biogran is a resorbable, granular biomaterial that biologically transforms to
remodeled cancellous bone in four to six months, and is currently sold in the
U.S. under 510(k) clearances and in Europe with a CE Mark for repair of oral
bone defects. Orthopaedic clinical trials are underway for use in non-load
bearing bone regeneration indications."
Appearing here is a picture of an injection device used to inject the
Company's ORTHOCOMP product into bone sites, including the following
description: "ORTHOCOMP(TM) Orthocomp is an injectable, high-strength bone
cement that bonds to bone and is fast setting and immediately load bearing.
The injectable procedure for Orthocomp is less invasive than current methods
of repair, which means faster patient recovery and more cost-effective
treatment."
Appearing here is a picture of the surgical application (via syringe) of the
Company's VITAGRAFT product, including the following description:
"VITAGRAFT(TM) Vitagraft is a resorbable calcium phosphate paste that hardens
quickly after application and is resorbed by the body as it is replaced by
cancellous bone. Vitagraft is especially useful in achieving moderate load
bearing, coupled with fixation hardware, to permit quicker return to function
in younger patients with healthy bone physiology."
Appearing here is text noting the following: "ORTHOCOMP and VITAGRAFT are not
cleared by the FDA. BIOGRAN is cleared for certain oral surgical indications."
2
<PAGE>
APPROVAL BY THE BELGIAN BANKING AND FINANCE COMMISSION
This Prospectus has been approved by the Belgian Banking and Finance
Commission ("Commission Bancaire et Financiere/Commissie voor het Bank-en
Financiewezen") ("CBF") on May 28, 1998 in accordance with Article 29ter, (S)
1, par. 1 of Royal Decree n(degrees) 185 of July 9, 1935 and Article 11 of the
Royal Decree of October 31, 1991 on the prospectus to be published for public
issues of securities. The approval of this Prospectus by the CBF does not
imply any judgment as to the appropriateness or the quality of this Offering,
the Common Stock nor of the situation of the Company or of the Selling
Shareholders. The notice prescribed by Article 29, (S) 1 of the Royal Decree
n(degrees) 185 of July 9, 1935 will appear in the financial press on or prior
to the date of admission to trading on EASDAQ.
RESPONSIBILITY FOR THE PROSPECTUS AND
DECLARATION OF CONFORMITY
The Company confirms that, to the best of its knowledge, the information
given in this Prospectus is in accordance with the facts in all material
respects and contains no omissions likely to affect the import of the
Prospectus in any material respect. Under U.S. federal securities laws, the
Company's Chief Executive Officer, Chief Financial Officer and members of the
Board of Directors are generally liable, subject to certain defenses, for
untrue statements of material facts in this Prospectus and omissions of
material facts which are required to be stated in this Prospectus or necessary
to make the statements in this Prospectus not misleading.
REFERRAL OF DISPUTES
Belgian investors may refer disputes relating to the content of the
Prospectus, to subscription or to acquired securities, to the Belgian courts
or tribunals.
FORWARD LOOKING STATEMENTS
This Prospectus contains forward-looking statements that address, among
other things, the Company's business strategy, use of proceeds, projected
capital expenditures, projected expenditures for clinical trials, projected
research and development expenditures, projected manufacturing expenditures,
research and development activities, clinical trial information, liquidity,
possible strategic alliances, and possible effects of changes in government
regulation. These statements may be found under "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business" as well as
elsewhere in the Prospectus. Actual events or results may differ materially
from those discussed in forward-looking statements as a result of various
factors, including those factors set forth in this Prospectus.
GLOSSARY OF TERMS
Some of the terms used in this Prospectus are defined in a "Glossary of
Terms" which immediately precedes the inside back cover page of this
Prospectus.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS ON EASDAQ WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK AT A LEVEL WHICH MIGHT NOT OTHERWISE PREVAIL ON EASDAQ. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN THE CASE OF ANY DOUBT ABOUT THE CONTENTS OR THE MEANING OF THE
INFORMATION OF THIS DOCUMENT, AN AUTHORIZED OR PROFESSIONAL PERSON WHO
SPECIALIZES IN ADVISING ON THE ACQUISITION OF FINANCIAL INSTRUMENTS SHOULD BE
CONSULTED.
COPIES OF THE PROSPECTUS WILL BE MADE AVAILABLE TO PROSPECTIVE INVESTORS, AT
NO COST, UPON PRIOR WRITTEN REQUEST ADDRESSED TO THE REGISTERED OFFICE OF THE
COMPANY OR UPON TELEPHONING QUARTZ CAPITAL PARTNERS LIMITED AT +44-171-408-
0777.
THIS PROSPECTUS MAY NOT BE ISSUED OR PASSED ON IN THE UNITED KINGDOM TO ANY
PERSON UNLESS THAT PERSON IS OF THE KIND DESCRIBED IN ARTICLE 11 (3) OF THE
UNITED KINGDOM FINANCIAL SERVICES ACT OF 1986 (INVESTMENT ADVERTISEMENTS)
(EXEMPTIONS) ORDER 1995 OR IS A PERSON TO WHOM THIS PROSPECTUS MAY OTHERWISE
BE LAWFULLY ISSUED OR PASSED ON.
3
<PAGE>
EXPERTS
The financial statements of the Company as of December 31, 1995, 1996 and
1997 and for the three years in the period ended December 31, 1997 included in
this Prospectus have been prepared by the Company in accordance with United
States generally accepted accounting principles ("U.S. GAAP") and have been
audited by Arthur Andersen LLP, independent public accountants, 1601 Market
Street, Philadelphia, Pennsylvania, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of such firm
as experts in giving said report. See "Financial Statements."
ADDITIONAL INFORMATION
The Company has filed with the U.S. Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
(the "Registration Statement") with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any agreement or other document are not necessarily complete, and
in each instance, reference is made to the copy of such agreement or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be obtained at no cost upon request from the Company at its
executive offices at 45 Great Valley Parkway, Malvern, Pennsylvania USA or by
calling +1-610-640-1775 and may be inspected without charge at the principal
office of the Commission in Washington, D.C. at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commissions's Regional Offices at Seven
World Trade Center, Suite 1300, New York, New York 10048, and Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and
copies may be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, the Registration Statement and certain other filings made with the
Commission through its Electronic Data Gathering Analysis and Retrieval
("EDGAR") system are publicly available through the Commission's Web site
located at http://www.sec.gov.
Companies approved for trading on EASDAQ are required to publish relevant
financial and other information regularly and to keep the public informed of
all events likely to affect the market price of their securities. Price
sensitive information will be made available to investors in Europe through
the EASDAQ- Reuters Regulatory Company Reporting System and other
international information vendors. Investors who do not have direct access to
such information systems should ask their financial intermediary for the terms
on which such information will be provided to them by that financial
intermediary.
The Company will ensure that a summary of the Company's quarterly and annual
financial statements will be provided to shareholders in Europe across the
EASDAQ Company Reporting System (ECR System). A hard copy of the annual report
will be provided to shareholders promptly after it becomes available. Complete
quarterly statements will either be sent by the Company to its shareholders or
will be available upon request from the Company at its executive offices at 45
Great Valley Parkway, Malvern, Pennsylvania USA or by calling +1-610-640-1775.
Copies of all documents filed (which does not include material for which
confidential treatment has been accorded) with the Commission by the Company
can be obtained by request to the Company at such offices.
Copies of the Company's filings with the Commission and copies of the
Company's up-to-date Articles of Incorporation and Bylaws will be available
for inspection at the offices of EASDAQ, 56 Rue de Colonies, Bte. 15, B-1000
Brussels, Belgium.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the financial statements of
the Company and the notes thereto, which have been prepared in accordance with
U.S. GAAP, included elsewhere in this Prospectus. Unless otherwise indicated,
all information presented in this Prospectus (i) assumes no exercise of the
Over-allotment Option and (ii) reflects the conversion of all outstanding
shares of the Company's Class A, Class B, and Class C Convertible Preferred
Stock into an aggregate of 3,526,418 shares of Common Stock upon the
consummation of this Offering. Each reference to the "Company" or "Orthovita"
refers to Orthovita(R), Inc.
THE COMPANY
Orthovita is a biomaterials company which began operations in 1993 to exploit
technology based on research emanating from the Catholic University of Leuven,
Belgium. The Company develops, manufactures and markets proprietary
osteobiologic bone substitutes and bone cements. Orthovita has targeted its
products for sale to the trauma, spine, implant cement, cranio-maxillofacial
and dental implant surgery markets, which the Company estimates have an
aggregate market potential of approximately US$1 billion. The Company believes
that these markets will require, and that its products will address the need
for, bone substitutes and bone cements that offer a broader range of
performance attributes, better patient outcomes and lower cost than are
currently available. The Company's biomaterials technology currently
encompasses the following three products which address differing patient needs:
ORTHOCOMP(TM), a composite, high strength, bone bonding cement that is fast
setting, immediately load bearing and injectable; BIOGRAN(R), a resorbable,
granular biomaterial that biologically transforms to remodeled bone in four to
six months; and VITAGRAFT(TM), a resorbable setting cement that assists
fracture healing and has indications for use in bone defects of younger
patients. To date, the Company has only received regulatory approval for
BIOGRAN for use in certain dental surgical applications and there can be no
assurance that the Company will obtain regulatory approval for any of its other
products or that it will successfully commercialize any of its products. On
April 28, 1998, the Company entered into a global strategic alliance for the
marketing and distribution of BIOGRAN and ORTHOCOMP for the dental implant
surgery market with Implant Innovations, Inc. ("3i"), a leading dental implant
company. On June 9, 1998, the Company entered into license and development and
supply agreements with Howmedica Inc., a wholly-owned subsidiary of Pfizer
Inc., whereby Howmedica has obtained the exclusive worldwide marketing, sales
and distribution rights for ORTHOCOMP in joint inplant procedures.
The global market for orthopaedic products used to address problems arising
from skeletal impairments is currently estimated to be approximately US$8
billion. Among these products are bone substitutes to replace or reconstruct
skeletal defects and augment fracture repair. The emergence of new, high
strength, fast setting, biologically active bone substitutes promises
significant improvements over current options for bone replacement, repair and
fixation while also providing solutions to previously unmet market needs. These
products will allow segmentation of the market between those younger patients
with high bone vitality that require a fast setting, resorbable bone
substitute, and those older patients and those with compromised bone physiology
that require a fast setting, high load bearing solution.
The Company is positioning ORTHOCOMP as a replacement for
polymethylmethacrylate ("PMMA") cement, a product used in approximately 65% of
joint implant procedures. Generally, Orthovita's portfolio of patent-protected
products will address the specific requirements of a diversity of procedures
based on patient and load bearing requirements. The Company will access
multiple distribution channels by utilizing a combination of third-party
alliances, direct sales and agent/distributors, and will leverage its large
intellectual property portfolio by concentrating its technical staff on
development of and approvals for products that are nearer to market
commercialization.
The Company was incorporated in 1992 under the laws of the Commonwealth of
Pennsylvania with the power to conduct the business described herein. The
Company's headquarters and principal place of business are located at 45 Great
Valley Parkway, Malvern, Pennsylvania 19355, and its telephone number is +1-
610-640-1775.
TRADEMARKS
Orthovita and BIOGRAN are U.S. registered trademarks of the Company and
application has been made to register ORTHOCOMP and VITAGRAFT as U.S.
registered trademarks. All other trade names and trademarks appearing in this
Prospectus are the property of their respective holders.
5
<PAGE>
THE OFFERING
Common Stock offered
hereby..................... 2,000,000 shares; 1,500,000 by the Company and
500,000 by the Selling Shareholders(1)
Common Stock to be
outstanding after this
Offering(2)................ 10,212,640 shares
Use of proceeds............. To fund expansion of manufacturing, marketing and
sales activities, clinical trials, research and
development activities and for working capital
and general corporate purposes. See "Use of
Proceeds."
Proposed EASDAQ symbol...... "VITA"
EASDAQ Market Makers........ Quartz Capital Partners Limited
Bank Brussels Lambert
Herzog, Heine & Geduld
- --------
(1) The Selling Shareholders comprise approximately 80 persons, none of whom or
which (i) is an officer or member of the board of directors of the Company
or (ii) with the exception of two holders who beneficially own 2.7% and
1.2% of the outstanding Common Shares, respectively, owns more than one
percent of the outstanding Common Stock.
(2) Includes 3,526,418 shares of Common Stock which will be outstanding upon
the conversion of all the outstanding shares of the Company's Class A,
Class B and Class C Preferred Stock upon the consummation of this Offering.
Excludes (i) 1,154,494 shares of Common Stock issuable upon the exercise of
options outstanding as of May 31, 1998 under the Company's 1993 Stock
Option Plan and 1997 Equity Compensation Plan (collectively, the "Stock
Option Plans") at a weighted average exercise price of US$3.34 per share,
(ii) 345,506 shares reserved for future grants under the Stock Option
Plans, (iii) 300,000 shares reserved for future issuance under the
Company's Employee Stock Purchase Plan, and (iv) 1,013,552 shares of Common
Stock issuable upon the exercise of warrants outstanding as of May 31, 1998
at a weighted average exercise price of US$3.49 per share. See
"Management--Stock Option Plans" and "Description of Capital Stock."
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- --------------------
1993(1) 1994 1995 1996 1997 1997 1998
------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ US$ -- US$ 34 US$ 578 US$ 1,860 US$ 3,312 US$ 741 US$ 825
Cost of sales........... -- 11 696 887 1,097 285 214
Operating expenses...... 928 2,045 3,066 7,162 9,999 2,349 2,033
Other expenses.......... 30 37 152 251 169 230 91
Extraordinary item--
gain................... -- -- -- -- 397 397 --
------- --------- --------- --------- --------- --------- ---------
Net loss(/2/)........... US$(958) US$(2,059) US$(3,336) US$(6,440) US$(7,556) US$(1,726) US$(1,513)
======= ========= ========= ========= ========= ========= =========
Net loss per common
share(/3/)............. US$ (1.60) US$ (0.36) US$ (0.33)
========= ========= =========
Shares used in computing
net loss per common
share(/3/)............. 5,050 4,792 5,186
========= ========= =========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ----------------------------------
PRO PRO FORMA AS
ACTUAL ACTUAL FORMA(4) ADJUSTED(5)
----------------- --------- --------- ------------
<S> <C> <C> <C> <C>
Working capital
(deficit)............... US$(1,081) US$(2,620) US$(2,620) US$10,530
Total assets............. 4,862 3,407 3,407 16,557
Long-term debt........... 833 874 874 874
Redeemable convertible
preferred stock......... 7,383 7,584 -- --
Total shareholders'
equity (deficit)........ (7,713) (9,397) (1,812) 11,338
</TABLE>
- --------
(1) For the period from inception (June 26, 1992) to December 31, 1993. The
Company's operations did not commence until November 1993.
(2) Before the accretion of the redemption premium on Class C Preferred Stock
in 1997 and the first three months of 1998 of US$537 and US$201,
respectively.
(3) See Note 2 to Notes to Financial Statements for an explanation of the
determination of the number of common shares used in computing net loss per
common share.
(4) Reflects the conversion of all the outstanding shares of the Company's
Class A, Class B and Class C Preferred Stock into an aggregate of 3,526,418
shares of Common Stock upon the consummation of this Offering.
(5) Represents pro forma data as adjusted to give effect to the sale of
1,500,000 shares of Common Stock offered by the Company at an assumed
initial public offering price of US$10.00 per share (after deducting
underwriting discounts and commissions and estimated offering expenses) and
the application of the estimated net proceeds therefrom. See
"Capitalization" and "Use of Proceeds."
6
<PAGE>
RISK FACTORS
The following risk factors, as well as the other information contained in
this Prospectus, should be considered carefully before purchasing the Common
Stock offered hereby. The realization of any of these factors or events could
materially and adversely affect the Company's business, operating results and
financial condition.
UNCERTAINTY RELATED TO REGULATORY APPROVALS
Requirement of Regulatory Approval
The jurisdictions in which the Company seeks to market its bone substitutes
and cements regulate these products as medical devices. In most circumstances,
the Company and its distributors and agents must obtain various regulatory
approvals and otherwise comply with extensive regulations regarding safety,
quality and efficacy standards. These regulations vary from country to
country, and regulatory review can be lengthy, expensive and uncertain. To
date, the Company has received and applied for only certain of the approvals
that are required to market its products. (For a description of the regulatory
status and applicable indications of the Company's three primary products,
ORTHOCOMP, BIOGRAN and VITAGRAFT, see "Business--Clinical Applications.") The
Company may not ultimately obtain the necessary regulatory approvals to market
its products in any of its targeted markets and any such regulatory approval
may include significant restrictions on the anatomic sites and types of
procedures for which the Company's products can be used. In addition, the
Company may be required to incur significant costs in obtaining or maintaining
its regulatory approvals. See "Business--Government Regulation."
United States
Regulation by FDA. Pursuant to the U.S. Federal Food, Drug, and Cosmetic Act
(the "FFD&C Act"), the U.S. Food and Drug Administration (the "FDA") regulates
the clinical testing, manufacturing, labeling, sale, distribution and
promotion of medical devices. Before the Company may market its products in
the U.S., it generally must obtain from the FDA either market clearance
through a Section 510(k) premarket notification (a "510(k)") or premarket
approval through a Premarket Approval ("PMA") application. Noncompliance with
applicable requirements, including good manufacturing practices ("GMP"), can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals and criminal prosecution. To date, the
Company has only received market clearance through a 510(k) for one of its
products, BIOGRAN, for dental surgical applications.
Action by FDA. There can be no assurance that the FDA will act favorably or
quickly on any such 510(k) notification or PMA application, and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain clearance or approval. Furthermore, the FDA may, in processing and
reviewing the Company's submissions, request additional data, require the
Company to conduct further clinical and non-clinical studies, or require
supplements to the Company's applications, any of which could result in
substantial additional cost and significant delays in the commercial sale of a
product. In addition, even if the FDA clears or approves an application, it
may impose significant restrictions on the anatomic sites or types of
procedures for which the product can be used. The failure of the Company to
obtain clearance of a 510(k) or approval of a PMA application or the
imposition of restrictions on any product could substantially limit the
Company's ability to market the product in the U.S.
Clinical Studies; Approval Restrictions and Limitations. The Company may not
be successful in enrolling sufficient numbers of patients to complete its
clinical studies. Moreover, data from any completed domestic or foreign
clinical studies may not demonstrate the safety and effectiveness of the
Company's products and such data may not otherwise be adequate to support
approval of a PMA application. In addition, if PMA approval is obtained, such
approval may significantly restrict anatomic sites and types of procedures for
which the Company's products can be used. Failure to obtain approval of a PMA
application or restrictions on the anatomic sites and types of procedures for
which the Company's products may be used could substantially limit the
Company's ability to market its products in the U.S.
Continual Regulation; Regulatory Changes. Any products manufactured or
distributed by the Company pursuant to FDA approvals or clearance will be
subject to extensive regulation by the FDA, and the FDA's enforcement policy
strictly prohibits the promotion of products for any uses other than those for
which approval or clearance was obtained. New governmental regulations may be
established that could prevent or delay regulatory approval of the Company's
products. Furthermore, if approval of a PMA application is obtained,
modifications to the approved product may require a PMA supplement or may
require the submission of a new
7
<PAGE>
PMA application. Modifications to 510(k)-cleared products may require
submission of a new 510(k) notification. The Company may not be successful in
obtaining the approval of any necessary PMA supplements, new PMA applications,
or new 510(k) notifications in a timely manner, if at all.
European Union and Other International Markets
General. The introduction of the Company's products in markets outside the
U.S. will also subject the Company to regulatory clearances in those
jurisdictions, which may impose substantial additional costs and burdens.
International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from
country to country. Many countries also impose product standards, packaging
and labeling requirements and import restrictions on devices. In addition,
each country has its own tariff regulations, duties and tax requirements. The
approval by the foreign government authorities is unpredictable and uncertain,
and the necessary approvals or clearances may not be granted on a timely
basis, if at all. Delays in receipt of, or failure to receive, such approvals
or clearances, or the loss of any previously received approvals or clearances,
could substantially limit the Company's ability to market its products.
Requirement of CE marking in the EU. To market a product in the European
Union (the "EU"), the Company must be entitled to affix a CE marking, an
international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. A CE marking
allows the Company to market a product in all of the member states of the EU.
The EU has promulgated rules that require that medical devices be CE marked by
June 1998. Prior to June 1998, medical device manufacturers have the choice of
complying with the EU directives or complying with the applicable regulations
of the various EU countries that were in effect on December 31, 1994. Failure
to be entitled to affix a CE marking will prohibit the Company from selling
its products in member countries of the EU. Unexpected delays or other
problems could hinder the Company's efforts to meet certification
requirements. To date, the Company has received a CE marking for only one of
its products, BIOGRAN, for dental surgical applications.
Requirement of MHW approval in Japan. The Company also intends to market its
products in Japan and plans to commence clinical trials to support regulatory
and reimbursement approval in Japan. The Company intends to file applications
for regulatory approval from the Ministry of Health and Welfare ("MHW") and
will need to obtain such approval prior to marketing a product. To date, the
Company has only made one filing with the MHW, relating to the use of BIOGRAN
for dental surgical applications.
HISTORY OF LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE RESULTS
The Company has incurred substantial operating losses since its inception
and, at March 31, 1998, had an accumulated deficit of approximately US$22.6
million. These losses have resulted principally from expenses required to be
incurred before the Company can begin marketing its products, including the
development and patenting of the Company's technologies, preclinical and
clinical studies, preparation of submissions to the FDA and foreign regulatory
bodies, and the development of sales, marketing and manufacturing
capabilities. Although the Company has commercialized BIOGRAN for certain
dental applications, the Company may not be successful in commercializing any
of its other products. The Company expects to continue to incur significant
operating losses in the future as it continues its product development
efforts, expands its marketing and sales activities and further develops its
manufacturing capabilities.
The Company's results of operations may fluctuate significantly in the
future as a result of a number of factors, many of which are outside of the
Company's control. These factors include, but are not limited to, the timing
of governmental approvals, unanticipated events associated with clinical and
preclinical trials, the medical community's acceptance of the Company's
products, the success of competitive products, the ability of the Company to
enter into strategic alliances with third parties, expenses associated with
development and protection of intellectual property matters, establishment of
commercial scale manufacturing capabilities, and the timing of expenses
related to commercialization of new products. Although the Company's revenues
grew significantly in 1997, this trend of increased revenues may not continue,
and the Company may never become profitable. The Company's results of
operations may fluctuate significantly from quarter to quarter and may not
meet expectations of securities analysts and investors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
NEED FOR ADDITIONAL FINANCING
The Company has experienced negative operating cash flows since its
inception. The Company plans to continue to spend substantial funds for
clinical trials in support of regulatory and reimbursement approvals, research
and development, and establishment of commercial scale manufacturing
capabilities. The Company believes that the cash obtained from this Offering,
together with the cash generated from the sale of current
8
<PAGE>
products, will be sufficient to meet the Company's currently estimated
operating and capital requirements at least through the end of 1999. However,
the Company cannot be certain that it will not require additional cash during
this period. Factors which may cause the Company's future capital requirements
to be greater than anticipated include the extent to which unforeseen
developments arise with the Company's clinical trials, research and
development or manufacturing activities, market acceptance of the Company's
products, the acquisition and defense of intellectual property rights or the
development of strategic alliances for the marketing of certain of its
products. Should the Company's cash not be sufficient to meet the Company's
currently estimated requirements, the Company will need to obtain additional
funds from additional sources, including equity or debt financings or
strategic alliances, that may result in substantial dilution to the holders of
Common Stock and in significant financial and operational restrictions. These
funds may not be available on satisfactory terms, if at all. If adequate
financing is not available, the Company may be required to delay, scale back
or eliminate certain operations. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
NEW TECHNOLOGY; UNCERTAINTY OF MARKET ACCEPTANCE
The Company's products are based on new technologies which have not been
previously used and must compete with more established treatments currently
accepted as the standards of care. Market acceptance of the Company's products
will largely depend on the Company's ability to demonstrate their relative
safety, efficacy, cost-effectiveness and ease of use. The use of the Company's
products will depend on physician awareness, marketing and sales efforts by
the Company and through any third-party alliances, and the availability and
extent of third-party reimbursement. The Company believes that recommendations
and endorsements by physicians will be essential for market acceptance of the
Company's products, and the Company is not certain that any such
recommendations or endorsements can be obtained. The Company's products may
not be accepted in the market in preference to other competing products or
therapies or to products and therapies that are subsequently developed. See
"Business--The Company's Bone Substitutes."
LIMITED CLINICAL TRIALS
While the Company has commercialized BIOGRAN in the United States, Europe
and elsewhere for certain dental surgical applications, it is in the clinical
or pre-clinical studies phase for ORTHOCOMP and VITAGRAFT. There can be no
assurance that any of the Company's products will prove safe and efficacious
for use in any new indication, that the Company will obtain regulatory
approval to market the Company's products for any new indication, that these
products will achieve market acceptance, or that adequate third-party
reimbursement will be available. Failure to demonstrate safety and efficacy in
the clinical trials could hinder obtaining regulatory approval. In addition,
the Company may incur significantly greater than anticipated costs and
expenses in conducting its clinical trials. See "Business--Clinical
Applications," "--Government Regulation" and "--Third-Party Reimbursement."
UNCERTAINTY RELATED TO THIRD-PARTY REIMBURSEMENT
The Company's products will generally be purchased by hospitals or
practicing physicians, surgeons and dentists which may bill various third-
party payors, such as governmental programs, managed care organizations, and
other private or governmental health insurers. Successful sales of the
Company's products will largely depend on the availability of adequate
coverage and reimbursement from third-party payors. There is significant
uncertainty concerning third-party reimbursement for the use of any medical
device incorporating new technology. Even if the Company receives approval of
a PMA or achieves CE marking entitlement for the Company's products, third-
party payors may nevertheless deny coverage or reimbursement or reimburse at a
low price if they conclude, on the basis of clinical, economic and other data,
that its use is not cost-effective, or that the product is being used for an
unapproved indication. Furthermore, third-party payors are increasingly
challenging the need to perform medical procedures, as well as limiting
reimbursement coverage for medical devices, and in many instances are
pressuring medical suppliers to lower their prices. The Company's products may
not be considered cost-effective by third-party payors, reimbursement may not
be available or, if available, third-party payors' reimbursement policies may
adversely affect the Company's ability to sell its products on a profitable
basis.
Member countries of the EU operate various combinations of centrally
financed health care systems and private health insurance systems. The
relative importance of such governmental and private systems varies from
country to country. Medical devices are most commonly sold to hospitals and
health care facilities at a price set by negotiation between the buyer and the
seller. The choice of devices is subject to constraints imposed by the
availability of funds within the purchasing institution. A contract to
purchase products may result from an individual initiative or as a result of a
public invitation and a competitive bidding process. In either case, the
purchaser pays the supplier and payment terms can vary widely throughout the
EU.
9
<PAGE>
For the U.S. government, such coverage and reimbursement decisions are made
by the Health Care Financing Administration ("HCFA"), which administers the
U.S. Medicare and Medicaid programs for patients eligible to receive public
health care benefits. The market for the Company's products could also be
adversely affected by recent U.S. legislation that reduces reimbursements
under the cost reimbursement system for the U.S. Medicare program. In
addition, an increasing emphasis on managed care in the U.S. has placed, and
will continue to place, greater pressure on medical device pricing. While the
Company cannot predict the effect such changes may have on its business, the
announcement of such proposals could have a material adverse effect on the
Company's ability to raise capital, and the adoption of such proposals would
have a material adverse effect on the Company's business, financial condition
and results of operations. Failure by hospitals and other users of the
Company's products to obtain coverage or reimbursement from third-party payors
or changes in governmental and private third-party payors' policies toward
reimbursement for procedures employing the Company's products would reduce
demand for the Company's products.
In Japan, at the end of the regulatory approval process, the MHW makes a
determination of the reimbursement level of the product. The MHW can set the
reimbursement level for the Company's products at its discretion, and the
Company may not be able to obtain regulatory approval in Japan or if such
approval is granted, the Company may not obtain a favorable per unit
reimbursement level. See "Business--Third-Party Reimbursement."
DEPENDENCE ON PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS; EXISTING
LITIGATION
General. The Company's success will depend in part on its ability to
preserve its trade secrets, obtain and maintain patent protection for its
technologies, products and processes, and operate without infringing the
proprietary rights of other parties. As a result of the substantial length of
time and expense associated with developing and commercializing new medical
devices, the Company places considerable importance on obtaining and
maintaining trade secret and patent protection for new technologies, products
and processes.
Company Patents. The Company intends to file applications as appropriate for
patents covering its technologies, products and processes. The Company intends
to continue to cooperate with its licensors, the University of Pennsylvania
and FBFC International ("FBFC"), in obtaining patent protection exclusively
licensed to the Company. (See "Business--License Agreements.") As of the date
of this Prospectus, the Company owns or controls 16 issued U.S. patents, 14
pending patent applications in the United States and numerous counterparts of
certain of these patents and pending patent applications in Europe and Japan.
There can be no assurance that patents will issue from any of the pending
patent applications. Since patent applications in the United States are
maintained in secrecy until issued, and since publication of discoveries in
the scientific or patent literature tends to lag behind actual discoveries,
the Company cannot be certain that it or any of its licensors was the first
creator of inventions covered by pending patent applications or that it or any
of its licensors was the first to file patent applications for such
inventions. Further, there can be no assurance that the claims allowed under
any issued patents will be sufficiently broad as to protect the Company's
proprietary position in the technology. In addition, there can be no assurance
that any patents issued to the Company or any of its licensors will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide commercially useful competitive advantages to the Company.
Ownership of Patents. A majority of the patents and patent applications in
the Company's patent portfolio are not owned by the Company, but are licensed
from third parties under license agreements which give the Company exclusive
rights for the commercial exploitation of the patents, subject to certain
provisions of the license agreements. Failure to comply with these provisions
could result in the loss of the Company's rights under these agreements.
Enforceability of Patents. Under Title 35 of the United States Code as
amended by the General Agreement on Tariffs and Trade implementing the Uruguay
Round Agreement Act of 1994, ("GATT"), patents that issue from patent
applications filed on or prior to June 8, 1995, will enjoy a 17-year period of
enforceability as measured from the date of patent issue or a 20-year period
of enforceability as measured from the earliest effective date of filing,
whichever is longer, while those that issue from applications filed on or
after June 8, 1995, will enjoy a 20-year period of enforceability as measured
from the date the patent application was filed or the first claimed priority
date, whichever is earlier. Patents that issue from applications filed on or
after June 8, 1995, may be extended under the term extension provisions of
GATT for a period up to five years to compensate for any period of
enforceability lost due to interference proceedings, government secrecy orders
or appeals to the Board of Patent Appeals or the Federal Circuit. Under the
Drug Price Competition and Patent Term Restoration Act of 1984, including
amendments implemented under GATT (the "Patent Term Restoration Act"), the
period of enforceability of a first or basic product patent or use patent
covering a drug may be extended for up to five
10
<PAGE>
years to compensate the patent holder for the time required for FDA regulatory
review of the product. This law also establishes a period of time following
FDA approval of certain drug applications during which the FDA may not accept
or approve applications for similar or identical drugs from other sponsors.
Any extension under the Patent Term Restoration Act and any extension under
GATT are cumulative. There can be no assurance that the Company will be able
to take advantage of such patent term extensions or marketing exclusivity
provisions of these laws, either as now constituted or as they may be changed
by any future legislation, or that such extensions will adequately restore the
time lost to the FDA approval process. While the Company cannot predict the
effect that such changes will have on its business, the adoption of such
changes could have a material adverse effect on the Company's ability to
protect its proprietary information and sustain the commercial viability of
its products. Furthermore, the possibility of shorter terms of patent
protection, combined with the lengthy FDA review process and possibility of
extensive delays in such process, could effectively further reduce the term
during which a marketed product could be protected by patents.
Trade Secrets and Know-how. The Company also relies on trade secrets and
proprietary know-how which it seeks to protect, in part, by confidentiality
agreements with its corporate partners, collaborators, employees and
consultants. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known or be
independently discovered by competitors.
Intellectual Property Rights of Others. The success of the Company will also
depend in part on neither infringing patents issued to competitors nor
breaching the technology licenses upon which the Company's products might be
based. While the Company is aware of certain patent applications and patents
belonging to competitors, it is uncertain whether these will require the
Company to alter its products or processes, pay licensing fees or cease
certain activities. Further, there can be no assurance that the Company will
be able to obtain a license to any other technology that it may require or
that, if obtainable, such technology can be licensed at reasonable cost.
Failure by the Company to obtain a license to any technology that it may
require to commercialize its products may have a material adverse impact on
the Company. Litigation, which could result in substantial cost to the
Company, may also be necessary to enforce any patents issued or licensed to
the Company and/or to determine the scope and validity of the proprietary
rights of others in court or administrative proceedings. In addition, to
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office or
in opposition, nullity or other proceedings before foreign agencies with
respect to any of its existing patents or patent applications or any future
patents or applications, which could result in substantial cost to the
Company. Further, the Company may have to participate at substantial cost in
International Trade Commission proceedings to abate importation of goods which
would compete unfairly with the Company's products. See "Business--Patents and
Proprietary Rights."
FBFC Patent Challenge. On July 23, 1994, U.S. Biomaterials Corporation filed
with the U.S. Patent and Trademark Office a Request for Reexamination of U.S.
Patent No. 5,204,106, assigned to FBFC (the "FBFC Patent"), of which the
Company is the exclusive licensee. The Company filed a response in this
proceeding on behalf of FBFC, establishing that the claims of the FBFC Patent
were properly allowed. As a result, a Certificate of Reexamination was issued
by the U.S. Patent and Trademark Office confirming the patentability of all
claims of the FBFC Patent without amendment. However, a nullification
proceeding was also instituted by U.S. Biomaterials Corporation against the
European counterpart to the FBFC Patent. The opposition division of the
European Patent Office tentatively decided in the Company's favor, but the
matter is still proceeding.
BIOGRAN Litigation. In May 1996, a complaint was filed in the U.S. District
Court for the Northern District of Florida by the University of Florida
Research Foundation, Inc., U.S. Biomaterials Corporation and Block Drug
Corporation against the Company, a distributor of the Company's BIOGRAN
product and the Company's Chairman. This action charged the defendants with
infringement of U.S. Patent No. 4,851,046 (the "046 Patent"), said to be
assigned to the University of Florida Research Foundation and said to be
exclusively licensed to U.S. Biomaterials Corporation. In April 1998, the
court granted the Company's summary judgment motion stating that the Company's
BIOGRAN product does not infringe this patent. The complaint also alleges
false representation, unfair competition, false advertising and trade
disparagement under U.S. federal and Florida state law, and no ruling has been
rendered with respect to these allegations. While the Company believes that it
will ultimately prevail in the European Patent Office nullification proceeding
and that the allegations of false description, false representation, unfair
competition, false advertising and trade disparagement under U.S. federal and
Florida state law are without merit, there can be no assurance that this
matter (the "BIOGRAN Matter") will be resolved on a basis that is favorable to
the Company in the near future, if at all. At March 31, 1998, the Company had
a reserve of US$635,000 to cover future legal fees related to the BIOGRAN
Matter. See "Business--Litigation."
11
<PAGE>
LIMITED MANUFACTURING EXPERIENCE
The Company has limited manufacturing capacity and experience. To date, with
the exception of BIOGRAN, the Company has not manufactured any of its products
in commercial quantities. The Company's future success is dependent on its
ability to manufacture its products in commercial quantities, in compliance
with regulatory requirements and in a cost effective manner. The manufacture
of the Company's products is subject to regulation and periodic inspection by
various regulatory bodies for compliance with GMPs, International Standards
Organization ("ISO") 9000 Series standards and equivalent requirements. There
can be no assurance that the regulatory authorities will not, during the
course of an inspection of existing or new facilities, identify what they
consider to be deficiencies in GMPs or other requirements and request, or
seek, remedial action. Failure to comply with such regulations or delay in
attaining compliance may adversely affect the Company's manufacturing
activities and could result in warning letters, injunctions, civil penalties,
FDA refusal to grant premarket approvals or clearances of future or pending
submissions, fines, recalls or seizures of products, total or partial
suspensions of production and criminal prosecution. Additionally, certain
modifications of the Company's manufacturing facilities and processes, such as
those made in preparation for commercial-scale production of products, will
subject the Company to further FDA inspections and review prior to final
approval of its products for commercial sale. The Company may not be able to
obtain necessary regulatory approvals or clearances on a timely basis, if at
all. See "Business--Manufacturing and Facilities."
DEPENDENCE ON SUPPLIERS
The Company's future operations may be dependent on a limited number of
speciality suppliers of products and services. For example, the Company
currently utilizes a limited number of suppliers of speciality chemicals and
outsources the manufacturing of BIOGRAN. The future failure of a supplier to
continue to provide the Company with its products or services at a quality
acceptable to the Company, or at all, could have a material adverse effect on
its business, financial condition and results of operations. Although the
Company believes that it maintains good relationships with its suppliers and
service providers, and is aware of alternative providers of critical supplies
and services, there can be no guarantee that such supplies and services will
continue to be available with respect to the Company's current and future
commercialized products.
COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE
The market for bone substitutes and cements is characterized by extensive
research efforts and rapid technological change. The Company anticipates that
it will face intense competition from medical device, medical products and
pharmaceutical companies. The Company's products could be rendered
noncompetitive or obsolete by technological advances made by the Company's
current or potential competitors. There can be no assurance that the Company
will be able to respond to technological advances through the development and
introduction of new products. Moreover, many of the Company's existing and
potential competitors have substantially greater financial, marketing, sales,
distribution, manufacturing and technological resources than the Company. Such
existing and potential competitors may be in the process of seeking FDA or
other regulatory approvals, or patent protection, for their respective
products or may enjoy substantial advantages over the Company in terms of
research and development expertise, experience in conducting clinical trials,
experience in regulatory matters, manufacturing efficiency, name recognition,
sales and marketing expertise or the development of distribution channels. The
attributes of the Company's products may cause some changes in surgical
techniques which have become standard within the medical community, and there
may be resistance to change. In addition, such competitors may obtain
regulatory approval and introduce or commercialize competing products in
advance of the Company's products. See "Business--Competition."
INCREASED RELIANCE ON THIRD-PARTY AGREEMENTS
The Company plans to place greater reliance on third-party strategic
alliances to market its products. To date, the Company has entered into a
global strategic alliance with 3i and no assurance can be given that it will
be able to establish similar alliances on a satisfactory basis, if at all. To
the extent that the Company chooses not to, or is unable to enter into similar
satisfactory alliances, it would need to either develop a network of
independent sales agents, distributors and dealers or create its own internal
direct sales and marketing capabilities. There can be no assurance that the
Company would be able to establish satisfactory arrangements with independent
sales representatives or agents, if at all, or develop its own internal direct
sales and marketing capabilities on an effective basis, if at all.
The amount and timing of resources which are devoted to the performance of
the contractual responsibilities by third parties to any such strategic
alliances will not be within the control of the Company. There can be no
assurance that third parties will perform their obligations as expected, pay
any required fees to the Company or
12
<PAGE>
market any products under these agreements, or that the Company will derive
any revenue from such arrangements. Certain agreements may also permit these
third parties to pursue existing or alternative technologies in preference to
the Company's technology. There can be no assurance that the interests of the
Company will continue to coincide with those of these third parties or that
they will not develop independently or with other third parties products which
could compete with the Company's products, or that disagreements over rights
or technology or other proprietary interests will not occur. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL AND ADVISORS
The Company relies on its key personnel in formulating and implementing its
product research, development and commercialization strategies. The Company's
future success will depend upon its ability to attract and retain highly
qualified personnel. The Company competes for such personnel with other
companies, academic institutions, government entities and other organizations.
The Company may not be successful in hiring or retaining qualified personnel.
Other than employment agreements with David S. Joseph, President and Chief
Executive Officer of the Company, Samuel A. Nalbone, Jr., Senior Vice
President, Operations, and Dr. Erik M. Erbe, Vice President, Research and
Development, the Company has not entered into any employment agreements with
any of its executive officers. See "Management."
PRODUCT LIABILITY; AVAILABILITY OF ADEQUATE INSURANCE
Use of the Company's products entails the risk of product liability claims.
Although the Company maintains product liability insurance in the annual
aggregate amount of up to $3 million, the coverage limits of the Company's
insurance policies may not be adequate and the insurance may not continue to
be available on commercially reasonable terms, if at all. In addition, whether
or not successful, any litigation brought against the Company could divert
management's attention and time and result in significant expenditures. See
"Business--Product Liability and Insurance."
ABSENCE OF PRIOR PUBLIC MARKET; RELIANCE ON A NEW QUOTATION SYSTEM AS THE SOLE
MARKET
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be
determined through negotiations among the Company and the Underwriters and may
not be indicative of the market price for the Common Stock after this
Offering. See "Offering and Subscription" for information relating to the
method of determining the initial public offering price of the Common Stock.
Although the Company has made an application to have the Common Stock admitted
to trading on EASDAQ, once admitted, there can be no assurance that an active
public market will develop and continue or that the initial public offering
price will correspond to the price at which the Common Stock will trade in the
public market subsequent to this Offering. EASDAQ is a new quotation system
and the Company will be one of a small number of issuers to quote its
securities on EASDAQ.
VOLATILITY OF STOCK PRICES
In general, equity markets, including EASDAQ, have from time to time
experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies or existing economic
conditions. These broad market fluctuations may adversely affect the market
price of the Common Stock. Factors such as fluctuations in the Company's
results, underperformance in relation to analysts' estimates, changes in stock
market analyst recommendations regarding the Company, 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, business conditions affecting other medical device companies
or the medical device industry generally, and general market conditions may
cause the market price of the Common Stock to be highly volatile or to be
significantly adversely effected.
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
The 2,000,000 shares of Common Stock offered hereby will be freely tradeable
immediately following this Offering. All of the remaining outstanding shares
(the "Restricted Shares"), have or will become available for sale in the
public market during 1998 subject, in certain instances, to the applicable
resale limitations of Rule 144 promulgated under the Securities Act of 1933,
as amended (the "Securities Act"). In addition, the Company intends to file a
Registration Statement on Form S-8 covering up to 1,500,000 shares issuable
upon exercise of stock options under the Stock Option Plan. Such option shares
(in the case of holders that are affiliates of the Company, subject to the
applicable resale limitations under Rule 144), upon issuance, will be
immediately
13
<PAGE>
available for resale. In addition, holders of approximately 4,441,344 of the
Restricted Shares have demand and piggyback registration rights with respect
to those shares. The Company's officers and directors, who hold, in the
aggregate, approximately 2,497,162 shares of Common Stock, have agreed not to
sell any shares of Common Stock for a period of 180 days following the date of
this Prospectus in accordance with EASDAQ regulations. Other shareholders have
agreed not to sell their shares for 180 days without the permission of the
Underwriters. Thereafter, these shares may become either freely resalable or
eligible for sale pursuant to the applicable resale limitations of Rule 144.
Sales of substantial amounts of Common Stock in the public market or the
availability of substantial amounts of such stock for sale subsequent to this
Offering could adversely affect the prevailing market price of the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."
RISKS RELATING TO INTERNATIONAL OPERATIONS
Approximately 26% and 18% of the Company's net revenues during the year
ended December 31, 1997 and the first three months of 1998, respectively, were
generated outside the U.S., principally in Europe from the sale of BIOGRAN. A
number of risks are inherent in international operations. International sales
and operations may be limited or disrupted by the imposition of governmental
controls, difficulties in managing international operations, and fluctuations
in foreign currency exchange rates. The international nature of the Company's
business subject it and its representatives, agents and distributors to the
laws and regulations of the jurisdictions in which they operate, and in which
the Company's products are sold. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Government
Regulation."
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCES OF PREFERRED STOCK
Certain provisions of Pennsylvania law could make it more difficult for a
third party to acquire, or could discourage a third party from attempting to
acquire, control of the Company. These provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Common Stock. In addition, shares of Preferred Stock may be issued by the
Board of Directors without shareholder approval on such terms and conditions,
and having such rights, privileges and preferences, as the Board of Directors
may determine. 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 any
preferred stock that may be issued in the future. The issuance of preferred
stock could have the effect of delaying, deterring or preventing a change in
control of the Company. The Company has no current plans to issue any shares
of preferred stock. See "Description of Capital Stock--Preferred Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of US$8.89 per share (based on an assumed
offering price of US$10.00 per share and after giving effect to underwriting
discounts and commissions and estimated offering expenses). Furthermore,
owners of Common Stock do not have preferred subscription rights and it is
anticipated that they will not be accorded such rights in the future. If the
Company offers additional Common Stock in the future, including shares that
may be issued upon exercise of stock options, purchasers of Common Stock in
this Offering may experience further dilution. See "Dilution."
NO DIVIDENDS
The Company has never declared nor paid dividends on its capital stock. The
Company currently intends to retain any future earnings for funding growth
and, therefore, does not intend to pay any cash dividends in the foreseeable
future. See "Dividend Policy."
CONTROL OF THE COMPANY
Immediately upon the completion of this offering, approximately 55.2% of the
Common Stock will be beneficially owned by the Company's officers, directors
and five percent holders. As a result, such persons, should they decide to act
together, will have the ability to control all matters submitted to
shareholders of the Company for approval (including the election and removal
of directors and any merger, consolidation or sale of all or substantially all
of the Company's assets) and to control the management and affairs of the
Company. Such concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of the Company, impede a merger,
consolidation, takeover or other business combination involving the Company or
discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of the Company, which in turn could have an
adverse effect on the market price of the Company's Common Stock. See
"Principal and Selling Shareholders" and "Certain Relationships and Related
Transaction."
14
<PAGE>
RECENT DEVELOPMENTS
On June 9, 1998, the Company and Howmedica, Inc., a wholly-owned subsidiary
of Pfizer Inc., entered into a License and Development Agreement, a Supply
Agreement and a Common Stock Purchase Agreement (collectively, the "Howmedica
Agreements"). Howmedica is a leading producer and marketer of bone cement.
Under the License and Development Agreement, Howmedica has obtained the
exclusive worldwide marketing, sales and distribution rights to use ORTHOCOMP
in joint implant procedures. The Company may earn payments of up to an
aggregate of US$4.5 million if various milestones are reached during the
anticipated four to five year development and approval process for this
indication. Howmedica also has an option until December 9, 1998 to acquire
worldwide distribution rights for screw augmentation and vertebrosplasty,
subject to agreement between the two parties on minimum purchase quantities.
Under the Supply Agreement, upon receipt of regulatory approvals, Howmedica
will be required to make annual purchases of ORTHOCOMP from the Company for a
six year period. However, Howmedica may obtain exclusive manufacturing rights
for ORTHOCOMP for the joint implant market from the Company upon a one-time
payment of US$7.0 million and will be required to pay royalties on future
sales.
Under the Common Stock Purchase Agreement, the Company sold 350,000 newly
issued shares of Common Stock to Howmedica for an aggregate purchase price of
US$3.5 million. Notwithstanding the foregoing, if the actual offering price in
the Offering is less than $11.00 per share, the Company will be required to
sell to Howmedica such additional number of shares of Common Stock at a
purchase price of $.01 per share so that the average price per share paid by
Howmedica for all of its shares of Common Stock is equal to 90% of the actual
offering price. Howmedica has agreed not to sell any of its shares of Common
Stock for at least 180 days following the date of the final Prospectus.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of US$10.00 per share are estimated to be US$13.2 million
(approximately US$15.9 million if the Underwriters' Over-allotment Option is
exercised in full) after deducting underwriting discounts and commissions and
estimated offering expenses. The Company will not receive any proceeds from
the sale of shares of Common Stock by the Selling Shareholders. See "Principal
and Selling Shareholders."
The Company currently expects to use approximately US$4.8 million of the net
proceeds of this Offering to fund the early stages of product
commercialization, including expansion of manufacturing capabilities and
marketing activities, approximately US$3.0 million to accelerate and expand
clinical trials of the Company's bone substitute and bone cement products in
the United States and abroad, and approximately US$3.4 million for research
and development activities. The balance of the net proceeds will be used for
working capital and general corporate purposes. Although the Company may use a
portion of the net proceeds for the licensing or acquisition of new products
or technologies from others, the Company currently has no plans or commitments
in this regard. The amounts actually expended for each purpose will be
determined at the discretion of the Company and actual expenditures may vary
significantly from the amounts indicated above depending upon numerous
factors, including the progress of the Company's clinical trials, actions
relating to regulatory and reimbursement matters, the costs and timing of
expansion of marketing, sales, manufacturing and product development
activities, competitive forces and the extent to which the Company's products
gain market acceptance.
Pending utilization of the net proceeds of this Offering, the Company
intends to invest the funds in short-term, interest-bearing, investment-grade
obligations. The Company believes that the cash obtained from this Offering,
together with the cash generated from the sale of current products, will be
sufficient to meet the Company's currently estimated operating and capital
requirements at least through the end of 1999. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, to fund the development
and growth of its business. Any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
the Company's financial condition, operating results, capital requirements,
applicable contractual restrictions and such other factors as the Board of
Directors deems relevant.
15
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1998, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company after giving effect to the conversion of the outstanding Class A,
Class B, and Class C Preferred Stock into 3,526,418 shares of Common Stock
upon the consummation of this Offering, and (iii) the pro forma
capitalization, as adjusted to reflect the issuance and sale of the 1,500,000
shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of US$10.00 per share and the application of the
estimated net proceeds therefrom, after deducting underwriting discounts and
commissions and offering expenses payable by the Company. See "Use of
Proceeds." This table should be read in conjunction with the Financial
Statements and the notes thereto and the other financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------------- -------------- --------------
<S> <C> <C> <C>
Short-term debt............... US$ 1,431,248 US$ 1,431,248 US$ 1,431,248
============== ============== ==============
Total long-term debt.......... US$ 873,935 US$ 873,935 US$ 873,935
-------------- -------------- --------------
Redeemable Class C Convertible
Preferred Stock 1,882,353
shares issued and outstanding
actual; no shares issued and
outstanding pro forma and pro
forma as adjusted(1)......... 7,584,285 -- --
-------------- -------------- --------------
Shareholders' equity
(deficit):
Preferred Stock, par value
US$.01 per share;
20,000,000 shares
authorized; 606,060 shares
Class A Convertible
Preferred Stock and
1,038,005 shares of Class B
Convertible Preferred Stock
issued and outstanding
actual; no shares issued
and outstanding pro forma
and pro forma as adjusted.. 16,441 -- --
Common Stock, par value
US$.01 per share;
50,000,000 shares
authorized; 5,186,222
shares issued and
outstanding actual;
8,712,640 shares issued and
outstanding pro forma;
10,212,640 shares issued
and outstanding pro forma
as adjusted(2)............. 51,862 87,126 102,126
Additional paid-in capital.. 13,138,103 20,703,565 33,838,565
Accumulated deficit......... (22,599,616) (22,599,616) (22,599,616)
Cumulative translation
adjustment................. (3,569) (3,569) (3,569)
-------------- -------------- --------------
Total shareholders' equity
(deficit)................ US$ (9,396,779) US$ (1,812,494) US$11,337,506
-------------- -------------- --------------
Total capitalization.... US$ (938,559) US$ (938,559) US$12,211,441
============== ============== ==============
</TABLE>
- --------
(1) Redeemable Class C Convertible Preferred Stock has been classified outside
of Shareholders' equity because the redemption provision is controlled by
the holder. See Note 11 to Notes to Financial Statements.
(2) Excludes (i) 1,154,494 shares of Common Stock issuable upon the exercise
of options outstanding as of May 31, 1998 under the Stock Option Plans at
a weighted average exercise price of US$3.34 per share, (ii) 345,506
shares reserved for future grants under the Stock Option Plans and (iii)
1,013,552 shares of Common Stock issuable upon the exercise of warrants
outstanding as of May 31, 1998 at a weighted average exercise price of
US$3.49 per share. See "Management--Stock Option Plans" and "Description
of Capital Stock."
16
<PAGE>
DILUTION
At March 31, 1998, the pro forma net tangible book value of the Company was
a deficit of approximately US$1.8 million, or US$0.21 per share of Common
Stock, after giving effect to the conversion of Class A, Class B and Class C
Preferred Stock into 3,526,418 shares of Common Stock upon the consummation of
this Offering. Pro forma net tangible book value per share is equal to the
Company's total tangible assets less its total liabilities, divided by the
total number of shares of Common Stock outstanding on a pro forma basis for
the period immediately prior to this Offering (but not including the 1,500,000
shares of Common Stock offered by the Company hereby). After giving effect to
the sale by the Company of 1,500,000 shares of Common Stock offered hereby at
an assumed initial public offering price of US$10.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses, the pro forma net tangible book value of the Company at March 31,
1998 would have been US$11.3 million, or approximately US$1.11 per share. This
represents an immediate increase in the net tangible book value of US$1.32 per
share to existing shareholders and immediate dilution of US$8.89 per share to
new investors purchasing shares of Common Stock in this Offering. Dilution per
share represents the difference between the amount per share paid by
purchasers of shares of Common Stock in this Offering and the net tangible
book value per share of Common Stock immediately after completion of this
Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......... US$10.00
--------
Pro forma net tangible book value per share of Common
Stock at March 31, 1998................................ US$(0.21)
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 1.32
--------
Pro forma net tangible book value per share after this
Offering............................................... 1.11
--------
Dilution per share to new investors..................... US$ 8.89
========
</TABLE>
The following table sets forth, on an adjusted basis as of March 31, 1998,
the number of shares of Common Stock purchased from the Company (assuming the
conversion of the Company's Class A, Class B and Class C Convertible Preferred
Stock into 3,526,418 shares of Common Stock), the total cash consideration
paid and the average price per share paid by the existing holders of Common
Stock and by new investors, before deducting estimated underwriting discounts
and commissions and expenses payable by the Company, at an assumed initial
public offering price of US$10.00 share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 8,712,640 85% US$20,337,376 58% US$ 2.33
New investors........... 1,500,000 15% 15,000,000 42 10.00
---------- ---- ------------- ----
Total................. 10,212,640 100% US$35,379,876 100%
========== ==== ============= ====
</TABLE>
The foregoing tables exclude all outstanding options and warrants. See
"Management--Stock Option Plans" and Note 11 to Notes to Financial Statements.
The exercise of outstanding options and warrants having an exercise price less
than the initial public offering price would increase the dilution effect to
new investors illustrated by the foregoing tables.
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Financial Statements and notes thereto appearing
elsewhere in this Prospectus. The selected statement of operations data for
the years ended December 31, 1995, 1996 and 1997 and the selected balance
sheet data as of December 31, 1995, 1996 and 1997 have been derived from the
Financial Statements, which have been audited by Arthur Andersen LLP,
independent public accountants, and are included elsewhere in this Prospectus.
The selected statement of operations data for the period from inception (June
26, 1992) to December 31, 1993 and the year ended December 31, 1994 and the
selected balance sheet data as of December 31, 1993 and 1994 have been derived
from financial statements audited by Arthur Andersen LLP, independent public
accountants, not included in this Prospectus. The statements of operations
data for the three months ended March 31, 1997 and 1998 and the selected
balance sheet data as of March 31, 1998 have been derived from the unaudited
financial statements of the Company which, in the opinion of the Company,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial condition as at those dates
and results of operation for those interim periods. The results for the three
months ended March 31, 1998 are not necessarily indicative of results that may
be expected for any other interim period or for the entire year.
STATEMENT OF OPERATIONS DATA (IN THOUSANDS EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- --------------------
1993(1) 1994 1995 1996 1997 1997 1998
-------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ US$ -- US$ 34 US$ 578 US$ 1,860 US$ 3,312 US$ 741 US$ 825
Cost of sales........... -- 11 696 887 1,097 285 214
-------- --------- --------- --------- --------- --------- ---------
Gross profit.......... -- 23 (118) 973 2,215 456 611
-------- --------- --------- --------- --------- --------- ---------
Operating expenses
General and administra-
tive.................. 204 1,587 940 2,069 3,763 987 590
Selling and marketing.. -- -- 1,659 3,915 4,249 1,002 939
Research and
development........... 724 458 467 1,178 1,987 360 504
-------- --------- --------- --------- --------- --------- ---------
Total operating
expenses............... 928 2,045 3,066 7,162 9,999 2,349 2,033
-------- --------- --------- --------- --------- --------- ---------
Operating loss........ (928) (2,022) (3,184) (6,189) (7,784) (1,893) (1,422)
Other expenses.......... 30 37 152 251 169 230 91
-------- --------- --------- --------- --------- --------- ---------
Loss before
extraordinary item... (958) (2,059) (3,336) (6,440) (7,953) (2,123) (1,513)
Extraordinary item--gain
on debt
extinguishment......... -- -- -- -- 397 397 --
-------- --------- --------- --------- --------- --------- ---------
Net loss(2)............. US$ (958) US$(2,059) US$(3,336) US$(6,440) US$(7,556) US$(1,726) US$(1,513)
======== ========= ========= ========= ========= ========= =========
Net loss per common
shares(3).............. US$(0.35) US$ (0.65) US$ (1.04) US$ (1.60) US$ (1.60) US$ (0.36) US$ (0.33)
======== ========= ========= ========= ========= ========= =========
Shares used in computing
net loss per common
share(3)............... 2,715 3,160 3,215 4,036 5,050 4,792 5,186
======== ========= ========= ========= ========= ========= =========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Working capital
(deficit).............. US$ 194 US$ (263) US$ (915) US$(3,140) US$(1,081) US$(2,620)
Total assets............ 245 1,121 1,508 1,546 4,862 3,407
Long-term debt.......... 610 652 1,645 1,589 833 874
Redeemable Convertible
Preferred Stock........ -- -- -- -- 7,383 7,584
Shareholders'
(deficit).............. (414) (622) (2,146) (4,089) (7,713) (9,397)
</TABLE>
- -------
(1) For the period from inception (June 26, 1992) to December 31, 1993. The
Company did not commence operations until November 1993.
(2) Before accretion of the redemption premium on Class C Preferred Stock in
1997 and the first three months of 1998 of US$537 and US$201,
respectively.
(3) See Note 2 to Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing net loss per
common share.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains certain statements of a forward-looking nature
relative to future events or the financial performance of the Company. Actual
events or results may differ materially from those indicated by such forward-
looking statements for a variety of reasons, including the matters set forth
under the caption "Risk Factors."
OVERVIEW
Orthovita is a biomaterials company which began operations in 1993 to
exploit technology based on research emanating from the Catholic University of
Leuven, Belgium. The Company develops, manufactures and markets proprietary
osteobiologic bone substitutes and bone cements. Orthovita has targeted its
products for sale to the trauma, spine, implant cement, cranio-maxillofacial
and dental implant surgery markets, which the Company estimates have an
aggregate market potential of approximately US$1 billion. The Company believes
that these markets will require, and that its products will address the need
for, bone substitutes and bone cements that offer a broader range of
performance attributes, better patient outcomes and lower cost than are
currently available. The Company's biomaterials technology currently
encompasses the following three products which address differing patient
needs: ORTHOCOMP, a composite, high strength bone bonding cement that is fast
setting, immediately load bearing and injectable; BIOGRAN, a resorbable,
granular biomaterial that biologically transforms to remodeled cancellous bone
in four to six months; and VITAGRAFT, a resorbable setting cement that assists
fracture healing and has indications for use in bone defects of younger
patients.
Since its inception in 1992, the Company has focused its efforts on
developing and commercializing its products. As a result, the Company has
incurred substantial operating losses since its inception and at March 31,
1998, had an accumulated deficit of approximately US$22.6 million. These
losses have resulted principally from expenses required to be incurred before
the Company can begin marketing its products, including the development and
patenting of the Company's technologies, preclinical and clinical studies,
preparation of submissions to the FDA and foreign regulatory bodies, and the
development of sales, marketing and manufacturing capabilities. The Company
expects to continue to incur significant operating losses in the future as it
continues its product development efforts, expands its marketing and sales
activities and further develops its manufacturing capabilities. No assurance
can be given that the Company will generate significant revenue or become
profitable on a sustained basis, if at all.
The Company has financed its operations from revenues generated from the
sale of BIOGRAN, which have totaled an aggregate of approximately US$6.6
million through March 31, 1998, and a series of private sales of capital
stock. From 1993 through 1997, the Company raised approximately US$20.8
million in a series of private placements. Most recently, in April 1997, the
Company sold 1,882,353 shares of Class C Preferred Stock, together with
related warrants exercisable for 215,025 shares of Common Stock (collectively,
the "April 1997 Financing"), to Schroder Ventures International Life Sciences
Fund, Electra Fleming Equity Partners and The Wellcome Trust Limited and
certain related funds for an aggregate of US$7.6 million, net of offering
costs. See "--Liquidity and Capital Resources" and "Certain Relationships and
Related Transactions."
For the three months ended March 31, 1998 and the years ended December 31,
1997, 1996 and 1995, net revenues generated from the U.S. were 82%, 74%, 60%
and 45% of net revenues, respectively, and net revenues generated from the
European Union were 14%, 19%, 36% and 47% of net revenues, respectively.
Although the Company's percentage of net revenues derived from U.S. markets
has increased in recent periods, the Company expects that its percentage of
net revenues derived from the U.S. will decrease while its percentage of net
revenues derived from EU markets will increase due to the timing of
anticipated regulatory approvals and the Company's marketing plans.
The Company has generally marketed BIOGRAN through internal direct sales
efforts in the U.S. On April 28, 1998, the Company signed an agreement with 3i
pursuant to which 3i has obtained the global distribution rights for BIOGRAN
and ORTHOCOMP for the dental implant surgery market. The Company's unit
selling price will decline since its BIOGRAN sales will now be to an
intermediary, but its marketing and sales costs for this product will also
significantly decrease, which the Company expects will result in an
improvement in BIOGRAN profit margins. 3i has committed to purchase a minimum
of $2.4 million of BIOGRAN during the remainder of 1998 and has committed to
escalating minimums in the subsequent four years. On June 9, 1998, the Company
entered into the Howmedica Agreements with Howmedica pursuant to which
Howmedica obtained exclusive worldwide marketing, sales and distribution
rights for ORTHOCOMP in joint implant procedures. To the extent that the
Company chooses not to, or is unable to enter into similar strategic alliances
for other products and
19
<PAGE>
indications, it would need to either develop a network of independent sales
agents, distributors and dealers or create its own internal direct sales and
marketing capabilities for these products and indications.
The Company has entered into certain agreements pursuant to which it is
obligated to pay royalties based on net revenues of certain of the Company's
products. To the extent that sales of these products increase in future
periods, the Company's license obligations will be expected to increase.
The Company has benefited from the research and development activities
conducted through its agreement with the University of Pennsylvania. This
agreement has allowed the Company to place greater focus on the
commercialization of its products. The Company's operating results and
financial condition would be adversely affected if it were required to fund
all of the research expenses related to its current and future products.
The Company has limited manufacturing capacity and has limited experience in
manufacturing its products. The Company has outsourced the manufacturing of
BIOGRAN to GMP-qualified facilities with extensive glass manufacturing, device
packaging and sterilization capabilities. The Company, however, intends to
manufacture ORTHOCOMP and VITAGRAFT at its Malvern facility and to obtain FDA
GMP certification and ISO 9000 series quality certification for all of its
products. Accordingly, its future success is dependent on its ability to
manufacture its products in commercial quantities, in compliance with
regulatory requirements and in a cost effective manner. The Company may not be
able to obtain necessary regulatory approvals or clearances on a timely basis,
if at all. If the Company could not manufacture its products, it would be
required to contract its manufacturing requirements to third parties and this
could result in higher costs and lower gross profit margins.
At December 31, 1997, the Company had cumulative U.S. tax net operating loss
carryforwards of approximately US$13 million, which begin to expire in 2008.
However, the Company's annual utilization of its net operating loss
carryforward will be limited as a result of various ownership changes that
have occurred in recent years. Additionally, because U.S. tax laws limit the
time during which these carryforwards may be applied against future taxes, the
Company may not be able to take full advantage of these carryforwards for U.S.
income tax purposes.
The Company's results of operations may fluctuate significantly in the
future as a result of a number of factors, many of which are outside of the
Company's control. These factors include, but are not limited to, the timing
of governmental approvals, unanticipated events associated with clinical and
preclinical trials, the medical community's acceptance of the Company's
products, the success of competitive products, the ability of the Company to
enter into strategic alliances with third parties, expenses associated with
development and protection of intellectual property matters, establishment of
commercial scale manufacturing capabilities, and the timing of expenses
related to commercialization of new products.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 TO THREE MONTHS ENDED
MARCH 31, 1997
Net Revenues. Net revenues for the three months ended March 31, 1998 were
US$825,000, compared to US$741,000 in the same prior year period, representing
a period-over-period increase of 11%. The decline in the growth rate of the
sale of BIOGRAN in the three month period ended March 31, 1998 was due
primarily to a reduction in international sales. While U.S. year to year sales
increased 35%, international sales decreased 39%. The Company attributes this
trend to a reduction in personnel dedicated to international sales activities
and the Company's efforts to secure a European strategic marketing alliance.
The Company expects its sales will increase in international markets as a
result of its global strategic alliance with 3i.
Gross Profit. The Company's gross profit for the three months ended March
31, 1998 was US$611,000, or 74% of net revenues, compared to US$456,000, or
62% of net revenues, in the same prior year period. The Company attributes
this improvement to its consolidation of its manufacturing of BIOGRAN in the
U.S, which consolidation was completed in the fourth quarter of 1997. See
"Business--Manufacturing and Facilities."
Operating Expenses. The Company's operating expenses for the three months
ended March 31, 1998 were US$2.0 million, or 247% of net revenues, compared to
US$2.3 million, or 317% of net revenues, in the same prior year period. The
Company attributes (i) the reduction of US$397,000 in general and
administrative expenses primarily to the inclusion in the prior year period of
approximately US$250,000 of expenses related to the BIOGRAN Matter, (ii) the
reduction of US$63,000 in sales and marketing expense to staffing reductions
as the Company consolidated certain sales territories, and (iii) the increase
of US$144,000 in research and development expense to additional preclinical
activities related to ORTHOCOMP.
20
<PAGE>
Extraordinary Gain. In the same prior year period, the Company recorded an
extraordinary gain of US$397,000 when it was relieved of certain debt owing to
the Flemish government upon the Company's election not to pursue the
commercialization of one of the dental products licensed from FBFC. See Note 5
to Notes to Financial Statements.
Net Loss. As a result of the foregoing factors, the Company's net loss for
the three months ended March 31, 1998 was US$1.5 million compared to a net
loss of $1.7 million in the same prior year period.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
Net Revenues. Net revenues for the year ended December 31, 1997 were US$3.3
million, compared to US$1.9 million for the year ended December 31, 1996,
representing an increase of 78%. The Company attributes this increase to
greater market penetration of BIOGRAN which resulted from the Company's
increased marketing efforts.
Gross Profit. The Company's gross profit for the year ended December 31,
1997 was US$2.2 million, or 67% of net revenues, compared to US$1.0 million,
or 52% of net revenues, for the prior year. The Company attributes this
improvement in its gross profit margin to its consolidation of its
manufacturing of BIOGRAN in the U.S., which consolidation was completed in the
fourth quarter of 1997.
Operating Expenses. The Company's operating expenses for the year ended
December 31, 1997 were US$10.0 million compared to US$7.2 million for the
prior year. This increase in operating expenses consisted primarily of
increases in general and administrative expenses of US$1.7 million and in
research and development of US$808,000. The Company attributes the increases
in general and administrative expenses to ongoing growth in staffing and
facilities necessary to support the growth of its business, US$1.0 million in
additional fees and expenses relating to the BIOGRAN Matter, and US$350,000
relating to the closing of the Company's European manufacturing facility. The
Company attributes its increases in research and development expenses to
expenses incurred in its preclinical activities in preparation for regulatory
filings.
Other Expenses. The Company's other expenses, which includes interest
expense, interest income and currency translation losses, were US$169,000 for
the year ended December 31, 1997 compared to US$251,000 for the year ended
December 31, 1996. In 1997 the Company realized net interest income as a
result the investment of the net proceeds realized from the April 1997
Financing. The Company recorded a currency translation loss of US$203,000 in
1997 from the impact of exchange rate changes on intercompany receivables. See
"--Overview" and "Certain Relationships and Related Transactions."
Extraordinary Gain. In 1997, the Company recorded an extraordinary gain of
US$397,000 when it was relieved of certain debt owing to the Flemish
government upon the Company's election not to pursue the commercialization of
one of the dental products licensed from FBFC. See Note 5 to Notes to
Financial Statements.
Net Loss. As a result of the foregoing factors, the Company's net loss for
the year ended December 31, 1997 was US$7.6 million compared to a net loss of
US$6.4 million for the prior year.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31,
1995
Revenues. Net revenues for the year ended December 31, 1996 were US$1.9
million, compared to US$578,000 for the year ended December 31, 1995,
representing an increase of 222%. The Company attributes this increase to
greater market penetration of BIOGRAN which resulted from the Company's
increased marketing efforts.
Gross Profit. The Company's gross profit for the year ended December 31,
1996 was US$1.0 million, or 52% of net revenues, compared to a deficit of
US$118,000 for the prior year.
Operating Expenses. The Company's operating expenses for the year ended
December 31, 1996 were US$7.2 million compared to US$3.1 million for the prior
year. This increase in operating expenses consisted primarily of increases in
(i) sales and marketing expenses of US$2.3 million, (ii) general and
administrative expenses of US$1.1 million and (iii) research and development
expenses of US$711,000. The Company attributes the increases in general and
administrative expenses to ongoing growth in staffing and facilities necessary
to support the growth of its business and US$750,000 in additional fees and
expenses relating to the BIOGRAN Matter. The Company attributes its increases
in research and development expenses to the continued
21
<PAGE>
growth in staffing and facilities for research and development, expenses
incurred in obtaining regulatory approvals, and expenses related to
preclinical activities in preparation for regulatory filings.
Other Expenses. The Company's other expenses were US$251,000 for the year
ended December 31, 1996 compared to US$152,000 for the prior year. Net
interest expense increased from 1995 to 1996 with the growth of the Company's
short-term and long-term debt financing arrangements.
Net Loss. As a result of the foregoing factors, the Company's net loss for
the year ended December 31, 1996 was US$6.4 million compared to a net loss of
US$3.3 million for the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31, 1998, December 31, 1997 and 1996 were
US$753,000, US$2.3 million and US$253,000, respectively, representing 22%, 46%
and 16%, respectively, of total assets. Cash equivalents consist of highly
liquid short-term investments with an original maturity of three months or
less.
The following is a summary of selected cash flow information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
-------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net cash used for
operating activities... US$(2,867,000) US$(4,969,000) US$ (7,589,000) US$(1,387,000) US$(1,428,000)
Net cash used for
investing activities... (147,000) (346,000) (414,000) (264,000) (73,000)
Net cash provided by
(used for) financing
activities............. 3,016,000 4,821,000 10,009,000 1,426,000 (34,000)
</TABLE>
Net Cash Used for Operating Activities
The principal source of the Company's current operating cash inflows is from
the sale of BIOGRAN. A summary of cash receipts from operating activities is
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ---------------------
1995 1996 1997 1997 1998
---------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Product Sales Revenue:
BIOGRAN--U.S.......... US$258,000 US$1,137,000 US$2,505,000 US$502,000 US$679,000
BIOGRAN--Europe....... 320,000 723,000 807,000 239,000 146,000
Interest Income......... 12,000 22,000 182,000 1,000 20,000
</TABLE>
Cash outflows were primarily used for the commercialization of BIOGRAN and
for development and pre-clinical activities in preparation for regulatory
filings of ORTHOCOMP and VITAGRAFT. Funds have been used for the hiring,
training and development of the direct sales force, marketing and distribution
of BIOGRAN and expansion of the Company from a development-stage company.
Net Cash Used for Investing Activities
The Company has invested US$414,000, US$346,000 and US$147,000 for the years
ended December 31, 1997, 1996 and 1995, respectively, and US$73,000 and
US$264,000 for the three months ended March 31, 1998 and 1997, respectively in
the purchase of property and equipment for the expansion of its product
development capabilities.
22
<PAGE>
Net Cash Provided By (Used In) Financing Activities
A summary of cash provided by (used in) financing activities is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Proceeds from sale of
common stock and
warrants............... US$1,520,000 US$4,447,000 US$ 2,256,000 US$1,438,000 --
Proceeds from sale of
convertible preferred
stock.................. 310,000 -- 7,609,000 -- --
Proceeds (repayments) of
long-term debt......... 786,000 364,000 112,000 (102,000) (34,000)
Proceeds from short-term
debt................... 400,000 10,000 32,000 90,000 --
------------ ------------ ------------- ------------ ----------
Net cash provided by
(used in) financing
activities............. US$3,016,000 US$4,821,000 US$10,009,000 US$1,426,000 US$(34,000)
============ ============ ============= ============ ==========
</TABLE>
In 1995, the Company (i) sold 72,880 units (the "Series A Units"),
consisting of five shares of common stock and one Class A common stock
purchase warrant, for US$21.25 per unit, raising net proceeds of US$1.5
million, (ii) sold 113,884 shares of Class B Convertible Preferred Stock (the
"Class B Stock"), raising net proceeds of US$310,000 and (iii) issued
US$775,000 of 15% Subordinated Secured Notes (the "Notes") and related
warrants (the "Related Warrants") exercisable for the purchase of 885,717
shares of Class B Stock at an exercise price of US$1.75 per share. The Notes
were subsequently retired concurrent with the April 1997 Financing when the
Note holders used the entire amount due under the Notes to partially exercise
the Related Warrants for 585,936 shares of Class B Stock (the "Class B Warrant
Shares").
In 1996, the Company sold (i) an additional 48,615 Series A Units for an
aggregate of US$1.0 million and (ii) 828,357 shares of common stock for
US$4.25 per share, raising net proceeds of US$3.4 million.
In 1997, the Company (i) sold 533,685 shares of common stock for US$4.25 per
share, raising net proceeds of US$2.3 million, (ii) completed the April 1997
Financing and (iii) issued the Class B Warrant Shares.
In 1995, the Company entered into a US$750,000 line of credit that was
secured by substantially all of the Company's assets as well as certain
personal assets of David S. Joseph, the Company's Chief Executive Officer and
President. Borrowings under this line of credit bore interest at a variable
rate of interest equal to the bank's prime rate plus 1.75%. This line of
credit expired in June 1997.
In 1996, the Company borrowed US$400,000 from David S. Joseph, the Company's
Chief Executive Officer and President. This note, which bore interest at 1.75%
above the prime rate, was retired in full in May 1997.
In 1997, the Company obtained a 47-month US$400,000 term loan from a
commercial bank. The term loan is secured by substantially all of the
Company's assets and bears interest at a variable rate equal to the bank's
prime rate plus 1.00%. At March 31, 1998, US$350,000 was outstanding under the
loan. The line requires the maintenance of certain financial covenants related
to cash balances, accounts receivable and inventory. Periodically, the Company
was out of compliance with its required financial covenants and obtained a
waiver from the bank regarding such covenant violations.
In September 1997, the Company obtained a US$1.0 million line of credit from
a commercial bank. This line is secured by substantially all of the Company's
assets, and borrowings under the line bear interest at a variable rate equal
to the bank's prime rate plus 1.50%. Advances under this line are further
restricted to an advance formula equal to 80% of eligible accounts receivable
and 40% of inventory. At March 31, 1998, US$692,000 was outstanding under the
line and the Company was not eligible to draw down any further advances based
on the advance formula. The line requires the maintenance of certain financial
covenants related to cash balances, accounts receivable and inventory.
Periodically, the Company has been in non-compliance with certain of its
required financial covenants under this facility and upon each such occurrence
has obtained a waiver from the bank. The Company is currently in default of
each of its financial covenants and has obtained a waiver from the bank
through January 1, 1999. Mr. Joseph has personally guaranteed US$356,000 of
the outstanding balance under this facility. The Company anticipates that it
will retire the amount outstanding under the line of credit with its
commercial bank with the proceeds from its sale of Common Stock to Howmedica.
In September 1997, the Company obtained a US$1.2 million capital lease
financing arrangement. The term of each individual lease under this
arrangement is 42 months, with payments based upon a monthly lease factor
23
<PAGE>
of US$29.31 per US$1,000 of acquisition cost and imputed interest of
approximately 10.85%. These leases are secured by the underlying capital
assets. As of March 31, 1998, the Company had an outstanding principal balance
of US$892,000 under these capital leases.
On June 9, 1998, the Company entered into the Howmedica Agreements, pursuant
to which the Company sold 350,000 shares of Common Stock to Howmedica, for an
aggregate purchase price of $3.5 million. If the actual offering price in the
Offering, however, is less than $11.00 per share, the Company will be required
to sell Howmedica such additional number of shares of Common Stock at a
purchase price of $.01 per share so that the average price per share paid by
Howmedica for all of its shares of Common Stock is equal to 90% of the actual
offering price.
Commitments and Contingencies
The Company leases office space and equipment under non-cancelable operating
leases. For the years ended December 31, 1997, 1996 and 1995, lease expense
was US$164,000, US$150,000 and US$104,000, respectively. Future minimum rent
payments under these leases are US$178,000 in 1998, US$159,000 in 1999,
US$143,000 in 2000 and US$50,000 in 2001.
Patent Litigation
For the years ended December 31, 1997 and 1996, the Company incurred
approximately US$1.7 million and US$759,000 of expenses related to its defense
of the BIOGRAN Matter, respectively. In April 1998, the court granted the
Company's summary judgment motion stating that the Company's BIOGRAN product
does not infringe this patent. The complaint also alleges false
representation, unfair competition, false advertising and trade disparagement
under U.S. federal and Florida state law, and no ruling has been rendered with
respect to the allegations of false representation, unfair competition, false
advertising and trade disparagement under federal and Florida state law. At
March 31, 1998, the Company had a reserve of US$635,000 to cover future legal
fees related to the BIOGRAN Matter. In addition, under the Company's licensing
agreement with FBFC relating to the FBFC Patent, FBFC has agreed to reimburse
litigation expenses related to patent defense costs such as those which the
Company has incurred in this instance. (See "Business--License Agreements.")
The Company anticipates that it will receive this reimbursement during 1998,
although the parties have yet to reach agreement as to the final amount and
payment dates. Such reimbursement will be net of accumulated royalties due
FBFC, payment of which has been suspended by agreement of both parties during
the pendency of this litigation. Because the amount owing to the Company from
FBFC for reimbursement of these litigation expenses exceeds the maximum
aggregate amount of any royalties which would be owed to FBFC under the
agreement, the Company does not expect to make any such royalty payment. See
Note 5 to Notes to Financial Statements.
Year 2000
Until recently, computer programs were written using two digits rather than
four to define the applicable year. As a result, date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations, including, among others, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company does not believe that it has material exposure to this "Year 2000"
issue with respect to its own information systems since its existing systems
correctly define the year 2000. The Company is in the process of conducting an
analysis which it expects to complete in 1998 to determine the extent to which
its customers' and suppliers' systems (insofar as they relate to the Company's
business) are subject to the Year 2000 issue. Accordingly, the Company is
currently unable to predict the extent to which the Year 2000 issue will
affect its customers or suppliers, or to the extent to which it would be
vulnerable to the failure of its customers or suppliers to remediate any Year
2000 issues on a timely basis.
Funding Requirements
The Company has experienced negative operating cash flows since its
inception. The Company plans to continue to spend substantial funds for
clinical trials in support of regulatory and reimbursement approvals, research
and development and establishment of commercial scale manufacturing
capabilities. In particular, the Company currently estimates its funding
requirements during the next twelve months to be approximately US$800,000,
US$1.5 million and US$1.1 million for clinical trials, research and
development and commercial manufacturing capacity, respectively. In addition,
the Company currently estimates its funding requirements for the twelve months
thereafter to be approximately US$900,000, US$1.9 million and US$3.7 million
for clinical trials, research and development and commercial manufacturing
capacity, respectively. The foregoing estimates
24
<PAGE>
of the Company's funding requirements are projections that are based upon a
number of assumptions and the amounts actually expended by the Company on any
of these items may vary, and these variances may be significant as the Company
cannot accurately predict the length and extent of the regulatory process. The
Company believes that the cash obtained from this Offering, together with the
cash generated from the sale of current products, will be sufficient to meet
the Company's currently estimated operating and capital requirements at least
through the end of 1999. The Company's future capital requirements will depend
upon numerous factors, including the extent to which unforeseen difficulties
arise or to which the Company's products gain market acceptance, the
acquisition and defense of intellectual property rights, the development of
strategic alliances for the marketing of certain of its products, and
competitive developments. In addition, although the Company has no present
commitments or understandings, it may seek to expand its operations and
product line via acquisitions and any such acquisition may increase the
Company's capital requirements. Should the Company's cash not be sufficient to
meet the Company's currently estimated requirements, the Company will need to
obtain additional funds through equity or debt financings, strategic alliances
with third parties or from other sources that may result in substantial
dilution to the holders of Common Stock and in significant financial and
operational restrictions. Any such required financing may not be available on
satisfactory terms, if at all.
25
<PAGE>
BUSINESS
Orthovita is a biomaterials company which began operations in 1993 to
exploit technology based on research emanating from the Catholic University of
Leuven, Belgium. This research was conducted by Dr. Paul Ducheyne, Chairman of
the Company, and others of this University, and Mr. Ducheyne continued in
collaborations with Leuven researchers after he became a professor at the
University of Pennsylvania. Additional funding was received through a license
agreement with FBFC International, a Belgian company which received an
interest free loan from the Belgian government.
The Company develops, manufactures and markets proprietary osteobiologic
bone substitutes and bone cements. Orthovita has targeted its products for
sale to the trauma, spine, implant cement, cranio-maxillofacial and dental
implant surgery markets, which the Company estimates have an aggregate market
potential of approximately US$1 billion. The Company believes that these
markets will require, and that its products will address the need for, bone
substitutes and bone cements that offer a broader range of performance
attributes, better patient outcomes and lower cost than are currently
available. The Company's biomaterials technology currently encompasses the
following three products which address differing patient needs: ORTHOCOMP, a
composite, high strength bone bonding cement that is fast setting, immediately
load bearing and injectable; BIOGRAN, a resorbable, granular biomaterial that
biologically transforms to remodeled cancellous bone in four to six months;
and VITAGRAFT, a resorbable setting cement that assists fracture healing and
has indications for use in bone defects of younger patients. On April 28,
1998, the Company entered into a global strategic alliance for the marketing
and distribution of BIOGRAN and ORTHOCOMP for the dental implant surgery
market with 3i, a leading dental implant company.
INDUSTRY OVERVIEW
The human skeleton is composed of two types of bone tissue: cortical and
cancellous bone. Cortical bone, which makes up approximately 80% of the human
skeleton, is dense, tubular in shape and is subject to bending, load bearing
and twisting forces. Cancellous bone, which constitutes approximately 20% of
the human skeleton, is less dense than cortical bone, more vascular and is
primarily subject to compressive forces. Bone continually regenerates and
remodels itself through a process of formation and resorption or bone loss.
This process is on-going and necessary to maintain skeletal integrity.
Skeletal integrity may become impaired by a number of factors, including
traumatic incident and degenerative disease. The global market for orthopaedic
products used to address problems arising from skeletal impairments is
currently estimated to be approximately US$8 billion. Among these products are
bone substitutes to replace or reconstruct skeletal defects and augment
fracture repair. Existing commercially available bone substitutes do not set
or harden to load bearing potential until the natural healing process of bone
is completed over a period of three to six months, depending on the location
of the bone defect and the age and health of the patient. The emergence of
new, high strength, fast setting, biologically active bone substitutes
promises significant improvements over current options for bone replacement,
repair and fixation while also providing solutions to previously unmet market
needs. These products will allow segmentation of the market between those
younger patients with high bone vitality that require a fast setting
resorbable bone substitute, and those older patients and those with
compromised bone physiology that require a fast setting, high load bearing
solution. Existing bone substitutes do not permit this matching of therapies
with patient needs because of various deficiencies, including the inability to
bear load or set immediately, the risk of disease transmission, and marginal
performance characteristics. The Company believes that its products address
these deficiencies by being safe, fast setting, bone bonding, and injectable,
and either resorbable (transforms to bone or is replaced by bone) or load
bearing, depending upon patient need. These attributes provide patients with
faster recovery to normal function. In addition, the cost-effectiveness goals
of managed care will be well served by the Company's approach to reducing
recovery times, hospital in-patient days and invasive procedures.
ORTHOVITA'S STRATEGY
The Company's goal is to become the leader in the bone substitute market for
bone repair products. The principal elements of the Company's strategy to
realize this goal are to:
Position ORTHOCOMP as a Replacement for PMMA Cement. The Company believes
that ORTHOCOMP will be viewed as a preferable cement material to PMMA because
of its superior mechanical properties and easier to use delivery system, and
that ORTHOCOMP will address a clear market need in joint implant and other
procedures. Although the Company has not obtained any regulatory approval for
ORTHOCOMP, the Company initially intends to pursue a 510(k) regulatory route
by targeting ORTHOCOMP for lower threshold indications,
26
<PAGE>
such as screw augmentation. On June 9, 1998, the Company entered into the
Howmedica Agreements whereby it granted Howmedica exclusive worldwide
marketing, sales and distribution rights for ORTHOCOMP in joint implant
procedures. The Company believes that the replacement of PMMA represents an
estimated US$250 million market.
Pursue Several Products for Multiple Uses. The Company is developing a
portfolio of patent-protected products to address the specific requirements of
various procedures based on patient and load bearing requirements. The Company
has identified needs for both resorbable and non-resorbable bone substitutes
for patients with differing capacities to grow bone. Patients with good bone
vitality will benefit from resorbable bone substitutes that are fast setting
and are replaced by new bone over time, while elderly and osteoporotic
patients with diminished bone healing capabilities will require non-resorbable
bone substitutes that will be immediately load bearing and bone bonding. The
Company's products provide real benefits for the surgical outcome without a
radical change in surgical technique, thereby increasing their probability of
acceptance in the marketplace.
Access Multiple Distribution Channels. The Company intends to utilize a
combination of third-party alliances, direct sales and agent/distributors,
depending upon the particular strength of the sales channel for a product and
its clinical indication. To date, the Company has entered into a global
strategic alliance with 3i for the marketing and distribution of BIOGRAN and
ORTHOCOMP for the dental implant surgery market and license and development
and supply agreements with Howmedica for the exclusive worldwide marketing,
sales and distribution rights for ORTHOCOMP in joint implant procedures. In
addition, it is anticipated that VITAGRAFT's use for trauma may be directed to
an agent/distributor network.
Utilize Existing Basic Research Agreements and Expand Intellectual
Property. The Company's technology strategy is to concentrate its technical
staff on development and commercialization of products that are near term to
market. The Company's license agreement with the University of Pennsylvania
has allowed the Company to remain focused on the commercialization of its bone
substitute products while basic research has been conducted through this
university affiliation. Patents and patents pending owned by the Company, and
to which the Company has been granted exclusive rights through license
agreements with the University of Pennsylvania and others, are integral
components of the Company's intellectual property portfolio. These patents and
patents pending include biomaterials as carriers for the controlled release of
growth factors and pharmaceuticals, and as substrates for seeding cells in
tissue engineering applications. The Company believes its current intellectual
property portfolio will continue to provide long-term product opportunities
not only in bone substitutes, but also for non-orthopaedic applications.
THE COMPANY'S BONE SUBSTITUTES
The Company's products are designed to solve a wide range of clinical
problems associated with current bone substitutes and provide optimal
attributes for a variety of specific applications.
ORTHOCOMP
ORTHOCOMP is a bioactive, self-setting, bone bonding composite that offers
ease of use delivery and is designed to provide rapid restoration of
functionality in load bearing, bone reinforcement, implant stabilization and
bone repair applications. The Company believes that the potential of ORTHOCOMP
to become the preferred material for cementing implants to bone represents a
significant market opportunity. The bioactive composite nature of ORTHOCOMP
allows it to conform to the precise area of placement, and its setting
polymerization reaction leads to immediate load bearing strength, with
elasticity more closely resembling that of natural bone than metal. Because of
its bioactivity, ORTHOCOMP becomes integrated with the bone at the interface,
enhancing the strength of the bond and the overall efficacy of the implant
system.
ORTHOCOMP can be formulated to allow for controllable setting times, various
viscosities and differing levels of strength. Less viscous formulations may be
delivered through pre-filled unit dose cartridges directly into the surgical
site or through minimally invasive surgery, and more viscous formulations can
be hand packed as putty. Unlike PMMA, which requires a relatively lengthy
mixing time and a short interval during which the material can be used,
ORTHOCOMP's novel mix-on-demand delivery system allows the surgeon much
greater flexibility with respect to the commencement of the setting time of
the material. ORTHOCOMP is also easily visualized under radiographic or
fluoroscopic imaging. The Company is not aware of any current competitors for
this type of surface bonding, high load bearing bone substitute.
The Company expects to file for a CE Mark for ORTHOCOMP for screw
augmentation, with clinical studies planned for mid-1998 in Europe. A global
multi-center study for the use of ORTHOCOMP for vertebroplasty in osteoporotic
patients is also expected to begin in 1998. Pre-clinical studies for the use
of ORTHOCOMP have begun in Europe and the United States for tooth root
anchoring. The Company plans to file an Investigation Device Exemption (an
"IDE") in 1999 for the use of ORTHOCOMP as a cement for joint implant
replacement.
27
<PAGE>
BIOGRAN
BIOGRAN is a bioactive glass granule that, when implanted in a bone defect
site, forms a calcium phosphate shell with an internal chamber where bone
forming cells differentiate and form new bone tissue over a four to six month
period. BIOGRAN is designed for cancellous bone defects that are not
immediately subject to load or for use in conjunction with fixation hardware.
The principal indication is for bone regeneration in preparation for tooth
root implantation. BIOGRAN has the consistency of paste when mixed with blood
or saline, is delivered via a syringe and is easy to handle at the surgical
site.
VITAGRAFT
VITAGRAFT is an injectable, self-setting, resorbable calcium phosphate bone
substitute material that is replaced by bone as it is resorbed. The novel,
mixed paste formula, based on the Company's fine particle synthesis
technology, allows complete interaction of the respective components and
proper placement in the body. The result is consistent setting in the body of
a fine grained structure comparable to human bone. It is especially useful in
achieving moderate load bearing, coupled with fixation hardware, to permit
quicker return to function in younger patients with healthy bone physiology.
Pre-clinical studies are currently underway and clinical studies are planned
in 1999 for the use of VITAGRAFT in tibial plateau fractures and cranio-
maxillofacial reconstruction.
CLINICAL APPLICATIONS
The Company is initially focused on seven clinical indications for use with
a potential global market of approximately seven million annual procedures,
representing approximately US$1 billion in product sales per year. The Company
believes that the clinician purchase decision will be based on patient bone
health factors, load bearing requirements at a particular site, and clinician
judgment regarding resorbable products that require fixation and longer
healing times versus non-resorbable products that return patients to their
maximum recovery state rapidly. The following chart sets forth certain
information regarding these seven indications, including the potential annual
global procedures, the applicable product, and whether the product has been
commercialized for the applicable indication or the fiscal quarter when
certain regulatory milestones are currently anticipated to be reached.
<TABLE>
<CAPTION>
POTENTIAL REGULATORY TIMELINE
ANNUAL GLOBAL -----------------------------------
INDICATIONS PROCEDURES(1) PRODUCT EUROPE USA
--------------- -------------- --------- ---------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Dental Surgery 2,315 BIOGRAN Commercialized Commercialized
Screw 2,330 ORTHOCOMP CE Mark expected 510(k) to be filed
Augmentation Q4-1998 Q2-1998
Vertebroplasty 700 ORTHOCOMP CE Clinicals to IDE to be filed
begin Q4-1998 Q4-1998
Tooth Root 830 ORTHOCOMP Pre-clinicals to 510(k) to be filed
Anchoring begin Q2-1998 Q4-1999
Cranio- 155(2) ORTHOCOMP CE Mark expected 510(k) to be filed
Maxillofacial Q1-1999 Q1-1999
Reconstruction
VITAGRAFT CE Mark expected 510(k) to be filed
Q3-1999 Q3-1999
Joint Implant 656 ORTHOCOMP CE Clinicals to IDE to be filed
Cement begin Q3-1999 Q3-1999
Tibial Fracture 100 VITAGRAFT CE Mark expected 510(k) to be filed
Repair Q4-1999 Q2-1999
</TABLE>
- --------
(1) Potential annual global procedures are derived from historical data for
the U.S. from various sources, including a 1990 American Dental
Association Survey of Dental Services Rendered, a 1997 Medical Data
International report, a 1992 study in the Journal of Bone Mineral
Resources and information from the Health Care Information Association.
This information was extrapolated globally by doubling the United States
figures to produce worldwide projections.
(2) This estimate includes the projections for Cranio-Maxillofacial
Reconstruction procedures for both ORTHOCOMP and VITAGRAFT.
The following describes each of these seven indications in more detail, of
which, only the use of BIOGRAN for certain dental surgical procedures has yet
received regulatory approval.
28
<PAGE>
Dental Surgery indications include the filling of bone defects, both those
created surgically and those caused by disease. During the course of
procedures ranging from periodontal disease treatment to implant placement
there is often a need to build up bone. BIOGRAN is placed into the site
through a surgical incision in proximity to the bone. The site is then
surgically closed and bone regeneration ensues over a six-month period. For
this indication, BIOGRAN competes with bone grafting products for filling oral
defects, including autograft bone, allograft bone, xenograft bone and other
synthetic bone graft materials.
Screw Augmentation is required in cases where the patient's bone is of
insufficient quality to allow a plate and screw construct to function. In a
typical plating procedure, the fracture is aligned and the plate is shaped to
conform to the natural shape of the bone. The first screws placed into the
plate serve to compress the fracture, permitting faster healing. The remaining
screws are then placed to stabilize the plate so that the fracture will not
move and healing can occur. The healing of a fracture is directly proportional
to the degree of stabilization. The failure of screws to purchase or hold is
common, especially in osteoporotic bone, although it can occur in non-
osteoporotic patients as well. Screws which do not hold are removed, and
either the screw hole is not used or is filled with a larger screw. The non-
use of a screw hole causes a large weak point to be created, presenting a
greater potential for fracture of the bone and plate through the weak area.
The use of a larger screw often results in a looser placement due to concerns
of stripping. Using ORTHOCOMP to anchor the screw in a quick and efficient way
allows the full function of the screw to be restored, to the benefit of both
the surgeon and the patient. There are no known cement products that have
received FDA approval or CE marking that would be in competition with
ORTHOCOMP for this indication. Clinical trials will be conducted in Norway and
the U.S.
Vertebroplasty is the filling or supplementation of up to three vertebrae,
compressed as a result of fracture, with a material that adds rigidity to
failing bone and reduces pain in the compression site. There is currently no
material approved for use in this procedure and this indication presents a
potential new market for ORTHOCOMP. The Company believes that using ORTHOCOMP,
the procedure can be performed on an outpatient or short-stay basis. Under the
Company's proposed procedure, the vertebra would be perforated through the
pedicular arch using a catheter and the material then injected into the
vertebra, setting within minutes and becoming load bearing. The procedure
would then be repeated through the other arch. Upon completion, the patient
typically experiences immediate pain relief and greater mobility. There is no
other known treatment for compressed vertebrae that remedies the physical
impairment and long-term immobility that leads to morbidity and reduced life
expectancy. The primary alternative method of treatment is the use of
pharmaceutical regimens; however, this method only provides some patients with
temporary pain relief. There are no known cement products that have received
FDA approval or CE marking that would be in competition with ORTHOCOMP for
this indication. Clinical studies will be conducted at 10 different U.S.
locations and at locations in the EU to be determined at a later date.
Tooth Root Anchoring is used to anchor prosthetic teeth. Implants are placed
into surgically prepared sites in either the mandible or maxilla to which
prosthetic teeth are later attached. They may be placed singularly, several
teeth in a row or as a full arch. If there is a full and healthy bone bed, the
implants may be placed immediately; otherwise, a bone grafting procedure is
necessary. The current bone grafting procedure requires about six months for
the bone to regenerate. The implant is then placed and is monitored for
stability. The development and placement of the prosthetic usually occurs
after the implant has demonstrated requisite stability and this may add
additional time to the process. As a result, the entire implant procedure can
take well over a year. In comparison, the Company believes implants anchored
with ORTHOCOMP will allow load bearing within four weeks and will serve a
broader patient population, including patients with low bone-regenerative
potential. In tooth root anchoring applications, the Company believes that no
alternative exists at this time that will compete with ORTHOCOMP, other than
the current method of tooth root implantation. Animal studies will be
conducted at the Catholic University of Leuven, Belgium.
Cranio-Maxillofacial Reconstruction utilizing VITAGRAFT as a resorbable
cement offers a promising bone substitute option for indications including
mandibular resections due to trauma or disease, reconstruction of fractures
and cranial defects. The Company believes ORTHOCOMP will be useful for
complicated applications such as plastic reconstruction and facial
augmentation to adjust the height and position, and to shape certain facial
features, especially the chin and cheek bone. In addition, the Company
believes that both VITAGRAFT and ORTHOCOMP may be used in the same
reconstruction or repair procedure. Utilizing the Company's biocompatible
products could potentially reduce the recovery time and provide ease of use
features for the surgeon. The Company may face competition from a new
generation of similar products currently entering the market or expected to
enter the market in the near future.
Joint Implant Cement is used to secure reconstructive products to the bone
by applying a grout made up of a liquid (monomer) mixed with a powder (PMMA).
Joint implant cement is currently the prevalent mode of
29
<PAGE>
fixation for hip, knee, shoulder and other replacements, and according to
Orthopedic Network News, joint implant cement implants represent approximately
65% of all implant procedures. During the procedure, the patient's joint is
exposed and prepared for the implant. The cement material is then added to
bond the implant to the bone. Currently, PMMA is typically used in this
procedure and Howmedica, producer of Simplex cement, has the dominant market
share. The use of PMMA, however, exposes patients to the monomer of PMMA as
well to potentially bone-damaging high temperatures during the setting of this
material. The Company believes that ORTHOCOMP possesses superior mechanical
and bioactive properties, is more biocompatible and uses a more efficient
delivery system than PMMA.
Tibial Fracture Repair addresses the loss of cancellous structure within the
tibial plateau. The function of the tibial plateau is to transfer the load
(weight of the body) to the shaft of the tibia (cortical bone). The cancellous
structure transfers load in a similar way to a girder structure in a building.
The plateau needs to continue to function so the patient can return to normal
activities. The Company believes that the replacement of the material with
VITAGRAFT, a space filling, load transferring material, will allow the patient
to return more quickly to function. The procedure involves the restoration of
the tibial plateau, allowing the femur to have a congruous surface with which
to interface. The fracture is augmented, if necessary, with orthopaedic
hardware such as screws. The Company may face competition from a new
generation of similar products currently entering the market or expected to
enter the market in the near future.
SALES AND MARKETING
The Company intends to market its products through a balance of exclusive
third-party strategic alliances, arrangements with agents and distributors and
through direct sales, depending upon the clinical indications for which the
products are intended. On April 29, 1998, the Company entered into its first
strategic alliance, a Global Distribution Agreement with 3i, whereby 3i
obtained the exclusive worldwide marketing, sales and distribution rights for
ORTHOCOMP and BIOGRAN for dental surgical applications for a term of five
years. For the remainder of calendar year 1998, 3i has guaranteed minimum
purchases in the following amount: US$770,000 in the second quarter,
US$815,000 in the third quarter and US$815,000 in the fourth quarter. On or
prior to December 1 of each calendar year during the term of the agreement, 3i
and the Company have promised that they will reach an agreement on a forecast
of products to be purchased by 3i during the next calendar year. These
forecasts are not a guarantee of purchases by 3i but will be used by the
Company to forecast production requirements. If, however, 3i fails to purchase
more than US$600,000 in a given calendar quarter after 1999, the Company may
terminate the agreement.
On June 9, 1998, the Company entered into the Howmedica Agreements whereby
(i) Howmedica has obtained exclusive worldwide marketing, sales and
distribution rights for ORTHOCOMP in joint implant procedures, (ii) the
Company may earn payments of up to an aggregate of US$4,500,000 if various
milestones are reached during the anticipated four to five year development
and approval process for this indication, (iii) upon receipt of regulatory
approvals, Howmedica will be required to make annual minimum purchases of
ORTHOCOMP from the Company for a six year period, (iv) Howmedica may obtain
exclusive manufacturing rights from the Company upon a one-time payment of
$7,000,000 and will be required to pay royalties on future sales, (v)
Howmedica has an option until December 9, 1998 to acquire worldwide
distribution rights for screw augmentation and vertebroplasty, subject to
agreement between the two parties on minimum purchase quantities and (vi)
Howmedica has certain rights of first negotiation and refusal for orthopaedic
applications of other Company technologies.
RESEARCH AND DEVELOPMENT
The Company's development efforts to date have been concentrated on the
development of products derived from research initially carried out at the
Catholic University of Leuven, Belgium and from its own internal research. The
Company has also gained access to intellectual property resulting from
research carried out at the University of Pennsylvania through a license
agreement and will be working to develop and commercialize products resulting
from such research. This intellectual property includes biomaterial substrates
for tissue engineering and carriers for growth factors and drug delivery. The
Company believes that these additional technologies may represent significant
potential future market opportunities which the Company intends to pursue. In
addition, the Company will seek to enter into strategic alliances, license
patented technologies and develop additional technologies to broaden its
future product offerings. The Company has incurred US$467,000, US$1.2 million
and US$2.0 million in research and development expense in 1995, 1996 and 1997,
respectively. See "--License Agreements."
30
<PAGE>
CLINICAL ADVISORY BOARD
The Company has a Clinical Advisory Board that currently consists of ten
preeminent clinicians. The Company anticipates that it will add members to
this board from the international medical community. The Clinical Advisory
Board has actively advised the Company regarding potential clinical uses of
its products and many of these members are expected to be involved in the
clinical trials of the Company's products. Certain members of the Clinical
Advisory Board have received options to purchase common stock of the Company,
a practice which the Company may continue in the future.
Steven P. Arnoczky, DMV is the Director of the Laboratory for Comparative
Orthopaedic Research at Michigan State University, East Lansing, Michigan. He
is Professor of Surgery, College of Veterinary Medicine and Human Medicine,
and has held faculty appointments at the Hospital for Special Surgery, New
York. Dr. Arnoczky has published extensively on musculoskeletal and sports
medicine research.
Robert E. Hunter, MD is in private practice in Aspen, Colorado and Clinical
Associate Professor at the University of Colorado. He served his fellowship in
Sports Medicine and is a member of numerous committees for the American
Academy of Orthopaedic Surgeons. Dr. Hunter is the team physician for the U.S.
Alpine Ski Team.
John Mathis, MD, MSc is the Director of Interventional Neuroradiology and
Co-Director, Division of Neuroradiology at Johns Hopkins Medical Center in
Baltimore, Maryland. Dr. Mathis also serves as an Associate Professor of
Radiology and Neurosurgery at Johns Hopkins Medical Center. His major research
interests are in materials evaluation and clinical applications development
for the treatment of vertebral crush fractures. Dr. Mathis is pursuing
material characterization and comparative analysis of bone cements for
vertebroplasty.
Sam Nasser, MD, PhD is Associate Professor and Clinical Educator, Wayne
State University School of Medicine, Department of Orthopaedic Surgery, and
Co-Director, Wayne State Adult Reconstruction Surgery Fellowship Program. Dr.
Nasser received the John Charnley Award from the Hip Society in 1990 and was
Guest Editor at the Orthopaedics Clinics of North America in 1992. His
research interest and funding focuses on biomaterials, instrumentation systems
in revision surgery and musculoskeletal infections related to total joint
arthroplasty.
John G. Seiler, MD is Associate Professor with tenure at Emory University,
Atlanta, Georgia, where he is Director of the Residency Training Program. His
sub-specialty is in hand surgery. Prior to his faculty appointment at Emory,
Dr. Seiler completed his fellowship under Richard Gelberman, MD in Boston,
Massachusetts.
Dan M. Spengler, MD is Professor and Chairman of the Department of
Orthopaedics at Vanderbilt University, Nashville, Tennessee. His sub-specialty
is in surgery of the spine and he is the Editor of the Journal of Spinal
Disorders.
Roby C. Thompson, MD is Vice Provost, The Academic Health Care Center of the
University of Minnesota, Minneapolis, Minnesota. He is past Professor and Head
of the Department of Orthopaedics at the University of Minnesota. Dr. Thompson
is a past President of the American Academy of Orthopaedic Surgery and
Chairman of the Board of Trustees of the Journal of Bone and Joint Surgery.
His sub-specialty interest is in orthopaedic oncology.
R. Gilbert Triplett, PhD, DDS is the Professor and Chairman, and Director of
Hospital Affairs, Department of Oral and Maxillofacial Surgery and
Pharmacology at Baylor College of Dentistry, Texas A&M University System, in
Dallas, Texas. Dr. Triplett's research areas of interest are in the field of
bone physiology, maxillofacial trauma, and dental implants and microsurgery.
Dr. Triplett has published extensively in the field of bone grafting and
regeneration.
Russell Warren, MD is Surgeon-in-Chief, The Hospital for Special Surgery,
New York, New York. He is past President of the Academy of Orthopaedic and
Sports Medicine, is the recipient of the Cabaud Award and is the team
physician for the New York Giants NFL football team.
Donald A. Wiss, MD is Coordinator of the Southern California Orthopedic
Institute in Van Nuys, California. He is Clinical Professor of Orthopaedics at
the University of Southern California.
MANUFACTURING AND FACILITIES
The Company's headquarters are located at the Great Valley Corporate Center,
Malvern, Pennsylvania, a suburb of Philadelphia. The Company conducts all of
its principal activities from this 15,000 square foot facility,
31
<PAGE>
which is leased through July 2000, with an option to renew for an additional
five-year term. The Company also leases office space in Grez Doiceau, Belgium
for its international sales and marketing activities.
The Company has outsourced the manufacture of BIOGRAN to GMP-qualified
facilities with extensive glass manufacturing, device packaging and
sterilization capabilities. The Company intends to manufacture ORTHOCOMP and
VITAGRAFT at its Malvern facility and to obtain FDA GMP certification and ISO
9000 series quality certification for all of its products.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will be dependent in part upon its ability to preserve
its trade secrets, obtain and maintain patent protection for its technologies,
products and processes in the United States, the European Union and other
jurisdictions, and operate without infringing the proprietary rights of other
parties. As a result of the substantial length of time and expense associated
with developing and commercializing new medical devices, the Company places
considerable importance on obtaining and maintaining trade secret and patent
protection for new technologies, products and processes, and also relies on
trade secrets and proprietary know-how which it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators,
employees and consultants.
The Company intends to file applications as appropriate for patents covering
its technologies, products and processes. The Company intends to continue to
cooperate with its licensors, the University of Pennsylvania and FBFC, in
obtaining patent protection exclusively licensed to the Company. As of the
date of this Prospectus, the Company owns or controls 16 issued U.S. patents
and 14 pending patent applications in the United States, two issued patents
and 11 pending patent applications in Europe, 11 patent applications in Japan
and one issued patent in Taiwan. Of the Company's issued U.S. patents, one
relates to BIOGRAN and one relates to ORTHOCOMP while the other 14 are
process-related and do not relate to a specific product. The two European
patents relate to BIOGRAN while the one issued patent in Taiwan is process-
related and does not relate to a specific product. See "Risk Factors--
Dependence on Patents, Proprietary Rights; Existing Litigation."
LICENSE AGREEMENTS
The Company's product development efforts have been dependent in part upon
Dr. Paul Ducheyne and the University of Pennsylvania in Philadelphia,
Pennsylvania. In September 1993, the Company and the University of
Pennsylvania entered into a license agreement (the "Penn License Agreement").
The Penn License Agreement grants the Company an exclusive, worldwide right
and license to use and sell products that utilize technology protected by the
University of Pennsylvania's patent rights for use in medical, dental and
veterinary fields for growth of bone cells, fixing human prosthetic devices,
coating human prosthetic devices, including bone growth onto or into modified
human prosthetic device and/or producing human prosthetic devices. The Penn
License Agreement has resulted in substantial cost savings to the Company
while allowing the Company to greatly expand its product development efforts.
The Company has agreed to pay a royalty of 4% of the net sales of products
made by the Company that utilize technology covered by the Penn License
Agreement. Additionally, the Company issued 120,008 shares of Company stock to
the University of Pennsylvania as partial consideration for the exclusive
license.
The Company's product development efforts have also been dependent upon FBFC
International ("FBFC"), a Belgian company established in the Kingdom of
Belgium with a registered office at B-1000 Brussels Wetstraat 24. In July
1992, the Company and FBFC entered into a license agreement (the "FBFC License
Agreement"). Under the FBFC License Agreement, which expires in 2002, FBFC
granted the Company an exclusive, worldwide license to use the technical
knowledge and expertise developed or obtained by FBFC relating to bioactive
glass granules. FBFC also provides technical assistance to the Company under
the FBFC License Agreement. The Company has agreed to pay a maximum of US$1.5
million over the life of the agreement for services, royalty payments and the
exclusive license.
COMPETITION
Competition in the medical device industry is intense in both the U.S. and
Europe. The medical device industry is generally characterized by rapid
product development and technological advancement. The Company's products
could be rendered noncompetitive or obsolete by technological advancements
made by the Company's current or potential competitors. There can be no
assurance that the Company will be able to respond to technological
advancements through the development and introduction of new products.
Moreover, many of the Company's existing and potential competitors have
substantially greater financial, marketing, sales,
32
<PAGE>
distribution and technological resources than the Company. Such existing and
potential competitors may be in the process of seeking FDA or other regulatory
approvals, or patent protection, for their respective products or may enjoy
substantial advantages over the Company in terms of research and development
expertise, experience in conducting clinical trials, experience in regulatory
matters, manufacturing efficiency, name recognition, sales and marketing
expertise or the development of distribution channels. Since the Company's
products compete with procedures that have, over the years, become standard
within the medical community, there can be no assurance that the procedures
underlying the Company's products will be able to replace more established
procedures and products. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competition will not have a material adverse effect on the Company's business,
financial condition and results of operations.
In orthopaedics and the dental surgery markets, the Company faces
competition from existing products and companies, and potential competition
from emerging companies developing bone substitutes. In the dental surgery
market, BIOGRAN competes with bone grafting products for filling oral defects,
including autograft bone (bone from another part of the patient's body),
allograft bone (bone derived from cadavers), xenograft bone (bone derived from
bovines), and other synthetic bone graft materials. In orthopaedic
applications for trauma and for cranio-maxillofacial reconstruction, the
Company's VITAGRAFT resorbable bone cements will face competition from a new
generation of similar products currently entering the market or expected to
enter the market in the near future. There are no known cement products that
have received FDA approval or CE marking for screw augmentation and
vertebroplasty that would be in competition with ORTHOCOMP for these
indications. However, the Company may face off-label use of PMMA or calcium
phosphate cements for these indications. In tooth root anchoring applications,
the Company believes that no alternative exists at this time that will compete
with ORTHOCOMP, other than the current method of tooth root implantation. The
joint implant cement market is dominated by the use of PMMA, and Howmedica,
the producer of Simplex cement, has the dominant market share. While the
Company believes that ORTHOCOMP is a superior product to PMMA, PMMA has been a
successful product and orthopaedic surgeons will likely be conservative in
accepting new cements. See "Risk Factors--Competition; Uncertainty of
Technological Change."
GOVERNMENT REGULATION
Consistent with its intent to market its products internationally, the
Company systematically applies for all necessary regulatory approvals for its
products in defined applications in Europe, the United States and other
selected geographic territories.
Products that have premarket approval or clearance from the FDA do not
require FDA export approval. However, some countries require manufacturers to
provide an FDA certificate for products for export ("CPE"), which requires the
device manufacturer to certify to the FDA that the product has been granted
premarket approval or clearance in the United States and that the
manufacturing facilities appeared to be in compliance with GMPs at the time of
the last GMP inspection. The FDA will refuse to issue a CPE if significant
outstanding GMP violations exist.
The introduction of the Company's products in international markets will
also subject the Company to international regulatory clearances that may
impose additional substantial costs and burdens. International sales of
medical devices are subject to the regulatory requirements of each country.
The regulatory review process varies from country to country. Many countries
also impose product standards, packaging and labeling requirements and import
restrictions on devices. In addition, each country has its own tariff
regulations, duties and tax requirements.
Europe
In order to continue selling its products within the European Economic Area
following June 14, 1998, the Company is required to achieve compliance with
the requirements of the European Union Medical Devices Directive (the "MDD")
and affix CE marking on its products to attest such compliance. To achieve
this, the Company's products must meet the "essential requirements" defined
under the MDD relating to safety and performance and the Company must
successfully undergo a verification of its regulatory compliance ("conformity
assessment") by TNO, or the Netherlands Organization for Applied Scientific
Research, the Dutch Notified Body selected by the Company. The nature of this
assessment will depend on the regulatory class of the Company's products.
Under European law, the Company's products are likely to be in Class III. In
the case of Class III products, the Company must (as a result of the
regulatory structure which the Company has elected to follow) establish and
maintain a complete quality system for design and manufacture as described in
Annex II of the MDD (this corresponds to a quality system for design in ISO
9001 and EN 46001 standards). The Notified
33
<PAGE>
Body must audit this quality system and determine if it meets the requirements
of the MDD. In addition, the Notified Body must approve the specific design of
each device in Class III. As part of the design approval process, the Notified
Body must also verify that the products comply with the essential requirements
of the MDD. In order to comply with these requirements, the Company must,
among other things, complete a risk analysis and present sufficient clinical
data. The clinical data presented by the Company must provide evidence that
the products meet the performance specifications claimed by the Company,
provide sufficient evidence of adequate assessment of unwanted side-effects
and demonstrate that the benefits to the patient outweigh the risks associated
with the device. The Company will be subject to continued surveillance by the
Notified Body and will be required to report any serious adverse incidents to
the appropriate authorities. The Company also will be required to comply with
additional national requirements that are beyond the scope of the MDD.
The Company is in the process of implementing policies and procedures that
are intended to allow the Company to receive ISO 9000 series certification of
its processes. ISO 9000 series certification is one of the quality systems
satisfying the CE Mark certification requirements for all products
manufactured in the United States.
United States
The medical devices to be manufactured and marketed by the Company are
subject to extensive regulation by the FDA. Pursuant to the FFD&C Act and the
regulations promulgated thereunder, the FDA regulates the clinical testing,
manufacture, labeling, distribution and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing approvals
and criminal prosecution.
In the United States, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, Class I devices, the least regulated category, are subject to
general controls and Class II devices are subject to general and special
controls. Generally, Class III devices are those which must receive premarket
approval by the FDA to ensure their safety and effectiveness. Other than
BIOGRAN, which is not classified, the Company's products are either Class II
or Class III devices.
Before a new device can be introduced into the market, the manufacturer must
generally obtain market clearance through either a 510(k) notification or a
premarket approval through a PMA application. A 510(k) clearance will be
granted if the submitted information establishes that the proposed device is
"substantially equivalent" to a legally marketed Class I or II medical device,
or to a Class III medical device for which the FDA has not called for a PMA.
The FDA may determine that a proposed device is not substantially equivalent
to a legally marketed device, or that additional information or data are
needed before a substantial equivalence determination can be made. A request
for additional data may require that clinical studies be performed to
establish the device's "substantial equivalence."
Commercial distribution of a device for which a 510(k) notification is
required can begin only after the FDA issues an order finding the device to be
"substantially equivalent" to a predicate device. Pursuant to the Food and
Drug Administration Modernization Act ("FDAMA"), enacted in November 1997, the
FDA must make a determination with respect to a 510(k) submission within 90
days of its receipt. The FDA may extend this time frame by requesting
additional data or information. Prior to enactment of the new law, it
generally has taken from four to twelve months from the date of submission to
obtain a 510(k) clearance, and in some instances has taken longer. It is not
expected that the new law will shorten this time frame significantly, if at
all. There can be no assurance that the Company will obtain 510(k) clearance
for its products on a timely basis.
A "not substantially equivalent" determination, or a request for additional
information, could delay the market introduction of new products that fall
into this category and could have a material adverse effect on the Company's
business, financial condition and results of operations. For any of the
Company's products that are cleared through the 510(k) process, modifications
or enhancements that could significantly affect the safety or efficacy of the
device or that constitute a major change to the intended use of the device
will require new 510(k) submissions. The FDA has recently implemented a
policy, under which certain device modifications may be submitted as a
"Special 510(k)," which will require only a 30-day review. Special 510(k)s
will be limited to those device modifications that do not affect the intended
use or alter the fundamental scientific technology of the device and for which
substantial equivalence can be demonstrated through design controls. There can
be no assurance that the Company will be able to utilize the new "Special
510(k)" option for any modifications made to the Company's 510(k)-cleared
devices.
34
<PAGE>
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
Class III device for which FDA has called for PMA applications. A PMA
application must be supported by valid scientific evidence that typically
includes extensive data, including preclinical and clinical trial data, to
demonstrate the safety and effectiveness of the device, as well as extensive
manufacturing information.
An FDA review of a PMA application generally takes one to two years from the
date the PMA application is accepted for filing, but may take significantly
longer. The review time is often significantly extended should the FDA ask for
more information or clarification of information already provided in the
submission. Pursuant to FDAMA, the FDA has established a number of policies
and procedures intended to streamline preparation and review of PMAs. These
include the opportunity for device sponsors to obtain FDA agreement in writing
on an investigational plan, the opportunity to meet with FDA within 100 days
of the PMA's filing to review its status, the ability to rely on compliance
with certain national or international standards to satisfy certain PMA
requirements, and increased use of postmarket controls to reduce PMA data
requirements. There can be no assurance that the Company will benefit from any
of these new policies or procedures.
During the PMA review period, an advisory committee, typically a panel of
clinicians, will likely be convened to review and evaluate the application and
provide recommendations to the FDA as to whether the device should be
approved. The FDA is not bound by the recommendations of the advisory panel.
Toward the end of the PMA review process, the FDA generally will conduct an
inspection of the manufacturer's facilities to ensure that they are in
compliance with applicable GMP requirements.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter or an
"approvable letter," which usually contains a number of conditions which must
be met in order to secure final approval of the PMA. When and if those
conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue an approval letter, authorizing commercial marketing of the device for
certain indications. If the FDA's evaluation of the PMA application or
manufacturing facilities is not favorable, the FDA will deny approval of the
PMA application or issue a "not approvable letter." The FDA may also determine
that additional clinical trials are necessary, in which case PMA approval may
be delayed up to several years while additional clinical trials are conducted
and submitted in an amendment to the PMA application. The PMA process can be
expensive, uncertain and lengthy and a number of devices for which other
companies have sought FDA approval have never been approved for marketing.
Modifications to a device that is the subject of an approved PMA application
(including modifications to its labeling or manufacturing process) may require
approval by the FDA of PMA supplements or new PMAs. Supplements to a PMA
application often require the submission of the same type of information
required for an initial PMA, except that the supplement is generally limited
to that information needed to support the proposed change from the product
covered by the original PMA application.
If clinical trials of a device are required in connection with either a
510(k) notification or a PMA application and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) is required to file an IDE application prior to
commencing clinical trials. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is reviewed and approved by the FDA and one or more appropriate
Institutional Review Boards ("IRB's"), clinical trials may begin at a specific
number of investigational sites with a specific number of patients, as
approved by the FDA. If the device presents a "non-significant risk" to the
patient, a sponsor may begin the clinical trial after obtaining approval for
the study by one or more appropriate IRB's, but not the FDA. For "significant
risk" devices, an IDE supplement must be submitted to and approved by the FDA
before a sponsor or an investigator may make a change to the investigational
plan that may affect its scientific soundness or the rights, safety or welfare
of human subjects. IRB approval may be required for changes in the
investigational plan for both non-significant risk and significant risk
devices.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to extensive regulation by the FDA,
including record keeping requirements and reporting of adverse experiences
with the use of the device. Device manufacturers are required to register
their establishments and list their devices with the FDA and certain state
agencies, and are subject to periodic inspections by the FDA and certain state
agencies. The FFD&C Act requires devices to be manufactured in accordance with
GMP regulations that impose certain procedural and documentation requirements
upon the Company with respect to manufacturing and quality assurance
activities. Revisions to the GMP regulations, effective June 1, 1998, will
impose new design control requirements on device manufacturers that likely
will increase the cost of complying with GMP requirements. Medical devices are
also subject to postmarket reporting requirements for deaths or
35
<PAGE>
serious injuries when the device may have caused or contributed to the death
or serious injury, and for certain device malfunctions that would be likely to
cause or contribute to a death or serious injury if the malfunction were to
recur. If safety or efficacy problems occur after the product reaches the
market, the FDA may take steps to prevent or limit further marketing of the
product.
Labeling and promotion activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved or uncleared
uses. Pursuant to the FDAMA, however, limited dissemination of information on
unapproved uses is permitted, provided certain procedures are followed and
certain commitments are made. The Company and its products are also subject to
a variety of state laws and regulations in those states or localities where
its products are or will be marketed. Any applicable state or local
regulations may hinder the Company's ability to market its products in those
states or localities. Manufacturers are also subject to numerous federal,
state and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations now or in the future or that such laws
or regulations will not have a material adverse effect upon the Company's
ability to do business.
THIRD-PARTY REIMBURSEMENT
Successful sales of the Company's products in the United States and other
markets will depend on the availability of adequate reimbursement from third-
party payors. In the United States, health care providers, such as hospitals
and physicians that purchase medical devices for treatment of their patients,
generally rely on third-party payors to reimburse all or part of the costs and
fees associated with the procedures performed with these devices. HCFA
administers the policies and guidelines for coverage and reimbursement of
health care providers treating Medicare and Medicaid patients. In certain
circumstances, such as many procedures involving PMMA cement, HCFA deems such
procedures "approvable" and reimburses the providers for such services. Both
public and private insurance plans are central to new product acceptance. The
United States Medicare inpatient reimbursement system is a prospective
reimbursement system whereby rates are set in advance, fixed for a specific
fiscal period, constitute full institutional payment for the designated health
service and generally do not vary with hospital treatment costs. Medicare
reimburses outpatient services based on a predetermined fee schedule. Both
outpatient and inpatient reimbursement systems could affect the amount of
payment a hospital receives for using the Company's products if they are
approved for coverage.
Member countries of the EU operate various combinations of centrally-
financed health care systems and private health insurance systems. The
relative importance of government and private systems varies from country to
country. The choice of devices is subject to constraints imposed by the
availability of funds within the purchasing institution. Medical devices are
most commonly sold to hospitals or health care facilities at a price set by
negotiation between the buyer and the seller. A contract to purchase products
may result from an individual initiative or as a result of a competitive
bidding process. In either case, the purchaser pays the supplier. Payment
terms can vary widely throughout the EU.
In Japan, at the end of the regulatory process, the MHW in its discretion
makes a determination of the per unit sales price of the product and the
reimbursement level.
Through the patient informed consent process, the Company receives full
access to the United States clinical trial patient's hospital discharge
financial record and other medical financial information. By comparing the
cost outcomes of treated patients and control patients, the Company expects to
substantiate the claim that the Company's products provide overall reductions
in costs thereby outweighing the incremental added cost of the product.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves the risk of product liability claims. While
the Company has not experienced any product liability claims to date, there
can be no assurance that product liability claims will not be asserted against
the Company or its licensees. Although the Company maintains product liability
insurance in the annual aggregate amount of up to $3 million, there can be no
assurance that this coverage will be adequate to protect the Company against
future product liability claims. In addition, product liability insurance is
expensive and there can be no assurance that product liability insurance will
be available to the Company in the future on terms satisfactory to the
Company, if at all. A successful product liability claim or series of claims
brought against the Company in excess of its coverage could have a material
adverse effect on the Company's business, financial condition and results of
operation.
36
<PAGE>
EMPLOYEES
As of May 31, 1998, the Company had 28 full-time employees, consisting of
four persons in research and development activities, five persons in
manufacturing and facilities, two persons in clinical and regulatory affairs,
9 persons in sales and marketing, seven persons in general and administrative
functions, and one employee at the Company's offices in Belgium. The Company
had an average of 17, 42 and 53 employees in 1995, 1996 and 1997,
respectively. The Company attributes the decline in employment from 1997 to
its determination to place greater reliance on exclusive third-party strategic
alliances, such as its alliance with 3i, and a reduced reliance on a direct
sales force.
No employees are covered by collective bargaining agreements, and the
Company believes it maintains good relations with its employees.
LITIGATION
On July 23, 1994, U.S. Biomaterials Corporation filed with the U.S. Patent
and Trademark Office a Request for Reexamination of the FBFC Patent, of which
the Company is the exclusive licensee. FBFC filed a response in this
proceeding, establishing that the claims of the FBFC Patent were properly
allowed. As a result, a Certificate of Reexamination was issued by the U.S.
Patent and Trademark Office confirming the patentability of all claims of the
FBFC Patent without amendment. However, a nullification proceeding was also
instituted by U.S. Biomaterials Corporation against the European counterpart
to the FBFC Patent. The opposition division of the European Patent Office
tentatively decided in FBFC's favor, but the matter is still proceeding.
In May 1996, a complaint was filed in the U.S. District Court for the
Northern District of Florida by the University of Florida Research Foundation,
Inc., U.S. Biomaterials Corporation and Block Drug Corporation against the
Company, a distributor of the Company's BIOGRAN product and the Company's
Chairman. This action charged the defendants with infringement of the 046
Patent, said to be assigned to the University of Florida Research Foundation
and said to be exclusively licensed to U.S. Biomaterials Corporation. In April
1998, the court granted the Company's summary judgment motion stating that the
Company's BIOGRAN product does not infringe this patent. The complaint also
alleges false representation, unfair competition, false advertising and trade
disparagement under U.S. federal and Florida state law, and no ruling has been
rendered with respect to these allegations.
While the Company believes that its licensor, FBFC, will ultimately prevail
in the European Patent Office nullification proceeding and that the
allegations of false description, false representation, unfair competition,
false advertising and trade disparagement under U.S. federal and Florida state
law are without merit, there can be no assurance that the BIOGRAN Matter will
be resolved on a basis that is favorable to the Company in the near future, if
at all. Net of insurance recoveries, the Company has incurred approximately
$1.9 million in expenses related to the BIOGRAN Matter. At March 31, 1998, the
Company had a reserve of US$635,000 to cover future legal fees related to the
BIOGRAN Matter.
From time-to-time, the Company may be involved in litigation relating to
claims arising out of its business. Other than the BIOGRAN Matter, there are
no claims or actions that are currently pending or anticipated against the
Company.
37
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
April 30, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Paul Ducheyne, Ph.D..... 48 Founder, Chairman of the Board and Chief Science and Technology Officer
David S. Joseph......... 55 President, Chief Executive Officer and Director
Samuel A. Nalbone, Jr... 42 Senior Vice President
Joseph M. Paiva......... 42 Vice President and Chief Financial Officer
Erik M. Erbe, Ph.D...... 33 Vice President, Research and Development
Thomas L. Parker, Jr.... 54 Vice President, Professional Relations
K. Vasanth Prabhu,
Ph.D................... 59 Vice President, Clinical and Technical Services
Gert Eussen............. 54 International Marketing Director
Howard Salasin, Ph.D. .. 63 Director
Richard M. Horowitz,
Esq.................... 37 Director
Jos B. Peeters, Ph.D.... 50 Director
James M. Garvey......... 51 Director
Lew Bennett............. 71 Director
</TABLE>
Dr. Ducheyne founded Orthovita and has served as the Chairman of the Board
since its inception and as Chief Science and Technology Officer since March
1998. Since 1997, Dr. Ducheyne has been the Director of the Program for
Bioactive Materials and Tissue Engineering at the University of Pennsylvania,
where he has been a professor of Bioengineering and Orthopaedic Surgery
Research since 1983. Dr. Ducheyne is a past President of the Society of
Biomaterials and serves or has served on the editorial board of ten biomedical
and orthopaedic journals, authored or co-authored over 200 papers and edited
ten books, and holds 21 patents. Dr. Ducheyne received his MS in Materials
Science and Metallurgical Engineering in 1972 and a PhD in Materials Science
(Thesis: "Metallic Orthopaedic Implants with a Porous Coating") in 1976 from
the Catholic University of Leuven, Belgium. In 1977, he presented the seminal
work on the use of hydroxyapatite coatings on porous materials for enhancing
fixation to bone.
Mr. Joseph has been President, CEO and a Director of Orthovita since 1993.
Mr. Joseph co-founded Surgical Laser Technologies, Inc. ("Surgical Laser") in
1985, a company that became publicly-traded in 1989, and served as its
Chairman from 1985 to 1993 and as its as Chief Executive Officer from 1985
until 1991. Prior to joining Surgical Laser, Mr. Joseph co-founded Site
Microsurgical Systems, an ophthalmic microsurgical company, in 1980 and served
as its Chief Executive Officer from 1980 to 1985. Mr. Joseph currently serves
on the Board of Directors of King's College in Pennsylvania and is a member of
the Corporation of The Jackson Laboratory, a leading genetic research
institute. He received a BS Degree from King's College in Pennsylvania and an
MBA from Xavier University in Ohio.
Mr. Nalbone has been the Senior Vice President since February 1996, and was
Vice President of Marketing from February 1995 until February 1996. Prior to
joining the Company, Mr. Nalbone was employed by 3M, Inc. ("3M") from 1979 to
1995 in a variety of sales, marketing and general management positions. From
1993 to February 1995, Mr. Nalbone was generally responsible for 3M's
orthopaedic implant business. From 1988 to 1993, Mr. Nalbone was a General
Manager of a division of 3M Health Care Ltd. in Japan. Mr. Nalbone received a
BS in Biology from the University of Hartford in Connecticut, performed
graduate research in Biochemistry at Notre Dame University in Indiana and
received an MBA from Pace University in New York.
Mr. Paiva has been the Company's Vice President and Chief Financial Officer
since December 1997. Prior thereto, Mr. Paiva was the Controller of Cephalon,
Inc., a publicly-traded biotechnology company, from December 1995 to December
1997, the Chief Financial Officer of ActiMed Laboratories, Inc., a medical
device company, from August 1994 to December 1995, and the Chief Financial
Officer of Argus Pharmaceuticals, Inc., a publicly-traded biotechnology
company, from September 1993 to April 1994. Mr. Paiva was also employed by
Cytogen Corporation, a biotechnology company, from September 1983 to September
1993 in a variety of positions of increasing responsibility, ultimately
serving as Director of Finance and as Chief Financial Officer of its
affiliated company, CytoRad Incorporated, a publicly-traded biotechnology
company. Mr. Paiva was also employed for three years in the audit department
of KPMG Peat Marwick, an international accounting firm. Mr. Paiva is the
current President of the Philadelphia-Princeton Chapter of the Association of
Bioscience Financial Officers. Mr. Paiva received a BS Degree in Accounting
from Fairleigh Dickinson University in New Jersey and an MBA from Rutgers
University in New Jersey. Mr. Paiva is a Certified Public Accountant.
38
<PAGE>
Dr. Erbe has been the Vice President, Research and Development of the
Company since May 1995. Prior thereto, Dr. Erbe was the Senior Product
Development Engineer of 3M's Dental Products Division from 1991 to 1995, where
he developed expertise in chemical ceramic synthesis and fabrication
technologies. His focus was on customer-defined product development, applied
research and scale-up in polymer composites, and glass and glass-ceramics
technologies related to the dental field. Dr. Erbe has authored seven
articles, holds two U.S. patents and had 12 records of invention while at 3M.
Dr. Erbe received his doctorate from the University of Missouri at Rolla in
Ceramic Engineering and Glass Science, where research was conducted in the
fields of glasses for radiopharmaceutical applications, bioabsorbable
composites for bone fixation, and sol-gel derived glasses for drug delivery.
Dr. Erbe is a member of several professional engineering and scientific
societies, an honorary research society (Sigma Xi) and the ISO general
assembly group, as well as several other ISO technical subcommittees.
Mr. Parker has been the Vice President of Professional Relations since
August 1996, responsible for developing the Company's orthopaedic advisory
board and coordinating the clinical use of the Company's products through his
long established relationships in the orthopaedic community worldwide. Prior
to joining the Company, Mr. Parker was employed by 3M from October 1978 to
August 1996 and prior thereto by Merck & Co. in a variety of management,
marketing and clinical positions. Mr. Parker received his BA in Biology and
Chemistry from LaGrange College in Georgia.
Dr. Prabhu has been the Vice President, Clinical and Technical Services of
the Company since June 1996. Prior thereto, Dr. Prabhu was employed by 3M
since 1978 and served as its Product Service Manager of the Assessment and
Therapy Laboratory from 1992 to 1996. As the Vice President for Clinical and
Technical Services, Dr. Prabhu is responsible for the Company's pre-clinical
validation, clinical studies, quality assurance, and professional services
groups. Dr. Prabhu has extensive experience in the validation, scale-up and
production of polymeric materials including synthetic casts, bone cements,
resin composite materials and hydrogel materials. Dr. Prabhu received a PhD
from New York University in Organic Chemistry in 1972.
Mr. Eussen is based in Belgium where he directs the Company's international
marketing activities. He joined Orthovita in June 1994 from his private
consulting business. Mr. Eussen's consulting projects have included the
strategic review of new business opportunities in the bone substitute market,
the study of oral implants in Europe and studies of the contemporary status of
biomaterials. From 1980 to 1993, Mr. Eussen was a founding manager and
shareholder of SIMED International BV in Utrecht, the Netherlands, whose main
business was the supplying, equipping, and installation of complete hospitals
in developing countries. From 1966 to 1980, Mr. Eussen was Marketing Manager,
Sales Manager and General Manager, respectively, for Stopler Instruments &
Equipment BV. Mr. Eussen received an MBA in Marketing Management from Hogere
Bedrijfsleidinc.
Dr. Salasin has been a Director since May 1995. Dr. Salasin was President,
Chief Executive Officer and 100% owner of Martin Industries, a manufacturing
company, from 1977 to 1996. He is a private investor and financial advisor to
a private investment fund, and has been a general management consultant since
1975. Dr. Salasin worked for 12 years in engineering positions in the space
industry for both General Electric and United Aircraft Corporation. Dr.
Salasin served on the Board of Surgical Laser Technologies, Inc. from 1985 to
1988. Dr. Salasin holds a BS in Electrical Engineering, an MS in Electrical
Engineering from Drexel University in Pennsylvania and a PhD in Education from
the University of Pennsylvania.
Mr. Horowitz has been a Director since May 1995. Mr. Horowitz has been
employed by R.A.F. Corporation, a private venture capital and acquisition
firm, as Vice President and General Counsel since 1991. R.A.F. Ventures IV,
L.P., an affiliate of the R.A.F. companies, is a significant shareholder of
the Company. Prior thereto, Mr. Horowitz was a corporate lawyer with the law
firm of Wolf, Block, Schorr and Solis-Cohen, Philadelphia, Pennsylvania, where
he specialized in mergers, acquisitions, corporate finance and general legal
and business issues. Mr. Horowitz received his BA in Economics and Political
Science from the University of Pennsylvania and his JD from Harvard Law School
in Massachusetts.
Dr. Peeters has been a Director since March 1996. Dr. Peeters is a Partner
with Baring Private Equity Partners Ltd., Chairman of Quartz Capital Partners
Limited and the founder and a Managing Director of Capricorn Venture Partners
n.v., a Belgian-based venture capital firm specializing in early-stage,
technology-based companies. From 1985 to 1992, Dr. Peeters was a Managing
Director of BeneVent Management n.v., a Belgian-based venture capital firm.
Dr. Peeters was co-founder and First Chairman of the Belgian Venturing
Association and in 1989/1990 he was Chairman of the European Venture Capital
Association (EVCA). Dr. Peeters was Chairman of the Working Group that founded
the European Association of Securities Dealers (EASD) and developed EASDAQ,
for which he serves as Vice-Chairman.
39
<PAGE>
Mr. Garvey has been a Director since April 1997. Mr. Garvey has been the
Chief Executive Officer and Managing Partner of Schroder Ventures Life
Sciences, a private venture capital firm and significant shareholder of the
Company, since May 1995. Prior to joining Schroder Ventures, Mr. Garvey was
Director of the US$600 million Venture Capital Division of Allstate Corp. He
served as president of Allegheny International Medical Technology until it was
acquired by PPG Industries in 1987. From 1971 to 1984, Mr. Garvey held general
management, marketing and distribution management positions in the United
States and Europe with Continental Water Systems, Millipore and the Kendall
Company. Mr. Garvey is currently a director of J&C Health Services,
LaserVision Centers and Allscripts Pharmaceuticals. Mr. Garvey received a BSE
degree from Northern Illinois University in 1969.
Mr. Bennett has been a Director since September 1997. Mr. Bennett has been
active in the medical field for 40 years, beginning his career in health care
in 1956 as a training director and divisional sales manager for Ethicon. Mr.
Bennett currently serves as Senior Vice President of Sofamor Danek Group,
Inc., Memphis, Tennessee, a manufacturer of spinal implants. From 1980 to
1990, he was associated with Richards Medical Company, where he served as
Senior Vice President, and was the General Manager of Neomed, Inc. and
Orthopaedic Accessories Division. In 1974, he founded Dillon Manufacturing
Company, an orthopaedic soft goods company that he sold to General Medical
Corporation in 1979. From 1966 to 1974, Mr. Bennett served as Vice President
for Sales and Marketing for Howmedica, Inc., a company that he founded and
that was eventually sold to Pfizer. Mr. Bennett lectures internationally to
business and professional groups working in the medical field.
Executive officers of the Company are appointed by, and serve at the
pleasure of, the Board of Directors.
DIRECTOR COMPENSATION
The Company currently reimburses its directors for out-of-pocket expenses
incurred in connection with their rendering of services as directors, but does
not pay cash fees to directors for attendance at meetings, although it may
decide to do so in the future. Directors who are not currently receiving
compensation as officers or employees of the Company are eligible to receive
options under the 1997 Equity Compensation Plan in consideration for their
service as directors. See "--Stock Option Plans--1997 Equity Compensation
Plan" below. In 1997, Messrs. Salasin, Horowitz, Garvey, Bennett and Peeters
each received an option to purchase 10,000 shares of Common Stock at an
exercise price of US$4.25 per share. See "Principal and Selling Shareholders."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1997, recommendations concerning the aggregate compensation of the
Company's executive officers were made by the Compensation Committee of the
Board of Directors, which currently consists of Mr. Garvey and Dr. Salasin.
Dr. Salasin was a member of this Committee during all of 1997 and Mr. Garvey
became a member of this Committee in April 1997 when he replaced a former
director on the Board. See "Certain Relationships and Related Transactions."
40
<PAGE>
EXECUTIVE COMPENSATION
The following table provides information concerning compensation paid or
accrued in the year ended December 31, 1997 with respect to the Company's
Chief Executive Officer and President and the other four executive officers
(collectively, the "Named Officers") who earned total salary and bonus of more
than $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG TERM COMPENSATION
-------------- -----------------------
SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR (US$) (US$) OPTION (#) (US$)(1)
- --------------------------- ---- ------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C>
David S. Joseph.................... 1997 210,577 -- -- --
President and Chief Executive
Officer
Samuel A. Nalbone, Jr. ............ 1997 167,308 50,000 140,000 2,375
Senior Vice President, Operations
Erik M. Erbe, Ph.D. ............... 1997 123,423 22,500 100,000 2,254
Vice President, Research and
Development
Thomas L. Parker, Jr. ............. 1997 115,827 -- -- 1,845
Vice President, Professional
Relations
K. Vasanth Prabhu, Ph.D. .......... 1997 119,035 12,000 -- 2,097
Vice President, Clinical and
Technical Services
</TABLE>
- --------
(1) The amounts disclosed in this column include Company matching
contributions on behalf of each Named Officer during 1997 under the
Company's 401(k) plan covering all of the Company's eligible employees.
STOCK OPTION INFORMATION
Option Grants. The following table sets forth certain information regarding
stock options granted by the Company during 1997 to the Named Officers:
OPTION GRANTS IN LAST YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM(1)
- ------------------------------------------------------------------------- -------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES BASE PRICE EXPIRATION
NAME (#)(2) IN 1997 (US$/SH)(3) DATE 5% (US$) 10% (US$)
- ---- ---------- ---------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
David S. Joseph......... -- -- -- -- -- --
Samuel A. Nalbone,
Jr. ................... 140,000 44.8% US$4.25 March 1, 2007 US$1,685,452 US$3,036,239
Erik M. Erbe, Ph.D. .... 100,000 32.0 4.25 July 1, 2007 1,203,895 2,168,742
Thomas L. Parker, Jr. .. -- -- -- -- -- --
K.Vasanth Prabhu,
Ph.D. ................. -- -- -- -- -- --
</TABLE>
- --------
(1) Potential Realizable Values assume that the price of the Common Stock is
equal to an assumed initial public offering price of US$10.00 and
appreciates at the annual rate shown (compounded annually) from the date
of grant until the end of the ten-year term of the option. Assumed stock
price appreciation at the rates of five and ten percent have been used in
accordance with U.S. Securities and Exchange Commission rules. These
amounts are reported net of the option exercise price, but before any
taxes associated with exercise or subsequent sale of the underlying stock.
The actual value, if any, an option holder may realize will be a function
of the extent to which the stock price exceeds the exercise price on the
date the option is exercised and also will depend on the option holder's
continued employment through the vesting period. Accordingly, the actual
value to be realized by the option holder may be greater or less than the
values estimated in this table.
(2) These options have a ten-year term, are exercisable in cumulative 20%
annual installments with the first installment exercisable on date of
grant and are subject to acceleration in the case of a change in control
as defined under the stock option plan.
(3) The exercise price per share of the options was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors.
41
<PAGE>
The following table sets forth information regarding stock options held as
of December 31, 1997 by the Named Officers. None of the Named Officers
exercised any stock options during 1997.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997(1)
ACQUIRED ON VALUE ------------------------- --------------------------
EXERCISE REALIZED SHARES SHARES
NAME (#) (US$) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
David S. Joseph......... -- -- -- -- -- --
Samuel A. Nalbone,
Jr. ................... -- -- 148,000 112,000 US$1,001,000 US$644,000
Erik M. Erbe, Ph.D. .... -- -- 67,500 67,500 440,625 388,125
Thomas L. Parker, Jr. .. -- -- 20,000 12,000 115,000 69,000
K. Vasanth Prabhu,
Ph.D. ................. -- -- 12,000 18,000 78,000 117,000
</TABLE>
- --------
(1) Calculated based on a value equal to an assumed initial public offering
price of US$10.00 per share, minus the per share exercise price,
multiplied by the number of shares underlying the options.
EMPLOYMENT AGREEMENTS
Each of David S. Joseph, Samuel A. Nalbone and Dr. Erik M. Erbe has an
employment agreement with the Company, under which, in the event of
involuntary termination without cause by the Company, the Company will pay 24
months salary as a severance benefit if a release in favor of the Company is
executed by the employee. Additionally, each employment agreement entitles the
employee to participate in any short-term or long-term incentive compensation
programs established by the Company for its senior level executives generally.
Mr. Joseph's employment agreement provides for his employment as the Company's
President through December 31, 1999 at an annual salary of US$225,000. Mr.
Nalbone's employment agreement provides for his employment as the Company's
Senior Vice President through December 31, 1999 at an annual salary of
US$175,000. Dr. Erbe's employment agreement provides for his employment as the
Company's Vice President of Research and Development through June 30, 2000 at
an annual salary of US$130,000. Dr. Erbe's employment agreement also provides
that, for the 1997 fiscal year, he will receive a minimum US$13,000 bonus and
that all prior option grants earned by Dr. Erbe vested upon execution of his
employment agreement. Dr. Erbe also received a 100,000 share incentive stock
option grant priced at $4.25 per share, with 32,500 shares vesting
immediately; the balance will vest according to the normal schedule under the
Company's Incentive Stock Option Plan. In addition, each employment agreement
contains other terms customarily found in executive officer employment
agreements, including provisions relating to the reimbursement of certain
business expenses, participation in employee benefit plans generally available
to the other executive officers of the Company, life insurance, severance
confidentiality and noncompetition.
STOCK OPTION PLANS
The following is a description of the Company's Stock Option Plans and
Employee Stock Purchase Plan. As of May 31, 1998, (i) 1,154,494 shares of
Common Stock were issuable upon the exercise of options under the Stock Option
Plans, (ii) 345,506 shares of Common Stock were reserved for future grants
under the Stock Option Plans, and (iii) 300,000 shares of Common Stock were
reserved for future issuance under the Employee Stock Purchase Plan. See Note
11 to Notes to Financial Statements for a chart indicating the number of
options granted under the Company's Stock Option Plans through March 31, 1998.
1993 Stock Option Plan
The purpose of the Company's 1993 Stock Option Plan (the "1993 Plan") is to
recognize the contributions made to the Company by key employees, consultants,
advisors and members of the Board of Directors of the Company, to provide such
persons with additional incentive to devote themselves to the future success
of the Company and to improve the ability of the Company to attract, retain
and motivate individuals upon whom the Company's sustained growth and
financial success depend by providing such persons with an opportunity to
acquire or increase their proprietary interest in the Company through receipt
of rights to acquire shares of the Company's Common Stock.
The aggregate number of shares of Common Stock of the Company that may be
issued under the 1993 Plan is 650,000 shares. As of May 31, 1998, options to
purchase 629,544 shares were outstanding under the 1993
42
<PAGE>
Plan. Under the terms of the 1993 Plan, if an option terminates or expires
unexercised, the shares attributable to the option will again be available for
grants. The 1993 Plan will terminate on November 9, 2003.
The 1993 Plan is administered by the Compensation Committee of the Board
(the "Compensation Committee"). All powers of the Compensation Committee may
be exercised by it in its sole discretion.
The Compensation Committee shall determine the number of shares of Common
Stock that will be subject to each grant of an option to key employees,
consultants, advisors and non-employee directors. Employees may receive
incentive stock options or nonqualified stock options under the Plan. Non-
employee directors, consultants and advisors may receive nonqualified stock
options.
The option price may be equal to, greater than or less than the fair market
value of a share of Common Stock on the date of grant, provided that (i) the
option price of an incentive stock option may not be less than the fair market
value of a share of Common Stock on the date of grant and (ii) an incentive
stock option that is granted to an employee who owns more than 10% of the
stock of the Company or a parent or subsidiary (a "10% shareholder") must have
an option price of not less than 110% of the fair market of the Common Stock
on the date of grant.
The Compensation Committee shall determine the term of each option, which
shall not exceed ten years from the date of grant. An incentive stock option
granted to a 10% shareholder may not have a term longer than five years from
the date of grant. The grantee may pay the option price (i) in cash or (ii) by
such method as the Compensation Committee may approve, including tendering
shares of Common Stock owned by the grantee or exercising options through a
broker. Options may be exercised while the grantee is an employee, consultant,
advisor or member of the Board or within a specified time after termination of
employment or service. Grants under the 1993 Plan may not be transferred
except upon the grantee's death.
The 1993 Plan provides that in the event of a Change of Control, outstanding
options will automatically vest in full. In addition, the Compensation
Committee may take such actions as it deems appropriate, including
accelerating the expiration date of options. A Change of Control will be
deemed to occur if (i) any person (other than the Company or certain related
entities or persons) acquires securities of the Company representing more than
50% of the voting power of the then outstanding securities of the Company or
(ii) the shareholders approve (or, if shareholder approval is not required,
the Board approves) an agreement providing for (x) the merger or consolidation
of the Company where the shareholders immediately before the transaction will
not hold, immediately after the transaction, a majority of the stock of the
surviving corporation, (y) a sale of substantially all of the assets of the
Company or (z) a liquidation or dissolution of the Company.
In the event of certain changes in the corporate stock, the Compensation
Committee may adjust the number and type of shares of Common Stock and the
option price subject to outstanding options, and the number and type of shares
of Common Stock that may be issued under the 1993 Plan.
The Board may amend or terminate the 1993 Plan, provided that any amendment
that changes the class of persons eligible to receive incentive stock options
or increases the number of shares of stock that may be issued under the Plan
shall be subject to approval by the shareholders of the Company.
1997 Equity Compensation Plan
The purpose of the Company's 1997 Equity Compensation Plan, as amended and
restated (the "1997 Plan"), is to provide (i) designated key employees of the
Company, (ii) consultants who perform valuable services for the Company and
(iii) non-employee members of the Board with the opportunity to receive grants
of incentive stock options, nonqualified stock options, stock appreciation
rights and restricted stock. The Company believes that the 1997 Plan will
cause the participants to contribute materially to the growth of the Company,
thereby benefiting the Company's shareholders, and align the economic
interests of the participants with those of the shareholders.
The aggregate number of shares of Common Stock of the Company that may be
issued under the 1997 Plan is 850,000 shares. As of May 31, 1998, options to
purchase 524,950 shares were outstanding under the 1997 Plan and no shares of
restricted stock or stock appreciation rights ("SARs") have been issued. If
options or SARs terminate or expire, or if restricted stock is forfeited, the
shares attributable to such grants may again be subject to grants under the
1997 Plan. After the Company becomes a public company (the effective date of
an initial registration of the Company stock under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), which
should approximately coincide with the completion of the Offering, the maximum
43
<PAGE>
aggregate number of shares of the Company's Common Stock that shall be subject
to grants made under the 1997 Plan to any individual during any calendar year
shall be 300,000 shares. The 1997 Plan will terminate on January 21, 2007,
unless sooner terminated pursuant to its terms.
The 1997 Plan is administered by the Board or by a committee consisting of
two or more persons appointed by the Board; provided however, that the full
Board must approve all grants made to members of the Board who are not
employees of the Company. After the Company becomes a public company, the 1997
Plan shall be administered by a committee (the "Committee"), which may consist
of outside directors. The Committee has full power and authority to administer
and interpret the 1997 Plan.
The Committee shall select the key employees, consultants and non-employee
directors to receive grants and shall determine the number of shares of Common
Stock that will be subject to each grant. Employees may receive incentive
stock options, nonqualified stock options, restricted stock or SARs under the
1997 Plan. Non-employee directors and consultants may receive nonqualified
stock options, restricted stock or SARs.
The option price of an option may be equal to, greater than or less than the
fair market value of a share of Common Stock on the date of grant, provided
that (i) the option price of an incentive stock option may not be less than
the fair market value of a share of Common Stock on the date of grant and (ii)
an incentive stock option that is granted to a 10% shareholder must have an
option price of not less than 110% of the fair market of the Common Stock on
the date of grant.
The Committee shall determine the term of each option, which shall not
exceed ten years from the date of grant. However, an incentive stock option
granted to a 10% shareholder may not have a term longer than five years from
the date of grant. The grantee may pay the option price (i) in cash, (ii) with
the consent of the Committee, by tendering shares of Common Stock owned by the
grantee or (iii) by a combination of the two. After the Company becomes a
public company, a grantee may exercise options through a broker. Options may
be exercised while the grantee is an employee, consultant or member of the
Board or within a specified time after termination of employment or service.
The Committee may grant restricted stock to key employees, consultants or
non-employee directors as it deems appropriate. The Committee will establish
the amount and terms of each restricted stock grant.
The Committee may grant SARs to a key employee, consultant or member of the
Board separately or in tandem with any stock option. Unless the Committee
determines otherwise, the base amount of each SAR shall be equal to the option
price of the related option or, if there is no related option, the fair market
value of a share of Common Stock on the date of grant of the SAR. When an SAR
is exercised, the grantee will receive an amount equal to the difference
between the fair market value of the Common Stock on the date of exercise and
the base price of the SAR. Payments shall be made in cash, Common Stock or a
combination of the two in such proportion as the Committee determines.
Grants under the 1997 Plan may not be transferred except upon the grantee's
death or, with respect to grants other than incentive stock options, if
permitted by the Committee pursuant to a domestic relations order. The
Committee may permit a grantee to transfer nonqualified stock options to
family members or other persons or entities on such terms as the Committee
deems appropriate.
The 1997 Plan provides that, unless the Committee determines otherwise,
outstanding options, SARs and restricted stock will automatically vest in full
in the event of a Change of Control. In the event of a Change of Control, the
Committee may require that grantees surrender their outstanding options and
SARs in exchange for payment by the Company, in cash or Common Stock, of an
amount equal to the amount by which the fair market value of the Common Stock
exceeds the option price or base price of the options or SARs, and the
Committee may terminate unexercised options and SARs. Unless the Committee
determines otherwise, upon a Change of Control where the Company is not the
surviving corporation (or survives only as a subsidiary of another
corporation), outstanding grants shall be assumed by the surviving
corporation. The definition of Change of Control under the 1997 Plan is
similar to the definition under the 1993 Plan.
In the event of certain changes in the corporate stock, the Committee may
adjust the number and type of shares of Common Stock and the option price
subject to outstanding options, SARs and restricted stock, and the number and
type of shares of Common Stock that may be issued under the Plan.
The Board may amend or terminate the 1997 Plan, provided that any amendment
that increases the number of shares of stock that may be issued under the Plan
or that is required to be approved by the shareholders under
44
<PAGE>
section 162(m) of the Internal Revenue Code of 1986, as amended (the "U.S.
Internal Revenue Code") shall be subject to approval by the shareholders of
the Company.
Employee Stock Purchase Plan
The purpose of the Company's Employee Stock Purchase Plan (the "ESP Plan")
is to provide eligible employees of the Company an opportunity to purchase
Common Stock of the Company. The Company believes that employee participation
in stock ownership will be to the mutual benefit of both the employee and the
Company. The ESP Plan will become effective after the Company becomes a public
company. The ESP Plan is intended to comply with the requirements of Section
423 of the U.S. Internal Revenue Code which permit the difference between the
exercise price and fair market value to be excluded from income. The aggregate
number of shares of Common Stock of the Company that may be issued under the
ESP Plan is 300,000 shares (subject to adjustment in the event of certain
changes in the Common Stock). The ESP Plan will terminate on November 10,
2007, unless sooner terminated pursuant to its terms.
Any employee who (i) is employed by the Company for a least 20 hours per
week and for more than five months per year, (ii) has completed at least two
years of continuous service with the Company and (iii) is not deemed for
purposes of Section 423(b)(3) of the U.S. Internal Revenue Code to own stock
possessing five percent or more of the total combined voting power of all
classes of stock of the Company, will be eligible to participate in the ESP
Plan. Under the ESP Plan, the Company will withhold a specified percentage
(not to exceed 10%) of the compensation paid to each participant, and the
amount withheld will be used to purchase Common Stock from the Company on the
last day of each purchase period. The price at which Common Stock will be
purchased under the ESP Plan will be equal to 85% of the fair market value of
the Common Stock on the first day of the applicable purchase period, or the
last day of the applicable purchase period, whichever is lower. The length of
each purchase period shall be a calendar quarter, with the first purchase
period to begin on a date designated by the Company after the effective date
of this Prospectus and new purchase periods to begin approximately every three
months thereafter.
Employees may end their participation in a purchase period at any time, and
participation ends automatically on termination of employment with the
Company. The maximum number of shares that a participant may purchase during
any purchase period will be equal to US$25,000 divided by the purchase price.
In addition, no participant may purchase shares under the ESP Plan (i) to the
extent that such participant would own five percent or more of the total
combined voting power or value of all classes of the capital stock of the
Company, or (ii) to the extent that such participant's right to purchase stock
under the ESP Plan accrues at a rate that exceeds US$25,000 worth of stock
during any calendar year. In the event of a dissolution or liquidation of the
Company or of a merger or consolidation in which the Company is not the
surviving corporation, the ESP Plan and any purchase periods then in progress
will terminate upon the effective date of such event.
The Board of Directors has the right to amend or terminate the ESP Plan.
However, no amendment may increase the number of shares reserved for purposes
of the Plan or allow a person who is not an eligible employee to become a
participant, without the approval of the shareholders of the Company.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Bylaws limit the liability of its directors to the maximum
extent permitted by Pennsylvania law and provide that, except for liability of
a director pursuant to any criminal statute, directors of the Company will not
be personally liable for monetary damages as such for any action taken or any
failure to take any action unless (i) the director breached or failed to
perform the duties of his or her office under Section 1721 of Pennsylvania
Business Corporate Law, and (ii) the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness.
The Company's Bylaws also provide that the Company shall indemnify, to the
fullest extent permitted by law, each present or former director or officer of
the Company who was or is a party to, or is threatened to be made a party to,
or is otherwise involved in, any proceeding, by reason of the fact that the
individual is or was a director or officer of the Company or is or was serving
in any such capacity at the request or for the benefit of the Company (the
"Indemnitee"). The Company's Bylaws provide that the indemnification shall
apply to all expense, liability and loss (including without limitation
attorneys fees, judgements, fines, taxes, penalties, and amounts paid or to be
paid in settlement) reasonably incurred or suffered by the Indemnitee in
connection with any proceeding.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company in which indemnification is required or
permitted.
45
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PURCHASE OF CAPITAL STOCK AND NOTES
In April 1997, the Company completed the April 1997 Financing, which
involved the sale of 1,882,353 shares of Class C Preferred Stock and related
warrants exercisable for 215,025 shares of Common Stock to Schroder Ventures
International Life Sciences Fund, Electra Fleming Equity Partners and The
Wellcome Trust Limited for an aggregate net amount of US$7.6 million. As part
of this transaction and in consideration of the relinquishment of certain
contractual rights, the Company and certain trusts established by Dr. Paul
Ducheyne, the Chairman of the Company, granted the holders of Class A and
Class B Preferred Stock warrants to purchase an aggregate of 133,291 and
166,709 shares of Common Stock, respectively, exercisable at US$4.25 per share
(the "Series Warrants"). Of the Series Warrants, an aggregate of 65,000 shares
of Common Stock are obtainable from these trusts and an aggregate of 235,000
shares of Common Stock are obtainable from the Company. In addition, Richard
Horowitz and Dr. Howard Salasin, directors of the Company, were granted Series
Warrants exercisable for 5,378 and 24,085 shares of Common Stock,
respectively, as part of this transaction. James Garvey, who is the Chief
Executive Officer and Managing Partner of Schroder Ventures Life Sciences
Funds, was elected to the Company's Board of Directors pursuant to an
agreement among certain shareholders of the Company. This agreement will
continue after the consummation of this Offering.
As part of the April 1997 Financing, each of Mr. Joseph and trusts
established by Dr. Paul Ducheyne granted a warrant to purchase 13,250 shares
of their Common Stock to Capricorn Venture Partners n.v. ("Capricorn"). Quartz
Capital Partners Limited ("Quartz Capital") acted as placement agent for the
Company in connection with the Company's placement of 1,882,353 shares of
Class C Preferred Stock in 1997. As partial compensation for its services in
that placement, it received ten year warrants, exercisable at an exercise
price of US$4.25 per share, to purchase an aggregate of 100,443 shares of the
Company's Common Stock. Dr. Peeters, a director of the Company, is both the
founder and a Managing Director of Capricorn and Chairman of the Board of
Quartz Capital.
In May 1995, the Company issued an aggregate of US$775,000 of the Notes and
the Related Warrants exercisable for the purchase of 885,717 shares of Class B
Stock, including US$425,000, US$25,000 and US$50,000 of such Notes and Related
Warrants exercisable for 322,700, 18,982 and 37,126 shares of Series B Stock,
to R.A.F., Mr. Horowitz and Dr. Salasin, respectively. Mr. Horowitz, who is a
managing director of R.A.F., was elected to the Company's Board of Directors
pursuant to an agreement among certain shareholders of the Company that
terminates upon the consummation of this Offering. As part of the April 1997
Financing, R.A.F., Mr. Horowitz and Dr. Salasin applied all interest and
principal due to them under the Notes towards a partial exercise of the
Related Warrants and received 322,700, 18,982 and 37,126 shares of Series B
Stock, respectively, upon such exercise. The Class A and Class B Stock will
automatically convert into an equal number of shares of Common Stock upon the
consummation of this Offering.
In 1996 and 1997, as part of a private placement of Common Stock, the
Company sold 1,362,042 shares, including 353,044 shares to Capricorn, of
Common Stock at a price of US$4.25 per share.
LOANS AND GUARANTEE OF DEBT
In 1995, the Company entered into a US$750,000 line of credit that was
secured by substantially all of the Company's assets as well as certain
personal assets of David S. Joseph, the Company's Chief Executive Officer and
President. This line of credit expired in June 1997. In 1996, the Company
borrowed US$400,000 from Mr. Joseph. This debt was retired in full in May
1997. Mr. Joseph has personally guaranteed US$356,000 of the outstanding
balance under the Company's current US$1 million line of credit. It is
expected that the lending bank will permit this guarantee to be relinquished
prior to or upon the consummation of this Offering.
46
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of its Common Stock as of April 30, 1998, and as adjusted to reflect
the sale of Common Stock offered by the Company hereby, for (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each of the Company's directors, (iii) each executive
officer, (iv) all directors and Named Officers as a group, and (v) the Selling
Shareholders. The ownership percentages listed in the following table have
been calculated in accordance with the rules of the U.S. Securities and
Exchange Commission. These rules require the inclusion with respect to any
particular owner of those shares that may be obtained upon the exercise of any
presently exercisable option or warrant, or any option or warrant that becomes
exercisable within the next 60 days. Since the number of options or warrants,
if any, may vary among these shareholders, the denominator which is used to
calculate these percentages may vary among shareholders.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP PRIOR NUMBER OF OWNERSHIP AFTER
TO OFFERING SHARES TO OFFERING #
----------------- BE SOLD -----------------
NAME AND ADDRESS OF BENEFICIAL UNDER THIS
OWNER SHARES PERCENT PROSPECTUS SHARES PERCENT
- ------------------------------ --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Paul Ducheyne, Ph.D.(1)......... 1,486,070 17.1% -- 1,486,070 14.6%
David S. Joseph(2).............. 840,587 9.6 -- 840,587 8.2
Samuel A. Nalbone, Jr.(3)....... 182,000 2.0 -- 182,000 1.8
Howard Salasin(4)............... 151,834 1.7 -- 151,834 1.5
Erik M. Erbe, Ph.D.(5).......... 67,500 * -- 67,500 *
Gert Eussen(6).................. 52,000 * -- 52,000 *
Richard M. Horowitz,
Esquire(7)..................... 43,950 * -- 43,950 *
Thomas L. Parker, Jr.(8)........ 25,300 * -- 25,300 *
K. Vasanth Prabhu, Ph.D.(9)..... 18,000 * -- 18,000 *
Joseph M. Paiva(10)............. 10,000 * -- 10,000 *
James M. Garvey(11)............. 10,000 * -- 10,000 *
Lew Bennett(10)................. 10,000 * -- 10,000 *
Jos. B. Peeters, Ph.D.(12)...... 10,000 * -- 10,000 *
All directors and executive
officers as a group
(14 persons)(13)............... 2,907,241 31.7 -- 2,907,241 27.3
FIVE PERCENT HOLDERS
Schroder Ventures International
Life Science Funds: L.P. I,
L.P. II, Trust and Co-
Investment Scheme(14).......... 788,143 9.0 -- 788,143 7.7
Electra Fleming Equity Partners
and EF Nominees Limited(15).... 785,648 8.9 -- 785,648 7.6
R.A.F. Ventures IV, L.P.(16).... 577,135 6.4 -- 577,135 5.5
The Wellcome Trust Limited(17).. 523,587 6.0 -- 523,587 5.1
Solomon Kal Rudman(18).......... 468,504 5.3 -- 468,504 4.5
SELLING SHAREHOLDERS
Ronald Lassin................... 272,727 3.1 72,727 200,000 1.7
Van Moer Santerre S.A........... 126,500 1.5 46,479 80,021 *
Other Selling Shareholders as a
Group(19)...................... 754,641 8.6 380,794 373,847 3.6
</TABLE>
- --------
# Assumes no exercise of the Underwriters' Over-allotment Option
* Less than one percent
(1) Includes (i) 200,000 shares held in trust by Dr. Ducheyne's spouse and
(ii) 727,324 shares held in trust for the benefit of Dr. Ducheyne's
children, of which 78,250 shares are obtainable upon the exercise of
warrants granted to certain shareholders. Dr. Ducheyne disclaims
beneficial ownership of the shares held by the foregoing trusts. Dr.
Ducheyne's address is 45 Great Valley Parkway, Malvern, Pennsylvania
19355.
(2) Includes (i) 100,000 shares held by Mr. Joseph's daughter in a revocable
trust and (ii) 13,250 shares underlying a warrant granted by Mr. Joseph
to a shareholder and excludes 26,529 shares of common stock held by Mr.
Joseph's spouse and for which Mr. Joseph disclaims beneficial ownership.
Mr. Joseph's address is 45 Great Valley Parkway, Malvern, Pennsylvania
19355.
(3) Includes 176,000 shares of Common Stock obtainable upon the exercise of
presently exercisable options and excludes 84,000 shares of Common Stock
obtainable upon the exercise of options which are not exercisable within
60 days after the date of this Prospectus.
(4) Includes (i) 39,908 shares of Common Stock obtainable from the Company
upon the exercise of presently exercisable warrants, (ii) 4,194 shares of
Common Stock obtainable from trusts established by Dr. Ducheyne upon the
exercise of a presently exercisable warrant and (iii) 10,000 shares of
common stock obtainable upon the exercise of presently exercisable
options.
(5) Includes 67,500 shares of Common Stock obtainable upon the exercise of
presently exercisable options and excludes 67,500 shares of Common Stock
obtainable upon the exercise of options which are not exercisable within
the next 60 days.
47
<PAGE>
(6) Includes 52,000 shares of Common Stock obtainable from the Company upon
the exercise of presently exercisable options and excludes 3,000 shares
of Common Stock obtained upon the exercise of options which are not
exercisable within the next 60 days.
(7) Includes (i) 12,871 shares of Common Stock obtainable from the Company
upon the exercise of presently exercisable warrants, (ii) 2,097 shares of
Common Stock obtainable from trusts established by Dr. Ducheyne upon the
exercise of a presently exercisable warrant and (iii) 10,000 shares of
common stock obtainable upon the exercise of presently exercisable
options. Excludes 322,700 shares of Common Stock, 163,014 shares of
Common Stock obtainable from the Company upon the exercise of a presently
exercisable warrant and 35,645 shares of Common Stock obtainable from
trusts established by Dr. Ducheyne upon the exercise of a presently
exercisable warrant held by R.A.F. Ventures IV, L.P. Mr. Horowitz is a
Managing Director of R.A.F. Ventures IV, L.P. Mr. Horowitz disclaims
beneficial interest of any shares held by R.A.F. Ventures IV, L.P.
(8) Includes 13,800 shares of Common Stock obtainable upon the exercise of
presently exercisable options and excludes 23,200 shares of Common Stock
obtainable upon the exercise of options which are not exercisable within
60 days after the date of this Prospectus.
(9) Includes 18,000 shares of Common Stock obtainable upon the exercise of
presently exercisable options and excludes 12,000 shares of Common Stock
obtainable upon the exercise of options which are not exercisable within
60 days after the date of this Prospectus.
(10) Represents 10,000 shares of Common Stock obtainable upon the exercise of
presently exercisable options.
(11) Represents 10,000 shares of Common Stock obtainable upon the exercise of
presently exercisable options. Excludes 705,883 shares of Common Stock
and 82,260 shares of Common Stock obtainable from the Company upon the
exercise of a presently exercisable warrant held by Schroder Ventures
Life Sciences Funds. Mr. Garvey is the Chief Executive Officer and
Managing Partner of Schroder Ventures Life Sciences Funds. Mr. Garvey
disclaims beneficial ownership of any shares held by Schroder Ventures
Life Sciences Funds.
(12) Represents 10,000 shares of Common Stock obtainable upon the exercise of
presently exercisable options. Excludes (i) 353,044 shares of Common
Stock owned by Capricorn, (ii) an aggregate of 26,500 shares of Common
Stock obtainable upon the exercise of a presently exercisable warrant
held by Quartz Capital, and (iii) 100,443 shares of Common Stock
obtainable upon the exercise of a presently exercisable warrant held by
Quartz Capital. Dr. Peeters is the Managing Director of Capricorn and
Chairman of the Board of Quartz Capital. Dr. Peeters disclaims beneficial
ownership of any shares beneficially owned by either Capricorn or Quartz
Capital.
(13) Includes 357,300 shares of Common Stock obtainable upon the exercise of
presently exercisable options and 52,779 shares of Common Stock
obtainable from the Company upon the exercise of presently exercisable
warrants. Excludes 229,700 shares of Common Stock obtainable upon the
exercise of options which are not exercisable within 60 days after the
date of this Prospectus.
(14) Includes 82,260 shares of Common Stock obtainable upon the exercise of
presently exercisable warrants. The address of Schroder Ventures Life
Sciences Funds is One Beacon Street, Suite 4500 Boston, MA 02108.
Schroder Ventures Life Sciences Funds disclaim any shares beneficially
owned by Mr. Garvey.
(15) Includes 79,765 shares of Common Stock obtainable upon the exercise of
presently exercisable warrants. The address of Electra Fleming Equity
Partners and EF Nominees Limited is 320 Park Avenue, 28th Floor New York,
NY 10022.
(16) Includes (i) 35,645 shares of Common Stock obtainable from trusts
established by Dr. Ducheyne upon the exercise of a presently exercisable
warrant and (ii) 218,790 shares of Common Stock obtainable from the
Company upon the exercise of a presently exercisable warrant. The address
of R.A.F. Ventures IV, L.P. is One Pitcairn Place, 165 Township Line
Road, Suite 2100 Jenkintown, PA 19046. R.A.F. Ventures IV, L.P. disclaims
any shares held by Mr. Horowitz.
(17) Includes 53,000 shares of Common Stock obtainable upon the exercise of
presently exercisable warrants. The address of The Wellcome Trust Limited
is 210 Euston Road, London, NW1-2BE, England.
(18) Includes (i) 113,138 shares of Common Stock obtainable from the Company
upon the exercise of presently exercisable warrants and (ii) 8,387 shares
of Common Stock obtainable from trusts established by Dr. Ducheyne upon
the exercise of a presently exercisable warrant. The address of Solomon
Kal Rudman is 56 Southwood Drive, Cherry Hill, NJ 08003.
(19) Represents the aggregate number of shares held by the Selling
Shareholders other than Ronald Lassin and Van Moer Santerre S.A. These
Selling Shareholders are comprised of approximately 80 persons, none of
whom or which (i) is an executive officer or director of the Company or
(ii) beneficially owns more than 1% of the outstanding Common Stock as of
the date of this Prospectus.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value US$.01 per share (the "Common Stock"), and 20,000,000
shares of Preferred Stock, par value US$.01 per share (the "Preferred Stock").
Immediately after the sale of the 1,500,000 shares of Common Stock offered by
the Company hereby, there will be 10,212,640 shares of Common Stock
outstanding and no shares of Preferred Stock outstanding. The issuance of the
shares of Common Stock offered hereby were approved for issuance by the
Company's Board of Directors on April 30, 1998. Following this Offering, the
Common Stock offered hereby will be held in book entry form in accordance with
EASDAQ procedures. See "EASDAQ Settlement and Clearance."
The following summary is qualified in its entirety by reference to the
Company's Amended and Restated Articles of Incorporation (the "Articles of
Incorporation"), which is included as an exhibit to the Registration Statement
of which this Prospectus is a part.
COMMON STOCK
Shares of authorized but unissued Common Stock may generally be issued upon
the approval of the Company's board of directors. Holders of Common Stock are
entitled to one vote for each share held of record on all matters submitted to
a vote of shareholders and do not have cumulative voting rights. The holders
of Common Stock are entitled to receive ratably such dividends, if any, as may
be declared by the Board of Directors out of funds legally available therefor,
subject to any preferential dividend rights of outstanding Preferred Stock.
Upon the liquidation, dissolution or winding up of the Company, subject to any
preferential liquidation rights of any outstanding shares of Preferred Stock,
the holders of Common Stock are entitled to receive ratably the net assets of
the Company available after the payment of all debts and other liabilities.
The holders of Common Stock have no preemptive, subscription, redemption,
sinking fund or conversion rights. The rights and preferences of holders of
Common Stock are subject to the rights of the Preferred Stock and will be
subject to the rights of any series of Preferred Stock which the Company may
issue in the future. The rights of the Common Stock cannot be altered without
an amendment to the Company's Articles of Incorporation that is approved by
the shareholders.
PREFERRED STOCK
The Company, by resolution of the Board of Directors and without any further
vote or action by the shareholders, has the authority, subject to certain
limitations prescribed by law, to issue from time to time up to an aggregate
of 20,000,000 shares of Preferred Stock in one or more classes or series and
to determine the designation and the number of shares of any class or series
as well as the voting rights, preferences, limitations and special rights, if
any, of the shares of any such class or series, including the dividend rights,
conversion rights, voting rights, redemption rights, and liquidation
preferences. Preferred Stock may be issued in a number of circumstances,
including capital raising transactions and in acquisitions. Preferred Stock
may also have the effect of delaying, deferring or preventing a change of
control of the Company.
Prior to this Offering, 606,060 shares of Class A Preferred Stock, 1,038,005
shares of Class B Preferred Stock and 1,882,353 shares of Class C Preferred
Stock were outstanding. Upon the consummation of this Offering, all
outstanding shares of all three classes of Preferred Stock will be converted
into an aggregate of 3,526,418 shares of Common Stock. No such shares of
Preferred Stock will be available for reissuance.
SHAREHOLDERS' MEETINGS
The Company is required to hold an annual meeting of shareholders, which
meeting is generally held in the month of May on a date selected by the
Company's Board of Directors unless another month is selected by the Board.
Matters generally put to a shareholders' vote include the election of
directors, the approval of certain changes in the capital stock of the
Company, the adoption and/or amendment of certain employee benefit plans, the
approval of certain amendments to the Articles of Incorporation and Bylaws of
the Company, and other extraordinary matters. The presence in person or by
proxy of shareholders owning a majority of all votes entitled to be cast at a
meeting constitutes a quorum. A plurality of the votes cast is required for
the election of directors, which means that those directors receiving the most
votes are elected to office although they may not necessarily have received a
majority of votes. Most other matters require the affirmative vote of a
majority of the votes cast by those shareholders present at the meeting,
although certain extraordinary matters require a greater vote.
All shareholders (including those residing in Belgium) will be sent notice
of an annual or special meeting not less than ten days before it is scheduled
to be held. In addition, state law and the rules of the U.S. Securities
49
<PAGE>
and Exchange Commission require greater advance notice for certain
transactions. Shares cannot be voted at a meeting unless the holder of record
is present in person or by proxy, a means by which a shareholder may authorize
the voting of his or her shares at a meeting. At a meeting, the shares
represented by each properly executed proxy card will be voted in accordance
with the shareholder's directions, thereby providing an alternative to a
shareholder appearing in person at a meeting in order to cast his or her vote.
Any shareholder executing a proxy card has the right to revoke it by providing
written or oral notice of revocation to the secretary of the company, or by
delivering a subsequently executed proxy card, at any time before the proxy is
voted.
PENNSYLVANIA ANTI-TAKEOVER LAWS
The Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"),
contains provisions applicable to publicly held Pennsylvania corporations that
may be deemed to have an anti-takeover effect. The Company has specifically
opted out of all but two of these provisions. The following is a description
of these provisions of the BCL that remain applicable to the Company.
Under Section 1715 ("Section 1715") of the BCL, directors of the corporation
are not required to regard the interests of the shareholders as being dominant
or controlling in considering the best interests of the corporation. The
directors may consider, to the extent they deem appropriate, such factors as
the effects of any action upon any group affected by such action (including
shareholders, employees, suppliers, customers and creditors of the corporation
and upon communities in which offices or other establishments of the
corporation are located); the short term and long term interests of the
corporation (including benefits that may accrue to the corporation from its
long term plans and the possibility that these interests may be best served by
the continued independence of the corporation); the resources, intent and
conduct of any person seeking to acquire control of the corporation; and all
other pertinent factors. The BCL provisions also provide directors with broad
discretion with respect to actions that may be taken in response to
acquisitions or proposed acquisitions of corporate control.
Subchapter F ("Subchapter F") of Subchapter 25 of the BCL is designed to
regulate certain "business combinations" between Exchange Act companies and
"interested shareholders." In general, Subchapter F prohibits the consummation
of certain enumerated business combination transactions, such as mergers and
stock acquisitions, during a five year moratorium period unless either the
stock purchase through which the interested shareholder became an interested
shareholder receives the prior approval of a corporation's board of directors
or such transaction receives the prior approval of a corporation's board or
certain specified classes of shareholders, and in some instances the
interested shareholder must comply with certain specified "fair price"
valuation and payment requirements. The moratorium period runs from the date
on which the interested shareholder becomes an "interested shareholder"
(generally, the date the shareholder first acquires beneficial ownership of
20% or more of the corporation's voting shares). After the moratorium period,
a corporation can undertake a business combination with the interested
shareholder only upon shareholder approval as specified in Subchapter F and,
in some cases, upon payment of a specified "fair price" to shareholders.
Section 1715 and Subchapter F may discourage open market purchases of Common
Stock or a non- negotiated tender or exchange offer for the Common Stock and,
accordingly, may be considered disadvantageous by a shareholder who would
desire to participate in any such transactions. In addition, Section 1715 and
Subchapter F may have a depressive effect on the price of the Common Stock.
Under U.S. securities laws, any person that acquires more than five percent
of the outstanding Common Stock must file a report with the U.S. Securities
and Exchange Commission disclosing such purchase and, thereafter, file an
annual report updating the ownership position until such time as the aggregate
shareholding is less than five percent. Failure to observe this disclosure
requirement may result in the imposition of penalties. A person that purchases
a large percentage of the Company's Common Stock, however, generally is not
required to purchase all of the outstanding Common Stock under applicable U.S.
and Pennsylvania law. Under Pennsylvania law, the Company may repurchase
shares of its Common Stock from shareholders, upon which the shares
repurchased are automatically retired.
OPTIONS AND WARRANTS
As of May 31, 1998, (i) 1,154,494 shares of Common Stock were issuable upon
the exercise of options under the Stock Option Plans at a weighted average
price of US$3.34, (ii) 345,506 shares of Common Stock were reserved for future
grants under the Stock Option Plans, (iii) 300,000 shares of Common Stock were
reserved for future issuance under the Employee Stock Purchase Plan, and (iv)
1,013,552 shares of Common Stock were issuable upon the exercise of warrants
outstanding at a weighted average exercise price of US$3.49 per share.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Common Stock is
StockTrans, Inc., Ardmore, Pennsylvania.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the sale
of substantial amounts of the Common Stock in the public market following this
Offering. Upon completion of this Offering, the Company will have 10,212,640
shares of Common Stock outstanding, plus 1,154,494 shares of Common Stock
subject to options outstanding under the Stock Option Plans as of May 31, 1998
and 1,013,552 shares of Common Stock issuable upon the exercise of warrants
outstanding. Of the shares outstanding, the Common Stock sold in this Offering
to persons other than affiliates of the Company will be freely tradeable
without restriction or further registration under the Act (unless purchased by
an affiliate). The remaining 8,212,640 shares of Common Stock (the "Restricted
Shares") were sold by the Company in reliance on exemptions from the
registration requirements of the Securities Act and are "restricted
securities" as defined in Rule 144 and may not be sold in the absence of
registration under the Securities Act unless an exemption is available,
including an exemption afforded by Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, if two years have elapsed
since the date of acquisition of Restricted Shares from the Company or any
affiliate and the acquiror or subsequent holder is not deemed to have been an
affiliate of the Company for at least 90 days prior to a proposed transaction,
such person would be entitled to sell such shares under Rule 144(k) without
regard to the limitations described below. If one year has elapsed since the
acquisition of Restricted Shares from the Company or any affiliate, the
acquiror or subsequent holder thereof (including persons who may be deemed
affiliates of the Company) is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then-
outstanding Common Stock or the average weekly trading volume in the Common
Stock on EASDAQ during the prior four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain provisions regarding the
manner of sale, notice requirements and the availability of current public
information about the Company. Upon the expiration of the 180 day lockup
period described below, all of the Restricted Shares will be eligible for sale
under Rule 144, of which 3,001,974 Restricted Shares will be subject to volume
limitations and certain other conditions of Rule 144. In general, all of the
shares of Common Stock sold in this Offering will be tradeable on EASDAQ
immediately and the Restricted Shares will be tradeable on EASDAQ upon
expiration of the lock-up period, subject to the foregoing limitations.
It is anticipated that a Registration Statement on Form S-8 covering the
Common Stock that may be issued pursuant to the options granted under the
Stock Option Plans will be filed prior to the expiration of the 180 day lock-
up and that shares of Common Stock that are so acquired and offered thereafter
pursuant to this Registration Statement generally may be resold in the public
market without restriction or limitation, except in the case of affiliates of
the Company, who generally may only resell such shares in accordance with the
provisions of Rule 144 other than the holding period requirement.
The Company, and its officers and directors, who collectively own 2,497,162
shares of Common Stock, have agreed with the Underwriters that they will not
sell or otherwise dispose of any shares of Common Stock for 180 days following
the date of this Prospectus in accordance with EASDAQ regulations. Other
shareholders have agreed not to sell their shares for 180 days without the
permission of the Underwriters.
REGISTRATION RIGHTS
The April 1997 Investors and the Class B Investors, who collectively
beneficially own 3,237,092 shares of Common Stock, have been granted certain
demand and shelf registration rights. Under these registration rights, the
April 1997 Investors and the Class B Investors may require, on not more than
one occasion, at any time after the earlier of April 11, 1999 or the Company's
generation of either US$10 million of net revenues or a net profit in any
fiscal year, that the Company file a registration statement covering the
public sale of Common Stock; provided, however, that the Company will have the
right to delay such a demand registration under certain circumstances for a
period not in excess of 90 days. The April 1997 Investors and the Class B
Investors will have the right to demand one registration on Form S-3 every six
months, provided at least US$500,000 worth of securities are to be sold in the
registration. These holders, together with the holders of Class A Stock, who
collectively beneficially own 739,351 shares of Common Stock, and the holders
of an aggregate of 1,264,925 shares of Common Stock (including Howmedica),
also have piggyback registration rights, subject to certain underwriter cut
back provisions. Notwithstanding the foregoing, no holder of registration
rights can exercise any such registration rights for an intended sale that can
be effectuated in compliance with Rule 144(k) under the Securities Act.
51
<PAGE>
EASDAQ SETTLEMENT AND CLEARANCE
Transactions executed on EASDAQ will be settled by delivery against payment
through the Swiss-based international settlement agency INTERSETTLE. The
following summarizes certain aspects of the operation of the INTERSETTLE and
the Depository Trust Company ("DTC") clearing systems. EASDAQ is a
comparatively new quotation system. There can be no assurance that an active
trading market for the Company's Common Stock will develop on EASDAQ upon
completion of this Offering. See "Risk Factors--Absence of Prior Public
Market." Persons proposing to trade the Company's Common Stock on EASDAQ
should inform themselves about the costs of such trading.
THE CLEARING SYSTEMS
INTERSETTLE
INTERSETTLE holds securities for its direct participants, which include
banks, securities brokers and dealers, other professional intermediaries and
foreign depositories, and facilitates the clearance and settlement of
securities transactions between participants through electronic book entry
changes in its accounts. Book entry settlement is mandatory for all financial
instruments traded on EASDAQ, eliminating the need for physical certificates.
Investors must hold a securities account with a financial institution that
directly or indirectly has access to INTERSETTLE's clearing and settlement
system. INTERSETTLE conducts a real-time gross payment system in connection
with its clearance operation, payments being made simultaneously with the book
entry transfers between securities accounts.
DTC
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provision of Section 17A of the Exchange
Act. DTC was created to hold securities of its participants and to facilitate
the clearance and settlement of securities transactions among its participants
in such securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. DTC's participants include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations,
some of whom (and/or their representatives) own DTC. Access to the DTC book-
entry system is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. DTC agrees with and represents to
its participants that it will administer its book-entry system in accordance
with its rules and bylaws and requirements of the law.
TRANSFERS BETWEEN INTERSETTLE AND DTC PARTICIPANTS
Upon the closing of this Offering, all Common Stock will be held through
DTC. The Company will deliver to DTC a global certificate registered in the
name of Cede & Co., as DTC's nominee. Common Stock held on behalf of
INTERSETTLE participants will be recorded in the books of DTC in the name of
the nominee company of Brown Brothers Harriman, acting as Custodian for
INTERSETTLE.
Transfers of the Common Stock will be effected in the following manner:
(i) transfers of Common Stock between INTERSETTLE participants will be
effected in accordance with procedures established for this purpose by
INTERSETTLE; and
(ii) transfers of Common Stock between INTERSETTLE participants and DTC
participants will be effected by an increase or a reduction of the quantity
of Common Stock held in INTERSETTLE's account at Brown Brothers Harriman
and a corresponding reduction or increase of the quantity of Common Stock
held by the other relevant DTC participant or participants.
Investors may hold the Company's shares through Intersettle. Intersettle in
no way undertakes to and has no other responsibility to monitor or ascertain
whether any transaction in the Company's shares or any other securities of the
Company comply with any selling, transfer or ownership restrictions.
The offered Company's shares may be credited to the accounts of investors
with financial institutions that have directly or indirectly access to the
Intersettle clearing and settlement system.
52
<PAGE>
INCOME TAX CONSIDERATIONS
UNITED STATES TAX CONSIDERATIONS
The following is a general discussion of the material U.S. federal income
and estate tax consequences of the ownership and disposition of Common Stock
by a person that, for United States federal income tax purposes, is a non-
resident alien individual, a foreign corporation, a foreign partnership or an
estate or trust, in each case not subject to U.S. federal income tax on a net
income basis in respect of income or gain from Common Stock (a "non-U.S.
holder"). This discussion does not consider the specific facts and
circumstances that may be relevant to particular non-U.S. holders in light of
their personal circumstances and does not address the treatment of non-U.S.
holders of Common Stock under the laws of any state, local or foreign taxing
jurisdiction. Further, this discussion is based on provisions of the Code,
Treasury Regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect on the date hereof and all of which
are subject to change on a possibly retroactive basis. Each prospective non-
U.S. holder is urged to consult a tax advisor with respect to the U.S. federal
tax consequences of acquiring, holding and disposing of Common Stock, as well
as any tax consequences that may arise under the laws of any state, local or
foreign taxing jurisdiction.
Dividends
Dividends paid to a non-U.S. holder of Common Stock will be subject to
withholding of U.S. federal income tax at a 30% rate or such lower rate as may
be specified by an applicable income tax treaty (such as that between the U.S.
and Belgium), unless the dividends are effectively connected with the conduct
of a trade or business within the U.S. (and are attributable to a U.S.
permanent establishment of such holder, if an applicable income tax treaty so
requires as a condition for the non-U.S. holder to be subject to U.S. income
tax on a net income basis in respect to such dividends). Such "effectively
connected" dividends are subject to tax at rates applicable to U.S. citizens,
resident aliens and domestic U.S. corporations, and are not generally subject
to withholding. Any such effectively connected dividends received by a non-
U.S. corporation may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Under the "Convention Between the United States of America and the Kingdom
of Belgium For the Avoidance of Double Taxation and the Preservation of Fiscal
Evasion With Respect to Taxes on Income" (the "Belgian Treaty"), a non-U.S.
holder that qualifies as a "resident of Belgium" may be entitled to a
withholding tax rate on dividends equal to 15%, rather than 30% as discussed
above. The term "resident of Belgium" generally means (x) a Belgian
corporation and (y) any person (including an individual, a partnership, an
estate, a trust, or any body of persons) who is a resident of Belgium for
purposes of its tax. In addition, the Belgian Treaty provides that if the non-
U.S. holder is a Belgian company that owns at least ten percent of the voting
stock of the Company, the withholding tax rate is further reduced to 5%.
Furthermore, under the Belgian Treaty, the additional 30% "branch profits tax"
described above, may be eliminated for qualified residents of Belgium.
Under currently effective U.S. Treasury Regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country (unless the payor has knowledge to the contrary) for purposes of the
withholding discussed above and, under the current interpretation of U.S.
Treasury Regulations, for purposes of determining the applicability of a tax
treaty rate. Under recently finalized U.S. Treasury Regulations that will
generally be effective for distributions after December 31, 1999 (the "Final
Withholding Regulations"), however, a non-U.S. holder of Common Stock who
wishes to claim the benefit of an applicable treaty rate would be required to
satisfy applicable certification requirements. In addition, under the Final
Withholding Regulations, in the case of Common Stock held by a foreign
partnership, (x) the certification requirement would generally be applied to
the partners of the partnership and (y) the partnership would be required to
provide certain information, including a U.S. taxpayer identification number.
The final Withholding Regulations also provide look-through rules for tiered
partnerships.
A non-U.S. holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund
with the U.S. Internal Revenue Service.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of Common Stock except in the
following circumstances: (i) where the gain is effectively connected with a
trade or business conducted by the non-U.S. holder in the U.S. (and is
attributable to a permanent establishment maintained in the U.S. by such non-
U.S. holder if an applicable income tax treaty so requires as a
53
<PAGE>
condition for such non-U.S. holder to be subject to United States taxation on
a net income basis in respect of gain from the sale or other disposition of
the Common Stock); (ii) in the case of a non-U.S. holder who is an individual
and holds the Common Stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year of the sale and certain
other conditions exist; (iii) the Company is or has been a "U.S. real property
holding corporation" for U.S. federal income tax purposes and, in the event
that the Common Stock is considered "regularly traded on an established
securities market," the non-U.S. holder held, directly or indirectly at any
time during the five-year period ending on the date of disposition, more than
5% of the Common Stock (and is not eligible for any treaty exemption); or (iv)
the non-U.S. holder is subject to tax pursuant to certain provisions of the
Code applicable to U.S. expatriates. Effectively connected gains realized by a
corporate non-U.S. Holder may also, under certain circumstances, be subject to
an additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
The Company believes it is not currently, and does not anticipate becoming,
a "U.S. real property holding corporation" for U.S. federal income tax
purposes.
Federal Estate Taxes
Common Stock held by a non-U.S. holder at the time of death will be included
in such holder's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
Under current law, U.S. information reporting requirements (other than
reporting of dividend payments for purposes of the withholding tax noted
above) and backup withholding tax generally will not apply to dividends paid
to non-U.S. holders that are either subject to the 30% withholding tax
discussed above or that are not so subject because an applicable tax treaty
(such as the Belgian Treaty) reduces such withholding. Otherwise, backup
withholding of U.S. federal income tax at a rate of 31% may apply to dividends
paid with respect to Common Stock to non-U.S. holders that are not "exempt
recipients" and that fail to provide certain information (including the
holder's U.S. taxpayer identification number). Generally, unless the payor of
dividends has definite knowledge that the payee is a U.S. person, the payor
may treat dividend payments to a payee with a foreign address as exempt from
information reporting and backup withholding. However, under the Final
Withholding Regulations, dividend payments generally will be subject to
information reporting and backup withholding unless applicable certification
requirements are satisfied. See the discussion above with respect to the rules
applicable to foreign partnerships under the Final Withholding Regulations.
In general, U.S. information reporting and backup withholding requirements
also will not apply to a payment made outside the U.S. of the proceeds of a
sale of Common Stock through an office outside the United States of a non-
United States broker. However, U.S. information reporting (but not backup
withholding) requirements will apply to a payment made outside the U.S. of the
proceeds of a sale of Common Stock through an office outside the U.S. of a
broker (i) that is a U.S. person, (ii) that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the
United States (iii) that is a "controlled foreign corporation" as to the U.S.
or (iv) (effective beginning January 1, 1999) that is a foreign partnership,
if at any time during its tax year, one or more of its partners are U.S.
persons (as defined in the Final Withholding Regulations) who in the aggregate
hold more than 50% of the income or capital interest in the partnership or if,
at any time during its tax year, such foreign partnership is engaged in a U.S.
trade or business, unless the broker has documentary evidence in its records
that the holder or beneficial owner is a non-U.S. person or the holder or
beneficial owner otherwise establishes an exemption. Payment of the proceeds
of the sale of Common Stock to or through a United States office of a broker
is currently subject to both United States backup withholding and information
reporting unless the holder certifies its non-U.S. status under penalties of
perjury or otherwise establishes an exemption.
A non-U.S. holder generally may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing the appropriate claim
for refund with the United States Internal Revenue Service.
BELGIAN TAX CONSIDERATIONS
The following is a summary of the material Belgian income and stamp tax
consequences of the acquisition, ownership and disposition of Common Stock.
This summary is required by EASDAQ as a condition to the quotation of the
Common Stock. It is based on the tax laws applicable in Belgium in effect at
the date of this Prospectus, and is subject to changes in Belgian law,
including changes that could have retroactive effect. This discussion is not
exhaustive of all possible tax considerations and potential investors are
advised to satisfy
54
<PAGE>
themselves as to the overall tax consequences, including specifically but not
limited to the consequences under Belgian law of the acquisition, ownership
and disposition of Common Stock in their own particular circumstances by
consulting their own tax advisors. The summary uses the term, "Belgian
Holders," to refer to beneficial owners of Common Stock of the Company whose
ownership of such Common Stock is not attributable to a permanent
establishment or a fixed base in another country and who are considered
residents of Belgium for the purposes of Belgian law.
Taxation of Dividends on Common Stock
Belgian Withholding Tax
Dividends distributed on Common Stock are generally subject in Belgium to a
withholding tax at the rate of 25%, when paid or attributed through a
professional intermediary in Belgium. However, no dividend withholding tax is
due if no Belgian professional intermediary is used to pay or attribute the
dividend. The Company has no intention to use a Belgian professional
intermediary to pay or attribute dividends to non-Belgian Holders.
No Belgian withholding tax is due on dividends paid on the Common Stock to a
company with its fiscal residence in Belgium.
In a case where dividends are paid outside Belgium without any intervention
of a paying agent in Belgium, no dividend withholding tax is, in principle,
due. However, where the Belgian Holder is a Belgian resident or entity subject
to the tax on legal entities (e.g., a pension fund), the Belgian Holder itself
must pay the dividend withholding tax.
Income Tax for Belgian Resident Individuals
In the hands of a Belgian Holder who is an individual holding common stock
as a private investment, the Belgian dividend withholding tax is a final tax
and the dividends need not be reported in the individual's annual income tax
return. If no withholding tax has been levied (i.e., in case of payment or
attribution outside of Belgium), the individual must report the dividends in
his or her tax return. Thus, in the case of the Company, such Belgian Holder
will be subject to the above mentioned withholding tax, to be increased with a
municipal surcharge (varying, as a rule, from 6% to 9%).
In the hands of an individual Belgian Holder whose holding of Common Stock
is effectively connected with a business, the dividends are taxable at the
ordinary rates for business income (i.e., varying from 25% to 55%, to be
increased by a crisis contribution of 3% of the tax due and the appropriate
municipal surcharge). Any Belgian withholding tax is creditable against the
final income tax due by the Belgian Holder, provided that the Belgian Holder
has the full legal ownership of the Common Stock at the time of payment or
attribution of any dividends, and provided further that the dividend
distribution does not entail a reduction in value of or a capital loss on the
Common Stock.
Income Tax for Belgian Resident Companies
Dividends received by Belgian Holders which are resident companies are, in
principle, subject to corporate income tax at the rate of 40.17% (i.e., the
standard rate of 39% increased by the crisis contribution of 3% of the
corporate income tax due). Lower rates may be applicable to Belgian resident
companies which, among other conditions, are not 50 percent or more owned by
another company and which derive taxable income below certain thresholds fixed
by law.
However, provided that the dividends benefit from the so-called "dividend-
received deduction," only 5% of the dividends received will be taxable. In
order to benefit from this deduction, the Company must not fall within one of
the categories for which the distributed dividends are expressly excluded from
the "dividend-received deduction" (e.g., dividends which are distributed by
tax-haven countries or are paid out of income has benefitted from a special
tax regime), and the beneficiary should hold, at the time of payment of the
dividends, a participation of at least 5% in the Company or a participation
which has an acquisition value of at least BEF 50 million.
The Company believes that, being incorporated in the Commonwealth of
Pennsylvania, U.S., any dividends which it may distribute from time to time to
Belgian Holders which are Belgian resident companies should qualify for the
dividend-received deduction in Belgium.
55
<PAGE>
Income Tax for Belgian Resident Entities Subject to the Belgian Tax on
Juridical Entities (Pension Funds, etc.)
The Belgian dividend withholding tax is a final tax.
Capital Gains Taxation
Individual Belgian Holders holding the Common Stock as a private investment
and entities subject to Belgian tax on legal entities are not subject to
Belgian capital gains tax on the disposal of the Common Stock.
Individual Belgian Holders may, however, be subject to a 33% tax (to be
increased by the 3% crisis contribution and the appropriate municipal
surcharge) if the capital gain is deemed to be "speculative" in nature, as
defined by Belgian case law.
Individual Belgian Holders whose holding of Common Stock may be considered
as effectively connected with a business will be taxable at ordinary
(progressive) rates on any capital gains realized upon a disposal of Common
Stock if they have held it for five years or less, but will be taxed at 16.5%
(to be increased by the 3% crisis contribution and the appropriate municipal
surcharge) on such gains if they have held the Common Stock for more than five
years before disposing of same.
Belgian resident companies are not subject to capital gains taxation,
provided that the dividends received on the shares which such companies have
disposed of would qualify for the "dividend-received deduction" (except for
the minimum holding requirement). As noted above, it is the Company's view
that any dividends it may distribute might qualify.
Indirect Taxes
Stamp Tax on Securities Transactions
In principle, a stamp tax is levied upon the subscription of new Common
Stock and the purchase and sale in Belgium of Common Stock, if effected by
means of a professional intermediary. The rate applicable to subscriptions of
new Common Stock is 0.35%, but there is a limit of 10,000 Belgian Francs per
transaction. The rate applicable for secondary sales and purchases in Belgium
of Common Stock through a professional intermediary is 0.17%, but there is a
limit of 10,000 Belgian Francs per transaction.
An exemption is available to professional intermediaries (e.g., credit
institutions), insurance companies, pension funds, and collective investment
vehicles which are acting for their own account. A non-resident holder of
Common Stock who is acting for his or her own account will also be entitled to
an exemption from this stamp tax, provided that he or she delivers to the
issuer or the professional intermediary in Belgium, as the case may be, an
affidavit confirming his or her non-resident status vis-a-vis Belgium.
56
<PAGE>
OFFERING AND SUBSCRIPTION
TOTAL NUMBER OF SHARES OFFERED
A total of 1,500,000 shares of Common Stock are intended to be sold by the
Company to the Underwriters and 500,000 shares are intended to be sold by the
Selling Shareholders to the Underwriters. All such shares are being offered by
the Underwriters through (i) a retail public offering in Belgium (the "Belgian
Public Offering") and (ii) placements to institutional investors inside and
outside Belgium, including in the U.S. to a limited number of qualified
institutional buyers (the "International Offering") (the Belgian Public
Offering and the International Offering are being collectively referred to as
the "Offering"). The Company is expected to grant the Underwriters an option
to acquire up to an aggregate of an additional 300,000 shares to cover over-
allotments, if any. See "Underwriting".
INDICATIVE OFFERING PRICE RANGE
The indicative offering price range ("Indicative Offering Price Range") for
the shares of between US$9.00 and US$11.00 for purposes of bookbuilding has
been determined by negotiation among the Company, the Selling Shareholders and
the Underwriters, represented by Quartz Capital Partners Limited ("Quartz
Capital"), acting as Lead Manager of the underwriting syndicate. If, during
the subscription period, this Indicative Offering Price Range is changed by
the Underwriters, in consultation with the Company, it will be published in
the Belgian financial press at the latest on the date following such change,
and will at the same date be confirmed by the Company to the Underwriters for
communication to their clients. The last date for publication of such a change
is expected to be June 18, 1998.
The final offering price for the shares will be negotiated among the
Company, the Selling Shareholders and the Underwriters. Among the facts to be
considered in determining the final offering price of the shares, in addition
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and future prospects of the Company, an
assessment of Company management, and the consideration of those factors in
relation to similar businesses. The final offering price will be fixed in U.S.
dollars on the earlier of the second business day following the closing of the
subscription period or July 15, 1998. In view of the Belgian Public Offering,
the final offering price will be published in the Belgian financial press at
the latest on the date following fixing of the final offering price and the
allocation of the shares offered hereby will be so published no later than
three days after the closing of the subscription period. The final offering
price will be a single price applicable to all investors. In addition, Belgian
subscribers are also subject to the stamp tax on securities transactions. See
"Income Tax Considerations--Indirect Taxes."
BOOKBUILDING
During the first part of the International Offering and prior to the Belgian
Public Offering, a bookbuilding will be conducted to determine institutional
interest and composition in the Offering. Institutional investors are invited
to submit to the Underwriters the amount of stock that they would be
interested in purchasing. Subsequent to order accumulation in the Belgian
Public Offering and following bookbuilding, the offering price will be
determined on the basis of a number of factors including the level of demand
shown by institutional investors and general market conditions.
SUBSCRIPTION PERIODS
The International Offering is open to institutional investors within and
outside of Belgium. It is expected to commence on June 3, 1998 and continue
after the closing of the bookbuilding period and is expected to close at 4
p.m. Brussels time on June 22, 1998 unless it is curtailed. The International
Offering will cover 75% of the shares, subject to the right of the
Underwriters to change percentages as described below.
The subscription period for the Belgian Public Offering is expected to
commence on June 18, 1998. The Belgian Public Offering is expected to close at
4 p.m. Brussels time on June 22, 1998. The Belgian Public Offering covers 25%
of the shares, subject to the right of the Underwriters to change the
percentages as described below. The proportion of the percentage of the shares
offered through the Belgian Public Offering and the International Offering can
be modified by agreement between the Underwriters and the Company depending
upon subscriptions in each tranche.
The subscription period for both tranches can, by agreement between the
Underwriters and the Company, be curtailed as soon as the total amount of
shares offered in the Offering has been reached or exceeded, in which
57
<PAGE>
case the early closing date will be published in the Belgian financial press.
The subscription period may also be extended by agreement. No subscriptions
will be accepted after closing of the subscription period.
SUBSCRIPTION PROCEDURES
In Belgium, copies of this Prospectus, with a form of subscription to the
shares attached, may be obtained from the principal offices of Artesia Bank
N.V. and Bank Brussels Lambert. Investors are requested to fill out the
subscription form attached to the Prospectus, indicating the number of shares
which they wish to purchase. The forms must be signed and delivered to Artesia
Bank N.V., WTC-Toren I, Emile Jacqmainlaan 162-B2, B-1000, Brussels, Belgium
or Bank Brussels Lambert, Avenue Marnix 24, B-1000, Brussels, Belgium.
In the event of oversubscription of the Belgian Public Offering, the
subscriptions shall lead to apportionment. Quartz Capital, acting as Lead
Manager, will submit to the Company a proposal for the apportionment of
shares, taking into account the quality of the investors with a view to
insuring a balanced secondary market. If either or both of the tranches are
oversubscribed, then the percentage of the shares received for that tranche
may be increased or decreased as set forth above, provided that shares
allocated to the Belgian Public Offering will not be reduced in the event that
the Belgian Public Offering is oversubscribed. Priority may be given to retail
investors having subscribed with Artesia Bank N.V. and Bank Brussels Lambert.
Shares must be paid in full by the investors to the Underwriters in United
States Dollars.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters of the Offering of the Common Stock through the Lead Manager,
Quartz Capital, are expected to severally agree to purchase from the Company
and Selling Shareholders the following respective number of shares of Common
Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Quartz Capital Partners Limited.................................... 1,400,000
Artesia Bank N.V................................................... 300,000
Bank Brussels Lambert.............................................. 300,000
---------
Total............................................................ 2,000,000
=========
</TABLE>
The Underwriting Agreement ("Underwriting Agreement") provides that the
obligations of the Underwriters are subject to certain conditions precedent,
including the absence of any material adverse change in the Company's business
and the receipt of certain certificates, opinions and letters from the
Company, its counsel and independent auditors. The nature of the Underwriters'
obligation is such that they are committed to purchase all shares of Common
Stock offered hereby if any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the public offering of the shares, the
offering price and other selling terms may be changed by the Managers.
Subject to the conditions of the Underwriting Agreement expected to be
signed on June 24, 1998, the Underwriter's risk is limited to the payment risk
for a period commencing June 24, 1998, the expected date of signing the
Underwriting Agreement, until June 30, 1998, the expected value date for
payment by investors.
The lead manager, Quartz Capital, is an investment banking firm based in
London. While it has been in existence for less than three years, the
principal officers have a total combined experience of over 50 years in the
securities industry. Quartz Capital has in the past acted as placement agent
for the Company in connection with placements of securities. Dr. Peeters, a
director of the Company, is both the founder and a managing Director of
Capricorn and the Chairman of the Board of Quartz Capital. See "Certain
Relationships and Related Transactions."
Purchasers of the shares offered pursuant to the Offering may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the
cover page hereof.
58
<PAGE>
Under the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable no later than 30 days after the date of
this Prospectus, to purchase up to an aggregate of 300,000 additional shares
of Common Stock to cover over-allotments, if any. To the extent that the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the above
tables bear to the total number of shares of Common Stock offered hereby. The
Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company's executive officers and directors have signed a lock-up
agreement that they will not offer, sell, or otherwise dispose of any shares
of Common Stock or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock owned by them
during the 180 days following the date of this Prospectus in accordance with
EASDAQ regulations. Other shareholders have agreed not to sell their shares
for 180 days without the permission of the Underwriters. The Company has
agreed that it will not, without the prior written consent of Quartz Capital,
offer, sell or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock during the 180-day period following
the date of this Prospectus, except that the Company may (i) grant additional
warrants under its employee benefit plans, (ii) issue Common Stock (or
securities convertible into Common Stock) in connection with a merger,
consolidation, acquisition or sale of assets, or formation of a joint venture
(in each case, the primary purpose of which is not to raise equity capital),
or (iii) issue Common Stock (or securities convertible into Common Stock) as
consideration for the acquisition of a business, product or license by the
Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, and
Brussels, Belgium. Certain legal matters in connection with this Offering are
being passed upon for the Underwriters by Brown, Rudnick, Freed & Gesmer,
Boston, Massachusetts.
59
<PAGE>
ORTHOVITA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Shareholders'
Deficit................................................................. F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orthovita, Inc.:
We have audited the accompanying balance sheets of Orthovita, Inc. (a
Pennsylvania corporation) as of December 31, 1995, 1996 and 1997, and the
related statements of operations, redeemable convertible preferred stock and
shareholders' deficit and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Orthovita, Inc. as of
December 31, 1995, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Philadelphia, Pa.,
January 27, 1998 (except for
the matter discussed in Note
1, as to which thedate is
June 9, 1998).
F-2
<PAGE>
ORTHOVITA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------------------------------- MARCH 31, MARCH 31,
1995 1996 1997 1998 1998
ASSETS --------------------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents............ $ 762,678 $ 253,465 $ 2,257,902 $ 753,466 $ 753,466
Restricted cash......... -- -- 200,000 200,000 200,000
Trade accounts
receivable net of
allowance of $12,500,
$46,424, $100,078,
$114,267 and $114,767.. 109,549 257,099 469,363 421,086 421,086
Inventories............. 177,550 332,787 248,707 223,864 223,864
Other current assets.... 44,098 62,609 101,794 127,169 127,169
------------ ------------- ------------ ------------ ------------
Total current assets... 1,093,875 905,960 3,277,766 1,725,585 1,725,585
PROPERTY AND EQUIPMENT,
net..................... 372,126 591,169 1,584,244 1,681,557 1,681,557
OTHER ASSETS............. 42,287 49,008 -- -- --
------------ ------------- ------------ ------------ ------------
$ 1,508,288 $ 1,546,137 $ 4,862,010 $ 3,407,142 $ 3,407,142
============ ============= ============ ============ ============
LIABILITIES AND
SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term bank
borrowings............. $ 650,000 $ 660,000 $ 692,000 $ 692,000 $ 692,000
Current portion of long-
term debt.............. 4,033 55,873 690,985 739,248 739,248
Subordinated promissory
note................... -- 351,125 -- -- --
Accounts payable........ 834,664 924,948 668,446 803,059 803,059
Accrued patent defense
costs.................. -- 750,000 1,003,236 635,003 635,003
Accrued compensation and
related expenses....... 267,953 447,954 412,926 516,003 516,003
Other accrued expenses.. 251,957 856,383 891,032 960,388 960,388
------------ ------------- ------------ ------------ ------------
Total current
liabilities........... 2,008,607 4,046,283 4,358,625 4,345,701 4,345,701
------------ ------------- ------------ ------------ ------------
LONG-TERM DEBT........... 1,645,374 1,588,539 832,991 873,935 873,935
------------ ------------- ------------ ------------ ------------
REDEEMABLE CLASS C
CONVERTIBLE PREFERRED
STOCK, 1,882,353 shares
issued and outstanding
in 1997 and 1998
(actual) no shares
issued and outstanding
(pro forma) (Note 11)
(liquidation value of
$8,627,862 at March 31,
1998)................... -- -- 7,383,090 7,584,285 --
------------ ------------- ------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 13
and 14)
SHAREHOLDERS' DEFICIT:
Class A Convertible
Preferred Stock, $.01
par value, 606,060
shares issued and
outstanding (actual) no
shares issued and
outstanding (pro
forma)................. 6,061 6,061 6,061 6,061 --
Class B Convertible
Preferred Stock, $.01
par value, 452,069,
452,069, 1,038,005 and
1,038,005 shares issued
and outstanding
(actual) no shares
issued and outstanding
(pro forma)............ 4,521 4,521 10,380 10,380 --
Common Stock, $.01 par
value, 15,000,000
shares authorized,
3,539,600, 4,610,800,
5,186,222 and 5,186,222
shares issued and
outstanding (actual)
8,712,640 shares issued
and outstanding (pro
forma) ................ 35,394 46,108 51,862 51,862 87,176
Additional paid-in
capital................ 4,243,106 8,679,209 13,138,103 13,138,103 20,703,565
Accumulated deficit..... (6,352,772) (12,792,725) (20,885,159) (22,599,616) (22,599,616)
Cumulative translation
adjustment............. (82,003) (31,859) (33,943) (3,569) (3,569)
------------ ------------- ------------ ------------ ------------
Total shareholders'
deficit............... (2,145,693) (4,088,685) (7,712,696) (9,396,779) $ (1,812,494)
------------ ------------- ------------ ------------ ------------
$ 1,508,288 $ 1,546,137 $ 4,862,010 $ 3,407,142 $ 3,407,142
============ ============= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
ORTHOVITA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES............ $ 577,753 $ 1,860,326 $ 3,311,540 $ 740,704 $ 824,902
COST OF SALES........... 695,998 887,236 1,096,848 285,177 213,505
----------- ----------- ----------- ----------- -----------
Gross profit (loss)... (118,245) 973,090 2,214,692 455,527 611,397
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
General and
administrative......... 940,090 2,069,289 3,762,906 986,576 590,305
Selling and marketing... 1,659,260 3,914,485 4,249,533 1,001,824 939,219
Research and
development............ 467,049 1,178,330 1,986,506 360,427 504,254
----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 3,066,399 7,162,104 9,998,945 2,348,827 2,033,778
----------- ----------- ----------- ----------- -----------
Operating loss........ (3,184,644) (6,189,014) (7,784,253) (1,893,300) (1,422,381)
INTEREST EXPENSE........ (163,495) (273,036) (148,156) (65,807) (65,751)
INTEREST INCOME......... 12,089 22,097 181,617 1,288 20,081
FOREIGN CURRENCY
TRANSACTION LOSS....... -- -- (202,527) (165,914) (45,211)
----------- ----------- ----------- ----------- -----------
Loss before
extraordinary item... (3,336,050) (6,439,953) (7,953,319) (2,123,733) (1,513,262)
EXTRAORDINARY ITEM--GAIN
ON EARLY EXTINGUISHMENT
OF DEBT................ -- -- 397,402 397,402 --
----------- ----------- ----------- ----------- -----------
NET LOSS................ (3,336,050) (6,439,953) (7,555,917) (1,726,331) (1,513,262)
ACCRETION OF REDEMPTION
PREMIUM ON PREFERRED
STOCK.................. -- -- (536,517) -- (201,195)
----------- ----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS.... $(3,336,050) $(6,439,953) $(8,092,434) $(1,726,331) $(1,714,457)
=========== =========== =========== =========== ===========
NET LOSS PER COMMON
SHARE
Before extraordinary
item................. $ (1.04) $ (1.60) $ (1.68) $ (0.44) $ (0.33)
Extraordinary item.... -- -- 0.08 0.08 --
----------- ----------- ----------- ----------- -----------
NET LOSS PER COMMON
SHARE.................. $ (1.04) $ (1.60) $ (1.60) $ (0.36) $ (0.33)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............ 3,215,000 4,036,150 5,050,397 4,792,459 5,186,222
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ORTHOVITA, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SHAREHOLDERS' DEFICIT
REDEEMABLE ---------------------------------------------------------------------------------
CLASS C CLASS A CLASS B
CONVERTIBLE CONVERTIBLE CONVERTIBLE ADDITIONAL CUMULATIVE
PREFERRED PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED TRANSLATION
STOCK STOCK STOCK STOCK CAPITAL DEFICIT ADJUSTMENT TOTAL
----------- ----------- ----------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994................... $ -- $6,061 $ 3,382 $31,600 $ 2,391,025 $ (3,016,722) $(37,725) $ (622,379)
Sale of 113,884 shares
of Class B Convertible
Preferred Stock, net
of offering costs of
$3,249................ -- 1,139 -- 308,793 -- -- 309,932
Sale of 364,400 shares
of Common Stock and
72,880 Class A Common
Stock purchase
warrants, net of
offering costs of
$28,826............... -- -- -- 3,644 1,516,230 -- -- 1,519,874
Issuance of Common
Stock and Common Stock
options for consulting
services.............. -- -- -- 150 27,058 -- -- 27,208
Currency translation
adjustment............ -- -- -- -- -- -- (44,278) (44,278)
Net loss............... -- -- -- -- -- (3,336,050) -- (3,336,050)
---------- ------ ------- ------- ----------- ------------ -------- -----------
BALANCE, DECEMBER 31,
1995................... -- 6,061 4,521 35,394 4,243,106 (6,352,772) (82,003) (2,145,693)
Sale of 243,075 shares
of Common Stock and
48,615 Class A Common
Stock purchase
warrants, net of
offering costs of
$22,714............... -- -- -- 2,431 1,007,924 -- -- 1,010,355
Sale of 828,357 shares
of Common Stock, net
of offering costs of
$84,055............... -- -- -- 8,283 3,428,179 -- -- 3,436,462
Currency translation
adjustment............ -- -- -- -- -- -- 50,144 50,144
Net loss............... -- -- -- -- -- (6,439,953) -- (6,439,953)
---------- ------ ------- ------- ----------- ------------ -------- -----------
BALANCE, DECEMBER 31,
1996................... -- 6,061 4,521 46,108 8,679,209 (12,792,725) (31,859) (4,088,685)
Sale of 533,685 shares
of Common Stock, net
of offering costs of
$12,467............... -- -- -- 5,337 2,250,357 -- -- 2,255,694
Issuance of 585,936
shares of Class B
Convertible Preferred
Stock................. -- -- 5,859 -- 1,019,531 -- -- 1,025,390
Sale of 1,882,353
shares of Class C
Convertible Preferred
Stock and Common Stock
warrants, net of
offering costs of
$1,153,427............ 6,846,573 -- -- -- 762,631 -- -- 762,631
Issuance of Common
Stock and Common Stock
options for services.. -- -- -- 417 426,375 -- -- 426,792
Currency translation
adjustment............ -- -- -- -- -- -- (2,084) (2,084)
Accretion of redemption
premium and dividends
on Class C Convertible
Preferred Stock....... 536,517 -- -- -- -- (536,517) -- (536,517)
Net loss............... -- -- -- -- -- (7,555,917) -- (7,555,917)
---------- ------ ------- ------- ----------- ------------ -------- -----------
BALANCE, DECEMBER 31,
1997................... 7,383,090 6,061 10,380 51,862 13,138,103 (20,885,159) (33,943) (7,712,696)
Currency translation
adjustment
(unaudited)........... -- -- -- -- -- -- 30,374 30,374
Accretion of redemption
premium and dividends
on Class C Convertible
Preferred Stock
(unaudited)........... 201,195 -- -- -- -- (201,195) -- (201,195)
Net loss (unaudited)... -- -- -- -- -- (1,513,262) -- (1,513,262)
---------- ------ ------- ------- ----------- ------------ -------- -----------
BALANCE, MARCH 31, 1998
(unaudited)............ $7,584,285 $6,061 $10,380 $51,862 $13,138,103 $(22,599,616) $ (3,569) $(9,396,779)
========== ====== ======= ======= =========== ============ ======== ===========
PRO FORMA BALANCE MARCH
31, 1998 AFTER
CONVERSION OF PREFERRED
STOCK INTO COMMON STOCK
(Note 11) (unaudited).. $ -- $ -- $ -- $87,126 $20,703,565 $(22,599,616) $ (3,569) $(1,812,494)
========== ====== ======= ======= =========== ============ ======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ORTHOVITA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.............. $(3,336,050) $(6,439,953) $(7,555,917) $(1,726,331) $(1,513,262)
Adjustments to
reconcile net loss to
net cash used in
operating
activities--
Extraordinary gain... -- -- (397,402) (397,402) --
Depreciation and am-
ortization.......... 75,304 115,362 217,432 30,088 98,189
Imputed interest..... 49,225 46,642 42,569 4,551 1,013
Services provided
for Common Stock
and Common Stock
options............. 27,208 -- 426,792 107,000 --
(Increase) decrease
in--
Restricted cash.... -- -- (200,000) -- --
Accounts receiv-
able.............. (105,450) (150,434) (212,264) (152,029) 48,277
Inventories........ (127,022) (167,115) 84,080 (20,432) 24,843
Other current as-
sets.............. 8,976 (21,052) (39,185) (17,937) (25,375)
Other assets....... (40,617) (14,418) 49,008 (47) --
Increase (decrease)
in--
Accounts payable... 299,485 108,810 (256,502) 167,882 134,613
Accrued patent de-
fense costs....... -- 750,000 253,236 379,543 (368,233)
Accrued
compensation and
related expenses.. 167,956 193,971 (35,028) 59,461 103,077
Other accrued ex-
penses............ 114,158 609,575 34,649 178,160 69,356
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities....... (2,866,827) (4,968,612) (7,588,532) (1,387,493) (1,427,502)
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of property
and equipment........ (147,143) (345,877) (413,939) (263,727) (73,189)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from short-
term bank
borrowings........... 400,000 10,000 32,000 90,000 --
Proceeds (repayments)
of long-term debt.... 785,755 364,310 463,219 (102,341) (34,119)
Repayments of
subordinated debt.... -- -- (351,125) -- --
Proceeds from sale of
Class B Convertible
Preferred Stock...... 309,932 -- -- -- --
Proceeds from sale of
Class C Convertible
Preferred Stock...... -- -- 7,609,204 -- --
Proceeds from sale of
Common Stock and
warrants............. 1,519,874 4,446,817 2,255,694 1,438,076 --
----------- ----------- ----------- ----------- -----------
Net cash provided
by (used in)
financing
activities....... 3,015,561 4,821,127 10,008,992 1,425,735 (34,119)
----------- ----------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND
CASH EQUIVALENTS...... 32,207 (15,851) (2,084) 164,206 30,374
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 33,798 (509,213) 2,004,437 (61,279) (1,504,436)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 728,880 762,678 253,465 253,465 2,257,902
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 762,678 $ 253,465 $ 2,257,902 $ 192,186 $ 753,466
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. BACKGROUND:
Orthovita, Inc. (the "Company") was incorporated in Pennsylvania in June
1992 and began operations in November 1993. The Company is engaged in the
development and commercialization of proprietary bioactive bone substitutes.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred substantial
operating losses since its inception and, at March 31, 1998, had an
accumulated deficit of approximately $22.6 million and a working capital
deficit of approximately $2.6 million. For the year ended December 31, 1997
and the three months ended March 31, 1998, the Company's net loss was $7.6
million, and $1.5 million, respectively. Such losses have resulted from
expenses associated with the development, patenting and patent defense of the
Company's technologies, preclinical and clinical studies, preparation of
submissions to the Food and Drug Administration and foreign regulatory bodies,
and the development of sales, marketing and manufacturing capabilities. There
can be no assurance that the Company will be able to generate sufficient
revenues to achieve or sustain profitability in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Prospectus.
Based on the variable nature of a significant portion of the Company's
expenditures and the cash balance at March 31, 1998, management believes that
additional funds will be needed to continue the Company's business through
December 31, 1998. Management believes that the required funding will be
available through public and private offerings of equity and debt and other
strategic arrangements and that the net proceeds from the initial public
offering, together with its current cash and cash equivalents, will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the period through December 31, 1998.
On April 28, 1998, the Company entered into a global strategic alliance for
the marketing and distribution of BIOGRAN for the dental implant surgery
market with Implant Innovations Inc. ("3i"), a leading dental implant company.
3i has committed to purchase a minimum of $2.4 million of BIOGRAN during the
remainder of 1998 and in each of the subsequent four years.
On June 9, 1998, the Company and Howmedica, a wholly-owned subsidiary of
Pfizer, Inc., entered into the three agreements (the "Howmedica Agreements"),
pursuant to which the Company sold 350,000 shares of Common Stock to
Howmedica, for an aggregate purchase price of $3.5 million. The Company is in
the process, through an initial public offering of its Common Stock, of
selling 1,500,000 shares of Common Stock at a price range of $9.00 to $11.00
per share (the "Offering"). If the actual offering price in the the Offering,
however, is less than $11.00 per share, the Company will be required to sell
Howmedica such additional number of shares of Common Stock at a purchase price
of $.01 per share so that the average price per share paid by Howmedica for
all of its shares of Common Stock is equal to 90% of the actual offering
price. As part of the Howmedica Agreements (i) Howmedica has obtained
exclusive worldwide marketing, sales and distribution rights for ORTHOCOMP in
joint implant procedures, (ii) the Company may earn payments of up to an
aggregate of $4.5 million as various milestones are reached during the
development and approval process for this indication, (iii) upon receipt of
regulatory approvals, Howmedica will be required to make minimum purchases of
ORTHOCOMP for a six year period, (iv) Howmedica may obtain exclusive
manufacturing rights from the Company for $7,000,000 and will be required to
pay royalties on future sales, and (v) Howmedica has certain other options and
rights as defined, to acquire distribution rights for certain other of the
Company's products and technologies.
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating
results and cause actual results to vary materially from expectations include,
but are not limited to, the uncertainty related to regulatory approvals,
uncertainty of market acceptance, limited clinical trials, uncertainty related
to third-party reimbursement, dependence on patents, trade secrets and
proprietary rights, limited manufacturing experience, dependence on suppliers,
competition, uncertainty of technological change, dependence on key personnel
and advisors, and product liability and the availability of adequate
insurance.
F-7
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The financial statements of the Company have been prepared using United
States generally accepted accounting principles.
Interim Financial Statements
The financial statements as of March 31, 1998, and for the three-month
periods ended March 31, 1997 and 1998 are unaudited and, in the opinion of
management, include all adjustments (consisting only of normal and recurring
adjustments) necessary for a fair presentation of results for these interim
periods. The results of operations for the three months ended March 31, 1998
are not necessarily indicative of the results to be expected for the entire
year.
Net Loss Per Common Share
The Company has presented net loss per common share for 1995, 1996, 1997 and
for the three months ended March 31, 1997 and 1998 pursuant to Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share".
Basic loss per share was computed by dividing net loss applicable to common
shareholders by the weighted average number of shares of Common Stock
outstanding during 1995, 1996, 1997 and for the three months ended March 31,
1997 and 1998. Diluted loss per share has not been presented since the impact
on loss per share is anti-dilutive due to the Company's losses. Diluted loss
per share is computed using the treasury stock method which assumes that the
Company would use any proceeds it would receive from the exercise of options
and warrants to repurchase shares at fair market value.
Belgian Branch
The accompanying financial statements include the accounts of Orthovita,
Inc. and its Belgian branch operations. The Belgian branch was established as
a manufacturing facility for the Company's products; however, in September
1997, the Company transferred manufacturing from Belgium to the United States.
The Company will continue to conduct sales activities from its Belgian branch.
All material intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company invests its excess cash in highly liquid short-term investments.
For the purposes of the statements of cash flows, the Company considers all
highly liquid investment instruments purchased with an original maturity of
three months or less to be cash equivalents.
Restricted Cash
Restricted cash represents funds maintained in a bank escrow account as
collateral for the Company's bank term loan and line of credit (See notes 7
and 8).
Inventories
Inventories are stated at the lower of cost or market and are utilized on a
first-in, first-out basis.
Property, Equipment and Depreciation
Property and equipment, including that held under capitalized lease
obligations, are recorded at cost. Depreciation is calculated on a straight-
line basis over the estimated useful lives of assets, primarily three to five
years. Expenditures for major renewals and improvements to property and
equipment are capitalized and expenditures for maintenance and repairs are
charged to operations as incurred.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment. Revenues
are presented net of sales discounts and returns. The Company records the
estimated cost that may be incurred for product returns in the
F-8
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
period the related revenue is recognized. The difference between the amount
recorded and the amount of actual returns to date is recorded in accrued
expenses.
International Sales
The Company has generated revenues from its United States headquarters and
its Belgian branch and derives revenues from the United States, Europe and
other locations. A summary revenues from each source for each period presented
follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -----------------
1995 1996 1997 1997 1998
-------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
United States:
United States............ $258,286 $1,122,269 $2,445,535 $494,491 $673,983
Other.................... -- 15,373 64,644 7,873 4,757
-------- ---------- ---------- -------- --------
Total.................. 258,286 1,137,642 2,510,179 502,364 678,740
======== ========== ========== ======== ========
Belgium:
Europe................... 269,152 674,709 641,917 182,819 113,122
Other.................... 50,315 47,975 159,444 55,521 33,040
-------- ---------- ---------- -------- --------
Total.................. 319,467 722,684 801,361 238,340 146,162
======== ========== ========== ======== ========
Total Revenues............. $577,753 $1,860,326 $3,311,540 $740,704 $824,902
======== ========== ========== ======== ========
</TABLE>
Research and Development Costs
Research and development costs are charged to expense as incurred.
Foreign Currency Translation
The functional currency for the Company's Belgian branch is the Belgian
franc. Accordingly, all assets and liabilities related to this operation are
translated at the current exchange rates at the end of each period. The
resulting translation adjustments are accumulated in a separate component of
Stockholders' deficit. Revenues and expenses are translated at average
exchange rates in effect during the period. Foreign currency transaction gains
and losses are included in results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Supplemental Cash Flow Information
In 1995, the Company issued options for the purchase of 10,512 shares of
Common Stock at prices ranging from $1 to $2.75 per share and issued 15,000
shares of Common Stock valued at $1 per share to certain vendors in payment of
consulting services valued at $27,208. In 1997, the Company issued options for
the purchase of 30,000 shares of Common Stock at $4.25 per share to certain
vendors in payment of consulting services valued at $38,546. Also during 1997,
the Company issued shares of Common Stock valued at $177,246 to the University
of Pennsylvania (see Note 6).
In 1995, 1996, 1997 and for the three months ended March 31, 1998, the
Company incurred capital lease obligations of $12,100, $20,051, $797,068, and
$122,313, respectively. No capital lease obligations were incurred in the
three months ended March 31, 1997. In 1995, 1996, 1997 and for the three
months ended March 31, 1997, and 1998, cash paid for interest was $43,104,
$63,018, $148,156, $65,807and $65,751, respectively.
F-9
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). This statement requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement
of financial position. SFAS 130 is effective for financial statements issued
for fiscal years beginning after December 15, 1997.
Comprehensive loss for each period presented is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Loss................ $(3,336,050) $(6,439,953) $(7,555,917) $(1,726,331) $(1,513,262)
Currency Translation
Adjustment............. (44,278) 50,144 (2,084) (42,461) 30,374
----------- ----------- ----------- ----------- -----------
Comprehensive Loss...... $(3,380,328) $(6,389,809) $(7,558,001) $(1,768,792) $(1,482,888)
=========== =========== =========== =========== ===========
</TABLE>
Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information ("SFAS 131"). This statement establishes
additional standards for segment reporting in the financial statements and is
effective for fiscal years beginning after December 15, 1997. Management
believes that SFAS 131 will not have an effect on the Company's financial
statements.
3. INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1995 1996 1997 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Raw materials and work-in-process..... $ 50,896 $ 82,097 $ 8,801 $ 17,971
Finished goods........................ 126,654 250,690 239,906 205,893
-------- -------- -------- --------
$177,550 $332,787 $248,707 $223,864
======== ======== ======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- MARCH 31,
1995 1996 1997 1998
-------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Machinery and laboratory
equipment................... $261,792 $ 418,070 $ 920,624 $1,080,857
Furniture, and office
equipment................... 208,623 291,325 436,279 429,515
Leasehold improvements....... -- 88,096 588,049 629,777
-------- --------- ---------- ----------
470,415 797,491 1,944,952 2,140,149
Less--Accumulated
depreciation................ (48,289) (206,322) (360,708) (458,592)
-------- --------- ---------- ----------
$372,126 $ 591,169 $1,584,244 $1,681,557
======== ========= ========== ==========
</TABLE>
For the years ended December 31, 1995, 1996 and 1997 and the three month
periods ended March 31, 1997 and 1998, depreciation and amortization expense
was $75,304, $115,358, $217,932, $30,088, and $98,189, respectively.
In the year ended December 31, 1997 and in the three months ended march 31,
1998, certain property and equipment was acquired under capitalized lease
obligations. These assets total $825,931 and $971,063, with related
accumulated depreciation of $81,528 and $124,560, at December 31, 1997 and
March 31, 1998, respectively.
F-10
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. FBFC INTERNATIONAL TECHNOLOGY LICENSE:
In April 1993, the Company exclusively licensed, on a worldwide basis, from
FBFC International, a Belgian company, ("FBFC"), certain intellectual property
including patents primarily related to two dental products for human
implantation.
The Company had agreed to pay FBFC certain royalties. The maximum aggregate
royalty payments to be made by the Company was not to exceed $3,000,000. This
amount was allocated evenly between each of the two dental products. The
Company must pay FBFC a running royalty, and receives credit against the
maximum, as follows: (i) 12% of net sales of FBFC-licensed products in the
dental market and 10% in other market extensions during the first five years
from the starting date of such running royalty; (ii) 12% of net sales of FBFC-
licensed products in the dental market and 7% in other market extensions from
five years after the starting date of the running royalty up to the
termination of the agreement. The agreement will terminate at the earlier of
ten years from the effective date of the agreement, as defined, or such time
as the Company has made the maximum aggregate royalty payments. After the
agreement terminates, the Company will maintain the exclusive right to the
FBFC-licensed products.
Also, as part of the license agreement, the Company assumed the payback
provisions contained in a loan agreement between FBFC and the Flemish
government for a noninterest-bearing loan payable in Belgian Francs. In 1993,
the Company discounted the loan using a market rate of interest and recorded a
liability and an expense for acquired technology. Imputed interest expense is
recognized on the loan based on the loan repayment schedule. Payments on this
loan are to be made annually through December 2003. These payments are in
addition to the payment of royalties and, as they are due to the Flemish
government and not the FBFC, have not been suspended. Repayments under the
loan and the payment of certain other fees, as defined, reduce the amount of
the maximum royalty on a dollar for dollar basis.
During 1996, the Company decided not to commercialize one of the dental
products licensed from FBFC and petitioned the Flemish government to exempt
the Company from the debt assumed when the technology was licensed. In 1997,
the Flemish government granted the Company an exemption of reimbursement of
approximately $426,000 of long-term debt ($397,402, net of unamortized debt
discount). By virtue of the Company's decision not to commercialize this
product, the maximum aggregate royalty payments to be made by the Company were
reduced from $3,000,000 to $1,500,000. The Company recorded an extraordinary
gain of $397,402 in 1997 due to the extinguishment of this debt. The Company
closed certain facilities in Belgium during 1997. Based on the terms of the
debt, this closure gives the Flemish government the right to call the debt.
Although the Flemish government has not exercised this right, the Company has
classified the entire outstanding balance of $378,952, and $370,846 at
December 31, 1997 and March 31, 1998, respectively as a current liability.
On May 1, 1996, a complaint was filed against the Company, alleging that the
technology the Company licensed from FBFC infringed a patent held by another
company. In accordance with the FBFC license, while an action of infringement
is pending, all payments required to be made by the Company under the royalty
arrangement will be suspended until a determination is made by the courts.
Additionally, FBFC has agreed to indemnify the Company for all reasonable
damages and costs incurred by the Company arising out of or resulting from
this action, for an amount not to exceed the maximum aggregate royalty
payments associated with this technology. In 1996 and 1997, the Company has
charged to expense approximately $2,458,000 of patent litigation legal fees.
Based upon the royalty of 12% of net sales, approximately $793,000 would be
owed to FBFC; however, since patent litigation fees charged to expense have
exceeded the royalty due, no accrual has been made for the royalties and the
Company does not expect the accrual or payment of royalties to resume in 1998
or thereafter. The Company expects to receive a reimbursement from FBFC; no
asset has been recorded for this gain contingency as of March 31, 1998. The
Company has been granted its summary judgment motion with respect to the issue
of noninfringement (Note 14).
At such time as the Company has satisfied its royalty obligations, this
agreement shall terminate and all of FBFC's rights in the intellectual
property, including the patents, will be transferred to and become the
exclusive property of the Company.
6. UNIVERSITY OF PENNSYLVANIA TECHNOLOGY LICENSE:
The Company has exclusively licensed on a worldwide basis, from the
University of Pennsylvania ("Penn"), certain intellectual property including
patents relating to materials and techniques for improving orthopedic
implants, bone grafting, and controlled drug release technologies. In
consideration for the above and
F-11
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
for certain expenses Penn incurred related to the intellectual property, the
Company issued 78,303 shares in 1993 and 41,705 shares in 1997 of Common Stock
to Penn with a fair market value of $78,303 and $177,246, respectively, at the
time. Penn is also entitled to a royalty on net sales, as defined, of products
based on the Penn-licensed technologies. No royalties have been incurred since
inception.
7. BANK BORROWINGS:
The Company had a $750,000 line of credit arrangement with a bank, of which
$660,000 was outstanding as of December 31, 1996, the line expired on June 30,
1997. The Company established a new $1 million line of credit arrangement with
another bank in September 1997 and entered into a $400,000 term loan with the
bank (the "Term Loan"), (collectively the "Credit Facility"). The Credit
Facility requires the Company to maintain certain financial covenants related
to specified levels of cash, accounts receivable, and inventory and to
maintain a restricted cash balance based on certain financial factors, as
defined. As of December 31, 1997 and March 31, 1998, the Company was in
violation of certain of these covenants. The bank waived these covenants and
limited the amount of restricted cash to $200,000; however, at March 31, 1998,
the Company had no additional availability under the line based on the advance
formula. Interest on the line of credit is payable at the prime rate plus
1.5%. As of December 31, 1997 and March 31, 1998, $692,000 was outstanding
under the line. The weighted average interest rate on the line was 10% for the
year ended December 31, 1997.
The Term Loan is payable in 48 monthly installments of $8,333. Interest on
the Term Loan is payable monthly at the prime rate plus 1% (9.5% at December
31, 1997). Additionally, the Company issued to the bank a warrant to purchase
5,000 shares of Common Stock at an exercise price of $4.25 per share. Based on
the term and exercise price of the warrants, the Black-Scholes model
determined a minimal value for the warrants. The weighted average interest
rate on the Term Loan was 9.50% for the year ended December 31, 1997. As of
December 31, 1997, the outstanding principal balance on the Term Loan was
$375,000.
8. LONG-TERM DEBT:
In 1997, the Company secured a $1,200,000 capital asset financing
arrangement with a lending institution. The term of each individual lease is
42 months and interest is approximately 10.85%. The leases are secured by the
underlying capital assets.
The Company had outstanding $775,000 of 15% Subordinated Secured Notes (the
"Notes") due in May 2000. In connection with the issuance of these Notes, the
Company issued to the Note holders warrants to purchase 885,717 shares of
Class B Convertible Preferred Stock at $1.75 per share. These warrants are
exercisable through May 9, 2000. The Notes plus accrued interest of
approximately $247,000 were satisfied in 1997 by the exercise of warrants to
purchase 585,936 shares of Class B Convertible Preferred Stock. As
compensation for the warrant exercise, the Company issued warrants to purchase
101,710 shares of Common Stock at $4.25 per share to the holders of the Notes.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- MARCH 31,
1995 1996 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Payable for acquired
technology net of
unamortized discount of
$110,878, $63,536, $20,967,
and $19,954 (see Note 5)... $ 863,652 $ 845,291 $ 378,952 $ 370,846
Term loans to a bank (see
Note 7).................... -- -- 375,000 350,000
Capitalized leases.......... 10,755 24,121 770,024 892,337
Subordinated secured notes,
repaid in 1997............. 775,000 775,000 -- --
---------- ---------- ---------- ----------
1,649,407 1,644,412 1,523,976 1,613,183
Less--Current portion....... (4,033) (55,873) (690,985) (739,248)
---------- ---------- ---------- ----------
$1,645,374 $1,588,539 $ 832,991 $ 873,935
========== ========== ========== ==========
</TABLE>
F-12
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt maturities as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.......................................................... $ 690,985
1999.......................................................... 337,447
2000.......................................................... 360,364
2001.......................................................... 156,147
----------
1,544,943
Less--unamortized discount.................................... (20,967)
----------
$1,523,976
==========
</TABLE>
9. SUBORDINATED PROMISSORY NOTE:
The Company had a $400,000 subordinated promissory note agreement with its
President with $351,125 outstanding as of December 31, 1996. The note was
repaid in May 1997.
10. PROFIT SHARING PLAN:
The Company has a Section 401(k) plan for all qualified employees, as
defined. For the years ended December 31, 1996 and 1997, the Company matches
$.25 for each $1.00 of qualified employee contribution up to a maximum of 6%
of the employee's salary. Effective January 1, 1998, the Company will match
$.50 for each $1.00 of qualified employee contributions up to a maximum of 6%
of the employee's salary. Employees are fully vested in their contributions,
while full vesting for the Company's contributions occurs upon death,
disability or completion of five years of service. Effective January 1, 1998,
the vesting period for the Company's contributions occurs upon death,
disability or completion of one year of service. Company contributions were
$14,432, $29,301, $6,001, and $16,066 for the years ended December 31, 1996
and 1997, and the quarters ended March 31, 1997 and 1998, respectively. The
plan's trustees are members of the management of the Company.
11. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT:
As of December 31, 1997 and March 31, 1998, the Company had 5,000,000
authorized shares of $.01 par value Preferred Stock of which 606,060,
1,038,005 and 1,882,353 were designated issued and outstanding as Class A
Convertible Preferred Stock ("Class A Preferred"), Class B Convertible
Preferred Stock ("Class B Preferred") and Redeemable Class C Convertible
Preferred Stock ("Class C Preferred"), respectively.
The holders of the Class A Preferred and Class B Preferred have full voting
rights and powers and shall receive dividends at the same rate as the holders
of the Common Stock, when and if declared. The holders of the Class A
Preferred and Class B Preferred have the right, at any time, to convert each
share of Class A Preferred and Class B Preferred into one share of Common
Stock, subject to adjustment, as defined.
In connection with the consummation of the Offering, the Company will
exercise its right, to cause the conversion of all, but not less than all, of
the Class A Preferred and Class B Preferred then issued.
The holders of the Class C Preferred have full voting rights and powers. The
holders of the Class C Preferred have the right, at any time, to convert each
share of Class C Stock into one share of Common Stock, subject to adjustment,
as defined.
Beginning April 1, 2004 the Class C Preferred are redeemable at the option
of a majority of the holders at $4.25 per share plus accrued but unpaid
dividends, if any. Because the redemption is outside of the Company's control,
the Class C Preferred have been classified outside of shareholders' equity in
the accompanying balance sheets. Class C Preferred are being accreted to their
redemption values for accounting purposes. The holders of Class C Preferred
are entitled to receive cumulative dividends of 8% per share per year, when
and if declared by the Company; provided, however, that no dividends may be
declared or paid on Common Stock unless all cumulative dividends have been
declared and paid on the Preferred Stock. The Class C Preferred have
liquidation preferences equal to $4.25 per share plus any accrued and unpaid
dividends. The holders of the Class C Preferred have agreed to convert their
shares into Common Stock upon the consummation of the Offering.
F-13
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Common Stock
In 1995 and 1996, the Company sold 72,880 and 48,615 units, consisting of
five shares of Common Stock and one Class A Common Stock purchase warrant, for
$21.25 per unit, raising net proceeds of $1,519,874 and $1,010,355,
respectively.
In 1996 and 1997, the Company sold 828,357 and 533,685 shares of Common
Stock for $4.25 per share, raising net proceeds of $3,436,462 and $2,255,694,
respectively.
Stock Options
The Company has Stock option plans that provide for both incentive and
nonqualified Stock options to be granted to key employees, consultants and
advisors. Options must have exercise prices equal to or greater than the fair
market value of the Common Stock on the date of grant. The options remain
exercisable for a maximum period of ten years. As of December 31, 1997, there
were 170,856 options available for grant under the plans and 675,444
exercisable outstanding options with a weighted average exercise price of
$2.83 per share. For options outstanding, the weighted average exercise price
per share is $3.29 with a weighted average remaining contractual life of
approximately eight and one-half years. Summary Stock option information is as
follows:
<TABLE>
<CAPTION>
PRICE AGGREGATE
NUMBER RANGE PRICE
--------- ---------- ----------
<S> <C> <C> <C>
Outstanding, December 31, 1994............. 307,232 $1.00-2.75 $ 438,854
Granted.................................. 151,012 2.75-4.25 428,033
Canceled................................. (12,500) 2.75 (34,375)
--------- ---------- ----------
Outstanding, December 31, 1995............. 445,744 1.00-4.25 832,512
Granted.................................. 240,900 2.75-4.25 881,425
Canceled................................. (50,500) 1.00-4.25 (55,250)
--------- ---------- ----------
Outstanding, December 31, 1996............. 636,144 1.00-4.25 1,658,687
Granted.................................. 460,000 4.25 1,955,000
Canceled................................. (17,000) 3.50-4.25 (64,000)
--------- ---------- ----------
Outstanding, December 31, 1997............. 1,079,144 1.00-4.25 3,549,687
Granted.................................. 42,250 4.25 179,563
Canceled................................. (7,800) 4.25 (33,150)
--------- ---------- ----------
Outstanding, March 31, 1998................ 1,113,594 $1.00-4.25 $3,696,100
========= ========== ==========
</TABLE>
Outstanding and vested options as of December 31, 1997, include 66,000
options held by three former employees. When these employees left the Company,
the Company increased the period during which the employees could exercise
their then vested options to extend beyond the normal 90 days following
termination of employment. For accounting purposes, this created a new
measurement date for the options and, therefore, the Company charged to
expense $211,000 related to the differences between the exercise prices of
these options and the fair value of the Company's Common Stock at the dates
the extensions were granted. Such amount is included in issuances of Common
Stock options for services on the Statement of Redeemable Convertible
Preferred Stock and Stockholders' Deficit.
F-14
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company applies Accounting Principal Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB #25") and the related interpretations in
accounting for its Stock option plans. Under APB #25, compensation cost
related to stock options is computed based on the intrinsic value of the stock
option at the date of grant, which represents the difference between the
exercise price and the fair value of the Company's Common Stock. Under
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," compensation cost related to stock options is
computed based on the value of the stock option at the date of grant using an
option valuation methodology, typically the Black-Scholes model. SFAS No. 123
can be applied either by recording the Black-Scholes model value of the
options or by continuing to record the APB #25 value and by disclosing SFAS
No. 123 information on a pro forma basis. The disclosure requirement of No.
123, "Accounting for Stock-Based Compensation," has been applied by the
Company. Had compensation cost for the Company's Common Stock option plan been
determined under SFAS No. 123, the Company's net loss and net loss per common
share would have been adjusted to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss applicable to common
shareholders:
As reported......................... $3,336,050 $6,439,953 $8,092,434
Pro forma........................... 3,360,494 6,519,456 8,499,187
Net loss per common share:
As reported......................... $ (1.04) $ (1.60) $ (1.60)
Pro forma........................... (1.05) (1.62) (1.69)
</TABLE>
The weighted average fair value of the options granted during 1995, 1996
and 1997 is estimated as $0.87, $1.14 and $1.46 per share, respectively, on
the date of grant using the Black-Scholes option pricing model with the
following assumptions: dividend yield of zero, volatility of zero, risk-free
interest rate at 6.48%, 6.12% and 7.0% during 1995, 1996 and 1997,
respectively, and an expected life of six years. Because the SFAS No. 123
method of accounting is not required to be applied to options granted prior to
January 1, 1995, the resulting pro forma compensation charge may not be
representative of that to be expected in the future years to the extent that
additional stock options are granted and the fair value of the Common Stock
increases.
12. INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected tax consequences of events that have been recognized in the Company's
financial statements or tax returns.
The components of income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current............................... $ -- $ -- $ --
Deferred.............................. (1,240,425) (2,253,984) (2,627,448)
----------- ----------- -----------
(1,240,425) (2,253,984) (2,627,448)
Valuation allowance................... 1,240,425 2,253,984 2,627,448
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
The difference between the Company's federal statutory income tax rate and
its effective income tax rate is primarily due to state income taxes and the
valuation allowance.
F-15
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Components of the Company's deferred tax asset as of December 31, 1996 and
1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets--
Net operating loss carryforwards.. $ 1,280,187 $ 2,840,596 $ 4,613,154
Accrued expenses not currently
deductible....................... 113,009 185,899 388,806
Research, patent and
organizational costs capitalized
for tax purposes................. 1,064,690 1,685,375 2,337,357
----------- ----------- -----------
2,457,886 4,711,870 7,339,317
Valuation allowance................. (2,457,886) (4,711,870) (7,339,317)
----------- ----------- -----------
Net deferred tax asset.............. $ -- $ -- $ --
=========== =========== ===========
</TABLE>
SFAS No. 109 requires that deferred tax assets and liabilities be recorded
without consideration as to their realizability. The portion of any deferred
tax asset for which it is more likely than not that a tax benefit will not be
realized must then be offset by recording a valuation allowance against the
asset. A valuation allowance has been established against all of the Company's
deferred tax assets since the realization of the deferred tax asset is not
assured given the Company's history of operating losses. The Company's
deferred tax asset includes the cumulative temporary difference related to
certain research, patent and organizational costs which have been charged to
expense in the accompanying statement of operations but have been recorded as
assets for the Company's federal tax returns. These tax assets are amortized
over periods generally ranging from five to 20 years for federal tax purposes.
As of December 31, 1997, the Company had approximately $13,180,000 of
federal net operating loss carryforwards, which begin to expire in 2008. The
Company's annual utilization of its net operating loss carryforwards will be
limited pursuant to the Tax Reform Act of 1986, since a cumulative change in
ownership over a three year period of more than 50% occurred as a result of
the cumulative issuance of the Company's Common Stock and Common Stock
equivalents. The Company believes, however, that such limitation will not have
a material impact on the ultimate utilization of its carryforwards.
The federal net operating loss carryforwards are scheduled to expire
approximately as follows:
<TABLE>
<S> <C>
2008............................................................. $ 8,000
2009............................................................. 491,000
2010............................................................. 2,976,000
2011............................................................. 4,492,000
2012............................................................. 5,213,000
-----------
$13,180,000
===========
</TABLE>
13. COMMITMENTS AND CONTINGENCIES:
The Company leases office space and equipment under noncancelable operating
leases. For the years ended December 31, 1995, 1996 and 1997, and the quarters
ended March 31, 1997 and 1998, lease expense was $103,657, $149,926, $164,384,
$49,979, and $60,402, respectively. At December 31, 1997, future minimum
rental payments under operating leases are as follows:
<TABLE>
<S> <C>
1998................................................................ $178,003
1999................................................................ 158,786
2000................................................................ 142,619
2001................................................................ 50,025
--------
$529,433
========
</TABLE>
The Company has employment and severance agreements with three officers, the
terms of which range from two to three years. The agreements provide for
minimum salary levels, adjusted annually at the discretion of the Board of
Directors. The aggregate minimum salary for these employees in 1998 is
$530,000 exclusive of bonuses.
F-16
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. LITIGATION:
In May 1996, a complaint was filed in the U.S. District Court for the
Northern District of Florida by the University of Florida Research Foundation,
Inc., U.S. Biomaterials Corporation and Block Drug Corporation (the
"Plaintiffs") against the Company, a distributor of the Company's BIOGRAN
product and the Company's Chairman. This action charged the defendants with
infringement of U.S. Patent No. 4,851,046 (the "046 Patent"), said to be
assigned to the University of Florida Research Foundation and said to be
exclusively licensed to U.S. Biomaterials Corporation. In April 1998, the
court granted the Company's summary judgment motion stating that the Company's
BIOGRAN product does not infringe this patent. The complaint also alleges
false representation, unfair competition, false advertising and trade
disparagement under federal and Florida state law, and no ruling has been
rendered with respect to these allegations.
On July 23, 1994, U.S. Biomaterials Corporation filed with the U.S. Patent
and Trademark Office a Request for Reexamination of U.S. Patent No. 5,204,106,
assigned to FBFC (the "FBFC Patent"), of which the Company is the exclusive
licensee. The 046 Patent was the sole reference in the Request for
Reexamination. The Company filed a response in this proceeding on behalf of
FBFC, establishing that the claims of the FBFC Patent were properly allowed.
As a result, a Certificate of Reexamination was issued by the U.S. Patent and
Trademark Office confirming the patentability of all claims of the FBFC Patent
without amendment.
A nullification proceeding has been instituted by U.S. Biomaterials
Corporation against the European counterpart to the FBFC Patent. The
opposition division of the European Patent Office tentatively decided in the
Company's favor, but the matter is still proceeding.
The Company believes that all claims of the FBFC Patent are valid, as
confirmed by the Certificate of Reexamination issued by the U.S. Patent and
Trademark Office. The Company intends to vigorously contest any contrary
allegations. The Company believes that the allegations of false description,
false representation, unfair competition, false advertising and trade
disparagement under federal and Florida state law are without merit and plans
to vigorously contest them.
As of March 31, 1998, the Company has accrued $635,000 for the estimated
future cost of defending this litigation.
F-17
<PAGE>
GLOSSARY OF TERMS
CE MARK International symbol of adherence to quality
assurance standards and compliance with applicable
European medical device directives.
CPE FDA Certificate of Product for Export.
FDA U.S. Food and Drug Administration.
FDAMA U.S. Food and Drug Administration Modernization Act.
FFD&C ACT U.S. Federal Food Drug and Cosmetic Act.
510(K) Pre-market notification providing market clearance
obtained from the FDA.
FORM S-3 A form that can be used to register securities in the
U.S. and may generally only be used by registrants
who have been registered under the Securities and
Exchange Act of 1934 for at least one year and have
timely filed all required reports under such Act.
FORM S-8 A form that is used to register securities in the
U.S. underlying employee benefit plans, such as the
Company's Stock Option Plans and Employee Stock
Purchase Plan.
401(K) A U.S. plan that permits an employee to contribute a
portion of his salary to a tax deferred retirement
plan. The employee is not taxed on the amount he
elects to contribute to the plan.
GMP Good Manufacturing Practices, U.S. FDA regulatory
requirements to ensure manufacturing quality.
HCFA U.S. Health Care Financing Administration, the
administrator of the U.S. Medicare and Medicaid
programs.
IDE Investigation Device Exemption
INCENTIVE STOCK OPTIONS An incentive stock option (or "ISO") gives the option
holder the legally enforceable right (an "option") to
purchase shares of stock at some time in the future
at a specified price. If certain requirements are
met, the exercise of the option will not result in
U.S. taxable income to the option holder.
IRB Institutional Review Board.
ISO 9000 SERIES STANDARDS Internationally accepted quality and compliance
standards developed by the International Standards
Organization.
MDD European Union Medical Devices Directive.
MHW Japanese Ministry of Health and Welfare.
NONQUALIFIED STOCK OPTIONS An option which does not qualify for any special U.S.
tax treatment.
PMA Premarket Approval Application, a procedure whereby
premarket approval is obtained from the FDA.
PMMA Polymethylmethacrylate, a cement product used in
approximately 65% of joint implant procedures.
RESTRICTED STOCK Shares of stock that are issued subject to certain
restrictions. During the period for which
restrictions apply, the holder may not sell, assign,
transfer, pledge or otherwise dispose of the shares.
RULE 144 A rule promulgated under the U.S. Securities Act of
1933 that, subject to certain conditions, allows for
the resale of restricted securities.
SARS An SAR or "stock appreciation right" gives the holder
the right to share in the appreciation of stock over
the base amount of the SAR (generally the fair market
value on the date of the grant). Upon the exercise of
an SAR, the holder receives the value of the stock
appreciation.
GLOSS-1
<PAGE>
<TABLE>
<S> <C>
Appearing here is a picture of a Appearing here is a picture of a
prosthetic tooth being anchored joint implant site filled with the
into an implant site using the Company's Orthocomp cement product
Company's Orthocomp product, including the following
including the following description: "Joint Cement:
description: "Dental Implant Orthocomp bonds hip and knee
Cement: The implant is anchored implants to bone with superior
into Orthocomp, and may mechanical and bioactive
dramatically reduce the time properties."
needed for the restoration
process."
Appearing here is a picture of a Appearing here is a picture of a
fractured bone being repaired with failed spinal bone being filled by
a plate and screws anchored using either the Company's Orthocomp or
the Company's Orthocomp product, Vitagraft product, including the
including the following following description
description: "Screw Augmentation: "Vertebroplasty: Orthocomp or
Orthocomp locks stripped screws in Vitagraft is injected into the
place, restoring plate function." failed spinal bone, relieving pain
in osteoporotic patients."
Appearing here is text noting the Appearing here is a picture of the
following:"Of the depicted Company's Biogran product placed
indications, the Company has only into a dental bone void, including
received regulatory approval for the following description: "Dental
BIOGRAN in certain dental surgical Surgery: Biogran is placed into a
applications." bone void (caused by disease or
extraction) as a grafted material.
The Biogran regenerates bone in
about six months and rebsorbs into
the body."
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. 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
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Experts.................................................................. 4
Additional Information................................................... 4
Prospectus Summary....................................................... 5
Risk Factors............................................................. 7
Recent Developments...................................................... 15
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 26
Management............................................................... 38
Certain Relationships and Related Transactions........................... 46
Principal and Selling Shareholders....................................... 47
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 52
Easdaq Settlement and Clearance.......................................... 53
Income Tax Considerations................................................ 54
Offering and Subscription................................................ 58
Underwriting............................................................. 59
Legal Matters............................................................ 60
Index to Financial Statements............................................ F-1
Glossary of Terms....................................................... GLOSS-1
</TABLE>
----------------
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 SHARES
[LOGO OF ORTHOVITA]
COMMON STOCK
----------------
PROSPECTUS
----------------
QUARTZ CAPITAL
PARTNERS LIMITED
ARTESIA BANK N.V.
BANK BRUSSELS LAMBERT
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses, other than
underwriting discounts and commissions, in connection with the issuance and
distribution of the shares of Common Stock being registered, all of which are
being borne by the Company:
<TABLE>
<S> <C>
Registration fee................................................. $ 7,464
Transfer agent and registrar fees................................ 25,000
Printing and engraving........................................... 150,000
Legal fees....................................................... 250,000
Blue Sky fees and expenses....................................... 5,000
EASDAQ listing fee............................................... 80,000
Accounting fees.................................................. 200,000
Miscellaneous.................................................... 82,536
--------
Total.......................................................... $800,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's bylaws require the Registrant to indemnify any person who
was or is a party or is threatened to be made a party to or is otherwise
involved in any threatened, pending or completed action, suit or proceeding by
reason of the fact that he or she is or was a director or officer of the
Registrant or is or was serving in any capacity at the request of the
Registrant as a director, officer, employee, agent, partner, or fiduciary of,
or in any other capacity for, another corporation or any partnership, joint
venture, trust, employee benefit plan or other enterprise, in each case, to
the fullest extent permitted by Pennsylvania law, against all expense,
liability and loss (including, without limitation, attorney's fees, judgments,
fines, taxes, penalties, and amounts paid or to be paid in settlement)
reasonably incurred, except where such indemnification is expressly prohibited
by applicable law, where such person has engaged in willful misconduct or
recklessness or where such indemnification has been determined to be unlawful.
Such indemnification as to expenses is mandatory to the extent the individual
is successful on the merits of the matter. Pennsylvania law permits the
Registrant to provide similar indemnification to employees and agents who are
not directors or officers. The determination of whether an individual meets
the applicable standard of conduct may be made by the disinterested directors,
independent legal counsel or the shareholders. Pennsylvania law also permits
indemnification in connection with a proceeding brought by or in the right of
the Registrant to procure a judgment in its favor. Insofar as indemnification
for liabilities arising under the Securities 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
that Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since April 1995, the Company has issued and sold the following unregistered
securities:
1. In December 1995 the Registrant completed the sale of 72,880 units
("Series A Units") to a group of accredited investors consisting of five
shares of common stock and warrant to purchase one share of common stock
for $21.25 per Series A Unit or $1.5 million in the aggregate.
2. In 1996, the Registrant completed the sale of 48,615 Series A Units to
a group of accredited investors for $21.25 per Series A Unit or $1.1
million in the aggregate.
3. In March 1997, the Registrant completed the sale of 1,373,542 shares
of common stock to a group of accredited investors for $4.25 per share or
$5.8 million in the aggregate.
4. In April 1997, the Registrant sold 1,882,353 shares of Class C
Convertible Preferred Stock to three venture capital funds for $4.25 per
share or $8.0 million in the aggregate.
5. In April 1997, the Registrant issued 41,705 shares of common stock to
the University of Pennsylvania as partial consideration for an exclusive,
worldwide license.
6. In June 1998, the Registrant sold 350,000 shares of Common Stock to
Howmedica Inc. for $10.00 per share or $3.5 million in the aggregate.
II-1
<PAGE>
The Company believes that the transactions described above were exempt from
registration under Section 4(2) of the Act because the subject securities were
sold to a limited group of persons, each of whom was believed to have been
either an accredited investor or a sophisticated investor or had a preexisting
business or personal relationship with the Company or its management and was
purchasing for investment without a view to further distribution. Restrictive
legends were placed on stock certificates evidencing the shares and/or
agreements relating to the right to purchase such shares described above.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The following is a list of exhibits filed as part of this Registration
Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.#
3.1 Amended and Restated Articles of Incorporation of the Company.*
3.2 Amended and Restated Bylaws of the Company.*
5.1 Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
shares of Common Stock being registered.#
10.1 Class C Convertible Preferred Stock and Warrant Purchase Agreement
dated as of April 11, 1997.*
10.2 Class A Holder Agreement dated as of April 11, 1997.*
10.3 Note and Warrant Holder Agreement dated as of April 11, 1997.*
10.4 Registration Rights Agreement dated as of April 11, 1997.*
10.5 License Agreement dated as of September 1, 1993 between the Company
and the Trustees of the University of Pennsylvania.*
10.6 Amendment A to the License Agreement between Orthovita, Inc. and the
Trustees of the University of Pennsylvania dated February 27, 1997.*
10.7 Employment Agreement dated as of December 31, 1996 between the Company
and David S. Joseph.*
10.8 Employment Agreement dated as of July 1, 1997 between the Company and
Dr. Erik Erbe.*
10.9 Employment Agreement dated as of December 31, 1996 between the Company
and Samuel A. Nalbone.*
10.10 Form of Warrant dated as of April 11, 1997 issued by the Company.*
10.11 Form of Warrant dated as of April 11, 1997 issued by the Company.*
10.12 Form of Warrant dated as of April 11, 1997 issued by the Company.*
10.13 Form of Warrant dated as of April 11, 1997 issued by the Company.*
10.14 Form of Warrant dated as of April 11, 1997 issued by the Company.*
10.15 Amended and Restated 1993 Stock Option Plan.*
10.16 Amended and Restated 1997 Equity Compensation Plan.*
10.17 Line of Credit, Term Loan and Security Agreement dated as of September
19, 1997 between the Company and Progress Bank.*
10.18 Master Equipment Lease Agreement dated as of July 11, 1997 between the
Company and Finova Technology Finance, Inc.*
10.19 Amended and Restated Employee Stock Purchase Plan.*
10.20@ Global Distribution Agreement dated as of April 29, 1998 between the
Company and Implant Innovations, Inc.*
10.21@ License and Development Agreement dated as of June 9, 1998 between the
Company and Howmedica, Inc.*
10.22@ Supply Agreement dated as of June 9, 1998 between the Company and
Howmedica, Inc.*
10.23 Stock Purchase Agreement dated as of June 9, 1998 between the Company
and Howmedica, Inc.*
10.24 Biomedical Materials Agreement dated as of July 29, 1992 between the
Company and FBFC, International.*
10.25 Form of Subscription Agreement.*
10.26 Amendment to Stockholders' Agreement among the Company and certain
shareholders.#
23.1 Consent of Arthur Andersen LLP.#
23.2 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
as Exhibit 5 hereto).
24.1 Power of Attorney (included in the signature page).*
27.1 Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
** To be filed by Amendment.
# Filed herewith.
@ Confidential Treatment Requested.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
(i) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(ii) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(iii) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
MALVERN, PENNSYLVANIA ON JUNE 23, 1998.
Orthovita, Inc.
/s/ David S. Joseph
By: _________________________________
DAVID S. JOSEPH,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES LISTED BELOW.
NAME CAPACITY DATE
/s/ David S. Joseph Chief Executive Officer,
_________________________________ President and Director June 23, 1998
DAVID S. JOSEPH (principal executive
officer)
/s/ Joseph M. Paiva Vice President and Chief
_________________________________ Financial Officer (principal June 23, 1998
JOSEPH M. PAIVA financial and accounting
officer)
* Chairman of the Board
_________________________________ June 23, 1998
PAUL DUCHEYNE, PH.D.
* Director
_________________________________ June 23, 1998
HOWARD SALASIN
* Director
_________________________________ June 23, 1998
RICHARD M. HOROWITZ, ESQ.
* Director
_________________________________ June 23, 1998
JAMES M. GARVEY
* Director
_________________________________ June 23, 1998
JOSEPH B. PEETERS, PH.D.
* Director
_________________________________ June 23, 1998
LEW BENNETT
/s/ David S. Joseph*
By___________________________________
Attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.#
3.1 Amended and Restated Articles of Incorporation of the Company.*
3.2 Amended and Restated Bylaws of the Company.*
5.1 Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
shares of Common Stock being registered.#
10.1 Class C Convertible Preferred Stock and Warrant Purchase Agreement
dated as of April 11, 1997.*
10.2 Class A Holder Agreement dated as of April 11, 1997.*
10.3 Note and Warrant Holder Agreement dated as of April 11, 1997.*
10.4 Registration Rights Agreement dated as of April 11, 1997.*
10.5 License Agreement dated as of September 1, 1993 between the Company
and the Trustees of the University of Pennsylvania.*
10.6 Amendment A to the License Agreement between Orthovita, Inc. and the
Trustees of the University of Pennsylvania dated February 27, 1997.*
10.7 Employment Agreement dated as of December 31, 1996 between the Company
and David S. Joseph.*
10.8 Employment Agreement dated as of July 1, 1997 between the Company and
Dr. Erik Erbe.*
10.9 Employment Agreement dated as of December 31, 1996 between the Company
and Samuel A. Nalbone.*
10.10 Form of Warrant dated as of April 11, 1997 issued by the Company.*
10.11 Form of Warrant dated as of April 11, 1997 issued by the Company.*
10.12 Form of Warrant dated as of April 11, 1997 issued by the Company.*
10.13 Form of Warrant dated as of April 11, 1997 issued by the Company.*
10.14 Form of Warrant dated as of April 11, 1997 issued by the Company.*
10.15 Amended and Restated 1993 Stock Option Plan.*
10.16 Amended and Restated 1997 Equity Compensation Plan.*
10.17 Line of Credit, Term Loan and Security Agreement dated as of September
19, 1997 between the Company and Progress Bank.*
10.18 Master Equipment Lease Agreement dated as of July 11, 1997 between the
Company and Finova Technology Finance, Inc.*
10.19 Amended and Restated Employee Stock Purchase Plan.*
10.20@ Global Distribution Agreement dated as of April 29, 1998 between the
Company and Implant Innovations, Inc.*
10.21@ License and Development Agreement dated as of June 9, 1998 between the
Company and Howmedica, Inc.*
10.22@ Supply Agreement dated as of June 9, 1998 between the Company and
Howmedica, Inc.*
10.23 Stock Purchase Agreement dated as of June 9, 1998 between the Company
and Howmedica, Inc.*
10.24 Biomedical Materials Agreement dated as of July 29, 1992 between the
Company and FBFC, International.*
10.25 Form of Subscription Agreement.*
10.26 Amendment to Stockholders' Agreement among the Company and certain
shareholders.#
23.1 Consent of Arthur Andersen LLP.#
23.2 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
as Exhibit 5 hereto).
24.1 Power of Attorney (included in the signature page).*
27.1 Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
** To be filed by Amendment.
# Filed herewith.
@ Confidential Treatment Requested.
II-5
<PAGE>
Exhibit 1.1
2,000,000 SHARES
COMMON STOCK
ORTHOVITA, INC.
UNDERWRITING AGREEMENT
DATED JUNE __, 1998
<PAGE>
TABLE OF CONTENTS
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY2
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY2
(a) Compliance with Registration Requirements2
(b) Offering Materials Furnished to Underwriters3
(c) Distribution of Offering Material By the Company3
(d) The Underwriting Agreement3
(e) Authorization of the Common Shares3
(f) No Applicable Registration or Other Similar Rights3
(g) No Material Adverse Change3
(h) Independent Accountants4
(i) Preparation of the Financial Statements4
(j) Incorporation and Good Standing of the Company and its Subsidiaries4
(k) Capitalization and Other Capital Stock Matters4
(l) Stock Listing5
(m) Non-Contravention of Existing Instruments; No Further Authorizations or
Approvals Required5
(n) No Material Actions or Proceedings5
(o) Intellectual Property Rights6
(p) All Necessary Permits, etc6
(q) Title to Properties6
<PAGE>
(r) Tax Law Compliance6
(t) Insurance6
(u) No Price Stabilization or Manipulation7
(v) Related Party Transactions7
(w) No Unlawful Contributions or Other Payments7
(x) Company's Accounting System7
(y) Compliance with Environmental Laws7
(z) ERISA Compliance8
(aa) EASD/NASD Associations8
B. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS8
(a) The Underwriting Agreement8
(b) The Custody Agreement and Power of Attorney9
(c) Title to Common Shares to be Sold; All Authorizations Obtained9
(d) Delivery of the Common Shares to be Sold9
(e) Non-Contravention; No Further Authorizations or Approvals Required9
(f) No Registration or Other Similar Rights9
(g) No Further Consents, etc10
(h) Disclosure Made by Such Selling Shareholder in the Prospectus10
(i) No Price Stabilization or Manipulation10
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES10
<PAGE>
(a) The Firm Common Shares10
(b) The First Closing Date10
(c) The Optional Common Shares; the Second Closing Date11
(d) Payment for the Common Shares11
(e) Delivery of the Common Shares12
(f) Delivery of Prospectus to the Underwriters12
SECTION 3. COVENANTS12
A. COVENANTS OF THE COMPANY.12
(a) Approval by Regulators12
(b) Representative Review of Proposed Amendments and Supplements12
(c) Regulatory Compliance13
(d) Amendments and Supplements to the Prospectus and Other Matters13
(e) Copies of any Amendments and Supplements to the Prospectus13
(f) Use of Proceeds13
(g) Transfer Agent13
(h) Earnings Statement13
(j) Periodic Reporting Obligations14
(k) Agreement Not To Offer or Sell Additional Securities14
(l) Future Reports to the Representative14
(m) EASDAQ14
<PAGE>
B. COVENANTS OF THE SELLING SHAREHOLDERS14
(a) Agreement Not to Offer or Sell Additional Securities15
(b) Delivery of Forms W-8 and W-915
SECTION 4. PAYMENT OF EXPENSES15
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS16
(a) Accountants' Comfort Letter16
(b) Compliance with Registration Requirements; No Stop Order; Approval of
Prospectus16
(c) No Material Adverse Change or Ratings Agency Change17
(d) Opinion of Counsel for the Company17
(e) Opinion of Counsel for the Underwriters17
(f) Officers' Certificate17
(g) Bring-down Comfort Letter17
(h) Selling Shareholders' Certificate18
(i) Selling Shareholders' Documents18
(j) Lock-Up Agreement from Certain Shareholders of the Company Other Than
Selling Shareholders18
(k) Additional Documents18
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES18
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT19
<PAGE>
SECTION 8. INDEMNIFICATION19
(a) Indemnification of the Underwriters19
(b) Indemnification of the Company, its Directors and Officers20
(c) Notifications and Other Indemnification Procedures21
(d) Settlements21
SECTION 9. CONTRIBUTION.22
SECTION 11. TERMINATION OF THIS AGREEMENT23
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY23
SECTION 13 NOTICES23
SECTION 14. SUCCESSORS24
SECTION 15. PARTIAL UNENFORCEABILITY24
SECTION 16. GOVERNING LAW PROVISIONS25
SECTION 17. FAILURE OF ONE OR MORE OF THE SELLING SHAREHOLDERS TO SELL AND
DELIVER COMMON SHARES25
SECTION 18. GENERAL PROVISIONS25
<PAGE>
SCHEDULE A - UNDERWRITERS27
SCHEDULE B-SELLING SHAREHOLDERS28
EXHIBIT A-LEGAL OPINION OF ISSUER'S COUNSELA-1
EXHIBIT B-FORM OF LOCK-UP LETTERB-1
<PAGE>
UNDERWRITING AGREEMENT
June __, 1998
QUARTZ CAPITAL PARTNERS LIMITED
As Representative of the several Underwriters
74 Brook Street
London W1Y 1YD
Ladies and Gentlemen:
INTRODUCTORY. Orthovita, Inc., a Pennsylvania corporation (the "Company),
proposes to issue and sell to the several underwriters named in Schedule A (the
----------
"Underwriters") an aggregate of 1,500,000 shares of its Common Stock, par value
$.01 per share (the "Common Stock"); and the shareholders of the Company named
in Schedule B (collectively, the "Selling Shareholders") severally propose to
----------
sell to the Underwriters an aggregate of 500,000 shares of Common Stock. The
1,500,000 shares of Common Stock to be sold by the Company and the 500,000
shares of Common Stock to be sold by the Selling Shareholders are collectively
called the "Firm Common Shares". In addition, the Company has granted to the
Underwriters an option to purchase up to an additional 300,000 shares (the
"Optional Common Shares") of Common Stock, as provided in Section 2. The Firm
Common Shares and, if and to the extent such option is exercised, the Optional
Common Shares are collectively called the "Common Shares". Quartz Capital
Partners Limited has agreed to act as representative of the several Underwriters
(in such capacity, the "Representative") in connection with the offering and
sale of the Common Shares.
The Company has prepared and filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (File No. 333-51689),
which contains a form of prospectus to be used in connection with the public
offering and sale of the Common Shares. Such registration statement, as
amended, including the exhibits and schedules thereto, in the form in which it
was declared effective by the Commission under the Securities Act of 1933 and
the rules and regulations promulgated thereunder (collectively, the "Securities
Act"), including any information deemed to be a part thereof at the time of
effectiveness pursuant to Rule 430A under the Securities Act, is called the
"Registration Statement". Any registration statement filed by the Company
pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b)
Registration Statement", and from and after the date and time of filing of the
Rule 462(b) Registration Statement the term "Registration Statement" shall
include the Rule 462(b)
1
<PAGE>
Registration Statement. Such prospectus, in the form first used by the
Underwriters to confirm sales of the Common Shares, is called the "Prospectus".
All references in this Agreement to the Registration Statement, the Rule 462(b)
Registration Statement, a preliminary prospectus, or the Prospectus or the Term
Sheet, or any amendments or supplements to any of the foregoing, shall include
any copy thereof filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR").
In addition, the Company has caused copies of the registration statement and
each amendment thereto and each prospectus included in such registration
statement or amendment to be filed with the Market Authority of the European
Association of Securities Dealers Automated Quotation market for financial
instruments ("EASDAQ") and the Banking and Finance Commission of the Kingdom of
Belgium ("CBF").
The Company and each of the Selling Shareholders hereby confirms their
respective agreements with the Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Regulatory Requirements. The Registration Statement and
any Rule 462(b) Registration Statement have been declared effective by the
Commission under the Securities Act. The Company has complied to the
Commission's satisfaction with all requests of the Commission for additional or
supplemental information. The Company's EASDAQ Admission Application has been
approved by the EASDAQ Market Authority. The Prospectus has been approved by
the EASDAQ Market Authority and the CBF. The Company has received no notice of
any stop order by the Commission suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement which is in
effect, or any equivalent action or trading halt by the EASDAQ Market Authority
or CBF, and no proceedings for such purpose have been instituted or are pending
or, to the best knowledge of the Company, are contemplated or threatened by the
Commission, EASDAQ Market Authority, or CBF.
The preliminary prospectus filed with Amendment No. 1 to the Registration
Statement on May 28, 1998 (the "Preliminary Prospectus") and the Preliminary
Prospectus as supplemented by the Supplement to the Prospectus dated June 12,
1998 (the "Prospectus Supplement") and the Prospectus, when filed, complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Common Shares.
Each of the Registration Statement, any Rule 462(b) Registration Statement and
any post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not
2
<PAGE>
misleading. The Prospectus, as amended or supplemented, as of its date and at
all subsequent times, did not and will not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The representations and warranties set forth in the two
immediately preceding sentences do not apply to statements in or omissions from
the Registration Statement, any Rule 462(b) Registration Statement, or any post-
effective amendment thereto, or the Prospectus, or any amendments or supplements
thereto, made in reliance upon and in conformity with information relating to
any Underwriter furnished to the Company in writing by the Representative,
expressly for use therein. There are no contracts or other documents required
under the Securities Act to be described in the Prospectus or to be filed as
exhibits to the Registration Statement which have not been described or filed as
required. The Prospectus, on the date hereof, complies in all material respects
with the provisions of Belgian law and the rules and regulations of the CBF and
EASDAQ.
(b) Offering Materials Furnished to Underwriters. The Company has delivered
to the Representative one complete manually signed copy of the Registration
Statement and of each consent and certificate of experts filed as a part
thereof, and conformed copies of the Registration Statement (without exhibits)
and preliminary prospectuses and the Prospectus, as amended or supplemented, in
such quantities and at such places as the Representative has reasonably
requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has not
distributed and will not distribute, prior to the later of the Second Closing
Date (as defined below) and the completion of the Underwriters' distribution of
the Common Shares, any offering material in connection with the offering and
sale of the Common Shares other than the Preliminary Prospectus, the Prospectus
Supplement, the Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be purchased by
the Underwriters from the Company have been duly authorized for issuance and
sale pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no persons
with registration or other similar rights to have any equity or debt securities
registered for sale under the Registration Statement or included in the offering
contemplated by this Agreement, other than the Selling Shareholders with respect
to the Common Shares included in the Registration Statement, except for such
rights as have been duly waived.
3
<PAGE>
(g) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is given
in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings, business,
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company and its subsidiaries, considered as
one entity (any such change is called a "Material Adverse Change"); (ii) the
Company and its subsidiaries, considered as one entity, have not incurred any
material liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; and (iii) there has been no
dividend or distribution of any kind declared, paid or made by the Company or,
except for dividends paid to the Company or other subsidiaries, any of its
subsidiaries on any class of capital stock or repurchase or redemption by the
Company or any of its subsidiaries of any class of capital stock.
(h) Independent Accountants. Arthur Anderson LLP who have expressed their
opinion with respect to the financial statements (which term as used in this
Agreement includes the related notes thereto) filed with the Commission as a
part of the Registration Statement and included in the Prospectus, are
independent public or certified public accountants as required by the Securities
Act.
(i) Preparation of the Financial Statements. The financial statements filed
with the Commission as a part of the Registration Statement and included in the
Prospectus present fairly, on the basis stated in the Registration Statement,
the financial position of the Company as of and at the dates indicated and the
results of their operations and cash flows for the periods specified. Such
financial statements have been prepared in conformity with generally accepted
accounting principles as applied in the United States applied on a consistent
basis throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules
are required under GAAP or the Securities Act to be included in the Registration
Statement. The financial data set forth in the Prospectus under the captions
"Prospectus Summary--Summary Financial Information", "Selected Financial Data"
and "Capitalization" fairly present the information set forth therein on a basis
consistent with that of the audited financial statements contained in the
Registration Statement.
(j) Incorporation and Good Standing of the Company and its Subsidiaries. The
Company has been duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation and has
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and, in the case of the
Company, to enter into and perform its obligations under this Agreement. The
Company has no facilities, employees or inventories in any other state which
would require it to qualify to do business in that state. The Company is duly
qualified as a foreign corporation to transact business and is in good standing
in each jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business, except for
such jurisdictions where the failure to so qualify or to be in good standing
would not, individually or in the
4
<PAGE>
aggregate, result in a Material Adverse Change. The Company does not own or
control, directly or indirectly, any corporation, association or other entity.
(k) Capitalization and Other Capital Stock Matters. The authorized, issued
and outstanding capital stock of the Company is as set forth in the Prospectus
under the caption "Description of Capital Stock" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Stock (including the Common Shares) conforms in all
material respects to the description thereof contained in the Prospectus. All
of the issued and outstanding shares of Common Stock (including the shares of
Common Stock owned by Selling Shareholders) have been duly authorized and
validly issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
shares of Common Stock were issued in violation of any preemptive rights, rights
of first refusal or other similar rights to subscribe for or purchase securities
of the Company. There are no authorized or outstanding options, warrants,
preemptive rights, rights of first refusal or other rights to purchase, or
equity or debt securities convertible into or exchangeable or exercisable for,
any capital stock of the Company or any of its subsidiaries other than those
listed in the Prospectus. The stock ledger of the Company delivered to the
Representative accurately lists the record owners of the capital stock, and the
Company has received no notice of any transfer of stock or lien or encumbrance
on any such stock owned by a Selling Stockholder not reflected thereon. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted thereunder, set forth in
the Prospectus accurately and fairly presents in all material respects the
information required to be shown with respect to such plans, arrangements,
options and rights.
(l) Stock Listing. The Common Shares have been admitted to trading on
EASDAQ.
(m) Non-Contravention of Existing Instruments; No Further Authorizations or
Approvals Required. Neither the Company nor any of its subsidiaries is in
violation of its charter or by-laws or is in default (or, with the giving of
notice or lapse of time, would be in default) ("Default") under any indenture,
mortgage, loan or credit agreement, note, contract, franchise, lease or other
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of them may be bound (including, without limitation, the
Company's Credit Facility with Progress Bank, as lender), or to which any of the
property or assets of the Company or any of its subsidiaries is subject (each,
an "Existing Instrument"), except for such Defaults that have not been waived by
such bank or as would not, individually or in the aggregate, result in a
Material Adverse Change The Company's execution, delivery and performance of
this Agreement and consummation of the transactions contemplated hereby and by
the Prospectus (i) have been duly authorized by all necessary corporate action
and will not result in any violation of the provisions of the charter or by-laws
of the Company or any subsidiary, (ii) will not conflict with or constitute a
breach of, or Default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any of
its subsidiaries pursuant to, or require the consent of any other part to, any
Existing Instrument, except for such conflicts, breaches, Defaults, liens,
charges or encumbrances as would not, individually or in the aggregate,
5
<PAGE>
result in a Material Adverse Change and (iii) will not result in any
violation of any law, administrative regulation or administrative or court
decree applicable to the Company or any subsidiary. No consent, approval,
authorization or other order of, or registration or filing with, any court or
other governmental or regulatory authority or agency, is required for the
Company's execution, delivery and performance of this Agreement and consummation
of the transactions contemplated hereby and by the Prospectus, except such as
have been obtained or made by the Company and are in full force and effect under
the Securities Act, applicable state securities or blue sky laws and the
applicable rules and regulations of EASDAQ and the CBF.
(n) No Material Actions or Proceedings. Except as otherwise disclosed in the
Prospectus, there are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened (i) against or
affecting the Company or any of its subsidiaries, (ii) which has as the subject
thereof any officer or director of, or property owned or leased by, the Company
or any of its subsidiaries or (iii) relating to environmental or discrimination
matters, where in any such case (A) there is a reasonable possibility that such
action, suit or proceeding might be determined adversely to the Company or such
subsidiary and (B) any such action, suit or proceeding, if so determined
adversely, would reasonably be expected to result in a Material Adverse Change
or adversely affect the consummation of the transactions contemplated by this
Agreement. No material labor dispute with the employees of the Company or any
of its subsidiaries, or with the employees of any principal supplier of the
Company, exists or, to the best of the Company's knowledge, is threatened or
imminent.
(o) Intellectual Property Rights. The Company and its subsidiaries own or
possess sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals, trade secrets and other similar rights (collectively, "Intellectual
Property Rights") reasonably necessary to conduct their businesses as now
conducted; and the expected expiration of any of such Intellectual Property
Rights would not result in a Material Adverse Change. Except as otherwise
disclosed in the Prospectus, neither the Company nor any of its subsidiaries has
received any notice of infringement or conflict with asserted Intellectual
Property Rights of others, which infringement or conflict, if the subject of an
unfavorable decision, would result in a Material Adverse Change.
(p) All Necessary Permits, etc. Except as otherwise disclosed in the
Prospectus, the Company and each subsidiary possess such valid and current
certificates, authorizations or permits issued by the appropriate state, federal
or foreign regulatory agencies or bodies necessary to conduct their respective
businesses as presently conducted, and neither the Company nor any subsidiary
has received any notice of proceedings relating to the revocation or
modification of, or non-compliance with, any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in a Material Adverse Change.
(q) Title to Properties. The Company and each of its subsidiaries has good and
marketable title to all the properties and assets reflected as owned in the
financial statements referred to in Section 1 (A) (i) above (or elsewhere in the
Prospectus), in each case free and clear of any security interests, mortgages,
liens,
6
<PAGE>
encumbrances, equities, claims and other defects, except for the Progress
Bank security interest in substantially all of its assets and the Finova
interest as lessor in certain leased properties, and such other matters as do
not materially and adversely affect the value of such property and do not
materially interfere with the use made or proposed to be made of such property
by the Company or such subsidiary. The real property, improvements, equipment
and personal property held under lease by the Company or any subsidiary are held
under valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the Company or
such subsidiary.
(r) Tax Law Compliance. The Company and its consolidated subsidiaries have
filed all necessary federal, state and foreign income and franchise tax returns
or have properly requested extensions thereof and have paid all taxes required
to be paid by any of them and, if due and payable, any related or similar
assessment, fine or penalty levied against any of them. The Company has made
adequate charges, accruals and reserves in the applicable financial statements
referred to in Section 1 (A) (i) above in respect of all federal, state and
foreign income and franchise taxes for all periods as to which the tax liability
of the Company or any of its consolidated subsidiaries has not been finally
determined.
(s) Company Not an "Investment Company". The Company has been advised of the
rules and requirements under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Company is not, and after receipt of payment for
the Common Shares will not be, an "investment company" within the meaning of
Investment Company Act and will conduct its business in a manner so that it will
not become subject to the Investment Company Act.
(t) Insurance. Each of the Company and its subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes, and policies for employee and product liability insurance. The
Company has no reason to believe that it or any subsidiary will not be able (i)
to renew its existing insurance coverage as and when such policies expire or
(ii) to obtain comparable coverage from similar institutions as may be necessary
or appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither of the Company nor any
subsidiary has been denied any insurance coverage which it has sought or for
which it has applied.
(u) No Price Stabilization or Manipulation. Other than the grant of the
option to purchase the Optional Common Shares pursuant to Section 2(c) hereof,
the Company has not taken and will not take, directly or indirectly, any action
designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Common Shares.
7
<PAGE>
(v) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any subsidiary or any other
person required to be described in the Prospectus which have not been described
as required.
(w) No Unlawful Contributions or Other Payments. Neither the Company nor any
of its subsidiaries nor, to the best of the Company's knowledge, any employee or
agent of the Company or any subsidiary, has made any contribution or other
payment to any official of, or candidate for, any federal, state or foreign
office in violation of any law or of the character required to be disclosed in
the Prospectus.
(x) Company's Accounting System. The Company maintains a system of accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles as
applied in the United States and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(y) Compliance with Environmental Laws. Except as would not, individually or
in the aggregate, result in a Material Adverse Change (i) neither the Company
nor any of its subsidiaries is in violation of any federal, state, local or
foreign law or regulation relating to pollution or protection of human health or
the environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including without
limitation, laws and regulations relating to emissions, discharges, releases or
threatened releases of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum and petroleum products
(collectively, "Materials of Environmental Concern"), or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environment Concern (collectively,
"Environmental Laws"); and (ii) there is no claim, action or cause of action
filed with a court or governmental authority, no investigation with respect to
which the Company has received written notice, and no written notice by any
person or entity alleging potential liability for investigatory costs, cleanup
costs, governmental responses costs, natural resources damages, property
damages, personal injuries, attorneys' fees or penalties arising out of, based
on or resulting from the presence, or release into the environment, of any
Material of Environmental Concern at any location owned, leased or operated by
the Company or any of its subsidiaries, now or in the past (collectively,
"Environmental Claims"), pending or, to the best of the Company's knowledge,
threatened against the Company or any of its subsidiaries or any person or
entity whose liability for any Environmental Claim the Company or any of its
subsidiaries has retained or assumed either contractually or by operation of
law.
(z) ERISA Compliance. The Company and its subsidiaries and any "employee
benefit plan" (as defined under the Employee Retirement Income Security Act of
1974, as amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, its
8
<PAGE>
subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in
all material respects with ERISA. "ERISA Affiliate" means, with respect to the
Company or a subsidiary, any member of any group of organizations described in
Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended,
and the regulations and published interpretations thereunder (the "Code") of
which the Company or such subsidiary is a member. No "reportable event" (as
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the Company,
its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates, if such "employee benefit plan" were terminated, would have any
"amount of unfunded benefit liabilities" (as defined under ERISA). Neither the
Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit
plan" established or maintained by the Company, its subsidiaries or any of their
ERISA Affiliates that is intended to be qualified under Section 401(a) of the
Code is so qualified and nothing has occurred, whether by action or failure to
act, which would cause the loss of such qualification.
(aa) EASD/NASD Associations. To the Company's knowledge, except as set forth
in Prospectus there are no affiliations or associations between any member of
either the European Association of Securities Dealers (the "EASD") or the
National Association of Securities Dealers, Inc., (the "NASD") and any of the
Company's officers, directors or 5% or greater securityholders.
Any certificate signed by an officer of the Company and delivered to the
Representative or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company (but not of such officer in his
individual capacity) to each Underwriter as to the matters set forth therein.
B. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each Selling
Shareholder represents, warrants and covenants to each Underwriter as follows:
(a) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by or on behalf of such Selling Shareholder and is a
valid and binding agreement of such Selling Shareholder, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of the (i) Custody
Agreement signed by such Selling Shareholder and the Company, as custodian (the
"Custodian"), relating to the deposit of the Common Shares to be sold by such
Selling Shareholder (the "Custody Agreement") and (ii) Power of Attorney
appointing certain individuals named therein as such Selling Shareholder's
attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set forth therein
relating to the transactions contemplated hereby and by
9
<PAGE>
the Prospectus (the "Power of Attorney"), of such Selling Shareholder has been
duly authorized, executed and delivered by such Selling Shareholder and is a
valid and binding agreement of such Selling Shareholder, enforceable in
accordance with its terms, except as rights to indemnification thereunder may be
limited by applicable law and except as the enforcement thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(c) Title to Common Shares to be Sold; All Authorizations Obtained. Such
Selling Shareholder has, and on the First Closing Date and the Second Closing
Date (as defined below) will have, good and valid title to all of the Common
Shares which may be sold by such Selling Shareholder pursuant to this Agreement
on such date and the legal right and power, and all authorizations and approvals
required by law and under its charter or by-laws, partnership agreement, trust
agreement or other organizational documents (collectively "Organizational
Documents") to the extent that such selling Shareholder's other than an
individual to enter into this Agreement and its Custody Agreement and Power of
Attorney, to sell, transfer and deliver all of the Common Shares which may be
sold by such Selling Shareholder pursuant to this Agreement and to comply with
its other obligations hereunder and thereunder.
(d) Delivery of the Common Shares to be Sold. Delivery of the Common Shares
which are sold by such Selling Shareholder pursuant to this Agreement will pass
good and valid title to such Common Shares, free and clear of any security
interest, mortgage, pledge, lien, encumbrance or other claim.
(e) Non-Contravention; No Further Authorizations or Approvals Required. The
execution and delivery by such Selling Shareholder of, and the performance by
such Selling Shareholder of its obligations under, this Agreement, the Custody
Agreement and the Power of Attorney will not contravene or conflict with, result
in a breach of, or constitute a Default under, or require the consent of any
other party to, the Organizational Documents of such Selling Shareholder if
applicable, or any other agreement or instrument to which such Selling
Shareholder is a party or by which it is bound or under which it is entitled to
any right or benefit, any provision of applicable law or any judgment, order,
decree or regulation applicable to such Selling Shareholder of any court,
regulatory body, administrative agency, governmental body or arbitrator having
jurisdiction over such Selling Shareholder. No consent, approval, authorization
or other order of, or registration or filing with, any court or other
governmental authority or agency, is required for the consummation by such
Selling Shareholder of the transactions contemplated in this Agreement, except
such as have been obtained or made and are in full force and effect under the
Securities Act the rules and regulation of the Belgium Banking and Finance
Commission and the rules of the EASD.
(f) No Registration or Other Similar Rights. Such Selling Shareholder does
not have any registration or other similar rights to have any equity or debt
securities registered for sale by the Company under the Registration Statement
or included in the offering contemplated by this Agreement, except for such
rights as are described in the Prospectus under "Shares Eligible for Future
Sale".
10
<PAGE>
(g) No Further Consents, etc. Except for the (i) consent of such Selling
Shareholder to the respective number of Common Shares to be sold by all of the
Selling Shareholders pursuant to this Agreement and (ii) waiver by certain other
holders of the Company's securities of certain registration rights no consent,
approval or waiver is required under any instrument or agreement to which such
Selling Shareholder is a party or by which it is bound or under which it is
entitled to any right or benefit, in connection with the offering, sale or
purchase by the Underwriters of any of the Common Shares which may be sold by
such Selling Shareholder under this Agreement or the consummation by such
Selling Shareholder of any of the other transactions contemplated hereby.
(h) Disclosure Made by Such Selling Shareholder in the Prospectus. All
information, if any, furnished by or on behalf of such Selling Shareholder in
writing expressly for use in the Registration Statement and Prospectus is, and
on the First Closing Date and the Second Closing Date will be, true, correct,
and complete in all material respects, and does not, and on the First Closing
Date and the Second Closing Date will not, contain any untrue statement of a
material fact or omit to state any material fact necessary to make such
information not misleading. Such Selling Shareholder confirms as accurate the
number of shares of Common Stock set forth opposite such Selling Shareholder's
name in the Custody Agreement (both prior to and after giving effect to the sale
of the Common Shares).
(i) No Price Stabilization or Manipulation. Such Selling Shareholder has not
taken and will not take, directly or indirectly, any action designed to or that
might be reasonably expected to cause or result in stabilization or manipulation
of the price of the Common Stock to facilitate the sale or resale of the Common
Shares.
Any certificate signed by or on behalf of any Selling Shareholder and
delivered to the Representative or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Shareholder to each
Underwriter as to the matters covered thereby.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
(a) The Firm Common Shares. Upon the terms herein set forth, (i) the Company
agrees to issue and sell to the several Underwriters an aggregate of 1,500,000
Firm Common Shares and (ii) the Selling Shareholders agree to sell to the
several Underwriters an aggregate of 500,000 Firm Common Shares, each Selling
Shareholder selling the number of Firm Common Shares set forth opposite such
Selling Shareholder's name on Schedule B. On the basis of the representations,
----------
warranties and agreements herein contained, and upon the terms but subject to
the conditions herein set forth, the Underwriters agree, severally and not
jointly, to purchase from the Company and the Selling Shareholders the
respective number of Firm Common Shares set forth opposite their names on
Schedule A. The purchase price per Firm Common Share to be paid by the several
- ----------
Underwriters to the Company and the Selling Shareholders shall be $[___] per
share.
11
<PAGE>
(b) The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of Brown Brothers Harriman & Co., New York (or such other place as
may be agreed to by the Company and the Representative) at [ ] Eastern Daylight
Time, on June ___, 1998, or such other time and date not later than ten calendar
days thereafter as the Representative shall designate by notice to the Company
(the time and date of such closing are called the "First Closing Date"). The
Company and the Selling Shareholders hereby acknowledge that circumstances under
which the Representative may provide notice to postpone the First Closing Date
as originally scheduled include, but are in no way limited to, any determination
by the Company, the Selling Shareholders or the Representative to recirculate to
the public copies of an amended or supplemented Prospectus or a delay as
contemplated by the provisions of Section 10.
(c) The Optional Common Shares; the Second Closing Date. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 300,000 Optional Common Shares from the
Company at the purchase price per share to be paid by the Underwriters for the
Firm Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the Representative
to the Company, which notice may be given at any time within 30 days from the
date of this Agreement. Such notice shall set forth (i) the aggregate number of
Optional Common Shares as to which the Underwriters are exercising the option,
(ii) the names and denominations in which the certificates for the Optional
Common Shares are to be registered and (iii) the time, date and place at which
such certificates will be delivered (which time and date may be simultaneous
with, but not earlier than, the First Closing Date; and in such case the term
"First Closing Date" shall refer to the time and date of delivery of
certificates for the Firm Common Shares and the Optional Common Shares). Such
time and date of delivery, if subsequent to the First Closing Date, is called
the "Second Closing Date" and shall be determined by the Representative and
shall not be earlier than three nor later than five full business days after
delivery of such notice of exercise. If any Optional Common Shares are to be
purchased, each Underwriter agrees, severally and not jointly, to purchase the
number of Optional Common Shares (subject to such adjustments to eliminate
fractional shares as the Representative may determine) that bears the same
proportion to the total number of Optional Common Shares to be purchased as the
number of Firm Common Shares set forth on Schedule A opposite the name of such
----------
Underwriter bears to the total number of Firm Common Shares. The Representative
may cancel the option at any time prior to its expiration by giving written
notice of such cancellation to the Company.
(d) Payment for the Common Shares. Payment for the Common Shares to be sold
by the Company shall be made at the First Closing Date (and, if applicable, at
the Second Closing Date) by wire transfer of immediately available funds to the
order of the Company. Payment for the Common Shares to be sold by the
12
<PAGE>
Selling Shareholders shall be made at the First Closing by wire transfer of
immediately available funds to the order of the Custodian.
It is understood that the Representative has been authorized, for its own
account and the accounts of the several Underwriters, to accept delivery of and
receipt for, and make payment of the purchase price for, the Firm Common Shares
and any Optional Common Shares the Underwriters have agreed to purchase. Each
of Quartz Capital Partners Limited, Artesia Bank, N.V. and Bank Brussels Lambert
may (but shall not be obligated to) make payment for any Common Shares to be
purchased by any Underwriter whose funds shall not have been received by the
Representatives by the First Closing Date or the Second Closing Date, as the
case may be, for the account of such Underwriter, but any such payment shall not
relieve such Underwriter from any of its obligations under this Agreement.
Each Selling Shareholder hereby agrees that (i) it will pay all stock transfer
taxes, stamp duties and other similar taxes, if any, payable upon the sale or
delivery of the Common Shares to be sold by such Selling Shareholder to the
several Underwriters, or otherwise in connection with the performance of such
Selling Shareholder's obligations hereunder and (ii) the Custodian is authorized
to deduct for such payment any such amounts from the proceeds to such Selling
Shareholder hereunder and to hold such amounts for the account of such Selling
Shareholder with the Custodian under the Custody Agreement.
(e) Delivery of the Common Shares. The Company and the Selling Shareholders
shall deliver, or cause to be delivered, to the Representative for the accounts
of the several Underwriters certificates for the Firm Common Shares to be sold
by them at the First Closing Date, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase price
therefor. The Company shall also deliver, or cause to be delivered, to the
Representative for the accounts of the several Underwriters, certificates for
the Optional Common Shares the Underwriters have agreed to purchase at the
First Closing Date or the Second Closing Date, as the case may be, against the
irrevocable release of a wire transfer of immediately available funds for the
amount of the purchase price therefor. The certificates for the Common Shares
shall be in definitive form and registered in such names and denominations as
the Representative shall have requested at least two full business days prior to
the First Closing Date (or the Second Closing Date, as the case may be) and
shall be made available for inspection on the business day preceding the First
Closing Date (or the Second Closing Date, as the case may be) at a location in
New York City as the Representative may designate. Time shall be of the
essence, and delivery at the time and place specified in this Agreement is a
further condition to the obligations of the Underwriters.
(f) Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m. New
York time on the second business day following the date the Common Shares are
released by the Underwriters for sale to the public, the Company shall deliver
or cause to be delivered copies of the Prospectus in such quantities and at such
places as the Representative shall request.
SECTION 3. COVENANTS.
13
<PAGE>
A. COVENANTS OF THE COMPANY. The Company further covenants and agrees with
each Underwriter as follows:
(a) Approval by Regulators. The Company shall cooperate with the
Representative and counsel for the Underwriters to obtain any further approval
of the Prospectus from the CBF and the EASDAQ Market Authority. The Company
will prepare and file with the Commission, the CBF and EASDAQ, promptly upon the
request of the Representative, any amendments or supplements to the Registration
Statement or the Prospectus which in the opinion of the Representative may be
necessary to enable the several Underwriters to continue the distribution of the
Common Shares and will use its best efforts to cause the same to become
effective or be approved, as the case may be, as promptly as possible.
(b) Representative Review of Proposed Amendments and Supplements. During such
period beginning on the date hereof and ending on the later of the First Closing
Date or such date, as in the opinion of counsel for the Underwriters, the
Prospectus is no longer required by law to be delivered in connection with sales
by an Underwriter or dealer (the "Prospectus Delivery Period"), prior to
amending or supplementing the Registration Statement (including any registration
statement filed under Rule 462(b) under the Securities Act) or the Prospectus,
the Company shall furnish to the Representative for review a copy of each such
proposed amendment or supplement, and the Company shall not file any such
proposed amendment or supplement to which the Representative shall reasonably
object.
(c) Regulatory Compliance. After the date of this Agreement, the Company
shall promptly advise the Representative in writing (i) of the receipt of any
comments of, or requests for additional or supplemental information from, the
Commission, EASDAQ Market Authority or CBF, (ii) of the time and date of any
filing of any post-effective amendment to the Registration Statement with the
Commission or any amendment or supplement to any preliminary prospectus or the
Prospectus with the Commission, EASDAQ Market Authority or CBF, (iii) of the
time and date that any post-effective amendment to the Registration Statement
becomes effective under the Securities Act or is approved by the EASDAQ Market
Authority or the CBF, (iv) of the issuance by the Commission, EASDAQ Market
Authority or CBF of any stop order or equivalent suspending the effectiveness of
the Registration Statement or any post-effective amendment thereto or of any
order preventing or suspending the use of any preliminary prospectus or the
Prospectus, and (v) of the commencement of any proceedings to remove, suspend or
terminate from listing or quotation the Common Stock from any securities
exchange upon which it is listed for trading or included or designated for
quotation, or of the threatening or initiation of any proceedings for any of
such purposes. If the Commission, EASDAQ Market Authority or CBF shall enter
any such stop order or equivalent at any time, the Company will use its best
efforts to obtain the lifting of such order as promptly as practical.
Additionally, the Company agrees that it shall comply with the provisions of
Rules 424(b) and 430A, as applicable, under the Securities Act and will use its
reasonable efforts to confirm that any filings made by the Company under such
Rule 424(b) were received in a timely manner by the Commission.
14
<PAGE>
(d) Amendments and Supplements to the Prospectus and Other Matters. If,
during the Prospectus Delivery Period, any event shall occur or condition exist
as a result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if in the opinion of
the Representative or counsel for the Underwriters it is otherwise necessary to
amend or supplement the Prospectus to comply with law, the Company agrees to
promptly prepare (subject to Section 3(A)(a) hereof), file with the Commission,
EASDAQ Market Authority and/or CBF and furnish at its own expense to the
Underwriters and to dealers, amendments or supplements to the Prospectus so that
the statements in the Prospectus as so amended or supplemented will not, in
light of the circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will comply
with law.
(e) Copies of any Amendments and Supplements to the Prospectus. The Company
agrees to furnish the Representative, without charge, during the Prospectus
Delivery Period, as many copies of the Prospectus and any amendments and
supplements thereto as the Representative may reasonably request.
(f) Use of Proceeds. The Company shall apply the net proceeds from the sale
of the Common Shares sold by it in the manner described under the caption "Use
of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its expense, a
registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representative an
earnings statement (which need not be audited) covering the twelve-month period
ending June 30, 1999 that satisfies the provisions of Section 11(a) of the
Securities Act.
(j) Periodic Reporting Obligations. During the Prospectus Delivery Period the
Company shall file, on a timely basis, with the Commission, EASDAQ and the CBF
all reports and documents required to be filed under the Exchange Act, EASDAQ
rules or the laws and regulations of Belgium.
(k) Agreement Not To Offer or Sell Additional Securities. During the period
of 180 days following the date of the Prospectus, the Company will not, without
the prior written consent of Quartz Capital Partners Limited (which consent may
be withheld at the sole discretion of Quartz Capital Partners Limited), directly
or indirectly, sell, offer, contract or grant any option to sell, pledge,
transfer or establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or
announce the offering of, or file any registration statement under the
Securities Act in respect of, any shares of Common Stock, options or warrants to
acquire shares of the Common Stock or securities exchangeable or exercisable for
or convertible into shares of Common Stock (other than as contemplated by this
Agreement with respect to the Common Shares); provided, however, that the
Company may issue (i) Common Stock issuable upon the exercise of warrants and
options which are outstanding as of the date of this Agreement, or (ii) options
to purchase its Common Stock granted pursuant to any stock option, stock bonus
or other stock
15
<PAGE>
plan or arrangement described in the Prospectus, or (iii) Common Stock issuable
pursuant to exercise of options under such plans or arrangements, but in each
case only if the holders of such shares, options, or warrants, or shares issued
upon exercise of such options or warrants, agree in writing not to sell, offer,
dispose of or otherwise transfer any such shares or options during such 180 day
period without the prior written consent of Quartz Capital Partners Limited
(which consent may be withheld at the sole discretion of the Quartz Capital
Partners Limited).
(l) Future Reports to the Representative. During the period of five years
hereafter the Company will furnish to the Representative at 74 Brook Street,
London W1Y 1YD, (i) as soon as practicable after the end of each fiscal year,
copies of the Annual Report of the Company containing the balance sheet of the
Company as of the close of such fiscal year and statements of income,
shareholders' equity and cash flows for the year then ended and the opinion
thereon of the Company's independent public or certified public accountants;
(ii) as soon as practicable after the filing thereof, copies of each proxy
statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current
Report on Form 8-K or other report filed by the Company with the Commission,
EASDAQ, the CBF or any securities exchange or designated offshore securities
market as defined in Regulation S under the Securities Act; and (iii) as soon as
available, copies of any report or communication of the Company mailed generally
to holders of its capital stock.
(m) EASDAQ. The Company will comply with all applicable rules and regulations
with respect to admission to trading of securities on EASDAQ and with all EASDAQ
rules and regulations. The Company will use its reasonable efforts to maintain
the admission to trading of the Common Shares on EASDAQ.
B. COVENANTS OF THE SELLING SHAREHOLDERS. Each Selling Shareholder further
covenants and agrees with each Underwriter:
(a) Agreement Not to Offer or Sell Additional Securities. Such Selling
Shareholder will not, without the prior written consent of Quartz Capital
Partners Limited (which consent may be withheld in its sole discretion),
directly or indirectly, sell, offer, contract or grant any option to sell
(including without limitation any short sale), pledge, transfer, establish an
open "put equivalent position" within the meaning of Rule 16a-1(h) under the
Exchange Act, or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock, or securities exchangeable or
exercisable for or convertible into shares of Common Stock currently or
hereafter owned either of record or beneficially (as defined in Rule 13d-3 under
Securities Exchange Act of 1934, as amended) by the undersigned, or publicly
announce the undersigned's intention to do any of the foregoing, for a period
commencing on the date hereof and continuing through the close of trading on the
date 180 days after the date of the Prospectus.
(b) Delivery of Forms W-8 and W-9. Such Selling Shareholder will deliver to
the Representative prior to the First Closing Date a properly completed and
executed United States Treasury Department Form
16
<PAGE>
W-8 (if the Selling Shareholder is a non-United States person) or Form W-9 (if
the Selling Shareholder is a United States Person).
Quartz Capital Partners Limited, on behalf of the several Underwriters, may,
in its sole discretion, waive in writing the performance by the Company or any
Selling Shareholder of any one or more of the foregoing covenants or extend the
time for their performance.
SECTION 4. PAYMENT OF EXPENSES. The Company shall pay all costs, fees and
expenses incurred in connection with the performance of the obligations
hereunder and in connection with the transactions contemplated hereby (other
than underwriting discounts and commissions), including without limitation (i)
all expenses incident to the issuance and delivery of the Common Shares
(including all printing and engraving costs), (ii) all fees and expenses of the
registrar and transfer agent of the Common Stock, (iii) all necessary issue,
transfer and other stamp taxes in connection with the issuance and sale of the
Common Shares to the Underwriters or by the Underwriters to their customers,
(iv) all fees and expenses of the Company's counsel, independent public or
certified public accountants and other advisors, (v) all costs and expenses
incurred in connection with the preparation, printing, filing, shipping and
distribution of the Registration Statement (including financial statements,
exhibits, schedules, consents and certificates of experts), each preliminary
prospectus and the Prospectus, and all amendments and supplements thereto, and
this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by
the Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Common Shares for offer and sale under the state securities or blue sky
laws of the United States, or the provincial securities laws of Canada, and, if
requested by the Representative, preparing and printing a "Blue Sky Survey" or
memorandum, and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, (vii) the filing fees incident to,
and the reasonable fees and expenses of counsel for the Underwriters in
connection with, any NASD review and approval of the Underwriters' participation
in the offering and distribution of the Common Shares, (viii) the fees and
expenses associated with admission to trading of Common Shares on EASDAQ or the
filing with the Belgium Banking and Finance Commission, (ix) the fees, up to a
limit of US$20,000, of De Bandt, Van Hecke & Lagae in respect of their work
relating to the offering of the Common Shares, and (x) all other fees, costs and
expenses referred to in Item 13 of Part II of the Registration Statement.
Except as provided in this Section 4, Section 6, Section 8 and Section 9 hereof,
the Underwriters shall pay their own expenses, including the fees and
disbursements of their counsel.
The Selling Shareholders further agree with each Underwriter to pay (directly
or by reimbursement) all fees and expenses incident to the performance of their
obligations under this Agreement which are not otherwise specifically provided
for herein, including but not limited to (i) fees and expenses of counsel and
other advisors for such Selling Shareholders, (ii) fees and expenses of the
Custodian and (iii) expenses and taxes incident to the sale and delivery of the
Common Shares to be sold by such Selling Shareholders to the Underwriters
hereunder (which taxes, if any, may be deducted by the Custodian under the
provisions of Section 2 of this Agreement).
17
<PAGE>
This Section 4 shall not affect or modify any separate, valid agreement
relating to the allocation of payment of expenses between the Company, on the
one hand, and the Selling Shareholders, on the other hand.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy in all materials respects of the representations and warranties on the
part of the Company and the Selling Shareholders set forth in Sections 1(A) and
1(B) hereof as of the date hereof and as of the First Closing Date as though
then made and, with respect to the Optional Common Shares, as of the Second
Closing Date as though then made, to the timely performance by the Company and
the Selling Shareholders of their respective covenants and other obligations
hereunder, and to each of the following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the Representatives shall
have received from Arthur Andersen LLP, independent public or certified public
accountants for the Company, a letter dated the date hereof addressed to the
Underwriters, in form and substance satisfactory to the Representative,
containing statements and information of the type ordinarily included in
accountant's "comfort letters" to underwriters, delivered according to Statement
of Auditing Standards No. 72 (or any successor bulletin), with respect to the
audited and unaudited financial statements and certain financial information
contained in the Registration Statement and the Prospectus (and the
Representative shall have received an additional three conformed copies of such
accountants' letter for each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; Approval of
Prospectus. For the period from and after effectiveness of this Agreement and
prior to the First Closing Date and, with respect to the Optional Common Shares,
the Second Closing Date:
(i) the Company shall have filed the Prospectus with the Commission
(including the information required by Rule 430A under the Securities Act) in
the manner and within the time period required by Rule 424(b) under the
Securities Act; or the Company shall have filed a post-effective amendment to
the Registration Statement containing the information required by such Rule
430A, and such post-effective amendment shall have become effective; or,
(ii) no stop order suspending the effectiveness of the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment to the Registration Statement, shall be in effect and no proceedings
for such purpose shall have been instituted or threatened by the Commission; and
(iii) The Prospectus shall have been approved by each of the EASDAQ
Market Authority and CBF and shall comply in all material respects with all
applicable legal requirements for use in a public offering in Belgium, and no
proceeding shall have been initiated by the CBF or EASDAQ for the purpose of
rescinding such approval.
18
<PAGE>
(c) No Material Adverse Change or Ratings Agency Change. For the
period from and after the date of this Agreement and prior to the First Closing
Date and, with respect to the Optional Common Shares, the Second Closing Date in
the reasonable judgment of the Representative there shall not have occurred any
Material Adverse Change.
(d) Opinion of Counsel for the Company. On each of the First Closing Date and
the Second Closing Date the Representative shall have received the favorable
opinion of Morgan, Lewis & Bockius LLP, counsel for the Company, dated as of
such Closing Date, the form of which is attached as Exhibit A and the opinion of
---------
Woodcock, Washburn, Kurtz, Mackiewicz and Norris as to certain patent matters
(and the Representative shall have received an additional three conformed copies
of each such counsel's legal opinion for each of the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First Closing
Date and the Second Closing Date the Representative shall have received the
favorable opinion of Brown, Rudnick, Freed & Gesmer, counsel for the
Underwriters, dated as of such Closing Date, with respect to such matters as it
may reasonably request, and the Company and the Selling Shareholders shall have
furnished to such counsel such documents as they may request for the purpose of
enabling them to pass upon such matters (and the Representative shall have
received an additional three conformed copies of such counsel's legal opinion
for each of the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and the Second
Closing Date the Representative shall have received a written certificate
executed by the Chief Executive Officer of the Company and the Chief Financial
Officer of the Company, dated as of such Closing Date, to the effect set forth
in subsections (b)(ii) and (c)(ii) of this Section 5, and further to the effect
that:
(i) for the period from and after the date of this Agreement and prior
to such Closing Date, there has not occurred any Material Adverse Change;
(ii) the representations, warranties and covenants of the Company set
forth in Section 1 (A) of this Agreement are true and correct in all material
respects with the same force and effect as though expressly made on and as of
such Closing Date; and
(iii) the Company has complied in all material respects with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date and the
Second Closing Date the Representative shall have received from Arthur Andersen
LLP, independent public or certified public accountants for the Company, a
letter dated such date, in form and substance satisfactory to the
Representative, to the effect that they reaffirm the statements made in the
letter furnished by them pursuant to subsection (a) of this Section 5, except
that the specified date referred to therein for the carrying out of
19
<PAGE>
procedures shall be no more than three business days prior to the First Closing
Date or Second Closing Date, as the case may be (and the Representative shall
have received an additional three conformed copies of such accountants' letter
for each of the several Underwriters).
(h) Selling Shareholders' Certificate. On the First Closing Date the
Representative shall received a written certificate executed by the Attorney-in-
Fact of each Selling Shareholder, dated as of such Closing Date, to the effect
that:
(i) the representations, warranties and covenants of such Selling
Shareholder set forth in Section 1(B) of this Agreement are true and correct
with the same force and effect as though expressly made by such Selling
Shareholder on and as of such Closing Date; and
(ii) such Selling Shareholder has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date.
(i) Selling Shareholders' Documents. On the date hereof, the Company and the
Selling Shareholders shall have furnished for review by the Representative
copies of the Powers of Attorney and Custody Agreements executed by each of the
Selling Shareholders and such further information, certificates and documents as
the Representative may reasonably request.
(j) Lock-Up Agreement from Certain Shareholders of the Company Other Than
Selling Shareholders. On the date hereof, the Company shall have furnished to
the Representative an agreement in the form of Exhibit B hereto from the
---------
officers, directors and certain holders of Common Stock listed in Schedule C,
and such agreement shall be in full force and effect on each of the First
Closing Date and the Second Closing Date.
(k) Additional Documents. On or before each of the First Closing Date and the
Second Closing Date, the Representative and counsel for the Underwriters shall
have received such information, documents and opinions as they may reasonably
require in order to evidence the accuracy of any of the representations and
warranties, or the satisfaction of any of the conditions or agreements, herein
contained.
If any condition specified in this Section 5 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the Representative
by notice to the Company and the Selling Shareholders at any time on or prior to
the First Closing Date and, with respect to the Optional Common Shares, at any
time prior to the Second Closing Date, which termination shall be without
liability on the part of any party to any other party, except that Section 4,
Section 6, Section 8 and Section 9 shall at all times be effective and shall
survive such termination.
20
<PAGE>
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representative pursuant to Section 5, Section 7, Section 10,
Section 11 or Section 17, or if the sale to the Underwriters of the Common
Shares on the First Closing Date is not consummated because of any refusal,
inability or failure on the part of the Company or the Selling Shareholders to
perform any agreement herein or to comply with any provision hereof, the Company
agrees to reimburse the Representatives and the other Underwriters severally,
upon demand for all out-of-pocket expenses that shall have been reasonably
incurred by the Representative and the Underwriters in connection with the
proposed purchase and the offering and sale of the Common Shares, including but
not limited to the reasonable fees and disbursements of counsel, printing
expenses, travel expenses, postage, facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall not become
effective until the later of (i) the execution of this Agreement by the parties
hereto and (ii) notification by the Commission to the Company and the
Representative of the effectiveness of the Registration Statement under the
Securities Act. Prior to such effectiveness, this Agreement may be terminated by
any party by notice to each of the other parties hereto, and any such
termination shall be without liability on the part of (a) the Company or the
Selling Shareholders to any Underwriter, except that the Company and the Selling
Shareholders shall be obligated to reimburse the expenses of the Representative
and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter
to the Company or the Selling Shareholders, or (c) of any party hereto to any
other party except that the provisions of Section 8 and Section 9 shall at all
times be effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters. The Company agrees to indemnify and
hold harmless each Underwriter, its officers and employees, and each person, if
any, who controls any Underwriter within the meaning of the Securities Act and
the Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereto,
including any information deemed to be a part thereof pursuant to Rule 430A
under the Securities Act, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading; or (ii) upon any untrue statement or alleged untrue
statement of a material fact contained in the Preliminary Prospectus, Prospectus
Supplement or the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; or (iii) in whole or in part upon any material
inaccuracy in the representations and warranties of the Company contained
herein; or (iv) in whole or in part upon any failure of the Company to perform
its obligations hereunder or
21
<PAGE>
under law; or (v) any act or failure to act or any alleged act or failure to act
by any Underwriter in connection with, or relating in any manner to, the Common
Stock or the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out of or
based upon any matter covered by clause (i) or (ii) above, provided that the
Company shall not be liable under this clause (v) to the extent that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its bad faith or willful misconduct; and to reimburse each Underwriter and each
such controlling person for any and all expenses (including the reasonable fees
and disbursements of counsel chosen by Quartz Capital Partners Limited) as such
expenses are reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representative expressly for use in
the Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); and provided, further, that with respect to
any preliminary prospectus, the foregoing indemnity agreement shall not inure to
the benefit of any Underwriter from whom the person asserting any loss, claim,
damage, liability or expense purchased Common Shares, or any person controlling
such Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 8(a) shall be in addition to any liabilities that the
Company and the Selling Shareholders may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement, the Selling Shareholders and each person, if any, who
controls the Company or any Selling Shareholder within the meaning of the
Securities Act or the Exchange Act, against any loss, claim, damage, liability
or expense, as incurred, to which the Company, or any such director, officer,
Selling Shareholder or controlling person may become subject, under the
Securities Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based upon
any untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or arises out of or is based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that
22
<PAGE>
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any preliminary prospectus, the
Prospectus (or any amendment or supplement thereto), in reliance upon and in
conformity with written information furnished to the Company and the Selling
Shareholders by the Representative expressly for use therein; and to reimburse
the Company, or any such director, officer, Selling Shareholder or controlling
person for any legal and other expense reasonably incurred by the Company, or
any such director, officer, Selling Shareholder or controlling person in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action. Each of the Company and
each of the Selling Shareholders, hereby acknowledges that the only information
that the Underwriters have furnished to the Company and the Selling Shareholders
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) are the statements set
forth (A) in the paragraph on the inside first page of the Prospectus concerning
stabilization by the Underwriters and (B) in the Sections entitled "Offering and
Subscription" and "Underwriting" in the Prospectus; and the Underwriters confirm
that such statements are correct. The indemnity agreement set forth in this
Section 8(b) shall be in addition to any liabilities that each Underwriter may
otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 8 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding
23
<PAGE>
sentence (it being understood, however, that the indemnifying party shall not be
liable for the expenses of more than one separate counsel (together with any
reasonable required local counsel), approved by the indemnifying party (Quartz
Capital Partners Limited in the case of Section 8(b) and Section 9),
representing the indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or consent
to the entry of judgment in any pending or threatened action, suit or proceeding
in respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any reason held to be
unavailable to or otherwise insufficient to hold harmless an indemnified party
in respect of any losses, claims, damages, liabilities or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
paid or payable by such indemnified party, as incurred, as a result of any
losses, claims, damages, liabilities or expenses referred to therein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand, and the Underwriters, on the other hand, from the
offering of the Common Shares pursuant to this Agreement or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Shareholders, on the one hand, and the Underwriters, on the other
hand, in connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand,
and the Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Common
Shares pursuant to this Agreement (before deducting expenses) received by the
Company and the total underwriting discount received by the Underwriters, in
each case as set forth on the front cover page of the Prospectus bear to the
aggregate initial public offering price of the Common Shares as set forth on
such cover. The relative fault of the Company on the one hand, and the
Underwriters, on the other hand, shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact or
24
<PAGE>
any such inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company on the one hand, or the Underwriters, on the
other hand, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 8(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 8(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section 9; provided, however, that no
additional notice shall be required with respect to any action for which notice
has been given under Section 8(c) for purposes of indemnification.
The Company, the Selling Shareholders and the Underwriters agree that it would
not be just and equitable if contribution pursuant to this Section 9 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
- ----------
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
SECTION 10. [Reserved]
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date
this Agreement maybe terminated by the Representative by notice given to the
Company and the Selling Shareholders if at any time (i) trading or quotation in
any of the Company's securities shall have been suspended or limited by the
Commission, by EASDAQ or the CBF, or trading in securities generally on EASDAQ,
shall have been suspended or limited, or minimum or maximum prices shall have
been generally established on EASDAQ; (ii) a general banking moratorium shall
have been declared by any United States or State of New York authorities or the
Bank of England; (iii) there shall have occurred any outbreak or escalation of
national or international hostilities or any crisis or calamity, or any change
in the United States or international financial
25
<PAGE>
markets, or any substantial change or development involving a prospective
substantial change in United States' or international political, financial or
economic conditions, as in the reasonable judgment of the Representative is
material and adverse and makes it impracticable to market the Common Shares in
the manner and on the terms described in the Prospectus or to enforce contracts
for the sale of securities; (iv) in the reasonable judgment of the
Representative there shall have occurred any Material Adverse Change; or (v) the
Company shall have sustained a loss by strike, fire, flood, earthquake, accident
or other calamity of such character as in the judgment of the Representative may
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured. Any
termination pursuant to this Section 11 shall be without liability on the part
of (a) the Company or the Selling Shareholders to any Underwriter, except that
the Company shall be obligated to reimburse the expenses of the Representative
and the Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to
the Company or the Selling Shareholders, or (c) of any party hereto to any other
party except that the provisions of Section 8 and Section 9 shall at all times
be effective and shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers , of the Selling Shareholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Shareholders, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 13 NOTICES. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representative:
Quartz Capital Partners Limited
74 Brook Street
London W1Y 1YD
Facsimile: +44-171-408-0777
Attention: Mr. Guy Innis
with a copy to:
Brown, Rudnick, Freed & Gesmer
One Financial Center
Boston, Massachusetts 02111
Facsimile: 617-856-8201
Attention: David H. Murphree, Esq.
26
<PAGE>
If to the Company or the Selling Shareholders:
Orthovita, Inc.
45 Great Valley Parkway
Malvern, Pennsylvania 19355
Facsimile: 610-640-1714
Attention: Mr. David Joseph, CEO
with a copy to:
Morgan, Lewis & Bockius LLP
2000 Logan Square
Philadelphia, PA 19103-6993
Attention: Stephen M. Goodman, Esq.
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and personal representative, and no other
person will have any right or obligation hereunder. The term "successors" shall
not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of
any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH JURISDICTION.
SECTION 17. FAILURE OF ONE OR MORE OF THE SELLING SHAREHOLDERS TO SELL AND
DELIVER COMMON SHARES. If one or more of the Selling Shareholders shall fail to
sell and deliver to the Underwriters the Common Shares to be sold and delivered
by such Selling Shareholders at the First Closing Date pursuant to this
Agreement, then the Underwriters may at their option, by written notice from the
Representative to the Company and the Selling Shareholders, either (i) purchase
a number of additional shares from other Selling
27
<PAGE>
Shareholders equal to the number of shares failed to deliver, or (ii) purchase
the shares which the Company and other Selling Shareholders have agreed to sell
and deliver in accordance with the terms hereof. If one or more of the Selling
Shareholders shall fail to sell and deliver to the Underwriters the Common
Shares to be sold and delivered by such Selling Shareholders pursuant to this
Agreement at the First Closing Date or the Second Closing Date, then the
Underwriters shall have the right, by written notice from the Representative to
the Company and the Selling Shareholders, to postpone the First Closing Date or
the Second Closing Date, as the case may be, but in no event for longer than
seven days in order that the required changes, if any, to the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected.
SECTION 18. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof, except that the provisions of Section
2 of the letter agreement between Quartz Capital Partners Limited and the
Company dated 30 April 1998 shall continue in effect until completion of the
Second Closing and Sections 1 and 4 through 7 thereof shall continue in
accordance with the terms thereof. This Agreement may be executed in two or
more counterparts, each one of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement may not be amended or modified unless in writing by all of the parties
hereto, and no condition herein (express or implied) may be waived unless waived
in writing by each party whom the condition is meant to benefit. The Table of
Contents and the Section headings herein are for the convenience of the parties
only and shall not affect the construction or interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated business
person who was adequately represented by counsel during negotiations regarding
the provisions hereof, including, without limitation, the indemnification
provisions of Section 8 and the contribution provisions of Section 9, and is
fully informed regarding said provisions. Each of the parties hereto further
acknowledges that the provisions of Sections 8 and 9 hereto fairly allocate the
risks in light of the ability of the parties to investigate the Company, its
affairs and its business in order to assure that adequate disclosure has been
made in the Registration Statement, any preliminary prospectus and the
Prospectus (and any amendments and supplements thereto), as required by the
Securities Act and the Exchange Act.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to the Company and the Custodian the enclosed copies
hereof, whereupon this instrument, along with all counterparts hereof, shall
become a binding agreement in accordance with its terms.
Very truly yours,
ORTHOVITA, INC.
28
<PAGE>
By:
David Joseph
SELLING STOCKHOLDERS
By:
David Joseph, as Attorney-in-Fact
The foregoing Underwriting Agreement is hereby confirmed and accepted by the
Representative in London, England as of the date first above written.
QUARTZ CAPITAL PARTNERS LIMITED
Acting as Representative of the
several Underwriters named in
the attached Schedule A.
By: ___________
29
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
FIRM COMMON
UNDERWRITERS SHARES
TO BE PURCHASED
<S> <C>
Quartz Capital Partners Limited ....... 1,400,000
Artesia Bank N.V. ..................... 300,000
Bank Brussels Lambert ................. 300,000
Total ................................. 2,000,000
</TABLE>
30
<PAGE>
SCHEDULE B
NUMBER OF
SELLING SHAREHOLDER FIRM
COMMON
SHARES
TO BE SOLD
[To be provided by the Company]
31
<PAGE>
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103-6993
June 23, 1998
Orthovita, Inc.
45 Great Valley Parkway
Malvern, PA 19355
Re: Orthovita, Inc. -- Registration Statement on Form S-1 (No. 333-51689)
---------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Orthovita, Inc, a Pennsylvania corporation (the
"Company"), in connection with the preparation of the above-referenced
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offering of up to 2,300,000 shares of the Company's common stock, par value
$.01 per share (the "Common Stock"), of which 1,500,000 shares (the "Company
Shares") of authorized but heretofore unissued shares of Common Stock are being
sold by the Company, 500,000 shares (the "Selling Shareholder Shares") of
presently issued and outstanding shares of Common Stock are being sold severally
by the selling stockholders identified as a group in the Registration Statement
(the "Selling Stockholders"), and 300,000 shares (the "Option Shares") of
authorized but heretofore unissued shares of Common Stock may be sold by the
Company pursuant to the underwriters' over-allotment option pursuant to the
terms of the Underwriting Agreement pertaining to the proposed offering subject
to the Registration Statement (the "Underwriting Agreement").
In rendering the opinion set forth below, we have reviewed (a) the Registration
Statement and the exhibits thereto; (b) the Company's Amended and Restated
Articles of Incorporation; (c) the Company's Amended and Restated Bylaws; (d)
certain records of the Company's corporate proceedings as reflected in its
minute and stock books; (e) a draft of the Underwriting Agreement; and (f) such
other documents as we have deemed relevant. In our examination, we have assumed
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals and the conformity with the originals of all documents
submitted to us as copies thereof.
Based upon the foregoing, we are of the opinion that:
1. the Company Shares and the Option Shares to be issued as described in
the Registration Statement, when and to the extent purchased by the
underwriters in accordance with the Underwriting Agreement, will be
legally issued, fully paid and non-assessable; and
2. the Selling Shareholder Shares to be sold to the underwriters in
accordance with the Underwriting Agreement have been legally issued
and are fully paid and non-assessable.
Our opinion set forth above is limited to the Business Corporation Law of the
Commonwealth of Pennsylvania, as amended.
We hereby consent to the use of this opinion as Exhibit 5 to the Registration
Statement and to the reference to this firm under the caption "Legal Matters."
In giving such opinion, we do not thereby admit that we are acting within the
category of persons whose consent is required under Section 7 of the Act or the
rules or regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
EXHIBIT 10.26
AMENDMENT TO STOCKHOLDERS' AGREEMENT OF ORTHOVITA, INC.
JUNE 15, 1998
THIS AMENDMENT TO STOCKHOLDERS' AGREEMENT is dated as of June 15, 1998 and
is an amendment to that certain STOCKHOLDERS' AGREEMENT (the "Stockholders'
Agreement") dated as of April 11, 1997 by and among Orthovita, Inc., a
Pennsylvania corporation (the "Company"), and the other parties hereto. All
terms used in this Amendment and not otherwise defined herein shall have the
meanings ascribed to such terms in the Stockholders' Agreement.
NOW, THEREFORE, in consideration of and reliance on the respective
covenants contained herein and intending to be legally bound hereby, the parties
hereto agree as follows:
Notwithstanding that the Stockholders' Agreement will by its terms terminate
upon the consummation of the offering contemplated by the Registration Statement
on Form S-1 (#333-51689) (the "Offering"), the Stockholders hereby agree that
the terms and conditions that exclusively relate to the nomination, election and
membership of the Class C Director contained in Section 2 of the Stockholders'
Agreement (including Sections 2(a)(2), 2(c) and 2(e) of the Stockholder's
Agreement), attached here as Exhibit A, shall instead continue in full force and
effect until such time (the "Class C Transition Time") as the Class C Holders no
longer own of record in the aggregate at least 50% of the shares of Common Stock
held by the Class C Holders on the date hereof (assuming the conversion of all
shares of Preferred Stock of the Company held by the Class C Holders). All other
terms and conditions contained in the Stockholders' Agreement shall
automatically terminate upon the consummation of such offering.
This Amendment shall have no force or effect if the Offering is not
consummated.
IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto
on the day and year first written above.
ORTHOVITA, INC.
By: _________________________
SCHRODER
Schroder Ventures International Life Sciences Fund LP1
By: Schroder Venture Managers Inc., its General Partner
By: _______________________________
Title: _______________________________
<PAGE>
Schroder Ventures International Life Sciences Fund LP2
By: Schroder Venture Managers Inc., its General Partner
By: _______________________________
Title: _______________________________
Schroder Ventures International Life Sciences Fund Trust
By: Schroder Venture Managers Limited as Attorney-in-Fact
for Codan Trust Company Limited as Trustee
By: _______________________________
Title: _______________________________
Schroder Ventures International Life Sciences Fund Co-
Investment Scheme
By: Schroder Venture Managers Limited, as Investment Manager
By: _______________________________
Title: _______________________________
ELECTRA
Electra Fleming Private Equity Partners
By: Electra Fleming GP (Unquoted UK),
its General Partner
By: _______________________________
Director
By: ________________________________
Secretary
EF Nominees Limited
By: ________________________________
Director
By: ________________________________
Secretary
<PAGE>
WELLCOME
The Wellcome Trust
By: The Wellcome Trust Limited, as the Trustee for
The Wellcome Trust
By: _______________________________
<PAGE>
SIGNATURES OF OTHER STOCKHOLDERS
______________________________ ___________________________________
Signature Signature
______________________________ ___________________________________
Name Name
______________________________ ___________________________________
Signature Signature
______________________________ ___________________________________
Name Name
______________________________ ___________________________________
Signature Signature
______________________________ ___________________________________
Name Name
______________________________ ___________________________________
Signature Signature
______________________________ ___________________________________
Name Name
______________________________ ___________________________________
Signature Signature
______________________________ ___________________________________
Name Name
______________________________ ___________________________________
Signature Signature
______________________________ ___________________________________
Name Name
______________________________ ___________________________________
Signature Signature
______________________________ ___________________________________
Name Name
<PAGE>
EXHIBIT A
2. Board of Directors.
(a) Each Stockholder shall vote all shares of Common Stock and Preferred
Stock (and any other shares of capital stock of the Company over which such
Stockholder exercises voting control) owned by him or it from time to time so as
to cause and maintain the election to the Board of Directors of one
representative designated jointly by Schroder and Electra (the "Class C
Director"), which representative shall initially be Jim Garvey.
*****************
(c) Each of the Directors designated in Section 2(a) shall be elected at
any annual or special meeting of the Company's stockholders (or by written
consent in lieu of a meeting of stockholders) and shall serve until his
successor is elected and qualified or until his earlier resignation or removal.
Until the Class C Transition Time, the Class C Director may be removed during
his term of office, without cause, by and only by the written consent of
Schroder and Electra.
*****************
(e) Each Stockholder shall vote all shares of Common Stock and Preferred
Stock (and any other shares of capital stock of the Company over which such
Stockholder exercises voting control) owned by them from time to time, and to
take such other actions as are necessary to cause the Articles of Incorporation
and the Bylaws of the Company to provide for the indemnification of directors
and for the limitation of director liability to the fullest extent permitted
under applicable law.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and all references to our firm included in or made part of this
registration statement.
/s/ Arthur Andersen LLP
Philadelphia, Pa.,
June 23, 1998
