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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] for the fiscal year ended December 31, 1999
or
[_]Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
to .
Commission file number 0-24517
ORTHOVITA, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2694857
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45 Great Valley Parkway 19355
Malvern, Pennsylvania (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (610) 640-1775
Securities registered pursuant to Section 12(b) of the Act:
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(Title of class) Name of each exchange on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this annual report on Form 10-K or
any amendment to this annual report on Form 10-K. [_]
As of March 15, 2000, the aggregate market value of the Common Stock held
by non-affiliates of the registrant was $76,000,032. Such aggregate market
value was computed by reference to the closing sale price of the Common Stock
as reported on the European Association of Securities Dealers' Automated
Quotation System on such date. For purposes of making this calculation only,
the registrant has defined affiliates as including all director, executive
officers and beneficial owners of more than ten percent of the registrant's
Common Stock.
As of March 15, 2000, there were 11,478,273 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
As stated in Part III of this annual report on Form 10-K, portions of the
following document are incorporated herein by reference:
Definitive proxy statement to be filed within 120 days after the end of the
fiscal year covered by this annual report on Form 10-K.
Unless the context indicates otherwise, the terms "Orthovita" and "Company"
refer to Orthovita, Inc. and, where appropriate, one or more of its
subsidiaries.
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TABLE OF CONTENTS
PART I
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ITEM 1. Business..................................................... 2-15
ITEM 2. Properties................................................... 15
ITEM 3. Legal Proceedings............................................ 15
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 15
PART II
Market for Registrant's Common Equity And Related Shareholder
ITEM 5. Matters...................................................... 15
ITEM 6. Selected Consolidated Financial Data......................... 16
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 17-29
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.... 30
ITEM 8. Financial Statements and Supplemental Data................... 30
Changes In and Disagreements with Accountants and Financial
ITEM 9. Disclosure................................................... 30
PART III
ITEM 10. Directors and Executive Officers of the Registrant........... 30
ITEM 11. Executive Compensation....................................... 30
Security Ownership of Certain Beneficial Owners and
ITEM 12. Management................................................... 31
ITEM 13. Certain Relationships and Related Transactions............... 31
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
ITEM 14. 8-K.......................................................... 31-32
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SIGNATURES
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PART I
Item 1. Business
In addition to historical facts or statements of current conditions, this
report contains forward-looking statements. Forward-looking statements provide
our current expectations or forecasts of future events. These may include
statements regarding anticipated scientific progress in our research programs,
development of potential products, prospects for regulatory approval,
manufacturing capabilities, market prospects for our products, sales and
earnings projections and other statements regarding matters that are not
historical facts. Some of these forward-looking statements may be identified by
the use of words in the statements such as "anticipated," "estimate," "expect,"
"project," "intend," "plan," "believe," or other words and terms similar in
meaning. Our performance and financial results could differ materially from
those reflected in these forward-looking statements due to general financial,
economic, regulatory and political conditions affecting the biotechnology,
orthopaedic and medical device industries as well as more specific risks
discussed throughout this document. Given these risks and uncertainties, any or
all of these forward-looking statements may prove to be incorrect. Therefore,
you are cautioned not to place too much reliance on any such forward-looking
statements. Furthermore, we do not intend, and are not obligated to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. We claim the protections afforded by
the Private Securities Litigation Reform Act of 1995, as amended, for our
forward-looking statements. The use of the words "Orthovita", the "Company",
"we", "us" or "our" herein refers to Orthovita, Inc., together with its
subsidiaries.
Orthovita is a leading developer of biomaterials and orthobiologics focused
on synthetic bone substitute products for orthopaedic applications primarily in
spine. The spine market represents one of the fast growing markets in
orthopaedics. We are also developing products for use in trauma and joint
replacement applications. We believe that there is a particular application for
our products in patients suffering from osteoporosis. Osteoporosis, whereby
bone becomes less dense and more likely to break, afflicts 10 million Americans
of which more than 80% are women. Our six products under development are based
on two broad technology platforms. Our patented CORTOSSTM biomaterial platform
consists of a bioactive glass and non-resorbable resin, which is used to form
synthetic cortical bone and can be delivered as either an injectable or a
putty. ORTHOCOMP(TM) Injectable, CORTOSS(TM) Injectable, and CORTOSS(TM) Putty
are under development in this platform. Our VITOSSTM orthobiologic platform
consists of a patented small particle resorbable calcium phosphate, which is
used to form osteoconductive synthetic cancellous bone and can be delivered as
an injectable or a scaffold. VITOSS(TM) Injectable and VITOSS(TM) Scaffold are
under development in this bone platform. Additionally, the two materials can be
combined to form our CORTOSSTM Implant products that incorporate the advantages
of each platform.
We are developing the CORTOSS and VITOSS product lines independently and
have retained all of the commercial rights to these products. We have a
worldwide agreement for the joint development and commercialization of
ORTHOCOMP Injectable for use in joint implant procedures, such as hip
replacements, with Howmedica, a subsidiary of Stryker Corp., the market leader
for joint implant cements.
The first product we developed was BIOGRAN(R) for use in the dental market.
In order to better focus on the orthopaedic market in, March 2000 we sold our
BIOGRAN dental grafting product line to Implant Innovations Inc. ("3i"), a
Biomet Company, for $3.9 million. We received proceeds of $3.5 million, with an
additional $400,000 held in an escrow account for one year, and realized a one-
time gain on the transaction of approximately $3.1 million.
Orthovita's Technology
The human skeleton consists of two types of bone: cortical bone (80%) and
cancellous bone (20%). Cortical bone is dense, structural and tubular in shape
and is subject to bending, load bearing and twisting forces. Cancellous bone is
less dense, more vascular and primarily subject to compressive forces. Skeletal
integrity is maintained by an ongoing process of regeneration and remodeling.
Both types of bone can be damaged from traumatic injury and degenerative
disease, such as osteoporosis, creating a need for both cortical and cancellous
synthetic bone substitutes.
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Synthetic Cortical Bone Substitute Platform
Our synthetic cortical bone substitute platform is based on a nonresorbable,
load bearing, resin composite. We currently have three products under
development derived from this platform: ORTHOCOMP Injectable, CORTOSS
Injectable, and CORTOSS Putty. Products derived this platform are formulated to
allow for controlled setting times, varying viscosities and differing
strengths. 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.
Our synthetic cortical bone platform provides the basis for products with
the ability to conform to the precise area of placement, with its fast setting
times, immediate load-bearing strength, and elasticity more closely resembling
that of natural bones. Because of their bioactivity, products derived from this
platform, we believe, will become integrated with the bone at the interface
where the bone is in contact with these products, enhancing the strength of the
bond. CORTOSS Injectable, our most advanced product under this platform,
possesses these unique properties, and unlike polymethylmethacrylate ("PMMA")
bone cement, which requires a relatively lengthy mixing time and short interval
during which the material can be used, has a mix-on-demand delivery system
which should allow the surgeon much greater flexibility. CORTOSS Putty is in an
ealier stage of development. CORTOSS Injectable is covered by two U.S. issued
patents and other U.S. and foreign patent applications are pending.
Synthetic Cancellous Bone Substitute Platform
The synthetic cancellous bone substitute platform, our other core
technology, is based on synthetic resorbable, calcium phosphate. Cancellous
bone has a lattice-like or spongy structure, which allows for nutrient
transport. We currently have two products under development from this platform,
VITOSS Injectable and VITOSS Scaffold. VITOSS Scaffold is a resorbable calcium
phosphate delivered as a preformed scaffold matrix that closely resembles the
porosity of normal cancellous bone and is replaced by bone as it is resorbed.
VITOSS Scaffold incorporates our patented nano-particle technology that enables
it to have thorough interconnected porosity, ultra-high purity and a precise
and controlled chemical composition with excellent reabsorption dynamics. We
believe our VITOSS Scaffold product will allow for both the flow of blood and
nutrients required for bone remodeling and for the seeding of signaling
molecules and growth factors to accelerate the healing process. We believe that
the characteristics of VITOSS make it potentially superior to that of calcium
phosphate based products currently on the market. VITOSS Scaffold may be
especially useful in cases where moderate load bearing, coupled with fixation
hardware, would permit quicker return to functionality in younger patients with
healthy bone physiology. VITOSS Injectable is in an earlier stage of
development. Our VITOSS platform is covered by two U.S. issued patents and
other U.S. and foreign patent applications are pending. In addition to the
products described above, the two materials can be combined to form our CORTOSS
Implant products that incorporate the advantages of each platform.
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Our Product Pipeline and Related Clinical Applications
The following table reflects the development status as of February 29, 2000
of our most advanced product candidates:
[GRAPH]
As further discussed in Government Regulations below, our product candidates
are subject to extensive regulation as medical devices by the United States
Food and Drug Administration (the "FDA") and European regulatory authorities.
For certain indications, approval (in the U.S. 510(k) clearance) may be granted
if we can establish that the product is "substantially equivalent" to certain
approved medical devices and generally does not require submission of data from
clinical studies. However the authorities may require additional information
including data from clinical studies before a substantial equivalence
determination can be made. Product approval applications for other products or
other indications must be supported by valid scientific evidence that typically
includes clinical trial data, to demonstrate the safety and effectiveness of
the device.
As described below, in December 1999, we filed a 510(k) with the FDA in the
U.S. for the approval of VITOSS Scaffold for use in bone defect repair. We have
also filed the first part of our application for approval in Europe for this
indication and expect to complete our filing in 2000 for this indication. We
also intend to file in 2000 a 510(k) application with the FDA for the use of
CORTOSS Injectable in cranial repair. As permitted by the regulations, these
filings do not include clinical data.
There can be no assurance that our clinical studies will be successful, our
applications will be made within the planned timeframe, that our 510(k)
application will be accepted without clinical data or that we will succeed in
obtaining any of the necessary regulatory approvals.
VITOSS Scaffold
Bone Defect Repair. Cancellous bone can be damaged and compressed due to
traumatic injury such as skiing or motor vehicle accidents. Cancellous bone may
also be removed in connection with surgery such as tumor resection or in
complex orthopaedic procedures leading to bone voids or gaps. We estimate that
100,000 patients suffer damage or removal of cancellous bone each year.
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Current "Scaffold" products on the market that are used to replace/repair
cancellous bone fall into three categories. Allograft or cadaver derived
products, calcium sulfate materials and coral derived materials consisting of a
hydroxyappitite shell around calcium carbonate. Allograft products may not
always be of uniform quality and consistency, and patients and physicians may
be concerned about the possibility of disease transmission. The calcium sulfate
products are non-porous tablets that resorb rapidly through dissolution
processes only. A successful cancellous replacement must resorb by both
dissolution and by cell mediated process to conduct the creation of new bone.
Coraline scaffold is mined from naturally occurring coral and has significantly
less porosity than VITOSS and is constructed from large blocks of mineral
rather than nano-sized particles.
Injectable, setting calcium phosphate cements are also used to repair
cancellous defects. These materials set to form a dense, brittle mass or block
of mineral. They are also non-porous and thus we believe they do not resorb and
turn over to bone as readily as VITOSS Scaffold.
We believe that replacement or repair of the cancellous bone with VITOSS
Scaffold will promote cancellous bone regrowth and allow patients to return
more quickly to function. Our patented method of producing VITOSS Scaffold
results in a unique porous structure closely resembling the structure of
natural cancellous bone.
In December 1999, we filed a 510(k) with the FDA in the U.S. for the
approval of VITOSS Scaffold for use in bone defect repair and have filed the
first part of our application for CE Mark approval with our notified body in
Europe for this indication.
Spinal Fusions. Many patients affected by severe back pain due to
degeneration of one or more discs are treated with a spinal fusion procedure.
Spinal fusion involves the fusing together of adjoining vertebrae in cases
where the patient has advanced disc degeneration or spinal instability. This
procedure involves surgical incision in the patient's back or abdomen. Fusions
frequently require the removal of the affected disc material and the surgical
attachment of a metal implant or a spinal fusion cage to join the two
surrounding vertebrae. The metal implant or spinal fusion cage is usually
packed with bone grafting material to help promote the union of the two
adjacent vertebrae. Bone grafting material is either autograft material, which
is obtained or harvested from the iliac crest region of the patient's own hip,
or allograft material, which is obtained from a cadaver.
The autograft harvest is an additional procedure that extends surgical time,
adding to costs and increasing blood loss and patient risk of infection or
adverse reaction from the additional time under anesthesia. Of equal concern,
harvesting bone for autograft sometimes causes protracted pain that
necessitates a trip back to the surgeon several months after the fracture
repair procedure. Allograft material may be perceived by some physicians as
less effective than autograft and may not be accepted by all patients.
We estimate that 400,000 spinal fusions are done annually, many of which use
autograft, allograft or synthetic grafting material. As further discussed in
Bone Defect Repair above, we have filed a 510(k) application with the FDA for
the use of VITOSS Scaffold in bone defect repair. We intend to initiate
preclinical studies exploring the use of VITOSS Scaffold soaked with bone
aspirate as a spinal fusion graft material. We believe VITOSS Scaffold has the
potential to replace the use of autologous grafts. The elimination of this
second operating procedure required by autograft may reduce patient pain and
potentially reduce the length of hospitalization. Therefore, VITOSS Scaffold
may be more readily accepted by patients and physicians than allograft
material.
CORTOSS Injectable
Cranial Repair Traumatic head injury or diseases affecting the brain and
eyes can require surgery to repair and treat the affected area. In order to
gain access to the brain, holes are made in the bony cranial structure, which
are required to be sealed or repaired after the surgery is completed. We
estimate that
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approximately 155,000 procedures requiring repair of the access holes or damage
from traumatic injury are performed worldwide each year. We believe that the
existence of an approved predicate device may allow CORTOSS Injectable to be
approved for use in cranial repair through the 510(k) process without the
necessity of conducting clinical trials. We have completed the preclinical
testing of CORTOSS for use in this indication and are preparing to file a
510(k) application. We believe that CORTOSS Injectable may possess superior
characteristics to the materials approved for use in this procedure today, in
particular its rapid setting and mix on demand delivery.
Long Bone Screw Augmentation. The augmentation of long bone screws is
required in cases where the patient's bone is of insufficient quality to allow
a screw to function. We estimate 1,000,000 of the 2,300,000 long bone fractures
which occur worldwide each year require external support including steel
plates. With plating, 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 that 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. We estimate that approximately 150,000 patients may require the
augmentation of screws with approximately six screws augmented per patient.
We believe the use of CORTOSS Injectable to anchor the screw in a quick and
efficient way will allow the full function of the screw to be restored. There
are no known cement products that have received FDA approval or CE marking that
would be in competition with CORTOSS Injectable for this indication. Clinical
trials for CORTOSS Injectable for this indication are being conducted in
Europe.
Vertebroplasty. We estimate there are 660,000 patients worldwide with
compression of the vertebrae due to fractures caused by osteoporosis or bone
cancer resulting in severe pain and immobility. The traditional treatments,
e.g., bed rest, bracing, narcotics or injections do not address the underlying
fracture. Vertebroplasty is a procedure for repairing the fractured vertebrae.
When used in this procedure, CORTOSS Injectable is injected into the vertebrae,
setting within minutes and becoming load bearing. The procedure can be
performed on an outpatient or short-stay basis.
Vertebroplasty provides almost immediate pain relief in over 90% of
osteoporotic patients. Early relief of pain provided by vertebroplasty results
in patients maintaining better functional capacity. Functional capacity, in
turn, is directly related to the ability to live independently and unassisted.
We are not aware of any known products that have received FDA approval or
European approval for use in this procedure and physicians currently use PMMA
"off-label". We believe that CORTOSS Injectable may have advantages over PMMA
in vertebroplasty including the ability to be seen by the physician when using
imaging equipment in performing the procedure, lower temperature setting time,
higher compression strength and the ability to be mixed on demand.
We have initiated clinical studies of CORTOSS Injectable in vertebroplasty
in Europe and believe these are the only controlled studies in this field. For
the patients accrued to date, the product has been well tolerated and effective
in stabilizing the compressive fracture and in providing significant pain
relief. We will accept additional patients into these clinical studies once we
refine the delivery needles and tubes used to deliver the material to the
vertebrae.
Compression Screw Augmentation We estimate approximately 750,000 hip
fractures occur annually of which an estimated 250,000 patients are repaired
using compression screw augmentation.
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Many osteoporotic patients, particularly elderly women, suffer a fracture of
the hip whereby the head or the "ball" of the hip ball and socket of the femur
leg bone is separated from the rest of the bone. These fractures are often
treated through the use of compression hip screws, which are placed through the
bone and into the femoral head to stabilize and compress the fracture to permit
healing. 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.
We believe the use of CORTOSS Injectable to anchor the screw in a quick and
efficient way will allow the full function of the screw to be restored. There
are no known products approved for this indication that would be in competition
with CORTOSS Injectable.
Pedicle Screw Augmentation. Many spinal surgeries today have become
possible only because of the availability of instrumentation systems that allow
manipulation and fixation of the individual elements of the spine. These
instrumentation systems are attached to the spine by means of screws placed in
the pedicle region of the vertebrae. In patients with sub optimal bone quality,
such as osteoporotic patients, the purchase or "bite" of these screws may be
insufficient to maintain the integrity of the construction.
There are approximately 280,000 patients in which pedicle screws are placed
each year. We estimate that approximately 35,000 may require the augmentation
of screws due to osteoporosis. There is no approved product for this procedure
and off-label use of PMMA, we believe, is inconvenient.
We believe CORTOSS Injectable has the potential to ensure secure fixation of
the screws, allowing the instrumentation systems to restore maximum fixation
and stabilize the spine. We believe CORTOSS Injectable's mix on demand delivery
system makes its use here convenient and practical.
Iliac Crest Repair. The bone grafting material used to pack the metal
implant and cages used in spinal fusion procedure is often autograft material,
obtained or "harvested" from the iliac crest region of the patient's own hip
through an operating procedure. This procedure leaves an open space in the
iliac crest, which is often painful and slow healing. We estimate that 400,000
spinal fusions are done annually, of which approximately 200,000 procedures use
autograft material and another 100,000 non-spinal fusion related procedures use
harvested material.
We believe that CORTOSS Injectable can be used to repair the bone void left
by the harvest procedure at the time of surgery and may reduce pain and speed
healing time.
CORTOSS Implants
Spine Revision. Spine revision surgery to restore the shape and alignment
of the spine is performed on patients suffering from deformities of the spine
such as scoliosis, which is a deviation in the normal curvature and alignment
of the spine. Spine revision and reconstruction procedures often require the
use of human cadaver bone to provide bone structure for the surgical repair.
Cadaver bone has various drawbacks, such as limited supply, poor and
inconsistent quality, and may not be accepted by all patients and physicians
due to concern over possible disease transmission. We believe there is a market
need for non-cadaver based revision products.
We believe CORTOSS Implants have the potential to address this need. CORTOSS
Implants are made of a combination of a CORTOSS outer shell and a VITOSS
Scaffold inner core that can be made in virtually any size and shape to fit the
clinical need. We believe the VITOSS Scaffold inner core will provide an
interconnected series of calcium phosphate micro pores similar to the porosity
of cancellous bone, and we expect it to be fully resorbable resulting in new
bone formation. We have identified the initial prototype design of the CORTOSS
Implants and have begun formulation development and initial mechanical studies.
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ORTHOCOMP
Reconstructive Joint Implant Procedures. Many patients, due to either
injury or osteoarthritis, need to have a skeletal joint, such as a hip or knee,
replaced by an artificial one made of metal or other materials. There are
approximately 1.1 million procedures performed with hip and knee prosthesis
worldwide. Although non-cement products are available, we estimate that in
approximately 65% of implant procedures bone cement is used to secure the new
joint to the bone. Currently, PMMA is typically used in this procedure and
Howmedica, producer of the Simplex brand of PMMA cement, has the dominant
market share. We believe that ORTHOCOMP possesses superior mechanical and
bioactive properties, and uses a more efficient delivery system than PMMA.
As further described in Sales and Marketing on June 9, 1998, we entered into
a series of agreements with Howmedica under which we will collaborate with
Howmedica to further develop our ORTHOCOMP products.
We have successfully completed a pilot preclinical study for the use of
ORTHOCOMP Injectable in joint implant procedures and are now moving this
program forward into a full-scale preclinical study. Successful results from
that study will allow our filing an Investigative Device Exemption ("IDE") for
the start of clinical studies.
Research and Development
Our products under development to date have been the result of our internal
research and development activities related more to applied research than that
of basic research discovery. We have also gained access to intellectual
property resulting from certain research carried out at the University of
Pennsylvania through a license and technology transfer agreement (the "Penn
License Agreement"). The Penn License Agreement grants us an exclusive,
worldwide right and license to use and sell products that utilize biomaterials
and certain bioactive glass fiber technology protected by the University of
Pennsylvania's patent rights for use in medical, dental and veterinary fields.
We issued 120,008 shares of our stock to the University of Pennsylvania as
partial consideration for the exclusive license. Additionally, in order to
retain our rights under the Penn License Agreement, we need to pay for the
related patent prosecution costs. We have agreed to pay a royalty of 4% of the
net sales of any products made by us that utilize technology covered by the
Penn License Agreement.
In addition, we may seek to enter into strategic alliances, or license
patented technologies or develop additional technologies to broaden our future
product offerings. We have incurred $5.3 million, $2.8 million and $2.0 million
in research and development expense in 1999, 1998 and 1997, respectively.
Patents and Proprietary Intellectual Property
We intend to file applications as appropriate for patents covering our
technologies, products and processes. As of March 24, 2000, we own or control
six issued U.S. patents, six 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
be issued from any of the pending patent applications. Since
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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, we cannot be certain that we
or any of our licensors were the first creator of inventions covered by pending
patent applications or that we or any of our licensors were 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 our proprietary position in the technology. In addition, there can
be no assurance that any patents issued to us or any of our licensors will not
be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide commercially useful competitive advantages to us.
On July 23, 1994, U.S. Biomaterials Corporation filed with the U.S. Patent
and Trademark Office a Request for Reexamination of the FBFC U.S. Patent which
provides patent protection in the U.S. for BIOGRAN. This patent has now been
assigned to 3i who purchased the BIOGRAN product line in March 2000. 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, U.S. Biomaterials
Corporation also instituted a nullification proceeding against the European
counterpart to the FBFC U.S. Patent. The opposition division of the European
Patent Office tentatively decided in FBFC's favor, but the matter is still
proceeding under an appeal. In connection with the BIOGRAN sale to 3i, 3i has
assumed control of this matter and we have agreed to reimburse for the
associated legal costs and to provide them with certain indemnification with
respect to the matter.
Spine Advisory Panel
We have a Spine Advisory Panel of physician experts that provides advise and
guidance to us in our spinal product development programs regarding potential
clinical uses of our products. Certain members of the Spine Advisory Panel have
received options to purchase common stock of the Company, a practice that the
Company may continue in the future.
Manufacturing and Product Supply
Our ability to conduct clinical trials on a timely basis, to obtain
regulatory approvals and to commercialize our products will depend in part upon
our ability to manufacture our products at a competitive price and in
accordance with applicable FDA and other regulatory requirements, including
Quality System Requirements ("QSR") and current Good Manufacturing Practice
("GMP") regulations.
We currently manufacture adequate supplies of product for clinical trials
and other studies. In order to sell our products on a commercial basis, we are
in the process of expanding our facilities and scaling-up our manufacturing
processes. Certain of our key raw materials used in the manufacturing of
CORTOSS Injectable and VITOSS Scaffold are purchased from third party vendors
some of whom are our only source of such raw materials.
Sales and Marketing
We intend to market our products, upon receipt of the necessary regulatory
approvals, through a combination of exclusive third-party strategic alliances
and arrangements with agents and distributors, depending upon the clinical
indications for which the products are intended and the geographic region in
which they are to be sold.
On June 9, 1998, we entered into a series of agreements with Howmedica under
which we will collaborate with Howmedica to further develop our ORTHOCOMP
products. Under these agreements, we granted Howmedica the exclusive worldwide
right to use and sell our ORTHOCOMP products for joint replacement surgery. We
will earn payments if and when various milestones are reached during the
development and approval process for this indication up to an aggregate of
$4,500,000. If the necessary regulatory approvals are
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received in the United States, the European Union or Japan, Howmedica will be
required to purchase from us a minimum volume of ORTHOCOMP products for each
region in which approval has been obtained for a six-year period. The annual
minimum purchase requirements may be set aside if, during the period from the
third anniversary of Howmedica's first commercial sale of an ORTHOCOMP product
until the fifth anniversary of such sale, Howmedica elects to purchase
exclusive manufacturing rights of ORTHOCOMP from us for a one-time payment of
$7,000,000. In addition, if Howmedica makes this election, they would make
royalty payments to us on future sales during the term of the Development and
License Agreement equal to 10% of Howmedica's net sales of ORTHOCOMP products
in territories with a valid claim of patent, or 5% of net sales in territories
with no such valid claim of patent.
We intend to seek arrangements with distributors and agents for the sale and
distribution of CORTOSS Injectable and VITOSS Scaffold in the U.S. and Europe.
Additionally, we seek to enter into a strategic alliance with an orthopaedic
company in Japan for the distribution, selling and marketing of CORTOSS
Injectable and VITOSS Scaffold.
Competition
Competition in the medical device industry is intense in both the U.S. and
Europe with rapid product development and technological advancement. Our
products could be rendered noncompetitive or obsolete by technological
advancements made by current or potential competitors. There can be no
assurance that we will be able to respond to technological advancements through
the development and introduction of new products. Moreover, many of our
existing and potential competitors have substantially greater financial,
marketing, sales, distribution and technological resources than us. Such
existing and potential competitors may be in the process of seeking FDA or
other regulatory approvals, or patent protection, for their respective
products. They may also enjoy substantial advantages over us 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 our products compete with procedures that have, over the years, become
standard within the medical community, there can be no assurance that the
procedures underlying our products will be able to replace more established
procedures and products. There can be no assurance that we will be able to
compete successfully against current or future competitors or that competition
will not have a material adverse effect on our business, financial condition
and results of operations.
In the orthopaedic market, we face competition from existing products and
companies, and potential competition from emerging companies developing bone
substitutes. In orthopaedic applications for trauma, we believe our VITOSS
Scaffold matrix will face competition from similar products currently on the
market or that may enter the market in the near future. We believe that VITOSS
Scaffold may have certain superior characteristics such as thorough
interconnected porosity, rapid resorption and replacement by bone. There are no
known products that have received FDA approval or a CE Mark for screw
augmentation and vertebroplasty that would be in competition with CORTOSS
Injectable for these indications; however, we may face off-label use of PMMA.
The reconstruction joint implant market is dominated by the use of PMMA, and
Howmedica, the producer of Simplex cement, has the dominant market share. We
believe that ORTHOCOMP has certain desirable attributes, such as higher
compressive strength, lower exotherm and simple mix-on-demand delivery system.
However, PMMA has been a successful product and orthopaedic surgeons will
likely be conservative in accepting new cements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Dependence on
the Commercial Success of CORTOSS and VITOSS."
Government Regulation
In order to market our products, we must apply for and be granted all
necessary regulatory approvals in Europe, the United States, Japan and other
selected geographic territories. There can be no assurance that we will succeed
in obtaining any of the necessary regulatory approvals described below.
10
<PAGE>
Europe
In order to sell our products within the European Economic Area, we are
required to achieve compliance with the requirements of the European Union
Medical Devices Directive (the "MDD") and affix CE marking on our products to
attest such compliance. To achieve this, our products must meet the "essential
requirements" defined under the MDD relating to safety and performance and we
must successfully undergo a verification of our regulatory compliance
("conformity assessment") by an independent notified body. We have selected the
TNO, or the Netherlands Organization for Applied Scientific Research, as our
notified body. The nature of the conformity assessment will depend on the
regulatory class of our products. Under European law, our products are likely
to be in Class III. In the case of Class III products, we must (as a result of
the regulatory structure which we have elected to follow) establish and
maintain a complete quality system for design and manufacture as described in
Annex II of the MDD (this corresponds to a quality system for design in ISO
9001 and EN 46001 standards). The Notified 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, we must, among other things, complete a risk
analysis and may be required to present sufficient clinical data. The clinical
data presented by us must provide evidence that the products meet the
performance specifications claimed by us, 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. We will be
subject to continued surveillance by the Notified Body and will be required to
report any serious adverse incidents to the appropriate authorities. We also
will be required to comply with additional national requirements that are
beyond the scope of the MDD.
We are in the process of implementing policies and procedures that are
intended to allow us to receive International Standards Organization
("ISO") 9000 series certification of our 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 that we intend to manufacture and market are subject to
extensive regulation by the FDA. Pursuant to the Federal Food, Drug and
Cosmetic 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 that must receive premarket
approval by the FDA to ensure their safety and effectiveness. Our products are
either Class II or Class III devices.
Before a new device can be introduced into the market, the manufacturer must
generally obtain market clearance through either a 510(k) notification or a
premarket approval ("PMA") 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."
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<PAGE>
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.
A "not substantially equivalent" determination, or a request for additional
information, could delay or prevent the market introduction of new products for
which we file such notifications. For any of our products that are cleared
through the 510(k) process, modifications or enhancements that could
significantly affect the safety or efficacy of the device or that constitute a
major change to the intended use of the device will require new 510(k)
submissions. The FDA has recently implemented a policy, under which certain
device modifications may be submitted as a "Special 510(k)," which will require
only a 30-day review. Special 510(k)'s will be limited to those device
modifications that do not affect the intended use or alter the fundamental
scientific technology of the device and for which substantial equivalence can
be demonstrated through design controls.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
Class III device for which FDA has called for PMA applications. A PMA
application must be supported by valid scientific evidence that typically
includes extensive data, including preclinical and clinical trial data, to
demonstrate the safety and effectiveness of the device, as well as extensive
manufacturing information.
An FDA review of a PMA application generally takes one to two years from the
date the PMA application is accepted for filing, but may take significantly
longer. The review time is often significantly extended should the FDA ask for
more information or clarification of information already provided in the
submission. Pursuant to FDAMA, the FDA has established a number of policies and
procedures intended to streamline preparation and review of PMAs. These include
the opportunity for device sponsors to obtain FDA agreement in writing on an
investigational plan, the opportunity to meet with FDA within 100 days of the
PMA's filing to review its status, the ability to rely on compliance with
certain national or international standards to satisfy certain PMA
requirements, and increased use of post market controls to reduce PMA data
requirements. There can be no assurance that we 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.
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<PAGE>
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
("IRBs"), 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 IRBs, 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 us 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 us with respect
to manufacturing and quality assurance activities. Revisions to the GMP
regulations impose new design control requirements on device manufacturers that
may increase the cost of complying with GMP requirements. Medical devices are
also subject to post market reporting requirements for deaths or 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. Our products and we are also subject to a variety
of state laws and regulations in those states or localities where our products
are or will be marketed. Any applicable state or local regulations may hinder
our ability to market our 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 we 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 our ability to do business.
Third-Party Reimbursement
Successful sales of our products in the United States and other markets will
depend on the availability of adequate reimbursement from third-party payers.
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
13
<PAGE>
payers to reimburse all or part of the costs and fees associated with the
procedures performed with these devices. Both public and private insurance
reimbursement plans are central to new product acceptance. For the U.S.
government, coverage and reimbursement decisions for patients eligible to
receive public health care benefits are made by the Health Care Financing
Administration ("HCFA"), which administers the U.S. Medicare and Medicaid
programs. The market for our products could be adversely affected by U.S.
legislation that reduces reimbursements under the cost reimbursement system for
the U.S. Medicare program. In certain circumstances, such as many procedures
involving PMMA cement, HCFA deems such procedures "approvable" and reimburses
the providers for such services. The U.S. 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.
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
we cannot predict the effect such changes may have on our business, the
announcement of such proposals could have a material adverse effect on our
ability to raise capital. In addition, the adoption of such proposals would
have a material adverse effect on our business, financial condition and results
of operations. Failure by hospitals and other users of our 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 our products would reduce demand for our products.
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, and payment terms vary widely
throughout the EU. Failure to obtain favorable negotiated prices with hospitals
or health care facilities could adversely affect sales of our products.
In Japan, at the end of the regulatory approval process, the Ministry of
Health and Welfare ("MHW") makes a determination of the reimbursement level of
the product. The MHW can set the reimbursement level for our products at their
discretion, and we may not be able to obtain regulatory approval in Japan or if
such approval is granted, we may not obtain a favorable per unit reimbursement
level.
Product Liability and Insurance
Our business involves the risk of product liability claims. While we have
not experienced any product liability claims to date, there can be no assurance
that product liability claims will not be asserted against our licensees or us.
Although we maintain product liability insurance in the annual aggregate amount
of up to $3 million, there can be no assurance that this coverage will be
adequate to protect us 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 us in the future on terms
satisfactory to us, if at all. A successful product liability claim or series
of claims brought against us in excess of our coverage could have a material
adverse effect on our business, financial condition and results of operations.
Employees
As of December 31, 1999, we had 50 full-time employees, consisting of eleven
persons in research and development activities, seventeen persons in
manufacturing, quality and facilities, three persons in clinical, medical and
regulatory affairs, seven persons in sales and marketing, eleven persons in
general and administrative functions, and one employee at our office in
Belgium. We had an average of 42, 33 and 53 employees in 1999, 1998 and 1997,
respectively. The increased number of employees from 1998 to 1999 is attributed
to our continued development of manufacturing, process technology and research
and development.
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The decline in employment from 1997 to 1998 is a result of our greater reliance
on exclusive third-party strategic alliances, such as our alliance with 3i, and
a reduced reliance on a direct sales force.
Item 2. Properties
Our headquarters are located at the Great Valley Corporate Center, Malvern,
Pennsylvania, which is a suburb of Philadelphia. We conduct all of our
principal activities at two adjacent facilities that total 32,000 square feet,
and which are leased or have renewal options through February 2005. We also
have our international sales and marketing activities based in our
administrative office in Grez Doiceau, Belgium.
Item 3. Legal Proceedings
In May 1996, the University of Florida Research Foundation, Inc., U.S.
Biomaterials Corporation and Block Drug Corporation filed a complaint in the
U.S. District Court for the Northern District of Florida, against us, a
distributor of BIOGRAN, and our former Chairman. This action charged the
defendants with infringement of U.S. Patent No. 4,851,046, 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 our
summary judgment motion stating that the BIOGRAN product does not infringe this
patent. The complaint also alleges false representation, unfair competition,
false advertising and trade disparagement under U.S. federal and Florida state
law and these complaints were settled with the Plaintiffs in September 1998.
During September 1998, the Plaintiffs filed with the U.S. Court of Appeals for
the Federal Circuit a request for an appeal of the U.S. District Court's
summary judgment with respect to the patent infringement claim. On October 6,
1999 the U.S. Court of Appeals entered an order affirming our motion for
summary judgment and dismissing a complaint for patent infringement. On January
4, 2000, the time period for filing a petition by the plaintiffs with the U.S.
Supreme Court expired; accordingly, this matter is considered to be finalized
in the United States.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Common Stock of the Company is quoted on the European Association of
Securities Dealers Automated Quotation ("EASDAQ"). Our ticker symbol is "VITA".
The following table reflects the range of high and low closing prices for the
common stock as reported on the EASDAQ for the stated periods.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
First Quarter, 1999.............................................. $7.40 $4.00
Second Quarter, 1999............................................. 6.50 5.00
Third Quarter, 1999.............................................. 6.40 3.85
Fourth Quarter, 1999............................................. 6.25 4.30
</TABLE>
As of December 31, 1999 there were 327 holders of record of our common
stock. On March 15, 2000, the last reported sale price of the common stock as
reported on the EASDAQ was $8.62 per share.
We have never declared or paid cash dividends on our capital stock and do
not anticipate paying any cash dividends in the foreseeable future.
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial data
that have been derived from the consolidated financial statements of Orthovita,
Inc. and subsidiaries as of and for each of the five years in the period ended
December 31, 1999 which have been audited by Arthur Andersen, LLP, independent
public accountants. This data should be read in conjunction with our
consolidated financial statements, including notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included in this document.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues(1)......... $ 1,054,120 $2,780,658 $3,311,540 $1,860,326 $ 577,753
Cost of sales........... 324,590 927,792 1,096,848 887,236 695,998
Operating expenses...... 10,755,317 7,897,961 9,998,945 7,162,104 3,066,399
Other (income)
expenses............... (529,193) (344,307) 169,066 250,939 151,406
Extraordinary item--
(gain)................. -- -- (397,402) -- --
Accretion of preferred
stock.................. -- 391,213 536,517 -- --
----------- ---------- ---------- ---------- ----------
Net loss applicable to
common shareholders.... $ 9,496,594 $6,092,001 $8,092,434 $6,439,953 $3,336,050
=========== ========== ========== ========== ==========
Net loss per common
share, basic and
diluted................ $ 0.83 $ 0.73 $ 1.60 $ 1.60 $ 1.04
=========== ========== ========== ========== ==========
Shares used in computing
net loss per common
share, basic and
diluted................ 11,411,896 8,314,679 5,050,397 4,036,150 3,215,000
=========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and short-term
investments............ $ 8,873,545 $15,355,808 $ 2,257,902 $ 253,465 $ 762,678
Total assets............ 11,321,446 18,888,632 4,862,010 1,546,137 1,508,288
Working capital
(deficit).............. 4,118,730 14,471,102 (1,080,859) (3,140,323) (914,732)
Long-term debt.......... 616,726 737,427 832,991 1,588,539 1,645,374
Redeemable convertible
preferred stock........ -- -- 7,383,090 -- --
Total shareholders'
equity (deficit)....... 5,646,669 15,528,575 (7,712,696) (4,088,685) (2,145,693)
</TABLE>
- --------
(1) Net revenues consist solely of sales of our BIOGRAN dental grafting
product. From product launch in 1994 until April 1998, we sold BIOGRAN
directly to our dental customers, and beginning in May 1998, we sold
BIOGRAN through our global distributor Implant Innovations, Inc. ("3i"). On
March 22, 2000, we sold the BIOGRAN dental grafting product line to 3i for
$3.9 million.
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<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
In addition to historical facts or statements of current conditions, this
report contains forward-looking statements. Forward-looking statements provide
our current expectations or forecasts of future events. These may include
statements regarding anticipated scientific progress in our research programs,
development of potential products, prospects for regulatory approval,
manufacturing capabilities, market prospects for our products, sales and
earnings projections and other statements regarding matters that are not
historical facts. Some of these forward-looking statements may be identified by
the use of words in the statements such as "anticipated," "estimate," "expect,"
"project," "intend," "plan," "believe," or other words and terms similar in
meaning. Our performance and financial results could differ materially from
those reflected in these forward-looking statements due to general financial,
economic, regulatory and political conditions affecting the biotechnology,
orthopaedic and medical device industries as well as more specific risks
discussed throughout this document. Given these risks and uncertainties, any or
all of these forward-looking statements may prove to be incorrect. Therefore,
you are cautioned not to place too much reliance on any such forward-looking
statements. Furthermore, we do not intend, and are not obligated to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. We claim the protections afforded by
the Private Securities Litigation Reform Act of 1995, as amended, for our
forward-looking statements.
Certain Risks Related to Our Business
We are dependent on the commercial success of CORTOSS Injectable and VITOSS
Scaffold.
Our success depends on obtaining regulatory approval for and successfully
launching our products. VITOSS Scaffold and CORTOSS Injectable, which are our
products furthest along in development, must be approved and successfully
launched during the next several years. To successfully commercialize our
products, our management team must rapidly execute our manufacturing, sales and
marketing plans. At the same time, our management team must manage anticipated
growth by implementing effective planning and operating processes. To manage
anticipated growth in operations, we may need to increase our manufacturing and
quality assurance staff, expand our manufacturing facility and expand our
marketing and distribution management staff. Our systems, procedures and
controls may not be adequate to support our expected growth in operations. If
we fail to manage our growth effectively, our business could suffer.
We are dependent on the commercial success of CORTOSS Injectable and VITOSS
Scaffold, and in particular:
-- the need to obtain their regulatory approval,
-- the need to develop at-scale manufacturing capability and capacity for
these products,
-- the need to build an effective sales and distribution network,
-- uncertainty of operating in international markets, and
-- the need for the market place to accept VITOSS and CORTOSS.
Each of these factors is described in more detail below.
We need to obtain regulatory approval.
The jurisdictions in which we will seek to market our bone substitutes will
regulate these products as medical devices. In most circumstances, we and our
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 the regulatory
review can be lengthy, expensive and uncertain. We may not ultimately obtain
the necessary regulatory approvals to market our products in any of
17
<PAGE>
the targeted markets and any such regulatory approval may include significant
restrictions on the anatomic sites and types of procedures for which our
products can be used. In addition, we may be required to incur significant
costs in obtaining or maintaining our regulatory approvals. The regulatory
requirements in some of the jurisdictions where we currently intend to market
our products are outlined below.
Modification of our products or development of new products may require us
to conduct additional clinical trials for these new or modified products and to
revise our filings with the FDA, which is time consuming and expensive. If we
were not successful in obtaining a license or redesigning our product, our
business could suffer.
United States
Regulation by FDA. Pursuant to the U.S. Federal Food, Drug, and Cosmetic
Act (the "FFD&C Act"), the FDA regulates the clinical testing, manufacturing,
labeling, sale, distribution and promotion of medical devices. Before we may
market our products in the U.S., we generally must obtain from the FDA either
market clearance through a Section 510(k) premarket notification or premarket
approval through PMA application. In December 1999, we filed a 510(k) with the
FDA for VITOSS Scaffold, based on the data from our preclinical studies, and we
intend to file a 510(k) in 2000 with the FDA for CORTOSS Injectable on a
similar basis. There can be no assurance that the FDA will find either of our
applications acceptable or "substantially equivalent." If not, then we will
have to pursue the PMA regulatory path which would require the addition of data
from clinical trials. This would result in a significant delay in the receipt
of regulatory clearance from the FDA. In addition, there can be no assurance
that the data from such clinical trials would support the receipt of regulatory
clearance from the FDA.
European Union and Other International Markets
General. The introduction of our products in markets outside the U.S. will
also be subject 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 our 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
our ability to market our products.
Requirement of CE marking in the EU. To market a product in the European
Union (the "EU"), we 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 us to market
a product in all of the member states of the EU. We intend to seek to obtain a
CE Mark from our notified body for the use of VITOSS Scaffold in metaphyseal
defects, based on the data from our preclinical studies, and we intend to seek
to obtain a CE Mark from our notified body for the use of CORTOSS Injectable in
screw augmentation and vertebroplasty supported by the data from the ongoing
clinical trials in Europe. There can be no assurance our notified body will
find any of our applications acceptable. We may be required to obtain
additional data from clinical trials for VITOSS Scaffold, which would result in
a significant delay in the receipt of the CE Mark for that product. In
addition, there can be no assurance that the data from any of our clinical
trials would support the receipt of the CE Mark by our notified body.
Requirement of MHW approval in Japan. In Japan, the approval of VITOSS
Scaffold and CORTOSS Injectable are likely to require clinical trials conducted
in Japan. Accordingly, we intend to seek a third party strategic alliance to
conduct such trials, obtain the necessary regulatory approvals and to market
our products in Japan. There can be no assurance that we will be successful in
entering into such an alliance or that, if successful, such third party will
succeed in conducting such clinical trials or in obtaining the necessary
regulatory approvals in Japan.
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<PAGE>
We need to develop at-scale manufacturing capability and capacity and we have
limited manufacturing experience.
We have limited manufacturing capacity and experience. Our future success is
dependent on our ability to manufacture our products in commercial quantities,
in compliance with regulatory requirements and in a cost-effective manner. In
order to do so we need to scale up our manufacturing processes and facilities.
There can be no assurance that we will be successful in scaling-up and
manufacturing our products in a cost-effective manner. The manufacture of our
products is subject to regulation and periodic inspection by various regulatory
bodies for compliance with GMP's, QSR's, 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 GMP's, QSR's or
other requirements and request, or seek, remedial action. Failure to comply
with such regulations or delay in attaining compliance may adversely affect our
manufacturing activities. We may not be able to obtain necessary regulatory
approvals or clearances to manufacture on a timely basis, if at all.
Our ability to manufacture VITOSS Scaffold and CORTOSS Injectable is
dependent on a limited number of specialty suppliers of certain raw materials.
The failure of a supplier to continue to provide us with these materials at a
price or quality acceptable to us, or at all, would have a material adverse
effect on our ability to manufacture these products. Although we believe that
we maintain good relationships with our suppliers, there can be no guarantee
that such supplies and services will continue to be available with respect to
our current and future commercialized products.
We need to build an effective sales and distribution network.
We currently do not have a distribution channel for our products in either
the U.S. or in Europe. We intend to build a distribution network of independent
distributors and agents in both the U.S. and Europe in order to market CORTOSS
Injectable and VITOSS Scaffold. The following describe the risks associated
with these efforts:
Any failure to build and manage our distributor organization may negatively
affect our potential market share and revenues. There are significant risks
involved in building and managing our distribution network, including the
failure to manage the development and growth of such a network, the failure to
adequately train both our employees and our outside sales agents and
distributors in the use and benefits of our products and the dependence on
outside agencies and distributors, over which we have limited or no control.
The amount and timing of resources that are devoted to the performance of
the contractual responsibilities by our distributors and agents will not be
within our control. There can be no assurance that third parties will perform
their obligations as expected, pay any required fees to us or market any
products under these agreements, or that we will derive any revenue from such
arrangements. Certain agreements may also permit these third parties to pursue
existing or alternative products in preference to our products. There can be no
assurance that our interests will continue to coincide with those of these
third parties or that they will not distribute products that could compete with
our products.
There are uncertainties when operating in international markets.
We intend to operate in international markets and a number of risks are
inherent in international operations. International sales and operations may be
limited or disrupted by the imposition of governmental controls, difficulties
in managing international operations, and fluctuations in foreign currency
exchange rates. The international nature of our business subjects us and our
representatives, agents and distributors to the laws and regulations of the
jurisdictions in which they operate, and in which our products are sold.
In Japan, the approval of VITOSS Scaffold and CORTOSS Injectable are likely
to require clinical trials. Accordingly, we intend to seek a third party
strategic alliance to conduct such trials, obtain the necessary regulatory
approvals and to market our products in Japan. There can be no assurance that
we will be successful in entering into such an alliance or that, if successful,
such third party will succeed in marketing our products in Japan.
19
<PAGE>
The market place may not accept any of our products.
Because the markets for our products are new and evolving, we cannot
accurately predict either the future growth rate, if any, or the ultimate size
of these markets. Physicians will not use our products unless they determine,
based on experience, clinical data and recommendations from prominent
physicians and mentors, that our products are safe and effective. In addition,
physicians tend to be slow to change their medical treatment practices because
of perceived liability risks arising from the use of new products and the
uncertainty of third party reimbursement for our products.
We may fail to gain market acceptance for our products, as a result of:
. our dependence on the continued publication of independent pre-clinical
and clinical data to support the use of our products;
. our failure to train a sufficient number of physicians to create demand
for our products;
. the refusal of payors to authorize insurance reimbursement for
procedures using our products.
Physicians and payors may not support the use of our products because there
is only limited preclinical or clinical data to support their effectiveness.
Our 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 our products will largely depend on our
ability to demonstrate their relative safety, efficacy, cost-effectiveness and
ease of use. We expect our initial product sales to be made to a group of early
adopting physicians. Further sales may require us to convince physicians who
currently favor existing techniques to switch to our products or to new
procedures that would use our products. Many physicians will not purchase our
products until there is sufficient, long-term clinical evidence to convince
them to alter their existing treatment methods. In addition, some payors
require the publication of peer reviewed clinical data before authorizing
payment. We believe that recommendations and endorsements by physicians will be
essential for market acceptance of our products, and we are not certain that
any such recommendations or endorsements can be obtained. There has been no
published clinical data for our products. Thus, continued publication of
positive clinical data and longer-term patient follow-up are necessary for us
to achieve significant sales growth.
Any failure in our physician training efforts could also significantly
reduce adoption rates. It is critical to the success of our sales effort to
train a sufficient number of physicians and to provide them adequate
instruction in the use of our products. We will rely on physicians to spend
their time and money to attend our training sessions. If physicians are not
properly trained they may misuse or ineffectively use our products. This may
result in unsatisfactory patient outcomes, patient injury, negative publicity
or lawsuits against us, any of which could have an adverse effect on our
product sales.
Successful sales of our products in the United States and other markets will
depend on the availability of adequate reimbursement from third-party payers.
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 payers to reimburse all or part of the costs and fees associated
with the procedures performed with these devices. Both public and private
insurance reimbursement plans are central to new product acceptance. For the
U.S. government, coverage and reimbursement decisions for patients eligible to
receive public health care benefits are made by the Health Care Financing
Administration ("HCFA"), which administers the U.S. Medicare and Medicaid
programs. The market for our products could be adversely affected by U.S.
legislation that reduces reimbursements under the cost reimbursement system for
the U.S. Medicare program. In certain circumstances, such as many procedures
involving PMMA cement, HCFA deems such procedures "approvable" and reimburses
the providers for such services. The U.S. 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.
20
<PAGE>
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
we cannot predict the effect such changes may have on our business, the
announcement of such proposals could have a material adverse effect on our
ability to raise capital. In addition, the adoption of such proposals would
have a material adverse effect on our business, financial condition and results
of operations. Failure by hospitals and other users of our 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 our products would reduce demand for our products.
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, and payment terms vary widely
throughout the EU. Failure to obtain favorable negotiated prices with hospitals
or health care facilities could adversely affect sales of our 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 our products at their discretion, and we may not be
able to obtain regulatory approval in Japan or if such approval is granted, we
may not obtain a favorable per unit reimbursement level.
We have a history of operating losses and need to raise additional capital
that may not be available in the future.
We have experienced negative operating cash flows since our inception. We
plan to continue to spend substantial funds for clinical trials in support of
regulatory and reimbursement approvals, research and development, and the
establishment of our commercial scale manufacturing capabilities and in support
of potential product launch. Factors which may cause our future capital
requirements to be greater than anticipated include the extent to which
unforeseen developments arise with our clinical trials, timing of regulatory
approval, research and development or manufacturing activities, market
acceptance of our products, the acquisition and defense of intellectual
property rights or the development of strategic alliances for the marketing of
certain of our products. We believe our existing cash as of December 31, 1999
together with the cash generated from the closing of the BIOGRAN sale will be
sufficient to meet our currently estimated operating and capital requirements
through at least December 31, 2000. We will need to obtain additional funds
through equity or debt financings, strategic alliances with third parties or
from other sources. Any such required financing may not be available on
satisfactory terms, if at all. The sale of additional equity or convertible
debt securities would result in additional dilution to our shareholders. If
additional funds are raised through the issuance of debt securities, these
securities could have certain rights senior to holders of common stock, and
could contain covenants that would restrict our operations. Any additional
financing may not be available in amounts or on terms acceptable to us, if at
all. If adequate financing is not available, we may be required to delay, scale
back or eliminate certain operations.
We have incurred substantial operating losses since our inception and, at
December 31, 1999, had an accumulated deficit of approximately $36.4 million.
These losses have resulted principally from expenses required to be incurred
before we can begin marketing our products, including the development and
patenting of our technologies, preclinical and clinical studies, preparation of
submissions to the FDA and foreign regulatory bodies, and the development of
sales, marketing and manufacturing capabilities. We expect to continue to incur
significant operating losses in the future as we continue our product
development efforts, expand our marketing and sales activities and further
develop our manufacturing capabilities.
We may never become profitable. Our future sales of product from our
synthetic cortical and cancellous bone technology platforms, if any, may not
grow, and we may not be able to achieve or maintain profitability in the
future.
21
<PAGE>
Our results of operations may fluctuate significantly in the future as a
result of a number of factors, many of which are outside of our 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 our products, the success of competitive
products, our ability to enter into strategic alliances with other companies,
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. The results
of our operations may fluctuate significantly from quarter to quarter and may
not meet expectations of securities analysts and investors.
Our success depends significantly on our ability to protect our proprietary
rights to the technologies used in our products.
General. Our success will depend in part on our ability to protect our
proprietary technology and we rely on patent protection, as well as a
combination of copyright, trade secret and trademark laws, and nondisclosure
and confidentiality agreements and other contractual restrictions to do so.
However, these legal means afford only limited protection and may not
adequately protect our rights or permit us to gain or keep any competitive
advantage. For example, our patents that have been issued may be challenged,
invalidated or circumvented by third parties. In addition, while we have
received notices of allowance with respect to some patent claims for certain
of our products, our patent applications and the notices of allowance we have
received, may not issue as patents in a form that will be advantageous to us.
Our patents and applications cover particular aspects of our products and
technology. There may be more effective technologies, designs or methods. If
the most effective treatment method is not covered by our products or
applications, it could have an adverse effect on any product sales. If we lose
any key personnel, we may not be able to prevent the unauthorized disclosure
or use of our technical knowledge or other trade secrets by those former
employees. Furthermore, the laws of foreign countries may not protect our
intellectual property rights to the same extent as the laws of the U.S.
Finally, even if our intellectual property rights are adequately protected,
litigation may be necessary to enforce our intellectual property rights, which
could result in substantial costs to us and result in a substantial diversion
of management attention. If our intellectual property is not adequately
protected, our competitors could use the intellectual property that we have
developed to enhance their products and compete more directly with which could
result in a decrease in our market share.
Intellectual Property Rights of Others. We may be sued for violating the
intellectual property rights of others. While we attempt to ensure that our
products do not infringe other parties' patents and proprietary rights, our
products may infringe. Whether a product infringes a patent involves complex
legal and factual issues, the determination of which is, in many cases, not
certain. In addition, because patent applications can take many years to
issue, there may be applications now pending of which we are unaware, which
may later result in issued patents that our products may infringe. There could
also be existing patents that one or more of our products may inadvertently be
infringing of which we are unaware. As the number of competitors in the
markets for minimally invasive treatment of spinal, trauma and joint disorders
grows, the possibility of a patent infringement claim against us increases.
There is a substantial amount of litigation over patent and other intellectual
property rights in the medical device industry generally and in the spinal
market segments particularly. Infringement and other intellectual property
claims, whether with or without merit, can be expensive and time-consuming to
litigate and divert management attention from our core business. Our products
may be covered by U.S. patents held by our competitors. We have made a careful
analysis in consultation with our experts and, based on such analysis, we
believe that either such patents or claims are invalid or if valid we do not
infringe. If the holder of patents brought an infringement action against us,
the cost of litigating the claim could be substantial. In addition, if the
relevant patent claims were upheld as valid and enforceable and our products
were found to infringe the patent, we could be prevented from selling the
relevant product unless we could obtain a license from the owner of the patent
or were able to redesign our product to avoid infringement. A license may not
be available or if available may be on terms unacceptable to us, or we may not
be successful in any attempt to redesign our products to avoid any
infringement.
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<PAGE>
In addition, to determine the priority of inventions, we 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 our existing patents or patent applications or
any future patents or applications, which could result in substantial cost to
us. Further, we may have to participate at substantial cost in International
Trade Commission proceedings to abate importation of goods that would compete
unfairly with our products.
Company Patents. We intend to file applications as appropriate for patents
covering our technologies, products and processes. As of March 24, 2000, we own
or control six issued U.S. patents, six 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, we cannot be certain that we or any of our
licensors were the first creator of inventions covered by pending patent
applications or that we or any of our licensors were 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 our proprietary position in the technology. In addition, there can be
no assurance that any patents issued to us or any of our licensors will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide commercially useful competitive advantages to us.
Ownership of Patents. Certain of the patents and patent applications in our
patent portfolio are not owned by us, but are licensed from third parties under
license agreements which give us 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
our rights under these agreements.
Enforceability of Patents. Under Title 35 of the United States Code as
amended by the General Agreement on Tariffs and Trade implementing the Uruguay
Round Agreement Act of 1994, ("GATT"), patents that issue from patent
applications filed on or prior to June 8, 1995, will enjoy a 17-year period of
enforceability as measured from the date of patent issue or a 20-year period of
enforceability as measured from the earliest effective date of filing,
whichever is longer. Patents 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 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 applications during which the FDA may not accept or approve
applications for similar or identical products from other sponsors. Any
extension under the Patent Term Restoration Act and any extension under GATT
are cumulative. There can be no assurance that we 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. 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.
23
<PAGE>
Trade Secrets and Know-how. We also rely on trade secrets and proprietary
know-how that we seek to protect, in part, by confidentiality agreements with
our corporate partners, collaborators, employees and consultants. There can be
no assurance that these agreements will not be breached, that we would have
adequate remedies for any breach, or that our trade secrets will not otherwise
become known or be independently discovered by competitors.
FBFC Patent Challenge. On July 23, 1994, U.S. Biomaterials Corporation filed
with the U.S. Patent and Trademark Office a Request for Reexamination of the
FBFC U.S. Patent which provides patent protection in the U.S. for BIOGRAN. This
patent has now been assigned to 3i who purchased the BIOGRAN product line in
March 2000. 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, U.S.
Biomaterials Corporation also instituted a nullification proceeding against the
European counterpart to the FBFC U.S. Patent. The opposition division of the
European Patent Office tentatively decided in FBFC's favor, but the matter is
still proceeding under an appeal. In connection with the BIOGRAN sale to 3i, 3i
has assumed control of this matter and we have agreed to reimburse for the
associated legal costs and to provide them with certain indemnification with
respect to the matter.
The orthopaedic market is highly competitive.
Extensive research efforts and rapid technological change characterize the
market for bone substitutes and cements in the orthopaedic market. We
anticipate that we will face intense competition from medical device, medical
products and pharmaceutical companies. Our products could be rendered
noncompetitive or obsolete by technological advances made by our current or
potential competitors. There can be no assurance that we will be able to
respond to technological advances through the development and introduction of
new products. Moreover, many of our existing and potential competitors have
substantially greater financial, marketing, sales, distribution, manufacturing
and technological resources than us. 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 they may have such approvals. They
may also enjoy substantial advantages over us 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 our products may cause some changes in surgical techniques that 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 our products.
We may be sued in a product liability action.
We manufacture medical devices that are used on patients in surgery, and we
may be subject to a product liability lawsuit. In particular, the market for
spine products has a history of product liability litigation. Any product
liability claim brought against us, with or without merit, could result in the
increase of our product liability insurance rates or the inability to secure
coverage in the future. In addition, we would have to pay any amount awarded by
a court in excess of policy limits. Although we maintain product liability
insurance in the annual aggregate amount of up to $3 million, our insurance
policies have various exclusions. Thus, we may be subject to a product
liability claim for which we have no insurance coverage, in which case we may
have to pay the entire amount of any award. Even in the absence of a claim, our
insurance rates may rise in the future to a point where we decide not to carry
this insurance. Finally, even a meritless or unsuccessful product liability
claim would be time-consuming and expensive to defend and could result in the
diversion of management's attention from our core business.
Our business could suffer if we cannot attract and retain the services of key
employees.
We depend substantially upon the continued service and performance of our
existing executive officers. We rely on our key personnel in formulating and
implementing our product research, development and
24
<PAGE>
commercialization strategies. Our success will depend in large part on our
ability to attract and retain highly skilled employees. We compete for such
personnel with other companies, academic institutions, government entities and
other organizations. We may not be successful in hiring or retaining qualified
personnel. If one or more of our key employees resigns, it could harm our
business. If we lose any key personnel, we may not be able to prevent the
unauthorized disclosure or use of our technical knowledge or other trade
secrets by those former employees. Other than employment agreements with David
S. Joseph, our Chairman and Chief Executive Officer, Bruce A. Peacock, our
President and Chief Operating Officer and Dr. Erik M. Erbe, our Vice President,
Research and Development, we have not entered into any employment agreements
with any of our executive officers.
Other risks.
We may issue preferred stock as an anti-takeover provision.
Certain provisions of Pennsylvania law could make it more difficult for a
third party to acquire us, or could discourage a third party from attempting to
acquire us. These provisions could limit the price that certain investors might
be willing to pay in the future for shares of our common stock. In addition,
our Board of Directors may issue shares of preferred stock without your
approval on such terms and conditions, and the preferred stock may have its
rights, privileges and preferences determined by the Board of Directors at that
time. The rights of the holders of any preferred stock that may be issued in
the future may adversely affect your rights as a holder of common stock. We
have no current plans to issue any shares of preferred stock.
Our executive officers and directors own a large percentage of our voting
stock and could exert significant influence over matters requiring shareholder
approval.
Our executive officers and directors own approximately 23.4% of our
outstanding common stock. In addition, one of our directors controls an
additional 6.9% of our outstanding common stock through the fund he manages.
Accordingly, these shareholders may, as a practical matter, be able to exert
significant influence over matters requiring approval by our shareholders,
including the election of directors and the approval of mergers or other
business combinations. This concentration could have the effect of delaying or
preventing a change in control. Our certificate of incorporation, our bylaws
and Pennsylvania law contains provisions that could discourage a takeover.
Provisions of our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or acquisition that a shareholder may
consider favorable.
We have not and do not intend to pay any dividends.
We have never declared nor paid dividends on our capital stock. We currently
intend to retain any future earnings for funding growth and, therefore, do not
intend to pay any cash dividends in the foreseeable future.
Our stock price is highly volatile.
Our stock price, like that of many early stage medical technology companies,
may be volatile. 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 our common stock. Factors such as fluctuations in our results,
under performance in relation to analysts' estimates, changes in stock market
analyst recommendations regarding our stock, announcements of technological
innovations or new products by us or our 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 us or by 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 our common stock to be highly volatile
or to be significantly adversely effected.
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<PAGE>
If our future quarterly operating results are below the expectations of
securities analysts or investors, the price of our common stock would likely
decline. Stock price fluctuations may be exaggerated if the trading volume of
our common stock is low.
Liquidity and Capital Resources
We have experienced negative operating cash flows since our inception, and
we have funded our operations primarily from the proceeds received from our
initial public offering. Cash, cash equivalents and short-investments decreased
42% from December 31, 1998 to 1999 due to the use of the proceeds for operating
spending. As of December 31, 1999 and 1998 cash, cash equivalents and
investments consisted of the following:
<TABLE>
<CAPTION>
Gross Unrealized
Unrealized Gross Fair Market
Original Cost Gains Losses Value
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1999:
Cash and cash equivalents..... $ 2,487,343 $ -- $ -- $ 2,487,343
Short-term investments........ 6,446,469 -- (60,267) 6,386,202
----------- -------- -------- -----------
$ 8,933,812 $ -- $(60,267) $ 8,873,545
=========== ======== ======== ===========
Percentage of total assets.... 78.4%
===========
December 31, 1998:
Cash and cash equivalents..... $ 842,064 $ -- $ -- $ 842,064
Short-term investments........ 14,414,394 106,882 (7,532) 14,513,744
----------- -------- -------- -----------
$15,256,458 $106,882 $ (7,532) $15,355,808
=========== ======== ======== ===========
Percentage of total assets.... 81.3%
===========
</TABLE>
We invest excess cash in highly liquid investment-grade marketable
securities including corporate commercial paper and U.S. government agency
bonds.
The following is a summary of selected cash flow information:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Net cash used in operating
activities........................... $(7,460,787) $ (6,335,509) $(7,588,532)
Net cash provided by (used in)
investing activities................. 7,614,061 (14,525,341) (413,939)
Net cash provided by financing
activities........................... 1,472,122 19,407,435 10,008,992
Changes in comprehensive income....... 19,883 37,577 (2,084)
----------- ------------ -----------
Net change in cash and cash
equivalents.......................... $ 1,645,279 $ (1,415,838) $ 2,004,437
=========== ============ ===========
</TABLE>
Net Cash Used in Operating Activities
Operating Cash Inflows--
The principal source of our current operating cash inflows has been derived
from sales of BIOGRAN product and interest income on short-term investments.
Additionally in January 1999, we received a one-time reimbursement of patent
defense costs of $474,580 under the Release and Termination Agreement with
FBFC.
Operating Cash Outflows--
Our cash outflows were primarily used for development and pre-clinical
activities in preparation for regulatory filings of potential products. In
addition, funds have been used for the leasing and fit-up of expanded
facilities and the hiring and training of additional employees.
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<PAGE>
Operating Cash Flow Requirements Outlook--
On March 22, 2000, we sold our BIOGRAN dental grafting product line to
Implant Innovations, Inc. ("3i") for $3.9 million. We continued to supply
BIOGRAN under the terms of our global distribution agreement with 3i prior to
the closing and have associated net product revenue. After the closing of the
sale agreement, we will have no product revenues derived from the sale of
BIOGRAN.
We expect operating cash outflows to continue to be driven by the expansion
of our product development efforts. During the second quarter of 1999, we were
cleared to begin clinical trials in Europe for the use of CORTOSS Injectable in
spinal fractures due to osteoporosis and for our use in screw augmentation
procedures. We also intend to seek clearance to begin clinical studies in the
U.S. We expect our cash requirements to increase significantly due to efforts
associated with the clinical trials as well as due to pre-commercial launch
activities in the U.S. and Europe. We expect our cash flow from operating
activities to continue to be negative until such time, if any, as regulatory
clearances for our products are obtained and revenue received from product
sales exceeds funding of operating costs. The timing of such events is
dependent upon a number of variables outside of our control.
Net Cash Provided By Investing Activities
We have invested $354,000, $111,000 and $414,000 for the years ended
December 31, 1999, 1998 and 1997, respectively in the purchase of property and
equipment for the expansion of our product development capabilities. In
addition during the twelve months ended December 31, 1999 and 1998, $8.0
million was provided by the net sale of investment quality marketable
securities and $14.4 million was used in the net purchase of investment quality
marketable securities, respectively.
Investing Cash Outlook--
In order to provide funds for operations, we expect to continue to sell
marketable securities. We expect that our use of cash for the purchase of
property and equipment for 2000 may increase in comparison to that of prior
periods as we scale-up manufacturing capacity for CORTOSS Injectable and VITOSS
Scaffold. We have approximately $882,000 remaining on an existing capital lease
line for use in funding the equipment necessary for the expansion of our
development and manufacturing facilities. The timing of such expansion is
dependent upon a number of variables outside of our control and include the
timing of regulatory clearances for marketing of our future products, the rate
of market acceptance and growth of product sales, and the lead times required
to bring additional manufacturing capacity on line.
Net Cash Provided By Financing Activities
In December 1999, we borrowed $2.0 million on a line of credit with our Bank
that was repaid in January 2000.
During the year ended 1999, stock options and warrants to purchase 106,072
shares of common stock were exercised resulting in proceeds of $352,380. In
addition during 1999, 2,732 shares of common stock were issued under our
Employee Stock Purchase Plan raising $11,831.
Our board of directors has approved a program to repurchase up to $1,000,000
worth of our common stock in open market transactions. The program is subject
to specific market conditions and other factors, on the EASDAQ exchange or in
negotiated transactions. Repurchases are made from time to time depending upon
the market price of our common stock and other circumstances. We do not expect
to make significant repurchases in 2000. During 1999, we repurchased 72,000
shares of common stock at an aggregate cost of $349,640, or approximately $4.86
per share.
27
<PAGE>
Financing Requirements Outlook
We expect to continue to use cash and investments to fund operating and
investing activities. We plan 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. We believe existing cash, together with the cash generated from
the closing of the BIOGRAN asset sale agreement with 3i will be sufficient to
meet our currently estimated operating and capital requirements through at
least December 31, 2000. Our future capital requirements will depend upon
numerous factors, including the extent to which unforeseen clinical,
regulatory, manufacturing or sales and marketing difficulties arise or to which
our products gain market acceptance, the acquisition and defense of
intellectual property rights, the development of strategic alliances for the
marketing of certain of our products, and other competitive developments. In
addition, although we have no present commitments or understandings, we may
seek to expand our operations and product line via acquisitions or joint
ventures and any such acquisitions or joint ventures may increase our capital
requirements. We will need to obtain additional funds through equity or debt
financings, strategic alliances with third parties or from other sources. This
activity will result in substantial dilution to the holders of common stock or
significant financial or operational restrictions. Any such required financing
may not be available on satisfactory terms, if at all.
Results of Operations
This section should be read in conjunction with the more detailed discussion
under "Liquidity and Capital Resources." And as described therein, we expect to
continue to incur significant operating losses in the future as we continue our
product development efforts, expand our marketing and sales activities and
further develop our manufacturing capabilities.
Comparison of the Year Ended December 31, 1999 to the Year Ended December 31,
1998
Net Revenues. Net revenues for the year ended December 31, 1999 were $1.1
million, compared to $2.8 million for the year ended December 31, 1998. Product
revenues for 1999 reflect sales to 3i at a transfer price equal to 50% of 3i's
sales price to its retail customers. For the same period in 1998, revenues
reflect our direct sales to customers through April plus the contract minimum
sales to 3i for the period May through September 1998. Under the global
distribution agreement we entered into with 3i, such sales to 3i in 1998
exceeded the rate of product re-sale by 3i to its customers and resulted in
product inventory at 3i. In 1999, 3i fulfilled the balance of its 1998 minimum
BIOGRAN purchase commitments that were deferred to 1999 and purchased an
additional $250,000 of BIOGRAN. 3i had no contracted purchase minimums during
1999.
Gross Profit. Our gross profit for the year ended December 31, 1999 was
$730,000, or 69% of net revenues, compared to $1.9 million, or 67% of net
revenues, for 1998.
Operating Expenses. Operating expenses for the year ended December 31, 1999
were $10.8 million compared to $7.9 million for the prior year. The increase in
general and administrative expenses year-over-year is primarily a result of an
increase in the number of employees during 1999 and a one-time $900,000
reimbursement during 1998 of patent litigation fees which was netted against
our expenses. Selling and marketing expenses decreased year-over-year as a
result of the elimination of the direct dental sales force when we entered into
our global distribution arrangement for BIOGRAN with 3i. The increase from 1998
to 1999 in research and development expenses is attributable to the expanded
development of our product pipelines and pre-clinical and clinical activities
of CORTOSS Injectable for vertebroplasty and screw augmentation in Europe.
Other Income (Expense). Other income (expense), includes interest expense,
interest income and, for 1998, currency translation losses. We recorded
$529,000 of other net income for the year ended December 31, 1999 compared to
$344,000 of other net income for the year ended December 31, 1998. The increase
in net income between 1998 and 1999 is attributed to higher average cash
balances from our June 1998 initial public offering.
28
<PAGE>
Net Loss. As a result of the foregoing factors, our net loss for the year
ended December 31, 1999 was $9.5 million compared to a net loss of $6.1 million
for 1998.
Comparison of the Year Ended December 31, 1998 to the Year Ended December 31,
1997
Net Revenues. Net revenues for the year ended December 31, 1998 were $2.8
million compared to $3.3 million for the year ended December 31, 1997. This
decrease was a result of our 3i agreement reached in 1998 that sets our selling
price per unit at 50% of 3i's average selling price per unit to their
customers. In 1997, we sold BIOGRAN directly to customers. We actually shipped
19% more BIOGRAN units in 1998 in comparison to 1997.
Gross Profit. Gross profit for the year ended December 31, 1998 was $1.9
million, or 67% of net revenues, compared to $2.2 million, or 67% of net
revenues, for the prior year. We realized significant BIOGRAN manufacturing
cost reductions in 1998 when we consolidated our BIOGRAN manufacturing
operation into the U.S. The manufacturing cost reductions enabled us to
maintain our gross profit margins percentage on BIOGRAN net product revenues in
1998 as compared to 1997 even as we reduced our average selling price per unit
to 50% of 3i's average selling price per unit to their customers.
Operating Expenses. Operating expenses for the year ended December 31, 1998
were $7.9 million compared to $10.0 million for the prior year. While our
arrangement with 3i has lowered our revenues, this alliance has allowed us to
decrease our sales and marketing expenses by $1.4 million for the year ending
December 31, 1998 as compared to 1997. Additionally there were decreases in
general and administrative expenses of $1.5 million and partially offset by an
increase in research and development of $778,000. We attribute the decreases in
general and administrative expenses to lower expenses relating to patent
litigation expenses associated with the BIOGRAN patent matter and reimbursement
of those expenses from FBFC. In addition, we received reimbursement from our
insurance company related to the BIOGRAN patent matter. In 1998, the Company
recorded $900,000 as an offset to general and administrative expense relating
to insurance proceeds and reimbursement from FBFC related to the BIOGRAN patent
matter. Increases in research and development expenses are attributed to
expenses incurred in preclinical activities in preparation for regulatory
filings.
Other Income (Expense). Other income (expense), include interest expense,
interest income and currency translation losses. We recorded $344,000 of other
income for the year ended December 31, 1998 compared to $169,000 of other
expense for the year ended December 31, 1997. In 1998, we realized net interest
income as a result of the investment of the initial public offering in June
1998. In 1997, the Company recorded a currency translation loss of $203,000
from the impact of exchange rate changes on intercompany balances.
Extraordinary Gain. In 1997, we recorded an extraordinary gain of $397,000
when we were relieved of certain debt owing to the Flemish government upon our
election not to pursue the commercialization of one of the dental products
licensed from FBFC.
Net Loss. As a result of the foregoing factors, our net loss for the year
ended December 31, 1998 was $6.1 million compared to a net loss of $8.1 million
for the prior year.
Commitments and Contingencies
We lease office space and equipment under non-cancelable operating leases.
For the years ended December 31, 1999, 1998 and 1997, lease expense was
$305,000, $213,000 and $164,000, respectively. As of December 31, 1999, future
minimum rent payments through the expiration of these leases are $321,000 in
2000, $166,000 in 2001, $19,000 in 2002 and $12,000 in 2003.
Subsequent Events
On March 22, 2000, we completed the sale of our BIOGRAN dental grafting
product line to 3i, a Biomet Company, for $3.9 million. 3i has been our
worldwide distributor for BIOGRAN since April 1998.
29
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
The functional currency for our 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
Shareholders' Equity. The Belgian manufacturing facility was closed during
December 1997 and subsequently the amount of expense incurred during 1999 and
1998 in Belgium has been minor. A significant fluctuation in the exchange rate
between the Belgian Franc and the U.S. Dollar would not have a significant
effect on our results of operations. Since entering the global distribution
agreement with 3i on April 28, 1998, all product revenue was a result of
domestic sales to 3i and therefore there is no significant foreign currency
gain or loss for the years ended December 31, 1999 and 1998.
Market Risk
We are exposed to market risk through changes in market interest rates that
could affect the value of our short-term investments. Interest rate changes
would result in unrealized gains or losses in the market value of the short-
term investments due to differences between the market interest rates and rates
at the inception of the short-term investment.
As of December 31, 1999 and 1998, our investments consisted primarily of
commercial paper, United States government agency bonds and high credit quality
corporate bonds. We estimate that if the average yield of our investment
portfolio decreased by 100 basis points, interest income for the year ended
December 31, 1999 would have decreased by approximately $185,000 during the
year. This estimate assumes that the decrease occurred on the last day of each
month during the years and reduced the yield of each investment instrument by
100 basis points. The impact on the Company's future interest income and future
changes in investment yields will depend on the gross amount of the Company's
investments and various external economic factors. See Item 7--"Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources".
Item 8. Financial Statements Supplemental Data
The consolidated financial statements of the Company and its subsidiaries
and supplementary data required by this item are attached to this annual
statement on Form 10-K beginning on page F-1.
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors and compliance with Section 16(a) of
the Securities Exchange Act of 1934 called for by Item 10 of Form 10-K will be
set forth under the captions "Nominees for the Board of Directors" and "Section
16(a) Beneficial Ownership Reporting and Compliance" in our definitive proxy
statement, to be filed within 120 days after the end of the fiscal year covered
by this annual report on Form 10-K, and is incorporated herein by reference.
Item 11. Executive Compensation
See Item 12.
30
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by Items 11 and 12 of Form 10-K will be set forth
under the captions "Executive Compensation: Report of the Compensation
Committee," "Summary Compensation Table," and "Holders of 5% or more and
Directors and Officers' Ownership of Orthovita, Inc. Stock," respectively, in
our definitive proxy statement, to be filed within 120 days after the end of
the fiscal year covered by this annual report on Form 10-K, and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements Financial Statements beginning on page F-2 are
filed as part of this annual report on Form 10-K.
2. Financial Statement Schedules Financial Statement Schedules beginning
on page F-2 are filed as part of this annual report on Form 10-K.
3. Exhibits. (see (c) below).
(b) Reports on Form 8-K.
The Company did not file a report on Form 8-K during the quarter ended
December 31, 1999.
(c) Exhibits
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated in parentheses.
<TABLE>
<C> <S>
3.1 Amended and Restated Articles of Incorporation of the Company **
3.2 Amended and Restated Bylaws of the Company **
10.18 Master Equipment Lease Agreement dated as of July 11, 1997 between the
Company and Finova Technology Finance, Inc. *
10.25 Amendment to the Master Equipment Lease Agreement dated as of April 15,
1999 between the Company and Finova Technology Finance, Inc. +
10.26 Amended and Restated 1997 Equity Compensation Plan ***
10.27 Second Amendment to Line of Credit, Term Loan and Security Agreement and
Second Amended and Restated Line of Credit Note +
10.28 Asset Sale Agreement dated as of February 10, 2000 between the Company
and Implant Innovations, Inc.+
23.1 Consent of Arthur Andersen LLP +
24.1 Power of Attorney (included in the signature page).
27.1 Financial Data Schedule.+
</TABLE>
- --------
+ Filed herewith.
* Filed as an Exhibit to the Company's Registration Statement on Form S-1
(333-51689) on May 1, 1998 and incorporated herein by reference.
** Filed as an Exhibit to the Company's Registration Statement on Form S-1/A
(335-51689) on June 15, 1998 and incorporated herein by reference.
31
<PAGE>
*** Filed as an Exhibit to the Company's Registration Statement on Form S-8
(333-90981) on November 15, 1999 and incorporated herein by reference.
Copies of the exhibits are available to shareholders (upon payment of a $.20
per page fee to cover the Company's expenses in furnishing the exhibits) from
Investor Relations Manager, Orthovita, Inc., 45 Great Valley Parkway, Malvern,
Pennsylvania, 19355.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Orthovita, Inc.
Date: March 28, 2000
/s/ David S. Joseph
By: _________________________________
David S. Joseph
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints David S.
Joseph Chairman and Chief Executive Officer of Orthovita, Inc. and subsidiaries
and Joseph M. Paiva, Vice President and Chief Financial Officer of Orthovita,
Inc. and subsidiaries, and each of them acting alone, as his true and lawful
attorneys-in-fact, in his name, place and stead, to execute and cause to be
filed with the Securities and Exchange Commission any or all amendments to this
report.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ David S. Joseph Chairman, Chief Executive March 28, 2000
______________________________________ Officer (principal
David S. Joseph executive officer)
/s/ Joseph M. Paiva Vice President and Chief March 28, 2000
______________________________________ Financial Officer
Joseph M. Paiva (principal financial
officer and accounting)
/s/ Paul Ducheyne, Ph.D. Director March 28, 2000
______________________________________
Paul Ducheyne, Ph.D.
/s/ Lew Bennett Director March 28, 2000
______________________________________
Lew Bennett
/s/ James M. Garvey Director March 28, 2000
______________________________________
James M. Garvey
/s/ Richard M. Horowitz Director March 28, 2000
______________________________________
Richard M. Horowitz
/s/ Bruce A. Peacock Director March 28, 2000
______________________________________
Bruce A. Peacock
/s/ Jos B. Peeters, Ph.D. Director March 28, 2000
______________________________________
Jos B. Peeters, Ph.D.
/s/ Howard Salasin, Ph.D. Director March 28, 2000
______________________________________
Howard Salasin, Ph.D.
</TABLE>
33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orthovita, Inc.:
We have audited the accompanying consolidated balance sheets of Orthovita,
Inc. (a Pennsylvania corporation) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. 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 auditing standards generally
accepted in the United States. 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. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania,
January 21, 2000
(except with respect to the matter discussed in Note 16,
as to which the date is March 22, 2000)
F-1
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 3)............... $ 2,487,343 $ 842,064
Short-term investments (Note 3).................. 6,386,202 14,513,744
Other receivables (Note 6)....................... -- 635,188
Inventories (Note 4)............................. 147,270 329,251
Other current assets............................. 155,966 773,485
------------ ------------
Total current assets........................... 9,176,781 17,093,732
------------ ------------
PROPERTY AND EQUIPMENT, net (Note 5)............... 2,041,524 1,709,506
------------ ------------
OTHER ASSETS....................................... 103,141 85,394
------------ ------------
$ 11,321,446 $ 18,888,632
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings (Note 7).............. $ 2,000,000 $ --
Note payable (Note 6)............................ 137,702 287,412
Current portion of long-term liabilities......... -- 175,058
Current portion of long-term capital lease
obligations (Note 8)............................ 530,126 362,239
Accounts payable................................. 1,327,825 381,144
Accrued patent defense cost (Note 15)............ 69,515 472,492
Accrued compensation and related expenses........ 605,507 342,453
Other accrued expenses........................... 387,376 601,832
------------ ------------
Total current liabilities...................... 5,058,051 2,622,630
------------ ------------
LONG-TERM LIABILITIES:
Capital lease obligations (Note 8)............... 616,726 608,562
Other liabilities................................ -- 128,865
------------ ------------
Total long-term liabilities.................... 616,726 737,427
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY (Note 10):
Common stock, $.01 par value, 15,000,000 shares
authorized, 11,331,632 and 11,372,700 shares
issued and outstanding as of December 31, 1999
and December 31, 1998, respectively............. 113,316 113,727
Additional paid-in capital....................... 42,002,795 42,289,024
Accumulated deficit.............................. (36,473,754) (26,977,160)
Accumulated other comprehensive income........... 4,312 102,984
------------ ------------
Total shareholders' equity..................... 5,646,669 15,528,575
------------ ------------
$ 11,321,446 $ 18,888,632
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
NET REVENUES (Note 11)................ $ 1,054,120 $ 2,780,658 $ 3,311,540
COST OF SALES......................... 324,590 927,792 1,096,848
------------ ----------- -----------
Gross profit...................... 729,530 1,852,866 2,214,692
------------ ----------- -----------
OPERATING EXPENSES:
General and administrative............ 3,674,515 2,253,836 3,762,906
Selling and marketing................. 1,807,212 2,879,804 4,249,533
Research and development (Note 12).... 5,273,590 2,764,321 1,986,506
------------ ----------- -----------
Total operating expenses.......... 10,755,317 7,897,961 9,998,945
------------ ----------- -----------
Operating loss.................... (10,025,787) (6,045,095) (7,784,253)
INTEREST EXPENSE...................... (110,601) (174,898) (148,156)
INTEREST INCOME....................... 639,794 511,882 181,617
FOREIGN CURRENCY TRANSACTION GAIN
(LOSS)............................... -- 7,323 (202,527)
------------ ----------- -----------
Loss before extraordinary item.... (9,496,594) (5,700,788) (7,953,319)
EXTRAORDINARY ITEM--GAIN ON EARLY
EXTINGUISHMENT OF DEBT (Note 6)....... -- -- 397,402
NET LOSS.............................. (9,496,594) (5,700,788) (7,555,917)
------------ ----------- -----------
ACCRETION OF REDEMPTION PREMIUM ON
PREFERRED STOCK...................... -- (391,213) (536,517)
------------ ----------- -----------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS......................... $ (9,496,594) $(6,092,001) $(8,092,434)
============ =========== ===========
NET LOSS PER COMMON SHARE, BASIC AND
DILUTED:
Before extraordinary item......... $ (.83) $ (.73) $ (1.68)
Extraordinary item................ -- -- 0.08
------------ ----------- -----------
NET LOSS PER COMMON SHARE, BASIC AND
DILUTED.............................. $ (.83) $ (.73) $ (1.60)
============ =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, BASIC AND
DILUTED.............................. 11,411,896 8,314,679 5,050,397
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shareholders' Equity
----------------------------------------------------------------------------------------
Redeemable
Class C Additional Accumulated
Convertible Convertible Common Paid-in Accumulated Comprehensive Comprehensive
Preferred Stock Preferred Stock Stock Capital Deficit Income Income Total
--------------- --------------- ------- ---------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1996................. $ -- $10,582 $46,108 $8,679,209 $(12,792,725) $(31,859) $ -- $(4,088,685)
Sale of 533,685
shares of common
stock, net of
offering costs of
$12,467............. -- -- 5,337 2,250,357 -- -- -- 2,255,694
Issuance of 585,936
shares of Class B
Convertible
Preferred stock..... -- 5,859 -- 1,019,531 -- -- -- 1,025,390
Sale of 1,882,353
shares of Class C
Convertible
Preferred stock and
common stock
warrants, net of
offering costs of
$1,153,427.......... 6,846,573 -- -- 762,631 -- -- -- 762,631
Issuance of common
stock and common
stock options for
services............ -- -- 417 426,375 -- -- -- 426,792
Accretion of
redemption premium
and dividends on
Class C Convertible
Preferred stock..... 536,517 -- -- -- (536,517) -- -- (536,517)
Comprehensive
income:
Net loss.......... -- -- -- -- (7,555,917) -- (7,555,917) (7,555,917)
Other
comprehensive
income:
Currency
translation
adjustment...... -- -- -- -- -- (2,084) (2,084) (2,084)
-----------
Comprehensive
income.......... $(7,558,001)
---------- ------- ------- ---------- ------------ -------- =========== -----------
BALANCE, DECEMBER 31,
1997................. 7,383,090 16,441 51,862 13,138,103 (20,885,159) (33,943) -- (7,712,696)
Sale of 370,392
shares of common
stock............... -- -- 3,704 3,496,296 -- -- -- 3,500,000
Sale of 1,800,000
shares of common
stock, net of
offering costs of
89,103.............. -- -- 18,000 16,669,838 -- -- -- 16,687,838
Conversion of
preferred stock to
common stock........ (7,774,303) (16,441) 35,264 7,755,480 -- -- -- 7,774,303
Accretion of
redemption premium
and dividends on
Class C Convertible
Preferred stock..... 391,213 -- -- -- (391,213) -- -- (391,213)
Exercise of common
stock options and
warrants to
purchase common
stock............... -- -- 4,897 1,163,760 -- -- -- 1,168,657
Issuance of common
stock options for
services............ -- -- -- 65,547 -- -- -- 65,547
Comprehensive
income:
Net loss........... -- -- -- -- (5,700,788) -- $(5,700,788) (5,700,788)
Other
comprehensive
income:
Unrealized gain on
short-term
investments, net... -- -- -- -- -- 99,350 99,350 99,350
Currency
translation
adjustment...... -- -- -- -- -- 37,577 37,577 37,577
-----------
Comprehensive
income.......... -- -- -- -- -- -- $(5,563,861) --
---------- ------- ------- ---------- ------------ -------- =========== -----------
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Shareholders'
Redeemable Equity
Class C Additional Accumulated
Convertible Convertible Common Paid-in Accumulated Comprehensive Comprehensive
Preferred Stock Preferred Stock Stock Capital Deficit Income Income
--------------- --------------- -------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1998................. -- -- 113,727 42,289,024 (26,977,160) 102,984 --
Exercise of common
stock options and
warrants to
purchase common
stock and common
stock purchased
under the Employee
Stock Purchase
Plan................ -- -- 1,088 363,123 -- -- --
Issuance of common
stock options and
warrants for
services............ -- -- -- 185,664 -- -- --
Repurchase of
common shares....... -- -- (720) (348,920) -- -- --
Receipt of common
shares in repayment
of loan ............ -- -- (779) (486,096) -- -- --
Comprehensive
income:
Net loss........... -- -- -- -- (9,496,594) -- $(9,496,594)
Other
comprehensive
income:
Unrealized loss on
short-term
investments, net.. -- -- -- -- -- (60,267) (60,267)
Currency
translation
adjustment...... -- -- -- -- -- (38,405) (38,405)
-----------
Comprehensive
income............ -- -- -- -- -- -- $(9,595,266)
===========
BALANCE, DECEMBER 31,
1999................. $-- $-- $113,316 $42,002,795 $(36,473,754) $ 4,312
==== ==== ======== =========== ============ =======
<CAPTION>
Total
-----------
<S> <C>
BALANCE, DECEMBER 31,
1998................. 15,528,575
Exercise of common
stock options and
warrants to
purchase common
stock and common
stock purchased
under the Employee
Stock Purchase
Plan................ 364,211
Issuance of common
stock options and
warrants for
services............ 185,664
Repurchase of
common shares....... (349,640)
Receipt of common
shares in repayment
of loan ............ (486,875)
Comprehensive
income:
Net loss........... (9,496,594)
Other
comprehensive
income:
Unrealized loss on
short-term
investments, net.. (60,267)
Currency
translation
adjustment...... (38,405)
Comprehensive
income............ --
BALANCE, DECEMBER 31,
1999................. $5,646,669
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................ $ (9,496,594) $ (5,700,788) $(7,555,917)
Adjustments to reconcile net loss to
net cash used in operating
activities--
Extraordinary gain................ -- -- (397,402)
Depreciation and amortization..... 631,696 427,991 217,432
Imputed interest.................. -- 20,967 42,569
Services provided for common stock
and common stock options......... 185,664 65,546 426,792
(Increase) decrease in--
Restricted cash................. -- 200,000 (200,000)
Other receivables............... 744,959 (703,809) --
Inventories..................... 181,981 (80,544) 84,080
Other current assets............ 20,873 394,318 (251,449)
Other assets.................... (17,747) (85,394) 49,008
Increase (decrease) in--
Accounts payable................ 946,681 (287,302) (256,502)
Accrued patent defense costs.... (402,977) (530,744) 253,236
Other liabilities............... (128,865) 303,923 --
Other accrued expenses.......... (126,460) (359,673) (379)
------------ ------------ -----------
Net cash used in operating
activities................... (7,460,789) (6,335,509) (7,588,532)
------------ ------------ -----------
INVESTING ACTIVITIES:
Purchase of investments............. (10,346,255) (15,892,669) --
Proceeds from sale of investments... 18,314,180 1,478,275 --
Purchase of property and equipment.. (353,862) (110,947) (413,939)
------------ ------------ -----------
Net cash provided by (used in)
investing activities......... 7,614,063 (14,525,341) (413,939)
------------ ------------ -----------
FINANCING ACTIVITIES:
Proceeds (repayments) of short-term
bank borrowings.................... 2,000,000 (692,000) 32,000
Proceeds (repayments) of debt....... (108,649) (487,507) 514,322
Repayments of subordinated debt..... -- -- (351,125)
Repayments of capital lease
obligations........................ (433,800) (241,529) (51,103)
Proceeds from exercise of common
stock options and warrants......... 364,211 640,633 --
Repurchase of common stock.......... (349,640) -- --
Proceeds from sale of Redeemable
Class C Convertible Preferred
stock.............................. -- -- 7,609,204
Proceeds from sale of common stock
and warrants....................... -- 20,187,838 2,255,694
------------ ------------ -----------
Net cash provided by financing
activities................... 1,472,122 19,407,435 10,008,992
------------ ------------ -----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS............ 19,883 37,577 (2,084)
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................... 1,645,279 (1,415,838) 2,004,437
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR.............................. 842,064 2,257,902 253,465
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF
YEAR................................. $ 2,487,343 $ 842,064 $ 2,257,902
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Orthovita, Inc. (the "Company"), a Pennsylvania corporation, began
operations in November 1993. We seek to develop, manufacture and market
orthopaedic products including synthetic bone substitutes based on novel
materials and technologies.
Our operations are subject to certain risks including but not limited to the
successful development and commercialization of our products in development and
our need for additional capital. We have incurred losses since out inception in
1993 and expect to continue to incur losses for at least the next several
years. Our products under development may never be commercialized or if
commercialized, may never generate substantial revenue. On March 22, 2000, we
completed the sale of our BIOGRAN(R) dental grafting product line to Implant
Innovations, Inc. ("3i") for $3.9 million. BIOGRAN has generated all of our net
revenue (see Notes 11 and 16).
Although we believe our existing cash, and short-term investments together
with the cash generated from the BIOGRAN sale will be sufficient to meet our
currently estimated operating and cash requirements for at least the next
twelve months, we will need to raise additional funds. If adequate financing is
not available, we may be required to delay, scale back or eliminate certain
operations.
2. Summary of Significant Accounting Policies:
Preparation of Financial Statements
Our financial statements have been prepared using United States generally
accepted accounting principles. This preparation requires that we make
assumptions and estimates that affect the reported amounts of assets and
liabilities, the 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.
Reclassifications
We have reclassified certain amounts in prior years' financial statements to
conform to the presentation for the current year.
Basis of Consolidation
The consolidated financial statements include the accounts of Orthovita,
Inc., its Belgian branch operations, and its wholly owned subsidiaries. We have
eliminated all material intercompany balances in consolidation.
Net Loss Per Share
We have presented net loss per common share pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Basic
loss per share excludes potentially dilutive securities and was computed by
dividing net loss applicable to common shareholders by the weighted average
number of shares of common stock outstanding for the period. Diluted per share
data is computed assuming the conversion or exercise of all dilutive securities
such as preferred stock, options and warrants. Convertible preferred stock,
common stock options and warrants outstanding have not been included in the
calculation of diluted earnings per share as the impact is anti-dilutive for
all periods presented due to the Company's losses.
Revenue Recognition
Revenue on product sales is recognized at the time of shipment. Revenues are
presented net of returns. The Company records the cost for product returns as
incurred.
F-7
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
shareholders' equity. Revenues and expenses are translated at average exchange
rates in effect during the period with foreign currency transaction gains and
losses, if any, included in results of operations.
Supplemental Cash Flow Information
In 1999, we issued options and warrants for the purchase of 41,100 shares of
common stock with various exercise prices to certain vendors in payment of
services valued at $185,664. During 1998, we issued options and warrants for
the purchase of 24,000 shares of common stock with various exercise prices to
certain vendors in payment of services valued at $65,547.
In 1999, we received 77,900 common shares of our stock in repayment of a
loan valued at $486,875. The balance of the loan was repaid in full with cash.
At December 31, 1998 the loan was included in Other Current Assets.
In 1999, 1998 and 1997, we incurred capital lease obligations of $609,851,
$442,306 and $797,068, respectively. In 1999, 1998 and 1997, cash paid for
interest was $110,601, $174,898 and $148,156, respectively. The Company paid no
income taxes in 1999, 1998 and 1997.
3. Cash, Cash Equivalents and Investments:
We invest excess cash in highly liquid investment-grade marketable
securities including corporate commercial paper and U.S. government agency
bonds. For financial reporting purposes, the Company considers all highly
liquid investment instruments purchased with an original maturity of three
months or less to be cash equivalents. All investments are considered
available-for-sale and, accordingly, unrealized gains and losses are included
in a separate component of shareholders' equity.
As of December 31, 1999 and 1998, cash and cash equivalents and investments
at cost and fair market value consisted of the following:
<TABLE>
<CAPTION>
Gross Gross Fair
Original Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1999:
Cash and cash equivalents... $ 2,487,343 $ -- $ -- $ 2,487,343
Short-term investments...... 6,446,469 -- (60,267) 6,386,202
----------- -------- -------- -----------
$ 8,933,812 $ -- $(60,267) $ 8,873,545
=========== ======== ======== ===========
December 31, 1998:
Cash and cash equivalents... $ 842,064 $ -- $ -- $ 842,064
Short-term investments...... 14,414,394 106,882 (7,532) 14,513,744
----------- -------- -------- -----------
$15,256,458 $106,882 $ (7,532) $15,355,808
=========== ======== ======== ===========
</TABLE>
F-8
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As further discussed in Note 7, we are required to maintain an minimum level
of aggregate cash, cash equivalents and investments.
4. Inventories:
Inventories are stated at the lower of cost or market on a first-in, first-
out basis. As of December 31, 1999 and 1998, inventories consisted of the
following:
<TABLE>
<CAPTION>
December 31
-----------------
1999 1998
-------- --------
<S> <C> <C>
Raw materials and work-in-process....................... $134,356 $280,927
Finished goods.......................................... 12,914 48,324
-------- --------
$147,270 $329,251
======== ========
</TABLE>
5. Property, Equipment and Depreciation:
Property and equipment, including assets 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 except for leasehold improvements where, if shorter, the remaining term
of the facility lease is used.
Expenditures for major renewals and improvements to property and equipment
are capitalized and expenditures for maintenance and repairs are charged to
operations as incurred.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Machinery and equipment........................... $ 1,853,969 $1,456,375
Furniture, marketing, and office equipment........ 891,330 478,228
Leasehold improvements............................ 716,619 563,602
----------- ----------
3,461,918 2,498,205
Less--Accumulated depreciation.................... (1,420,394) (788,699)
----------- ----------
$ 2,041,524 $1,709,506
=========== ==========
</TABLE>
In the years ended December 31, 1999 and 1998, certain property and
equipment was acquired under capitalized lease obligations. Total capital
assets under lease are $1,922,621 and $1,316,941 with related accumulated
depreciation of $634,715 and $297,387 at December 31, 1999 and 1998,
respectively.
6. FBFC International Technology License:
In July 1992, we obtained a license from FBFC International, a Belgian
company, (the "FBFC License") to certain patents covering BIOGRAN. We had
agreed to pay FBFC a maximum aggregate royalty of $3,000,000, allocated evenly
between each of two dental products. We also agreed to pay FBFC a running
royalty, and receive credit against the related maximum, of 12% on BIOGRAN net
sales.
Also, as part of the license agreement, we assumed the payback provisions
contained in a loan agreement between FBFC and the Flemish government for a
noninterest-bearing loan payable in Belgian Francs. We discounted the loan
using a market rate of interest and recorded a liability and an expense for
acquired
F-9
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
technology. Imputed interest expense is recognized on the loan based on the
loan repayment schedule. Payments on this loan are to be made annually through
December 2003. These payments are in addition to the payment of royalties and
are due to the Flemish government. Repayments under the loan and the payment of
certain other fees, as defined, reduce the amount of the maximum royalty on a
dollar for dollar basis. During 1996, we decided not to commercialize one of
the dental products licensed from FBFC and petitioned the Flemish government to
exempt us from the debt assumed when the technology was licensed. In 1997, the
Flemish government granted us an exemption of reimbursement of approximately
$426,000 of long-term debt ($397,402, net of unamortized debt discount). We
recorded an extraordinary gain of $397,402 in 1997 due to the extinguishment of
this debt. By virtue of our decision not to commercialize this product, the
maximum aggregate royalty payment to be made by us was reduced from $3,000,000
to $1,500,000. We closed certain facilities in Belgium during 1997, and 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,
we have classified the liability of $137,702 and $287,412, at December 31, 1999
and 1998, respectively, as a current liability. As further discussed under Note
15, in connection with certain patent litigation, FBFC agreed to reimburse
patent defense costs of $474,580, which was classified as Other Receivables at
December 31, 1998.
7. Bank Borrowings:
We have a one-year $2 million line of credit arrangement with our commercial
bank that expires at the end of 2000. The line of credit requires us to
maintain a minimum aggregate level of cash and investments of $4 million,
minimum working capital of $4 million and other specific financial covenants.
Interest on the line of credit is payable at the prime rate plus 1.0% and the
weighted average interest rate was 9.5% for the year ended December 31, 1999.
As of December 31, 1999, $2 million was outstanding under the line, which was
repaid in January 2000.
8. Capital Lease Obligations:
Capital lease obligations consisted of the following:
<TABLE>
<CAPTION>
December 31
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Capital lease obligations......................... $1,308,690 $1,163,043
Less--amount representing interest................ (161,838) (192,242)
---------- ----------
Present value of minimum lease payments........... 1,146,852 970,801
Less--current portion of minimum lease payments... (530,126) (362,239)
---------- ----------
$ 616,726 $ 608,562
========== ==========
</TABLE>
Capital lease obligation maturities as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000............................................................ $ 614,097
2001............................................................ 440,627
2002............................................................ 223,529
2003............................................................ 30,437
----------
$1,308,690
==========
</TABLE>
F-10
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1997, we secured a $1,200,000 capital asset lease 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. Prior to the expiration of the financing arrangement in
December 1998, we secured an additional $1,500,000 capital lease financing
arrangement with the same lending institution. Consistent with the first
arrangement, each individual lease's term is 42 months and the leases are
secured by the underlying capital assets. Interest is approximately 9.4%.
9. Profit Sharing Plan:
The Company has a Section 401(k) plan for all qualified employees, as
defined. Company contributions are discretionary and determined annually and
were $67,541 and $65,860 for the years ended December 31, 1999 and 1998,
respectively.
10. Shareholders' Equity:
On June 25, 1998, in connection with our Initial Public Offering (the
"Offering"), all convertible preferred stock then outstanding was converted to
common shares.
Common Stock
On June 25, 1998, we completed the Offering of our common shares on the
Brussels-based EASDAQ stock exchange. The offering raised net proceeds of
approximately $13.8 million from the sale of 1.5 million shares of common stock
at $10.50 per share. In July 1998, in connection with the Offering, we sold
300,000 additional shares of common stock at $10.50 per share as the
underwriters exercised their over-allotment option, raising net proceeds of
approximately $2.9 million.
In June 1998, in connection with a series of agreements that we entered into
with Howmedica, Inc., we sold 370,392 shares of common stock to Howmedica,
Inc., for $3.5 million (See Note 12).
F-11
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options
We have stock option plans that provide for both incentive and nonqualified
stock options to be granted to key employees, consultants and advisors. Options
are granted with exercise prices equal to or greater than the fair market value
of the common stock on the date of grant. Generally incentive stock options
become exercisable in equal installments over a four-year period and
nonqualified stock options are issued fully vested. The options remain
exercisable for a maximum period of ten years. As of December 31, 1999, there
were 84,306 options available for grant under the plans and 779,555 exercisable
options outstanding with a weighted average exercise price of $3.38 per share.
For all outstanding options, the weighted average exercise price per share is
$4.42 with a weighted average remaining contractual life of approximately eight
and one-half years. Summary stock option information is as follows:
<TABLE>
<CAPTION>
Exercise Aggregate
Number Price Range Exercise Price
--------- ----------- --------------
<S> <C> <C> <C>
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.............................. 232,050 4.25-11.63 1,130,423
Exercised............................ (227,000) 1.00- 4.25 (651,500)
Canceled............................. (101,400) 1.00- 4.25 (404,950)
--------- ----------- ----------
Outstanding, December 31, 1998......... 982,794 1.00-11.63 3,623,660
Granted.............................. 739,850 4.35- 6.60 3,869,778
Exercised............................ (101,472) 2.75- 4.25 (332,830)
Canceled............................. (33,950) 4.25- 4.75 (147,888)
--------- ----------- ----------
Outstanding, December 31, 1999......... 1,587,222 $1.00-11.63 $7,012,720
========= =========== ==========
</TABLE>
We apply Accounting Principal Board Opinion No. 25, "Accounting for Stock
Issued to Employees," (APB 25) and the related interpretations in accounting
for our stock option plans. Under APB 25, compensation cost related to stock
options is computed based on the intrinsic value of the stock option at the
date of grant, reflected by the difference between the exercise price and the
fair value of our common stock. Under SFAS No. 123, "Accounting for Stock-Based
Compensation," compensation cost related to stock options is computed based on
the value of the stock options at the date of grant using an option valuation
methodology, typically the Black-Scholes model. SFAS No. 123 can be applied
either by recording the Black-Scholes model value of the options or by
continuing to record the APB 25 value and by disclosing SFAS No. 123
information on a pro forma basis. We have applied the proforma disclosure
requirement of SFAS No. 123, "Accounting for Stock-Based Compensation". Had
compensation cost for our common stock option plan been determined under SFAS
No. 123, our net loss and net loss per common share would have been adjusted as
follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net loss applicable to common
shareholders:
As reported......................... $ 9,496,594 $6,092,001 $8,092,434
Pro forma........................... 11,508,328 6,677,576 8,499,187
Net loss per common share, basic and
diluted:
As reported......................... $ (.83) $ (.73) $ (1.60)
Pro forma........................... (1.01) (.80) (1.68)
</TABLE>
F-12
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair value of the options granted during 1999 is
estimated as $2.87 per share on the date of grant, using the Black-Scholes
option pricing model with the following assumptions: dividend yield of zero,
volatility of 50%, risk-free interest rate of approximately 6.4%, and an
expected life of six years. The weighted average fair value of the options
granted during 1998 and 1997 is estimated as $2.64 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 50%,
risk-free interest rate at 5.0% and 7.0% during 1998 and 1997, respectively,
and an expected life of six years. The resulting pro forma compensation charge
presented 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 or decreases.
Employee Stock Purchase Plan
During November 1998, an Employee Stock Purchase Plan (the "ESPP") was
established to provide eligible employees an opportunity to purchase our common
stock. Under the terms of the ESPP, eligible employees may have up to 10% of
eligible compensation deducted from their pay to purchase common stock. The per
share purchase price is 85% of the last trading price of common stock on the
EASDAQ Exchange on the last day of each calendar quarter. The amount that may
be offered pursuant to the ESPP is 300,000 common shares. There were 2,732
shares purchased under the ESPP during 1999. No shares were purchased under the
ESPP during 1998.
Common Stock Purchase Warrants
In connection with the issuance of our $2.0 million line of credit
arrangement, in November 1999, we issued to our lender warrants to purchase
10,000 shares of our common stock at $6.00 per share. The warrants remain
exercisable for five years from date of issue and were valued at $30,825 on
date of issuance.
In addition, we have issued warrants in connection with other equity
transactions and, as of December 31, 1999, we had 781,255 common stock purchase
warrants outstanding with an average exercise price of $4.13 per share. The
warrants have an average remaining life of approximately 2 years.
11. Net Revenues:
On April 29, 1998, we entered into a Global Distribution Agreement with 3i,
whereby 3i obtained the exclusive worldwide marketing, sales and distribution
rights for BIOGRAN for dental surgical applications. The arrangement provides
for 3i to pay us 50% of their BIOGRAN average selling price through December
31, 1998 and 45% for the year 1999. On March 22, 2000, we sold our BIOGRAN
dental grafting product line to 3i for $3.9 million. In 1999 and 1998, 3i
accounted for 100% and 58%, respectively, of our net revenue (See Note 16).
12. Research and Development:
In June 1998, we entered into a series of agreements with Howmedica, Inc.
(the "Howmedica Agreements"), under which we granted Howmedica the exclusive
worldwide marketing, sales and distribution rights for the use of our ORTHOCOMP
Injectable in joint implant procedures. In connection with the Howmedica
Agreements, we may earn payments of up to an aggregate of $4,500,000 if various
milestones are reached during the development and approval process for this
indication. If regulatory approvals are received, Howmedica will be required to
make annual minimum purchases of ORTHOCOMP Injectable from us for a six-year
period. The annual minimum purchase requirement may be set aside if, during the
period from the third anniversary of Howmedica's first commercial sale of
ORTHOCOMP until the fifth anniversary of such sale, Howmedica elects to obtain
exclusive manufacturing rights from us by making a one-time payment of
$7,000,000 and by making royalty payments to us on future sales during the term
of the agreement equal to
F-13
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10% of Howmedica's net sales in territories with a valid claim of patent or 5%
of net sales in territories with no such valid claim of patent. Additionally,
except for our VITOSS synthetic cancellous bone technology platform, Howmedica
has certain rights of first negotiation and refusal for orthopaedic
applications of our other technologies.
We have exclusively licensed on a worldwide basis, from the University of
Pennsylvania ("Penn"), certain intellectual property including patents relating
to materials and techniques for improving orthopaedic implants, bone grafting,
and controlled drug release technologies. In consideration for the above and
for certain expenses Penn incurred related to the intellectual property, we
issued 41,705 shares of common stock to Penn during 1997. 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.
13. Income Taxes:
We account 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 financial statements or
tax returns.
The components of income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current............................. $ -- $ -- $ --
Deferred............................ (2,116,201) (2,015,603) (2,428,881)
----------- ----------- -----------
(2,116,201) (2,015,603) (2,428,881)
Valuation allowance................. 2,116,201 2,015,603 2,428,881
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
The difference between our federal statutory income tax rate and our
effective income tax rate is primarily due to state income taxes and the
valuation allowance.
Components of our deferred tax asset as of December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
December 31
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............ $ 8,121,626 $ 6,418,700
Accrued expenses not currently deductible... 294,217 179,087
Research, patent and organizational costs
capitalized for tax purposes............... 3,638,336 2,232,784
------------ -----------
12,054,179 8,830,571
Valuation allowance........................... (12,054,179) (8,830,571)
------------ -----------
Net deferred tax asset........................ $ -- $ --
============ ===========
</TABLE>
SFAS No. 109 requires that deferred tax assets and liabilities be recorded
without consideration as to their realizability. The portion of any deferred
tax asset for which it is more likely than not that a tax benefit will not be
realized must then be offset by recording a valuation allowance against the
asset. A valuation allowance has been established against all of our deferred
tax assets since the realization of the deferred tax asset is not
F-14
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assured given our history of operating losses. The deferred tax asset includes
the cumulative temporary difference related to certain research, patent and
organizational costs, which have been charged to expense in the accompanying
Statements of Operations but have been recorded as assets for federal tax
return purposes. These tax assets are amortized over periods generally ranging
from 5 to 20 years for federal tax purposes.
As of December 31, 1999, we had approximately $23,622,000 of federal net
operating loss carryforwards, which begin to expire in 2008. Our annual
utilization of 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
our common stock and common stock equivalents. We believe, however, that such
limitation may not have a material impact on the ultimate utilization of our
carryforwards.
The federal net operating loss carryforwards are scheduled to expire
approximately as follows:
<TABLE>
<S> <C>
2008............................. $ 7,729
2009............................. 490,568
2010............................. 2,976,405
2011............................. 4,342,295
2012............................. 5,450,361
2013............................. 4,219,188
2014............................. 6,135,884
-----------
$23,622,430
===========
</TABLE>
14. Commitments and Contingencies:
We lease office space and equipment under noncancelable operating leases.
For the years ended December 31, 1999, 1998 and 1997, lease expense was
$304,732, $212,948, $164,384, respectively. At December 31, 1999, future
minimum rental payments under operating leases are as follows:
<TABLE>
<S> <C>
2000................................ $321,039
2001................................ 165,911
2002................................ 18,636
2003................................ 12,489
--------
$518,075
========
</TABLE>
At December 31, 1999, we reserved $171,169 for our commitment under an
employment severance agreement.
15. Litigation and Proceedings:
In May 1996, the University of Florida Research Foundation, Inc., U.S.
Biomaterials Corporation and Block Drug Corporation filed a complaint in the
U.S. District Court for the Northern District of Florida, against us, a
distributor of our BIOGRAN product, and our former Chairman. This action
charged the defendants with infringement of U.S. Patent No. 4,851,046, 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 our summary judgment motion stating that our BIOGRAN product does not
infringe this patent. The complaint also alleges false representation, unfair
competition, false advertising and trade disparagement under U.S. federal and
Florida state law and these complaints were settled with the Plaintiffs in
September 1998.
F-15
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During September 1998, the Plaintiffs filed with the U.S. Court of Appeals for
the Federal Circuit a request for an appeal of the U.S. District Court's
summary judgment with respect to the patent infringement claim. On October 6,
1999 the U.S. Court of Appeals entered an order affirming our motion for
summary judgment and dismissing a complaint for patent infringement. On January
4, 2000, the time period for filing a petition by the plaintiffs with the U.S.
Supreme Court expired, accordingly, this matter is considered to be finalized
in the United States.
On July 23, 1994, U.S. Biomaterials Corporation filed with the U.S. Patent
and Trademark Office a Request for Reexamination of the FBFC U.S. Patent which
provides patent protection in the U.S. for BIOGRAN. This patent has now been
assigned to 3i who purchased the BIOGRAN product line in March 2000. 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, U.S. Biomaterials
Corporation also instituted a nullification proceeding against the European
counterpart to the FBFC U.S. Patent. The opposition division of the European
Patent Office tentatively decided in FBFC's favor, but the matter is still
proceeding under an appeal. In connection with the BIOGRAN sale to 3i, 3i has
assumed control of this matter and we have agreed to reimburse for the
associated legal costs and to provide them with certain indemnification with
respect to the matter. Net of insurance recoveries and other reimbursements, we
have incurred approximately $1.0 million in legal defense expenses related to
this matter. At December 31, 1999, we reduced our reserve to $69,500 to cover
future legal fees related to this matter in Europe.
16. Subsequent Events:
On March 22, 2000, we completed the sale of our BIOGRAN dental grafting
product line to 3i, a Biomet Company, for $3.9 million. 3i has been our
worldwide distributor for BIOGRAN since April 1998. Upon the closing of the
sale, we expect to receive $3.5 million in cash, with an additional $400,000 to
be held in an escrow account for one year, and to realize a one-time gain on
the transaction of approximately $3.1 million. In connection with this
transaction, we have agreed to indemnify 3i for any product liability that may
arise from BIOGRAN product manufactured by us prior to the closing of this
transaction, any liability that may arise from the European Patent Office
nullification proceeding, if any, and certain other liabilities. If no
liabilities arise within one year from the close of this sale for which we have
agreed to indemnify 3i, then the $400,000 escrow will be released to us.
F-16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Amended and Restated Articles of Incorporation of the Company**
3.2 Amended and Restated Bylaws of the Company**
10.18 Master Equipment Lease Agreement dated as of July 11, 1997 between the
Company and Finova Technology Finance, Inc.*
10.25 Amendment to the Master Equipment Lease Agreement dated as of April
15, 1999 between the Company and Finova Technology Finance, Inc.+
10.26 Amended and Restated 1997 Equity Compensation Plan***
10.27 Second Amendment to Line of Credit, Term Loan and Security Agreement
and Second Amended and Restated Line of Credit Note+
10.28 Asset Sale Agreement dated as of February 10, 2000 between the Company
and Implant Innovations, Inc.+
23.1 Consent of Arthur Andersen LLP+
24.1 Power of Attorney (included in the signature page)
27.1 Financial Data Schedule+
</TABLE>
- --------
+ Filed herewith.
* Filed as an Exhibit to the Company's Registration Statement on Form S-1
(333-51689) on May 1, 1998 and incorporated herein by reference.
** Filed as an Exhibit to the Company's Registration Statement on Form S-1/A
(335-51689) on June 15, 1998 and incorporated herein by reference.
*** Filed as an Exhibit to the Company's Registration Statement on Form S-8
(333-90981) on November 15, 1999 and incorporated herein by reference.
<PAGE>
AMENDMENT NO. 1 TO
MASTER EQUIPMENT LEASE AGREEMENT
AMENDMENT NO. 1 dated as of April 15, 1999 TO MASTER EQUIPMENT LEASE AGREEMENT
(this "Amendment") dated as of June 11, 1997, by and between FINOVA CAPITAL
CORPORATION, ASSIGNEE OF FINOVA TECHNOLOGY FINANCE, INC. ("Lessor") and
ORTHOVITA, INC. ("Lessee"):
WHEREAS, Lessor and Lessee entered into a Master Equipment Lease Agreement
dated as of June 11, 1997 (the "Master Lease") and into certain Rental Schedules
No. 1 through 11 thereunder; and
WHEREAS, Lessor and Lessee intend to enter into Rental Schedule No. 12, and
wish to amend the Master Lease with respect to Rental Schedule No. 12 and any
following Rental Schedules;
In consideration of the foregoing premises and the mutual covenants
hereinafter contained, the parties hereto agree as follows with Respect to
Rental Schedule No. 12 and any following Rental Schedules to amend the following
sections BELOW:
1. Primary Term. Delete section 4 and substitute the following:
Primary Term. The Primary Term for each item of 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 months set forth in such Rental Schedule,
plus the number of days remaining in any partial month, if the Lease
Commencement Date occurs on any day other than the thirtieth or thirty-
first day of a month (twenty-eighth day in the case of February). If the
Lease Commencement Date occurs on the thirty-first day of a month, the
Primary Term shall be for the number of months set forth in such Rental
Schedule, plus the number of days from the Lease Commencement Date through
the twenty-ninth day of the next following month. If the Lease
Commencement Date occurs on the thirtieth day of a month, The Primary Term
shall be for the number of months set forth in such Rental Schedule.
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.
2. Other Covenants: Section 17 (a) (i) is amended to read: Quarterly interim
financial statements within 45 days of the close of each of the first three
fiscal quarters of every year certified by the Lessee's Chief Financial
Officer and accompanied by a certificate executed by Lessee's Chief
Financial Officer to the effect that since the date of the last certificate
delivered to Lessor there has been no default under the Master Lease or, if
the same cannot be so certified, the reasons surrounding the same.
3. Option to Renew. Delete section 21 in its entirety.
4. Purchase Option. Delete section 25(a) through (c) and substitute the
following:
25. Purchase Obligation. Lessee shall be obligated to purchase all items
of the Equipment then subject to a Rental Schedule at the expiration of the
Primary Term for such items of the Equipment for a purchase price, payable
in immediately available funds, equal to the Fair Market Value of such items
which Fair Market Value shall equal fifteen percent (15%) of the original
Acquisition Cost of the Equipment, 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
<PAGE>
be on as "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.
5. Definitions. Delete paragraph 5 which references the "Fair Market Value"
definition.
6. Definitions. Delete all references to "any and all Renewal Terms" in
paragraph 9 "Lease Term" and paragraph 14 "Stipulated Loss Value."
7. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Connecticut (other than the
conflicts of laws provisions).
8. Counterparts. This Amendment may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
9. Ratification. Except as specifically set forth in or modified by this
Amendment, all of the terms, conditions and provisions of the Documents
shall remain in full force and effect and are hereby ratified and confirmed.
IN WITNESS WHEREOF, the parties hereto have executed or caused to be executed by
their duly authorized representatives this Amendment as of the date first above
written.
LESSOR: LESSEE:
FINOVA CAPITAL CORPORATION ORTHOVITA, INC.
By: /s/ Barbara Sullivan By: /s/ Joseph M. Paiva
----------------------- ----------------------
Title: Contract Administrator Title: Chief Financial Officer
----------------------- -----------------------
ATTEST:
By: /s/ Lisa S. Casel
-----------------------
Title: Controller
-----------------------
<PAGE>
SECOND AMENDMENT TO LINE OF CREDIT
TERM LOAN AND SECURITY AGREEMENT
This Second Amendment to Line of Credit Term Loan and Security Agreement
("Second Amendment") is entered into effective the 23rd day of December, 1999 by
and between PROGRESS BANK (the "Bank"), a Federal savings bank with offices at 4
Sentry Parkway, Suite 200, Blue Bell, Pennsylvania 19422, and ORTHOVITA, INC., a
Pennsylvania corporation ("Borrower"), with offices at 45 Great Valley Parkway,
Malvern, Pennsylvania 19355.
BACKGROUND
A. Borrower and the Bank are parties to a Line of Credit, Term Loan and
Security Agreement dated September 19, 1997 as amended by a First Amendment to
Line of Credit, Term Loan and Security Agreement dated August 31, 1998 (the
"Agreement").
B. Borrower has requested the Bank to renew and increase the amount of
the Line of Credit Facility.
C. The Bank has agreed to renew and increase the amount of the Line of
Credit Facility under the terms and conditions of the Agreement, as hereby
amended.
D. The Bank and Borrower desire to enter into this Second Amendment for,
among other reasons, the following:
(i) to renew and increase the amount of the Line of Credit Facility;
and
(ii) to amend certain other covenants with which Borrower must comply.
E. The Agreement shall remain in full force and effect, without
modification or amendment, except as specifically set forth below.
NOW, THEREFORE, Borrower and the Bank intending to be legally bound, and in
consideration of the aforementioned Background which is incorporated herein by
reference, and in consideration of the terms and conditions set forth herein
hereby agree as follows:
1. All references in the Agreement and/or any of the Loan Documents to
"the Agreement" or "this Agreement" shall be understood to refer to the Line of
Credit, Term Loan and Security Agreement dated September 19, 1997, as amended by
the First Amendment to Line of Credit, Term Loan and Security Agreement dated
August 31, 1998 and as amended by this Second Amendment, and as the same may
hereafter be amended from time to time. All terms not defined herein shall have
the meanings given to them in the Agreement.
2. CONFIRMATION OF EXISTING LOANS. Borrower hereby ratifies, confirms and
acknowledges that the statements contained in the foregoing Background are true,
accurate and
<PAGE>
correct and that the Loan Documents are valid, binding and in full force and
effect as of the date hereof, Borrower further acknowledges, confirms,
represents and warrants that it has no defenses, set-offs, counterclaims, or
challenges to or against the payment of any sums owing under the Loan Documents,
or to the enforceability or validity of the terms thereof. Borrower further
acknowledges and confirms and represents and warrants that it has no claims,
suits or causes of action against the Bank and hereby remises, releases and
forever discharges the Bank, its officers, directors, shareholders,
representatives and their successors and assigns, and any of them, from any
claims, causes of action, suits, or demands whatsoever in law and equity, which
it has or may have from the beginning of the world to the date of this Second
Amendment. Neither this Second Amendment nor any of the documents executed in
connection herewith, is in any way intended to constitute a novation of or to
the Loan Documents.
3. CONFIRMATION OF INDEBTEDNESS. Borrower confirms and acknowledges that
as of June 30, 1999 no indebtedness was owed to the Bank by Borrower under the
Loan Documents.
4. Section 1.1 of the Agreement is hereby amended by deleting there from
the definition of "Borrowing Base."
5. The definition of "Warrant Agreement" in Section 1.1 of the Agreement
is hereby amended to read in its entirety as follows:
WARRANT AGREEMENT. Individually and collectively the Warrant
Agreement issued to Progress Capital, Inc. on or about September
19, 1997 entitling Progress Capital, Inc. to purchase 5,000
shares of Borrower's Common Stock pursuant to the terms and
conditions contained therein, the Warrant Agreement issued to
Progress Capital, Inc. in April, 1998 entitling Progress Capital,
Inc. to purchase 5,000 shares of Borrower's Common Stock pursuant
to the terms and conditions therein and the Warrant Agreement
issued to Progress Capital, Inc. on or about December __, 1999
entitling Progress Capital, Inc. to purchase 10,000 shares of
Borrower's Common Stock pursuant to the terms and conditions
contained therein.
6. Section 2.1(a) of the Agreement is hereby amended to read in its
entirety as follows:
(a) Subject to, and in accordance with, the terms and
conditions of this Agreement, the Bank agrees to make advances in
integral multiples of 51,000 (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 $2,000,000 in all cases less the sum of the then unpaid
principal amount of all previous Advances.
2
<PAGE>
7. Section 2.1(d) of the Agreement is hereby amended to read in its
entirety as follows:
(d) The term of this Line of Credit shall commence as of
September 19, 1997 and, unless earlier terminated, shall
terminate on the earlier to occur of (i) an Event of Default (as
defined herein), or (ii) December 23, 2000 (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, among
other things, Borrower's financial condition, business,
operations and assets as reflected in Borrower's financial
statements for the year ended December 31, 1999, which extension
or renewal, if any, shall be evidenced by a letter to such affect
from the Bank and by Borrower's execution and delivery of such
other documents and instruments as the Bank may require.
8. The first phrase of Section 2.2 and Section 2.2(a) of the Agreement
are hereby amended to read in their entirety as follows:
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 (the "Line of Credit
Note")
(a) payable to the order of the Bank in the face
amount of Two Million Dollars ($2,000,000.00);
9. Section 6.1(a)(vi) of the Agreement is hereby amended to read in its
entirety as follows:
(vi) BORROWER'S CERTIFICATE. Within thirty (30) days after
the end of each period, a quarterly certificate of the officer of the
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
(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
3
<PAGE>
financial and other information as the Bank may
request.
10. The title to Section 6.1 is hereby amended to read in its entirety
as follows:
6.1 FINANCIAL STATEMENTS: COMPLIANCE REPORT
11. Section 6.1(a) of the Agreement is hereby amended to add thereto a
new subsection (vii), as follows:
(vii) 10Q REPORTS. As soon as available, and in any
event, not later than 60 days after the end of each period,
Borrower shall furnish to the Bank its quarterly 10Q Reports.
12. Section 6.1 is hereby amended to add thereto a new subsection (b)
as follows:
(b) Within thirty (30) days after the end of each fiscal
quarter, Borrower shall submit to the Bank a quarterly covenant
compliance certificate certifying to Borrower's compliance with
the financial covenants set forth in Sections 6.2 - 6.5, signed
by its chief financial officer in form and substance satisfactory
to the Bank.
13. Section 6.2 of the Agreement is hereby amended to read in its
entirety as follows:
6.2 MAXIMUM DEBT TO TANGIBLE NET WORTH. Borrower will
maintain a ratio of Debt to Tangible Net Worth, which shall be
verified at the close of each fiscal quarter of Borrower in
accordance with GAAP, of no more than:
(a) from September 19, 1997 through June 30, 1999, 1.75:1.0: and
(b) from July 1, 1999 through the Loan Termination Date,
1.0:1.0.
14. Section 6.3 of the Agreement hereby amended to read in its entirety
as follows:
6.3 MINIMUM WORKING CAPITAL. Borrower will maintain a
minimum Working Capital, which shall be verified at the close of
each fiscal quarter of Borrower in accordance with GAAP, of at
least:
(a) from September 19, 1997 through August 31, 1998,
$1,000,000.00;
4
<PAGE>
(b) from September 1, 1998 through June 30, 1999,
$2,000,000.00; and
(c) from July 1, 1999 through the Loan Termination Date,
$4,000,000.00.
15. Section 6.4 of the Agreement is hereby amended to read in its
entirety as follows:
6.4 MINIMUM CASH LEVEL. Borrower will maintain a minimum
cash and cash equivalent balance, which shall be verified at the
close of each fiscal quarter of Borrower in accordance with GAAP,
of:
(a) from September 19, 1997 through June 30, 1999,
$1,000,000.00; and
(b) from July 1, 1999 through the Loan Termination Date,
$4,000,000.00.
16. Section 6.18 of the Agreement is hereby amended to read in its
entirety as follows:
6.18 USE OF PROCEEDS. Initially, Borrower shall use the
proceeds of the Line of Credit for working capital and short-term
borrowing purposes. All Advances from September 1, 1998 through
June 30, 1999, shall be used to finance Qualified Accounts and
Qualified Inventory. All Advances from July 1, 1999 through the
Loan Termination Date shall be used for short term Working
Capital. Borrower shall use the proceeds of the Term Loan to
re-finance the acquisition of certain equipment previously
purchased by Borrower.
17. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants that, as of the date hereof:
(a) Borrower has obtained all necessary authorization from its board
of directors and shareholders to enter into this Second Amendment and the
transactions contemplated hereby;
(b) The representations and warranties of Borrower set forth in
Article 4 of the Agreement are true and correct as of the date of this Second
Amendment as if made on the date hereof;
(c) There has been no material adverse change in the business,
properties, operations or condition (financial or otherwise) of Borrower since
December 31, 1998, the date of the financial statements most recently furnished
by Borrower to Bank; and
5
<PAGE>
(d) As of the date of this Second Amendment there does not exist any
Event of Default under the Agreement nor does there exist any event which, with
the passage of time, the giving of notice, or both, would constitute an Event of
Default under the Agreement.
18. CERTIFICATE(S) OF INSURANCE. Borrower shall deliver to Bank
certificate(s) of insurance evidencing that Borrower is in compliance with
Section 6.10 of the Agreement concurrently with the signing of this Second
Amendment.
19. EXPENSES. Borrower 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 concerning this Second Amendment and other documents as
required by law or deemed necessary by the Bank, including but not limited to
the cost of all filing fees and lien searches deemed necessary by the Bank. Such
costs and expenses shall be paid by Borrower concurrently with the execution of
this Second Amendment and all such expenses hereafter incurred shall be paid
within fifteen (15) days after notice by the Bank.
20. ADDITIONAL EVENTS OF DEFAULT. Without limiting the generality of the
terms and conditions of the Agreement or this Second Amendment, the occurrence
of any one or more of the following events shall constitute additional Events of
Default under the Agreement:
(a) The failure of Borrower's to duly perform or observe any
obligation, covenant or agreement set forth in this Second Amendment;
(b) Any representation or warranty of Borrower set forth herein is
discovered to be materially untrue as of the date of this Second Amendment, or
any statement, certificate or date furnished by Borrower to the Bank heretofore
is discovered to be materially untrue as of the date as of which the facts
therein set forth were stated or certified to be true.
21. INCONSISTENCIES AND INTEGRATION. All of the terms, conditions and
covenants, to the extent not expressly inconsistent with those set forth herein,
of the Agreement or the other Loan Documents are incorporated herein by
reference and shall remain in full force and effect unaffected and unaltered by
the terms of this Second Amendment. To the extent there is any inconsistency
between the terms of this Second Amendment and any of the Loan Documents, the
terms of this Second Amendment shall control.
22. MISCELLANEOUS.
(a) COMMITMENT FEE. Borrower shall pay the Bank a non-refundable fee
in the amount of $10,000.00 for the Bank's commitments to renew and increase the
amount of the Line of Credit. Such fee shall be paid concurrently with the
execution of this Second Amendment.
(b) WARRANT AGREEMENT. Concurrently with its execution of this Second
Amendment, Borrower shall deliver to Progress Capital, Inc., a Warrant Agreement
entitling Progress Capital, Inc. to purchase 10,000 shares of Borrower's Common
Stock.
6
<PAGE>
(c) COLLATERAL. Borrower shall provide the Bank, prior to or
concurrently with the execution of this Second Amendment, evidence satisfactory
to it and its counsel that the Collateral is free and clear, as of the date
hereof, of any and all security interests, except as set forth in the Agreement.
(d) FURTHER ASSURANCES. From time to time Borrower shall execute and
deliver to the Bank such additional documents and will provide such additional
information as the Bank may reasonably request to carry out the intent of this
Second Amendment.
(e) GOVERNING LAW. This Second Amendment, and the rights and
obligations of the parties under this Second Amendment, shall be governed by,
and construed and interpreted in accordance with, the domestic, internal laws of
the Commonwealth of Pennsylvania, without reference to principles of conflicts
of law.
(f) BINDING EFFECT AND ASSIGNMENT. This Second Amendment shall inure
to the benefit of, and shall be binding upon, the respective successors and
assigns of the parties hereto. Borrower shall not assign any of its rights or
delegate any of its obligations hereunder without the prior written consent of
the Bank.
(g) SEVERABILITY. If any provision of this Second Amendment shall be
invalid under applicable laws, such invalidity shall not affect any other
provision of this Second Amendment that can be given effect without the invalid
provision, and to this end, the provisions hereof are severable.
(h) COUNTERPARTS AND HEADINGS. This First Amendment may be executed
in any number of counterparts, each of which shall be deemed an original, but
all of which together shall constitute but one and the same instrument. Section
headings contained herein are for convenience of reference only and shall in no
way affect or be used to construe or interpret this Second Amendment.
(i) SEAL. This Agreement is intended to take effect as an instrument
under seal.
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment
as of the day and year first above written.
ORTHOVITA, INC.
By: /s/ BRUCE A. PEACOCK
---------------------------
Bruce A. Peacock, President
PROGRESS BANK
By: /s/ STEVEN D. HOBMAN
---------------------------------------
Steven D. Hobman, Senior Vice President
<PAGE>
THIS SECOND AMENDED AND RESTATED LINE OF CREDIT NOTE AMENDS AND RESTATES, BUT
DOES NOT REPAY, THE AMENDED AND RESTATED LINE OF CREDIT NOTE DATED AUGUST 31,
1998 FROM ORTHOVITA, INC. TO PROGRESS BANK IN THE ORIGINAL PRINCIPAL AMOUNT OF
$1,000,000.00
SECOND AMENDED AND RESTATED LINE OF CREDIT NOTE
$2,000,000.00
FOR VALUE RECEIVED, without set-off or deduction, ORTHOVITA, INC., a
Pennsylvania corporation ("Maker"), in accordance with the terms and conditions
set forth below, hereby promises to pay, as provided herein, to the order of
PROGRESS BANK (the "Bank"), the principal sum of Two Million Dollars
($2,000,000.00) or such lesser amount as may be advanced to Maker, in lawful
money of the United States of America, together with interest thereon at an
annual rate equal to the "Prime Rate" (as defined herein) plus (i) from
September 19, 1997 through August 31, 1998, one and one-half percent (1.50%),
and (ii) from and after September 1, 1998, one percent (1.00%).
(a) 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.
(b) Interest on this Note shall be due and payable monthly in arrears
commencing on October 1, 1997, and continuing on the first day of each month
thereafter until the Bank's credit availability evidenced by this Note has
expired or been terminated, and the principal amount of an all accrued interest
with regard to this Note have been paid in full (it being understood that
interest shall again accrue upon any subsequent borrowing under the Line of
Credit).
(c) Interest shall be computed on the basis of a 360-day year for the
actual number of days elapsed (365/360 or 366/360 as appropriate).
(d) Principal shall be due and payable in full on the earlier to
occur of an Event of Default or the Loan Termination Date (as defined in Section
2.1(d) of the Loan Agreement).
(e) Upon the occurrence of a monetary default hereunder, the rate of
interest shall be increased to a rate equal to two percent (2%) above the then
current rate of interest specified herein, payable on the date of default (the
"Default Rate"). Interest shall continue to accrue at the
<PAGE>
Default 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.
(f) If any of the aforesaid payments of interest shall become overdue
for a period in excess of ten (10) days, Maker shall pay the Bank a "late
charge" of five percent (5%) of the monthly interest payment then past due.
(g) All payments of principal and interest with regard to this Note
shall be made in lawful money of the United States of America in immediately
available funds at the Bank's office at 4 Sentry Parkway, Suite 200, P.O. Box
3036, Blue Bell, PA 19422 or at such other place as the Bank shall designate in
writing.
(h) Maker shall not be obligated to pay and the Bank shall not
collect interest at a rate in excess of the maximum permitted by law or the
maximum that will not subject the Bank to any civil or criminal penalties. If,
because of the acceleration of maturity, the payment of interest in advance or
any other reason, Maker is required, under the provisions of the Line of Credit,
Term Loan and Security Agreement dated September 19, 1997 between Maker and the
Bank, as amended (the "Loan Agreement"), to pay interest at a rate in excess of
such maximum rate, the rate of interest under such provisions shall immediately
and automatically be reduced to such maximum rate, and any payment made in
excess of such maximum rate, together with interest thereon at a rate provided
herein from the date of such payment, shall be immediately and automatically
applied to the reduction of the unpaid principal balance of this Note as of the
date on which such excess payment is made. If the amount to be so applied to
reduction of the unpaid principal balance exceeds the unpaid principal balance,
the amount of such excess shall be refunded by the Bank to Maker.
(i) Notwithstanding the face amount of this Note, the liability of
the Maker under this Note shall be limited at all times to the unpaid principal
amount of, all accrued unpaid interest on, all late charges with respect to, and
all costs incurred in the collection of any sum due under and in connection with
the Line of Credit Facility (as provided in Section 2.1 of the Loan Agreement)
and as reflected on the records of the Bank.
(j) This Note is the Note referred to in Section 2.2 of the Loan
Agreement and is entitled to all the benefits of such Loan Agreement and all the
security referred to therein. In the event of a conflict between the terms of
this Note and the terms of the Loan Agreement, the terms of the Loan Agreement
shall control.
(k) All of the agreements, conditions, covenants, provisions and
stipulations contained in the Loan Agreement which are to be kept and performed
by Maker are hereby made a part of this Note to the same extent and with the
same force and effect as if they were fully set forth herein, and Maker
covenants and agrees to keep and perform them, or cause them to be kept and
performed, strictly in accordance with their terms.
(l) Upon the occurrence of an Event of Default as that term is
defined in Article 8 of the Loan Agreement, then, and in such event, the Bank
may declare this Note to be due and
2
<PAGE>
payable, whereupon the entire unpaid balance of principal, together with all
accrued interest thereon, shall become immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived, anything herein or in the Loan Agreement to the
contrary notwithstanding.
(m) UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, AS THAT TERM IS
DEFINED IN ARTICLE 8 OF THE LOAN AGREEMENT, MAKER HEREBY IRREVOCABLY AUTHORIZES
AND EMPOWERS THE PROTHONOTARY OR ANY ATTORNEY OF ANY COURT OF THE COMMONWEALTH
OF PENNSYLVANIA OR ELSEWHERE TO APPEAR AT ANY TIME FOR MAKER IN ANY ACTION
BROUGHT AGAINST SUCH MAKER ON THIS NOTE AT THE SUIT OF THE BANK, WITH OR WITHOUT
DECLARATION FILED, AS OF ANY TERM, AND THEREIN TO CONFESS OR ENTER JUDGMENT
AGAINST MAKER FOR THE ENTIRE UNPAID PRINCIPAL OF THIS NOTE AND ALL OTHER SUMS
PAYABLE BY OR ON BEHALF OF MAKER PURSUANT TO THE TERMS OF THIS NOTE OR THE LOAN
AGREEMENT, AND ALL ARREARS OF INTEREST THEREON, TOGETHER WITH COSTS OF SUIT,
ATTORNEY'S COMMISSION FOR COLLECTION OF FIVE PERCENT (5%) OF THE TOTAL AMOUNT
THEN DUE BY MAKER TO THE BANK (BUT IN ANY EVENT NOT LESS THAN ONE THOUSAND
DOLLARS ($1,000.00)), AND FOR SO DOING THIS NOTE OR A COPY HEREOF VERIFIED BY
AFFIDAVIT SHALL BE A SUFFICIENT WARRANT. THE AUTHORITY GRANTED HEREIN TO CONFESS
JUDGMENT SHALL NOT BE EXHAUSTED BY ANY EXERCISE THEREOF BUT SHALL CONTINUE FROM
TIME TO TIME AND AT ALL TIMES UNTIL PAYMENT IN FULL OF ALL THE AMOUNTS DUE
HEREUNDER.
(n) The remedies of the Bank as provided herein or in the Loan
Agreement, and the warranties contained herein or in the Loan Agreement shall be
cumulative and concurrent, and may be pursued singly, successively, or together
at the sole discretion of the Bank, and may be exercised as often as occasion
therefor shall occur; and the failure to exercise any such right or remedy shall
in no event be construed as a waiver or release thereof.
(o) Maker hereby waives and releases all errors, defects and
imperfections in any proceedings instituted by the Bank under the terms of this
Note or of the Loan Agreement, as well as all benefit that might accrue to Maker
by virtue of any present or future laws exempting any property, real, personal
or mixed, or any part of the proceeds arising from any sale of any such
property, from attachment, levy, or sale under execution, or providing for any
stay of execution, exemption from civil process, or extension of time for
payment; and Maker agrees that any real estate that may be levied upon pursuant
to a judgment obtained by virtue hereof, on any writ of execution issued
thereon, may be sold upon any such writ in whole or in part in any order desired
by the Bank. MAKER HEREBY WAIVES ITS RIGHT TO A TRIAL BY JURY.
(p) Maker and all endorsers, sureties and guarantors hereby jointly
and severally waive presentment for payment, demand, notice of demand, protest
and notice of protest of this Note, and all other notices in connection with the
delivery, acceptance, performance, default, or enforcement of the payment of
this Note, and they agree that the liability of each of them shall be
unconditional, without regard to the liability of any other party, and shall not
be affected in any
3
<PAGE>
manner by any indulgence, extension of time, renewal, waiver or modification
granted or consent to any and all extensions of time, renewals, waivers, or
modifications that may be granted by the Bank with respect to the payment or
other provisions of this Note, and to the release of the collateral or any part
thereof, with or without authorization and agree that additional makers,
endorsers, guarantors, or sureties may become parties hereto without notice to
them or affecting their liability hereunder.
(q) The Bank shall not be deemed, by any set of omission or
commission, to have waived any of its rights or remedies hereunder unless such
waiver is in writing and signed by the Bank, and then only to the extent
specifically set forth in the writing. A waiver on one event shall not be
construed as continuing or as a bar to or waiver of any right or remedy to a
subsequent event.
(r) This instrument shall be governed by and construed according to
the domestic, internal laws (but not the law of conflict of laws) of the
Commonwealth of Pennsylvania.
(s) Whenever used, the singular number shall include the plural, the
plural the singular; the use of any gender shall be applicable to all genders,
and the words the "Bank" and "Maker" shall be deemed to include the respective
successors and assigns of the Bank and Maker.
(t) Any provision contained in this Note which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be 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.
IN WITNESS WHEREOF, Maker, intending to be legally bound hereby, has caused
this Note to be duly executed by its authorized officers, and its corporate seal
to be affixed and attested, effective the 23rd day of December, 1999.
ORTHOVITA, INC.
By: /s/ BRUCE A. PEACOCK
---------------------------
Bruce A. Peacock, President
<PAGE>
ASSET SALE AGREEMENT
Among
ORTHOVITA, INC.
And
VITA LICENSING, INC.
And
IMPLANT INNOVATIONS, INC.
Dated as of February 10, 2000
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
RECITALS.................................................... 3
ARTICLE I DEFINITIONS....................................... 3
ARTICLE II SALE OF ASSETS................................... 5
ARTICLE III CONSIDERATION................................... 5
ARTICLE IV CLOSING.......................................... 7
ARTICLE V COVENANTS AND AGREEMENTS.......................... 7
ARTICLE VI REPRESENTATIONS AND WARRANTIES................... 12
ARTICLE VII SURVIVAL OF REPRESENTATIONS; INDEMNITY.......... 16
ARTICLE VIII TERMINATION OF AGREEMENT....................... 19
ARTICLE IX MISCELLANEOUS................................... 20
</TABLE>
SCHEDULES
Schedule 1.2 Biogran(R) Know-How
Schedule 1.3 Biogran(R) Patents
Schedule 1.4 Biogran(R) Regulatory Approvals
Schedule 1.5 Biogran(R) Trademarks
Schedule 1.6 Contracts
Schedule 1.7 Equipment
Schedule 1.9 Inventory
Schedule 1.11 Marketing Materials
Schedule 1.14 Specifications
Schedule 3.3.2 Revised Inventory List
Schedule 3.5 Purchase Price Allocation
Schedule 3.7 Current CORTOSS(TM) and ORTHOCOMP(TM) Products
Schedule 4.2A Form of Biogran(R) Patent Assignment
Schedule 4.2B Form of Biogran(R) Regulatory Approval Assignment
Schedule 4.2C Form of Biogran(R) Trademark Assignment
Schedule 4.3.1 Wiring Instructions
Schedule 6.1.5 Pending Actions
Schedule 6.1.10 Suppliers
-i-
<PAGE>
Schedule 6.1.14 Studies and Information
EXHIBITS
Exhibit 4.2D Form of Escrow Agreement
Exhibit 4.2E Form of Bill of Sale
Exhibit 4.2F Form of Termination Agreement for Distribution Agreement
Exhibit 4.2G Form of Assignment of Contracts
Exhibit 4.2H Form of Legal Opinion of Sellers' Counsel
Exhibit 4.3A Form of Legal Opinion of Purchaser's Counsel
-ii-
<PAGE>
ASSET SALE AGREEMENT
--------------------
This ASSET SALE AGREEMENT is dated as of February 10, 2000 (the "Signing Date")
among ORTHOVITA, INC., a Pennsylvania corporation ("Orthovita"), and VITA
LICENSING, INC., a Delaware corporation ("Vita Licensing", collectively with
Orthovita, the "Sellers") and IMPLANT INNOVATIONS, INC., a Florida corporation
("Implant Innovations" or "Purchaser").
RECITALS
--------
WHEREAS, Orthovita and Implant Innovations entered into a Global
Distribution Agreement on April 29, 1998 (the "Distribution Agreement") to
facilitate the global distribution of Finished Product (as defined below) for
dental surgical indications and the parties wish to terminate the Distribution
Agreement in favor of this Asset Sale Agreement; and
WHEREAS, Sellers wish to sell Purchaser the Transferred Assets
(as defined below) and Purchaser desires to purchase from the Sellers the
Transferred Assets necessary for the manufacture and sale of Finished Product;
and
WHEREAS, Vita Licensing is the sole assignee of the Biogran(R)
Patents (as defined below) referred to in Title I of Schedule 1.3, Orthovita is
------------
the sole assignee of the Biogran(R) Patents referred to in Title II of Schedule
--------
1.3, and Orthovita is the sole owner of the Biogran(R) Trademarks, the Biogran
- ---
(R) Know-How, the Biogran(R) Regulatory Approvals, the Equipment, the Contracts,
the Marketing Materials, and the Inventory (each as defined below).
NOW, THEREFORE, in consideration of the respective covenants contained herein
and intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
---------
DEFINITIONS
-----------
1.1 "Agreement" shall mean this document and any annex, addendum, exhibit,
attachment, schedule or modification hereto.
1.2 "Biogran(R) Know-How" shall mean all currently existing proprietary
material and information including data, technical information, know-how,
experience, inventions, discoveries, trade secrets, compositions of matter
and methods, whether or not patentable or confidential, solely as they
relate to and are necessary for the manufacture and packaging of Finished
Product, owned by Sellers and described in Schedule 1.2.
------------
1.3 "Biogran(R) Patents" shall mean the patents and patent applications listed
in Schedule 1.3 and any patents issuing therefrom.
------------
1.4 "Biogran(R) Regulatory Approvals" shall mean with respect to the United
States and the European Union, all authorizations, licenses or permits
required by the appropriate
<PAGE>
governmental entity or entities and necessary for commercial sale of
Finished Product in that territory including, without limitation and where
applicable, approval of labeling, price, reimbursement and manufacturing,
owned by Sellers and listed in Schedule 1.4.
------------
1.5 "Biogran(R) Trademarks" shall mean the registered and unregistered
trademarks for Finished Product, owned by Sellers and identified in
Schedule 1.5.
------------
1.6 "Contracts" shall mean all the contracts relating to Finished Product
manufacture, sale, and research, and use of the Transferred Assets, to be
transferred from Sellers to Purchaser, and identified in Schedule 1.6,
------------
Subsection A.
------------
1.7 "Equipment" shall mean that equipment used for the manufacture and
packaging of Finished Product and identified in Schedule 1.7.
------------
1.8 "Finished Product" shall mean Product packaged, labeled and boxed with
instructions for use, and ready for distribution to the customer.
1.9 "Inventory" shall mean all inventories of (a) Finished Product, (b) raw
materials, (c) Packaged Product, and (d) packaging materials used in the
manufacture and packaging of Finished Product that are owned by Sellers and
are in the possession or under the control of Sellers and identified in
Schedule 1.9.
------------
1.10 "Knowledge" shall mean the knowledge of each corporate officer of the party
or parties. An individual is deemed to have knowledge of a particular fact
or matter if (a) such individual is actually aware of the fact or matter or
(b) a prudent individual could be expected to discover or otherwise become
aware of the fact or matter in the course of performing his or her ordinary
duties in a competent manner.
1.11 "Marketing Materials" shall mean all of the currently existing marketing
materials owned by Sellers and used by Purchaser in relation to Finished
Product distribution and identified in Schedule 1.11.
-------------
1.12 "Packaged Product" shall mean Product packaged, labeled and boxed with
instructions for use, but not ready for distribution to customer.
1.13 "Product" shall mean bioactive glass granules that are formulated for use
as a bone substitute known as Biogran(R) brand bone substitute and are
covered by a claim of a Biogran(R) Patent.
1.14 "Specifications" shall mean the written specifications for the Finished
Product attached as Schedule 1.14, as the same may be amended from time to
-------------
time by Sellers in accordance with U.S. Food and Drug Administration
("FDA") requirements and other regulatory requirements.
<PAGE>
ARTICLE II
----------
SALE OF ASSETS
--------------
2.1 Sale and Purchase of Assets. Subject to and upon the terms and
---------------------------
conditions set forth in this Agreement, Sellers shall, at the Closing
provided for in Article IV, grant, sell, transfer, convey, assign and
deliver to Purchaser all their respective interests in, and Purchaser
shall purchase, the following assets, properties and rights of every
kind and description, real, personal and mixed, tangible and intangible
(including all causes of action, rights of action, contract rights and
claims against third parties), wherever situated as the same shall exist
on the Closing Date (as defined below) (the assets being purchased from
Sellers are sometimes collectively referred to as the "Transferred
Assets"): (1) the Biogran(R) Patents, Biogran(R) Trademarks, and
Biogran(R) Know-How (collectively, the "Intellectual Property"); (2)
the Biogran(R) Regulatory Approvals; (3) the Equipment; (4) the
Contracts; (5) the Marketing Materials; and (6) the Revised Inventory
(as defined below).
2.2 Liabilities. With the exception of payments due under the Contracts, the
-----------
Transferred Assets are hereby conveyed free and clear of all debts,
taxes, claims, options, liabilities, obligations, liens and
encumbrances. Title to and risk of loss of the Transferred Assets shall
pass to Purchaser as of the Closing (as defined below).
ARTICLE III
-----------
CONSIDERATION
-------------
3.1 Purchase Price. On the Closing Date (as defined below), Purchaser shall
--------------
pay to Sellers as the purchase price for the Transferred Assets sold
hereunder the sum of (a) Three Million Nine Hundred Thousand Dollars
($3,900,000) and (b) the Revised Inventory Amount (as defined below) in
the manner described in Section 4.3. In addition, Purchaser shall pay to
Sellers on the Closing Date the Distribution Agreement Amount (as
defined below) in the manner described in Section 4.3.
3.2 Inventory Amount. Schedule 1.9 sets forth, as of January 21, 2000, a
---------------- ------------
true and complete list of all items in Inventory, including (a) the part
number of each item, (b) the quantity of each item, and (c) the location
of each item (the "Inventory List").
3.3 Inspection and Revisions to Inventory List. Prior to the Closing Date
------------------------------------------
(as defined below), representative(s) of Purchaser shall meet with
representative(s) of Sellers to inspect jointly the Inventory wherever
located and to update the quantity and location of the items on the
Inventory List. The parties agree and acknowledge that the Purchaser
will not necessarily purchase all of the packaging material referenced
on Schedule 1.9, but shall, prior to Closing, specify the amount of
------------
packaging material, if any, it wishes to acquire.
3.3.1 Purchaser may reject and deduct from the Inventory List any items
that do not reasonably meet the standards set forth in Section
6.1.12 and cannot reasonably be expected to meet such standards
on or prior to the Closing Date.
<PAGE>
3.3.2 Sellers shall then revise the Inventory List to reflect
adjustments made by the parties under this Section 3.3 (the
"Revised Inventory List"). The Revised Inventory List shall
represent the items in the Inventory, including the packaging
material Purchaser wishes to acquire, as of the last business day
before the Closing Date, shall include a calculation of the total
value of the items listed thereon (the "Revised Inventory
Amount") and shall be appended to this Agreement as Schedule
--------
3.3.2.
-----
3.3.3 Purchaser shall pay the Revised Inventory Amount to Sellers at
the Closing in the manner set forth in Section 4.3. For the
purposes of calculating the values of the items listed on the
Revised Inventory List, the following criteria shall be employed:
3.3.3.1 Raw Materials shall be valued at documented cost to
Orthovita.
3.3.3.2 Packaging materials shall also be valued at documented
cost to Orthovita.
3.3.3.3 Finished Product shall be valued as follows: (a)
Finished Product which has not been delivered to
Purchaser and is the subject of Implant Innovations
Purchase Order No. 6994 or Purchase Order No. 8374
(calling for the purchase of the quantities set forth in
such purchase orders) shall be valued based on the
number of units multiplied by the unit value as
established under the Distribution Agreement; (b)
Finished Product which has not been delivered to
Purchaser and is the subject of any new Implant
Innovations purchase orders mutually agreed upon and
entered into by the parties after the Signing Date shall
be valued based on the number of units multiplied by the
unit value as established under the Distribution
Agreement; and (c) Finished Product other than the
foregoing, shall be valued based on the number of units
multiplied by the sum of the documented cost per unit
plus fifteen percent (15%) of such documented cost.
3.3.3.4 Any Packaged Product which cannot be converted into
Finished Product prior to the Closing Date shall be
properly disposed of by Purchaser as waste product at
Purchaser"s expense, unless the parties mutually agree
otherwise.
3.4 Distribution Agreement Amount. On the Closing Date (as defined below),
-----------------------------
Purchaser shall pay to Sellers all amounts owed by Purchaser to Sellers,
net of any amount owed by Sellers to Purchaser, under the Distribution
Agreement (the "Distribution Agreement Amount") for Finished Product
purchased by Purchaser and delivered by Sellers in accordance with the
Distribution Agreement. Purchaser shall pay the Distribution Agreement
Amount to Sellers in the manner set forth in Section 4.3.
3.5 Allocation. Sellers and Purchaser agree that the portion of the purchase
----------
price referred to in Section 3.1(a) shall be allocated to the various
categories of Transferred Assets in
<PAGE>
accordance with the attached Schedule 3.5. The parties agree that the
------------
values assigned to the various categories of the Transferred Assets as
set forth in Schedule 3.5 are fair and reasonable values for such assets
------------
purchased.
3.6 Technical Assistance. During the period of six (6) months following the
--------------------
Closing Date (as defined below), Sellers shall make up to two employees
reasonably available to provide technical support for the manufacture of
the Finished Product at the Purchaser"s reasonable request, at times and
places agreed to by the parties; provided, however, that Purchaser shall
pay (i) all reasonable out-of-pocket costs and expenses (including
travel, lodging and other similar expenses) of such Sellers" employees
incurred in connection with providing such technical support, such
amount not to exceed $10,000 without Purchaser"s prior approval, and
(ii) $850 per day for each of Sellers" employees used in connection with
providing technical support services to Purchaser in excess of twenty
(20) total work days during this six (6) month period.
3.7 Right of First Refusal for New Products. If during the period from the
---------------------------------------
Closing Date (as defined below) to April 29, 2003, a Seller develops or
obtains transferable rights to a new product(s) that (a) includes
bioactive glass granules as an active component, except for Orthovita"s
current products trademarked as (i) CORTOSS(TM) and (ii) ORTHOCOMP(TM)
described on Schedule 3.7, and (b) has application in the dental
------------
surgical field (the "New Product"), Purchaser shall have the right of
first refusal to distribution rights for the New Product in such field.
Such Seller shall provide to Purchaser timely notice that the New
Product is available for distribution (the "New Product Notice") and
Purchaser shall have seven (7) business days from receipt of the New
Product Notice to provide written notice to Seller providing whether it
has an interest or has no interest in the New Product (the "Interest
Notice"). If the Interest Notice provides that the Purchaser has no
interest in the New Product, Seller shall have no further obligation to
provide any rights to Purchaser with respect to the New Product. If the
Interest Notice provides that the Purchaser has an interest in the New
Product, Seller will have seven (7) business days to provide written
notice to Purchaser that describes the terms and conditions under which
such Seller is prepared to grant the rights regarding the New Product to
Purchaser (the "Terms Notice"). Upon Purchaser"s receipt of the Terms
Notice, the parties shall enter into good faith negotiations regarding
the New Product. If the parties are unable to reach a mutually
acceptable arrangement for Purchaser to distribute the new product
within 60 days after Purchaser receives the Terms Notice, Seller may
enter into an agreement with any third party to distribute the New
Product, except that Seller shall not offer the New Product to a third
party on terms that on balance are more favorable to that third party
than the terms offered by Seller to Purchaser.
ARTICLE IV
----------
CLOSING
-------
4.1 Location, Date. Unless the parties agree in writing to another date or
--------------
place, the closing of the transactions contemplated by this Agreement
("Closing") shall be held at the offices of Morgan, Lewis & Bockius LLP
in Philadelphia, Pennsylvania, at 10:00 a.m., local time, on the date
(the "Closing Date") that is the earlier of (a) ninety (90) days after
<PAGE>
Purchaser receives from Sellers (1) Orthovita"s certificate and written
declaration of conformity for Finished Product and (2) the written
report of TNO (Orthovita"s current Notified Body for the Finished
Product) on the recently performed Design Examinations on Finished
Product or (b) the later of (i) five (5) business days after Purchaser
receives written notification from its Notified Body that the CE
Certificate for the Finished Product will be issued in the Purchaser"s
name or (ii) Sellers' delivery to Purchaser of all quantities of
Finished Product set forth in Purchase Order No. 6994 and Purchase Order
No. 8374.
4.2 Sellers" Obligations. On the Closing Date, Sellers shall deliver to
--------------------
Purchaser:
4.2.1 the executed Biogran(R) Patent Assignments in substantially the
form of the attached Schedule 4.2A;
-------------
4.2.2 the executed Biogran(R) Regulatory Approvals Assignments in
substantially the form of the attached Schedule 4.2B;
-------------
4.2.3 the executed Biogran(R) Trademark Assignments in substantially
the form of the attached Schedule 4.2C;
-------------
4.2.4 the executed Escrow Agreement in substantially the form of the
attached Exhibit 4.2D (the "Escrow Agreement");
------------
4.2.5 the executed Bill of Sale in substantially the form of the
attached Exhibit 4.2E;
------------
4.2.6 the executed Distribution Termination Agreement in
substantially the form of the attached Exhibit 4.2F;
------------
4.2.7 the executed Assignment of Contracts in substantially the form
of the attached Exhibit 4.2G;
------------
4.2.8 an opinion dated the date of the Closing in form and substance
satisfactory to Purchaser in substantially the form of the
attached Exhibit 4.2H;
------------
4.2.9 a copy of the executed Agreement between Orthovita and Vita
Licensing regarding the termination of the Vita Licensing, Inc.
License to Orthovita dated June 28, 1999;
4.2.9 copies of all files and other data and documents pertaining to
the Biogran(R) Know-How, Biogran(R) Trademarks, Biogran(R)
Patents and Biogran(R) Regulatory Approvals (which, if
requested by Purchaser, shall be shipped to a location
designated by Purchaser at Purchaser"s expense); and
4.2.10 the resolutions duly adopted by the Board of Directors of each
Seller evidencing the taking of all corporate action necessary
to authorize the execution, delivery and performance of this
Agreement and the other transaction documents and the
consummation of the transactions contemplated hereby and
thereby.
<PAGE>
4.3 Purchaser's Obligations. On the Closing Date, Purchaser shall:
-----------------------
4.3.1 deliver to Vita Licensing the sum of Three Million Five Hundred
Thousand Dollars ($3,500,000) in the form of a wire transfer
executed in accordance with Vita Licensing wiring instructions
provided by Sellers in Schedule 4.3.1;
--------------
4.3.2 execute and deliver the Escrow Agreement in substantially the
form of Exhibit 4.2D and deliver to Chase Manhattan Trust
------------
Company, N.A. (the "Escrow Agent") the sum of Four Hundred
Thousand Dollars ($400,000) by a cashier"s check or wire
transfer, which sum shall be held in escrow by the Escrow Agent
pursuant to the Escrow Agreement;
4.3.3 execute and deliver the Distribution Termination Agreement in
substantially the form of the attached Exhibit 4.2F;
------------
4.3.4 deliver to Sellers an opinion dated the date of the Closing in
form and substance satisfactory to Sellers in substantially the
form of the attached Exhibit 4.3A;
------------
4.3.5 deliver to Orthovita an amount equal to the Revised Inventory
Amount plus the Distribution Agreement Amount by cashier"s
check or wire transfer executed in accordance with the
Orthovita wiring instructions in Schedule 4.3.1;
--------------
4.3.6 deliver to Sellers proof of filing an amended registration with
the U.S. Food and Drug Administration evidencing the addition
of Finished Product to Purchaser"s registration; and
4.3.7 deliver to Sellers the resolutions duly adopted by the Board of
Directors of Purchaser evidencing the taking of all corporate
action necessary to authorize the execution, delivery and
performance of this Agreement and the other transaction
documents and the consummation of the transactions contemplated
hereby and thereby.
ARTICLE V
---------
COVENANTS AND AGREEMENTS
------------------------
5.1 Cooperation. Prior to the Closing Date, the Purchaser will use
-----------
commercially reasonable efforts to obtain a CE Mark for the Finished
Product. Sellers will cooperate in good faith with Purchaser to obtain
such CE Mark, including (a) providing to Purchaser or its designee as
soon as reasonably practicable the documents listed in Section 4.1 and
(b) providing to Purchaser or its designee as soon as reasonably
practicable any other documentation required to achieve the same.
Sellers shall provide to Purchaser, Purchaser"s Notified Body for the
Finished Product (mdc, medical device certification GmbH), and
Purchaser"s other regulatory authority representatives reasonable access
to (a) Orthovita's technical files relating to Biogran(R) Regulatory
Approvals, (b) Orthovita"s device history and quality records relating
to the Finished Product and (c) copies of such documents. Sellers shall
retain these records for a period that, after the expiration date of the
last lot of Finished Product manufactured by Orthovita, is the greater
of (i) two years
<PAGE>
or (ii) the life of the Finished Product. Except as to the delivery of
documents contemplated by Section 4.1, Purchaser shall reimburse Sellers
for all out-of-pocket costs incurred by Sellers as a result of Sellers"
assistance in connection with Purchaser"s request for assistance with
such CE Mark. All regulatory filings for regulatory approvals after the
Closing Date shall be the sole responsibility and at the expense of the
Purchaser.
5.2 Conduct of Business Pending Closing. Prior to the Closing Date, and
-----------------------------------
unless Purchaser shall otherwise consent or agree in writing, the
Sellers covenant and agree that:
5.2.1 Sellers will engage in the manufacture of Finished Product in
the ordinary course of business and consistent with past
practice, except that the Sellers shall not be required to take
any action to purchase raw materials or commission manufacture
of Finished Product unless Sellers receive prior written
consent or instruction from Purchaser to do so;
5.2.2 Sellers will not incur, create, assume or suffer to exist any
license (other than the existing license between Orthovita and
Vita Licensing set forth on Schedule 1.6), mortgage, pledge,
------------
lien, restriction, encumbrance, tenancy, encroachment,
covenant, condition, right-of-way, easement, claim, security
interest, charge or other matter affecting title on any of the
Transferred Assets or waive any right relating to the
Transferred Assets;
5.2.3 Sellers shall not (a) modify, amend, extend, renew or terminate
any of the Contracts or enter into any new contracts relating
to the Transferred Assets or (b) make purchases relating to the
Transferred Assets or the Finished Product in an amount greater
than $25,000, except with respect to consents or instructions
from Purchaser in accordance with Section 5.2.1;
5.2.4 Sellers shall keep the Biogran(R) Regulatory Approvals in full
force and effect and renew any of them that will expire on or
before the Closing Date;
5.2.5 Sellers shall conduct the business in such a manner so that the
representations and warranties contained in Article 6 shall
continue to be true and correct on and as of the Closing Date
as if made on and as of the Closing Date;
5.2.6 Sellers shall make all reasonable efforts to provide
information about the Transferred Assets and Finished Products
to the Purchaser that is reasonably requested;
5.2.7 Sellers shall maintain in force (including necessary renewals)
any existing insurance policies covering the Transferred
Assets, except to the extent that they may be replaced with
equivalent policies appropriate to insure the Transferred
Assets;
5.2.8 Sellers shall inform Purchaser prior to the Closing of any
updates to the Schedules to this Agreement as necessary to
cause the information contained in them to continue to be
accurate up to and including the Closing Date;
<PAGE>
5.2.9 Sellers will not take any action or omit to take any action
which will result in a violation of any applicable law or cause
a breach of any agreements, contracts or commitments;
5.2.10 Sellers shall not (a) solicit, initiate or encourage the
submission of a competing proposal to purchase the Transferred
Assets, (b) enter into or agree to enter into any contract to
sell the Transferred Assets, or (c) participate in any
discussions or negotiations that would reasonably be expected
to lead to such a contract; or
5.2.11 Sellers shall not enter into any agreement to do or not to do
any of the foregoing, as the case may be.
5.3 Conditions Precedent to Obligations of Purchaser. The obligations of
------------------------------------------------
Purchaser to proceed with the Closing under this Agreement are subject
to the fulfillment prior to or at Closing of the following conditions
(any one or more of which may be waived in whole or in part by Purchaser
in Purchaser's sole discretion):
5.3.1 Bringdown of Representations and Warranties. Sellers"
-------------------------------------------
representations and warranties contained in this Agreement
shall be true and correct on and as of the time of Closing,
with the same force and effect as though such representations
and warranties had been made on, as of and with reference to
such time, and Purchaser shall have received a certificate to
such effect signed by each Seller.
5.3.2 Performance and Compliance. The Sellers shall have performed
--------------------------
all of the covenants and complied with all of the provisions
required by this Agreement to be performed or complied with by
them on or before the Closing.
5.3.3 Satisfactory Instruments. All instruments and documents
------------------------
required on the Sellers' part to effectuate and consummate the
transactions contemplated hereby shall have been delivered to
Purchaser and shall be in form and substance reasonably
satisfactory to Purchaser and its counsel.
5.4 Conditions Precedent to Obligations of Sellers. The obligations of
----------------------------------------------
Sellers to proceed with the Closing under this Agreement are subject to
the fulfillment prior to or at Closing of the following conditions (any
one or more of which may be waived in whole or in part by Sellers in
Sellers" sole discretion):
5.4.1 Bringdown of Representations and Warranties. Purchaser"s
-------------------------------------------
representations and warranties contained in this Agreement
shall be true and correct on and as of the time of Closing,
with the same force and effect as though such representations
and warranties had been made on, as of and with reference to
such time, and Sellers shall have received a certificate to
such effect signed by Purchaser.
5.4.2 Performance and Compliance. The Purchaser shall have performed
all of the covenants and complied with all of the provisions
required by this Agreement to be performed or complied with by
it on or before the Closing Date.
<PAGE>
5.4.3 Satisfactory Instruments. All instruments and documents
------------------------
required on the Purchaser"s part to effectuate and consummate
the transactions contemplated hereby shall have been delivered
to Sellers and shall be in form and substance reasonably
satisfactory to Sellers and their counsel.
5.5 Finished Product Complaints; Recalls. The Sellers shall cooperate in
------------------------------------
good faith with the Purchaser in matters regarding traceability of the
Finished Product, complaints regarding the Finished Product, the
vigilance system regarding the Finished Product and recalls (whether
mandatory or voluntary) regarding the Finished Product. Each party shall
provide information and data as reasonably required by the other party
with respect to such matters and shall cooperate fully with the other
party in order to permit the other party to meet its reporting
requirements under applicable law.
5.5.1 The decision to conduct a recall belongs solely to Sellers as
it relates to Finished Product manufactured by Sellers prior to
and on the Closing Date.
5.5.2 The decision to conduct a recall belongs solely to Purchaser as
it relates to Finished Product manufactured by Purchaser after
the Closing Date.
5.5.3 The parties will cooperate fully with each other in effecting
any recall of the Finished Product pursuant to this Section
5.5, including communications with any purchasers or users of
the Finished Product.
5.5.4 Sellers shall bear all costs and expenses of any recall of the
Finished Product manufactured by Sellers on or before the
Closing Date and Purchaser shall bear all costs and expenses of
any recall of the Finished Product manufactured by Purchaser
after the Closing Date.
5.6 Sale of Product. After the Closing Date, Sellers agree that they shall
---------------
not make, use, or sell any Finished Product until the expiration date of
the last to expire of the Biogran" Patents.
5.7 Packaging and Labeling. If Purchaser, despite commercially reasonable
----------------------
efforts, is unable to obtain packaging materials without Sellers' name
and/or logo prior to the Closing Date, Sellers agree to allow Purchaser
to use, for a reasonable period of time, Sellers' packaging materials
with Sellers' name and/or logo in connection with its manufacture and
sale of the Finished Product, provided that Purchaser places Purchaser's
-------- ----
label (a) securely and completely over the Sellers' name and/or logo
(other than the packaging trays embossed with Sellers' name and/or logo)
and (b) does so in compliance with all applicable regulatory
requirements until Purchaser is able to obtain packaging materials
without Sellers' name and/or logo.
5.8 Exchange of Information and Confidentiality. This Agreement contemplates
-------------------------------------------
the exchange of certain confidential and proprietary information
relating to the Finished Product and the Transferred Assets by one party
(the "Disclosing Party") to the other party (the "Receiving
<PAGE>
Party") in the negotiations leading up to this Agreement and in the
period between the Signing Date and the Closing Date.
5.8.1 During the period between the Signing Date and the Closing
Date, with respect to the Confidential Information of the
Disclosing Party, each party, shall (a) use the respective
Confidential Information only for the purpose of performing
its duties or exercising its rights under this Agreement
and for no other purpose, subject to the terms and
conditions of this Agreement; (b) safeguard the respective
Confidential Information against disclosure to others with
the same degree of care as it exercises with its own data
of a similar nature; and (c) not disclose the respective
Confidential Information to others (except to those who are
bound by a like obligation of confidentiality and
restriction on use) without the express written consent of
the other party.
5.8.2 The obligations of Section 5.8.1 shall not apply to that
Confidential Information of the Disclosing Party which: (a)
the Receiving Party can demonstrate by written records was
previously known to it; (b) is now, or in the future
becomes, public knowledge other than through the acts or
omissions of the Receiving Party; and (c) the Receiving
Party is required to disclose by law or pursuant to the
direction of a court or government agency, provided the
Disclosing Party is first given a reasonable opportunity to
contest such disclosure.
5.8.3 Nothing contained herein is intended to prevent either
party from using the Confidential Information to obtain
necessary or appropriate regulatory approvals, to execute
or obtain patent rights in connection with the Transferred
Assets, or to use such Confidential Information in
disclosure instruments prepared by the parties to comply
with applicable securities laws.
5.8.4 Except as otherwise set forth in this Agreement, the
furnishing of the Confidential Information of the
Disclosing Party to the Receiving Party shall not
constitute any grant or license to the Receiving Party
under any legal rights now or hereinafter held by the
Disclosing Party.
5.8.5 The obligations of this Section 5.8 shall survive the
termination of this Agreement.
5.9 Marketing Materials. Purchaser shall be required to make its own
-------------------
determination whether the Marketing Materials are appropriate and
suitable for Purchaser's use in connection with the sale and
marketing of the Finished Product after the Closing Date.
5.9 CE Mark. Purchaser has in place valid certifications for ISO-9001 and
-------
EN-46001 and will maintain such certifications up to and including
the Closing Date in order to facilitate obtaining Purchaser's CE Mark
for the Finished Product.
5.10 Trademark Use. Other than as set forth in Section 5.7 and Purchaser"s
-------------
use and ownership of the Biogran(R) Trademarks, neither party shall,
without written permission from the other,
<PAGE>
use in any manner any trademark, trade name, design, symbol, logo
styles, service mark, emblem or other mark owned by the other party;
except as packaging of certain of the Inventory manufactured by
Sellers and transferred hereunder may currently have such trademark,
trade name, design, symbol, logo styles, service mark, emblem or
other mark affixed to it as of the Closing Date.
5.11 Covenant Not To Sue. Sellers hereby agree to grant Purchaser,
-------------------
effective on the Closing Date, a covenant not to sue Purchaser with
respect to its manufacture, distribution or sale of Finished Product
for infringement of any issued patents or patent applications owned
by Sellers.
5.12 Product Liability Insurance. After the Closing Date, Sellers shall
---------------------------
maintain tail coverage with respect to its product liability
insurance with coverage of at least $1 million per claim and $3
million in the aggregate to cover any product liability claims
arising from Finished Product manufactured by Sellers. Sellers shall
provide, as soon as reasonably practicable, a copy of the certificate
of insurance related to such insurance coverage and shall provide
prompt notice to Purchaser of any change in such insurance.
5.13 Taxes and Unemployment Compensation. Sellers hereby agree to pay all
-----------------------------------
taxes and unemployment compensation contributions due for all periods
prior to the Closing.
ARTICLE VI
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
6.1 Representations and Warranties of Sellers. Sellers, jointly and
-----------------------------------------
severally, hereby represent and warrant to Purchaser that, as of the
Signing Date:
6.1.1 Corporate Status of Orthovita. Orthovita is a corporation
-----------------------------
duly incorporated and in good standing under the laws of the
Commonwealth of Pennsylvania, and has all requisite power and
authority to enter into this Agreement, to perform its
obligations hereunder and to consummate the transactions
contemplated hereby.
6.1.2 Corporate Status of Vita Licensing. Vita Licensing is a
----------------------------------
corporation duly incorporated and in good standing under the
laws of the State of Delaware, and has all requisite power and
authority to enter into this Agreement, to perform its
obligations hereunder and to consummate the transactions
contemplated hereby.
6.1.3 Authority Relative to Agreement. The execution, delivery
-------------------------------
and performance of this Agreement by Sellers and the
consummation by Sellers of the transactions contemplated
hereby have been duly authorized by all necessary corporate
action, and this Agreement constitutes the legal, valid and
binding obligation of Sellers, enforceable against Sellers in
accordance with its terms, except as limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium and other
laws of general applicability relating to or affecting
creditors' rights, and (ii) equitable principles generally and
limitations on the availability of equitable remedies.
6.1.4 Brokers and Finders. Neither Sellers nor any person, firm
-------------------
or corporation acting on
<PAGE>
their respective behalf has employed any broker, agent or
finder or incurred any liability for any brokerage fees,
agents' commissions or finders' fees in connection with the
transactions contemplated herein.
6.1.5 Pending Actions. Except as disclosed in Schedule 6.1.5,
--------------- --------------
there are no claims, actions, proceedings, or investigations
pending or, to Sellers' Knowledge, threatened, against or
relating to the Transferred Assets or the Finished Product,
before any court, tribunal or regulatory body.
6.1.6 Title to Properties; Encumbrances. Sellers have good and
---------------------------------
marketable title in the Transferred Assets free and clear of
any and all liens, pledges, claims, charges, security
interests or other encumbrances. Vita Licensing and Orthovita
are the assignees of the Biogran(R) Patents, and Orthovita is
the owner of the Biogran(R) Know-How, the Biogran(R)
Trademarks, the Biogran(R) Regulatory Approvals, the Equipment
and the Inventory.
6.1.7 Equipment. To Orthovita's Knowledge, the Equipment is in
---------
good operating condition and repair (ordinary wear and tear
excepted), is not in need of any repair or maintenance (other
than normal and routine repair and maintenance) and it is
suitable and appropriate for the current use thereof made by
Orthovita in connection with manufacturing Finished Product.
ORTHOVITA EXPRESSLY DISCLAIMS ANY AND ALL OTHER WARRANTIES
WITH RESPECT TO THE EQUIPMENT, EXPRESS OR IMPLIED. ORTHOVITA
SHALL NOT HAVE ANY LIABILITY TO PURCHASER, ITS CUSTOMERS,
FINISHED PRODUCT END-USERS OR ANY OTHER PERSON OR ENTITY FOR
ANY DIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES
ARISING OUT OF THE USE OR PERFORMANCE OF THE EQUIPMENT ON OR
AFTER THE CLOSING DATE.
6.1.8 Liabilities. Other than listed in Schedule 1.6 and
-----------
Schedule 6.1.5, Sellers have no outstanding claims,
liabilities or indebtedness, contingent or otherwise, relating
to the Transferred Assets.
6.1.9 Transferred Assets Complete. The Transferred Assets
---------------------------
constitute all of the material assets and rights owned by the
Sellers relating to the manufacture, marketing and sale of the
Finished Product. Upon the transfer of the Transferred Assets
(other than any required regulatory approvals, Biogran(R)
Know-How and Biogran(R) Patents) to the Purchaser, the
Purchaser will have all of the material assets and rights
necessary to manufacture, market and sell Finished Product.
Upon the transfer of the Biogran(R) Regulatory Approvals to
the Purchaser, the Purchaser will have all of the material
assets and rights necessary to manufacture, market and sell
Finished Product in the United States and the European Union.
To Sellers" Knowledge, upon the transfer of the Biogran(R)
Know-How and Biogran(R) Patents to the Purchaser, the
Purchaser will own all of the intellectual property rights
necessary to manufacture, market and sell the Finished
Product.
<PAGE>
6.1.10 Suppliers. The relationships of Orthovita with its
---------
suppliers currently used to manufacture and package the
Finished Product, identified in Schedule 6.1.10, are good
---------------
commercial working relationships and (i) none of these
suppliers have within the last 12 months threatened to cancel
or otherwise terminate, or to the Knowledge of Orthovita,
intend to cancel or terminate, the relationship of such
supplier with Orthovita, (ii) none of these suppliers have
during the last 12 months decreased materially or threatened
to decrease or limit materially any supply to Orthovita, or to
the Knowledge of Orthovita, intend to modify materially its
relationship with the Orthovita in connection with the
Finished Product or any of the Transferred Assets, (iii) none
of these suppliers have informed Orthovita of regulatory
matters that would preclude the continued manufacture of
Finished Product, and (iv) to the Knowledge of Orthovita, the
consummation of the transactions contemplated hereby will not
materially affect the ability of any of these suppliers to
provide supplies related to Finished Product. Vita Licensing
does not have a relationship with any of the suppliers set
forth in Schedule 6.1.10.
---------------
6.1.11 Compliance with Laws. Sellers are in compliance, and have
--------------------
not received any notice of any alleged violation, of any
applicable federal, state or local law, ordinance, regulation,
order, judgment or other requirement of any governmental or
regulatory body, court or arbitrator, which violation could
have a material adverse effect on the condition of the
Transferred Assets or the Finished Product. Orthovita
currently has all Biogran(R) Regulatory Approvals necessary to
manufacture, market and sell the Finished Product in the
United States and the European Union and such regulatory
approvals have not been withdrawn or revoked. No material
violations exist in respect of any Biogran(R) Regulatory
Approval and no proceeding is pending or, to Sellers"
Knowledge, threatened, to revoke or limit any Biogran(R)
Regulatory Approval.
6.1.12 Inventory. The Finished Product described on Schedule 3.3.2
--------- --------------
manufactured by Orthovita or its designee has been
manufactured, stored, packaged, and labeled by Orthovita or
its designee in accordance with applicable warranties and
Specifications. The Finished Product is of merchantable
quality, fit for the purpose intended and free of defects in
design and manufacture. The raw material described on the list
of Inventory is suitable for use in and in condition for the
manufacture of Finished Product in conformity with applicable
warranties and Specifications. The list of Inventory, listed
on Schedule 3.3.2, is true and correct in all material
--------------
respects. To Orthovita's Knowledge, there are no adverse
conditions materially affecting the supply of items of
Inventory. EXCEPT FOR THE FOREGOING AND THE REPRESENTATIONS
AND WARRANTIES OF ORTHOVITA SET FORTH IN THIS SECTION 6.1,
ORTHOVITA MAKES NO WARRANTY OF ANY KIND WITH RESPECT TO
INVENTORY, EITHER EXPRESS OR IMPLIED, BY FACT OR LAW, OTHER
THAN ORTHOVITA'S IMPLIED WARRANTIES OF TITLE, FREEDOM FROM
ENCUMBRANCE, AND RIGHT TO TRANSFER SAME.
6.1.13 Tax Matters. Sellers have filed all federal, state, county,
-----------
local and other tax returns, reports and forms that each
Seller is required to file with respect to the
<PAGE>
Transferred Assets. There are no present disputes as to taxes
of any nature payable by Sellers with respect to the
Transferred Assets.
6.1.14 Studies and Information. All written information provided
-----------------------
by Sellers to Purchaser regarding the safety and efficacy of
the Finished Product, identified in Schedule 6.1.14, is true
---------------
and accurate in all material respects.
6.1.15 Full Disclosure. The material documents and other papers
---------------
delivered by or on behalf of Sellers in connection with this
Agreement are true, complete and authentic. None of the
Sellers' representations or warranties contained in this
Agreement contain an untrue statement of a material fact or
omit to state a material fact necessary to prevent the
statements, in the context in which made, from being
materially false or misleading. There are no material facts
that were not disclosed to the Purchaser in writing that would
have a material adverse effect on the condition of the
Transferred Assets or the ability of the Sellers to perform
their material obligations under this Agreement.
6.1.16 No Breach. The execution, delivery and performance of this
---------
Agreement by the Sellers and the consummation of the
transactions contemplated hereby by the Sellers will not (a)
violate, conflict with or result in the breach of any
provision of the Articles of Incorporation or Bylaws of each
Seller; (b) violate or result in the material breach of any of
the terms of any material contract to which a Seller is a
party or to which it or any of the Transferred Assets may be
bound or subject; (c) violate any statute, law or regulation
of any jurisdiction; or (d) violate or result in the
revocation, invalidity or suspension of any Biogran(R)
Regulatory Approval.
6.1.17 No Third Party Rights. To Sellers' Knowledge, no third
---------------------
party rights are required to manufacture, market or sell the
Finished Product under the Biogran(R) Patents or Biogran(R)
Know-How assigned to Purchaser hereunder. Sellers have not
entered into any arrangements with third parties which would
allow them to circumvent this Agreement and continue to make,
use and sell Finished Product under the Biogran(R) Patents.
6.1.18 Intellectual Property. To Sellers' Knowledge, all
---------------------
Biogran(R) Patents, Biogran(R) Trademarks, and Biogran(R)
Know-How that are used with or incorporated into the Finished
Product are owned exclusively by Sellers, free and clear of
claims or rights of any other person or entity. To Sellers'
Knowledge, the use, development, manufacture, or sale of
Finished Product by the Purchasers will not infringe a valid
claim of any third party patent. Sellers have not communicated
with any third party to the effect that the actions or
products of that third party may conflict with or infringe any
rights of the Sellers under the Biogran(R) Patents, Biogran(R)
Trademarks, or Biogran(R) Know-How. Except as set forth in
Schedule 6.1.5, no claim is pending regarding the Intellectual
--------------
Property. Except as set forth in Schedule 6.1.5, Sellers have
--------------
not received notice from any third party to the effect that
the Finished Product, Biogran(R) Patents, Biogran(R)
Trademarks, or Biogran(R) Know-How infringes upon, may
infringe upon, or conflicts with the rights of the third party
or any other persons
<PAGE>
and, to Sellers' Knowledge, there is no basis for any such
claim (whether or not pending or threatened). Except as set
forth in Schedule 6.1.5, Sellers have not received any written
--------------
communication from any third party to the effect that any of
the Biogran(R) Patents or Biogran(R) Trademarks may be invalid
or unenforceable and to Sellers' Knowledge, there is no basis
for any such claim (whether or not pending or threatened).
6.1.19 Consents. No consents are required of any third party for
--------
the Sellers to enter into this Agreement or sell the
Transferred Assets.
6.1.20 Contracts and Other Agreements. Schedule 1.6, Subsection B
------------------------------ --------------------------
sets forth all of the material contracts, oral agreements, and
other commitments relating to the manufacture and sale of the
Finished Product and use of the Transferred Assets to which
the Sellers are a party or by or to which any of the
Transferred Assets are bound. Neither Seller is in default
under any Contract, nor is any other party to any Contract in
default, nor does any condition exist that with notice or
lapse of time or both would constitute a default under any
Contract. Schedule 1.6, Subsection B also lists and describes
--------------------------
the status of all Contracts currently in negotiation or
proposed by each Seller relating to the Finished Product or
the Transferred Assets that would be required to be listed on
Schedule 1.6, Subsection B if entered into by a Seller.
--------------------------
6.2 Representations and Warranties of Purchaser. Purchaser hereby
-------------------------------------------
represents and warrants to Sellers that, as of the Signing Date:
6.2.1 Corporate Status of Purchaser. Purchaser is a corporation duly
-----------------------------
incorporated, validly existing and in good standing under the
laws of Florida, and has all requisite power and authority to
enter into this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated
hereby.
6.2.2 Authority Relative to Agreement. The execution, delivery and
-------------------------------
performance of this Agreement by Purchaser and the
consummation by Purchaser of the transactions contemplated
hereby have been duly authorized by all necessary corporate
action, and this Agreement constitutes the legal, valid and
binding obligation of Purchaser, enforceable in accordance
with its terms, except as limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium and other
laws of general applicability relating to or affecting
creditors' rights, and (ii) equitable principles generally and
limitations on the availability of equitable remedies.
6.2.3 Brokers and Finders. Neither Purchaser nor any person, firm or
-------------------
corporation acting on its behalf has employed any broker,
agent or finder or incurred any liability for any brokerage
fees, agents' commissions or finders' fees in connection with
the transactions contemplated herein.
6.2.4 CE Mark. To Purchaser's Knowledge, Purchaser should receive in
-------
a timely manner the written notification from its Notified
Body that the CE Certificate for the Finished Product will be
issued in the Purchaser"s name, provided that Purchaser
receives in a
<PAGE>
timely manner the documents Sellers are required to deliver
under Section 4.1.
6.2.5 No Breach. The execution, delivery and performance of this
---------
Agreement by the Purchaser and the consummation of the
transactions contemplated hereby by the Purchaser will not (a)
violate, conflict with or result in the breach of any
provision of the Articles of Incorporation or Bylaws of the
Purchaser; (b) violate or result in the material breach of any
of the terms of any material contract to which Purchaser is a
party; or (c) violate any statute, law or regulation of any
jurisdiction.
6.2.6 Consents. No consents are required of any third party for the
--------
Purchaser to enter into this Agreement and purchase the
Transferred Assets.
ARTICLE VII
-----------
SURVIVAL OF REPRESENTATIONS; INDEMNITY
--------------------------------------
7.1 Survival of Representations. The respective representations and
---------------------------
warranties of the parties contained in this Agreement and the
obligations to indemnify and hold harmless pursuant to this Article
shall survive the consummation of the transactions contemplated hereby.
7.2 Sellers' Indemnifications. Sellers, jointly and severally, agree to
-------------------------
indemnify and hold harmless Purchaser and each of its affiliates,
officers, directors, employees, agents, successors and assigns
(collectively with Purchaser, "Purchaser's Indemnified Persons") from,
against and in respect of all damages, losses or expenses suffered or
paid, directly or indirectly, as a result of any and all third party
claims, demands, suits, causes of action, proceedings, judgments and
liabilities, including reasonable counsel fees and expenses incurred in
litigation or otherwise, assessed, incurred or sustained by or against
Purchaser's Indemnified Persons with respect to or arising out of (i)
each of the actions listed in Schedule 6.1.5; (ii) any sales, use,
--------------
excise or transfer taxes which may be imposed in connection with the
Transferred Assets on or before the Closing Date; (iii) Sellers'
operation of the Transferred Assets on or before the Closing Date; (iv)
any Finished Product manufactured by Orthovita or its designee on or
before the Closing Date; (v) any infringement of third party rights
resulting from Sellers' manufacture or sale of Finished Product on or
before the Closing Date; and (vi) Sellers' promotion, distribution,
marketing or sale of the Finished Product on or before the Closing
Date.
7.3 Purchaser's Indemnifications. Purchaser agrees to indemnify and hold
----------------------------
harmless Sellers and each of their affiliates, officers, directors,
employees, agents, successors and assigns (collectively with Sellers,
"Sellers' Indemnified Persons") from, against and in respect of all
damages, losses or expenses suffered or paid, directly or indirectly,
as a result of any and all third party claims, demands, suits, causes
of action, proceedings, judgments and liabilities, including reasonable
counsel fees and expenses incurred in litigation or otherwise,
assessed, incurred or sustained by or against Sellers' Indemnified
Persons with respect to or arising out of (i) any Finished Product
manufactured by Purchaser or its designee after the Closing Date; (ii)
any sales, use, excise or transfer taxes which
<PAGE>
may be imposed for operating the Transferred Assets after the Closing
Date; (iii) Purchaser's operation of the Transferred Assets after the
Closing Date; (iv) except as to matters identified in Schedule 6.1.5 or
--------------
matters relating to a breach of a representation or warranty of Sellers
relating to intellectual property under Section 6.1.18 of this
Agreement, any infringement of third party rights resulting from
Purchaser's manufacture or sale of Finished Product after the Closing
Date; and (v) Purchaser's promotion, distribution, marketing or sale of
the Finished Product after the Closing Date.
7.4 Mutual Indemnifications. Each party agrees to indemnify and hold
-----------------------
harmless Sellers' Indemnified Persons or Purchaser's Indemnified
Persons, as the case may be, from, against and in respect of all
damages, losses or expenses suffered or paid, directly or indirectly,
as a result of any and all claims, demands, suits, causes of action,
proceedings, judgments and liabilities, including reasonable counsel
fees and expenses incurred in litigation or otherwise, assessed,
incurred or sustained by or against the other with respect to or
arising out of (a) any breach of a covenant or agreement in this
Agreement by that party or (b) the failure of any representation or
warranty made by such party in this Agreement to be true and correct in
all respects as of the Closing Date.
7.5 Deductible. Except as set forth in the second sentence of this Section
----------
7.5, if the Purchaser seeks indemnification under Section 7.2 or 7.4,
it may not make any claim for such indemnification under this Article
against Sellers unless and until the aggregate amount of all such
claims against such Sellers exceed $200,000 (the "Deductible"),
whereupon the Purchaser may claim indemnification for the amount of all
such claims, excluding the Deductible. This Section 7.5 (Deductible)
shall not apply to the actions listed in Schedule 6.1.5 nor shall it
--------------
apply to Seller's breach of its covenant in Section 5.13.
7.6 Procedure for Indemnification.
-----------------------------
7.6.1 In the case of any claim, demand, action or proceeding for
which indemnification is sought pursuant to Sections 7.2, 7.3
or 7.4, the party or parties seeking indemnification (the
"Indemnitee") shall promptly notify the party or parties from
whom indemnification is sought (the "Indemnitor") in writing
of the existence and nature of such claim, demand, action or
proceeding specifying the nature of such claim or demand and
the amount or the estimated amount thereof to the extent then
feasible, which estimate shall not be conclusive of the final
amount of such claim or demand (the "Claim Notice"). No
failure or delay by the Indemnitee in the performance of the
foregoing shall reduce or otherwise affect the obligation of
the Indemnitor to indemnify and hold the Indemnitee harmless.
The Indemnitor shall have ten (10) business days from the date
of delivery of the Claim Notice (the "Notice Period") to
notify the Indemnitee whether or not the Indemnitor disputes
its liability to the Indemnitee hereunder with respect to such
claim or demand and, notwithstanding any such dispute, whether
or not it desires, at its sole cost and expense, to defend the
Indemnitee against any such claim or demand.
<PAGE>
7.6.2 If such claim, demand, action or proceeding is by a third
party (a "Claim"), the Indemnitee hereby agrees that it shall
give the Indemnitor a reasonable opportunity to defend the
same or prosecute such action to conclusion or settlement
satisfactory to the Indemnitor at its sole cost and expense
and with counsel of its own selection (who shall be approved
by the Indemnitee, which approval shall not be unreasonably
withheld) and the Indemnitor shall pay any resulting
settlements, judgments or decrees. If the Indemnitor controls
the defense of any such claim, allegation, suit or proceeding,
the Indemnitor shall vigorously defend such claim, allegation,
suit or proceeding. The Indemnitee shall at all times also
have the right fully to participate in the defense at
Indemnitee's sole costs and expense so long as such
participation occurs without hindering or impairing the
defense of the Indemnitor. If the Claim is one that cannot by
its nature be defended solely by the Indemnitor, the
Indemnitee shall make available all information and assistance
that the Indemnitor may reasonably request; provided, however,
-------- -------
that any associated out-of-pocket expenses shall be paid by
the Indemnitor.
7.6.3 With respect to the matter described as European Patent
Office, Opposition, Number T-0307/99-332 on Schedule 6.1.5 to
--------------
this Agreement (the "Existing Matter"), Purchaser shall
control the prosecution and defense of the Existing Matter,
provided that Purchaser (a) retains Sellers' existing counsel
Woodcock Washburn Kurtz Mackiewicz & Norris LLP and Ablett &
Stebbing ("Existing Counsel") in connection with such Existing
Matter, (b) shall within seven (7) business days promptly
submit all invoices relating to costs of defense of the
Existing Matter to Sellers (in which case, Sellers shall,
within thirty (30) days of receipt, remit its payment to
Purchaser), and (c) provides Sellers the opportunity to
participate in settlement discussions, if any, with respect to
the Existing Matter. Any settlement of the Existing Matter
shall be subject to Sellers' prior written consent, not to be
unreasonably withheld. If Purchaser does not retain the
Existing Counsel, Purchaser may control the prosecution and
defense of the Existing Matter but Sellers shall only be
required to pay up to $25,000 for legal costs and expenses
with respect to the Existing Matter.
7.6.4 If the Indemnitor elects not to defend the Indemnitee against
a claim or demand, either by written notice or by failure to
respond within the Notice Period, then Indemnitee may defend
such claim or demand at its sole cost and expense. If any
Indemnitor desires to participate in, but not control, any
such defense it may do so at its sole cost and expense.
Indemnitor shall reimburse Indemnitee for its reasonable costs
and expenses and the amount of any resulting judgment or
settlement.
7.6.5 Prior to the termination of the Escrow Agreement, upon the
determination of a Purchaser's Indemnified Person's right to
indemnification under this Agreement, the Indemnitor and the
Indemnitee shall execute and deliver a joint written
instruction to the Escrow Agent setting forth the amount of
Escrow Funds to be disbursed to the Purchaser's Indemnified
Person.
<PAGE>
7.6.6 The indemnification rights under this Section are independent
of and in addition to such rights and remedies as the parties
may have at law or in equity or otherwise for any
misrepresentation, breach of warranty or failure to fulfill
any agreement or covenant hereunder on the part of any party
hereto including, without limitation, the right to seek
specific performance, rescission or restitution, none of which
rights or remedies shall be affected or diminished hereby.
ARTICLE VIII
------------
TERMINATION OF AGREEMENT.
------------------------
8.1 Termination. This Agreement may be terminated prior to the Closing
-----------
Date as follows:
8.1.1 at the election of Purchaser or Sellers, as the case may be,
if the other party has not fulfilled any one or more of the
conditions to its respective obligations to close by the
Closing Date fixed by this Agreement;
8.1.2 at the election of Purchaser or Sellers, as the case may be,
if the other party has breached any material representation,
warranty, covenant or agreement contained in this Agreement
which breach cannot be or is not cured by the Closing Date;
8.1.3 at the election of Purchaser or Sellers, if any legal
proceeding is commenced or threatened by any governmental or
regulatory body or other person directed against the
consummation of the Closing and either Purchaser or Sellers,
as the case may be, reasonably and in good faith deems it
impractical or inadvisable to proceed in view of such legal
proceeding or threat thereof; or
8.1.4 at any time on or prior to the Closing Date, by mutual written
agreement of the Sellers and the Buyer.
8.2 Survival. If this Agreement is terminated in accordance with its
--------
terms and the transactions contemplated hereby are not consummated as
described above, this Agreement shall become void and of no further
force and effect, except for the provisions of Sections 5.8, 8, 9.4
and 9.11.
ARTICLE IX
----------
MISCELLANEOUS
-------------
9.1 Execution in Counterparts. For the convenience of the parties, this
-------------------------
Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one
and the same document.
9.2 Notices. All notices which are required or may be given pursuant to
-------
the terms of this Agreement shall be in writing and shall be
sufficient in all respects if given in writing and delivered or
mailed by registered mail, certified mail, or express courier,
postage prepaid, or if sent by telex or telefax (in each case
promptly confirmed by registered or certified mail postage prepaid)
as follows:
<PAGE>
If to Sellers, to:
Orthovita, Inc.
45 Great Valley Parkway
Malvern, Pennsylvania 19355
Fax: (610) 640-1714
Attention: Bruce A. Peacock, Chief Operating Officer and
President
Vita Licensing, Inc.
300 Delaware Avenue
Suite 900, 9th Floor
MC " DE5403
Wilmington, Delaware 19801
Fax: (302) 552-3128
Attention: Joseph M. Paiva, Vice President
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Fax: (215) 963-5299
Attention: David R. King, Esquire
If to Purchaser, to:
Implant Innovations, Inc.
4555 Riverside Drive
Palm Beach Gardens, Florida 33410
Fax: (561) 776-6833
Attention: President
With a copy to:
Steel, Hector & Davis LLP
1900 Phillips Point West
777 South Flagler Drive
West Palm Beach, Florida 33401
Fax: (561) 655-1509
Attention: Thomas G. O"Brien, III, Esquire
or such other address as a party hereto shall have designated by notice
in writing to the other parties hereto. Unless otherwise provided
herein, all notices, demands and requests sent in
<PAGE>
the manner provided herein shall be effective upon the earlier of
delivery thereof or three days after the mailing thereof by
registered or certified mail.
9.3 Waivers. Either party hereto may, by written notice executed by an
-------
authorized representative and provided to the other party hereto, (a)
extend the time for the performance of any of the obligations or
other actions of the other under this Agreement; (b) waive any
inaccuracies in the representations or warranties of the other party
contained in this Agreement or in any document delivered pursuant to
this Agreement; (c) waive compliance with any of the conditions to
its obligations contained in this Agreement; or (d) waive or modify
performance of any of the obligations of the other party under this
Agreement. Except as provided in the preceding sentence, no action
taken pursuant to this Agreement shall be deemed to constitute a
waiver, by either party taking such action, of compliance with any
representation, warranty, covenant or agreement contained in this
Agreement. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.
9.4 Publicity. The parties hereto will consult with each other before
---------
issuing any press release or making any public statement with respect
to this Agreement and the transactions contemplated by this
Agreement, and, except as may be required by applicable law or any
stock exchange regulations, no party shall issue any such press
release or make any such public statement without the consent of the
other parties hereto, which consent shall not be unreasonably
withheld.
9.5 Entire Agreement. This Agreement, together with the Exhibits and
----------------
Schedules hereto, constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof and supersedes all
prior representations, agreements and understandings, oral or
written, by or among the parties hereto with respect to the subject
matter hereof.
9.6 Applicable Law. This Agreement and the legal relations between the
--------------
parties hereto shall be governed by and construed in accordance with
the laws of the Commonwealth of Pennsylvania.
9.7 Jurisdiction. Any judicial proceeding brought against either party to
------------
this Agreement in connection with any dispute arising out of this
Agreement or any matter related hereto may be brought in the federal
or state courts of the Commonwealth of Pennsylvania and, by execution
and delivery of this Agreement, each of the parties to this Agreement
accepts for itself the exclusive jurisdiction of the aforesaid
courts, and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement.
9.8 Binding Effect; Benefits. This Agreement shall inure to the benefit
------------------------
of and be binding upon the parties hereto and their respective
successors and permitted assigns. Nothing in this Agreement,
expressed or implied, is intended to confer on any person other than
the parties hereto or their respective successors and permitted
assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement.
<PAGE>
9.9 Assignability. Neither this Agreement nor any of the parties' rights
-------------
hereunder shall be assignable by either party hereto without the
prior written consent of the other party hereto.
9.10 U.S. Dollars. Any and all references herein to the word "Dollars" or
------------
the symbol "$" is a reference to United States Dollars.
9.11 Expenses. Each party agrees to pay its transfer, excise or related
--------
taxes payable by reason of the consummation of the transactions
contemplated in this Agreement. Each party shall pay its own legal
fees and disbursements and other expenses incurred in connection with
this Agreement.
9.12 Rights of Third Parties. Nothing in this Agreement shall be construed
-----------------------
as giving any person, firm, corporation or other entity, other than
the parties hereto and their respective successors and permitted
assigns, any right, remedy or claim under or in respect of this
Agreement or any provision hereof.
9.13 Captions; Language. The Article and Section captions used herein are
------------------
for reference purposes only, and shall not in any way affect the
meaning or interpretation of this Agreement. In this Agreement,
unless the context otherwise requires, the singular includes the
plural, the plural, the singular, and the word "or" is used in the
inclusive sense.
9.14 Amendments. This Agreement may not be changed orally, but only by an
----------
agreement in writing signed by Sellers and Purchaser and making
specific reference to this Agreement and Section. Any provision of
this Agreement can be waived, amended, supplemented or modified by
the written agreement of Sellers and Purchaser.
9.15 Severability. In case any provision in this Agreement shall be held
------------
invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions hereof will not in any way
be affected or impaired thereby.
9.16 Cross References; Exhibits. References in this Agreement to Articles,
--------------------------
Sections, Schedules and Exhibits are references to Articles and
Sections of this Agreement and to Schedules and Exhibits attached to
this Agreement. The Schedules and Exhibits are hereby made a part of
this Agreement.
9.17 Further Assurances. At any time and from time to time, each party
------------------
hereto, without further consideration, shall cooperate, take such
further action and execute and deliver such further instruments and
documents as may be reasonably requested by any other party in order
to carry out the provisions and purposes of this Agreement and to
transfer possession of and good title to the Transferred Assets to
Purchaser. This obligation shall survive the consummation of the
transactions contemplated hereby.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered by their duly authorized officers as of the date first
above written.
IMPLANT INNOVATIONS, INC.
By: /s/ Edward Sabin
Title: Vice President, Finance and Administration
ORTHOVITA, INC.
By: /s/ Bruce A. Peacock
Title: President and Chief Operating Officer
VITA LICENSING, INC.
By: /s/ Joseph M. Paiva
Title: Vice President
<PAGE>
FEBRUARY 10, 2000 -- SCHEDULES AND EXHIBITS
-------------------------------------------
SCHEDULES
Schedule 1.2 Biogran(R) Know-How
Schedule 1.3 Biogran(R) Patents
Schedule 1.4 Biogran(R) Regulatory Approvals
Schedule 1.5 Biogran(R) Trademarks
Schedule 1.6 Contracts
Schedule 1.7 Equipment
Schedule 1.9 Inventory
Schedule 1.11 Marketing Materials
Schedule 1.14 Specifications
Schedule 3.3.2 Revised Inventory List
Schedule 3.5 Purchase Price Allocation
Schedule 3.7 Current CORTOSS(TM) and ORTHOCOMP(TM) Products
Schedule 4.2A Form of Biogran(R) Patent Assignment
Schedule 4.2B Form of Biogran(R) Regulatory Approval Assignment
Schedule 4.2C Form of Biogran(R) Trademark Assignment
Schedule 4.3.1 Wiring Instructions
Schedule 6.1.5 Pending Actions
Schedule 6.1.10 Suppliers
Schedule 6.1.14 Studies and Information
EXHIBITS
Exhibit 4.2D Form of Escrow Agreement
Exhibit 4.2E Form of Bill of Sale
Exhibit 4.2F Form of Termination Agreement for Distribution Agreement
Exhibit 4.2G Form of Assignment of Contracts
Exhibit 4.2H Form of Legal Opinion of Sellers' Counsel
Exhibit 4.3A Form of Legal Opinion of Purchaser"s Counsel
<PAGE>
Schedule 1.2
Biogran(R) Know-How
Manufacturing and Packaging of Biogran(R)
MO-SCI Standard Operation Procedure Index
For C1099 Project
SOP # Title Version
------- ----- -------
SOP#C1099-1 Raw Material Inspection & Handling 1.4
SOP#C1099-2 Batching Process 1.5
SOP#C1099-3 Melting and Draining 1.4
SOP#C1099-4 Drying Process 1.2
SOP#C1099-6 Crushing by Hand 1.1
SOP#C1099-9 Daily Log for Hand Crushing 1.1
SOP#C1099-10 Screening for Fibers 1.1
SOP#C1099-11 Engineering Change Order 1.0
SOP#C1099-13 Final Product Release 1.2
SOP#C1099-14 Grinding by Machine 1.3
SOP#C1099-15 Remelting Procedure 1.0
SOP#C1099-17 Furnace Calibration 1.0
SOP#C1099-18 Furnace Maintenance 1.0
SOP#C1099-19 Personnel Responsibility 1.0
SOP#C1099-20 Vorti-Siv Cleaning 1.0
SOP#C1099-21 Precision Screen of Biogran(R) 1.0
Ethox Corporation Device Master Record Index
Ethox Corp Device Master Record for Part Number 2100-0001 (2 pack, 750 mg.
Syringe)
Ethox Corp Device Master Record for Part Number 2100-0002 (7 pack, 750 mg.
Syringe)
Ethox Corp Device Master Record for Part Number 2100-0003 (7 pack, 500 mg. Cup)
Ethox Corp Device Master Record for Part Number 2100-0004 (7 pack, 750 mg. Cup)
Ethox Corp Device Master Record for Part Number 2100-0005 (7 pack, 1550 mg. Cup)
Steris-Isomedix Sterilization Specification
Packaged Product is Gamma sterilized utilizing 25kGy minimum dosage, with
validation performed by Pharmaceutical Systems, Inc., Mundelein, Illinois,
consistent with the recommendations of ANSI/AAMI/ISO 11137, 1994.
<PAGE>
Schedule 1.3
Biogran(R) Patents
I. Title: Process for Restoring an Osseous Defect or Deficiency by Filling
with Osseous Tissue
Country Patent No.
- -------- ----------
United States 5,204,106
Austria 107519
Belgium 09000433
Canada 2,014,940
German Democratic Republic 293728
(Former)
Germany EP 394152
European Patent Office 394152
Spain 2,055,386
France 8905504
Japan 1,873,690
Switzerland EP 394152
Denmark EP 394152
Great Britain EP 394152
Greece 3,012,309
Italy 26375BE/94
Luxembourg EP 394152
the Netherlands EP 394152
Sweden EP 394152
II. Title: Bioactive Granules for Bone Tissue Formation
Country Patent or Application No.
- ------- -------------------------
United States 5,658,332*
European Patent Office 869749
Austria EP 869749
Belgium EP 869749
Denmark EP 869749
France EP 869749
Great Britain EP 869749
Germany EP 869749
Greece EP 869749
Ireland EP 869749
Italy EP 869749
Luxembourg EP 869749
Monaco EP 869749
Netherlands EP 869749
Portugal EP 869749
Spain EP 869749
Sweden EP 869749
Switzerland EP 869749
India 699/CAL/95
Japan 503243/96
*The U.S. patent is the only issued patent in the family; the others are pending
applications.
<PAGE>
Schedule 1.4
Biogran(R) Regulatory Approvals
510K--US
--------
K941780, decision date 02/10/95, and
K952922, decision date 12/19/95.
CE MARK--EU
-----------
CE Certificate, Medical Devices, Class III products, Certificate Number
CE2240.01
EC Design Examination Certificate, Class III products,
Certificate Number DEXAM2240.01
SYSTEMCERTIFICATE, meets ISO9001 and EN46001 requirements,
Certificate Number S97.070A
Note: The CE Mark is not transferable. The Purchaser must register for its own
CE Mark.
<PAGE>
Schedule 1.5
Biogran(R) Trademarks
United States
Mark Registration No. Registration Date
- ---- ---------------- -----------------
BIOGRAN(R) 2,034,186 1/28/97
Argentina
Mark Application No. Filing Date
- ---- --------------- -----------
BIOGRAN(R) 1978993 5/29/95
Brazil
Mark Registration No. Registration Date
- ---- ---------------- -----------------
BIOGRAN(R) 818742259 5/5/98
Chile
Mark Registration No. Registration Date
- ---- ---------------- -----------------
BIOGRAN(R) 465,076 7/30/96
Colombia
Mark Registration No. Registration Date
- ---- ---------------- -----------------
BIOGRAN(R) 181,748 11/29/95
European Community
Mark Registration No. Effective Registration Date*
- ---- ---------------- ---------
BIOGRAN(R) 64725 4/1/96
Mexico
Mark Registration No. Effective Registration Date*
- ---- ---------------- ----------------------------
BIOGRAN(R) 530,711 7/28/95
*This date, actually the filing date, should be used to calculate expiration of
the registration and renewal periods. These periods are measured in 10-year
increments beginning with the filing date. In many countries, such statutory
periods are based on the filing date, although retroactive protection for events
occurring between the filing date and the actual registration date is not
available.
<PAGE>
Schedule 1.6
Contracts
A.
Contracts:
<TABLE>
<CAPTION>
-------------------------------------------------------------------- --------------
UNITS Lots of Raw
--------------------------------------------------------------------
Finished Goods Inventory Part Number Material
--------------------------------------------------------------------
2100-0001 2100-0002 2100-0003 2100-0004 2100-0005 Bioglass
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ethox P.O. 99040501 0 600 0 0 0
Ethox P.O. 99110902 0 0 1,350 0 150
Ethox P.O. 00013108 0 900 0 0 0
Mo-Sci P.O. 00010455
Steris " Isomedix P.O. 00013105 0 5 3 0 1
(Lots) 13
Mo-Sci P.O. 00010437 (space
rental=$3,438/yr)
</TABLE>
Quality:
Mo-Sci Corporation cGMP compliance agreement between Orthovita, Inc. and Mo-
Sci Corporation dated November 29, 1999.
Ethox Corporation cGMP compliance agreement between Orthovita, Inc. and
Ethox Corporation dated December 9, 1996.
<PAGE>
B.
Contracts:
<TABLE>
<CAPTION>
------------------------------------------------------------------- --------------
UNITS Lots of Raw
-------------------------------------------------------------------
Finished Goods Inventory Part Number Material
-------------------------------------------------------------------
2100-0001 2100-0002 2100-0003 2100-0004 2100-0005 Bioglass
------------------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Ethox P.O. 99040501 0 600 0 0 0
Ethox P.O. 99110902 0 0 1,350 0 150
Ethox P.O. 00013108 0 900 0 0 0
Mo-Sci P.O. 00010455 13
Steris " Isomedix P.O. 00013105 0 5 3 0 1
(Lots)
Mo-Sci P.O. 00010437 (space
rental=$3,438/yr)
</TABLE>
Quality:
Mo-Sci Corporation cGMP compliance agreement between Orthovita, Inc. and Mo-
Sci Corporation dated November 29, 1999.
Ethox Corporation cGMP compliance agreement between Orthovita, Inc. and
Ethox Corporation dated December 9, 1996.
Dental Research Studies:
Clinical Research Agreement between New York University and Orthovita, Inc.
dated November 22, 1996; the term of the agreement
has expired.
Principal Investigator: Stuart J. Froum DDS
Total Cost: $55,000.00
Clinical Study Agreement between Texas A&M Research Foundation - Baylor College
of Dentistry and Orthovita, Inc., as amended
February 1999. The term of the agreement and the term of the amendment have
expired.
Principal Investigator: Dr. Roger R. Throndson
Total Cost: $23,017.00
Intellectual Property:
Orthovita, Inc. Patent Assignment to Vita Licensing, Inc. dated May 19, 1999
Vita Licensing, Inc. License to Orthovita, Inc. dated June 28, 1999
Distribution:
Global Distribution Agreement between Orthovita, Inc. and Implant Innovations,
Inc. dated April 29, 1998
<PAGE>
Schedule 1.7
Equipment
Description Asset ID Location Qty
Model 69 Granulizer Mill 143-1 MoSci 1
IMD 69 Rolls 189-1 MoSci 1
Crucible, 3L, Platinum-20% Rhodi 334-1 MoSci 1
Despatch LAC Oven 193-1 Ethox 1
Biogran(R) Safety Flange Injection 377-1 Ethox 1
Silicone Spray Application System 403-1 Ethox 1
Biologival Safety Cabinet 404-1 Ethox 1
Ethox 40 mil Tool Tray 485-1 Ethox 1
Tooling - Cup Tray Kenson Plastics, Inc., 920 Brush Creek Road,
Warrendale, PA 15086
p - (412) 776-6820 f - (412) 776-3910
Tooling - Syringe Tray Crystal Thermoplastics, Inc., P.O. Box 7007,
Cumberland, RI
p - (401) 333-6363 f - (401) 333-6592
Note - physical possession of tooling cannot be transferred from the vendors'
location.
<PAGE>
Schedule 1.9
Inventory
(as of 1/21/2000)
<TABLE>
<CAPTION>
------------------------------------------------ ------------
QUANTITY UNITS Lots of
Finished Goods Inventory Part Number Raw
------------------------------------------------
ITEM DESCRIPTION LOCATION 2100-0001 2100- 2100- 2100- 2100- Material
0002 0003 0004 0005 Bioglass
------------------------------------------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
I. Inventory Amount (as of 1/21/2000)
Finished Product Inventory at
Orthovita (Units) Malvern 0 36 557 326 82
Packaged Product In-Transit from
Ethox or Steris, Net In-Transit from 1,150 600 900 0 150
Ethox to Malvern
(Net of retains & samples)
Raw Material Bioglass at Ethox (Lots) Ethox 16
-------- ------- ------- ------ ------ ------
Total Inventory Amount (as of 1/21/2000) 1,150 636 1,457 326 232 16
</TABLE>
Note: Miscellaneous packaging materials in unknown quantities located at Ethox.
<PAGE>
Schedule 1.11
Marketing Materials
1. From Orthovita - Price List Biogran(R)
2. From Orthovita - Comparison Chart of Biogran(R) & DFDBA
3. From Orthovita - Comparison Chart of Biogran(R) & Xeno-Graft
4. From Orthovita - article - Biogran(R) - "This raises the question whether
Bio-Oss may be regarded as a resorbable material, as previously reported."
5. From Orthovita - article - Biogran(R) - "We showed that different bone bank
preparations of DFDBA even for the same bank, varied considerably in their
ability to induce new bone, suggesting inherent differences in the quality
of the material."
6. From Orthovita - article - Biogran(R) - "Ability of Commercial
Demineralized Freeze-Dried Bone Allograft to Induce New Bone Formation Is
Dependent on Donor Age But Not Gender."
7. From Orthovita - article - Biogran(R) - "Xenogenic bovine bone and DFDBA
did not contribute to bone to microscrew contacts and are not recommended
for enhancement of vital bone to implant contacts".Xenogenic bone and DFDBA
appear to interfere with normal extraction socket healing."
8. From Orthovita - article - Biogran(R) - "Biogran" vs. Bio-Oss Part II
9. Biogran(R) - Compendium of studies - A comprehensive listing of articles.
10. Orthovita Clinical Case Review - "Biogran(R) Case Report: Ridge
Preservation of Edentulated Mandible for Optimal Implant Placements."
11. Orthovita Clinical Case Review - "Biogran(R) Case Report: Regeneration of
Large Extraction Socket Defect Prior to Implant Placement."
12. Orthovita Clinical Case Review - "Biogran(R) Case Report: Salvage of a
Molar Compromised By a Large Infrabony Defect."
13. ART 659 - "What is a Periodontist?"
14. ART 667 - "What is Ridge Preservation?"
15. No ART number - Laminated Ridge Preservation Chart.
<PAGE>
16. ART 668 rev 10/99 - "Biogran(R) - Resorbable Synthetic Bone Graft"
information brochure.
17. 1 set of 52 slides for a presentation created by Chuck Cohen, on Biogran(R)
& Orthovita.
<PAGE>
Schedule 1.14
Specifications
Sterile 45S5 glass particles sized to 300-355 microns.
<PAGE>
Schedule 3.3.2
Revised Inventory List
To be provided as set forth in Section 3.3.2.
<PAGE>
Schedule 3.5
Purchase Price Allocation
Transferred Asset Category Schedule Assigned
Value
Biogran(R) Patents (Title I) Schedule 1.3
United States $2,520,000
All other outside the
United States 1,080,000
Biogran(R) Patents (Title II) Schedule 1.3 50,000
Biogran(R) Trademarks Schedule 1.5 26,500
Biogran(R) Know-How Schedule 1.2 26,500
Contracts Schedule 1.6A 26,500
Biogran(R) Regulatory Approvals Schedule 1.4 26,500
Equipment Schedule 1.7 144,000
$3,900,000
<PAGE>
Schedule 3.7
Current CORTOSS(TM) and ORTHOCOMP(TM) Products
CORTOSS Injectable(TM)
CORTOSS Putty(TM)
CORTOSS Implants(TM)
ORTHOCOMP Injectable Cement(TM)
The products listed above are patented, nonresorbable, bone bonding composites
that, subject to the receipt of all required regulatory approvals by
governmental and regulatory authorities, will offer ease of use in delivery and
immediate function to load bearing, bone reinforcement, implant stabilization
and bone grafting applications. The biocompatible nature allows for intimate
conformation to the area of placement and the setting or polymerization reaction
leads to immediate load bearing strength with elastic moduli closely resembling
that of natural bone, as opposed to metal alone. The strength of the composite
material is integrated by the surface grafting and chemical bonding to bone and
tissue surfaces. This interaction leads to improved fracture toughness of the
entire implant system. This composite is ideal for osteoporotic patients and
other patients whose bone vitality is compromised, such as those being treated
for cancer. The specially formulated thermoset resin matrix exhibits a low
exotherm on polymerization and strong 3-dimensional bonding that prohibits
residual monomer leaching.
<PAGE>
Schedule 4.2A
Form of Biogran(R) Patent Assignment
(A) WORLDWIDE PATENT ASSIGNMENT
This Patent Assignment is made on this _____ day of ______________ 2000, by
Orthovita, Inc., a corporation formed under Pennsylvania law, and having a place
of business at 45 Great Valley Parkway, Malvern, Pennsylvania 19355 (the
"Assignor") in favor of Implant Innovations, Inc., having a place of business at
4555 Riverside Drive, Palm Beach Gardens, Florida, a corporation formed under
Florida law ("Assignee").
WHEREAS, Assignor owns all right, title and interest in and to,
or arising under, certain United States and foreign Letters Patent and
applications for Letters Patent set forth on the attached Schedule A; and
WHEREAS, Assignee desires to acquire all right, title, and
interest in and to said United States and foreign Letters Patent and
applications for Letters Patent;
NOW, THEREFORE, for One Dollar ($1) and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged,
Assignor hereby assigns and transfers to Assignee, the entire right, title, and
interest in and to the United States and foreign Letters Patent and applications
for Letters Patent set forth on the attached Schedule A and in and to all
Letters Patent granted on said applications, and hereby agrees to execute all
applications or papers necessary to obtain and maintain said United States and
foreign Letters Patent and applications for Letters Patent in all countries.
by Assignor ORTHOVITA, INC.
By: ___________________________
Name: _________________________
Title: __________________________
State of Pennsylvania
County of :
On this ______ day of ___________, 2000, personally appeared before me a Notary
Public for the State of Pennsylvania; and acknowledged to me that he executed
the same for the uses and purposes therein set forth.
Signature of Notary Public
Seal Residing at: ________________________
_____________________________________
<PAGE>
My Commission Expires: _____________
<PAGE>
SCHEDULE A
I. Title: Process for Restoring an Osseous Defect or Deficiency by Filling with
Osseous Tissue
Country Patent No.
- -------- ----------
United States 5,204,106
Austria 107519
Belgium 09000433
Canada 2,014,940
German Democratic Republic 293728
(Former)
Germany EP 394152
European Patent Office 394152
Spain 2,055,386
France 8905504
Japan 1,873,690
Switzerland EP 394152
Denmark EP 394152
Great Britain EP 394152
Greece 3,012,309
Italy 26375BE/94
Luxembourg EP 394152
the Netherlands EP 394152
Sweden EP 394152
II. Title: Bioactive Granules for Bone Tissue Formation
Country Patent or Application No.
- ------- -------------------------
United States 5,658,332*
European Patent Office 869749
Austria EP 869749
Belgium EP 869749
Denmark EP 869749
France EP 869749
Great Britain EP 869749
Germany EP 869749
Greece EP 869749
Ireland EP 869749
Italy EP 869749
Luxembourg EP 869749
Monaco EP 869749
Netherlands EP 869749
Portugal EP 869749
Spain EP 869749
Sweden EP 869749
Switzerland EP 869749
India 699/CAL/95
Japan 503243/96
*The U.S. patent is the only issued patent in the family; the others are pending
applications.
<PAGE>
Schedule 4.2B
Form of Biogran(R) Regulatory Approval Assignment
______________, 2000
Document Mail Center (HFZ-401)
Center for Devices and Radiological Health
Food and Drug Administration
9200 Corporate Boulevard
Rockville, MD 20850
Re: K941780, decision date 02/10/95, and
K952922, decision date 12/19/95.
Dear Sir/Madam:
This is to inform you that, effective ____, 2000, ownership of K941780, decision
date 02/10/95, and K952922, decision date 12/19/95, was transferred from
Orthovita, Inc. to:
Implant Innovations, Inc.,
4555 Riverside Drive
Palm Beach Gardens, Florida
Fax: (561) 776-6833
Please include a copy of this letter each of the files for K941780 and K952922.
Thank you for your attention to this matter.
Sincerely,
Orthovita, Inc.
_________________________________
By:
Title:
<PAGE>
Schedule 4.2C
Form of Biogran(R) Trademark Assignment
TRADEMARK ASSIGNMENT
--------------------
This Trademark Assignment is made on this _____ day of
______________ 2000, by Orthovita, Inc., a corporation formed under Pennsylvania
law, and by Vita Licensing, Inc., a corporation formed under Delaware law
(collectively the "Assignors") in favor of Implant Innovations, Inc., a
corporation formed under Florida law ("Assignee").
WHEREAS, Assignors own all right, title and interest in and to,
or arising under, certain United States and foreign trademarks, together with
all registrations or applications therefor, set forth on the attached Schedule A
("Marks"), and the goodwill of the business developed through the use of the
Marks; and
WHEREAS, Assignee desires to acquire all right, title, and
interest in and to the Marks and the goodwill developed through the use of the
Marks; and
WHEREAS, Assignee is a successor to a portion of the business of
Assignors to which the Marks pertain and such business is ongoing and existing.
NOW, THEREFORE, for good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, Assignors hereby assign and
transfer to Assignee, the entire right, title, and interest in and to the Marks
and the goodwill of the business symbolized by the Marks. All rights and
privileges, including the right to sue for and receive all damages from past
infringements of the Marks, will be held and enjoyed by the Assignee, its
successors, or future assigns, and other legal representatives.
by Assignor ORTHOVITA, INC.
By: ___________________________
Name: _________________________
Title: __________________________
State of Pennsylvania
County of :
On this ______ day of ___________, 2000, personally appeared before me a Notary
Public for the State of Pennsylvania; and acknowledged to me that he executed
the same for the uses and purposes therein set forth.
<PAGE>
Signature of Notary Public
Seal Residing at:_______________________
_________________________________
My Commission Expires: ____________
Assignor VITA LICENSING, INC.
By: ___________________________
Name: _________________________
Title: __________________________
State of Delaware
County of :
On this ______ day of ___________, 2000, personally appeared before me a Notary
Public for the State of Delaware; and acknowledged to me that he executed the
same for the uses and purposes therein set forth.
Signature of Notary Public
Seal Residing at: _______________________
_________________________________
My Commission Expires: ____________
by Assignee IMPLANT INNOVATION, INC.
By: ___________________________
Name: _________________________
Title: __________________________
State of Florida
County of :
On this ______ day of ___________, 2000, personally appeared before me a Notary
Public for the State of Delaware; and acknowledged to me that he executed the
same for the uses and purposes therein set forth.
Signature of Notary Public
Seal Residing at: _______________________
<PAGE>
_________________________________
My Commission Expires: ____________
SCHEDULE A
United States
Mark Registration No. Registration Date
- ---- ---------------- -----------------
BIOGRAN(R) 2,034,186 1/28/97
Argentina
Mark Application No. Filing Date
- ---- --------------- -----------
BIOGRAN(R) 1978993 5/29/95
Brazil
Mark Registration No. Registration Date
- ---- ---------------- -----------------
BIOGRAN(R) 818742259 5/5/98
Chile
Mark Registration No. Registration Date
- ---- ---------------- -----------------
BIOGRAN(R) 465,076 7/30/96
Colombia
Mark Registration No. Registration Date
- ---- ---------------- -----------------
BIOGRAN(R) 181,748 11/29/95
European Community
Mark Registration No. Effective Registration Date*
- ---- ---------------- ----------------------------
BIOGRAN(R) 64725 4/1/96
Mexico
Mark Registration No. Effective Registration Date*
- ---- ---------------- ----------------------------
BIOGRAN(R) 530,711 7/28/95
*This date, actually the filing date, should be used to calculate expiration of
the registration and renewal periods. These periods are measured in 10-year
increments beginning with the filing date. In many countries, such statutory
periods are based on the filing date, although retroactive protection for events
occurring between the filing date and the actual registration date is not
available.
<PAGE>
Schedule 4.3.1
Wiring Instructions
VITA LICENSING WIRING INSTRUCTIONS:
First Union National Bank
ABA 053000219
Trust Operations Account #5000000016439
FBO: Vita Licensing, Inc.
Account #6728013862
Attention DTCM fax (302) 552-3127
ORTHOVITA WIRING INSTRUCTIONS:
Progress Bank
ABA 231371841
Account #1050-00988
FBO: Orthovita, Inc.
Attention: Steven Hobman
<PAGE>
Schedule 6.1.5
Pending Actions
1. Court of Appeals for the Federal Circuit Docket No. 99-1071, 99-1072;
Status: affirmed without opinion, deadline for appeal to Supreme Court has
passed.
2. European Patent Office, Opposition, Number T-0307/99-332.
<PAGE>
Schedule 6.1.10
Suppliers
Mo-Sci Corporation
4000 Enterprise Drive
P.O. Box 2
Rolla, Missouri 65402-0002
p - (573) 364-2338
f - (573) 364-9589
Ethox Corporation
251 Seneca Street Buffalo,
New York 14204-2088
p - (716) 842-4000
f - (716) 842-4040
Steris-Isomedix Services
4405 Marketing Place
Groveport, Ohio 43125
p - (614) 836-5757
f - (614) 836-9829
<PAGE>
Schedule 6.1.14
Studies and Information
Compendium of Studies
March 1999
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Title/Reference Study Design Status/Results
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Toshitake Furusawa, Kazuaki Mizunuma, 25 patients received subantral Histologies confirmed excellent
Osteoconductive properties and efficacy of augmentation with Biogran(R). At 7 bone growth inside and surrounding
resorbable bioactive glass as a bone months, biopsies were taken and implants excavated granules. Transformed
grafting material, Implant Dentistry, Vol placed. Histological, micromechanical, Biogran(R) is the same hardness as
-----------------
6, Num 2, 1997, 93-101. and chemical analysis were performed. natural bone. Silica was nearly
absent at the 7 month time point.
- -----------------------------------------------------------------------------------------------------------------------------
Schepers, E, DeClercq, M, Ducheyne, P, and Biogran(R) compared to dense and porous HA The paper which documented
Kempeneers, R, Bioactive glass particles in Beagle mandible. Histologies at 1, Biogran(R)'s unique osteostimulatory
as a filler for bone lesions, J Oral 2, 3, 6, and 12 months. effect on bone tissue formation.
------
Rehabilitation, 1991, 18:439-52. Phenomenon not seen with other
- --------------
materials.
- -----------------------------------------------------------------------------------------------------------------------------
Schepers, E. Ducheyne, P. Bioactive glass Original dog study extended for 24 This is the study that documents
particles of narrow size range for months. Additional comparisons with the criticality and superiority of
treatment of oral bone defects: A 1-24 212-300, 425-800, and 100-710um particle 300-355 um bioactive glass particle
month experiment with several materials sizes. size range for stimulating bone
and particle sizes and size ranges. J. growth.
---
Oral Rehabilitation, 1997, 24: 171-181.
- -------------------
- -----------------------------------------------------------------------------------------------------------------------------
Schepers, E, Ducheyne, P, Bioactive glass Clinical evaluation of Biogran(R) in Biogran(R) was found effective for
particles of limited size range: a new extraction sites, ridge augmentations, the treatment of a variety of oral
material for the repair of bone defects, cystic defects, and apical defects. 86 bone defects with no incidence of
Implant Dentistry, Vol 2, Num 3, 1993, patients with 106 defect sites. 3 year material failure.
- -----------------
151-156. follow up.
- -----------------------------------------------------------------------------------------------------------------------------
E. Schepers and P. Ducheyne, Long term Clinical evaluation of Biogran" in This study documents that the
clinical evaluation of bioactive glass extraction sites, ridge augmentations, excellent results evident in the
particles of narrow size range, cystic defects, and apical defects. Implant Dentistry article after two
Bioceramics, Vol 9, 99-102, 1996. 119 patients with 139 defect sites. 5 years of follow up, are maintained
year follow up. for at least 5 years.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Title/Reference Study Design Status/Results
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AM Gatti, Glass corrosion layers on Biogran(R) was placed in the jaws, muscle, These two animal models confirmed
bioactive glass granules of uniform size and skin of rabbits and sheep. the osteostimulatory effect of
affect cellular function, Bioceramics, Vol Biogran(R) in bony sites. Biogran(R)
-----------
6, 1993, 395-400 placed in non osseous sites would
excavate without bone growth.
- -----------------------------------------------------------------------------------------------------------------------------
Evert Schepers, Lieven Barbier, Paul Implants are placed into Biogran(R) Quantification of bone growth
Ducheyne, Implant placement enhanced by treated or ungrafted extraction sockets reveals much greater bone formation
bioactive glass particles of narrow size after 3 months of healing in the beagle in the extraction sockets treated
range, Int Journal of Oral and mandible. Implants are allowed to with Biogran(R). Also, there was
Maxillofacial Implants, 1998; 13:655-665 osseointegrate for 3 additional months, better osseointegration of the
and are then loaded for 2 months. All implants placed into Biogran(R)
sites are evaluated histologically. treated sites than control sites
for both before and after loading
of the implants. Presented at
Congress of Preprosthetic Surgery,
Copenhagen, Denmark, June 1997
- -----------------------------------------------------------------------------------------------------------------------------
W. Lai, P. Ducheyne, J. Garino, Removal 5 rabbits received 1500 mg (equivalent Resorbed silica gel is harmlessly
pathway of silicon released from bioactive to 30 cc in human) Biogran(R) and 4 excreted in soluble form through
glass granules, in vivo, Bioceramics, 1998 control rabbits. Urine and blood urine. No accumulation in distal
samples collected daily and weekly, organs (appendix, brain, kidney,
respectively. Distal organs examined at liver, heart, and lung).
6 weeks.
- -----------------------------------------------------------------------------------------------------------------------------
Greg Fox, DMD, Edwin S. Rosenberg, DMD, 12 patients with paired interproximal The Biogran(R) treated sites
Bioactive glass particles of narrow size defects. Biogran(R) vs. ungrafted significantly (P0.0001)
range for the repair of human control. 6 months reentry to measure outperformed the control sites for
interproximal periodontal defects bone height gain. both bone height gain and clinical
attachment level gain. Presented
at AAP New Orleans, Oct. 1996.
- -----------------------------------------------------------------------------------------------------------------------------
V. Lekovic, E.B. Kenney, P. Camargo Socket 17 patients with bilateral extractions Ridge Preservation with Biogran(R)
----------
preservation with Biogran(R) and calcium were treated. Primary closure was not was statistically significantly
sulfate barrier for closure, UCLA and attempted. Capset was used to contain better than controls. Final
University of Belgrade Biogran(R). Control sites were not manuscript is in preparation.
grafted. Sites reentered at 6 months. Biopsies undergoing histological
Ridge dimensions are measured pre-op and preparation.
at 6 months.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Title/Reference Study Design Status/Results
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gert L. deLange, E. K. Berger, Clinical Patients are treated with different The first group of patients (50-50
and histological evaluation of bone mixture ratios (50-50; 80-20; 100-0; mixture) were biopsied at 3-5
regeneration in atrophic maxillae by the 0-100) of Biogran(R) and autogenous bone months and show very active bone
use of Biogran(R), Dept of Oral Cell taken from the iliac crest. Trephine growth throughout the sinus as
Biology, Academic Center for Dentistry, core biopsies are taken prior to implant evidenced by new woven bone covered
Amsterdam, NETHERLANDS placement. by large bands of osteoid tissue.
Presented at Euro Perio Congress,
Florence, Italy, May 1997.
Submitted by J. Clinical Oral
Implants Research.
- -----------------------------------------------------------------------------------------------------------------------------
A. Valentin, The clinical application of 50 patients underwent subantral grafting The first biopsies have been
Biogran(R) for sinus augmentation and ridge or ridge splitting with implants. prepared histologically and
splitting augmentations with implant Biopsies are taken at 6 months. confirmed good bone growth.
placements, Mannheim, Germany Presented at the Congress for
Preprosthetic Surgery, Copenhagen,
Denmark, June 1997. Submitted to
Quintessence Jan 99.
- -----------------------------------------------------------------------------------------------------------------------------
G. Triplett, R. Throndson, The Application 20 patients with bi-lateral impacted 3rd All surgeries were completed. Six
of Biogran(R) for Enhanced Clinical Outcomes molars will be studied. One site is month evaluation completed 6/99.
After 3rd Molar Extractions, Baylor grafted with Biogran(R); other not grafted Reduced pain in Biogran(R) grafted
University as control. Periodontal health distal sites.
to 2nd molar will be charted for one
year.
- -----------------------------------------------------------------------------------------------------------------------------
Stuart J. Froum, Dennis Tarnow, and Edwin Biogran(R) will be compared to DFDBA and All surgeries are completed.
S. Rosenberg, Comparison of two bone graft ungrafted control for treating Preliminary results presented at 3i
materials for extraction socket repair, extraction sockets. Trephine core International Symposium Jan 99.
Department of Implant Dentistry, New York biopsies will be taken prior to implant Biogran(R) histologies show superior
University College of Dentistry placement at 3 and 6 months. bone density than DFDBA and
controls.
- -----------------------------------------------------------------------------------------------------------------------------
Evert Schepers, Daniel van Steenberghe, Histological analysis of treatments for Pilot study showed promising
Periodontal Study in Beagle Dogs, bone loss from chronically inflamed results for regeneration of
Departments of Periodontology and tissues. Four treatment modalities will attachment apparatus in Biogran(R)
Prosthetic Dentistry, Catholic University be compared (Biogran(R); Membrane e-PTFE, treated sites after 3 months.
of Leuven, BELGIUM Perioglas, Control-no material) Study is complete pending histological
evaluation. Data very promising for
Biogran(R).
- -----------------------------------------------------------------------------------------------------------------------------
Peter Blijdorp, Sinus elevation Biogran(R) plus autogenous bone 6 patients are entered into the
using bioactive glass granules of (50/50) is compared to Autogenous study. First histologies confirm
narrow size range and autogenous bone extended with HA (80/20). good bone growth.
bone, Dutch Academy of Aesthetic Dentistry,
Arnhem, NETHERLANDS
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Title/Reference Study Design Status/Results
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
G. Cordioli, C. Mazzocco, Sinus At least 3 implants are placed 36 implants placed, no failures at
augmentation using Biogran(R) with immediately in each grafted sinus. 15% 2 years. Histologies show active
simultaneous implant placement, Padova, autogenous, 85% Biogran(R) placed in class bone growth. Histomorphometric
ITALY IV sinuses. Biopsies taken at 9 months. data being analyzed.
- -----------------------------------------------------------------------------------------------------------------------------
Bercy, Use of Biogran(R) to treat large Twenty four patients with 6mm or greater Excellent stable results at 2
periodontal defects. Academic Hospital, defects with 2 or less bony walls are years. Data being written-up for
St. Luc, Brussels, BELGIUM being entered into the study for submission.
treatment with Biogran(R) without a
membrane. Standardized x-rays and
clinical follow-up will occur at 12
and 24 months post-op.
- -----------------------------------------------------------------------------------------------------------------------------
F. Khoury, Grafting of Chin Autogenous 30 consecutive patients to have About 10 patients have been entered
Bone Harvest Sites. autogenous harvest sites in symphysis into study, preliminary results are
filled with Biogran(R) and covered with excellent.
Guidor7 membrane.
- -----------------------------------------------------------------------------------------------------------------------------
R.C. Rhoad, E. Vresilovic, Bioactive glass 4 beagles were bilaterally grafted with Biogran(R) was over 95% resorbed.
as a bone graft substitute in a canine Biogran(R) and autogenous bone for 6 Active bone growth with Biogran(R)
metaphyseal bone defect, University of months was nearly indistinguishable
Pennsylvania, Department of Orthopaedic compared to autogenous bone control
Surgery sites.
- -----------------------------------------------------------------------------------------------------------------------------
Fumihiko Watanabe, Comparative study of 5 beagles treated for tooth extraction, Study just getting started.
graft materials for filling extraction Biooss, Biogran(R), TCP and autogenous to
sites, School of Dentistry, Tokyo be compared. Implants placed 3 months
after grafting. Histology after 3
months of integration.
- -----------------------------------------------------------------------------------------------------------------------------
Brett Dyer, Raul Caffessee, Biogran(R) for 1 year human clinical trial. Clinical First histologic sections under
the treatment of periodontal defects, parameters measured preop, and 1 year preparation.
Houston, Texas with surgical reentry. Biopsies of
grafted sites taken at 1 year.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 4.2D
Form of Escrow Agreement
FORM OF ESCROW AGREEMENT
This ESCROW AGREEMENT ("Escrow Agreement") is made as of __________________
2000, by and among ORTHOVITA, INC., a Pennsylvania corporation, and VITA
LICENSING, INC., a Delaware corporation, (collectively the "Sellers"), CHASE
MANHATTAN TRUST COMPANY, NATIONAL ASSOCIATION (the "Escrow Agent") and IMPLANT
INNOVATIONS, INC., a Florida corporation ("Buyer").
Background
----------
The Buyer and the Sellers are parties to that certain Asset Sale Agreement
dated as of even date herewith (the "Asset Sale Agreement"). This Escrow
Agreement is being executed and delivered pursuant to Sections 4.2.4 and 4.3.2
of the Asset Sale Agreement.
Witnesseth
----------
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
for good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and in consideration of the mutual covenants herein, hereby
agree as follows:
1. Effect of Asset Sale Agreement
------------------------------
As between the Buyer and the Sellers, the provisions of the Asset Sale
Agreement are incorporated herein by reference, but only as the context of this
Escrow Agreement may require. The Escrow Agent is not a party to the Asset Sale
Agreement and shall, therefore, act only in accordance with the terms and
conditions contained herein. Unless otherwise defined herein, capitalized terms
are used herein as defined in the Asset Sale Agreement.
2. Creation of the Escrow Account.
------------------------------
There is hereby created and established with the Escrow Agent an escrow
account (the "Escrow Account"), to be held in the custody of the Escrow Agent in
accordance with this Escrow Agreement.
3. Escrow Funds.
------------
(a) On the date of this Escrow Agreement, the Buyer is depositing
exclusively with the Escrow Agent the sum of $400,000 (together with any
interest thereon or proceeds therefrom from the
<PAGE>
date hereof, the "Escrow Funds"), and the Escrow Agent acknowledges receipt of
the Escrow Funds and deposit thereof into the Escrow Account.
(b) The Escrow Funds shall be continuously invested and reinvested by the
Escrow Agent in short-term United States obligations issued by or guaranteed by
the United States Treasury, or in such other securities or instruments, as may
be approved in writing from time to time by the Sellers and the Buyer. Absent
joint specific written investment directions from such parties, the Escrow Funds
will be invested in the Vista 100% U.S. Treasury Fund, which is a mutual fund
for which the Escrow Agent or an affiliate of the Escrow Agent may serve as
investment manager, administrator, shareholder servicing agent, and/or custodian
or subcustodian, notwithstanding that (i) the Escrow Agent or an affiliate of
the Escrow Agent receives fees from such funds for services rendered, (ii) the
Escrow Agent charges and collects fees for services rendered pursuant to this
Escrow Agreement that are separate from the fees received from such funds, and
(iii) services performed for such funds and pursuant to this Escrow Agreement
may at times duplicate those provided to such funds by the Escrow Agent or its
affiliates. All interest income or other investment proceeds thereon shall
become part of the Escrow Funds.
(c) The Escrow Funds shall not be subject to lien or attachment by any
creditor of any party hereto, and shall be used solely for the purpose set forth
in this Escrow Agreement and the Asset Sale Agreement. Other than as provided
herein, the Escrow Funds shall not be subject to set-off.
(d) Except as provided in Sections 4 or 5 hereof, the Escrow Funds may
only be disbursed from the Escrow Account upon the joint written direction of
the Sellers and the Buyer.
(e) Subject to the remaining provisions contained herein, including
Sections 4 and 5 hereof, any payment of the Escrow Funds (including accrued
interest) shall automatically include payment of the Escrow Agent"s compensation
in accordance with Section 7 below, after which time payment shall be
automatically made to Sellers, without the requirement of any further action by
the parties hereto.
(f) Each of the Buyer and the Sellers, in the notice section of this
Escrow Agreement, are providing the Escrow Agent with its Tax Identification
Number (TIN) as assigned by the Internal Revenue Service.
4. Claims under the Asset Sale Agreement.
-------------------------------------
<PAGE>
(a) If at any time during the Escrow Period (as herein defined) the Escrow
Agent receives written notice (a "Claim Notice") from Buyer that it is entitled
to indemnification pursuant to Article VII of the Asset Sale Agreement together
with a certificate from the President and CEO or any Vice President certifying
that (x) the Deductible has been met and the procedures set forth in Article VII
of the Asset Sale Agreement that are applicable to the Buyer have been followed,
and (y) the Buyer has given the Sellers" contemporaneous notice of such claim
for indemnification, then the Escrow Agent shall pay from the Escrow Funds the
amount of damages specified in such notice, unless the Escrow Agent receives a
written objection from the Sellers" (a "Claim Response") to Buyer's claim within
30 days after the date of the Claim Notice.
(b) In the case of a Claim Response, the Escrow Agent shall pay from the
Escrow Funds only such amount as specified:
(i) in a joint written direction of the Buyer and the Sellers, or
(ii) in a final order of a court of competent jurisdiction (a "Final
Order").
5. Escrow Period; Termination of Escrow.
------------------------------------
(a) The period during which the Escrow Funds shall be held in escrow
hereunder (the "Escrow Period") shall commence on the date hereof and shall end
on the date that is the later of (i) the date on which all of the Escrow Funds
have been delivered to the Buyer pursuant to Section 4 hereof and (ii) the first
anniversary of the date hereof (the "Disbursement Date").
(b) If a dispute with respect to a Claim Notice is unresolved on the
Disbursement Date, the Escrow Agent shall (i) hold back and not distribute a
portion of the then remaining Escrow Funds in an amount equal to such unresolved
claim (the "Hold Back Funds"), and (ii) release from escrow and distribute to
the Sellers the remaining Escrow Funds, if any, in accordance with Section 3(d)
hereof. The Hold Back Funds shall continue to be held by the Escrow Agent
pursuant to this Escrow Agreement and the Escrow Agent shall only pay the Hold
Back Funds to the Sellers and/or the Buyer, as the case may be, in accordance
with the provisions of Section 4(b) above. This Escrow Agreement shall terminate
at such time as the Hold Back Funds have been delivered to the Buyer and/or the
Sellers pursuant to the terms of this Escrow Agreement.
6. Duties of the Escrow Agent.
--------------------------
<PAGE>
(a) The Escrow Agent shall be liable as a depository only. The duties and
responsibilities of the Escrow Agent hereunder shall be determined solely by the
express provisions of this Escrow Agreement. The Escrow Agent undertakes to
perform only such duties as are expressly set forth herein and no further duties
or responsibilities shall be implied. The Escrow Agent shall have no duty to
solicit any payments that may be due to it hereunder. The Escrow Agent shall not
be liable for any action taken or omitted by it in good faith unless a court of
competent jurisdiction determines that the Escrow Agent's gross negligence or
willful misconduct caused a loss to the Buyer or any Seller. In the
administration of this Escrow Agreement and the Escrow Account hereunder, the
Escrow Agent may execute any of its powers and perform its duties hereunder
directly or through agents or attorneys and may consult with counsel,
accountants and other skilled persons to be selected and retained by it. The
Escrow Agent shall not be liable for anything done, suffered or omitted in good
faith by it in accordance with the advice or opinion of any such counsel,
accountants or other skilled persons. The Escrow Agent shall not be liable for
any mistake of fact or error in judgment, or for any act or failure to act of
any kind taken in good faith and believed by it to be authorized or within the
rights or powers conferred by this Escrow Agreement, unless such act or failure
to act has been determined by a court of competent jurisdiction to constitute
willful misconduct or gross negligence that caused a loss to the Buyer or any
Seller, as the case may be.
(b) The Escrow Agent shall not be liable in any respect on account of
identity, authority or rights of persons executing or delivering, or purporting
to execute or deliver, any document, item, or other writing, and may rely
absolutely and be fully protected in acting upon any item, document or other
writing believed by it in good faith to be authentic in performing its duties
hereunder. The Escrow Agent shall have no duty to inquire into or investigate
the validity, accuracy or content of any such document or other writing.
(c) The Buyer, on the one hand, and the Sellers, on the other hand,
jointly and severally, agree to indemnify and hold the Escrow Agent and its
directors, officers, agents and employees (collectively, the "Indemnitees")
harmless from and against any and all claims, liabilities, losses, damages,
fines, penalties, and expenses, including out-of-pocket, incidental expenses,
legal fees and expenses, the allocated costs and expenses of in-house counsel
and legal staff and the costs and expenses of defending or preparing to defend
against any claim ("Losses") that may be imposed on, incurred by, or asserted
against, the Indemnitees or any of them for following any instruction or other
direction upon which the Escrow Agent is authorized to rely pursuant to the
terms of this Escrow Agreement. All Losses hereunder shall be paid 50% by the
Buyer, on the one hand, and 50% by the Sellers, on the other hand. The
provisions of this Section 6(c) shall survive the
<PAGE>
termination of this Escrow Agreement and the resignation or removal of the
Escrow Agent for any reason. Anything in this Escrow Agreement to the contrary
notwithstanding, in no event shall the Escrow Agent be liable for special,
indirect or consequential loss or damage of any kind whatsoever (including but
not limited to lost profits), even if the Escrow Agent has been advised of such
loss or damage and regardless of the form of action.
(d) In the event of disagreement between the parties to this Escrow
Agreement, or persons claiming under them, or any of them, the Escrow Agent
reserves the right to hold all Escrow Funds in its possession until a mutual
agreement has been reached between all of said parties, or until delivery is
made to court in any interpleader action, or until as otherwise authorized by
final judgment or decree.
(e) The Escrow Agent may resign and be discharged from its duties under
this Escrow Agreement by giving the Buyer and the Sellers 30 days? prior written
notice thereof.
(f) At any time, the Buyer and the Sellers may discharge the Escrow Agent
by jointly executing and delivering to the Escrow Agent notice of its discharge
as Escrow Agent hereunder and specifying (i) the date when such discharge shall
take effect and (ii) the successor (the "Successor Escrow Agent") is, in which
event the Escrow Agent will be discharged of its duties as of such date and
shall transfer all Escrow Funds then held by the Escrow Agent to the Successor
Escrow Agent. This Agreement shall terminate, and the Escrow Agent shall be
discharged from any further obligations hereunder upon the disbursement of the
Escrow Funds.
(g) If the Escrow Agent shall be dissolved, or if its property or affairs
shall be taken under the control of any state or federal court or administrative
body or agency because of insolvency or bankruptcy, or if for any other reason a
vacancy shall forthwith exist in the office of Escrow Agent, then within a
period of 30 days thereafter, a Successor Escrow Agent shall be appointed by the
mutual agreement of the Buyer and the Sellers. If no agreement has been reached
as aforesaid and no Successor Escrow Agent shall have been so appointed and have
accepted such appointment within such 30-day period, the Buyer shall appoint a
Successor Escrow Agent (which shall be independent of the Buyer).
7. Expenses.
--------
The Escrow Agent shall be entitled to reasonable compensation for its
services and reimbursement for its out-of-pocket expenses set forth on Exhibit A
---------
hereto. All such compensation and reimbursement for out-of-pocket expenses and
fees (including reasonable attorneys' fees) shall be paid out of any payment of
the Escrow Funds (including accrued interest) which shall automatically
<PAGE>
be paid to the Escrow Agent under Section 3 hereof without the requirement of
any further action by the parties hereto. The Buyer and the Sellers shall each
bear their own expenses in connection with the resolution of any Claim under
Section 4 hereof.
8. Notices.
-------
Unless expressly specified otherwise herein, all notices or other
communications required or permitted to be given under this Escrow Agreement
shall be in writing and shall be considered sufficiently given in all respects
(a) when personally delivered, (b) when sent by telecopier, with written
confirmation of receipt, (c) the day after being sent by overnight courier
service or (d) three days after being deposited in the United States Certified
Mail, Postage Prepaid, Return Receipt Requested, addressed as follows or in each
case to such other address or facsimile number as shall be designated by notice
duly given pursuant to this Section:
If to Sellers, to:
Orthovita, Inc.
45 Great Valley Parkway
Malvern, Pennsylvania 19355
Fax: (610) 640-1714
Attention: Bruce A. Peacock, Chief Operating Officer and
President
Telephone: (610) 407-5250
Vita Licensing, Inc.
300 Delaware Avenue
Suite 900, 9th Floor
MC - DE5403
Wilmington, Delaware 19801
Fax: (302) 552-3128
Attention: Joseph M. Paiva, Vice President
Telephone: (610) 407-5233
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Fax: (215) 963-5299
Attention: David R. King, Esquire
Telephone: (215) 963-5371
If to Purchaser, to:
<PAGE>
Implant Innovations, Inc.
4555 Riverside Drive
Palm Beach Gardens, Florida 33410
Fax: (561) 776-6833
Attention: President
Telephone: (561) 776-6702
With a copy to:
Steel, Hector & Davis LLP
1900 Phillips Point West
777 South Flagler Drive
West Palm Beach, Florida 33401
Fax: (561) 655-1509
Attention: Thomas G. O'Brien III, Esquire
Telephone: (561) 650-7287
If to the Escrow Agent:
Chase Manhattan Trust Company, National Association
One Liberty Place, Suite 5210
1650 Market Street
Philadelphia, PA 19103
Fax: (215) 568-1450
Attention: Capital Market Fiduciary Services
Telephone: (215) 988-1322
9. General Terms.
-------------
(a) This Escrow Agreement shall be construed and enforced in accordance
with the laws of the Commonwealth of Pennsylvania without regard to its
provisions concerning conflict of laws.
(b) This Escrow Agreement shall be binding upon the parties hereto and
their respective successors and assigns. Any corporation or association into
which the Escrow Agent in its individual capacity may be merged or converted or
with which it may be consolidated, or any corporation or association resulting
from any merger, conversion or consolidation to which the Escrow Agent in its
individual capacity shall be a party, or any corporation or association to which
all or substantially all the corporate trust business of the Escrow Agent in its
individual capacity may be sold or otherwise transferred, shall be the successor
to the Escrow Agent hereunder without further act.
(c) This Escrow Agreement and, as between the Buyer and Sellers only, the
Asset Sale Agreement, contain the entire agreement among the parties hereto with
respect to the subject matter hereof. This Escrow Agreement may not be amended
or revised except by a written instrument signed by all the parties hereto.
(d) Unless the context of this Escrow Agreement clearly
<PAGE>
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) "including" has the inclusive meaning frequently identified
with the phrase "but not limited to" and (iv) references to "hereunder,"
"herein," "hereto" or "hereof" relate to this Escrow Agreement. The section and
other headings contained in this Escrow Agreement are for reference purposes
only and shall not control or affect the construction of this Escrow Agreement
or the interpretation thereof in any respect. Section, subsection, schedule and
exhibit references are to this Escrow Agreement unless otherwise specified. Each
accounting term used herein that is not specifically defined herein shall have
the meaning given to it under generally accepted accounting principles.
(e) This Escrow Agreement may be executed in two or more counterparts,
each of which shall be binding 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 Escrow Agreement to produce or account for more than one such
counterpart.
(f) In the event funds transfer instructions are given (other than in
writing at the time of execution of this Escrow Agreement), whether in writing,
by facsimile or otherwise, the Escrow Agent shall seek confirmation of such
instructions by telephone call-back to the person or persons designated in
Section 8 hereof, and the Escrow Agent may rely upon the confirmation of anyone
purporting to be the person or persons so designated. The persons and telephone
numbers for call-backs may be changed only in a writing actually received and
acknowledged by the Escrow Agent. The Buyer and the Sellers acknowledge that
such security procedure is commercially reasonable.
(g) It is understood that the Escrow Agent and the beneficiary's bank in
any funds transfer may rely solely upon any account numbers or similar
identifying number provided by either of the other parties hereto to identify
(i) the beneficiary, (ii) the beneficiary's bank, or (iii) an intermediary bank.
The Escrow Agent may apply any of the Escrow Funds for any payment order it
executes using any such identifying number, even where its use may result in a
person other than the beneficiary being paid, or the transfer of funds to a bank
other than the beneficiary's bank, or an intermediary bank designated.
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
[SIGNATURE PAGE TO ESCROW AGREEMENT]
IN WITNESS WHEREOF, this Escrow Agreement has been executed by the
undersigned as of the day and year first written above.
CHASE MANHATTAN TRUST COMPANY,
NATIONAL ASSOCIATION, as Escrow Agent
By: ____________________________________
Name: Judith Wisniewski
Title: Assistant Vice President
IMPLANT INNOVATIONS, INC.
By: ____________________________________
Name:
Title:
ORTHOVITA, INC.
By: ____________________________________
Name:
Title:
VITA LICENSING, INC.
By: ____________________________________
Name:
Title:
<PAGE>
EXHIBIT A
Escrow Agent Fees and Expenses
Orthovita, Inc.
Proposed Escrow Agency Agreement Between
Orthovita, Inc. VITA Licensing and Implant Innovations
Chase Manhattan Trust Company, National Association
Proposal to Serve as Escrow Agent
Initial Fee
-----------
To cover the review and negotiation of the draft Escrow Agency Agreement,
establishment of the trust account on our system and communication with the
Working Party.
$500.00
(Payable upon Closing)
Annual Fee
----------
To cover the ongoing administrative functions of the Escrow Agent in accordance
with the terms and conditions of the Escrow Agency Agreement.
$2000.00
(Payable upon Closing and in Advance of Annual Anniversary Dates)
Expenses
--------
Out-of-pocket expenses (capped at 4% of First Year Invoice), fees and
disbursements, and services of an unanticipated or extraordinary nature are not
included in the above schedule.
<PAGE>
Exhibit 4.2E
Form of Bill of Sale
Orthovita, Inc., a Pennsylvania corporation (hereinafter referred to as the
"Seller"), for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, paid to it by Implant Innovations, Inc., a
Florida corporation (hereinafter referred to as the "Purchaser"), hereby sells,
assigns, and transfers to the Purchaser the assets set forth on Schedules 1.7,
1.9 and 1.11 to the Asset Sale Agreement (referred to below) owned by the Seller
and forming a portion of the Transferred Assets (as defined in the Asset Sale
Agreement referred to below). Nothing in this Bill of Sale shall be construed to
be a modification of, or limitation on, any provision of the Asset Sale
Agreement dated as of ________________ ___, 2000 among the Seller, Vita
Licensing, Inc. and the Purchaser, including the representations and warranties
set forth therein.
DATED: ______________
ORTHOVITA, INC.
By: ___________________________________
Title:
<PAGE>
Exhibit 4.2F
Form of Termination Agreement for Distribution Agreement
Orthovita, Inc., a Pennsylvania corporation ("Orthovita") and Implant
Innovations, Inc., a Florida corporation ("3i"), are parties to the Global
Distribution Agreement, entered into April 29, 1998 for the purpose of
facilitating the distribution and sale of Biogran" brand bone graft material.
The parties hereby acknowledge and agree to terminate the Distribution Agreement
in favor of the Asset Sale Agreement dated as of ______________. Upon execution
of this Termination Agreement, the parties will cease to have any rights or
obligations under the Global Distribution Agreement, except Sections 5, 6, 7, 8,
9, and 10 of the Global Distribution Agreement that survive under Section 7.3
thereof.
The parties hereby agree that any purchase orders entered into pursuant to the
Global Distribution Agreement shall terminate with the execution of this
Termination Agreement.
ORTHOVITA, INC.
By: ___________________________
Name: _________________________
Title: ________________________
IMPLANT INNOVATION, INC.
By: ___________________________
Name: _________________________
Title: ________________________
<PAGE>
Exhibit 4.2G
Form of Assignment of Contracts
This ASSIGNMENT OF CONTRACTS ("Assignment") is entered into this ___
day of _________________, 2000, by and between ORTHOVITA, INC., a Pennsylvania
corporation ("Assignor"), and IMPLANT INNOVATIONS, INC., a Florida corporation
("Assignee"). For valuable consideration, the parties hereto, each intending to
be legally bound and to bind their respective successors and assigns, hereby
covenant and agree as follows.
1. For the purpose of performing the parties' respective obligations
under the Asset Sale Agreement, dated as of ________________ ___, 2000, among
Assignor, Vita Licensing, Inc., a Delaware corporation ("Vita Licensing), and
Assignee (the "Asset Sale Agreement"), the Assignor hereby assigns, transfers
and sets over unto Assignee, and Assignee hereby accepts, all of Assignor's
rights, title and interest in and to the Contracts (as defined in Section 1.6 of
the Asset Sale Agreement).
2. This Assignment shall inure to the benefit of and shall be
binding upon the parties hereto and their respective successors and assigns.
3. This Assignment shall be governed by and construed according to
the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment to
be executed by their duly authorized representatives on the date first above
written.
ORTHOVITA, INC.
-----------------------------
By:
Title:
IMPLANT INNOVATIONS, INC.
-----------------------------
By:
Title:
<PAGE>
Exhibit 4.2H
Form of Legal Opinion of Sellers" Counsel
February ___, 2000
Implant Innovations, Inc.
4555 Riverside Drive
Palm Beach Gardens, FL 33410
Ladies and Gentlemen:
We have acted as counsel to Orthovita, Inc., a Pennsylvania corporation
("Orthovita"), and Vita Licensing, Inc., a Delaware corporation ("Vita",
collectively with Orthovita, the "Sellers") in connection with the Asset Sale
Agreement dated as of _____________ ___, 2000 (the "Asset Purchase Agreement"),
among Orthovita, Vita, and Implant Innovations, Inc., a Florida corporation (the
"Purchaser").
Terms that are defined in the Asset Sale Agreement and also used herein shall
have the definitions set forth in the Asset Sale Agreement unless they are
otherwise defined herein.
This opinion is being delivered pursuant to Section 4.2.8 of the Asset Sale
Agreement. In connection with the opinions expressed below, we have examined and
relied upon executed copies of the Asset Sale Agreement, the certificate or
articles of incorporation and the bylaws of each of Orthovita and Vita. We have
also examined and relied upon such other documents, instruments and certificates
of public officials and made such other investigations of fact and law as we
have deemed necessary.
We have assumed the genuineness of all signatures (other than the signatures of
the applicable officers of the Sellers), the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. We have further assumed
that the Asset Sale Agreement and all other agreements and documents
contemplated by the Asset Sale Agreement (the "Ancillary Documents"), constitute
legal, valid and binding obligations of all parties thereto (other than the
Sellers).
As to certain matters of fact material to this opinion, we have, where such
facts were not independently known to us, relied without independent
investigation upon certificates of officers of the Sellers.
<PAGE>
Based upon and subject to the foregoing, and subject to the additional
qualifications set forth below, we are of the opinion that:
1. Orthovita is a corporation validly subsisting under the laws of the
Commonwealth of Pennsylvania. Vita is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of
Delaware.
2. Each Seller has the requisite corporate power and authority to carry on its
business as, to our knowledge, it is now conducted.
3. Each Seller has all requisite corporate power and authority necessary to
execute, deliver and perform its obligations under the Agreement and the
Ancillary Documents.
4. The Agreement and the Ancillary Documents have been duly executed and
delivered by each Seller.
5. The execution and delivery of the Agreement and the Ancillary Documents,
performance by Sellers of their respective obligations under the Agreement
and the Ancillary Documents and the exercise by Sellers of their respective
rights created by the Agreement and the Ancillary Documents do not (i)
violate the Articles of Incorporation or Bylaws of either Seller, (ii) to
our knowledge, constitute a breach of or a default under any material
agreement or instrument to which either Seller is a party or by which it or
its assets are bound, (iii) to our knowledge, result in the creation of a
mortgage, security interest or other encumbrance upon the assets of either
Seller, (iv) violate any judgment, decree, injunction, writ or order of any
court, arbitration or administrative tribunal, which judgment, decree,
injunction, writ or order, known to us and binding on either Seller or its
assets or (v) to our knowledge, violate any federal or Pennsylvania law,
rule or regulation.
6. Except as disclosed in Schedule 6.1.5, to our knowledge, there is no
action, suit or proceeding pending or threatened against either Seller that
could reasonably be expected to have a material adverse effect on the
applicable Seller or that in any manner draws into question the validity of
the Agreement or the Ancillary Documents.
7. Except as disclosed in the next paragraph, the Agreement and the Ancillary
Documents are valid and binding obligations of each Seller enforceable
against the applicable Seller in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent
<PAGE>
conveyance or other laws from time to time in effect that affect creditors'
rights generally and subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at
law).
The opinions expressed herein are limited to matters governed by the laws of the
Commonwealth of Pennsylvania, the General Corporation Law of the State of
Delaware, and the federal laws of the United States. To the extent that any
opinion herein relates to matters governed by any laws other than the laws to
which the opinions expressed herein are limited, we have assumed that such laws
are the same in all relevant respects as the laws of the Commonwealth of
Pennsylvania. In addition, our opinions expressed in paragraph 1 above as to the
subsistence of Orthovita and existence in good standing of Vita are based solely
on certificates of valid subsistence or legal existence or good standing issued
by the Secretaries of State of the Commonwealth of Pennsylvania or the State of
Delaware and have the meanings imparted by such certificates.
Wherever we have stated that we have assumed any matter or relied or based our
opinion upon any representation or advice, it is intended to indicate that we
have assumed such matter or relied or based our opinion upon such representation
or advice without making any factual, legal or other inquiry or investigation,
and without expressing any opinion or conclusion of any kind concerning such
matter; no inference as to our knowledge of any matters bearing on the accuracy
of any such statement or opinion should be drawn from the fact of our
representation of the Sellers.
In rendering the foregoing opinions and advice, whenever a statement set forth
herein is qualified to "our knowledge" or limited to matters "known to us" or by
any similar phrase, it is intended to indicate that, during the course of our
representation of the Sellers, no information that would give us current actual
knowledge of the inaccuracy of such statement has come to the attention of those
attorneys in our firm who have rendered legal services in connection with the
transactions contemplated by the Asset Sale Agreement. However, we have not
undertaken any independent investigation to determine the accuracy of such
statement and no inference as to our knowledge of any matters bearing on the
accuracy of any such statement should be drawn from the fact of our
representation of the Sellers.
No opinion is expressed herein with respect to any provisions of the Asset Sale
Agreement or Ancillary Documents that purport to specify certain governing laws,
the jurisdictions in which legal proceedings may be instituted or methods of
resolving disputes. In addition, no opinion is expressed herein as to any of the
topics
<PAGE>
listed under Section 19 "Specific Legal Issues" of the Third-Party Legal Opinion
-------------------------
Report, published in 1991 by the Section of Business Law of the American Bar
- ------
Association.
The opinions expressed herein are solely for the benefit of you in connection
with the Asset Sale Agreement and Ancillary Documents and may not be relied on
in any manner or for any purpose by any other Person; nor may copies be
furnished to any other Person without the prior written consent of this firm.
Very truly yours,
MORGAN, LEWIS & BOCKIUS LLP
<PAGE>
Exhibit 4.3A
Form of Legal Opinion of Purchaser"s Counsel
February ___, 2000
Orthovita, Inc.
45 Great Valley Parkway
Malvern, PA 19355
Vita Licensing, Inc.
300 Delaware Avenue
Suite 900, 9/th/ Floor
MC-DE5403
Wilmington, DE 19801
Ladies and Gentlemen:
We have acted as counsel to Implant Innovations, Inc., a Florida corporation
(the "Company"), in connection with the Asset Sale Agreement dated as of
February ___, 2000 (the "Agreement") by and among Orthovita, Inc., Vita
Licensing, Inc. and the Company. Except as otherwise indicated herein,
capitalized terms used in this Opinion Letter are defined as set forth in the
Agreement or the Accord (as defined below), as the case may be. We are
delivering this Opinion Letter at the request of our clients pursuant to Section
4.3.4 of the Agreement.
Except as otherwise expressly modified herein to the contrary, this Opinion
Letter is governed by, and shall be interpreted in accordance with, the Legal
Opinion Accord and commentary thereto (the "Accord") of the ABA Section of
Business Law (1991). As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage and other
limitations, all as more particularly described in the Accord, and this Opinion
Letter should be read in conjunction with the Accord.
In our capacity as counsel to the Company, we have examined signed copies of the
Transaction Documents to which the Company is a party. With respect to various
questions of fact material to this Opinion Letter, we have relied upon (i) the
representations and warranties made by the Company in the Transaction Documents
and (ii) the Certificate of ____________, ___________ of the Company, attached
to this Opinion Letter as Attachment A.
Based upon and subject to the foregoing, and subject to the qualifications that
follow, it is our opinion that:
<PAGE>
1. The Company is incorporated under the laws of the State of Florida and its
status is active.
2. To our Knowledge, the Company has the corporate power and authority to
conduct its business as it is now being conducted.
3. The Company has the corporate power and authority to execute and deliver
the Transaction Documents and to perform its obligations under the
Transaction Documents.
4. The Transaction Documents have been executed and delivered by the Company.
5. The execution and delivery of the Transaction Documents, performance by the
Company of its obligations under the Transaction Documents and the exercise
by the Company of the rights created by the Transaction Documents do not
(i) violate the Company's Constituent Documents; (ii) to our Knowledge,
constitute a breach of or default under any material agreement or
instrument to which the Company is a party or by which it or its assets are
bound; (iii) to our Knowledge, result in the creation of a mortgage,
security interest or other encumbrance upon the assets of the Company; (iv)
to our Knowledge, violate any judgment, decree or order of any court or
administrative tribunal, which judgment, decree or order is binding upon
the Company or its assets; or (v) to our Knowledge, violate any Federal or
Florida law, rule or regulation.
6. The Agreement and the Transaction Documents are enforceable against the
Company.
The opinions expressed herein are specifically limited to the Federal Law and
the Laws of the State of Florida.
This opinion is limited to matters expressly set forth herein and no opinion is
to be implied or may be inferred beyond the matters expressly stated herein.
Pursuant to Section 21 of the Accord, the phrase "Primary Lawyer Group," as used
in the Accord is hereby modified. For purposes of applying the Accord to this
Opinion Letter, the Primary Lawyer Group means the lawyers of this firm who have
given substantive legal attention to the representation of the Company in
connection with the Agreement and the transactions contemplated by it.
Subject to the foregoing, this Opinion Letter may be relied upon by you only in
connection with the Agreement and the Transaction Documents and the transactions
contemplated thereby, and may not be used or relied upon by you or any other
person, firm, corporation or entity for any other purpose whatsoever, except to
<PAGE>
Orthovita, Inc.
Vita Licensing, Inc.
February ___, 2000
Page 75
the extent authorized in the Accord, without our prior express written consent
in each such instance.
Very truly yours,
STEEL HECTOR & DAVIS LLP
KAP/TGO/JIM
<PAGE>
ATTACHMENT A
CERTIFICATE OF _____________
AS ______________ OF IMPLANT INNOVATIONS, INC.
I am _________ of Implant Innovations, Inc., a Delaware corporation (the
"Company"). I give this Certificate as support for factual matters contained in
the Opinion Letter of Steel Hector & Davis LLP ("SHD") delivered to Orthovita,
Inc. and Vita Licensing, Inc. (collectively, "Sellers") in connection with the
Asset Sale Agreement (the "Agreement") dated as of February ___, 2000 among
Sellers and the Company. All information in this Certificate is given as of
today. Capitalized terms used in this Certificate are defined as set forth in
the Agreement.
1. A true and correct copy of each of the Company's Articles of Incorporation
and Bylaws as currently in effect has previously been provided to SHD and has
not been rescinded or repealed.
2. The Company has not approved dissolution and has not taken any other steps
leading to its dissolution.
3. The Company has adopted resolutions authorizing the Company to take all
actions required to be taken by it in connection with the transactions
contemplated by the Agreement and the related documents and agreements
(collectively, the "Transaction Documents").
4. The Company has delivered to SHD all of the documents that may affect
authorization of the Agreement. All of the documents delivered are true and
correct and have not been rescinded or repealed.
5. The Company is not a party to any agreement or instrument that may
adversely affect the Transaction Documents and is not subject to any
restrictions, judgments, orders, decrees, actions, claims, investigations or
other proceedings that may adversely affect the transactions contemplated by the
Transaction Documents.
6. The Company's books and records are complete.
Dated: February ___, 2000
__________________________________
----------, ------------
Implant Innovations, Inc.
<PAGE>
Orthovita, Inc.
Vita Licensing, Inc.
February ___, 2000
Page 2
-2-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report into the Company's previously filed
Registration Statement on Form S-8 File No. 333-66681. It should be noted that
we have not audited any financial statements of the Company or performed any
audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Philadelphia, PA
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATIN EXTRACTED FROM FORM 10-K
DATED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,487,343
<SECURITIES> 6,386,202
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 147,270
<CURRENT-ASSETS> 155,966
<PP&E> 2,041,524
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,321,446
<CURRENT-LIABILITIES> 5,058,051
<BONDS> 616,726
0
0
<COMMON> 113,316
<OTHER-SE> 5,533,353
<TOTAL-LIABILITY-AND-EQUITY> 5,646,669
<SALES> 1,054,120
<TOTAL-REVENUES> 1,054,120
<CGS> 324,590
<TOTAL-COSTS> 324,590
<OTHER-EXPENSES> 10,755,317
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,601
<INCOME-PRETAX> (9,496,594)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,496,594)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,496,594)
<EPS-BASIC> (.83)
<EPS-DILUTED> (.83)
</TABLE>
