<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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:
ALAN SINGER, 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. [X]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE(1) FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per share.......... $25,300,000 $7,464
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
----------------
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
MAY 1, 1998
2,000,000 SHARES
[LOGO OF ORTHOVITA APPEARS HERE]
COMMON STOCK
-----------
A total of 2,000,000 shares of Common Stock are being offered hereby (the
"Offering") though a retail public offering in Belgium and 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$ and
US$ per share.
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 6.
-----------
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 and the Selling Shareholders have 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$ .
(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
-----------
RETAIL PUBLIC OFFERING IN BELGIUM
ARTESIA BANK N.V. BANQUE BRUXELLES LAMBERT
The date of this Prospectus is , 1998
<PAGE>
[ARTWORK APPEARS HERE]
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 , 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, here represented by the Board of Directors, 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.
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.
3
<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 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. and its subsidiaries.
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. 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.
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.
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, 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.
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.
4
<PAGE>
THE OFFERING
Common Stock offered 2,000,000 shares; 1,500,000 by the Company and
hereby..................... 500,000 by the Selling Shareholders
Common Stock to be
outstanding after this
Offering(1)................ 10,224,140 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
- --------
(1) Excludes (i) 1,128,094 shares of Common Stock issuable upon the exercise of
options outstanding as of April 30, 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$3.32 per share,
(ii) 131,006 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 April 30, 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/)............. 5,062 4,804 5,198
========= ========= =========
</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$(2,620) US$
Total assets............. 4,862 3,407 3,407
Long-term debt........... 833 874 874 874
Redeemable convertible
preferred stock......... 7,383 7,584 -- --
Total shareholders'
equity.................. (7,713) (9,397) (1,812)
</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 Preferred Stock in 1997
and the first three months of 1998 of US$537 and US$201, respectively.
(3) See Note 2 to Notes to Financial Statements for an explanation of the
determination of the number of common shares used in computing net loss per
common share.
(4) Reflects the conversion of all the outstanding shares of the Company's
Class A, Class B and Class C Preferred Stock into Common Stock upon the
consummation of this Offering.
(5) Represents pro forma data as adjusted to give effect to the sale of
1,500,000 shares of Common Stock offered by the Company at an assumed
initial public offering price of US$ 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."
5
<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
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 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
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) pre-
market 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.
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.
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.
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 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
6
<PAGE>
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
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.
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.
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
7
<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. 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. 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. 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.
8
<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
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.
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.
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.
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 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
9
<PAGE>
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.
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.
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."
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.
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 with respect to the issue of noninfringement. 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."
10
<PAGE>
LIMITED MANUFACTURING EXPERIENCE
The Company has limited manufacturing capacity and experience. 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 is dependent on a limited number of speciality suppliers of
products and services. These include suppliers of speciality chemicals and the
outsourcing of BIOGRAN manufacturing. The 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 to the Company at reasonable cost and terms, if at all.
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 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
11
<PAGE>
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.
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, 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 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, directors and
certain shareholders, who hold, in the aggregate, approximately 6,016,217
shares of Common Stock, have agreed not to sell any shares of Common Stock for
a period of 180 days following the consummation of this Offering.
12
<PAGE>
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.
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. A number of risks are
inherent in international operations. International sales and operations may
be limited or disrupted by the imposition of government 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$ per share (based on an assumed
offering price of US$ per share and after giving effect to underwriting
discounts and commissions and estimated offering expenses). 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."
13
<PAGE>
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$ per share are estimated to be US$ (approximately
US$ 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 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 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 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 net proceeds from this 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 next 12 months. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
14
<PAGE>
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.
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$ 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............... 7,584,285 -- --
-------------- -------------- --------------
Shareholders' equity (deficit):
Preferred Stock, par value
US$.01 per share; 10,000,000
shares authorized; 606,060
shares Class A Convertible
Preferred Stock and
1,038,005 shares of Class B
Convertible Preferred Stock
issued and outstanding
actual; no shares issued and
outstanding pro forma and
pro forma as adjusted....... 16,441 -- --
Common Stock, par value
US$.01 per share; 50,000,000
shares authorized; 5,197,722
shares issued and
outstanding actual;
8,724,140 shares issued and
outstanding pro forma;
10,224,140 shares issued and
outstanding pro forma as
adjusted(1)................. 51,977 87,241 102,241
Additional paid-in capital... 13,137,988 20,703,450
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$
-------------- -------------- --------------
Total capitalization..... US$ (938,559) US$ (938,559) US$
============== ============== ==============
</TABLE>
- --------
(1) Excludes (i) 1,128,094 shares of Common Stock issuable upon the exercise
of options outstanding as of April 30, 1998 under the Stock Option Plans
at a weighted average exercise price of US$3.32 per share, (ii) 131,006
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 April 30, 1998 at a weighted average exercise price of
US$3.49 per share. See "Management--Stock Option Plans" and "Description
of Capital Stock."
15
<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$ 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$ , or approximately US$ per share. This represents
an immediate increase in the net tangible book value of US$ per share to
existing shareholders and immediate dilution of US$ 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$
-----
Pro forma net tangible book value per share of Common Stock
at March 31, 1998......................................... US$(0.21)
--------
Increase in pro forma net tangible book value per share
attributable to new investors.............................
Pro forma net tangible book value per share after this
Offering..................................................
Dilution per share to new investors........................ US$
=====
</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$ share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 8,724,140 85% US$20,425,107 % US$2.34
New investors........... 1,500,000 15% US$ %
---------- ---- ------------- ----
Total................. 10,224,140 100% US$ 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.
16
<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
administrative....... 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$ (1.59) 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 4,042 5,062 4,804 5,198
======== ========= ========= ========= ========= ========= =========
</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' equity
(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) Net of accretion of redemption premium on Preferred Stock of US$537 in
1997 and US$201 in the first three months of 1998.
(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.
17
<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. To the extent that the
Company chooses not to, or is unable to enter into similar strategic alliances
for other products and 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.
18
<PAGE>
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.
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 the reduction 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, the reduction in sales
and marketing expense due to staffing reductions as the Company consolidated
certain sales territory, and the increase in research and development expense
for additional preclinical activities related to ORTHOCOMP.
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.
19
<PAGE>
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.
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.
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.
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. The Company was able to achieve a gross profit
margin in 1996 as a result of its consolidation of its manufacturing of
BIOGRAN in the U.S.
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
sales and marketing expenses of US$2.3 million, general and administrative
expenses of US$1.1 million and in 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 continue the growth in staffing and facilities and
expenses incurred in obtaining regulatory approvals and its 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.
20
<PAGE>
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.
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
21
<PAGE>
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$1,010,000 and (ii) 839,857 shares of common stock for US$4.25
per share, raising net proceeds of US$3,436,000.
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 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 make 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. Mr. Joseph has personally guaranteed
US$356,000 of the outstanding balance under this facility.
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 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.
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. Although the court in the BIOGRAN Matter
recently granted the Company's summary judgment motion with respect to the
issue of noninfringement, 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 the second quarter
of 1998. 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.
22
<PAGE>
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. 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.
23
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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. 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 is a preferable cement material to PMMA because of its superior
mechanical properties and easier to use delivery system, and that ORTHOCOMP
addresses a clear market need in joint implant and other procedures. The
Company initially intends to pursue an easier regulatory route by targeting
ORTHOCOMP for lower threshold indications, such as screw augmentation. The
Company believes that its longer-term objective to replace PMMA represents an
estimated US$250 million market opportunity.
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
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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. For example, it is anticipated that ORTHOCOMP's use
as a joint implant replacement cement will be directed to a leading hip and
knee implant company, whereas 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 provides 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.
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.
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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
cases where moderate load bearing, coupled with fixation hardware, will 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 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 28, 1998, the Company entered into its first
strategic alliance, with 3i, whereby 3i has obtained the global distribution
rights for BIOGRAN and ORTHOCOMP for the dental implant surgery market.
The following chart sets forth certain information regarding these
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.
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.
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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 a material 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.
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. Using ORTHOCOMP, the procedure can be
performed on an outpatient or short-stay basis. The vertebra is perforated
through the pedicular arch using a catheter. The material is then injected
into the vertebra, sets within minutes and is load bearing. The procedure is
then 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.
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, implants anchored with ORTHOCOMP may
allow load bearing within two to four weeks and will serve a broader patient
population, including patients with low bone-regenerative potential.
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. 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. It is feasible 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.
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 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. 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 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.
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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. See "--License Agreements."
CLINICAL ADVISORY BOARD
The Company has a Clinical Advisory Board that currently consists of nine
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.
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.
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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.
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, 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,
14 pending patent applications in the United States and numerous counterparts
of certain of these patents and pending patent applications in Europe and
Japan.
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, a Belgian company. In July 1992, the Company and FBFC entered into a
license agreement (the "FBFC License Agreement"). Under the FBFC License
Agreement, as amended, FBFC grants 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 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
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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, 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 competitive 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, 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 international 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 a 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
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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
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.
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 intended use
and for which substantial equivalence can be demonstrated through design
controls.
31
<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 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
32
<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. 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, 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.
33
<PAGE>
EMPLOYEES
As of March 31, 1998, the Company had 39 full-time employees, consisting of
four persons in research and development activities, three persons in
manufacturing and facilities, four persons in clinical and regulatory affairs,
19 persons in sales and marketing, seven persons in general and administrative
functions, and two employees at the Company's offices in Belgium.
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 with respect to
the issue of noninfringement. 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. 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.
34
<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 Ohio 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 1983 to September 1993 in a
variety 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.
35
<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.
36
<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.
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.
37
<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 $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG TERM COMPENSATION
-------------- -------------------------
SECURITIES
YEAR UNDERLYING ALL OTHER
SALARY BONUS OPTION/SAR'S COMPENSATION
NAME AND PRINCIPAL POSITION YEAR (US$) (US$) (#) (US$)(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.
38
<PAGE>
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
INDIVIDUAL GRANTS FOR OPTION 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$374,192 US$948,277
Erik M. Erbe, Ph.D. .... 100,000 32.0 4.25 July 1, 2007 267,280 677,341
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 the exercise price shown for each particular option on the date
of grant 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.
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$ US$
Erik M. Erbe, Ph.D. .... -- -- 67,500 67,500
Thomas L. Parker, Jr. .. -- -- 12,800 19,200
K. Vasanth Prabhu,
Ph.D. ................. -- -- 12,000 18,000
</TABLE>
- --------
(1) Calculated based on a value equal to an assumed initial public offering
price of US$ 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
39
<PAGE>
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
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 the 1993 Plan is 650,000 shares. As of March 31, 1998,
options to purchase 629,544 shares were outstanding under the 1993 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.
40
<PAGE>
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 March 31, 1998, options to
purchase 485,050 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
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
41
<PAGE>
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 section 162(m) of
the Internal Revenue Code of 1986, as amended (the "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 constitute an employee stock purchase
plan within the meaning of Section 423 of the Code. 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 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.
42
<PAGE>
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.
43
<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 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 178,709 shares of Common Stock,
respectively, exercisable at US$4.25 per share (the "Series Warrants"). Of the
Series Warrants, an aggregate of 77,000 shares of Common Stock are obtainable
from Dr. Paul Ducheyne 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.
As part of the April 1997 Financing, each of Messrs. Ducheyne and Joseph
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.
44
<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.
<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)......... 1,496,070 17.1% -- 1,496,070 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 1.7
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 *
James M. Garvey(10)............. 10,000 * -- 10,000 *
Lew Bennett(11)................. 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 31.8 -- 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 8.9 -- 788,143 7.6
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).... 533,359 6.1 -- 533,359 5.2
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
As a Group(19).................. 500,000
</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, (ii)
650,324 shares held in trust for the benefit of Dr. Ducheyne's children
and (iii) 90,250 shares underlying certain warrants granted by Dr.
Ducheyne 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. 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 and (ii) 4,194 shares
of Common Stock obtainable from Dr. Ducheyne upon the exercise of a
presently exercisable warrant.
(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.
(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 and (ii) 2,097 shares
of Common Stock obtainable from Dr. Ducheyne upon the exercise of a
presently exercisable warrant. 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 47,645 shares of Common
Stock obtainable from 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.
45
<PAGE>
(10) Includes 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.
(11) Includes 10,000 shares of Common Stock obtainable upon the exercise of
presently exercisable options.
(12) Includes 10,000 shares of Common Stock obtainable upon the exercise of
presently exercisable options.
(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 47,645 shares of Common Stock obtainable from Dr. Ducheyne 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) Include 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 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, none of whom beneficially owns more than 5% of the
outstanding Common Stock as of the date of this Prospectus.
46
<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 10,000,000
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 10,224,140 shares of Common Stock
outstanding and no shares of Preferred Stock outstanding.
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
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 election of directors is determined by a
plurality of the votes cast and, except as otherwise required by law, all
other matters are determined by a majority of the votes cast. 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.
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 10,000,000 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. The issuance of Preferred Stock may 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.
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.
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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 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.
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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 10,224,140
shares of Common Stock outstanding, plus 1,128,094 shares of Common Stock
subject to options outstanding under the Stock Option Plans as of April 30,
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 8,224,140 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. 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 [5,012,903]
Restricted Shares will be subject to volume limitations and certain other
conditions of Rule 144.
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 beneficially
own 2,917,241 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 after the date of this Prospectus.
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 914,925 shares of Common Stock, 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.
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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 Offerings. 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, or indirectly
through Euroclear and Cedel Bank. None of Intersettle, Euroclear or Cedel Bank
in any way undertakes to and none of them shall have any 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
Intersettle clearing and settlement system. The term financial institution
includes Euroclear and Cedel Bank which have made arrangements with
Intersettle to have the Company's shares credited to accounts with Euroclear
and Cedel Bank through intermediaries.
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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 U.S. 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 "Belgium 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 Belgium 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 Belgium Treaty provides that if the non-U.S. holder is a Belgium
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 Belgium
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
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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 Belgium 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 retrospective effect. This discussion is not
exhaustive of all possible tax considerations and potential investors are
advised to satisfy themselves as to the overall tax consequences, including
specifically but not limited to the consequences under
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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 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 at the rate of 25%.
In certain cases, the abovementioned 25% rate of dividend withholding tax
will be reduced to 15%. The reduced rate applies, in particular, to (i)
dividends distributed on shares publicly issued after January 1, 1994; and
(ii) dividends distributed on shares that have been privately issued after
January 1, 1994, in exchange for cash contributions, provided the shares are
registered or bearer shares placed in "open custody" with a financial
institution in Belgium as of the date of their issuance. This reduced rate
will apply to dividends distributed on the Common Stock issued by the Company.
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 taxed at the separate rate of 15%, 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 or 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.
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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.
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.
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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 "Belgium
Public Offering") and (ii) placements to institutional investors inside and
outside Belgium, including in the U.S. a limited number of qualified
institutional buyers (the "International Offering") (the Belgium 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$ and US$ 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
will be , 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 first business day following the closing of the
subscription period or , 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. The final
offering price will be a single price applicable to all investors.
BOOKBUILDING
During the first part of the International Offering and prior to the Belgium
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 May , 1998 and continue
after the closing of the bookbuilding period and is expected to close at 4
p.m. Brussels time on June , 1998 unless it is curtailed. The International
Offering will cover % of the shares, subject to the right of the Underwriters
to change percentages as described below.
The subscription period for the Belgium Public Offering will commence on
June , 1998 unless bookbuilding is curtailed, in which case the Belgian
Public Offering will commence on the business day following the date of the
closing of the bookbuilding period. The Belgium Public Offering is expected to
close at 4 p.m. Brussels time on June , 1998. The Belgium Public Offering
covers % 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 Belgium Public Offering and the International
Offering can be modified by agreement between the Underwriters and the Company
depending upon subscriptions in each tranche. The Belgium Public Offering,
however, will not be reduced in the event of oversubscription.
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 case the
early closing date will be published in the Belgium financial press. No
subscriptions will be accepted after closing of the subscription period.
55
<PAGE>
SUBSCRIPTION PROCEDURES
In Belgium, copies of this Prospectus, with a form of subscription to the
shares attached, may be obtained from the . 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 .
In the event of oversubscription of the Belgium 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 provided above, provided that shares
allocated to the Belgium Public Offering will not be reduced in case the
Belgium Public Offering is oversubscribed. Shares must be paid in full by the
investors to the Underwriters in United States Dollars.
56
<PAGE>
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>
---------
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 , 1998, the Underwriter's risk is limited to the payment risk
for a period commencing June , 1998, the date of signing the Underwriting
Agreement, until June , 1998, the value date for payment by investors.
Quartz Capital has in the past acted as placement agent for the Company in
connection with placements of securities. 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.
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.
Certain of the Company's shareholders, the executive officers and directors
have agreed that they will not, without the prior written consent of Quartz
Capital, 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. (This 180 day lock-up may not be waived
for directors.) The Company has agreed that it will not, without the prior
written consent of the 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
57
<PAGE>
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.
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 audited by Arthur Andersen LLP, independent public
accountants 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.
ADDITIONAL INFORMATION
The Company has filed with 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 inspected without
charge at the principal office of the U.S. Securities and Exchange Commission
(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. Copies of all documents filed
with the Commission by the Company can be obtained by request to the Company
at such offices.
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.
58
<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 Stockholders'
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
stockholders' 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 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ Arthur Andersen LLP
Philadelphia, Pa.,
January 27, 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
STOCKHOLDERS' 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)
STOCKHOLDERS' 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, 4,622,300,
5,197,722 and 5,197,722
shares issued and
outstanding (actual)
8,724,140 shares issued
and outstanding (pro
forma) ................ 35,394 46,223 51,977 51,977 87,241
Additional paid-in
capital................ 4,243,106 8,679,094 13,137,988 13,137,988 20,703,450
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 stockholders'
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
CURRENCY TRANSLATION
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.................. $ (1.04) $ (1.59) $ (1.60) $ (0.36) $ (0.33)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............ 3,215,000 4,041,900 5,061,897 4,803,959 5,197,722
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ORTHOVITA, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
STOCKHOLDERS 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 839,857 shares
of Common Stock, net
of offering costs of
$132,930.............. -- -- -- 8,398 3,428,064 -- -- 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 46,223 8,679,094 (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
Currency translation
adjustment............ -- -- -- -- -- -- (2,084) (2,084)
Issuance of Common
Stock and Common Stock
options for services.. -- -- -- 417 426,375 -- -- 426,792
Accretion of redemption
premium on 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 51,977 13,137,988 (20,885,159) (33,943) (7,712,696)
Currency translation
adjustment
(unaudited)........... -- -- -- -- -- -- 30,374 30,374
Accretion of redemption
premium on 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 $51,977 $13,137,988 $(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).. $ -- $ -- $ -- $87,241 $20,703,450 $(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.
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. See "Risk Factors" in the Prospectus.
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 has committed to escalating minimums in the subsequent
four years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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. Due to the Company's net losses, diluted loss per share has not
been presented.
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.
F-7
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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 derived 56%, 39%, 25%, 31% and 18% of revenues in 1995, 1996,
1997 and the three months ended March 31, 1997 and 1998, respectively, from
customers outside the United States.
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
F-8
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
Recently Issued Accounting Pronouncements
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. Management believes that
SFAS 130 will not have a material effect on the Company's financial
statements.
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,
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Raw materials and work-in-process................ $ 82,097 $ 8,801 $ 17,971
Finished goods................................... 250,690 239,906 205,893
-------- -------- --------
$332,787 $248,707 $223,864
======== ======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Machinery and laboratory equipment........ $ 418,070 $ 920,624 $1,080,857
Furniture, and office equipment........... 291,325 436,279 429,515
Leasehold improvements.................... 88,096 588,049 629,777
--------- ---------- ----------
797,491 1,944,952 2,140,149
Less--Accumulated depreciation............ (206,322) (360,708) (458,592)
--------- ---------- ----------
$ 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.
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-9
<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.
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. 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. The Company receives a credit against the
maximum royalty amount for repayments of the loan and certain other fees, as
defined.
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 as a current liability as of
December 31, 1997 and March 31, 1998.
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. 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 for certain expenses Penn incurred related to
the intellectual property, the Company issued 96,250 shares in 1993 and 41,705
in 1997 shares of Common Stock to Penn with a fair market value of $96,250 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.
F-10
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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
collateral 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,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Payable for acquired technology net of
unamortized discount of $63,536,
$20,967, and $19,954 (see Note 5)...... $ 845,291 $ 378,952 $ 370,846
Term loans to a bank (see Note 7)....... -- 375,000 350,000
Capitalized leases...................... 24,121 770,024 892,337
Subordinated secured notes, repaid in
1997................................... 775,000 -- --
---------- ---------- ----------
1,644,412 1,523,976 1,613,183
Less--Current portion................... (55,873) (690,985) (739,248)
---------- ---------- ----------
$1,588,539 $ 832,991 $ 873,935
========== ========== ==========
</TABLE>
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>
F-11
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 STOCKHOLDERS' 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.
Under certain circumstances, the Company has the right, at its option, to
cause the conversion of all, but not less than all, of the 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. 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. Management expects
the holders of the Class C Preferred to agree to convert their shares into
Common Stock upon the consummation of the Offering.
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 839,857 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
F-12
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
The Company applies Accounting Principal Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and the related interpretations in accounting
for its Stock option plans. The disclosure requirement of Statement of
Financial Accounting Standards ("SFAS") 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) $ (1.59) $ (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.
F-13
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Current............................................ $ -- $ --
Deferred........................................... (2,253,984) (2,627,448)
----------- -----------
(2,253,984) (2,627,448)
Valuation allowance................................ 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.
Components of the Company's deferred tax asset as of December 31, 1996 and
1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets--
Net operating loss carryforwards............... $ 2,840,596 $ 4,613,154
Accrued expenses not currently deductible...... 185,899 388,806
Research, patent and organizational costs
capitalized for tax purposes.................. 1,685,375 2,337,357
----------- -----------
4,711,870 7,339,317
Valuation allowance.............................. (4,711,870) (7,339,317)
----------- -----------
Net deferred tax asset........................... $ -- $ --
=========== ===========
</TABLE>
A valuation allowance has been established since the realization of the
deferred tax asset is not assured given the Company's history of operating
losses.
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>
F-14
<PAGE>
ORTHOVITA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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>
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 with respect to the issue
of noninfringement. 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.
The Company has $635,003 of accrued patent defense costs as of March 31,
1998 for the estimated future cost of defending this litigation, primarily
legal fees.
F-15
<PAGE>
[DESCRIPTIONS TO BE ADDED FOR EDGAR FILING]
<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>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 15
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 24
Management............................................................... 35
Certain Relationships and Related Transactions........................... 44
Principal and Selling Shareholders....................................... 45
Description of Capital Stock............................................. 47
Shares Eligible for Future Sale.......................................... 49
Easdaq Settlement and Clearance.......................................... 50
Income Tax Considerations................................................ 51
Offering and Subscription................................................ 55
Underwriting............................................................. 57
Legal Matters............................................................ 58
Experts.................................................................. 58
Additional Information................................................... 58
Index to Financial Statements............................................ F-1
</TABLE>
-----------------
UNTIL , 1998 (25 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 APPEARS HERE]
ORTHOVITA, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
, 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................................................. $ 6,490
Transfer agent and registrar fees................................ 25,000
Printing and engraving........................................... 150,000
Legal fees....................................................... 250,000
Blue Sky fees and expenses....................................... 0
EASDAQ listing fee............................................... *
Accounting fees.................................................. 150,000
Miscellaneous.................................................... 100,000
--------
Total.......................................................... $ *
========
</TABLE>
- --------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION AND 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") 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
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 for $4.25 per share or $5.8 million in the aggregate.
4. In April 1997, the Company sold 1,882,353 shares of Class B
Convertible Preferred for $4.25 per share or $8.0 million in the aggregate.
5. In April 1997, the Company issued 41,705 shares of common stock as
partial consideration for an exclusive, worldwide license.
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 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.*
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>
- --------
*Filed herewith.
**To be filed by Amendment.
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 REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN MALVERN, PENNSYLVANIA
ON APRIL 30, 1998.
Orthovita, Inc.
By: /s/ David S. Joseph
---------------------------------
DAVID S. JOSEPH,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Each person in so signing also makes, constitutes and appoints David Joseph
and Joseph Paiva and each of them acting alone, his true and lawful attorney-
in-fact, with full power of substitution, to execute and cause to be filed
with the Securities and Exchange Commission pursuant to the requirements of
the Securities Act of 1933, as amended, any and all amendments and post-
effective amendments to this Registration Statement, and including any
Registration Statement for the same offering that its to be effective upon
filing pursuant to Rule 462(b) under the Securities Act, with exhibits thereto
and other documents in connection therewith, and hereby ratifies and confirms
all that said attorney-in-fact or his substitute or substitutes may do or
cause to be done by virtue hereof.
NAME CAPACITY DATE
/s/ David S. Joseph Chief Executive Officer, April 30,
- --------------------------------- President and Director 1998
DAVID S. JOSEPH (principal executive
officer)
/s/ Joseph M. Paiva Vice President and Chief April 30,
- --------------------------------- Financial Officer (principal 1998
JOSEPH M. PAIVA financial and accounting
officer)
/s/ Paul Ducheyne Chairman of the Board April 30,
- --------------------------------- 1998
PAUL DUCHEYNE, PH.D.
/s/ Howard Salasin Director April 30,
- --------------------------------- 1998
HOWARD SALASIN
/s/ Richard M. Horowitz Director April 30,
- --------------------------------- 1998
RICHARD M. HOROWITZ, ESQ.
/s/ James M. Garvey Director April 30,
- --------------------------------- 1998
JAMES M. GARVEY
/s/ Joseph B. Peeters Director April 30,
- --------------------------------- 1998
JOSEPH B. PEETERS, PH.D.
/s/ Lew Bennett Director April 30,
- --------------------------------- 1998
LEW BENNETT
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 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.*
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>
- --------
*Filed herewith.
**To be filed by Amendment.
II-5
<PAGE>
Exhibit 10.1
CLASS C CONVERTIBLE PREFERRED STOCK AND
WARRANT PURCHASE AGREEMENT
This CLASS C CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE
AGREEMENT (this "Agreement") dated April 11, 1997 is entered into by Orthovita,
Inc., a Pennsylvania corporation (the "Company"), Schroder Ventures
International Life Sciences Fund LP1, a Delaware limited partnership ("Schroder
LP1"), Schroder Ventures International Life Sciences Fund LP2, a Delaware
limited partnership ("Schroder LP2"), Schroder Ventures International Life
Sciences FundTrust, a trust organized under the laws of Bermuda ("Schroder
Trust"), The Schroder Ventures International Life Sciences Fund Co-Investment
Scheme, a corporation organized under the laws of Bermuda ("Schroder Co-
Investment" and together with Schroder LP1, Schroder LP2 and Schroder Trust,
"Schroder"), The Wellcome Trust Limited, a company limited by guarantee
incorporated in England, as trustee of The Wellcome Trust ("The Wellcome
Trust"), an English charity registered with the Charity Commissioner of England
and Wales under number 210,183 ("Wellcome"), Electra Fleming Private Equity
Partners, a limited partnership established under the Limited Partnership Act of
1907 of the United Kingdom, ("Electra Equity"), and EF Nominees Limited, a
private limited liability company incorporated under the laws of England and
Wales ("EF" and together with Electra Equity, "Electra"). Schroder, Wellcome
and Electra are sometimes collectively referred to herein as the "Purchasers".
The execution and delivery by Wellcome of this Agreement is subject to
Attachment A hereto.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Reference to Definitions.
------------------------
For convenience, certain terms used in more than one part of this
Agreement are listed in alphabetical order and defined or referred to below
(such terms as well as any other terms defined elsewhere in this Agreement shall
be equally applicable to both the singular and plural forms of the terms
defined).
"Affiliates" means, with respect to a particular party, Persons or
entities controlling, controlled by or under common control with that party, as
well as the officers, directors and majority-owned Persons of that party and of
its other Affiliates. For the purposes of the foregoing, ownership, directly
or indirectly, of 50% or more of the voting stock or other equity interest shall
be deemed to constitute control.
"Agreement" means this Agreement and the Exhibits and Disclosure
Letter hereto.
<PAGE>
"Assets" means all of the assets, properties, goodwill and rights of
every kind and description, real and personal, tangible and intangible
(including goodwill), wherever situated and whether or not reflected in the most
recent Financial Statements, that are owned or possessed by the Company and used
or held for use in connection with the operation of the Business.
"Balance Sheet" is defined in Section 4.5.
"Balance Sheet Date" is defined in Section 4.5.
"Benefit Plans" means all employee benefit plans of the Company within
the meaning of Section 3(3) of ERISA and any related or separate Contracts,
plans, trusts, programs, policies, arrangements, practices, customs and
understandings, in each case whether formal or informal, that provide benefits
so described in ERISA Sections 3(1) or 3(2) to any present or former employee of
the Company, or present or former beneficiary, dependent or assignee of any such
employee or former employee, including, without limitation, all incentive,
bonus, deferred compensation, vacation, holiday, medical, disability, share
purchase or other similar plans, policies, programs, practices or arrangements.
"Business" means the entire existing and presently contemplated
business conducted by the Company.
"Certificate of Designations" means the Certificate of Designations,
Preferences and Rights of Class C Convertible Preferred Stock of Orthovita,
Inc., in substantially the form attached as EXHIBIT A hereto.
"Charter Documents" means an entity's certificate or articles of
incorporation, certificate defining the rights and preferences of securities,
articles of organization, general or limited partnership agreement, certificate
of limited partnership, operating agreement, joint venture agreement or similar
document governing the entity.
"Class A Preferred Stock" means the Class A Convertible Preferred
Stock, par value $.01 per share, of the Company.
"Class B Preferred Stock" means the Class B Convertible Preferred
Stock, par value $.01 per share, of the Company.
"Class C Preferred Stock" means the Class C Convertible Preferred
Stock, par value $.01 per share, of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the common stock, par value $.01 per share, of
the Company.
2
<PAGE>
"Company" is defined in the preamble.
"Confidential Information" means any confidential information or trade
secrets of the Business, including, without limitation, information and
knowledge pertaining to products and services offered, innovations, designs,
ideas, plans, trade secrets, proprietary information, know-how and other
technical information, distribution and sales methods and systems, sales and
profit figures, customer and client lists, and relationships with dealers,
distributors, wholesalers, customers, clients, suppliers and others who have
business dealings with the Business.
"Contract" means any written or oral contract, agreement, lease, plan,
instrument or other document or commitment, arrangement, undertaking, practice
or authorization that is binding on any Person or its property under applicable
law.
"Copyrights" means registered copyrights, copyright applications and
unregistered copyrights.
"Court Order" means any judgment, decree, injunction, order or ruling
of any Federal, state, local or foreign court or governmental or regulatory body
or arbitrator or authority that is binding on any Person or its property under
applicable law.
"Default" means (a) a breach, default or violation, (b) the occurrence
of an event that with or without the passage of time or the giving of notice, or
both, would constitute a breach, default or violation or cause an Encumbrance to
arise or (c) with respect to any Contract, the occurrence of an event that with
or without the passage of time or the giving of notice, or both, would give rise
to a right of termination, renegotiation or acceleration or a right to receive
damages or a payment of penalties.
"Disclosure Letter" means the Disclosure Letter of the Company
delivered pursuant to Section 2.
"Encumbrances" means any lien, mortgage, security interest, pledge,
restriction on transferability or voting, defect of title or other claim, charge
or encumbrance of any nature whatsoever on any property or property interest.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Financial Statements" is defined in Section 4.5.
"GAAP" means United States generally accepted accounting principles.
"Intellectual Property" means any Copyrights, Patents, Trademarks,
technology rights and licenses, trade secrets, franchises, know-how, inventions
and other intellectual property.
3
<PAGE>
"Inventory" means any inventory, including raw materials, supplies,
work in process and finished goods.
"Knowledge of the Company" or "best knowledge of the Company" or words
of similar import mean the actual knowledge of David S. Joseph, Paul Ducheyne,
Salvatore Nalbone or Stanley J. Musial.
"Law" means any statute, law, ordinance, regulation, order or rule of
any federal, state, local, foreign or other governmental agency or body or of
any other type of regulatory body, including those covering environmental,
energy, safety, health, transportation, bribery, recordkeeping, zoning,
antidiscrimination, antitrust, wage and hour, and price and wage control
matters.
"Liability" means any direct or indirect liability, indebtedness,
obligation, expense, claim, loss, damage, deficiency, guaranty or endorsement of
or by any Person, absolute or contingent, accrued or unaccrued, due or to become
due, liquidated or unliquidated.
"Litigation" means any lawsuit, action, arbitration, administrative or
other proceeding, criminal prosecution or governmental investigation or inquiry.
"Material Adverse Effect" means a material adverse effect on the
financial condition or results of operations of the Company.
"Ordinary course" or "ordinary course of business" means the ordinary
course of business that is consistent in nature and, where relevant, amount with
past practices.
"Patents" means all patents and patent applications.
"Permit" means any governmental permit, license, registration,
certificate of occupancy, approval and other authorization.
"Person" means any natural person, corporation, partnership,
proprietorship, association, trust or other legal entity.
"Preferred Stock" means the preferred stock, par value $.01 per share,
of the Company.
"Public Offering" is defined in Section 6(b) of the Statement of
Designation, Preferences and Rights of Class C Convertible Preferred Stock of
Orthovita, Inc.
"Purchase Price" means $8,000,000.
4
<PAGE>
"Registration Rights Agreement" means the Registration Rights
Agreement by and among the Company and certain other stockholders of the Company
in substantially the form attached as EXHIBIT B hereto.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means the 1,882,353 shares of the Class C Preferred Stock
purchased by the Purchasers pursuant to this Agreement.
"Stockholders' Agreement" means the Stockholders' Agreement by and
among the Company and certain of its stockholders entered into as of the date
hereof.
"Trademarks" means registered trademarks, registered service marks,
trademark and service mark applications and unregistered trademarks and service
marks.
"Transaction Documents" means this Agreement, the Registration Rights
Agreement, the Stockholders' Agreement and the Certificate of Designations.
"Transactions" means the purchase and sale of the Shares and Warrants
and the consummation of the other transactions contemplated by the Transaction
Documents.
"Warrants" means the warrants of the Company delivered to the
Purchasers and exercisable for that number of shares of Common Stock as is set
forth on EXHIBIT C hereto opposite each such Purchaser's name and in
substantially the form attached as EXHIBIT D.
2. Purchase and Sale of Securities. The Company hereby sells to each
-------------------------------
Purchaser, and each Purchaser hereby purchases from the Company, the number of
Shares set forth on EXHIBIT C hereto opposite each such Purchaser's name for a
purchase price equal to the amount set forth on EXHIBIT C opposite each such
Purchaser's name. In addition, the Company hereby grants the Warrant to the
Purchasers.
3. Closing.
-------
3.1 Location; Date. The closing of the Transactions (the "Closing")
--------------
shall take place on the date hereof at the offices of Morgan, Lewis & Bockius
LLP, 2000 One Logan Square, Philadelphia, Pennsylvania 19103.
3.2 Closing Conditions. The obligations of the parties hereunder
------------------
shall be subject to the satisfaction or waiver of the following conditions:
a. the obligations of the Company at the Closing shall be
subject to each Purchaser delivering or causing to be delivered:
5
<PAGE>
(i) the Purchase Price equal to the amount set forth on
EXHIBIT C opposite each such Purchaser's name;
(ii) an executed copy of the Registration Rights Agreement;
and
(iii) such other agreements, documents and instruments
contemplated by this Agreement and such other items as may be
reasonably requested the Company;
b. The obligations of the Purchasers at the Closing shall be
subject to the Company delivering or causing to be delivered:
(i) payment instructions regarding the Purchase Price;
(ii) an executed copy of the Registration Rights Agreement;
(iii) a legal opinion of Morgan, Lewis & Bockius, LLP,
counsel to the Company, in form and substance reasonably
satisfactory to counsel to the Purchasers;
(iv) certificates representing the Shares and the Warrants;
(v) a Certificate of the Secretary of State of the
Commonwealth of Pennsylvania as to the due incorporation and good
standing of the Company;
(vi) a copy of the Articles of Incorporation of the
Company, and all amendments thereto, certified by the Secretary
of State of the Commonwealth of Pennsylvania;
(vii) evidence of the filing with the Secretary of State of
the Commonwealth of Pennsylvania of the Certificate of
Designation;
(x) a fully executed copy of the Shareholders' Agreement
dated as of the date hereof in substantially the form attached
hereto as EXHIBIT E; and
(xi) such other agreements, documents and instruments
contemplated by this Agreement and such other items as may be
reasonably requested the Purchasers;
6
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4. Representations and Warranties of the Company. Except as set forth in
---------------------------------------------
a letter dated the date of this Agreement, executed by the Company containing
information required by this Agreement and exceptions to the representations and
warranties of the Company under this Agreement indicating, in each instance, the
subsection of this Agreement to which each such exception relates (the
"Disclosure Letter"), the Company hereby jointly and severally represent and
warrant to the Purchasers that as of the date hereof:
4.1 Organization, Standing and Qualification. The Company is a
----------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the Commonwealth of Pennsylvania and is qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where it is required to
be so qualified, except where the failure to so qualify would not have a
Material Adverse Effect. The Company has previously delivered to the
Purchasers true, correct and complete copies of its Charter Documents and bylaws
and has previously made available for inspection by the Purchasers the Company's
complete corporate minute and stock books.
4.2 Authorization. The Company has the requisite power and authority
-------------
to own its property and carry on the Business as currently conducted, and to
execute and deliver the Transaction Documents to which it is a party and to
perform the Transactions to be performed by it. Each Transaction Document
executed and delivered by the Company as of the date hereof has been duly
executed and delivered by the Company and constitutes a valid and binding
obligation of the Company, enforceable against it in accordance with its terms.
4.3 Consents and Approvals. There is no Litigation pending, or to
----------------------
the knowledge of the Company, threatened, by or against or affecting the
Company in connection with or relating to the Transactions or any action to be
taken in connection herewith or therewith or the consummation thereof. Except
for the consents specified in the Disclosure Letter, neither the execution or
delivery by the Company of the Transaction Documents, nor the performance of the
Transactions to be performed by it thereunder, will require any filing, consent
or approval, constitute a Default or cause any payment obligation to arise under
(a) any Law or Court Order to which the Company is subject, (b) the Charter
Documents or bylaws of the Company or (c) any Contract, Permit or other document
to which the Company is a party or by which its Business may be subject.
4.4 Capitalization. The authorized capital stock of the Company
--------------
consists of (i) 15,000,000 shares of Common Stock, of which 5,186,221 shares are
currently outstanding, and (ii) 5,000,000 shares of Preferred Stock, of which
606,060 shares have been designated as Class A Preferred Stock, all of which are
currently outstanding, 1,337,786 shares have been designated as Class B
Preferred Stock, of which 1,038,005 shares are currently outstanding, and
1,882,353 shares have been designated as Class C Preferred Stock. Except for
the Class A Preferred Stock, the Class B Preferred Stock, the Class C Preferred
Stock, outstanding warrants which are presently exercisable for 299,781 shares
of Series B Preferred Stock, outstanding warrants which are presently
exercisable for 703,444 shares of Common Stock and outstanding options which are
presently exercisable for an aggregate of 793,143 shares of Common Stock, there
are no existing options, warrants, calls, commitments or other rights of any
character (including conversion or preemptive rights) relating
7
<PAGE>
to the acquisition of any issued or unissued capital stock or other securities
of the Company. All of the Company's outstanding shares of capital stock are,
and all of the Shares outstanding immediately following consummation of the
Transactions will be, duly and validly authorized and issued, fully paid and
non-assessable, and, based on the representations and warranties of the
Purchasers herein, all of such shares have been, or will be upon the Closing,
issued in compliance with all Federal and state securities laws. EXHIBIT F to
this Agreement contains an accurate and complete list of the shareholders,
option holders and warrant holders of record of the Company and the number of
shares or shares of Common Stock obtainable upon the exercise of options or
warrants or the conversion of Preferred Stock, as the case may be, that each
hold of record.
4.5 Financial Statements. The Disclosure Letter includes correct and
--------------------
complete copies of audited financial statements consisting of a balance sheet of
the Company as of December 31, 1994, 1995 and 1996 and the related statements of
income and cash flows for the years then ended, all of which are audited and
reported on by Arthur Andersen LLP (collectively, the "Financial Statements").
The Financial Statements are in all material respects consistent with the books
and records of the Company and there are no transactions required by GAAP,
applied on a consistent basis, to be recorded in accounting records that have
not been recorded in the accounting records underlying such Financial
Statements. The Financial Statements have been prepared in accordance with GAAP
consistently applied and present fairly the financial position and assets and
liabilities of the Company as of the dates thereof and its cash flows and the
results of its operations for the years then ended. The balance sheet as of
December 31, 1996 that is included in the Financial Statements is referred to
herein as the "Balance Sheet" and the date thereof is referred to as the
"Balance Sheet Date."
4.6 Title to Assets and Related Matters. Except as set forth in the
-----------------------------------
Disclosure Letter, the Company has good title to, valid leasehold interests in
or valid licenses to use, all of its material Assets. Except as set forth in
the Disclosure Letter, the Assets (i) are all in the possession or under the
control of the Company and are located on the Real Property, as defined below,
that are used by the Company, (ii) are all in good working order, where
applicable and except for ordinary wear and tear and (iii) represent all of the
Assets necessary to conduct the Business in the manner currently or presently
contemplated to be operated.
4.7 Real Property. The Disclosure Letter describes all real estate
-------------
leased by the Company (collectively, the "Real Property"). The Company does not
have an ownership interest in any Real Property.
4.8 Certain Personal Property. The Company has delivered to the
-------------------------
Purchasers a complete fixed asset schedule, describing and specifying the
location of all material items of tangible personal property that are included
in the Balance Sheet. Except as set forth in the Disclosure Letter, since
December 31, 1996, the Company has not (i) acquired any items of tangible
personal property that has, in any case, a carrying value in excess of $25,000,
or an aggregate carrying value in excess of $50,000 or (ii) disposed of any
items of tangible personal property (other than inventory) that
8
<PAGE>
have, in any case, an initial carrying value in excess of $25,000, or an initial
aggregate carrying value in excess of $50,000.
4.9 Personal Property Leases. The Disclosure Letter lists all
------------------------
material Assets and property (other than Real Property) that are used by the
Company in the operation of the Business and that are possessed by the Company
under an existing lease, including all trucks, automobiles, machinery,
equipment, furniture and computers, except for any lease under which the
aggregate annual payments are less than $5,000 (each, an "Immaterial Lease").
The Disclosure Letter also lists the leases under which such assets and property
listed in the Disclosure Letter are possessed. All of such leases (excluding
"Immaterial Leases") are referred to herein as the "Personal Property Leases."
4.10 Liabilities. The Company does not have any material Liabilities,
-----------
except (a) as specifically disclosed in the Financial Statements (including the
notes thereto), (b) Liabilities incurred in the ordinary course since the
Balance Sheet Date, which do not in the aggregate exceed $25,000 and (c)
Liabilities under any Contracts specifically disclosed in the Disclosure Letter
(or not required to be disclosed because of the term or amount involved) that
were not required under GAAP to have been specifically disclosed or reserved for
on the Balance Sheet. All of the Company's obligations pursuant to its 15%
Subordinated Secured Notes Due 2000 have been satisfied in full.
4.11 Taxes. The Company has duly filed all Federal, state, local,
-----
foreign and other tax returns that are required to be filed and that were due
prior to the Closing Date, and, except as set forth in the Disclosure Letter,
have paid all taxes and assessments shown as being due pursuant to such returns
or pursuant to any assessment received. All taxes and other assessments and
levies that the Company has been required by law to withhold or to collect have
been duly withheld and collected and have been paid over to the proper
governmental authorities or are properly held by the Company for such payment.
There are no pending or, to the knowledge of the Company, threatened proceedings
or other actions, for the assessment or collection of additional taxes of any
kind by the Company for any period which remains open under the applicable
statute of limitations for examination of Federal income tax under the Code for
which returns have or should have been filed.
4.12 Subsidiaries. The Company does not own, directly or indirectly,
------------
any interest or investment (whether equity or debt) in any corporation,
partnership, business, trust, joint venture or other legal entity.
4.13 Legal Proceedings and Compliance with Law.
-----------------------------------------
(a) There is no Litigation that is pending or, to the knowledge
of the Company, threatened against or affecting the Company. There has been no
Default by the Company under any Law applicable to the Company, except for any
Defaults that would not have a Material Adverse Effect, and the Company has not
received any notice from any governmental entity
9
<PAGE>
regarding any alleged Default under any Law except those that would not have a
Material Adverse Effect. There has been no Default with respect to any Court
Order to which the Company is a party.
(b) Except in those cases where the failure would not have a
Material Adverse Effect, (i) the Company has obtained and is in full compliance
with all Permits, all of which are listed in the Disclosure Letter along with
their respective expiration dates, that are required for the ownership of the
Assets or operation of the Business and Assets as currently or presently
contemplated to be operated by the Company, (ii) all of the Permits are
currently valid and in full force and (iii) the Company has filed such timely
and complete renewal applications as may be required with respect to its
Permits. To the knowledge of the Company, no revocation, cancellation or
withdrawal of a Permit has been threatened.
4.14 Contracts.
---------
(a) The Disclosure Letter lists each Contract of the following
types to which the Company is a party or by which it is bound:
(i) Contracts with any present or former stockholder,
director, officer, or employee of the Company;
(ii) Contracts for the purchase of, or payment for,
supplies or products, or for the performance of services, from or by a third
party, in excess of $25,000 with respect to any one supplier or other party;
(iii) Contracts to sell or supply products, inventory or
other property to, or to perform services for, a third party, in excess of
$25,000 with respect to any one customer or other party other than purchase
orders received in the ordinary course of business;
(iv) Contracts to lease to or to operate for any other
party any asset that involve an amount in excess of $25,000 in any individual
case (other than Real Property Leases and Personal Property Leases identified in
the Disclosure Letter);
(v) Any notes, debenture, bonds, conditional sale
agreements, equipment trust agreements, letter of credit agreements,
reimbursement agreements, loan agreements or other Contracts for the borrowing
or lending of money (including loans to or from officers, directors, partners or
stockholders or any members of their immediate families), or agreements or
arrangements for a line of credit or for a guarantee of, or other undertaking in
connection with, the indebtedness of any other Person involving in any instance
an amount in excess of $25,000;
(vi) Contracts creating or recognizing any Encumbrances
with respect to any Assets; and
10
<PAGE>
(vii) Contracts for any capital expenditure or leasehold
improvement in excess of $25,000.
(b) The Company is not in Default under any material Contract.
The Company has not received any written communication from, or given any
written communication to, any other party indicating that the Company or such
other party, as the case may be, is in Default under any material Contract. To
the knowledge of the Company, none of the other parties to any such Contract to
which the Company is a party is in Default thereunder.
4.15 Intellectual Property.
---------------------
(a) The Company does not currently use nor has it since its
inception used in the development, production or marketing of its products and
services any Copyrights, Patents or Trademarks except for those listed in the
Disclosure Letter. The Company owns or has the lawful right to use all material
Intellectual Property that is used in the operation of the Business in the
ordinary course or otherwise. Except as set forth in the Disclosure Letter, all
of the Intellectual Property listed in the Disclosure Letter is owned by the
Company free and clear of any Encumbrances, or used pursuant to an agreement
that is described in the Disclosure Letter. Except in such cases that would not
have a Material Adverse Effect or as set forth in the Disclosure Letter, the
Company does not infringe upon or unlawfully or wrongfully use any Intellectual
Property rights owned or claimed by another Person, and the Company is not in
Default, and has not received any notice of any claim of infringement or any
other claim or proceeding, with respect to any such Intellectual Property.
Except for any rights under written licenses or other written Contracts or as
set forth in the Disclosure Letter, no current or former employee of the Company
and no other Person owns or has any proprietary, financial or other interest,
direct or indirect, in whole or in part, and including any right to royalties or
other compensation, in any of the Intellectual Property, or in any application
therefor.
(b) Except as set forth on the Disclosure Letter, all employees
and consultants of the Company who are involved in the design, review,
evaluation or development of Intellectual Property have executed a nondisclosure
and assignment of inventions agreement (a "Confidentiality Agreement"), a copy
of which has been provided to the Purchasers. To the knowledge of the Company,
(i) none of the Confidential Information has been used, divulged or appropriated
(A) for the benefit of any Person other than the Company or a customer of the
Company or (B) otherwise to the detriment of the Company, (ii) except as
specified on the Disclosure Letter, none of such employees or consultants
engaged in providing services of the Company is subject to any contractual or
legal restrictions that might interfere with the use of his best efforts to
promote the interests of the Company, (iii) no such employee or consultant is,
or is currently expected to be, in Default under any material term of any
employment contract, agreement or arrangement relating to the Intellectual
Property, or any confidentiality agreement or any other Contract or any
restrictive covenant relating to the Intellectual Property, or the development
or exploitation thereof.
11
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4.16 ERISA.
-----
(a) The Disclosure Letter contains a complete list of all
Benefit Plans sponsored or maintained by the Company or under which the Company
may be obligated. All Benefit Plans conform to, and are being administered and
operated in compliance with, the requirements of ERISA, the Code and all
applicable Laws. All returns, reports and disclosure statements required to be
made under ERISA and the Code with respect to all Benefit Plans have been timely
filed or delivered or an extension for the delayed filing has been obtained from
the Internal Revenue Service or the Department of Labor. There have not been any
"prohibited transactions," as such term is defined in Section 4975 of the Code
or Section 406 of ERISA involving any of the Benefit Plans, that could subject
the Company to any penalty or tax imposed under the Code or ERISA.
(b) Any Benefit Plan that is intended to be qualified under
Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code
has been determined by the Internal Revenue Service to be so qualified or an
application for determination has been timely filed (and is still pending) with
the Internal Revenue Service, and such determination remains in effect and has
not been revoked. To the knowledge of the Company, nothing has occurred since
the date of any such determination (if received) that would affect materially
adversely such qualification or exemption, or result in the imposition of excise
taxes or income taxes on unrelated business income under the Code or ERISA with
respect to any Benefit Plan.
(c) The Company does not sponsor or contribute to a defined
benefit plan subject to Title IV of ERISA, nor does it have a current or
contingent obligation to contribute to any multiemployer plan (as defined in
Section 3(37) of ERISA). The Company does not have any liability with respect to
any employee benefit plan (as defined in Section 3(3) of ERISA) other than with
respect to the Benefit Plans. For purposes of this Section 4.16(c), the term
"Company" shall include any corporation that is a member of any controlled group
of corporations (as defined in Section 414(b) of the Code) that includes the
Company, any trade or business (whether or not incorporated) that is under
common control (as defined in Section 414(c) of the Code) with the Company, any
organization (whether or not incorporated) that is a member of an affiliated
service group (as defined in Section 414(m) of the Code) that includes the
Company and any other entity required to be aggregated with the Company pursuant
to the regulations issued under Section 414(o) of the Code.
(d) There are no pending or, to the knowledge of the Company,
threatened claims by or on behalf of any Benefit Plans, or by or on behalf of
any individual participants or beneficiaries of any Benefit Plans, alleging any
breach of fiduciary duty on the part of the Company or any of its officers,
directors or employees under ERISA or any applicable Law, or claiming benefit
payments other than those made in the ordinary operation of such plans, nor is
there, to the knowledge of the Company, any basis for any such claim. To the
knowledge of the Company, the Benefit Plans are not the subject of any
investigation, audit or action by the Internal Revenue Service, the Department
of Labor or the Pension Benefit Guaranty Corporation ("PBGC").
12
<PAGE>
4.17 Absence of Certain Changes. Except as contemplated by this
--------------------------
Agreement, since the Balance Sheet Date, the Company has conducted its Business
in the ordinary course and there has not been with respect to the Company:
a. any material adverse change in its Business;
b. any change or amendment in its Charter Documents;
c. any distribution or payment declared or made in respect of
its capital stock by way of dividend, purchase or redemption of
shares or otherwise;
d. any increase in the compensation payable or to become
payable to any director, officer, employee or agent, except for
increases for non-officer employees made in the ordinary course
of business, nor any other material, non-ordinary change in any
employment or consulting arrangement;
e. any sale, assignment or transfer of any material Assets, or
any additions to or transactions involving any material Assets,
other than those made in the ordinary course of business;
f. other than in the ordinary course of business, any waiver or
release of any claim or right or cancellation of any debt held;
g. any payment to any Affiliate of the Company;
h. any change in the accounting policies followed by the
Company or the method of applying such principles; or
i. any capital expenditure commitment involving in any
individual case, or series of related cases, more than (i)
$25,000 or (ii) an amount that would cause the sum of all such
capital expenditure commitments to exceed $50,000.
4.18 Customers. The Company has used its reasonable business efforts
---------
to maintain and, to the knowledge of the Company, currently maintains, good
working relationships with all of its customers. The Disclosure Letter
contains, with respect to the year ended December 31, 1996, a list of the names
of the ten customers that were the largest dollar volume customers of products
or services sold or provided by the Company for such year. Except as set forth
in the Disclosure Letter, none of such customers that conducted business with
the Company has given the Company notice terminating or canceling or, to the
knowledge of the Company, threatening to terminate or cancel any Contract or
relationship with the Company.
13
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4.19 Finder's Fees. Except as set forth in the Disclosure Letter, no
-------------
Person retained by the Company is or will be entitled to any commission or
finder's or similar fee in connection with the Transactions.
4.20 Transactions with Affiliates. Except as set forth in the
----------------------------
Disclosure Letter, no affiliate of the Company or any member of his immediate
family, owns or has a controlling ownership interest in any corporation or other
entity that is a party to any Contract with respect to the Assets or Business.
4.21 Full Disclosure. There are no materially misleading
---------------
misstatements in any of the representations and warranties made by the Company
in this Agreement, the Disclosure Letter, the Exhibits to this Agreement, or in
any other Transaction Document and the Company has not omitted to state any fact
necessary to make the statements made herein or therein in light of the
circumstances in which they were made not materially misleading.
5. Representations and Warranties of the Purchasers. Each of the
------------------------------------------------
Purchasers hereby severally, and not jointly, represents and warrants to the
Company that:
5.1 Status. Schroder is an investment group comprised of two limited
------
partnerships validly existing under the laws of the State of Delaware and a
trust and a corporation, each validly exiting under the laws of Bermuda.
Electra Equity is a limited partnership established under the Limited
Partnership Act of 1907 of the United Kingdom, acting by its general partners
Electra Fleming (Unquoted UK) limited. EF is a private limited liability
company incorporated under the laws of England and Wales. The Wellcome Trust
Limited is a company limited by guarantee incorporated in England. The Wellcome
Trust is an English charity registered with the Charity Commissioner of England
and Wales under number 210,183. Each Purchaser has the requisite power and
authority to execute and deliver the Transaction Documents to which it is a
party and to perform the Transactions to be performed by it thereunder, and such
execution, delivery and performance by it have been duly authorized by all
necessary action.
5.2 Authorization. Each Purchaser has the requisite power and
-------------
authority to execute and deliver the Transaction Documents to which it is a
party and to perform the Transactions to be performed by it. Such execution,
delivery and performance by each Purchaser have been duly authorized by all
necessary action. Each Transaction Document executed and delivered by a
Purchaser has been duly executed and delivered by such Purchaser and constitutes
a valid and binding obligation of such Purchaser, enforceable against it in
accordance with its terms.
5.3 Consents and Approvals. There is no Litigation pending, or to
----------------------
the knowledge of either Purchaser, threatened, by or against or affecting either
Purchaser in connection with or relating to the Transactions or any action to be
taken in connection herewith or therewith or the consummation thereof. Neither
the execution and delivery by a Purchaser of the Transaction Documents to which
it is a party, nor the performance of the Transactions to be performed by it
thereunder, will require any filing, consent or approval or constitute a Default
under (a) any Law or
14
<PAGE>
Court Order to which it is subject, (b) its Charter Documents or bylaws or (c)
any Contract, Permit or other document to which it is a party or by which its
properties or other assets may be subject. Each Purchaser has obtained all
consents, approvals, authorizations or orders of third parties, including
governmental authorities, necessary for the authorization, execution and
performance of this Agreement and the Transactions by such Purchaser.
5.4 Finder's Fees. No Person retained by such Purchaser is or will
-------------
be entitled to any commission or finder's or similar fee in connection with the
Transactions.
5.5 Investment Representations.
--------------------------
(a) Each Purchaser acknowledges that none of the Shares have
been registered under the Securities Act or the securities laws of any state,
and the Shares acquired by it cannot be resold unless they are subsequently
registered under the Securities Act and any applicable state securities laws or
unless an exemption from such registration is available. Each Purchaser
acknowledges that the Company may, before effecting a transfer of any of the
Shares, require an opinion of counsel, in form satisfactory to the Company, that
any transfer not being made pursuant to applicable federal and state
registration requirements may be made pursuant to an exemption from such
registration requirements.
(b) Each Purchaser is acquiring its Shares for its own account
for investment and not either: (i) with a view to, or for sale in connection
with, any distribution thereof; or (ii) with any present intention of
distributing or selling the same. Neither Purchaser has any present or
contemplated agreement, obligation, indebtedness or commitment providing for the
disposition of the Shares.
(c) Each Purchaser (meaning in the case of Wellcome, The
Wellcome Trust) is an "accredited investor" within the meaning of Rule 501(a)
promulgated under the Securities Act.
(d) Each Purchaser has been provided with or been given complete
access to all of the financial and other information requested by such Purchaser
or deemed by such Purchaser to be necessary or material for such Purchaser to
make an analysis and decision concerning the investment contemplated by this
Agreement.
(e) Each Purchaser has substantial experience in investing and
acknowledges that it is able to bear the economic risk of an investment in the
Shares and has such knowledge and experience in financial or business matters
that it is capable of evaluating the merits and risks of the investment in the
Shares.
15
<PAGE>
6. Certain Agreements.
------------------
6.1 Right of First Refusal.
----------------------
(a) Except as set forth in Section 6.1(g), before the Company
shall issue, sell or exchange, agree or obligate itself to issue, sell or
exchange, or reserve or set aside for issuance, sale or exchange, any of its
securities (the "Offered Securities"), including any (i) shares of Common Stock,
(ii) any other equity security of the Company, including without limitation,
shares of Preferred Stock, (iii) any convertible debt security of the Company,
including without limitation, any debt security which by its terms is
convertible into or exchangeable for any equity security of the Company, (iv)
any security of the Company that is a combination of debt and equity, or (v) any
option, warrant or other right to subscribe for, purchase or otherwise acquire
any such equity security or any such debt security of the Company, the Company
shall, in each case, offer to sell a portion of such securities (the "ROFR
Securities") to the Purchasers then holding capital stock of the Company as
follows: the Company shall offer to sell to each Purchaser that portion of the
Offered Securities as the number of shares of Common Stock held by such
Purchaser or issuable to such Purchaser upon conversion of the Shares or any
other security (collectively, the "Conversion Shares") bears to the total number
of shares of Common Stock then outstanding (including, all shares of Common
Stock issuable upon the conversion of all outstanding convertible securities
(including shares of Preferred Stock) and presently exercised options and
warrants of the Company, at a price and on such other terms as shall have been
specified by the Company in writing delivered to the Purchasers (the "Offer"),
which Offer by its terms shall remain open and irrevocable for a period of 30
days from receipt of the Offer.
(b) Notice of each Purchaser's intention to accept, in whole or
in part, any Offer made pursuant to Section 6.2(a) shall be evidenced by a
writing signed by such Purchaser and delivered to the Company prior to the end
of the 30-day period of such offer, setting forth such of the Purchaser's ROFR
Securities as such Purchaser elects to purchase (the "Notice of Acceptance").
(c) If Notices of Acceptance are not given by the Purchasers in
respect of all the ROFR Securities, the Company shall have 90 days from the end
of said 30-day period to sell any such ROFR Securities as to which a Notice of
Acceptance has not been given by the Purchasers (the "Refused Securities") to
any Person, but only for cash and otherwise in all respects upon terms and
conditions, including, without limitation, unit price and interest rates, which
are no more favorable, in the aggregate, to such other Person or Persons or less
favorable to the Company than those set forth in the Offer.
(d) Upon the closing of any purchase of ROFR Securities, the
Purchasers shall purchase from the Company, and the Company shall sell to the
Purchasers, the number of ROFR Securities specified in the Notices of
Acceptance, upon the terms and conditions specified in the Offer. The purchase
by the Purchasers of any ROFR Securities is subject in all cases to the
preparation, execution and delivery by the Company and the Purchasers of a
purchase agreement relating to such ROFR Securities reasonably satisfactory in
form and substance to the Purchasers and
16
<PAGE>
their respective counsel. Unless otherwise specified in the Offer, the
Purchasers understand that the ROFR Securities will not have been registered
under the Securities Act and applicable state securities laws, and, therefore,
will not be able to be resold unless they are subsequently registered under the
Securities Act and applicable state securities laws or unless an exemption from
such registration is available. No Purchaser shall resell or otherwise dispose
of all or any part of the ROFR Shares purchased by it except as permitted by
law, including, without limitation, any regulations under the Securities Act and
applicable state securities laws.
(e) In each case, any ROFR Securities not purchased by the
Purchasers or other Person or Persons in accordance with Section 6.2 may not be
sold or otherwise disposed of until they are again offered to the Purchasers
under the procedures specified in Sections 6.2.
(f) The rights of each of the Purchasers under this Section 6
may be waived by each such Purchaser in writing and shall terminate (a) when the
Purchasers own less than twenty percent of the Conversion Shares or (b)
immediately prior to the effectiveness of any registration statement with
respect to a Public Offering.
(g) The rights of the Purchasers under this Section 6 shall not
apply to:
(i) Common Stock issued as a stock dividend to
holders of Common Stock or upon any subdivision or combination of shares of
Common Stock;
(ii) Preferred Stock issued as a dividend to holders
of Preferred Stock upon any subdivision or combination of shares of Preferred
Stock;
(iii) the Conversion Shares;
(iv) shares of Common Stock issued upon the exercise
of outstanding stock options and warrants as of the date hereof;
(v) shares of Common Stock which, together with the
shares of Common Stock referred to in Section 6.2(g)(iv), do not exceed 650,000,
issued upon the exercise of stock options granted after the date hereof pursuant
to any qualified or non-qualified stock option plan or agreement, employee stock
ownership plan, employee benefit plan, stock purchase agreement, stock plan,
stock restriction agreement, consulting agreement or other option, arrangement,
agreement; or
17
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(vi) securities issued upon conversion of any shares of
Preferred Stock.
6.2 Financial Information; Option Vesting. Until the occurrence of a
-------------------------------------
Public Offering:
(a) The Company shall have prepared and delivered (as soon as
practicable after their availability, but in no event later than 90 days after
the end of each fiscal year) to each of the Purchasers annual financial
statements of the Company which shall be audited by an accounting firm of
national reputation.
(b) The Company shall prepare and deliver to each of the Purchasers
its annual business plan (which shall include an opening budget) within 45 days
after the beginning of the applicable fiscal year covered by such plan.
(c) All options granted by the Company to new employees of the
Company shall be subject to a minimum vesting period of four years.
6.3 Legend. The certificates for the Shares and any shares of Common
------
Stock issuable upon conversion of the Shares will bear legends substantially in
the following form:
The securities represented by this certificate have
been acquired for investment and have not been registered
under the Securities Act of 1933, as amended, (the "Act") or
the securities laws of any state. The securities may not be
transferred in the absence of such registration or an
exemption from registration under the Act and applicable
state securities laws.
6.4 Confidentiality and Assignment of Inventions. The Company shall
--------------------------------------------
cause each employee of the Company to execute and deliver an agreement with
respect to the nondisclosure of confidential information and the assignment of
inventions.
7. Indemnification.
---------------
7.1 Indemnification by the Company. The Company shall indemnify and
------------------------------
hold harmless each Purchaser and its Affiliates, officers, directors, employees,
agents, successors and assigns (each, an "Indemnified Purchaser Party") from and
against any and all Liabilities, claims, demands, judgments, settlement
payments, losses, costs, damages and expenses whatsoever (including reasonable
attorneys', consultants' and other professional fees and disbursements of every
kind, nature and description incurred by such Indemnified Purchaser Party in
connection therewith) (collectively, "Damages") that such Indemnified Purchaser
Party may sustain, suffer or incur that result from, arise out of or relate to
any breach of or any inaccuracy in any representation, warranty, covenant or
18
<PAGE>
agreement of the Company contained in this Agreement, including any breach of
the obligation to indemnify hereunder.
7.2 Indemnification by the Purchasers. Each Purchaser shall
---------------------------------
indemnify and hold harmless the Company and each of the Company's shareholders,
Affiliates, officers, directors, employees, agents, successors and assigns (each
an "Indemnified Company Party") from and against any Damages that such
Indemnified Company Party may sustain, suffer or incur that result from, arise
out of or relate to any breach of or inaccuracy in any representation, warranty,
covenant or agreement of such Purchaser contained in this Agreement, including
any breach of the obligation to indemnify hereunder.
7.3 Procedure for Claims.
--------------------
(a) Any Indemnified Purchaser Party or any Indemnified Company Party
that desires to seek indemnification under any part of this Section 7 (each, an
"Indemnified Party") shall give notice (a "Claim Notice") to each party
responsible or alleged to be responsible for indemnification hereunder (an
"Indemnitor"). Such Claim Notice shall specifically explain the nature of the
claim and the parties known to be involved, and shall specify the amount
thereof. Each Indemnitor to which or whom a Claim Notice is given shall respond
to any Indemnified Party that has given a Claim Notice (a "Claim Response")
within 30 days (the "Response Period") after the date that the Claim Notice is
given. Any Claim Notice or Claim Response shall be given in accordance with the
notice requirements hereunder, and any Claim Response shall specify whether or
not the Indemnitor giving the Claim Response disputes the claim described in the
Claim Notice. If any Indemnitor fails to give a Claim Response within the
Response Period, the Indemnified Party shall provide the Indemnitor with notice
(the "Additional Notice") of such failure in accordance with the notice
requirements of this Agreement, and if the Indemnitor fails to respond within
twenty days after such Additional Notice, such Indemnitor shall be deemed not to
dispute the claim described in the related Claim Notice is given. If any
Indemnitor elects not to dispute a claim described in a Claim Notice, whether by
failing to give a timely Claim Response or by written acknowledgment, then the
amount of such claim shall be conclusively deemed to be an obligation of such
Indemnitor.
(b) If any Indemnitor shall be obligated to indemnify an Indemnified
Party hereunder, such Indemnitor shall pay to such Indemnified Party within 30
days after the last day of the applicable Response Period the amount to which
such Indemnified Party shall be entitled. If there shall be a dispute as to the
amount or manner of indemnification under this Section 7, the Indemnitor and the
Indemnified Party shall seek to resolve such dispute through negotiations and,
if such dispute is not resolved within twenty days, the Indemnified Party may
pursue whatever legal remedies may be available for recovery of the Damages
claimed from any Indemnitor. If any Indemnitor fails to pay all or part of any
indemnification obligation when due, then such Indemnitor shall also be
obligated to pay to the applicable Indemnified Party interest on the unpaid
amount for each day during which the obligation remains unpaid at an annual rate
equal to 10%.
19
<PAGE>
(c) Notwithstanding any other provision of this Section 7, with
respect to each Purchaser, neither the Company nor such Purchaser shall be
liable under this Agreement for any Damages arising out of or based upon any
inaccuracy in or breach of any representation or warranty made in or pursuant to
this Agreement for an amount in excess of the Purchase Price paid by each such
Purchaser.
7.4 Claims Period. Any claim for indemnification under this Section
-------------
7 for a breach of a representation or warranty shall be made by giving a Claim
Notice under Section 7.3 on or before the applicable "Expiration Date" specified
below in this Section 7.4, or the claim under this Section 7 shall be invalid.
The Expiration Date shall mean the twenty-fourth month anniversary of the date
hereof , provided, however, that the Expiration Date shall mean the date on
which the applicable statute of limitations expires with respect to any claim
for Damages related to any representation or warranty that was known to be
untrue by the maker when made with an actual intent to mislead or defraud. If
more than one of such Expiration Dates applies to a particular claim, the latest
of such Expiration Dates shall be the controlling Expiration Date for such
claim. So long as an Indemnified Party gives a Claim Notice for an Unliquidated
Claim on or before the applicable Expiration Date, and provided such claim is
liquidated within thirty months after the Unliquidated Claim Notice is given,
such Indemnified Party shall be entitled to pursue its rights to indemnification
regardless of the date on which such Indemnified Party gives the related
Liquidated Claim Notice.
7.5 Effect of Investigation. Any claim for indemnification shall not
-----------------------
be invalid as a result of any investigation by or opportunity to investigate
afforded to the Purchasers.
8. Payment of Expenses. Each party hereto shall pay its own expenses for
-------------------
lawyers, accountants, consultants, brokers, finders and other advisors (hired or
otherwise retained or engaged by such party) with respect to the Transactions;
provided, however, that the Company shall pay the first $15,000 of the fees and
- -------- -------
expenses incurred by the Purchaser's attorneys in connection with the
Transactions but the Purchasers shall pay all such fees and expenses in excess
of such amount.
9. Contents of Agreement. This Agreement, together with the other
---------------------
Transaction Documents, sets forth the entire understanding of the parties hereto
with respect to the Transactions and supersedes all prior agreements or
understandings among the parties regarding those matters.
10. Amendment, Parties in Interest, Assignment, Etc. This Agreement may
------------------------------------------------
be amended, assigned, modified or supplemented only by a written instrument duly
executed by each of the parties hereto. If any provision of this Agreement
shall for any reason be held to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall not affect any
other provision hereof, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective heirs, legal representatives, successors and
permitted assigns of the parties hereto. Any term or provision of this
Agreement may be waived at any time by the party entitled to the benefit thereof
by a written instrument duly executed by such party. The parties
20
<PAGE>
hereto shall execute and deliver any and all documents and take any and all
other actions that may be deemed reasonably necessary by their respective
counsel to complete the Transactions.
11. Interpretation. Unless the context of this Agreement clearly requires
--------------
otherwise, (a) references to the plural include the singular, the singular the
plural, and the part the whole, (b) "or" has the inclusive meaning frequently
identified with the phrase "and/or" and (c) "including" has the inclusive
meaning frequently identified with the phrase "but not limited to." The section
and other headings contained in this Agreement are for reference purposes only
and shall not control or affect the construction of this Agreement or the
interpretation thereof in any respect. Section, subsection, schedule and
exhibit references are to this Agreement unless otherwise specified. Each
accounting term used herein that is not specifically defined herein shall have
the meaning given to it under GAAP.
12. Remedies. The remedies provided by Section 7 shall constitute the
--------
exclusive remedies for the matters covered thereby. With respect to any matters
not covered by Section 7, any party shall be entitled to such rights and
remedies as such party may have at law or in equity or otherwise for any breach
of this Agreement, including the right to seek specific performance, rescission
or restitution, none of which rights or remedies shall be affected or diminished
by the remedies provided hereunder.
13. Notices.
-------
All notices that are required or permitted hereunder shall be in
writing and shall be sufficient if personally delivered or sent by mail,
facsimile message or Federal Express or other delivery service. Any notices
shall be deemed given upon the earlier of the date when received at, or the
third day after the date when sent by registered or certified mail or the day
after the date when sent by Federal Express to, the address or fax number set
forth below, unless such address or fax number is changed by notice to the other
party hereto given in accordance with the foregoing notice procedures:
If to the Company:
Orthovita, Inc.
285 Great Valley Parkway
Malvern, Pennsylvania 19355
FAX: (610) 640-1714
with a required copy to:
Stephen M. Goodman, Esq.
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
FAX (215) 963-5299
If to the Purchasers:
21
<PAGE>
Schroder Ventures Managers Ltd.
22 Church Street
Hamilton, HM 11 Bermuda
FAX:
Attention: Nichola Lawson
Schroder Ventures Life Sciences
One Beacon Street
Boston, MA 02108
Attention: Jim Garvey
FAX: (617)
Electra Fleming Limited
65 Kingsway
London WC2B 6QT
England
FAX: 0171 242 1806
Attention: Jonathan Mussellwhite
with required copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Attention: Michael Lytton, Esq.
FAX: (617) 227-4420
Wellcome Trust Limited
As Trustee of The Wellcome Trust
210 Euston Road
London NW1 2BE
England
FAX: 011 44 171 611 7268
Attention: Sandra Robertson
with required copy to
Testa, Hurwitz & Thibeault, LLP
Exchange Place
53 State Street
Boston, MA 02109-2809
Attention: Robin A. Painter, Esq.
FAX: (617) 248-7100
22
<PAGE>
14. Governing Law. This Agreement shall be construed and interpreted in
-------------
accordance with the laws of the Commonwealth of Pennsylvania, without regard to
its provisions concerning conflict of laws.
15. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be binding as of the date first written above,
and all of which shall constitute one and the same instrument. Each such copy
shall be deemed an original, and it shall not be necessary in making proof of
this Agreement to produce or account for more than one such counterpart.
23
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto on the day and year first written above.
ORTHOVITA, INC.
By: /s/ David S. Joseph
-------------------------------
Title: President
SCHRODER
Schroder Ventures International Life Sciences Fund LP1
By: Schroder Venture Managers Inc., its General Partner
By: /s/ Peter Everson
-------------------------------
Title: Director & Vice President
Schroder Ventures International Life Sciences Fund LP2
By: Schroder Venture Managers Inc., its General Partner
By: /s/ Peter Everson
-------------------------------
Title: Director & Vice President
Schroder Ventures International Life Sciences Fund
Trust
By: Schroder Venture Managers Limited as Attorney-in-
Fact for Codan Trust Company Limited as Trustee
By: /s/ Peter Everson
-------------------------------
Title: Director
Schroder Ventures International Life Sciences Fund
Co-Investment Scheme
By: Schroder Venture Managers Limited, as Investment
Manager
By: /s/ Peter Everson
-------------------------------
Title: Director
24
<PAGE>
ELECTRA
Electra Fleming Private Equity Partners
By: Electra Fleming GP (Unquoted UK),
its General Partner
By: Signature illegible
-------------------------------
Director
By: _______________________________
EF Nominees Limited
By: Signature illegible
-------------------------------
Director
By: _______________________________
WELLCOME
The Wellcome Trust
By: The Wellcome Trust Limited, as the Trustee for
The Wellcome Trust
By: Signature illegible
-------------------------------
Chief Investment Officer
25
<PAGE>
EXHIBIT 10.2
CLASS A HOLDER AGREEMENT
This AGREEMENT dated as of April 11, 1997 is entered into by and among
ORTHOVITA, INC., a Pennsylvania corporation (the "Company"), and each of the
holders of the Company's Class A Convertible Preferred Stock, $.01 par value per
share (the "Class A Stock"), who are signatories to this Agreement
(collectively, the "Class A Investors," and individually, a "Class A Investor").
BACKGROUND
----------
The Class A Investors are parties to a Preferred Stock Purchase Agreement
with the Company dated April 15, 1994 (the "Class A Agreement") pursuant to
which, among other things, they purchased shares of Class A Stock of the
Company, were granted certain rights with respect to future issuances by the
Company of any class of stock equivalent to or having a preference or priority
over the Class A Stock and were granted certain put and registration rights with
respect to the Class A Stock.
In order to finance the continuing operating activities of the Company, the
Company proposes to enter into a Class C Convertible Preferred Stock Purchase
Agreement (the "Class C Agreement") providing for the sale and issuance of its
Class C Convertible Preferred Stock, $.01 par value (the "Class C Stock"), which
Stock may be deemed to have certain preferences or priorities senior or
equivalent to the Class A Stock. A copy of a draft of the Statement of
Designation, Preferences and Rights of Class C Convertible Preferred Stock is
attached hereto as Exhibit A.
---------
The Class A Investors, recognizing that the execution and delivery of this
Agreement is a condition precedent to the consummation of the transactions
contemplated by the Class C Agreement, desire to approve, pursuant to Section
5(b) of the Class A Agreement, the issuance of the Class C Stock, become parties
to the Registration Rights Agreement attached hereto as Exhibit B and amend the
---------
Class A Agreement, all as provided herein.
NOW THEREFORE, in consideration of the foregoing, the parties hereto agree
as follows:
1. The Class A Agreement is hereby amended by deleting Sections 8 and 9
of the Class A Agreement in their entirety. All other provisions of the Class
A Agreement shall remain in full force and effect.
2. The Class A Investors hereby approve the issuance of Class C Stock
pursuant to such terms set forth in Exhibit A, with such changes as may be
approved by the Company's board of directors.
<PAGE>
3. The Company shall issue to each holder of the Class A Stock a warrant,
substantially in the form attached hereto as Exhibit C, to purchase .21993
---------
shares of Common Stock for each share of Class A Stock held by such holder.
4. This Agreement may be executed in two or more counterparts, each of
which shall be considered an original, but all of which together shall
constitute the same instrument.
IN WITNESS WHEREOF, each party has executed this Agreement as of the date
first above written.
ORTHOVITA, INC.
By:\s\David S. Joseph
------------------
President
\s\Howard Salasin
--------------------------------------
Howard Salasin
\s\Solomon Kal Rudman
--------------------------------------
Solomon Kal Rudman
\s\Ronald P. Lassin
--------------------------------------
Ronald P. Lassin
-2-
<PAGE>
EXHIBIT 10.3
NOTE AND WARRANT HOLDER AGREEMENT
This AGREEMENT dated as of April 11, 1997 is entered into by and among
ORTHOVITA, INC., a Pennsylvania corporation (the "Company"), and each of the
other parties to the Purchase Agreement, dated May 9, 1995 (the "Purchase
Agreement"), who are signatories to this Agreement (collectively, the "Note and
Warrant Holders," and individually, a "Note and Warrant Holder").
BACKGROUND
----------
The Note and Warrant Holders are parties to the Purchase Agreement with the
Company pursuant to which, among other things, they purchased from the Company
15% Subordinated Secured Notes ("Notes") and warrants (the "Warrants") to
purchase shares of Class B Convertible Preferred Stock, par value $.01 per share
(the "Class B Stock"), and were granted certain registration and anti-dilution
rights. In addition, pursuant to the Purchase Agreement, RAF Ventures IV, L.P.
("RAF") was granted the right to elect two members to the Company's Board of
Directors (the "RAF Directors").
In order to finance the continuing operating activities of the Company, the
Company proposes to enter into a Class C Convertible Preferred Stock Purchase
Agreement (the "Class C Agreement") providing for the sale and issuance of its
Class C Convertible Preferred Stock, $.01 par value (the "Class C Stock").
The Note and Warrant Holders, recognizing that the execution and delivery
of this Agreement is a condition precedent to the consummation of the
transactions contemplated by the Class C Agreement, desire to approve the
issuance of the Class C Stock, amend the Purchase Agreement, apply all amounts
due to the Note and Warrant Holders under the Notes for the purchase of Class B
Stock, become a party to the Registration Rights Agreement and Stockholders'
Agreement attached hereto as Exhibit A and Exhibit B, respectively, receive
--------- ---------
warrants substantially in the form attached hereto as Exhibit D (the "New
---------
Warrants") and Exhibit E (the "Ducheyne Warrants"), respectively, and amend and
---------
restate the terms of the Class B Stock in the form attached hereto as Exhibit F.
---------
It is a condition precedent to the purchase by the prospective investors of the
Class C Stock that Paul Ducheyne ("Ducheyne") sell all of the shares of Common
Stock obtainable upon the exercise of the Ducheyne Warrants and the Company sell
the shares of Common Stock obtainable upon the exercise of the New Warrants.
NOW THEREFORE, in consideration of the foregoing, the parties hereto agree
as follows:
1. The Purchase Agreement is hereby amended by deleting Article VI and
Sections 7.1, 7.2 and 8.2(d) of the Purchase Agreement in their entirety. All
other provisions of the Purchase Agreement shall continue in full force and
effect and shall be enforceable in accordance with their terms.
<PAGE>
2. Each of the Note and Warrant Holders hereby applies the full amount
due to such Note and Warrant Holder under his or its respective Note (such
amount is as set forth opposite such Holder's name on Exhibit C hereto), and for
---------
such purpose hereby surrenders such Note to the Company in full payment of the
exercise price under his or its respective Warrant for the purchase of that
number of shares of Class B Stock as is set forth opposite his or its name on
Exhibit C hereto.
- ---------
3. The Note and Warrant Holders hereby approve the issuance of Class C
Stock pursuant to such terms as may be approved by the Company's Board of
Directors.
4. The Company hereby issues to each of the Note and Warrant Holders the
New Warrants, exercisable for the purchase of that number of shares of the
Company's Common Stock, $.01 par value (the "Common Stock"), as it set forth
opposite the name of each such Holder on Exhibit C attached hereto. Ducheyne
---------
hereby issues to the Note and Warrant Holders the Ducheyne Warrants, exercisable
for the purchase of that number of shares of Common Stock as it set forth
opposite the name of each such Holder on Exhibit C attached hereto. Each share
---------
of Common Stock, when sold upon the payment of the purchase price pursuant to
the terms of the New Warrants and Ducheyne Warrants will be duly authorized,
validly issued, fully-paid and non-assessable. Ducheyne hereby represents and
warrants that he has good and valid title, free and clear of any and all liens
and encumbrances of any kind, to the Common Stock sold by him to the Note and
Warrant Holders pursuant to the Ducheyne Warrant. Ducheyne shall place the
stock certificates representing such shares of Common Stock in escrow with the
Company which shares shall be released to only the Note and Warrant Holders upon
their proper exercise of the Ducheyne Warrants.
5. This Agreement may be executed in two or more counterparts, each of
which shall be considered an original, but all of which together shall
constitute the same instrument.
6. The amended and restated terms of the Series B Stock in the form
attached as Exhibit F hereto is hereby approved.
IN WITNESS WHEREOF, each party has executed this Agreement as of the date
first above written.
ORTHOVITA, INC.
By: \s\ David S. Joseph
----------------------------
\s\ Paul Ducheyne
-----------------------------
Paul Ducheyne
-2-
<PAGE>
\s\ David S. Joseph
-------------------------------------
David S. Joseph
RAF VENTURES IV, L.P.
By: RAF Ventures, Inc.,
its general partner
By: /s/ Richard M. Horowitz
------------------------------------
Richard M. Horowitz, Vice President
/s/ Richard M. Horowitz
-------------------------------------
Richard M. Horowitz
/s/ Edward Sickles
-------------------------------------
Edward Sickles
/s/ Robert S. Adelson
-------------------------------------
Robert S. Adelson
THE HRG CORPORATION
By: Signature illegible
-------------------------------------
/s/ Howard Salasin
-------------------------------------
Howard Salasin
/s/Solomon Kal Rudman
--------------------------------------
Solomon Kal Rudman
-3-
<PAGE>
Exhibit 10.4
ORTHOVITA, INC.
---------------
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS AGREEMENT is made as of the 11th day of April, 1997 by and among
Orthovita, Inc., a Pennsylvania corporation (the "Company"), and the undersigned
security holders of the Company (the "Stockholders").
BACKGROUND
----------
The Stockholders are persons and entities that own shares or warrants
exercisable for shares of Class A Convertible Preferred Stock, par value $0.01
per share (the "Class A Stock"), Class B Convertible Preferred Stock, par value
$0.01 per share (the "Class B Stock"), or Class C Convertible Preferred Stock,
par value $.01 per share, of the Company (the "Class C Stock"). As a condition
precedent to the investment in shares of Class C Stock on the date hereof by
certain of the Stockholders pursuant to the terms of that certain Class C
Convertible Preferred Stock Purchase Agreement dated the date hereof by and
among the Company and such Stockholders and the termination of all registration
rights previously held by the Stockholders holding shares or warrants
exercisable for the Class B Stock or shares of Class A Stock, the Company has
agreed to provide the registration rights provided for in this Agreement to the
Stockholders.
WITNESSETH:
----------
The parties hereto, each intending to be legally bound and in exchange for
the mutual covenants herein, agree as follows:
1. Demand Registrations.
--------------------
(a) Requests for Registration. At any time after the earlier of (x) the
-------------------------
Company has generated either (i) annual net revenues in excess of $10,000,000 or
(ii) a net profit in any fiscal year, in each case, as shown in the Company's
audited financial statements, and (y) the second anniversary of the date hereof,
the holders of fifty percent or more of the Class B and C Registrable Securities
(defined below) may demand registration (the "Demand Registration") under the
Securities Act of 1933, as amended (the "1933 Act"), of all or any portion of
the Class B and C Registrable Securities owned by such holders. In order to
accomplish such demand, such holders shall send written notice of the demand to
the Company, which notice shall specify the number of Class B and C Registrable
Securities sought to be registered. The holders of the Class B and C
Registrable Shares shall have the right to one Demand Registration (in addition
to the requirements of Section 3 hereof).
(b) Procedure. Within 10 days after receipt of such a demand, the Company
---------
will give written notice of such requested registration to all other holders of
Registrable Securities (defined below) and will include in such registration,
subject to the allocation provisions below, all other Registrable Securities
with respect to which the Company has received written requests for inclusion
within 30 days after the Company's mailing of such notice, plus any securities
of the Company that the Company chooses to include on its own behalf.
<PAGE>
(c) Expenses. In a Demand Registration, the Company will pay the
--------
Registration Expenses (defined below), but the Underwriting Commissions (defined
below) will be shared by the Company and those holders of Registrable Securities
whose Registrable Securities are included in the Demand Registration in
proportion to any securities included on their behalf.
(d) Priority on Demand Registrations. If a Demand Registration is
--------------------------------
underwritten and the managing underwriters advise the Company in writing that in
their opinion the number of Registrable Securities requested to be included
exceeds the number that can be sold in such offering, at a price reasonably
related to fair value, the Company will include in such Demand Registration (i)
first, the Class B and C Registrable Securities requested to be included in such
Demand Registration by the holders of Class B and C Registrable Securities,
(ii) second, any securities that the Company desires to include on its own
behalf, and (iii) third, any shares of common stock, par value $.01 per share,
of the Company (the "Common Stock") which the Company has received requests for
inclusion from any other securityholder (including holders of Registrable
Securities) of the Company with contractual rights to include shares in such a
registration, in each case within each such group on a pro rata basis determined
by reference to the total number of securities sought to be included in such
registration. A Demand Registration shall not be considered to be the one
Demand Registration under Section 1(a) if (i) as a result of the foregoing
allocation, the holders of the Class B and C Registrable Shares are not able to
register and sell in the Demand Registration at least 75% of the Registrable
Securities sought to be included by such holders in the Demand Registration or
the aggregate gross proceeds received by such holders pursuant to the Demand
Registration is less than $10 million, or (ii) the registration statement does
not become effective for any reason.
(e) Selection of Underwriters. If any Demand Registration is underwritten,
-------------------------
the selection of investment banker(s) and manager(s) and the other decisions
regarding the underwriting arrangements for the offering will be made jointly by
the Company and the holders of the Class B and C Registrable Securities.
(f) Restrictions on Demand Registrations. Notwithstanding any provision to
------------------------------------
the contrary in this Section 1, the Company will not be obligated to effect any
Demand Registration or Form S-3 Registration (defined below) (i) within six
months after the effective date of a previous registration of Common Stock or
(ii) if, at the time of such demand, the filing of such a registration statement
would, as determined by the board of directors of the Company, adversely affect
a material Company financing project or a material proposed or pending
acquisition, merger or other similar corporate transaction to which the Company
is or reasonably expects to be a party, provided, however, that the Company
shall only be entitled to delay effecting any such Registration pursuant to this
clause (ii) for a period not to exceed 90 days.
2. Piggyback Registrations.
-----------------------
(a) Right to Piggyback. Whenever the Company proposes to register any of
------------------
its securities under the 1933 Act (other than a Demand Registration or a Form S-
3 Registration), and the registration form to be used may be used for the
registration of Registrable Securities (a "Piggyback Registration"), the Company
will give prompt written notice to all holders of Registrable Securities and
will include in such Piggyback Registration, subject to the allocation
provisions below, all
-2-
<PAGE>
Registrable Securities with respect to which the Company has received written
requests for inclusion within 30 days after the Company's mailing of such
notice. The Company will use reasonable efforts to select a form of registration
statement which does not impose for its use limitations on the maximum value or
number of securities to be registered if these limitations would preclude
registration of the Registrable Securities that the Company has been requested
to include in such registration.
(b) Piggyback Expenses. In all Piggyback Registrations, the Company will
------------------
pay the Registration Expenses related to the Registrable Securities of the
Selling Stockholders, but the Selling Stockholders will pay the Underwriting
Commissions related to their Registrable Securities.
(c) Priority on Primary Registrations. If a Piggyback Registration is an
---------------------------------
underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number that
can be sold in such offering, at a price reasonably related to fair value, the
Company will allocate the securities to be included as follows: first, the
securities the Company proposes to sell on its own behalf; second, any
Registrable Securities requested to be included in such registration by the
holders of Registrable Securities; and third such shares of Common Stock which
the Company has received requests for inclusion from any other securityholder of
the Company with contractual rights to include shares in such a registration, in
each case within each such group on a pro rata basis determined by reference to
the total number of securities sought to be included in such registration.
(d) Priority on Secondary Registrations. If a Piggyback Registration is
-----------------------------------
initiated as an underwritten secondary registration on behalf of holders of the
Company's securities (other than a Demand Registration pursuant to Section 1),
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number that can be sold in such offering, at a price reasonably
related to fair value, the Company will allocate the securities to be included
as follows: first, the securities requested to be included by the holders
initiating such registration; second, any Registrable Securities requested to be
included in such registration by the holders of Class A Stock, Class B Stock and
Class C Stock; and third, Registrable Securities requested to be included in
such registration and shares of Common Stock which the Company has received
requests for inclusion from any other securityholder of the Company with
contractual rights to include shares in such a registration, in each case within
each such group on a pro rata basis determined by reference to the total number
of securities sought to be included in such registration.
(e) Selection of Underwriters. If any Piggyback Registration is
-------------------------
underwritten, the selection of investment banker(s) and manager(s) and the other
decisions regarding the underwriting arrangements for the offering will be made
by the Company if the registration is under Section 2(c), or by the holders
initiating such registration, if the registration is under Section 2(d).
-3-
<PAGE>
3. Registration on Form S-3. After the Company has completed a public
------------------------
offering of shares of the Common Stock pursuant to a registration statement
declared effective under the 1933 Act, the Company shall use its best efforts to
qualify for the use of Form S-3 or any comparable or successor form or forms for
the registration of the Class B and C Registrable Securities for resale; and to
that end, the Company shall register (whether or not required by law to do so)
its Common Stock under the Securities Exchange Act of 1934 in accordance with
the provisions of that Act as soon as possible following the effective date of
the first registration of any of the Company's securities under the 1933 Act.
After the Company has so qualified, in addition to the rights contained in the
foregoing provisions of this Registration Rights Agreement, each holder of Class
B and C Registrable Securities shall have the right to require registration of
its Registrable Securities on Form S-3 at the Company's expense, provided that
the Registrable Securities to be registered shall have a market value of at
least $500,000. Each holder of Class B and C Registrable Securities shall be
entitled to an unlimited number of registrations pursuant to this Section 3;
provided that each holder shall be entitled to only one such registration during
any 6-month period. When the Company receives notice of any holder's request
for a registration on Form S-3, it shall send notice of such proposed
registration to all other holders of Class B and C Registrable Securities.
4. Holdback Agreements. Neither any Stockholder nor the Company shall effect
-------------------
any public sale or distribution of equity securities of the Company or any
securities convertible into or exchangeable or exercisable for such securities
during the seven days prior to and the 90 days after any underwritten Demand
Registration or underwritten Piggyback Registration has become effective (except
as part of such underwritten registration); provided that, such restriction
shall not apply to any Stockholder unless all directors and officers of the
Company have agreed to similar restrictions.
5. Registration Procedures.
-----------------------
Whenever the holders of Registrable Securities have requested that any
Registrable Securities be registered pursuant to Section 1, 2 or 3 of this
Agreement, the Company will, as expeditiously as possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to the resale of such Registrable
Securities and use its best efforts to cause such registration statement to
become effective (provided that before filing a registration statement or
prospectus or any amendments or supplements thereto, the Company will
furnish each Selling Stockholder with copies of all such documents proposed
to be filed);
(b) prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period of not less than 180 days;
(c) furnish to each Selling Stockholder such number of copies of such
registration statement, each amendment and supplement thereto and the
prospectus included in such registration statement (including each
preliminary prospectus), and
-4-
<PAGE>
such other documents as such Selling Stockholder may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by
such Selling Stockholder;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such
jurisdictions as the managing holders of the Registrable Securities
included in the registration may reasonably request;
(e) notify each Selling Stockholder at any time when a prospectus
relating thereto is required to be delivered under the 1933 Act within the
period that the Company is required to keep the registration statement
effective of the happening of any event as a result of which the prospectus
included in such registration statement contains an untrue statement of a
material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company will
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
will not contain an untrue statement of a material fact or omit to state
any fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed or included on
securities exchanges or eligible for quotation on any trading system on
which similar securities issued by the Company are then listed or included;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration
statement;
(h) enter into such customary agreements (including an underwriting
agreement in customary form) and take such other customary actions as may
be reasonably necessary to expedite or facilitate the disposition of such
Registrable Securities;
(i) obtain a "comfort" letter addressed to the Company from its
indepen dent public accountants in customary form and covering such matters
of the type customarily covered by "comfort" letters; and
(j) make available for inspection by any Selling Stockholder, any
underwriter participating in any disposition pursuant to such registration
statement, and any attorney, accountant or other agent retained by any such
Selling Stockholder or underwriter, all financial and other records,
pertinent corporate documents and properties of the Company, and cause the
Company's officers, directors and employees to supply all information
reasonably requested by any such Selling Stockholder, underwriter,
attorney, accountant or agent in connection with such registration
statement.
-5-
<PAGE>
6. Indemnification.
---------------
(a) The Company hereby indemnifies, to the extent permitted by law, each
Selling Stockholder, its officers and directors, and each person who controls
such holder (within the meaning of the 1933 Act), against all losses, claims,
damages, liabilities and expenses arising out of or resulting from any untrue or
alleged untrue statement of material fact contained in any registration
statement, prospectus or preliminary prospectus or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading except insofar as the
same are caused by or contained in any information furnished in writing to the
Company by such holder expressly for use therein or by any such holder's failure
to deliver a copy of the regi stration statement or prospectus or any
amendments or supplements thereto after the Company has furnished such holder
with a sufficient number of copies of the same. In connection with an under
written offering, the Company will indemnify the underwriters, their officers
and directors, and each person who controls such underwriters (within the
meaning of the 1933 Act) to the same extent as provided above with respect to
the indemnification of the Stockholders.
(b) In connection with any registration statement in which a Selling
Stockholder is participating, each such holder will furnish to the Company in
writing such information as is reasonably requested by the Company for use in
any such registration statement or prospectus and will indemnify, to the extent
permitted by law, the Company, its directors and officers and each person who
controls the Company (within the meaning of the 1933 Act) against any losses,
claims, damages, liabilities and expenses resulting from any untrue or alleged
untrue statement of material fact or any omission or alleged omission of a
material fact required to be stated in the registration statement or prospectus
or any amendment thereof or supplement thereto or necessary to make the
statements therein not misleading, but only to the extent that such untrue
statement or omission is contained in information so furnished by such holder
specifically for use in preparing the registration statement. Notwithstanding
the foregoing, the liability of a Selling Stockholder under this Section 6(b)
shall be limited to an amount equal to the net proceeds actually received by the
Selling Stockholder from the sale of Registrable Securities covered by the
registration statement.
(c) Any person entitled to indemnification hereunder will (i) give prompt
notice to the indemnifying party of any claim with respect to which it seeks
indemnification and (ii) unless in such indemnified party's reasonable judgment
a conflict of interest between such indemnified and indemnifying parties may
exist with respect to such claim, permit such indemnifying party to assume the
defense of such claim with counsel reasonably satisfactory to the indemnified
party. If such defense is assumed, the indemnifying party will not be subject
to any liability for any settlement made without its consent (but such consent
will not be unreasonably withheld). An indemnifying party who is not entitled,
or elects not, to assume the defense of a claim will not be obligated to pay the
fees and expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
-6-
<PAGE>
7. Participation in Underwritten Registrations. No Selling Stockholder may
-------------------------------------------
participate in any underwritten registration hereunder unless such holder (a)
agrees to sell such holder's securities on the basis provided in any
underwriting arrangements approved by the persons entitled hereunder to approve
such arrangements under Sections 1(e) or 2(e), and (b) completes and executes
all questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements.
8. Definitions.
-----------
(a) The term "Class B and C Registrable Securities" means (i) the shares of
Common Stock underlying the Class B Stock or Class C Stock of the Company
registered in the name of the Stockholders from time to time, (ii) the shares of
Common Stock underlying the warrants of the Company issued to the holders of the
Class B Stock and the Class C Stock on April 11, 1997, (iii) the shares of
Common Stock underlying certain warrants of the Company issued to the holders of
the Class B Stock on May 9, 1995, and (iv) any securities issued or to be issued
with respect to the securities referred to above by way of a stock dividend or
stock split or in connection with a combina tion of shares, recapitalization,
merger, consolidation or other reorganization, provided such securities have
voting rights with respect to the election of directors and other matters
presented generally to the stockholders of the Company for consideration and
have unlimited rights with respect to dividends and the proceeds of any
liquidation of the Company. As to any particular Class B and C Registrable
Securities, such securities will cease to be Class B and C Registrable
Securities when they have been (A) effectively registered under the 1933 Act and
disposed of in accordance with the registration statement covering them, (B)
transferred pursuant to Rule 144 under the 1933 Act (or any similar provision
then in force) or (C) eligible for sale pursuant to Rule 144(k) under such Act.
(b) The term "Registrable Securities" means (i) the Class B and C
Registrable Securities, (ii) the shares of Common Stock underlying the Class A
Stock registered in the name of the Stockholders from time to time, (iii) the
shares of Common Stock underlying the warrants of the Company issued to the
holders of the Class A Stock on April 11, 1997, and (iv) any securities issued
or to be issued with respect to the securities referred to above by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization, provided such
securities have voting rights with respect to the election of directors and
other matters presented generally to the stockholders of the Company for
consideration and have unlimited rights with respect to dividends and the
proceeds of any liquidation of the Company. As to any particular Registrable
Securities, such securities will cease to be Registrable Securities when they
have been (A) effectively registered under the 1933 Act and disposed of in
accordance with the registration statement covering them, (B) transferred
pursuant to Rule 144 under the 1933 Act (or any similar provision then in force)
or (C) eligible for sale pursuant to Rule 144(k) under such Act.
(c) The term "Registration Expenses" means all expenses incident to the
Company's performance of or compliance with this Agreement, including all
registration and filing fees, fees and expenses of compliance with securities or
blue sky laws, printing expenses, messenger and delivery expenses, expenses and
fees for listing the securities to be registered on exchanges on which similar
securities issued by the Company are then listed, and fees and disbursements of
counsel for the Company, one counsel for the Stockholders in the event of a
Demand Registration, and of all
-7-
<PAGE>
independent certified public accountants, underwriters (other than Underwriting
Commissions and the fees and disbursements of underwriters' counsel) and other
persons retained by the Company.
(d) The term "Selling Stockholders" means registered holders of Registrable
Securities who request inclusion of all or a portion of their shares of
Registrable Securities in a Demand Registration pursuant to the Section 1(b), a
Form S-3 Registration pursuant to Section 3 or a Piggyback Registration pursuant
to Section 2(a).
(d) The term "Underwriting Commissions" means all underwriting discounts or
commissions relating to the sale of securities of the Company, but excludes any
expenses reimbursed to underwriters.
9. Limitations on Subsequent Registration Rights. From and after the date of
---------------------------------------------
this Agreement, the Company may enter into an agreement with any holder or
prospective holder of any securities of the Company that would allow such holder
or prospective holder to include such securities in any registration filed under
Sections 1 or 2 hereof or that would add any such holder or prospective holder
as a party to this Agreement. The Company shall not enter into any such
agreement, however, without the prior written consent of the beneficial holders
of a majority of the outstanding Registrable Securities unless under the terms
of such agreement, such holder or prospective holder may include such securities
in any such registration only to the extent that the inclusion of its securities
would not reduce the amount of the Registrable Securities that the Stockholders
would be entitled to include in such registration.
10. Miscellaneous.
-------------
(a) Notices. All notices that are required or permitted hereunder shall be
-------
in writing and shall be sufficient if personally delivered or sent by mail,
facsimile message or Federal Express or other overnight delivery service. Any
notices shall be deemed given upon the earlier of the date when received at, or
the third day after the date when sent by registered or certified mail or the
day after the date when sent by Federal Express to, the address or fax number
set forth below, unless such address or fax number is changed by notice to the
other party hereto.
(b) Amendments and Waivers. The provisions of this Agreement may be
----------------------
amended or terminated and the Company may take any action herein prohibited, or
omit to perform any act herein required to be performed by it, if approved in
writing by the Stockholders that own beneficially a majority of the Registrable
Securities and or by any agreement permitted by Section 9.
(c) Binding Effect. This Agreement will bind and inure to the benefit of
--------------
the respective successors (including any successor resulting from a merger or
similar reorganization), assigns, heirs, and personal representatives of the
parties hereto. Without limiting the generality of the foregoing, if a
Stockholder liquidates or reorganizes such that its assets are transferred to
its own stockholders or partners or to another entity, such stockholders,
partners or entity shall succeed to all of the rights of the Stockholder
hereunder. Notwithstanding the foregoing, if the Common Stock becomes listed or
otherwise included for trading or quotation on a national securities exchange,
including the
-8-
<PAGE>
NASDAQ National Market, this Agreement shall no longer bind and inure to the
benefit of any transferee of any Stockholder.
(d) Prior Agreements. This Agreement is the only agreement among the
----------------
Company and any of the Stockholders with respect to the subject matter hereof,
and any prior agreements between the Company and any of the Stockholders
relating to the subject matter of this Agreement are terminated as of the date
hereof and shall have no further force and effect.
(e) Governing Law. All questions concerning the construction, validity and
-------------
interpretation of this Agreement will be governed by the internal law, not the
law of conflicts, of the Commonwealth of Pennsylvania.
(f) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be considered to be an original instrument and
to be effective as of the date first written above. Each such copy shall be
deemed an original, and it shall not be necessary in making proof of this
Agreement to produce or account for more than one such counterpart.
(g) Interpretation. Unless the context of this Agreement clearly requires
--------------
otherwise, (i) references to the plural include the singular, the singular the
plural, the part the whole, (ii) references to one gender include all genders,
(iii) "or" has the inclusive meaning frequently identified with the phrase
"and/or" and (iv) "including" has the inclusive meaning frequently identified
with the phrase "but not limited to." The section and other headings contained
in this Agreement are for reference purposes only and shall not control or
affect the construction of this Agreement or the interpretation thereof in any
respect.
(h) The Wellcome Trust. The execution and delivery by The Wellcome Trust
------------------
of this Agreement is subject to Attachment A hereto.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
ORTHOVITA, INC.
By: /s/ David S. Joseph
-----------------------------------
Title: President
CLASS A HOLDERS
/s/ Howard Salasin
---------------------------------------
Howard Salasin
/s/ Solomon Kal Rudman
---------------------------------------
Solomon Kal Rudman
/s/ Ronald P. Lassin
---------------------------------------
Ronald P. Lassin
-10-
<PAGE>
CLASS B HOLDERS
/s/ Paul Ducheyne
---------------------------------------
Paul Ducheyne
/s/ David S. Joseph
---------------------------------------
David S. Joseph
RAF VENTURES IV, L.P.
By: RAF Ventures, Inc.,
its general partner
By: /s/Richard M. Horowitz
---------------------------------------
Richard M. Horowitz, Vice President
/s/ Richard M. Horowitz
----------------------------------
Richard M. Horowitz
/s/ Edward Sickles
---------------------------------------
Edward Sickles
/s/ Robert S. Adelson
---------------------------------------
Robert S. Adelson
THE HRG CORPORATION
By: Signature illegible
---------------------------------------
/s/ Howard Salasin
---------------------------------------
Howard Salasin
/s/ Solomon Kal Rudman
---------------------------------------
Solomon Kal Rudman
-11-
<PAGE>
CLASS C HOLDERS
SCHRODER
Schroder Ventures International Life Sciences Fund LP1
By: Schroder Venture Managers Inc., its General Partner
By: /s/ Peter Everson
-----------------------------------
Title: Director & Vice President
---------------------------------
Schroder Ventures International Life Sciences Fund LP2
By: Schroder Venture Managers Inc., its General Partner
By: /s/ Peter Everson
-----------------------------------
Title: Director & Vice President
Schroder Ventures International Life Sciences Fund
Trust
By: Schroder Venture Managers Limited as Attorney-in-
Fact for Codan Trust Company Limited as Trustee
By: /s/ Peter Everson
------------------------------------
Title: Director
Schroder Ventures International Life Sciences Fund Co-
Investment Scheme
By: Schroder Venture Managers Limited, as Investment
Manager
By: /s/ Peter Everson
-----------------------------------
Title: Director
-12-
<PAGE>
ELECTRA
Electra Fleming Private Equity Partners
By: Electra Fleming GP (Unquoted UK), its General
Partner
By: Signature illegible
-----------------------------------
Director
By:
-----------------------------------
EF Nominees Limited
By: Signature illegible
-----------------------------------
Director
By: ___________________________________
WELLCOME
The Wellcome Trust
By: The Wellcome Trust Limited, as the Trustee for
The Wellcome Trust
By: Signature illegible
----------------------------------
Chief Investment Officer
-13-
<PAGE>
This License Agreement ("AGREEMENT") is made by and between The Trustees of
the University of Pennsylvania, a Pennsylvania nonprofit corporation, with
offices located at 3700 Market Street, Suite 300, Philadelphia, Pennsylvania
19104-3147 ("PENN") and Orthovita, Inc., a corporation organized and existing
under the laws of Pennsylvania ("LICENSEE"), having a place of business at
Haverford, PA.
This AGREEMENT is effective as of September 1, 1993 ("EFFECTIVE DATE").
RECITALS
WHEREAS, PENN owns and is a proprietor of certain intellectual property
developed by Dr. Paul Ducheyne of PENN's School of Engineering relating to novel
materials and techniques for improving orthopaedic implants; and,
WHEREAS, PENN owns applications for United States letters patent listed in
Attachment 1 and attached hereto and foreign counterparts relating to the
foregoing intellectual property developed by Dr. Ducheyne; and,
WHEREAS, LICENSEE desires to secure the exclusive right and license to use,
develop, manufacture, market and exploit the intellectual property developed by
Dr. Ducheyne described in Attachment 1 hereto; and,
WHEREAS, PENN has determined that the exploitation of the intellectual
property of Dr. Ducheyne is in the best interest of PENN and is consistent with
its educational and research missions and goals; and,
WHEREAS, PENN and LICENSEE have entered into a STOCK PURCHASE AGREEMENT
(Attachment 2) providing for the issuance to PENN of shares of LICENSEE's Common
Stock in partial consideration of the exclusive license granted hereunder;
NOW, THEREFORE, in consideration of the premises and of the promises and
covenants contained herein and intending to be legally bound hereby, the parties
agree as follows:
ARTICLE 1 - DEFINITIONS
1.1 AFFILIATE means, when used with reference to LICENSEE, any ENTITY
directly or indirectly controlling, controlled by or under common control with
LICENSEE. For purposes of this AGREEMENT "control" means the direct or indirect
ownership of over fifty percent (50%) of the outstanding voting securities of an
ENTITY or the right to receive over fifty percent (50%) of the profits or
earnings of an ENTITY, or the right to control the policy decisions of a ENTITY.
1.2 BANKRUPTCY EVENT means voluntary or involuntary proceedings by or
against such ENTITY are instituted in bankruptcy or under any insolvency law, or
a receiver or custodian
1
<PAGE>
is appointed for such ENTITY, or proceedings are instituted by or against such
ENTITY for corporate reorganization or the dissolution of such ENTITY, which
proceedings, if involuntary, shall not have been dismissed within sixty (60)
days after the date of filing, or such ENTITY makes an assignment for the
benefit of creditors, or substantially all of the assets of such ENTITY are
seized or attached and not released within sixty (60) days thereafter.
1.3 CALENDAR QUARTER means each three-month period, or any portion
thereof, beginning on January 1, April 1, July 1 and October 1.
1.4 CALENDAR YEAR means a period of twelve (12) months beginning on
January 1 and ending on December 31.
1.5 CONFIDENTIAL INFORMATION means and includes all technical information,
inventions, trade secrets, developments, discoveries, software, know-how,
methods, techniques; formulae, data, processes and other proprietary ideas,
whether or not patentable or copyrightable, that PENN identifies as confidential
or proprietary at the time it is delivered or communicated to LICENSEE.
1.6 ENTITY means a corporation, an association, a joint venture, a
partnership, a trust, a business, an individual, a government or political
subdivision thereof, including an agency, or any other organization that can
exercise independent legal standing.
1.7 FDA means the Food and Drug Administration of the United States.
1.8 FEDERAL GOVERNMENT INTEREST means the rights of the United States
Government under Public Laws 96-517, 97-256 and 98-620, codified at 33 U.S.C.
200-212, and any regulations issued thereunder, as statute or regulations may be
amended from time to time hereafter.
1.9 FAIR MARKET VALUE means the cash consideration which LICENSEE or its
sublicensee would realize from an unaffiliated, unrelated buyer in an arm's
length sale of an identical item sold in the same quantity and at the same time
and place of the transaction.
1.10 FIELD OF USE means the use of PENN TECHNICAL INFORMATION and/or PENN
PATENT RIGHTS for use in medical, dental and veterinary fields for growth of
bone cells, fixing human prosthetic devices, coating human prosthetic devices,
inducing bone growth onto or into modified human prosthetic devices, and/or
producing human prosthetic devices.
1.11 LICENSE shall include LICENSEE and its AFFILIATES.
1.12 NET SALES means the cash consideration or FAIR MARKET VALUE
attributable to the SALE of any PENN LICENSED PRODUCT(S), less qualifying costs
directly attributable to such SALE and borne by LICENSEE or its sublicense.
2
<PAGE>
1.12.1 Such qualifying costs which shall be documented by LICENSEE
at the time of their occurrence shall be limited to the following:
1.12.1.1 Discounts, in amounts customary in the trade, for
quantity purchases, prompt payments and for
wholesalers and distributors.
1.12.1.2 Credits or refunds, not exceeding the original
invoice amount, for claims or returns.
1.12.1.3 Prepaid transportation insurance premiums.
1.12.1.4 Prepaid outbound transportation expenses.
1.12.1.5 Sales and use taxes imposed by a governmental
agency.
1.13 PENN LICENSED PRODUCT(S) means products which in the absence of this
AGREEMENT would infringe at least one claim of PENN PATENT RIGHTS or products
which are made using a process or machine covered by a claim of PENN PATENT
RIGHTS or products made, at least in part, using PENN TECHNICAL INFORMATION.
1.14 PENN PATENTED PRODUCT(S) means products which are made, made for,
used or sold, which manufacture, use or sale is covered by any claim of the PENN
PATENT RIGHTS in any country.
1.15 PENN PATENT RIGHTS means those United States patent applications
listed in Attachment 1 hereto, and foreign counterparts including continuation,
divisional and re-issue applications thereof and continuation-in-part
applications thereof based upon intellectual property discovered by PENN through
Dr. Ducheyne together with any and all patents issuing thereupon.
1.16 PENN TECHNICAL INFORMATION means research and development
information, unpatented inventions know-how, trade secrets, and technical data
in the possession of PENN on the EFFECTIVE DATE of this AGREEMENT which is
needed to produce PENN LICENSED PRODUCTS.
1.17 SALE means any bona fide transaction for which consideration is
received or expected for the sale, use, lease, transfer or other disposition of
PENN LICENSED PRODUCT(S). A SALE of PENN LICENSED PRODUCT(S) shall be deemed
completed at the time LICENSEE or its sublicense invoices, ships, or receives
payment for such PENN LICENSED PRODUCT(S), whichever occurs first.
3
<PAGE>
ARTICLE 2 - LICENSE AGREEMENT
2.1 PENN grants to LICENSEE for the term of this AGREEMENT an exclusive,
world-write right and license with the right to grant sublicenses to make, have
made, use and sell PENN LICENSED PRODUCT(S) in the FIELD OF USE. No other rights
or licenses are granted hereunder.
2.2 The license grant of this Article 2 is exclusive but for the
reserved right of PENN to use and permit other nonprofit organizations to use
the PENN PATENT RIGHTS, and the PENN TECHNICAL INFORMATION solely for
educational and research purposes.
2.3 LICENSEE acknowledges that in accordance with the FEDERAL GOVERNMENT
INTEREST, the United States government retains certain rights in intellectual
property funded in whole or part under any contract, grant or similar agreement
with a Federal agency. The license grant of this Article 2 is expressly subject
to all of such right.
2.4 The right to sublicense conferred upon LICENSEE under this AGREEMENT
is subject to the following conditions:
2.4.1 In each such sublicense, the sublicensee shall be prohibited
from further sublicensing and shall be subject to the terms and conditions of
the license granted to LICENSEE under this AGREEMENT.
2.4.2 LICENSEE shall forward to PENN, within thirty (30) days of
execution, a complete and accurate copy written in the English language of each
sublicense granted hereunder. PENN's receipt of such sublicense shall not
constitute an approval of such sublicense or a waiver of any of PENN's rights or
LICENSEE's obligations hereunder.
2.4.3 If LICENSEE becomes subject to a BANKRUPTCY EVENT, all
payments then or thereafter due and owing to LICENSEE from its sublicensees
shall upon notice from PENN to any such sublicense become payable directly to
PENN for the account of LICENSEE; provided however, that PENN shall remit to
LICENSE the amount by which such payments exceed the amounts owed by LICENSEE to
PENN.
2.4.4 Notwithstanding any such sublicense, LICENSEE shall remain
primarily liable to PENN for all of the LICENSEE'S duties and obligations
contained in this AGREEMENT, and any act or omission of a sublicensee which
would be a breach of this AGREEMENT if performed by LICENSEE shall be deemed to
be a breach by LICENSEE of this AGREEMENT.
ARTICLE 3 - FEES AND ROYALTIES
3.1 LICENSE INITIATION FEE AND ROYALTIES
4
<PAGE>
3.1.1 In partial consideration of the exclusive license granted
herein, LICENSEE shall pay to PENN on the EFFECTIVE DATE of this AGREEMENT, a
non-refundable license initiation fee of three and one-half percent (3.5 %) of
the currently issued and outstanding shares of LICENSEE's common stock via a
Stock Purchase Agreement (Appendix 2). The issuance of such stock shall be in
accordance with a Stock Agreement attached to this Agreement as Appendix 2.
3.1.2 In further consideration of the exclusive license granted
herein, LICENSEE shall pay to PENN a royalty of four percent (4%) of the NET
SALES of PENN LICENSED PRODUCTS made, made for, used or sold by LICENSEE and any
sublicensees or any other products, the rights of which were obtained through
sublicense of the PENN LICENSED PRODUCTS.
3.1.3 NET SALES of any PENN LICENSED PRODUCT shall not be subject to
more than one assessment of the scheduled royalty; such assessment shall be the
highest applicable royalty.
3.1.4 In the event that a PENN LICENSED PRODUCT is sold in the form
of a combination product containing one or more products which are themselves
not PENN LICENSED PRODUCTS, the NET SALES shall be calculated by multiplying the
sales price of such combination product by the fraction A/(A+B) where A is the
invoice price or FAIR MARKET VALUE of the PENN LICENSED PRODUCT and B is the
total invoice price or FAIR MARKET VALUE of the other products. In the case of a
combination product which includes one or more PENN LICENSED PRODUCTS, the NET
SALES upon which the royalty due PENN is based shall not be less than the normal
aggregate NET SALES for such PENN LICENSED PRODUCTS.
3.2 MILESTONES AND MAINTENANCE FEES
3.2.1 LICENSEE shall use its best efforts to develop for commercial
use and to market PENN LICENSED PRODUCTS as soon as practical, consistent with
sound and reasonable business practices.
3.2.2 LICENSEE shall provide PENN on each June 1 and December 1 with
written reports, setting forth in such detail as PENN may reasonably request,
the progress of the development, evaluation, testing and commercialization of
the PENN LICENSED PRODUCTS. LICENSEE shall also notify PENN within thirty (30)
days of the first commercial sale of any PENN LICENSED PRODUCT.
3.2.3 LICENSEE and PENN shall meet at least once each year this
Agreement is extant, on or about the anniversary of this Agreement, to discuss
LICENSEE's progress with respect to the development and regulatory status of
each of the PENN LICENSED PRODUCTS and the anticipated date of commercialization
or sublicense of such products.
3.3 REPORTS AND RECORDS
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3.3.1 LICENSEE shall deliver to PENN within forty-five (45) days
after the end of each CALENDAR QUARTER a report, certified by the chief
financial officer of LICENSEE setting forth in reasonable detail the calculation
of the royalties due to PENN for such CALENDAR QUARTER, including, without
limitation:
3.3.1.1 Number of PENN LICENSED PRODUCTS involved in
SALES, listed by country.
3.3.1.2 Gross consideration for SALES of PENN LICENSED
PRODUCTS, including all amounts invoiced, billed,
or received.
3.3.1.3 Qualifying costs, as defined in Section 1.12,
listed by category of cost.
3.3.1.4 NET SALES of PENN LICENSED PRODUCTS listed by
country.
3.3.1.5 Royalties owed to PENN, listed by category,
including without limitation earned and
sublicensee-derived.
3.3.2 Royalties payable under Sections 3.1 and 3.3 hereof shall be
paid within forty-five (45) days following the last day of the CALENDAR QUARTER
in which the royalties accrue and shall accompany the report of Section 3.4.1.
3.3.3 LICENSEE will maintain and cause its sublicensees to maintain,
complete and accurate books and records which enable the royalties payable
hereunder to be verified. The records for each CALENDAR QUARTER shall be
maintained for three years after the submission of each report under Article 3
hereof. Upon reasonable prior notice to LICENSEE, PENN and its accountants shall
have access to all books and records relating to the SALES of PENN LICENSED
PRODUCTS by LICENSEE and its sublicensees to conduct a review or audit thereof.
Such access shall be available not more than once each CALENDAR YEAR, during
normal business hours, and for each of the three years after the expiration or
termination of this AGREEMENT. If PENN determines that LICENSEE has underpaid
royalties by 5% or more, LICENSEE will pay the costs and expenses of PENN and
its accountants in connection with their review or audit.
3.4 CURRENCY, PLACE OF PAYMENT, INTEREST
3.4.1 All dollar amounts referred to in this AGREEMENT are expressed
in United States dollars. All payments to PENN under this AGREEMENT shall be
made in United States dollars by check payable to "The Trustees of the
University of Pennsylvania."
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<PAGE>
3.4.2 If LICENSEE receives revenues from SALES of PENN LICENSED
PRODUCTS in currency other than United States dollars, revenues shall be
converted into United States dollars at the conversion rate for the foreign
currency as published in the eastern edition of The Wall Street Journal as of
the last business day of the applicable CALENDAR QUARTER.
3.4.3 Amounts that are not paid when due shall accrue interest from
the due date until paid, at an annual rate equal to the prime rate as designated
by LICENSEE'S principal lender plus two percent (2%) (or the maximum allowed by
law, if less).
ARTICLE 4 - CONFIDENTIALITY
4.1 CONFIDENTIALITY
4.1.1 LICENSEE agrees to maintain in confidence and not to disclose
to any third party any CONFIDENTIAL INFORMATION of PENN received pursuant to
this AGREEMENT. LICENSEE agrees to ensure that its employees have access to
CONFIDENTIAL INFORMATION only on a need-to-know basis and are obligated in
writing to abide by LICENSEE'S obligations hereunder. The foregoing obligation
shall not apply to:
4.1.1.1 information that is known to LICENSEE or
independently developed by LICENSEE prior to the
time of disclosure, in each case, to the extent
evidenced by written records promptly disclosed to
PENN upon receipt of the CONFIDENTIAL INFORMATION.
4.1.1.2 information disclosed to LICENSEE by a third party
that has a right to make such disclosure;
4.1.1.3 information that becomes patented, published or
otherwise part of the public domain as a result of
lawful acts by PENN or a third person obtaining
such information, as a matter of right; or
4.1.1.4 information that is required to be disclosed by
order of United States government authority,
including the U.S. Food and Drug Administration
and the U.S. Securities and Exchange Commission,
or a court of competent jurisdiction; provided
that LICENSEE, shall use its best efforts to
obtain confidential treatment of such information
by the agency or court.
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<PAGE>
4.2 PENN shall not be obligated to accept any confidential information
from LICENSEE. PENN bears no institutional responsibility for maintaining the
confidentiality of any confidential information of LICENSEE.
4.3 The placement of a copyright notice on any CONFIDENTIAL INFORMATION
shall not be construed to mean that such information has been published and will
not release LICENSEE from its obligation of confidence hereunder.
ARTICLE 5 - TERM AND TERMINATION
5.1 This AGREEMENT, unless sooner terminated as provided herein, shall
terminate upon the expiration of the last to expire or become abandoned of the
PENN PATENT RIGHTS.
5.2 LICENSEE may, at its option, terminate this AGREEMENT at any time by
doing all of the following:
5.2.1 By ceasing to make, have made, use and sell all PENN LICENSED
PRODUCTS; and
5.2.2 By terminating all sublicenses, and causing all sublicensees to
cease making, having made, using and selling all PENN LICENSED PRODUCTS; and
5.2.3 By giving sixty (60) days notice to PENN of such cessation and
of LICENSEE's intent to terminate; and
5.2.4 By tendering payment of all accrued royalties.
5.3 PENN may terminate this AGREEMENT if any of the following occur:
5.3.1 LICENSEE becomes more than ninety (90) days in arrears in
payment of royalties or expenses due pursuant to this AGREEMENT and LICENSEE
does not provide full payment immediately upon demand; or
5.3.2 LICENSEE becomes subject to a BANKRUPTCY EVENT; or
5.3.3 LICENSEE breaches this AGREEMENT and does not cure such breach
within ninety (90) days written notice thereof.
5.4 PENN may also terminate this AGREEMENT individually as to a PENN
LICENSED PRODUCT and PENN PATENT RIGHTS related thereto if:
5.4.1 five years have elapsed from the EFFECTIVE DATE of this
AGREEMENT; and
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<PAGE>
5.4.2 LICENSEE has not submitted such PENN LICENSED PRODUCT for FDA
regulatory approval; or
5.4.3 LICENSEE has not made a SALE within one (1) year after FDA
Regulatory Approval of such PENN LICENSED PRODUCT or has no sublicensees doing
so; or
5.4.4 LICENSEE has not met milestones specified in Section 3.2; and
5.4.5 PENN has given LICENSEE ninety (90) days notice of intent to
terminate.
5.4.6 Notwithstanding the foregoing, PENN agrees that it shall not
terminate this Agreement individually as to a PENN LICENSED PRODUCT without
giving LICENSEE the opportunity to extend the term of this AGREEMENT as to such
PENN LICENSED PRODUCT upon the payment to PENN of such reasonable consideration
as is mutually agreed to by each of the parties.
In the event LICENSEE terminates this AGREEMENT individually as
to a PENN LICENSED PRODUCT and PENN PATENT RIGHTS related thereto as provided
herein, Penn shall be free to license to any other party the rights to make,
have made, use and sell such PENN LICENSED PRODUCT and to use such PENN PATENT
RIGHTS upon such terms as PENN deems appropriate, without any further obligation
to LICENSEE.
5.5 If LICENSEE becomes subject to a BANKRUPTCY EVENT, all duties of PENN
and all rights (but not duties) of LICENSEE under this AGREEMENT shall
immediately terminate without the necessity of any action being taken either by
PENN or by LICENSEE. To secure the complete and timely payment and satisfaction
of all LICENSEE's royalty obligations under this AGREEMENT, LICENSEE hereby
grants to PENN a security interest, effective immediately, in LICENSEE's entire
right, title and interest in and to this AGREEMENT and to all inventories of
PENN LICENSED PRODUCTS now or hereafter owned by LICENSEE. In addition to any
rights or remedies provided for under this AGREEMENT, PENN shall have all of the
rights and remedies of secured party under the Uniform Commercial Code. Upon
the request and at the sole expense of PENN, LICENSEE shall execute any and all
instruments or documents as shall be reasonably necessary to evidence and
perfect such security interest in any jurisdiction.
5.6 Upon termination of this AGREEMENT, LICENSEE shall, at PENN's request,
return to PENN all CONFIDENTIAL INFORMATION fixed in any tangible medium of
expression as well as any data generated by LICENSEE during the term of this
AGREEMENT which will facilitate the development of the technology licensed
hereunder.
5.7 LICENSEE's obligation to pay royalties accrued under Article 3 hereof
shall survive termination of this AGREEMENT. In addition, the provisions of
Articles 4 (for a three
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<PAGE>
(3) year period), and 8.1, 8.2, 8.3, 9 (for the applicable statute of
limitations) shall survive such termination
ARTICLE 6 - PATENT MAINTENANCE AND REIMBURSEMENT
6.1 PENN shall control and diligently prosecute and maintain PENN PATENT
RIGHTS provide LICENSEE shall promptly reimburse PENN for all the attorneys
fees, expenses, official fees and other charges incident to the preparation,
prosecution and maintenance of PENN PATENT RIGHTS, as documented in the
memorandum of October 15, 1993 from Jeffrey Solash to David Joseph, attached
hereto as Exhibit 1. PENN shall provide LICENSEE with itemized statements
reflecting these expenses LICENSEE shall reimburse PENN for such past expenses
according to the following schedule:
<TABLE>
<CAPTION>
Date of Payment Amount of Payment
- --------------- -----------------
<S> <C>
Within 90 Days of the EFFECTIVE DATE One-quarter (1/4) of accrued expenses;
Upon the 1st Anniversary of This One-quarter (1/4) of accrued expenses;
Agreement
Upon the 2nd Anniversary of This One-half (1/2) of accrued expenses.
Anniversary
</TABLE>
LICENSEE shall also promptly reimburse PENN for all documented attorneys
fees, expenses, official fees and other charges incident to the preparation,
prosecution and maintenance of PENN PATENT RIGHTS incurred subsequent to the
EFFECTIVE DATE of this Agreement; provided, however, that PENN will file patent
applications on technology only after receipt of notice from LICENSEE that such
technology should become should become part of the PENN PATENT RIGHTS.
6.2 LICENSEE and its sublicensees shall comply with all United States and
foreign laws with respect to patent marking of PENN LICENSED PRODUCTS.
ARTICLE 7 - INFRINGEMENT AND LITIGATION
7.1 PENN and LICENSEE are responsible for notifying each other promptly of
any infringement of PENN PATENT RIGHTS which may come to their attention. PENN
and LICENSEE shall consult one another in a timely manner concerning any
appropriate response thereto.
7.2 LICENSE shall have the right, but not the obligation to prosecute such
infringement at its own expense. LICENSE shall not settle or compromise any
such suit in a manner that imposes any obligations or restrictions on PENN or
grants any rights to the PENN TECHNICAL
10
<PAGE>
INFORMATION or the PENN PATENT RIGHTS, without PENN'S written permission.
Financial recoveries from any such litigation will first be applied to reimburse
LICENSEE for its litigation expenditures with additional recoveries being paid
to LICENSEE, subject to a royalty due PENN based on the provisions of Article 3
hereof.
7.3 Such rights of Section 7.2 shall be subject to the continuing right of
PENN to intervene at PENN's own expense and join LICENSEE in any claim or suit
for infringement of the PENN PATENT RIGHTS. Any considerations received by
LICENSEE in settlement of any claim or suit shall be shared between PENN and
LICENSEE in proportion with their share of the litigation expenses in such
infringement action. If counsel chosen by LICENSEE is reasonably acceptable to
PENN, for these purposes, PENN's litigation expenses shall not be deemed to
include counsel fees.
7.4 If LICENSEE fails to prosecute such infringement, PENN shall have the
right, but not the obligation, to prosecute such infringement at its own
expense. In such event, financial recoveries will be entirely retained by PENN.
7.5 In any action to enforce any of the PENN PATENT RIGHTS either party,
at the request and expense of the other party shall cooperate to the fullest
extent reasonably possible. This provision shall not be construed to require
either party to undertake any activities, including legal discovery, at the
request of any third party except as may be required by lawful process of a
court of competent jurisdiction.
7.6 In the event an infringement action is brought by a third party
claiming that the PENN TECHNICAL INFORMATION or PENN PATENT RIGHTS or any PENN
LICENSED PRODUCT infringes or violates any patent, copyright, trademark or other
intellectual property rights of such third party, LICENSEE's first obligation
shall be to defend, indemnify and hold harmless the Indemnified Parties at the
extent provided in Article 8 of this AGREEMENT. While such a third party
infringement action is pending, all royalties and other payments required to
made any LICENSEE under Article 3 shall be held in an interest-bearing escrow
account established as a joint account in the names of LICENSEE and PENN
(hereinafter referred to as the "Account").
7.6.1 Upon determination by a court of competent jurisdiction from
which no appeal has been or can be taken that no infringement occurred, and
following satisfaction of LICENSEE's obligation under Article 8, the payments
held in the Account shall be used as follows: (a) LICENSEE shall be entitled to
deduct from the Account an amount equal to fifty percent (50%) of LICENSEE's
costs and expenses incurred in defending such infringement action; and (b) any
amount remaining the Account after such deduction shall be paid to PENN.
7.6.2 Upon a determination by a court of competent jurisdiction from
which no appeal has been or can be taken than an infringement occurred, LICENSEE
and PENN shall meet to agree upon a schedule and terms for the resumption of the
payment to PENN of royalties and other payments consistent with the court's
determination and the effect of such determination on rights licensed under this
AGREEMENT, and PENN shall take whatever action is necessary to
11
<PAGE>
remedy the infringement, if practical, and consistent with sound and reasonable
business practices. Following satisfaction of LICENSEE's obligations under
Article 8, the payments held in the Account shall be used as follows: (a)
LICENSEE shall be entitled to deduct from the Account an amount equal to one
hundred percent (100%) of LICENSEE's costs and expenses incurred in defending
such infringement action; and (b) any amount remaining in the Account after such
deduction shall be paid to PENN.
7.6.3 In no event shall the provisions of this Article 7; (a) in any
way limit LICENSEE's obligations to defend, indemnify and hold harmless the
Indemnified Parties as required in Article 8; and (b) require PENN to refund any
royalties or other payments received by PENN prior to the commencement of an
infringement action.
ARTICLE 8 - DISCLAIMER OF WARRANTY; INDEMNIFICATION
8.1 THE PENN PATENT RIGHTS, JOINT PATENT RIGHTS, PENN TECHNICAL
INFORMATION, PENN LICENSED PRODUCTS AND ALL OTHER TECHNOLOGY LICENSED UNDER THIS
AGREEMENT ARE PROVIDED ON AN "AS IS" BASIS AND PENN MAKES NO REPRESENTATIONS OR
WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT THERETO. BY WAY OF EXAMPLE BUT NOT
OF LIMITATION, PENN MAKES NO REPRESENTATION OR WARRANTIES (i) OF COMMERCIAL
UTILITY; (ii) OF MERCHANTABILITY OF FITNESS FOR A PARTICULAR PURPOSE; OR (iii)
THAT THE USE OF THE PENN PATENT RIGHTS, PENN TECHNICAL INFORMATION, PENN
LICENSED PRODUCTS AND ALL TECHNOLOGY LICENSED UNDER THIS AGREEMENT WILL NOT
INFRINGE ANY PATENT, COPYRIGHT OR TRADEMARK OR OTHER PROPRIETARY OR PROPERTY
RIGHTS OF OTHERS. PENN SHALL NOT BE LIABLE TO LICENSEE, LICENSEE'S SUCCESSORS
OR ASSIGNS OR ANY THIRD PARTY WITH RESPECT TO: ANY CLAIM ARISING FROM THE USE OF
THE PENN PATENT RIGHTS, PENN TECHNICAL INFORMATION, PENN LICENSED PRODUCTS AND
ALL TECHNOLOGY LICENCED UNDER THIS AGREEMENT OR FROM THE MANUFACTURE, USE OR
SALE OF PENN LICENSED PRODUCTS; OR ANY CLAIM FOR LOSS OF PROFITS, LOSS OR
INTERRUPTION OF BUSINESS, OR FOR INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OF
ANY KIND.
8.2 LICENSEE will defend, indemnify and hold harmless PENN, its trustees,
officers, agents and employees (individually, an "Indemnified Party", and
collectively, the "Indemnified Parties"), from and against any and all
liability, loss, damage, action, claim or expense suffered or incurred by the
Indemnified Parties (including attorney's fees) (individually, a "Liability",
and collectively, the "Liabilities") that results from or arises out of: (a) the
development, use, manufacture, promotion, sale or other disposition, of any PENN
TECHNICAL INFORMATION, PENN PATENT RIGHTS or PENN LICENSED PRODUCTS by LICENSEE,
its assignees, sublicensees, vendors or other third parties; (b) breach by
LICENSEE of any covenant or agreement contained in this AGREEMENT; and (c) the
enforcement by an Indemnified Party of its rights under
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<PAGE>
this Section. Without the foregoing, LICENSEE will defend, indemnify and hold
harmless the Indemnified Parties from and against any Liabilities resulting
from:
8.2.1 any product liability or other claim of any kind related to the
use by a third party of a PENN LICENSED PRODUCT that was manufactured, sold or
otherwise disposed by LICENSEE, its assignees, sublicensees, vendors or other
third parties; and
8.2.2 clinical trials or studies conducted by or on behalf of
LICENSEE relating to the PENN TECHNICAL INFORMATION, PENN PATENT RIGHTS or PENN
LICENSED PRODUCTS, including, without limitation, any claim by or on behalf of a
human subject of any such clinical trial or study, any claim arising from the
procedures specified in any protocol used in any such clinical trial or study,
any claim of deviation, authorized or unauthorized, from the protocols of any
such clinical trial or study, and any claim resulting from or arising out of the
manufacture or quality control by a third party of any substance administered in
any clinical trial or study.
8.3 The Indemnified Party shall promptly notify LICENSEE of any claim or
action giving rise to Liabilities subject to the provisions of the foregoing
Section. LICENSEE shall have the right to defend any such claim or action, at
its cost and expense. LICENSEE shall not settle or compromise any such claim or
action in a manner that imposes any restrictions or obligations on PENN or
grants any rights to PENN TECHNICAL INFORMATION, PENN PATENT RIGHTS or PENN
PATENTED PRODUCTS without PENN's prior written consent. If LICENSEE fails or
declines to assume the defense of any such claim or action within thirty (30)
days after notice thereof, PENN may assume the defense of such claim or action
for the account and at the risk of LICENSEE, and any Liabilities related thereto
shall be conclusively deemed a liability of LICENSEE. LICENSEE shall pay
promptly to the Indemnified Party any Liabilities to which the foregoing
indemnify relates, as incurred. The indemnification rights of PENN or other
Indemnified Party contained herein are in addition to all other rights which
such Indemnified Party may have at law or in equity or otherwise.
8.4 INSURANCE
8.4.1 LICENSEE shall procure and maintain a policy or policies of
comprehensive general liability insurance, including broad form and contractual
liability, and, if commercial reasonable at standard rates, such coverage in a
minimum amount of $1,000,000 combined single limit per occurrence and in the
aggregate as respects personal injury, bodily injury and property damage arising
out of LICENSEE'S performance of this AGREEMENT.
8.4.2 LICENSEE shall, upon commencement of clinical trials involving
PENN LICENSED PRODUCTS, procure and maintain a policy or policies of product
liability insurance and, if commercially reasonable at standard rates, such
coverage in a minimum amount of $3,000,000 combined single limit per occurrence
and in the aggregate as respects bodily injury and property damage arising out
of LICENSEE's performance of this AGREEMENT.
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<PAGE>
8.4.3 The policy or policies of insurance specified herein shall be
issued by an insurance carrier with an A.M. Best rating of "A" or better and
shall name PENN as an additional insured with respect to LICENSEE's performance
of this AGREEMENT. LICENSEE shall provide PENN with certificates evidencing the
insurance coverage required herein and all subsequent renewals thereof. Such
certificates shall provide that LICENSEE's insurance carrier(s) notify PENN in
writing at least 30 days prior to cancellation or material change in coverage.
8.4.4 PENN shall periodically review the adequacy of the minimum
limits of liability specified herein. The specified minimum insurance amounts
shall not constitute a limitation of LICENSEE's obligation to indemnify PENN
under this AGREEMENT.
ARTICLE 9 - USE OF PENN'S NAME; INDEPENDENT CONTRACTOR
9.1 LICENSEE and its employees and agents shall not use and LICENSEE
shall not permit its sublicensees to use PENN's name, any adaptation thereof,
any PENN logotype, trademark, service mark or slogan or the name mark or
logotype of any PENN representative or organization in any way without the
prior, written consent of PENN.
9.2 Nothing herein shall be deemed to establish a relationship of
principal and agent between PENN and LICENSEE, nor any of their agents or
employees for any purpose whatsoever. The AGREEMENT shall not be construed as
constituting PENN and LICENSEE as partners, or as creating any other form of
legal association or arrangement which would impose liability upon one party for
the act or failure to act of the other party.
ARTICLE 10 - ADDITIONAL PROVISIONS
10.1 LICENSEE shall comply with all prevailing laws, rules and regulations
pertaining to the development, testing, manufacture, marketing, sales, use,
import or export of products. Without limiting the foregoing, it is understood
that this AGREEMENT may be subject to United States laws and regulations
controlling the export of technical data, computer software, laboratory
prototypes and other commodities, articles and information, including the Arms
Export Control Act as amended in the Export Administration Act of 1979, and that
the parties obligations hereunder are contingent upon compliance with applicable
United States export laws and regulations. The transfer of certain technical
data and commodities may require a license from the cognizant agency of the
United States Government and/or written assurances by LICENSEE that LICENSEE
shall not export data or commodities to certain foreign countries without prior
approval of such agency. PENN neither represents that a license is not required
nor that, if required, it will issue.
10.2 This AGREEMENT and the rights and duties appertaining thereto may not
be assigned by LICENSEE without first obtaining the express written consent of
PENN which consent shall not be unreasonably withheld. Any such purported
assignment, without the written consent of PENN, shall be null and of no effect.
14
<PAGE>
10.3 Notices, payments, statements, reports and other communications under
this AGREEMENT shall be in writing and shall be deemed to have been received as
of the date dispatched if sent by public overnight courier (e.g. Federal
Express) and addressed as follows:
If for PENN:
University of Pennsylvania
Center for Technology Transfer
3700 Market Street, Suite 300
Philadelphia, PA 19104-3147
Attention: Managing Director
with a copy to:
Office of General Counsel
University of Pennsylvania
211 College Hall
Philadelphia, PA 19104-6303
Attention: General Counsel
If for LICENSEE:
with a copy to:
Stephen M. Goodman
Wolf, Block, Schorr & Solis-Cohen
15th & Chestnut Streets
Philadelphia, PA 19102
Either party may change its official address upon written notice to the other
party.
10.4 This AGREEMENT shall be construed and governed in accordance with the
laws of the Commonwealth of Pennsylvania, without giving effect to conflict of
law provisions.
10.5 This AGREEMENT and the STOCK PURCHASE AGREEMENT (Attachment 2 hereto)
are being entered into simultaneously and each is related to the other in
setting forth the entire agreement of the parties. Any modification of this
AGREEMENT shall be in writing and signed by an authorized representative of each
party.
15
<PAGE>
10.6 In the event that a party to this AGREEMENT perceives the existence
of a dispute with the other party concerning any right or duty provided for
herein, the parties shall, as soon as practicable, confer in an attempt to
resolve the dispute. If the parties are unable to resolve such dispute amicably,
then the parties hereby submit to the exclusive jurisdiction of and venue in the
courts located in the Eastern District of the Commonwealth of Pennsylvania with
respect to any and all disputes concerning the subject of this AGREEMENT.
10.7 A waiver by either party of a breach or violation of any provision
of this AGREEMENT will not constitute or be construed as a waiver of any
subsequent breach or violation of that provision or as a waiver of any breach or
violation of any other provision of this AGREEMENT.
10.8 Any of the provisions of this AGREEMENT which are determined to be
invalid or unenforceable in any jurisdiction shall be ineffective to the extent
of such invalidity or unenforceability in such jurisdiction, without rendering
invalid or unenforceable the remaining provisions hereof or affecting the
validity or unenforceability of any of the terms of this AGREEMENT in any other
jurisdiction.
10.9 The headings and captions used in this AGREEMENT are for convenience
of reference only and shall not affect its construction or interpretation.
10.10 Nothing in this AGREEMENT, express or implied, is intended to confer
on any person, other than the parties hereto or their permitted assigns, any
benefits, rights or remedies.
10.11 PENN and LICENSEE shall not discriminate against any employee or
applicant for employment because of race, color, sex, sexual or affectional
preference, age, religion, national or ethnic origin, or handicap.
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<PAGE>
IN WITNESS WHEREOF the parties, intending to be legally bound, have caused
this AGREEMENT to be executed by their duly authorized representatives.
THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA
______________________________________
DATE: November 29, 1993
--------------------------------
SIGNATURE: /s/ Stephen M. Sammut
----------------------------
TYPED NAME: Stephen M. Sammut
---------------------------
TITLE: Managing Director, Center for Technology Transfer
---------------------------------------------------
LICENSEE
______________________________________
DATE: 11-21-93
---------------------------------
SIGNATURE: /s/ David S. Joseph
----------------------------
TYPED NAME:___________________________
TITLE: President
--------------------------------
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<PAGE>
Exhibit 10.6
AMENDMENT A
LICENSE AGREEMENT BETWEEN ORTHOVITA, INC. AND
THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA
This Amendment A to the License Agreement between Orthovita, Inc. ("LICENSEE")
and the Trustees of the University of Pennsylvania ("PENN") is made effective by
the parties as of February 27, 1997.
BACKGROUND
WHEREAS, PENN and LICENSEE entered into a License Agreement - L081
("AGREEMENT") effective September 1, 1993 and;
Pursuant to this AGREEMENT, LICENSEE owes PENN $134,744.80 for the
reimbursement of outstanding PENN PATENT RIGHTS costs and;
PENN owns additional patent rights developed by Dr. Paul Ducheyne of PENN's
School of Engineering relating to novel materials and techniques for
improving orthopaedic implants (described in PENN Dockets G1100, I1400,
I1434, I1453, and I1477) ("ADDITIONAL PATENT RIGHTS") and;
PENN owns applications United States letters patent and foreign
counterparts relating to the ADDITIONAL PATENT RIGHTS developed by Dr. Paul
Ducheyne as described above; and
LICENSEE desires to obtain the exclusive right and license to use and
exhibit the ADDITIONAL PATENT RIGHTS developed by Dr. Paul Ducheyne; and
PENN has determined that the exploitation of the ADDITIONAL PATENT RIGHTS
developed by Dr. Paul Ducheyne is in the best interest of PENN and is
consistent with its educational and research missions and goals;
NOW, THEREFORE, the parties agree as follows:
1. Unless otherwise defined in this Amendment A, all terms shall have the
same meaning as set forth in the AGREEMENT.
2. Pursuant to Article 2 of the AGREEMENT, PENN grants to LICENSEE upon
execution of this Amendment A, and payment of the amount specified in
<PAGE>
paragraph 3 and 5 of this Amendment A, an exclusive right and license
to make, have made, use or sell the ADDITIONAL PATENT RIGHTS.
3. Upon execution of this Amendment A LICENSEE will reimburse PENN
$50,000 to be credited towards LICENSEE's obligation to pay PENN's
outstanding out-of-pocket patent costs.
4. LICENSEE will pay PENN $50,000 on or before April 1, 1997 to be
credited towards LICENSEE's obligation to pay PENN's outstanding out-
of-pocket patent costs.
5. LICENSEE will issue to PENN 31,705 shares of capital stock in LICENSEE
upon execution of this Amendment A, such issue to be credited as a
final payment towards LICENSEE's obligation to pay PENN's outstanding
out-of-pocket patent costs.
6. Upon execution of the Amendment A, LICENSEE will issue an additional
10,000 shares of capital stock in LICENSEE as a license initiation fee
for the execution of this Attachment A.
7. The shares of capital stock noted in items 5 and 6 win be sold in the
LICENSEE's current private offering at $4.25 per share. In the event
that the shares of capital stock noted in items 5 and 6 are not sold
in the LICENSEE's current private offering at $4.25 per share or if
shares of capital stock in LICENSEE, in which PENN holds an ownership
interest, are not publicly traded on or before September 1, 2001,
LICENSEE will purchase the shares of capital stock noted in items 5
and 6 from PENN at $4.25 per share plus 8% interest compounded
annually.
8. LICENSEE will sponsor research at the PENN Equine Center for at least
$57,000 related to the licensed technologies.
9. PENN will continue to control the prosecution all patent applications
relating to the licensed PATENT RIGHTS.
10. LICENSEE will reimburse PENN's patent costs for PENN Dockets I1400,
I1434, I1453, and I1477 except, PENN will not seek reimbursement from
LICENSEE for the preparation, filing and prosecution through issuance
in the United States for PENN Dockets I1400, I1434, I1453, and I1477,
11. LICENSEE will reimburse PENN's patent costs, United States and
foreign, for in PENN Dockets G1100, D602, D621, D826, E848, E913,
E939, and E941.
2
<PAGE>
12. LICENSEE will reimburse PENN's patent costs, United States and
foreign, for all extensions of all patents including divisionals,
continuations in part, continuations, reissues and foreign
counterparts related to all PENN PATENT RIGHTS and ADDITIONAL PATENT
RIGHTS.
13. The issuance of the shares of capital stock noted in items 5 and 6
will be conveyed by a mutually acceptable Stock Purchase Agreement
that will include, but will not be limited to, piggy back registration
rights.
14. The termination provisions of Article 5 of the Agreement shall apply
to the ADDITIONAL PATENT RIGHTS. In addition, PENN may individually
terminate the license granted in Paragraph 2 of this Amendment A to
each of PENN Dockets GI100, I1400, I1434, I1453, and I1477 may be
terminated without effecting the other PENN Dockets GI100, I1400,
I1434, I1453, and I1477 if LICENSEE does not use its best efforts to
develop for commercial use and market the ADDITIONAL PATENT RIGHTS.
LICENSEE must provide to PENN i.) before July 31, 1997 a written
development plan, setting forth in such detail as PENN may reasonably
request, for progressing the development, evaluation, testing and
commercialization of each of PENN Dockets GI100, I1400, I1434, I1453,
and I1477; and ii.) on each anniversary of the execution of this
Amendment A, a written development plan and progress report, setting
forth in such detail as PENN may reasonably request, the past progress
and future plans for the development, evaluation, testing and
commercialization of each of PENN Dockets GI100, I1400, I1434, I1453,
and I1477. Such reports should document the moneys dedicated and/or
spent on the development, evaluation, testing and commercialization of
each of PENN Dockets GI100, I1400, I1434, I1453, and I1477.
15. Except as set forth in the foregoing provisions of this Amendment A,
all of the terms and conditions of the AGREEMENT shall apply, and such
AGREEMENT, as amended, shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Attachment A through their
duly authorized representatives as set forth below, and this Attachment A shall
be attached to, and shall become a part of, the AGREEMENT between the parties.
3
<PAGE>
THE TRUSTEES OF THE
UNIVERSITY of PENNSYLVANIA ORTHOVITA, INC.
By: \s\ Louis P. Berneman By: \s\ David Joseph
-------------------------------- ----------------------------
Name: Louis P. Berneman Name: David Joseph
Title: Managing Director, Center for Title: President
Technology Transfer
Date: February 27, 1997 Date: February 27, 1997
I have read and agree to abide by the terms of this Amendment A.
By: \s\ Louis P. Berneman
--------------------------------
Name: Paul Ducheyne, Ph.D.
Title. Professor
Date: March 5, 1997
-----------------------------
4
<PAGE>
Exhibit 10.7
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement") entered into as of December 31,
1996, by and between Orthovita, Inc., a Pennsylvania corporation (the
"Company"), and David S. Joseph, an employee of the Company ("Executive").
WHEREAS, the Company wishes to continue to employ Executive as its
President and Chief Executive Officer, and both parties desire to enter into an
employment agreement to reflect Executive's position with the Company upon the
terms and conditions set forth herein.
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Employment. The Company hereby continues to employ Executive as its
----------
President. Executive hereby accepts such employment and agrees to perform his
duties and responsibilities, in accordance with the terms, conditions and
provisions hereinafter set forth.
1.1. Employment Term. The term of Executive's employment under this
---------------
Agreement (the "Employment Term") shall commence as of the date hereof (the
"Effective Date") and shall continue until December 31, 1999, unless terminated
prior thereto in accordance with Section 5 or unless extended prior thereto in
the event a Change of Control in accordance with Section 6.
1.2. Duties and Responsibilities. Executive shall serve as the Company's
---------------------------
President and Chief Executive Officer and in such other senior positions, if
any, to which he may be elected by the Board of Directors of the Company (the
"Board") during the Employment Term. During the Employment Term, Executive shall
perform all duties and accept all responsibilities incident to, and not
inconsistent with, such positions as may be reasonably assigned to him by the
Board.
1.3. Extent of Service. During the Employment Term, Executive agrees to
-----------------
use his best efforts to carry out his duties and responsibilities under Section
1.2 hereof and, consistent with the other provisions of this Agreement, to
devote substantially all his business time, attention and energy thereto except
to the extent required by Executive's outside board directorships, civic or
charitable activities. Except for positions held on the date of this Agreement,
Executive agrees not to become engaged in any other business, civic or
charitable activity which, in the Board's reasonable judgment, is likely to
interfere materially with his ability to discharge his duties and
responsibilities to the Company.
1.4. Base Salary. For all the services rendered by Executive hereunder,
-----------
the Company shall pay Executive a base salary ("Base Salary"), commencing on the
March 1, 1997, at the annual rate of $225,000, payable in installments at such
times as the Company customarily pays its other senior level executives (but in
any event no less often than monthly). Executive's Base
<PAGE>
Salary, for each fiscal year of the Company commencing after December 31, 1997,
shall be reviewed and may be appropriately increased by the Company's Board
pursuant to its normal performance review policies for senior level executives.
1.5. Retirement and Benefit Coverages. During the Employment Term,
--------------------------------
Executive shall be entitled to participate in all employee pension and
retirement plans and programs and welfare benefit plans and programs that are
available to the Company's senior level executives as a group or to its
employees generally, as such retirement plans or benefit coverages may be in
effect from time to time. In addition, Executive shall be entitled to the
Company's regular holiday and vacation policy and any other executive
perquisites provided by the Company to its senior level executives.
1.6. Life Insurance. During the Employment Term, the Company shall
--------------
maintain, under an arrangement satisfactory to the Company, $3,000,000 of life
insurance on the life of Executive. Executive shall have the right to designate
the beneficiary of such insurance policy. The Company may maintain term life
insurance, whole life insurance or such other form of insurance as it deems
appropriate.
1.7. Incentive Programs. Executive shall be entitled to participate in any
------------------
short-term or long-term incentive compensation programs established by the
Company for its senior level executives generally. Payments under such programs
shall depend upon achievement of certain business and individual performance
targets specified and approved by the Board; provided, however, that Executive's
"target opportunity" under any such program shall be at least at the highest
level of target award for any other senior level executive.
2. Confidential Information. Executive recognizes and acknowledges that,
------------------------
by reason of his employment by and service to the Company before, during and, if
applicable, after the Employment Term, he has had and will continue to have
access to certain confidential and proprietary information relating to the
Company's business, which may include, but is not limited to, trade secrets,
trade "know-how", customer information, supplier information, cost and pricing
information, marketing and sales techniques, strategies and programs, computer
programs and software and financial information (collectively referred to as
"Confidential Information"). Executive acknowledges that such Confidential
Information is a valuable and unique asset of the Company and Executive
covenants that he will not at any time during the course of his employment use
any Confidential Information or divulge or disclose any Confidential Information
to any person, firm or corporation except in connection with Executive's good
faith belief as to the proper performance of his duties for the Company.
Executive also covenants that, at any time after the termination of his
employment, directly or indirectly, he will not use any Confidential Information
for any purpose or divulge or disclose any Confidential Information to any
person, firm or corporation, unless such information is in the public domain
through no fault
2
<PAGE>
of Executive or except when required to do so by a court of law, by any
governmental agency having supervisory authority over the business of the
Company or over Executive or by any administrative or legislative body
(including a committee thereof) with apparent jurisdiction to order him to
divulge, disclose or make accessible such information, in which case Executive
will inform the Company in writing promptly of such required disclosure.
3. Non-Competition; Non-Solicitation.
---------------------------------
(a) During his employment by the Company and for a period of two
years thereafter, or, if longer, for the period during which Executive receives
payments from the Company under Section 5, Executive will not, except with the
prior written consent of the Board, directly or indirectly own, manage, operate,
join, control, finance or participate in the ownership, management, operation,
control or financing of, or be connected as an officer, director, employee,
partner, principal, agent, representative, consultant or otherwise with, or use
or permit his name to be used in connection with, any business or enterprise
that is engaged in a geographic area in which the Company or any of its
affiliates is operating either during the Employment Term or on the date
Employee's employment terminates, as applicable, (whether or not such business
is physically located within those areas) (the "Geographic Area"), in any
business that is competitive to a business from which the Company or any of its
affiliates derive at least five percent of its respective gross revenues either
during the Employment Term or on the date Executive's employment terminates, as
applicable. It is recognized by Employee that the business of the Company and
its affiliates and Executive's connection therewith is or will be involved in
activity throughout the Geographic Area, and that more limited geographical
limitations on this non-competition covenant are therefore not appropriate.
(b) The foregoing restrictions shall not be construed to prohibit the
ownership by Executive of less than five percent of any class of securities of
any corporation which is engaged in any of the foregoing businesses having a
class of securities registered pursuant to the Securities Exchange Act of 1934
(the "Exchange Act"), provided that such ownership represents a passive
investment and that neither Executive nor any group of persons including
Executive in any way, either directly or indirectly, manages or exercises
control of any such corporation, guarantees any of its financial obligations,
otherwise takes any part in its business, other than exercising his rights as a
shareholder, or seeks to do any of the foregoing.
(c) Executive further covenants and agrees that, during his employment
by the Company and for the period of two years thereafter, or, if longer, for
the period during which Executive receives payments from the Company under
Section 5, Executive will not personally solicit for another business or
enterprise any customer that was a customer of the Company or any of its
affiliates during the Employment Term or on the date on which Executive's
employment terminates or any person who is a managerial or higher level employee
of the Company at the time of Executive's termination. The foregoing covenant
of Executive shall not apply to any person after twelve months have elapsed
subsequent to the date on which such person's employment by the Company has
terminated.
3
<PAGE>
4. Equitable Relief.
----------------
(a) Executive acknowledges and agrees that the restrictions contained
in Sections 2 and 3 are reasonable and necessary to protect and preserve the
legitimate interests, properties, goodwill and business of the Company, that the
Company would not have entered into this Agreement in the absence of such
restrictions and that irreparable injury will be suffered by the Company should
Executive breach any of the provisions of those Sections. Executive represents
and acknowledges that (i) he has been advised by the Company to consult his own
legal counsel in respect of this Agreement, and (ii) he has had full
opportunity, prior to execution of this Agreement, to review thoroughly this
Agreement with his counsel.
(b) Executive further acknowledges and agrees that a breach of any of
the restrictions in Sections 2 and 3 cannot be adequately compensated by
monetary damages. Executive agrees that the Company shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as an equitable accounting of all earnings, profits and
other benefits arising from any violation of Sections 2 or 3 hereof, which
rights shall be cumulative and in addition to any other rights or remedies to
which the Company may be entitled. In the event that any of the provisions of
Sections 2 or 3 hereof should ever be adjudicated to exceed the time,
geographic, service, or other limitations permitted by applicable law in any
jurisdiction, it is the intention of the parties that the provision shall be
amended to the extent of the maximum time, geographic, service, or other
limitations permitted by applicable law, that such amendment shall apply only
within the jurisdiction of the court that made such adjudication and that the
provision otherwise be enforced to the maximum extent permitted by law.
(c) Executive irrevocably and unconditionally (i) agrees that any
suit, action or other legal proceeding arising out of this Agreement, including,
without limitation, any action commenced by the Company for preliminary and
permanent injunctive relief and other equitable relief, may be brought in the
United States District Court for the Eastern District of Pennsylvania, or if
such court does not have jurisdiction or will not accept jurisdiction, in any
court of general jurisdiction in Chester County, Pennsylvania, (ii) consents to
the non-exclusive jurisdiction of any such court in any such suit, action or
proceeding, and (iii) waives any objection which Executive may have to the
laying of venue of any such suit, action or proceeding in any such court.
Executive also irrevocably and unconditionally consents to the service of any
process, pleadings, notices or other papers in a manner permitted by the notice
provisions of Section 12 hereof.
5. Termination. The Employment Term shall terminate upon the occurrence
-----------
of any one of the following events:
5.1. Disability. The Company may terminate the Employment Term in
----------
compliance with applicable law, if Executive is unable substantially to perform
his duties and responsibilities hereunder to the full extent required by the
Board by reason of illness, injury or incapacity for six
4
<PAGE>
consecutive months, or for more than nine months in the aggregate during any
period of twelve calendar months (a "Disability"); provided, however, that the
Company shall continue to pay Executive his Base Salary until the Company acts
to terminate the Employment Term. In addition, in the event Executive executes
(and does not revoke) a written release upon incurring a Disability (such
release to be effective only if the Company executes such release),
substantially in the form attached hereto as Annex 1, as to all claims specified
in Section 5.4(b) below (the "Release"), Executive shall be entitled to receive
all amounts and benefits to the same extent and at the same time as specified in
Section 5.4(b), offset by any amounts Executive receives under any long term
disability program maintained by the Company. Otherwise, the Company shall have
no further liability or obligation to Executive for compensation under this
Agreement. In the event of any dispute under this Section 5.1 and to the extent
determined by the Board to be job-related and consistent with business
necessity, Executive shall submit to a physical examination by a licensed
physician selected by the Board and approved by Executive, such approval not to
be unreasonably withheld.
5.2. Death. The Employment Term shall terminate in the event of
-----
Executive's death. In such event, the Company shall pay to Executive's
executors, legal representatives or administrators, as applicable, an amount
equal to the installment of his Base Salary set forth in Section 1.4 hereof for
the month in which he dies. If Executive dies while an employee of the Company,
(i) Executive's estate or designated beneficiary shall be entitled to receive
the proceeds of the life insurance policy described in Sections 1.6 and (ii) has
been met by March 15, 1997, but the bonus described in Section 1.7(a) has not
yet been paid, the Company shall pay the bonus described in Section 1.7(a) to
Executive's estate. Otherwise, the Company shall have no further liability or
obligation under this Agreement to his executors, legal representatives,
administrators, heirs or assigns or any other person claiming under or through
him.
5.3. Cause. The Company may terminate the Employment Term at any time for
-----
"cause" upon 30 days' written notice to Executive, in which event all payments
under this Agreement shall cease, except for (i) Base Salary to the extent
already earned and a payment equal to any unused vacation, which shall be paid
in a single lump sum on the day the Employment Term terminates, and (ii) any
other benefits in accordance with the terms of any applicable plans and programs
of the Company. For purposes of this Agreement, Executive's employment may be
terminated for "cause" if (i) Executive is convicted of a felony, (ii) in the
reasonable determination of the Board, Executive has committed an intentional
act of fraud, embezzlement, or theft in connection with Executive's duties in
the course of his employment with the Company, or engaged in gross mismanagement
or gross negligence in the course of his employment with the Company or (iii)
Executive intentionally breached his obligations under this Agreement, including
inattention to or neglect of duties and shall not have remedied such breach
within 30 days after receiving written notice from the Board specifying the
details thereof; provided, however, that in any case under this clause (iii),
the act or failure to act by Executive is materially harmful to the business of
the Company. For purposes of this Agreement, an act or omission on the part of
Executive shall be deemed "intentional" only if it
5
<PAGE>
was done by Executive in bad faith, not merely an error in judgment, and without
reasonable belief that the act or omission was in the best interest of the
Company.
5.4. Termination Without Cause.
-------------------------
(a) The Company may remove Executive, at any time, without cause, from
the position in which he is employed hereunder (in which case the Employment
Term shall be deemed to have ended) upon not less than 30 days' prior written
notice to Executive; provided, however, that, in the event that such notice is
given, Executive shall be under no obligation to render any additional services
to the Company and shall be allowed to seek other employment. Upon any such
removal, except as provided in Section 5.4(b) below, Executive shall be
entitled to receive, as liquidated damages for the failure of the Company to
continue to employ Executive, only the amount due to Executive under the
Company's then-current severance pay plan for employees and (i) Base Salary to
the extent already earned and a payment equal to any unused vacation, which
shall be paid in a single lump sum on the day the Employment Term ends, and (ii)
any other benefits in accordance with the terms of any applicable plans and
programs of the Company. No other payments or benefits shall be due under this
Agreement to Executive, but Executive shall be entitled to any other benefits in
accordance with the terms of any applicable plans and programs of the Company.
(b) Notwithstanding the foregoing, upon such removal, in the event
that Executive executes (and does not revoke) the Release as to any and all
claims against the Company and all related parties with respect to all matters
arising out of Executive's employment by the Company (other than any
indemnification rights, or all entitlements under the terms of this Agreement or
under any other plans or programs of the Company in which he participated and
under which he has accrued a benefit or continues to have rights), and the
termination thereof, Executive shall be entitled to receive, commencing on the
eighth day following the execution of the Release by Executive, in lieu of the
payment described in subsection (a) hereof, which Executive agrees to waive, as
liquidated damages for the failure of the Company to continue to employ
Executive, (i) continuation for two years of Executive's Base Salary in
---------
accordance with Section 1.4 (without regard to Executive's removal), (ii) any
other amounts earned, vested, or owing but not yet paid under Section 1 above,
(iii) a pro-rata portion of any incentive compensation to the extent such amount
would have been earned in accordance with the terms of such programs specified
in Section 1.7 above for the then current fiscal year of the Company, (iv) a
payment equal to any unused vacation, and (v) any other benefits in accordance
with the terms of any applicable plans and programs of the Company. The Company
shall have no further liability or obligation to Executive for compensation
under this Agreement.
5.5. Constructive Termination Without Cause.
--------------------------------------
(a) Resignation by Executive for good reason ("Constructive
Termination Without Cause") shall mean a termination of Executive's employment
at his initiative following the occurrence, without Executive's written consent,
of (i) a material diminution in Executive's
6
<PAGE>
duties, responsibilities, authority, or status, or a failure of Executive to
have a position reporting directly to the Board, (ii) a reduction in any amount
of Executive's Base Salary, (iii) the assignment to Executive of duties or
obligations which are materially inconsistent with the duties, responsibilities,
authority, or status of his position as defined in Section 1.2 above or which
materially impair Executive's ability to function in his then current position,
or (iv) a failure of the Company to comply with any of the material terms of
this Agreement.
(b) In the event of a Constructive Termination Without Cause, if
Executive executes (and does not revoke) the Release as to all claims specified
in Section 5.4(b), Executive shall be entitled to receive all amounts and
benefits to the same extent and at the same time as specified in Section 5.4(b).
In the event Executive refuses to execute the Release (or revokes the Release),
he shall receive only the amounts and benefits to the same extent and at the
same time as specified in Section 5.4(a).
(c) Prior to resigning under this Section, Executive shall give
written notice to the Board and offer a 30-day period for the Company to cure.
If no cure has been effected by the end of the applicable cure period, Executive
may resign immediately in accordance with the provisions of subsections (a) and
(b) above.
5.6. Voluntary Termination. Executive may voluntarily terminate the
---------------------
Employment Term upon 30 days' prior written notice for any reason. In such
event, Executive shall be entitled only to (i) Base Salary to the extent already
earned and a payment equal to any unused vacation, which shall be paid in a
single lump sum on the day the Employment Term terminates, and (ii) any other
benefits in accordance with the terms of any applicable plans and programs of
the Company. A voluntary termination under this Section 5.6 shall not be deemed
a breach of this Agreement.
5.7. Termination at December 31, 1999. Notwithstanding Section 5.6, if (i)
--------------------------------
the Employment Term shall not have been terminated prior to December 31, 1999
pursuant to the foregoing provisions of this Section 5 and Executive and the
Company cannot reach a mutually acceptable agreement in respect of the
continuation of Executive's employment after December 31, 1999, (ii) Executive
voluntarily terminates his employment with the Company at December 31, 1999, and
(iii) Executive executes (and does not revoke) the Release described in Section
5.4(b), the Company shall pay to Executive as severance compensation the amounts
described in Section 5.4(b), but with Executive's Base Salary to continue under
Section 5.4(b)(i) for one year after termination of employment. The payments
--------
under this Section 5.7 shall be made in lieu of the payments described in
Section 5.6, which Executive agrees to waive. In the event Executive refuses to
execute the Release (or revokes the Release), Executive shall receive only
amounts and benefits to the same extent and at the same time as specified in
Section 5.6.
6. Change of Control.
-----------------
7
<PAGE>
(a) If a Change of Control (as defined below) occurs during the
Employment Term, the Employment Term shall automatically be extended to the date
that is two years after the effective date of the Change of Control, subject to
---------
the provisions of subsection (b) below.
(b) Notwithstanding anything in this Agreement to the contrary, if it
shall be determined that any payment or distribution by the Company to or for
the benefit of Executive pursuant to the terms of this Agreement or otherwise (a
"Payment") would constitute an "excess parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and
that it would be economically advantageous to the Company to reduce the Payment
to avoid or reduce the taxation of excess parachute payments under Section 4999
of the Code, the aggregate present value of the amounts payable or distributable
to or for the benefit of Executive pursuant to this Agreement (such payments or
distributions pursuant to this Agreement are hereinafter referred to as
"Agreement Payments") shall be reduced (but not below zero) to the Reduced
Amount. The "Reduced Amount" shall be an amount expressed in present value
which maximizes the aggregate present value of Agreement Payments without
causing any Payment to be subject to taxation under Section 4999 of the Code.
For purposes of this Section 6, present value shall be determined in accordance
with Section 280G(d)(4) of the Code. The calculations under this Section 6(b)
shall be made as follows:
(i) All determinations to be made under this Section 6(b) shall be
made by the Company's independent public accounting firm as in effect
immediately prior to the Change of Control (the "Accounting Firm"), which firm
shall provide its determinations and any supporting calculations to the Company
and Executive within 10 days of the event that gives rise to the "excess
parachute payment." Any such determination by the Accounting Firm shall be
binding upon the Company and Executive. Executive shall in his sole discretion
determine which and how much of the Agreement Payments shall be eliminated or
reduced consistent with the requirements of this Section 6(b). Within five days
after Executive's determination, the Company shall pay (or cause to be paid) or
distribute (or cause to be distributed) to or for the benefit of Executive such
amounts as are then due to Executive under this Agreement.
(ii) As a result of the uncertainty in the application of Section
280G of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Agreement Payments will have been made by the
Company which should not have been made ("Overpayment") or that additional
Agreement Payments which have not been made by the Company could have been made
("Underpayment"), in each case, consistent with the calculations required to be
made hereunder. Within two years after the event that gives rise to the "excess
parachute payment," the Accounting Firm shall review the determination made by
it pursuant to the preceding paragraph. If the Accounting Firm determines that
an Overpayment has been made, any such Overpayment shall be treated for all
purposes as a loan to Executive which Executive shall repay to the Company,
together with interest at the applicable Federal rate provided for in Section
7872(f)(2) of the Code (the "Federal Rate"); provided, however, that no amount
shall be payable by Executive to the Company if and to the extent such payment
would not reduce the amount which is subject to taxation under Section 4999 of
the Code. In the event
8
<PAGE>
that the Accounting Firm determines that an Underpayment has occurred, any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Executive, together with interest at the Federal Rate.
(iii) All of the fees and expenses of the Accounting Firm in
performing the determinations referred to in subsections (i) and (ii) above
shall be borne solely by the Company. The Company agrees to indemnify and hold
harmless the Accounting Firm from any and all claims, damages and expenses
resulting from or relating to its determinations pursuant to subsections (i) and
(ii) above, except for claims, damages or expenses resulting from the gross
negligence or willful misconduct of the Accounting Firm.
(iv) The limitations of this Section 6(b) shall only apply if
payments under this Agreement are subject to Section 280G at the time of the
Change of Control. If payments under this Agreement would not be subject to
Section 280G if the shareholders of the Company approved the payments, the
Company shall use its best efforts to procure the necessary shareholder approval
of the payments in a timely manner. If the shareholders approve the payments so
that Section 280G does not apply, the Company shall make payments under this
Agreement without regard to this Section 6(b).
(c) A "Change of Control" shall be deemed to have occurred under this
Agreement if:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than a person who is a shareholder of the Company as
of the effective date of this Agreement) is or becomes a "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing more than 50% of the voting power of the
then outstanding securities of the Company; or
(ii) The shareholders of the Company approve (or, if shareholder
approval is not required, the Board approves) an agreement providing for (i) the
merger or consolidation of the Company with another corporation where the
shareholders of the Company, immediately prior to the merger or consolidation,
will not beneficially own, immediately after the merger or consolidation, shares
entitling such shareholders to more than 50% of all votes to which all
shareholders of the surviving corporation would be entitled in the election of
directors (without consideration of the rights of any class of stock to elect
directors by a separate class vote), (ii) the sale or other disposition of all
or substantially all of the assets of the Company, or (iii) a liquidation or
dissolution of the Company.
7. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of Executive's employment and the
Employment Term to the extent necessary to the intended preservation of such
rights and obligations.
9
<PAGE>
8. Mitigation and Offsets. Executive shall be required to mitigate the
----------------------
amount of any payment or benefit provided for in this Agreement by seeking other
employment or otherwise and there shall be offset against amounts due Executive
under this Agreement on account of any remuneration attributable to any
subsequent employment that he may obtain. The Company's obligations to make
payments under this Agreement and otherwise to perform its obligations hereunder
shall not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the Company may
have against Executive or others.
9. Arbitration; Expenses. In the event of any dispute under the
---------------------
provisions of this Agreement other than a dispute in which the primary relief
sought is an equitable remedy such as an injunction, the parties shall be
required to have the dispute, controversy or claim settled by arbitration in the
City of Philadelphia, Pennsylvania in accordance with the National Rules for the
Resolution of Employment Disputes then in effect of the American Arbitration
Association, before a panel of three arbitrators, two of whom shall be selected
by the Company and Executive, respectively, and the third of whom shall be
selected by the other two arbitrators. Any award entered by the arbitrators
shall be final, binding and nonappealable and judgment may be entered thereon by
either party in accordance with applicable law in any court of competent
jurisdiction. This arbitration provision shall be specifically enforceable. The
arbitrators shall have no authority to modify any provision of this Agreement or
to award a remedy for a dispute involving this Agreement other than a benefit
specifically provided under or by virtue of the Agreement. If Executive
prevails on any material issue which is the subject of such arbitration or
lawsuit, the Company shall be responsible for all of the fees of the American
Arbitration Association and the arbitrators and any expenses relating to the
conduct of the arbitration as well as Executive's reasonable legal fees and
expenses. The arbitrators shall, in any other event, determine who shall pay
Executive's legal fees and expenses.
10. No Attachment. Except as required by law, no right to receive
-------------
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to execution, attachment, levy, or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect; provided, however, that nothing in this Section
shall preclude the assumption of such rights by executors, administrators or
other legal representatives of Executive or his estate and their assigning any
rights hereunder to the person or persons entitled thereto.
11. Source of Payment. All payments provided for under this Agreement
-----------------
shall be paid in cash from the general funds of the Company. The Company shall
not be required to establish a special or separate fund or other segregation of
assets to assure such payments, and, if the Company shall make any investments
to aid it in meeting its obligations hereunder, Executive shall have no right,
title or interest whatever in or to any such investments except as may otherwise
be expressly provided in a separate written instrument relating to such
investments. Nothing contained in this Agreement, and no action taken pursuant
to its
10
<PAGE>
provisions, shall create or be construed to create a trust of any kind, or a
fiduciary relationship, between the Company and Executive or any other person.
To the extent that any person acquires a right to receive payments from the
Company hereunder, such right, without prejudice to rights which employees may
have, shall be no greater than the right of an unsecured creditor of the
Company.
12. Notices. All notices and other communications required or permitted
-------
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when hand delivered or mailed by
registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
If to the Company, to:
Orthovita, Inc.
45 Great Valley Parkway
Malvern, PA 19355
If to Executive, to:
Mr. David S. Joseph
or to such other names or addresses as the Company or Executive, as the case may
be, shall designate by notice to each other person entitled to receive notices
in the manner specified in this Section.
13. Contents of Agreement; Amendment and Assignment.
-----------------------------------------------
(a) This Agreement supersedes all prior agreements and sets forth the
entire understanding between the parties hereto with respect to the subject
matter hereof and cannot be changed, modified, extended or terminated except as
provided herein or upon written amendment approved by the Company and executed
on its behalf by a duly authorized officer and by Executive.
(b) All of the terms and provisions of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the respective heirs,
executors, administrators, legal representatives, successors and assigns of the
parties hereto, except that the duties and responsibilities of Executive
hereunder are of a personal nature and shall not be assignable or delegatable in
whole or in part by Executive. The Company shall require any successor (whether
direct or indirect, by purchase, merger, consolidation, reorganization or
otherwise) to all or substantially all of the business or assets of the Company,
by agreement in form and substance satisfactory to Executive, expressly to
assume and agree to perform this Agreement in the same
11
<PAGE>
manner and to the extent the Company would be required to perform if no such
succession had taken place.
14. Severability. If any provision of this Agreement or application
------------
thereof to anyone or under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provision or application of this Agreement which can be given
effect without the invalid or unenforceable provision or application and shall
not invalidate or render unenforceable such provision or application in any
other jurisdiction. If any provision is held void, invalid or unenforceable
with respect to particular circumstances, it shall nevertheless remain in full
force and effect in all other circumstances.
15. Remedies Cumulative; No Waiver. No remedy conferred upon a party by
------------------------------
this Agreement is intended to be exclusive of any other remedy, and each and
every such remedy shall be cumulative and shall be in addition to any other
remedy given hereunder or now or hereafter existing at law or in equity. No
delay or omission by a party in exercising any right, remedy or power hereunder
or existing at law or in equity shall be construed as a waiver thereof, and any
such right, remedy or power may be exercised by such party from time to time and
as often as may be deemed expedient or necessary by such party in its sole
discretion.
16. Beneficiaries/References. Executive shall be entitled, to the extent
------------------------
permitted under any applicable law, to select and change a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
Executive's death by giving the Company written notice thereof. In the event of
Executive's death or a judicial determination of his incompetence, references in
this Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
17. Miscellaneous. All section headings used in this Agreement are for
-------------
convenience only. This Agreement may be executed in counterparts, each of which
is an original. It shall not be necessary in making proof of this Agreement or
any counterpart hereof to produce or account for any of the other counterparts.
18. Withholding. The Company may withhold from any payments under this
-----------
Agreement all federal, state and local taxes as the Company is required to
withhold pursuant to any law or governmental rule or regulation. Executive
shall bear all expense of, and be solely responsible for, all federal, state and
local taxes due with respect to any payment received hereunder.
19. Governing Law. This Agreement shall be governed by and interpreted
-------------
under the laws of the Commonwealth of Pennsylvania without giving effect to any
conflict of laws provisions.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first above written.
ORTHOVITA, INC.
By: [SIGNATURE ILLEGIBLE] /s/ David S. Joseph
------------------------------ -------------------
Compensation Committee Member David S. Joseph
12
<PAGE>
Exhibit 10.8
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement") entered into as of July 1, 1997, by
and between Orthovita, Inc., a Pennsylvania corporation (the "Company"), and
Erik M. Erbe, (Erbe) Ph.D. an employee of the Company.
WHEREAS, the Company wishes to continue to employ Erbe as its Vice
President of, Research and Development, and both parties desire to enter into an
employment agreement to reflect Erbe's position with the Company upon the terms
and conditions set forth herein.
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Employment. The Company hereby continue to employ Erbe as its Vice
----------
President of Research and Development. Erbe hereby accepts such employment and
agrees to perform his duties and responsibilities, in accordance with the terms,
conditions and provisions hereinafter set forth.
1.1 Employment Term. The term of Erbe's employment under this Agreement
---------------
(the "Employment Term") shall commence as of the date hereof (the "Effective
Date") and shall continue until June 30, 2000, unless terminated prior thereto
in accordance with Section 5 or unless extended prior thereto in the event a
Change of Control in accordance with Section 6.
1.2 Duties and Responsibilities. Erbe shall serve as the Company's Vice
---------------------------
President of Research and Development and in such other senior positions, if
any, to which he may be appointed to by the President and CEO of the Company
(the "CEO") in conjunction with his direct superior during the Employment Term.
During the Employment Term, Erbe shall perform all duties and accept all
responsibilities incident to, and not inconsistent with, such positions as may
be reasonably assigned to him.
1.3 Extent of Service. During the Employment Term, Erbe agrees to use his
-----------------
best efforts to carry out his duties and responsibilities under Section 1.2
hereof and, consistent with the other provisions of this Agreement, to devote
substantially all his business time, attention and energy thereto except to the
extent required by Erbe's outside board directorships, civic or charitable
activities. Except for positions held on the date of this Agreement, Erbe
agrees not to become engaged in any other business, civic or charitable activity
which, in the CEO's reasonable judgment, is likely to interfere materially with
his ability to discharge his duties and responsibilities to the Company.
1.4 Base Salary. For all the services rendered by Erbe hereunder, the
-----------
Company shall pay Erbe a base salary ("Base Salary"), commencing on July 1,
1997, at the annual rate of $130,000. payable in installments at such times as
the Company customarily pays its other senior
<PAGE>
level executives (but in any event no less often than monthly). Erbe's Base
Salary, for each fiscal year of the Company commencing after December 31, 1997,
shall be reviewed and may be appropriately increased pursuant to its normal
performance review policies for senior level executives.
1.5 Retirement and Benefit Coverages. During the Employment Term, Erbe
--------------------------------
shall be entitled to participate in all employee pension and retirement plans
and programs and welfare benefit plans and programs that are available to the
Company's senior level executives as a group or to its employees generally, as
such retirement plans or benefit coverages may be in effect from time to time.
In addition, Erbe shall be entitled to the Company's regular holiday and
vacation policy and any other executive perquisites provided by the Company to
its senior level executives.
1.6 Life Insurance. During the Employment Term, the company shall
--------------
maintain, under an arrangement satisfactory to the Company, $1,000,000 of life
insurance on the life of Erbe. Erbe shall have the right to designate the
beneficiary of such insurance policy. The Company may maintain term life
insurance, whole life insurance or such other form of insurance as it deems
appropriate.
1.7 Incentive Programs. Erbe shall be entitled to participate in any
------------------
short-term or long-term incentive compensation programs established by the
Company for its senior level Executives generally. Payments under such programs
shall depend upon achievement of certain business and individual performance
targets specified by his direct superior and approved by the CEO. For the 1997
fiscal year, Erbe shall receive a minimum 20% bonus based on the annual salary
in place in 1997 prorated for the 6 month short period. Erbe shall receive a
100,000 share incentive stock option grant priced at $4.25 per share upon
execution of this agreement. These shares will vest according to the Company's
Incentive Stock Option plan in currently in place an additional vesting 12,500
shares will vest immediately in addition to the 20% immediate vesting of the
current 100,000 option grant. All shares of the new 100,000 grant that is part
of this agreement will vest immediately upon a change of control. Any prior
option grants earned by Erbe will vest immediately upon execution of this
agreement.
2. Confidential Information. Erbe recognizes and acknowledges that, by
------------------------
reason of his employment by and service to the Company before, during and, if
applicable, after the Employment Term, he has had and will continue to have
access to certain confidential and proprietary information relating to the
Company's business, which may include, but is not limited to, trade secrets,
trade "know-how", customer information, supplier information, cost and pricing
information, marketing and sales techniques, strategies and programs, computer
programs and software and financial information (collectively referred to as
"Confidential Information"). Erbe acknowledges that such Confidential
Information is a valuable and unique asset of the Company and Erbe covenants
that he will not at any time during the course of his employment use any
Confidential Information or divulge or disclose any Confidential Information to
any person, firm or corporation except in connection with Erbe's good faith
belief
2
<PAGE>
as to the proper performance of his duties for the Company. Erbe also
covenants that, at any time after the termination of his employment, directly or
indirectly, he will not use any Confidential Information for any purpose or
divulge or disclose any confidential Information to any person, firm or
corporation, unless such information is in the public domain through no fault of
Erbe or except when required to do so by a court of law, by any governmental
agency having supervisory authority over the business of the Company or over
Erbe or by any administrative or legislative body (including a committee
thereof) with apparent jurisdiction to order him to divulge, disclose or make
accessible such information in which case Erbe will inform the company in
writing promptly of such required disclosure.
3. Non-Competition: Non-Solicitation.
---------------------------------
(a) During his employment by the Company and for a period of two years
thereafter, or, if longer, for the period during which Erbe receives payments
from the Company under Section 5, Erbe will not, except with the prior written
consent of the CEO, directly or indirectly own, manage, operate, join, control,
finance or participate in the ownership management, operation, control or
financing of, or be connected as an officer, director, employee, partner,
principal, agent, representative, consultant or otherwise with, or use or permit
his name to be used in connection with, any business or enterprise that is
engaged in any business that is competitive to a business from which the Company
or any of its affiliates derive at least five percent of its respective gross
revenues either during the Employment Term or on the date Erbe's employment
terminates, as applicable.
(b) The foregoing restrictions shall not be construed to prohibit the
ownership by Erbe of less than five percent of any class of securities of any
corporation which is engaged in any of the foregoing businesses having a class
of securities registered pursuant to the Securities Exchange Act of 1934 (the
"Exchange Act"), provided that such ownership represents a passive investment
and that neither Erbe nor any group of persons including Erbe in any way, either
directly or indirectly, manages or exercises control of any such corporation,
guarantees any of its financial obligations, otherwise takes any part in its
business, other than exercising his rights as a shareholder, or seeks to do any
of the foregoing.
(c) Erbe further covenants and agrees that, during his employment by
the Company and for the period of two years thereafter, or, if longer, for the
period during which Erbe receives payments from the Company under Section 5,
Erbe will not personally solicit for another business or enterprise any customer
in the business of the Company that was a customer of the Company or any of its
affiliates during the Employment Term or on the date on which Erbe's employment
terminates or any person who is a managerial or higher level employee of the
Company at the time of Erbe's termination. The foregoing covenant of Erbe shall
not apply to any person after twelve months have elapsed subsequent to the date
on which such person's employment by the Company has terminated.
3
<PAGE>
4. Equitable Relief.
----------------
(a) Erbe acknowledges and agrees that the restrictions contained in
Sections 2 and 3 are reasonable and necessary to protect and preserve the
legitimate interests, properties, goodwill and business of the Company, that the
Company would not have entered into this Agreement in the absence of such
restrictions and that irreparable injury will be suffered by the Company should
Erbe breach any of the provisions of those Sections. Erbe represents and
acknowledges that (i) he has been advised by the Company to consult his own
legal counsel in respect of this Agreement, and (ii) he has had full
opportunity, prior to execution of this Agreement, to review thoroughly this
Agreement with his counsel.
(b) Erbe further acknowledges and agrees that a breach of any of the
restrictions in Sections 2 and 3 cannot be adequately compensated by monetary
damages. Erbe agrees that the Company shall be entitled to preliminary and
permanent injunctive relief, without the necessity of proving actual damages, as
well as an equitable accounting of all earnings, profits and other benefits
arising from any violation of Sections 2 or 3 hereof, which rights shall be
cumulative and in addition to any other rights or remedies to which the Company
may be entitled. In the event that any of the provisions of Sections 2 or 3
hereof should ever be adjudicated to exceed the time, geographic, service, or
other limitations permitted by applicable law in any jurisdiction, it is the
intention of the parties that the provision shall be amended to the extent of
the maximum time, geographic, service, or other limitations permitted by
applicable law, that such amendment shall apply only within the jurisdiction of
the court that made such adjudication and that the provision otherwise be
enforced to the maximum extent permitted by law.
(c) Erbe (i) agrees that any suit, action or other legal proceeding
arising out of this Agreement, including, without limitation, any action
commenced by the Company for preliminary and permanent injunctive relief and
other equitable relief, may be brought in the United States District Court for
the Eastern District of Pennsylvania, or if such court does not have
jurisdiction or will not accept jurisdiction, in any court of general
jurisdiction in Chester County, Pennsylvania, (ii) consents to the non-exclusive
jurisdiction of any such court in any such suit, action or proceeding, and (iii)
waives any objection which Erbe may have to the laying of venue of any such
suit, action or proceeding in any such court. Erbe also irrevocably and
unconditionally consents to the service of any process, pleadings, notices or
other papers in a manner permitted by the notice provisions of Section 12
hereof.
5. Termination. The Employment Term shall terminate upon the occurrence
-----------
of any one of the following events:
5.1 Disability. The Company may terminate the Employment Term in
----------
compliance with applicable law, if Erbe is unable substantially to perform his
duties and responsibilities hereunder to the full extent required by the Board
by reason of illness, injury or incapacity for six consecutive months, or for
more than nine months in the aggregate during any period of twelve
4
<PAGE>
calendar months (a "Disability"); provided, however, that the Company shall
continue to pay Erbe his Base Salary until the Company acts to terminate the
Employment Term. In addition, in the event Erbe executes (and does not revoke) a
written release upon incurring a Disability (such release to be effective only
if the Company executes such release), substantially in the form attached hereto
as Annex 1, as to all claims specified in Section 5.4(b) below (the "Release"),
Erbe shall be entitled to receive all amounts and benefits to the same extent
and at the same time as specified in Section 5.4(b), offset by any amounts Erbe
receives under any long term disability program maintained by the Company.
Otherwise, the Company shall have no further liability or obligation to Erbe for
compensation under this Agreement. In the event of any dispute under this
Section 5.1 and to the extent determined by the Board to be job-related and
consistent with business necessity, Erbe shall submit to a physical examination
by a licensed physician selected by the Board and approved by Erbe, such
approval not to be unreasonably withheld.
5.2 Death. The Employment Term shall terminate in the event of Erbe's
-----
death. In such event, the Company shall pay to Erbe's executors, legal
representatives or administrators, as applicable, an amount equal to the
installment of his Base Salary set forth in Section 1.4 hereof for the month in
which he dies. If Erbe dies while an employee of the Company, (i) Erbe's estate
or designated beneficiary shall be entitled to receive the proceeds of the life
insurance policy described in Sections 1.6 and (ii) has been met by March 15,
1997, but the bonus described in Section 1.7(a) has not yet been paid, the
Company shall pay the bonus described in Section 1.7(a) to Erbe's estate.
Otherwise, the Company shall have no further liability or obligation under this
Agreement to his executors, legal representatives, administrators, heirs or
assigns or any other person claiming under or through him.
5.3 Cause. The Company may terminate the Employment Term at any time for
-----
"cause" upon 30 days' written notice to Erbe, in which event all payments under
this Agreement shall cease, except for (i) Base Salary to the extent already
earned and a payment equal to any unused vacation, which shall be paid in a
single lump sum on the day the Employment Term terminates, and (ii) any other
benefits in accordance with the terms of any applicable plans and programs of
the Company. For purposes of this Agreement, Erbe's employment may be
terminated for "cause" if (i) Erbe is convicted of a felony, (ii) in the
reasonable determination of the Board, Erbe has committed an intentional act of
fraud, embezzlement, or theft in connection with Erbe's duties in the course of
his employment with the Company, or engaged in gross mismanagement or gross
negligence in the course of his employment with the Company or (iii) Erbe
intentionally breached his obligations under this Agreement, including
inattention to or neglect of duties and shall not have remedied such breach
within 30 days after receiving written notice from the Board specifying the
details thereof; provided, however, that in any case under this clause (iii),
the act or failure to act by Erbe is materially harmful to the business of the
Company. For purposes of this Agreement, an act or omission on the part of Erbe
shall be deemed "intentional" only if it was done by Erbe in bad faith, not
merely an error in judgment, and without reasonable belief that the act or
omission was in the best interest of the Company.
5
<PAGE>
5.4 Termination Without Cause.
-------------------------
(a) The Company may remove Erbe, at any time, without cause, from the
position in which he is employed hereunder (in which case the Employment Term
shall be deemed to have ended) upon not less than 30 days' prior written notice
to Erbe; provided, however, that, in the event that such notice is given, Erbe
shall be under no obligation to render any additional services to the Company
and shall be allowed to seek other employment. Upon any such removal, except as
provided in Section 5.4(b) below, Erbe shall be entitled to receive as
liquidated damages for the failure of the Company to continue to employ Erbe,
only the amount due to Erbe under the Company's then-current severance pay plan
for employees and (i) Base Salary to the extent already earned and a payment
equal to any unused vacation, which shall be paid in a single lump sum on the
day the Employment Term ends, and (ii) any other benefits in accordance with the
terms of any applicable plans and programs of the Company. No other payments or
benefits shall be due under this Agreement to Erbe, but Erbe shall be entitled
to any other benefits in accordance with the terms of any applicable plans and
programs of the Company.
(b) Notwithstanding the foregoing, upon such removal, in the event
that Erbe executes (and does not revoke) the Release as to any and all claims
against the Company and all related parties with respect to all matters arising
out of Erbe's employment by the Company (other than any indemnification rights,
or all entitlements under the terms of this Agreement or under any other plans
or programs of the Company in which he participated and under which he has
accrued a benefit or continues to have rights), and the termination thereof,
Erbe shall be entitled to receive, commencing on the eighth day following the
execution of the Release by Erbe, in lieu of the payment described in subsection
(a) hereof, which Erbe agrees to waive, as liquidated damages for the failure of
the Company to continue to employ Erbe, (i) continuation for two years of Erbe's
---------
Base Salary in accordance with Section 1.4 (without regard to Erbe's removal),
(ii) any other amounts earned, vested, or owing but not yet paid under Section 1
above, (iii) a pro-rata portion of any incentive compensation to the extent such
amount would have been earned in accordance with the terms of such programs
specified in Section 1.7 above for the then current fiscal year of the Company,
(iv) a payment equal to any unused vacation, and (v) any other benefits in
accordance with the terms of any applicable plans and programs of the Company.
The Company shall have no further liability or obligation to Erbe for
compensation under this Agreement.
5.5 Constructive Termination Without Cause.
--------------------------------------
(a) Resignation by Erbe for good reason ("Constructive Termination
Without Cause") shall mean a termination of Erbe's employment at his initiative
following the occurrence, without Erbe's written consent, of (i) a material
diminution in Erbe's duties, responsibilities, authority, or status, or a
failure of Erbe to have a position reporting directly to the Senior Vice
President, Operations, (ii) a reduction in any amount of Erbe's Base Salary,
(iii) the assignment to Erbe of duties or obligations which are materially
inconsistent with the duties,
6
<PAGE>
responsibilities, authority, or status of his position as defined in Section 1.2
above or which materially impair Erbe's ability to function in his then current
position, or (iv) a failure of the Company to comply with any of the material
terms of this Agreement.
(b) In the event of a Constructive Termination Without Cause, if Erbe
executes (and does not revoke) the Release as to all claims specified in Section
5.4(b), Erbe shall be entitled to receive all amounts and benefits to the same
extent and at the same time as specified in Section 5.4(b). In the event Erbe
refuses to execute the Release (or revokes the Release), he shall receive only
the amounts and benefits to the same extent and at the same time as specified in
Section 5.4(a).
(c) Prior to resigning under this Section, Erbe shall give written
notice to the Board and offer a 30-day period for the Company to cure. If no
cure has been effected by the end of the applicable cure period, Erbe may resign
immediately in accordance with the provisions of subsections (a) and (b) above.
5.6 Voluntary Termination. Erbe may voluntarily terminate the Employment
---------------------
Term upon 30 days' prior written notice for any reason. In such event, Erbe
shall be entitled only to (i) Base Salary to the extent already earned and a
payment equal to any unused vacation, which shall be paid in a single lump sum
on the day the Employment Term terminates, and (ii) any other benefits in
accordance with the terms of any applicable plans and programs of the Company.
A voluntary termination under this Section 5.6 shall not be deemed a breach of
this Agreement.
5.7 Termination at June 30, 2000. Notwithstanding Section 5.6, if (i) the
----------------------------
Employment Term shall not have been terminated prior to December 31, 1999
pursuant to the foregoing provisions of this Section 5 and Erbe and the Company
cannot reach a mutually acceptable agreement in respect of the continuation of
Erbe's employment after Jun 30, 2000, (ii) Erbe voluntarily terminates his
employment with the Company at June 30, 2000, and (iii) Erbe executes (and does
not revoke) the Release described in Section 5.4(b), the Company shall pay to
Erbe as severance compensation the amounts described in Section 5.4(b), but with
Erbe's Base Salary to continue under Section 5.4(b)(i) for one year after
--------
termination of employment. The payments under this Section 5.7 shall be made in
lieu of the payments described in Section 5.6, which Erbe agrees to waive. In
the event Erbe refuses to execute the Release (or revokes the Release), Erbe
shall receive only amounts and benefits to the same extent and at the same time
as specified in Section 5.6.
6. Change of Control.
-----------------
(a) If a Change of Control (as defined below) occurs during the
Employment Term, the Employment Term shall automatically be extended to the date
that is two years after the effective date of the Change of Control, subject to
---------
the provisions of subsection (b) below.
7
<PAGE>
(b) Notwithstanding anything in this Agreement to the contrary, if it
shall be determined that any payment or distribution by the Company to or for
the benefit of Erbe pursuant to the terms of this Agreement or otherwise (a
"Payment") would constitute an "excess parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and
that it would be economically advantageous to the Company to reduce the Payment
to avoid or reduce the taxation of excess parachute payments under Section 4999
of the Code, the aggregate present value of the amounts payable or distributable
to or for the benefit of Erbe pursuant to this Agreement (such payments or
distributions pursuant to this Agreement are hereinafter referred to as
"Agreement Payments") shall be reduced (but not below zero) to the Reduced
Amount. The "Reduced Amount" shall be an amount expressed in present value
which maximizes the aggregate present value of Agreement Payments without
causing any Payment to be subject to taxation under Section 4999 of the Code.
For purposes of this Section 6, present value shall be determined in accordance
with Section 280G(d)(4) of the Code. The calculations under this Section 6(b)
shall be made as follows:
(i) All determinations to be made under this Section 6(b) shall
be made by the Company's independent public accounting firm as in effect
immediately prior to the Change of Control (the "Accounting Firm"), which firm
shall provide its determinations and any supporting calculations to the Company
and Erbe within 10 days of the event that gives rise to the "excess parachute
payment." Any such determination by the Accounting Firm shall be binding upon
the Company and Erbe. Erbe shall in his sole discretion determine which and how
much of the Agreement Payments shall be eliminated or reduced consistent with
the requirements of this Section 6(b). Within five days after Erbe's
determination, the Company shall pay (or cause to be paid) or distribute (or
cause to be distributed) to or for the benefit of Erbe such amounts as are then
due to Erbe under this Agreement.
(ii) As a result of the uncertainty in the application of
Section 280G of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Agreement Payments will have been
made by the Company which should not have been made ("Overpayment") or that
additional Agreement Payments which have not been made by the Company could have
been made ("Underpayment"), in each case, consistent with the calculations
required to be made hereunder. Within two years after the event that gives rise
to the "excess parachute payment," the Accounting Firm shall review the
determination made by it pursuant to the preceding paragraph. If the Accounting
Firm determines that an Overpayment has been made, any such Overpayment shall be
treated for all purposes as a loan to Erbe which Erbe shall repay to the
Company, together with interest at the applicable Federal rate provided for in
Section 7872(f)(2) of the Code (the "Federal Rate"); provided, however, that no
amount shall be payable by Erbe to the Company if and to the extent such payment
would not reduce the amount which is subject to taxation under Section 4999 of
the Code. In the event that the Accounting Firm determines that an Underpayment
has occurred, any such Underpayment shall be promptly paid by the Company to or
for the benefit of Erbe, together with interest at the Federal Rate.
8
<PAGE>
(iii) All of the fees and expenses of the Accounting Firm in
performing the determinations referred to in subsections (i) and (ii) above
shall be borne solely by the Company. The Company agrees to indemnify and hold
harmless the Accounting Firm from any and all claims, damages and expenses
resulting from or relating to its determinations pursuant to subsections (i) and
(ii) above, except for claims, damages or expenses resulting from the gross
negligence or willful misconduct of the Accounting Firm.
(iv) The limitations of this Section 6(b) shall only apply if
payments under this Agreement are subject to Section 280G at the time of the
Change of Control. If payments under this Agreement would not be subject to
Section 280G if the shareholders of the Company approved the payments, the
Company shall use its best efforts to procure the necessary shareholder approval
of the payments in a timely manner. If the shareholders approve the payments so
that Section 280G does not apply, the Company shall make payments under this
Agreement without regard to this Section 6(b).
(c) A "Change of Control" shall be deemed to have occurred under this
Agreement if:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than a person who is a shareholder of the
Company as of the effective date of this Agreement) is or becomes a "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing more than 50% of the
voting power of the then outstanding securities of the Company; or
(ii) The shareholders of the Company approve (or, if shareholder
approval is not required, the Board approves) an agreement providing for (i) the
merger or consolidation of the Company with another corporation where the
shareholders of the Company, immediately prior to the merger or consolidation,
will not beneficially own, immediately after the merger or consolidation, shares
entitling such shareholders to more than 50% of all votes to which all
shareholders of the surviving corporation would be entitled in the election of
directors (without consideration of the rights of any class of stock to elect
directors by a separate class vote), (ii) the sale or other disposition of all
or substantially all of the assets of the Company, or (iii) a liquidation or
dissolution of the Company.
7. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of Erbe's employment and the Employment
Term to the extent necessary to the intended preservation of such rights and
obligations.
8. Mitigation and Offsets. Erbe shall not be required to mitigate the
----------------------
amount of any payment or benefit provided for in this Agreement by seeking other
employment or otherwise and there shall be offset against amounts due Erbe under
this Agreement on account of any remuneration attributable to any subsequent
employment that he may obtain. The Company's obligations to make payments under
this Agreement and otherwise to perform its obligations
9
<PAGE>
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against Erbe or others.
9. Arbitration; Expenses. In the event of any dispute under the
---------------------
provisions of this Agreement other than a dispute in which the primary relief
sought is an equitable remedy such as an injunction, the parties shall be
required to have the dispute, controversy or claim settled by arbitration in the
City of Philadelphia, Pennsylvania in accordance with the National Rules for the
Resolution of Employment Disputes then in effect of the American Arbitration
Association, before a panel of three arbitrators, two of whom shall be selected
by the Company and Erbe, respectively, and the third of whom shall be selected
by the other two arbitrators. Any award entered by the arbitrators shall be
final, binding and nonappealable and judgment may be entered thereon by either
party in accordance with applicable law in any court of competent jurisdiction.
This arbitration provision shall be specifically enforceable. The arbitrators
shall have no authority to modify any provision of this Agreement or to award a
remedy for a dispute involving this Agreement other than a benefit specifically
provided under or by virtue of the Agreement. If Erbe prevails on any material
issue which is the subject of such arbitration or lawsuit, the Company shall be
responsible for all of the fees of the American Arbitration Association and the
arbitrators and any expenses relating to the conduct of the arbitration as well
as Erbe's reasonable legal fees and expenses. The arbitrators shall, in any
other event, determine who shall pay Erbe's legal fees and expenses.
10. No Attachment. Except as required by law, no right to receive
-------------
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to execution, attachment, levy, or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect; provided, however, that nothing in this Section
shall preclude the assumption of such rights by executors, administrators or
other legal representatives of Erbe or his estate and their assigning any rights
hereunder to the person or persons entitled thereto.
11. Source of Payment. All payments provided for under this Agreement
-----------------
shall be paid in cash from the general funds of the Company. The Company shall
not be required to establish a special or separate fund or other segregation of
assets to assure such payments, and, if the Company shall make any investments
to aid it in meeting its obligations hereunder, Erbe shall have no right, title
or interest whatever in or to any such investments except as may otherwise be
expressly provided in a separate written instrument relating to such
investments. Nothing contained in this Agreement, and no action taken pursuant
to its provisions, shall create or be construed to create a trust of any kind,
or a fiduciary relationship, between the Company and Erbe or any other person.
To the extent that any person acquires a right to receive payments from the
Company hereunder, such right, without prejudice to rights which employees may
have, shall be no greater than the right of an unsecured creditor of the
Company.
10
<PAGE>
12. Notices. All notices and other communications required or permitted
-------
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when hand delivered or mailed by
registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
If to the Company, to:
Orthovita, Inc.
45 Great Valley Parkway
Malvern, PA 19355
If to Erbe, to:
Erik M. Erbe, Ph.D.
1247 Berwyn Paoli Road
Berwyn, PA 19312
or to such other names or addresses as the Company or Erbe, as the case may be,
shall designate by notice to each other person entitled to receive notices in
the manner specified in this Section.
13. Contents of Agreement; Amendment and Assignment.
-----------------------------------------------
(a) This Agreement supersedes the July 5, 1995 agreement and other all
prior agreements and sets forth the entire understanding between the parties
hereto with respect to the subject matter hereof and cannot be changed,
modified, extended or terminated except as provided herein or upon written
amendment approved by the Company and executed on its behalf by a duly
authorized officer and by Erbe.
(b) All of the terms and provisions of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the respective heirs,
executors, administrators, legal representatives, successors and assigns of the
parties hereto, except that the duties and responsibilities of Erbe hereunder
are of a personal nature and shall not be assignable or delegatable in whole or
in part by Erbe. The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise) to
all or substantially all of the business or assets of the Company, by agreement
in form and substance satisfactory to Erbe, expressly to assume and agree to
perform this Agreement in the same manner and to the extent the Company would be
required to perform if no such succession had taken place.
14. Severability. If any provision of this Agreement or application
------------
thereof to anyone or under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provision or application of this Agreement which can be given
effect without the invalid or unenforceable provision or application and shall
not invalidate or render unenforceable such provision or application in any
other jurisdiction. If any provision is held void, invalid or unenforceable
with respect to
11
<PAGE>
particular circumstances, it shall nevertheless remain in full
force and effect in all other circumstances.
15. Remedies Cumulative; No Waiver. No remedy conferred upon a party by
------------------------------
this Agreement is intended to be exclusive of any other remedy, and each and
every such remedy shall be cumulative and shall be in addition to any other
remedy given hereunder or now or hereafter existing at law or in equity. No
delay or omission by a party in exercising any right, remedy or power hereunder
or existing at law or in equity shall be construed as a waiver thereof, and any
such right, remedy or power may be exercised by such party from time to time and
as often as may be deemed expedient or necessary by such party in its sole
discretion.
16. Beneficiaries/References. Erbe shall be entitled, to the extent
------------------------
permitted under any applicable law, to select and change a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
Erbe's death by giving the Company written notice thereof. In the event of
Erbe's death or a judicial determination of his incompetence, references in this
Agreement to Erbe shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
17. Miscellaneous. All section headings used in this Agreement are for
-------------
convenience only. This Agreement may be executed in counterparts, each of which
is an original. It shall not be necessary in making proof of this Agreement or
any counterpart hereof to produce or account for any of the other counterparts.
18. Withholding. The Company may withhold from any payments under this
-----------
Agreement all federal, state and local taxes as the Company is required to
withhold pursuant to any law or governmental rule or regulation. Erbe shall
bear all expense of, and be solely responsible for, all federal, state and local
taxes due with respect to any payment received hereunder.
19. Governing Law. This Agreement shall be governed by and interpreted
-------------
under the laws of the Commonwealth of Pennsylvania without giving effect to any
conflict of laws provisions.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first above written.
ORTHOVITA, INC.
By:\s\David S. Joseph \s\Erik M. Erbe, Ph.D.
------------------- -----------------------
David S. Joseph Erik M. Erbe, Ph.D.
President & CEO
12
<PAGE>
Exhibit 10.9
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement") entered into as of December 31,
1996, by and between Orthovita, Inc., a Pennsylvania corporation (the
"Company"), and Samuel A. Nalbone, an employee of the Company ("Executive").
WHEREAS, the Company wishes to continue to employ Executive as a Senior
Vice President, and both parties desire to enter into an employment agreement to
reflect Executive's position with the Company upon the terms and conditions set
forth herein:
WHEREAS, both parties understand that this Agreement shall supersede the
Employment Agreement dated February 6, 1995 (the "1995 Employment Agreement")
between Executive and the Company.
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Employment. The Company hereby continues to employ Executive as a
----------
Senior Vice President. Executive hereby accepts such employment and agrees to
perform his duties and responsibilities, in accordance with the terms,
conditions and provisions hereinafter set forth.
1.1. Employment Term. The term of Executive's employment under this
---------------
Agreement (the "Employment Term") shall commence as of the date hereof (the
"Effective Date") and shall continue until December 31, 1999, unless terminated
prior thereto in accordance with Section 5 or unless extended prior thereto in
the event a Change of Control in accordance with Section 6.
1.2. Duties and Responsibilities. Executive shall serve as a Senior Vice
---------------------------
President of the Company and in such other senior positions, if any, to which he
may be elected by the Board of Directors of the Company (the "Board") during the
Employment Term. During the Employment Term, Executive shall perform all duties
and accept all responsibilities incident to, and not inconsistent with, such
positions as may be reasonably assigned to him by the President and Chief
Executive Officer of the Company.
1.3. Extent of Service. During the Employment Term, Executive agrees to
-----------------
use his best efforts to carry out his duties and responsibilities under Section
1.2 hereof and, consistent with the other provisions of this Agreement, to
devote substantially all his business time, attention and energy thereto except
to the extent required by Executive's outside board directorships, civic or
charitable activities. Except for positions held on the date of this Agreement,
Executive agrees not to become engaged in any other business, civic or
charitable activity which, in the Board of
<PAGE>
Director's reasonable judgment, is likely to interfere materially with his
ability to discharge his duties and responsibilities to the Company.
1.4. Base Salary. For all the services rendered by Executive hereunder,
-----------
the Company shall pay Executive a base salary ("Base Salary"), commencing on
March 1, 1997, at the annual rate of $175,000, payable in installments at such
times as the Company customarily pays its other senior level executives (but in
any event no less often than monthly). Executive's Base Salary, for the fiscal
year of the Company commencing after December 31, 1997, shall be reviewed and
may be appropriately increased by the Company's Board pursuant to its normal
performance review policies for senior level executives.
1.5. Retirement and Benefit Coverages. During the Employment Term,
--------------------------------
Executive shall be entitled to participate in all employee pension and
retirement plans and programs and welfare benefit plans and programs that are
available to the Company's senior level executives as a group or to its
employees generally, as such retirement plans or benefit coverages may be in
effect from time to time. In addition, Executive shall be entitled to the
Company's regular holiday and vacation policy and any other executive
perquisites provided by the Company to its senior level executives.
1.6. Life Insurance. During the Employment Term, the Company shall
--------------
maintain, under an arrangement satisfactory to the Company, $1,500,000 of life
insurance on the life of Executive. Executive shall have the right to designate
the beneficiary of such insurance policy. The Company may maintain term life
insurance, whole life insurance or such other form of insurance as it deems
appropriate.
1.7. Incentive Programs. Executive shall be entitled to participate in any
------------------
short-term or long-term incentive compensation programs established by the
Company for its senior level executives generally. Payments under such programs
shall depend upon achievement of certain business and individual performance
targets specified and approved by the Board; provided, however, that Executive's
"target opportunity" under any such program shall be at least at the highest
level of target award for any other senior level executive.
2. Confidential Information. Executive recognizes and acknowledges that,
------------------------
by reason of his employment by and service to the Company before, during and, if
applicable, after the Employment Term, he has had and will continue to have
access to certain confidential and proprietary information relating to the
Company's business, which may include, but is not limited to, trade secrets,
trade "know-how", customer information, supplier information, cost and pricing
information, marketing and sales techniques, strategies and programs, computer
programs and software and financial information (collectively referred to as
"Confidential Information"). Executive acknowledges that such Confidential
Information is a valuable and unique asset of the Company and Executive
covenants that he will not at any time during the course of his employment use
any Confidential Information or divulge or disclose any Confidential Information
to any person, firm or corporation except in connection with Executive's good
faith
2
<PAGE>
belief as to the proper performance of his duties for the Company. Executive
also covenants that, at any time after the termination of his employment,
directly or indirectly, he will not use any Confidential Information for any
purpose or divulge or disclose any Confidential Information to any person, firm
or corporation, unless such information is in the public domain through no fault
of Executive or except when required to do so by a court of law, by any
governmental agency having supervisory authority over the business of the
Company or over Executive or by any administrative or legislative body
(including a committee thereof) with apparent jurisdiction to order him to
divulge, disclose or make accessible such information, in which case Executive
will inform the Company in writing promptly of such required disclosure.
3. Non-Competition; Non-Solicitation.
---------------------------------
(a) During his employment by the Company and for a period of two
years thereafter, or, if longer, for the period during which Executive receives
payments from the Company under Section 5, Executive will not, except with the
prior written consent of the Board, directly or indirectly own, manage, operate,
join, control, finance or participate in the ownership, management, operation,
control or financing of, or be connected as an officer, director, employee,
partner, principal, agent, representative, consultant or otherwise with, or use
or permit his name to be used in connection with, any business or enterprise
that is engaged in a geographic area in which the Company or any of its
affiliates is operating either during the Employment Term or on the date
Employee's employment terminates, as applicable, (whether or not such business
is physically located within those areas) (the "Geographic Area"), in any
business that is competitive to a business from which the Company or any of its
affiliates derive at least five percent of its respective gross revenues either
during the Employment Term or on the date Executive's employment terminates, as
applicable. It is recognized by Employee that the business of the Company and
its affiliates and Executive's connection therewith is or will be involved in
activity throughout the Geographic Area, and that more limited geographical
limitations on this non-competition covenant are therefore not appropriate.
(b) The foregoing restrictions shall not be construed to prohibit the
ownership by Executive of less than five percent of any class of securities of
any corporation which is engaged in any of the foregoing businesses having a
class of securities registered pursuant to the Securities Exchange Act of 1934
(the "Exchange Act"), provided that such ownership represents a passive
investment and that neither Executive nor any group of persons including
Executive in any way, either directly or indirectly, manages or exercises
control of any such corporation, guarantees any of its financial obligations,
otherwise takes any part in its business, other than exercising his rights as a
shareholder, or seeks to do any of the foregoing.
(c) Executive further covenants and agrees that, during his employment
by the Company and for the period of two years thereafter, or, if longer, for
the period during which Executive receives payments from the Company under
Section 5, Executive will not personally solicit for another business or
enterprise any customer that was a customer of the Company or any of its
affiliates during the Employment Term or on the date on which Executive's
3
<PAGE>
employment terminates or any person who is a managerial or higher level employee
of the Company at the time of Executive's termination. The foregoing covenant
of Executive shall not apply to any person after twelve months have elapsed
subsequent to the date on which such person's employment by the Company has
terminated.
4. Equitable Relief.
----------------
(a) Executive acknowledges and agrees that the restrictions contained
in Sections 2 and 3 are reasonable and necessary to protect and preserve the
legitimate interests, properties, goodwill and business of the Company, that the
Company would not have entered into this Agreement in the absence of such
restrictions and that irreparable injury will be suffered by the Company should
Executive breach any of the provisions of those Sections. Executive represents
and acknowledges that (i) he has been advised by the Company to consult his own
legal counsel in respect of this Agreement, and (ii) he has had full
opportunity, prior to execution of this Agreement, to review thoroughly this
Agreement with his counsel.
(b) Executive further acknowledges and agrees that a breach of any of
the restrictions in Sections 2 and 3 cannot be adequately compensated by
monetary damages. Executive agrees that the Company shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as an equitable accounting of all earnings, profits and
other benefits arising from any violation of Sections 2 or 3 hereof, which
rights shall be cumulative and in addition to any other rights or remedies to
which the Company may be entitled. In the event that any of the provisions of
Sections 2 or 3 hereof should ever be adjudicated to exceed the time,
geographic, service, or other limitations permitted by applicable law in any
jurisdiction, it is the intention of the parties that the provision shall be
amended to the extent of the maximum time, geographic, service, or other
limitations permitted by applicable law, that such amendment shall apply only
within the jurisdiction of the court that made such adjudication and that the
provision otherwise be enforced to the maximum extent permitted by law.
(c) Executive irrevocably and unconditionally (i) agrees that any
suit, action or other legal proceeding arising out of this Agreement, including,
without limitation, any action commenced by the Company for preliminary and
permanent injunctive relief and other equitable relief, may be brought in the
United States District Court for the Eastern District of Pennsylvania, or if
such court does not have jurisdiction or will not accept jurisdiction, in any
court of general jurisdiction in Chester County, Pennsylvania, (ii) consents to
the non-exclusive jurisdiction of any such court in any such suit, action or
proceeding, and (iii) waives any objection which Executive may have to the
laying of venue of any such suit, action or proceeding in any such court.
Executive also irrevocably and unconditionally consents to the service of any
process, pleadings, notices or other papers in a manner permitted by the notice
provisions of Section 12 hereof.
4
<PAGE>
5. Termination. The Employment Term shall terminate upon the occurrence
-----------
of any one of the following events:
5.1. Disability. The Company may terminate the Employment Term in
----------
compliance with applicable law, if Executive is unable substantially to perform
his duties and responsibilities hereunder to the full extent required by the
Board by reason of illness, injury or incapacity for six consecutive months, or
for more than nine months in the aggregate during any period of twelve calendar
months (a "Disability") provided, however, that the Company shall continue to
pay Executive his Base Salary until the Company acts to terminate the Employment
Term. In addition, in the event Executive executes (and does not revoke) a
written release upon incurring a Disability (such release to be effective only
if the Company executes such release), substantially in the form attached hereto
as Annex 1, as to all claims specified in Section 5.4(b) below (the "Release"),
Executive shall be entitled to receive all amounts and benefits to the same
extent and at the same time as specified in Section 5.4(b), offset by any
amounts Executive receives under any long term disability program maintained by
the Company. Otherwise, the Company shall have no further liability or
obligation to Executive for compensation under this Agreement. In the event of
any dispute under this Section 5.1 and to the extent determined by the Board to
be job-related and consistent with business necessity, Executive shall submit to
a physical examination by a licensed physician selected by the Board and
approved by Executive, such approval not to be unreasonably withheld.
5.2. Death. The Employment Term shall terminate in the event of
-----
Executive's death. In such event, the Company shall pay to Executive's
executors, legal representatives or administrators, as applicable, an amount
equal to the installment of his Base Salary set forth in Section 1.4 hereof for
the month in which he dies. If Executive dies while an employee of the Company,
Executive's estate or designated beneficiary shall be entitled to receive the
proceeds of the life insurance policy described in Sections 1.6. Otherwise, the
Company shall have no further liability or obligation under this Agreement to
his executors, legal representatives, administrators, heirs or assigns or any
other person claiming under or through him.
5.3. Cause. The Company may terminate the Employment Term at any time for
-----
"cause" upon 30 days' written notice to Executive, in which event all payments
under this Agreement shall cease, except for (i) Base Salary to the extent
already earned and a payment equal to any unused vacation, which shall be paid
in a single lump sum on the day the Employment Term terminates, and (ii) any
other benefits in accordance with the terms of any applicable plans and programs
of the Company. For purposes of this Agreement, Executive's employment may be
terminated for "cause" if (i) Executive is convicted of a felony, (ii) in the
reasonable determination of the Board, Executive has (x) committed an
intentional act of fraud, embezzlement, or theft in connection with Executive's
duties in the course of his employment with the Company, or (y) engaged in gross
mismanagement or gross negligence in the course of his employment with the
Company or (iii) Executive intentionally breached his obligations under this
Agreement, including inattention to or neglect of duties and shall not have
remedied such breach within 30 days after receiving written notice from the
Board specifying the details
5
<PAGE>
thereof; provided, however, that in any case under this clause (iii), the act or
failure to act by Executive is materially harmful to the business of the
Company. For purposes of this Agreement, an act or omission on the part of
Executive shall be deemed "intentional" only if it was done by Executive in bad
faith, not merely an error in judgment, and without reasonable belief that the
act or omission was in the best interest of the Company.
5.4. Termination Without Cause.
-------------------------
(a) The Company may remove Executive, at any time, without cause, from
the position in which he is employed hereunder (in which case the Employment
Term shall be deemed to have ended) upon not less than 30 days' prior written
notice to Executive; provided, however, that, in the event that such notice is
given, Executive shall be under no obligation to render any additional services
to the Company and shall be allowed to seek other employment. Upon any such
removal, except as provided in Section 5.4(b) below, Executive shall be
entitled to receive, as liquidated damages for the failure of the Company to
continue to employ Executive, only the amount due to Executive under the
Company's then-current severance pay plan for employees and (i) Base Salary to
the extent already earned and a payment equal to any unused vacation, which
shall be paid in a single lump sum on the day the Employment Term ends, and (ii)
any other benefits in accordance with the terms of any applicable plans and
programs of the Company. No other payments or benefits shall be due under this
Agreement to Executive, but Executive shall be entitled to any other benefits in
accordance with the terms of any applicable plans and programs of the Company.
(b) Notwithstanding the foregoing, upon such removal, in the event
that Executive executes (and does not revoke) the Release as to any and all
claims against the Company and all related parties with respect to all matters
arising out of Executive's employment by the Company (other than any
indemnification rights, or all entitlements under the terms of this Agreement or
under any other plans or programs of the Company in which he participated and
under which he has accrued a benefit or continues to have rights), and the
termination thereof, Executive shall be entitled to receive, commencing on the
eighth day following the execution of the Release by Executive, in lieu of the
payment described in subsection (a) hereof, which Executive agrees to waive, as
liquidated damages for the failure of the Company to continue to employ
Executive, (i) continuation for two years of Executive's Base Salary in
---------
accordance with Section 1.4 (without regard to Executive's removal), (ii) any
other amounts earned, vested, or owing but not yet paid under Section 1 above,
(iii) a pro-rata portion of any incentive compensation to the extent such amount
would have been earned in accordance with the terms of such programs specified
in Section 1.7 above for the then current fiscal year of the Company, (iv) a
payment equal to any unused vacation, and (v) any other benefits in accordance
with the terms of any applicable plans and programs of the Company. The Company
shall have no further liability or obligation to Executive for compensation
under this Agreement.
6
<PAGE>
5.5. Constructive Termination Without Cause.
--------------------------------------
(a) Resignation by Executive for good reason ("Constructive
Termination Without Cause") shall mean a termination of Executive's employment
at his initiative following the occurrence, without Executive's written consent,
of (i) a material diminution in Executive's duties, responsibilities, authority,
or status, (ii) a reduction in any amount of Executive's Base Salary, (iii) the
assignment to Executive of duties or obligations which are materially
inconsistent with the duties, responsibilities, authority, or status of his
position as defined in Section 1.2 above or which materially impair Executive's
ability to function in his then current position, or (iv) a failure of the
Company to comply with any of the material terms of this Agreement.
(b) In the event of a Constructive Termination Without Cause, if
Executive executes (and does not revoke) the Release as to all claims specified
in Section 5.4(b), Executive shall be entitled to receive all amounts and
benefits to the same extent and at the same time as specified in Section 5.4(b).
In the event Executive refuses to execute the Release (or revokes the Release),
he shall receive only the amounts and benefits to the same extent and at the
same time as specified in Section 5.4(a).
(c) Prior to resigning under this Section, Executive shall give
written notice to the Board and offer a 30-day period for the Company to cure.
If no cure has been effected by the end of the applicable cure period, Executive
may resign immediately in accordance with the provisions of subsections (a) and
(b) above.
5.6. Voluntary Termination. Executive may voluntarily terminate the
---------------------
Employment Term upon 30 days' prior written notice for any reason. In such
event, Executive shall be entitled only to (i) Base Salary to the extent already
earned and a payment equal to any unused vacation, which shall be paid in a
single lump sum on the day the Employment Term terminates, and (ii) any other
benefits in accordance with the terms of any applicable plans and programs of
the Company. A voluntary termination under this Section 5.6 shall not be deemed
a breach of this Agreement.
5.7. Termination at December 31, 1999. Notwithstanding Section 5.6, if (i)
--------------------------------
the Employment Term shall not have been terminated prior to December 31, 1999
pursuant to the foregoing provisions of this Section 5 and Executive and the
Company cannot reach a mutually acceptable agreement in respect of the
continuation of Executive's employment after December 31, 1999, (ii) Executive
voluntarily terminates his employment with the Company at December 31, 1999, and
(iii) Executive executes (and does not revoke) the Release described in Section
5.4(b), the Company shall pay to Executive as severance compensation the amounts
described in Section 5.4(b), but with Executive's Base Salary to continue under
Section 5.4(b)(i) for one year after termination of employment. The payments
--------
under this Section 5.7 shall be made in lieu of the payments described in
Section 5.6, which Executive agrees to waive. In the event Executive
7
<PAGE>
refuses to execute the Release (or revoke the Release), Executive shall receive
only amounts and benefits to the same extent and at the same time as specified
in Section 5.6.
6. Change of Control.
-----------------
(a) If a Change of Control (as defined below) occurs during the
Employment Term, the Employment Term shall automatically be extended to the date
that is two years after the effective date of the Change of Control, subject to
---------
the provisions of subsection (b) below.
(b) Notwithstanding anything in this Agreement to the contrary, if it
shall be determined that any payment or distribution by the Company to or for
the benefit of Executive pursuant to the terms of this Agreement or otherwise (a
"Payment") would constitute an "excess parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and
that it would be economically advantageous to the Company to reduce the Payment
to avoid or reduce the taxation of excess parachute payments under Section 4999
of the Code, the aggregate present value of the amounts payable or distributable
to or for the benefit of Executive pursuant to this Agreement (such payments or
distributions pursuant to this Agreement are hereinafter referred to as
"Agreement Payments") shall be reduced (but not below zero) to the Reduced
Amount. The "Reduced Amount" shall be an amount expressed in present value
which maximizes the aggregate present value of Agreement Payments without
causing any Payment to be subject to taxation under Section 4999 of the Code.
For purposes of this Section 6, present value shall be determined in accordance
with Section 280G(d)(4) of the Code. The calculations under this Section 6(b)
shall be made as follows:
(i) All determinations to be made under this Section 6(b) shall be
made by the Company's independent public accounting firm as in effect
immediately prior to the Change of Control (the "Accounting Firm"), which firm
shall provide its determinations and any supporting calculations to the Company
and Executive within 10 days of the event that gives rise to the "excess
parachute payment." Any such determination by the Accounting Firm shall be
binding upon the Company and Executive. Executive shall in his sole discretion
determine which and how much of the Agreement Payments shall be eliminated or
reduced consistent with the requirements of this Section 6(b). Within five days
after Executive's determination, the Company shall pay (or cause to be paid) or
distribute (or cause to be distributed) to or for the benefit of Executive such
amounts as are then due to Executive under this Agreement.
(ii) As a result of the uncertainty in the application of Section 280G
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Agreement Payments will have been made by the
Company which should not have been made ("Overpayment") or that additional
Agreement Payments which have not been made by the Company could have been made
("Underpayment"), in each case, consistent with the calculations required to be
made hereunder. Within two years after the event that gives rise to the "excess
parachute payment," the Accounting Firm shall review the determination made by
it pursuant to the preceding paragraph. If the Accounting Firm determines that
an Overpayment
8
<PAGE>
has been made, any such Overpayment shall be treated for all purposes as a loan
to Executive which Executive shall repay to the Company, together with interest
at the applicable Federal rate provided for in Section 7872(f)(2) of the Code
(the "Federal Rate"); provided, however, that no amount shall be payable by
Executive to the Company if and to the extent such payment would not reduce the
amount which is subject to taxation under Section 4999 of the Code. In the event
that the Accounting Firm determines that an Underpayment has occurred, any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Executive, together with interest at the Federal Rate.
(iii) All of the fees and expenses of the Accounting Firm in
performing the determinations referred to in subsections (i) and (ii) above
shall be borne solely by the Company. The Company agrees to indemnify and hold
harmless the Accounting Firm from any and all claims, damages and expenses
resulting from or relating to its determinations pursuant to subsections (i) and
(ii) above, except for claims, damages or expenses resulting from the gross
negligence or willful misconduct of the Accounting Firm.
(iv) The limitations of this Section 6(b) shall only apply if
payments under this Agreement are subject to Section 280G at the time of the
Change of Control. If payments under this Agreement would not be subject to
Section 280G if the shareholders of the Company approved the payments, the
Company shall use its best efforts to procure the necessary shareholder approval
of the payments in a timely manner. If the shareholders approve the payments so
that Section 280G does not apply, the Company shall make payments under this
Agreement without regard to this Section 6(b).
(c) A "Change of Control" shall be deemed to have occurred under this
Agreement if:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than a person who is a shareholder of the Company as
of the effective date of this Agreement) is or becomes a "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing more than 50% of the voting power of the
then outstanding securities of the Company; or
(ii) The shareholders of the Company approve (or, if shareholder
approval is not required, the Board approves) an agreement providing for (i) the
merger or consolidation of the Company with another corporation where the
shareholders of the Company, immediately prior to the merger or consolidation,
will not beneficially own, immediately after the merger or consolidation, shares
entitling such shareholders to more than 50% of all votes to which all
shareholders of the surviving corporation would be entitled in the election of
directors (without consideration of the rights of any class of stock to elect
directors by a separate class vote), (ii) the sale or other disposition of all
or substantially all of the assets of the Company, or (iii) a liquidation or
dissolution of the Company.
9
<PAGE>
7. Survivorship. The respective rights and obligations of the parties
------------
hereunder shall survive any termination of Executive's employment and the
Employment Term to the extent necessary to the intended preservation of such
rights and obligations.
8. Mitigation and Offsets. Executive shall be required to mitigate the
----------------------
amount of any payment or benefit provided for in this Agreement by seeking other
employment or otherwise and shall be offset against amounts due Executive under
this Agreement on account of any remuneration attributable to any subsequent
employment that he may obtain. The Company's obligations to make payments under
this Agreement and otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Company may have
against Executive or others.
9. Arbitration; Expenses. In the event of any dispute under the
---------------------
provisions of this Agreement other than a dispute in which the primary relief
sought is an equitable remedy such as an injunction, the parties shall be
required to have the dispute, controversy or claim settled by arbitration in the
City of Philadelphia, Pennsylvania in accordance with the National Rules for the
Resolution of Employment Disputes then in effect of the American Arbitration
Association, before a panel of three arbitrators, two of whom shall be selected
by the Company and Executive, respectively, and the third of whom shall be
selected by the other two arbitrators. Any award entered by the arbitrators
shall be final, binding and nonappealable and judgment may be entered thereon by
either party in accordance with applicable law in any court of competent
jurisdiction. This arbitration provision shall be specifically enforceable. The
arbitrators shall have no authority to modify any provision of this Agreement or
to award a remedy for a dispute involving this Agreement other than a benefit
specifically provided under or by virtue of the Agreement. If Executive
prevails on any material issue which is the subject of such arbitration or
lawsuit, the Company shall be responsible for all of the fees of the American
Arbitration Association and the arbitrators and any expenses relating to the
conduct of the arbitration as well as Executive's reasonable legal fees and
expenses. The arbitrators shall, in any other event, determine who shall pay
Executive's legal fees and expenses.
10. No Attachment. Except as required by law, no right to receive
-------------
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to execution, attachment, levy, or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect; provided, however, that nothing in this Section
shall preclude the assumption of such rights by executors, administrators or
other legal representatives of Executive or his estate and their assigning any
rights hereunder to the person or persons entitled thereto.
11. Source of Payment. All payments provided for under this Agreement
-----------------
shall be paid in cash from the general funds of the Company. The Company shall
not be required to
10
<PAGE>
establish a special or separate fund or other segregation of assets to assure
such payments, and, if the Company shall make any investments to aid it in
meeting its obligations hereunder, Executive shall have no right, title or
interest whatever in or to any such investments except as may otherwise be
expressly provided in a separate written instrument relating to such
investments. Nothing contained in this Agreement, and no action taken pursuant
to its provisions, shall create or be construed to create a trust of any kind,
or a fiduciary relationship, between the Company and Executive or any other
person. To the extent that any person acquires a right to receive payments from
the Company hereunder, such right, without prejudice to rights which employees
may have, shall be no greater than the right of an unsecured creditor of the
Company.
12. Notices. All notices and other communications required or permitted
-------
hereunder or necessary or convenient in connection herewith shall be in writing
and shall be deemed to have been given when hand delivered or mailed by
registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
If to the Company, to:
Orthovita, Inc.
45 Great Valley Parkway
Malvern, PA 19355
If to Executive, to:
Mr. Samuel A. Nalbone
or to such other names or addresses as the Company or Executive, as the case may
be, shall designate by notice to each other person entitled to receive notices
in the manner specified in this Section.
13. Contents of Agreement; Amendment and Assignment.
-----------------------------------------------
(a) This Agreement supersedes all prior agreements (including without
limitation Executive's 1995 Employment Agreement) and sets forth the entire
understanding between the parties hereto with respect to the subject matter
hereof and cannot be changed, modified, extended or terminated except as
provided herein or upon written amendment approved by the Company and executed
on its behalf by a duly authorized officer and by Executive.
(b) All of the terms and provisions of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the respective heirs,
executors, administrators, legal representatives, successors and assigns of the
parties hereto, except that the duties and responsibilities of Executive
hereunder are of a personal nature and shall not be assignable or
11
<PAGE>
delegatable in whole or in part by Executive. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the extent the Company would be required to perform if no such
succession had taken place.
14. Severability. If any provision of this Agreement or application
------------
thereof to anyone or under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provision or application of this Agreement which can be given
effect without the invalid or unenforceable provision or application and shall
not invalidate or render unenforceable such provision or application in any
other jurisdiction. If any provision is held void, invalid or unenforceable
with respect to particular circumstances, it shall nevertheless remain in full
force and effect in all other circumstances.
15. Remedies Cumulative; No Waiver. No remedy conferred upon a party by
------------------------------
this Agreement is intended to be exclusive of any other remedy, and each and
every such remedy shall be cumulative and shall be in addition to any other
remedy given hereunder or now or hereafter existing at law or in equity. No
delay or omission by a party in exercising any right, remedy or power hereunder
or existing at law or in equity shall be construed as a waiver thereof, and any
such right, remedy or power may be exercised by such party from time to time and
as often as may be deemed expedient or necessary by such party in its sole
discretion.
16. Beneficiaries/References. Executive shall be entitled, to the extent
------------------------
permitted under any applicable law, to select and change a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
Executive's death by giving the Company written notice thereof. In the event of
Executive's death or a judicial determination of his incompetence, references in
this Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
17. Miscellaneous. All section headings used in this Agreement are for
-------------
convenience only. This Agreement may be executed in counterparts, each of which
is an original. It shall not be necessary in making proof of this Agreement or
any counterpart hereof to produce or account for any of the other counterparts.
18. Withholding. The Company may withhold from any payments under this
-----------
Agreement all federal, state and local taxes as the Company is required to
withhold pursuant to any law or governmental rule or regulation. Executive
shall bear all expense of, and be solely responsible for, all federal, state and
local taxes due with respect to any payment received hereunder.
19. Governing Law. This Agreement shall be governed by and interpreted
-------------
under the laws of the Commonwealth of Pennsylvania without giving effect to any
conflict of laws provisions.
12
<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first above written.
ORTHOVITA, INC.
By: /s/ David S. Joseph /s/ Samuel N. Nalbone
------------------------- ------------------------------
President & CEO Samuel A. Nalbone
Annex 1-1
<PAGE>
Exhibit 10.10
THE WARRANT REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THE WARRANT REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED OR DISPOSED OF WITHOUT AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER THAT SUCH TRANSFER OR DISPOSITION DOES NOT VIOLATE THE SECURITIES ACT OF
1933, AS AMENDED, OR THE RULES AND REGULATIONS THEREUNDER.
No. B-1
No. of Shares Subject to Warrant: 55,776
Void after 5:00 p.m. Philadelphia Time on April 10, 2002.
WARRANT
TO PURCHASE COMMON STOCK
OF
ORTHOVITA, INC.
This is to certify that, for value received, RAF Ventures IV, L.P.
("Holder") is entitled to purchase, subject to the provisions of this Warrant,
from Orthovita, Inc., a Pennsylvania corporation ("Company"), 55,776 shares of
Common Stock, $.01 par value, of the Company ("Common Stock"), at a price of
$4.25 per share at any time during the period beginning April 11, 1997 and
ending at 5:00 p.m. Philadelphia Time on April 10, 2002. The number of shares
of Common Stock to be received upon the exercise of this Warrant and the price
to be paid for a share of Common Stock may be adjusted from time to time as
hereinafter set forth. The shares of Common Stock deliverable upon such
exercise, and as adjusted from time to time, are hereinafter sometimes referred
to as "Warrant Shares," and the exercise price of a share of Common Stock in
effect at any time and as adjusted from time to time is hereinafter sometimes
referred to as the "Exercise Price."
(a) EXERCISE OF WARRANT. Subject to the provisions of Section (g)
hereof, this Warrant may be exercised in whole or in part at any time or from
beginning on April 11,1997 and ending at 5:00 p.m. Philadelphia Time on April
10, 2002, or if such day is a day on which banking institutions in the
Commonwealth of Pennsylvania are authorized by law to close, then on the next
succeeding day which shall not be such a day, by presentation and surrender
hereof to the Company at its principal office, or at the office of its stock
transfer agent, if any, with the Purchase Form annexed hereto duly executed and
accompanied by payment of the Exercise Price for the number of shares specified
in such form, in lawful money of the United States of America in cash or by
official bank or certified check made payable to the Company. If this Warrant
should be exercised in part only, the Company shall, upon surrender of this
Warrant
<PAGE>
for cancellation, execute and deliver a new Warrant evidencing the rights of the
Holder thereof to purchase the balance of the shares purchasable thereunder.
Upon receipt by the Company of this Warrant at its office, or by the stock
transfer agent of the Company, if any, at its office, in proper form for
exercise and together with payment of the Exercise Price in the manner provided
herein, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, provided, however, that if at the date
of surrender of such Warrants and payment of such Exercise Price, the transfer
books for the Common Stock shall be closed, the certificates for the shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened, and until such date the Company
shall be under no duty to deliver any certificate for such shares and the Holder
shall not be deemed to have become a holder of record of such shares.
(b) RESERVATION AND STATUS OF SHARES. The Company hereby agrees that
at all times there shall be reserved for issuance and/or delivery upon exercise
of this Warrant such number of shares of its Common Stock as shall be required
for issuance and delivery upon exercise of this Warrant. All shares of Common
Stock which shall be issued upon the exercise of this Warrant shall be validly
issued, fully paid and nonassessable.
(c) FRACTIONAL SHARES. The Company shall not be required to issue
fractions of shares on the exercise of Warrants. If any fraction of a share
would, except for the provisions of this Section, be issuable on the exercise of
any Warrant, the Company will (1) if the fraction of a share otherwise issuable
is equal to or less than one-half, round down and issue to the Holder only the
largest whole number of shares of Common Stock to which the Holder is otherwise
entitled, or (2) if the fraction of a share otherwise issuable is greater than
one-half, round-up and issue to the Holder one additional share of Common Stock
in addition to the largest whole number of shares of Common Stock to which the
Holder is otherwise entitled.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OR WARRANT. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Subject to the provisions of Section (g), upon
surrender of this Warrant to the Company or at the office of its stock transfer
agent, if any, with the Assignment Form annexed hereto duly executed and funds
sufficient to pay any transfer tax, the Company shall, without charge, execute
and deliver a new Warrant in the name of the assignee named in such instrument
of assignment and this Warrant shall be canceled. If this Warrant should be
assigned in part only, the Company shall, upon surrender of this Warrant in
accordance with the procedures set forth in the preceding sentence, execute and
deliver, in addition to the new Warrant described in the preceding sentence, a
new Warrant evidencing the rights of the Holder to purchase the balance of the
shares purchasable thereunder. The term "Warrant" as used herein includes any
Warrants into which this Warrant may be divided or exchanged. Upon receipt by
the Company of evidence satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
such indemnification as the Company may in its discretion impose, and upon
surrender and cancellation
-2-
<PAGE>
of this Warrant, if mutilated, the Company will execute and deliver a new
Warrant of like tenor and date.
(f) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price and the number and
kind of securities purchasable upon the exercise of this Warrant shall be
subject to adjustment from time to time as hereinafter provided:
(1) In case the Company shall issue Common Stock as a dividend
upon Common Stock or in payment of a dividend thereon, shall subdivide the
number of outstanding shares of its Common Stock into a greater number of shares
or shall contract the number of outstanding shares of its Common Stock into a
lesser number of shares, the Exercise Price then in effect shall be adjusted,
effective at the close of business on the record date for the determination of
stockholders entitled to receive such dividend or be subject to such subdivision
or contraction, to the price (computed to the nearest cent) determined by
dividing (A) the product obtained by multiplying the Exercise Price in effect
immediately prior to the close of business on such record date by the number of
shares of Common Stock outstanding prior to such dividend, subdivision or
contraction, by (B) the sum of the number of shares of Common Stock outstanding
immediately after such dividend, subdivision, or contraction.
(2) If any capital reorganization or reclassification of the
capital stock of the Company (other than as set forth in subsection (1) of this
Section (f)), or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder of each Warrant shall thereafter have the right
to purchase and receive upon the basis and upon the terms and conditions
specified in the Warrant and in lieu of the shares of Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented by such Warrant, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of shares of such
Common Stock immediately theretofore purchasable and receivable upon the
exercise of the rights represented by such Warrant had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any such
case appropriate provision shall be made with respect to the rights and interest
of the Holder to the end that the provisions of the Warrant (including, without
limitation, provisions for adjustment of the Exercise Price and of the number of
shares issuable upon the exercise of Warrants) shall thereafter be applicable as
nearly as may be practicable in relation to any shares of stock, securities, or
assets thereafter deliverable upon exercise of Warrants. The Company shall not
effect any such consolidation, merger or sale unless prior to or simultaneously
with the consummation thereof, the successor corporation (if other than the
Company) resulting from such
-3-
<PAGE>
consolidation or merger or the corporation purchasing such assets shall assume,
by written instrument, the obligation to deliver to the Holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions, the
Holder may be entitled to purchase.
(3) Upon each adjustment of the Exercise Price pursuant to
subsection (1) of this Section (f), the number of shares of Common Stock
specified in each Warrant shall thereupon evidence the right to purchase that
number of shares of Common Stock (calculated to the nearest hundredth of a share
of Common Stock) obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
purchasable immediately prior to such adjustment upon exercise of such Warrant
and dividing the product so obtained by the Exercise Price in effect after such
adjustment.
(4) Irrespective of any adjustments of the number or kind of
securities issuable upon exercise of Warrants or the Exercise Price, Warrants
theretofore or thereafter issued may continue to express the same number of
shares of Common Stock and Exercise Price as are stated in similar Warrants
previously issued.
(5) The Company may, at its sole option, retain the independent
public accounting firm regularly retained by the Company, or another firm of
independent public accountants of recognized standing selected by the Company's
Board of Directors, to make any computation required under this Section (f) and
a certificate signed by such firm shall be conclusive evidence of any
computation made under this Section (f).
(6) Whenever there is an adjustment in the Exercise Price or in
the number or kind of securities issuable upon exercise of the Warrants, or
both, as provided in this Section (f), the Company shall (i) promptly file in
the custody of its Secretary or Assistant Secretary a certificate signed by the
Chairman of the Board or the President or a Vice President of the Company and by
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Company, setting forth the facts requiring such adjustment and
the number and kind of securities issuable upon exercise of each Warrant after
such adjustment; and (ii) cause a notice stating that such adjustment has been
effected and stating the Exercise Price then in effect and the number and kind
of securities issuable upon exercise of each Warrant to be sent to each
registered holder of a Warrant.
(7) The Exercise Price and the number of shares issuable upon
exercise of a Warrant shall not be adjusted except in the manner and only upon
the occurrence of the events heretofore specifically referred to in this Section
(f).
(g) TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933 AND OTHER
APPLICABLE SECURITIES LAWS. This Warrant or the Warrant Shares or any other
security issued or issuable upon exercise of this Warrant may not be sold or
otherwise disposed of unless Holder provides the Company with an opinion of
counsel satisfactory to the Company in form satisfactory to the Company that
this Warrant or the Warrant Shares or such other security may be legally
transferred without violating the Securities Act of 1933 and any
-4-
<PAGE>
other applicable securities law and then only against receipt of an agreement of
the transferee to comply with the provisions of this Section (g) with respect to
any resale or other disposition of such securities.
(h) NOTICE GENERALLY. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given, made and received only when delivered (personally, by courier
service such as Federal Express or by other messenger) or when deposited in the
United States mails, certified or registered mail, return receipt requested,
postage prepaid, addressed to the Holder at the address provided to the Company
by such Holder or to the Company at 45 Great Valley Parkway, Malvern,
Pennsylvania 19355, or such other address as shall have been furnished in
writing to the party giving or making such notice, demand or delivery.
(i) GOVERNING LAW. This Warrant shall be construed in accordance with
and governed by the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the Company, intending to be legally bound,
has caused this Warrant to be executed by a duly authorized officer as an
instrument under seal on this 11th day of April, 1997.
ORTHOVITA, INC.
By: /s/ David S. Joseph
------------------------
President
-5-
<PAGE>
Exhibit 10.11
THE WARRANT REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THE WARRANT REPRESENTED BY THIS
CERTIFICATE MAY NOT BE TRANSFERRED OR DISPOSED OF WITHOUT AN OPINION
OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH TRANSFER OR
DISPOSITION DOES NOT VIOLATE THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE RULES AND REGULATIONS THEREUNDER.
No. D-7
No. of Shares Subject to Warrant: 8,387
Void after 5:00 p.m. Philadelphia Time on April 10, 2002.
WARRANT
TO PURCHASE COMMON STOCK
OF
ORTHOVITA, INC.
This is to certify that, for value received, Solomon Kal Rudman
("Holder") is entitled to purchase, subject to the provisions of this Warrant,
from Paul Ducheyne, a Pennsylvania resident, 8,387 shares of Common Stock, $.01
par value, of Orthovita, Inc., a Pennsylvania corporation ("Company") ("Common
Stock"), at a price of $4.25 per share at any time during the period beginning
April 11, 1997 and ending at 5:00 p.m. Philadelphia Time on April 10, 2002. The
number of shares of Common Stock to be received upon the exercise of this
Warrant and the price to be paid for a share of Common Stock may be adjusted
from time to time as hereinafter set forth. The shares of Common Stock
deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Shares," and the exercise price of
a share of Common Stock in effect at any time and as adjusted from time to time
is hereinafter sometimes referred to as the "Exercise Price."
(a) EXERCISE OF WARRANT. Subject to the provisions of Section (g)
hereof, this Warrant may be exercised in whole or in part at any time or from
beginning on April 11, 1997 and ending at 5:00 p.m. Philadelphia Time on April
10, 2002, or if such day is a day on which banking institutions in the
Commonwealth of Pennsylvania are authorized by law to close, then on the next
succeeding day which shall not be such a day, by presentation and surrender
hereof to the Company, as the escrow agent for the Warrant Shares, at its
principal office, or at the office of its stock transfer agent, if any, with the
Purchase Form annexed hereto duly executed and accompanied by payment of the
Exercise Price for the number of shares specified in such form, in lawful money
of the United States of America in cash or by official bank or certified
<PAGE>
check made payable to Ducheyne. If this Warrant should be exercised in part
only, Ducheyne shall, upon surrender of this Warrant for cancellation, execute
and deliver a new Warrant evidencing the rights of the Holder thereof to
purchase the balance of the shares purchasable thereunder. Upon receipt by the
Company of this Warrant at its office, in proper form for exercise and together
with payment of the Exercise Price in the manner provided herein, the Holder
shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, provided, however, that if at the date of surrender
of such Warrants and payment of such Exercise Price, the transfer books for the
Common Stock shall be closed, the certificates for the shares in respect of
which such Warrants are then exercised shall be issuable as of the date on which
such books shall next be opened, and until such date the Company shall be under
no duty to deliver any certificate for such shares and the Holder shall not be
deemed to have become a holder of record of such shares.
(b) RESERVATION AND STATUS OF SHARES. All shares of Common Stock
which shall be issued upon the exercise of this Warrant shall be validly issued,
fully paid and nonassessable.
(c) FRACTIONAL SHARES. Neither Ducheyne nor the Company shall be
required to issue fractions of shares on the exercise of Warrants. If any
fraction of a share would, except for the provisions of this Section, be
issuable on the exercise of any Warrant, the Company will (1) if the fraction of
a share otherwise issuable is equal to or less than one-half, round down and
issue to the Holder only the largest whole number of shares of Common Stock to
which the Holder is otherwise entitled, or (2) if the fraction of a share
otherwise issuable is greater than one-half, round-up and issue to the Holder
one additional share of Common Stock in addition to the largest whole number of
shares of Common Stock to which the Holder is otherwise entitled.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OR WARRANT. This Warrant
is exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to Ducheyne for other Warrants of different denominations
entitling the holder thereof to purchase in the aggregate the same number of
shares of Common Stock purchasable hereunder. Subject to the provisions of
Section (g), upon surrender of this Warrant to Ducheyne or at the office of its
stock transfer agent, if any, with the Assignment Form annexed hereto duly
executed and funds sufficient to pay any transfer tax, Ducheyne shall, without
charge, execute and deliver a new Warrant in the name of the assignee named in
such instrument of assignment and this Warrant shall be canceled. If this
Warrant should be assigned in part only, Ducheyne shall, upon surrender of this
Warrant in accordance with the procedures set forth in the preceding sentence,
execute and deliver, in addition to the new Warrant described in the preceding
sentence, a new Warrant evidencing the rights of the Holder to purchase the
balance of the shares purchasable thereunder. The term "Warrant" as used herein
includes any Warrants into which this Warrant may be divided or exchanged. Upon
receipt by Ducheyne of evidence satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of such indemnification as Ducheyne may in its discretion impose,
and upon surrender and cancellation of this Warrant, if mutilated, Ducheyne will
execute and deliver a new Warrant of like tenor and date.
-2-
<PAGE>
(f) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price and the number and
kind of securities purchasable upon the exercise of this Warrant shall be
subject to adjustment from time to time as hereinafter provided:
(1) In case the Company shall issue Common Stock as a dividend
upon Common Stock or in payment of a dividend thereon, shall subdivide the
number of outstanding shares of its Common Stock into a greater number of shares
or shall contract the number of outstanding shares of its Common Stock into a
lesser number of shares, the Exercise Price then in effect shall be adjusted,
effective at the close of business on the record date for the determination of
stockholders entitled to receive such dividend or be subject to such subdivision
or contraction, to the price (computed to the nearest cent) determined by
dividing (A) the product obtained by multiplying the Exercise Price in effect
immediately prior to the close of business on such record date by the number of
shares of Common Stock outstanding prior to such dividend, subdivision or
contraction, by (B) the sum of the number of shares of Common Stock outstanding
immediately after such dividend, subdivision, or contraction.
(2) If any capital reorganization or reclassification of the
capital stock of the Company (other than as set forth in subsection (1) of this
Section (f)), or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder of each Warrant shall thereafter have the right
to purchase and receive upon the basis and upon the terms and conditions
specified in the Warrant and in lieu of the shares of Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented by such Warrant, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of shares of such
Common Stock immediately theretofore purchasable and receivable upon the
exercise of the rights represented by such Warrant had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any such
case appropriate provision shall be made with respect to the rights and interest
of the Holder to the end that the provisions of the Warrant (including, without
limitation, provisions for adjustment of the Exercise Price and of the number of
shares issuable upon the exercise of Warrants) shall thereafter be applicable as
nearly as may be practicable in relation to any shares of stock, securities, or
assets thereafter deliverable upon exercise of Warrants. The Company shall not
effect any such consolidation, merger or sale unless prior to or simultaneously
with the consummation thereof, the successor corporation (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume, by written
-3-
<PAGE>
instrument, the obligation to deliver to the Holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, the Holder
may be entitled to purchase.
(3) Upon each adjustment of the Exercise Price pursuant to
subsection (1) of this Section (f), the number of shares of Common Stock
specified in each Warrant shall thereupon evidence the right to purchase that
number of shares of Common Stock (calculated to the nearest hundredth of a share
of Common Stock) obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
purchasable immediately prior to such adjustment upon exercise of such Warrant
and dividing the product so obtained by the Exercise Price in effect after such
adjustment.
(4) Irrespective of any adjustments of the number or kind of
securities issuable upon exercise of Warrants or the Exercise Price, Warrants
theretofore or thereafter issued may continue to express the same number of
shares of Common Stock and Exercise Price as are stated in similar Warrants
previously issued.
(5) The Company may, at its sole option, retain the independent
public accounting firm regularly retained by the Company, or another firm of
independent public accountants of recognized standing selected by the Company's
Board of Directors, to make any computation required under this Section (f) and
a certificate signed by such firm shall be conclusive evidence of any
computation made under this Section (f).
(6) Whenever there is an adjustment in the Exercise Price or in
the number or kind of securities issuable upon exercise of the Warrants, or
both, as provided in this Section (f), the Company shall (i) promptly file in
the custody of its Secretary or Assistant Secretary a certificate signed by the
Chairman of the Board or the President or a Vice President of the Company and by
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Company, setting forth the facts requiring such adjustment and
the number and kind of securities issuable upon exercise of each Warrant after
such adjustment; and (ii) cause a notice stating that such adjustment has been
effected and stating the Exercise Price then in effect and the number and kind
of securities issuable upon exercise of each Warrant to be sent to each
registered holder of a Warrant.
(7) The Exercise Price and the number of shares issuable upon
exercise of a Warrant shall not be adjusted except in the manner and only upon
the occurrence of the events heretofore specifically referred to in this Section
(f).
(g) TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933 AND OTHER
APPLICABLE SECURITIES LAWS. This Warrant or the Warrant Shares or any other
security issued or issuable upon exercise of this Warrant may not be sold or
otherwise disposed of unless Holder provides the Company with an opinion of
counsel satisfactory to the Company in form satisfactory to the Company that
this Warrant or the Warrant Shares or such other security may be legally
transferred without violating the Securities Act of 1933 and any other
applicable securities law and then only against receipt of an agreement of the
transferee to
-4-
<PAGE>
comply with the provisions of this Section (g) with respect to any resale or
other disposition of such securities.
(h) NOTICE GENERALLY. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given, made and received only when delivered (personally, by courier
service such as Federal Express or by other messenger) or when deposited in the
United States mails, certified or registered mail, return receipt requested,
postage prepaid, addressed to the Holder at the address provided to the Company
by such Holder or to the Company at 45 Great Valley Parkway, Malvern,
Pennsylvania 19355, or such other address as shall have been furnished in
writing to the party giving or making such notice, demand or delivery.
(i) GOVERNING LAW. This Warrant shall be construed in accordance
with and governed by the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, Ducheyne and the Company, intending to be
legally bound, has caused this Warrant to be executed by a duly authorized
officer as an instrument under seal on this 11th day of April, 1997.
\s\Paul Ducheyne
------------------------------
Paul Ducheyne
ORTHOVITA, INC.
By: \s\David S. Joseph
-----------------------------------
President
-5-
<PAGE>
EXHIBIT 10.12
THE WARRANT REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THE WARRANT REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED OR DISPOSED OF WITHOUT AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER THAT SUCH TRANSFER OR DISPOSITION DOES NOT VIOLATE THE SECURITIES ACT OF
1933, AS AMENDED, OR THE RULES AND REGULATIONS THEREUNDER.
No. A-1
No. of Shares Subject to Warrant: 59,981
Void after 5:00 p.m. Philadelphia Time on April 10, 2002.
WARRANT
TO PURCHASE COMMON STOCK
OF
ORTHOVITA, INC.
This is to certify that, for value received, Solomon Kal Rudman
("Holder") is entitled to purchase, subject to the provisions of this Warrant,
from Orthovita, Inc., a Pennsylvania corporation ("Company"), 59,981 shares of
Common Stock, $.01 par value, of the Company ("Common Stock"), at a price of
$4.25 per share at any time during the period beginning April 11, 1997 and
ending at 5:00 p.m. Philadelphia Time on April 10, 2002. The number of shares
of Common Stock to be received upon the exercise of this Warrant and the price
to be paid for a share of Common Stock may be adjusted from time to time as
hereinafter set forth. The shares of Common Stock deliverable upon such
exercise, and as adjusted from time to time, are hereinafter sometimes referred
to as "Warrant Shares," and the exercise price of a share of Common Stock in
effect at any time and as adjusted from time to time is hereinafter sometimes
referred to as the "Exercise Price."
(a) EXERCISE OF WARRANT. Subject to the provisions of Section (g)
hereof, this Warrant may be exercised in whole or in part at any time or from
beginning on April 11,1997 and ending at 5:00 p.m. Philadelphia Time on April
10, 2002, or if such day is a day on which banking institutions in the
Commonwealth of Pennsylvania are authorized by law to close, then on the next
succeeding day which shall not be such a day, by presentation and surrender
hereof to the Company at its principal office, or at the office of its stock
transfer agent, if any, with the Purchase Form annexed hereto duly executed and
accompanied by payment of the Exercise Price for the number of shares specified
in such form, in lawful money of the United States of America in cash or by
official bank or certified check made payable to the Company. If this Warrant
should be exercised in part only, the Company shall, upon surrender of this
Warrant
<PAGE>
for cancellation, execute and deliver a new Warrant evidencing the
rights of the Holder thereof to purchase the balance of the shares purchasable
thereunder. Upon receipt by the Company of this Warrant at its office, or by
the stock transfer agent of the Company, if any, at its office, in proper form
for exercise and together with payment of the Exercise Price in the manner
provided herein, the Holder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise, provided, however, that if
at the date of surrender of such Warrants and payment of such Exercise Price,
the transfer books for the Common Stock shall be closed, the certificates for
the shares in respect of which such Warrants are then exercised shall be
issuable as of the date on which such books shall next be opened, and until such
date the Company shall be under no duty to deliver any certificate for such
shares and the Holder shall not be deemed to have become a holder of record of
such shares.
(b) RESERVATION AND STATUS OF SHARES. The Company hereby agrees that
at all times there shall be reserved for issuance and/or delivery upon exercise
of this Warrant such number of shares of its Common Stock as shall be required
for issuance and delivery upon exercise of this Warrant. All shares of Common
Stock which shall be issued upon the exercise of this Warrant shall be validly
issued, fully paid and nonassessable.
(c) FRACTIONAL SHARES. The Company shall not be required to issue
fractions of shares on the exercise of Warrants. If any fraction of a share
would, except for the provisions of this Section, be issuable on the exercise of
any Warrant, the Company will (1) if the fraction of a share otherwise issuable
is equal to or less than one-half, round down and issue to the Holder only the
largest whole number of shares of Common Stock to which the Holder is otherwise
entitled, or (2) if the fraction of a share otherwise issuable is greater than
one-half, round-up and issue to the Holder one additional share of Common Stock
in addition to the largest whole number of shares of Common Stock to which the
Holder is otherwise entitled.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OR WARRANT. This Warrant
is exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Subject to the provisions of Section (g), upon
surrender of this Warrant to the Company or at the office of its stock transfer
agent, if any, with the Assignment Form annexed hereto duly executed and funds
sufficient to pay any transfer tax, the Company shall, without charge, execute
and deliver a new Warrant in the name of the assignee named in such instrument
of assignment and this Warrant shall be canceled. If this Warrant should be
assigned in part only, the Company shall, upon surrender of this Warrant in
accordance with the procedures set forth in the preceding sentence, execute and
deliver, in addition to the new Warrant described in the preceding sentence, a
new Warrant evidencing the rights of the Holder to purchase the balance of the
shares purchasable thereunder. The term "Warrant" as used herein includes any
Warrants into which this Warrant may be divided or exchanged. Upon receipt by
the Company of evidence satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
such indemnification as the Company may in its discretion impose, and upon
surrender and cancellation
-2-
<PAGE>
of this Warrant, if mutilated, the Company will execute and deliver a new
Warrant of like tenor and date.
(f) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price and the number and
kind of securities purchasable upon the exercise of this Warrant shall be
subject to adjustment from time to time as hereinafter provided:
(1) In case the Company shall issue Common Stock as a dividend
upon Common Stock or in payment of a dividend thereon, shall subdivide the
number of outstanding shares of its Common Stock into a greater number of shares
or shall contract the number of outstanding shares of its Common Stock into a
lesser number of shares, the Exercise Price then in effect shall be adjusted,
effective at the close of business on the record date for the determination of
stockholders entitled to receive such dividend or be subject to such subdivision
or contraction, to the price (computed to the nearest cent) determined by
dividing (A) the product obtained by multiplying the Exercise Price in effect
immediately prior to the close of business on such record date by the number of
shares of Common Stock outstanding prior to such dividend, subdivision or
contraction, by (B) the sum of the number of shares of Common Stock outstanding
immediately after such dividend, subdivision, or contraction.
(2) If any capital reorganization or reclassification of the
capital stock of the Company (other than as set forth in subsection (1) of this
Section (f)), or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder of each Warrant shall thereafter have the right
to purchase and receive upon the basis and upon the terms and conditions
specified in the Warrant and in lieu of the shares of Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented by such Warrant, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of shares of such
Common Stock immediately theretofore purchasable and receivable upon the
exercise of the rights represented by such Warrant had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any such
case appropriate provision shall be made with respect to the rights and interest
of the Holder to the end that the provisions of the Warrant (including, without
limitation, provisions for adjustment of the Exercise Price and of the number of
shares issuable upon the exercise of Warrants) shall thereafter be applicable as
nearly as may be practicable in relation to any shares of stock, securities, or
assets thereafter deliverable upon exercise of Warrants. The Company shall not
effect any such consolidation, merger or sale unless prior to or simultaneously
with the consummation thereof, the successor corporation (if other than the
Company) resulting from such
-3-
<PAGE>
consolidation or merger or the corporation purchasing such assets shall assume,
by written instrument, the obligation to deliver to the Holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions, the
Holder may be entitled to purchase.
(3) Upon each adjustment of the Exercise Price pursuant to
subsection (1) of this Section (f), the number of shares of Common Stock
specified in each Warrant shall thereupon evidence the right to purchase that
number of shares of Common Stock (calculated to the nearest hundredth of a share
of Common Stock) obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
purchasable immediately prior to such adjustment upon exercise of such Warrant
and dividing the product so obtained by the Exercise Price in effect after such
adjustment.
(4) Irrespective of any adjustments of the number or kind of
securities issuable upon exercise of Warrants or the Exercise Price, Warrants
theretofore or thereafter issued may continue to express the same number of
shares of Common Stock and Exercise Price as are stated in similar Warrants
previously issued.
(5) The Company may, at its sole option, retain the independent
public accounting firm regularly retained by the Company, or another firm of
independent public accountants of recognized standing selected by the Company's
Board of Directors, to make any computation required under this Section (f) and
a certificate signed by such firm shall be conclusive evidence of any
computation made under this Section (f).
(6) Whenever there is an adjustment in the Exercise Price or in
the number or kind of securities issuable upon exercise of the Warrants, or
both, as provided in this Section (f), the Company shall (i) promptly file in
the custody of its Secretary or Assistant Secretary a certificate signed by the
Chairman of the Board or the President or a Vice President of the Company and by
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Company, setting forth the facts requiring such adjustment and
the number and kind of securities issuable upon exercise of each Warrant after
such adjustment; and (ii) cause a notice stating that such adjustment has been
effected and stating the Exercise Price then in effect and the number and kind
of securities issuable upon exercise of each Warrant to be sent to each
registered holder of a Warrant.
(7) The Exercise Price and the number of shares issuable upon
exercise of a Warrant shall not be adjusted except in the manner and only upon
the occurrence of the events heretofore specifically referred to in this Section
(f).
(g) TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933 AND OTHER
APPLICABLE SECURITIES LAWS. This Warrant or the Warrant Shares or any other
security issued or issuable upon exercise of this Warrant may not be sold or
otherwise disposed of unless Holder provides the Company with an opinion of
counsel satisfactory to the Company in form satisfactory to the Company that
this Warrant or the Warrant Shares or such other security may be legally
transferred without violating the Securities Act of 1933 and any
-4-
<PAGE>
other applicable securities law and then only against receipt of an agreement of
the transferee to comply with the provisions of this Section (g) with respect to
any resale or other disposition of such securities.
(h) NOTICE GENERALLY. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given, made and received only when delivered (personally, by courier
service such as Federal Express or by other messenger) or when deposited in the
United States mails, certified or registered mail, return receipt requested,
postage prepaid, addressed to the Holder at the address provided to the Company
by such Holder or to the Company at 45 Great Valley Parkway, Malvern,
Pennsylvania 19355, or such other address as shall have been furnished in
writing to the party giving or making such notice, demand or delivery.
(i) GOVERNING LAW. This Warrant shall be construed in accordance
with and governed by the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the Company, intending to be legally bound,
has caused this Warrant to be executed by a duly authorized officer as an
instrument under seal on this 11th day of April, 1997.
ORTHOVITA, INC.
By: \s\David S. Joseph
-----------------------------------
President
-5-
<PAGE>
Exhibit 10.13
THE WARRANT REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THE WARRANT REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED OR DISPOSED OF WITHOUT AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER THAT SUCH TRANSFER OR DISPOSITION DOES NOT VIOLATE THE SECURITIES ACT OF
1933, AS AMENDED, OR THE RULES AND REGULATIONS THEREUNDER.
No. C-1
No. of Shares Subject to Warrant: 51,993
Void after 5:00 p.m. Philadelphia Time on April 10, 2002.
WARRANT
TO PURCHASE COMMON STOCK
OF
ORTHOVITA, INC.
This is to certify that, for value received, Schroder Ventures
International Life Sciences Fund LP1 ("Holder") is entitled to purchase, subject
to the provisions of this Warrant, from Orthovita, Inc., a Pennsylvania
corporation ("Company"), 51,993 shares of Common Stock, $.01 par value, of the
Company ("Common Stock"), at a price of $4.25 per share at any time during the
period beginning April 11, 1997 and ending at 5:00 p.m. Philadelphia Time on
April 10, 2002. The number of shares of Common Stock to be received upon the
exercise of this Warrant and the price to be paid for a share of Common Stock
may be adjusted from time to time as hereinafter set forth. The shares of Common
Stock deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Shares," and the exercise price of
a share of Common Stock in effect at any time and as adjusted from time to time
is hereinafter sometimes referred to as the "Exercise Price."
(a) EXERCISE OF WARRANT. Subject to the provisions of Section (g)
hereof, this Warrant may be exercised in whole or in part at any time or from
beginning on April 11, 1997 and ending at 5:00 p.m. Philadelphia Time on April
10, 2002, or if such day is a day on which banking institutions in the
Commonwealth of Pennsylvania are authorized by law to close, then on the next
succeeding day which shall not be such a day, by presentation and surrender
hereof to the Company at its principal office, or at the office of its stock
transfer agent, if any, with the Purchase Form annexed hereto duly executed and
accompanied by payment of the Exercise Price for the number of shares specified
in such form. The Purchase Price shall be paid
<PAGE>
by delivering either: (i) a certified check, bank draft or wire transfer of
immediately available funds to the order of the Company or (ii) this Warrant
with instructions that the Company retain as payment of the Purchase Price such
number of Warrant Shares as shall be determined under the next sentence (a
"Cashless Exercise"). In the event of a Cashless Exercise, the Holder shall
receive that number of Warrant Shares determined by multiplying the number of
Warrant Shares for which the Cashless Exercise is made by a fraction, the
numerator of which shall be the difference between the then Current Market Price
(as defined below) per Warrant Share and the Exercise Price, and the denominator
of which shall be the then Current Market Price per share of Common Stock. The
remaining Warrant Shares for which Cashless Exercise has been made shall be
deemed to have been paid to the Company as the Exercise Price. If this Warrant
should be exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
rights of the Holder thereof to purchase the balance of the shares purchasable
thereunder. Upon receipt by the Company of this Warrant at its office, or by the
stock transfer agent of the Company, if any, at its office, in proper form for
exercise and together with payment of the Exercise Price in the manner provided
herein, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, provided, however, that if at the date
of surrender of such Warrants and payment of such Exercise Price, the transfer
books for the Common Stock shall be closed, the certificates for the shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened, and until such date the Company
shall be under no duty to deliver any certificate for such shares and the Holder
shall not be deemed to have become a holder of record of such shares.
For purposes hereof:
"Appraised Value" means, in respect of any share of Common Stock on
any date herein specified, the value attributable to such share of Common Stock
if all of the assets of the Company and its subsidiaries were sold as of the
last day of a fiscal month to end within 60 days prior to such date specified,
and thereafter liquidated in accordance with the terms of the Company's Articles
of Incorporation, as determined in good faith by the Board of Directors of the
Company.
"Book Value" means, in respect of any share of Common Stock on any
date herein specified, the value attributable to such share of Common Stock if
all of the assets of the Company and its subsidiaries were sold for the
consolidated book value thereof as of the last day of any month immediately
preceding such date, and thereafter liquidated in accordance with the Company's
Articles of Incorporation, as determined in accordance with generally accepted
accounting principles in the United States.
"Business Day" means any day that is not a Saturday or Sunday or a day
on which banks are required or permitted to be closed in the State of New York.
-2-
<PAGE>
"Current Market Price" means, in respect of the Common Stock on any
date herein specified, the higher of (a) the Book Value per share of Common
Stock at such date and (b) the Appraised Value per share of Common Stock as at
such date, or if there shall then be a public market for the Stock, the average
of the daily market prices for 30 consecutive Business Days commencing 45 days
before such date. The daily market price for each such Business Day shall be (i)
the last sale price on such date on the principal stock exchange on which the
Common Stock is then listed or admitted to trading, (ii) if no sale takes place
on such day on any such exchange, the average of the last reported closing bid
and asked prices on such day as officially quoted on any such exchange, (iii) if
the Common Stock is not then listed or admitted to trading on any stock
exchange, the average of the last reported closing bid and asked prices on such
day in the over-the-counter market, as furnished by the National Association of
Securities Dealers Automatic Quotation System or the national Quotation Bureau,
Inc., (iv) if neither such corporation at the time is engaged in the business of
reporting such prices, as furnished by any similar firm then engaged in such
business, or (v) if there is no such firm, as furnished by any member of the
National Association of Securities Dealers, Inc. ("NASD") selected by the
Company.
(b) RESERVATION AND STATUS OF SHARES. The Company hereby agrees that
at all times there shall be reserved for issuance and/or delivery upon exercise
of this Warrant such number of shares of its Common Stock as shall be required
for issuance and delivery upon exercise of this Warrant. All shares of Common
Stock which shall be issued upon the exercise of this Warrant shall be validly
issued, fully paid and nonassessable.
(c) FRACTIONAL SHARES. The Company shall not be required to issue
fractions of shares on the exercise of Warrants. If any fraction of a share
would, except for the provisions of this Section, be issuable on the exercise of
any Warrant, the Company will (1) if the fraction of a share otherwise issuable
is equal to or less than one-half, round down and issue to the Holder only the
largest whole number of shares of Common Stock to which the Holder is otherwise
entitled, or (2) if the fraction of a share otherwise issuable is greater than
one-half, round-up and issue to the Holder one additional share of Common Stock
in addition to the largest whole number of shares of Common Stock to which the
Holder is otherwise entitled.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OR WARRANT. This Warrant
is exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Subject to the provisions of Section (g), upon
surrender of this Warrant to the Company or at the office of its stock transfer
agent, if any, with the Assignment Form annexed hereto duly executed and funds
sufficient to pay any transfer tax, the Company shall, without charge, execute
and deliver a new Warrant in the name of the assignee named in such instrument
of assignment and this Warrant shall be canceled. If this Warrant should be
assigned in part only, the Company shall, upon surrender of this Warrant in
accordance with the procedures set forth in the preceding sentence, execute and
-3-
<PAGE>
deliver, in addition to the new Warrant described in the preceding sentence, a
new Warrant evidencing the rights of the Holder to purchase the balance of the
shares purchasable thereunder. The term "Warrant" as used herein includes any
Warrants into which this Warrant may be divided or exchanged. Upon receipt by
the Company of evidence satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
such indemnification as the Company may in its discretion impose, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date.
(f) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price and the number and
kind of securities purchasable upon the exercise of this Warrant shall be
subject to adjustment from time to time as hereinafter provided:
(1) Whenever the "Conversion Factor" (as defined in the
Statement of Designation, Preferences and Rights of Class C Convertible
Preferred Stock of Orthovita, Inc. (the "Statement of Designation") is adjusted
pursuant to the terms of the Statement of Designation, the Exercise Price shall
also be adjusted to an amount equal to such adjusted Conversion Factor,
effective immediately upon the adjustment of the Conversion Factor.
(2) If any capital reorganization or reclassification of the
capital stock of the Company (other than as set forth in subsection (1) of this
Section (f)), or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder of each Warrant shall thereafter have the right
to purchase and receive upon the basis and upon the terms and conditions
specified in the Warrant and in lieu of the shares of Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented by such Warrant, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of shares of such
Common Stock immediately theretofore purchasable and receivable upon the
exercise of the rights represented by such Warrant had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any such
case appropriate provision shall be made with respect to the rights and interest
of the Holder to the end that the provisions of the Warrant (including, without
limitation, provisions for adjustment of the Exercise Price and of the number of
shares issuable upon the exercise of Warrants) shall thereafter be applicable as
nearly as may be practicable in relation to any shares of stock, securities, or
assets thereafter deliverable upon exercise of Warrants. The Company shall not
effect any such consolidation, merger or sale unless prior to or simultaneously
with the
-4-
<PAGE>
consummation thereof, the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume, by written instrument, the obligation to deliver to the
Holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, the Holder may be entitled to purchase.
(3) Upon each adjustment of the Exercise Price pursuant to
subsection (1) of this Section (f), the number of shares of Common Stock
specified in each Warrant shall thereupon evidence the right to purchase that
number of shares of Common Stock (calculated to the nearest hundredth of a share
of Common Stock) obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
purchasable immediately prior to such adjustment upon exercise of such Warrant
and dividing the product so obtained by the Exercise Price in effect after such
adjustment.
(4) Irrespective of any adjustments of the number or kind of
securities issuable upon exercise of Warrants or the Exercise Price, Warrants
theretofore or thereafter issued may continue to express the same number of
shares of Common Stock and Exercise Price as are stated in similar Warrants
previously issued.
(5) The Company may, at its sole option, retain the independent
public accounting firm regularly retained by the Company, or another firm of
independent public accountants of recognized standing selected by the Company's
Board of Directors, to make any computation required under this Section (f) and
a certificate signed by such firm shall be conclusive evidence of any
computation made under this Section (f).
(6) Whenever there is an adjustment in the Exercise Price or in
the number or kind of securities issuable upon exercise of the Warrants, or
both, as provided in this Section (f), the Company shall (i) promptly file in
the custody of its Secretary or Assistant Secretary a certificate signed by the
Chairman of the Board or the President or a Vice President of the Company and by
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Company, setting forth the facts requiring such adjustment and
the number and kind of securities issuable upon exercise of each Warrant after
such adjustment; and (ii) cause a notice stating that such adjustment has been
effected and stating the Exercise Price then in effect and the number and kind
of securities issuable upon exercise of each Warrant to be sent to each
registered holder of a Warrant.
(7) The Exercise Price and the number of shares issuable upon
exercise of a Warrant shall not be adjusted except in the manner and only upon
the occurrence of the events heretofore specifically referred to in this Section
(f).
(g) TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933 AND OTHER
APPLICABLE SECURITIES LAWS. This Warrant or the Warrant Shares or any other
security issued or issuable upon exercise of this Warrant may not be sold or
otherwise disposed of unless Holder provides the Company with an opinion of
counsel satisfactory to the
-5-
<PAGE>
Company in form satisfactory to the Company that this Warrant or the Warrant
Shares or such other security may be legally transferred without violating the
Securities Act of 1933 and any other applicable securities law and then only
against receipt of an agreement of the transferee to comply with the provisions
of this Section (g) with respect to any resale or other disposition of such
securities.
(h) NOTICE GENERALLY. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given, made and received only when delivered (personally, by courier
service such as Federal Express or by other messenger) or when deposited in the
United States mails, certified or registered mail, return receipt requested,
postage prepaid, addressed to the Holder at the address provided to the Company
by such Holder or to the Company at 45 Great Valley Parkway, Malvern,
Pennsylvania 19355, or such other address as shall have been furnished in
writing to the party giving or making such notice, demand or delivery.
(i) GOVERNING LAW. This Warrant shall be construed in accordance with
and governed by the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the Company, intending to be legally bound,
has caused this Warrant to be executed by a duly authorized officer as an
instrument under seal on this 11th day of April, 1997.
ORTHOVITA, INC.
By: \s\David S. Joseph
-----------------------------------
President
-6-
<PAGE>
Exhibit 10.14
WARRANT
THIS WARRANT AND THE SHARES OF PREFERRED STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "1933 ACT"), OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THE SECURITIES
HAVE BEEN TAKEN BY THE REGISTERED OWNER FOR INVESTMENT, AND WITHOUT A VIEW TO
RESALE OR DISTRIBUTION THEREOF, AND MAY NOT BE TRANSFERRED OR DISPOSED OF
WITHOUT AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH TRANSFER OR
DISPOSITION DOES NOT VIOLATE THE 1933 ACT, AND THE RULES AND REGULATIONS
THEREUNDER.
NO. B-8 Warrant to Purchase 20,017
Shares of Convertible Preferred Stock
WARRANT TO PURCHASE CONVERTIBLE PREFERRED STOCK
OF
ORTHOVITA, INC.
This Warrant certifies that, for value received, Howard Salasin or
registered assigns (the "Holder"), is entitled, at or before 5:00 p.m., Eastern
Daylight Time, on May 9, 2000 to purchase, subject to the provisions of this
Warrant, from Orthovita, Inc., a Pennsylvania corporation (the "Company"), up to
Twenty Thousand Seventeen (20,017) shares of the Company's Class B Convertible
Preferred Stock, par value $.01 per share (the "Preferred Stock"), subject to
adjustment as provided in Section (h), at an exercise price ("Exercise Price")
of $1.75 per share of Preferred Stock.
This Warrant has been issued by the Company pursuant to the Purchase
Agreement executed on even date herewith (the "Purchase Agreement") among the
Company, the Holder, and certain other purchasers of Warrants.
(a) EXERCISE OF WARRANT. This Warrant may be exercised, in whole or
in part, by presentation and surrender of this Warrant to the Company at its
principal office, with the Purchase Form annexed hereto duly executed and
accompanied by payment of the Exercise Price for the number of shares specified
in such form. Payment of the Exercise Price may be made by certified check, wire
transfer of immediately available funds or bank treasurer's or cashier's check,
in each case payable in United States currency, to the order of the Company.
Upon receipt by the Company of this Warrant at its principal office, in proper
form for exercise, including proper payment of the Exercise Price for the number
of shares of Preferred Stock as to which this Warrant is then being exercised,
the Holder shall be deemed to be the holder of record of the shares of Preferred
Stock issuable upon such exercise (the
<PAGE>
"Warrant Shares") for all purposes. The Company shall issue certificates
representing the Warrant Shares as to which this Warrant has been properly
exercised as promptly as practicable after such exercise. If this Warrant shall
have been exercised in part, the Company, at the time of delivery of the
certificate or certificates representing the Warrant Shares issuable upon such
exercise, shall deliver to the Holder a new Warrant evidencing the rights to
purchase the number of shares of Preferred Stock as to which this Warrant has
not been exercised, which new Warrant in all other respects shall be identical
with this Warrant.
(b) RESERVATION OF SHARES. The Company shall at all times reserve and
keep available, for issuance and/or delivery upon exercise of this Warrant, such
number of shares of Preferred Stock as shall be required for issuance and
delivery upon exercise in full of this Warrant.
(c) STATUS OF SHARES. All shares of Preferred Stock which shall be
issued upon the exercise of this Warrant shall be validly issued, fully paid and
nonassessable.
(d) FRACTIONAL SHARES. The Company shall not be required to issue
fractions of shares on the exercise of this Warrant. If any fraction of a share
would, except for the provisions of this Section (d), be issuable on the
exercise of this Warrant, the Company shall (1) if the fraction of a share
otherwise issuable is equal to or less than one-half, round down and issue to
the Holder only the largest whole number of shares of Preferred Stock to which
the Holder is otherwise entitled, or (2) if the fraction of a share otherwise
issuable is greater than one-half, round up and issue to the Holder one
additional share of Preferred Stock in addition to the largest whole number of
shares of Preferred Stock to which the Holder is otherwise entitled.
(e) REPLACEMENT OF WARRANT. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
(and in the case of loss, theft or destruction, proof of ownership), and upon
surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a new Warrant of like tenor and date. The Company may
condition the replacement of a Warrant reported by the Holder as lost, stolen,
destroyed or mutilated upon receipt by the Company from the Holder of an
indemnity or security reasonably satisfactory to the Company.
(f) RIGHTS OF THE HOLDER. The Holder shall not, by virtue of this
Warrant, be entitled to any rights of a shareholder of the Company, either at
law or equity, and the rights of the Holder are limited to those expressed in
this Warrant and the Purchase Agreement executed as of even date herewith among
the Company, the Holder and the other purchasers of the Warrant (the "Purchase
Agreement").
(g) TRANSFER; DIVISION; COMBINATION. Subject to the provisions of the
Shareholders' Agreement, the transfer of this Warrant is registrable on the
books of the Company to be maintained for such purpose, upon surrender of this
Warrant at the principal office of the Company, together with the Assignment
Form annexed hereto duly executed by
<PAGE>
the Holder or his or her agent or attorney and funds sufficient to pay any stock
transfer tax payable upon such transfer. Upon such surrender and payment, the
Company shall execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees and in the denominations specified in such instrument of
assignment, and this Warrant promptly shall be cancelled. This Warrant may be
divided upon presentation hereof at the principal office of the Company,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued, signed by the then Holder or such Holder's agent
or attorney. Subject to the provisions of this Section (g) and the legend on the
cover page of the Warrant as to any transfer that may be involved in such
division, the Company shall execute and deliver a new Warrant or Warrants in
exchange for this Warrant in accordance with such notice. The Company shall
maintain, at its principal office, books for the registration and the
registration of transfer of this Warrant.
(h) ADJUSTMENTS.
(1) If at any time or from time to time the Company shall (i)
take a record of the holders of the Preferred Stock for the purpose of entitling
them to receive a dividend payable in, or other distribution of, shares of
Preferred Stock, (ii) subdivide the outstanding shares of Preferred Stock into a
larger number of shares of Preferred Stock or (iii) combine the outstanding
shares of Preferred Stock into a smaller number of shares of Preferred Stock,
then the number of shares of Preferred Stock thereafter issuable upon exercise
of this Warrant shall be adjusted so as to consist of the same number of shares
that a record holder of the number of shares of Preferred Stock issuable upon
exercise of this Warrant immediately prior to the happening of such event would
own or be entitled to receive after the happening of such event and the Exercise
Price shall be adjusted to equal the Exercise Price in effect immediately prior
to the adjustment, multiplied by the number of shares of Preferred Stock for
which this Warrant is exercisable immediately prior to the adjustment divided by
the number of shares for which this Warrant is exercisable immediately after
such adjustment. Any adjustments required by this Section (l) shall be made
whenever and as often as any specified event requiring an adjustment shall
occur. If the Company shall take a record of the holders of the Preferred Stock
for the purpose of effecting such distribution, subdivision or combination and
shall, thereafter and before such distribution, subdivision, or combination,
abandon its plan to pay or deliver such distribution or effect such subdivision
or combination, then thereafter no adjustment shall be required by reason of the
taking of such record and any such adjustment previously made in respect thereof
shall be rescinded and annulled.
(2) If the Company shall reorganize its capital, reclassify its
capital stock, or merge or consolidate with another corporation, and, pursuant
to the terms of such reorganization, reclassification, merger or consolidation,
the Company is the surviving corporation, then the Holder shall have the right
thereafter to receive, upon exercise of this Warrant, such securities or other
property receivable, upon or as a result of such reorganization,
reclassification, merger or consolidation, by a holder of the number of shares
of Preferred Stock issuable upon exercise of this Warrant immediately prior to
such event. If the Company shall merge or consolidate into another corporation,
or sell, transfer or otherwise
<PAGE>
dispose of all or substantially all its property, assets or business to another
corporation and, pursuant to the terms of such merger, consolidation or
disposition of assets, securities of the successor or acquiring corporation or
other property are to be received by or distributed to the holders of shares of
Preferred Stock, then prior to the time such reorganization, reclassification,
merger, consolidation or disposition of assets becomes effective, the Company
shall have the right to require the Holder to, at the Holder's option, either
exercise or surrender this Warrant. However, if (i) the Company does require the
Holder to exercise or surrender this Warrant, (ii) the Holder elects to exercise
rather than surrender this Warrant and (iii) the fair market value per share of
Preferred Stock is less than the Exercise Price at the effective time of such
merger, consolidation or disposition of assets, the Holder shall be entitled to
exercise this Warrant at the Fair Market Value (as hereinafter defined). If the
Company does not require the Holder to exercise this Warrant as provided in this
subparagraph, then the Holder shall have the right thereafter to receive, upon
exercise of this Warrant, such securities or other property receivable, upon or
as a result of such reorganization, reclassification, merger, consolidation or
disposition of assets, by a holder of the number of shares of Preferred Stock
issuable upon exercise of this Warrant immediately prior to such event.
For purposes of this subparagraph (2), the Fair Market Value per share
of Preferred Stock shall be the value agreed upon by the Company and RAF
Ventures, Inc. ("RAF"). If the Company and RAF are unable to agree on the Fair
Market Value then (i) the Company shall select a representative of a nationally
recognized accounting firm experienced with the valuation of private companies,
(ii) RAF shall select a representative of a second nationally recognized
accounting firm experienced with the valuation of a private companies, (iii)
each party shall provide the other party with notice of the representative so
selected by it within five days of such selection, (iv) the two representatives
so selected shall together choose a representative of a third nationally
recognized accounting firm experienced in the valuation of private companies and
(v) the three representatives together shall, within a reasonable period of
time, decide the Fair Market Value. If one party fails to select a
representative within 15 days after the above notice was sent, the other party's
representative shall determine the Fair Market Value. If the two representatives
fail to select a third representative within 15 days after notice of the
selection of the second representative, either party may cause the
representative of the third firm to be selected by the American Arbitration
Association in Philadelphia, Pennsylvania. If any representative becomes
unavailable, his or her successor shall be chosen by the accounting firm of
which he or she is a representative. The Fair Market Value shall be determined
by the majority of the representatives of the three nationally recognized
accounting firms. If the representatives are unable to reach a majority, then
each representative shall specify a Fair Market Value and the Fair Market Value
binding upon the parties shall equal one-half of the sum of the two Fair Market
Values that are closest in amount to each other; and provided further that, if
the highest and lowest Fair Market Values are equidistant in amount from the
middle Fair Market Value, the middle Fair Market Value shall be binding on the
parties. The Fair Market Value rendered pursuant to this subparagraph (2) shall
be final and binding on the parties hereto. The Company and all holders (the
"Contesting Holders") who have elected to exercise this Warrant (other than
holders that have agreed to accept, in lieu of all rights under this subsection
(h)(2), an amount per share equal to
<PAGE>
the value calculated by the Company) shall each bear the fees and expenses of
the representative selected by it, and the fees and expenses of the
representative of the third nationally recognized accounting firm shall be
shared equally by the Company and the Contesting Holders. Each Contesting Holder
shall share such fees and expenses in the proportion that the number of Warrant
Shares issuable upon exercise of such holder's Warrants bears to the number of
Warrant Shares issuable upon exercise of all Warrants held by the Contesting
Holders.
(3) In order to ensure that the antidilution provisions of the
Section 6(c) of the Certificate of Designations, Preferences and Rights of Class
B Convertible Preferred Stock of the Company (the "Designations") are applied to
the Warrant Shares issuable hereunder, the Conversion Factor (as defined in
Section 6(c) of the Designations) applicable to the Warrant Shares issuable
hereunder and the number of shares of Common Stock issuable upon conversion of
each Warrant Share issuable hereunder shall be determined and adjusted from time
to time in accordance with such Section 6(c) as if all such Warrant Shares were
issued and outstanding from the date of this Warrant through the date of such
conversion; provided, however, that if the provisions of Section 9.1 of the
Purchase Agreement ("Section 9.1") become applicable, the adjustments authorized
by this subsection (h)(3) shall be recalculated on the same basis as adjustments
to outstanding convertible Preferred Stock then held by the Purchasers (as
defined in the Purchase Agreement) would be recalculated in accordance with
Section 9.1.
(4) On or after January 1, 1996, in case the Company shall issue
shares of its Common Stock (excluding shares issued (i) in any of the
transactions described in subsections (h)(1), (h)(2), (h)(5), or (h)(7), (ii)
upon exercise of options granted to the Company's employees under a plan or
plans adopted by the Company's Board of Directors, (iii) upon exercise of
options outstanding at May 9, 1995, (iv) upon exercise of this Warrant, (v)
pursuant to the exercise or conversion of securities issued in transactions
described in subsection (h)(5), (vi) upon conversion of the Preferred Stock of
the Company outstanding on May 9, 1995 and (vii) pursuant to Section 7.1 and/or
7.2 of the Purchase Agreement or pursuant to the "Prior Agreement" as defined
therein) for a consideration per share (the "Offering Price") less than the
Exercise Price, the Exercise Price shall be adjusted immediately thereafter so
that it shall equal the Offering Price.
(5) In case the Company shall issue any securities convertible
into or exchangeable for its Common Stock (excluding shares issued pursuant to
Section 7.1 and/or 7.2 of the Purchase Agreement or pursuant to the Prior
Agreement) for a consideration per share of Common Stock (the "Conversion
Price") initially deliverable upon conversion or exchange of such securities
(determined as provided in Section (h)(6) below) less than the Exercise Price
per share in effect immediately prior to the issuance of such securities, the
Exercise Price shall be adjusted immediately thereafter so that it shall equal
the Conversion Price; provided, that if any such securities are not so converted
--------
or exchanged prior to their expiration or termination, the Exercise Price shall
be readjusted to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such securities been made upon the basis
of the number of shares of Common Stock actually delivered upon
<PAGE>
conversion or exchange of such securities. Such adjustment shall be made
successively whenever such an issuance is made.
(6) For purposes of any computation respecting consideration
received pursuant to subsection (h)(4) and (h)(5) above, the following shall
apply:
(A) in the case of the issuance of shares of Common Stock
for cash, the consideration shall be the amount of such cash, provided
that in no case shall any deduction be made for any commissions,
discounts or other expenses incurred by the Company for any
underwriting of the issue or otherwise in connection therewith;
(B) in the case of the issuance of shares of Common Stock
for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair market
value thereof as determined in good faith by the Board of Directors of
the Company (irrespective of the accounting treatment thereof),
provided that in no case shall any deduction be made for any
commissions, discounts or other expenses incurred by the Company for
any underwriting of the issue or otherwise in connection therewith;
and
(C) in the case of the issuance of securities convertible
into or exchangeable for shares of Common Stock, the Conversion Price
shall be deemed to be the consideration received by the Company for
the issuance of such securities plus the additional consideration, if
any, to be received by the Company upon the conversion or exchange
thereof (the consideration in each case to be determined in the same
manner as provided in clauses (A) and (B) of this Section (h)(6)).
(7) If, pursuant to Section 7.1 and/or 7.2 of the Purchase
Agreement, the Purchasers shall be entitled to receive an additional number of
shares of Preferred Stock, the number of Warrant Shares issuable pursuant to
this Warrant shall be increased by the number of shares issuable, pursuant to
such Sections 7.1 and/or 7.2, to a holder of the number of shares of Preferred
Stock issuable upon exercise of this Warrant immediately prior to the occurrence
of the events resulting in the issuance of additional Preferred Stock pursuant
to such Sections 7.1 and 7.2, and the Exercise Price shall be adjusted to equal
the Exercise Price in effect immediately prior to such adjustment multiplied by
the number of shares of Preferred Stock for which this Warrant is exercisable
immediately prior to such adjustment divided by the number of shares for which
this Warrant is exercisable immediately after such adjustment.
(8) {INTENTIONALLY OMITTED}
(9) Upon adjustment to the Exercise Price pursuant to
subsections (h)(4) or (h)(5), the number of shares into which this Warrant may
be converted shall be
<PAGE>
adjusted to the product obtained by multiplying the number of shares subject to
the exercise of this Warrant immediately prior to the adjustment in the Exercise
Price by a fraction, the numerator of which shall be the Exercise Price
immediately prior to such adjustment and the denominator of which shall be the
Exercise Price immediately thereafter.
(10) Each adjustment in the Exercise Price pursuant to this
Section (h) shall be calculated to the nearest tenth of a cent. Each adjustment
to the number of shares issuable pursuant to this Warrant shall be calculated to
the nearest hundredth of a share.
(11) Whenever there is an adjustment in the number or kind of
securities to which the Holder is entitled upon exercise of this Warrant, as
provided in this Section (h), the Company shall (i) promptly file in the custody
of its Secretary a certificate signed by the Chairman of the Board or the
President or a Vice President of the Company, showing in detail the facts
requiring such adjustment and the number and kind of securities issuable upon
exercise of this Warrant after such adjustment, and (ii) cause a copy of such
calculation of the adjustment and a notice stating that such adjustment has been
effected and stating the number and kind of securities issuable upon exercise of
this Warrant to be sent to the Holder.
(i) NOTICE OF CORPORATE ACTION.
If at any time:
(1) the Company shall take a record of the holders of its
Preferred Stock for the purpose of entitling them to receive a dividend (other
than a cash dividend payable out of earnings or earned surplus legally available
for the payment of dividends under the laws of the jurisdiction of incorporation
of the Company) or other distribution, or any right to subscribe for or purchase
any evidences of if its indebtedness, any shares or stock of any class or any
other securities or property, or to receive any other similar right, or
(2) there shall be any capital reorganization of the Company,
any reclassification or recapitalization of the capital stock of the Company or
any consolidation or merger of the Company with or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation, or
(3) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the company;
then, the Company shall give to the Holder at least 30 days'
prior written notice of the date on which a record date shall be selected for
such dividend, distribution or right or for determining rights to vote in
respect of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up. Such notice
in accordance with the foregoing clause shall also specify (i) the date on which
it is proposed that any such record is to be taken for the purpose
<PAGE>
of such dividend, distribution or right, the date on which the holders of
Preferred Stock shall be entitled to any such dividend, distribution or right,
and the amount and character thereof, or (ii) the date on which it is proposed
that any such reorganization, reclassification, merger, consolidation, sale,
transfer, disposition, dissolution, liquidation or winding up is to take place
and the time, if any such time has been fixed, as of which the holders of
Preferred Stock shall be entitled to exchange their shares of Preferred Stock
for securities or other property deliverable upon such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up. Each such written notice shall be
sufficiently given if addressed to the Holder at the last address of Holder
appearing on the books of the Company and delivered in accordance with Section
(j).
Failure to mail any notice, or the existence of any defect in any
notice, pursuant to this subparagraph (3), shall not affect the legality or
validity of any corporate action taken.
(j) NOTICE GENERALLY. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given, made and received only when delivered (personally, by courier
service such as Federal Express or by other messenger) or when deposited in the
United States mails, certified or registered mail, return receipt requested,
postage prepaid, addressed to the Holder at the address provided to the Company
by such Holder or to the Company at 45 Great Valley Parkway, Malvern,
Pennsylvania 19355, or such other address as shall have been furnished in
writing to the party giving or making such notice, demand or delivery.
(k) GOVERNING LAW. This Warrant shall be construed in accordance with
and governed by the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the Company, intending to be legally bound, has
caused this Warrant to be executed by a duly authorized officer as an instrument
under seal on this 11th day of April, 1997.
ORTHOVITA, INC.
By: \s\David S. Joseph
------------------
President
<PAGE>
PURCHASE FORM
-------------
Dated_________________, 19__
The undersigned hereby irrevocably elects to exercise the within Warrant to the
extent of purchasing ________ shares of Preferred Stock and hereby makes payment
of $__________________ in payment of the Warrant Exercise Price thereof.
_______________________
INSTRUCTIONS FOR REGISTRATION OF PREFERRED STOCK
- ------------------------------------------------
Name____________________________________________________
(Please typewrite or print in block letters)
Address_________________________________________________
________________________________________________________
________________________________________________________
Social Security Number
or other
Tax Identification Number_______________________________
Signature_______________________________________________
<PAGE>
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby
sells, assigns and transfers unto the Assignee named below all of the rights of
the undersigned under this Warrant, with respect to the number of shares of
Preferred Stock set forth below:
Name and Address of Assignee No. of Shares of Preferred Stock
- ---------------------------- --------------------------------
and does irrevocably constitute and appoint _______________ Attorney to register
such transfer on the books of Orthovita, Inc. maintained for such purpose, with
full power of substitution in the premises.
Dated: _____________, 199_
Signature: _______________________
Witness: _______________________
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE>
Exhibit 10.17
LINE OF CREDIT, TERM LOAN AND SECURITY AGREEMENT
BETWEEN
PROGRESS BANK
AND
ORTHOVITA, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ARTICLE 1
DEFINITIONS
1.1 Definitions 1
1.2 Undefined Terms; Accounting Terms 6
ARTICLE 2
AMOUNTS, TERMS AND CONDITIONS OF LINE OF CREDIT LOAN 7
2.1 Line of Credit Facility 7
2.2 Line of Credit Note 7
2.3 Term Loan 8
2.4 Term Note 8
2.5 Payments 9
2.6 Computations 10
2.7 Confirmation of Borrower's Liabilities 10
2.8 Late Charge 10
ARTICLE 3
SECURITY INTEREST
3.1 Grant of Security Interest and Assignment of Accounts 10
3.2 Future Advances 11
3.3 Additional Security 11
3.4 Perfection of Security Interest 11
3.5 Power of Attorney 12
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1 Organization, Qualification 13
4.2 Affiliations; Fictitious Names 13
4.3 Authority, Authorization 13
4.4 Enforceability 13
4.5 Conflicts 14
4.6 Litigation 14
4.7 Compliance with Laws 14
4.8 Taxes 15
4.9 Financial Condition 15
4.10 Accounts 16
4.11 Equipment and Inventory 16
4.12 Collateral 16
4.13 Contingent Liabilities 17
4.14 Trademarks, Tradenames, Patents and Copyrights 17
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
4.15 ERISA 17
4.16 Operations of Borrower 18
4.17 Labor 18
4.18 COBRA Continuation Coverage 18
4.19 Environmental Representations, Obligations and Covenants 18
ARTICLE 5
CONDITIONS OF LENDING
5.1 Loan Documents 20
5.2 Representations, Warranties 20
5.3 Defaults 21
5.4 Certificates, Supporting Documents 21
5.5 Collateral Security Documents 21
5.6 Insurance 21
5.7 Delivery of Warrant Certificate 21
ARTICLE 6
AFFIRMATIVE COVENANTS
6.1 Financial Statements 22
6.2 Maximum Debt to Tangible Net Worth 23
6.3 Minimum Working Capital 23
6.4 Minimum Cash Level 23
6.5 Minimum Tangible Net Worth 23
6.6 Liabilities 23
6.7 ERISA 23
6.8 Notice of Default, Labor Troubles, Litigation 24
6.9 Corporate Existence, Properties 24
6.10 Insurance 24
6.11 Policies; Proceeds 24
6.12 Books, Records, Audits 25
6.13 Returned Merchandise 25
6.14 Taxes, Etc. 25
6.15 Compliance with Laws 25
6.16 Banking Relationship 25
6.17 Financial Condition 25
6.18 Use of Proceeds 25
ARTICLE 7
NEGATIVE COVENANTS
7.1 Debt 26
7.2 Liens 26
7.3 Endorsements, Etc. 27
7.4 Change in Business; Mergers, Consolidations 27
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
7.5 Management 27
7.6 Subsidiaries 27
7.7 Contingent Liabilities 27
7.8 Sales and Lease-Backs 28
7.9 Limitation of Leases 28
7.10 Voluntary Prepayments, Modification of Debt Instruments 28
7.11 Removal and Protection of Property 28
7.12 Transactions with Affiliates 28
7.13 Disposition of Assets 29
7.14 Disposition of Accounts 29
ARTICLE 8
EVENTS OF DEFAULT, REMEDIES
8.1 Events of Default 29
8.2 Acceleration and Termination of Commitments 30
8.3 Right of Set-Off 31
8.4 Marshalling 31
8.5 Cumulative Remedies 31
ARTICLE 9
MISCELLANEOUS
9.1 Waivers 32
9.2 Notices 32
9.3 Legal Costs; Filing Costs 33
9.4 Right of Entry 33
9.5 Warrant to Confess Judgment in Replevin 33
9.6 No Waiver 34
9.7 Application of Proceeds 34
9.8 Representation, Warranties 34
9.9 Successors 35
9.10 Governing Law 35
9.11 Headings 35
9.12 Severability 35
9.13 Entire Agreement 35
9.14 Location of Business; Inventory; Records 35
9.15 Conflicting Provisions 35
9.16 Submission to Jurisdiction 35
</TABLE>
iii
<PAGE>
LINE OF CREDIT, TERM LOAN AND SECURITY AGREEMENT
BETWEEN
PROGRESS BANK
AND
ORTHOVITA, INC.
LINE OF CREDIT, TERM LOAN AND SECURITY AGREEMENT, (the "Agreement") dated
September 19, 1997 between PROGRESS BANK (the "Bank"), a Federal savings bank
with offices at 4 Sentry Parkway, Suite 200, Blue Bell, PA 19422-0764, and
ORTHOVITA, INC., a Pennsylvania corporation ("Borrower"), with offices at 45
Great Valley Parkway, Malvern, PA 19355.
Borrower and Bank, intending to be legally bound, hereby agree as follows.
ARTICLE 1
DEFINITIONS
-----------
1.1 Definitions. For purposes of this Agreement, the following terms shall have
-----------
the following meanings:
Account Debtor. The party who is obligated on or under any Account.
--------------
Advances. "Advances" shall have the meaning given to such term in Section
--------
2.1(a) hereof.
Affiliate. With respect to any Person, another Person directly or
---------
indirectly Controlling, Controlled by or under common Control with any such
Person.
Agreement. This Line of Credit, Term Loan and Security Agreement and all
---------
amendments, modifications and supplements hereto and restatements hereof.
Bank. Progress Bank, a Pennsylvania banking institution, or any successor
----
bank.
Bankruptcy Code. The Bankruptcy Reform Act of 1994 and all similar or
---------------
successor statutes, and all rules and regulations of Federal agencies and
authorities promulgated under those statutes, all as they have been and may be
amended from time to time.
Borrowing Base. At any time, an aggregate amount equal to: (i) 80% of
--------------
Qualified Accounts plus (ii) 40% of Qualified Inventory plus (iii) 100% of
Borrower's cash and cash
1
<PAGE>
equivalents maintained in a cash collateral account at Bank, but excluding the
cash maintained in the Special Cash Collateral Account.
Borrowing Date. Each date upon which the Bank makes an Advance to
--------------
Borrower.
Business Day. A day other than a Saturday, Sunday or Holiday on which the
------------
Bank is open for the transaction of banking business.
Code. The Internal Revenue Code of 1986, as amended.
----
Collateral. "Collateral" shall have the meaning given to such term in
----------
Section 3.1 hereof.
Control. The possession, directly or indirectly, of the power to direct or
-------
cause the direction of the management and policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
Controlled Group. "Controlled Group" shall have the meaning set forth for
----------------
"Controlled group of corporations" at Section 1563 of the Code.
Current Assets. The aggregate amount carried as current assets on the
--------------
books of Borrower; provided, however, that in no event shall Current Assets
include any deferred assets, other than prepaid items such as insurance, taxes,
interest, commissions, rents, royalties, and similar items or any other items
that are not treated as current assets under generally accepted accounting
principles consistently applied.
Current Liabilities. The aggregate amount carried as liabilities on the
-------------------
books of Borrower for accounts payable, accrued salaries, accrued expenses,
current taxes, current rent or lease payments, installments of long-term Debt
which are due on demand or within one (1) year after the date as of which
Current Liabilities are to be determined, any other Debt due on demand or within
one (1) year after the date as of which Current Liabilities are to be
determined, and any other amounts that are treated as current liabilities under
generally accepted accounting principles consistently applied.
Debt. (a) All items of indebtedness or liability which, in accordance
----
with GAAP, would be included in determining total liabilities as shown on a
balance sheet as of the date that Debt is to be determined, (b) all indebtedness
secured by any mortgage, pledge, lien or security interest existing on property
owned by the Person whose Debt is being determined, whether or not the
indebtedness secured thereby is an obligation of such entity, and (c)
guaranties, endorsements (other than for purposes of collection in the ordinary
course of business), other contingent obligations in respect of, or to purchase
or to otherwise acquire, indebtedness of others, and other contingent
obligations of a type described in Section 7.7 hereof.
Default. Any event specified in Section 8.1 of this Agreement, whether or
-------
not any requirement for notice or passage of time or any other condition has
been satisfied.
2
<PAGE>
ERISA. The Employee Retirement Income Security Act of 1974, as amended,
-----
together with the rules and regulations promulgated thereunder.
Event of Default. Any event specified in Section 8.1 of this Agreement,
----------------
provided that any requirement for notice or passage of time or any other
condition has been satisfied.
GAAP. Generally accepted accounting principles.
----
Liabilities. The obligations of Borrower to the Bank:
-----------
a) To pay the principal of and all interest on the Notes in accordance with
the terms thereof, to pay all other amounts due by Borrower in accordance with
the terms hereof, and to satisfy all of Borrower's liabilities to the Bank,
whether hereunder or otherwise, whether now existing or hereafter incurred,
matured or unmatured, direct or contingent, primary or secondary, joint or
several, including any extensions, modifications, renewals thereof and
substitutions therefor and liabilities of Borrower which the Bank may have
obtained by assignment, subrogation, or otherwise, and all liabilities of
Borrower as guarantor, surety or endorser of the obligations of any third party
or parties to the Bank;
b) To repay the Bank all amounts advanced by the Bank hereunder or otherwise
on behalf of Borrower, including, but without limitation, advances for principal
or interest, payments to prior secured parties, mortgagees, or lienors, or for
taxes, levies, insurance, securities, registration fees, or agency fees for any
of the Collateral;
c) To reimburse the Bank, on demand, for all of the Bank's expenses and costs,
including the reasonable fees and expenses of its counsel, in connection with
the preparation of and closing under this Agreement and the administration,
amendment, modification, or enforcement of this Agreement and the documents
required hereunder, including, without limitation, any proceeding brought or
threatened to enforce payment of any of the obligations referred to in the
foregoing paragraphs (a) and (b).
Line of Credit. The meaning provided at Section 2.1 hereof.
--------------
Line of Credit Note. The line of credit note executed by Borrower in the
-------------------
principal amount specified in Section 2.2 hereof, and all amendments,
modifications and supplements thereto and restatements thereof.
Loans. The Line of Credit facility and the Term Loan.
-----
Loan Account. The account of Borrower on the books of the Bank in which is
------------
recorded, inter alia, the Advances and the payments of principal and interest
made by Borrower to the Bank.
Loan Documents. Individually and collectively, this Agreement, the Line of
--------------
Credit Note, the Term Note, and all other existing and future agreements,
pledges, instruments, documents, assignments, leases, guarantees and contracts
(including amendments,
3
<PAGE>
modifications and supplements to and restatements of any of the foregoing)
delivered by or on behalf of the Borrower in connection with this Agreement.
Loan Termination Date. "Loan Termination Date" shall have the meaning
---------------------
given to such term in Section 2.1(d) hereof.
Maximum Debt to Tangible Net Worth. Total Debt of the Borrower divided by
----------------------------------
Tangible Net Worth.
Minimum Cash Level. "Minimum Cash Level" shall have the meaning given to
------------------
such term in Section 6.4 hereof.
Minimum Tangible Net Worth. "Minimum Tangible Net Worth" shall have the
--------------------------
meaning given to such term in Section 6.5 hereof.
Notes. The Line of Credit Note and the Term Note.
-----
PBGC. The Pension Benefit Guaranty Corporation or any successor thereto.
----
Person. Any individual, corporation, partnership, association, joint-stock
------
company, trust, unincorporated organization, joint venture, court or government
or political subdivision or agency thereof.
Plan. Any plan subject to Title IV of ERISA and maintained for employees
----
of Borrower, any of its subsidiaries or any members of a Controlled Group of
which Borrower is a part.
Prime Rate. The "Prime Rate" is the floating annual rate of interest that
----------
is published as such in the Money Rates Section of The Wall Street Journal and
-----------------------
is sometimes used by the Bank as a reference base with respect to different
rates charged to borrowers. The Prime Rate shall change simultaneously and
automatically upon any change in such Prime Rate. The Bank's determination and
designation from time to time of the referenced rate shall not in any way
preclude the Bank from making loans to other borrowers at a rate which is higher
or lower than or different from the Prime Rate.
Qualified Accounts. At any time, all Accounts of Borrower but excluding
------------------
the following: (a) contra accounts, (b) offset accounts, (c) C.O.D. or sight
draft accounts, (d) commission accounts, (e) employee and salesmen accounts, (f)
consignment accounts, (g) guaranteed sales accounts, (h) inter-company accounts,
(i) any amount known to be not readily collectable for any reason, (j) any
invoice without a definite due date, (k) pre-billed invoices, (l) the amount of
any account which is more than 90 days past invoice date, (m) accounts in
litigation or arbitration, (n) all retainers (including, but not limited to
construction retainages), (o) accounts with 50% or more of the balance 90 days
past invoice date, (p) accounts not generated in the ordinary course of
business, (q) interest, (r) finance charges, (s) accounts arising out of a
contract with any department or instrumentality of the United States of America,
unless such account has been assigned to the Bank under the provisions
4
<PAGE>
of the Federal Assignment of Claims Act, (t) accounts in which the Bank does not
have a first lien, and (u) such other accounts deemed to be unqualified, in
whole or in part, by the Bank in its reasonable discretion. Although the above
items are deemed unqualified for Advance purposes, they remain part of the
Collateral pledged to the Bank and perfected under the Uniform Commercial Code.
Qualified Inventory. At any time, all Inventory of Borrower which meets
-------------------
all of the following criteria: (a) the Inventory is readily saleable in a bona
fide arm's length transaction, or is usable, in the ordinary course of business
of Borrower; (b) the title of Borrower to the Inventory is absolute and is not
subject to any prior assignment or encumbrance, except the security interest of
the Bank; (c) if the Inventory is located on leased premises, a landlord's
waiver satisfactory in form and substance to the Bank shall have been delivered
to the Bank for such premises; (d) the Inventory has not been designated or
otherwise identified as belonging to any entity other than Borrower; and (e) the
Inventory is located in Malvern, Chester County, Pennsylvania, unless otherwise
agreed in writing by the Bank. Qualified Inventory shall not include any
Inventory drop-shipped or held on consignment by any other company than
Borrower.
Reportable Event. "Reportable Event" has the meaning assigned to such term
----------------
in Section 4043(b) of ERISA or regulations issued thereunder.
Special Cash Collateral. "Special Cash Collateral Account" shall have the
-----------------------
meaning given to such term in Section 3.3 hereof.
Subordinated Debt. At any time, all indebtedness of Borrower for borrowed
-----------------
money, which is subordinated absolutely in right of payment of principal and
interest to the Notes, excluding all such indebtedness which Borrower incurs
after the date of this Agreement without the prior written approval of the Bank.
Tangible Net Worth. At any time, the amount by which (a) the par value (or
------------------
value stated on the books) of all classes of Borrower's capital stock, plus (or
minus in the case of deficit) the amount of surplus, whether capital or earned
(and including any advance from the shareholders to Borrower) of Borrower,
exceeds (b) the aggregate amount carried as assets on the books of Borrower for
(i) goodwill, licenses, patents, trademarks, treasury stock, unamortized debt
discount and expense and other intangibles, (ii) cost of investments in excess
of net assets as of the time of the acquisition by Borrower, and (iii) write-up
in the book value of any assets of Borrower resulting from a revaluation thereof
subsequent to the Closing Date, all as determined in accordance with GAAP
applied on a consistent basis from period to period.
Term Loan. "Term Loan" shall have the meaning given to such term in
---------
Section 2.3 hereof.
Term Note. The term note executed by Borrower in the principal amount
---------
specified in Section 2.4 hereof, and all amendments, modifications and
supplements thereto and restatements thereof.
5
<PAGE>
Total Liabilities. The aggregate amount which, in accordance with
-----------------
generally accepted accounting principles consistently applied, is carried as
total liabilities on the books of Borrower.
Warrant Agreement. The Warrant Agreement issued to Progress Capital, Inc.
-----------------
concurrently with the execution of this Agreement entitling Progress Capital,
Inc. to purchase 5,000 shares of Borrower's common stock pursuant to the terms
and conditions contained therein.
Working Capital. Total Current Assets minus total Current Liabilities.
---------------
1.2 Undefined Terms; Accounting Terms. Unless expressly provided in this
---------------------------------
Agreement, or unless the context requires otherwise:
(a) terms used in this Agreement without definition including but not
limited to Accounts, Chattel Paper, Documents, Equipment, General Intangibles,
Goods, Instruments, Inventory, and Proceeds, which are defined in the
Pennsylvania Uniform Commercial Code shall have the meanings assigned to them in
the Pennsylvania Uniform Commercial Code as amended from time to time, and
(b) all accounting terms not specifically defined herein shall be
construed, and all financial data submitted pursuant to this Agreement shall be
prepared, in accordance with generally accepted accounting principles, as
applied in the preparation of the latest reviewed financial statements delivered
to the Bank pursuant to Section 4.9 of this Agreement.
ARTICLE 2
AMOUNTS, TERMS AND CONDITIONS OF LINE OF CREDIT LOAN
2.1 Line of Credit Facility.
-----------------------
(a) Subject to, and in accordance with, the terms and conditions of this
Agreement, the Bank agrees to make advances in integral multiples of $1,000 (the
"Advances") to Borrower upon request at any time and from time to time during
the period commencing on the date hereof and ending on the earlier of (i) the
occurrence of an Event of Default, or (ii) the Loan Termination Date, in an
amount which in the aggregate shall not exceed the lesser of:
(1) $1,000,000 or
(2) the Borrowing Base,
in all cases less the sum of the then unpaid principal amount of all previous
Advances.
(b) Borrower may request an Advance by notice to the Bank not later than
2:00 P.M., Philadelphia, Pennsylvania time, on the Business Day on which
Borrower wishes the Bank to make the Advance.
6
<PAGE>
(c) Borrower, subject to the terms and conditions of this Agreement, may
reborrow any amount repaid by Borrower at any time and from time to time on or
before the termination of the Bank's commitment under this Section 2.1.
(d) The term of this Line of Credit shall commence on the date hereof and,
unless earlier terminated, shall terminate on the earlier to occur of (i) an
Event of Default (as defined herein), or (ii) May 31, 1998 (the "Loan
Termination Date"). The Loan Termination Date may be extended or renewed by the
Bank, in its sole discretion, on a day-to-day basis or otherwise, at the request
of Borrower and upon a review of Borrower's financial condition, business,
operations and assets as reflected in Borrower's annual financial statements,
which extension or renewal, if any, shall be evidenced by a letter to such
effect from the Bank and by Borrower's execution and delivery of such other
documents and instruments as the Bank may require.
2.2 Line of Credit Note. The obligation of Borrower to pay the principal of,
-------------------
and accrued interest on, the Line of Credit shall be evidenced by its promissory
note dated this date (the "Line of Credit Note"):
(a) payable to the order of the Bank in the face amount of One Million
Dollars ($1,000,000.00);
(b) bearing interest on the unpaid principal amount of all Advances at an
annual rate equal to the Prime Rate plus one and one-half percent (1.50%), which
shall fluctuate with changes in the Prime Rate, and shall be computed on the
actual number of days elapsed on the basis of a 360-day year;
(c) payable as to interest monthly in arrears on the 1st day of each month
commencing September 1, 1997 through and including the first day on which:
(i) the Line of Credit shall have expired or been terminated, and
(ii) Borrower shall have repaid in full the Line of Credit (it being
understood that interest shall again accrue upon any subsequent borrowing under
this Line of Credit);
(d) payable as to principal as follows:
(i) if the unpaid balance of the Line of Credit exceeds the Borrowing
Base, at any time, then within three (3) Business Days after notification from
the Bank, but only as to such excess; and
(ii) in full on the earlier to occur of an Event of Default or the
Loan Termination Date;
(e) secured by the Collateral;
7
<PAGE>
(f) prepayable by Borrower without penalty or premium but with accrued
interest to the date of such prepayment on the amount prepaid, at any time and
from time to time, in whole or in part, upon notification to the Bank of such
prepayment not later than 10:00 a.m. on the date of such prepayment; and
(g) substantially in the form of Exhibit "A" attached hereto and made a
part hereof.
2.3 Term Loan. Subject to, and in accordance with, the terms and conditions of
---------
this Agreement, the Bank agrees to loan Borrower the principal amount of Four
Hundred Thousand Dollars ($400,000.00) (the "Term Loan").
2.4 Term Note. The obligation of Borrower to pay the principal of, and accrued
---------
interest on, the Term Loan shall be evidenced by its promissory note dated the
date of this Agreement (the "Term Note"):
(a) payable to the order of the Bank in the face amount of Four Hundred
Thousand Dollars ($400,000.00);
(b) bearing interest on the unpaid principal amount at an annual rate
equal to the Prime Rate plus one percent (1.0%), which shall fluctuate with
changes in the Prime Rate, and shall be computed on the actual number of days
elapsed on the basis of a 360-day year;
(c) payable as to interest monthly in arrears on the 1st day of each month
commencing September 1, 1997;
(d) payable as to principal in equal monthly installments of $8,333.33
each, plus accrued interest thereon, commencing on October 1, 1997 and on the
1st day of each month thereafter and one final payment of $8,333.49, together
with all accrued and unpaid interest thereon, due and payable on September 1,
2001 or payable in full upon the occurrence of an Event of Default;
(e) secured by the Collateral;
(f) prepayable by Borrower without penalty or premium but with accrued
interest to the date of such prepayment on the amount prepaid, at any time and
from time to time, in whole or in part, upon notification to the Bank of such
prepayment not later than 10:00 a.m. on the date of such prepayment; and
(g) substantially in the form of Exhibit "B" attached hereto and made a
part hereof.
2.5 Payments.
--------
(a) All payments by Borrower under the Loan Documents shall be made to the
Bank at its office described in the heading of this Agreement, or such other
place or places
8
<PAGE>
as the Bank may direct in writing, prior to 2:00 P.M., Philadelphia,
Pennsylvania time, on the date of payment (or, if the date of payment is not a
Business Day, the next Business Day) in funds which are immediately available to
the Bank.
(b) All payments received by the Bank in immediately available funds prior
to 2:00 P.M., Philadelphia, Pennsylvania time, on any Business Day will be
credited to Borrower's Loan Account on the date of receipt. All payments
received by the Bank in immediately available funds after 2:00 P.M.,
Philadelphia, Pennsylvania time, on any Business Day will be credited to
Borrower's Loan Account on the next Business Day.
(c) All payments received by the Bank which are not in immediately
available funds shall be subject to a clearance of three (3) Business Days.
2.6 Computations.
------------
(a) Interest shall be calculated on the basis of a 360-day year for the
actual number of days elapsed (365/360 or 366/360, as the case may be).
Interest for each month shall be added to principal as of the close of each
month.
(b) Any change in interest rate resulting from a change in the Prime Rate
shall be effective as of the opening of business on the day on which the Bank
announces the change.
(c) Except as otherwise expressly provided in this Agreement, whenever a
payment of principal becomes due on a day which is not a Business Day, the
maturity of the Liabilities shall be extended to the next succeeding Business
Day and interest shall accrue on such Liabilities at the applicable rate during
the extension.
2.7 Confirmation of Borrower's Liabilities. Each and every statement of
--------------------------------------
account transmitted by Bank to Borrower hereunder, whether in person, or by
ordinary mail or otherwise, shall be final, conclusive and binding upon Borrower
in all respects as to all loans, fees, interest, charges, payments, receipts,
balances, Collateral and all other matters reflected therein unless Borrower,
within fifteen (15) days after the mailing thereof, shall give notice to Bank in
writing of all objections to any such statement of account specifying those
items considered by Borrower to be in dispute. Borrower agrees that its failure
to specify items in dispute within the foregoing fifteen (15) day period shall
operate as a waiver of its rights to do so at a later time.
2.8 Late Charge. If any of the payments under either of the Notes shall become
-----------
overdue for a period of ten (10) days, Borrower shall pay the Bank a "late
charge" of five percent (5%) of the monthly interest payment then past due.
9
<PAGE>
ARTICLE 3
SECURITY INTEREST
-----------------
3.1 Grant of Security Interest and Assignment of Accounts.
-----------------------------------------------------
(a) To secure the payment to the Bank of Borrower's Liabilities, and to
secure performance of all of its obligations under this Agreement, Borrower
hereby grants to the Bank a security interest in all of Borrower's presently
owned and hereafter acquired Accounts, Chattel Paper, Documents, Equipment
(including, but not limited to, machinery, equipment [including patterns],
fixtures, office equipment and furniture, and motor vehicles), General
Intangibles (including, but not limited to, goodwill, trademarks, tradenames,
trade styles, patents, copyrights and telephone numbers and listings), Goods,
Instruments and Inventory and all accessions thereto, all products and cash and
non-cash Proceeds of the same (collectively, the "Collateral"), and Borrower
hereby assigns, transfers and sets over to the Bank all of its presently owned
and hereafter acquired Accounts and Proceeds thereof. The security interest of
the Bank in all Collateral shall be a first lien security interest. Borrower
agrees that the aforesaid grant of security interest is intended as a
contemporaneous exchange for value given to Borrower.
(b) The right to Proceeds provided for above does not, and shall not be
interpreted to, constitute authorization or consent by the Bank to any
disposition of any Collateral. This Agreement and the security interest granted
herein shall stand as general and continuing security for all Liabilities and
may be retained by the Bank until all Liabilities have been satisfied in full;
provided, however, that this Agreement shall not be rendered void by the fact
that no commitment by the Bank to make Advances to Borrower exists as of any
particular date, but shall continue in full force and effect until all
Liabilities have been satisfied in full and neither party hereto has any
obligation to the other under any of the Loan Documents.
(c) As additional security for the Liabilities, Borrower conveys, assigns
and grants a security interest to the Bank in and to all present and future
files, books, ledgers, records, bills, invoices, receipts, deeds, certificates
or documents of ownership, warranties, bills of sale and all other data and data
storage systems and media pertaining to any of the Collateral.
3.2 Future Advances. The Liabilities secured hereby include all future
---------------
advances, including payments on guarantees, made by the Bank at any time or
times to or for the benefit of Borrower, whether obligatory or optional,
including all costs, expenses, court costs and reasonable attorneys' fees
incurred in the collection of the Liabilities and/or the Collateral, or for the
establishment, maintenance or enforcement of the Bank's security interest
therein.
3.3 Additional Security. As additional Collateral to secure the Liabilities,
-------------------
Borrower grants to the Bank a security interest in all of Borrower's present and
future deposits or other monies due from instruments, documents, policies and
certificates of insurance, securities, goods, accounts receivable, choses in
action, chattel paper, currency, property and the proceeds thereof, owned by
Borrower or in which it has an interest, now or hereafter in the possession or
control of the Bank or in transit by mail or carrier to or from the Bank or in
the possession of any other person acting in the Bank's behalf, without regard
to whether the
10
<PAGE>
Bank received the same in pledge, for safekeeping, as agent for collection or
transmission or otherwise, or whether the Bank has conditionally released the
same. The property described in this paragraph shall constitute part of the
Collateral for all purposes under this Agreement. In furtherance of the
foregoing, Borrower shall maintain a cash collateral account with the Bank (the
"Special Cash Collateral Account"), which shall have a balance equal to
$200,000.00. The Bank's security interest in such cash collateral account shall
be evidenced by a Pledge of Deposit Account substantially in the form of Exhibit
"C" attached hereto and made a part hereof.
3.4 Perfection of Security Interest. Borrower shall execute and deliver to
-------------------------------
the Bank concurrently with the execution of this Agreement, and at any time or
times hereafter at the request of Bank, all assignments, certificates of title,
conveyances, assignment statements, financing statements, renewal financing
statements, security agreements, affidavits, notices and all other agreements,
instruments and documents that the Bank may reasonably request, in form
satisfactory to the Bank, and shall take any and all other actions reasonably
requested by the Bank, in order to perfect and maintain the security interests
and liens granted herein by Borrower to the Bank and in order to fully
consummate all of the transactions contemplated herein and under this Agreement.
3.5 Power of Attorney. Borrower does hereby irrevocably make, constitute and
-----------------
appoint the Bank and any of its officers, employees or agents as the true and
lawful attorneys of Borrower with power to
(a) sign the name of Borrower on any financing statement, renewal
financing statement, notice or other similar document which, in the Bank's
opinion, must be filed in order to perfect or continue perfected the security
interests granted in this Agreement;
(b) receive, endorse, assign and deliver, in the name of Borrower or in
the name of the Bank, all checks, notes, drafts and other instruments relating
to any Collateral including but not limited to receiving, opening and properly
disposing of all mail addressed to Borrower concerning Accounts;
(c) sign the name of Borrower on any invoice or bill of lading relating to
any Account, drafts against Account Debtors, schedules and assignments of
Accounts, notices of assignment, verifications of Accounts and notices to
Account Debtors, including, but not limited to, notices to Account Debtors
advising them to make payments on Accounts directly to the Bank;
(d) take or bring at Borrower's cost, in its name or in the name of the
Bank, all steps, actions and suits deemed by Bank necessary or desirable to
effect collections of Accounts, to enforce payment of any Account, to settle,
compromise, sell, assign, discharge or release, in whole or in part, any amounts
owing on Accounts, to prosecute any action or proceeding with respect to
Accounts, to extend the time of payment of any and all Accounts, and to make
allowances and adjustments with respect thereto;
(e) secure credit in the name of Borrower or in the name of the Bank; and
11
<PAGE>
(f) do all other things necessary to carry out this Agreement.
Neither the Bank nor any attorney will be liable for any act of commission
(other than an act of willful misconduct by the Bank) or omission nor for any
error of judgment or mistake of fact or law. This power, being coupled with an
interest, is irrevocable so long as any of the Liabilities remain unpaid.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
------------------------------
To induce the Bank to enter into this Agreement, and to make the Loan
provided for herein, Borrower represents and warrants to the Bank that:
4.1 Organization, Qualification of Borrower.
---------------------------------------
(a) Borrower is a corporation duly organized, validly subsisting and in
good standing under the laws of the Commonwealth of Pennsylvania.
(b) Borrower is duly licensed or qualified as a foreign corporation and in
good standing under the laws of each jurisdiction in which the nature of the
business transacted by it and the character of the property owned or leased by
it make such licensing or qualification necessary and where the failure to be so
licensed or qualified is material to the business of Borrower.
(c) Borrower has no subsidiaries.
4.2 Affiliations; Fictitious Names.
------------------------------
(a) Borrower is not a member of any partnership or joint venture.
(b) Except as described in Schedule 4.2(b), Borrower is not affiliated, by
stock ownership or otherwise, with any other business entity.
(c) Borrower has never conducted business under or otherwise used any
fictitious names or trade names.
4.3 Authority, Authorization.
------------------------
(a) Borrower has the power to execute, deliver and perform the Loan
Documents to which it is a party, and to borrow under this Agreement and the
Notes.
(b) Borrower has taken all necessary action to authorize the borrowings
provided for in this Agreement and the execution, delivery and performance of
the Loan Documents to which Borrower is a party.
12
<PAGE>
(c) No consent of any other party (including stockholders of Borrower) and
no consent, license, approval or authorization of, or registration or
declaration with, any governmental authority, bureau or agency is required in
connection with the execution, delivery, performance, validity or enforceability
of this Agreement or any Loan Documents to which Borrower is a party.
4.4 Enforceability.
--------------
(a) This Agreement has been duly and validly executed by Borrower and
constitutes a legal, valid and binding obligation of Borrower, enforceable in
accordance with its terms, except as its enforceability may be limited by
bankruptcy, insolvency or other similar laws of general application relating to
or affecting the enforcement of creditors' rights.
(b) All other Loan Documents, when executed and delivered to the Bank
pursuant to the terms of this Agreement or those Loan Documents, will be legal,
valid and binding obli gations of Borrower, enforceable in accordance with
their terms and the terms of this Agreement, except as the enforcement of any of
them may be limited by bankruptcy, insolvency or other similar laws of general
application relating to or affecting the enforcement of creditors' rights.
4.5 Conflicts.
---------
(a) The execution, delivery and performance of the Loan Documents to which
Borrower is a party will not conflict with, result in a breach of, or constitute
a default under any provision of:
(i) any existing law or regulation or order of any court,
governmental authority, bureau or agency having jurisdiction;
(ii) the Articles of Incorporation or By-Laws of Borrower; or
(iii) any agreement or instrument to which Borrower is a party or
which purports to be binding upon it or any of its assets.
(b) The execution, delivery and performance of the Loan Documents to which
Borrower is a party will not result in the creation or imposition of any lien on
any of its assets pursuant to the provisions of any agreement or instrument to
which Borrower is a party or which purports to be binding upon it or any of its
assets other than such liens as are created by the Loan Documents themselves.
4.6 Litigation.
----------
(a) Except as disclosed in Borrower's financial statements, there is no
litigation or governmental proceeding pending or, to the knowledge of Borrower,
threatened which is reasonably likely to:
13
<PAGE>
(i) have a material adverse effect on the financial condition or
business of Borrower so as to impair the ability of Borrower to perform this
Agreement or any of the Loan Documents; or
(ii) prohibit, restrict or limit payment of the Notes or performance
of this Agreement by Borrower.
(b) Borrower is not in default with regard to any order of any court or
governmental authority.
4.7 Compliance with Laws. Borrower's business is in compliance in all material
--------------------
respects with all laws, ordinances and other governmental regulations; there is
no outstanding notice of any uncorrected violation of any such law, ordinance or
governmental regulation; Borrower has all permits, licenses, approvals and other
authorizations from federal, state and local authorities that are necessary for
the conduct of its business as now conducted or intended to be conducted in the
future and no claim is pending or, to the best of Borrower's knowledge,
threatened to revoke any of said permits, licenses, approvals and other
authorizations or to declare them invalid in any respect.
4.8 Taxes.
-----
(a) Borrower has filed or caused to be filed all tax returns (including,
without limitation, those relating to Federal and state income taxes) required
to be filed and has paid all taxes, assessments and penalties due and payable by
it (other than those being contested in good faith by appropriate proceedings
for which adequate reserves have been provided on its books). Borrower does not
know of any proposed additional tax assessment against it not adequately covered
by reserves.
(b) The reserves and provisions for taxes on the books of Borrower are
adequate for all open years and for its current fiscal period.
(c) No tax liens have been filed against the assets of Borrower, and no
claims are being asserted with respect to such taxes which, if adversely
determined, would have a material adverse effect upon the financial condition,
business or operations of Borrower.
4.9 Financial Condition. The Borrower has delivered to the Bank correct and
-------------------
complete copies of (i) unaudited financial statements consisting of a balance
sheet of the Company as of June 30, 1997 and the related statements of income
and cash flows for the period then ended, and (ii) audited financial statements
consisting of a balance sheet of the Company as of December 31, 1995 and 1996
and the related statements of income and cash flows for the years then ended
which are audited and reported on by Arthur Andersen LLP (collectively, the
"Delivered Financial Statements"). The Delivered Financial Statements are, and
the financial statements of the Borrower to be delivered to the Bank in the
future (the "Subsequent Financial Statements" and together with the Delivered
Financial Statements, the "Financial Statements") will be, in all material
respects consistent with the books and records of the Company and there have not
been or will not be any transactions required by GAAP,
14
<PAGE>
applied on a consistent basis, to be recorded in accounting records that have
not been or will not be recorded in the accounting records underlying the
Financial Statements. The Delivered Financial Statements have been, and the
Subsequent Financial Statements will be, prepared in accordance with GAAP
consistently applied and present fairly the financial position and assets and
liabilities of the Company as of the dates thereof and its cash flows and
results of its operations for the periods then ended, subject to normal
recurring year-end adjustments and the absence of notes in the case of unaudited
Financial Statements. Borrower does not possess and will not possess any "loss
contingency" (as that term is defined in Financial Accounting Standards Board,
Statement of Financial Accounting Standards No. 5 - "FASB 5") which is not
accrued, reflected, or reserved against in its balance sheet or disclosed in the
footnotes to such balance sheet. There has been no material adverse change in
the business, properties, operations or condition (financial or otherwise) of
Borrower since the date of the financial statements which were most recently
furnished by Borrower to the Bank. No event has occurred which could reasonably
be expected to interfere with the normal business operations of Borrower.
4.10 Accounts. Borrower represents and warrants that:
--------
(a) it is now and at all times hereafter shall be the absolute owner, free
and clear of all liens, encumbrances and security interests, except the liens
and security interests granted or permitted herein and the potential liens of
any state government to enforce possible sales tax liabilities, of indefeasible
title to its Accounts; and
(b) every Account described in the certifications delivered in accordance
with Section 6.1(a)(v) hereof will be a good and valid Account representing an
undisputed bona fide indebtedness of a debtor to Borrower and there are and will
be no defenses, setoffs, contraclaims, or counterclaims of any nature whatsoever
against any such Account; and no agreement under which any deduction, discount,
allowance or special terms of payment may be claimed, has been or will be made
with any Account Debtor except as shown on the statement or invoice furnished to
the Bank with reference thereto.
4.11 Equipment and Inventory. Borrower represents and warrants that:
-----------------------
(a) it is now, and at all times hereafter shall be, the sole owner, free
and clear of all liens, encumbrances and security interests, except the liens
and security interests granted or permitted herein, of indefeasible title to its
Equipment and Inventory; and
(b) except for depreciation and obsolescence, Borrower will keep its
Equipment in good repair and maintained in a state of good operating efficiency,
and will make all necessary repairs, replacements of and renewals so that the
value and operating efficiency thereof shall at all times be maintained and
preserved in a manner consistent with good management.
15
<PAGE>
4.12 Collateral. Borrower represents and warrants that:
----------
(a) it is the lawful owner of all Collateral and has the right to pledge,
sell, assign and transfer the same and grant a security interest therein; no
Collateral has been or will be pledged, sold, assigned or transferred to any
person, firm or corporation, other than the Bank or in any way encumbered and
Borrower will warrant and defend all Collateral against the claims and demands
of all persons, firms or corporations;
(b) all representations made by Borrower to the Bank with reference to the
description, content or valuation of any and all of the Collateral are true and
correct; the sale of all Inventory which gives rise to an Account is an absolute
sale and not on consignment or approval and all such merchandise shall have been
the absolute property of Borrower, free of lien, and Borrower does not have the
same on consignment or approval; all services which give rise to an Account have
actually been performed; all invoices, records, notes, documents of title,
shipping, and delivery receipts and any and all other instruments, memoranda and
documents presented or delivered to the Bank shall be valid, genuine and not
subject to any dispute or defense;
(c) as of the execution of this Agreement, no other financing agreements
are in force and no claim of any security interest, lien or encumbrance in or on
the Collateral is on file in any public office;
(d) there is no fact known to Borrower that Borrower has not disclosed to
the Bank in writing and described in Schedule 4.12(d) hereof that is reasonably
likely to materially adversely affect the properties, business or financial
condition of Borrower or of the Collateral or the Loans provided for in this
Agreement;
(e) this Agreement, upon the filing of financing statements in the
appropriate governmental offices, will create in favor of the Bank valid and
perfected first lien security interests in the Collateral; and
(f) the Collateral and all of the records, ledger sheets, correspondence
and invoice documents and instruments, relating to or evidencing the Collateral
shall be kept on the premises described in Section 9.14 of this Agreement, such
records to be kept in appropriate containers in safe places. The Bank at all
reasonable times shall have full access to and the right to audit Borrower's
books and records.
4.13 Contingent Liabilities. There are no suretyship agreements, guarantees or
----------------------
other contingent liabilities of Borrower that are not disclosed in the financial
statements described in Section 4.9 or in Schedule 4.13, except such liabilities
as are created by the Loan Documents.
4.14 Trademarks, Tradenames, Patents and Copyrights. All trademarks, tradenames,
----------------------------------------------
patents and copyrights owned by Borrower, as well as all applications for any of
the foregoing, are described in Schedule 4.14 attached hereto and made a part
hereof.
16
<PAGE>
4.15 ERISA. No Reportable Event has occurred with respect to any Plan. Each
-----
Plan has been maintained, in all material respects, in accordance with its terms
and with all provisions of ERISA applicable thereto. Borrower has not incurred
any liability to the PBGC.
4.16 Operations of Borrower. All operations of Borrower have been carried on in
----------------------
accordance with all applicable laws, statutes, ordinances, rules and
regulations, including, but not limited to, those relating to degradation of the
environment. No investigation by any governmental authority, federal, state or
local, is pending or threatened against Borrower.
4.17 Labor. Borrower is not involved in any strike, lock-out, boycott or any
-----
other labor trouble, similar or dissimilar, nor is it involved in labor
negotiations. Borrower is not a party to any collective bargaining agreement.
4.18 COBRA Continuation Coverage. Borrower provides COBRA Continuation Coverage
---------------------------
under group health plans (if any) for separating employees in accordance with
the provisions of Section 162(k) of the Code.
4.19 Environmental Representations, Obligations and Covenants.
--------------------------------------------------------
(a) Borrower represents and warrants that it has conducted all appropriate
inquiry and does not know or have reason to know of any activity at any real
property owned or leased by Borrower (collectively, the "Real Property") which
has been conducted, or is being conducted, except in compliance with all
statutes, ordinances, regulations, orders and requirements of common law
concerning (i) those activities, (ii) repairs or construction of any
improvements, (iii) handling of any materials, (iv) discharges to the air, soil,
surface water or ground water, and (v) storage treatment or disposal of any
waste at or connected with any activity at the Real Property ("Environmental
Statutes").
(b) Borrower shall cause all activities at the Real Property to be
conducted in compliance with all Environmental Statutes. Borrower shall cause
all permits, licenses or approvals to be obtained, and shall cause all
notifications to be made, as required by Environmental Statutes. Borrower
shall, at all times, cause compliance with the terms and conditions of any such
approvals or notifications.
(c) Borrower represents and warrants that, to the best of its knowledge,
no contamination is present at the Real Property. Borrower shall not permit
contamination of the Real Property by hazardous substances. Borrower shall cause
hazardous substances to be handled on the Real Property in a manner which will
not cause an undue risk of the contamination of the Real Property.
(d) For purposes of this section, the term "contamination" shall mean the
uncontained presence of hazardous substances at the Real Property, or arising
from the Real Property, which may require remediation under any applicable law.
(e) For purposes of this section, "hazardous substances" shall mean
"hazardous substances" or "contaminants" as defined pursuant to the
Comprehensive Environmental
17
<PAGE>
Response, Compensation and Liability Act, 42 U.S.C. Section 9601-9657, as
--
amended by the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No.
- -------
99-499, 100 Stat. 1613 (Oct. 17, 1986), "regulated substances" within the
meaning of subtitle I of the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6991-699li, as amended by the Superfund Amendments and Reauthorization
-------------
Act of 1986 Pub. L. No. 99-499, 100 Stat. 1613 (Oct. 17, 1986), and "hazardous
substances" or "contaminants" as defined pursuant to the Pennsylvania Hazardous
Sites Cleanup Act, Pa. Stat. Ann. tit. 35, Section 6020.101 to .1305 (Purdon
Supp. 1989), or any other substances which may be the subject of liability
pursuant to Sections 316 or 401 of the Pennsylvania Clean Streams Law, Pa. Stat.
Ann. tit. 35, Section 691.1 to .1001 (Purdon 1977 and Supp. 1989).
(f) Borrower represents and warrants that it has conducted all appropriate
inquiry and does not know or have any reason to know of any:
(i) polychlorinated biphenyls or substances containing
polychlorinated biphenyls present on the Real Property,
(ii) asbestos or materials containing asbestos present on the Real
Property, or
(iii) urea formaldehyde foam insulation on the Real Property.
(g) Borrower represents and warrants that it does not know or have reason
to know of any investigation of the Real Property for presence of radon gas or
the presence of the radioactive decay products of radon.
(h) Borrower represents and warrants that no tanks presently or formerly
used for the storage of any gas, chemical or petroleum product above or below
ground are present at the Real Property. Borrower shall neither install nor
permit to be installed any temporary or permanent tanks for the storage of any
liquid or gas above or below ground except in compliance with the other
provisions of this Section.
(i) Upon the occurrence of an Event of Default and acceleration of payment
of all obligations of Borrower under Section 8.2 hereof, the Bank may, at its
discretion, commission an investigation at Borrower's expense of (i) compliance
at the Real Property with Environmental Statutes, (ii) the presence of hazardous
substances or contamination at the Real Property, (iii) the presence at the Real
Property of material which is the subject of subparagraph (f) of this section,
(iv) the presence at the Real Property of radon, or (v) the presence at the Real
Property of tanks which are the subject of subparagraph (h) of this Section.
(j) In connection with any investigation pursuant to subparagraph (i) of
this paragraph, Borrower shall comply with any reasonable request for
information made by the Bank or its agents in connection with any such
investigation. Borrower represents and warrants that any response to any such
request for information will be full and complete.
18
<PAGE>
(k) Borrower will assist the Bank and its agents to obtain any records
pertaining to the Real Property or to Borrower in connection with an
investigation pursuant to subparagraph (i) of this Section.
(l) Borrower will afford the Bank and its agents access to all areas of
the Real Property at reasonable times and in reasonable manners in connection
with any investigation pursuant to subparagraph (i) of this Section.
(m) No investigation commissioned pursuant to subparagraph (i) shall have
any effect upon the representations or warranties made by Borrower to the Bank
under this Section.
(n) Borrower hereby agrees to indemnify and to hold harmless the Bank of,
from and against any and all expenses, loss or liability suffered by the Bank by
reason of Borrower's breach of any of the provisions of this Section including
(but not limited to) (i) any and all expenses that the Bank may incur in
complying with the Environmental Statutes; (ii) any and all costs that the Bank
may incur in studying or remedying any contamination of the Real Property; (iii)
any and all fines, penalties or other sanctions (including a voiding of any
transfer of the Real Property) assessed upon the Bank by reason of failure of
Borrower to have complied with Environmental Statutes; (iv) any and all loss of
value of the Real Property by reason of: (A) failure to comply with
Environmental Statutes; (B) the presence on the Real Property of any hazardous
substances; (C) the presence on the Real Property of any materials which are the
subject of this section; (D) the presence on the Real Property of radon; or (E)
the presence on the Real Property of any tank; and (v) any and all legal and
professional fees and costs incurred by the Bank in connection with the
foregoing. This indemnification shall survive payment of the Notes.
ARTICLE 5
CONDITIONS OF LENDING
---------------------
The obligation of the Bank to make any Advances and to make the Term Loan
is subject to the accuracy of the representations and warranties in Article 4 of
this Agreement as of the date of this Agreement, the performance by Borrower of
its obligations to be performed under this Agreement before the date of each of
the Advances, and the satisfaction of the following conditions:
5.1 Loan Documents. Borrower shall have executed and delivered or caused to
--------------
be executed and delivered to the Bank all Loan Documents.
5.2 Representations, Warranties. The representations and warranties contained
---------------------------
in Article 4 of this Agreement shall be true at and as of the date of the making
of the Term Loan and any Advance with the same effect as if made at and as of
such time, except to the extent that the facts upon which such representations
and warranties are based may be changed in the ordinary course by the
transactions permitted or contemplated by this Agreement.
19
<PAGE>
5.3 Defaults. There shall exist no Default or condition which, with the
--------
giving of notice or the passage of time or both, would result in an Event of
Default upon consummation of the Term Loan or any Advance.
5.4 Certificates, Supporting Documents. The Bank shall have received on or
----------------------------------
prior to the date hereof:
(a) copies, certified by the Secretary of Borrower, of the resolutions of
the Board of Directors of Borrower authorizing the execution, delivery and
performance of the Loan Documents to which Borrower is a party and the
borrowings under this Agreement;
(b) certificates of the Secretary of Borrower as to the incumbency and
signatures of the officers of Borrower signing the Loan Documents to which it is
a party;
(c) a certificate of the Secretary of State of the jurisdiction of
incorporation of Borrower as to the good standing of Borrower dated no more than
ten (10) days prior to the date of this Agreement; and
(d) an opinion of counsel to Borrower satisfactory in form and substance
to the Bank and its counsel.
5.5 Collateral Security Documents. Borrower shall have delivered or shall
-----------------------------
have caused to be delivered to the Bank financing statements describing the
Collateral shall have been filed or readied for filing in each jurisdiction and
in each office as shall have been required by the Bank.
5.6 Insurance. Borrower shall have provided the Bank with certificates of
---------
insurance evidencing Borrower's compliance with the requirements of Section 6.10
hereof.
5.7 Delivery of Warrant Certificate. Borrower shall have delivered the Warrant
-------------------------------
Agreement to Progress Capital, Inc.
5.8 Loan Commitment Fees. The Borrower shall have paid the Bank the Line
--------------------
of Credit commitment fee in the amount of $5,000.00 and the Term Loan commitment
fee in the amount of $2,000.00.
ARTICLE 6
AFFIRMATIVE COVENANTS
---------------------
On and after the date of this Agreement and so long as either of the Notes
remains outstanding and unpaid in whole or in part, or so long as the credit
availability evidenced thereby remains in effect, whichever is longer, Borrower
will observe the following covenants unless the Bank shall otherwise consent in
writing:
20
<PAGE>
6.1 Financial Statements.
--------------------
(a) Borrower will furnish to the Bank the financial information described
below:
(i) Annual Statements. As soon as available, and in any event not
-----------------
later than 90 days after the close of each fiscal year of Borrower beginning
with the fiscal year ending December 31, 1997, the annual audited financial
report of Borrower containing a balance sheet of Borrower as of the end of such
fiscal year and related statements of income, cash flow and changes in financial
position of Borrower for such fiscal year, setting forth in each case in
comparative form the corresponding figures of the previous annual audit report,
all in reasonable detail, prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved, and containing an opinion
without exception [or qualification] by independent certified public accountants
selected by Borrower and satisfactory to the Bank.
(ii) Monthly Statements. As soon as available, and in any event not
------------------
later than 15 days after the end of each month, a balance sheet of Borrower as
of the end of such month and related statements of incomeany cash flows of
Borrower for such each month and for the period from the beginning of the
current fiscal year to the end of each month, setting forth in each case in
comparative form the corresponding figures for the corresponding periods of the
preceding fiscal year, all in reasonable detail, prepared in accordance with
GAAP (except for the absence of notes and normally recurring year-end
adjustments) applied on a consistent basis throughout the periods involved, and
prepared by the principal financial officer of Borrower.
(iii) Tax Returns of Borrower. As soon as available, and in any event
-----------------------
not later than 30 days after the filing thereof, Borrower shall furnish to the
Bank copies of all tax returns.
(iv) Agings. As soon as possible, but in any event not later than
------
fifteen (15) days after the end of each month, an accounts receivable aging and
an accounts payable aging certified by the principal financial officer of
Borrower in form reasonably satisfactory to Bank.
(v) Accounts Receivable and Inventory Certification. As soon as
-----------------------------------------------
possible, but in any event not later than ten (10) days after the end of each
month, an accounts receivable and inventory count certified by the principal
financial officer of Borrower.
(vi) Borrower's Certificate. Concurrently with the delivery of the
----------------------
financial statements referred to in paragraph (ii) above, a certificate of the
officer of Borrower who certified such statements, to the effect that:
(A) no Event of Default or Default has occurred and is
continuing under this Agreement, or, if any such Event of Default or Default
exists, specifying its nature, the period of its existence and the curative
action Borrower has taken or proposes to take, and
21
<PAGE>
(B) Borrower is not in default of any material provision under
any material agreement to which it is a party, and
(C) from time to time, such additional financial and other
information as the Bank may request.
6.2 Maximum Debt to Tangible Net Worth. Borrower will maintain a ratio of
----------------------------------
Debt to Tangible Net Worth of no more than 1.75:1.0. Borrower's compliance with
this covenant shall be verified at the close of each fiscal quarter of Borrower
in accordance with GAAP.
6.3 Minimum Working Capital. Borrower will maintain a Minimum Working Capital
-----------------------
of at least $1,000,000.00. Borrower's compliance with this covenant shall be
verified at the close of each fiscal quarter of Borrower in accordance with
GAAP.
6.4 Minimum Cash Level. Borrower will maintain a minimum cash and cash
------------------
equivalent balance of $1,000,000.00 ("Minimum Cash Level"). Borrower's
compliance with this covenant shall be verified at the close of each fiscal
quarter of Borrower in accordance with GAAP.
6.5 Minimum Tangible Net Worth. Borrower will maintain minimum Tangible Net
--------------------------
Worth of not less than $1,800,000.00 ("Minimum Tangible Net Worth"). Borrower's
compliance with this covenant shall be verified at the close of each fiscal
quarter of Borrower in accordance with GAAP.
6.6 Liabilities. Borrower will pay and discharge, at or before their maturity,
-----------
all of its respective obligations and liabilities (including, without
limitation, tax liabilities), except those which may be contested in good faith,
and maintain in accordance with GAAP and practices adequate reserves for any of
the same.
6.7 ERISA. Borrower will comply in all material respects with ERISA. Borrower
-----
will furnish to the Bank, as soon as possible and in any event within thirty
(30) days after Borrower knows or has reason to know that any Reportable Event
has occurred with respect to any Plan or that the PBGC or Borrower has
instituted or will institute proceedings under Title IV of ERISA to terminate
any Plan, a certificate of the chief financial officer of Borrower setting forth
details as to such Reportable Event and the action which Borrower proposes to
take with respect thereto, together with a copy of any notice of such Reportable
Event that may be required to be filed with the PBGC, or any notice delivered by
the PBGC evidencing its intent to institute such proceedings or any notice to
the PBGC that such Plan is to be terminated, as the case may be. For all
purposes of this Section 6.7, Borrower shall be deemed to have all knowledge or
knowledge of all facts attributable to the administrator of such Plan.
6.8 Notice of Default, Labor Troubles, Litigation. Borrower will promptly give
---------------------------------------------
notice in writing to the Bank of the occurrence of any Event of Default or
Default under this Agreement or other agreement of Borrower, or of the
occurrence of any strike, lock-out, boycott or any other labor dispute affecting
Borrower and any dispute between Borrower or
22
<PAGE>
any other party, if such litigation, proceeding or dispute might materially
interfere with the normal business operations of Borrower or, if resolved other
than in the favor of Borrower, such litigation, proceeding or dispute would have
a material adverse effect on Borrower's financial condition.
6.9 Corporate Existence, Properties. Borrower will maintain, (a) its corporate
-------------------------------
existence, its qualification to do business and its good standing in each
jurisdiction in which qualification is necessary for the proper conduct of its
businesses, (b) all licenses, permits and other authorizations necessary for the
ownership and operation of its properties and businesses, and (c) its properties
in good repair, working order and condition and Borrower will make all necessary
or appropriate repairs, renewals, replacements and substitutions, so that the
efficiency of all such property shall at all times be properly preserved and
maintained.
6.10 Insurance. Borrower will maintain, with respect to all its properties,
---------
assets and businesses, insurance with financially sound and reputable insurers
against loss or damage of the kinds customarily insured against by corporations
or other business entities of established reputation engaged in the same or
similar business and similarly constituted, in such types and amounts as are
customarily carried under similar circumstances by such other corporations or
other business entities, and/or as are required by the Bank, including fire and
extended coverage insurance on all insurable assets which will contain standard
loss payee clauses in favor of the Bank, will be in an amount not less than 80%
of the insurable value of such assets or 100% of the Loans, whichever is
greater, and will provide for thirty-days' notice of cancellation to the Bank.
Borrower shall provide the Bank with a certificate of insurance prior to
settlement.
6.11 Policies; Proceeds. Borrower shall deliver to the Bank on demand certified
------------------
copies of all such insurance policies (or, at the option of the Bank,
certificates evidencing coverage) covering the risks set forth in Section 6.10
above, with loss payable clauses in a form satisfactory to the Bank naming the
Bank as payee and co-insured. All proceeds payable under any of said policies
shall be payable in all events to the Bank, but at the option of the Bank any
such proceeds may be released to Borrower. Borrower hereby grants to the Bank a
continuing security interest in and to all said policies and the proceeds
thereof to secure the repayment of the Liabilities and agrees that the Bank
shall have the right, in the name of Borrower or in the name of the Bank, to
23
<PAGE>
file claims under any insurance policies, to receive, receipt and give
acquittance for any payments that may be made thereunder, and to execute any and
all endorsements, receipts, releases, assignments, reassignments or other
documents that may be necessary to effect the collection, compromise or
settlement of any such claims under any such insurance policies.
6.12 Books, Records, Audits.
----------------------
(a) Borrower will maintain accurate and complete records and books of
account with respect to all its operations in accordance with GAAP.
(b) Borrower will permit, at all reasonable times and upon reasonable
prior notice, officers and representatives of the Bank to examine and make
copies from its books and records, and to discuss the affairs, finances and
accounts of Borrower with its officers and public accountants, to visit and
inspect its real and personal property. Upon the occurrence of an Event of
Default and so long as the same remains uncured, the Bank may perform audits at
any time upon reasonable notice.
6.13 Returned Merchandise. Borrower shall promptly notify the Bank of any
--------------------
material amount of merchandise returned or to be returned and of all material
disputes and claims by Account Debtors. Notwithstanding the foregoing, all
returned merchandise shall remain part of the Collateral. Upon request, Borrower
will forthwith pay to the Bank Advances made against the merchandise returned if
the return of such merchandise causes the unpaid balance of the line of credit
to exceed the Borrowing Base.
6.14 Taxes, Etc. Borrower will pay when due all taxes, assessments and charges
-----------
imposed upon it or its property or that it is required to withhold and pay over,
except where contested in good faith and where adequate reserves have been set
aside. Upon the Bank's request, Borrower shall furnish the Bank with proof
satisfactory to the Bank of the making of the payment or deposit of all Federal,
state and local withholding taxes required of Borrower by applicable law; such
proof shall be furnished within five (5) days after the due date of each such
payment or deposit established by law.
6.15 Compliance with Laws. Borrower will comply with all laws and regulations
--------------------
applicable to it in the operation of its business. Borrower will comply with all
of its obligations under Section 4.19.
6.16 Banking Relationship. Borrower will maintain the Bank as its primary bank
--------------------
of account.
6.17 Financial Condition. Borrower will immediately give the Bank written notice
-------------------
of any material adverse change in its financial condition or, operations or the
Collateral from that described in the most recent financial statements of
Borrower previously delivered to the Bank.
24
<PAGE>
6.18 Use of Proceeds. Borrower shall use the proceeds of the Line of Credit for
---------------
working capital and short-term borrowing purposes and the proceeds of the Term
Loan to re-finance the acquisition of certain equipment previously purchased by
Borrower.
ARTICLE 7
NEGATIVE COVENANTS
------------------
On and after the date of this Agreement and so long as either of the Notes
remains outstanding and unpaid, in whole or in part, or so long as the credit
availability evidenced by the Line of Credit Note remains in effect, whichever
is longer, Borrower will observe the following covenants unless the Bank shall
otherwise consent in writing:
7.1 Debt. Borrower will not create, incur, assume, guarantee or in any manner
----
become or remain liable with regard to any debt, except:
(a) Debt existing on the date of this Agreement and described in Schedule
7.1 attached hereto and made a part hereof (excluding debt evidenced by the
Notes);
(b) Debt evidenced by the Notes;
(c) Debt with regard to accounts payable and other extensions of trade
credit incurred in the ordinary course of business and which is not more than 60
days overdue, unless Borrower is contesting, in good faith and by appropriate
proceedings, its obligation to make payment, and has established such reserve
with regard to the contested obligation as its certified public accountants
shall consider adequate; and
(d) ordinary course debt (including capitalized equipment leases) incurred
in connection with the purchase of any Equipment provided that the aggregate
amount of such debt (including capitalized equipment leases) incurred in any
fiscal year shall not exceed $600,000 in fiscal year 1997 or $200,000 in any
fiscal year thereafter.
(e) Subordinated Debt.
7.2 Liens. Borrower will not create, incur, assume or suffer to exist any lien
-----
upon any of its existing or future, tangible or intangible, real, personal or
mixed property, except:
(a) Pledges or deposits under workmen's compensation laws, unemployment
compensation laws or other similar laws;
(b) Good faith deposits in connection with bids, tenders, contracts (other
than for the purpose of borrowing money or obtaining credit) and leases to which
Borrower is a party, including rent security deposits;
(c) Deposits to secure public or statutory obligations of Borrower, surety
or appeal bonds to which Borrower is a party, payment of contested taxes of
Borrower, or payment of import duties of Borrower;
25
<PAGE>
(d) Any lien which is imposed by law, e.g., those of carriers,
----
materialmen, mechanics and warehousemen, if payment secured by that lien is not
yet due, or if the validity or the amount of payment is being contested in good
faith by appropriate proceedings for which adequate reserves have been
established;
(e) Any lien arising from a judgment or award against Borrower with regard
to which Borrower is prosecuting an appeal or proceedings for review, and has
obtained a stay of execution pending such appeal or proceedings for review;
(f) Any lien for taxes, assessments or other governmental charges or
levies not yet subject to penalties for nonpayment, or the validity or amount of
which is being contested by appropriate legal proceedings, and with regard to
which adequate reserves have been established;
(g) liens granted to secure indebtedness incurred under Section 7.1(d)
provided such liens are limited to the specific item of Equipment being
financed; and
(h) Any lien created for the sole purpose of extending, renewing or
refunding any lien permitted under paragraphs (a) through (g), if such lien is
limited to all or part of the same property covered by the original lien, and if
the amount of the debt secured by the lien does not exceed the amount of debt
secured by the lien at the time of extension, renewal or refunding;
7.3 Endorsements, Etc. Borrower shall not endorse, guarantee or become surety
------------------
for the obligations of any person, firm or corporation, except Borrower may
endorse checks and endorse negotiable instruments for collection in the ordinary
course of business.
7.4 Change in Business; Mergers, Consolidations. Borrower will not make any
-------------------------------------------
substantial change in the nature of the business of Borrower, or merge or
consolidate with any other corporation.
7.5 Management. There will be no change in the senior management of Borrower
----------
that is unacceptable to Bank in the exercise of its reasonable discretion.
7.6 Subsidiaries. Borrower will not create any new subsidiaries without having
------------
given Bank at least ten (10) days prior written notice.
7.7 Contingent Liabilities. Borrower will not become or remain liable,
----------------------
directly or indirectly, in connection with the obligations, stock or dividends
of any person, firm, corporation or other entity, whether by guarantee,
endorsement, agreement to supply or advance funds, agreement to maintain working
capital or net worth, agreement to purchase or repurchase goods or services
whether or not such goods or services are actually acquired, or otherwise.
7.8 Sales and Lease-Backs. Borrower will not enter into any arrangement,
---------------------
directly or indirectly, with any Person, whereby any of them shall sell or
transfer any property, real or
26
<PAGE>
personal, whether now owned or hereafter acquired, and thereafter rent or lease
such property or other property which the lessee intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
7.9 Limitation of Leases. Except for those leases existing as of the date
--------------------
hereof and reflected on Schedule 7.9 attached hereto and made a part hereof,
Borrower will not incur, create or assume any commitment to make any direct or
indirect payment, whether as rent or otherwise, under any lease, rental or other
arrangement for the use or hire of property of any person, firm, corporation or
other entity, if, after giving effect thereto, the aggregate amount of such
payments to be made by Borrower under all such leases, rentals or other
arrangements would be in excess of $100,000 in any one year (excluding leases
capitalized under Financial Accounting Standards Board, Statement of Accounting
Standards No. 13) during any fiscal year of Borrower.
7.10 Voluntary Prepayments, Modification of Debt Instruments. Borrower will not
-------------------------------------------------------
(a) prepay, purchase, redeem or otherwise acquire for value prior to the stated
maturity thereof all or any part of any indebtedness for borrowed money,
including, but not limited to, the Subordinated Debt, or (b) amend, modify or
supplement in any way, or request any waiver of the provisions of, any
instrument providing for or evidencing any indebtedness for borrowed money or
constituting the deferred purchase price of property or assets.
7.11 Removal and Protection of Property. Except as otherwise expressly permitted
----------------------------------
herein, Borrower will not remove (other than in the ordinary course of business)
any Equipment, Goods, Inventory, or General Intangibles from the place of
business where presently located, nor permit the value of any property to be
impaired.
7.12 Transactions with Affiliates. Borrower shall not, except as otherwise
----------------------------
expressly permitted by this Agreement, directly or indirectly enter into any
transaction or modify any existing transaction with any Affiliate including,
without limitation, (a) investments in, or loans or advances to, an Affiliate,
(b) the transfer, sale, lease, assignment or other disposition of any assets to
an Affiliate, (c) the merger into or consolidation with or purchase or
acquisition of assets from an Affiliate, or (d) any other transaction directly
or indirectly with or for the benefit of any Affiliate (including, without
limitation, any guarantees or assumptions of obligations of an Affiliate by
Borrower or of Borrower by an Affiliate). The Bank may withhold its consent to
any such transaction with an Affiliate if (i) an Event of Default has occurred
and is continuing, or (ii) such transaction, based upon the reasonable
assumptions of the Bank, could (A) result in a material adverse change in the
business, operations, financial condition or prospects of Borrower, (B) affect
Borrower's ability to repay the indebtedness evidenced by the Notes or any other
indebtedness of Borrower to the Bank, (C) prejudice or impair, or result in the
diminution of, any rights of the Bank with respect to the indebtedness evidenced
by the Notes or any other indebtedness of Borrower to the Bank or any collateral
pledged to secure such indebtedness, or (D) result in a Default or an Event of
Default hereunder or under the Loan Documents or a default under or with respect
to any other document or instrument evidencing and/or securing the Loans or any
other material obligation of Borrower to any Person.
27
<PAGE>
7.13 Disposition of Assets. Borrower will not liquidate or dissolve itself (or
---------------------
suffer any liquidation or dissolution), or convey, sell, lease, pledge, or
otherwise transfer or dispose of all or any substantial part of its property,
assets or business other than in the ordinary course of business.
7.14 Disposition of Accounts. Borrower will not sell, discount or otherwise
-----------------------
dispose of its notes, Accounts, Chattel Paper, Documents, General Intangibles or
Instruments except to, or with, the Bank.
ARTICLE 8
EVENTS OF DEFAULT, REMEDIES
---------------------------
8.1 Events of Default. Each of the following shall constitute an Event of
-----------
Default:
(a) Payment. Failure by Borrower to pay the principal of, or accrued
-------
interest on, the Notes (or either of them) or any other instrument or obligation
of Borrower to the Bank when such amounts become due, or the failure of Borrower
to pay any other amount payable to the Bank under the Loan Documents, within
five (5) days of the date when such amount becomes due.
(b) Representations, Warranties. Any representation or warranty made by
---------------------------
Borrower in the Loan Documents shall prove to be false or misleading in any
material respect as of the date when made.
(c) Covenants. Failure by Borrower to observe or perform any covenants,
---------
conditions or provisions applicable to it contained in the Loan Documents [other
than those described in paragraphs (a) and (b) above] provided that such failure
shall continue for a period of fifteen (15) days after written notice from the
Bank to Borrower.
(d) Other Obligations. Borrower defaults in:
-----------------
(i) any payment of principal of, or interest on, any obligations for
borrowed money, including, but not limited to, the Subordinated Debt (other than
the Notes or any such obligation payable to the Bank), or for the deferred
purchase price of property beyond any grace period provided with regard to such
payment,
(ii) the performance of any other material agreement, term or
condition contained in any such obligation or in any agreement relating to such
obligation, or
(iii) the performance of any lease of other contract material to
Borrower's business, if the effect of such default is to cause, or to permit the
holder or holders of such obligation or the other party to such lease of
contract (or trustee on behalf of such holder or holders or parties) to then
cause such obligation to become due or such lease or contract to be terminated
prior to its stated maturity.
28
<PAGE>
(e) Voluntary Bankruptcy. Filing by Borrower of a voluntary petition in
--------------------
bankruptcy or a voluntary petition or any answer seeking reorganization,
arrangement, readjustment of its debts or for any other relief under the
Bankruptcy Code, or under any other existing or future federal or state
insolvency act or law, or any formal written consent to, approval of, or
acquiescence in, any such petition or proceeding by Borrower, the application by
Borrower for, or the appointment by consent or acquiescence of, a receiver or
trustee of, Borrower or for all or a substantial part of its property; the
making by Borrower of an assignment for the benefit of creditors.
(f) Involuntary Bankruptcy. Filing of any involuntary petition against
----------------------
Borrower in bankruptcy or seeking reorganization, arrangement or readjustment of
its debts or for any other relief under the Bankruptcy Code, or under any other
existing or future federal or state insolvency act or law; or the involuntary
appointment of a receiver or trustee of Borrower, or for all or a substantial
part of the property of Borrower; and the continuance of any of such events for
a period of sixty (60) days undismissed, unbonded or undischarged.
(g) Reportable Event. If (1) any Reportable Event that the Bank reasonably
----------------
determines in good faith creates a reasonable possibility of the termination of
any Plan or of the appointment by the appropriate United States district court
of a trustee to administer any Plan shall have occurred and be continuing 30
days after written notice to such effect shall have been given to Borrower by
the Bank, or (2) any Plan shall be terminated, or (3) the plan administrator of
any Plan shall file with the PBGC a notice of intention to terminate such Plan,
or (4) the PBGC shall institute proceedings to terminate any Plan or to appoint
a trustee to administer any Plan and such proceedings shall remain undismissed
or unstayed for three (3) business days and if, in any of the cases described in
the foregoing clauses (1) to (4), the Bank further reasonably determines in good
faith that the amount of the unfunded guaranteed benefits (within the meaning of
Title IV of ERISA) resulting upon termination of such Plan would have a material
adverse effect on the financial condition, properties or operations of Borrower
if a lien against the assets of Borrower were to result under ERISA.
8.2 Acceleration and Termination of Commitments. (a) Upon the occurrence of
-------------------------------------------
an Event of Default specified in paragraphs (a) through (d) and (g) of Section
8.1 of this Agreement, the Bank may:
(i) terminate immediately and irrevocably the unused portions of the
credit availability evidenced by the Notes;
(ii) declare the unpaid principal balance of, all accrued, unpaid
interest on, and all other sums payable with regard to, the Notes and all other
Liabilities from Borrower to the Bank to be immediately due and payable
whereupon the Notes, all such accrued interest and all such Liabilities shall
become and be forthwith due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by
Borrower; and
(iii) pursue all other remedies of the Bank provided for in the Loan
Documents as well as those available at law and in equity.
29
<PAGE>
(a) Upon the occurrence of an Event of Default specified in paragraphs (e)
and (f) of Section 8.1 of this Agreement, the unused portions of the credit
availability evidenced by the Notes shall automatically and immediately
terminate and the unpaid principal balance of, all accrued, unpaid interest on,
and all other sums payable with regard to, the Notes and all other instruments
of obligation of the Guarantors and Borrower to the Bank shall automatically and
immediately become due and payable, in all cases without any action on the part
of the Bank.
(b) Upon the occurrence of a monetary default hereunder, which default
remains uncured after five (5) days' notice to Borrower from the Bank, the rate
of interest on each Note shall be increased to a rate equal to two percent (2%)
above the interest rate payable on the date of default (the "Default Rate").
Interest at the rates provided for in the Note, or at the Default Rate, shall
continue to accrue at such rate, and continue to be paid even after default,
maturity, acceleration, recovery of judgment, bankruptcy or insolvency
proceeding of any kind until such monetary default has been cured.
8.3 Right of Set-Off. Upon the occurrence of an Event of Default, the Bank
----------------
shall have the right, in addition to all other rights and remedies available to
it, to set-off the unpaid balance of the Notes against any debt owing to
Borrower by the Bank and any funds in any account maintained by Borrower with
the Bank.
8.4 Marshalling.
-----------
(a) If an Event of Default shall have occurred and be continuing, the Bank
shall not be required to marshal any present or future security for, or
guarantees of, the Liabilities or to resort to any such security or guarantees
in any particular order.
(b) Borrower waives, to the fullest extent it lawfully can, any right it
might have to require the Bank to pursue any particular remedy before proceeding
against it, and any right to the benefit of, or to direct the application of the
proceeds of, any Collateral until the Notes and all other Liabilities have been
paid in full.
8.5 Cumulative Remedies. The rights and remedies provided in the Loan
-------------------
Documents are cumulative and not exclusive of any rights or remedies provided by
law or in equity.
ARTICLE 9
MISCELLANEOUS
-------------
9.1 Waivers.
(a) No failure or delay on the part of the Bank in exercising any right,
power or privilege under the Loan Documents shall operate as a waiver of any
right, power or privilege, except as and to the extent that the assertion of
such right, power or privilege shall be barred by an applicable statute of
limitations.
30
<PAGE>
(b) No single or partial exercise of, or abandonment or discontinuance of
steps to enforce, any right, power or privilege under the Loan Documents shall
preclude any other or further exercise of such right, power or privilege, or the
exercise of any other right, power or privilege.
(c) BORROWER DOES HEREBY EXPRESSLY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING OF ANY KIND WHETHER ARISING OUT OF, UNDER OR BY REASON OF
THE LOAN DOCUMENTS OR ANY ASSIGNMENT OR TRANSACTION THEREUNDER. BORROWER
UNDERSTANDS THAT THE BANK IS RELYING ON THIS WAIVER IN MAKING THE LOANS PROVIDED
FOR HEREIN.
9.2 Notices. All notices, requests and demands to or upon the parties shall
-------
be deemed to have been given or made on the day of personal service or on the
day they are deposited in the mails, postage prepaid, registered or certified
mail, return receipt requested, or, in the case of telegraphic notice, when
delivered to the telegraph company, charges prepaid, addressed to the parties at
the addresses set forth below or to such other address as may be hereafter
designated in writing in accordance herewith:
Borrower:
Orthovita, Inc.
45 Great Valley Parkway
Malvern, PA 19355
Attention: David Joseph, Chief Executive Officer
with a copy to its counsel:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
Attention: Stephan M. Goodman, Esquire
Fax: (215) 963-5299
The Bank:
Progress Bank
4 Sentry Parkway
Suite 200
P.O. Box 3036
Blue Bell, PA 19422
Attention: Steve Hobman
9.3 Legal Costs; Filing Costs. If at any time or times hereafter the Bank
-------------------------
employs counsel to prepare or consider approvals, waivers or consents, or to
intervene, file a petition, answer, motion or other pleading in any suit or
proceeding relating to this Agreement or relating to any Collateral, or to
protect, take possession of, or liquidate any Collateral, or to attempt to
enforce any security interest or lien in any Collateral, or to enforce any
rights of the Bank or
31
<PAGE>
liabilities of Borrower's Account Debtors, or any other person, firm or
corporation which may be obligated to the Bank by virtue of the Loan Documents,
then in any of such events, all of the reasonable attorneys' fees arising from
such services, and any expenses, costs and charges relating thereto, shall
become a part of Borrower's Liabilities secured by the Collateral, payable on
demand.
Borrower further agrees to reimburse the Bank for its out-of-pocket
expenses, including but not limited to attorneys' fees and other costs of
preparation and filing of the Loan Documents and other documents as required by
law or deemed necessary by the Bank including but not limited to the cost of all
lien searches deemed necessary by the Bank. Such costs and expenses shall be
paid simultaneously with the execution of this Agreement and all such expenses
hereafter incurred shall be paid within fifteen (15) days after notice by the
Bank.
9.4 Right of Entry. Upon the occurrence of an Event of Default, the Bank
--------------
shall have the right to enter and remain upon the premises of Borrower without
cost or charge to the Bank, and to use the same, together with materials,
supplies, books and records of Borrower, for the purpose of liquidating or
collecting the Collateral, or for the purpose of preparing for and conducting
the sale of Collateral, whether by foreclosure, auction or otherwise.
9.5 Warrant to Confess Judgment in Replevin. Upon the occurrence of an Event
---------------------------------------
of Default, Borrower authorizes and empowers the Prothonotary or any attorney of
any court of record to appear for Borrower and confess judgment against Borrower
in favor of the Bank in any action of replevin instituted by the Bank to recover
possession of the Collateral or any part thereof, for which this shall be his
sufficient warrant. An affidavit made by someone acting on behalf of the Bank
setting forth the facts necessary to authorize the entry of judgment shall be
conclusive evidence of such facts, and no bond need be filed by the Bank. Upon
the entry of judgment in replevin for possession, a writ of possession may issue
forthwith, without any prior writ or proceedings whatsoever. The right to
confess judgment herein contained may be exercised from time to time and shall
not be exhausted by one or more exercises thereof. Borrower hereby expressly
agrees that in exercising the right to confess judgment herein contained, the
Bank need not cause the original of this Agreement to be filed, but a copy
authenticated by someone acting on behalf of the Bank shall be sufficient.
9.6 No Waiver. The Bank's failure at any time or times hereafter to require
---------
strict performance by Borrower of any of the provisions, warranties, terms and
conditions contained in this Agreement shall not waive, affect or diminish any
right of the Bank at any time or times hereafter to demand strict performance
therewith and with respect to any other provisions, warranties, terms and
conditions contained in this Agreement and any waiver of any Event of Default
shall not waive or affect any other Event of Default, whether prior or
subsequent thereto, and whether of the same or a different type. None of the
warranties, conditions, provisions and terms contained in this Agreement shall
be deemed to have been waived by any act or knowledge of the Bank, its agents,
officers or employees except by an instrument in writing signed by an officer of
the Bank and directed to Borrower specifying such waiver.
32
<PAGE>
9.7 Application of Proceeds.
-----------------------
(a) On and after the date, if any, on which the Borrower's Liabilities to
the Bank are accelerated pursuant to Section 8.2 of this Agreement, Borrower
irrevocably waives the right to direct the application of all subsequent
payments (including proceeds of Collateral) which the Bank receives from or for
the benefit of Borrower.
(b) The proceeds of any sale or other disposition of any Collateral shall
be applied by the Bank in the following order:
(i) first, to the payment of all costs and expenses due under the
Loan Documents, including without limitation all costs and expenses of
collecting Borrower's Liabilities and reasonable attorneys' fees;
(ii) second, to the payment in full of all accrued and unpaid
interest on Borrower's Liabilities;
(iii) third, to the payment in full of the principal balance of
Borrower's Liabilities; and
(iv) fourth, to Borrower to the extent of any surplus.
(c) Borrower shall remain liable to the Bank for any deficiency in payment
of Borrower's Liabilities after application of the proceeds in accordance with
paragraph (b).
9.8 Representation, Warranties.
--------------------------
(a) All representations, warranties, covenants and agreements made in the
Loan Documents shall survive the execution and delivery of this Agreement, the
making of the Advances under this Agreement and the issuance of the Notes.
(b) The provisions of Section 9.3 of this Agreement shall survive payment
of the Notes and all other Liabilities of Borrower to the Bank.
9.9 Successors. This Agreement shall be binding upon and inure to the benefit
----------
of Borrower and the Bank and their respective successors and assigns, except
that Borrower may not assign or transfer its rights under this Agreement without
the prior written consent of the Bank.
9.10 Governing Law. The Loan Documents, and the rights and obligations of the
-------------
parties under the Loan Documents, shall be governed by, and construed and
interpreted in accordance with, the domestic, internal laws, but not the law of
conflict of laws, of the Commonwealth of Pennsylvania.
33
<PAGE>
9.11 Headings. The section, subsection, paragraph and other headings in this
--------
Agreement are for reference purposes only and shall not control or affect the
construction or interpretation of this Agreement in any respect.
9.12 Severability. The parties intend the provisions of this Agreement to
------------
be severable. If any provision of this Agreement is held to be invalid or
unenforceable in whole or in part in any jurisdiction, such provision, as to
such jurisdiction, shall be ineffective to the extent of such invalidity or
unenforceability without in any manner affecting the validity or enforceability
of that provision in any other jurisdiction, or the remaining provisions of this
Agreement in any jurisdiction.
9.13 Entire Agreement. This Agreement and the Loan Documents represent the
----------------
entire agreement and understanding of the parties, and may not be amended
subsequently by oral statements of, or courses of dealing between, the parties.
9.14 Location of Business; Inventory; Records. Borrower maintains its only
----------------------------------------
places of business and substantially all of its records and assets at the
following location:
45 Great Valley Parkway
Malvern, Pennsylvania 19355
Borrower will notify the Bank in advance of any change in the location of
any business of Borrower, including any change in the location of records and
inventory, whether by reason of the establishment of a new place of business or
the discontinuance of a present place of business.
9.15 Conflicting Provisions. In the event of any direct conflict between the
----------------------
provisions of this Agreement and the provisions of other Loan Documents, the
provisions of this Agreement shall control.
9.16 Submission to Jurisdiction. Borrower hereby irrevocably and unconditionally
--------------------------
waives any right to claim immunity in respect of itself or any of its property
or assets, including immunity from jurisdiction, immunity from attachment prior
to entry of judgment, immunity from attachment in aid of execution of judgment,
in any suit, action or proceeding arising out of or relating to this Agreement.
In addition, Borrower and the Bank agree that any suit, action or proceeding may
be instituted in the Courts of Common Pleas of Chester County, Pennsylvania,
Montgomery County, Pennsylvania or in the United States District Court of the
Eastern District of Pennsylvania, and irrevocably and unconditionally submit to
the jurisdiction of any such court for such purpose.
34
<PAGE>
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, have
caused this Agreement to be duly executed on the day and year first above
written.
ORTHOVITA, INC.
By: /s/ David S. Joseph
------------------------
President
PROGRESS BANK
By: /s/ Steven D. Hobman
------------------------
Senior Vice President
35
<PAGE>
EXHIBIT 10.18
MASTER EQUIPMENT LEASE AGREEMENT
DATED AS OF
JULY 11, 1997
BETWEEN
FINOVA TECHNOLOGY FINANCE, INC.
(LESSOR)
AND
ORTHOVITA, INC.
(LESSEE)
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
1. Agreement for Lease of Equipment.......................... 1
2. Delivery and Acceptance of Equipment...................... 1
3. Disclaimer of Warranties.................................. 2
4. Primary Term.............................................. 2
5. Rent...................................................... 2
6. Lessee's Representations and Warranties................... 3
7. Identification Marks...................................... 4
8. Fees and Taxes............................................ 5
9. General Indemnity......................................... 5
10. Use of Equipment; Location; Liens......................... 6
11. Maintenance and Repairs; Additions to
Equipment................................................ 6
12. Loss, Damage or Destruction of Equipment.................. 7
13. Reports; Inspections...................................... 8
14. Insurance................................................. 8
15. Return of Equipment....................................... 9
16. Lessor's Ownership; Equipment To Be and
Remain Personal Property................................. 11
17. Other Covenants........................................... 11
18. Events of Default......................................... 12
19. Assignment and Transfer by Lessor......................... 15
20. Recording and Filing; Expenses............................ 16
21. Option to Renew........................................... 16
22. Quiet Enjoyment........................................... 16
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
23. Failure or Indulgence Not Waiver;
Additional Rights of Lessor.............................. 16
24. Sublease.................................................. 17
25. Purchase Option........................................... 17
26. Notices................................................... 17
27. Entire Agreement; Severability; Amendment or
Cancellation of Lease.................................... 18
28. Waiver of Jury............................................ 18
29. Restriction of Limitation Periods
and Damages.............................................. 18
30. Governing Law; Consent to Jurisdiction
and Service.............................................. 18
31. Lessor's Right to Perform for Lessee..................... 18
32. Agreement for Lease Only.................................. 18
33. Binding Effect............................................ 18
34. General................................................... 19
35. Definitions............................................... 19
</TABLE>
3
<PAGE>
MASTER EQUIPMENT LEASE AGREEMENT
--------------------------------
MASTER EQUIPMENT LEASE AGREEMENT dated as of July 11, 1997, between
ORTHOVITA, INC. (hereinafter called "Lessee"), a Pennsylvania that has its
executive office and principal place of business at 45 Great Valley Parkway
Malvern, PA 19355 and FINOVA TECHNOLOGY FINANCE, INC. (hereinafter called
"Lessor"), a Delaware corporation with its principal place of business at 10
Waterside Drive, Farmington, Connecticut 06032-3065.
In consideration of the mutual covenants hereinafter contained, Lessee and
Lessor agree as follows:
1. Agreement for Lease of Equipment. Lessor shall lease to Lessee and
Lessee shall lease from Lessor, upon the terms and conditions specified in this
Master Lease and the applicable Rental Schedule, the Equipment as described in
the applicable Rental Schedule including Schedule A of such Rental Schedule and
this Master Lease. Each Rental Schedule shall incorporate the terms of this
Master Lease and shall constitute a separate lease (the term "this Lease" shall
refer collectively to the applicable Rental Schedule and this Master Lease).
Only the signed copy of each Rental Schedule and not this Master Lease shall
constitute chattel paper the possession of which can perfect a security
interest. In the event of a conflict between the provisions of this Master
Lease and the provisions of any Rental Schedule, the provisions of the Rental
Schedule shall prevail.
2. Delivery and Acceptance of Equipment. (a) Lessor and Lessee agree that
the vendor of the Equipment to Lessor or, as to any Equipment to be sold by
Lessee to Lessor and leased back, the vendor of the Equipment to Lessee (in
either case, the "Vendor") will be responsible to deliver the Equipment to
Lessee at the location specified in the applicable Rental Schedule. Such
delivery shall be delivery of the Equipment by Lessor to Lessee under this Lease
unless such Equipment is to be sold by Lessee to Lessor and leased back.
Provided that no Event of Default has occurred, no event which with the passage
of time or giving of notice would be an Event of Default has occurred, and is
continuing, and the conditions set forth in the next following paragraph have
been met and the Equipment is not to be sold by Lessee to Lessor and leased
back, Lessor hereby authorizes Lessee, acting as Lessor's agent, to accept for
Lessor, and in Lessor's name, the Equipment from the Vendor upon delivery
pursuant to the purchase contract for the Equipment. Such acceptance shall be
acceptance of the Equipment by Lessee under this Lease. Nevertheless, if within
five business days after Lessee has received delivery of an item of the
Equipment, Lessee has not given Lessor written notice of a defect therein and
Lessor has not notified Lessee not to accept the Equipment, Lessee shall be
deemed to have (a) acknowledged receipt of such item of the Equipment in good
condition and repair and (b) accepted such item of the Equipment under this
Lease. Lessee agrees to confirm any acceptance of the Equipment by Lessee by
executing a Certificate of Inspection and Acceptance and providing the same to
Lessor in accordance with the notice provision hereof on or about the Lease
Commencement Date, but no later than the date for payment to the Vendor.
(b) Conditions precedent to every progress payment and Lease Term
Commencement shall include that (i) no payment shall be past due to Lessor or
any assign of Lessor from Lessee or any Guarantor (as hereinafter defined),
whether as a lessee, a guarantor or in some other capacity; (ii) Lessee shall be
in compliance with the provisions of this Lease; (iii) all documentation then
required by Lessor's counsel shall have been received by Lessor; (iv) Lessee
shall not be in default under any material contract to which Lessee is a party
or by which Lessee or the property of Lessee is bound; and (v) there shall not
have been any material adverse change or threatened material adverse change in
the financial or other condition, business, operations, properties, assets or
prospects of Lessee, any Guarantor or any Manufacturer (as hereinafter defined)
since May 30, 1997, or from the written information that has been supplied to
Lessor prior to May 30, 1997 by Lessee, any Guarantor or any Manufacturer.
3. Disclaimer of Warranties. LESSEE ACKNOWLEDGES THAT IT HAS SELECTED
BOTH THE EQUIPMENT AND EVERY MANUFACTURER AND OTHER VENDOR OF THE EQUIPMENT,
THAT LESSEE HAS NOT RELIED UPON LESSOR FOR SUCH SELECTION AND THAT LESSEE HAS A
COPY OF THE PURCHASE CONTRACT(S) FOR LESSOR'S PURCHASE OF THE EQUIPMENT. LESSOR
------
HAS NOT MADE AND SHALL NOT BE DEEMED TO HAVE MADE ANY REPRESENTATION OR
- ------------ ---------------------
WARRANTY, EXPRESS OR IMPLIED, AS TO THE MERCHANTABILITY, FITNESS FOR USE,
- -------------------------------------------------------------------------
FITNESS FOR A PARTICULAR PURPOSE
- --------------------------------
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OR TITLE OF THE EQUIPMENT (OR ANY PART THEREOF) OR AS TO COMPLIANCE WITH
- -----------------------------------------------
SPECIFICA TIONS, COMPLIANCE WITH GOVERNMENTAL REGULATIONS, QUALITY, SELECTION,
INSTALLATION, SUITABILITY, PERFORMANCE, CONDITION, DESIGN, ABSENCE OF DEFECTS,
OPERATION, OR NON-INFRINGEMENT OF PATENT, COPYRIGHT, TRADEMARK OR OTHER
INTELLECTUAL PROPERTY RIGHTS OF THE EQUIPMENT (OR ANY PART THEREOF). LESSEE
------
SHALL LEASE THE EQUIPMENT "AS IS, WHERE IS". LESSOR HEREBY DISCLAIMS ANY AND ALL
- --------------------------------------------
SUCH WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED. LESSEE AND LESSOR AGREE
THAT ALL RISKS INCIDENT TO THE MATTERS REFERRED TO IN THIS SECTION ARE TO BE
BORNE BY LESSEE. Lessor has and shall have no responsibility for the
installation, adjustment or servicing of the Equipment. The provisions of this
Section have been negotiated and are intended to be a complete exclusion and
negation of any representations or warranties by Lessor, express or implied,
with respect to the Equipment that may arise pursuant to any law now or
hereafter in effect, or otherwise. In no event shall defect in, or unfitness of,
any or all of the Equipment, or any breach of warranty or representation by any
or every Manufacturer or other Vendor relieve Lessee of the obligation to pay
rent or to make any other payments required hereunder or to perform any other
obligation hereunder. Without limiting the generality of the foregoing, Lessor
shall not be responsible or liable for any (i) defect, either latent or patent,
in any of the Equipment or for any direct or consequential damages therefrom,
(ii) loss of use of any of the Equipment or for any loss of profits or any
interruption in Lessee's business occasioned by Lessee's inability to use any or
all of the Equipment for any reason whatsoever, or (iii) in the event that any
Vendor delays or fails to make delivery of any or all of the Equipment or fails
to fulfill or comply with any purchase contract or order. For as long as no
Event of Default shall have occurred hereunder, Lessor hereby transfers and
assigns to Lessee during the Lease Term (as hereinafter defined) all right and
interest of Lessor in any Manufacturer's and other Vendor's warranties with
respect to any and all of the Equipment, and agrees to execute all documents
reasonably necessary to effect such transfer and assignment, except that to the
extent any rights of Lessor with respect to the Equipment may not be assigned
or otherwise be available to Lessee, Lessor shall instead use reasonable efforts
to enforce such rights against such Manufacturers or other Vendors but only upon
the request and at the expense of Lessee.
4. Primary Term. The Primary Term for each item of the Equipment shall
commence on the Lease Commencement Date provided for by the Rental Schedule for
such Equipment, and unless sooner terminated pursuant to the provisions of this
Lease, shall be for the number of calendar months set forth in such Rental
Schedule, plus the number of days remaining in any partial calendar month if the
Lease Commencement Date occurs on other than the first day of a month.
Notwithstanding the foregoing, the provisions of this Master Lease on
indemnification of Lessor by Lessee shall apply between Lessor and Lessee with
respect to any Equipment from the time that any order for the Equipment is
placed by Lessor.
5. Rent. (a) Lessee shall pay to Lessor in cash or by check as rent for
the Equipment during the Lease Term, the amounts provided for in the Rental
Schedule ("Basic Rent") for such Equipment on the dates designated therein
("Payment Dates"), at the location of Lessor set forth therein, or at such other
address or to such other person or entity as Lessor, from time to time, may
designate.
(b) Lessee shall also pay to Lessor, upon notice by Lessor to Lessee that
payment is due, any sums other than for Basic Rent that Lessee at any time shall
be required to pay Lessor pursuant to the provisions of this Lease, including
but not limited to sums payable by reason of payments by Lessor to any Vendors
in advance of the delivery of such Equipment or the commencement of the Lease
Term for such Equipment, together with every additional charge, interest and
cost which may be added for non-payment or late payment of any such sums or of
Basic Rent. All such sums shall be additional rent ("Additional Rent") and
Lessor shall provide Lessee with notification as to the amount of any Additional
Rent. If Lessee shall fail to pay any Additional Rent, Lessor shall have all
rights, powers and remedies with respect thereto as are provided herein or by
law in the case of non-payment of Basic Rent.
(c) With respect to any amount of Basic Rent or Additional Rent not
received by Lessor within three days from when due hereunder, Lessee shall pay
to Lessor interest on such amount from the due date thereof until payment is
received by Lessor at two percent per month or the highest rate of interest on
amounts past due that is not unlawful, whichever is lower (the "Default Interest
Rate"). Additionally, with respect to each such instance of
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late payment, Lessee shall pay to Lessor, within three days of notification that
such payment is due, a collection fee of $500, which fee approximates Lessor's
administrative costs, at minimum, to collect such unpaid Basic Rent or
Additional Rent.
(d) LESSEE AGREES THAT TIME IS OF THE ESSENCE TO LESSOR IN LESSEE'S MAKING
PAYMENTS OF BASIC RENT AND ADDITIONAL RENT WHEN SUCH PAYMENTS BECOME DUE.
(e) This Lease is a net-net-net lease and, notwithstanding any other
provisions of this Lease, it is intended that Basic Rent and Additional Rent
shall be paid without notice, demand, counterclaim, setoff, deduction or defense
and without abatement, suspension, deferment, diminution or reduction. Lessee
shall perform all its obligations under this Lease at its sole cost and expense.
Except to the extent otherwise expressly specified herein, the obligations and
liabilities of Lessee hereunder shall in no way be released, discharged or
otherwise affected for any reason, including, without limitation: (i) any
defect in the condition, quality or fitness for use of the Equipment or any part
thereof; (ii) any damage to, removal, abandonment, salvage, loss, scrapping or
destruction of or any requisition or taking of the Equipment or any part
thereof; (iii) any restriction, prevention or curtailment of or interference
with any use of the Equipment or any part thereof; (iv) any defect in title or
rights to the Equipment or any lien on such title or rights or on the Equipment;
(v) any change, waiver, extension, indulgence or other action or omission in
respect of any obligation or liability of Lessor; (vi) any bankruptcy,
insolvency, reorganization, composition, adjustment, dissolution, liquidation or
other like proceedings relating to Lessee or any action taken with respect to
this Lease by any trustee or receiver of Lessee or by any court, in any such
proceeding; (vii) any claim that Lessee has or might have against any Person (as
hereinafter defined), including without limitation Lessor; (viii) any failure on
the part of Lessor to perform or comply with any of the terms hereof or of any
other agreement; (ix) any invalidity, unenforceability or disaffirmance of this
Lease or any provision hereof against or by Lessee; or (x) any other occurrence
whatsoever, whether similar or dissimilar to the foregoing, whether or not
Lessee or Lessor shall have notice or knowledge of any of the foregoing. To the
extent permitted by law, Lessee waives all rights now or hereafter conferred by
statute or otherwise to quit, terminate, cancel, rescind or surrender this
Lease, or to any diminution or reduction of Basic Rent or Additional Rent
payable by Lessee hereunder.
6. Lessee's Representations and Warranties. Lessee represents and
warrants (and if requested by Lessor, promptly will provide supporting documents
to the effect and an opinion of counsel substantially in the form requested by
Lessor) that as of the date that Lessee signs this Master Lease, as of any date
that Lessor makes a payment to a Vendor prior to the date all Equipment has been
accepted for lease hereunder, as of each date that any Equipment is accepted for
lease hereunder and as of each Lease Commencement Date pursuant to a Rental
Schedule hereunder: (i) all items of the Equipment are new and unused as of the
Lease Commencement Date, unless otherwise specified in the applicable Rental
Schedule in which event the specified items of the Equipment shall have been
delivered new to Lessee by their suppliers not more than 90 days prior to their
Lease Term Commencement; (ii) Lessee is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization, and is
qualified and in good standing to do business wherever necessary to carry on its
present business and operations, including the jurisdictions where the Equipment
is or will be located; (iii) Lessee has the power to enter into this Lease and
the other instruments and documents executed by Lessee in connection herewith
(together with this Lease, the "Transactional Documents") and to pay and perform
its obligations under this Lease and the other Transactional Documents; (iv)
this Lease and the other Transactional Documents have been duly authorized,
executed and delivered by Lessee, and constitute the valid, legal and binding
obligations of Lessee enforceable in accordance with their terms; (v) no vote or
consent of, or notice to, the holders of any class of stock of Lessee is
required, or if required, such vote or consent has been obtained or given, to
authorize the execution, delivery and performance of this Lease and the other
Transactional Documents by Lessee; (vi) neither the execution and delivery by
Lessee of this Lease or the other Transactional Documents, nor the consummation
by Lessee of the transactions contemplated hereby or thereby, nor compliance by
Lessee with the provisions hereof or thereof, conflicts with or results in a
breach of any of the provisions of any Certificate of Incorporation or By-laws
or partnership or trust agreement or certificate of Lessee, or of any applicable
law, judgment, order, writ, injunction, decree, award, rule or regulation of any
court, administrative agency or other governmental authority, or of any
indenture, mortgage, deed of trust, other agreement or instrument of any nature
to which Lessee is a party or by which it or its property is bound or affected
or pursuant to which it is constituted, or constitutes a default under any
thereof or will result in the creation of any lien, charge, security interest or
other encumbrance upon any
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of the Equipment, other than the interests therein of Lessor or any Assignee (as
hereinafter defined), or upon any other right or property of Lessee or will in
any manner adversely affect Lessor's or any Assignee's right, title and interest
in any of the Equipment; (vii) no consent, approval, withholding of objection or
other authorization of or by any court, administrative agency, other
governmental authority or any other Person is required, except such consents,
approvals or other authorizations which have been duly obtained and are in full
force and effect and copies of which have been furnished Lessor, in connection
with the execution, delivery or performance by Lessee, or the consummation by
Lessee, of the transactions contemplated by this Lease and the other
Transactional Documents; (viii) there are no actions, suits or proceedings
pending, or, to the knowledge of Lessee, threatened, in any court or before any
administrative agency or other governmental authority against or affecting
Lessee, which, if adversely decided would or could, individually or in the
aggregate, materially and adversely affect the financial or other condition,
business, operations, properties, assets or prospects of Lessee or the ability
of Lessee to perform any of its obligations under this Lease or under the other
Transactional Documents, except for any such actions, suits or proceedings that
Lessee has described in writing to Lessor; (ix) no Event of Default or event or
condition which upon the passage of time, the giving of notice, or both, would
constitute an Event of Default, exists or is continuing; (x) there has been no
material adverse change or threatened change in Lessee's, any Guarantor's or any
Manufacturer's financial or other condition, business, operations, properties,
assets or prospects since the date of Lessee's, such Guarantor's or
Manufacturer's most recent financial statements reported on by an independent
public accounting firm prior to the date of this Master Lease, since the dates
of each such Person's interim and annual financial statements, if any,
subsequent to such prior statements, or from the written information that has
been supplied to Lessor by Lessee, any Guarantor or such Manufacturer; (xi)
Lessee possesses any and all authorizations, certifications and licenses which
are or may be required to use and operate the Equipment; (xii) the actual
Acquisition Cost pursuant to the applicable Rental Schedule of each item of the
Equipment does not exceed the fair and usual price for like quantity purchases
of such item and reflects all discounts, rebates and allowances for the
Equipment given to Lessee, any Guarantor or any affiliate of Lessee or any
Guarantor by any Vendor or other Person including, without limitation, discounts
for advertising, prompt payment, testing or other services; (xiii) all
information supplied to Lessor by Lessee or any Guarantor is correct and does
not omit any statement necessary to make the information supplied not
misleading; and (xiv) the financial statements of Lessee and any Guarantor have
been prepared in accordance with generally accepted accounting principles
consistently applied and accurately and completely present the financial
condition and the results of operations of Lessee and such Guarantors at the
dates of and for the periods covered by such statements.
7. Identification Marks. To the extent requested by Lessor or if
required by applicable law, Lessee shall affix to the Equipment at Lessee's
expense signs, labels, or other forms of notice to disclose Lessor's ownership
of, and the interest of any Assignee in, the Equipment. Lessee shall keep and
maintain such signs, labels or other forms of notice affixed to the Equipment
throughout the Lease Term. Lessor may furnish such signs, labels or other forms
of notice to Lessee. Except as otherwise directed by Lessor, Lessee shall not
allow the name of any person other than Lessor to be placed on any part of the
Equipment as a designation that might reasonably be interpreted as a claim of
ownership.
8. Fees and Taxes. Lessee agrees to pay promptly when due, and to
indemnify and hold Lessor harmless from, all license, title, registration and
recording fees whatsoever, all taxes including, without limitation, sales, use,
franchise, personal property, excise, import, export and stamp taxes and customs
duties, and all charges together with any penalties, fines or interest thereon
which are assessed, levied or imposed by any governmental or taxing authority
against Lessor with respect to any or all of the Equipment or the purchase,
acquisition, ownership, construction, installation, shipment, delivery, lease,
possession, use, maintenance, condition, operation, control, return or other
disposition thereof or the rents, receipts or earnings arising therefrom which
accrue or are payable with respect to the Equipment or this Lease or which are
assessed, are based on a valuation date, or are due during or with respect to
the Lease Term or any subsequent period until the Equipment has been returned to
Lessor pursuant to the provisions of this Lease or until the Equipment has been
purchased by Lessee pursuant to any purchase option provisions of this Lease,
excluding, however, any taxes solely measured by Lessor's net income from the
general operation of Lessor's business. In the event any fees, taxes or charges
payable by Lessee pursuant to the next preceding sentence are paid by Lessor, or
if Lessor is required to collect or pay any thereof, Lessee shall reimburse
Lessor therefor (plus any penalties, fines or interest thereon) promptly upon
demand. Unless and until Lessor notifies Lessee in writing to the contrary,
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Lessee shall file and pay any personal property taxes levied or assessed on the
Equipment directly to the levying authority. Upon Lessor's written request,
Lessee shall submit to Lessor satisfactory evidence of payment by Lessee of any
or all amounts for which Lessee is required to make payment or to indemnify
Lessor hereunder that are paid by Lessee, and of the filing of any and all
reports, returns and other documentation required in connection with any such
payment. However, Lessor may, if it elects, estimate such personal property
taxes and bill Lessee therefor periodically in advance. In the event Lessor
elects to pay the personal property taxes directly to a levying authority,
Lessor shall submit to Lessee a copy of its personal property tax return and its
receipt for the full amount of such personal property taxes so paid by Lessor.
All of the obligations of Lessee under this Section shall continue in full force
and effect notwithstanding any expiration, termination, rescission or
cancellation of this Lease. Lessee acknowledges that Lessor may not be exempt
from the payment of any of the amounts referred to herein, even though Lessee
might have been exempt therefrom if it were the owner or purchaser of the
Equipment, and Lessee agrees that this Section shall apply, and the amounts due
from it hereunder shall be due, whether or not Lessee might itself have
otherwise been exempt from any such payments. Subject to the foregoing, Lessee
shall have the right to contest in good faith any such taxes levied or imposed
by any governmental or taxing authority, provided that Lessee shall have given
Lessor not less than ten days prior notice of its intention to contest and full
particulars of the proposed contest, in the opinion of Lessor the proposed
contest will not adversely affect the interests of Lessor or any Assignee, and
Lessee either shall have paid the taxes or provided for a bond or other security
so that none of the Equipment will be subject to seizure, confiscation or
forfeiture. For purposes of this Section, the term "Lessor" shall include each
member of Lessor's affiliated group, if any.
9. General Indemnity. (a) Lessee shall indemnify Lessor and any Assignee
(as hereinafter defined), and their respective agents and servants, against, and
agrees to defend, protect, save and keep them harmless from, any and all
liabilities, obligations, losses, damages, penalties, claims, actions, suits,
costs, expenses and disbursements, including attorneys' fees and expenses and
costs for customs, completion, performance and appeal bonds, of whatsoever kind
and nature (including, without limitation, for negligence, tort liability,
damages by reason of strict or absolute liability, punitive damages, and
indirect and consequential damages, but excluding any such amounts imposed or
incurred as a result of Lessor's gross negligence or willful misconduct),
imposed on or incurred by or assessed against Lessor and/or any Assignee, in any
way relating to or arising out of (i) the failure of Lessee to provide or obtain
any certificates, documents, consents, authorizations, clearances, licenses,
permits or instruments required hereunder or under any of the other
Transactional Documents, or (ii) the ordering, construction, installation,
delivery, testing, ownership, lease, possession, use, maintenance, operation,
control, movement, import, export, shipment, condition, or return of the
Equipment (including but not limited to latent and other defects, whether or not
discoverable by Lessor or Lessee, and any claim for patent, trademark,
copyright, software or other intellectual property infringement) until such time
as the Equipment shall have been returned to Lessor pursuant to the provisions
of this Lease or until the Equipment shall have been purchased by Lessee
pursuant to any purchase option provisions of this Lease.
(b) The obligations of Lessee under this Section shall survive the payment
of all known obligations under and any expiration, termination, rescission or
cancellation of this Lease, and are expressly made for the benefit of and shall
be enforceable by Lessor, its successors and any Assignee.
10. Use of Equipment; Location; Liens. (a) During the Lease Term, Lessee
warrants and agrees that the Equipment shall be used and operated and otherwise
be in compliance with any established operating procedures therefor of any
Manufacturer and all statutes, regulations and orders of any governmental body
having power to regulate the Equipment or its use. Lessee shall bear and pay
all costs of such compliance. Lessee shall not permit the Equipment to be used
or maintained in any manner or condition that would violate, or could result in
the termination of, the insurance policies carried by Lessee pursuant to the
provisions of this Lease on insurance, or in any manner or condition or for any
purpose for which, in the opinion of any Manufacturer, the Equipment is not
designed or suited.
(b) Lessee agrees that without Lessor's prior written consent, it will not
remove any of the Equipment from the location specified in the Rental Schedule
for such Equipment or permit any of the Equipment to be used by anyone other
than Lessee, Lessee's employees or a responsible independent contractor engaged
by Lessee.
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(c) During the Lease Term and until the Equipment has been returned to
Lessor pursuant to the provisions of this Lease or until the Equipment is
purchased by Lessee pursuant to any purchase option provisions of this Lease,
Lessee will not directly or indirectly create, incur, assume or suffer to exist
any mortgage, security interest, lien or encumbrance on the Equipment or
Lessor's or any Assignee's title thereto or interest therein, except in the name
of Lessor and its successor(s) and any Assignee. Lessee, at its own expense,
will promptly take such action as may be necessary to keep the Equipment free
and clear of, and to duly discharge, any such mortgage, security interest, lien
or encumbrance not excepted above.
(d) Lessee agrees to procure and maintain in effect all licenses,
certificates, permits and other approvals and consents required by federal,
state and local laws and regulations in connection with Lessee's possession,
use, operation and maintenance of the Equipment. During the Lease Term, Lessee
agrees that 100 percent of the use of the Equipment shall be "qualified business
use" as that term is and shall be from time to time defined by the Internal
Revenue Code of 1986, as amended.
(e) Lessee shall cooperate fully with Lessor or any Assignee to perfect
and record their respective interests in connection with the Transactional
Documents including, without limitation, the filing of financing statements and
will pay such Persons their reasonable costs related thereto. Lessee authorizes
Lessor to file financing statements that are signed only by Lessor or that are
signed for Lessee by Lessor in any jurisdiction when permitted by law or local
authority. Lessee hereby grants to Lessor power-of-attorney to act as Lessee's
attorney-in-fact to sign Lessee's name on financing statements as "Debtor".
11. Maintenance and Repairs; Additions to Equipment. (a) Lessee shall,
for the entire Lease Term, at its sole expense, maintain all of the Equipment in
good, safe and efficient operating repair, appearance and condition, will keep
all components of the Equipment properly calibrated and aligned, will make all
required adjustments, replacements and repairs and will obtain and install any
upgrades for the Equipment that are announced and available for sale by a
Manufacturer (collectively, "maintenance and repairs"). Such maintenance and
repairs shall include, but not be limited to, all recommended or advised by a
Manufacturer, all required or advised by cognizant governmental agencies or
regulatory bodies and all commonly performed by prudent business and/or
professional practice. All maintenance and repairs to any item of the Equipment
shall be made by the Manufacturer or, upon prior written approval by Lessor,
those of substantially equal skill or knowledge in maintaining and repairing the
Equipment.
(b) Lessee shall not modify the Equipment without the prior written
consent of Lessor. Any replacements, substitutions, additions, attachments,
accessions, parts, fittings, accessories, modifications, enhancements,
maintenance and repairs and other upgrades to the Equipment whenever made shall
be considered accessions to the Equipment and shall automatically become the
property of Lessor.
(c) All instruction manuals, published statements of capabilities and
technical specifications, service, maintenance and repair records, installation,
qualification, certification and calibration reports, usage logs, and printed
material relating to the Equipment shall be deemed part of the Equipment.
Computer programs, programming codes, operating systems, data processing
instructions, series of instructions or statements which are machine readable,
and any like symbols or signals usable by an electronic data processing system
(collectively "Software") that has been or shall be installed or entered in the
Equipment shall become a part of the Equipment except for any Software that is
proprietary Software of Lessee and is not a modification, change, enhancement or
improvement to any Software which is identified or listed in the description of
specific items of the Equipment in or attached to a Rental Schedule. Whenever
Lessee acquires Software licenses from other parties, with respect to the
Software such licenses shall automatically and without further action by Lessee
be assigned to Lessor and become through assignment a part of the Equipment
transferable to any future user of the Equipment for use with the Equipment.
12. Loss, Damage or Destruction of Equipment. (a) Lessee shall bear all
risks of damage to, taking of, or theft, loss or destruction of, any or all of
the Equipment commencing as of the date of this Master Lease and continuing
throughout the Lease Term and until such Equipment has been returned to Lessor
or purchased by Lessee pursuant to any purchase option provisions of this Lease.
Except as otherwise herein expressly provided,
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no damage to, taking of or theft, loss or destruction of any Equipment shall
impair any obligation of Lessee to Lessor under this Lease, including, without
limitation, the obligation to pay Basic Rent.
(b) In the event that any item of Equipment shall become damaged from any
cause whatsoever, Lessee agrees to promptly notify Lessor in writing of such
fact, fully informing Lessor of the details thereof. If any item of Equipment
is damaged (unless the same, in the opinion of Lessor is irreparably damaged, in
which case the provisions of this Lease with respect to a Casualty Occurrence
shall apply), Lessee shall, at its sole cost and expense, place the same in good
repair, condition and working order or replace the same with "like property"
having the same value and operating capabilities and useful life at least equal
to the damaged Equipment prior to the date of such damage, which property shall
thereupon become subject to this Lease with title thereto in Lessor. In the
event that an item of Equipment has been damaged, but not irreparably, if no
Event of Default has occurred and is continuing hereunder, upon receipt by
Lessor of evidence, satisfactory to Lessor, that such repair, restoration or
replacement has been completed, and an invoice therefor, Lessor shall release to
Lessee or its supplier the proceeds of any insurance received by Lessor as a
result of such damage for the purpose of reimbursing Lessee for the costs of
repairing, restoring or replacing such item.
(c) In the event that any item of Equipment shall become lost, stolen,
destroyed or irreparably damaged from any cause whatsoever, or if any item of
Equipment or Lessor's title thereto shall be requisitioned or seized by any
governmental authority (each such occurrence being herein called a "Casualty
Occurrence") during the Lease Term and until it has been returned to Lessor
pursuant to the provisions of this Lease or until the Equipment is purchased by
Lessee pursuant to any purchase option provisions of this Lease, Lessee shall
promptly notify Lessor in writing of such fact, fully informing Lessor of all
details of the Casualty Occurrence in question, and shall pay Lessor in cash the
greater of (i) the "Stipulated Loss Value" as set forth in the Table of
Stipulated Loss Values attached to the Rental Schedule pursuant to which such
item of Equipment is leased hereunder, calculated as of the date of the Casualty
Occurrence, or (ii) the Fair Market Value (as hereinafter defined) of the item
of Equipment in question as of the date of the Casualty Occurrence. This
payment shall be made within 30 days following the Casualty Occurrence, together
with the Basic Rent accrued and unpaid with respect to such Equipment as of the
date of the Casualty Occurrence, plus all Additional Rent or amounts owing with
respect to such Equipment on such date of payment.
(d) Upon the payment of the greater of the Stipulated Loss Value or Fair
Market Value of the Equipment in question in accordance with the terms of this
Section, and the payment of all Basic Rent, Additional Rent and any other sums
then due hereunder, this Lease shall terminate with respect to the Equipment or
part thereof suffering the Casualty Occurrence and all Lessor's rights and title
to such Equipment shall pass to Lessee, "as is" and "where is", without any
representation or warranty by, or recourse to, Lessor, as provided by the
provisions of this Master Lease on disclaimer of warranties and as evidenced by
a duly executed bill of sale naming Lessor as the seller and Lessee as the
buyer.
(e) Provided that no Event of Default has occurred and no event that with
the passage of time or giving of notice, or both, would be an Event of Default
has occurred and is continuing, any insurance proceeds received as the result of
a Casualty Occurrence with respect to any or all items of the Equipment shall be
applied first in reduction of any other then unpaid obligation of Lessee to
Lessor hereunder and second in reduction of Lessee's obligation to pay the
greater of the Fair Market Value or the Stipulated Loss Value for such item if
not already paid by Lessee to Lessor, or, if already paid by Lessee, to the
reimbursement of Lessee therefor, and the balance of the insurance proceeds, if
any, shall be paid to Lessee.
13. Reports; Inspections. Lessee will cause to be furnished to Lessor, if
requested, from time-to-time a statement showing the condition and such other
information regarding the Equipment as Lessor may reasonably request. Lessor
and any Assignee shall have the right, upon reasonable notice to Lessee, to
inspect the Equipment including Lessee's records with respect to the Equipment,
to copy such records, and to inspect and copy Lessee's records with respect to
the financial statements Lessee is required to furnish Lessor or has warranted
to Lessor pursuant to this Lease. Any inspection by Lessor or any Assignee shall
not be deemed to be approval or acknowledgment by Lessor or such Assignee of the
safety, freedom from defects, performance or compliance with specifications or
governmental requirements of the Equipment or of the conformity of the Equipment
or such
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financial statements to the requirements or warranties of this Lease, and the
disclaimers set forth in the provisions of this Master Lease on disclaimer of
warranties shall apply to any such inspection. Lessee shall pay or reimburse
Lessor for Lessor's costs and travel expenses for one such inspection per year,
and for Lessor's costs, travel expenses and salaries and the charges and such
expenses of Lessor's advisers for the inspection following an inspection which
encountered a breach of the requirements of this Lease or the warranties of
Lessee pursuant to this Lease.
14. Insurance. During the Lease Term and until all Equipment has been
returned to Lessor pursuant to the provisions of this Lease or until the
Equipment is purchased by Lessee pursuant to any purchase option provisions of
this Lease, Lessee shall procure and maintain at its expense with reputable
insurers acceptable to Lessor (i) insurance on all of the Equipment in an amount
not less than the greater of the Equipment's Stipulated Loss Value or Fair
Market Value replacement cost insuring against all risks of loss or damage to
the Equipment and against such other risks as Lessee would, in the prudent
management of its properties, maintain with respect to similar equipment owned
by it, and (ii) comprehensive public liability and property damage insurance, in
such amounts as shall be satisfactory to Lessor but for not less than the
greater of $1,000,000 or the amounts customarily maintained by parties similar
to Lessee for similar leased equipment with similar contemplated use, insuring
Lessor and any Assignees, as their interests may appear, against liability for
death, bodily injury, professional malpractice, and property damage arising out
of or resulting from the design, construction, manufacture, ownership, use,
operation, lease or maintenance of, or otherwise in connection with, the
Equipment. On the policies referred to in clause (i), such insurance shall name
Lessor (and any Assignees) as the sole loss payee so that (and Lessor and Lessee
hereby agree that) the insurance proceeds payable under such policies will be
payable and paid solely to Lessor (and to any Assignees). On the policies
referred to in clause (ii), such insurance will name Lessor (and any Assignees)
as an additional insured as its interests may appear. All such policies shall
provide that they may not be invalidated against Lessor (or any Assignees)
because of any violation of a condition or a breach of warranty of the policies
or application therefor by Lessee, that they may not be altered or canceled
except after 30 days' prior written notice to Lessor, and that Lessor and any
Assignee have the right but not the obligation to pay the premiums with respect
to coverage required by this Lease in order to continue such insurance in effect
or to obtain like coverage. Under the policies of insurance required to be
maintained by Lessee pursuant to this Master Lease, Lessee agrees to waive any
right of subrogation and to cause the insurance carrier to waive any right of
subrogation in each instance as such right may exist against Lessor or any
Assignee and for any and all loss or damage to the Equipment. Lessee shall
maintain and deliver evidence to Lessor of such insurance written by insurers
and in amounts satisfactory to Lessor. Should Lessee fail to provide such
insurance coverage, Lessor may obtain coverage protecting interests of Lessor
and Lessee, or the interest of Lessor only, for part or all of the Lease Term or
such period beyond the Lease Term as is required by this Lease or by the
insurance company issuing such coverage. The proceeds of such insurance shall be
applied, at the option of Lessee if no Event of Default shall exist, and
otherwise at Lessor's option, toward (i) replacement, restoration or repair of
the Equipment or (ii) payment of the obligations of Lessee under this Lease.
Lessee hereby appoints Lessor as Lessee's attorney-in-fact to make claims for,
receive payment of, and execute and endorse all documents, checks or drafts for
loss or damage under any such policies.
15. Return of Equipment. (a) At the end of the Lease Term for any
Equipment, Lessee at its sole expense shall forthwith return possession of such
Equipment without omissions to Lessor by:
(i) properly preparing, crating and/or assembling such Equipment (in
accordance with the Manufacturer's instructions if such instructions exist) for
shipment by common carrier with all containers and pieces labeled with model,
part and unit numbers and descriptions; and
(ii) shipping such Equipment by common carrier, with insurance and freight
prepaid, to a place designated by Lessor within a 1,000 mile radius of the
specified location under this Lease for such Equipment. Lessor shall pay
additional shipping charges incurred because of distances in excess of such
1,000 miles.
The insurance required by clause (ii) above shall provide that in the event
of loss such insurance shall pay Lessor in cash directly the greater of (A) the
full replacement value of such Equipment and (B) the "Stipulated Loss Value" as
set forth in the Exhibit to the Rental Schedule calculated as of the Payment
Date next preceding the date
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<PAGE>
of loss. Lessee acknowledges that "full replacement value" may exceed Fair
Market Value.
(b) When the Equipment is returned to Lessor it shall be complete. The
condition of the Equipment including Software upon receipt by Lessor shall be
not less than (i) meeting all specifications for such fully up graded equipment
as published most currently by the respective Equipment vendor(s),
Manufacturer(s) or supplier(s) (collectively referred to, together with their
successors and assigns, if any, as "Vendors"), (ii) in fully operational
condition, (iii) capable of being installed and operated in the normal course by
another user, (iv) for each item of the Equipment for which the Vendor has a
program of maintenance and service including certification for reinstallation
and for qualification under the maintenance and service program certified in
writing by the Vendor that the items of the Equipment are in compliance with the
conditions specified in this paragraph, are accepted by the Vendor for
reinstallation and are qualified for the usual and customary service and
maintenance program of the Vendor, (v) legally qualified for future use or
operation of the Equipment by another lessee or purchaser of the Equipment, (vi)
free of defects, visible or concealed, including, but not limited to, damage or
malfunction of any kind, dents, fractures, chips, scratches, stains,
defacements, discolorations, rust, corrosion, electrical shorts, fluid
restrictions or blockages, disconnections, breakage or the like, (vii) safe for
routine and usual operation, (viii) in compliance with any and all pertinent
governmental or regulatory rules, laws or guidelines for its operation or use,
(ix) free of Lessee's markings or labelings, and (x) free of any advertising or
insignia not requested by Lessor that was placed on the Equipment by Lessee.
(c) Lessor reserves the right to inspect the Equipment within 30 days of
its return to verify compliance with the provisions of this Master Lease on
Equipment maintenance and repairs and additions and on return of Equipment.
Should there be less than full compliance, Lessor at its option may (i) perform
or cause to be performed through service organizations of its own choosing such
maintenance and repairs, including upgrades, replacements, the obtaining of
paid-up Software licenses and other services, as it deems necessary to effect
such compliance, (ii) require Lessee to perform or cause to be performed such
maintenance and repairs, including upgrades, replacements, the obtaining of
paid-up Software licenses and other services, as Lessor deems necessary to
effect such compliance and/or (iii) reasonably estimate the costs to effect such
compliance. Lessee shall pay to Lessor the costs for performance of (i) or (ii)
above, or the estimated costs under (iii) above, in any such case including the
costs of the inspection(s). If maintenance and repairs, including upgrades,
replacements, and the obtaining of paid-up Software licenses and other services,
are necessary to place any of the Equipment under any Rental Schedule in the
condition required by this Lease, Lessee shall continue to pay to Lessor monthly
Additional Rent at the last prevailing rate during the Lease Term for Basic Rent
on the Equipment under such Rental Schedule for the period of delay until all
such required maintenance and repairs can be performed, or for the period of
time reasonably necessary to accomplish such maintenance and repairs. For any
such period that applies, Lessee shall continue to provide the insurance
required during the Lease Term. However, Lessor's acceptance of such rent and
provision of insurance during such period shall not constitute a renewal of the
Lease Term, a waiver of Lessor's right to prompt return of such Equipment in the
condition required by this Section, or a waiver of Lessor's right to possession
of such Equipment.
(d) Should the inspection reveal any item(s) of the Equipment to be
missing, Lessee shall be responsible for paying to Lessor promptly the greater
of the Stipulated Loss Value or the Fair Market Value of such item(s) of the
Equipment computed as of the last Payment Date prior to the end of the Lease
Term, plus the amount of any impairment of the Fair Market Value of the
remaining item(s) of the Equipment due to the absence of such missing item(s) of
the Equipment.
(e) In the event that Lessee fails to return any of the Equipment when
required, at the election of Lessor effected by notice to Lessee, the Lease Term
for such Equipment shall be extended on a month-to-month basis on the same terms
as previously in effect, and Lessee shall pay to Lessor monthly in advance Basic
Rent for such Equipment at the last prevailing rate during the unextended Lease
Term, until such Equipment has been returned to Lessor pursuant to the
provisions of this Lease. Notwithstanding any month-to-month continuance of
this Lease, Lessor may resort to any remedies available to it under this Lease,
at law or in equity, to recover such Equipment at any time following the end of
such extended Lease Term.
(f) Lessor may give notice to Lessee not more than 120 days and not less
than 30 days prior to the end
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<PAGE>
of the Lease Term that Lessee shall delay returning the Equipment to Lessor and
shall keep the Equipment on the premises of Lessee in working condition after
the end of the Lease Term and until requested by Lessor to return the Equipment
or until six months after the end of the Lease Term, whichever first occurs, at
which time Lessee shall forthwith return possession of the Equipment without
omissions to Lessor as provided by the provisions of this Section other than
this paragraph. After the end of the Lease Term, Lessee shall not use the
Equipment except in the performance of demonstrations requested by Lessor.
During the period from notice to delay returning the Equipment until requested
to return the Equipment or six months after the end of the Lease Term, Lessee
shall maintain the Equipment in the same condition as required to be maintained
during the Lease Term, shall cooperate with Lessor, shall grant access to
Lessee's premises for inspection of the Equipment by potential purchasers and
future lessees of the Equipment and representatives of Lessor, and shall
facilitate demonstrations of the Equipment by Lessor. During such period and
thereafter until the Equipment is delivered to a common carrier with the
insurance upon such delivery required by this Section, Lessee shall continue to
maintain the insurance required by this Lease during the Lease Term. Lessee
shall continue to have the risk of loss of the Equipment and the obligation to
indemnify Lessor as provided by this Lease until the return of the Equipment to
Lessor following such period and delivery.
(g) Not less than 180 days prior to expiration of the Lease Term, if
Lessee has not given notice of the exercise of any purchase option and Lessor
has not given notice of the exercise of any option to require Lessee to purchase
such Equipment, Lessee shall give Lessor notice that Lessee shall be returning
the Equipment forthwith upon the expiration of the Lease Term unless otherwise
notified by Lessor and either (i) that the Equipment is in the condition
required by this Lease upon the return of the Equipment or (ii) specifying the
respects in which the condition of the Equipment is not in compliance with such
requirements and the measures that Lessee shall take to bring the Equipment into
compliance.
16. Lessor's Ownership; Equipment To Be and Remain Personal Property. (a)
Lessee acknowledges and agrees that it does not have, and by execution of this
Lease and/or payments and performance hereunder it shall not have or obtain, any
title to the Equipment, nor any property right or interest, legal or equitable,
therein, except its rights as Lessee hereunder and subject to the terms hereof.
Lessee shall not have or claim a security interest and shall not seek or obtain
replevin, detinue, specific performance, sequestration, claim and delivery, or
like remedies in or for this Lease, any rents under this Lease, any or all of
the Equipment, any items of personal property identified to become items of the
Equipment, or any proceeds of any or all of the foregoing.
(b) All of the Equipment shall be and remain personal property
notwithstanding the manner in which the Equipment may be attached or affixed to
realty. Upon the expiration, cancellation or termination of the Lease Term of
any or all of the Equipment, Lessee shall have the obligation, and Lessor shall
have the right, to remove, or cause the removal of, such Equipment from the
premises where the same is then located, for return to Lessor pursuant to the
provisions of this Master Lease on return of Equipment and, if applicable, on
Events of Default, whether or not any of the Equipment is affixed or attached to
realty or to any building. In the exercise of its rights, Lessor shall not be
liable for any damage to the realty or any such building or other real or
personal property occasioned by any removal of the Equipment by Lessee or Lessor
or the agents of Lessee or Lessor. Lessee further covenants and agrees that
Lessee will, at the request of Lessor, obtain and deliver to Lessor concurrently
with the execution and delivery of each Rental Schedule, a waiver, in recordable
form, from the owner and any landlord, tenant or holder of any lien or
encumbrance on the realty or building(s) on or in which any of the Equipment
described in such Rental Schedule shall be located, under which such owner,
landlord, tenant and holder (i) agree and consent that such Equipment is and
shall be personal property, owned by and removable by Lessor upon the
expiration, cancellation or termination of the Lease Term thereof, and (ii)
waive any rights of distraint or similar rights with respect to such Equipment.
(c) If Lessee is unable to return, or is prevented from returning, any of
the Equipment to Lessor upon the expiration, cancellation or termination of the
Lease Term as required under the provisions of this Master Lease on return of
Equipment, for any reason whatsoever, including, but not limited to, the
assertion by any third party of any claim against such Equipment, or of any
right with respect thereto, whether or not resulting from the manner in which
such Equipment is affixed or attached to, or installed in, the realty or any
building(s)
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<PAGE>
thereon or any other personal or real property, or from the failure of any
owner, landlord or tenant of said realty (or the building(s) thereon) or the
holder of any lien or encumbrance to execute the waiver in writing of such fact,
for all purposes of this Lease such Equipment shall be deemed to have been the
subject of a Casualty Occurrence. Thereupon, Lessee shall pay to Lessor the
amounts provided for by the provisions of this Master Lease on loss, damage or
destruction of Equipment, with respect to such Equipment, at the time, in the
manner, and with the consequences provided by such provisions.
(d) Notwithstanding the foregoing provisions of this Section, without
Lessor's prior written consent, Lessee shall not permit any of the Equipment to
be attached or affixed to, imbedded in or incorporated into any building,
structure, real estate or other personal or real property.
17. Other Covenants. (a) Lessee agrees to furnish, upon Lessor's
request, such financial, business and operational information concerning Lessee
and any or all Guarantors, including copies of its and their tax returns, as
Lessor or its assigns may reasonably request during the Lease Term.
Additionally, Lessee shall furnish to Lessor and its assigns without notice or
demand therefor two complete copies of its and of every Guarantor's (i)
quarterly interim financial statements within 45 days of the close of each of
the first three fiscal quarters of every year, certified by the chief financial
officer of, respectively, Lessee or such Guarantor and (ii) annual financial
statements within 90 days of the close of each fiscal year reported on by
independent accountants without material adverse qualification or comment. All
such financial statements shall be prepared in accordance with generally
accepted accounting principles consistently applied, and shall accurately and
completely present Lessee's and every Guarantor's financial condition and
results of operations at the dates of and for the periods covered by such
statements.
(b) Lessee shall promptly furnish to Lessor copies of (i) filings that
Lessee or any Guarantor makes with the SEC or other government agencies under
the securities laws including but not limited to definitive proxy statements,
registration statements, prospectuses and tender offer filings, and reports on
holdings or acquisitions of securities, relating to proxy solicitations, and on
Form 10-K, 10-Q, 8-K or similar forms, and any amendments to such filings, (ii)
press releases of Lessee or any Guarantor, and (iii) new product (or service)
announcements of Lessee or any Guarantor.
(c) If Lessee has been notified by Lessor, in writing, of Lessee's
default, then Lessee shall give Lessor notice of all meetings of the
stockholders or directors of such corporation and copies of all materials that
are furnished to the stockholders or directors for the meetings at the same time
that the notice or materials are sent to the stockholders or directors. If
Lessee or any Guarantor or a general partner of Lessee or any Guarantor is a
partnership, Lessee shall give Lessor notice of all meetings of such partnership
and copies of all materials that are furnished to the part ners for the meetings
at the same time that the notice or materials are sent to the partners. Lessor
shall have the right to have its representative attend any and all such meetings
at the expense, including travel costs, of Lessee.
(d) There shall be no actual or threatened conflict with, or violation of,
any statute, regulation, standard or rule relating to Lessee, its present or
future operations, or the Equipment.
(e) All information supplied to Lessor or its assigns by Lessee or any
Guarantor shall be correct and shall not omit any statement necessary to make
the information supplied not be misleading. There shall be no material breach
of the representations and warranties made by Lessee in connection with this
Lease or by any Guarantor in connection with a Guaranty (as hereinafter
defined).
(f) Lessee shall give Lessor notice of any change in the address of the
executive office or principal place of business of Lessee not less than 15 days
prior to the change.
(g) No change shall occur in the control (the result of an Initial Public
Offering does not reflect a change in ownership), and no material change shall
occur in the ownership, of Lessee or any Guarantor, and no Guarantor shall
assert in writing that the obligations of the Guarantor as a Guarantor or in its
Guaranty are not in full force and effect.
(h) Lessee shall not make any payment or distribution of money, checks,
securities or property to any
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Person in contravention of the provisions of any Guaranty or subordination that
such Person has made in favor of Lessor or its assigns of which Lessee shall
have notice or knowledge.
18. Events of Default. If one or more of the following events
(hereinafter called "Events of Default" or an "Event of Default") shall occur:
(i) default shall be made in the payment of any Basic Rent or Additional
Rent due under this Master Lease or under any Rental Schedule hereto, and any
such default shall continue for more than 10 days after the due date thereof;
(ii) any representation or warranty by Lessee or any Guarantor made in
this Master Lease or in any Guaranty or other Transactional Document or
certificate furnished to Lessor in connection with this Lease or pursuant hereto
shall at any time prove to be incorrect in any material respect;
(iii) Lessee shall make or permit any unauthorized assignment or transfer
of this Master Lease or any Rental Schedule to this Master Lease or of any of
Lessee's rights and obligations hereunder or thereunder, or Lessee shall make or
permit any unauthorized sublease or transfer of any Equipment or the possession
of any Equipment;
(iv) Lessee shall default in the observance and/or performance of any
other covenant, condition or agreement on the part of Lessee to be observed
and/or performed under this Master Lease, under any Rental Schedule hereto, or
under any other Transactional Document, which default is not governed by
paragraphs (i), (ii) or (iii) above, and such default shall continue for 30 days
after written notice from Lessor to Lessee specifying the default and demanding
the same to be remedied;
(v) Lessee or any Guarantor shall make an assignment for the benefit of
creditors, or cease being in substantially the same line or lines of business in
which it is presently engaged, or generally fail to pay its debts as they become
due, or become insolvent or commence a voluntary case under the federal
Bankruptcy Code as now or hereafter constituted or any other applicable federal
or state bankruptcy, insolvency or similar law, or admit in writing its
inability to pay its debts as they mature, or consent to the appointment of a
trustee or receiver, or a trustee or a receiver shall be appointed for Lessee or
any Guarantor or for a substantial part of Lessee's or any Guarantor's property
without such party's consent and such appointment shall be not dismissed for a
period of 60 days; there shall have been entered a decree or order for relief by
a court having jurisdiction in respect of Lessee or any Guarantor, or approving
as properly filed a petition seeking a reorganization, arrangement, adjustment
or composition of or in respect of Lessee or any Guarantor in an involuntary
proceeding or case under any applicable federal or state bankruptcy, insolvency
or other similar law, or appointing a receiver, liquidator, assignee, custodian,
trustee or similar official of Lessee or any Guarantor or of any substantial
part of its property, or ordering the winding-up or liquidation of its affairs,
and the continuance of any such decree or order unstayed and in effect for a
period of 60 days, or there shall have been filed a petition by or against
Lessee or any Guarantor under any bankruptcy law or other insolvency law and, if
petition is filed against Lessee or such Guarantor, the petition is not
withdrawn or dismissed within 60 days after the date of filing; or Lessee or any
Guarantor shall cease doing business as a going concern or shall liquidate or
be dissolved;
(vi) Lessee or any Guarantor shall, without the prior written consent of
Lessor, enter into a merger, consolidation or division, effect a share exchange
of its outstanding stock for the stock of another corporation, make a tender
offer for equity securities of a publicly held entity, or sell or otherwise
dispose of all or a major part of its assets or of assets that produce all or a
major part of its revenues or profits; provided, however, that Lessee or any
Guarantor, without violating the provisions of this clause, may consolidate with
or merge with a corporation or other entity organized under the laws of one of
the states of the United States (the surviving entity, a "successor"), or sell
(except by means of a sale and leaseback arrangement) all or substantially all
of its business and assets to such a successor, on the condition that any
successor expressly assume in writing all of the obligations of Lessee pursuant
to this Lease or of such Guarantor pursuant to its Guaranty, and that the net
tangible assets and the net worth (determined in accordance with generally
accepted accounting principles) of the successor after the consolidation, merger
or sale shall be at least equal to the net tangible assets and the net worth of
Lessee or such Guarantor, as the case may be, immediately prior to the
consolidation, merger or sale;
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(vii) there shall occur under any other lease, contract or agreement
between Lessee and Lessor, an Event of Default, as defined in such lease,
contract or agreement;
(viii) any of the Equipment shall be attached, levied upon, encumbered,
pledged, seized or taken under any judicial process (except for any attachment,
levy, encumbrance or pledge caused to be placed on the Equipment by Lessor) and
such proceedings shall not be vacated, or fully stayed, within 30 days thereof;
(ix) at any time there shall occur under (A) any lease between Lessee and
a party other than Lessor as lessor or (B) under any lease wholly or partially
guaranteed by Lessee, the exercise by the lessor of its possessory remedies or
commencement of legal proceedings by the lessor for default under the lease;
provided that the aggregate future payments remaining to be made or guaranteed
by Lessee exceed $10,000, and that under a lease described in (B) above within
ten days of notice to Lessee of such exercise of remedies and demand for payment
by Lessee any such amount guaranteed by Lessee remains unpaid; or
(x) any obligation of Lessee or any Guarantor for the payment of
borrowed money or the acquisition of assets by purchase, conditional sale or
other arrangement is not paid or refinanced at maturity, whether by acceleration
or otherwise, or is declared due and payable prior to the stated maturity
thereof by reason of default or other violation of the terms of any promissory
note or agreement evidencing or governing such obligation, and Lessor has given
Lessee an opportunity to either cure the purported Event of Default or supply
information satisfactory to Lessor that it does not, in fact, exist;
this Lease shall be declared in default, immediately and without notice upon the
occurrence of an Event of Default specified in clause (v) above, and in the case
of any other Event of Default, upon Lessor at any time at its option subsequent
to such Event of Default giving notice to Lessee that this Lease is declared in
default. At any time after this Lease has been declared in default, Lessor may
exercise one or more of the following remedies, to the extent not then
prohibited by law, as Lessor in its sole discretion may elect:
(I) to proceed by appropriate court action or actions at law or in
equity or in bankruptcy to enforce performance by Lessee of the covenants and
terms of this Lease and/or to recover damages for the breach thereof;
(II) to terminate or cancel this Lease upon written notice to Lessee
whereupon all rights of Lessee to use the Equipment shall immediately terminate,
but Lessee shall not be relieved of any obligations under this Lease;
(III) whether or not this Lease be so terminated or canceled, and without
notice to Lessee, to repossess and/or to render inoperable the Equipment
wherever found, with or without legal process, and for this purpose Lessor
and/or its agents may enter upon any premises of or under the control or
jurisdiction of Lessee or any agent of Lessee without liability for suit, action
or other proceeding by Lessee and remove the Equipment therefrom; Lessee hereby
expressly waives any claims for damages occasioned by such repossession; LESSEE
HEREBY EXPRESSLY WAIVES ANY AND ALL RIGHTS, INCLUDING RIGHTS TO NOTICE OR A
JUDICIAL HEARING, WITH RESPECT TO REPOSSESSION OF THE EQUIPMENT AFTER AN EVENT
OF DEFAULT;
(IV) to hold or to use any Equipment returned to Lessor or repossessed by
Lessor for any purpose whatsoever, to sell any Equipment at a private or public,
cash or credit sale, to re-lease any Equipment, in all the foregoing events free
and clear of any rights of Lessee and without any duty to account to Lessee with
respect to such action or inaction;
(V) whether or not Lessor shall have exercised, or shall hereafter at
any time exercise, any of its other rights with respect to an item of the
Equipment, upon written notice to Lessee, to demand that Lessee pay to Lessor,
and Lessee shall pay to Lessor on the date specified in such notice, as
liquidated damages for loss of a bargain and not as a penalty (in lieu of the
Basic Rent for such Equipment that prior to the Event of Default was to have
been paid on Payment Dates subsequent to the date specified in such notice), the
sum equal to the excess, if any, of 125% of the Stipulated Loss Value for such
- ---
item of Equipment computed as of the latest Payment Date when all Basic Rent and
------------
Additional Rent then due and payable has been fully paid over whichever of the
following three amounts Lessor, in its sole discretion, shall designate in such
notice:
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(A) the present value of the fair market rental value (determined as
hereafter provided in this Section) of such item of the Equipment for
the remainder of the Lease Term as of the date specified in such
notice, the present value to be computed on the basis of a seven
percent per annum rate of discount from the respective dates upon
which such rent would be paid,
(B) the fair market sales value (determined as hereafter provided in this
Section) of such item of Equipment as of the date specified in such
notice, or
(C) if Lessor shall have sold or re-leased any item of Equipment pursuant
to clause (IV) above, the net proceeds of such sale or re-lease,
plus interest at the Default Interest Rate (a) on such sum from the such Payment
--- -------
Date until paid and (b) on whichever of such three amounts is so designated by
- ----
Lessor from such Payment Date until whichever one of the following shall be
------------
applicable to the designated amount: the time when the fair market rental or
sales value shall have been so determined or the time when the Equipment shall
have been sold or re-leased; and
(VI) to forthwith recover from Lessee, and Lessee shall be fully liable
for, all Basic Rent that shall accrue until the date that the Equipment is
returned to or repossessed by Lessor and any Additional Rent including
collection fees, whenever accrued, and interest at the Default Interest Rate.
In addition to the foregoing, Lessor may also recover from Lessee all costs
and expenses arising out of Lessee's default, including, without limitation,
expenses of repossession of the Equipment and the storage, inspection, repair,
reconditioning, sale and re-leasing thereof, and reasonable attorneys' fees
incurred by Lessor in exercising any of its rights or remedies hereunder. For
the purposes of this Section only, "fair market rental value" and "fair market
sales value" shall be determined by an appraisal of an independent appraiser
chosen by Lessor, and the cost of any such appraisal shall be borne by Lessee.
No remedy referred to in this Section is intended to be exclusive, but each
shall be cumulative and in addition to any other remedy referred to above or
otherwise available to Lessor at law or in equity or in bankruptcy. Lessor
shall have no duty to pay Lessee any surplus from sale or lease of the
Equipment, or in the fair market rental or sales value of the Equipment, above
all amounts payable by Lessee to Lessor. The exercise by Lessor of any one or
more remedies shall not be deemed to preclude the simultaneous or later exercise
by Lessor of any or all such previously exercised remedies and any and all other
remedies.
19. Assignment and Transfer by Lessor. (a) Lessor may at any time and
from time to time assign to one or more security assignees (all herein called
the "Secured Party" and also called an "Assignee") for the purpose of securing a
loan to Lessor or for any other purpose, and at its sole discretion, may also
sell or transfer to one or more Persons (herein called the "Transferee" and also
called an "Assignee"), in any case subject to the rights of Lessee under this
Lease but without notice to or consent of Lessee, this Lease, any other
Transactional Documents, any or all of the Equipment, and all sums at any time
due and to become due or at any time owing or payable by Lessee to Lessor under
this Lease or pursuant to any or all of the Transactional Documents. The
Secured Party shall not be obligated to perform any duty, covenant or condition
required to be performed by Lessor under this Lease or any other Transactional
Documents.
(b) Lessee agrees that notwithstanding any assignment to a Secured Party,
each and every covenant, agreement, representation and warranty of Lessor under
this Lease shall be and remain the sole liability of Lessor and of every
successor in interest of Lessor (excluding any Secured Party) or, in the case of
assignment to a Transferee, shall become and remain the sole liability of the
Transferee if so agreed to by the Transferee and if not so agreed to shall be
and remain the sole liability of Lessor. Lessee further agrees and acknowledges
that any assignment, sale or transfer by Lessor could not and shall not
materially change any duty or obligation of Lessee or materially increase any
burden or risk of Lessee.
(c) Lessee further acknowledges and agrees that from and after the receipt
by Lessee of written notice of an assignment from Lessor, Lessee shall comply
with the directions or demands given in writing by the Secured Party or (to the
extent not inconsistent with the directions or demands of the Secured Party) by
the Transferee, and
14
<PAGE>
the Secured Party or Transferee shall have the right to exercise (either in its
own name or in the name of Lessor) all rights, privileges, and remedies of
Lessor provided for herein. Lessee agrees that any obligation to a Secured Party
as a result of the assignment of this Lease to a Secured Party as aforesaid
shall not be reduced or minimized by reason of any claim, defense, counterclaim,
set-off, abatement, reduction or recoupment or other right that Lessee might
otherwise have been able to assert against Lessor, any prior Assignee or any
Transferee. After any assignment to a Secured Party and unless and until Lessee
is otherwise notified by the Secured Party, this Lease may not be amended or
modified, and no consent or waiver hereunder shall be effective, without the
prior written consent of the Secured Party. Lessee agrees to execute and Lessor
or any Transferee or Secured Party may record any instruments and documents
relating to such assignment, mortgage or security interest desired by Lessor or
any Transferee or Secured Party. Lessee shall promptly provide any such
instruments and documents that are requested by Lessor or any Assignee including
certificates indicating any claim, defense, counterclaim, set-off, abatement,
reduction, recoupment or other right that Lessee may have against Lessor or any
Assignee, the date to which Basic Rent has been paid under each Rental Schedule
hereunder and that this Lease is in effect without default or amendment, or the
extent of such default or amendment, as the case may be.
20. Recording and Filing; Expenses. Lessee will, upon demand of Lessor,
at Lessee's cost and expense, do and perform any other act and will execute,
acknowledge, deliver, file, register, record and deposit (and will re-file, re-
register, re-record or re-deposit whenever required) any and all instruments
required by law or requested by Lessor (or any Assignee) including, without
limitation, financing statements under the Uniform Commercial Code (which,
notwithstanding the intent of Lessor and Lessee that this is a true lease,
Lessor shall have the right to file wherever and whenever Lessor requires), for
the purpose of providing proper protection to the satisfaction of Lessor (and/or
any Assignee) of Lessor's title to any Equipment (and/or of any Assignee's
security interest in the Equipment) or for the purpose of carrying out the
intention of this Lease. Lessee will also pay, or will upon demand reimburse
Lessor for, all reasonable costs and expenses incurred by Lessor in connection
with this Lease, any other Transactional Documents, and any related
transactions, closings, assignments, sales and transfers to any Secured Party or
Transferee, enforcement of Lessor's rights under this Lease and the other
Transactional Documents, proceedings involving Lessee or any Guarantor as a
debtor under any chapter of the Bankruptcy Code, filings, the documentation of
this and any related transactions, and fees and costs of attorneys for Lessor in
connection therewith.
21. Option to Renew. (a) Upon the expiration of the Primary Term
provided for under any Rental Schedule, and provided that the financial
condition of Lessee then meets the criteria of Lessor and that no Event of
Default or event which with the giving of notice or lapse of time, or both,
would constitute an Event of Default, has occurred and then remains unremedied
to Lessor's satisfaction, Lessee shall have the option, exercisable on at least
180 days' prior written notice to Lessor, to renew this Lease with respect to
all, but not less than all (except for items that have been destroyed and for
which Lessor has received payment of the greater of the Stipulated Loss Value or
the Fair Market Value with respect thereto) of the Equipment then subject to
such Rental Schedule, for up to two successive additional renewal terms (each a
"Renewal Term") of one year at a rate of Basic Rent for each Renewal Term that
would be obtained in an arm's-length transaction at the end of the Primary Term
between an informed and willing prospective lessee and an informed and willing
lessor, each under no compulsion to lease (said rate being herein called the
"Fair Rental Rate").
(b) If, on or before a date 100 days prior to the expiration of the
Primary Term or any Renewal Term with respect to such Rental Schedule, Lessor
and Lessee are unable to agree upon a determination of the Fair Rental Rate of
the Equipment, Lessee shall have no obligation to renew this Lease and shall
either give the notice required by the provisions of this Master Lease of
intention to return such Equipment and on the condition of such Equipment or a
written notice that Lessee wishes to proceed with its option. If Lessee gives
such notice that it will proceed with its option, such Equipment shall be leased
during the Renewal Term at the Fair Rental Rate determined in accordance with
the procedure for Appraisal (as hereinafter defined).
22. Quiet Enjoyment. So long as no Event of Default has occurred and is
continuing hereunder, Lessee shall have peaceful and quiet use and enjoyment of
the Equipment during the Lease Term as against acts of Lessor or anyone claiming
solely by, through or under Lessor including any Secured Party or Transferee.
15
<PAGE>
23. Failure or Indulgence not Waiver; Additional Rights of Lessor. (a)
No failure to exercise, and no delay in exercising, any right, power or remedy
hereunder on the part of Lessor shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
Any waiver, to be effective, must be in writing. A waiver of any covenant, term
or condition contained herein shall not be construed as a waiver of any
subsequent breach of the same covenant, term or condition. Receipt by Lessor of
any Basic Rent or Additional Rent with knowledge of the breach of any provision
hereof shall not constitute a waiver of such breach.
(b) Lessor shall be entitled to injunctive relief in case of the violation
or attempted or threatened violation of any of the provisions hereof, to a
decree compelling performance of any of the provisions hereof, and to any other
remedy allowed in law or in equity.
24. Sublease. Lessee shall not sublease the Equipment, relinquish
possession of the Equipment, or assign, pledge or hypothecate this Lease or any
of Lessee's rights or obligations hereunder, in whole or in part, without the
prior written consent of Lessor. Nevertheless, any such sublease and the rents,
profits and proceeds therefrom shall be the property of Lessor and, unless
Lessor has consented to such sublease, Lessor within 30 days after receiving
notice thereof in accordance with the provisions of this Master Lease on notices
shall have the right to declare the sublease void from its purported
commencement, to terminate the sublease or to accept the sublease. Any such
attempted relinquishment of possession, assignment, pledge or hypothecation by
Lessee without such consent shall be null and void.
25. Purchase Option. (a) If (i) no Event of Default, and no event which
with the giving of notice or lapse of time, or both, would constitute an Event
of Default, has occurred and then remains unremedied to Lessor's satisfaction,
and (ii) this Lease shall not have been earlier terminated, Lessee shall be
entitled, at its option, upon written notice to Lessor, as hereinafter provided,
to purchase all, but not less than all, items of the Equipment then subject to a
Rental Schedule, at the expiration of the Primary Term for such items of the
Equipment or, as the case may be, at the expiration of any Renewal Term for such
items of the Equipment, for an amount, with respect to each such item of the
Equipment, payable in immediately available funds, equal to the Fair Market
Value thereof as determined by an Appraisal, plus any applicable sales, excise
or other taxes imposed as a result of such sale (other than net income taxes
attributable to such sale). Lessor's sale of any item of the Equipment shall be
on an "as-is", "where-is" basis, without any representation or warranty by or
recourse to Lessor, as provided by the provisions of this Master Lease on
disclaimer of warranties, and shall be subject to such additional terms and
conditions as may be specified in the Rental Schedule. If Lessee intends to
exercise said purchase option, Lessee shall give written notice to Lessor to
such effect at least 180 days prior to the earliest expiration of the Primary
Term of the item(s) of the Equipment subject to the particular Rental Schedule
with respect to which Lessee intends to exercise its purchase option, or, if a
Renewal Term is then in effect, at least 180 days prior to the earliest
expiration of the then current Renewal Term of the item(s) of the Equipment
subject to the particular Rental Schedule with respect to which Lessee intends
to exercise its purchase option. If Lessee fails to give such written notice to
Lessor as aforesaid, it shall be conclusively presumed that Lessee has elected
not to exercise such purchase option. If Lessee gives such written notice,
Lessee shall be obligated to buy, and Lessor shall be obligated to sell, such
Equipment on the terms herein provided.
(b) If Lessee has elected to exercise its purchase option, as provided in
this Section, as soon as practicable following Lessor's receipt of the written
notice from Lessee of Lessee's intent to exercise such option, Lessor and Lessee
shall consult for the purpose of determining the Fair Market Value of each such
item of the Equipment as of the end of the Primary Term thereof, or, if this
Lease has been renewed pursuant to any provisions of this Lease on option to
renew, as of the end of the then current Renewal Term thereof, and any values
agreed upon in writing shall constitute the Fair Market Value of each such item
of the Equipment for the purposes of this Section. In so consulting, Lessor and
Lessee may refer to books containing indexes of standard values for used
equipment of relevant type and age and to the records of Lessee and similar
users which tabulate the history of revenues and various other economic benefits
derived from the use of the Equipment. If Lessor and Lessee have failed to agree
upon such value prior to the 150th day before the expiration of the Primary
Term, or, if this Lease has been renewed, prior to the 150th day before the
expiration of the then current Renewal Term, on and after such 150th day either
party may request that such value be determined by Appraisal.
16
<PAGE>
(c) Notwithstanding any election by Lessee to purchase, the provisions of
this Lease shall continue in full force and effect until the transfer of
ownership of such Equipment upon the date of purchase by the delivery of a Bill
of Sale by Lessor.
26. Notices. Any notice or other communication required or permitted to
be given by either party hereto to the other party shall be deemed to have been
given upon its receipt, in writing, by the receiving party at its address set
forth below, or at such other address as the receiving party shall have
furnished to the other party by notice pursuant to this Section.
If to Lessee: Orthovita, Inc.
45 Great Valley Parkway
Malvern, PA 19355
17
<PAGE>
If to Lessor: FINOVA Technology Finance, Inc.
10 Waterside Drive
Farmington, CT 06032-3065
27. Entire Agreement; Severability; Amendment or Cancellation of Lease.
This Lease constitutes the complete and exclusive statement of the terms of the
agreement between the parties with respect to the leasing of the Equipment and
any sale of the Equipment by Lessor to Lessee. Any provision of this Lease
which is prohibited or unenforceable in any jurisdiction shall be, as to such
jurisdiction, ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof, and any such prohibition
or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. LESSEE ACKNOWLEDGES
RECEIPT OF A COPY OF THIS MASTER LEASE. Lessor and Lessee agree that neither
this Lease nor Lessee's acceptance or deemed acceptance of any or all of the
Equipment may be canceled, waived, altered, amended, repudiated, terminated,
rescinded, revoked or modified, except by a writing signed by Lessee and a duly
authorized representative of Lessor.
___________________________
Signature of Lessee
28. Waiver of Jury. Lessor and Lessee waive any right and all right to
trial by jury in any action or proceeding relating in any way to this Lease.
29. Restriction of Limitation Periods and Damages. Any action for breach
of warranty or in respect of or relating to the Equipment or this Lease that may
be brought by Lessee against Lessor or any Assignee must be commenced within one
year after the cause of action accrues. Lessee shall not make any claim in
respect of or relating to the Equipment or this Lease against Lessor or any
Assignee for special consequential or punitive damages.
30. Governing Law; Consent to Jurisdiction and Service. This Lease shall
be governed by and construed in accordance with the laws of the State of
Connecticut (other than the conflicts of laws provisions). Lessee agrees that
any legal action or proceeding against Lessee in respect of or relating to this
Lease or the Equipment may be brought in any state or federal court sitting in
the city of Hartford in the State of Connecticut. Lessee hereby irrevocably
consents and submits to the nonexclusive personal jurisdiction of said courts
and irrevocably agrees that all claims in any such action or proceeding may be
heard and determined in and enforced by any such court. Lessee irrevocably
consents to the service of summons, notice, or other process relating to any
such action or proceeding by delivery thereof to it by hand or by mail in the
manner set forth in the provisions of this Master Lease on notices.
31. Lessor's Right to Perform for Lessee. If Lessee fails to duly and
promptly perform any of its obligations under this Lease or fails to comply with
any of the covenants or agreements contained herein, Lessor may itself perform
such obligations or comply with such covenants or agreements, for the account of
Lessee, without thereby waiving any default, and any amount paid or expense
(including, without limitation, attorney's fees) reasonably incurred by Lessor
in connection with such performance or compliance shall, together with interest
thereon at the Default Interest Rate, be payable by Lessee to Lessor on demand.
32. Agreement for Lease Only. Lessor and Lessee agree that this Lease is
and is intended to be a true lease (and not a lease in the nature of a security
interest) and further agree to treat this Lease as a true lease for all
purposes, including, without limitation, tax purposes.
33. Binding Effect. This Lease shall inure to the benefit of and be
binding upon the parties hereto and their respective permitted successors and
assigns.
34. General. The captions in this Master Lease and each Rental Schedule
are for convenience of reference only. There shall be only one original
executed copy of this Master Lease and of each Rental Schedule. This
18
<PAGE>
Master Lease is and each Rental Schedule shall be executed in the State of
Connecticut by Lessor's having countersigned the same in the State of
Connecticut, and are to be and shall be performed in the State of Connecticut by
reason of the requirements therein for payment by Lessee to Lessor to be made in
the State of Connecticut.
35. Definitions. The following terms, not elsewhere defined, shall have
the following meanings for all purposes hereof:
"Acquisition Cost" of any item of the Equipment shall mean an amount equal
to the sum of (i) the purchase price of such item of the Equipment paid by
Lessor pursuant to the purchase order for such item of the Equipment assigned to
or given by Lessor, plus (ii) any excise, sales or use tax, freight,
installation, set-up and other costs that are paid by Lessor on or with respect
to such item of the Equipment on or about the time of Lessor's purchase of the
Equipment or the Lease Commencement Date and that Lessor does not request Lessee
to directly reimburse to Lessor.
"Appraisal" shall mean the following procedure whereby recognized
independent qualified equipment appraisers shall mutually agree upon the amount
in question. The party seeking Appraisal shall deliver a written notice to that
effect to the other party appointing its appraiser, and within 15 days after
receipt of such notice, the other party shall, by written notice, appoint its
appraiser. If within 15 days after appointment of the two appraisers as
described above, the two appraisers are unable to agree upon the amount in
question, a third appraiser shall be chosen within five days thereafter by
mutual agreement of the first two appraisers, or if the first two appraisers
fail to agree upon the appointment of a third appraiser, such appointment shall
be made by an authorized representative of the American Arbitration Association.
The appraisal of the third appraiser shall be given within a period of ten days
after the selection of the third appraiser. The average of the three appraisals
arrived at by the three appraisers shall be binding and conclusive on Lessor and
Lessee. Lessor and Lessee each shall pay the fees of the appraiser appointed by
it and shall share equally the fees and expenses of the third appraiser, if any,
and those of the American Arbitration Association, if applicable.
"Certificate of Inspection and Acceptance" shall mean a certificate in the
form designated by Lessor whereby Lessee evidences its acceptance of one or more
items of the Equipment for lease hereunder.
"Fair Market Value" shall mean, with respect to the Equipment in question, the
amount which would be paid for that Equipment in an arm's-length sale
transaction between an informed and willing buyer (not a used equipment or scrap
dealer) who wants the Equipment to be as described in the next following
sentence and is under no compulsion to buy, and an informed and willing seller
under no compulsion to sell. In determining the Fair Market Value, it shall be
assumed (whether or not the same be true) that the Equipment is fully
operational, installed and in economically productive service and that all
maintenance and repairs including upgrades, replacements and other services
required by this Lease have been performed and that the Equipment is in such
condition to comply fully with the requirements of this Lease, including
provisions of this Master Lease governing the return of Equipment. The costs of
removal from the location of current use and installation at another location
for use shall not be a deduction in determining the Fair Market Value.
Upon any exercise by Lessee of the purchase option provided for by this Master
Lease at the expiration of the Primary Term for the Equipment subject to a
Rental Schedule, Lessor and Lessee agree that the Fair Market Value shall be ten
percent (10%) of the Acquisition Cost of such Equipment.
"Guarantor" shall mean a guarantor of any or all of the obligations of
Lessee pursuant to this Lease.
"Guaranty" shall mean a writing containing a guaranty of any or all of the
obligations of Lessee pursuant to this Lease.
"Lease Commencement Date" with respect to an item of Equipment shall mean
the date of commencement of the Lease Term of the item as provided by the
applicable Rental Schedule.
19
<PAGE>
"Lease Term" with respect to an item of the Equipment shall mean the
Primary Term plus any and all Renewal Terms plus any period during which Lessee
retains the Equipment on a month-to-month basis pursuant to provisions of this
Master Lease governing the return of the Equipment. The Lease Term shall
include the Lease Commencement Date and the date on which the Lease Term ends.
"Manufacturer" shall mean the Person that manufactures the item of the
Equipment in question.
"Master Lease" shall mean this Master Equipment Lease Agreement.
"Person" shall mean an individual, a corporation, a partnership, an
association, a joint-stock company, a limited liability company, a trust, an
estate, any incorporated organization or similar association, a government or
political subdivision, or any other entity.
"Rental Schedule" shall mean each schedule, executed by Lessor and Lessee
pursuant to this Master Lease, providing for a description of some or all of the
Equipment to be leased hereunder, the place or places where such Equipment shall
be located, its Acquisition Cost, the Basic Rent payable by Lessee with respect
thereto, the Primary Term thereof, the Lease Commencement Date with respect
thereto, and such other matters as Lessor and Lessee may agree upon.
"Stipulated Loss Value" shall mean the amounts specified in the Table of
Stipulated Loss Values applicable to the items of the Equipment subject to a
Rental Schedule, as provided by the Schedule B attached to the Rental Schedule.
Except as otherwise provided in a writing signed by Lessor and Lessee, the
Stipulated Loss Value immediately prior to the end of the Primary Term for any
items of the Equipment shall be the Stipulated Loss Value throughout any Renewal
Term(s) for such items, and thereafter until such items are returned to Lessor
pursuant to the provisions of this Lease or purchased by Lessee pursuant to any
then applicable purchase option provisions of this Lease.
IN WITNESS WHEREOF, the duly authorized representatives of Lessor and
Lessee have executed this Master Lease as of the date first above written.
LESSOR: LESSEE:
FINOVA TECHNOLOGY FINANCE, INC. ORTHOVITA, INC.
By:____________________________ By:_____________________________
Title:__________________________ Title:___________________________
ATTEST:
By:_____________________________
Title:___________________________
20
<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.,
May 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 253,465 2,257,902
<SECURITIES> 0 200,000
<RECEIVABLES> 303,523 569,441
<ALLOWANCES> 46,424 100,078
<INVENTORY> 332,787 248,707
<CURRENT-ASSETS> 905,960 3,277,766
<PP&E> 797,491 1,944,952
<DEPRECIATION> 206,322 360,708
<TOTAL-ASSETS> 1,546,137 4,862,010
<CURRENT-LIABILITIES> 4,046,283 4,358,625
<BONDS> 0 0
0 7,383,090
10,582 10,582
<COMMON> 46,223 51,977
<OTHER-SE> (4,145,490) (7,775,255)
<TOTAL-LIABILITY-AND-EQUITY> 1,546,137 4,358,010
<SALES> 1,860,326 3,311,540
<TOTAL-REVENUES> 1,860,326 3,311,540
<CGS> 887,236 1,096,848
<TOTAL-COSTS> 7,162,104 9,998,945
<OTHER-EXPENSES> (22,097) 20,910
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 273,036 148,156
<INCOME-PRETAX> (6,439,953) (7,953,319)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,439,953) (7,953,319)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 397,402
<CHANGES> 0 0
<NET-INCOME> (6,439,953) (7,555,917)
<EPS-PRIMARY> (1.59) (1.60)
<EPS-DILUTED> 0 0
</TABLE>
