<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 1997.
REGISTRATION NO. 333-36379
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PACIFICHEALTH LABORATORIES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5122 22-3367588
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
1460 ROUTE 9 NORTH
WOODBRIDGE, NJ 07095
732/636-6141
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
JONATHAN D. RAHN, EXECUTIVE VICE PRESIDENT
1460 ROUTE 9 NORTH
WOODBRIDGE, NJ 07095
TELEPHONE 732/636-6141
FACSIMILE 732/636-7410
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
Copies of communications to:
JOSEPH CHICCO, ESQUIRE VICTOR J. DIGIOIA, ESQUIRE
CONNOLLY EPSTEIN CHICCO FOXMAN BRIAN C. DAUGHNEY, ESQUIRE
ENGELMYER & EWING GOLDSTEIN & DIGIOIA, LLP
1515 MARKET STREET - 9TH FLOOR 369 LEXINGTON AVENUE
PHILADELPHIA, PA 19102 NEW YORK, NY 10036
TELEPHONE 215/851-8410 TELEPHONE 212/599-3322
FACSIMILE 215/851-8383 FACSIMILE 212/557-0295
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO ITEM 502(f) OF REGULATION S-B
BETWEEN REGISTRATION STATEMENT AND FORM OF PROSPECTUS
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ITEM NUMBER AND HEADING CAPTION IN PROSPECTUS
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<S> <C> <C>
1. Front of Registration Statement and Outside
Front Cover of Prospectus.................. Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus................................. Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk Factors......... Prospectus Summary - The Company, - Risk
Factors, - Summary Financial Information
4. Use of Proceeds.............................. Use of Proceeds
5. Determination of Offering Price.............. Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution..................................... Dilution
7. Selling Security Holders..................... Not Applicable
8. Plan of Distribution......................... Inside Front Cover; Underwriting
9. Legal Proceedings............................ Business of the Company - Legal Proceedings
10. Directors, Executive Officers, Promoters and
Control Persons............................ Management
11. Security Ownership of Certain Beneficial
Owners and Management...................... Management; Principal Stockholders
12. Description of Securities.................... Description of Securities
13. Interests of Named Experts and Counsel....... Not Applicable
14. Disclosure of Commission Position on
Indemnification............................ Description of Securities
15. Organization With Last Five Years............ Certain Relationships and Related
Transactions
16. Description of Business...................... Business of the Company
17. Management's Discussion and Analysis or
Plan....................................... Management's Discussion and Analysis
18. Description of Property...................... Business of the Company - Offices and Other
Facilities
19. Certain Relationships and Related
Transactions............................... Certain Relationships and Related
Transactions
20. Market for Common Equity and Related
Stockholder Matters........................ Outside Front Cover of Prospectus; Risk
Factors
21. Executive Compensation....................... Management - Executive Compensation
22. Financial Statements......................... Financial Statements
23. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..... Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 17, 1997
PROSPECTUS
1,200,000 SHARES
PACIFICHEALTH LABORATORIES, INC.
COMMON STOCK
PacificHealth Laboratories, Inc. (the "Company") is hereby offering
1,200,000 shares (the "Shares") of its common stock, par value $.0025 per share
(the "Common Stock"). Prior to this offering, there has been no public market
for the Common Stock, and there can be no assurance such a market will develop
or be sustained. It is currently estimated that the initial public offering
price will be $6.00 per Share. The initial public offering price of the Shares
has been arbitrarily determined by negotiation between the Company and First
Montauk Securities Corp. (the "Underwriter") and is not necessarily related to
the Company's assets, book value, results of operations, or any other
established criteria of value. The Company's Common Stock has been approved for
quotation on the SmallCap Market of the Nasdaq Stock Market, Inc. ("Nasdaq")
under the symbol "PHLI".
------------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL
DILUTION. PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER "RISK
FACTORS" BEGINNING ON PAGE 4 AND "DILUTION".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================
<S> <C> <C> <C>
| | UNDERWRITING |
| | DISCOUNTS | PROCEEDS TO
| PRICE TO PUBLIC | AND COMMISSIONS (1)| COMPANY (2)
Per Share............................. | $6.00 | $.60 | $5.40
Total(3).............................. | $7,200,000 | $720,000 | $6,480,000
==================================================================================================
</TABLE>
(1) Does not include additional compensation to be paid to the Underwriter
consisting of (a) a non-accountable expense allowance of 3% of the gross
proceeds of this offering, or $.18 per Share, of which $30,000 has been paid
to date (b) warrants to purchase 120,000 additional shares of the Company's
Common Stock (the "Underwriter's Warrants") exercisable over a period of
four years commencing one year from the date hereof at an exercise price
equal to 145% of the initial public offering price of the Shares, and (c)
the retention of the Underwriter as the Company's investment banker and
financial consultant for a period of two years at a monthly fee of $2,000 or
an aggregate of $48,000. In addition, the Company has agreed to indemnify
the Underwriter against certain liabilities including liabilities under the
Securities Act of 1933, as amended. See "Underwriting".
(2) Before deduction of expenses payable by the Company (excluding the
Underwriter's Commissions but including the non-accountable expense
allowance) estimated at $380,000 or $.32 per Share ($412,400 or
approximately $.30 per Share if the Underwriter's over-allotment is
exercised). See "Use of Proceeds".
(3) The Company has granted to the Underwriter a 45-day option to purchase up to
180,000 additional Shares (15% of the number initially offered to the
public) upon the same terms as set forth above to cover over-allotments. If
the option is fully exercised the Totals for Price to Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be $8,280,000,
$828,000 and $7,452,000, respectively. See "Underwriting".
The Shares are being offered by the Underwriter, when, as and if delivered
to and accepted by the Underwriter and subject to the approval of certain legal
matters by its counsel. The Underwriter reserves the right to reject any order
either in whole or in part. It is expected that delivery of the certificates for
the Shares will be made in against payment therefor at the offices of the
Underwriter on or about _______, 1997.
[FIRST MONTAUK SECURITIES CORP. LOGO]
The date of this Prospectus is December , 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
AVAILABLE INFORMATION
As of the date of this Prospectus, the Company will become subject to the
informational and reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and, in accordance therewith, will file
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed with the Commission by the Company may be inspected and copied
at the public reference facilities maintained by the Commission at its principal
offices at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and 7 World Trade
Center, Suite 1300, New York, New York 10048. Such reports, proxy statements and
other information may also be obtained from the web site that the Commission
maintains at http://www.sec.gov. Copies of these materials can also be obtained
at prescribed rates from the Public Reference Section of the Commission at its
principal offices in Washington, D.C., set forth above.
The Company intends to distribute to its shareholders Annual Reports
containing audited financial statements and Quarterly Reports containing
unaudited financial information. The Company's fiscal year end is December 31.
FOR CALIFORNIA RESIDENTS ONLY: The Commissioner of Corporations of the
State of California (the "Commissioner") has imposed investor suitability
standards of $65,000 of income and $250,000 of net worth, excluding principal
residence, home furnishings, and automobiles, or in the alternative, a minimum
net worth of at least $500,000, excluding principal residence, home furnishings,
and automobiles, for all sales of Shares of the Company to residents of the
State of California. California residents wishing to invest must show their
eligibility by completing a confidential purchaser questionnaire. They must also
sign a form letter acknowledging that this offering does not meet certain
guidelines of the Commissioner. The secondary trading exemption ordinarily
provided by Section 25104(h) will be withheld until January 1, 1998 at which
time new Section 25101.1 shall become effective. As a result, investors may not
be able to resell their shares to residents of California until after January 1,
1998. The new Section 25101.1 requires that the Company be a "reporting" company
under Section 13 or 15d of the Securities and Exchange Act and that the Company
file a required notice with the Commissioner prior to any such sales.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET
PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN
THE COMMON STOCK MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with more detailed information and financial statements, and notes
relating thereto, appearing elsewhere in this Prospectus. Effective as of the
date of this Prospectus, certain founding shareholders of the Company have
agreed to contribute 200,000 shares of Common Stock back to the Company for
cancellation. Unless otherwise indicated, all references in this Prospectus,
apart from the financial statements, to numbers of shares of Common Stock
outstanding and any related per share data give retroactive effect to this
cancellation. Unless otherwise specified in this Prospectus, all information in
this Prospectus assumes an initial offering price of $6.00 per Share, and no
exercise of the over-allotment granted to the Underwriter.
THE COMPANY
PacificHealth Laboratories, Inc. (hereinafter referred to as the "Company")
was incorporated in April 1995 to engage in the development and sale of products
based upon natural ingredients that have demonstrable health benefits and can be
marketed without prior Food and Drug Administration approval under current
regulatory guidelines, and to promote and market those products aggressively
through mass and health food channels of distribution using, among other things,
marketing claims based upon Company-conducted research and testing.
The Company has focused its efforts since inception on developing a limited
number of products and the infrastructure to support its initial activities. The
Company's first product, ENDUROX(Registered), a dietary supplement marketed in
the sports performance and recovery category, was introduced in March 1996.
Commercial shipments of the product commenced in May 1996. Extensions on the
ENDUROX product line (ENDUROX EXCEL(Trademark) and ENDUROX ProHeart(Trademark))
were introduced in March 1997. From inception through September 30, 1997, the
Company's sales of the original ENDUROX formulation were $4,948,079, and the
combined sales of ENDUROX EXCEL and ENDUROX ProHeart were $971,883.
Management believes that the use of natural products as dietary supplements
to improve and promote health and well being is gaining increasing acceptance by
American consumers. The Company's primary strategy for growth is to develop new
brands and products, and to continue to expand its distribution network. The
Company has pursued a "multi-channel" distribution strategy in marketing its
line of ENDUROX products, and intends to follow a similar strategy with future
products. The ENDUROX line is sold in retail outlets in all 50 states, including
mass merchandisers such as WalMart, KMart and Target; chain drug stores such as
CVS, Walgreens, Eckerds and Rite Aid; and grocery supermarkets such as Pathmark
and Albertsons. The Company distributes its products to the health food segment
through General Nutrition Centers, a chain with over 2,800 outlets, and
independent health food retailers. The Company also sells through other
channels, including sports specialty stores such as The Sports Authority and
health clubs. The nature of the product and its target market dictate the
channels of distribution in which a product is launched, and the level of effort
directed to each channel of distribution.
The Company has additional proprietary products in various stages of
development, including products which use natural ingredients that have
demonstrated effectiveness in muscle nutrition and sports recovery, in treating
the symptoms of mild to moderate depression, in reducing the pain and
inflammation of arthritis, in appetite control and in accelerating recovery from
strains and sprains. The proceeds from this offering will be used primarily to
develop and market these products.
The Company is a Delaware corporation with executive offices located at
1460 Route 9 North, Woodbridge, New Jersey 07095 (telephone 732/636-6141).
3
<PAGE>
THE OFFERING
Shares offered..................... 1,200,000 shares of Common Stock, par value
$.0025 ("Shares")
Shares outstanding:
Before the offering........... 2,985,672 shares(1)
After the offering............ 4,185,672 shares(1)(2)
Use of proceeds.................... The Company intends to use the proceeds of
this offering, after payment of costs
associated with the offering, to pay
advertising, marketing and manufacturing
costs, including costs associated with the
introduction of new products, for research
and development, to retain additional
personnel, and for general operating and
administrative expenses. See "Use of
Proceeds".
Risk factors....................... A purchase of Shares is a highly speculative
investment and subject to substantial
dilution and a high degree of risk,
including risks relating to a limited
operating history, recent losses, dependence
on new products, and dependence on certain
significant customers. See "Risk Factors"
and "Dilution".
- ------------------
(1) Does not include 359,740 shares of Common Stock reserved for issuance upon
conversion of outstanding 10% Convertible Preferred Stock, 1,420,200 shares
of Common Stock issuable upon the exercise of outstanding options, and
255,500 shares of Common Stock issuable upon the exercise of outstanding
warrants. See "DESCRIPTION OF SECURITIES -- Preferred Stock" and "-- Stock
Options and Warrants".
(2) Assumes no exercise of the Underwriter's option to purchase 180,000
additional shares of Common Stock to satisfy overallotments in the offering
(the Underwriter's "Over-allotment Option"), and does not include shares of
Common Stock reserved for issuance upon the exercise of the Underwriter's
Warrant.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information presented below for the fiscal years
ended December 31, 1996 and 1995 was derived from the audited financial
statements of the Company appearing elsewhere herein. The summary financial
information as of September 30, 1997 for the nine-month periods ended September
30, 1997 and 1996 was derived from the unaudited financial statements of the
Company. The unaudited financial statements include all adjustments, consisting
of normal recurring adjustments, which the Company considers necessary for a
fair presentation of its financial position and results of operations for those
periods. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1997. The summary should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial statements of the Company and the related notes to the
financial statements, each appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
--------------------- -----------------------
1996 1995(1) 1997 1996
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................................... $3,085,726 $ -0- $2,834,236 $1,043,082
Net Operating Income (Loss)............................ 53,156 (210,647) (3,959,638) (557,877)
Other Income (Expense)................................. 53,583 14,026 36,442 41,028
Net Income (Loss)...................................... 144,751 (196,621) (3,961,408) (517,139)
Net Income (Loss) per Share
Primary(2)........................................... .05 (.12) (1.15) (.20)
Fully Diluted(2)..................................... .04 (.12) (1.15) (.20)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
DECEMBER 31, AS
1996 ACTUAL ADJUSTED(3)
------------ ---------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Current Assets............................................ $4,006,474 $1,673,190 $7,773,190
Current Liabilities....................................... 669,227 1,281,947 1,281,947
Working Capital........................................... 3,337,247 391,243 6,491,243
Total Assets.............................................. 4,195,281 1,840,182 7,940,182
Total Long Term Liabilities............................... -0- -0- -0-
Stockholders' Equity...................................... 3,526,054 558,235 6,658,235
</TABLE>
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(1) Fiscal 1995 reflects operations from inception in April 1995 through
December 31, 1995.
(2) See Note 1 of Notes to Financial Statements concerning the computation of
"primary" and "fully diluted" earnings per share.
(3) Adjusted to give effect to the receipt of the net proceeds of the offering.
Assumes that the Underwriter's over-allotment option is not exercised.
5
<PAGE>
RISK FACTORS
Before deciding whether to purchase Shares in this offering, prospective
investors should carefully consider all of the information contained in this
Prospectus and, in particular, the factors discussed below. Information
contained in this Prospectus contains "forward-looking statements," including,
without limitation, statements containing the words "believes," "expects,"
"intends," "seeks to," "may," "will," "should," "anticipates" and similar words,
or the negative thereof, other variations thereon, comparable terminology or by
discussions of strategy. There is no assurance that future results or events
which are covered by forward-looking statements will be achieved. The following
paragraphs of this section of the Prospectus identify factors with respect to
certain forward-looking statements that could cause actual results to vary
materially from future results to which such forward-looking statements refer.
Other factors which are not discussed in this section also could cause actual
results to vary materially from future results referred to in forward-looking
statements.
Accumulated Deficit; Recent Losses; Limited Operating History. The Company
has a limited operating history and has accumulated losses since its inception,
with an accumulated deficit of $4,241,830 at September 30, 1997, primarily
attributable to operations in the nine month period then ended in which the
Company incurred a net loss of $3,961,408. The Company anticipates a loss in the
fourth quarter of 1997, primarily as a result of continuing marketing and
advertising costs, development costs and general and administrative expenses.
The Company does not have a history of operations from which investors could
draw reasonable conclusions as to its future performance, and there can be no
assurance that the Company will operate profitably in the future. The
implementation of the Company's current business plan, including the
introduction of new products, is materially dependent upon the receipt of
additional capital from this offering. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Substantially all of the Company's revenues to date have resulted from sale
of its original product, ENDUROX(Registered), which was introduced in May 1996,
and extensions of the ENDUROX product line which were introduced in March 1997.
The Company intends to utilize a substantial portion of proceeds from this
offering to complete the development and to commence marketing new products,
will continue to incur significant marketing and selling costs in connection
with its current products and with new products as they are introduced, and
remains subject to all of the risks inherent in the establishment of a new
business enterprise. The likelihood that the Company will be successful should
be considered in light of the problems, expenses, difficulties, complications
and delays frequently encountered in establishing a new business in a
competitive environment such as the environment in which the Company operates.
See "Business of the Company."
Dependence on New Products. The Company believes that its ability to grow
and succeed in the future will be significantly dependent upon its ability to
introduce new and innovative products and market those products successfully.
Although the Company intends to introduce several new products over the next 18
months, there can be no assurance that these products will be launched on
schedule, or at all, that the Company's efforts to develop additional products
will be successful, or that any of the Company's new products will be
commercially successful, either initially or over time. See "Business of the
Company -- Proposed Products."
Dependence on Significant Customers. The Company's largest customer,
General Nutrition Centers, accounted for approximately 45% of net sales in
fiscal 1996. In the nine month period ended September 30, 1997, GNC accounted
for 26%, and WalMart and KMart accounted for 13% and 10%, respectively, of net
sales. The loss of any of these customers, or a significant reduction in
purchase volume by or financial difficulty of such customers, for any reason,
could have a material adverse effect on the Company's results of operations or
financial condition. The Company has no agreements with or commitments from
these customers with respect to future purchases, and there can be no assurance
that any of the these companies will continue as major customers of the Company.
See "Business of the Company -- Marketing and Distribution."
Dependence Upon Key Personnel. Prior to this offering, the Company has
relied extensively on the services of its founders and principal shareholders.
These individuals will continue to play key roles in the Company's management,
and the loss of services of one or more of them could, and in the
6
<PAGE>
case of Robert Portman, the Company's President, would, materially and adversely
affect the Company and its prospects. See "Management -- Executive Officers and
Directors." The Company has obtained a $2,000,000 "key man" life insurance
policy covering Dr. Portman, but it is unlikely that the proceeds from such
policy would be adequate to fully compensate the Company for the loss of Dr.
Portman's services. The Company has no such insurance on any other person.
The Company has a three year employment agreement with Dr. Portman, which
contains terms limiting his ability to engage in activities competitive with the
Company following the termination of his employment. Dr. Portman, together with
other founders and principal shareholders, is a party to a Shareholders
Agreement which contains restrictions against most activities that could be
considered competitive with the Company so long as that agreement is in force.
See "Management -- Compensation of Executive Officers."
Competition. The natural dietary supplement industry is highly
competitive. The availability of numerous contract manufacturers and a ready
availability of natural ingredients, coupled with a relatively relaxed
regulatory environment, result in a fairly low barrier to begin business.
Numerous companies compete with the Company in the development, manufacture and
marketing of supplements as their sole or principal business, and the Company
estimates that there are approximately 20 large national companies that
manufacture or distribute herbal products and medicinals. Generally, these
companies are well funded and sophisticated in their marketing approaches.
Examples are Weider Nutrition International, Nature's Way, Nature's Herbs and
Solaray, Inc. In addition, there are a number of large, multilevel marketers
such as Shaklee, Herbalife and Amway that sell encapsulated herbs, diet
products, herbal supplement formulas and vitamin supplements. See "Business of
the Company -- Competition."
No Manufacturing Capabilities. The Company has no manufacturing
facilities, and does not presently intend to manufacture any of its products.
Thus, the Company is dependent upon contractual relationships with manufacturers
to fulfill its product needs. The Company's ability to market and sell its
products requires that such products be manufactured in commercial quantities,
in compliance with applicable federal and state regulatory requirements, and at
an acceptable cost to enable the Company to arrive at a price structure which
will not inhibit sales while accommodating distribution costs and third party
sales compensation. Competitors who do their own manufacturing may obtain an
advantage over the Company with respect to pricing, availability of product and
in other areas through their control of the manufacturing process. See "Business
of the Company -- Manufacturing."
In addition to competitors whose primary business is in the natural dietary
supplement industry, large pharmaceutical companies and packaged food and
beverage companies to which the dietary supplement marketplace represents a
relatively small part of their total marketing effort and sales, participate in
the industry on a limited basis. Increased competition from such companies could
have a material adverse effect on the Company as they have financial and other
resources available to them, and possess manufacturing, distribution and
marketing capabilities, which are far greater than those of the Company. See
"Business of the Company -- Competition."
Broad Discretion of Management in Application of Proceeds. The anticipated
uses of the net proceeds of this offering have been allocated only generally,
and a significant portion (approximately 25%) of the net proceeds will be added
to working capital. The Company reserves the right to reallocate the proceeds
among the categories specified under the caption "Use of Proceeds" as well as
using the proceeds for purposes not specified. Accordingly, the Company's
management will have broad discretion in the application of the net proceeds of
this offering. See "Use of Proceeds."
Absence of Conclusive Clinical Studies. Although the ingredients in the
Company's products are vitamins, minerals, herbs and other substances for which
there is a long history of human consumption, and the Company believes all of
its products to be safe when taken as directed by the Company, no assurance can
be given that the Company's products, even when used as directed, will have the
effects intended or will not have adverse effects associated with long term
consumption in the combinations and dosages provided in the products. Although
the Company tests the ingredients, formulations and production of its products
to verify safety and to establish efficacy to support its marketing claims, they
have not sponsored clinical studies on the long-term effect of human
consumption. See "-- Effect of Unfavorable Publicity" and "-- Product Liability"
below.
7
<PAGE>
No Long-Term Contracts for Supply of Raw Materials. The Company obtains
from other sources all of its raw materials for the manufacture of its products.
The Company generally does not have contracts with any entities or persons
committing such suppliers to provide the materials required for the production
of its products. There can be no assurance that suppliers will provide the raw
materials needed by the Company in the quantities requested or at a price the
Company is willing to pay. Because the Company does not control the actual
production of these raw materials, it is also subject to delays caused by
interruption in production of materials based on conditions not wholly within
its control. Such conditions include job actions or strikes by employees of
suppliers, weather, crop conditions, transportation interruptions and natural
disasters or other catastrophic events. The inability of the Company to obtain
adequate supplies of raw materials for its products at favorable prices, or at
all, as a result of any of the foregoing factors or otherwise could have a
material adverse effect on the Company. See "Business -- Manufacturing."
Effect of Unfavorable Publicity. The Company believes the dietary
supplement market is affected by national media attention regarding the
consumption of such products. There can be no assurance that future scientific
research or publicity will not be unfavorable to the dietary supplement market
generally, or to any particular product, or inconsistent with earlier favorable
research or publicity. Because of the Company's dependence upon consumer
perceptions, adverse publicity associated with illness or other adverse effects
resulting from the consumption of products distributed by other companies which
are similar to the Company's products, could have a material adverse impact on
the Company, even if the publicity did not relate to the Company's products.
Adverse publicity directly concerning the Company's products could be expected
to have an immediate negative effect on the market for that product. See
"Business of the Company -- Marketing and Distribution."
Dependence on Chinese Relationships and Supplies. The Company has entered
into a number of licensing and cooperation agreements with institutions and
individuals located in the People's Republic of China ("China") in order to gain
access to products, research and manufacturing "know how" relating to herbs and
other natural ingredients used in "traditional" Chinese medicine. The Company's
ENDUROX line of products is based upon a Chinese herb, ciwujia, as the primary
active ingredient. There can be no assurance that circumstances beyond the
ability of the Company to control, such as political or economic conditions in
China, will not interfere with its supplies of this herb. While China has
encouraged commercial relationships with United States and other Western
businesses in recent years and, to a limited extent, has implemented a "free
enterprise" or "market" economy domestically, it remains ruled by a communist
dictatorship which could, at any time, for internal or international political
or economic reasons, curtail all such business and economic relationships. In
addition, the Company has not received an opinion of either U.S. or Chinese
counsel as to the enforceability of its licensing and cooperation agreements in
China or the United States, or, to the extent enforceable, the term during which
agreements, none of which has a fixed termination date, may be enforced. See
"Business of the Company -- The China Relationship."
Intellectual Property Protection. The Company has received a United States
patent covering the use of ciwujia, the principal active herb in ENDUROX, to
improve physical performance and stamina during exercise, and for enhancing
recovery after exercise is completed. The Company has applied for foreign
patents on ciwujia in Canada, Mexico, all Western European countries and in 51
other principal European, South American and Asian countries. To the extent the
Company does not have patents on its products, there can be no assurance that
another company will not replicate one or more of the Company's products, nor is
there any assurance that patents which are obtained, including the ciwujia
patent, will provide meaningful protection or significant competitive advantages
over competing products. For example, the Company's use patent on ciwujia would
not prevent sale of a product using this herb with a claimed benefit or use that
was not covered by the Company's patent.
The Company has federal trademark registrations for ENDUROX(Registered) and
has trademark applications pending to register ARNICYN(Trademark),
PROSOL(Trademark), ENDUROX(Registered) ProHeart(Trademark) and
ENDUROX(Registered) EXCEL(Trademark) pending with the United States Patent and
Trademark Office. See "BUSINESS -- Proposed Products." The Company also has
filed the ENDUROX trademark in all Western European countries, Canada, Mexico
and Japan. The Company's policy is to pursue registrations for all of the
trademarks associated with its key products, and to protect its legal rights
concerning the use of its trademarks. The Company relies on common law trademark
rights to protect its unregistered trademarks. Common law
8
<PAGE>
trademark rights do not provide the Company with the same level of protection as
afforded by a United States federal registration of a trademark. For example,
unlike a registered trademark, common law trademark rights are limited to the
geographic area in which the trademark is actually used.
There can be no assurance that any patent and trademark protection that the
Company obtains will be effective to protect the Company's products from
duplication by other manufacturers. In addition, while the Company believes that
its products do not and will not infringe upon the patents or violate the
proprietary rights of others, it is possible that such infringement or violation
has occurred or may occur. In the event that products sold by the Company are
determined to infringe upon the patents or proprietary rights of others, the
Company could be required to modify its products or obtain a license for the
manufacture and/or sale of such products, or could be prohibited from selling
such products. There can be no assurance that, in such an event, the Company
would be able to do so in a timely manner, upon acceptable terms and conditions,
or at all, and the failure to do any of the foregoing could have a material
adverse effect upon the Company. Nor can there be any assurance that the Company
will be able to afford the expense of any litigation which may be necessary to
enforce its intellectual property rights, or to defend an action charging the
Company with patent infringement or the violation of the intellectual property
rights of others. Further, if the Company's products or proposed products were
found to infringe upon the intellectual property rights of others, the Company
could, under certain circumstances, become liable for damages, which could also
have a material adverse effect on the Company. See "Business of the Company --
Patents and Trademarks."
Control by Management and Principal Stockholders. Following the completion
of this offering, the Company's executive officers and directors will own, in
the aggregate, approximately 31.4% of the outstanding Common Stock and
immediately exercisable options to acquire an additional 417,500 shares of the
Company's Common Stock which, if exercised in full, would give management an
additional 6.3% of the outstanding Common Stock. Accordingly, the Company's
existing management can be expected to be able to significantly influence or
control the election of the Board of Directors and the business affairs of the
Company following the offering. See "Principal Stockholders."
Possible Conflict of Interest with Underwriter. Robert Portman, and David
Portman, executive officers and directors of the Company, are shareholders of
First Montauk Financial Corp., the parent entity of the Underwriter. David
Portman owns 50,000 shares of common stock of First Montauk Financial Corp. and
options to purchase 60,000 shares. Robert Portman owns 125,386 shares of common
stock of First Montauk Financial Corp. First Montauk Financial Corp. is a
publicly-held corporation whose shares are traded in the over-the-counter
("OTC") market. David Portman has served as a director of First Montauk
Financial Corp. since 1993. Neither Robert Portman nor David Portman are
officers or directors of the Underwriter. Although David Portman does not
participate in any matters brought before the Board of Directors of First
Montauk Financial Corp. regarding the Company, as a result of the foregoing,
there may exist conflicts of interest between the Company and the Underwriter.
Investors should consider these potential conflicts of interests when making
their investment decision. See "Management" and "Underwriting."
No Prior Public Market for Common Stock; Determination of Offering
Price. Prior to this offering, there has been no market for the Common Stock of
the Company. While the Company's Common Stock has been approved for listing on
the Nasdaq SmallCap Market, there can be no assurance that an active trading
market for the Common Stock will be established, or if so established,
sustained. The initial offering price for the Shares has been arbitrarily
determined through negotiation between the Company and the Underwriter based on
such factors as the business potential and earnings prospects of the Company and
prevailing market conditions. Such price may not be indicative of the market
price of the Shares after this offering has been consummated. See
"Underwriting."
Substantial and Immediate Dilution. Purchasers of the Shares offered
hereby will incur an immediate and substantial dilution in the net tangible book
value of the Shares of approximately $4.75 per share (approximately 79.2%) from
the public offering price of $6.00. Certain existing shareholders of the
Company, including officers and directors, received their shares at nominal cost
or costs below the offering price of the Shares. The average price paid by
existing shareholders of the Company, assuming the conversion of outstanding
shares of 10% Covertible Preferred Stock, is approximately
9
<PAGE>
$1.54 per share. Thus, purchasers in this offering will bear a substantially
greater risk of loss than existing shareholders. See "Dilution."
Possible Delisting; Penny Stock Regulation. It is a condition of the
offering that the Company's Common Stock be listed on the Nasdaq SmallCap
Market. Under Nasdaq rules, in order to maintain a listing on the Nasdaq
SmallCap Market, a company must have, among other things, $2,000,000 in net
tangible assets, or either (i) a market capitalization of $35,000,000 or more,
or (ii) $500,000 net income in its last fiscal year or two of its last three
fiscal years. In addition, the listed security must have a minimum bid price of
$1.00 per share. Further, Nasdaq reserves the right to withdraw or terminate a
listing on the Nasdaq SmallCap Market at any time and for any reason in its
discretion. If the Company were unable to maintain a listing on the Nasdaq
SmallCap Market, quotations, if any, for "bid" and "asked" prices of the Common
Stock would be in the over-the-counter market, either in the "pink sheets"
published by the National Quotation Bureau, Inc. or on the National Association
of Securities Dealers OTC Electronic Bulletin Board. In such event, an investor
could find it more difficult to dispose of or to obtain accurate quotations of
prices for the Common Stock.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Securities and Exchange Commission
regulations generally define a penny stock to be an equity security that has a
price of less than $5.00 per share, subject to certain exceptions. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith. In addition, if the
Company's securities do not meet an exception to the penny stock regulations,
trading in the Company's securities would be covered by Rule 15g-9 promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act") for non-Nasdaq
and non-national securities exchange listed securities. Under such rule,
broker/dealers who recommend such securities to persons other than established
customers and accredited investors (generally, individuals with net worth in
excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together
with their spouses) must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities whose market price is at least $5.00 per share are
exempt from this rule.
If the Company's securities become subject to the regulations applicable to
penny stocks, the market liquidity for the Shares could be adversely affected
because the regulations on penny stocks could limit the ability of
broker/dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the secondary
market. See "Underwriting" and "Description of Securities."
Government Regulation. The manufacturing, packaging, labeling,
advertising, distribution and sale of the Company's products are subject to
regulation by one or more governmental agencies. Failure by the Company to
comply with governmental regulations applicable to its business could result in
limitations or prohibitions on the sale of certain products, fines or other
sanctions.
The Company believes that the most significant governmental regulations
applicable to its business are those promulgated by the Food and Drug
Administration (the "FDA") under the Federal Food, Drug and Cosmetic Act (the
"FFDC Act"), and the Federal Trade Commission under the Federal Trade Commission
Act, which prohibits unfair or deceptive trade practices, including false or
misleading advertising. The Company's products and activities also are subject
to regulation by the Consumer Product Safety Commission, the United States
Department of Agriculture, the Environmental Protection Agency, and by various
agencies of the states, localities and foreign countries in which the Company's
products are sold. See "Business of the Company -- Government Regulation."
With respect to its application to dietary supplements, the FFDC Act has
been amended several times, most recently by the Nutrition Labeling and
Education Act of 1990 and the Dietary Supplement Health and Education Act of
1994 (the "DSHEA"). The Company's products are generally classified and
regulated as dietary supplements under the FFDC Act, as amended, and are
therefore not subject to premarket approval by the FDA. However, these products
are subject to extensive labeling regulation by the FDA and can be removed from
the market if shown to be unsafe. Moreover, if the FDA
10
<PAGE>
determines, on the basis of labeling or advertising claims by the Company, that
the "intended use" of any of the Company's products is for the diagnosis, cure,
mitigation, treatment or prevention of disease, it can regulate those products
as drugs and require premarket clearance for safety and effectiveness, and if
the FDA determines that the requirements of DSHEA for making claims that a
dietary supplement product affects the "structure or function" of the body have
not been met, such non-complying claims could result in the regulation of the
product as a drug. See "Business of the Company -- Regulation."
Governmental regulations in foreign countries in which the Company wishes
to distribute its products may prevent or delay entry into the market, or
require the reformulation, of the Company's products. At the present time, the
only foreign country in which the Company's products are sold is Canada.
Compliance with Canadian governmental regulations is controlled by the Company's
distributor for Canada, an independent contractor over whom the Company has
limited control.
In the future, the Company may be subject to additional laws or regulations
administered by the FDA or other federal, state or foreign regulatory
authorities, the repeal of laws or regulations which the Company considers
favorable, such as the DSHEA, or more stringent interpretations of current laws
or regulations. New laws or regulations could, for example, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not able to be reformulated, imposition of
additional recordkeeping requirements, expanded documentation of the properties
of certain products, expanded or different labeling and scientific
substantiation. Any or all of such requirements could have a material adverse
effect on the Company's results of operations and financial condition. The
Company cannot predict the nature of such future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business. See "Business of the Company -- Regulation."
Product Liability. The Company, like other retailers, distributors and
manufacturers of products that are designed to be ingested, faces an inherent
risk of exposure to product liability claims in the event that the use of its
products results in injury. With respect to product liability claims, the
Company has coverage of $5,000,000 per occurrence and in the aggregate, subject
to a self-insurance retention or "deductible" of $2,500. However, there can be
no assurance, however, that such insurance will continue to be available at a
reasonable cost, or, if available, will be adequate to cover liabilities which
the Company could incur. The Company generally does not obtain contractual
indemnification from parties supplying raw materials or marketing its products
and, in any event, any such indemnification is limited by its terms and, as a
practical matter, to the creditworthiness of the indemnifying party. In the
event that the Company does not have adequate insurance or contractual
indemnification, product liabilities relating to defective products could have a
material adverse effect on the Company. See "Business of the Company."
Factors Inhibiting Takeover; Authorized Prefered Stock. Certain provisions
of the Company's Amended and Restated Certificate of Incorporation and Bylaws
may be deemed to have anti-takeover effects and may delay, defer or prevent a
takeover attempt that a stockholder might consider in the Company's or the
stockholder's best interest. The Company's Amended and Restated Certificate of
Incorporation authorizes the Board of Directors to determine the rights,
preferences, privileges and restrictions of unissued series of preferred stock
and the designation of any such series, without any vote or action by the
Company's stockholders. Thus, the Board of Directors can authorize and issue
shares of preferred stock with voting or conversion rights that could adversely
affect the voting or other rights of holders of the Company's Common Stock. In
addition, the issuance of preferred stock may have the effect of delaying,
deferring or preventing a change of control of the Company, since the terms of
any preferred stock which might be issued could contain terms which could
contain special voting rights or increase the costs of acquiring the Company.
See "Description of Securities -- 10% Convertible Preferred Stock."
The Company is subject to Section 203 of the Delaware General Corporation
Law which prevents transactions between the Company and an "interested
stockholder" unless certain conditions are satisfied. The applicability of
Section 203 may have the effect of delaying, deferring or preventing "changes in
control" of the Company, even if such event would be beneficial to the then
existing
11
<PAGE>
shareholders. See "Description of Capital Stock" for additional information
concerning Section 203 and other provisions of the Delaware General Corporation
Law.
Future Sales of Common Stock. Upon completion of this offering, there will
be 4,185,672 shares of Common Stock outstanding, assuming the over-allotment
option is not exercised, and 143,896 shares of 10% Convertible Preferred Stock,
each of which presently is convertible into 2.5 shares of Common Stock or a
total of 359,740 shares ("Conversion Shares"). See "Description of Securities --
10% Convertible Preferred Stock." Shares sold in this offering will be tradeable
without restriction by persons other than "affiliates" of the Company. The
shares of Common Stock presently outstanding are, and Conversion Shares if
issued would be, "restricted securities" as that term is defined in Rule 144
promulgated under the Securities Act of 1933 (the "Securities Act"). Such
securities are eligible for sale without registration under Rule 144 upon
satisfaction of certain conditions, including a minimum "holding period" of one
year from the time the securities are purchased from the Company or an affiliate
of the Company. All of the Company's outstanding Common Stock, and Conversion
Shares when issued, will be saleable under Rule 144 within ninety days following
completion of this offering, subject to the "lock up" agreements described in
the following paragraph in the case of shares owned by executive officers,
directors and certain other shareholders.
All of the Company's directors and executive officers, and certain of its
shareholders have entered into a "lock up" agreement with the Underwriter
pursuant to which they have agreed that, for a period of one year from the date
of this Prospectus, they will not offer, sell, contract to sell, pledge or
otherwise dispose of shares of the Company's Common Stock without the prior
written consent of the Underwriter. Holders of 2,440,222 shares of Common Stock
have entered into such agreements. Holders of 353,750 shares of Common Stock and
46,223 shares of 10% Convertible Preferred Stock have entered into similar
agreements in which the "lock up" period is six months. In addition, the Company
has agreed not to issue additional securities without the prior consent of the
Underwriter for a period of one year from the initial sale of Shares, except for
additional shares of 10% Convertible Preferred Stock as dividends to holders of
outstanding shares of 10% Convertible Preferred Stock, and additional shares of
Common Stock upon the exercise of outstanding options and warrants and the
exercise of the Underwriter's Overallotment Option or Underwriter's Warrants.
In addition to the Underwriter's "lock up" agreements, pursuant to the
request of certain state securities authorities officers, directors and one
other shareholder of the Company have entered into agreements with the Company
which further restrict their ability to sell shares of the Company's Common
Stock which they own. These agreements preclude the sale of shares subject to
the agreements (a total of 1,580,765 shares, hereinafter referred to as
"escrowed shares") by such shareholders for a period of one year from the date
of this Prospectus, and limit sales of all but 76,001 of the escrowed shares in
the second year following the date of this Prospectus to 2 1/2% of the total
number of escrowed shares owned by such shareholders every three months. The
shareholders who have entered into these agreements and the number of escrowed
shares subject to their respective agreements are as follows: Robert Portman and
Jennifer Portman, individually and as trustee for the Portman's minor children
- -- 887,198 shares); Jonathan D. Rahn -- 228,098 shares; David Portman -- 163,431
shares; T. Colin Campbell and Karen Campbell -- 199,893 shares; and Jemeson
Investment Co. -- 26,144 shares.
No prediction can be made as to the effect, if any, that future sales, or
the availability of Common Stock for future sales, will have on the market price
of the Common Stock from time to time. Sales of substantial amounts of Common
Stock by the Company or by stockholders who hold restricted securities, or the
perception that such sales may occur, could adversely affect market prices for
the Common Stock. For additional information on possible future sales of
restricted securities in accordance with Rule 144, see "Shares Available for
Future Sale."
Underwriter's Influence on the Market. A significant number of the Shares
may be sold to customers of the Underwriter. Such customers subsequently may
engage in transactions for the sale or purchase of such securities through or
with the Underwriter. Although it has no obligation to do so, the Underwriter
intends to make a market in the Common Stock and may otherwise effect
transactions in such securities. If it participates in such market, the
Underwriter may exert a dominating influence on the market, if one develops, for
the Common Stock. Such market-making activity, if commenced, may
12
<PAGE>
be discontinued at any time. Moreover, if the Underwriter exercises the
Underwriter's Warrants, it may be required under Regulation M promulgated under
the Exchange Act to temporarily suspend its market-making activities. The price
and liquidity of the Common Stock may be significantly affected by the degree,
if any, of the Underwriter's participation in such market. See "Underwriting."
Limited Experience of Underwriter. Although the Underwriter was formed and
first registered as a broker-dealer in 1983, current management has operated the
Underwriter only since 1986. The Underwriter has, to date, manageed only one
public offering prior to this offering but has participated in more than 200
public offerings as a selling group member. Prospective purchasers of the Shares
offered hereby should consider this limited experience in evaluating the
securities offered hereby. See "Underwriting."
Future Issuances of Stock by the Company. Following this offering, the
Company will have 10,000,000 shares of Common Stock authorized, of which
4,185,672 shares will be issued and outstanding, assuming that the
over-allotment option has not been exercised, and an additional 1,200,700 shares
of Common Stock will be reserved for issuance upon the exercise of outstanding
options and warrants, and upon conversion of outstanding shares of 10%
Convertible Preferred Stock. The Company also will have 650,000 shares of
preferred stock, $.01 par value per share (the "Preferred Stock"), authorized
but unissued and undesignated. The balance of the Company's authorized shares of
Common Stock and 650,000 shares of the Preferred Stock are not reserved for any
purpose and may be issued without any action or approval by the Company's
stockholders. See "Description of Securities."
Shares Issuable Pursuant to Options. In addition to the Company's
outstanding warrants, the Company has granted options to purchase 1,420,200
shares of the Company's Common Stock. See "Management -- Stock Option Plan."
During the terms of the options, the holders thereof are given the opportunity
to profit from a rise in the market price of the Common Stock without assuming
the risks of ownership, with a resulting dilution in the interest of other
security holders. Also, the exercise thereof may dilute the net book value per
share of the Common Stock. The existence of the options may adversely affect the
terms on which the Company can obtain additional equity financing. Moreover, the
holders are likely to exercise their options at times when the Company would
otherwise be able to obtain capital on terms more favorable than could be
obtained through the exercise of the options. In order to gain regulatory
clearances for this offering in certain states, the Company has agreed that it
will not issue additional stock options or warrants for a period of one year
following the date of this Prospectus, apart from the warrants to be sold to the
Underwriter in connection with this offering. See "Underwriting."
Limitations on Liability of Directors and Officers. The Company's
Certificate of Incorporation limits the liability of directors of the Company
for monetary damages for breaches of directors' fiduciary duty of care. This
provision may reduce the likelihood of derivative litigation against directors
and may discourage or deter shareholders or management from suing directors for
breaches of their duty of care, even though such an action, if successful, might
otherwise benefit the Company and its shareholders. In addition, the Company's
Bylaws provide for the indemnification of directors and officers in connection
with civil, criminal, administrative or investigative proceedings when acting in
their capacities as agents for the Company. See "Disclosure of Commission
Position on Indemnification for Securities Act Liabilities."
Non-payment of Dividends. The Company has not paid dividends on Common
Stock in the past, and has no intention of paying dividends on Common Stock in
the foreseeable future. The Company has paid dividends on its 10% Convertible
Preferred Stock "in kind", i.e., in additional shares of 10% Convertible
Preferred Stock, with cash dividends paid only in lieu of fractional shares. See
"Description of Capital Stock" and "Use of Proceeds."
13
<PAGE>
DILUTION
The stockholders' equity of the Company at September 30, 1997, was
$558,235. Giving effect to the sale of the Shares and payment of offering
expenses, but to no other post-September 30, 1997, transactions or operations,
and assuming no exercise of the over-allotment option, the Company's
stockholders' equity immediately following the offering would be approximately
$6,658,235. The net tangible book value of Common Stock would be approximately
$1.25 per share, or approximately 79.2% less than the price paid by purchasers
of Shares in this offering. The difference between the net tangible book value
of the Common Stock following this offering and the initial offering price of
the Shares represents dilution in the tangible book value of the investment of
purchasers in the offering. The Company's present holders of Common Stock would
benefit from an increase in the present tangible book value of their investment,
from a negative $.30 per share to $1.25.
The following table illustrates this per share dilution:
Assumed initial public offering price per Share........... $6.00
Tangible book value per share of Common Stock before
this offering........................................ $(0.30)
Increase in net tangible book value per share
attributable to the sale of the Shares offered
hereby............................................... $ 1.55
------
Net tangible book value per share of Common Stock after
this offering.......................................... $1.25
-----
Dilution per share to new stockholders.................... $4.75
=====
The following table sets forth the number of shares of Common Stock
purchased from the Company and the total consideration and the average price
paid by (a) present holders of Common Stock or their predecessors, and (b)
purchasers of Shares in this offering.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE TOTAL PERCENTAGE OF AVERAGE
COMMON OF CLASS CONSIDERATION TOTAL PRICE
STOCK OUTSTANDING PAID CONSIDERATION PER SHARE
--------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Present holders................. 2,985,672 71.3% $ 3,946,519 35.4% $1.32
Purchasers in this offering
(1)........................... 1,200,000 28.7% $ 7,200,000 64.6% $6.00
--------- ---- ----------- ---- -----
Totals..................... 4,185,672 100% $11,146,519 100% $2.66
========= ==== =========== ==== =====
</TABLE>
- ------------------
(1) Assumes no exercise of the over-allotment option.
The Company also has outstanding 143,896 shares of 10% Convertible
Preferred Stock for which the holders of such shares or their predecessors paid
$1,200,000. Each share of the 10% Convertible Preferred Stock outstanding
presently is convertible into 2.5 shares of Common Stock, or 359,740 shares in
total. Conversion of outstanding 10% Convertible Preferred Stock would result in
an imputed purchase price of $3.34 per share of Common Stock issued in
conversion. The net tangible book value of the 10% Convertible Preferred Stock
at September 30, 1997, was approximately $3.88 per share. Giving retroactive
effect to the receipt of the proceeds from this offering, the net tangible book
value of shares of the 10% Convertible Preferred Stock would be $10.00 per
share. See "Description of Capital Stock -- 10% Convertible Preferred Stock."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this offering, after deducting sales
commissions (10% of gross proceeds) and the non-accountable expense allowance
(3% of gross proceeds) payable to the Underwriter, and other offering expenses
such as legal and accounting expenses, registration and filing fees, printing
and other miscellaneous offering expenses, are estimated to be $6,100,000
($7,039,600 if the Underwriter's over-allotment option is exercised). The
Company intends to use the net proceeds of the offering as follows:
PERCENTAGES
OF TOTAL
DESCRIPTION AMOUNT PROCEEDS
- ----------- ---------- -----------
Marketing and advertising(1)......................... $2,640,000 43.3%
Inventory and manufacturing costs(2)................. 1,015,000 16.6%
Research and development............................. 610,000 10%
Added personnel costs(3)............................. 305,000 5%
Working capital(4)................................... 1,530,000 25.1%
---------- ----
Totals....................................... $6,100,000 100%
========== ====
- ------------------
(1) Both in connection with the launch of new products (approximately 80%) and
in support of existing products.
(2) New product inventory and costs associated with the start up of manufacture
for new products.
(3) The Company expects to increase its staff following this offering by hiring
five individuals, principally for sales and marketing purposes.
(4) Funds allocated for working capital may be used for payments relating to the
Company's reserve for product replacement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Section
(b)(i)."
The above amounts represent management's present estimates based upon
current operating plans and certain strategic assumptions, including those
relating to the Company's future revenue levels and expenditures, and industry
and general economic and other conditions. Although the Company does not
contemplate any material changes in the proposed use of proceeds, since the
proposed uses of proceeds are based on assumptions concerning future events and
conditions, many of which are not in the Company's control, the amounts shown
may be adjusted among the uses indicated above or, if business conditions make
it necessary or advisable, in management's opinion, to do so, certain portions
of the net proceeds may be used for other corporate purposes. By way of
illustration only, if the Company's revenues in future periods were less than
anticipated, management might increase its allocation of funds to marketing and
advertising in an effort to increase sales. Alternatively, management might
decrease the allocation of funds for that purpose if, in the circumstances,
management believed that reduced sales levels would not support previously
budgeted marketing and advertising expenses. In the latter case, funds
previously allocated for marketing and advertising might be reallocated to
research and development to pursue the identification and development of new
products, or to accelerate ongoing research and development activities. By way
of further illustration, if manufacturing and inventory costs associated with
new products were higher than anticipated, management might be required to scale
back operations in the areas affected, or to reallocate funds to manufacturing
and inventory which previously had been allocated to other uses.
The Company anticipates that it will commence the application of the
proceeds upon completion of this offering and that such proceeds will be applied
over the next twelve months. The Company believes that the net proceeds of this
offering will be sufficient to satisfy its requirements to implement its
business plans over such period. Pending such use, the net proceeds of this
offering will be invested in short term, interest bearing deposits or in United
States government securities. The Company reserves the right to enter into short
term borrowing in the future as business conditions or the Company's needs may
require.
To the extent the over-allotment option is exercised, any proceeds from
such exercise will be added to working capital.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to give effect to the issuance and sale of
1,200,000 Shares, the receipt of net proceeds therefrom, and the application of
net proceeds as set forth under the caption "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------
PRO FORMA
ACTUAL(1) AS ADJUSTED(1)
----------- --------------
(UNAUDITED)
<S> <C> <C>
Current liabilities............................... $1,281,947 $ 1,281,947
---------- -----------
Long term debt and other liabilities (excluding
current maturities)............................. $ -0- $ -0-
---------- -----------
Common Stock, authorized 10,000,000 shares, par
value $.0025 per share, 2,985,672 shares
outstanding (4,185,672 shares outstanding as
adjusted)....................................... $ 7,464(2) $ 10,464(2)
---------- -----------
10% Convertible Preferred Stock, authorized
250,000 shares, par value $.01 per share,
143,896 shares outstanding...................... $ 1,439 $ 1,439
---------- -----------
Additional paid in capital........................ $4,791,162(2) $10,888,162(2)(3)
---------- -----------
Accumulated deficit............................... $4,241,830(4) $ 4,241,830(4)
---------- -----------
Total Stockholder Equity.......................... $ 558,235 $ 6,658,235
---------- -----------
</TABLE>
- ------------------
(1) Does not include Common Stock reserved for issuance upon exercise of
outstanding options and warrants (1,200,200 shares), the over-allotment
option (180,000 shares) or the Underwriter's Warrants (120,000 shares), or
upon conversion of outstanding shares of 10% Convertible Preferred Stock
(359,470 shares based upon the present conversion ratio).
(2) Giving effect to the cancellation, effective as of the date of this
Prospectus, of 200,000 shares issued to the Company's President in
connection with the organization of the Company.
(3) After deduction of the Underwriter's commission (10%), unaccountable expense
allowance (3%), and other offering expenses (primarily legal and accounting
fees, and printing costs) estimated at $164,000.
(4) Includes dividends paid on 10% Convertible Preferred Stock ($102,765)
through September 30, 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
(a) Introduction
The Company was incorporated in April 1995 to develop and market dietary
supplements that improve and promote health and well being and can be offered
for sale without prior approval by The Food and Drug Administration in
compliance with current regulatory guidelines. The Company's first product,
ENDUROX(Registered), was introduced in March 1996, and commercial sales began in
May 1996. Prior to that time, the Company was engaged in organizational and
financing activities, product research and development, and preliminary
marketing and distribution activities. In March 1997, the Company extended the
ENDUROX line of products with ENDUROX ProHeart(Trademark) and ENDUROX
EXCEL(Trademark). The Company has identified and developed a number of new
products which are scheduled to be introduced beginning in the fourth quarter of
1997.
(b) Results of Operations
(i) Nine Months Ended September 30, 1997 versus September 30, 1996
The Company incurred a loss of $3,961,408 or $1.15 per share for the period
ended September 30, 1997, compared to a loss of $517,139 or $.20 per share for
the period ended September 30, 1996. In most respects, operations in these
periods cannot be meaningfully compared since the Company did not begin
commercial operations until May 1996.
In the nine months ended September 30, 1997, revenues increased to
$2,834,236, from $1,043,082 for the same period in 1996. The increase is
attributable to the fact that sales of the Company's initial product, ENDUROX,
and extensions to the ENDUROX line of products introduced in March 1997, were
placed into existing channels of distribution that had only begun to be
established in the comparable 1996 period, with the first sales of product
occurring in May 1996. A portion of sales in the first nine months of 1997 can
be attributed to retailer customer purchases of opening inventory, or "pipe-line
fill", for ENDUROX EXCEL and ENDUROX ProHeart, sales of which represented
$971,883 or approximately 34.3% of total sales in the nine month period. The
balance of the Company's revenues in the nine months ended September 30, 1997
($1,862,353) resulted from sales of ENDUROX and included both sales to new
customers and reorders from existing customers. Substantially all sales of the
Company in the first nine months of 1996 were attributed to "pipe-line fill" for
the original ENDUROX product. Once the distribution pipeline for a retail
product is filled, sales result only from reorders from retailers as they
replenish inventory sold to their customers, from the expansion of the
distribution network to new channels, or from adding retailers in existing
distribution channels. As a result, sales in the initial months of a product's
distribution may not be indicative of sales levels that will be achieved in
later periods.
The loss of $517,139 incurred by the Company in the nine months ended
September 30, 1996 was attributable primarily to the fact that revenues derived
from ENDUROX in and after May 1996 were insufficient to offset the selling,
general and administrative expenses which were incurred throughout the entire
nine month period. The Company's gross profit margin in the nine months ended
September 30, 1997 (57.4%) was lower than the margin in the nine months ended
September 30, 1996 (73.1%), primarily as a result of the inclusion of $420,100
in cost of goods sold in the nine months ended September 30, 1997, representing
the cost of encapsulated ENDUROX product inventory written off in the period, a
reduction in sales of $385,595 relative to customer refunds for returned ENDUROX
capsule inventory and lower gross profit margins on ENDUROX ProHeart and ENDUROX
EXCEL than on the original ENDUROX product.
The Company's substantial loss in the nine months ended September 30, 1997
was attributable primarily to a non-recurring charge of $564,749, to a
substantial increase in selling, general and administrative expenses, from
$1,278,681 in the first nine months of 1996 to $4,923,936 in the nine months
ended September 30, 1997, and to a reduction in sales of $385,595 relative to
customer refunds for returned ENDUROX capsule inventory. The non-recurring
charge of 564,749 was incurred in connection with the replacement by the Company
of its customers' inventory of ENDUROX in encapsulated form with a caplet form
of the product, and includes a reserve of $752,250 at September
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<PAGE>
30, 1997, which management believes is adequate to cover future exchanges or
returns of retailers' capsule inventory. This replacement of inventory was
required because the active herbal ingredient in ENDUROX is highly water
absorbent, which resulted in the capsules changing color and/or size in
conditions of high heat and humidity, even though the product was encapsulated
in a gel capsule and sealed in a blister package. To rectify this problem, the
Company decided to switch to a caplet form of product, in which the ingredients
are compressed and coated, from the more porous gelatin capsule filled with
ingredients in powdered form. ENDUROX is now sold by the Company only in caplet
form. ENDUROX EXCEL and ENDUROX ProHeart were introduced in caplet form, but the
introduction of these products was delayed as a result of the capsule problem
with the original ENDUROX product, and the volume of original ENDUROX sales in
the nine months ended September 30, 1997 was substantially below the Company's
projections based upon the distribution which the Company had either obtained
for the product or which was anticipated.
The increase in selling, general and administrative expenses in the nine
months ended September 30, 1997, was attributable primarily to increased
expenditures for advertising and promotion. The promotional and advertising
expenses incurred in 1997 were committed well in advance in order to obtain mass
distribution in the case of television advertising and to obtain publication
dates in the case of print advertising, and the level of such expenditures in
the nine month period ended September 30, 1997 ($4,109,414) was in excess of
sales revenues for the period. The remaining increases in selling, general and
administration expense in the first nine months of 1997, as compared to the year
earlier period, was primarily a function of increased staff and related expense
as the Company progressed from the development stage to full operating status.
(ii) Fiscal Year Ended December 31, 1996 Versus December 31, 1995
In 1996, operating, selling, general and administrative expenses all
increased dramatically over fiscal 1995 levels, primarily as a result of
expenses incurred in development and marketing activities related to ENDUROX.
Personnel related costs increased, from $54,237 in fiscal 1995 to $310,934 in
fiscal 1996, primarily as a result of increases in staffing as the Company
progressed from a development stage company in 1995 to full commercial
operations in May 1996.
Approximately 90% of the Company's sales in 1996 were in the second half of
the year, with a majority occurring in the fourth quarter. Much of this sales
volume was the result of "pipe-line fill", i.e., as the Company expanded its
distribution network for ENDUROX, retailer purchases of opening inventory
represented a substantial portion of sales. The Company had no sales in 1995.
(c) Liquidity and Capital Resources
(i) September 30, 1997
At September 30, 1997, the Company's current assets exceeded its current
liabilities by $391,243, with a ratio of current assets to liabilities of
approximately 1.31 to 1 versus a ratio of approximately 5.99 to 1 at December
31, 1996. The change in current ratio was attributable primarily to the
Company's operating losses in the nine months ended September 30, 1997, the
decrease in accounts receivable ($1,427,580) being reflective of the decrease in
sales in August and September 1997 compared to November and December 1996,
ameliorated somewhat by the sale of Common Stock in the first quarter of 1997.
Based on current activities and assuming successful completion of the
offering, management expects the Company to be able to satisfy its cash
requirements during the remainder of fiscal 1997 and in fiscal 1998 from the
proceeds of this offering, from cash on hand and, if necessary, from a bank line
of credit, secured by accounts receivable, which enables the Company to borrow
up to 80% of the amount of current accounts receivable (defined as 90 days or
less), to a maximum of $1,000,000. At September 30, 1997, the Company had not
made any borrowings against this line of credit. The Company is in the second
year of a three year promotional contract which requires annual payments of
$300,000. Apart from this contract, the Company has no commitments for
advertising or promotion expenditures beyond the fourth quarter of 1997.
Commitments in the fourth quarter are approximately $80,000.
(ii) December 31, 1996 and 1995
At year end 1996 and 1995, the Company's cash resources were adequate for
its immediate working capital needs. A need for additional funds in 1996 in
order to begin marketing ENDUROX
18
<PAGE>
was anticipated, and this need was met through private offerings of 10%
Convertible Preferred Stock in the fourth quarter of 1995 and first quarter of
1996 ($1,200,000), and of Common Stock in the second and third quarters of 1996
($1,968,750). Total offering costs incurred in connection with these capital
transactions were approximately $463,000, exclusive of non-cash compensation
paid to the Underwriter for services relating to the transactions.
Additional capital was raised through the sale of Common Stock to
institutional investors in August 1996 ($525,000) and February 1997 ($999,999),
and to two individual investors in December 1996 ($60,000) and April 1997
($45,000). Total offering costs incurred in connection with these capital
transactions were approximately $113,000, exclusive of non-cash compensation
paid to the Underwriter for services relating to the August 1996 transaction.
(d) Impact of Inflation
The Company expects to be able to pass inflationary increases for raw
materials and other costs on to its customers through price increases, as
required, and does not expect inflation to be a significant factor in its
business. However, the Company's operating history is very limited, and this
expectation is based more on observations of its competitors' historic
operations than its own experience.
(e) Seasonality
Nutritional supplement sales tend to be somewhat seasonal, with lower sales
typically realized during the first and second fiscal quarters, and higher sales
typically realized during the third and fourth fiscal quarters. The Company
believes such fluctuations in sales are the result of greater marketing and
promotional activities toward the end of each fiscal year, customer buying
patterns, and consumer spending patterns related primarily to the consumers'
interest in achieving personal health and fitness goals after the beginning of
each new calendar year and before the summer fashion season. Some classes of
products, however, differ in seasonality. For example, January typically is the
best month for sales of products for weight loss and control. In any event, at
this stage and for the foreseeable future, the Company believes that the impact
of new product introductions and marketing expenses associated with the
introduction of new products will have a far greater impact on its operations
than industry and product seasonality.
(f) Impact of Recently Issued Financial Accounting Standards
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which provides guidance on how to measure impairment of long-lived assets,
certain intangibles and goodwill related to those assets to be held and used,
and for long-lived assets and certain identifiable intangibles to be disposed
of. The Company adopted this statement effective June 1, 1996, and expects that
it will have no material effect on its financial position and results of
operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation", which defines a fair value based
method of accounting for stock based employee compensation plans. Under SFAS No.
123, companies are encouraged, but are not required, to adopt the fair value
method for fiscal years beginning after December 15, 1995 for all employee
awards granted after the beginning of such year. Companies are permitted to
continue to account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), but, in
future years, must disclose, in a note to the financial statements, pro forma
net income and earnings per share as if SFAS No. 123 had been applied. The
Company has determined that it will not adopt the fair value method, but will
continue to account for stock-based compensation under APB No. 25 and provide
the requisite disclosure under SFAS No. 123.
In February 1997, the Financial Accountant Standards Board issued SFAS No.
128 (SFAS No. 128), "Earnings per Share", which supersedes Accounting Principles
Board Opinion No. 15 "Earnings per Share" and replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and provides guidance on other computational
changes. SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. The Company does not expect the adoption of SFAS No. 128 to have a
material impact on the financial position and results of operations of the
Company.
19
<PAGE>
BUSINESS OF THE COMPANY
GENERAL
The Company was incorporated in April 1995 to develop and market natural
products based upon herbs and other botanicals with a demonstrated ability to
improve and promote health and well being. Management of the Company believes
that recent growth in the natural health product industry will continue, driven
by the public's heightened awareness of the benefits of such products and a more
favorable regulatory climate following the passage of the Dietary Supplement
Health & Education Act of 1994. See "Government Regulation" below.
From its organization in April 1995 until it introduced its first
commercial product, ENDUROX(Registered), in March 1996, the Company was engaged
primarily in organizational and financing activities, product research, and
preliminary marketing and distribution activities. During this period, the
Company developed a master broker network for ENDUROX and future products, and
obtained distribution for its products in mass channels (mass merchandisers,
chain drug and supermarkets) and through health food chains and individual
stores.
The product formulation for ENDUROX is based on a Chinese herb, ciwujia,
which has been shown to enhance athletic performance, stamina and recovery, and
was identified by the Company and the Institute of Nutrition and Food Hygiene of
the Chinese Academy of Preventative Medicine (the "INFH") in Beijing, China. See
" -- The China Relationship" below. In addition to ciwujia, which has long been
used as part of traditional Chinese medicine for the treatment of fatigue and
general malaise, the Company has identified other herbs and botanicals through
its relationship with the INFH. The Company also has sought to identify products
utilizing botanicals of non-Chinese origin and, where possible, to license
products conceived or developed by others which have some level of market
protection (e.g., through a patent, patent claim, manufacturing technology etc.)
Most of the proposed new products discussed below are based on herbs and other
natural ingredients which are not of Chinese origin.
The Company's business strategy is to identify novel and safe natural
products that have demonstrable health benefits and can be marketed without
prior FDA approval under current regulatory guidelines, and to promote and
market those products aggressively through mass and health food channels of
distribution using, among other things, marketing claims based upon Company-
conducted research and testing.
OVERVIEW OF THE NATURAL HEALTH PRODUCT MARKET
According to industry sources, sales of natural products and supplements
through all outlets were approximately $15 billion in 1996. Chain drug stores,
mass merchandising and grocery outlets, which represent the bulk of sales of
natural products and supplements, grew at a rate of 20% in 1996 over the
previous year. The Company believes that this growth is being driven by
information in the mass media which continues to highlight problems with the
American diet; the fact that American consumers are becoming increasingly
disenchanted with and skeptical about many conventional medical approaches to
disease treatment; and, finally, recent clarifications and changes of food and
drug laws that have eased significantly the regulatory burdens associated with
the introduction and sale of dietary supplements.
Public awareness of the positive effects of nutritional supplements on
health has been heightened by widely publicized reports and medical research
findings indicating a correlation between the consumption of a wide variety of
nutrients and the reduced incidence of certain diseases. Reports have indicated
that the United States government and universities generally have increased
sponsorship of research relating to nutritional supplements. In addition,
Congress has established the Office of Alternative Medicine within the National
Institutes of Health to foster research into alternative medical treatment
modalities, which may include natural remedies. Congress has also recently
established the Office of Dietary Supplements in the National Institutes of
Health to conduct and coordinate research into the role of dietary supplements
in maintaining health and preventing disease.
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<PAGE>
According to Congressional findings that accompanied the passage of the
Dietary Supplement Health & Education Act of 1994, national surveys reveal that
almost 43% of Americans regularly consume vitamins, minerals and herbal
supplements and 80% consume these products at some time during their lives. The
35-and-older age group of consumers, which is expected to continue to grow over
the next two decades, represents 78% of the regular users of vitamin and mineral
supplements. Based on data provided by the United States Bureau of the Census,
from 1990 to 2010, the 35-and-older age group of the United States population is
projected to increase by 32%, a significantly greater increase than the 20%
projected increase for the United States population in general.
The Company believes that the aging of the United States population,
together with a corresponding increased focus on preventative health care
measures, will continue to result in increased demand for certain nutritional
supplement products. Also, the Company believes that the continuing shift to
managed healthcare delivery systems will place greater emphasis on disease
prevention and/or health maintenance, areas with which natural health products
are most identified.
With respect to the distribution of natural health products, while
distribution through small to large sized natural food stores remain a
significant factor, the bulk of the growth is found in the mass merchandisers
and health food chains such as General Nutrition Centers which now represent the
majority of sales, and represent the fastest growing channels of distribution.
INITIAL PRODUCTS -- ENDUROX(REGISTERED)
The Company's initial product, ENDUROX(Registered), is a dietary supplement
the principal ingredient of which is the herb ciwujia. Laboratory tests
conducted by the INFH compared the endurance of laboratory animals to which
ciwujia was administered to groups using other herbs (ginseng, cordyceps and
wolfberry) and to a control group. Test results showed that ciwujia
significantly improved the test animals' endurance. Human trials, in which test
subjects underwent aerobic and other measurements and assessments following
various exercise routines with and without administering ENDUROX, were conducted
in the exercise physiology laboratories at the Academy of Preventive Medicine,
Institute of Food Hygiene, in Beijing, and the University of North Texas Health
Science Center in Fort Worth, Texas. On the basis of these studies, researchers
and the Company concluded that ENDUROX changed the way the body fuels a workout
by shifting the fuel source from carbohydrate to fat, thereby increasing fat
metabolism; built endurance by slowing the lactic acid buildup that causes
muscle soreness and fatigue; raised the anaerobic threshold during workout; and
sped recovery following workout, as measured by heart rate and lactic acid
levels.
The Company also conducted extensive qualitative and quantitative marketing
research to measure consumer receptivity to a natural product that could improve
exercise performance. The research showed, among other things, that almost 52
million consumers exercise more than 100 times per year ("frequent exercisers"),
that the average household income of frequent exercisers exceeded $45,000 per
year in 1995 and, in that year, frequent exercisers had spent over $5.3 billion
on exercise equipment.
Based on its market research, management decided to launch ENDUROX in both
health food and mass consumer distribution channels, using a master broker for
chain drug, grocery, and mass merchandisers and a separate master broker for the
health food segments. The Company formally introduced ENDUROX on March 15, 1996,
at the Natural Product Expo West in Anaheim, California. See "Marketing and
Distribution" below.
The first extensions to the ENDUROX line of products, ENDUROX
EXCEL(Trademark) and ENDUROX ProHeart(Trademark), were introduced in March 1997.
ENDUROX EXCEL contains 50% more ciwujia than regular ENDUROX, plus vitamin E. It
is targeted to "serious" athletes, i.e., individuals who engage in competitive
athletics or whose exercise regimen is comparable to that of a competitive
athlete. ENDUROX ProHeart is targeted to the heart conscious consumers who
exercise regularly. In addition to ciwujia, ENDUROX ProHeart contains vitamins E
and C and folic acid. Sales of ENDUROX EXCEL and ENDUROX ProHeart were $407,831
and $564,052, respectively, in the nine months ended September 30, 1997.
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<PAGE>
PROPOSED PRODUCTS
ENDUROX(Registered) RECOVER(Trademark) is a new sports drink in the
development stage. The Company expects to obtain data from trials to be
conducted for the Company at a number of institutions with well known exercise
physiology departments to support its marketing claims. These trials are
expected to be completed in the first quarter of 1998.
The market for sports drinks currently exceeds $1.5 billion a year. This
market is dominated by Gatorade, which is manufactured by Quaker Foods. In
addition, there are a number of sports drink products primarily marketed through
health food stores. These include MetRx, products from Weider Nutrition
International, Champion Nutrition, and house brands sold by General Nutrition
Centers. Sports drinks sold through health food channels, which is the market
which the Company intends to target, represent approximately $300 million in
sales, with the balance of sales being made in mass channels of distribution.
The Company expects to initiate sales of this product in the second quarter of
1998.
PROSOL PLUS(Trademark) is a new product based on the herb hypericum (St.
John's Wort). Hypericum has been shown to be effective in treating the symptoms
of mild to moderate depression in numerous clinical studies. In Germany, where
the expense of hypericum use is reimbursed by government sponsored health
insurance, it outsells Prozac, the leading US product for treating depression,
by a substantial margin. Under the Dietary Supplement Health and Supplement Act
of 1994, PROSOL PLUS cannot be marketed for the treatment of depression, as
such, but can be marketed to improve emotional well-being. "See Government
Regulation" below.
The Company has filed a trademark application for the names PROSOL and
PROSOL PLUS, and expects to launch advertising and promotional efforts for this
product in January 1998. Initial sales of the product were made to GNC in the
fourth quarter of 1997, and the Company expects initial retail sales to occur in
December 1997.
ARNICYN(Trademark) is a topical analgesic stick that contains a combination
of natural ingredients which have demonstrated effectiveness in reducing the
pain and inflammation of arthritis. The four herbal components in ARNICYN are
capsaicin, menthol, arnica and boswellia serrata.
The total market for topical analgesics in mass channels of distribution in
1997 exceeded $350 million. Some of the major brand names in this category
include Bengay and Zostrix. Products containing capsaicin represent the fastest
growing segment of the market. ARNICYN will be targeted to an estimated 20
million Americans who have arthritis. The Company intends to launch ARNICYN in
December 1997 through direct response TV, and then expand distribution into
chain drug and mass merchandisers.
PO 2 is the Company's working name for a proposed new product based on a
protein which, when ingested, stimulates the body's release of cholecystokinin,
a peptide which is involved in the human digestive process. Research has shown
that the release of cholecystokinin in humans increase satiety resulting in
decreased food intake and, thus, provides an approach to weight loss and control
using the body's natural appetite control mechanism.
The proteins which stimulate cholecystokinin are called protease inhibitors
and are found in soy and potatoes. Only the protease inhibitors obtained from
potatoes, however, have been shown to be effective in humans. The investigator
who showed that the protease inhibitor from potatoes stimulated the release of
cholecystokinin received a use patent on the enzyme in 1985. However,
purification of the enzyme was not commercially feasible until recently, when
researchers developed a proprietary method of purifying the protein. This
purified protease inhibitor (PO 2) has been found effective to stimulate the
release of cholecystokinin in numerous studies, including studies published by
researchers at the University of Texas Health Science Center and unpublished
studies by the same researchers.
The Company has signed a license agreement with the licensor of the patent
covering the potato-derived protease inhibitor and the developer of the
proprietary purification process. This agreement
22
<PAGE>
grants to the Company the exclusive world wide right to market and develop a
number of weight loss products incorporating the purified protein ingredient,
which would be supplied to the Company by the licensor.
The Company expects the product, which is as yet unnamed, to be introduced
as a powder drink that would be taken one hour prior to meals. The Company
estimates that the product will be launched in limited distribution in the third
quarter of 1998, with a full marketing and distribution to begin in January
1999. This schedule is intended to capitalize on the fact that approximately 30%
of the annual sales of diet products and services typically occur in January.
Industry data indicates a national market of approximately $3 billion for weight
loss and weight control products, including prescription drugs, OTC products,
diet foods and nutritional supplements.
SPORTS ANALGESIC: Strains and sprains resulting from sports injuries are
usually treated with a topical analgesic, an oral analgesic or a combination of
both agents. There currently are no non-prescription products that can
accelerate recovery from a sports injury in the sprain/strain category. The
Company has formulated a product with both an internal and external component
that it expects to launch in the third quarter of 1998. Management believes that
a combination internal/external sports analgesic would represent a unique
product in a category which has lacked innovation in the last ten years. The
Company intends to work with professional trainers both in evaluating the
product and also using their endorsements to promote the product. This product
would be distributed through health food stores and selected mass merchandisers.
THE CHINA RELATIONSHIP
In connection with its organization, the Company entered into an Exclusive
Technology Sharing and Strategic Alliance Agreement and a Licensing Agreement
with the Institute of Nutrition & Food Hygiene of the Chinese Academy of
Preventive Medicine (the "INFH") in Beijing, People's Republic of China. The
purpose of these agreements and relationships to obtain access to agents derived
from natural sources proven effective in China, where the use of herbs in health
and healing has been an integral part of "traditional" Chinese medicine for over
4,000 years, as well as to Chinese research and manufacturing "know how" in this
area.
INFH is the most prestigious nutritional organization in China, reporting
directly to the Ministry of Health. The INFH has worked closely with the World
Health Organization and is involved in on-going research concerning the
relationship of nutrition with health and disease from a mechanistic and
epidemiological perspective, and the role of natural products in maintaining and
preventing disease. Under its agreements with the Company, the INFH has granted
to the Company the exclusive right to commercialize within and outside of China
all products identified and developed by the Company and the INFH based upon
natural TCM herbs and other natural agents in nine specified areas: obesity
management, sports recovery/anti-fatigue, female health (PMS and estrogen
supplementation), health teas, arthritis, diabetes mellitus and cholesterol
lowering. The INFH also has agreed to seek out and enter into licensing
agreements with other Chinese institutions for other natural constituents that
can be used in products for the treatment of disease and maintenance of health
and well being, and either to assign such licenses to the Company or give the
Company a right of first refusal to license the product. Nothing in the
Company's agreements with the INFH or other Chinese institutions, however,
prevents any other person or company from buying herbs and other natural agents
in China for use or resale inside or outside of China.
The Company has agreed, after the Company achieves a defined level of
profitability, to pay a royalty (starting at 2% on annual net sales under $25
million, and declining to 0.5% on annual net sales in excess of $200 million) to
the INFH based upon sales of products utilizing natural constituents exported
from China or developed in China, or based in whole or in part on such
constituents. The level of profitability which the Company must achieve in any
annual period before a royalty must be paid is such that the Company's pre-tax
profits in the period, less 50% of the Company's accumulated loss carry forward,
less taxes, and less royalties payable to the INFH must be greater that zero.
Prior to the date of this Prospectus, the Company has not paid any royalties to
the INFH pursuant to this agreement, and the Company does not anticipate
incurring any obligation to pay royalties until the year
23
<PAGE>
ended December 31, 1998, at the earliest. See "Certain Relationships and Related
Transactions -- Certain Other Transactions".
None of the aforementioned agreements has a fixed termination date,
although the agreements may be terminated by either party upon ninety (90) days
notice in the event of a material breach.
MANUFACTURING
The Company does not intend to develop its own manufacturing capabilities
since management believes that the availability of manufacturing services from
third parties on a contract basis is more than adequate to meet the Company's
needs in the foreseeable future. The Company has identified and worked with a
number of manufacturers who have sufficient manufacturing capacity to meet the
short and intermediate-term production needs of the Company, and who will assist
the Company in its development work, as in the case of ENDUROX.
The Company has used the services of a number of companies to assist in the
manufacture of its ENDUROX line of products. Ciwujia is harvested and extracted
in China under the supervision of quality control scientists from the INFH.
Every lot of ciwujia extract is standardized and undergoes a broad range of
quality assurance tests. The extract is then shipped to a processor in the
United States, where it is spray dried. Following the spray dry procedure the
product is shipped to an encapsulator and, from the encapsulator, to a packager
where it is blister packed and packaged. The product is then shipped to a
distribution center in Cincinnati, Ohio.
The Company has no existing contractual commitments or other arrangements
for the future manufacture of its products. Rather, it places orders for
manufacturing services as required based upon price quotations and other terms
obtained from selected manufacturers.
ENDUROX is, and future products of the Company are expected to be,
manufactured in the United States.
MARKETING AND DISTRIBUTION
The Company's first product, ENDUROX(Registered), a dietary supplement in
the sports performance and recovery market segment, was introduced in March
1996, and commercial shipments of the product were begun in May 1996. Extensions
on the ENDUROX product line (ENDUROX EXCEL(Trademark) and ENDUROX
ProHeart(Trademark)) were introduced in March 1997.
The Company has pursued a "multi-channel" distribution strategy in
marketing its line of ENDUROX products, and intends to follow a similar strategy
with future products. The ENDUROX line of products is sold in retail outlets in
all 50 states, with customers in the mass channels of distribution including
mass merchandisers such as WalMart, KMart and Target; chain drug stores such as
CVS, Walgreens, Eckerds and Rite Aid; and grocery supermarkets such as Pathmark
and Albertsons. The Company distributes its products to the health food market
through General Nutrition Centers, a chain with over 2,800 outlets (see "Risk
Factors -- Dependence Upon Significant Customers"), and independent health food
retailers. The Company also sells through other channels, such as sports
specialty stores such as The Sports Authority and health clubs. The nature of
the product and its target market dictate the channels of distribution in which
a product is launched, and the level of effort directed to each channel of
distribution.
ENDUROX ProHeart presently is distributed through leading health food
stores and General Nutrition Centers. The Company plans to expand distribution
of ENDUROX ProHeart into mass channels, specifically chain drug and mass
merchandisers, in the fourth quarter of 1997. Advertising for this product will
commence in February 1998, which is National Heart Month, primarily in magazines
that reach the over 50 age bracket. The product also will be supported by an
extensive public relations campaign creating awareness on the importance of
exercise, antioxidants and folic acid in helping protect and maintain heart
health.
The Company uses two master brokers in its distribution network, one for
mass volume retailers and the other for the health food market. Both master
brokers receive a fixed monthly payment plus a commission on sales under
agreements that are terminable at will by either party on relatively short
notice. Most of the Company's customers are sold direct through its broker
networks, although large
24
<PAGE>
drug wholesalers are used to reach smaller chains and independents. General
Nutrition Centers, which is the Company's largest customer, is a "house account"
which the Company sells directly outside its broker network. The Company also is
considering the use of electronic media such as direct response TV, "home
shopping" networks and, possibly, TV infomercials to market one or more of its
new products. The Company believes that electronic media can serve as a means of
gaining immediate sales volume while laying a foundation for broader
distribution through mass channels.
The Company began distribution of ENDUROX in Canada in 1997 through an
independent distributor, with the first retail sales made in April 1997. At the
present time, this represents the Company's sole non-US marketing channel. The
Company is seeking regulatory clearances to distribute ENDUROX in Europe, South
America and Asia, but there is no assurance that the Company will obtain these
clearances, and, in any event, the Company does not expect to be in a position
to begin significant distribution outside the United States until the end of
1998 at the earliest.
To support its marketing efforts, the Company advertises in trade and
consumer health food and sports magazines and on television, attends trade shows
and exhibitions, sponsors promotional programs and events and in-store
promotions, and engages in an extensive public relations effort that has
included television, that has resulted in articles in numerous health, fitness,
trade and natural products publications, which the Company also uses to promote
its products. In September 1996, the Company entered into a three year
endorsement contract with former professional football player Joe Montana. Mr.
Montana receives an annual fee, and also received an option to purchase 25,000
shares of Common Stock upon execution of the endorsement contract. See
"Description of Capital Stock -- Other Options and Warrants". The Company has
made extensive use of television and other media advertising featuring Mr.
Montana, and Mr. Montana also has been featured in a number of the Company's
promotional and public relations activities. Other paid endorsers for the
Company include Frank Shorter (two-time Olympic medalist), Jeff Galloway (former
Olympian and author of the leading running book sold in North America), Debbi
Lawrence (two-time Olympian and considered America's greatest racewalker), Dave
Scott (six-time winner of the "Ironman" competition) and Grete Waitz (nine-time
winner of the New York City Marathon).
In the twelve-month period December 31, 1996 and the nine months ended
September 30, 1997, the Company's expenditures for product advertising and
promotion were approximately $1,303,880 and $4,109,414, respectively.
COMPETITION
Dietary supplements are distributed in variety of ways, including
independent health food suppliers, such as the Company, who focus on vitamins
and dietary supplements; mass volume retail suppliers; gym and health club
product suppliers; direct sale and mail order vendors; and private label
manufacturers. The Company estimates that there are approximately 20 large
national companies that manufacture or distribute herbal products and
medicinals. Generally, these companies are well funded and sophisticated in
their marketing approaches. Examples are Weider Nutrition International,
Nature's Way, Nature's Herbs and Solaray, Inc. In addition, there are a number
of large, multilevel marketers such as Shaklee, Herbalife and Amway that sell
encapsulated herbs, diet products, herbal supplement formulas and vitamin
supplements.
As the market for herbal products and medicinals has increased, major
retailers such as GNC have introduced house brands to take advantage of their
retailing strength, a trend that is likely to continue. Although major retailers
generally have not introduced innovative products in the past, the Company
believes that house brands represent a competitive threat once a product has
become established. Large pharmaceutical companies and packaged food and
beverage companies also participate in the nutritional supplement market on a
limited basis. Increased competitive activity from such companies could have a
material, adverse effect on the Company and other participants in the industry
since such companies have greater financial and other resources available to
them and possess far more extensive manufacturing, distribution and marketing
capabilities than the Company and its other competitors.
Since the Company's products are based upon natural ingredients, its
competitors have access to the same ingredients and will be able to develop and
market products the same as or similar to the Company's products. Except to the
limited extent that the Company may obtain patent protection for
25
<PAGE>
certain uses of ingredients in its products, its competitors' products may make
the same claims of benefits from use of the products that the Company makes.
Thus, long term success in the marketplace for any of the Company's products is
likely to be less dependent on the novelty of the product than on such factors
as distribution and marketing capabilities. In this regard, investors should
note that GNC, the Company's largest customer, presently offers a "generic"
product that is based on ciwujia, the natural ingredient on which the Company's
ENDUROX line of products is based.
As the nutritional supplement industry grows and matures, it can be
expected that retailers will favor suppliers that can provide innovative and
high margin products, who are financially stable and who aggressively market and
promote a wide line of products. Independent companies which have a limited
product line, and who fail to develop new, innovative products and support them
with strong marketing efforts will be unlikely to succeed in that environment.
GOVERNMENT REGULATION
The Company believes that all of its existing and proposed products, as
described above, are dietary supplements which do not require governmental
approvals to market in the United States. The processing, formulation,
packaging, labeling and advertising of such products, however, are subject to
regulation by one or more federal agencies including the Food and Drug
Administration ("FDA"), the Federal Trade Commission, the Consumer Products
Safety Commission, the Department of Agriculture and the Environmental
Protection Agency. See "RISK FACTORS -- Government Regulation". The Company's
activities also are subject to regulation by various agencies of the states and
localities in which its products are sold.
The FDA traditionally has been the main agency regulating the types of
products sold by nutritional supplement firms such as the Company, but much of
that authority stemmed from the FDA's treatment of dietary supplements as food
additives and drugs. The FDA's role in this area was reduced mainly to policing
the activities of makers of dietary supplements by the enactment of the Dietary
Supplement Health and Education Act of 1994 (the "DSHEA") in October 1994. The
DSHEA amended and modified the application of certain provisions of the Federal
Food, Drug and Cosmetics Act (the "FFDC Act") as they relate to dietary
supplements, established an Office of Dietary Supplements at the National
Institute of Health in order to coordinate and conduct scientific research into
the health benefits of dietary supplements, established a presidential
commission to study and make recommendations on the regulation of label claims
and statements for dietary supplements, and required the FDA to promulgate
regulations consistent with the DSHEA and the recommendations of the
presidential commission.
Prior to the enactment of the DSHEA, the FDA had required nutrition
labeling on all dietary supplements and prohibited the making of any health
claim on a dietary supplement unless the supplement was consumed as a food, its
components were demonstrated to be safe, and the health claim was supported by
significant scientific agreement and approved by the FDA. Passage of the DSHEA
impacted the FDA's ability to issue and implement regulations with respect to
dietary supplements by exempting such products from classification as "food
additives" or, in most circumstances, "drugs". Although the DSHEA is generally
viewed as a positive development for companies that sell dietary supplements
such as vitamins, minerals, herbs, botanicals, amino acids and similar
substances, the legislation imposed significant requirements that must be
adhered to in order for a product to qualify for the safe harbors established by
the DSHEA.
The DSHEA defines a dietary supplement to include (i) any product intended
to supplement the diet that bears or contains a vitamin, mineral, herb or other
botanical, an amino acid, a substance to supplement the diet by increasing the
total dietary intake, or any concentrate, constituent, extract, or combination
of any such ingredient, provided that such product is either intended for
ingestion in tablet, capsule, powder, softgel, gelcap, or liquid droplet form
or, if not intended to be ingested in such form, is not represented for use as a
conventional food or as a sole item of a meal or the diet, (ii) is not
represented for use as a conventional food or as a sole item of a meal or the
diet, and (iii) is labeled as a dietary supplement. The definition also includes
highly technical provisions dealing with a dietary supplement that contains an
ingredient that also has been approved by the FDA as a drug. The practical
26
<PAGE>
effect of such an expansive definition is to ensure that the new protections and
requirements of the DSHEA will apply to a wide class of products.
One important provision of the DSHEA exempts the dietary ingredients in
dietary supplements from being treated as "food additives". Any substance that
is added to a food product that is not "generally recognized as safe" by experts
whose opinion is based on published scientific literature is subject to being
regulated as a food additive by the FDA. Under the FFDC Act, a substance that is
a food additive may not be added to food products unless explicitly permitted by
the FDA by issuance of a regulation. Petitioning the FDA for such a regulation
is a process that could take five years or more, and involve the expenditure of
hundreds of thousands of dollars or more to test a product and participate in
any ensuing proceedings. Prior to enactment of the DSHEA, dietary supplement
ingredients were often alleged to have "food additive" status.
Although dietary supplements are now exempted from treatment as food
additives by the FDA, the DSHEA imposed significant new safety standards
regulating dietary supplements to prevent the sale of dietary supplements that
are unsafe, toxic, unsanitary or adulterated. The DSHEA provides that a dietary
supplement will be deemed to be an adulterated food if it presents a significant
or unreasonable risk of illness or injury when used in accordance with its
labeling or, if no conditions of use are suggested or recommended in the
labeling, under ordinary conditions of use. Generally, the FFDC Act prohibits
the introduction or delivery of adulterated food into interstate commerce so a
dietary supplement that is deemed adulterated may not be sold or distributed
through interstate commerce. The FDA has the burden of proof in establishing
that a dietary supplement is adulterated under such a standard, thereby reducing
the FDA's role from one of preapproval of dietary supplements to that of
policing those substances that present a significant or unreasonable risk of
illness or injury.
The DSHEA also imposes additional requirements that must be adhered to for
dietary supplements which contain a "new" dietary ingredient. Under the DSHEA, a
"new" dietary ingredient is one that was not marketed in the United States
before October 15, 1994. A dietary supplement that contains such a new dietary
ingredient will be deemed to be adulterated unless either (a) all ingredients
contained in the dietary supplement have been present in the food supply as an
article used for food in a form in which the food has not been chemically
altered, or (b) there is a history of use or other evidence of safety
establishing that the new dietary ingredient, when used under the conditions
recommended or suggested in the labeling, will reasonably be expected to be
safe. In order to qualify for the safe harbor under the second condition, a
manufacturer/distributor of the new dietary ingredient or supplement must
provide, at least 75 days before introducing or delivering for introduction such
substance into interstate commerce, information to the FDA that forms the basis
on which the manufacturer/distributor has concluded that a dietary supplement
containing the new dietary ingredient is reasonably expected to be safe.
Finally, the DSHEA provided non-delegable authority to the Secretary of the
Department of Health and Human Services to declare that a dietary supplement
poses an imminent hazard to public health or safety. Following such declaration,
it is immediately illegal to market such a product, although the Secretary must
thereafter promptly hold a formal hearing in order to determine whether to
affirm or withdraw the declaration.
The DSHEA also has increased the ability of sellers of dietary supplements
to provide information about their products to consumers. Prior to the enactment
of the DSHEA, the FDA position was that any publication used in connection with
the sale of a dietary supplement could be regulated by the FDA as "labeling".
Further, if the publication in question contained information claiming or
suggesting that an ingredient present in a dietary supplement might be used in
the cure, mitigation, treatment or prevention of any disease, such supplement
would be subject to regulation under the FDA Act as a drug. Under the DSHEA,
however, a publication, including an article, a book or chapter in a book, or an
official abstract of a peer reviewed scientific publication that appears in an
article and was prepared by the authors or the editors of a publication, is not
considered labeling and may be used in connection with the sale of a dietary
supplement to consumers if such publication is reprinted and it
27
<PAGE>
(i) is not false or misleading; (ii) does not promote a particular manufacture
or brand of a dietary supplement; (iii) is displayed or presented with other
items on the same subject matter so as to present a balanced view of the
available scientific information; (iv) is physically separate from dietary
supplements if displayed in an establishment where such products are sold; and
(v) does not have appended to it any information by sticker or any other method.
The United States has the burden of proof to establish that a publication is
false or misleading if a proceeding is established to prevent a publication. The
DSHEA specifically provides that it does not restrict a retailer or wholesaler
of dietary supplements in any way whatsoever from selling books or other
publications as a part of its business. These provisions of the DSHEA may
indirectly affect the Company because they will make it easier for retailers and
wholesalers that sell the Company's products to display and sell publications
that are related to the Company's business and discuss the benefits of dietary
supplements such as the ones that the Company manufactures and distributes.
FDA regulations published prior to the enactment of the DSHEA and pursuant
to the Nutrition Labeling and Education Act prohibit the use of any health claim
in the labeling of any food products, including brochures, unless the claim of
such labeling is first approved by the FDA by regulation. Under the DSHEA,
companies that manufacture and distribute dietary supplements are allowed to
make any of the following four types of statements with regard to nutritional
support on labeling without FDA approval: (i) a statement that claims a benefit
related to a classical nutrient deficiency disease and discloses the prevalence
of such disease in the United States; (ii) a statement that describes the role
of a nutrient or dietary ingredient intended to affect structure or function in
humans; (iii) a statement that characterizes the documented mechanism by which a
nutrient or dietary ingredient acts to maintain or function; or (iv) a statement
that "describes general well-being" from consumption of a nutrient or dietary
ingredient. In addition to making sure that a statement meets one of these four
criteria, a manufacturer of the dietary supplement must have substantiation that
such statement is truthful and not misleading, must not claim to diagnose,
mitigate, treat, cure, or prevent a specific disease or class of diseases, and
must contain the following disclaimer, prominently displayed in boldface type:
"This statement has not been evaluated by the Food and Drug Administration. This
product is not intended to diagnose, treat, cure, or prevent any disease."
Additionally, the manufacturer must notify the Secretary of Health and Human
Services no later than 30 days after the first marketing of the dietary
supplement to which such statement relates. In addition, a dietary supplement
must list the name and quantity of each ingredient and the total weight of a
proprietary blend, be identified as a "dietary supplement", and identify the
part of a plant from which any herb or botanical ingredient is derived. Special
rules for branding apply if there is an official FDA monograph covering the
class of product in which the dietary supplement is classified.
The DSHEA did not limit the FDA's ability to regulate manufacturing but
authorized the FDA to prescribe good manufacturing practice regulations for
dietary supplements which are to be modeled after current good manufacturing
practice regulations for food. Since the manufacturers which are involved in
manufacturing the Company's products are experienced in producing products
subject to FDA manufacturing standards, the Company does not believe that new
regulations regarding manufacture of dietary supplements will adversely affect
the Company or its suppliers.
The effect of new federal regulations and standards is that, although the
authority of the FDA to regulate dietary supplements has been limited, it and
other government agencies, particularly the Department of Health and Human
Services, have been granted substantial new policing authority to stop the
distribution of a dietary supplement if government personnel believe they can
show that the product is not safe. The Company is not able to predict with
certainty the long term impact of this regulatory scheme on its activities.
PATENTS AND TRADEMARKS
The Company received a United States patent in December 1996 covering the
use of ciwujia, the principal active herb in ENDUROX, to improve physical
performance and stamina during exercise, and for enhancing recovery after
exercise is completed. The Company has applied for foreign patents on ciwujia in
Canada, Mexico, all Western European countries and in 51 other principal
European,
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<PAGE>
South American and Asian countries. To the extent the Company does not have
patents on its products, there can be no assurance that another company will not
replicate one or more of the Company's products, nor is there any assurance that
patents which are obtained, including the ciwujia patent, will provide
meaningful protection or significant competitive advantages over competing
products. For example, the Company's use patent on ciwujia would not prevent
sale of the herb with a claim or for a use that was not covered by the Company's
patent.
The Company believes that certain of its proposed products also may be
eligible for "use" patents, and patent coverage will be considered in seeking to
license products developed by others. There is no assurance, however, that the
Company will receive any additional patents, or that any patents which it does
have or may obtain will provide meaningful protection. The Company does not
believe that patent protection will be as significant to its growth as such
factors as product selection and the extent and effectiveness of its advertising
and other marketing and promotional activities.
The Company has federal trademark registrations for ENDUROX(Registered) and
has trademark applications pending to register ARNICYN(Trademark),
PROSOL(Trademark), ENDUROX(Registered) ProHeart(Trademark) and
ENDUROX(Registered) EXCEL(Trademark) pending with the United States Patent and
Trademark Office. See "BUSINESS -- Proposed Products". The Company also has
filed the ENDUROX trademark in all Western European countries, Canada, Mexico
and Japan. The Company's policy is to pursue registrations for all of the
trademarks associated with its key products, and to protect its legal rights
concerning the use of its trademarks. The Company relies on common law trademark
rights to protect its unregistered trademarks.
EMPLOYEES
At the present time, the Company has seven full time employees at its
Woodbridge, NJ offices. Of these, two employees are executive and
administrative, two are in sales and marketing, and two are in accounting and
operations. The Company also employs two persons on a part-time basis in its
Beijing, People's Republic of China, office in research and development, and
employs a number of consultants who devote limited portions of their time to the
Company's business. The Company intends to expand its staff following this
offering, through the addition of five individuals, principally for sales and
marketing purposes. None of the Company's employees are represented by a union,
and the Company believes that its employee relations are good.
OFFICES AND OTHER FACILITIES
The Company presently leases approximately 2,645 square feet of office
space from CSC Associates, a company owned by Robert Portman, President and a
Director, and David Portman, Secretary and a Director, of the Company at a
monthly rental of $2,645, plus utilities. The Company's lease with CSC
Associates expires January 31, 2000. See "Certain Relationships and Related
Transactions".
The Company also leases laboratory and office space from the INFH at 29 Nan
Wei Road, Beijing, at a yearly cost of $4,000.
The Company believes that its facilities are adequate for its present
needs.
LEGAL PROCEEDINGS
The Company is not a party to, or involved in, any legal proceedings.
29
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as follows:
<TABLE>
<S> <C>
Robert Portman, PhD............... President and Chief Executive Officer, Treasurer
and Chairman of the Board of Directors
Jonathan D. Rahn.................. Executive Vice President, Chief Financial Officer
and Director
David I. Portman.................. Secretary and Director
T. Colin Campbell, PhD............ Director
Irving I.A. Tabachnick, PhD....... Director
</TABLE>
DR. ROBERT PORTMAN, age 53, has served as President, Treasurer and Chairman
of the Board of Directors of the Company since its inception. Dr. Portman has a
PhD in Biochemistry and worked as a senior scientist at Schering Laboratories
before co-founding M.E.D. Communications in 1974 with his brother, David
Portman. In 1987, Dr. Portman started a consumer agency and, in 1993, he merged
both agencies to form C&M Advertising. C&M Advertising, with billings in excess
of $100 million, handled national advertising for such diverse accounts as
Berlex Laboratories, Ortho-McNeil Laboratories, Tetley Tea, Radisson Hotels and
HIP of New Jersey. Effective June 1, 1995, Dr. Portman relinquished his
responsibilities as Chairman of C&M Advertising (which since has been renamed
"The Sawtooth Group") to assume his present positions with the Company on a full
time basis, and, in September 1996, Dr. Portman sold his interest in that
company. Dr. Portman is a minority stockholder (less than 2%) of the
Underwriter.
In April 1988, Dr. Portman incorporated a company to develop and market a
patented dental device. A prototype of the device was developed in conjunction
with researchers at the University of Pennsylvania. In 1993, Dr. Portman
determined that the investment of additional funds for the purpose of marketing
and advertising the product was not warranted, and the company, HydroDent
Laboratories, Inc., of which Dr. Portman then was the President and principal
stockholder and creditor, was liquidated in the U.S. Bankruptcy Court for the
District of New Jersey.
JONATHAN D. RAHN, age 53, is the Executive Vice President and Chief
Financial Officer, as well as a director, of the Company. From the inception of
the Company to his employment by the Company in July 1996, Mr. Rahn served as a
consultant to the Company in financial and certain operational matters. Mr.
Rahn, a certified public accountant, has over 30 years experience in accounting
and financial analysis, and has held various executive positions for a number of
diverse businesses, both public and private. For approximately three years
immediately preceding his employment by the Company, he was a self-employed
consultant involved in the evaluation, due diligence and structuring of
investments in and acquisitions of development-stage companies.
DAVID I. PORTMAN, age 56, has served as Secretary and a Director of the
Company from its inception. Mr. Portman has a BS in Pharmacy and an MBA. He
worked as a sales representative and marketing manager for Eli Lilly,
Beecham-Massengill, Winthrop Laboratories and Sandoz Pharmaceuticals before
co-founding M.E.D. Communications in 1974. In 1988, Mr. Portman sold his
interest in M.E.D. Communications to Robert Portman, and became President of
TRIAD Development, a real estate company that has numerous commercial and rental
properties in New Jersey, a position that he still holds. Mr. Portman also has
served as a director of the Underwriter since 1993, and is a minority
stockholder (less than 1%) of the Underwriter.
Robert Portman and David Portman are brothers.
DR. T. COLIN CAMPBELL, age 63, has served as a Director of the Company
since its inception. Dr. Campbell also serves as Chairman of the Company's U.S.
Scientific Advisory Board. Dr. Campbell has been Jacob Gould Schurman Professor
of Nutritional Biochemistry of Cornell University since 1985. Over the past
three decades, Dr. Campbell, has been directing research correlating diet,
lifestyle and disease. In 1979, Dr. Campbell, with the encouragement of the
Chinese government, initiated the
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largest epidemiological study ever undertaken focusing on the relationship
between nutrition and disease. The China-Cornell Research Project is expected to
continue well into the 21st Century. Dr. Campbell is an honorary professor at
the Chinese Academy of Preventive Medicine.
DR. IRVING I.A. TABACHNICK, age 73, was elected a director of the Company
in December 1997. Dr. Tabachnick has served as a consultant to Schering Plough
Corporation, a New York Stock Exchange listed company, since 1989. Prior to
1989, he was employed by Schering Plough Corporation in a number of positions,
including Vice President -- Drug Safety and Metabolism, Senior Director --
Biological Research and Development, and Director -- Biological Sciences and
Director -- Physiology and Biochemistry.
In connection with a private placement of 10% Convertible Preferred Stock,
completed in January 1996 for which the Underwriter acted as placement agent,
the Company agreed to use its best efforts to elect to its Board of Directors
one nominee designated by the Underwriter and as to whom the Company had no
reasonable objection, and a second nominee mutually selected by the Company and
the Underwriter. Prior to this offering, Jonathan D. Rahn was the designee
mutually selected by the Company and the Underwriter. While the Company expects
him to continue to serve as a director, Mr. Rahn is not now serving as and will
not in the future be a designee of the Underwriter. Pursuant to the underwriting
arrangements for this offering, the Company has agreed for a period of five
years from the date of this Prospectus to cause a person designated by the
Underwriter to be elected to the Company's Board of Directors. See
"Underwriting." This agreement supersedes earlier agreements between the Company
and the Underwriter relating to election of persons designated by the
Underwriter to the Company's Board of Directors. The Underwriter has not advised
the Company of any designee to serve on the Board of Directors and, further, has
advised the Company that it does not intend to exercise its right to designate a
nominee for election as a director in the near future.
Under corporate governance rules applicable to issuers with securities
listed on the Nasdaq SmallCap Market, the issuer must have a minimum of two
independent directors and an audit committee with a majority of independent
directors. At the present time, the Company considers T. Colin Campbell and
Irving I.A. Tabachnick to be "independent" directors, and has formed an Audit
Committee consisting of Dr. Campbell, Dr. Tabachnick and Jonathan D. Rahn.
OTHER KEY ADVISORS AND CONSULTANTS
In addition to its executive officers, the Company considers Dr. Junshi
Chen to be a key advisor. Dr. Chen, age 62, is Chairman of the Company's Chinese
Scientific Advisory Board, and is a Professor and Deputy Director of the INFH.
Besides directing the research activities of the INFH, Dr. Chen is a recognized
expert in China on nutritional status and cancer mortality and the antioxidant
properties of various dietary constituents. Dr. Chen also is a member of the
Political Consultative Group of China, a select group of individuals who serve
as advisors to the government and the People's Congress, and a member of the
government committee which reviews and approves new drug applications in China.
COMPENSATION OF EXECUTIVE OFFICERS
Robert Portman is the only executive officer of the Company with a
fixed-term employment agreement. Under this agreement, Dr. Portman is employed
for a three year term commencing January 1, 1998, at an annual salary of
$150,000 for the first two years, and at a salary to be determined by the
Compensation Committee of the Company's Board of Directors during the third
year. In addition to salary, Dr. Portman is entitled to receive a bonus of
$25,000 if the Company's net, pre-tax income in the fiscal year ending December
31, 1998, exceeds $25,000, and a further bonus equal to five percent of the
amount, if any, by which the Company's net, pre-tax income exceeds $1,000,000 in
the fiscal years ending December 31, 1998 and 1999.
Dr. Portman's employment agreement also provides for the grant of options
under the Company's Incentive Stock Option Plan, described below, to purchase up
to 475,000 shares of Common Stock at a price of $6.00 per share, the initial
public offering price of shares in this Offering. This option vests as to
one-third of the shares issuable upon full exercise of the option as of the
first, second and third anniversaries of the effective date of the employment
agreement, provided that Dr. Portman is employed by the Company at such dates.
To the extent not previously vested, the option also will vest
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<PAGE>
if Dr. Portman's employment is terminated by the Company without cause. In
addition, if Dr. Portman's employment is terminated by the Company without
cause, or by Dr. Portman with cause, Dr. Portman will be entitled to receive
payment of an amount equal to the lesser of full salary for one year or for the
remaining term of the agreement.
The table below sets forth information concerning compensation paid to Dr.
Portman in 1996. No other executive officer of the Company received compensation
of $100,000 or more in fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------
AWARDS PAYOUTS
------------------------ -----------------
SECURITIES ALL
RESTRICTED UNDER- OTHER
ANNUAL COMPENSATION OTHER ANNUAL STOCK LYING LTIP COMPEN-
NAME AND PRINCIPAL ---------------------- COMPENSATION AWARD(S) OPTIONS/ PAYOUTS SATION
POSITION YEAR SALARY ($) BONUS ($) ($) ($) SARS (#) ($) ($)
------------------ ---- ---------- --------- ------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Portman........ 1996 162,500(1) -0- (2) -0- 225,000 -0- -0-
</TABLE>
- ------------------
(1) Includes $37,500 accrued in respect of 1995 salary which was paid in 1996.
(2) Less than 10% of annual salary and bonus.
The following table sets forth certain information regarding the options
granted to Dr. Portman in fiscal 1996:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
---- ------------ ---------------- -------- ----------
<S> <C> <C> <C> <C>
Robert Portman....................................... 225,000 32% 3.75 3/31/01
</TABLE>
The following table sets forth information with respect to the number of
unexercised options and the value of unexercised "in-the-money" options held by
Dr. Portman at December 31, 1996.
AGGREGATED OPTION/SAR EXERCISES IN 1996 LAST FISCAL YEAR AND
OPTION/SAR VALUES AT 12/31/96
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ACQUIRED OPTIONS/SARS AT FISCAL THE-MONEY OPTIONS/SARS
ON YEAR-END (#) AT DECEMBER 31, 1996 ($)
EXERCISE VALUE --------------------------- ---------------------------
NAME (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert Portman................. -0- -0- 100,000 425,000 200,000 456,250
</TABLE>
For the purpose of computing the value of "in-the-money" options at
December 31, 1996, in the above table, the fair market value of the Common Stock
at December 31, 1996, is deemed to be $4.00 per share, as determined by the
Board of Directors of the Company and equal to the last price at which the
Company sold its Common Stock in 1996.
DIRECTORS' COMPENSATION
None of the Company's directors received compensation for their services as
directors in 1996. T. Colin Campbell, a director of the Company, received an
option to purchase 5,000 shares of Common Stock pursuant to the Company's 1995
Incentive Stock Option Plan in recognition of his services as Chairman of the
Company's U.S. Scientific Advisory Board. The option is exercisable at a price
of $3.75 per share, and expires March 1, 2001.
32
<PAGE>
STOCK OPTION PLAN
1995 Plan: In August 1995, the Company adopted an Incentive Stock Option
Plan (the "1995 Plan") and reserved 582,000 shares of Common Stock for issuance
upon the exercise of options granted under the 1995 Plan. The number of shares
reserved for issuance under the 1995 Plan subsequently was increased to
1,500,000 shares. Options under the 1995 Plan are not designed to qualify for
special tax treatment as statutory "incentive stock options" under Section 422
of the Internal Revenue Code of 1986. As a result, persons who exercise options
under the 1995 Plan are subject to federal income taxation on the difference
between the exercise price of the option and the fair market value of the shares
purchased upon exercise as of the date of exercise, and the Company is eligible
for a corresponding deduction in computing its income for tax purposes.
The 1995 Plan is administered by the Board of Directors, or a committee of
the Board if it elects to delegate administration of the 1995 Plan to a
committee. To date, the Board has not done so.
The Board has full discretion to determine the persons or entities to
receive options under the Plan, including non-employee consultants and advisors
to the Company. The Board also has substantial discretion as to the terms and
duration of the options granted, provided that the exercise price of options may
not be less than the lower of (i) "market value" of the Common Stock, as
determined by the Board, on the date the option is granted, or (ii) 50% of the
then current conversion price of the Company's 10% Convertible Preferred Stock.
Unless sooner terminated, the 1995 Plan terminates on December 31, 2004. There
presently are outstanding options to purchase 1,420,200 shares of Common Stock
at prices ranging from $2.00 to $6.00 granted under the 1995 Plan.
In connection with obtaining regulatory clearances to conduct this offering
in certain states, the Company has agreed that it will not issue or grant
additional employee stock options a warrant for a period of one year from the
date of this Prospectus.
Bonus Option Program: In July 1996, the Company adopted a Bonus Stock
Option Award Program (the "Bonus Option Program") expressly for Robert Portman.
The Bonus Option Program provided for the grant to Dr. Portman of options to
purchase 25,000 shares of Common Stock for each $1,000,000 increase in the
Company's valuation, as defined in the Program, between June 30, 1996 and
December 31, 1996, December 31, 1996 and December 31, 1997, and December 31,
1997 and December 31, 1998. Any options granted were to be exercisable for a
period of five years from the date of grant at a price equal to the fair market
value of the Common Stock at the date of grant.
The Bonus Option Program was cancelled in connection with Dr. Portman
entering into a new employment agreement with the Company, which is effective
January 1, 1998. See "Compensation of Executive Officers" above.
SCIENTIFIC ADVISORY BOARDS
The Company has established U.S. and Chinese Scientific Advisory Boards to
provide it with on-going advice and counsel regarding research direction,
product development, analysis of data and general counseling. As a need rises,
the Company consults with individual members of these Boards on a non-scheduled
basis. A brief description of the backgrounds of the Advisory Boards' member are
set forth below.
U.S. Scientific Advisory Board:
T. Colin Campbell, a Director of the Company, is Chairman of the Company's
U.S. Advisory Board. Its other members are:
David Kritchevsky, PhD, Institute Professor, Wistar Institute, Professor of
Biochemistry in Surgery. Dr. Kritchevsky is an expert in lipid biochemistry,
atherosclerosis and the relationship between nutrition and aging and nutrition
and cancer. He has published on the effects of dietary fiber on colon cancer,
circulating cholesterol and the effects of dietary fat and energy on
experimental carcinogenesis. He was a member of the 1982 National Academy of
Sciences Committee on Diet, Nutrition and Cancer, is a member of numerous
professional societies, serves as editor of several professional annuals and was
Western Hemisphere Editor of the journal, Atherosclerosis.
33
<PAGE>
William Pryor, PhD, Thomas and David Boyd Professor, Departments of
Chemistry and Biochemistry; Director, Biodynamics Institute, Louisiana State
University. Dr. Pryor is an authority in free radical chemistry and biology. He
has published on the role that various reactive oxygen species play in the
production of degenerative tissue damage, such as cancer and atherosclerotic
diseases. His publications number over 500. Dr. Pryor wrote the first textbook
on free radicals (McGraw-Hill 1966) and was the founder and first editor of the
journal, Free Radical Biology & Medicine.
David J. Jenkins, PhD, Dsc, Professor of Medicine & Nutritional Sciences,
University of Toronto; Director, Clinical Nutrition & Risk Factor Modification
Center, St. Michael's Hospital. Dr. Jenkins has extensively researched the
effects of soluble and insoluble dietary fiber upon various biochemical factors
associated with, or predictive of, cardiovascular disease, diabetes and
colorectal and prostate cancers. Dr. Jenkins is a member of several professional
nutrition societies, in Canada, Great Britain and the United States. He has
served on a number of international committees involved in the treatment and
prevention of diabetes.
Chinese Scientific Advisory Board:
Professor Junshi Chen, MD, is Deputy Director of the Institute of Nutrition
& Food Hygiene at the Chinese Academy of Preventive Medicine and a Director of
the Company. Professor Chen is the Chair of the Chinese Scientific Advisory
Board.
Professor Boping Wu, Former Director of Medicine Information, Research
Institute, Academy of Traditional Chinese Medicine; Member, Expert Committee,
Academy of Traditional Chinese Medicine ("TCM"); Advisory, Chinese
Administration of TCM. Dr. Wu is one of the leading experts on Traditional
Chinese Medicine. Although his professional expertise concerns treatment of
immune function disorders, he was responsible for creating a comprehensive
database on medicinal herbs. Dr. Wu is a member of Chinese AIDS prevention
committee and has developed TCM anti-AIDS formulas that are being tested in
Africa and England.
Professor Weiyi Yang, Chair, Department of Clinical Research, Beijing
University of TCM; Advisor, Chinese Administration of TCM; Consultant, World
Health Organization. Professor Yang's research interests are in the theory and
mechanism of TCM. His research program has focused on explaining the
effectiveness of TCM using modern technology. His work also involves expanded
application of TCM. Recently Professor Yang was asked to coordinate a nationwide
effort to identify herb combinations that could increase performance of Chinese
athletes.
Professor Ganzhong Liu, Director, Department of Pharmacological Research,
Beijing Sino-Japan Hospital; Secretary General, Chinese Society of Pharmacology;
Professor, Department of Pharmacology, Beijing Medical College. Dr. Liu's
research interests concern neuro-pharmacology and toxicology of agents used in
TCM. He has published 20 articles and edited several books including Recent
Advances in Chinese Herb Drugs-Actions and Uses and TCM Pharmacology and
Clinical Research. As Secretary General of the Society of Pharmacology, Dr. Liu
remains extremely current in TCM research conducted throughout China.
Professor Mingzhi Xie, Department of Phytopharmacology, Institute of
Materia Medica, Chinese Academy of Medical Sciences. Dr. Xie has worked in
phytopharmacology for more than 30 years. She is a member of the Review Board
for New Drugs. Her current research interests focus on the mechanism of TCM
compounds in treating obesity and diabetes.
34
<PAGE>
PRINCIPAL SHAREHOLDERS
As of December 15, 1997, the Company had outstanding 2,985,672 shares of
Common Stock, giving effect to the cancellation effective as of the date of this
Prospectus of 200,000 shares issued in connection with the organization of the
Company. The Company also had outstanding 143,896 shares of 10% Convertible
Preferred Stock, each share of which presently is convertible into 2.5 shares of
Common Stock.
The following table sets forth information concerning the present ownership
of the Company's Common Stock and 10% Convertible Preferred Stock by the
Company's directors, executive officers and each person known to the Company to
be the beneficial owner of more than five percent of either of such classes of
the capital stock, the beneficial ownership of these securities by such persons
following the offering, and the total voting power represented by the securities
owned by such persons.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
COMMON 10% CONVERTIBLE COMMON STOCK VOTING POWER(4)
STOCK PREFERRED STOCK AS ADJUSTED(1)(3) -------------------------
NAME AND ADDRESS (% OF CLASS)(1) (% OF CLASS)(2) (% OF TOTAL) OUTSTANDING AS ADJUSTED
- ---------------- --------------- --------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Robert Portman (5) ................... 1,032,267 -0- 1,032,267 28.2% 21.2%
President, Chief Executive Officer (31.3%) (22.9%)
and a Director
188 Igoe Road
Morganville, NJ 07751
Jonathan D. Rahn (6) ................. 343,000 -0- 343,000 10.0% 7.4%
Executive Vice President, Chief (11.1%) (8.0%)
Financial Officer and a Director
413 Gatewood Road
Cherry Hill, NJ 08003
David I. Portman ..................... 185,000 -0- 185,000 5.5% 4.1%
Secretary and a Director (6.2%) (4.4%)
19 Pal Drive
Wayside, NJ 07712
T. Colin Campbell (7) ................ 172,954 -0- 172,954 5.4% 4.0%
Director (5.8%) (4.1%)
26 Beckett Way
Ithaca, NY 14850
Irving Tabachnik, Director ........... -0- -0- -0- -0- -0-
9 Woodland Avenue
North Caldwell, NJ 07006
Jemeson Investment Co. (8) ........... 222,222 -0- 222,222 6.6% 4.9%
320 Park Place (7.4%) (5.3%)
Birmingham, AL 35203
Mark M. Carter, M.D. ................. 105,220(8) 42,088 105,220(9) 3.1% 2.3%
105 Lantern Wick Place (3.4%) (29.2%) (2.5%)
Ponte Verda Beach, FL 32082
Ronald & Alberta Weinisch, JTWROS .... 45,458(8) 18,183 45,458(9) (10) (10)
902 East 8th Street (1.5%) (12.6%) (1.1%)
Brooklyn, NY 11230
Grumet Partners LP ................... 29,725(8) 11,890 29,725(9) (10) (10)
Jack Grumet, General Partner (1.0%) (8.3%) (0.7%)
19 Seven Oaks Drive
Holmdel, NJ 07733
Officers and Directors as a group 1,733,220 -0- 1,733,220 46.1% 34.9%
(5 persons) ........................ (50.9%) (37.7%)
</TABLE>
(footnotes on following page)
35
<PAGE>
(footnotes from previous page)
- ------------------
(1) Common Stock which is issuable (a) upon the exercise of a stock option which
is presently exercisable or which becomes exercisable within sixty days, or
(b) upon conversion of outstanding 10% Convertible Preferred Stock, is
considered outstanding for the purpose of computing the percentage ownership
(x) of persons holding such options or Preferred Stock, and (y) of officers
and directors as a group with respect to all options and Preferred Stock
held by officers and directors. Gives effect to the cancellation of 200,000
shares contributed back to the Company and cancelled effective as of the
date of this Prospectus.
(2) The 143,896 shares of 10% Convertible Preferred Stock outstanding are
convertible into Common Stock on the basis of two and one-half (2 1/2)
shares of Common Stock per share of 10% Convertible Preferred. The number of
shares of Common Stock into which shares of Preferred Stock can be converted
will be reduced to 1.667 shares (i.e., a "conversion price" of $6.00)
effective January 1, 1998, and remain at that ratio until December 31, 2000.
Thereafter the conversion price will remain $6.00 unless the Company's
Common Stock is traded in The Nasdaq Stock Market or on a national
securities exchange, in which case the conversion price will be 90% of the
then current market value of the Common Stock. Holders of outstanding 10%
Convertible Preferred are entitled to vote on all matters as a single class
with holders of Common Stock, with each shares of Preferred Stock
representing a number of votes equal to the shares of Common Stock into
which such share of Preferred Stock is then convertible.
(3) Assumes that all Shares are sold, and that the Over-allotment Option is not
exercised. Represents shares of Common Stock and percentage ownership of
Common Stock only. Percentages do not reflect total voting power since the
voting power of the Company's capital stock is divided between holders of
Common Stock (89.2% at September 30, 1997) and 10% Convertible Preferred
Stock (10.8% at September 30, 1997). See "Description of Securities."
(4) Total voting power outstanding represents the voting power of the persons
indicated taking into account all shares of all classes deemed to be
outstanding and beneficially owned by such persons. See footnotes (1) and
(2) above. Total voting power as adjusted assumes all Shares are sold, and
that the Over-allotment Option is not exercised.
(5) Includes (i) a presently-exercisable option issued pursuant to the Company's
1995 Incentive Stock Option Plan (a "1995 Plan Option") to acquire 200,000
shares at a price of $2.00 per share, (ii) a presently-exercisable 1995 Plan
Option to acquire an additional 112,500 shares at a price of $3.75 per
share. Does not include (x) 200,000 shares of Common Stock owned by Jennifer
Portman, Dr. Portman's wife, individually and as Trustee for his and her
minor children, as to which Dr. Portman disclaims beneficial ownership, (y)
1995 Plan Options to purchase an additional 687,500 shares which are not
vested and do not vest within sixty days.
(6) Includes a 1995 Plan Option to acquire 100,000 shares at a price of $3.75
per share. Does not include a 1995 Plan Option to purchase 100,000 shares
which is not vested and does not vest within sixty days.
(7) Includes a 1995 Plan Option to acquire 5,000 shares at a price of $3.75 per
share. Does not include 38,900 shares of Common Stock owned by Dr.
Campbell's wife or 160,521 shares of Common Stock owned by Dr. Campbell's
adult children, as to which he disclaims beneficial ownership.
(8) The principal shareholders of Jemeson Investment Co., Inc. ("Jemeson") and
their respective equity ownership of Jemeson are as follows: H. Corban Day
(24%), Margaret L. Jemeson (20%) and John S. Jemeson, III (19%). The
remaining equity interest is owned in varying percentages by eight other
family members.
(9) Represents shares of Common Stock issuable upon conversion of 10%
Convertible Preferred Stock.
(10) Less than one percent.
36
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ORGANIZATIONAL TRANSACTIONS
In connection with its organization, the Company issued a total of
1,200,000 shares of Common Stock to Robert Portman, David Portman, T. Colin
Campbell, Junshi Chen, Ming Li and T. Nelson Campbell. These shares were issued
for par value, i.e. $.0025 per share. All of these initial shareholders, who may
be deemed founders or promoters of the Company, are parties to a Shareholders
Agreement which provided, among other things, for the composition of the initial
Board of Directors of the Company, appointment of Dr. Portman as Chief Executive
Officer, and obtaining additional financing. The Stockholders Agreement also
limits the parties' ability to engage in certain competitive activities, and
provides rights of first refusal to other parties if any party wishes to make a
transfer of shares, other than certain permitted transfers. Robert Portman, the
Company's President, has contributed back to the Company, effective as of the
date of this Prospectus, 200,000 of the shares which he acquired in connection
with the organization of the Company.
Also in connection with the Company's organization, the Company sold at par
value a total of 68,000 shares of Common Stock to Daniel Berkowitz (25,000
shares), T. George Harris (15,000 shares) and Jonathan D. Rahn (18,000 shares),
and to the four members of its U.S. Scientific Advisory Board (2,500 shares
each).
In June 1995, the Company sold to Robert Portman, David Portman, T. Colin
Campbell and Jonathan D. Rahn a total of 310,000 shares of Common Stock and
387,500 shares of Founders Preferred Stock for an aggregate cash consideration
of $325,000. In December 1995, all holders of Founders Preferred Stock converted
such shares into an aggregate 620,000 shares of Common Stock.
A portion of the Common Stock acquired by Robert Portman, T. Colin
Campbell, Junshi Chen, Ming Li and T. Nelson Campbell in the transactions
described above subsequently was transferred to their respective spouses and
children and/or certain business associates of the Company.
Junshi Chen, one of the Company's founding shareholders and Chairman of its
Chinese Scientific Advisory Board, is a Deputy Director of the INFH. The Company
has agreed, after the Company achieves a defined level of profitability
sufficient to "recapture" all organizational, administration, pre-operative and
operating expenses incurred from inception, to pay a royalty (starting at 2% and
declining to 0.5%) to the INFH based upon sales of products utilizing natural
constituents exported from China or developed in China, or based in whole or in
part on such constituents. No royalties have been paid to date, and the Company
does not believe that royalties will be payable before the fiscal year ending
December 31, 1999, at the earliest.
CERTAIN OTHER TRANSACTIONS
The Company rents approximately 2,645 square feet of office space, utilized
for executive and administrative offices, from CSC Associates, a company owned
by Robert Portman, Chairman of the Board and Chief Executive Officer of the
Company, and David Portman, Secretary and a Director of the Company, is at a
rent of $2,645 per month, plus utilities, under a three year lease which expires
January 31, 2000. The Company believes that the terms upon which it obtains its
executive offices are at least as favorable to it as could be obtained from an
unrelated party through arms-length negotiations.
The terms of the Company's lease with CSC Associates were approved
unanimously by the Company's Board of Directors, including all "independent" and
"disinterested" directors. The Company considers T. Colin Campbell to be an
"independent" director and for the purpose of considering the Company's lease
with CSC Associates considers both Dr. Campbell and Jonathan D. Rahn to be
"disinterested" directors. The Company also considers Irving I. A. Tabachnick,
who was elected a director following approval of these transactions, to be an
independent director.
Except as described in this Prospectus, the Company has not entered into
any material transactions or series of transactions which, in the aggregate,
would be considered material in which any officer, director or beneficial owner
of 5% or more of any class of capital stock of the Company had a personal
interest. It is the Company's policy that transactions in which an officer or
director has a personal interest must be on terms no less favorable to the
Company than could be obtained in arms-length negotiation with non-affiliated
parties, that all such transactions be approved by a majority of
37
<PAGE>
independent, disinterested directors, and that the Company bear all legal and
other reasonable expenses, if any, incurred by its disinterested, independent
directors in considering and acting upon any such matter.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, $.0025 par value, of which 2,985,672 shares are outstanding as of
December 15, 1997, and 1,000,000 shares of Preferred Stock, $.01 par value, of
which 350,000 shares have been designated 10% Convertible Preferred Stock,
143,896 shares of which are outstanding at December 15, 1997.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share of Common
Stock owned of record on all matters to be voted on by stockholders, including
the election of directors. Holders of Common Stock do not have cumulative voting
rights and, accordingly, the holders of more than 50% of the outstanding shares
can elect the entire Board of Directors. Any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority of
the shares then entitled to vote at an election of directors.
The holders of Common Stock are entitled, upon liquidation or dissolution
of the Company, to receive pro rata all assets remaining available for
distribution to stockholders. The Common Stock has no preemptive or other
subscription rights, and there are no conversion rights or redemption
provisions. All outstanding shares of Common Stock are validly issued, fully
paid, and nonassessable.
PREFERRED STOCK
The Company's Board of Directors has the authority by resolution to issue
up to 1,000,000 shares of preferred stock in one or more series and fix the
number of shares constituting any such series, the voting powers, designations,
preferences and relative, participating, optional or other special rights and
qualifications, limitations, or restrictions thereof, including the dividend
rights, dividend rate, terms of redemption (including sinking fund provisions),
redemption price or prices, conversion rights and liquidation preferences of the
shares constituting any series, without any further vote or action by the
stockholders. For example, the Board of Directors is authorized to issue,
without any further vote or action by stockholders, a series of preferred stock
that would have the right to vote, separately or with any other series of
preferred stock, on any proposed amendment to the Company's Certificate of
Incorporation or any other proposed corporate action, including business
combinations and other transactions, or which might otherwise adversely affect
the voting power of the holders of Common Stock.
10% CONVERTIBLE PREFERRED STOCK
The Company has designated 350,000 shares of its Preferred Stock as "10%
Convertible Preferred Stock", 143,896 of which have been issued as of November
17, 1997. The Company has no present plans to issue additional shares of 10%
Convertible Preferred Stock (hereinafter "Convertible Preferred") except as
dividends on shares presently outstanding. If additional shares of 10%
Convertible Preferred Stock were needed for this purpose, the Company's Board of
Directors has the authority to increase the number of such shares authorized.
Holders of Convertible Preferred are entitled to annual dividends of $1.00
per share, payable quarterly to holders of record as of March 31, June 30,
September 30 and December 31 in each year. Dividends are payable, at the option
of the Company, in cash or in additional shares of 10% Convertible Preferred
valued for this purpose at $10.00 per share (i.e., the purchase price pair for
such shares). Through September 30, 1997, the Company has issued 23,896 shares
of Convertible Preferred as dividends on previously outstanding shares.
Convertible Preferred is convertible at the option of its holder into two
and one-half (2 1/2) shares of Common Stock, i.e., at a conversion price of
$4.00 per share of Common Stock based upon the original purchase price of the
Convertible Preferred, until December 31, 1997. Thereafter, until December 31,
2000, shares of Convertible preferred are convertible at a conversion price of
$6.00 per share of Common Stock. After December 31, 2000, the conversion price
will remain $6.00 per share unless the Common Stock is then admitted for trading
on The Nasdaq Stock Market (SmallCap Market
38
<PAGE>
or National Market System) or a national securities exchange, in which case the
conversion price will be 90% of the then current market value of the Common
Stock. Conversion prices of the Convertible Preferred will be adjusted in the
event of any stock splits, dividends on Common Stock payable in Common Stock or
similar events.
Holders of Convertible Preferred are entitled to a number of votes per
Share in the election of directors and on all other matters submitted to
shareholders for their approval or consent equal to the number of shares of
Common Stock into which a share of Convertible Preferred is convertible at the
time of the meeting at which the vote is cast or, in the case of an action of
shareholders taken without a formal meeting, on the date of such action. Holders
of Convertible Preferred vote as a class with holders of Common Stock, except
that, without the vote or consent of the holders of at least a majority of the
shares of Convertible Preferred then outstanding, the Company may not (i) create
or issue or increase the authorized number of shares of any class or classes or
series of stock ranking prior to the Convertible Preferred upon liquidation,
(ii) amend or alter or repeal any of the provisions of the Company's Certificate
of Incorporation so as to affect adversely the preferences or rights of the
Convertible Preferred, or (iii) authorize any reclassification of the
Convertible Preferred.
The Company has the right to redeem the Convertible Preferred at any time
after December 31, 1997, at a price of $10.50 per Share, until December 31,
2002, and thereafter at a price of $10.00 per Share, in each case plus accrued
dividends, if any. Convertible Preferred not previously redeemed or converted
into Common Stock is subject to mandatory redemption by the Company on December
31, 2005. If the Company is prohibited by law from redeeming the Convertible
Preferred at that time, holders of the Convertible Preferred will be notified,
and the Company will be required to redeem the Convertible Preferred thereafter
as soon as the legal prohibition is eliminated.
STOCK OPTIONS AND WARRANTS
As described under the caption "Management -- Stock Option Plans" and
"Management -- Compensation of Executive Officers", the Company has adopted an
incentive stock option plan (the "1995 Plan") and reserved 1,500,000 shares of
Common Stock for issuance upon the exercise of options granted under such Plan.
As of the date of this Prospectus, options to purchase 1,420,200 shares at
prices ranging from $2.00 to $6.00 have been granted under the 1995 Plan. No
options have been exercised to date.
The Company also has granted an option to purchase 25,000 shares at the
initial offering price of the Shares to Big Sky, Inc., the Company used by Joe
Montana for his endorsement and similar contracts. Big Sky, Inc. has agreed,
however, that it will not exercise this option for a period of nine months after
the date of this Prospectus without the Company's prior written consent. This
option will expire five years after the date of this Prospectus.
The Company has outstanding Warrants to purchase 255,500 shares of Common
Stock: 227,500 shares at a price of $3.75, and 28,000 shares at a price of
$6.25. These warrants were issued to the Underwriter and certain of its officers
and employees in connection with prior financings, and expire on July 29, 2000
and August 8, 2000, respectively.
In order to obtain regulatory clearances for this offering in certain
states, the Company has agreed that it will not issue additional stock options
or warrants for a period of one year following the date of this Prospectus,
apart from the warrants to be sold to the Underwriter in connection with this
offering. See "Underwriting."
DIVIDEND POLICY
The holders of the Company's Convertible Preferred are entitled to
dividends, as described above. The holders of Common Stock are entitled to
receive such dividends, if any, as may be declared from time to time by the
Board of Directors, in its discretion, from funds legally available therefor,
but cannot be declared so long as an arrearage exists in dividend payments on
the 10% Convertible Preferred Stock. The Company does not presently anticipate
paying dividends on its Common Stock.
TRANSFER AGENT
StockTrans, Inc., 7 East Lancaster Avenue, Ardmore PA 19003-2318, serves as
the registrar and transfer agent for the Company's Common Stock.
39
<PAGE>
CERTAIN CHARTER AND DELAWARE LAW PROVISIONS
Limitation of Director Liability: The Company's Certificate of
Incorporation contains a provision permitted by Delaware law which eliminates
the personal liability of the Company's directors for monetary damages for
breach or alleged breach of their fiduciary duty of care which arises under
state law. Although this does not change the directors' duty of care, it limits
legal remedies which are available for breach of that duty to equitable
remedies, such as an injunction or rescission. This provision of the Company's
Certificate of Incorporation has no effect on directors' liability for: (1)
breach of the directors' duty of loyalty; (2) acts or omissions not in good
faith or involving intentional misconduct or known violations of law; and (3)
approval of any transactions from which the directors derive an improper
personal benefit, nor does it relieve the Company or its directors from
compliance with federal or state securities laws.
Indemnification: The Certificate of Incorporation and the Bylaws of the
Company require indemnification, to the fullest extent permitted by the Delaware
General Corporation Law, of any person who is or was involved in any manner in
any investigation, claim or other proceeding by reason of the fact that such
person is or was a director or officer of the Company, or of another corporation
serving at the request of the Company, against all expenses and liabilities
actually and reasonably incurred by such person in connection with the
investigation, claim or other proceeding. Prior to the offerings, the Company
also plans to obtain officer and director liability insurance with respect to
certain matters, including matters arising under the Securities Act.
Section 203 of the Delaware General Corporation Law: Following this
offering, the Company will be subject to Section 203 of the Delaware General
Corporation Law which, in general, prohibits a publicly held Delaware
corporation from engaging in various "business combination" transactions with
any "interested stockholder" for a period of three years after the date for the
transaction in which the person became an "interested stockholder", unless (i)
the transaction is approved by the Board of Directors of the corporation prior
to the date the interested stockholder obtained such status, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding, those shares owned, by (a) persons who are directors and
also officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) on or subsequent
to such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3 of the outstanding voting
stock which is not owned by the interested stockholder. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to a stockholder. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or, within three years, did own) 15% or
more of the corporation's voting stock. The statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control attempts with
respect to the Company and, accordingly, may discourage attempts to acquire the
Company.
40
<PAGE>
UNDERWRITING
First Montauk Securities Corp. (the "Underwriter" has agreed, subject to
the terms and conditions of the underwriting agreement between the Company and
the Underwriter (the "Underwriting Agreement") to purchase from the Company, and
the Company has agreed to sell to such Underwriter, an aggregate of 1,200,000
Shares. The Underwriter's obligations are subject to approval of certain legal
matters by counsel and various conditions.
The Underwriter has advised the Company that it proposes to offer the
Shares offered hereby to the public at the offering price set forth on the cover
of this Prospectus and that it may allow to certain dealers, who are members of
the National Association of Securities Dealers, Inc. ("NASD"), concessions of
not in excess of $.30 per Share, of which not in excess of $.15 may be reallowed
to other dealers who are members of the NASD.
The Underwriter is committed on a "firm commitment" basis to purchase all
of the Shares offered hereby, if any are purchased. The Underwriter has advised
the Company that it does not intend to confirm sales to any account over which
it exercises discretionary authority.
The Company has granted an option to the Underwriter, exercisable during
the 45 day period after the date of this Prospectus, to purchase up to an
aggregate of 180,000 additional Shares at the public offering price, less the
underwriting discounts and commissions. The Underwriter may purchase such Shares
only to cover over-allotments made in connection with the sale of the Shares
offered hereby.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Registration Statement, including liabilities under the Act.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the aggregate offering price of the Shares offered hereby
including any shares purchased pursuant to the Underwriter's over-allotment
option), of which $30,000 has been paid to date.
The Company has also agreed to sell to the Underwriter or its designees,
warrants (the "Underwriter's Warrants") to purchase 120,000 shares of Common
Stock at a price of $.001 per warrant or an aggregate of $120.00. The
Underwriter's Warrants will be exercisable for a period of four years,
commencing one year after the date of this Prospectus, at an initial per share
exercise price equal to 145% of the initial public offering price per share of
Common Stock or $8.70 per share. The Common Stock underlying the Underwriter's
Warrants are identical in all respects to the Common Stock to be issued to the
public. The Underwriter's Warrants cannot be transferred, assigned, or
hypothecated for one year from the date of their issuance, except that they may
be assigned in whole or in part, to any successor, officer or partner of the
Underwriter (or any officer or partner of any such successor or partner).
Thereafter, the Underwriter's warrants may be transferred to officers,
employees, directors or consultants of the Underwriters. The Underwriter's
Warrants will contain anti-dilution provisions providing for appropriate
adjustment upon the occurrence of certain events.
The Underwriter and persons affiliated with the Underwriter also own (a)
warrants granted in August 1996 which expire July 31, 2000, to purchase 102,375
shares of Common Stock at a price of $3.75 per share, (b) warrants which expire
on August 9, 2000, to purchase 12,000 shares at $6.25 per share and (c) 75,000
shares of Common Stock, which shares and warrants were sold and issued to the
Underwriter as compensation in connection with financings completed in 1996 in
which the Underwriter acted as the Company's placement agent.
The Company has agreed that it will, on any one occasion during the
four-year period commencing one year from the date hereof, register the
Underwriter's Warrants and the underlying securities, at the Company's expense,
at the request of holders of a majority of the shares of Common Stock issuable
upon exercise of the Underwriter's Warrants. The Company has also agreed, during
the six year period commencing one year from the date hereof, to certain
"piggy-back" registration rights for holders of the Underwriter's Warrants and
the underlying securities.
For the life of the Underwriter's Warrants, the holders are given, at
nominal cost, the opportunity to profit from a rise in the market price for the
Common Stock of the Company without assuming the risk of ownership, with a
resulting dilution in the interest of other security holders. As long as the
Underwriter's Warrants remain unexercised, the terms under which the Company
could obtain additional capital may be adversely affected. Moreover, the holders
of the Underwriter's Warrants might be expected to exercise them at a time when
the Company would, in all likelihood, be able to
41
<PAGE>
obtain needed capital by a new offering of its securities on terms more
favorable than those provided by the Underwriter's Warrants. Additionally, if
the Underwriter should exercise its registration rights to effect a distribution
of the Underwriter's Warrants or underlying securities, the Underwriter, prior
to and during such distribution, may be unable to make a market in the Company's
securities. If the Underwriter must cease making a market, the market and market
price for such securities may be adversely affected and holders of such
securities may be unable to sell such securities. See "Risk Factors --
Underwriter's Warrants".
The Company has agreed pursuant to the Underwriting Agreement that for a
period of one year after the completion of this offering, neither the Company
nor any of its officers, directors or "affiliate" shareholders shall offer,
issue, sell, contract to sell, grant any option for the sale of or otherwise
dispose of any securities of the Company without the Underwriter's prior written
consent, except for shares issued upon the exercise of existing options and
rights, upon exercise of the overallotment option and the Underwriter's
Warrants, and shares of 10% Convertible Preferred Stock, issued as dividends on
outstanding shares.
The Company has also agreed pursuant to the Underwriting Agreement for a
period of five years following the date of this Prospectus, to use its best
efforts to cause an individual designated by the Underwriter to be elected to
the Company's Board of Directors. This individual may be an associate or
affiliate of the Underwriter, though no individual has been designated as of the
date of this Prospectus. The Underwriter has no plans to select such individual
in the immediate future. In the alternative, if the Underwriter does not
designate an individual to be elected to the Company's Board of Directors, the
Underwriter shall have the right to designate an advisor to attend all meetings
of the Board of Directors, which advisor shall have the right to receive notice
of all Board meetings. In addition, the Company and Underwriter have agreed that
upon the consummation of the offering, they will enter into a financial
consulting agreement for a period of two years at a monthly fee of $2,000. The
agreement also entitles the Underwriter to receive 5% of the first $5,000,000,
and 2 1/2% of the excess, if any, over $5,000,000, of the consideration paid in
connection with any business transactions between the Company and a party
introduced to the Company by the Underwriter.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement and related documents, copies of which
are on file at the offices of the Underwriters, the Company and the Securities
and Exchange Commission.
Prior to the offering, there has been no public market for the Shares.
Consequently, the public offering price of the Shares has been determined by
arms' length negotiation between the Company and the Underwriter and is not
necessarily related to the Company's value, net worth, or any other established
criteria of value.
The Underwriter was formed and first registered as a broker-dealer in 1983.
During the last three years, the Underwriter has been the lead underwriter in
only one public offering prior to this offering, but has participated in more
than 200 public offerings as a syndicate or selling group member. Prospective
purchasers of the Shares should consider the Underwriter's limited experience as
a lead underwriter in evaluating the securities offered hereby.
In connection with the offering, the Underwriter and selling group members
(if any) and its affiliates may engage in transactions that stabilize, maintain
or otherwise affect the market price of the Common Stock. Such transactions may
include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase Common
Stock for the purpose of stabilizing its market price. The Underwriter also may
create a short position for the account of the Underwriter by selling more
Common Stock in connection with this offering than it is committed to purchase
from the Company, and in such case may purchase Common Stock in the open market
following completion of this offering to cover all or a portion of such short
position. In addition, the Underwriter may impose "penalty bids" under
contractual arrangements whereby it may reclaim from a dealer participating in
this offering for its account, the selling concession with respect to the Common
Stock that is distributed in this offering but subsequently purchased for its
account in the open market. Any of the transactions described in this paragraph
may result in the maintenance of the price of the Common Stock at a level above
that which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if any is undertaken, may be
discontinued at any time.
42
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
The Company has 2,985,672 shares of Common Stock issued and outstanding,
and up to 359,740 additional shares of Common Stock are issuable upon conversion
of outstanding shares of 10% Convertible Preferred Stock. These shares of Common
Stock are, or will be when issued, "restricted securities" as defined in Rule
144 promulgated under the 1933 Act.
Rule 144 governs resale of "restricted securities" for the account of any
person (other than an issuer), and restricted and unrestricted securities for
the account of an "affiliate" of the issuer (i.e., generally, officers,
directors and owners of 10% or more of the voting securities of an issuer).
Restricted securities generally include any securities such as the Company's
outstanding securities which are acquired directly or indirectly from an issuer
or its affiliates other than in connection with a public offering. Under Rule
144 unregistered resales of restricted securities cannot be made until the
securities have been held for one year from the later of acquisition from the
issuer or an affiliate of the issuer. Thereafter, restricted securities may be
resold without registration subject to compliance with Rule 144's volume
limitation, aggregation, broker transaction, notice filing requirements and
requirements concerning publicly available information about the Company ("Rule
144 Requirements"). Resales of both restricted and unrestricted securities by
affiliates of an issuer are subject to the Rule 144 Requirements. The volume
limitations provide that a person (or persons who must aggregate their sales)
cannot, within any three-month period, sell more than the greater of one percent
of the then outstanding shares, or the average weekly reported trading volume
during the four calendar weeks preceding each such sale. A non-affiliate may
resell restricted securities which have been held for two years or more free of
the Rule 144 Requirements.
With respect to the Company's presently outstanding shares of Common Stock
and shares issuable upon conversion of outstanding 10% Convertible Preferred
Stock ("Conversion Shares"), 3,345,412 outstanding shares of Common Stock, and
any Conversion Shares when issued will satisfy the "one year" holding
requirements and thus be saleable under Rule 144 upon compliance with the other
Rule 144 Requirements. The remaining shares of the Company's outstanding
restricted Common Stock will satisfy the one year holding requirement beginning
in December 1997, and all will have satisfied that requirement by May 1998.
All of the Company's directors and executive officers, and certain of its
shareholders have entered into a "lock up" agreement with the Underwriter
pursuant to which they have agreed that, for a period of one year from the date
of this Prospectus, they will not offer, sell, contract to sell, pledge or
otherwise dispose of shares of the Company's Common Stock without the prior
written consent of the Underwriter. Holders of 2,440,222 shares of Common Stock
have entered into such agreements. Holders of 353,750 shares of Common Stock and
46,223 shares of 10% Convertible Preferred Stock have entered into similar
agreements in which the "lock up" period is six months. In addition, the Company
has agreed not to issue additional securities without the prior consent of the
Underwriter for a period of one year from the initial sale of Shares, except for
additional shares of 10% Convertible Preferred Stock as dividends to holders of
outstanding shares of 10% Convertible Preferred Stock, and additional shares of
Common Stock upon the exercise of outstanding options and warrants and the
exercise of the Underwriter's Overallotment Option or Underwriter's Warrants.
In addition to the Underwriter's "lock up" agreements, officers, directors
and one other shareholder of the Company have entered into agreements with the
Company which further restrict their ability to sell shares of the Company's
Common Stock which they own. These agreements preclude the sale of shares
subject to the agreements (the "escrow shares") by such shareholders for a
period of one year from the date of this Prospectus, and limit sales of the
escrowed shares in the second year following the date of this Prospectus to
2 1/2% of the total number of escrowed shares owned by each such shareholder.
The shareholders who have entered into these agreements and the number of
escrowed shares subject to their respective agreements are as follows: Robert
Portman and Jennifer Portman, individually and as trustee for the Portman's
minor children -- 887,198 shares); Jonathan D. Rahn -- 228,098 shares; David
Portman -- 163,431 shares; T. Colin Campbell and Karen Campbell -- 199,893
shares; and Jemeson Investment Co. -- 26,144 shares.
43
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Connolly Epstein Chicco Foxman Engelmyer & Ewing, Philadelphia, PA.
Certain legal matters in connection with the Common Stock will be passed upon
for the Underwriter by Goldstein & DiGioia, LLP, New York, New York.
Shareholders of the firm of Connolly Epstein Chicco Foxman Engelmyer & Ewing own
an aggregate of 10,000 shares of the Company's Common Stock.
EXPERTS
The financial statements of the Company and its affiliates as of December
31, 1996, and for the years ending December 31, 1996 and 1995, appearing in this
Prospectus and Registration Statement have been audited by Schiffman Hughes
Brown, Blue Bell, PA, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act of
1933 with respect to the shares of Common Stock offered by this Prospectus. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement and the exhibits
and financial statement schedules filed as a part thereof. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. All of these documents may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549,
or at the Regional Offices of the Commission at 210 South Dearborn Street, Room
1204, Chicago, Illinois 60604; and at 7 World Trade Center, New York, New York
10048. Copies of such material may be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
Section 145 of the Delaware General Corporation Law, as amended, authorizes
the Company to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. Article 9 of the Company's Certificate of Incorporation
provides for the indemnification of directors and officers to the full extent
permitted by Delaware law.
The Company may also purchase and maintain insurance for the benefit of any
director or officer which may cover claims for which the Company could not
indemnify such person.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore unenforceable.
44
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Report................................ F-2
Financial Statements:
Balance Sheets............................................ F-3
Statements of Operations.................................. F-4
Statement of Stockholders' Equity......................... F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................... F-7-F-13
F-1
<PAGE>
------------------------------
SCHIFFMAN
HUGHES
BROWN
------------------------------
A PROFESSIONAL CORPORATION
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of PacificHealth Laboratories, Inc.
We have audited the accompanying balance sheets of PacificHealth Laboratories,
Inc. as of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996 and the
period from April 13, 1995 (inception) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PacificHealth Laboratories,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for the year ended December 31, 1996 and from April 13, 1995
(inception) to December 31, 1995, in conformity with generally accepted
accounting principles.
Schiffman Hughes Brown
Blue Bell, Pennsylvania
December 12, 1997
- --------------------------------------------------------------------------------
790 Penllyn Pike, Suite 302, Blue Bell, PA 19422 (215) 646-2000 --
Fax (215) 646-1937
F-2
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2)........... $ 743,313 $1,071,850 $ 112,020
Accounts receivable, net (Note 3)............ 2,020,545 592,965
Inventories (Note 4)......................... 905,950 118,592 700,179
Prepaid expenses............................. 268,800 19,100 261,100
Other........................................ 29,854 6,750 6,926
Deferred tax asset........................... 38,012
---------- ---------- ----------
Total current assets...................... 4,006,474 1,216,292 1,673,190
---------- ---------- ----------
Property and equipment, net (Note 5)........... 178,339 2,223 115,161
---------- ---------- ----------
Other assets:
Deferred offering costs...................... 43,748
Organization costs, net of accumulated
amortization (Note 6)..................... 10,468 13,647 8,083
---------- ---------- ----------
$ 10,468 $ 13,647 $ 51,831
---------- ---------- ----------
$4,195,281 $1,232,162 $1,840,182
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........ $ 669,227 $ 116,221 $ 529,697
Reserve for product replacement (Note 4)..... 752,250
---------- ---------- ----------
Total current liabilities................. 669,227 116,221 1,281,947
---------- ---------- ----------
Commitments (Notes 8 and 15)
Stockholders' equity:
10% convertible preferred stock, $.01 par
value; authorized 1,000,000 shares; issued
and outstanding 133,666 shares in 1996,
119,903 shares in 1995 and 143,896 shares
at September 30, 1997..................... 1,337 1,199 1,439
Common stock, $.0025 par value; authorized
10,000,000 shares; issued and outstanding
2,953,450 shares in 1996, 2,198,000 shares
in 1995 and 3,185,672 shares at September
30, 1997.................................. 7,384 5,495 7,964
Additional paid-in capital................... 3,694,990 1,305,879 4,790,662
Accumulated deficit.......................... (177,657) (196,632) (4,241,830)
---------- ---------- ----------
3,526,054 1,115,941 558,235
---------- ---------- ----------
$4,195,281 $1,232,162 $1,840,182
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM APRIL 13, 1995 (INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1997 1996
---------- ---------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.............................. $3,085,726 $ -0- $ 2,834,236 $1,043,082
---------- ---------- ----------- ----------
Cost of goods sold:
Inventory, beginning................ 118,592 905,950 118,592
Purchases........................... 1,537,670 118,592 1,000,198 887,681
---------- ---------- ----------- ----------
1,656,262 118,592 1,906,148 1,006,273
Less: inventory, ending............. (905,950) (118,592) (700,179) (725,838)
---------- ---------- ----------- ----------
750,312 -0- 1,205,969 280,435
---------- ---------- ----------- ----------
Gross profit.......................... 2,335,414 -0- 1,628,267 762,647
---------- ---------- ----------- ----------
Selling, general and administrative
expenses............................ 2,224,683 186,892 4,923,936 1,278,681
Research and development (Note 12).... 25,331 21,502 39,637 23,729
Amortization expense.................. 3,180 2,253 2,385 2,385
Depreciation expense.................. 29,064 57,198 15,729
Provision for replacement of product
(Note 4)............................ 564,749
---------- ---------- ----------- ----------
2,282,258 210,647 5,587,905 1,320,524
---------- ---------- ----------- ----------
Net operating income (loss)........... 53,156 (210,647) (3,959,638) (557,877)
Other income (expense):
Interest income..................... 53,583 14,026 36,442 41,028
---------- ---------- ----------- ----------
Income (loss) before income taxes..... 106,739 (196,621) (3,923,196) (516,849)
Provision (benefit) for income taxes
(Note 11)........................... (38,012) -0- 38,212 290
---------- ---------- ----------- ----------
Net income (loss)..................... $ 144,751 $ (196,621) $(3,961,408) $ (517,139)
========== ========== =========== ==========
Primary net income (loss) per share of
common stock........................ $ .05 $ (.12) $ (1.15) $ (.20)
========== ========== =========== ==========
Fully diluted net income (loss) per
share of common stock............... $ .04 $ (.12) $ (1.15) $ (.20)
========== ========== =========== ==========
Primary weighted average shares
outstanding......................... 2,689,063 1,630,420 3,454,878 2,620,702
========== ========== =========== ==========
Fully diluted weighted average shares
outstanding......................... 3,447,050 1,806,421 4,697,229 3,215,472
========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM APRIL 13, 1995 (INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON PAID IN ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT EQUITY
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, April 13, 1995 (inception)..... $ -0- $ -0- $ -0- $ -0- $ -0-
Issuance of 387,500 shares of Founder's
preferred stock....................... 3,875 212,792 216,667
Conversion of 387,500 shares of
Founder's preferred stock for 620,000
shares of common stock................ (3,875) 1,550 2,325 -0-
Issuance of 3,945,000 shares of common
stock (subsequently reduced to
1,578,000 shares after reverse stock
split)................................ 3,945 107,558 111,503
Issuance of 118,750 shares of 10%
convertible preferred stock........... 1,188 983,204 984,392
Issuance of 1,153 shares of 10%
convertible preferred stock as a
dividend.............................. 11 (11) -0-
Net loss for the period ended December
31, 1995.............................. (196,621) (196,621)
------ ------ ---------- ----------- ----------
Balance, December 31, 1995.............. 1,199 5,495 1,305,879 (196,632) 1,115,941
Issuance of 755,000 shares common
stock................................. 1,888 2,249,820 2,251,708
Issuance of 450 shares of common stock
for services.......................... 1 1,799 1,800
Issuance of 1,250 shares of 10%
convertible preferred stock........... 13 12,487 12,500
Issuance of 12,513 shares of 10%
convertible preferred stock as a
dividend.............................. 125 125,005 (125,130)
Cash dividends.......................... (646) (646)
Net income for the year ended December
31, 1996.............................. 144,751 144,751
------ ------ ---------- ----------- ----------
Balance, December 31, 1996.............. 1,337 7,384 3,694,990 (177,657) 3,526,054
Issuance of 232,222 shares of common
stock................................. 580 993,474 994,054
Issuance of 10,230 shares of 10%
convertible preferred stock as a
dividend.............................. 102 102,198 (102,300)
Cash dividend........................... (465) (465)
Net loss for the period ended September
30, 1997.............................. (3,961,408) (3,961,408)
------ ------ ---------- ----------- ----------
Balance, September 30, 1997
(Unaudited)........................... $1,439 $7,964 $4,790,662 $(4,241,830) $ 558,235
====== ====== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM APRIL 13, 1995 (INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1997 1996
---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ 144,751 $ (196,621) $(3,961,408) $ (517,139)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Loss on retirement of fixed assets.... 58,061
Depreciation.......................... 29,064 57,198 15,729
Amortization.......................... 3,180 2,253 2,385 2,385
Deferred taxes........................ (38,012) 38,012
Issuance of common stock for
services............................ 1,800
Deferred offering..................... (43,748)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable.......................... (2,020,545) 1,427,580 (533,956)
(Increase) decrease in prepaid
expenses............................ (249,700) (19,100) 7,700 (122,381)
(Increase) decrease in inventory...... (787,358) (118,592) 205,771 (607,246)
(Increase) decrease in other current
assets.............................. (23,104) (6,750) 22,928 (10,371)
Increase in accounts payable and
accrued expenses.................... 553,006 116,221 (139,530) 288,694
Increase in reserve for product
replacement......................... 752,250
---------- ----------- ----------- -----------
Net cash used by operating activities........ (2,386,918) (222,589) (1,572,801) (1,484,285)
---------- ----------- ----------- -----------
Cash flows for investing activities:
Purchase of fixed assets................... (151,928) (52,082) (98,927)
Incurred organizational costs.............. (15,900)
Purchase of furniture and fixtures......... (53,252) (2,223)
---------- ----------- ----------- -----------
Net cash used in investing activities........ (205,180) (18,123) (52,082) (98,927)
---------- ----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock................... 2,251,707 111,503 994,055 2,191,707
Issuance of preferred stock................ 12,500 1,201,059 12,500
Dividends paid............................. (646) (465) (531)
---------- ----------- ----------- -----------
Net cash provided by financing activities.... 2,263,561 1,312,562 993,590 2,203,676
---------- ----------- ----------- -----------
Net increase (decrease) in cash.............. (328,537) 1,071,850 (631,293) 620,464
Cash, beginning balance...................... 1,071,850 -0- 743,313 1,071,850
---------- ----------- ----------- -----------
Cash, ending balance......................... $ 743,313 $ 1,071,850 $ 112,020 $ 1,692,314
========== =========== =========== ===========
Supplemental disclosure of cash flow
information:
Taxes paid................................. $ 150 $ -0- $ -0- $ 290
========== =========== =========== ===========
Non-cash financing activity:
Preferred stock dividend................... $ 125,130 $ 115 $ 102,300 $ 92,640
========== =========== =========== ===========
Issuance of common stock for services...... $ 1,800 $ -0- $ -0- $ -0-
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. BUSINESS:
PacificHealth Laboratories, Inc. (the Company) (PHL) was organized on April
13, 1995 to develop and market innovative natural products that have been
clinically shown to improve health and well being. At the present time, the
Company's ENDUROX line of products represents 100% of revenues.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and cash equivalents:
For purposes of reporting cash flows, the Company considers all cash
accounts which are not subject to withdrawal restrictions or penalties, and
certificates of deposit with original maturities of 90 days or less, to be cash
or cash equivalents.
Accounts receivable:
The Company provides an allowance for doubtful accounts, as needed, for
accounts deemed uncollectible.
Inventory:
Inventory is recorded at the lower of cost or market using the first-in,
first-out (FIFO) method.
Equipment and depreciation:
Property and equipment are carried at cost. Depreciation is calculated
using the straight-line method over their estimated useful lives ranging from 3
to 10 years. Depreciation expense for the years ended December 31, 1996 and 1995
was $29,064 and $0, respectively. Depreciation expense for the nine months ended
September 30, 1997 and 1996 was $57,198 and $15,729, respectively.
Organization costs:
Organization costs are capitalized and amortized over 5 years.
Earnings per share:
Primary earnings per share are computed by dividing net income (loss) by
the weighted average number of shares of common stock and the equivalent number
of common shares of convertible preferred stock. Fully diluted earnings per
share reflect the dilutive effect of stock options and warrants. For the year
ended December 31, 1995 and the nine months ended September 30, 1997 and 1996,
the computation of fully diluted loss per share was antidilutive; therefore, the
amounts reported for primary and fully dilutive loss per share were the same.
Research and development:
Research and development costs consist of expenditures incurred by the
Company during the course of planned search and investigation aimed at the
discovery of new knowledge which will be used to develop and market natural
products which improve health and well being. The Company expenses all such
research and development costs as they are incurred.
Income taxes:
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of balance sheet items for
financial and income tax reporting. The only difference between the basis for
F-7
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
financial and income tax reporting was the booking of tax benefit for the net
operating loss carryforward.
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable....................... $2,020,545 $-0- $614,465
Less: allowance for
doubtful accounts....................... -0- -0- 21,500
---------- ---- --------
$2,020,545 $-0- $592,965
========== ==== ========
</TABLE>
4. INVENTORIES:
Inventories at December 31, 1996, 1995 and September 30, 1997 consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.............................. $112,734 $118,592 $ 95,065
Work-in-process............................ 223,675 258,373
Finished goods............................. 569,541 346,741
-------- -------- --------
$905,950 $118,592 $700,179
======== ======== ========
</TABLE>
At the beginning of 1997, the Company decided to reformulate its ENDUROX
product into a caplet rather than a capsule, because the capsule form was very
hygroscopic and became altered in size and color in conditions of high heat and
humidity. As a result, the Company abandoned its inventory of capsules and,
whenever necessary, either exchanged its retailers' inventory of capsules with
caplets or issued a credit for returned capsules. The exchange of caplets for
capsules was recorded as a charge to the provision for product replacement.
Refunds were recorded as a reduction of revenue.
At September 30, 1997, the Company's management estimated that
approximately 170,000 packages of capsule product were in retailers' inventory
and recorded a reserve totaling $752,250. The estimate assumed that seventy-five
percent of the packages would be returned for replacement and twenty-five
percent would be returned for refunds. The cost of the replacement inventory,
$433,500, was charged to the provision and the estimated refunds, $318,750, was
recorded as a reduction of revenue.
Both ENDUROX EXCEL and ENDUROX ProHeart were introduced in a caplet form.
F-8
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment.................... $111,158 $2,223 $119,554
Molds and dies............................. 96,245 48,417
-------- ------ --------
207,403 2,223 167,971
Less:
Accumulated depreciation................. 29,064 52,810
-------- ------ --------
$178,339 $2,223 $115,161
======== ====== ========
</TABLE>
6. ORGANIZATION COSTS:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Cost....................................... $15,900 $15,900 $15,900
Less:
Accumulated amortization................. 5,432 2,223 7,817
------- ------- -------
$10,468 $13,647 $ 8,083
======= ======= =======
</TABLE>
7. STOCK:
Capital stock:
The total number of shares of all classes of stock which the Company has
authority to issue is 11,000,000 shares, consisting of (a) ten million
(10,000,000) shares of Common Stock, par value $.0025 per share, and (b) one
million (1,000,000) shares of Preferred stock, par value $.01 per share. The
preferred stock may be issued in one or more series, and may have such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions as shall be stated in the resolution
or resolutions providing for the issue thereof adopted by the Board of Directors
of the Company from time to time.
Common stock:
In 1995, 3,945,000 shares were issued and subsequently reduced to 1,578,000
by a 2.5 for 1 reverse split. In 1996, the Company issued 680,000 shares of
common stock for $2,453,750 and 450 shares for $1,800 in services. Also in 1996
under the terms of the Placement Agency Agreement relating to the sale of 10%
convertible preferred stock described below, the Company sold 75,000 shares of
common stock to the placement agent for $18,000. During the nine months ended
September 30, 1997, the Company issued 232,222 shares of common stock for
$1,044,999.
Founders preferred stock:
In 1995, 387,500 shares of Founder's preferred stock were issued. Each
share of Founders preferred stock entitled its holder to receive an annual cash
dividend of $.06 per share (payable from retained earnings). Each share of the
Founder's preferred stock is convertible into 4 shares of common stock. The
Founder's preferred stock was converted into 620,000 shares of the Company's
common stock after giving effect to a subsequent 2.5 for 1 reverse split in
August 1995.
F-9
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
7. STOCK (CONTINUED):
10% convertible preferred stock:
In 1996 and 1995, the Company sold a total of 120,000 shares of its 10%
convertible preferred stock for $1,200,000.
Holders of shares of the 10% convertible preferred stock are entitled to
receive an annual dividend of $1.00 per share, payable in quarterly installments
of $.25 per share. Dividends may be paid in cash or in additional shares at the
discretion of the Board of Directors of the Company. Each share of preferred
stock may be converted into two and one half shares of common stock through
December 31, 1997 and, thereafter each share of 10% convertible preferred stock
may be converted into one and two-thirds shares of the Company's common stock.
Activity for the periods ended is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Stock dividends
(shown as shares)........................ 12,513 1,153 10,230
======= ====== =======
Cash dividends............................. $ 646 $ -0- $ 465
======= ====== =======
</TABLE>
8. COMMITMENTS:
Strategic Alliance Agreement:
The Company entered into an exclusive relationship with the Institute of
Nutrition & Food Hygiene (INFH), an institution located in The People's Republic
of China, for the purpose of commercializing various products, know how and/or
intellectual property outside of China. Per the Agreement, the INFH will attempt
to locate and enter into exclusive licensing agreements with other institutions
located in China to supply the Company with an array of herbs, non-prescription
drugs, nutritional supplements, intellectual property and technology for
developing products derived from natural sources which can be used in the
maintenance of health and well being. Any future products licensed by the INFH
will be assigned to the Company subject to terms and conditions of the
Agreement.
When the Company has achieved profitability on a cumulative basis it shall
pay royalties to the INFH applicable to the net revenues of any products
exported from China, developed in China or products which are based on extracts
from China. The royalties to be paid are as follows:
<TABLE>
<CAPTION>
NET REVENUES ROYALTY
------------ -------
<S> <C>
$0 - 25 million............................. 2%
$25 - 100 million........................... 1 1/2%
$100 - 200 million.......................... 1%
Over $200 million........................... 1/2%
</TABLE>
F-10
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
8. COMMITMENTS (CONTINUED):
For all royalties which are earned by INFH in excess of $25 million but
less than $100 million, PHL shall receive a 30% credit. This credit shall be
escrowed by PHL and be applied to "Special Services" performed by the INFH,
institutions or individuals with whom the INFH has entered into a licensing
agreement. Unused credits shall carry over beyond the year in which it was
earned. For purposes of the Agreement, Special Services shall be defined as:
(1) Clinical studies/research
(2) Laboratory studies/research
(3) Toxicology studies/research
(4) Formulation and/or product development
(5) Quality control studies/services
(6) Payment to Chinese consultants for work including, but not limited
to, clinical and/or research design, product development, quality
control, manufacturing and/or sourcing.
Line of credit:
In May, 1997, the Company entered into a line of credit agreement with its
bank which enables the Company to borrow up to 80% of their current accounts
receivable (defined as less than 90 days old), up to a maximum of $1,000,000. At
September 30, 1997, the Company had not borrowed any monies from this line of
credit.
Employment and consulting agreements:
The Company has entered into an employment contract with the Chairman and
CEO that provides for minimum annual compensation of $150,000. The Company is
the beneficiary of a keyman life insurance policy (on the Chairman's life) for
$2,000,000. It also has consulting agreements with certain shareholders and
others who have expertise of value to the Company.
9. INCENTIVE STOCK OPTION PLAN:
In 1995, the Company established an incentive stock option plan (the Plan)
and presently has reserved 1,500,000 shares of the Company's common stock for
issuance under the Plan. Options granted pursuant to the Plan at December 31,
1996 were 904,500, and those options were granted to certain officers, key
employees and/or consultants to the Company. Exercise prices range from $2 to $4
per common share, and vest over varying periods of time. In the first nine
months of 1997, 15,700 options were granted to certain officers, key employees
and/or consultants to the Company. Exercise prices on the options granted in
1997 range from $4.25 to $4.50 per common share, and vest over varying periods
of time. All issuances were granted at the fair market value of the Company's
common stock at time of grant. As of September 30, 1997, no options have been
exercised.
F-11
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
9. INCENTIVE STOCK OPTION PLAN (CONTINUED):
Transactions in the Plan since inception are as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED AVERAGE
GRANTED VESTED PER VESTED EXERCISE PRICE PER
SHARES SHARES COMMON SHARE VESTED COMMON SHARE
--------- ------- -------------- -------------------
<S> <C> <C> <C> <C>
Balance, April 13, 1995.... -0- -0-
Activity during period..... 300,000 -0-
--------- -------
Balance, December 31,
1995..................... 300,000 -0-
--------- -------
Activity during the year
ended December 31,
1996..................... 604,500 144,500 $2.00 - $4.00 $2.57
--------- -------
Balance, December 31,
1996..................... 904,500 144,500
--------- -------
Activity during the nine
months ended September
30, 1997................. 15,700 388,200 $2.00 - $4.50 $3.36
--------- -------
Balance, September 30,
1997..................... 920,200 532,700 $3.14
========= =======
</TABLE>
The Company accounts for stock-based compensation in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation which permits the use of the
intrinsic value method described in APB Opinion No. 25, Accounting for Stock
Issued to Employees, and requires the Company to disclose the pro forma effects
of accounting for stock-based compensation using the fair value method as
described in the optional accounting requirements of SFAS No. 123. As permitted
by SFAS No. 123, the Company will continue to account for stock-based
compensation under APB Opinion No. 25, under which the Company has recognized no
compensation expense.
Had compensation cost for the Company's stock option plan been determined
based on the fair value of the Company's common stock at the dates of awards
under the fair value method of SFAS No. 123, the Company's net income and net
income per common share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
<S> <C> <C> <C>
Net income:
As reported............................. $ 144,751 $(196,621) $(3,961,408)
Pro forma............................... (92,305) (229,934) (4,227,079)
Net income per common share:
As reported............................. .05 (.12) (1.15)
Pro forma............................... (.03) (.14) (1.22)
</TABLE>
Significant assumptions used to calculate the above fair value of the
awards are as follows:
<TABLE>
<S> <C> <C>
Risk free interest rates of return............... 5.75%
Expected option life............................. 60 months
Expected dividends............................... $-0-
</TABLE>
10. WARRANTS:
At September 30, 1997, the Company has warrants outstanding for the
purchase of 255,500 shares of the Company's common stock at exercise prices
ranging between $3.75 to $6.25 per common share. The warrants expire at the
close of business on July 31, 2000 (112,375 warrants exercisable at $3.75 per
share) and August 8, 2000 (12,000 warrants exercisable at $6.25 per share). As
of September 30, 1997, no warrants have been exercised.
F-12
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
11. INCOME TAXES:
Income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- --------------
1996 1995 1997 1996
---------- ---- ------- ----
<S> <C> <C> <C> <C>
Current:
Federal................................... $ -0- $-0- $ -0- $-0-
State..................................... -0- -0- 200 290
---------- ---- ------- ----
-0- -0- 200 290
---------- ---- ------- ----
Deferred:
Federal................................... (30,067) -0- 30,067 -0-
State..................................... (7,945) -0- 7,945 -0-
---------- ---- ------- ----
(38,012) -0- 38,012 -0-
---------- ---- ------- ----
$ (38,012) $-0- $38,212 $290
========== ==== ======= ====
</TABLE>
The Company has $88,432 in Federal and state net operating loss carryovers
which can be used to offset future taxable income. The net operating loss
carryforwards expire in the year 2010. In 1996, management of the Company
assessed its then current earnings along with the then existing sales backlog
and budgeted sales for 1997 and had determined that it was more likely than not
that the net operating loss carryforwards would be utilized in 1997 thus a
deferred tax asset of $38,012 was recorded on the books. This deferred tax asset
was calculated using effective tax rates for federal and state. However, as a
result of reassessment by the Company at September 30, 1997, it appears that net
operating loss carryforwards will not be recognized in 1997 and has thus
reversed the deferred tax asset recorded at December 31, 1996.
12. RESEARCH AND DEVELOPMENT COSTS:
For the year ended December 31, 1996 and for the period from April 13, 1995
to December 31, 1995, research and development costs were $25,331 and $21,502,
respectively. Research and development costs for the nine months ended September
30, 1997 and 1996 were $39,637 and $23,729, respectively.
13. FINANCIAL INSTRUMENTS:
Cash accounts are secured by the Federal Deposit Insurance Corporation up
to $100,000. At December 31, 1996 and September 30, 1997, cash deposits exceeded
federally insured limits by approximately $400,000 and $12,020, respectively.
14. SIGNIFICANT CUSTOMERS:
For the year ended December 31, 1996, the Company had revenues from one
customer which accounted for approximately 45% of total revenue. During the nine
months ended September 30, 1997, the Company had three customers with billings
in excess of 10% of total revenues. These three customers accounted for
approximately 49% of total revenues.
15. RELATED PARTY:
The Company leases its offices from a company owned equally by the
president and secretary of PacificHealth Laboratories, Inc. The three year lease
starting February 1, 1997 requires monthly payments of $2,645, plus a monthly
charge for the Company's portion of certain common area costs. Rent expense for
the nine months ended September 30, 1997 was $30,308.
F-13
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THE PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 6
Dilution................................ 14
Use of Proceeds......................... 15
Capitalization.......................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 17
Business of the Company................. 20
Management.............................. 30
Principal Shareholders.................. 35
Certain Relationships and Related
Transactions.......................... 37
Description of Securities............... 38
Underwriting............................ 41
Shares Available for Future Sale........ 43
Legal Matters........................... 43
Experts................................. 44
Additional Information.................. 44
Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... 44
Index to Financial Statements........... F-1
</TABLE>
------------------
UNTIL _________, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
1,200,000 SHARES
PACIFICHEALTH
LABORATORIES, INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
[LOGO]
DECEMBER , 1997
================================================================================
<PAGE>
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated amount of various expenses in
connection with the sale and distribution of the securities being registered:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 2,771
NASD filing fee............................................. 1,414
Underwriter's nonaccountable expense allowance (assuming no
exercise of Over-allotment Option)........................ 216,000*
Printing and engraving expenses............................. 35,000*
Legal fees and expenses (including blue sky fees and
expenses)................................................. 100,000*
Accounting fees and expenses................................ 10,000*
Transfer agent fees......................................... 5,000*
Miscellaneous............................................... 9,815*
--------
Total..................................................... $380,000*
========
</TABLE>
- ------------------
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Sales of unregistered securities within the two years preceding the date of
the Registration Statement are as follows:
In an offering completed in January 1996, the Company sold 120,000
shares of 10% Convertible Preferred Stock at a price of $10 per share
(aggregate $1,200,000.00) to 29 investors, of which 25 were accredited
investors. Through September 30, 1997, the Company has issued an additional
23,896 shares of 10% Convertible Preferred Stock as dividends upon the
outstanding shares of 10% Convertible Preferred Stock, as permitted, at its
option, pursuant to the terms of the 10% Convertible Preferred Stock. These
offers and sales were made by the Company in reliance upon the exemption
from securities registration provided by Regulation D, Rule 506,
promulgated under the Securities Act of 1933, as amended. In connection
with the offering of 10% Convertible Preferred Stock, the placement agent,
First Montauk Securities Corp. ("First Montauk") received commissions of
$120,000; entered into a Consulting Agreement with the Company pursuant to
which it received a $30,000 consulting fee; received the right to acquire
75,000 shares of the Company's Common Stock at a price of $.24 per share,
which right was exercised at the final closing of the offering; received an
nonaccountable expense allowance of $24,000; and reimbursement of certain
legal expenses in the amount of $6,000. The following persons and/or
entities were purchasers in this offering: Mark M. Carter, MD; Malcolm E.
Hawley, DDS Profit Sharing Plan; Leonard Kaplan; Delaware Charter Guarantee
& Trust Co., Trustee FBO Lawrence L. Lidfeldt SEP/IRA; T. George Harris;
Ronald Weinisch and Alberta Weinisch, JTWROS; Conrad Ellman; Charles W.
Kramer; Barbara Waingort; Elliot Marvel and Evelyn Marvel, JTWROS; Barry
Friedenberg; Delaware Charter Guarantee & Trust Co., Trustee FBO Paul
Prager IRA; Joseph Mahana; Vincent A. Ventimiglia; Charles F. Moran;
William A. Schwartz; Frank J. Vecchione; Mark L. Friedell, MD and Donna S.
Friedell, JTWROS; Delaware Charter Guarantee & Trust Co., Trustee SERP FBO
Stephen Frankel, Frankel Real Estate Inc.; Ronald Iannelli; Pulmonary &
Critical Care Associates, P.A. P/S Plan & Trust, Stuart Millstone, Trustee;
Alyse Borgersen; Joseph Buckelew; Michael Theodorobeakos; Dolores Bauer &
Anthony Bauer, JTWROS; Grumet Partners LP, Jack Grumet, General Partner;
Andrew Gennusa; Jeffrey Golden, C/F Melissa Golden UGMA/NY; Richard B.
Soldo, Sr. and Ann Soldo, JTWROS.
II-1
<PAGE>
In an offering completed in July 1996, the Company offered and sold
525,000 shares of its Common Stock at a price of $3.75 per share to 83
investors, of which 66 were accredited investors. These offers and sales
were made by the Company in reliance upon the exemption from securities
registration provided by Regulation D, Rule 506, promulgated under the
Securities Act of 1933, as amended. First Montauk acted as Placement Agent
for the offering, and received commissions of $196,750; warrants to acquire
227,500 shares of the Company's Common Stock at a price of $3.75 per share,
which expire on July 29, 2000; an nonaccountable expense allowance of
$29,531.25; and reimbursement of certain legal expenses in the amount of
$6,000. The following persons and/or entities were purchasers in this
offering: J. Allyn Simmons, Jr.; Michael C. Stanley; Delaware Charter
Guarantee & Trust, TTEE F/B/O Michael C. Stanley IRA R/O; Delaware Charter
Guarantee & Trust, TTEE F/B/O James Tobin IRA; John B. Rutzel; Delaware
Charter Guarantee & Trust, TTEE F/B/O Bruce DeSchryver IRA R/O; Delaware
Charter Guarantee & Trust, TTEE F/B/O Scott M. Browne, IRA; Jeffrey &
Sharon Golden, JTWROS; Crane B. Harris; Katherine Harris; Crane B. Harris,
C/F Elizabeth Aston Harris a Minor, Pursuant to the VA UGMA; Crane B.
Harris, C/F Evan H. Harris a Minor, Pursuant to the VA UGMA; Delaware
Charter Guarantee & Trust, TTEE F/B/O Douglas A. Love IRA; William A.
Schwartz; Delaware Charter Guarantee & Trust, TTEE FBO Daniel C. Dagit IRA;
David R. Walker; John M. and Mary I. Burlingame, Tenants-in-Common;
Delaware Charter Guarantee & Trust, TTEE FBO Daniel S. Berman IRA R/O;
Georgie W. Stanley; M. Brett Stanley; Peter E. S. Nichols; Herbert Talbot,
Jr. & Anne N. Talbot, JTWROS; Charlotte C. Collins; Delaware Charter
Guarantee & Trust, TTEE FBO Louis L. Scher IV IRA R/O; Lola Ambrosi;
Charles W. Kramer; Elizabeth N. Callahan; Brooks N. Hallock; Delaware
Charter Guarantee & Trust, TTEE FBO Francis Booth IRA; Andrew W. Bisset;
Catherine Cassidy; Georgie S. Powers; Lynn P. Harrington; Robert R.
Bartolini; Delaware Charter Guarantee & Trust, TTEE FBO Hillsdale Music
Inc. PS Plan; Neil Costa & Lynn Ahrens, JTWROS; Virginia L. Schmidt;
Delaware Charter Guarantee & Trust, TTEE F/B/O J. Gale Yetman IRA; Delaware
Charter Guarantee & Trust, TTEE F/B/O Richard J. Yetman IRA; Deborah Galler
and F. Michael Heinrich, Jr., JTWROS; W. Kenneth Albrecht; Delaware Charter
Guarantee & Trust, TTEE F/B/O Robert B. Williams IRA R/O; Barbara J.
Shannon; Delaware Charter Guarantee & Trust, TTEE F/B/O Glen J. Beauchamp
IRA; Marcia Paulen; Ralf Sellig; Fred R. Huettig; Delaware Charter
Guarantee & Trust, TTEE F/B/O Neil Costa IRA R/O; Sandra W. Bisset; Gemma
Moorman; Joseph Chicco and Rita A. Chicco, JTWROS; Neil G. Epstein and
Laura F. Jansen, JTWROS; John M. Krno U/W/O, Theresa V. Krno and Anita Von
Dreusche, TTEES; Adlai Wertman and Janet Ambrosi Wertman, JTWROS; Richard
H. Norwood; Path Holdings, Inc.; Delaware Charter Guarantee & Trust, TTEE
F/B/O John P. Harkrader, Jr. IRA R/O; Delaware Charter Guarantee & Trust,
TTEE F/B/O John H. Burlingame IRA R/O; Judith Golden; Delaware Charter
Guarantee & Trust, TTEE F/B/O Robert R. Bartolini IRA R/O; Elizabeth L.
Vreeland; Delaware Charter Guarantee & Trust, TTEE F/B/O David A. Lackland
IRA R/O; Robert L. Crowell Rev. Tr. UAD 4/26/91, Robert L. Crowell, TTEE;
Desmond H. O'Connell, Jr. and Roberta J. O'Connell, JTWROS; Delaware
Charter Guarantee & Trust, TTEE F/B/O Joseph J. Tulskie IRA; Anthony N.
DiCesare D.D.S., P.A. Profit Sharing Trust; Eleftherios Kougentakis; Daniel
W. and Mary H. Kiningham, JTWROS; George B. Lucas Trust #3 dtd 5/8/87,
Daniel Brainard Slack, TTEE; The Sawtooth Group; Delaware Charter Guarantee
& Trust, TTEE F/B/O Howard Greenberg IRA; Andrew Panzo; Polly Vecchione; B.
Michael Pisani; Charles H. Rose and Mindy G. Rose, JTWROS; Eric V. Malm;
Stephen S. Lancaster; Evelyn J. Busch; Richard P. Gonder; Delaware Charter
Guarantee & Trust, TTEE F/B/O Robert P. Ferris IRA; Ann Lucas Burns;
Delaware Charter Guarantee & Trust, TTEE F/B/O Carol A. Fahey IRA R/O; John
E. Madsen, Jr. and Louise B. Madsen, JTWROS; Delaware Charter Guarantee &
Trust, TTEE F/B/O Richard Kollisch IRA R/O; Carla F. Madrigal; Thelma B.
Jones; and Edmund N. Goodman, MD.
In a private transaction in August 1996, the Company sold 140,000
shares of its Common Stock to the Kaufmann Fund, New York City, NY, at a
price of $3.75 per share (aggregate $525,000.00). This sale was made by the
Company in reliance upon the exemption from securities registration
provided by Regulation D, Rule 506, promulgated under the Securities Act of
1933,
II-2
<PAGE>
as amended. In connection with this private transaction, the Company paid
First Montauk a fee of $52,500 for its services in connection with the sale
of the Common Stock, plus a nonaccountable expense allowance of $5,250
(less certain legal expenses) incurred by the Company in connection with
this sale. In connection with this financing, First Montauk and certain of
its employees received warrants to purchase an aggregate of 28,000 shares
of the Company's Common Stock at a price of $6.25 per share, expiring
August 5, 2000.
In September 1996, the Company granted an option to purchase 25,000
shares of Common Stock to Big Sky, Inc. as part of an endorsement
agreement. The exercise price of this option will equal the offering price
for the Shares. The option will expire five years from the effective date
of the Registration Statement.
In December 1996, the Company issued an aggregate 450 shares of its
Common Stock as a holiday bonus to five employees (Debbie Caponigro, Tracey
Clayton, Lisa McGuinness, Darlene Marosevitch and Leslie Steib). These
shares were issued without registration in reliance upon the fact that they
did not involve any sale of securities.
Also December 1996, the Company sold 15,000 shares of Common Stock to
one of its officers and directors, David Portman, at a price of $4.00 per
share (aggregate $60,000.00). This sale was made by the Company in reliance
upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended.
In a private transaction in February 1997, the Company sold 222,222
shares of its Common Stock to one accredited investor, Jemeson Investment
Co., Birmingham, AL, at a price of $4.50 per share (aggregate $999,999.00).
This sale was made by the Company in reliance upon the exemption from
securities registration provided by Regulation D, Rule 506, promulgated
under the Securities Act of 1933, as amended.
In April 1997, the Company sold 10,000 shares of Common Stock to a
single accredited investor, Theodore Lange, at a price of $4.50 per share.
This sale was made by the Company in reliance upon the exemption from
securities registration provided by Regulation D, Rule 506, promulgated
under the Securities Act of 1933, as amended.
All of the foregoing transactions were exempt from registration under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS.
(a) Exhibits
Exhibits listed below either were filed with the Company's initial filing
of Form SB-2 on September 25, 1997(*), with Amendment No. 1 to Form SB-2 filed
October 23, 1997 (**) or are filed herewith (***).
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C> <C>
***1.1 -- Underwriting Agreement
***1.2 -- Selected Dealer Agreement
*3.1 -- Certificate of Incorporation of the Company and all
amendments thereto
***3.2.1 -- Amended and Restated Bylaws of the Company
***4.1 -- Specimen Common Stock Certificate
***4.2 -- Underwriter's Warrant Agreement and Form of Warrant
*4.3 -- Designation of 10% Convertible Preferred Stock
</TABLE>
II-3
<PAGE>
<TABLE>
EXHIBIT
NO.
-------
<S> <C> <C>
***5 -- Opinion of Connolly Epstein Chicco Foxman Engelmyer & Ewing
regarding the legality of securities being registered
*10.1 -- Incentive Stock Option Plan of 1995
*10.2 -- Employment Agreement between the Company and Robert Portman
dated May 1, 1995
***10.2.1 -- Employment Agreement between the Company and Robert Portman
effective January 1, 1998
*10.3 -- Strategic Alliance Agreement between the Company and the
Institute of Nutrition and Food Hygiene
*10.4 -- Exclusive License Agreement between the Company and the INFH
*10.5 -- Shareholders Agreement
*10.6 -- Big Sky, Inc. Endorsement Agreement
*10.7 -- Big Sky, Inc. Option Agreement
10.8 -- Financial Consulting Agreement between the Company and the
Underwriter
**10.9 -- License and distribution letter agreement with Kemin Foods,
L.C. dated September 22, 1997
**10.10 -- Credit Agreement with Summit Bank dated May 1, 1997
***23.1 -- Consent of Schiffman Hughes Brown
***23.2 -- Consent of Connolly Epstein Chicco Foxman Engelmyer & Ewing
(included in Exhibit 5)
*24 -- Power of Attorney (included in the signature pages of the
Registration Statement)
***27 -- Financial Data Schedules
</TABLE>
- ------------------
* Previously filed
** Filed with Amendment No. 1.
*** Filed herewith.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment No. 3
to Registration Statement No. 333-36379 to be signed on its behalf by the
undersigned, in the City of Philadelphia, on the 16th day of December, 1997.
PACIFICHEALTH LABORATORIES, INC.
By: /s/ ROBERT PORTMAN
-----------------------------------------
Robert Portman
President and Chief Executive Officer
and a Director
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
<S> <C> <C>
/s / JONATHAN D. RAHN Chief Financial Officer, December 16, 1997
- --------------------------------------- Principal Accounting
Jonathan D. Rahn Officer and a Director
/s / DAVID I. PORTMAN Director December 16, 1997
- ---------------------------------------
David I. Portman
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
EXHIBIT NO. DESCRIPTION NUMBER
- ----------- ----------- ---------------
<S> <C> <C> <C>
***1.1 -- Underwriting Agreement
***1.2 -- Selected Dealer Agreement
*3.1 -- Certificate of Incorporation of the Company and all
amendments thereto
***3.2 -- Amended and Restated Bylaws of the Company
***4.1 -- Specimen Common Stock Certificate
***4.2 -- Underwriter's Warrant Agreement and Form of Warrant
*4.3 -- Designation of 10% Convertible Preferred Stock
***5 -- Opinion of Connolly Epstein Chicco Foxman Engelmyer &
Ewing regarding the legality of securities being
registered
*10.1 -- Incentive Stock Option Plan of 1995
*10.2 -- Employment Agreement between the Company and Robert
Portman dated May 1, 1995
***10.2.1 -- Employment Agreement between the Company and Robert
Portman effective January 1, 1998
*10.3 -- Strategic Alliance Agreement between the Company and
the Institute of Nutrition and Food Hygiene
*10.4 -- Exclusive Licensing Agreement between the Company and
the INFH
*10.5 -- Shareholders Agreement
*10.6 -- Big Sky, Inc. Endorsement Agreement
*10.7 -- Big Sky, Inc. Option Agreement
*10.8 -- Financial Consulting Agreement between the Company
and the Underwriter
**10.9 -- License and distribution letter agreement with Kemin
Foods, L.C. dated September 22, 1997
**10.10 -- Credit Agreement with Summit Bank dated May 1, 1997
***23.1 -- Consent of Schiffman Hughes Brown
***23.2 -- Consent of Connolly Epstein Chicco Foxman Engelmyer &
Ewing (included in Exhibit 5)
*24 -- Power of Attorney (included in the signature pages of
the Registration Statement)
***27 -- Financial Data Schedules
</TABLE>
- ------------------
* Filed with Form SB-2 on September 25, 1997
** Filed with Amendment No. 1 to Form SB-2 on October 23, 1997
*** Filed herewith.
EXHIBIT 1.1
<PAGE>
1,200,000 Shares of Common Stock
of
PACIFICHEALTH LABORATORIES, INC.
UNDERWRITING AGREEMENT
----------------------
Red Bank, New Jersey
December , 1997
First Montauk Securities
328 Newman Springs Road
Red Bank, New Jersey 07701
Ladies and Gentlemen:
PacificHealth Laboratories Inc., a Delaware corporation (the "Company"),
confirms its agreement with First Montauk Securities Corp. (the "Underwriter"),
with respect to the sale by the Company and the purchase by the Underwriter, of
1,200,000 shares of the Company's common stock, par value $.0025 per share
("Common Stock") and with respect to the grant by the Company to the
Underwriter of the option described in Section 2(b) hereof to purchase all or
any part of 180,000 additional shares for the purpose of covering
over-allotments, if any. The aforesaid 1,200,000 shares of Common Stock (the
"Firm Securities") and together with all or any part of the 180,000 additional
shares of Common Stock subject to the overallotment option described in Section
2(b) hereof (the "Overallotment Securities") are hereinafter collectively
referred to as the "Securities". The Company also proposes to issue and sell to
the Underwriter, (the "Underwriter's Warrant") pursuant to the Underwriter's
Warrant Agreement (the "Underwriter's Warrant Agreement") for the purchase of an
aggregate of 120,000 additional shares of Common Stock (the "Underwriter's
Option Shares"). The Securities, the Underwriter's Warrant Agreement and
Underwriter's Option Shares are more fully described in the Registration
Statement (as defined in Subsection 1(a) hereof) and the Prospectus (as defined
in Subsection 1(a) hereof) referred to below. Unless the context otherwise
requires, all references to the "Company" shall include all presently existing
subsidiaries and any entities acquired by the Company on or prior to the Closing
Date (defined in Subsection 2(c) hereof). All representations, warranties and
opinions of counsel required hereunder shall cover any such subsidiaries and
acquired entities taken as a whole.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, each of the Underwriter as of the date hereof,
and as of the Closing Date and any Overallotment Closing Date (as defined in
Subsection 2(c) hereof), if any, as follows:
<PAGE>
(a) The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, and an amendment or amendments thereto,
on Form SB-2 (No. 333-36379) including any related preliminary prospectus (each
a "Preliminary Prospectus"), for the registration of the Securities under the
Securities Act of 1933, as amended (the "Act"), which registration statement and
any amendment or amendments have been prepared by the Company in conformity with
the requirements of the Act and the rules and regulations of the Commission
under the Act. Following execution of this Agreement, the Company will promptly
file (i) if the Registration Statement has been declared effective by the
Commission, (A) a Term Sheet (as defined in the Rules and Regulations (as
hereinafter defined)) pursuant to Rule 434 under the Act or (B) a Prospectus
under Rules 430A and/or 424(b) under the Act, in either case in form
satisfactory to the Underwriter or (ii) in the event the registration statement
has not been declared effective, a further amendment to said registration
statement in the form heretofore delivered to the Underwriter and will not,
before the registration statement becomes effective, file any other amendment
thereto unless the Underwriter shall have consented thereto after having been
furnished with a copy thereof. Except as the context may otherwise require, such
registration statement, as amended, on file with the Commission at the time the
registration statement becomes effective (including the prospectus, financial
statements, schedules, exhibits and all other documents filed as a part thereof
and all information deemed to be a part thereof as of such time pursuant to
paragraph (b) of Rule 430A of the Rules and Regulations)(as hereinafter
defined), is hereinafter called the "Registration Statement" and the form of
prospectus in the form first filed with the Commission pursuant to Rule 424(b)
of the Rules and Regulations, is hereinafter called the "Prospectus." For
purposes hereof, "Rules and Regulations" mean the rules and regulations adopted
by the Commission under either the Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has issued
any order preventing or suspending the use of any Preliminary Prospectus, the
Registration Statement or Prospectus or any part thereof and no proceedings for
a stop order have been instituted or are pending or, to the best knowledge of
the Company, threatened. Each of the Preliminary Prospectus, the Registration
Statement and the Prospectus at the time of filing thereof conformed in all
material respects with the requirements of the Act and the Rules and
Regulations, and neither the Preliminary Prospectus, the Registration Statement
nor the Prospectus at the time of filing thereof, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that this
representation
2
<PAGE>
and warranty does not apply to statements made or statements omitted in reliance
upon and in conformity with written information furnished to the Company with
respect to the Underwriter by or on behalf of the Underwriter expressly for use
in such Preliminary Prospectus, Registration Statement or Prospectus.
(c) When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date and each Overallotment Closing Date
(as hereinafter defined) and during such longer period as the Prospectus may be
required to be delivered in connection with sales by the Underwriter or a
dealer, the Registration Statement and the Prospectus will contain all material
statements which are required to be stated therein in compliance with the Act
and the Rules and Regulations, and will in all material respects conform to the
requirements of the Act and the Rules and Regulations; neither the Registration
Statement, nor any amendment thereto, at the time the Registration Statement or
such amendment is declared effective under the Act, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, not misleading, and
the Prospectus at the time the Registration Statement becomes effective, at the
Closing Date and at any Overallotment Closing Date, will not contain an untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, not misleading; provided, however, that this
representation and warranty does not apply to statements made or statements
omitted in reliance upon and in conformity with information supplied to the
Company in writing by or on behalf of the Underwriter expressly for use in the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto.
(d) The Company has been duly organized and is now, and at the Closing Date
and any Overallotment Closing Date will be, validly existing as a corporation in
good standing under the laws of the State of Delaware. The Company does not own,
directly or indirectly, an interest in any corporation, partnership, trust,
joint venture or other business entity; provided, that the foregoing shall not
be applicable to the investment of the net proceeds from the sale of the
Securities in short-term, low-risk investments as set forth under "Use of
Proceeds" in the Prospectus except to the extent that any failure of the Company
to comply with the foregoing does not have a material adverse effect on the
Company. The Company is duly qualified to do business and in good standing as a
foreign corporation in each jurisdiction in which its ownership or leasing of
its properties or the character of its operations require such qualification to
do business, except where the failure to so qualify would not have a material
adverse effect on the Company. The Company has all requisite power and authority
(corporate and other), and has
3
<PAGE>
obtained any and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials and bodies (including, without limitation, those having jurisdiction
over environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; the Company is and has been
doing business in compliance with all such authorizations, approvals, orders,
licenses, certificates, franchises and permits and all federal, state, local and
foreign laws, rules and regulations upon the Company; and the Company has not
received any notice of proceedings relating to the revocation or modification of
any such authorization, approval, order, license, certificate, franchise, or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision ruling or finding, would materially and adversely affect the condition,
financial or otherwise, or the earnings, business affairs, position, prospects,
value, operation, properties, business or results of operation of the Company.
The disclosures, if any, in the Registration Statement concerning the effects of
federal, state, local, and foreign laws, rules and regulations on the Company's
business as currently conducted and as contemplated are correct in all material
respects and do not omit to state a material fact necessary to make the
statements contained therein not misleading.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under the caption "Capitalization"
and will have the adjusted capitalization set forth therein on the Closing Date,
based upon the assumptions set forth therein, and the Company is not a party to
or bound by any instrument, agreement or other arrangement providing for the
Company to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and as otherwise described in the
Prospectus. The Securities, the Underwriter's Warrant and the Underwriter's
Warrant Shares and all other securities issued or issuable by the Company
conform or, when issued and paid for, will conform in all respects to all
statements with respect thereto contained in the Registration Statement and the
Prospectus. All issued and outstanding securities of the Company have been duly
authorized and validly issued and are fully paid and non-assessable; the holders
thereof have no rights of rescission with respect thereto, and are not subject
to personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any holders of
any security of the Company, or similar contractual rights granted by the
Company to subscribe for or purchase securities. The Securities, the
Underwriter's Warrant and the Underwriter's Warrant Shares to be issued and sold
by the Company hereunder, and upon payment therefor, are not and will not be
subject to any preemptive or other similar rights of any stockholder to
subscribe for or purchase securities, have been duly authorized and, when
issued,
4
<PAGE>
paid for and delivered in accordance with the terms hereof and thereof, will be
validly issued, fully paid and non-assessable and will conform to the
descriptions thereof contained in the Prospectus; the holders thereof will not
be subject to any liability solely as such holders; all corporate action
required to be taken for the authorization, issuance and sale of the Securities,
the Underwriter's Warrant and the Underwriter's Warrant Shares has been duly and
validly taken; and the certificates, if any, representing the Securities and the
Underwriter's Warrant Shares will be in due and proper form. Upon the issuance
and delivery pursuant to the terms hereof of the Securities to be sold to the
Underwriter by the Company hereunder, the Underwriter will acquire good and
marketable title to such Securities free and clear of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction or equity of
any kind whatsoever.
(f) The financial statements of the Company, together with the related
notes and schedules thereto, included in the Registration Statement, the
Preliminary Prospectus and the Prospectus fairly present the financial position
and the results of operations of the Company at the respective dates and for the
respective periods to which they apply; and such financial statements have been
prepared in conformity with generally accepted accounting principles and the
Rules and Regulations, consistently applied throughout the periods involved.
There has been no material adverse change or development involving a prospective
change in the condition, financial or otherwise, or in the earnings, business
affairs, position, prospects, value, operation, properties, business, or results
of operation of the Company, whether or not arising in the ordinary course of
business, since the dates of the financial statements included in the
Registration Statement and the Prospectus and the outstanding debt, the
property, both tangible and intangible, and the business of the Company, conform
in all material respects to the descriptions thereof contained in the
Registration Statement and in the Prospectus.
(g) Schiffman, Hughes, Brown, Blue, Bell, P.A., whose report is filed with
the Commission as a part of the Registration Statement, is an independent
certified public accountant as required by the Act and the Rules and
Regulations.
(h) The Company (i) has paid all federal, state, local, and foreign taxes
for which it is liable, including, but not limited to, withholding taxes and
taxes payable under Chapters 21 through 24 of the Internal Revenue Code of 1986
(the "Code"), (ii) has furnished all tax and information returns it is required
to furnish pursuant to the Code, and has established adequate reserves for such
taxes which are not due and payable, and (iii) does not have knowledge of any
tax deficiency or claims outstanding, proposed or assessed against it.
5
<PAGE>
(i) The Company maintains insurance, which is in full force and effect, of
the types and in the amounts which it reasonably believes to be adequate for its
business, including, but not limited to, personal injury and product liability
insurance covering all personal and real property owned or leased by the Company
against fire, theft, damage and all risks customarily issued against.
(j) There is no action, suit, proceeding, inquiry, investigation,
litigation or governmental proceeding (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or foreign,
pending or to the knowledge of the Company threatened against (or circumstances
that may give rise to the same), or involving the properties or business of the
Company which: (i) questions the validity of the capital stock of the Company or
this Agreement or of any action taken or to be taken by the Company pursuant to
or in connection with this Agreement; (ii) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in all
respects); or (iii) might materially affect the condition, financial or
otherwise, or the earnings, business affairs, position, prospects, value,
operation, properties, business or results of operations of the Company.
(k) The Company has full legal right, power and authority to enter into
this Agreement, the Underwriter's Warrant Agreement, the Consulting Agreement
(as described in Section 4(x) hereof) and to consummate the transactions
provided for in such agreements; and this Agreement, the Underwriter's Warrant
Agreement and the Consulting Agreement have each been duly authorized, executed
and delivered by the Company. Each of this Agreement, the Underwriter's Warrant
Agreement and the Consulting Agreement, constitutes a legally valid and binding
agreement of the Company, subject to due authorization, execution and delivery
by the Underwriter, enforceable against the Company in accordance with its terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law). Neither the
Company's execution or delivery of this Agreement, the Underwriter's Warrant
Agreement, or the Consulting Agreement, its performance hereunder and
thereunder, its consummation of the transactions contemplated herein and
therein, nor the conduct of its business as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto, conflicts
with or will conflict with or results or will result in any material breach or
violation of any of the terms or provisions of, or constitutes or will
constitute a material default under, or result in the creation or imposition of
any
6
<PAGE>
material lien, charge, claim, encumbrance, pledge, security interest defect or
other restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of: (i) the
Certificate of Incorporation or By-Laws of the Company; (ii) any material
license, contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or by which the Company is bound or
to which any of its properties or assets (tangible or intangible) is or may be
subject; or (iii) any statute, judgment, decree, order, rule or regulation
applicable to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, having jurisdiction over the Company or any of its
activities or properties.
(l) No consent, approval, authorization or order of, and no filing with,
any court, regulatory body, government agency or other body, domestic or
foreign, is required for the performance by the Company of this Agreement and
the transactions contemplated hereby, except such as have been or may be
obtained under the Act or may be required under state securities or Blue Sky
laws in connection with (i) the Underwriter's purchase and distribution of the
Firm Securities and Overallotment Securities to be sold by the Company
hereunder; or (ii) the issuance and delivery of the Underwriter's Warrant or the
Underwriter's Warrant Shares.
(m) All executed agreements or copies of executed agreements (whether
electronically scanned or otherwise) filed as exhibits to the Registration
Statement to which the Company is a party or by which the Company may be bound
or to which any of its assets, properties or businesses may be subject have been
duly and validly authorized, executed and delivered by the Company, and
constitute legally valid and binding agreements of the Company, enforceable
against it in accordance with their respective terms, except to the extent there
is no material adverse effect upon the Company. The descriptions contained in
the Registration Statement of contracts and other documents are accurate in all
material respects and fairly present the information required to be shown with
respect thereto by the Rules and Regulations and there are no material contracts
or other documents which are required by the Act or the Rules and Regulations to
be described in the Registration Statement or filed as exhibits to the
Registration Statement which are not described or filed as required, and the
exhibits which have been filed are materially or substantially complete and
correct copies of the documents of which they purport to be copies.
7
<PAGE>
(n) Subsequent to the respective dates as of which information is set forth
in the Registration Statement and Prospectus, and except as may otherwise be
indicated or contemplated herein or therein, the Company has not: (i) issued any
securities or incurred any liability or obligation, direct or contingent, for
borrowed money in any material amount; (ii) entered into any transaction other
than in the ordinary course of business; (iii) declared or paid any dividend or
made any other distribution on or in respect of its capital stock; or (iv) made
any changes in capital stock, material changes in debt (long or short term) or
liabilities other than in the ordinary course of business; or (v) made any
material changes in or affecting the general affairs, management, financial
operations, stockholders equity or results of operations of the Company.
(o) No default exists in the due performance and observance of any material
term, covenant or condition of any license, contract, indenture, mortgage,
installment sales agreement, lease, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement, or any other agreement
or instrument evidencing an obligation for borrowed money, or any other
agreement or instrument to which the Company is a party or by which any of the
Company may be bound or to which any of its property or assets (tangible or
intangible) of the Company is subject or affected except where such default does
not, and will not, have a material adverse effect upon the Company.
(p) The Company has generally enjoyed a satisfactory employer-employee
relationship with its employees and is in compliance in all material respects
with all federal, state, local, and foreign laws and regulations respecting
employment and employment practices, terms and conditions of employment and
wages and hours.
(q) Since its inception, the Company has not incurred any liability arising
under or as a result of the application of the provisions of the Act.
(r) Except as disclosed in the Prospectus, the Company does not presently
maintain, sponsor or contribute to, and never has maintained, sponsored or
contributed to, any program or arrangement that is an "employee pension benefit
plan," an "employee welfare benefit plan " or a "multiemployer plan" as such
terms are defined in Sections 3(2), 3(1) and 3(37) respectively of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans").
Except as disclosed in the Prospectus, the Company does not maintain or
contribute, now or at any time previously, to a defined benefit plan, as defined
in Section 3(35) of ERISA.
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(s) The Company is not in violation of any domestic or foreign laws,
ordinances or governmental rules or regulations to which it is subject.
(t) No holders of any securities of the Company or of any options, warrants
or other convertible or exchangeable securities of the Company exercisable for
or convertible or exchangeable for securities of the Company have the right to
include any securities issued by the Company in the Registration Statement or
any registration statement to be filed by the Company or to require the Company
to file a registration statement under the Act.
(u) Neither the Company, nor, to the Company's best knowledge after due
inquiry, any of its employees, directors, stockholders or affiliates (within the
meaning of the Rules and Regulations) has taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably be
expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
(v) None of the patents, patent applications, trademarks, service marks,
trade names and copyrights, or licenses and rights to the foregoing presently
owned or held by the Company is in dispute or are in any conflict with the right
of any other person or entity within the Company's current area of operations
nor has the Company received notice of any of the foregoing. The Company: (i)
owns or has the right to use, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, all patents, trademarks, service marks, trade
names and copyrights, technology and licenses and rights with respect to the
foregoing, used in the conduct of its business as now conducted or proposed to
be conducted without infringing upon or otherwise acting adversely to the right
or claimed right of any person, corporation or other entity under or with
respect to any of the foregoing; and (ii) except as set forth in the Prospectus,
is not obligated or under any liability whatsoever to make any payments by way
of royalties, fees or otherwise to any owner or licensee of, or other claimant
to, any patent, trademark, service mark trade name, copyright, know-how,
technology or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise.
(w) The Company has taken reasonable security measures to protect the
secrecy, confidentiality and value of all the material trade secrets,
trademarks, know-how (including unpatented and/or unpatentable proprietary and
confidential
9
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information) technical data and information ("Intellectual Property") material
to its operations.
(x) The Company has good and marketable title to, or valid and enforceable
leasehold estates in, all items of real and personal property owned or leased by
it free and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects, or other restrictions or equities of any kind whatsoever,
other than liens for taxes or assessments not yet due and payable.
(y) On or before the effective date of the Registration Statement, the
Company shall cause to be duly executed legally binding and enforceable
agreements pursuant to which (i) each of the Company's officers and directors,
has agreed not to, directly or indirectly, offer to sell, sell, grant any option
for the sale of, assign, transfer, pledge, hypothecate or otherwise encumber any
of their shares of Common Stock or other securities (either pursuant to Rule 144
of the Rules and Regulations or otherwise) or dispose of any beneficial interest
therein for a period of not less than 12 months, (ii) other persons owning
at least 469,307 shares of the Company's Common Stock (or Securities convertible
into Common Stock) have agreed not to, directly or indirectly, offer to sell,
sell, grant any option for the sale of, assign, transfer, pledge, hypothecate or
otherwise encumber any of their shares of Common Stock or other securities
(either pursuant to Rule 144 of the Rules and Regulations or otherwise) or
dispose of any beneficial interest therein for a period of not less than 6
months. The Company will cause the Transfer Agent, as defined below, to mark an
appropriate legend on the face of stock certificates representing all of such
shares of Common Stock.
(aa) The Company has not incurred any liability and there are no
arrangements or understandings for services in the nature of a finder's or
origination fee with respect to the sale of the Securities or any other
arrangements, agreements, understandings, payments or issuances with respect to
the Company or any of its officers, directors, employees or affiliates that may
adversely affect the Underwriter's compensation, as determined by the National
Association of Securities Dealers, Inc. ("NASD").
(bb) The Firm Securities have been approved for quotation on the Nasdaq
SmallCap Market of the Nasdaq Stock Market, Inc. subject to official notice of
issuance.
(cc) Neither the Company nor any of its respective officers, employees,
agents or any other person acting on behalf of the Company, has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or
10
<PAGE>
supplier, or official or employee of any governmental agency (domestic or
foreign) or instrumentality of any government (domestic or foreign) or any
political party or candidate for office (domestic or foreign) or other person
who was, is, or may be in a position to help or hinder the business of the
Company (or assist the Company in connection with any actual or proposed
transaction) which: (a) might subject the Company, or any other such person to
any damage or penalty in any civil, criminal or governmental litigation or
proceeding (domestic or foreign); (b) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company;
and (c) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The Company's internal
accounting controls are sufficient to cause the Company to comply with the
Foreign Corrupt Practices Act of 1977, as amended.
(dd) Except as set forth in the Prospectus, no officer, director or
stockholder of the Company, or any "affiliate" or "associate" (as these terms
are defined in Rule 405 promulgated under the Rules and Regulations) of any such
person or entity or the Company, has or has had, either directly or indirectly,
(i) a material interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company, or (B) purchases from or sells or furnishes to the
Company any goods or services, except with respect to the beneficial ownership
of not more than 1% of the outstanding shares of capital stock of any
publicly-held entity; or (ii) a beneficial interest in any material contract or
agreement to which the Company is a party or by which it may be bound or
affected. Except as set forth in the Prospectus under "Certain Transactions",
there are no existing agreements, arrangements, understandings or transactions,
or proposed agreements, arrangements, understandings or transactions, between or
among the Company, and any officer, director, or principal stockholder of the
Company, or any affiliate or associate of any such person or entity.
(ee) Any certificate signed by any officer of the Company and delivered to
the Underwriter or to the Underwriter's counsel shall be deemed a representation
and warranty by the Company to the Underwriter as to the matters covered
thereby.
(ff) The Company has entered into an employment agreement with Dr. Robert
Portman as described in the Prospectus. The Company has obtained key-man life
insurance policy with respect to Dr. Portman in an amount of at least
$2,000,000.
(gg) No securities of the Company have been sold by the Company since its
inception, except as disclosed in Part II of the Registration Statement.
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(hh) The minute books of the Company have been made available to
Underwriter's counsel and contain a complete summary of all meetings and actions
of the Board of Directors and Stockholders of the Company since April, 1995.
(ii) Except as disclosed in writing to the Underwriter or the Prospectus no
officer, or director or to the Company's knowledge, stockholder of the Company
has any affiliation or association with any member of the NASD.
2. Purchase, Sale and Delivery of the Securities and Agreement to Issue
Underwriter's Warrant.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriter, and the Underwriter agrees
to purchase from the Company, at the price per Security set forth below, the
Firm Securities.
(b) In addition, on the basis of the representations, warranties, covenants
and agreements, herein contained, but subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriter to purchase up
to an additional 180,000 shares of Common Stock. The option granted hereby will
expire 45 days after the date of this Agreement, and may be exercised in whole
or in part from time to time only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the Firm
Securities upon notice by the Underwriter to the Company setting forth the
number of Overallotment Securities as to which the Underwriter is then
exercising the option and the time and date of payment and delivery for such
Overallotment Securities. Any such time and date of delivery shall be determined
by the Underwriter, but shall not be later than seven full business days after
the exercise of said option, nor in any event prior to the Closing Date, as
defined in paragraph (c) below, unless otherwise agreed to between the
Underwriter and the Company. Nothing herein contained shall obligate the
Underwriter to make any over-allotments. No Overallotment Securities shall be
delivered unless the Firm Securities shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates for,
the Firm Securities shall be made at the offices of the Underwriter at 328
Newman Springs road, Red Bank, New Jersey 07701 or at such other place as shall
be designated by the Underwriter. Such delivery and payment shall be made at
10:00 a.m. (New York City time) on December __, 1997 or at such other time and
date as shall be designated by the Underwriter but not less than three (3) nor
more than five (5) business days after
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<PAGE>
the effective date of the Registration Statement (such time and date of payment
and delivery being hereafter called "Closing Date"). In addition, in the event
that any or all of the Overallotment Securities are purchased by the
Underwriter, payment of the purchase price for, and delivery of certificates for
such Overallotment Securities shall be made at the above-mentioned office or at
such other place and at such time (such time and date of payment and delivery
being hereinafter called "Overallotment Closing Date") as shall be agreed upon
by the Underwriter and the Company on each Overallotment Closing Date as
specified in the notice from the Underwriter to the Company. Delivery of the
certificates for the Firm Securities and the Overallotment Securities, if any,
shall be made to the Underwriter against payment by the Underwriter of the
purchase price for the Firm Securities and the Overallotment Securities, if any,
to the order of the Company as the case may be by certified check in New York
Clearing House funds, certificates for the Firm Securities and the Overallotment
Securities, if any, shall be in definitive, fully registered form, shall bear no
restrictive legends and shall be in such denominations and registered in such
names as the Underwriter may request in writing at least two (2) business days
prior to Closing Date or the relevant Overallotment Closing Date, as the case
may be. The certificates for the Firm Securities and the Overallotment
Securities, if any, shall be made available to the Underwriter at the
above-mentioned office or such other place as the Underwriter may designate for
inspection, checking and packaging no later than 9:30 a.m. on the last business
day prior to Closing Date or the relevant Overallotment Closing Date, as the
case may be.
The purchase price of the Securities to be paid by the Underwriter to the
Company for the Securities purchased under Clauses (a) and (b) above will be
$5.40 per Share (which price is net of the Underwriter's discount and
commissions). The Company shall not be obligated to sell any Securities
hereunder unless all Firm Securities to be sold by the Company are purchased
hereunder. The Company agrees to issue and sell the Securities to the
Underwriter in accordance herewith.
(d) On the Closing Date, the Company shall issue and sell to the
Underwriter, the Underwriter's Warrant at a purchase price of $120.00 which
Underwriter's Warrant shall entitle the holders thereof to purchase an aggregate
of 120,000 shares of Common Stock. The Underwriter's Warrant shall be
exercisable for a period of four (4) years commencing one (1) year from the
effective date of the Registration Statement at an initial exercise price equal
to one hundred forty-five (145%) of the initial public offering price of the
Firm securities. The Underwriter's Warrant Agreement and form of Warrant
Certificate shall be substantially in the form filed as exhibits to the
Registration Statement. Payment for the Underwriter's Warrant shall be made on
the Closing Date. The
13
<PAGE>
Company has reserved and shall continue to reserve a sufficient number of Shares
for issuance upon exercise of the Underwriter's Warrant.
3. Public Offering of the Securities. As soon after the Registration
Statement becomes effective and as the Underwriter deems advisable, but in no
event more than five (5) business days after such effective date, the
Underwriter shall make a public offering of the Securities (other than to
residents of or in any jurisdiction in which qualification of the Securities is
required and has not become effective) at the price and upon the other terms set
forth in the Prospectus and otherwise in compliance with the Rules and
Regulations. The Underwriter may allow such concessions and discounts upon sales
to other dealers as set forth in the Prospectus. The Underwriter may from time
to time increase or decrease the public offering price after distribution of the
Securities has been completed to such extent as the Underwriter, in its sole
discretion, deems advisable.
4. Covenants of the Company. The Company covenants and agrees with the
Underwriter as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Exchange Act or
within 25 days after the Closing Date except for Form 8-A: (i) before
termination of the offering of the Securities by the Underwriter which the
Underwriter shall not previously have been advised and furnished with a copy; or
(ii) to which the Underwriter shall have objected; or (iii) which is not in
compliance with the Act, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof, the
Company will advise the Underwriter and confirm by notice in writing: (i) when
the Registration Statement, as amended, becomes effective, if the provisions of
Rule 430A promulgated under the Act will be relied upon, when the Prospectus has
been filed in accordance with said Rule 430A and when any post-effective
amendment to the Registration Statement becomes effective; (ii) of the issuance
by the Commission of any stop order or of the initiation, or the threatening of
any proceeding, suspending the effectiveness of the Registration Statement or
any order preventing or suspending the use of the Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, or the institution or
proceeding for that purpose; (iii) of the issuance by any state securities
commission of any proceedings for the suspension of the qualification of the
Securities for offering or sale in any jurisdiction or of the
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<PAGE>
initiation, or the threatening, of any proceeding for that purpose; (iv) of the
receipt of any comments from the Commission; and (v) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information. If the Commission or
any state securities commission or regulatory authority shall enter a stop order
or suspend such qualification at any time, the Company will make every
reasonable effort to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Underwriter) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Underwriter pursuant to
Rule 424(b)(4)) not later than the Commission's close of business on the earlier
of (i) the second business day following the execution and delivery of this
Agreement and (ii) the fifth business day after the effective date of the
Registration Statement.
(d) The Company will give the Underwriter notice of its intention to file
or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriter in connection with the offering of the Securities which differs from
the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
will furnish the Underwriter with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such prospectus to which the Underwriter or Goldstein
& DiGioia, LLP ("Underwriter's counsel"), shall reasonably object.
(e) The Company shall cooperate in good faith with the Underwriter, and
Underwriter's counsel, at or prior to the time the Registration Statement
becomes effective, in endeavoring to qualify the Securities for offering and
sale under the securities laws of such jurisdictions as the Underwriter may
reasonably designate, and shall cooperate with the Underwriter and Underwriter's
counsel in the making of such applications, and filing such documents and shall
furnish such information as may be required for such purpose; provided, however,
the Company shall not be required to qualify as a foreign corporation or file a
general consent to service of process in any such jurisdiction. In each
jurisdiction where such qualification shall be effected, the Company will,
unless the Underwriter agree that such action is not at the time necessary or
advisable, use all reasonable efforts to file and make such statements or
reports at such times
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<PAGE>
as are or may reasonably be required by the laws of such jurisdiction to
continue such qualification.
(f) During the time when the Prospectus is required to be delivered under
the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when the Prospectus
relating to the Securities is required to be delivered under the Act, any event
shall have occurred as a result of which, in the opinion of counsel for the
Company or Underwriter's counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Act, the Company will notify the Underwriter promptly and
prepare and file with the Commission an appropriate amendment or supplement in
accordance with Section 10 of the Act, each such amendment or supplement to be
reasonably satisfactory to Underwriter's counsel, and the Company will furnish
to the Underwriter a reasonable number of copies of such amendment or
supplement.
(g) As soon as practicable, but in any event not later than 45 days after
the end of the 12-month period commencing on the day after the end of the fiscal
quarter of the Company during which the effective date of the Registration
Statement occurs (90 days in the event that the end of such fiscal quarter is
the end of the Company's fiscal year), the Company shall make generally
available to its security holders, in the manner specified in Rule 158(b) of the
Rules and Regulations, and to the Underwriter, an earnings statement which will
be in such form and detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and
Regulations, which statement need not be audited unless required by the Act,
covering a period of at least 12 consecutive months after the effective date of
the Registration Statement.
(h) During a period of five (5) years after the date hereof and provided
that the Company is required to file reports with the Commission under Section
12 of the Exchange Act, the Company will furnish to its stockholders, as soon as
practicable, annual reports (including financial statements audited by
independent public accountants), and will deliver to the Underwriter:
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<PAGE>
(i) as soon as they are available, copies of all reports (financial or
other) mailed to stockholders;
(ii) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD or
any securities exchange;
(iii) every press release and every material news item or article of
interest to the financial community in respect of the Company and any
future subsidiaries or their affairs which was released or prepared by the
Company;
(iv) any additional information of a public nature concerning the
Company and any future subsidiaries or their respective businesses which
the Underwriter may reasonably request;
(v) a copy of any Schedule 13D, 13G, 14D-1, 13E-3 or 13E-4 received or
filed by the Company from time to time.
During such five-year period, if the Company has active subsidiaries, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(i) For as long as the Company is required to file reports with the
Commission under Section 12 of the Exchange Act, the Company will maintain a
Transfer Agent, as well as a Registrar (which may be the same entity as the
Transfer Agent) for its Common Stock.
(j) The Company will furnish to the Underwriter or pursuant to the
Underwriter's direction, without charge, at such place as the Underwriter may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Underwriter may reasonably
request.
(k) Neither the Company, nor its officers or directors, nor affiliates of
any of them (within the meaning of the Rules and Regulations) will take,
directly or indirectly, any action designed to, or which might in the future
reasonably be expected to cause or result in, stabilization or manipulation of
the price of any securities of the Company except as may be permitted under the
Exchange Act.
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<PAGE>
(l) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the provisions, set forth under the
caption "Use of Proceeds" in the Prospectus. No portion of the net proceeds will
be used directly or indirectly to acquire any securities issued by the Company.
(m) The Company shall timely file all such reports, forms or other
documents as may be required from time to time, under the Act, the Exchange Act,
and the Rules and Regulations, and all such reports, forms and documents filed
will comply as to form and substance with the applicable requirements under the
Act, the Exchange Act, and the Rules and Regulations.
(n) The Company shall furnish to the Underwriter as early as practicable
prior to each of the date hereof, the Closing Date and each Overallotment
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited consolidated interim financial
statements of the Company (which in no event shall be as of a date more than
forty-five (45) days prior to the date of the Registration Statement) which have
been read by the Company's independent public accountants, as stated in their
letters to be furnished pursuant to Section 6(k) hereof.
(o) For a period of two (2) years from the Closing Date, the Company shall
furnish to the Underwriter at the Company's sole expense, (i) daily consolidated
transfer sheets relating to the Securities upon the Underwriter's request; (ii)
a list of holders of Common Stock upon the Underwriter's request; (iii) a list
of, if any, the securities positions of participants in the Depository Trust
Company upon the Underwriter's request.
(p) Until a date which is five (5) years from the Closing Date shall use
its best efforts to cause one (1) individual selected by the Underwriter to be
elected to the Board of Directors of the Company (the "Board"), if requested by
the Underwriter and provided such individual is reasonably acceptable to and
approved by the Company. The Underwriter's nominee, if elected, shall receive
the same compensation as the other non-employee members of the Board.
Alternatively, the Underwriter shall be entitled to appoint an individual who
shall be permitted to attend all meetings of the Board and to receive all
notices and other correspondence and communications sent by the Company to
members of the Board, and copies of all minutes thereof. The Company shall
reimburse the Underwriter's designee for his or her out-of-pocket expenses
reasonably incurred and authorized in advance by the Company in connection with
his or her attendance of the Board meetings. To the extent permitted by law, the
Company agrees to indemnify and hold the designee (as a director or observer)
and the Underwriter harmless against any and all claims, actions, awards and
judgements arising out of his or her service as a director or an observer and
the Company shall
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<PAGE>
maintain a liability insurance policy in an amount of not less than $1,000,000
affording coverage for the action of its officer and directors, to include such
designee and the Underwriter as an insured under such policy. The Underwriter's
nominee shall, if a member of the Board, be a member of the Audit Committee of
the Board if qualified. The Underwriter's nominee or designee, as the case may
be, shall agree not to disclose any non-public information and shall, if
requested by the Company, execute and deliver a non-disclosure agreement upon
terms reasonably acceptable to the Company. The Company reserves the right not
to provide information and to exclude such Underwriter's attendee from any
meeting or portion thereof if attendance at such meeting by such attendee would
compromise or adversely affect the attorney-client privilege between the Company
and its counsel, or would, in the good faith judgment of the Board, result in
conflict of interest situation. The Company shall use its reasonable efforts to
promptly bring to the attention of such attendee any agenda item that, in the
good faith judgment of the Board, would result in any trade secret, privileged
matter or conflict of interest arising during such meeting and the Board may
exclude such attendee (or alternatively, the attendee shall be entitled to
exclude himself or herself) from any deliberation or discussion of the Board
concerning such trade secret (if the observer has not executed a confidentiality
agreement), privileged matter or dissemination of such information. If such
observer in his or her good faith believes that an item to be discussed shall
result in a conflict, then such observer shall promptly bring such conflict to
the attention of the Chairman of the Board. In no event shall any provision of
this paragraph waive any obligation of confidentiality to the Company owed by
any such attendee or the Underwriter.
(q) For a period equal to the lesser of (i) five (5) years from the date
hereof, or (ii) the sale to the public of the Underwriter's Warrant Shares, the
Company will not take any action or actions that may prevent or disqualify the
Company's use of Form S-3 (or other appropriate form) for the registration under
the Act of the Underwriter's Warrant Shares.
(r) For a period of five (5) years from the date hereof, use its best
efforts at its cost and expense to maintain the listing of the Securities on the
Nasdaq SmallCap or National Market System.
(s) As soon as practicable, but in no event more than 5 business days after
the effective date of the Registration Statement, file a Form 8-A with the
Commission providing for the registration under the Exchange Act of the
Securities.
(t) Following the Effective Date of the Registration Statement and for a
period of two (2) years thereafter, the
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Company shall, at its sole cost and expense, prepare and file such blue sky
trading applications with such jurisdictions as the Underwriter may reasonably
request after consultation with the Company, and on the Underwriter's request,
furnish the Underwriter with a secondary trading survey prepared by securities
counsel to the Company.
(u) The Company shall not amend or alter the terms of any written or oral
employment agreement between the Company and any executive officer in existence
as of the date hereof in a manner more favorable to such employee without the
prior consent of the Underwriter, which consent shall not be unreasonably
withheld by the Underwriter. For a period of three (3) years from the date
hereof prior to the Company entering into any oral or written employment
agreement with any person who will, upon commencement of such persons duties be
deemed an executive officer, the Company shall consult with the Underwriters and
the entire Board of Directors as to the proposed terms of such employment.
(v) Until the completion of the distribution of the Securities, the Company
shall not without the prior written consent of the Underwriter, which consent
shall not be unreasonably withheld, issue, directly or indirectly, any press
release or other communication or hold any press conference with respect to the
Company or its activities or the offering contemplated hereby, other than trade
releases issued in the ordinary course of the Company's business consistent with
past practices with respect to the Company's operations.
(w) The Company will use its best efforts to maintain its registration
under the Exchange Act in effect for a period of five (5) years from the Closing
Date.
(x) On the Closing Date, the Company and the Underwriter shall enter into a
financial consulting agreement, in the form filed as an Exhibit to the
Registration Statement, pursuant to which the Underwriter will provide financial
consulting services to the Company for a two year period for an aggregate fee of
$2,000 per month ($48,000 in the aggregate), payable in full at the Closing and
the term of which shall commencing on the Closing Date (the "Financial
Consulting Agreement"). Among other provisions, the Consulting Agreement shall
contain terms which provide that the Company shall pay the Underwriter a fee
equal to five (5%) percent of the amount up to $5,000,000 and two and one half
(2 1/2 percent) of the excess, if any, over $5,000,000 of the consideration
involved in any transaction (regardless of the form of transaction, whether by
merger, acquisition or sale of assets or otherwise) consummated by the Company
with a party introduced by the Underwriter to the Company.
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(y) For a period of 12 months commencing on the Closing Date, except with
the written consent of the Underwriter, will not issue or sell, directly or
indirectly, any shares of its capital stock, or sell or grant options, or
warrants or rights to purchase any shares of its capital stock, except pursuant
to (i) this Agreement, (ii) the Underwriter's Warrant , (iii) the exercise of
warrants and options of the Company heretofore issued and described in the
Prospectus, and (iv) the grant of options and the issuance of shares issued upon
exercise of options issued or to be issued under the Company's stock option plan
as described in the Prospectus (Stock Option Plan). Except as discussed in the
Prospectus, prior to the Closing Date, the Company will not issue any options or
warrants without the prior written consent of the Underwriter. The Company shall
not, for a period of 12 months from the Closing Date offer or sell any
securities pursuant to Regulation S or similar regulation without the
Underwriter's prior written consent.
(z) Except for the rights of Big Sky, Inc. the Company will not file any
registration statement relating to the offer or sale of any of the Company's
securities, including any registration statement on Form S-8, during the 24
months following the Closing Date without the Underwriter's prior written
consent.
(aa) Subsequent to the dates as of which information is given in the
Registration Statement and Prospectus and prior to the Closing Dates, except as
disclosed in or contemplated by the Registration Statement and Prospectus, (i)
the Company will not have incurred any liabilities or obligations, direct or
contingent, or entered into any material transactions other than in the ordinary
course of business; (ii) there shall not have been any change in the capital
stock, funded debt (other than regular repayments of principal and interest on
existing indebtedness) or other securities of the Company, any material adverse
change in the condition (financial or other), business, operations, income, net
worth or properties, including any material loss or damage to the properties of
the Company (whether or not such loss is insured against), which could
materially adversely affect the condition (financial or other), business,
operations, income, net worth or properties of the Company; and (iii) the
Company shall not pay or declare any dividend or other distribution on its
Common Stock or its other securities or redeem or repurchase any of its Common
Stock or other securities.
(bb) Except as disclosed in or contemplated by the Registration Statement
and Prospectus, the Company, for a period of 24 months following the Closing
Date, shall not redeem any of its securities, and shall not pay any dividends or
make any other cash distribution in respect of its securities in excess of the
amount of the Company's current or retained earnings derived after the Closing
Date without obtaining the Underwriter's prior written consent, which consent
shall not be unreasonably
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withheld. The Underwriter shall either approve or disapprove such contemplated
redemption of securities or dividend payment or distribution within ten (10)
business days from the date the Underwriter receives written notice of the
Company's proposal with respect thereto; a failure of the Underwriter to respond
within the ten (10) business day period shall be deemed approval of the
transaction.
(cc) The Company maintains and will continue to maintain a system of
internal accounting controls sufficient to provide reasonable assurance that:
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary in order to
permit preparation of financial statements in accordance with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of Closing Date and the
Overallotment Closing Date (to the extent not paid at the Closing Date) all its
expenses and fees (other than fees of Underwriter's Counsel, except as provided
in (iv) below) incident to the performance of the obligations of the Company
under this Agreement, including, without limitation: (i) the fees and expenses
of accountants and counsel for the Company; (ii) all costs and expenses incurred
in connection with the preparation, duplication, mailing, printing and filing of
the Registration Statement and the Prospectus and any amendments and supplements
thereto and the printing, mailing and delivery of this Agreement, the Selected
Dealer Agreements, and related documents, including the cost of all copies
thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriter in
quantities as hereinabove stated; (iii) the printing, engraving, issuance and
delivery of the Securities and Underwriter's Warrant Shares including any
transfer or other taxes payable thereon; (iv) disbursements and fees of
Underwriter's counsel in connection with the qualification of the Securities
under state or foreign securities or "Blue Sky" laws and determination of the
status of such securities under legal investment laws, including the costs of
printing and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental
Blue Sky Memorandum" and "Legal Investments Survey," if any, which Underwriter's
counsel fees (exclusive of filing fees and disbursements) shall equal $25,000
and of which $7,500 has previously been paid; (v) advertising costs and
expenses, including but not limited to costs and expenses in connection with one
information meeting held in New York, New
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York, one tombstone advertisement, at least 5 bound volumes of the Offering
documents for the Underwriter and its counsel and prospectus memorabilia; (vi)
fees and expenses of the transfer agent; (vii) the fees payable to the NASD; and
(viii) the fees and expenses incurred in connection with the listing of the
Securities on the Nasdaq SmallCap Market. All fees and expenses payable to the
Underwriter hereunder shall be payable at the Closing Date or Overallotment
Closing Date, as applicable; provided, however, the company shall pay such fees
and costs in advance of the Closing Date if requested by the Underwriter. The
Underwriter shall be responsible for all of its own costs of counsel.
(b) If this Agreement is terminated by the Underwriter in accordance with
the provisions of Section 6, Section 10(a) or Section 11, the Company shall
reimburse and indemnify the Underwriter for up to $40,000 out-of-pocket actual
expenses reasonably incurred in connection with the transactions contemplated
hereby including the fees and disbursements of counsel for the Underwriter of
which the Underwriter acknowledges $30,000 has been paid prior to the date
hereof.
(c) The Company further agrees that, in addition to the expenses payable
pursuant to subsection (a) of this Section 5, it will pay to the Underwriter a
non-accountable expense allowance equal to three percent (3%) of the gross
proceeds received by the Company from the sale of the Firm Securities, $30,000
of which has been paid to date to the Underwriter . The Company will pay the
remainder of the non-accountable expense allowance on the Closing Date by
certified or bank cashier's check or, at the election of the Underwriter, by
deduction from the proceeds of the offering contemplated herein. In the event
the Underwriter elects to exercise the over-allotment option described in
Section 2(b) hereof, the Company further agrees to pay to the Underwriter on the
Overallotment Closing Date (by certified or bank cashier's check or, at the
Underwriter's election, by deduction from the proceeds of the offering) a non-
accountable expense allowance equal to three percent (3%) of the gross proceeds
received by the Company from the sale of the Overallotment Securities.
6. Conditions of the Underwriter's Obligations. The obligations of the
Underwriter hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the Closing Date and
each Overallotment Closing Date, if any, as if they had been made on and as of
the Closing Date or each Overallotment Closing Date, as the case may be; the
accuracy on and as of the Closing Date or Overallotment Closing Date, if any, of
the statements of officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Overallotment Closing Date, if any, of each of its covenants
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and obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective not later than
5:30 P.M., New York time, on the date of this Agreement or such later date and
time as shall be consented to in writing by the Underwriter, and, at Closing
Date and each Overallotment Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated to the knowledge of the Company by the Commission and any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of Underwriter's counsel. If the
Company has elected to rely upon Rule 430A of the Rules and Regulations, the
price of the Securities and any price-related information previously omitted
from the effective Registration Statement pursuant to such Rule 430A shall have
been transmitted to the Commission for filing pursuant to Rule 424(b) of the
Rules and Regulations within the prescribed time period, and prior to Closing
Date the Company shall have provided evidence satisfactory to the Underwriter of
such timely filing, or a post-effective amendment providing such information
shall have been promptly filed and declared effective in accordance with the
requirements of Rule 430A of the Rules and Regulations.
(b) The Underwriter shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Underwriter's opinion, and the opinion of its counsel is
material or omits to state a fact which, in the Underwriter's opinion, is
material and is required to be stated therein or is necessary to make the
statements therein not misleading, or that the Prospectus, or any supplement
thereto, contains an untrue statement of fact which, in the Underwriter's
reasonable opinion, or the opinion of its counsel is material, or omits to state
a fact which, in the Underwriter's reasonable opinion, is material and is
required to be stated therein or is necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(c) At the Closing Date and the Overallotment Closing Date, the Underwriter
shall have received the favorable opinion of Connolly Epstein Chicco Foxman
Engelmeyer & Ewing, counsel to the Company, dated the Closing Date, or
Overallotment Closing Date, as the case may be, addressed to the Underwriter and
in form and substance satisfactory to Underwriter's counsel, to the effect that:
(i)(A) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Delaware with
full corporate power and
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authority to own or lease its properties and to carry on its business as
set forth in the Registration Statement and Prospectus; (B) the Company is
duly qualified as a foreign corporation in all jurisdictions in which by
reason of maintaining an office in such jurisdiction or by owning or
leasing real property in such jurisdiction it is required to be so
qualified except where the failure to be so qualified would have no
material adverse effect upon the business, properties, results of
operations, conditions (financial or otherwise) affairs or properties of
the Company (a "Material Adverse Effect"); and (C) to the best of counsel's
knowledge, the Company has not received any notice of proceedings relating
to the revocation or modification of any such license or qualification
which revocation or modification would have a Material Adverse Effect upon
the Company.
(ii) The Registration Statement, each Preliminary Prospectus that has
been circulated and the Prospectus and any post-effective amendments or
supplements thereto (other than the financial statements, schedules and
other financial and statistical data included therein, as to which no
opinion need be rendered) comply as to form in all material respects with
the requirements of the Act and Regulations and the conditions for use of a
registration statement on Form SB-2 have been satisfied by the Company.
(iii) Except as described in the Prospectus, the Company does not own
an interest of a character required to be disclosed in the Registration
Statement in any corporation, partnership, joint venture, trust or other
business entity;
(iv) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus as of the date indicated
therein, under the caption "Capitalization". The Securities, Underwriter's
Warrant and the Underwriter's Warrant Shares conform or upon issuance will
conform in all material respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly authorized and validly
issued and all shares of capital stock are fully paid and non-assessable;
the holders thereof are not, except by reason of their own conduct or acts,
subject to personal liability by reason of being such holders, and none of
such securities were issued in violation of the preemptive rights of any
holder of any security of the Company. The Securities to be sold by the
Company hereunder, the Underwriter's Warrant to be sold by the Company
under the Underwriter's Warrant Agreement and Underwriter's Warrant Shares
have been duly authorized and, when issued, paid for and delivered in
accordance with the terms hereof, will be validly issued, fully paid and
non-assessable and conform or upon issuance will conform to the description
thereof contained in the Prospectus; are not, subject to any preemptive
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<PAGE>
or other similar rights of any stockholder of the Company; that, to such
counsel's knowledge, the holders of the Securities and Underwriter's
Warrant Shares shall not be personally liable for the payment of the
Company's debts solely by reason of being such holders except as they may
be liable by reason of their own conduct or acts; and that the certificates
representing the Securities, Underwriter's Warrant and Underwriter's
Warrant Shares are in due and proper legal form. Upon delivery of the
Securities to the Underwriter against payment therefor as provided for in
this Agreement, the Underwriter (assuming they are bona fide purchasers
within the meaning of the Uniform Commercial Code) will acquire good title
to the Securities, free and clear of all liens, encumbrances, equities,
security interests and claims.
(v) The Registration Statement has been declared effective under the
Act, and, if applicable, filing of all pricing information has been timely
made in the appropriate form under Rule 430A, and, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened or contemplated under the Act;
(vi) To the best of such counsel's knowledge, (A) there are no
material contracts or other documents required to be described in the
Registration Statement and the Prospectus and filed as exhibits to the
Registration Statement other than those described in the Registration
Statement and the Prospectus and filed as exhibits thereto, and (B) the
descriptions in the Registration Statement and the Prospectus and any
supplement or amendment thereto regarding such material contracts or other
documents to which the Company is a party or by which it is bound, are
accurate in all material respects and fairly represent the information
required to be shown by Form SB-2 and the Rules and Regulations;
(vii) This Agreement, the Underwriter's Warrant Agreement and the
Financial Consulting Agreement have each been duly and validly authorized,
executed and delivered by the Company, and assuming that each is a valid
and binding agreement of the Underwriter, as the case may be, constitutes
a legally valid and binding agreement of the Company, enforceable as
against the Company in accordance with their respective terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to
or affecting enforcement of creditors rights and the application of
equitable principles in any action, legal or equitable, and except as
rights to indemnity or contribution may be limited by applicable law or
pursuant to public policy).
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<PAGE>
(viii) Neither the execution or delivery by the Company of this
Agreement, the Underwriter's Warrant Agreement or the Financial Consulting
Agreement, nor its performance hereunder or thereunder, nor its
consummation of the transactions contemplated herein or therein, nor the
conduct of its business as described in the Registration Statement, the
Prospectus, and any amendments or supplements thereto, nor the issuance of
the Securities pursuant to this Agreement, conflicts with or will conflict
with or results or will result in any material breach or violation of any
of the terms or provisions of, or constitutes or will constitute a material
default under, or result in the creation imposition of any material lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company except to the extent such event
will not have a Material Adverse Effect pursuant to the terms of, (A) the
Certificate of Incorporation or By-Laws of the Company, (B) any material
indenture, mortgage, deed of trust, voting trust agreement, stockholders
agreement, note, loan or credit agreement or any other agreement or
instrument that is material to the Company to which the Company is a party
or by which it is bound or to which its properties or assets (tangible or
intangible) are subject, or any indebtedness, or (C) any statute, judgment,
decree, order, rule or regulation applicable to the Company or any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body, having jurisdiction over the Company or any of
its respective activities or properties.
(ix) No consent, approval, authorization or order, and no filing with,
any court, regulatory body, government agency or other body (other than
such as may be required under state securities laws or the NASD, as to
which no opinion need be rendered) is required in connection with the
issuance by the Company of the Securities pursuant to the Prospectus and
the Registration Statement, the performance of this Agreement, the
Underwriter's Warrant Agreement and the Financial Consulting Agreement by
the Company, and the taking of any action by the Company contemplated
hereby or thereby, which has not been obtained;
(x) Except as described in the Prospectus, to the best of its
knowledge the Company is not in breach of, or in default under, any
material term or provision of any indenture, mortgage, installment sale
agreement, deed of trust, lease, voting trust agreement, stockholders'
agreement, note, loan or credit agreement or any other agreement or
instrument evidencing an obligation for borrowed money, or any other
agreement or instrument to which the Company is a party or by which the
Company may be bound or to which any of the property or assets (tangible or
intangible) of the Company is subject or affected; and the Company is not
in violation of any material term or provision of its Certificate of
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<PAGE>
Incorporation or By-Laws or in violation of any material franchise,
license, permit, judgment, decree, order, statute, rule or regulation
material to the Company business;
(xi) The statements in the Prospectus under the captions "THE
COMPANY," "BUSINESS," "MANAGEMENT," "PRINCIPAL STOCKHOLDERS," "CERTAIN
TRANSACTIONS," "DESCRIPTION OF SECURITIES STOCK," and "SHARES ELIGIBLE FOR
FUTURE SALE" have been reviewed by such counsel, and insofar as they refer
to statements of law, descriptions of statutes, licenses, rules or
regulations or legal conclusions, are correct in all material respects;
(xii) To the best of such counsel's knowledge after due inquiry,
except for the rights of Big Sky, Inc. no person, corporation, trust,
partnership, association or other entity holding securities of the Company
has the contractual right to include and/or register any securities of the
Company in the Registration Statement, require the Company to file any
registration statement or, if filed, to include any security in such
registration statement;
(xiii) the Securities are eligible for listing on the Nasdaq SmallCap
Market.
In addition, such counsel shall state that in connection with the
preparation of the Registration Statement and the Prospectus such counsel has
participated in conferences with officers and other representatives of the
Company, the independent public accountants for the Company and the Underwriter
at which the contents of the Registration Statement, the Prospectus and related
matters were discussed and, although such counsel is not passing upon, has not
verified, and does not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement and
Prospectus and made no independent check or verification thereof, on the basis
of the foregoing, no facts have come to the attention of such counsel which lead
them to believe that either the Registration Statement or any amendment thereto
at the time such Registration Statement or amendment became effective or the
Prospectus as of the date of such opinion contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no opinion with respect to the financial statements and schedules and
other financial and statistical data included in the Registration Statement or
Prospectus or with respect to statements or omissions made therein in reliance
upon information furnished in writing to the Company on behalf of the
Underwriter expressly for use in the Registration Statement or the Prospectus).
In
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<PAGE>
rendering such opinion, such counsel may state that no portion of the opinion
relates, or is given with regard to any issues or elements of any state or
federal Intellectual Property Law, Patent Law, Trademark Law, Environmental Law,
the laws and regulations regulating the sale, distribution and preparation of
food, drugs and pesticides, or the laws regulating international trade for the
United States, any of them, or any agencies deriving authority from either or
both, and all other foreign jurisdictions and their respective agencies.
In rendering such opinion, such counsel may rely, (A) as to matters
involving the application of laws other than the laws of the United States, the
corporate laws of Delaware and New Jersey and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent specified in
such opinion, if at all, upon an opinion or opinions (in form and substance
reasonably satisfactory to Underwriter's counsel) of other counsel reasonably
acceptable to Underwriter's counsel, familiar with the applicable laws of such
other jurisdictions, and (B) as to matters of fact, to the extent they deem
proper, on certificates and written statements of responsible officers of the
Company and certificates or other written statements of officers of departments
of various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company; provided, that copies of any such
statements or certificates shall be delivered to Underwriter's counsel if
requested. The opinion of such counsel for the Company shall state that the
opinion of any such other counsel is in form satisfactory to such counsel and,
in their opinion, the Underwriter and they are justified in relying thereon.
(d) At each Overallotment Closing Date, if any, the Underwriter shall have
received the favorable opinion of counsel to the Company, each dated the
Overallotment Closing Date, addressed to the Underwriter and in form and
substance satisfactory to Underwriter's counsel confirming as of the
Overallotment Closing Date the statements made by such firm, in their opinion,
delivered on the Closing Date.
(e) On or prior to each of the Closing Date and the Overallotment Closing
Date, Underwriter's Counsel shall have been furnished such documents,
certificates and other legal opinions (including, without limitation, legal
opinions related to patent, trademark or Food and Drug matters) as they may
reasonably require and request for the purpose of enabling them to review or
pass upon the matters referred to in subsection (c) of this Section 6, or in
order to evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained.
(f) Prior to the Closing Date and each Overallotment Closing Date, if any:
(i) there shall have been no material
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<PAGE>
adverse change nor development involving a prospective change in the condition,
financial or otherwise, prospects or the business activities of the Company,
whether or not in the ordinary course of business, from the latest dates as of
which such condition is set forth in the Registration Statement and Prospectus;
(ii) there shall have been no transaction, not in the ordinary course of
business, entered into by the Company, from the latest date as of which the
financial condition of the Company is set forth in the Registration Statement
and Prospectus which is materially adverse to the Company; (iii) the Company
shall not be in material default under any provision of any instrument relating
to any outstanding indebtedness for money borrowed, except as described in the
Prospectus; (iv) no material amount of the assets of the Company shall have been
pledged or mortgaged, except as set forth in the Registration Statement and
Prospectus; (v) no action, suit or proceeding, at law or in equity, shall have
been pending or to its knowledge threatened against the Company, or affecting
any of its properties or businesses before or by any court or federal, state or
foreign commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may materially adversely affect the business,
operations, prospects or financial condition or income of the Company, except as
set forth in the Registration Statement and Prospectus; and (vi) no stop order
shall have been issued under the Act and no proceedings therefor shall have been
initiated, threatened or contemplated by the Commission.
(g) At the Closing Date and each Overallotment Closing Date, if any, the
Underwriter shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Overallotment Closing Date, as
the case may be, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are, in all material respects, true and correct, as if made on
and as of the Closing Date or the Overallotment Closing Date, as the case
may be, and the Company has complied with all agreements and covenants and
satisfied all conditions contained in this Agreement on its part to be
performed or satisfied at or prior to such Closing Date or Overallotment
Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for that purpose have been
instituted or are pending or, to the best of each of such person's
knowledge, are contemplated or to their knowledge threatened under the Act;
(iii) The Registration Statement and the Prospectus and, if any, each
amendment and each supplement thereto, contain all statements and
information required to be
30
<PAGE>
included therein, and none of the Registration Statement, the Prospectus
nor any amendment or supplement thereto includes any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and neither the
Preliminary Prospectus nor any supplement thereto included any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading except to
the extent any such material fact may be corrected in the Final Prospectus;
and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and except as
otherwise contemplated therein: (A) the Company has not incurred up to and
including the Closing Date or the Overallotment Closing Date, as the case
may be, other than in the ordinary course of its business, any material
liabilities or obligations, direct or contingent; (B) the Company has not
paid or declared any dividends or other distributions on its capital stock;
(C) the Company has not entered into any material transactions not in the
ordinary course of business; (D) there has not been any change in the
capital stock or any increase in long-term debt or any increase in the
short-term borrowings (other than any increase in the short-term borrowings
in the ordinary course of business) of the Company; (E) the Company has not
sustained any material loss or damage to its property or assets, whether or
not insured; (F) there is no litigation which is pending or threatened
against the Company which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth;
(v) Neither the Company nor any of its officers or affiliates shall
have taken, and the Company, its officers and affiliates will not take,
directly or indirectly, any action designed to, or which might reasonably
be expected to, cause or result in the stabilization or manipulation of the
price of the Company's securities to facilitate the sale or resale of the
Shares.
References to the Registration Statement and the Prospectus in this
subsection (g) are to such documents as amended and supplemented at the date of
such certificate.
(h) By the Effective Date, the Underwriter shall have received clearance
from NASD as to the amount of compensation allowable or payable to the
Underwriter, as described in the Registration Statement.
(i) At the time this Agreement is executed, the Underwriter shall have
received a letter, dated such date,
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addressed to the Underwriter in form and substance satisfactory in all respects
(including the non-material nature of the changes or decreases, if any, referred
to in clause (iii) below) to the Underwriter, from Schiffman, Hughes, Brown,
Blue, Bell P.A.:
(i) confirming that they are independent public accountants with
respect to the Company within the meaning of the Act and the applicable
Rules and Regulations;
(ii) stating that it is their opinion that the combined financial
statements and supporting schedules of the Company included in the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and Regulations
thereunder and that the Underwriter may rely upon the opinion of Schiffman,
Hughes, Brown, Blue, Bell, P.A. with respect to the financial statements
and supporting schedules included in the Registration Statement;
(iii) stating that, on the basis of a limited review which included a
reading of the latest available unaudited interim combined financial
statements of the Company (with an indication of the date of the latest
available unaudited interim combined financial statements), a reading of
the latest available minutes of the stockholders and board of directors and
the various committees of the boards of directors of the Company,
consultations with officers and other employees of the Company responsible
for financial and accounting matters and other specified procedures and
inquiries, nothing has come to their attention that would lead them to
believe that (A) the unaudited combined financial statements and supporting
schedules of the Company included in the Registration Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or are not fairly
presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
combined financial statements of the Company included in the Registration
Statement, or (B) at a specified date not more than five (5) days prior to
the effective date of the Registration Statement, there has been any change
in the capital stock or long-term debt of the Company, or any decrease in
the stockholders' equity or net current assets or net assets of the Company
as compared with amounts shown in the financial statements included in the
Registration Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any change or decrease, setting
forth the amount of such change or decrease, and (C) during the period from
September 30, 1997 to a specified date not more than five (5) days prior to
the effective date of the Registration Statement, there was any decrease in
net revenues, net earnings or increase in net earnings per common share of
the Company, in each case as compared with the corresponding period
beginning September 30, 1996 other than as set forth in or contemplated by
the Registration
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<PAGE>
Statement, or, if there was any such decrease, setting forth the amount of
such decrease;
(iv) setting forth, at a date not later than five (5) days prior to
the effective date of the Registration Statement, the amount of liabilities
of the Company (including a breakdown of commercial paper and notes payable
to banks);
(v) stating that they have compared specific dollar amounts, numbers
of Securities, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus
in each case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general accounting
records, including work sheets, of the Company and excluding any questions
requiring an interpretation by legal counsel, with the results obtained
from the application of specified readings, inquiries and other appropriate
procedures (which procedures do not constitute an examination in accordance
with generally accepted auditing standards) set forth in the letter and
found them to be in agreement; and
(vi) stating that they have not during the immediately preceding five
(5) year period brought to the attention of the Company's management any
"weakness", as defined in Statement of Auditing Standard No. 60
"Communication of Internal Control Structure Related Matters Noted in an
Audit, " in the Company's internal controls;
(vii) stating that they have in addition carried out certain specified
procedures, not constituting an audit, with respect to certain pro forma
financial information which is included in the Registration Statement and
the Prospectus and that nothing has come to their attention as a result of
such procedures that caused them to believe such unaudited pro forma
financial information does not comply in form in all material respects with
the applicable accounting requirements of Regulation S-B or that the pro
forma adjustments have not been properly applied to the historical amounts
in the compilation of that information; and
(viii) statements as to such other matters incident to the transaction
contemplated hereby as the Underwriter may reasonably request.
At the Closing Date and each Overallotment Closing Date, the Underwriter
shall have received from Schiffman Hughes Brown, Blue Bell PA, a letter, dated
as of the Closing Date, or Overallotment Closing Date, as the case may be, to
the effect that they reaffirm that statements made in the letter furnished
pursuant to Subsection (i) of this Section, except that the specified date
referred to shall be a date not more than five
33
<PAGE>
days prior to Closing Date and, if the Company has elected to rely on Rule 430A
of the Rules and Regulations, to the further effect that they have carried out
procedures as specified in clause (iii) of subsection (i) of this Section with
respect to certain amounts, percentages and financial information as specified
by the Underwriter and deemed to be a part of the Registration Statement
pursuant to Rule 430A(b) and have found such amounts, percentages and financial
information to be in agreement with the records specified in such clause (iii).
(k) On each of Closing Date and Overallotment Closing Date, if any, there
shall have been duly tendered to the Underwriter for their accounts the
appropriate number of Securities against payment therefore.
(l) No order suspending the sale of the Securities in any jurisdiction
designated by the Underwriter pursuant to subsection (e) of Section 4 hereof
shall have been issued on either the Closing Date or the Overallotment Closing
Date, if any, and no proceedings for that purpose shall have been instituted or
to its knowledge or that of the Company shall be contemplated.
If any condition to the Underwriter's obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Overallotment Closing Date, as
the case may be, is not so fulfilled, the Underwriter may terminate this
Agreement or, if the Underwriter so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Underwriter, and
each person, if any, who controls the Underwriter ("controlling person") within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
against any and all losses, claims, damages, expenses or liabilities, joint or
several (and actions in respect thereof), whatsoever (including but not limited
to any and all expenses whatsoever reasonably incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever), as such are incurred, to which such Underwriter or such
controlling person may become subject under the Act, the Exchange Act or any
other statute or at common law or otherwise or under the laws of foreign
countries arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained (i) in any Preliminary Prospectus (except
that the indemnification contained in this paragraph with respect to any
preliminary prospectus shall not inure to the benefit of the Underwriter or to
the benefit of any person controlling the Underwriter on account of any loss,
claim, damage, liability or expense arising from the sale of the Firm Securities
by the
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Underwriter to any person if a copy of the Prospectus, as amended or
supplemented, shall not have been delivered or sent to such person within the
time required by the Act, and the untrue statement or alleged untrue statement
or omission or alleged omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus, as amended and supplemented, and
such correction would have eliminated the loss, claim, damage, liability or
expense), the Registration Statement or the Prospectus (as from time to time
amended and supplemented); (ii) in any post-effective amendment or amendments or
any new registration statement and prospectus in which is included Securities of
the Company issued or issuable upon exercise of the Underwriter's Warrant; or
(iii) in any application or other document or written communication (in this
Section 7 collectively called "application") executed by the Company or based
upon written information furnished by the Company in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, the Nasdaq Stock Market,
Inc. or any other securities exchange; or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading (in the case of the Prospectus, in the
light of the circumstances under which they were made), unless in any case above
such statement or omission was made in reliance upon and in conformity with
written information furnished to the Company with respect to any Underwriter by
or on behalf of such Underwriter expressly for use in any Preliminary
Prospectus, the Registration Statement or Prospectus, or any amendment thereof
or supplement thereto, in any post-effective amendment, new registration
statement or prospectus or in any application, as the case may be.
The indemnity agreement in this subsection (a) shall be in addition to any
liability which the Company may have at common law or otherwise.
(b) The Underwriter agrees, to indemnify and hold harmless the Company,
each of its directors, each of its officers who has signed the Registration
Statement, and each other person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act to the
same extent as the foregoing indemnity from the Company to the Underwriter (i)
with respect to statements or omissions, or alleged statements or omissions if
any, made in any Preliminary Prospectus, the Registration Statement or
Prospectus or any amendment thereof or supplement thereto in any post-effective
amendment, new registration statement or prospectus, or in any application made
in reliance upon, and in strict conformity with, written information furnished
to the Company with respect to the Underwriter by the Underwriter expressly for
use in such Preliminary Prospectus, the Registration Statement or Prospectus
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<PAGE>
or any amendment thereof or supplement thereto or in any post-effective
amendment, new registration statement or prospectus, or in any such application,
directly related to the transactions effected by the Underwriter in connection
with this Offering; provided that such written information or omissions only
pertain to disclosures in the Preliminary Prospectus, the Registration Statement
or Prospectus or any amendment thereof or supplement thereto, in any
post-effective amendment, new registration statement or prospectus or in any
such application, and (ii) for any claim, loss, damages or liability for
violation or alleged violations of any federal or state securities laws in the
offer or sale of the Securities; provided, further, that the liability of the
Underwriter to the Company shall be limited to the product of the Underwriter's
discount or commission for the Shares multiplied by the number of Shares
purchased by the Underwriter hereunder. The Company acknowledges that the
statements with respect to the public offering of the Firm Securities set forth
under the heading "Underwriting" and the stabilization legend and the last
paragraph of the cover page in the Prospectus have been furnished by the
Underwriter expressly for use therein and any information furnished by or on
behalf of the Underwriter filed in any jurisdiction in order to qualify the
Securities under state securities laws or filed with the Commission, the NASD or
any securities exchange constitute the only information furnished in writing by
or on behalf of the Underwriter for inclusion in the Prospectus and the
Underwriter hereby confirms that such statements and information are true and
correct and shall be on each Closing Date and Overallotment Closing Date.
(c) Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action, suit or proceeding, such indemnified
party shall, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 7, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party or parties
of the commencement thereof, the indemnifying party or parties will be entitled
to participate therein, and to the extent it may elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid notice
from such indemnified party, the indemnifying party may assume the defense
thereof with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing the indemnified party or parties shall have the
right to employ its or their own counsel in any such case but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been
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<PAGE>
authorized in writing by the indemnifying parties in connection with the defense
of such action at the expense of the indemnifying party, (ii) the indemnifying
parties shall not have employed counsel reasonably satisfactory to such
indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnifying party or parties shall have reasonably concluded that there may be
defenses available to it or them that are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided however, that such consent was not
unreasonably withheld.
(d) In order to provide for just and equitable contribution in any case in
which (i) an indemnified party makes claim for indemnification pursuant to this
Section 7, but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that the express provisions of
this Section 7 provide for indemnification in such case, or (ii) contribution
under the Act may be required on the part of any indemnified party, then each
indemnifying party shall contribute to the amount paid as a result of such
losses, claims, damages, expenses or liabilities (or actions in respect thereof)
(A) in such proportion as is appropriate to reflect the relative benefits
received by each of the contributing parties, on the one hand, and the party to
be indemnified on the other hand, from the offering of the Securities or (B) if
the allocation provided by clause (A) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand in connection with the statements or omissions that resulted in such
losses, claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is the contributing
party and the Underwriter is the indemnified party, the relative benefits
received by the Company on the one hand,
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<PAGE>
and the Underwriter, on the other, shall be deemed to be in the same proportion
as the total net proceeds from the offering of the Securities (before deducting
expenses) bear to the total underwriting discounts and commissions received by
the Underwriter hereunder, in each case as set forth in the table on the cover
page of the Prospectus. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, expenses or
liabilities (or actions in respect thereof) referred to above in this
subdivision (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this Section 7, each person, if any, who controls the Company within the
meaning of the Act, each officer of the Company who has signed the Registration
Statement, and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to this subparagraph (d). Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect to
which a claim for contribution may be made against another party or parties
under this subparagraph (d), notify such party or parties from whom contribution
may be sought, but the omission so to notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from any
obligation it or they may have hereunder or otherwise than under this
subparagraph (d), or to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may have at common
law or otherwise.
8. Representations and Agreements to Survive Delivery. All representations,
warranties and agreements contained in this Agreement or contained in
certificates of officers of the Company submitted pursuant hereto, shall be
38
<PAGE>
deemed to be representations, warranties and agreements at the Closing Date and
the Overallotment Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of the Underwriter, the
Company, or any controlling person, and shall survive termination of this
Agreement or the issuance and delivery of the Securities to the Underwriter.
9. Effective Date. This Agreement shall become effective at 9:30 a.m., New
York City time, on the next full business day following the date hereof, or at
such earlier time after the Registration Statement becomes effective as the
Underwriter , in its discretion, shall release the Securities for the sale to
the public, provided, however that the provisions of Sections 5, 7 and 10 of
this Agreement shall at all times be effective. For purposes of this Section 9,
the Securities to be purchased hereunder shall be deemed to have been so
released upon the earlier of dispatch by the Underwriter of telegrams to
securities dealers releasing such Securities for offering or the release by the
Underwriter for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. Termination.
(a) The Underwriter shall have the right to terminate this Agreement: (i)
if any calamitous domestic or international event or act or occurrence has
materially disrupted, or in the Underwriter's commercially reasonable opinion
will in the immediate future materially disrupt general securities markets in
the United States; or (ii) if trading on the New York Stock Exchange, the
American Stock Exchange, or in the over-the-counter market shall have been
suspended or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required on the
over-the-counter market by the NASD or by order of the Commission or any other
government authority having jurisdiction; or (iii) if the United States shall
have become involved in a war or major hostilities; or (iv) if a banking
moratorium has been declared by a New York State or federal authority; or (v) if
a moratorium in foreign exchange trading has been declared; or if the Company
shall have sustained a material loss, whether or not insured, by reason of fire,
flood, accident or other calamity; or (vi) if there shall have been such
material adverse change in the conditions or prospects of the Company, involving
a change not contemplated by the Registration Statement, or (vii) if there shall
have been such material adverse change in general economic, political or
financial conditions as in the Underwriter's reasonable judgment would make it
inadvisable or impracticable to proceed with the offering, sale or delivery of
the Securities.
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<PAGE>
(b) Notwithstanding any contrary provision contained in this Agreement, any
election hereunder or any termination of this Agreement (including, without
limitation, pursuant to Sections 9 and 10 hereof), and whether or not this
Agreement is otherwise carried out, the provisions of Section 5 shall not be in
any way affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
11. Default by the Company. If the Company shall fail at the Closing Date
or any Overallotment Closing Date, as applicable, to sell and deliver the number
of Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Overallotment Closing Date, the
Underwriter s may at the Underwriter's option, by notice from the Underwriter to
the Company, terminate the Underwriter's obligations to purchase Securities from
the Company on such date) without any liability on the part of any
non-defaulting party other than pursuant to Section 5 and Section 7 hereof. No
action taken pursuant to this Section shall relieve the Company from liability,
if any, in respect of such default.
12. Venue; Submission to Jurisdiction. The Company (a) agrees that any
legal suit, action or proceeding arising out of or relating to this Agreement
shall be instituted exclusively in the federal or state courts located in the
State of New Jersey (b) waives any objection which the Company may have now or
hereafter to the venue of any such suit, action or proceeding, and (c)
irrevocably consents to the jurisdiction of the courts of the State of New
Jersey and the United States District Court for the District of New Jersey in
any such suit, action or procedure. Each of the Company and the Underwriter
further agrees to accept and acknowledge service of any and all process which
may be served in any suit, action or proceeding in the federal or state courts
located in the State of New Jersey and agrees that service of process upon the
Company mailed by certified mail to the Company's address shall be deemed in
every respect effective service of process upon the company in any such suit,
action or proceeding. In the event of litigation between the parties arising
hereunder, the prevailing party shall be entitled to costs and reasonable
attorney's fees.
13. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriter shall be directed to First Montauk
Securities Corp., 328 Newman Springs Road, Red Bank, New Jersey 07701, with a
copy to Goldstein & DiGioia, LLP, 369 Lexington Avenue, New York, New York
10017, Attention: Victor J. DiGioia, Esq. Notices to the Company shall be
directed to the
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<PAGE>
Company at 1460 Route 9, North Woodbridge, NJ 07095, with a copy to Connolly
Epstein Chicco Foxman Engelmyer & Ewing, 1515 Market Street, 9th Floor,
Philadelphia, PA 19102.
14. Parties. This Agreement shall inure solely to the benefit of and shall
be binding upon, the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal Underwriters and assigns, and their respective heirs and legal
Underwriters and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provisions herein contained. No purchaser of Securities from
any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
15. Applicable Law/Construction. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New Jersey
without giving effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Waiver. The waiver by either party of the breach of any provision of
this Agreement by the other party shall not operate or be construed as a waiver
of any subsequent breach.
18. Assignment. Except as otherwise provided within this Agreement, neither
party hereto may transfer or assign this Agreement without prior written consent
of the other party.
[remainder of page intentionally left blank]
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<PAGE>
19. Titles and Captions. All article, section and paragraph titles or
captions contained in this Agreement are for convenience only and shall not be
deemed part of the context nor affect the interpretation of this Agreement.
20. Pronouns and Plurals. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine, neuter, singular or plural as the
identity of the Person or Persons may require.
21. Entire Agreement. This Agreement contains the entire understanding
between and among the parties and supersedes any prior understandings and
agreements among them respecting the subject matter of this Agreement.
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
PACIFICHEALTH LABORATORIES INC.
By:___________________________
Name:
Title: President
Confirmed and accepted as of the date first above written.
FIRST MONTAUK SECURITIES CORP.
By:_____________________________
Name:
Title: President
42
1,200,000 Shares of
Common Stock, $.0025 par value
PACIFICHEALTH LABORATORIES, INC.
SELECTED DEALER AGREEMENT
_______, 1997
- -----------------------
- -----------------------
- -----------------------
Ladies/Gentlemen:
We have agreed as the underwriter (the "Underwriter") named in the
enclosed prospectus (the "Prospectus"), subject to the terms and conditions of
an Underwriting Agreement dated ___ , 1997 (the "Underwriting Agreement"), to
purchase from PACIFICHEALTH LABORATORIES, INC. (the "Company") 1,200,000 shares
(the "Firm Shares") of Common Stock, par value $.0025 (the "Common Stock"). We
may also purchase as many as 180,000 additional shares of Common Stock (the
"Option Shares") from the Company pursuant to Section 2(b) of the Underwriting
Agreement. The Firm Shares to be sold by the Company and the Option Shares are
sometimes collectively referred to herein as the "Shares" and are more
particularly described in the Prospectus, additional copies of which will be
supplied in reasonable quantities upon request.
We are offering a portion of the Shares for sale to selected dealers
(the "Selected Dealers"), among whom we are pleased to include you, at the
public offering price of $6.00 per share, less a concession in the amount set
forth in the Prospectus under "Underwriting" ($.60 per share). This offering is
made subject to delivery of the Shares and their acceptance by the Underwriter,
to the approval of all legal matters by our counsel, and to the terms and
conditions herein set forth, and may be made on the basis of the reservation of
the Shares or an allotment against subscription.
<PAGE>
We will advise you by telefax or telegram of the method and terms of
the offering. Acceptances should be sent to First Montauk Securities Corp., 328
Newman Springs Road, Red Bank, New Jersey 07701, Attention: Syndicate
Department. Subscription books may be closed by us at any time without notice,
and we reserve the right to reject any subscription in whole or in part, but
notification of allotments against and rejections of subscriptions will be made
as promptly as practicable.
Any of the Shares purchased by you hereunder are to be promptly offered
by you to the public at the public offering price, except as herein otherwise
provided and except that a reallowance from any such public offering price not
in excess of the amount set forth in the Prospectus under "Underwriting" ($.50
per share) may be allowed to dealers who are members in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"), or foreign
dealers or institutions not eligible for membership in said association who
agree to abide by the conditions with respect to foreign dealers and
institutions set forth in your confirmation below. We may buy Shares from, or
sell Shares to, any Selected Dealer, and any Selected Dealer may buy Shares
from, or sell Shares to, any other Selected Dealer at the public offering price
less all or any part of the concession set forth in the Prospectus. After the
Shares are released for sale to the public, we are authorized to vary the
offering price of the Shares and other selling terms.
If, prior to the termination of this Agreement, we purchase or contract
to purchase any Shares which were purchased by you from us or any Selected
Dealer at a concession from the public offering price (or any Shares which we
believe have been substituted therefor): you agree that we may: (i) require you
to pay us on demand an amount equal to the concession on such Shares; (ii) sell
for your account the Shares so purchased and debit or credit your account with
the loss or profit resulting from such sale; or (iii) require you to purchase
such Shares at a price equal to the total cost of such purchase including
commissions and transfer taxes on redelivery.
Shares accepted or allotted hereunder shall be paid for in full at the
public offering price, or, if we shall so advise you, at such price less the
concession to dealers, at the office of First Montauk Securities Corp., 328
Newman Springs Road, Red Bank, New Jersey 07701, prior to 8:30 a.m., New York
City time, on such day after the public offering date as we may advise, by
certified or official bank check payable in New York Clearing House funds to the
order of First Montauk Securities Corp., against delivery of certificates. If
Shares are purchased and paid for by you hereunder at the public offering price,
the concession will be paid to you after the termination of this Agreement.
2
<PAGE>
We have been advised by the Company that a registration statement (File
No. 333-36379) for the Shares, filed under the Securities Act of 1933, as
amended (the "Act"), has become effective. You agree that in selling the Shares
purchased pursuant hereto (which agreement shall also be for the benefit of the
Company) you will comply with the applicable requirements of the Act and of the
Securities Exchange Act of 1934, as amended, and the terms and conditions set
forth in the Prospectus. No person is authorized by the Company or any of the
Underwriters to give or rely on any information or to make any representations
not contained in the Prospectus in connection with the sale of Shares. You are
not authorized to act as agent for the Company or the Underwriter in offering
the Shares to the public or otherwise. Nothing contained herein shall constitute
that the Selected Dealers are partners with the Underwriter or with one another.
The Underwriter shall not be under any liability (except for our own
want of good faith) for or in respect of the validity or value of, or title to,
any Shares; the form or completeness of, or the statements contained in, or the
validity of, the registration statement, any preliminary prospectus, the
Prospectus, or any amendment or supplement thereto or any other letters or
instruments executed by or on behalf of the Company or others; the form or
validity of the agreement for the purchase of the Shares or this Agreement; the
delivery of the Shares; the performance by the Company or others of any
agreement on its or their part; or any matter in connection with any of the
foregoing; provided, however, that nothing in this paragraph shall be deemed to
relieve the Underwriter from any liability imposed by the Act.
You, by your confirmation below, represent that (i) you are a member in
good standing of the NASD or are a foreign bank or dealer not eligible for
membership in the NASD which agrees to make offers or sales of Shares within the
United States, its territories or its possessions, or to persons who are
citizens thereof or residents therein; (ii) neither you nor any of your
directors, officers, partners or "persons associated with" you (as defined in
the By-Laws of the NASD) nor, to your knowledge, any "related person" (as
defined by the NASD in its Interpretation of Article III, Section I of its Rules
of Fair Practice, as amended) or any other broker-dealer, have participated or
intend to participate in any transaction or dealing as to which documents or
information are required to be filed with the NASD pursuant to such
Interpretation, and as to which such documents or information have not been so
filed as required.
3
<PAGE>
You agree not to, at any time prior to the termination of this
Agreement, bid for, purchase, sell or attempt to induce others to purchase or
sell, directly or indirectly, any Common Stock other than (a) as provided for in
this Agreement or the Underwriting Agreement relating to the Shares, or (b)
purchases or sales as broker on unsolicited orders for the account of others. In
making the sales of Shares, if you are a member of the NASD, you will comply
with all applicable rules of the NASD, including, without limitation, Rules
2730, 2740, 2750 and 2420 of the NASD Conduct Rules, or if you are a foreign
bank or dealer, you agree to comply with such Interpretation of such Rules as
though you were such a member and Section 25 of such Article as it applies to a
nonmember broker or dealer in a foreign country.
Upon application to us, we will inform you as to the advice we have
received from counsel concerning the jurisdictions in which the Shares have been
qualified for sale or are exempt under the respective securities or blue sky
laws of such jurisdictions, but we have not assumed and will not assume any
obligation or responsibility as to the right of any Selected Dealer to sell the
Shares in any jurisdiction.
As Underwriter, we shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the offering or
arising thereunder. Neither we, acting as the Underwriter, shall be under any
obligation to you except for obligations expressly assumed by us in this
Agreement.
You agree, upon our request, at any time or times prior to the
termination of this Agreement, to report to us the number of Shares purchased by
you pursuant to the provisions hereof which then remain unsold.
Selected Dealers will be governed by the conditions herein set forth
until this Agreement is terminated. This Agreement will terminate at the close
of business on the 30th business day after the initial public offering of the
Shares, but, in our discretion, may be extended by us for a further period or
periods not exceeding 30 business days in the aggregate and in our discretion,
whether or not extended, may be terminated at any earlier time. Notwithstanding
the termination of this Agreement, you shall remain liable for your
proportionate amount of any claim, demand or liability which may be asserted
against you alone, or against you together with other dealers purchasing Shares
upon the terms hereof, or against us, based upon the claim that the Selected
Dealers, or any of them, constitute an association, an unincorporated business
or other entity.
This Agreement shall be construed in accordance with the laws of the
State of New Jersey without giving effect to conflict of laws principles.
4
<PAGE>
In the event that you agree to purchase Shares in accordance with the
terms hereof, and with the aforementioned telegram, kindly confirm such
agreement by completing and signing the form provided for that purpose on the
enclosed duplicate hereof and returning it to us promptly.
All communications from you should be addressed to First Montauk
Securities Corp., 328 Newman Springs Road, Red Bank, New Jersey 07701 Attention:
Syndicate Department. Any notice from us to you shall be deemed to have been
duly given if mailed or telegraphed to you at this address to which this letter
is mailed.
Very truly yours,
FIRST MONTAUK SECURITIES CORP.
As Underwriter
By:
---------------------------------
Name:
Title:
5
<PAGE>
FIRST MONTAUK SECURITIES CORP.
328 Newman Springs Road
Red Bank, New Jersey 07701
Attention: Syndicate Department
Ladies/Gentlemen:
We hereby confirm our agreement to purchase __________ Shares (as such
term is defined in the Selected Dealer Agreement) of Common Stock of
PacificHealth Laboratories Inc., subject to the terms and conditions of the
foregoing Agreement and your telegram to us referred to therein. We hereby
acknowledge receipt of the definitive Prospectus relating to the Shares, and we
confirm that in purchasing Shares we have relied upon no statements whatsoever,
written or oral, other than the statements in such Prospectus. We have made a
record of our distribution of preliminary prospectuses and, when furnished with
copies of any revised preliminary prospectus, we have, upon your request,
promptly forwarded copies thereof to each person to whom we had theretofore
distributed preliminary prospectuses. We confirm that we have complied and will
comply with all of the requirements of Rule 15c2-8 under the Securities Exchange
Act of 1934.
We hereby represent that we are a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") or, if we are not
such a member, we are a foreign dealer or institution not eligible for
membership in said Association which agrees to make no sales within the United
States, its territories or its possessions or to persons who are citizens
thereof or residents therein. If we are such a member, we agree to comply with
all applicable rules of the NASD, including, without limitation, the provisions
of Section 24 of Article III of the Rules of Fair Practice of the NASD, or, if
we are such a foreign dealer or institution, we agree to comply with all
applicable rules of the NASD, including, without limitation, the NASD's
Interpretation with Respect to Free-Riding and Withholding and Sections 8, 24
and 36 of such Article as if we were such a member, and Section 25 of such
Article as it applies to a non-member broker or dealer in a foreign country.
------------------------------
Corporate or Firm Name of
Selected Dealer
------------------------------
(Signature of Authorized
Official or Partner)
Dated: , 1997
AMENDED AND RESTATED
BY-LAWS
OF
PACIFICHEALTH LABORATORIES, INC.
Adopted as of December 10, 1997
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
PACIFICHEALTH LABORATORIES, INC.
ARTICLE I - Stockholders
1.1 Place of Meetings. All meetings of stockholders shall be held at such
place within or without the State of Delaware as may be designated from time to
time by the Board of Directors (the "Board"), the Chairman of the Board or the
President or, if not so designated, at the registered office of the Corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the election of
directors and for the transaction of such other business as may properly be
brought before the meeting shall be held at a time fixed by the Board or, if not
so fixed by the Board, by the President. If this date shall fall upon a legal
holiday, then such meeting shall be held on the next succeeding business day at
the same hour.
1.3 Special Meeting. Special meetings of stockholders may be called at any
time by the Board, the Chairman of the Board or the President, and shall be
called by the Board upon the request of the holders of twenty percent (20%) of
the outstanding shares of stock of the Corporation entitled to vote at the
meeting. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting.
1.4 Notice of Meetings. Except as otherwise provided by law, written notice
of each meeting of stockholders, whether annual or special, shall be given not
less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote at such meeting. The notices of all
meetings shall state the place, date and hour of the meeting. The notice of a
special meeting shall state, in addition, the purpose or purposes for which the
meeting is called.
1.5 Voting List. The officer who has charge of the stock ledger of the
Corporation shall prepare, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall
<PAGE>
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten (10) days
prior to the meeting, at the place where the meeting is to be held or, if such
place is specified in the notice of the meeting at a place within the city which
the meeting is to be held other than the place of the meeting. The list shall
also be produced and kept at the time and place of the meeting during the whole
time of the meeting, and may be inspected by any stockholder who is present.
1.6 Quorum and Required Vote. Except as otherwise provided by law or in the
Certificate of Incorporation, the holders of a majority of the shares of stock
entitled to vote on a particular matter present in person or represented by
proxy shall constitute a quorum for the purpose of considering such matter.
1.7 Voting and Proxies. Each stockholder shall have one vote for each share
of stock entitled to vote and held of record by such stockholder, and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Certificate of Incorporation. Each stockholder of record entitled to vote
at a meeting of the stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may vote or express such consent or dissent
in person or may authorize another person or persons to vote or act for such
stockholder by proxy in accordance with applicable law.
1.8 Business to be Conducted. At any meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before a meeting of stockholders, such business
must be (a) specified in the notice of the meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, (b) otherwise properly
brought before the meeting by or at the direction of the Board of Directors, or
(c) otherwise properly brought before the meeting by a stockholder. For business
to be properly brought before a meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that in the event
that less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. A stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the meeting
(a) a brief description of the business desired to be brought before the meeting
and the reasons for conducting such business at the meeting, (b) the name and
address, as they appear on the Corporation's books, of the
2
<PAGE>
stockholder proposing such business, (c) the class and number of shares of the
Corporation's capital stock which are beneficially owned by the stockholder, and
(d) any material interest of the stockholder in such business. Notwithstanding
anything in the Bylaws to the contrary, no business shall be conducted at any
meeting of the stockholders except in accordance with the procedures set forth
in this Section 1.8. The Chair of the meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the Bylaws and, in such event, such
business shall not be transacted.
1.9 Nominations for Election as Directors. Only persons who are nominated
in accordance with the procedures set forth in this Section 1.9 shall be
eligible for election as Directors of the Corporation. Nominations of persons
for election to the Board of Directors of the Corporation may be made at a
meeting of stockholders (a) by or at the direction of the Board of Directors, or
(b) by any stockholder of the Corporation entitled to vote for the election of
Directors at the meeting who gives timely notice of his/her/its intention to
make such nomination at the meeting. Such notice shall be made in writing to the
Secretary of the Corporation, and must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that in the event
that less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such stockholder's notice shall set forth (x)
as to each person whom the stockholder proposes to nominate for election or
re-election as a Director (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for the
election of directors or otherwise is required pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (including without limitation
such persons' written consent to being named in any proxy statement as a nominee
and to serving as a Director if elected); and (y) as to the stockholder giving
the notice (i) the name and address, as they appear on the Corporation's books,
of such stockholder and (ii) the class and number of shares of the Corporation
which are beneficially owned by such stockholder. At the request of the Board of
Directors any person nominated by the Board of Directors for election as a
Director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which pertains
to the nominee. No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the procedures set forth in
3
<PAGE>
this Section 1.9. The Chair of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the Bylaws and, in such event, the defective nomination shall be
disregarded.
1.10 Applicability of Federal Securities Laws and Regulations. At any time
that the Corporation has a class of equity securities registered under the
Securities Exchange Act of 1934, to the extent that any provision of this
Article 1 shall be in conflict with rules and regulations of the Securities and
Exchange Commission promulgated under such Act with respect to the nomination
and/or election of Directors of the Corporation, or otherwise with respect to
the conduct of business at a meeting of stockholders, such rules and regulations
shall govern and this Article shall be interpreted and limited in its
application, as necessary, to conform with such rules and regulations.
ARTICLE II - Directors
2.1 General Powers. The business and affairs of the Corporation shall be
managed by or under the direction of the Board, which may exercise all of the
powers of the Corporation except as may be otherwise provided by law or the
Certificate of Incorporation.
2.2 Number and Term. The Board of Directors shall have not less than three
(3) nor more than nine (9) members. Except as may be provided in the Certificate
of Incorporation and subject to any resolution of the stockholders, the Board
shall have the authority to determine the number of directors which shall
constitute the Board and the terms of office of directors.
2.3 Nomination by Stockholders. Nominations for election to the Board of
Directors may be made by the Board of Directors or by any stockholder of any
outstanding class of capital stock of the Corporation entitled to vote for the
election of directors in accordance with the procedures set forth in Article I
hereof.
2.4 Regular Meetings. Regular meetings of the Board may be held without
notice at such time and place, either within or without the State of Delaware,
as shall be determined from time to time by the Board.
2.5 Special Meeting. Unless the Board shall otherwise direct, special
meetings of the Board may be held at any time and place, within or without the
State of Delaware, and shall be called at any time by or at the request of the
President and shall be called by or at the written request of one-third of the
directors, or by one director in the event that there is only a single director
in office.
4
<PAGE>
Notice, which need not be written, of the time and place of special meetings
shall be given to each director at least twenty-four (24) hours before the time
for which the meeting is scheduled. A notice or waiver of notice of a meeting of
the Board need not specify the purposes of the meeting. Any business may be
transacted at a special meeting.
2.6 Meetings by Telephone Conference Calls. Directors or any members of any
committee designated by the Directors may participate in a meeting of the Board
or such committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation by such means shall constitute presence in person
at such meeting.
2.7 Quorum. A majority of all the directors in office shall constitute a
quorum at all meetings of the Board.
2.8 Committees. The Board may, by resolution passed by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the directors of the Corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members of the
committee present at any meeting and not disqualified from voting, whether or
not such member or members constitute a quorum, may unanimously appoint another
member of the Board to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board and subject to the provisions of the General Corporation
Law of the State of Delaware, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
Corporation.
ARTICLE III - Officers
3.1 Enumeration. The officers of the Corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board may determine.
3.2 Election. Officers shall be elected annually by the Board at its first
meeting following the annual meeting of stockholders.
3.3 Duties and Powers. Except as otherwise provided by the
5
<PAGE>
Board, the officers shall have, exercise and perform the duties and powers
usually incident to their offices and as set forth herein:
(i) Chief Executive Officer and President. The President shall be the
chief executive officer of the Corporation unless the Board shall elect a
Chairman and vest in such Chairman the authority of chief executive officer of
the Corporation. The Chief Executive Officer of the Corporation shall, subject
to the direction of the Board, have general charge and supervision of the
business of the Corporation. Unless otherwise provided by the Board, the
President shall preside at all meetings of the stockholders, and if he is a
director, at all meetings of the Board. If the Chairman of the Board of
Directors shall be the chief executive officer of the Corporation, the President
shall perform such duties and possess such powers as the Board of Directors may
from time to time prescribe.
(ii) Vice President. Any Vice President shall perform such duties and
possess such powers as the Board or the President may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
President in the order determined by the Board) shall perform the duties of the
President and when so performing shall have all the powers of and be subject to
all the restrictions upon the President.
(iii) Secretary. The Secretary shall perform such duties and shall
have such powers as the Board or the President may from time to time prescribe,
including without limitation the duty and power to give notices of all meetings
of stockholders and special meetings of the Board, to attend all meetings of
stockholders and the Board and keep a record of the proceedings, to maintain a
stock ledger and prepare lists of stockholders and their addresses as required,
to be custodian of corporate records and the corporate seal and to affix and
attest to the same on documents.
(iv) Treasurer. The Treasurer shall perform such duties and shall have
such powers as may from time to time be assigned to him by the Board or the
President, including without limitation the duty and power to keep and be
responsible for all funds and securities of the Corporation, to deposit funds of
the Corporation in depositories selected by the Board, to disburse such funds as
ordered by the Board, to make proper accounts of such funds, and to render as
required by the Board statements of all such transactions and of the financial
condition of the Corporation.
3.4 Salaries. Officers of the Corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board.
6
<PAGE>
ARTICLE IV - Transfer of Share Certificates
Except as otherwise established by rules and regulations adopted by the
Board and subject to applicable law, shares of stock may be transferred on the
books of the Corporation only by the registered holder or by duly authorized
attorney. Transfers shall be made only on surrender to the Corporation or its
transfer agent of the certificate representing such shares properly endorsed or
accompanied by a written assignment or power of attorney properly executed, and
with such proof of authority of the authenticity of signature as the Corporation
or its transfer agent may reasonably require. Except as may be otherwise
required by law, by the Certificate of Incorporation or by these By-Laws, the
Corporation shall be entitled to treat the record holder of stock as shown on
its books as the owner of such stock for all purposes, including the payment of
dividends and the right to vote with respect to such stock, regardless of any
transfer, pledge or other disposition of such stock until the shares have been
transferred on the books of the Corporation in accordance with the requirements
of these By-Laws.
ARTICLE V - Indemnification
5.1 Right to Indemnification. The Corporation shall indemnify any person
who was or is a party or threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (collectively, a "proceeding"), by reason of the
fact such person is or was (a) a director or executive officer of the
Corporation or a constituent corporation absorbed in a consolidation or merger
(hereinafter, a "constituent corporation"), or, (b) is or was serving at the
request of the Corporation or a constituent corporation as a director, officer,
partner, employee or agent of another corporation, partnership, joint venture or
other enterprise or entity, or (c) is or was a director or officer of the
Corporation serving at its request as an administrator, trustee or other
fiduciary of one or more of the employee benefit plans, if any, of the
Corporation or another entity which may be in effect from time to time, against
all expenses, liability and loss actually and reasonably incurred or suffered by
such person in connection with such proceeding, whether or not the indemnified
liability arises or arose from any proceeding by or in the right of the
Corporation, to the extent that such person is not otherwise indemnified and to
the extent that such indemnification is not prohibited by law as it presently
exists or may hereafter be amended.
7
<PAGE>
5.2 Advance of Expenses. The Corporation shall advance all expenses
reasonably incurred by a person entitled to indemnification pursuant to Section
5.1 above, in defending a proceeding in advance of the final disposition of such
proceeding, and may, but shall not be obligated to, advance expenses of other
persons entitled to indemnification pursuant to any other agreement or provision
of law.
5.3 Procedure for Determining Permissibility. To determine whether any
indemnification under this Article V is permissible, the Board by a majority
vote of a quorum consisting of directors not parties to such proceeding may, and
on request of a person seeking indemnification shall be required to, determine
in each case whether the applicable standards in any applicable statute have
been met, or such determination shall be made by independent legal counsel if
such quorum is not obtainable, or, even if obtainable, a majority vote of a
quorum of disinterested directors so directs. If a claim for indemnification
under this Article is not paid in full within ninety (90) days after a written
claim therefor has been received by the Corporation, the claimant may file suit
to recover the unpaid amount of such claim, and the Corporation shall have the
burden of proving that the claimant was not entitled to the requested
indemnification under applicable law. The reasonable expenses of any person in
prosecuting a successful claim for indemnification hereunder, and the fees and
expenses of any independent legal counsel engaged to determine permissibility of
indemnification, shall be borne by the Corporation. For purposes of this
paragraph, "independent legal counsel" means legal counsel other than that
regularly or customarily engaged by or on behalf of the Corporation.
5.4 Proceedings Initiated by Indemnitee. Notwithstanding any other
provision of this Article V, the Corporation shall be required to indemnify a
person in connection with a proceeding initiated by such person only if the
proceeding was authorized by the Board.
5.5 Indemnification Not Exclusive; Inuring of Benefit. The indemnification
provided by this Article V shall not be deemed exclusive of any other right to
which one seeking indemnification may have or hereafter acquire under any
statute, provision of the Certificate of Incorporation, these By-Laws,
agreement, vote of stockholders or disinterested directors or otherwise, and
shall inure to the benefit of the heirs, executors and administrators of any
such person.
5.6 Insurance and Other Indemnification. The Board shall have the power to
(i) authorize the Corporation to purchase and maintain, at the Corporation's
expenses, insurance on behalf of the Corporation and on behalf of others to the
extent that power to do so has not been prohibited by applicable law,
8
<PAGE>
and (ii) give other indemnification to the extent not prohibited by applicable
law.
5.7 Modification or Repeal. Any modification or repeal of any provision of
this Article V shall not adversely affect any right or protection of an
Authorized Representative existing hereunder with respect to any act or omission
occurring prior to such modification or repeal.
ARTICLE VI - Amendments
6.1 By the Board of Directors. These By-Laws may be altered, amended or
repealed or new By-Laws may be adopted by the affirmative vote of a majority of
the directors present at any regular or special meeting of the Board at which a
quorum is present.
6.2 By the Stockholders. These By-Laws may be altered, amended or repealed
or new By-Laws may be adopted by the affirmative vote of the holders of a
majority of the shares of the capital stock of the Corporation entitled to vote
at any regular meeting of stockholders, or at any special meeting of
stockholders, provided such change shall have been set forth, or a summary
thereof shall have been provided, in the notice of such special meeting.
These By-Laws have been adopted by the unanimous written consent of all
Directors of the Corporation dated as of December 4, 1997, effective as of that
date, and have been filed with the undersigned this 4th day of December, 1997.
/s/ David I. Portman
--------------------------------
David I. Portman, Secretary
Record of Amendments
--------------------
Section Amended Date Amended Adopted By
- --------------- ------------ ----------
9
NUMBER SHARES
PACIFICHEALTH LABORATORIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
COMMON STOCK CUSIP 695113 10 0
THIS CERTIFIES THAT:
is owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF $.0025 PAR VALUE EACH OF
PACIFICHEALTH LABORATORIES, INC.
transferable on the books of the Corporation in person or by attorney upon
surrender of this certificate duly endorsed or assigned. This certificate and
the shares represented hereby are subject to the laws of the State of Delaware,
and to the Certificate of Incorporation of and Bylaws of the Corporation, as now
or hereafter amended. This certificate is not valid until countersigned by the
Transfer Agent.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
DATED: COUNTERSIGNED
STOCKTRANS, INC.
7 E. LANCASTER AVENUE, ARDMORE, PA 19003
TRANSFER AGENT
BY:
[SEAL]
AUTHORIZED SIGNATURE
/s/ David Portman /s/ Robert Portman
-------------------- -----------------------
SECRETARY PRESIDENT
<PAGE>
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -as tenants in common
TEN ENT -as tenants by the entireties
JT TEN -as joint tenants with right
of survivorship and not as tenants
in common
UNIF GIFT MIN ACT-_________as Custodian for_________
(Cust) (Minor)
under Uniform Gifts to Minors
Act____________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received,_______________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_____________________________________
| |
|_____________________________________|
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated______________________
____________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER, UPON REQUEST AND WITHOUT
CHARGE, A FULL STATEMENT OF THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND
LIMITATIONS OF THE SHARES OF EACH CLASS AND SERIES AUTHORIZED TO BE ISSUED, SO
FAR AS THE SAME HAVE BEEN DETERMINED, AND OF THE AUTHORITY, IF ANY, OF THE BOARD
TO DIVIDE THE SHARES INTO CLASSES OR SERIES AND TO DETERMINE AND CHANGE THE
RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF ANY CLASS OR SERIES SUCH
REQUEST MAY BE MADE TO THE SECRETARY OF THE CORPORATION OR TO THE TRANSFER
AGENT NAMED ON THIS CERTIFICATE.
- --------------------------------------------------------------------------------
THE SIGNATURE TO THE ASSIGNMENT MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE
FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A COMMERCIAL BANK OR TRUST
COMPANY OR A MEMBER FIRM OF A NATIONAL OR REGIONAL OR OTHER RECOGNIZED STOCK
EXCHANGE IN CONFORMANCE WITH A SIGNATURE GUARANTEE MEDALLION PROGRAM.
- --------------------------------------------------------------------------------
STOCK MARKET INFORMATION EXCHANGE
EXHIBIT 4.2
<PAGE>
- --------------------------------------------------------------------------------
PACIFICHEALTH LABORATORIES, INC.
----------
UNDERWRITER'S WARRANT AGREEMENT FOR SHARES
Dated as of December __, 1997
- --------------------------------------------------------------------------------
<PAGE>
UNDERWRITER'S WARRANT AGREEMENT dated as of December __, 1997 between
PACIFICHEALTH LABORATORIES,INC., a Delaware corporation with its principal
address at 1460 Route 9, North Woodbridge, New Jersey 07095 (the "Company") and
FIRST MONTAUK SECURITIES CORP., as Underwriter, a (hereinafter referred to
variously as the "Holder" or the "Underwriter").
W I T N E S S E T H :
---------------------
WHEREAS, the Underwriter has agreed pursuant to the underwriting agreement
(the "Underwriting Agreement") dated as of the date hereof between the
Underwriter and the Company, to underwrite the Company's proposed public
offering (the "Public Offering") of 1,200,000 shares of common stock $.0025 par
value (the "Common Stock") of the Company at a public offering price of $6.00
per share (the "Shares"); and
WHEREAS, the Company proposes to issue to the Underwriter warrants
("Underwriter's Warrants") to purchase up to an aggregate of 120,000 fully paid
non-assessable shares (the "Shares") of the Company's Common Stock, at an
exercise price of $8.70 per share (145% of the public offering price of the
Shares); and
WHEREAS, the Underwriter's Warrants to be issued pursuant to this
Agreement will be issued on the Closing Date (as such term is defined in the
2
<PAGE>
Underwriting Agreement) by the Company to the Underwriter in consideration for,
and as part of the compensation in connection with the Public Offering;
NOW, THEREFORE, in consideration of the premises, the payment by the
Underwriter to the Company of an aggregate of One Hundred and Twenty ($120.00),
the agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
l. Grant. The Holder is hereby granted the right to purchase, at any time
from ____, 1998 [one year after effective date] until 5:30 P.M., New York time,
on _____, 2002 [four years after effective date], up to an aggregate of 120,000
Shares at an initial exercise price (subject to adjustment as provided in
Section 8 hereof) of $8.70 per Share (the "Exercise Price"), subject to the
terms and conditions of this Agreement. Except as set forth herein, the Shares
issuable upon exercise of the Underwriter's Warrants are in all respects
identical to the shares of Common Stock being purchased by the Underwriter for
resale to the public pursuant to the terms and provisions of the Underwriting
Agreement.
2. Underwriter's Warrant Certificates. The Underwriter's warrant
certificates (the "Underwriter's Warrant Certificates") delivered and to be
delivered pursuant to this Agreement shall be in the form set forth in Exhibit
A, attached hereto and made a part hereof, with such appropriate insertions,
omissions, substitutions, and other variations as required or permitted by this
Agreement.
3
<PAGE>
3. Exercise of Underwriter's Warrants.
Section 3.1 Exercise. The Underwriter's Warrants initially are exercisable
at an aggregate initial exercise price (subject to adjustment as provided in
Section 8 hereof) per share, as set forth in Section 6 hereof payable by
certified or official bank check in New York Clearing House funds, subject to
adjustment as provided in Section 8 hereof. Upon surrender at the Company's
principal offices currently located at 1460 Route 9, North Woodbridge, New
Jersey 07095), of an Underwriter's Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Purchase Price
(as hereinafter defined) for the Shares purchased, the registered holder of an
Underwriter's Warrant Certificate ("Holder" or "Holders") shall be entitled to
receive a certificate or certificates for the Shares so purchased. The purchase
rights represented by each Underwriter's Warrant Certificate are exercisable at
the option of the Holder thereof, in whole or in part (but not as to fractional
shares of Common Stock underlying the Underwriter's Warrants). In the case of
the purchase of less than all the Shares purchasable under any Underwriter's
Warrant Certificate, the Company shall cancel the Underwriter's Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Underwriter's Warrant Certificate of like tenor for the balance of the Shares
purchasable thereunder.
Section 3.2 Cashless Exercise. At any time during the Warrant Exercise
Term, the Holder may, at its option, exchange the Warrants represented by such
Holder's Warrant certificate, in whole or in part (a "Warrant Exchange), into
the
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number of fully paid and non-assessable Shares determined in accordance with
this Section 3.2, by surrendering such Warrant certificate at the principal
office of the Company or at the office of its transfer agent, accompanied by a
notice stating such Holder's intent to effect such exchange, the number of
Shares to be exchanged and the date on which the Holder requests that such
Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall
take place on the date specified in the Notice of Exchange, or, if later, the
date the Notice of Exchange is received by the Company (the "Exchange Date").
Certificates for the Shares issuable upon such Warrant Exchange and, if
applicable, a new Warrant of like tenor evidencing the balance of the Shares
remaining subject to the Holder's Warrant certificate, shall be issued as of the
Exchange Date and delivered to the Holder within three (3) business days
following the Exchange Date. In connection with any Warrant Exchange, the
Holder's Warrant certificate shall represent the right to subscribe for and
acquire (i) the number of Shares (rounded to the next highest integer) equal to
(A) the number of Shares specified by the Holder in its Notice of Exchange (the
"Total Share Number") less (B) the number of Shares equal to the quotient
obtained by dividing (i) the product of the Total Share Number and the existing
Exercise Price (as hereinafter defined) per Share by (ii) the Market Price (as
defined in Section 3.3 hereof) of a share of Common Stock.
Section 3.3 Market Price. For the purpose of this Agreement, the phrase
"Market Price" at any date shall be deemed to be the (i) last reported sale
price on the last trading day or, in case no such reported sale takes place on
such day, the
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average last reported sale price for the last three (3) trading days, in either
case as officially reported by the principal securities exchange on which the
Common Stock is listed or admitted to trading, or, (ii) if the Common Stock is
not listed or admitted to trading on any national securities exchange but is
listed or quoted upon the Nasdaq National Market or SmallCap Market (together
referred to hereinafter as "NASDAQ"), the closing bid price on the last trading
day, or, in case no such reported bid takes place on such day, the average
closing bid price for the last three (3) trading days, as furnished by NASDAQ or
similar organization if NASDAQ is no longer reporting such information, or (iii)
if the Common Stock is not listed upon a principal exchange or quoted on NASDAQ,
but quotes for the Common Stock are available in the OTC Bulletin Board the
closing bid price on the last trading day, or, in case no such bid takes place
on such day, the average closing bid price for the last three (3) trading days
as furnished on the OTC Bulletin Board or (iv) in the event the Common Stock is
not traded upon a principal exchange and not listed on NASDAQ and quotes are not
available on the OTC Bulletin Board, as determined in good faith by resolution
of the Board of Directors of the Company, based on the best information
available to it.
4. Issuance of Certificates. Upon the exercise of the Underwriter's
Warrants, the issuance of certificates for the Shares or other securities,
properties or rights underlying such Underwriter's Warrants, shall be made
forthwith (and in any event within five (5) business days thereafter) without
charge to the Holder thereof including, without limitation, any tax which may be
payable in respect of the
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issuance thereof, and such certificates shall (subject to the provisions of
Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Underwriter and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Underwriter's Warrant Certificates and the certificates representing
the Shares issuable upon exercise of the Underwriter's Warrants shall be
executed on behalf of the Company by the manual or facsimile signature of the
then Chairman or Vice Chairman of the Board of Directors or President or Vice
President of the Company under its corporate seal reproduced thereon, attested
to by the manual or facsimile signature of the then present Secretary or
Assistant Secretary of the Company. The Underwriter's Warrant Certificates shall
be dated the date of the execution by the Company upon initial issuance,
division, exchange, substitution or transfer. The certificates representing the
Shares issuable upon exercise of the Underwriter's Warrant shall be identical in
form to those issued in connection with the Public Offering.
5. Restriction On Transfer of Underwriter's Warrants. The Holder of an
Underwriter's Warrant Certificate, by its acceptance thereof, covenants and
agrees
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that the Underwriter's Warrants are not being acquired with a view to the
distribution thereof; and that the Underwriter's Warrants may not be sold,
transferred, assigned, hypothecated or otherwise disposed of, in whole or in
part, for a period of one (1) year from the date hereof, except to officers of
the Underwriter or members of the Selling Group (as defined in the Underwriting
Agreement) and thereafter only to officers, directors, employees of and one
consultant to the Company.
6. Exercise Price.
Section 6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Underwriter's
Warrant shall be $7.20 per Share. The exercise price shall be adjusted from time
to time in accordance with the provisions of Section 8 hereof.
Section 6.2 Exercise Price. The term "Exercise Price" herein shall mean the
initial exercise prices or the adjusted exercise price, depending upon the
context of the Underwriter's Warrants.
7. Registration Rights.
Section 7.1 Registration Under the Securities Act of 1933. The
Underwriter's Warrants and the Shares issuable upon exercise of the
Underwriter's Warrants, have been registered (the "Registration Statement")
under the Securities Act of 1933, as amended (the "Act").
Section 7.2 Piggyback Registration. If, at any time commencing after
__________, 1998 (one (1) year from the Effective Date), through and including
________, 2002 (five (5) years from the Effective Date), the Company proposes to
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register any of its securities under the Act (other than on Form S-8 or any
successor form for use in connection with the issuer employee benefit plans in
connection with a merger or acquisition) it will give written notice by
registered or certified mail, at least thirty (30) days prior to the filing of
each such registration statement, to the Underwriter and to all other Holders of
the Underwriter's Warrants and Shares underlying the Underwriter's Warrants, of
its intention to do so. If any of the Underwriter or other Holders of the
Underwriter's Warrants and/or the Shares underlying the Underwriter's Warrants,
notify the Company within twenty (20) days after receipt of any such notice of
its or their desire to include any such securities in such proposed registration
statement, the Company shall afford each of the Underwriter and such Holders of
the Underwriter's Warrants and/or Shares underlying the Underwriter's Warrants,
the opportunity to have any of such securities registered under such
registration statement; provided, however, that in the event the underwriters of
any securities proposed to be sold by the Company advise the Company that in
their opinion the number of securities requested to be included in such
registration pursuant to this Agreement and pursuant to any other rights granted
by the Company to holders of its securities exceeds the number of securities
that can be sold in the offering without adversely affecting the offering price
of the Company's securities, the Company may first include in such registration
all securities the Company proposes to sell (without including the holders of
other rights granted by the Company), and each Holder shall accept a pro rata
reduction in the number of shares to be included in such registration statement.
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Notwithstanding the provisions of this Section 7.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 7.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
Section 7.3 Demand Registration.
(a) At any time commencing after , 1998 (one (1) year from the Effective
Date) through and including , 2002 (five (5) years from the Effective Date), the
Holders of the Underwriter's Warrants and Shares underlying the Underwriter's
Warrants, representing a "Majority" of the shares of Common Stock issued or
issuable upon the exercise of the Underwriter's Warrants (assuming the exercise
of all of the Underwriter's Warrants) shall have the right (which right is in
addition to the registration rights under Section 7.2 hereof), exercisable by
written notice to the Company, to have the Company prepare and file with the
Commission, on one occasion only, a registration statement and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for the Underwriter and Holders, in order to
comply with the provisions of the Act, so as to permit a public offering and
sale of their respective Underwriter's Warrants and Shares for at least nine (9)
consecutive months by such Holders and any other Holders of the Underwriter's
Warrants and the Shares who shall notify the Company within ten (10) days after
receiving notice from the
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Company of such request. Such registration and all costs incident thereof shall
be at the expense of the Company, as provided in Section 7.4(b).
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Underwriter's Warrants and Shares within ten
(10) days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2 and subsection
(a) of this Section 7.3, at any time within the time period specified in Section
7.4(a) hereof, through and including ___________, 2002 (five (5) years from the
Effective Date), any Holder of the Underwriter's Warrants and/or Shares,
representing a "Majority" (as hereinafter defined) of the shares of Common Stock
issued or issuable upon the exercise of the Underwriter's Warrants (assuming the
exercise of all of the Underwriter's Warrants) shall have the right, exercisable
by written request to the Company, to have the Company prepare and file, on one
occasion, with the Commission a registration statement so as to permit a public
offering and sale for nine (9) consecutive months by any such Holder of its
shares, provided, however, that the provisions of Section 7.4(b) hereof shall
not apply to any such registration request and registration and all costs
incident thereto shall be at the expense of the Holder or Holders making such
request.
(d) The Company and the Holders agree that the Holders of Underwriters
Warrants and Shares (the "Securities") will suffer damages if the Company fails
to fulfill its obligations under this Section 7.3. In the event that the holders
of the Securities are required to initiate suit or arbitration to enforce their
rights under this Section 7, then the Company shall pay all reasonable costs and
expenses, including attorney's fees incurred by the Holders in connection
therewith.
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Section 7.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration statement
within sixty (60) days of receipt of any demand therefor in accordance with
Section 7.3(a), shall use its best efforts to have any registration statement
declared effective by within 90 days after filing, and shall furnish each Holder
desiring to sell the Shares underlying the Underwriter's Warrants such number of
prospectuses as shall reasonably be requested. Notwithstanding the foregoing
sentence, the Company shall be entitled to postpone the filing of any
registration statement otherwise required to be prepared and filed by it
pursuant to this Section 7.4(a) if the Company (i) is publicly committed to a
self-tender or exchange offer and the filing of a registration statement would
cause a violation of Regulation M under the Securities Exchange Act of 1934 as
amended (the "Exchange Act") or (ii) or if the Company is involved in
negotiating or consummating an acquisition or merger which would make such
registration impracticable in which case the filing of the registration
statement may be delayed for a reasonable period not to exceed 150 days. In the
event of such postponement, the Company shall be required to file the
registration statement pursuant to this Section 7.4(a) upon the earlier of (i)
the consummation or termination, as applicable, of the event requiring such
postponement or (ii) 150 days after the receipt of the initial demand for such
registration. Additionally, notwithstanding anything to the contrary contained
herein, during any period that a registration statement filed pursuant to
Section 7.3 hereof is effective, the Company shall have the right to prohibit
the sale of any Warrants or Warrant Shares thereunder upon notice to the
Holder(s) (A) if in the opinion of counsel for the Company, the Company would
thereby be required to disclose information not otherwise then required by law
to be publicly disclosed where it is significant to the operations or well being
of the Company that such information remain undisclosed, provided that the
Company shall use its best efforts to minimize the period of time in which it
shall prohibit the sale of any of such shares pursuant to this clause (A), (B)
for periods of up to 30 days if the Company reasonably believes that such sale
might reasonably be expected to have an adverse effect on any significant
proposal or plan of the Company to engage in an acquisition of assets or any
merger, consolidation, tender offer, financing, corporate reorganization or
similar transaction; (C) during the period starting with the date 10 days prior
to the
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Company's estimate of the date of filing of, and ending on a date 120 days after
the effective date of, a Company initiated registration in which the Holders are
entitled to and may in fact participate in accordance with Section 7.2 hereof,
but in no event longer than 180 days; or (D) upon the happening of any event, as
a result of which the prospectus under the registration statement includes an
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances then existing (in which case, the Company shall
within a reasonable period provide the Holder with revised or supplemental
prospectuses and the Holders shall promptly take action to cease making any
offers of such shares until receipt and distribution of such revised or
supplemental prospectuses.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s) counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, and blue sky fees and expenses.
The Holder(s) will pay all costs, fees and expenses in connection with any
registration statement filed pursuant to Section 7.3(c).
(c) The Company will take all necessary action which may be required in
qualifying or registering the Underwriter's Warrants and Shares underlying the
Underwriter's Warrants included in a registration statement for offering and
sale under the securities or blue sky laws of such states as reasonably are
requested by
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the Holder(s), provided that the Company shall not be obligated to execute or
file any general consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Underwriter's Warrants
and Shares to be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act or otherwise, arising from such
registration statement but only to the same extent and with the same effect as
the provisions pursuant to which the Company has agreed to indemnify the
Underwriter contained in Section 7 of the Underwriting Agreement.
(e) The Holder(s) of the Underwriter's Warrants and Shares underlying the
Underwriter's Warrants to be sold pursuant to a registration statement, and
their successors and assigns, shall severally, and not jointly, indemnify the
Company, its officers and directors and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against all loss, claim, damage or expense or liability (including
all expenses reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which they may become subject under the Act,
the Exchange Act or otherwise, arising from information furnished by or on
behalf of such Holders, or
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their successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in Section 7 of the Underwriting Agreement pursuant to which the
Underwriter has agreed to indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as requiring the
Holder(s) to exercise their Underwriter's Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other than
the Shares underlying the Underwriter's Warrants to be included in any
registration statement filed pursuant to Section 7.3 hereof, or permit any other
registration statement (other than in connection with a merger or acquisition)
to become effective within 120 days of a registration statement filed pursuant
to Section 7.3 hereof, without the prior written consent of the Holders of the
Underwriter's Warrants or Shares underlying the Underwriter's Warrants
representing a majority of the shares of Common Stock issuable upon the exercise
of such Underwriter's Warrants.
(h) If the Shares underlying the Underwriter's Warrants are to be sold in
an underwritten public offering, the Company shall use its best efforts to
furnish to each Holder participating in the offering and to each such
underwriter, a signed counterpart, addressed to such underwriter, of (i) an
opinion of counsel to the Company dated the date of the closing under the
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underwriting agreement, and (ii) a "cold comfort" letter dated the date of the
closing under the underwriting agreement signed by the independent public
accountants who have issued a report on the Company's financial statements
included in such registration statement, in each case covering substantially the
same matters with respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(i) The Company shall as soon as practicable after the effective date of
the registration statement, and in any event within 15 months thereafter, have
made "generally available to its security holders" (within the meaning of Rule
158 under the Act) an earnings statement (which need not be audited) complying
with Section 11(a) of the Act and covering a period of at least 12 consecutive
months beginning after the effective date of the registration statement.
(j) The Company shall deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described below, and the
managing underwriters, copies of all correspondence between the Commission and
the Company, its counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to the registration statement and
permit each Holder and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable
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securities laws or rules of the National Association of Securities Dealers, Inc.
("NASD"). Such investigation shall include access to books, records and
properties and opportunities to discuss the business of the Company with its
officers and independent auditors, all to such reasonable extent and at such
reasonable times and as often as any such Holder shall reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriter(s) selected for such underwriting, if any, by Holders
holding a Majority of the Underwriter's Warrants and Shares underlying the
Underwriter's Warrants requested to be included in such underwriting. Such
underwriting agreement shall be satisfactory in form and substance to the
Company, each Holder and such managing underwriters, and shall contain such
representations, warranties and covenants by the Company and such other terms as
are customarily contained in agreements of that type used by the managing
underwriter(s).
The Holders shall be parties to any underwriting agreement relating to an
underwritten sale of their Underwriter's Warrants and the Shares underlying the
Underwriter's Warrants and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for the benefit
of such underwriter(s) shall also be made to and for the benefit of such
Holders. Such Holders shall not be required to make any representations or
warranties to or agreements with the Company or the underwriter(s) except as
they may relate to such Holders, their intended methods of distribution, and
except for matters related to disclosures with respect to such Holders,
contained or required to be contained,
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in such registration statement under the Act and the rules and regulations
thereunder.
(l) For purposes of this Agreement, the term "Majority" in reference to the
Holders of Underwriter's Warrants and Shares, shall mean in excess of fifty
percent (50%) of the then outstanding Shares, assuming the full exercise of all
Underwriter's Warrants that (i) are not held by the Company, an affiliate,
officer, creditor, employee or agent thereof or any of their respective
affiliates, members of their families, persons acting as nominees or in
conjunction therewith or (ii) have not been resold to the public pursuant to
Rule 144 under the Act or a registration statement filed with the Commission
under the Act.
(m) Notwithstanding anything to the contrary herein, the Company shall have
no obligation (i) to register any Shares which previously were sold by a Holder
pursuant to an effective registration statement under the Act or which are then
saleable, without registration and without restriction, pursuant to Section 4(i)
of the Act, or (ii) to register any Shares or Warrants under Section 7.3 if, at
the time it receives Holders' notice of exercise of the rights set forth in
Section 7.3, the Company is in the process of preparing a registration for a
public offering of securities by the Company in which Holders are entitled to
participate under Section 7.2, such registration is filed within forty-five days
following receipt of such notice from Holders, and such registration statement
becomes effective within 120 days thereafter, or (iii) during the period of time
that any registration statement to which Section 7.2 or subsection (ii) above is
effective, but no longer than 120 days after its effective date.
8. Adjustments to Exercise Price and Number of Securities.
Section 8.1 Subdivision and Combination. In case the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the Exercise
Price of the Underwriter's Warrants shall forthwith be proportionately decreased
in the case of subdivision or increased in the case of combination.
Section 8.2 Adjustment in Number of Securities. Upon each adjustment of the
Exercise Price of the Underwriter's Warrants, pursuant to the provisions of this
Section 8, the number of shares issuable upon the exercise of the Underwriter's
Warrants, shall be adjusted to the nearest full amount by multiplying a number
equal to the exercise price in effect immediately prior to such adjustment by
the number of shares of Common Stock issuable upon exercise of the Underwriter's
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Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Prices.
Section 8.3 Definition of Common Stock. For the purpose of this Agreement,
the term "Common Stock" shall mean (i) the class of stock designated as Common
Stock in the Articles of Incorporation of the Company as amended as of the date
hereof, or (ii) any other class of stock resulting from successive changes or
reclassifications of such Common Stock, consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value. In
the event that the Company shall after the date hereof issue common securities
with greater or superior voting rights than the shares of Common Stock
outstanding as of the date hereof, the Holder, at its option, may receive upon
exercise of any Underwriter's Warrant, either shares of Common Stock or a like
number of such securities with greater or superior voting rights.
Section 8.4 Merger or Consolidation. In case of any consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the Holder shall have
the right thereafter (until the expiration of such warrant) to receive, upon
exercise of such warrant, the kind and amount of shares of stock and other
securities and property receivable upon such consolidation or merger, by a
holder of the number of shares
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of Common Stock of the Company for which such warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8. The above provision of this
subsection shall similarly apply to successive consolidations or mergers.
Section 8.5 No Adjustment of Exercises Price in Certain Cases. No
adjustment of the Exercise Price of the Underwriter's Warrants shall be made:
(a) Upon the issuance or sale of the Underwriter's Warrants or Shares
issuable upon the exercise of the Underwriter's Warrants or the exercise of
options and warrants outstanding on the date hereof and described in the
prospectus relating to the Public Offering; or
(b) If the amount of such adjustment shall be less than two cents
($.02) per share of Common Stock, provided, however, that in such case any
adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least two cents ($.02) per share of Common
Stock.
9. Exchange and Replacement of Underwriter's Warrant Certificates. Each
Underwriter's Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holder at the principal executive office of
the Company, for a new Underwriter's Warrant Certificate of like tenor and date
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representing in the aggregate the right to purchase the same number of Shares as
provided in the original Underwriter's Warrants in such denominations as shall
be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Underwriter's Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Underwriter's Warrants, if mutilated, the Company will make and deliver a
new Underwriter's Warrant Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of shares of Common Stock upon the
exercise of the Underwriter's Warrants, nor shall it be required to issue scrip
or pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
11. Reservation and Listing of Securities. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Underwriter's Warrants,
such number of shares of Common Stock or other securities, properties or rights
as shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Underwriter's Warrants and payment of the Exercise
Price
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therefor, all shares of Common Stock and other securities issuable upon such
exercise shall be duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any stockholder. As long as the
Underwriter's Warrants shall be outstanding, the Company shall use its best
efforts to cause all shares of Common Stock issuable upon the exercise of the
Underwriter's Warrants to be listed (subject to official notice of issuance) on
all securities exchanges on which the Common Stock issued to the public in
connection herewith may then be listed and/or quoted on NASDAQ.
12. Notices to Underwriter's Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Underwriter's Warrants and their exercise, any of
the following events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on
the books of the Company; or
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(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any
option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property assets and business as an entirety shall
be proposed; then, in any one or more of such events the Company shall give
written notice to the Holders of such event at least fifteen (15) days
prior to the date fixed as a record date or the date of closing the
transfer books for the determination of the stockholders entitled to such
dividend, distribution, convertible or exchangeable securities or
subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such record date
or the date of closing the transfer books, as the case may be. Failure to
give such notice or any defect therein shall not affect the validity of any
action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. Notices.
All notices requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been duly made when delivered, or
mailed by registered or certified mail, return receipt requested:
23
<PAGE>
(a) If to the registered Holder of the Underwriter's Warrants, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3 hereof or
to such other address as the Company may designate by notice to the
Holders.
14. Supplements and Amendments. The Company and the Underwriter may from
time to time supplement or amend this Agreement without the approval of any
holders of Underwriter's Warrant Certificates (other than the Underwriter) in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Underwriter may deem necessary or desirable and which
the Company and the Underwriter deem shall not adversely affect the interests of
the Holders of Underwriter's Warrant Certificates.
15. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of business on
______ , 2002. Notwithstanding the foregoing, the indemnification provisions of
Section 7 shall survive such termination until the close of business on
_____________ 16, 2004.
24
<PAGE>
17. Governing Law: Submission to Jurisdiction. This Agreement and each
Underwriter's Warrant Certificate issued hereunder shall be deemed to be a
contract made under the laws of the State of New Jersey and for all purposes
shall be construed in accordance with the laws of such State without giving
effect to the rules of said State governing the conflicts of laws.
The Company, the Underwriter and the Holders hereby agree that any action,
proceeding or claim against it arising out of, or relating in any way to, this
Agreement shall be brought and enforced in the courts of the State of New Jersey
or of the United States of America for the District of New Jersey, and
irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive.
The Company, the Underwriter and the Holders hereby irrevocably waive any
objection to such exclusive jurisdiction or inconvenient forum. Any such process
or summons to be served upon any of the Company, the Underwriter and the Holders
(at the option of the party bringing such action, proceeding or claim) may be
served by transmitting a copy thereof, by registered or certified mail, return
receipt requested, postage prepaid, addressed to it at the address set forth in
Section 13 hereof. Such mailing shall be deemed personal service and shall be
legal and binding upon the party so served in any action, proceeding or claim.
The Company, the Underwriter and the Holders agree that the prevailing
party(ies) in any such action or proceeding shall be entitled to recover from
the other party(ies) all of its/their reasonable legal costs and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
25
<PAGE>
18. Entire Agreement: Modification. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and, except as provided in Section 14 hereof, may not be
modified or amended except by a writing duly signed by the party against whom
enforcement of the modification or amendment is sought.
19. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
20. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. Benefits or this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Underwriter and any other registered Holder(s) of the Underwriter's Warrant
Certificates or Shares underlying the Underwriter's Warrants any legal or
equitable right, remedy or claim under this Agreement; and this Agreement shall
be for the sole and exclusive benefit of the Company and the Underwriter and any
other Holder(s) of the Underwriter's Warrant Certificates or Shares.
22. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be
26
<PAGE>
an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
[SEAL] PACIFICHEALTH LABORATORIES, INC.
By _________________________________________
Name:
Title:
Attest:
_______________________
Secretary
FIRST MONTAUK SECURITIES CORP.
By ______________________________
Name:
Title:
27
<PAGE>
EXHIBIT A
[FORM OF UNDERWRITER'S WARRANT CERTIFICATE]
THE UNDERWRITER'S WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER
SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE UNDERWRITER'S WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE UNDERWRITER'S WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, _____________, 2002
No. UW-1 120,000 Underwriter's Warrants
Underwriter's Warrant Certificate
This Underwriter's Warrant Certificate certifies that ____________________,
or registered assigns, is the registered holder of 120,000 Underwriter's
Warrants to purchase initially, at any time from ________________, 1998 [one
year from the effective date of the offering] until 5:30 p.m. New York time on
_____________, 2002 [five years from the effective date of the offering]
("Expiration Date"), up to 120,000 fully-paid and non-assessable shares of
Common Stock, par value $.0025 per share (the "Warrants") of PACIFICHEALTH
LABORATORIES, INC., a Delaware corporation (the "Company"), at an initial
exercise price, subject to adjustment in certain events (the "Exercise Price"),
of $8.70 per Share upon surrender of this Underwriter's Warrant Certificate and
payment of the Exercise Price at an office or agency of the Company, but subject
to the conditions set forth herein and in the warrant agreement dated as of
_____________-, 1997 between the Company and FIRST MONTAUK SECURITIES CORP. (the
"Underwriter's Warrant Agreement"). Payment of the Exercise Price shall be made
by certified or official bank check in
<PAGE>
New York Clearing House funds payable to the order of the Company or otherwise
in accordance with the terms of the Underwriter's Warrant Agreement. In
accordance with Section 3.2 of the Underwriter's Warrant Agreement, payment of
the exercise price may also be made by the delivery of Shares of Common Stock of
the Company.
No Underwriter's Warrant may be exercised after 5:30 p.m., New York time,
on the Expiration Date, at which time all Underwriter's Warrants evidenced
hereby, unless exercised prior thereto, shall thereafter be void.
The Underwriter's Warrants evidenced by this Underwriter's Warrant
Certificate are part of a duly authorized issue of warrants pursuant to the
Underwriter's Warrant Agreement, which Underwriter's Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Underwriter's Warrants.
The Underwriter's Warrant Agreement provides that upon the occurrence of
certain events the exercise price and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Underwriter's
Warrant Certificate evidencing the adjustment in the exercise price and the
number and/or type of securities issuable upon the exercise of the Underwriter's
Warrants; provided, however, that the failure of the Company to issue such new
Underwriter's Warrant Certificates shall not in any way change, alter or
otherwise impair, the rights of the holder as set forth in the Underwriter's
Warrant Agreement.
Upon due presentment for registration of transfer of this Underwriter's
Warrant Certificate at an office or agency of the Company, a new Underwriter's
Warrant Certificate or Underwriter's Warrant Certificates of like tenor and
evidencing in the aggregate a like number of Underwriter's Warrants shall be
issued to the transferee(s) in exchange for this Underwriter's Warrant
Certificate, subject to the limitations provided herein and in the Underwriter's
Warrant Agreement, without any charge except for any tax or other governmental
charge imposed in connection with such transfer.
Upon the exercise of less than all of the Underwriter's Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Underwriter's Warrant Certificate representing such number of unexercised
Underwriter's Warrants.
2
<PAGE>
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Underwriter's Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Underwriter's Warrant Certificate which are defined
in the Underwriter's Warrant Agreement shall have the meanings assigned to them
in the Underwriter's Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Underwriter's Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ______________-, 1997
PACIFICHEALTH LABORATORIES, INC.
[SEAL] By _________________________________
Name:
Title:
Attest:
_________________________________
Secretary
3
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Underwriter's Warrant Certificate, to purchase ________
shares of Common Stock and herewith tenders in payment for such securities a
certified or official bank check payable in New York Clearing House Funds to the
order of _______________________________ in the amount of $_______________, all
in accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of _____________ whose address is
____________________ and that such Certificate be delivered to ________________
whose address is _______________.
Dated:
Signature __________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Underwriter's
Warrant Certificate.)
________________________________
Insert Social Security or Other
Identifying Number of Holder)
[LETTERHEAD OF CONNOLLY EPSTEIN CHICCO FOXMAN ENGELMYER & EWING
a pennsylvania professional corporation
attorneys at law]
PacificHealth Laboratories
1460 Route 9 North
Woodbridge, NJ 07095
Re: Registration Statement on Form SB-2
File No. 333-36379
-----------------------------------
Dear Gentlemen/Ladies:
We have acted as counsel to PacificHealth Laboratories, Inc. (the
"Company") in connection with the preparation and filing of the above captioned
Registration Statement (the "Registration Statement") relating to the public
offering of up to 1,380,000 shares of Common Stock, par value $.0025, to be sold
by the Company to First Montauk Securities Corp. ("FMSC") as underwriter,
including 180,000 shares which FMSC will have the option to purchase from the
Company solely for the purpose of covering over-allotments.
We are familiar with the Registration Statement. We have reviewed the
Company's Certificate of Incorporation and By-laws, each as amended to date. We
also have examined such public and private corporate documents, certificates,
instruments and corporate records, and such questions of law, as we have deemed
necessary for the purpose of expressing an opinion on the matters set forth
below. In all examinations of documents we have assumed the genuineness of all
signatures appearing on such documents, and the genuineness and authenticity of
all copies submitted to us conformed, photostatic or other copies as true copies
of the original document.
On the basis of the foregoing, we are of the opinion that the shares, when
issued and sold in accordance with the plan of distribution set forth in the
Registration Statement, will be validly issued, fully paid and non-assessable.
<PAGE>
PacificHealth Laboratories
December 15, 1997
Page 2
We consent to the filing of this opinion as an Exhibit to the Registration,
and consent to the reference to us under the caption "Legal Matters" in the
Prospectus included in the Registration Statement.
Very truly yours,
CONNOLLY EPSTEIN CHICCO
FOXMAN ENGELMYER & EWING
By: /s/ Joseph Chicco
-----------------------------
Joseph Chicco
JOC:lpf
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") dated December 15, 1997, by and
between PacificHealth Laboratories, Inc. (hereinafter the "Company"), a Delaware
corporation, and Robert Portman (hereinafter "Employee").
WHEREAS, the Company desires to retain the services of Employee and
Employee desires to be employed upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
1. EMPLOYMENT: The Company shall employ Employee as its President and
Chief Executive Officer, and Employee shall accept employment and shall render
services in such capacities, under and subject to the conditions and terms set
forth herein. During the period of his employment, Employee shall devote his
full time, attention, energy, knowledge and skill to the business and interests
of the Company, from offices of the Company to be maintained in the Central New
Jersey area, and the Company shall be entitled to the profits and other benefits
arising from or incident to the work, services and advice of Employee.
2. TERM: The term of this Agreement, and the term of employment of
Employee hereunder, shall commence on January 1, 1998 (the Effective Date"), and
shall end on the day preceding the third anniversary date of the Effective Date,
i.e., December 30, 2000 (the "Scheduled Termination Date"), provided:
a. Employee shall have the right to terminate his employment
hereunder for cause, upon written notice to the Company referring to this
paragraph 2(a) and describing the condition relied upon by him in invoking the
provisions hereof, if, without Employee's written consent, (i) the Company fails
to pay Employee any salary or other compensation or benefit required to be paid
hereunder when due and for a period of thirty (30) days after demand therefor by
Employee; (ii) there occurs any substantial change in the authorities, powers,
functions or duties attached to Employee's positions; or (iii) Employee is
required by any directive from the Company to reside outside of the Central New
Jersey area; unless, in any such case, the Company, within thirty (30) days
after Employee's giving of notice hereunder, takes full and effective action to
eliminate the condition cited by Employee in his notice of termination as the
reason for his giving of such notice.
b. Employee shall have the right to terminate his employment
hereunder without cause at any time upon not less than thirty (30) days written
notice.
3. COMPENSATION:
<PAGE>
a. Employee shall receive base salary which shall be paid in
equal, bi-weekly installments commencing with the first pay period immediately
following the Effective Date. Employee's salary shall be as follows:
i) For two full years following the Effective Date, Employee's
base salary shall be $150,000 per year, provided, however, that Employee's
salary shall be increased to $175,000 per year effective January 1, 1999, if the
Company's net pre-tax operating income for the year ended December 31, 1998,
exceeds $25,000.
ii) In the third year following the Effective Date, Employee's
base salary shall be determined by a Compensation Committee of the Board of
Directors of the Company, a majority of which shall be independent directors.
b. In addition to his base salary, Employee shall receive a bonus
equal to five percent (5%) of the amount, if any, by which the Company's pre-tax
operating income exceeds $1,000,000 in each of the fiscal years ending December
31, 1998 and 1999.
c. In addition to base salary and bonus payable pursuant to (a)
and (b) above, Employee shall have the right and option (the "Option") to
purchase 475,000 shares of the Company's Common Stock at a purchase price of
$6.00 per share, subject to the following terms and conditions:
i) The Option shall vest as to 158,334 shares on the first
anniversary of the Effective Date, as to 158,333 shares on the second
anniversary of the Effective Date, and as to 158,333 shares on the third
anniversary of the Effective Date, and shall not be exercisable by Employee
until and to the extent vested;
ii) To the extent not previously vested, the Options shall
terminate upon termination of Employee's employment by (A) Employee, without
cause, or (B) by the Company with cause.
iii) The Option shall vest in full immediately (A) if
Employee's employment is terminated by the Company without cause, (B) Employee's
employment is terminated by Employee with cause, (C) the Company should merge
with another corporation or entity and the Company is not the surviving
corporation, or (D) all or substantially all of the outstanding capital stock or
assets of the Company are acquired by another person or entity.
iv) To the extent not previously exercised, the Option shall
terminate upon the earlier of (A) the fifth anniversary of the Effective Date or
(B) six (6) months following the termination of Employee's employment by the
Company.
2
<PAGE>
v) All terms and conditions of the Company's 1995 Incentive
Stock Option Plan which are not inconsistent with the foregoing terms and
conditions shall apply to the Option.
4. OTHER BENEFITS:
a. The Company shall pay Employee for ordinary and reasonable
business expenses incurred by him in the performance of services pursuant to
this Agreement. In addition, the Company shall provide Employee with a
Company-owned or leased automobile for his use or reimburse Employee for his
costs in leasing such automobile. Employee shall keep such records and shall
render to the Company such accounts covering such expenses as the Company shall
reasonably require.
b. During the term of his employment and during any restricted
period during which Employee is entitled to receive payments pursuant to
subparagraph 5(c) below, Employee shall be entitled to participate in any
medical, health, disability and accident or other hospitalization or insurance
plan established by the Company for its employees generally.
c. During each full year of the term of Employment, Employee shall
be entitled to four (4) weeks paid vacation time.
5. COMPENSATION UPON TERMINATION: If Employee's employment is terminated at
any time during the term hereof, the following provisions shall apply:
a. If Employee's employment is terminated for any reason
whatsoever, except for termination by the Company with cause, as defined in
subparagraph (e) below, or by Employee without cause pursuant to subparagraph
2(b) above, the Company shall pay to Employee, (i) at the time of termination,
an amount equal to the base salary which would have been paid during a period
(the "Severance Period") beginning on the date of termination of employment and
ending on the earlier of (A) the Scheduled Termination Date, or (B) the first
anniversary of the termination date, and (ii) an amount equal to any bonus that
would have been payable to Employee pursuant to paragraph 3(b) above during the
Severance Period had Employee remained employed by the Company hereunder during
the Severance Period, payments shall be in lieu of any other severance or
post-employment benefits except as otherwise expressly provided for in this
Agreement.
b. If Employee's employment is terminated by his death, the
payments to Employee provided for in subparagraph (a) above shall be made to his
estate or to a beneficiary designated by him by notice to the Company, and shall
be reduced by an amount equal to life insurance proceeds, if any, paid to
beneficiaries designated by Employee under any life insurance policy owned by
the Company. The Company shall use its best efforts to obtain and maintain in
force key man insurance on Employee's life in the amount of $2,000,000.00 for
its benefit, which insurance proceeds may be used, in part, to fund the
aforementioned termination payment.
3
<PAGE>
c. If Employee's employment is terminated for any reason other
than Employee's death, the Company, at its election, by notice to Employee given
not later than ten (10) days after such termination and referring specifically
to this subparagraph, shall have the right to require for one (1) year from the
date of termination (the "restricted period") that Employee not become employed
by, become an officer, director, partner or agent of, or become an investor in,
any business engaged in the manufacture or sale of natural food products and/or
dietary supplements, provided that (i) the Company continues to pay to Employee
during the restricted period when payment of Employee's base salary would
otherwise be due and without interruption, an amount equal to one hundred (100%)
percent of Employee's base salary in effect immediately prior to termination
unless such termination is for "cause", as defined below, in which case no
payment shall be required, and (ii) the Company honors and timely performs its
obligations to Employee under subparagraph (a) above. Any failure by the Company
to make the payments required hereunder as and when due, or to honor and timely
perform its obligations to Employee under subparagraphs (a) or (b) above, shall
constitute a full and irrevocable waiver of the Company's rights under this
subparagraph (c). Payments, if any, to Employee hereunder shall be in addition
to any payments required under subparagraphs (a) or (b) above.
d. Nothing in subparagraph (c) above or elsewhere in this
Agreement shall prohibit Employee from acquiring a passive equity stake
representing less then one (1%) of any class of an issuer's outstanding
securities.
e. For the purposes of this Agreement, "cause" for termination of
Employee's employment shall exist only in the event of (i) Employee's gross
negligence or intentional malfeasance in the performance of his duties as an
officer of the Company which results in or creates a substantial risk of serious
financial injury to the Company, (ii) Employee's conviction of a felony or
misdemeanor involving fraud or theft provided that, if such conviction is
appealed by Employee, the conviction is upheld by the appellate courts, (iii)
any final determination by any governmental agency, court or securities exchange
or by The Nasdaq Stock Market, Inc. ("Nasdaq") that Employee has violated any
securities laws or exchange or Nasdaq rules, or (iv) Employee enters into a
consent order with respect thereto.
6. ASSIGNMENT: This Agreement is personal in its nature and neither of the
parties hereto shall, without the consent of the other, assign or transfer this
Agreement or any rights or obligations hereunder, except that the Company may
assign or transfer this Agreement to a successor organization in the event of
merger, consolidation, or transfer of sale of all or substantially all of the
assets of the Company, in which case the term Company shall mean such successor,
provided that in the case of any such assignment or transfer, the obligations of
this Agreement are assumed by such successor or are binding upon and inure to
the benefit of such successor as a matter of law.
7. NOTICES: All notices hereunder shall be in writing and shall be deemed
to have been given at the time when mailed in any general or branch United
States Post Office
4
<PAGE>
enclosed in a certified post-paid envelope, addressed to the respective parties
stated below, or to such changed address as such party may fix by notice as
aforesaid:
To the Company:
Attn: Board of Directors
1460 Route 9 North
Woodbridge, NJ 07095
with a copy to:
Connolly Epstein Chicco
Foxman Engelmyer & Ewing
Attention: Joseph Chicco
1515 Market Street, 9th Floor
Philadelphia, PA 19102
To Employee:
Robert Portman
188 Igoe Road
Morganville, NJ 07751
in each case with copies of such notice to each director of the Company then in
office.
8. GOVERNING LAW: This Agreement and all performance under this Agreement
shall be governed by the laws of the State of New Jersey.
9. WAIVER, MODIFICATION: No waiver or modification of this Agreement or of
any covenant, condition or limitation contained herein shall be valid or
effective unless it is in writing and duly executed by Employee and the Company.
10. RESOLUTION OF DISPUTES: Any controversy or claim arising out of or
relating to this Agreement or the breach thereof, including without limitation a
claim for declaratory relief or relief which is equitable in nature, shall be
settled by arbitration in either Philadelphia, Pennsylvania or Newark, New
Jersey, by an arbitrator selected by Employee and the Company. If the Company
and Employee cannot agree on the appointment of an arbitrator within ten (10)
days after a request for arbitration, then such arbitrator shall be an
attorney-at-law with no prior professional association with any of the parties
or their affiliates who is selected in accordance with procedures established
and implemented by the American Arbitration Association. The arbitration shall
be conducted in accordance with the rules of the American Arbitration
Association, except as otherwise provided in this paragraph 10. Except as
otherwise provided herein, all costs of the
5
<PAGE>
arbitration shall be borne by the Company. Judgment upon any award rendered by
the arbitrator may be entered in any court having jurisdiction over the parties.
Any award of the arbitrator shall include interest at a rate or rates considered
just under the circumstances by the arbitrator and may include, in the
discretion of the arbitrator, an award of legal expenses and costs to the
prevailing party.
11. TERMINATION OF PRIOR AGREEMENT AND PROGRAM: This Agreement supersedes
the Employment Agreement dated May 1, 1995, between Employer and Employee (the
"1995 Contract") and the Bonus Stock Option Award Program adopted by Employer in
July 1996 (the "Program") expressly for Employee. The 1995 Contract and Program
are terminated, and Employer and Employee release each other from any
obligations thereunder, effective as of the Effective Date.
IN WITNESS WHEREOF, Employee has signed his name and the Company, by the
signatures of its duly authorized officers, has executed this Agreement, as of
the date and year mentioned at the top of page one.
PACIFICHEALTH LABORATORIES, INC.
By: /s/ Jonathan D. Rahn
--------------------------
Jonathan D. Rahn
Executive Vice President
By: /s/ Robert Portman
--------------------------
Robert Portman
6
ACCOUNTANT'S CONSENT
(Letterhead of Schiffman Hughes Brown)
ACCOUNTANT'S CONSENT
To the Stockholders and Board of Directors
PacificHealth Laboratories, Inc.
We consent to the use of our Independent Auditor's Report dated December 12,
1997 and accompanying financial statements of PacificHealth Laboratories, Inc.
(the "Company") for the years ended December 31, 1996 and 1995, in the
Prospectus constituting part of Amendment No. 3 to the Company's Registration
Statement on Form SB-2 (Registration No. 333-36379) filed with the Securities
and Exchange Commission.
We also consent to the reference to us under the caption "Experts" in such
Prospectus.
/s/ SCHIFFMAN HUGHES BROWN
SCHIFFMAN HUGHES BROWN
Certified Public Accountants
Blue Bell, Pennsylvania
December 16, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND RELATED STATEMENTS OF OPERATIONS, STOCKHOLDERS
EQUITY AND CASH FLOWS OF PACIFICHEALTH LABORATORIES, INC. AS AT
AND FOR THE YEAR AND NINE MONTH PERIODS ENDED DECEMBER 31, 1996 AND
SEPTEMBER 30, 1997, RESPECTIVELY, AND IS QUALIFIED IN ITS ENTIRETY
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 112,020 743,313
<SECURITIES> 0 0
<RECEIVABLES> 614,465 2,020,545
<ALLOWANCES> 21,500 0
<INVENTORY> 700,179 905,950
<CURRENT-ASSETS> 1,673,190 4,006,474
<PP&E> 167,971 207,403
<DEPRECIATION> 52,810 29,064
<TOTAL-ASSETS> 1,840,182 4,195,281
<CURRENT-LIABILITIES> 1,281,947 669,227
<BONDS> 0 0
0 0
1,439 1,337
<COMMON> 7,964 7,384
<OTHER-SE> 244,239 3,517,333
<TOTAL-LIABILITY-AND-EQUITY> 1,840,182 4,195,281
<SALES> 2,834,236 3,085,726
<TOTAL-REVENUES> 2,834,236 3,085,726
<CGS> 1,205,969 750,312
<TOTAL-COSTS> 1,205,969 785,869
<OTHER-EXPENSES> 5,587,905 2,228,675
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (3,923,196) 106,739
<INCOME-TAX> 38,212 (38,212)
<INCOME-CONTINUING> (4,265,404) 144,751
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,961,408) 144,751
<EPS-PRIMARY> (1.15) .05
<EPS-DILUTED> (1.15) .04
</TABLE>
