<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1997
REGISTRATION NO. 333-5306-D
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OSMOTICS CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 2844 84-1287070
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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1125 17TH STREET, SUITE 2310
DENVER, COLORADO 80202
(303) 293-2087
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
--------------
STEVEN S. PORTER
CHIEF EXECUTIVE OFFICER
OSMOTICS CORPORATION
1125 17TH STREET, SUITE 2310
DENVER, COLORADO 80202
(303) 293-2087
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
--------------
Copies to:
<TABLE>
<S> <C>
C. KEVIN KELSO, ESQ. ALAN I. ANNEX, ESQ.
MARK A. LEAHY, ESQ. ROBERT S. MATLIN, ESQ.
MARK PORTER, ESQ. CAMHY KARLINSKY & STEIN LLP
FENWICK & WEST LLP 1740 BROADWAY, 16TH FLOOR
TWO PALO ALTO SQUARE NEW YORK, NEW YORK 10019
PALO ALTO, CALIFORNIA 94306 (212) 977-6600
(415) 494-0600
</TABLE>
--------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share(2)...... 1,293,750 $8.50 $10,996,875 $3,333
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Representative's
Warrants................ 112,500 $.0001 $11 (3)
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Common Stock issuable upon
exercise of
Representative's
Warrants(4)............. 112,500 $10.20 $1,147,500 $348
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Total.................. $3,681(5)
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</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act.
(2) Includes 168,750 shares of Common Stock issuable upon exercise of the
Representative's Over-Allotment Option.
(3) No registration fee required pursuant to Rule 457 under the Securities
Act.
(4) Pursuant to Rule 416 of the Securities Act, there are also being
registered hereby such additional indeterminate number of shares of Common
Stock as may become issuable pursuant to the anti-dilution provisions of
the Representative's Warrants.
(5) Previously paid.
--------------
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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, FEBRUARY 6, 1997
[LOGO OF OSMOTICS(R) APPEARS HERE]
1,125,000 SHARES OF COMMON STOCK
-----------
This Prospectus relates to the offering (the "Offering") of 1,125,000 shares
(the "Shares") of common stock, $0.001 par value per share ("Common Stock"), by
Osmotics Corporation, a Delaware corporation (the "Company"). All of the Shares
offered hereby are being sold by the Company.
Prior to this Offering, there has been no public market for the Common Stock,
and there can be no assurance that such a market will develop after the
completion of this Offering or, if developed, that it will be sustained. It is
currently estimated that the initial public offering price will be between
$7.50 and $8.50 per Share. For information regarding the factors considered in
determining the initial public offering price of the Shares, see "Risk Factors"
and "Underwriting." The Company has applied to have the Shares included for
quotation on the Nasdaq SmallCap Market under the symbol "OSMO" and listed on
The Boston Stock Exchange under the symbol " ".
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price of the Shares.
-----------
THE SHARES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE
6 AND "DILUTION" ON PAGE 19.
-----------
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>
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<CAPTION>
PRICE TO PUBLIC UNDERWRITING DISCOUNT(1) PROCEEDS TO COMPANY(2)
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<S> <C> <C> <C>
Per Share................................. $ $ $
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Total(3).................................. $ $ $
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</TABLE>
(1) Does not include additional compensation payable to National Securities
Corporation, the representative (the "Representative") of the several
underwriters (the "Underwriters"), in the form of a 3% non-accountable
expense allowance. In addition, see "Underwriting" for information
concerning indemnification and contribution arrangements with the
Underwriters and other compensation payable to the Representative.
(2) Before deducting estimated expenses of $750,000 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters an option exercisable within 45
days after the date of this Prospectus to purchase up to an aggregate of
168,750 additional shares of Common Stock upon the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such over-allotment option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-----------
The Shares are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the Shares offered hereby will be made against payment at the
offices of National Securities Corporation, Seattle, Washington on or about
, 1997.
NATIONAL SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[PICTURE OF ANTIOXIDANT SKIN CARE DERM PRODUCT]
Antioxidant Skin Care Derms transdermal cosmetic patches that deliver the
antioxidant Vitamin C to the skin to help reduce the appearance of fine lines
and wrinkles.
[OSMOTICS LOGO]
Other products sold under the Osmotics label include skin cleansers, hydrating
facial mists, facial moisturizers and alpha hydroxy acid products.
[PICTURE OF OTHER COMPANY PRODUCTS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET, ON
THE BOSTON STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. The Shares offered hereby involve a high degree of risk. See
"Risk Factors." Except where otherwise indicated, all share and per share data
in this Prospectus (including data with respect to options and warrants to
purchase shares of Common Stock) have been adjusted to reflect the
reincorporation of the Company from Colorado to Delaware pursuant to a merger
at an effective exchange ratio of one share of Common Stock of the Delaware
corporation for each 2.2 shares of common stock of the Colorado corporation and
associated changes in the Company's charter documents, to be effected before
the closing of this Offering. See "Description of Capital Stock." In addition,
unless otherwise indicated, all information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised.
THE COMPANY
Osmotics Corporation ("Osmotics" or the "Company") develops and markets
cosmetic skin care products. The Company's current principal products are based
on technology combining the Company's transdermal cosmetic delivery skin
patches ("Patches") with a special formulation of ascorbic acid (vitamin C), an
antioxidant. The products, which currently include the Osmotics label
Antioxidant Skin Care Derms, the Spa-Sante Systeme C label Patch and The
Wrinkle Patch, are intended to reduce the appearance of fine facial lines and
wrinkles. The Patches are placed on targeted wrinkles on a person's face to
saturate the skin with the antioxidant. Antioxidants contained in certain
current skin care lotions, creams or oils are exposed to the atmosphere and
lose their antioxidant effectiveness, if not absorbed into the skin within a
relatively short time after application, estimated by the Company to be
approximately 40 minutes. In contrast, the Company's vitamin C formulation is
protected by the Patch from the atmosphere and, therefore, can be absorbed over
the recommended 10 hour period of treatment. Further, Patches maintain the
purity of the vitamin C formulation and deliver the formulation to specific
problem areas of the skin. Drug and Cosmetic Industry Magazine honored the
Antioxidant Skin Care Derms in its December 1995 issue in the cosmetic skin
care treatment packaging category. The Company has filed a U. S. patent
application relating to certain aspects of its Patches.
One industry source has estimated that revenues in the United States skin
care products market were approximately $5.12 billion in 1994, representing
approximately 24.6% of total revenues in the United States personal care
products market. The same source projected that revenues in the United States
skin care products market would be approximately $6.46 billion in 1997 and
approximately $9.31 billion in 2001, representing a compound annual growth rate
from 1994 to 2001 of 8.9%. The Company believes that a portion of the estimated
future growth in revenues will come from the sale of skin care products
containing vitamin ingredients, such as the Company's vitamin C formulation.
The Company believes that the reasons for this continued growth of sales in the
skin care products market include fundamental changes now taking place in
demographic (aging population) and environmental factors, which are stimulating
the need for innovative, more effective skin care products. The U.S. Bureau of
Census has estimated that between 1993 and 2020, the number of individuals age
45 and over in the United States will increase by 59%, while those under age 45
in the United States will increase by only 7%. Further, the first of the
approximately 76 million "baby boomers" in the United States who were born
between 1946 and 1960 turned 50 in 1996. The Company believes that the need for
new skin care products will increase as the population ages because concern
with the effects of aging on the skin increases with age.
The Company's objectives are to be the leader in the marketing of skin care
products that deliver antioxidants by means of skin patches, to remain the
leader in that market segment and to expand its product line of other skin care
products and compete in the cosmeceuticals market. The Company currently
markets cleansers, moisturizers, alpha hydroxy acid and lipsticks in the
upscale market under the Osmotics label product line, and skin creams and
hydrating moisture sprays in The Wrinkle Patch label product line. The Company
intends to develop and market additional product line extensions in the future.
3
<PAGE>
The Company first sold skin care products under the Osmotics label, including
Antioxidant Skin Care Derms, in April 1995 to certain Saks Fifth Avenue stores.
The Company commenced marketing its Spa-Sante label Patch in March 1996 through
spas, beauty salons and estheticians, and commenced marketing The Wrinkle Patch
in October 1995 through a direct sale catalog. The Company offers The Wrinkle
Patch label products to several direct sale catalogs, through TV home shopping
channels, through an infomercial and through the World Wide Web. The Company
has also agreed to supply to a third party skin patches for inclusion in
products to be sold by the third party under its own label in certain foreign
markets. The Company may seek to have its products marketed under additional
private labels.
Outside the United States, the Company launched Osmotics label products,
including Antioxidant Skin Care Derms, in the United Kingdom in May 1996 at six
House of Fraser stores located throughout the United Kingdom. In the fall of
1996, the Company launched products in Paris, France at a Galeries Lafayette
store and in Geneva, Switzerland at eight Pharmacies Principale stores. In
January 1997, the Company launched products in France at Le Printemps,
Samaritaine, Bon Marche and Perfumerie Sephora stores. In December 1996, the
Company introduced products in Brazil and Ecuador. The Company expects to
launch products in additional countries in Canada, South America, Europe and
Asia during 1997.
The predecessor entity to the Company was incorporated in Colorado in August
1993. Before the closing of this Offering, the Company intends to reincorporate
in Delaware by merging into a newly formed corporation incorporated in Delaware
in July 1996. The Company's principal executive offices are located at 1125
17th Street, Denver, Colorado 80202. Its telephone number is (303) 293-2087. In
this Prospectus, the terms "Company" and "Osmotics" refer to the Company and
its predecessors.
RISK FACTORS
The Shares offered hereby involve a high degree of risk. This Prospectus
contains forward-looking statements, including those discussed under
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Use of Proceeds." These forward-looking statements
involve a number of risks and uncertainties, including, but not limited to,
those discussed under "Risk Factors." The Company's actual results may differ
significantly from the results discussed in the forward-looking statements. See
"Risk Factors."
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company......... 1,125,000 shares
Common Stock to be outstanding after this
Offering................................... 2,603,299 shares(1)
Use of proceeds............................. For repayment of indebtedness
and general corporate purposes,
including marketing and sales
expenditures and working
capital. See "Use of Proceeds."
Proposed Nasdaq SmallCap Market symbol...... OSMO
Proposed Boston Stock Exchange symbol.......
</TABLE>
- --------
(1) Based upon shares issued and outstanding as of December 31, 1996. Does not
include 272,000 shares of Common Stock issuable upon exercise of options
outstanding as of December 31, 1996 granted to directors, officers,
employees of, and consultants to, the Company, at a weighted average
exercise price of $2.42 per share; (ii) 150,000 shares of Common Stock
issuable upon exercise of options to be granted concurrently with the
effective date of this Offering, at an exercise price equal to 110% of the
initial public offering price of the Shares offered hereby; (iii) 200,000
additional shares of Common Stock reserved for future grants under the
Company's 1997 Directors Stock Option Plan and 1997 Equity Incentive Plan;
(iv) 73,036 shares of Common Stock issuable upon exercise of other options
and warrants outstanding as of December 31, 1996, at an exercise price of
$1.10 per share; (v) an estimated approximately 118,750 shares of Common
Stock issuable upon exercise of the Bridge Warrants at an exercise price of
$0.022 per share; and (vi) 112,500 shares of Common Stock issuable upon
exercise of the Representative's Warrants at an exercise price equal to
120% of the initial public offering price of the Shares offered hereby.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1995 1996
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<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................................. $ 328 $1,255
Loss from operations........................................... (790) (1,401)
Net loss....................................................... (811) (1,842)
Net loss per share(1).......................................... (.68) (1.27)
Shares used in computing net loss per share(1)................. 1,187 1,446
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------
AS
ACTUAL ADJUSTED(2)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 91 $6,290
Current assets............................................ 869 7,068
Current liabilities....................................... 1,869 594
Total assets.............................................. 1,372 7,167
Long-term debt, less current portion...................... 39 39
Total stockholders' equity (deficit)...................... (536) 6,534
</TABLE>
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(1) For an explanation of the determination of the number of shares used in per
share calculations, see Note 2 of Notes to the Company's financial
statements appearing at the end of this Prospectus (the "Financial
Statements").
(2) Adjusted to reflect the sale of 1,125,000 Shares by the Company hereby at
an assumed initial public offering price per Share of $8.00, and after
deducting the underwriting discounts and commissions and estimated offering
expenses and the application of the net proceeds therefrom. See
"Capitalization" and "Use of Proceeds."
----------------
The Osmotics name logo(R) and Antioxidant Skin Care Derms(R) are registered
U.S. trademarks of the Company. The Company has U.S. trademark applications
pending for AKA RED(TM), WRINKLE PATCH(TM), THE NIGHTIME MIRACLE(TM) and
SYSTEME C(TM). All other trademarks or trade names referred to in this
Prospectus are the property of their respective owners.
5
<PAGE>
RISK FACTORS
An investment in the Shares offered hereby involves a high degree of risk.
In addition to the other information in this Prospectus, the following factors
should be considered carefully in evaluating an investment in the Shares. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements. Factors that may cause
such a difference include, but are not limited to, those discussed below and
elsewhere in this Prospectus.
Limited Operating History; History of Operating Losses; Going Concern
Opinion; Accumulated Deficit. The Company was organized in August 1993 and has
only a limited operating history upon which evaluation of its prospects can be
made. The Company has never been profitable and, at December 31, 1996, had a
working capital deficit of approximately $1,000,000 and an accumulated deficit
of approximately $2,733,000. In addition, the report of the Company's
independent public accountants accompanying the Financial Statements notes
that the Company's recurring losses from operations and net capital deficiency
raise substantial doubt about the Company's ability to continue as a going
concern, absent completion of this Offering. The Company began shipping its
first product, Antioxidant Skin Care Derms, in April 1995, and the Company's
limited operating history makes the prediction of future operating results
difficult. The Company does not believe that prior growth rates are
necessarily indicative of future operating results. Future operating results
will depend on many factors, including demand for the Company's products, the
level of product and price competition, the Company's success in expanding the
number of stores through which its products are sold and its other
distribution channels, the ability of the Company to develop and market line
extensions of its present products, the ability of the Company to control
costs, general economic conditions and other factors. There can be no
assurance that the Company will ever generate significant revenues or achieve
or sustain profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Product and Customer Concentration. Approximately 48% of the Company's
revenues from its inception in August 1995 to December 31, 1996 have been
derived from the sale of products to Saks Fifth Avenue stores located in the
United States, and revenues from sales to Saks Fifth Avenue stores accounted
for approximately 88% and 37% of the Company's revenues in 1995 and 1996,
respectively. The Company and Saks Fifth Avenue have not entered into a
written contract respecting the sale of products. Revenues from sales to Self
Care catalog accounted for approximately 12% and 16% of the Company's revenues
in 1995 and 1996, respectively. Further, revenues from sales to House of
Fraser stores accounted for approximately 18% of the Company's revenues in
1996. There can be no assurance that any Saks Fifth Avenue or House of Fraser
store or Self Care catalog will continue to purchase products from the
Company.
The Company currently expects that revenues attributable to Antioxidant Skin
Care Derms and other Osmotics label products will account for a significant
portion of the Company's revenues in 1997. As a result, the Company's future
operating results are dependent upon market acceptance of these products in
both domestic and international retail outlets. There can be no assurance that
the Company's products will achieve market acceptance or that the Company will
be successful in marketing its products. A decline in demand for, or market
acceptance of, Antioxidant Skin Care Derms, as a result of competition or
other factors, would have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Products."
Fluctuations in Quarterly Results; Seasonality. The Company's quarterly
operating results have varied in the past and may in the future vary
significantly, depending on factors such as the size and timing of customer
orders, price and other competitive conditions in the cosmetics industry and
the timing of new product announcements and releases by the Company and its
competitors. The Company operates with little order backlog, and substantially
all of its revenues in each quarter result from sales made in that quarter.
Accordingly, revenues for any future quarter are difficult to predict. It is
likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Common Stock would likely be materially adversely affected.
6
<PAGE>
The Company believes that demand by retail department stores located in the
United States for cosmetic products, including those of the Company, is
generally greatest during the fall season and lowest during the summer months.
Since a large component of the Company's revenues are derived from sales to
retail department stores, the Company may in the future experience such
seasonality in its revenues. The Company intends to introduce additional
products, sell its products through additional distribution channels and sell
products in additional geographic regions. Each of these actions may have
different seasonal trends and may affect overall seasonality of the Company's
operating results. See "--Product and Customer Concentration" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Management of Growth. The Company's recent, and anticipated future, growth
has placed, and is expected to continue to place, a strain on the Company's
administrative, financial and operational resources. The size of the Company's
professional staff has increased from nine full-time employees at December 31,
1995 to 12 such employees at December 31, 1996. In addition, at December 31,
1995 and 1996, there were four and 11 persons, respectively, working in retail
stores for whom the Company was responsible for all or a portion of their
salary. Of those 11 persons, five were in the United States. The Company plans
to hire additional employees in 1997, including a Controller and additional
administrative, sales and marketing personnel. The Company's ability to manage
its growth effectively will require it to continue to improve its operational,
financial and management controls, reporting systems and procedures, to
install new management information and control systems and to train, motivate
and manage employees. If the Company is unable to manage growth effectively
and new employees are unable to achieve adequate performance levels, the
Company's business, operating results and financial condition could be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Competition. The cosmetics, skin care and personal care business is highly
competitive. Increased competition could result in price reductions, reduced
transaction size, fewer customer orders and reduced gross margins, any of
which could have a material adverse effect on the Company's business,
operating results and financial condition. The Company believes that the
principal competitive factors affecting the cosmetics market include product
uniqueness, product performance, the effectiveness of sales and marketing
efforts and company reputation. There can be no assurance that the Company
will compete successfully in the future with respect to these or other
factors.
The Company believes that no other company is currently marketing products
using skin patch technology to deliver antioxidants to a person's skin for
cosmetic purposes, although certain products using gauze pads to deliver
antioxidants are presently sold by certain of the Company's competitors. The
Company believes that other products currently utilizing transdermal delivery
systems are sold primarily in prescription pharmaceutical markets for other
than cosmetic use. However, the FDA recently approved the marketing of a
consumer product, without the need for a prescription, for transdermal
delivery of nicotine using a patch. There can be no assurance that products
using skin patch technology to deliver antioxidants to a person's skin for
cosmetic purposes do not exist or are not under development by others.
Certain skin creams, lotions and oils currently sold by cosmetics companies,
including the Cellex-C brand antioxidant serum, compete with the Company's
comparable products. Additionally, Avon Products markets a vitamin C formula
under the brand name Anew, which Avon claims, among other things, minimizes
the appearance of fine lines and wrinkles. Some of the Company's current, and
many of the Company's potential, competitors have significantly greater
financial, marketing, product development, testing and other resources than
the Company and sell their products more widely than the Company. As a result,
they may have the capacity to respond more quickly to changes in customer
requirements or to devote greater resources to the development, testing,
promotion and sale of their products than the Company. It is possible that new
competitors may emerge and rapidly gain significant market share.
Additionally, it is possible current or new competitors might introduce
competitive products which also utilize skin patch technology or other
technology that produces results similar or superior to the Company's Patches
or which are sold at a lower price than the Company's products in similar
distribution channels. There can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results and financial condition. See
"Business--Competition."
7
<PAGE>
Changes in the Retail Industry. A significant portion of the Company's
revenues to date have been derived from the sale of products to certain Saks
Fifth Avenue stores located in the United States. The Company also sells
products to other retailers located in the United States and other countries.
The retail industry has periodically experienced consolidation and other
ownership changes. Major retailers in the United States and in foreign markets
may in the future consolidate, undergo restructurings or realign their
affiliations, which could decrease the number of stores that sell the
Company's products, increase the ownership concentration within the retail
industry or change the way in which the Company markets products. While such
changes in the retail industry to date have not had a material adverse effect
on the Company's business, operating results or financial condition, there can
be no assurance as to the future effect of any such changes. See "Business--
Sales and Marketing."
Brand Loyalty of Consumers of Cosmetics. The Company believes that consumers
of cosmetics products are increasingly less loyal to a particular brand name
and, as a result, are less likely to purchase multiple types of products
within a brand's product line unless those products satisfy specific needs of
the consumers. The Company believes that this trend may have aided the
Company's introduction of its Patches, but there can be no assurance that this
trend will aid the Company in the introduction of products in the future. See
"Business--Strategy."
Protection of Intellectual Property. The Company currently relies primarily
on a combination of trademark laws, trade secrets, confidentiality procedures
and contractual provisions to protect its technology. The Osmotics name logo
and Antioxidant Skin Care Derms are registered U.S. trademarks of the Company.
The Company has U.S. trademark applications pending for AKA RED, WRINKLE
PATCH, THE NIGHTIME MIRACLE and SYSTEME C. The United States Patent and
Trademark Office (the "PTO") has rejected the Company's U.S. trademark
application for Spa-Sante. The Company intends to challenge that rejection.
The Company has trademark applications pending in Japan for OSMOTICS, Spa
Sante, The Wrinkle Patch and SYSTEME C, in Korea for OSMOTICS and the Osmotics
label, Spa Sante, The Wrinkle Patch and SYSTEME C, in the European Community
for OSMOTICS and the Osmotics logo and in Ecuador for OSMOTICS. There can be
no assurance that any of these marks for which registration applications are
pending will be registered.
The Company filed one United States patent application in 1994 and filed a
continuation in part of that patent application in 1995. The PTO has rejected
all claims in these applications, alleging that the claimed inventions were
obvious. In response, the Company filed a continuation in part application in
1996, accumulating subject matter of both prior patent applications and
addressing, among other things, the use of the Patches as a method to deliver
antioxidants. The Company also has filed an application under an international
treaty designating various foreign countries for which the Company preserved
certain rights in the event it files patent applications in any of those
countries. The Company also intends to file additional patent applications in
the PTO on various features of its products in the future, if appropriate.
However, there can be no assurance that any patents will issue in any country
with respect to currently pending applications or any future patent
applications.
The validity and breadth of claims in patents involve complex legal and
factual questions and, therefore, may be highly uncertain. No assurance can be
given that any issued patent or patents based on the pending patent
applications or any future patent application will exclude competitors or
provide competitive advantages to the Company or that others will not claim
rights in or ownership of the Company's rights which it regards as
proprietary. Furthermore, there can be no assurance that others have not
developed or will not develop similar products, duplicate any of the Company's
products or design around any patents that may be issued in the future to the
Company. Since patent applications in the United States are maintained in
secrecy until patents issue, the Company also cannot be certain that others
did not first file applications for inventions covered by the Company's
pending patent applications, nor can the Company be certain that it will not
infringe any patents that may issue to others on such applications.
Despite the Company's efforts to protect its rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products may prove to be difficult, and, while the Company is
unable to
8
<PAGE>
determine the existence or amount of other products which now or in the future
illegally duplicate the Company's products, such other products can be
expected to be a persistent problem. In addition, the laws of many countries
do not protect the Company's rights which it regards as proprietary to as
great an extent as do the laws of the United States. There can be no assurance
that the Company's means of protecting its rights will be adequate or that the
Company's competitors will not independently develop similar products.
To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Business--Intellectual Property and Other Proprietary Rights."
Dependence on Key Personnel. The Company's future success will depend in
large part upon its ability to attract, retain and motivate highly skilled
employees. The loss of any of the Company's senior management or other key
research, development, sales and marketing personnel, particularly if lost to
competitors, could have a material adverse effect on the Company's business,
operating results and financial condition, including its ability to attract
employees. In particular, the loss of Steven S. Porter, the Company's
President, Chief Executive Officer and Chairman of the Board, or Francine E.
Porter, the Company's Executive Vice President and Treasurer, would have a
material adverse effect on the Company's development and marketing efforts.
The Company intends to obtain key man life insurance policies covering Steven
Porter and Francine Porter at the closing of this Offering. See "Business--
Sales and Marketing" and "Business--Employees."
Risks Associated with International Sales. Sales of the Company's products
outside of the United States have represented an increasingly greater portion
of total revenues. The Company intends to expand the sales of its products in
Europe and South America and to launch the sales of its products in Asia,
which efforts will require significant management attention and financial
resources. The Company has committed and continues to commit resources to
developing international sales. There can be no assurance that the Company's
efforts to develop international sales will be successful, and the failure of
such efforts could have a material adverse effect on the Company's business,
operating results and financial condition. International sales are subject to
a number of risks, including differing regulatory requirements which might
require the Company, among other things, to modify the formulation and
packaging of its products, unexpected changes in regulatory requirements,
longer payment cycles, import and export restrictions and tariffs, shipping
delays, difficulties in staffing and managing foreign operations, the burden
of complying with a variety of foreign laws, greater difficulty in accounts
receivable collection, potentially adverse tax consequences, currency
fluctuations and political and economic instability. Additionally, the
protection of intellectual property may be more difficult to enforce outside
of the United States. In the event that the Company is successful in expanding
its international operations, the imposition of exchange or price controls or
other restrictions on foreign currencies could materially adversely affect the
Company's business, operating results and financial condition. As the Company
increases its international sales, its total revenues may also be affected to
a greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe. See "Business--Strategy"
and "Business--Sales and Marketing."
Suppliers; Manufacturing Limitations. The Company currently obtains
ingredients, packaging and final formulations from several third party
suppliers and has not entered into a written agreement with any such supplier.
Although the Company believes that all ingredients are presently obtainable
and has identified additional third parties that could also supply such
ingredients, there can be no assurance that the Company will continue to be
able to obtain such ingredients, packaging or formulations from third parties
at all or in sufficient quantities and on terms and conditions acceptable to
the Company. The Company relies on a different third party to manufacture raw
products into finished products. The Company has entered into a written
agreement respecting confidentiality, but not supply requirements or
otherwise, with this manufacturer. The Company believes that if this
manufacturer were unexpectedly to stop manufacturing raw products into
finished products
9
<PAGE>
for the Company, there would be a temporary adverse effect on the Company's
ability to produce products on a timely basis, but that one or more other
third party manufacturers could be identified. The Company neither has nor
plans to acquire the equipment and facilities necessary to manufacture its
current and future products and is and will be dependent upon third party
contract manufacturers for such production. There can be no assurance that the
Company will continue to be able to obtain contract manufacturing on
commercially acceptable terms for products in the quantities currently
obtainable or that may be required in the future. Further, there can be no
assurance that manufacturing or quality control problems will not arise at the
manufacturing plant of the Company's present contract manufacturer. In
addition, if the Food and Drug Administration (the "FDA") were to determine
that any of the Company's cosmetic products, including products that contain
active sunscreen ingredients and are labeled with a sun protection factor, are
also drugs, those products would have to be manufactured in accordance with
the FDA's current good manufacturing practice ("GMP") requirements for
finished pharmaceuticals. The Company's present contract manufacturer produces
the Company's finished products at a GMP manufacturing facility, but there can
be no assurance of compliance or that, if the Company had to contract with a
different third party manufacturer, the GMP requirements, if applicable, would
be met. See "Business--Manufacturing."
Government Regulation. The Company and its cosmetic products are subject to
regulation by the FDA and the Federal Trade Commission (the "FTC") in the
United States, as well as by various other federal, state and local
authorities. Such regulation relates primarily to the ingredients, packaging,
labeling, advertising and marketing of the Company's products. Cosmetics do
not require premarket notification to, or premarket approval by, the FDA, but
must be properly labeled and manufactured. Failure to comply with FDA
requirements in such matters can result in severe civil and criminal
penalties, including seizure of product, injunction against production,
distribution, sales and marketing, and prosecution. The FTC oversees the
advertising of cosmetic products, and prohibits false or misleading
advertising. The FTC has a number of remedies available to it, including
preliminary injunctive relief based on its mere "reason to believe" that an
advertisement is false or misleading.
If the FDA were to determine that any of the Company's products are new
drugs (as well as or instead of cosmetics), the Company would not be able to
market such products without obtaining FDA approval of new drug applications
submitted by the Company or, alternatively in the case of certain over-the-
counter ("OTC") drug products, without complying with an FDA OTC monograph
setting out permissible ingredients and indications (claims), among other
requirements. The approval process for new drugs is lengthy, expensive and
uncertain. Securing FDA approvals requires the submission of extensive
preclinical (laboratory and animal) and clinical safety and effectiveness data
to the FDA, together with detailed manufacturing, labeling and other
supporting information. Gathering the requisite data and preparing the
requisite applications for marketing permits usually takes many years. The FDA
review process of such applications typically is lengthy, and there could be
no assurance as to when, if ever, the FDA approvals would be obtained. Such
determinations by the FDA could, depending on the products affected, have a
material adverse effect on the Company's business, operating results and
financial condition and on the market price of the Common Stock. There can be
no assurance that the Company's current or future products will not be
regulated by the FDA as new drugs, nor can there be any assurance that any
future requirements will not have a material adverse effect on the Company's
business, financial condition or results of operations or on the market price
of the Common Stock. See "Business--Government Regulation."
Risk of Product Liability; Limited Product Liability Insurance. The testing,
marketing and sale of cosmetic products entails an inherent risk of
allegations of product liability, and there can be no assurance that
substantial product liability claims will not be asserted against the Company.
The Company has obtained limited amounts of insurance for product liability
claims. However, there can be no assurance that the Company will be able to
obtain or maintain insurance on acceptable terms for its development, testing
and commercial activities or that any insurance obtained will provide adequate
protection against potential liabilities.
Control by Existing Stockholders. Upon completion of this Offering, the
directors, executive officers and principal stockholders of the Company and
their affiliates will, in the aggregate, beneficially own approximately 46.4%
of the Company's outstanding Common Stock (approximately 43.5% if the
Underwriters' over-allotment
10
<PAGE>
option is exercised in full), including shares issuable upon exercise of
outstanding options or warrants that are exercisable by such persons before
March 2, 1997. As a result, these stockholders, acting together, will possess
significant influence on stockholders of the Company, election of the
Company's Board of Directors and the approval of significant corporate
transactions. Such control could delay, defer or prevent a change in control
of the Company, impede a merger, consolidation, takeover or other business
combination involving the Company, or discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of the
Company. See "Management" and "Principal Stockholders."
Future Additional Capital Requirements; No Assurance Future Capital Will be
Available. The Company's capital requirements will depend on numerous factors,
including the resources the Company devotes to the development, manufacture
and marketing of its products, including the launch of new product lines or
the launch of products into new distribution channels, both domestic and
international; market acceptance and demand for its products; and other
factors. While the timing and amount of such capital requirements cannot be
predicted with accuracy, the Company believes that the net proceeds of this
Offering, together with cash on hand, cash expected to be received upon
payment of outstanding accounts receivable as of December 31, 1996, and cash
expected to be generated from operations, will provide adequate funding for
the Company to hire additional personnel, launch new marketing and product
development programs, and otherwise conduct its anticipated business
activities through at least 12 months after the date of the closing of this
Offering. Nevertheless, the Company may be required to raise additional funds
through public or private debt or equity financings, collaborative
relationships, bank facilities or other arrangements. There can be no
assurance that the Company will not require additional funding sooner than
expected or that such additional funding, if needed, will be available on
terms attractive to the Company, or at all. Any additional equity financing
may be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Exercise of Warrants and Options. As of December 31, 1996, 272,000 shares of
Common Stock were issuable upon exercise of outstanding employee, officer,
director or consultant stock options at a weighted average exercise price of
$2.42 per share and 73,036 shares of Common Stock were issuable upon exercises
of other outstanding options and warrants (excluding the Bridge Warrants) at a
weighted average exercise price of $1.10 per share. Further, upon the
effective date of this Offering, (i) 150,000 shares of Common Stock will be
issuable upon exercise of options to be granted concurrently with the
effective date of this Offering, at an exercise price equal to 110% of the
initial public offering price of the Shares offered hereby, (ii) 200,000
additional shares will be reserved for future grants under the Company's 1997
Directors Stock Option Plan and 1997 Equity Incentive Plan, (iii) an estimated
approximately 118,750 shares will be issuable upon exercise of the Bridge
Warrants at an exercise price of $.022 per share and (iv) 112,500 shares will
be issuable upon exercise of the Representative's Warrants at an exercise
price equal to 120% of the initial public offering price of the Shares offered
hereby. For the life of such options and warrants, the holders thereof will
have the opportunity to profit from a rise in the market price of the Common
Stock without assuming the risk of ownership of the shares of Common Stock
issuable upon exercise of such options and warrants, with the resulting
dilution in the interest of the Company's stockholders by reason of exercise
of such options and warrants at a time when the exercise price is less than
the market price for the Common Stock. Further, the terms on which the Company
could obtain additional capital during the life of such options and warrants
may be adversely affected. The holders of such options and warrants may be
expected to exercise such options and warrants at a time when the Company
would, in all likelihood, be able to obtain any needed capital by a new
offering of its securities on more favorable terms than those provided for by
those options and warrants.
Effect of Certain Charter Provisions; Anti-Takeover Effects of Delaware
Law. Upon completion of the Offering, the Company's Board of Directors will
have the authority to issue up to 10,000,000 shares of Preferred Stock and to
determine the prices, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be
11
<PAGE>
issued in the future. The issuance of Preferred Stock could adversely affect
the voting power of holders of Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation.
Additionally, issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no current
plans to issue shares of Preferred Stock. Further, certain provisions of
Delaware law could discourage potential acquisition proposals and could delay
or prevent a change in control of the Company. These provisions are designed
to reduce the vulnerability of the Company to an unsolicited acquisition
proposal. These provisions are also intended to discourage certain tactics
that may be used in proxy fights. However, such provisions could have the
effect of discouraging others from making tender offers for the Company's
shares, and, as a consequence, they also may inhibit increases in the market
price of the Company's shares that could result from actual or rumored
takeover attempts. Such provisions also may have the effect of preventing
changes in the management of the Company. In addition, Section 203 of the
Delaware General Corporation Law restricts certain business combinations with
any "interested stockholder" as defined by such statute. The statute may have
the effect of delaying, deferring or preventing a change in control of the
Company. See "Description of Capital Stock."
Limits on Secondary Trading; Possible Illiquidity of Trading Market. The
Company has applied to have the Common Stock listed on the Nasdaq SmallCap
Market and The Boston Stock Exchange (the "BSE"), which may be significantly
less liquid markets than the Nasdaq National Market or other stock exchanges.
Moreover, if the Company should be unable to maintain the standards for
continued quotation on the Nasdaq SmallCap Market and the BSE, the Common
Stock could be subject to removal from the Nasdaq SmallCap Market and the BSE.
Trading, if any, in the Common Stock would therefore be conducted in the over-
the-counter market on an electronic bulletin board established for securities
that do not meet the Nasdaq SmallCap Market or the BSE's listing requirements
or in what are commonly referred to as the "pink sheets." As a result, an
investor would find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Common Stock. In addition, depending on
several factors including the future market price of the Common Stock, the
Common Stock could become subject to the so-called "penny stock" rules that
impose additional sales practice and market making requirements on broker-
dealers who sell and/or make a market in such securities, which could affect
the ability or willingness of broker-dealers to sell and/or make a market in
the Common Stock and the ability of purchasers of the Common Stock to sell
their shares in the secondary market.
No Prior Public Market; Possible Volatility of Stock Price. Before this
Offering, there has been no public market for the Common Stock, and there can
be no assurance that any broker-dealer will act as a market maker for the
Common Stock or that an active public market for the Common Stock will develop
or be sustained after this Offering. The initial public offering price for the
Common Stock will be determined by negotiation among the Company and the
Representative based upon a number of factors and may not be an indication of
the market price of the Common Stock following this Offering. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price of the Common Stock. The trading prices of the
Common Stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of new products by the Company
or its competitors, changes in financial estimates by securities analysts and
other events or factors. In addition, the Company believes that the stock
market has experienced volatility that has affected the market prices of
equity securities of many cosmetics companies and that sometimes has been
unrelated or disproportionate to the operating performance of such companies.
These broad market fluctuations may adversely affect the market price of the
Common Stock.
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this Offering could adversely
affect the market price for the Company's Common Stock. The number of shares
of Common Stock available for sale in the public market is limited by
restrictions under the Securities Act of 1933, as amended (the "Securities
Act"), and lock-up agreements providing that the holders of such shares will
not directly or indirectly sell, contract to sell, grant any option to
purchase or otherwise transfer or dispose of any securities of the Company
until one year from the closing of this Offering without the prior written
consent of the Representative.
12
<PAGE>
Based on shares issued and outstanding as of December 31, 1996, as a result
of the foregoing lock-up agreements and securities law restrictions, 30,000
shares of Common Stock other than the 1,125,000 Shares offered hereby will be
eligible for resale without restriction immediately after the effectiveness of
this Offering pursuant to Rule 144 or Rule 144(k), and approximately 1,220,442
additional shares of Common Stock will be eligible for resale, pursuant to
either Rule 701 or Rule 144, beginning one year from the closing of this
Offering. The remaining 227,857 shares will become eligible for resale from
time to time thereafter as the requisite holding periods required by Rule 144
are met. The Securities and Exchange Commission has proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. If enacted, such rule change would cause all of the remaining
shares to be eligible for public resale upon expiration of the lock-up
agreements. The Company also intends to register on a registration statement
on Form S-8, following the effective date of this Offering, a total of 622,000
shares of Common Stock (assuming no exercise of options or warrants after
December 31, 1996) subject to certain outstanding options or reserved for
issuance under the Company's 1997 Equity Incentive Plan and 1997 Directors
Stock Option Plan. Additional shares of Common Stock issuable upon the
exercise of certain outstanding options and warrants will become eligible for
public sale as a result of registration rights agreements with the Company or
the Company otherwise agreeing to register such shares. See "Description of
Capital Stock--Registration Rights" and "Shares Eligible for Future Sale."
Representative's Warrants. At the closing of this Offering, the Company will
sell to the Representative for nominal consideration the Representative's
Warrants to purchase up to 112,500 shares of Common Stock. The
Representative's Warrants will be exercisable for a period of four years
commencing 12 months after the date of this Prospectus, at an exercise price
equal to 120% of the initial public offering price per Share. As long as the
Representative's Warrants or other outstanding warrants remain unexercised,
the Company's ability to obtain additional capital might be adversely
affected. Moreover, the Representative or other holders of outstanding
warrants may be expected to exercise such warrants at a time when the Company
would, in all likelihood, be able to obtain any needed capital by a new
offering of its securities on terms more favorable than those provided by the
warrants. Holders of the Representative's Warrants and holders of other
warrants have certain registration rights with respect to shares of Common
Stock underlying those warrants. See "Description of Capital Stock--Other
Securities," "Description of Capital Stock--Registration Rights" and
"Underwriting."
Immediate and Substantial Dilution. Investors participating in this Offering
will incur immediate, substantial dilution of $5.50 per share. To the extent
options and warrants to purchase Common Stock are exercised, there will be
further dilution. See "Dilution."
Legal Proceedings. From October through December 1996, in additional
closings of the Bridge Financing, the Company issued Bridge Notes in the
aggregate principal amount of $250,000 and additional Bridge Warrants to
purchase an estimated approximately 31,250 shares of Common Stock. Such
issuances may not have complied with all applicable requirements to satisfy
exemptions from the registration or qualification requirements under
securities laws of the United States and certain states in which those
securities were issued. The Bridge Notes will, however, be repaid in full at
the closing of this Offering, and to date no purchaser has made a claim for
rescission or other remedies. As a result, the Company believes that even if
such transactions were found to have violated federal or state securities
laws, such violations would not have a material adverse effect on the
Company's business, operating results or financial condition, although there
can be no assurances that this would be the case.
A dispute exists between the Company and a third party under an infomercial
production and product management agreement concerning the Company's
obligations under that agreement. The Company is also subject to various
claims and business disputes in the ordinary course of business; however, the
Company is unaware of any present claims or disputes which would have a
material adverse effect on the Company's business, operating results or
financial condition. See "Business--Legal Proceedings."
13
<PAGE>
USE OF PROCEEDS
The gross proceeds to the Company from the sale of 1,125,000 Shares offered
by the Company hereby are estimated to be $9,000,000 ($10,350,000 if the
Underwriters' over-allotment option is exercised in full). The net proceeds to
the Company are estimated to be approximately $7,080,000 ($8,254,500 if the
Underwriters' over-allotment option is exercised in full), after deducting
estimated underwriting discounts and commissions of approximately $1,170,000
($1,345,500 if the Underwriters' over-allotment option is exercised in full)
and offering expenses of approximately $750,000. The Company currently expects
to use the estimated net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
DOLLAR PERCENTAGE OF
APPLICATION OF NET PROCEEDS AMOUNT NET PROCEEDS
--------------------------- ----------- -------------
<S> <C> <C>
Repayment of outstanding debt(1)...................... $1,078,500 15.2%
Payment of outstanding consultants' fees(2)........... 121,000 1.7
Marketing and sales of the Company's products(3)...... 3,800,000 53.7
Working capital and general corporate purposes........ 2,080,500 29.4
</TABLE>
- --------
(1) The Company intends to apply these proceeds to repay approximately
$950,000 payable under the notes issued in the Bridge Financing (which
have interest rates ranging from 12% to 15% per annum), $107,500 payable
under the notes issued in the 1995 Note Financing (which have an interest
rate of 10.0% per annum) and $21,000 relating to an unsecured promissory
note (which has an interest rate of 10.0% per annum). See
"Capitalization--Recent Financing Transactions" and "Certain
Transactions."
(2) The Company intends to apply these proceeds to pay certain outstanding
consultants' fees, royalties and commissions.
(3) The Company intends to apply these proceeds to the marketing of the
Company's products to upscale retail stores located in the United States,
the anticipated launch of products in other countries and the pursuit of
other marketing and sales opportunities. See "Business--Sales and
Marketing."
The foregoing represent estimates only, and the actual amounts expended by
the Company for these purposes and the timing of such expenditures will depend
on numerous factors. The Company may use a portion of the net proceeds to
acquire businesses or companies complementary to the Company's business,
although the Company currently has no specific plans or commitments to acquire
any business or companies, from affiliates of the Company or any other party.
The terms of any such acquisition from an affiliate of the Company will be no
less favorable to the Company than could be obtained from unaffiliated third
parties. Pending use of the net proceeds for the above purposes, the Company
intends to invest such funds in short-term, interest-bearing, investment-grade
obligations and federally insured certificates of deposit.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain all future
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future. The payment of any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements, the
general financial condition of the Company, general business conditions and
contractual restrictions on payment of dividends, if any.
14
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1996, (1) the actual
capitalization of the Company, (2) the pro forma capitalization of the Company
to reflect (a) the closing of $200,000 of additional Bridge Financing in
January 1997 and (b) the reincorporation of the Company in Delaware and
concurrent changes to the Company's authorized capital stock, and (3) further
adjustment of the pro forma capitalization to give effect to the sale of
1,125,000 Shares offered hereby at an assumed initial public offering price of
$8.00 per Share, after deducting underwriting discounts and commissions and
other estimated expenses of this Offering.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------
ACTUAL PRO FORMA AS ADJUSTED(5)
------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes and capital lease payable(1)(2)........ $ 844 $ 944 $ 55
Stockholders' equity(3):
Preferred stock, par value $.001 per share,
no shares authorized actual, 10,000,000
shares authorized pro forma and as
adjusted, no shares issued or outstanding
pro forma and as adjusted.................
Common stock, no par value actual, par
value $.001 per share pro forma and as
adjusted:
Authorized shares--6,000,000 actual,
15,000,000 pro forma and as adjusted....
Issued and outstanding shares--1,478,299,
1,478,299 and 2,676,335,
respectively(4)(5)...................... 1,816 1 3
Additional paid-in capital(6).............. -- 1,815 8,979
Warrants(1)(5)............................. 381 481 475
Accumulated deficit........................ (2,733) (2,733) (2,923)
------- ------- -------
Total stockholders' equity (deficit)....... (536) (436) 6,534
------- ------- -------
Total capitalization................... $ 308 $ 508 $ 6,589
======= ======= =======
</TABLE>
- --------
(1) The Bridge Financing (see "--Recent Financing Transactions") is accounted
for as a borrowing and a sale of equity securities (the Bridge Warrants).
The $950,000 gross proceeds of the Bridge Financing (including the
$200,000 received in January 1997) is allocated between the Bridge Notes
and the Bridge Warrants based on their relative fair values at the date of
issuance. The Bridge Warrants are exercisable at a nominal amount of $.022
per share. Consequently, their fair value was deemed to be $950,000, the
fair value of the Common Stock issuable upon exercise of the Bridge
Warrants. The estimated fair value of the Bridge Notes is also $950,000,
which is their principal amount and which will be repaid upon closing of
this Offering. The Bridge Warrants are reflected above at a discounted
amount of $475,000. The Bridge Notes issued during 1996 were initially
recorded at a discounted amount of $375,000 (principal amount of $750,000,
less discount of $375,000). At December 31, 1996, those Bridge Notes are
reflected in the balance sheet at $660,000 ($750,000, less unamortized
discount of $90,000). The pro forma amounts also include the additional
$200,000 of proceeds received in January 1997, allocated $100,000 to
additional Bridge Warrants and $100,000 to the discounted value of the
additional Bridge Notes. Unamortized discount at December 31, 1996, of
$90,000 and additional discount for Bridge Notes issued in January 1997 of
$100,000, are shown in the As Adjusted amounts as an increase to the
accumulated deficit.
(2) Loans to the Company (excluding the Bridge Notes) in the aggregate
principal amount of $128,500 outstanding at December 31, 1996, are also
due upon closing of this Offering.
(3) Before closing of this Offering, the Company will reincorporate in
Delaware and change its authorized capital to consist of 15,000,000 shares
of $.001 par value common stock and 10,000,000 shares of $.001 par value
preferred stock.
(4) Based upon shares issued and outstanding as of December 31, 1996. Does not
include 272,000 shares of Common Stock issuable upon exercise of options
outstanding as of December 31, 1996 granted to directors,
15
<PAGE>
officers, employees of, and consultants to, the Company, at a weighted
average exercise price of $2.42 per share; (ii) 150,000 shares of Common
Stock issuable upon exercise of options to be granted concurrently with the
effective date of this Offering, at an exercise price equal to 110% of the
initial public offering price of the Shares offered hereby; (iii) 200,000
additional shares of Common Stock reserved for future grants under the
Company's 1997 Directors Stock Option Plan and 1997 Equity Incentive Plan;
(iv) 73,036 shares of Common Stock issuable upon exercise of other options
and warrants outstanding as of December 31, 1996, at an exercise price of
$1.10 per share; (v) an estimated approximately 118,750 shares of Common
Stock issuable upon exercise of the Bridge Warrants at an exercise price of
$0.022 per share; and (vi) 112,500 shares of Common Stock issuable upon
exercise of the Representative's Warrants at an exercise price equal to 120%
of the initial public offering price of the Shares offered hereby.
(5) Options (which are included as "Warrants" in the above table) to purchase
73,036 shares of Common Stock, issued by the Company in connection with
certain loans to the Company, are exercisable only through the effective
date of an initial public offering. Because the exercise price of $1.10 per
share under such options are significantly less than the estimated initial
public offering price of the Shares offered hereby, it is assumed for the
As Adjusted calculations that all such options will be exercised for
aggregate net proceeds to the Company of $80,344. However, the holders of
such options may allow any or all of the options to expire without
exercise.
(6) The As Adjusted calculations are net of underwriting discounts and
commissions and other estimated expenses of this Offering in the aggregate
of $1,920,000.
RECENT FINANCING TRANSACTIONS
Common Stock Private Placements. From May 1, 1996 to June 30, 1996, the
Company sold a total of approximately 121,106 shares of Common Stock in a
private placement transaction to a limited number of investors at a price of
$4.40 per share. Such sales were made in reliance on Section 4(2) of the
Securities Act. See "Description of Capital Stock."
In November and December 1996, the Company sold a total of 70,000 shares of
Common Stock in a private placement transaction to two investors at $5.94 per
share. Such sales were made in reliance on Regulation S of the Securities Act.
In connection with such sales, the Company paid placement fees to the
Representative of $49,897 and the net proceeds from such sales were $365,903.
Bridge Financing Transaction. In a July 1996 private placement, the Company
issued $500,000 principal amount of 12% nonconvertible promissory notes (the
"Bridge Notes") and warrants (the "Bridge Warrants") to acquire shares (the
"Bridge Shares") of Common Stock to a small number of sophisticated investors
(the "Bridge Investors"). The exercise price of the Bridge Warrant issued to
each Bridge Investor is $0.022 per Bridge Share. Net proceeds were
approximately $427,500. In additional closings ("Additional Closings") of the
Bridge Financing from October through December 1996, the Company issued
additional Bridge Notes in the aggregate principal amount of $250,000 and
additional Bridge Warrants. The Bridge Warrants issued in the Additional
Closings are not exercisable until one year following the effective date of
this Offering. Net proceeds from such Additional Closings was approximately
$250,000. In January 1997, the Company issued additional Bridge Notes in the
aggregate principal amount of $200,000 and additional Bridge Warrants, in
reliance on Regulation S of the Securities Act. The Bridge Warrant entitles the
holder to acquire a number of Bridge Shares equal to the principal amount of
the holder's Bridge Note ($950,000 in the aggregate) divided by the initial
public offering price of one Share. If this Offering is not consummated before
one year following the date of issuance of a Bridge Warrant, then that Bridge
Warrant will entitle the holder to acquire a number of Bridge Shares equal to
the principal amount of the holder's Bridge Note divided by $4.40 per share.
Interest on the outstanding principal balance of each Bridge Note accrues at a
rate of 12% per annum until six months following its issuance and 15% per annum
thereafter until maturity. Principal and interest under each Bridge Note is due
in four equal quarterly installments beginning nine months following its
issuance, unless an initial public offering becomes effective before that date,
at which time principal will be due five business days after the Company
receives funds from such an offering. If the Company defaults in the payment of
any of these installments, then holders
16
<PAGE>
of approximately 884,074 shares of Common Stock have agreed to vote their
shares in favor of the directors designated by a representative of the Bridge
Investors, and the Company has agreed in certain circumstances to cause
additional shares to become subject to the voting agreement so that the
representative of the Bridge Investors can elect a majority of the directors
of the Company. The Bridge Notes are secured by a security interest, granted
to a representative of the Bridge Investors, in substantially all of the
assets of the Company, including its intellectual property. The rights of the
Bridge Investors in the collateral, and the procedures governing the Bridge
Investors' rights to act with respect to the collateral, are governed by a
security agreement. Upon repayment of the Bridge Notes following the closing
of this Offering or otherwise at maturity or prepayment, the collateral will
be released in full.
The Company intends to repay the Bridge Notes out of a portion of the net
proceeds of this Offering. See "Use of Proceeds." As a result, after the
closing of this Offering no Bridge Notes will remain outstanding. The Company
has the option to prepay the Bridge Notes at any time upon notice to the
holders.
The Company has agreed to file a registration statement no later than nine
months after the effectiveness of this Offering registering the resale of the
Bridge Shares, and the Bridge Investors have certain additional piggyback
registration rights. See "Description of Capital Stock--Registration Rights."
The Bridge Warrants issued in the Bridge Financing have been valued at
issuance for financial statement purposes at their estimated relative fair
market value, and this amount will represent a discount from the principal
amount of the Bridge Notes. The amount of the discount is being amortized to
interest expense over the contractual maturity of the Bridge Notes.
In connection with the Bridge Financing and all Additional Closings
thereunder, the Company paid placement fees and legal fees to third parties of
a total of $72,500.
The transactions described above in which Bridge Notes and Bridge Warrants
were issued are referred to in this Prospectus as the "Bridge Financing."
17
<PAGE>
DILUTION
The net negative tangible book value of the Company as of December 31, 1996
was approximately $(956,000) or $(0.65) per share of Common Stock. Net
tangible book value per share is determined by dividing the amount of total
tangible assets of the Company less total liabilities by the number of shares
of Common Stock outstanding at that date. After giving effect to the sale of
the 1,125,000 Shares offered by the Company hereby (at an assumed initial
public offering price of $8.00 per Share and after deducting the estimated
underwriting discounts and commissions and offering expenses), the adjusted
net tangible book value of the Company as of December 31, 1996 would have been
approximately $6,521,000 or $2.50 per share. This represents an immediate
increase in net tangible book value of $3.15 per share to existing
stockholders and an immediate dilution of $5.50 per share to new investors
purchasing Shares at the initial public offering price. The following table
illustrates the per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $8.00
-----
Net tangible book value per share at December 31, 1996.......... $(.65)
-----
Increase in net tangible book value per share attributable to
new investors.................................................. 3.15
-----
Pro forma net tangible book value per share after this Offering... 2.50
-----
Net tangible book value dilution per share to new investors....... $5.50
=====
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1996, the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by the existing
stockholders and by the new investors purchasing Shares in this Offering
(before deduction of estimated underwriting discounts and commissions and
offering expenses), based upon an assumed initial public offering price of
$8.00 per Share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- ------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 1,478,299 56.8% $ 1,986,186 18.1% $1.34
New investors............. 1,125,000 43.2 9,000,000 81.9 8.00
--------- ----- ----------- -----
Totals.................. 2,603,299 100.0% $10,986,186 100.0%
========= ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over-allotment
option and no exercise of outstanding stock options and warrants. As a
consequence, the foregoing table does not include (i) 345,036 shares of Common
Stock issuable upon exercise of stock options and warrants outstanding as of
December 31, 1996, at a weighted average exercise price of $2.14 per share;
(ii) 150,000 shares of Common Stock issuable upon exercise of options to be
granted concurrently with the effective date of this Offering, at an exercise
price equal to 110% of the initial public offering price of the shares offered
hereby; (iii) 200,000 additional shares of Common Stock reserved for future
grants under the Company's 1997 Directors Stock Option Plan and 1997 Equity
Incentive Plan; (iv) an estimated approximately 118,750 shares of Common Stock
issuable upon exercise of the Bridge Warrants, at an exercise price of $0.022
per share and (v) 112,500 shares of Common Stock issuable upon exercise of the
Representative's Warrants at an exercise price equal to 120% of the initial
public offering price of the Shares offered hereby. To the extent that any of
these options or warrants are exercised, there will be further dilution to new
investors. See "Capitalization," "Management--Employee Benefit Plans" and
"Description of Capital Stock."
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus.
The statement of operations data for the years ended December 31, 1995 and
1996, and the balance sheet data at December 31, 1995 and 1996, are derived
from and qualified by reference to the Financial Statements included elsewhere
in this Prospectus. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1995 1996
----- -------
(IN
THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................................... $ 328 $ 1,255
Cost of products sold........................................ 160 435
----- -------
Gross profit............................................... 168 820
Operating expenses:
General and administrative................................. 293 542
Selling and marketing...................................... 600 1,588
Product management......................................... 66 91
----- -------
Loss from operations......................................... (791) (1,401)
Other income (expenses):
Interest expense........................................... (20) (443)
Other income............................................... -- 2
----- -------
Net loss..................................................... $(811) $(1,842)
===== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................................................... $ 37 $ 91
Current assets.......................................... 280 869
Current liabilities..................................... 558 1,869
Total assets............................................ 291 1,372
Notes payable and capital leases........................ 200 844
Accumulated deficit..................................... (890) (2,733)
Total stockholders' deficit............................. (273) (536)
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from the results discussed in such forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed below and elsewhere in this Prospectus, particularly in "Risk
Factors."
GENERAL
The Company was formed in August 1993 for the purpose of developing and
marketing cosmetic skin care products, including its Patches. The Company will
reincorporate in Delaware before the closing of this Offering.
The Company has never been profitable and, at December 31, 1996, had a
working capital deficit of $999,973 and an accumulated deficit of $2,732,654.
The Company began shipping its first product, Antioxidant Skin Care Derms, in
April 1995, and the Company's limited operating history makes the prediction
of future operating results difficult. The Company does not believe that prior
growth rates are necessarily indicative of future operating results. Future
operating results will depend on many factors, including demand for the
Company's products, the level of product and price competition, the Company's
success in expanding the number of stores through which its products are sold
and its other distribution channels, the ability of the Company to develop and
market line extensions of its present products, the ability of the Company to
control costs, general economic conditions and other factors. See "Risk
Factors--Limited Operating History; History of Operating Losses; Going Concern
Opinion; Accumulated Deficit."
Approximately 48% of the Company's revenues from initial shipments in April
1995 to December 31, 1996 have been derived from the sale of products to Saks
Fifth Avenue stores located in the United States, and revenues from sales to
Saks Fifth Avenue stores accounted for approximately 37% of the Company's
revenues for 1996. Revenues from sales to Self Care catalog accounted for
approximately 12% and 16% of revenues in 1995 and 1996, respectively. In 1996
total catalog sales amounted to 21% of total Company revenues. Further,
revenues from sales to House of Fraser, United Kingdom accounted for
approximately 18% of the Company's revenues in 1996. Total foreign sales
accounted for 32% of the Company's revenues in 1996. The Company currently
expects that revenues attributable to Antioxidant Skin Care Derms and other
Osmotics label products will account for a significant portion of the
Company's revenues in 1997. As a result, the Company's future operating
results are dependent upon market acceptance of these products in both
domestic and international retail outlets. There can be no assurance that the
Company's products will achieve market acceptance or that the Company will be
successful in marketing its products. A decline in demand for, or market
acceptance of, Antioxidant Skin Care Derms, as a result of competition or
other factors, would have a material adverse effect on the Company's business,
operating results and financial condition. However, the Company began
marketing products under the Wrinkle Patch label in October 1995 and began
marketing the Spa-Sante label Patch in March 1996. Sales from these products
accounted for approximately 26% of the Company's revenues for 1996. In 1995,
revenues from sales of The Wrinkle Patch accounted for approximately 12% of
total revenues. The Company expects that the ratio of revenues from sales to
Saks Fifth Avenue stores to its total revenues will continue to decrease. See
"Risk Factors--Product and Customer Concentration" and "Business--Strategy."
The cosmetics, skin care and personal care business is highly competitive.
Increased competition could result in price reductions, reduced transaction
size, fewer customer orders and reduced gross margins, any of which could have
a material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors--Competition."
RESULTS OF OPERATIONS
Years ended December 31, 1995 and 1996
Revenues. Total revenues for 1996 were $1,254,800, compared with $328,465
for 1995. A major component of the increase was an increase in the volume of
domestic retail sales of Osmotics label products.
20
<PAGE>
These revenues increased even though the Company engaged in only limited
advertising during 1996. The Company also benefited from greater market
awareness of the Company's products, stimulated in part by non-Company
sponsored articles in television and print media about the Company's products.
Another major component of the increase in revenues was revenues from sales of
new products, primarily The Wrinkle Patch and, to a lesser extent, Spa Sante
label products. Revenues from international sales also contributed to the
increase in 1996 compared to 1995. The Company did not have any revenues from
international sales in 1995.
Cost of Products Sold. Cost of products sold were $435,201 for 1996 compared
to $160,000 for 1995. The increase was due primarily to the increase in volume
of sales. Cost of products sold as a percentage of revenues was 34.7% for 1996
compared to 48.7% for 1995, due to the costs not increasing proportionately
with higher volume of sales. The Company expects that the dollar amount of
costs of products sold will increase with increases in product sales; however,
there can be no assurance that margins with respect to increased sales will
continue at the levels experienced to date. Margins will vary with the mix of
products sold, unit sales prices, and actual material and manufacturing costs
negotiated with vendors.
Production Management. While the Company's products are manufactured by
third parties, the Company is responsible for purchasing and procurement of
inventory, arranging for product storage and coordination of shipments to
customers. Primary components of production management include expenses
relating to wages and salaries of the Company's personnel engaged in operating
activities, payroll related costs, and travel. Production management expenses
were $90,889 for 1996 compared to $66,059 for 1995. The increase was primarily
due to increase in salary and salary-related items.
Selling and Marketing. Selling and marketing expenses were $1,587,765 for
1996 compared to $600,087 for 1995. Major selling and marketing expenses
include, among other things, development expenses relating to the Company's
products, salaries, fringe benefits, public relations, advertising, trade
shows and travel costs. The increase was primarily due to increase in
personnel, accelerated travel requirements, promotional and advertising
efforts, including attendance at trade shows, to introduce the Company's
products, and greater sample costs. Selling and marketing expenses are
expected to increase significantly after this Offering as a result of
increased marketing efforts, both domestic and international, increased
salaries and hiring of personnel, advertising and promotion and new product
introductions and are expected to initially increase substantially as a
percentage of the Company's revenues until sales volume increases, if any, are
achieved.
General and Administrative. General and administrative costs were $541,600
for 1996 compared to $292,742 for 1995. The increase was primarily due to
increased expenses in the areas of salaries and salary related costs of
personnel engaged in administrative functions, accounting and general services
and costs such as rent, insurance, telephone, legal, postage, depreciation and
financing expenses.
The Company's operating expenses are expected to increase significantly as
the result of anticipated increases in marketing efforts in the United States
and internationally, introduction of the Company's products in a larger number
of stores and through a greater number of channels, increases in personnel
costs associated with the anticipated expansion in the Company's business and
new costs related to being a public company (including directors and officers
liability insurance and increased professional fees).
Interest. Interest expenses increased to $443,480 for 1996 from $20,285 for
1995 primarily because of interest relating to promissory notes executed in
1994 and 1995, and amortization of the discount related to the Bridge Notes.
As a result of the issuance of the Bridge Notes and Bridge Warrants, for
financial statement purposes the estimated fair market value of the Bridge
Warrants will represent a discount from the principal amount of the Bridge
Notes. The amount of the discount has been amortized to interest expense over
the contractual maturity of the Bridge Notes. Consequently, because the Bridge
Notes will be repaid out of a portion of the net proceeds of this Offering,
the Company will expense any remaining unamortized discount in the quarter in
which this Offering is consummated. The amount of such expense, which will be
a one-time charge, is expected to be approximately $190,000 and will cause the
Company's reported net income for such quarter to be significantly lower (or
reported net loss to be significantly higher) than it otherwise would be.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in August 1993, the Company has financed its activities
through the issuance of debt instruments and equity in private placement
transactions and, to a lesser degree, from sales of products, which commenced
in April 1995. From inception to December 31, 1996, the Company had received
approximately $2,961,000 from debt and equity transactions, while sales in the
same period were approximately $1,583,000. At December 31, 1996, the Company
had approximately $91,000 in cash.
Cash used in the Company's operations was $1,667,690 in 1996 compared to
$735,081 in 1995. The increase in cash used in the Company's operations was
primarily due to expansion of the Company's organization and increased sales.
The Company did not have any material capital expenditures for 1995. Capital
expenditures for 1996 consisted primarily of furniture and fixtures and
computer equipment, which together totaled approximately $93,000.
From inception through December 31, 1996, the Company reported losses of
$2,732,654. At December 31, 1996 the Company had a working capital deficit of
$999,973. In the absence of this Offering, the Company needs additional
funding to continue its operations through the remainder of 1997.
Consequently, there is substantial doubt as to the ability of the Company to
continue as a going concern. The Company's financial statements have been
prepared assuming that the Company will continue as a going concern and do not
include any adjustments that might result from the outcome of this
uncertainty. If this Offering is delayed or suspended, other financing sources
will be needed. The Company has no credit facility with a bank or other
financial institution and no in-place source of capital. The Company intends
to use a portion of the net proceeds of this Offering to repay the Bridge
Notes and other outstanding indebtedness. See "Use of Proceeds." While the
timing and amount of cash requirements cannot be predicted with certainty, the
Company believes that the net proceeds from this Offering, together with cash
on hand, cash expected to be received upon payment of outstanding accounts
receivable as of December 31, 1996, and cash expected to be generated from
operations, will provide adequate funding for the Company to hire additional
personnel, launch new marketing and product development programs, and
otherwise conduct its business activities through at least 12 months from the
effective date of this Offering. However, the Company's future liquidity and
capital requirements will depend upon numerous factors, including the
Company's success in increasing sales of existing products and introducing new
products, expanding the channels through which the Company's products are
sold, and operational cost controls. In general, however, the Company's cash
requirements are expected to increase significantly over the next several
years to meet new product development and implementation programs, and to fund
anticipated marketing and sale activities associated with expanded domestic
and international opportunities. The Company may be required to raise
additional funds through public or private debt or equity financing,
collaborative relationships, bank facilities or other arrangements. There can
be no assurance that the Company will not require additional funding sooner or
that such additional funding, if needed, will be available on terms attractive
to the Company, or at all. Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants. See "Use of Proceeds" and "Risk Factors--Future Additional Capital
Requirements; No Assurance Future Capital Will be Available."
At December 31, 1996, the Company had net operating loss carryforwards
(NOLs) for federal tax purposes of approximately $2,200,000. The Company's
ability to use these NOLs to offset future taxable income may be subject to
future restrictions under applicable provisions of the Internal Revenue Code
of 1986, as amended (the "Code").
22
<PAGE>
BUSINESS
The Company develops and markets cosmetic skin care products. The Company's
current principal products are based on technology combining Patches with a
special formulation of ascorbic acid (vitamin C), an antioxidant. The
products, which currently include the Osmotics label Antioxidant Skin Care
Derms, the Spa-Sante label Systeme C Patch and The Wrinkle Patch, are intended
to reduce the appearance of fine facial lines and wrinkles. The Patches are
placed on targeted wrinkles on a person's face to saturate the skin with the
antioxidant. Antioxidants contained in certain current skin care lotions,
creams or oils are exposed to the atmosphere and lose their antioxidant
effectiveness, if not absorbed into the skin within a relatively short time
after application, estimated by the Company to be approximately 40 minutes. In
contrast, the Company's vitamin C formulation is protected by the Patch from
the atmosphere and, therefore, can be absorbed over the recommended 10 hour
period of treatment. Further, Patches maintain the purity of the vitamin C
formulation and deliver the formulation to specific problem areas of the skin.
Drug and Cosmetic Industry Magazine honored the Antioxidant Skin Care Derms in
its December 1995 issue in the cosmetic skin care treatment packaging
category. The Company has filed a U.S. patent application relating to certain
aspects of its Patches.
The Company believes that the skin care segment of the cosmetics market is
large and growing. One industry source has estimated that revenues in the
United States skin care products market were approximately $5.12 billion in
1994, representing approximately 24.6% of total revenues in the United States
personal care products market. The same source projected that revenues in the
United States skin care products market would be approximately $6.46 billion
in 1997 and approximately $9.31 billion in 2001, representing a compound
annual growth rate from 1994 to 2001 of 8.9%. The Company believes that a
significant portion of recent past growth in revenues has come from the
proliferation of alpha hydroxy acid ("AHA") products, which are not
antioxidants. The Company believes that a portion of the future growth in
revenues projected by the industry source will come from the sale of skin care
products containing vitamin ingredients, such as the Company's vitamin C
formulation. In the markets in which the Company intends to compete, the
Company believes that the United States market typically comprises a
significant portion of the overall worldwide market.
The Company believes that the reasons for this continued growth of sales in
the skin care products market include fundamental changes now taking place in
demographic (aging population) and environmental factors, which are
stimulating the need for innovative, more effective skin care products. The
U.S. Bureau of Census has estimated that between 1993 and 2020, the number of
individuals age 45 and over in the United States will increase by 59%, while
those under age 45 in the United States will increase by only 7%. Furthermore,
the first of the approximately 76 million "baby boomers" in the United States
who were born between 1946 and 1960 turned 50 in 1996. The Company believes
that the need for new skin care products will increase as the population ages
because concern with the effects of aging on the skin increases with age.
BACKGROUND
Skin wrinkles are caused by, among other things, free radicals. A free
radical is an unstable oxygen molecule seeking, at the molecular level, to
pair up with an electron. Free radicals can be created in the atmosphere by
the exposure of oxygen to sunlight and pollution. Free radicals can also be
created within a person's skin by natural metabolic processes. A free radical
from the atmosphere can penetrate the top layer of a person's skin, called the
lipid layer, and combine with a molecule in the next layer of skin which
supports the lipid layer, called the collagen, thereby damaging the collagen.
The collagen is weakened over time by this process, causing the lipid layer to
lose its support and the skin to become more wrinkled. Antioxidants are
molecules which can combine with and, as a result, neutralize free radicals.
Antioxidants which are absorbed into a person's skin can thereby neutralize
free radicals and reduce the appearance of fine lines and wrinkles in the
skin.
When exposed to the atmosphere, antioxidants can combine with free radicals
in the atmosphere and lose their beneficial effect, or bioavailability, on the
skin. Antioxidants contained in certain current skin care lotions,
23
<PAGE>
creams or oils are exposed to the atmosphere and as a result lose their
bioavailability, if not absorbed into the skin within a relatively short time
after application, estimated by the Company to be approximately 40 minutes.
SOLUTION
The Company's current principal products, Antioxidant Skin Care Derms, the
Spa-Sante label Patch and The Wrinkle Patch, combine transdermal cosmetic
delivery skin patches ("Patches") with a special formulation of ascorbic acid
(vitamin C), an antioxidant. The Patches are placed on targeted skin wrinkles
to saturate the skin with the antioxidant. The vitamin C formulation, upon
absorption into a person's skin, can neutralize damaging free radicals and,
therefore, reduce the appearance of fine lines and wrinkles in the skin.
Vitamin C is an unstable compound and loses bioavailability if exposed in
solution form to the atmosphere. However, in powder form, vitamin C maintains
bioavailability for up to five years. The Company's Patches store the vitamin
C formulation in powder form, thereby extending its bioavailability. The
vitamin C formulation is suspended in the raw polymer base of the Patches
through a fabrication process that creates a porous matrix effect (a lattice
work of interconnecting bonds) within the resulting Patch material. The
vitamin C formulation mixes with the moisture of a person's skin and is
absorbed into the skin. The vitamin C formulation is protected by the Patch
from the atmosphere and, therefore, can be absorbed over the recommended 10
hour period of treatment. The Company recommends that each Patch be discarded
after a single use and that a Patch be applied to the target area of skin
three times a week.
Skin patches sold by certain companies to deliver nicotine, estrogen or
nitroglycerin can sometimes cause skin irritation from the penetration
enhancers which they contain as well as from both the compounds in their
adhesives and the strength of the adhesives (which can sometimes cause
irritation when the patch is removed from the skin). However, the Company's
Patches cause little skin irritation because they use lighter adhesives and do
not contain penetration enhancers. Additionally, the Company provides an oil
based formulation to aid in the removal of its Patches.
STRATEGY
The Company's objectives are to be the leader in the marketing of skin care
products that deliver antioxidants by means of skin patches, to remain the
leader in that market segment and to expand its product line of other skin
care products and compete in the cosmeceuticals market. The key elements of
the Company's strategy to achieve this objective are as follows:
Initial Product Launch into the Upscale Retail Market. The Company initially
developed a product line, marketed under the Osmotics label, for the upscale
retail market consisting of several products, including the Antioxidant Skin
Care Derms. These products were initially launched into the upscale retail
market in order to derive the credibility and prestige for the Osmotics brand
customarily associated with success in that market. Antioxidant Skin Care
Derms were introduced in April 1995 exclusively at certain Saks Fifth Avenue
stores located in the United States. Saks Fifth Avenue provided support for
the launch of this product. Introduction of the Company's products into the
upscale market has been accompanied by positive media exposure in fashion
magazines and newspapers, such as Elle, Self and Allure, from national and
international beauty editors, who generally write about prestige market
brands.
Broader Channels of Distribution and Sales. The Company's strategy also
includes marketing and selling products through a broader number of retail
channels. The Company markets the Spa-Sante and The Wrinkle Patch labels to
the broader retail market, but through different channels. The Spa-Sante label
Patch is marketed to spas, beauty salons and estheticians and was introduced
at the International Beauty Show in New York City, a large industry trade
show, in March 1996. The Wrinkle Patch was first offered in October 1995 in
Self Care catalog. The Company offers The Wrinkle Patch label products to
several direct sale catalogs, through TV home shopping channels, through an
infomercial, and through the World Wide Web. The Company also has entered in
an agreement with a third party for private label sales by the third party,
and is pursuing opportunities to enter agreements with other third parties for
private label sales. The Company anticipates that it may ultimately sell a
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larger volume of products through these channels than through the upscale
retail market, and that at some future date a greater portion of its total
revenues may be comprised of sales of products through these channels compared
to sales of products to the upscale retail market.
Product Line Extensions. The Company believes that, if and as consumer
awareness of its products using Patches increases, consumers may be more
likely to try other related products sold by the Company. The Company
currently markets several products as part of its different product lines. See
"--Products." The Company expects to develop and market additional line
extensions for all its various labels in the future, which might include,
among others, (1) products using Patches to deliver stronger or different
antioxidants than delivered by the Company's present products, (2) products
using Patches to deliver antioxidants to different parts of a person's body,
(3) products used to pre-treat the areas of skin to which Patches are to be
applied, which, the Company believes, will enhance the effect of the
antioxidants contained in the Patch and (4) hair and body products.
The Company believes that consumers of cosmetics products are increasingly
less loyal to a particular brand name and, as a result, are less likely to
purchase multiple types of products within a brand's product line unless those
products satisfy specific needs of the consumers. The Company believes that
this trend may have aided the Company's introduction of its Patches, but there
can be no assurance that this trend will aid the Company's introduction of
products in the future. See "Risk Factors--Brand Loyalty of Consumers of
Cosmetics."
International Distribution. The Company markets its products outside of the
United States. As in the United States, the Company expects that ordinarily it
will launch its products in a country by first selling products to upscale
retailers, and then selling products into alternative retail channels. The
Company launched its Osmotics label products, including Antioxidant Skin Care
Derms, in the United Kingdom in May 1996 through the Dickins & Jones store
located on Regent Street in London, England, a member of the House of Fraser
group, which the Company believes serves the upscale retail market, and at
five other House of Fraser stores, and has since launched products in other
stores located in Europe and South America. The Company expects to launch
products in other international locations during 1997. See "--Sales and
Marketing."
PRODUCTS
Products Using Patches. The Company's current primary products are
Antioxidant Skin Care Derms, Spa-Sante label Patches and The Wrinkle Patch.
These products are Patches containing a special formulation of ascorbic acid
(vitamin C), an antioxidant. Each of these Patches has a unique shape that
covers the fine lines around a person's eyes ("crow's feet") and saturates the
skin with the antioxidant. This vitamin C formulation reduces the appearance
of fine lines and wrinkles in a person's skin.
The Spa-Sante label Patches and The Wrinkle Patch contain the same amount of
vitamin C formula and have the same shape, but contain less vitamin C formula
and have a slightly different shape than Antioxidant Skin Care Derms.
Products Sold Under the Osmotics Label. The following products, in addition
to the Antioxidant Skin Care Derms, are sold under the Osmotics label:
. Hydrating Cleanser, which is a facial cleanser for normal, dry and
sensitive skin types and contains humectants to help retain moisture in
the skin.
. Balancing Cleanser, which is a facial cleanser for normal and oily skin
types and contains antibacterial agents, vitamin B6, and humectants for
acne breakout.
. Firming Tonic Facial Mist, which is a product containing natural
botanicals and oils sprayed on the face to firm, tone and hydrate dry,
mature skin.
. Balancing Tonic Facial Mist, which is a product containing natural
botanicals and oils sprayed on the face to regulate oil control, tone,
and hydrate normal to oily skin.
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. Hydrating Complex SPF 15, which is a skin lotion containing vitamins A,
C and E that replenishes moisture with hyaluronic acid and other
moisturizers and contains active sunscreen ingredients.
. Balancing Complex SPF 15, which is a skin lotion containing vitamins A,
B6, C, and E that replenishes moisture without oils and contains active
sunscreen ingredients.
. Intensive Moisture Therapy, which is a skin cream that hydrates dry,
damaged or dehydrated skin.
. Antioxidant Eye Therapy, which is an eye gel containing botanicals to
moisturize and diminish puffiness and dark circles under the eye.
. Daily Eye Protection SPF 15, which is a skin cream designed to
moisturize and protect skin around the eyes and contains active
sunscreen ingredients.
. Facial Renewal, which is a product to be applied at night containing
alpha hydroxy acids, derived from sugarcane, buttermilk and citrus
fruit, used to remove dry, dead surface cells.
. Antioxidant Body Complex, which is a skin cream for the body with
kalaya oil and antioxidant vitamins that moisturizes, firms, and
strengthens the skin.
. Lip Colors, which are treatment lipsticks available in six shades
containing antioxidant vitamins, moisturizers and active sunscreen
ingredients.
Products Sold Under The Wrinkle Patch Label. The following products, in
addition to The Wrinkle Patch, are sold under that label:
. Tonic Facial Mist, which is a product sprayed on the face to firm, tone
and hydrate dry, mature skin.
. Two in One Cream, which is a skin cream containing Emu oil, alpha
hydroxy acids and antioxidants.
Product Development. The Company has completed the final formulation of, and
is now in the testing and evaluation process for, emollients to be sold under
the Spa-Sante line, which are to be used to pre-treat areas of the skin to
which Patches are to be applied. The Company believes that use of these
emollients will enhance the effect of the antioxidants contained in Patches
subsequently applied to the target area. The Company designs and develops the
concepts for new products internally. After developing the concept for a
possible new product, the Company generally contracts with third party
chemists and consultants to develop the specific formula for the possible new
product. The Company tests that formula internally and then coordinates with
such third parties to finalize the formulation for the potential product.
SALES AND MARKETING
Antioxidant Skin Care Derms. The Company currently sells in the United
States Antioxidant Skin Care Derms and line extensions of that product,
including cleansers, moisturizers, toners, alpha hydroxy acid, and lipsticks
under the Osmotics label to certain Saks Fifth Avenue, Neiman Marcus and
Nordstrom stores.
Outside the United States, the Company launched Osmotics label products,
including Antioxidant Skin Care Derms, in the United Kingdom in 1996 at six
House of Fraser stores located throughout the United Kingdom. In the fall of
1996, the Company launched products in Paris, France at a Galeries Lafayette
store and in Geneva, Switzerland at eight Pharmacies Principale stores. In
January 1997, the Company launched products in France at Le Printemps,
Samaritaine, Bon Marche and Perfumerie Sephora stores. In December 1996, the
Company introduced products in Brazil and Ecuador. The Company expects to
launch products in additional countries in Canada, South America, Europe and
Asia during 1997.
The Company has entered into an agreement with a third party whereby the
third party has the exclusive right to market and sell in France products
manufactured by the Company under the Osmotics label. This agreement
terminates in January 2000, and is renewable for successive three-year periods
unless either party elects otherwise. The agreement is subject to earlier
termination if the third party distributor fails to satisfy certain
performance goals.
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The Spa-Sante Line. The Spa-Sante label Patch is, and other products to be
sold under the line by the Company are to be, directed at spas, beauty salons
and estheticians. The Company has entered into an agreement with a third party
whereby the third party has the exclusive right to market, sell and distribute
all skin care products manufactured by the Company under the brand name Spa-
Sante to professional beauty establishments, including spas and beauty salons,
located in North America, Central America, Europe, the Middle East and Africa.
The third party distributor will market, sell and distribute the products on
behalf of the Company and retain a percentage of the selling price of the
products sold. Beginning in 1997, the third party has agreed to pay all costs
of sales. This agreement terminates in July 2001, and is renewable at the
third party distributor's election for two successive five-year periods. The
agreement is subject to earlier termination if the third party distributor
fails to satisfy certain performance goals.
The Company has entered into an agreement with a different party, who holds
45,454 shares of Common Stock, whereby the third party has the exclusive right
to market, sell and distribute all products manufactured by the Company in
Japan, China, Korea, Taiwan, Hong Kong, Singapore, Thailand, Vietnam,
Australia, New Zealand, the Philippines, Malaysia, Indonesia and all other
Southeast Asian countries. The third party distributor will purchase for
resale the products from the Company. This agreement terminates in December
2001, and is renewable at the third party distributor's election for two
successive five-year periods. The agreement is subject to earlier termination
if the third party distributor fails to satisfy certain purchase or
performance goals, and the Company is currently reviewing the third party's
performance under the agreement, including whether the third party has
satisfied the required purchase or performance goals.
The Wrinkle Patch. The Wrinkle Patch was first offered in Self Care catalog
and is now offered in several direct sale catalogs, including The Sharper
Image Spa. The Company is also in the process of offering that product through
TV home shopping channels, through an infomercial and through the World Wide
Web. The Company offered The Wrinkle Patch on Q2 Shopping Channel in February
1996, and on QVC in November 1996. The Company expects to offer The Wrinkle
Patch in 1997 to self-select retail stores (stores where consumers select
their own purchases without assistance of an in-store demonstrator).
A thirty minute infomercial has been produced offering The Wrinkle Patch,
which was shown first on United States regional cable television stations in
September 1996. Sales of The Wrinkle Patch resulting from the airings, before
the date of this Prospectus, of that infomercial were less than the Company
expected. The Company expects to dub this infomercial into various foreign
languages and show it in other countries. Additionally, pursuant to an
Infomercial Production and Product Management Agreement, dated as of March 5,
1996, between the Company and VideOne Marketing, Inc. (as amended, the
"VideOne Agreement"), VideOne, the third party producer of the infomercial,
has the exclusive right worldwide, subject to certain exceptions, (i) to
manage the direct response marketing and airing of the infomercial and (ii) to
distribute The Wrinkle Patch, including updates and revisions, in certain
direct response media categories. Notwithstanding VideOne's exclusive rights,
the Company may seek an agreement with any other third party in these direct
response media categories consistent with a general marketing plan developed
by the Company and VideOne, but VideOne has a right of first refusal to enter
into an agreement with the Company on the same terms. This exclusivity
terminates in March 1997, and is automatically renewable for two successive
one-year periods provided certain stated performance goals are satisfied. The
infomercial was financed in part by a third party, who is entitled to receive
certain royalties from sales of the product from the infomercial.
Licensing. The Company has agreed to supply on a non-exclusive basis to a
third party skin patches for inclusion in products to be sold by the third
party under its own label in all countries, other than countries located in
the Pacific Rim. The third party has agreed not to market and sell such
products in the upscale market (which is defined in the contract), and the
Company has agreed not to sell skin patches under the Osmotics trademark
except in the upscale market. This agreement terminates in January 2002, and
is renewable for successive five-year periods unless either party elects
otherwise. The Company is pursuing additional opportunities to enter into
agreements with third parties for private label sales by the third parties.
The Company anticipates that as part of such arrangements, the third parties
would pay the costs of any new product development. The Company expects to
receive royalty fees from such licenses. There can be no assurance that the
Company will be able to enter into
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any such additional licenses on terms attractive to the Company, and the
Company does not anticipate receiving any royalty revenues from such licenses,
if at all, until at least 1998.
Public Relations. The Company's marketing efforts also include establishing
and maintaining media relations with fashion magazines and other media
outlets. News of the Company's products has been featured internationally as
well as on several United States broadcasts. To date, the Company has received
write-ups in over 25 United States publications and 20 foreign publications,
including: Longevity, World Class, New Woman, The Rose Sheet, Women's Wear
Daily, Beauty Fashion, Glamour, Beverly Hills, Harper's Bazaar, Self, Elle and
Rocky Mountain News.
MANUFACTURING
The Company currently obtains ingredients, packaging and final formulations
from several third party suppliers and has not entered into a written
agreement with any such supplier. Although the Company believes that all
ingredients are presently obtainable and has identified additional third
parties that could also supply such ingredients, there can be no assurance
that the Company will continue to be able to obtain such ingredients from
third parties at all or in sufficient quantities and on terms and conditions
acceptable to the Company. The Company relies on a different third party,
named Franklin Medical, to manufacture raw products into finished products.
The Company has entered into a written agreement respecting confidentiality,
but not supply requirements or otherwise, with this manufacturer. The Company
believes that if this manufacturer were unexpectedly to stop manufacturing raw
products into finished products for the Company, there would be a temporary
adverse effect on the Company's ability to produce products on a timely basis,
but that one or more other third party manufacturers could be identified. The
Company neither has nor plans to acquire the equipment and facilities
necessary to manufacture its current and future products and is and will be
dependent upon third party contract manufacturers for such production. There
can be no assurance that the Company will continue to be able to obtain
contract manufacturing on commercially acceptable terms for products in the
quantities currently obtainable or that may be required in the future.
Further, there can be no assurance that manufacturing or quality control
problems will not arise at the manufacturing plant of the Company's present
contract manufacturer. In addition, if the FDA were to determine that any of
the Company's cosmetic products, including products that contain active
sunscreen ingredients and that are labeled with a sun protection factor, are
also drugs, those products would have to be manufactured in accordance with
the FDA's current good manufacturing practice ("GMP") requirements for
finished pharmaceuticals. See "Risk Factors--Suppliers; Manufacturing
Limitations."
COMPETITION
The cosmetics, skin care and personal care business is highly competitive.
Increased competition could result in price reductions, reduced transaction
size, fewer customer orders, and reduced gross margins, any of which could
have a material adverse effect on the Company's business, operating results
and financial condition. The Company believes that the principal competitive
factors affecting the cosmetics market include product uniqueness, product
performance, the effectiveness of sales and marketing efforts and company
reputation. There can be no assurance that the Company will compete
successfully in the future with respect to these or other factors.
The Company believes that no other company is currently marketing products
using skin patch technology to deliver antioxidants to a person's skin for
cosmetic purposes, although certain products using gauze pads to deliver
antioxidants are presently sold by certain of the Company's competitors. The
Company believes that other products currently utilizing transdermal delivery
systems are sold primarily in prescription pharmaceutical markets for other
than cosmetic use. However, the FDA recently approved the marketing of a
consumer product, without the need for a prescription, for transdermal
delivery of nicotine using a patch. There can be no assurance that products
using patch technology to deliver antioxidants to a person's skin for cosmetic
purposes do not exist or are not under development by others.
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Certain skin creams, lotions and oils currently sold by cosmetics companies,
including the Cellex-C brand antioxidant serum, compete with the Company's
comparable products. Additionally, Avon Products markets a vitamin C formula
under the brand name Anew, which Avon claims, among other things, minimizes
the appearance of fine lines and wrinkles. Some of the Company's current, and
many of the Company's potential, competitors have significantly greater
financial, marketing, product development, testing and other resources than
the Company and sell their products more widely than the Company. As a result,
they may have the capacity to respond more quickly to changes in customer
requirements or to devote greater resources to the development, testing,
promotion and sale of their products than the Company. It is possible that new
competitors may emerge and rapidly gain significant market share.
Additionally, it is possible current or new competitors might introduce
competitive products which also utilize skin patch technology or other
technology that produces results similar or superior to the Company's Patches
or which are sold at a lower price than the Company's products in similar
distribution channels. There can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results and financial condition. See "Risk
Factors--Competition."
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company currently relies primarily on a combination of trademark laws,
trade secrets, confidentiality procedures and contractual provisions to
protect its technology. The Osmotics word logo and Antioxidant Skin Care Derms
are registered U.S. trademarks of the Company. The Company has U.S. trademark
applications pending for AKA RED, WRINKLE PATCH, THE NIGHTIME MIRACLE and
SYSTEME C. The PTO has rejected the Company's trademark application for Spa-
Sante. The Company intends to challenge that rejection. The Company has
trademark registrations pending in Japan for OSMOTICS, Spa Sante, The Wrinkle
Patch and SYSTEME C, in Korea for OSMOTICS and the Osmotics label, Spa Sante,
The Wrinkle Patch and SYSTEME C, in the European Community for OSMOTICS and
the Osmotics logo and in Eucador for OSMOTICS. There can be no assurance that
any of these marks for which registration applications are pending will be
registered.
The Company filed one United States patent application in 1994 and filed a
continuation in part of that patent application in 1995. The PTO has rejected
all claims in these applications, alleging that the claimed inventions were
obvious. In response, the Company filed a continuation in part application in
1996, accumulating subject matter of both prior patent applications and
addressing, among other things, the use of the Patches as a method to deliver
antioxidants. The Company also has filed an application under an international
treaty designating various foreign countries for which the Company preserved
certain rights in the event it files patent applications in any of those
countries. The Company also intends to file additional patent applications in
the PTO on various features of its products in the future, if appropriate.
However, there can be no assurance that any patents will issue in any country
with respect to currently pending applications or any future patent
applications.
The validity and breadth of claims in patents involve complex legal and
factual questions and, therefore, may be highly uncertain. No assurance can be
given that any issued patent or patents based on the pending patent
application or any future patent application will exclude competitors or
provide competitive advantages to the Company or that others will not claim
rights in or ownership of the Company's rights which it regards as
proprietary. Furthermore, there can be no assurance that others have not
developed or will not develop similar products, duplicate any of the Company's
products or design around any patents that may be issued in the future to the
Company. Since patent applications in the United States are maintained in
secrecy until patents issue, the Company also cannot be certain that others
did not first file applications for inventions covered by the Company's
pending patent applications, nor can the Company be certain that it will not
infringe any patents that may issue to others on such applications.
Despite the Company's efforts to protect its rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products may prove to be difficult, and, while the Company is
unable to
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determine the existence or amount of other products which now or in the future
illegally duplicate the Company's products, such other products can be
expected to be a persistent problem. In addition, the laws of many countries
do not protect the Company's rights which it regards as proprietary to as
great an extent as do the laws of the United States. There can be no assurance
that the Company's means of protecting its rights will be adequate or that the
Company's competitors will not independently develop similar products.
To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Risk Factors--Protection of Intellectual Property."
GOVERNMENT REGULATION
The Company and its cosmetic products are subject to regulation by the FDA
and the Federal Trade Commission (the "FTC") in the United States, as well as
by various other federal, state and local authorities. Such regulation relates
primarily to the ingredients, packaging, labeling, advertising and marketing
of the Company's products. Cosmetics do not require premarket notification to,
or premarket approval by, the FDA, but must be properly labeled and
manufactured. Failure to comply with FDA requirements in such matters can
result in severe civil and criminal penalties, including seizure of product,
injunction against production, distribution, sales, and marketing, and
prosecution. The FTC oversees the advertising of cosmetic products, and
prohibits false or misleading advertising. The FTC has a number of remedies
available to it, including preliminary injunctive relief based on its "reason
to believe" that an advertisement is false or misleading. See "Risk Factors--
Governmental Regulation."
The Company believes that its products are cosmetics under the Federal Food,
Drug, and Cosmetic Act (the "FDC Act"), because the Company, as shown by its
labeling, advertising, promotional, and other activities, intends that its
products be applied to the body to cleanse, beautify, promote attractiveness
or temporarily alter appearance. Such products meet the statutory definition
of cosmetic. By contrast, the Company believes that its products are not drugs
as defined in the FDC Act, because the Company, as shown by its labeling,
advertising, promotional, and other activities, does not intend that they
cure, mitigate, treat or prevent disease, or have other than a temporary
effect on the structure or function of the body.
There can be no assurance, however, that the FDA will not determine that
some or all of the Company's products are new drugs (as well as or instead of
cosmetics) based on ingredients, their concentrations or labeling,
advertising, or promotional material. In particular, the FDA could determine
that the Company's cosmetic products that contain active sunscreen ingredients
and that are labeled with a sun protection factor ("SPF") are also drugs. Most
over-the-counter ("OTC") drugs are marketed in the United States without FDA
prior approval under FDA regulations that permit such OTC marketing if the FDA
has issued a monograph with respect to that drug (including its ingredients
and indication(s) (claims)), and the product and its labeling comply with that
monograph. In a 1993 proposal to establish a monograph for OTC sunscreen drug
products, the FDA tentatively concluded that the use of the term "sunscreen"
on the label of a product causes it to be a drug, and that the use of the term
SPF in the labeling of a product is a basis for the product to be considered a
drug. The FDA also proposed that any final monograph based on the proposal be
made effective twelve months after the date of publication of the final
monograph. If the FDA adopts these tentative conclusions and finalizes the
proposed monograph for OTC sunscreen drug products, the Company's products
that contain active sunscreen ingredients and that are labeled with an SPF
will have to (i) comply with the monograph with respect to ingredients (or
remove ingredients not covered by the monograph), indications (claims) and
labeling, among other things, (ii) be covered by individual marketing
approvals from the FDA (as discussed below), (iii) be relabeled to eliminate
any mention of SPF, sunscreen or the like, or (iv) be removed from the market.
The Company believes that any changes to its products, ingredients,
indications or labeling resulting from the FDA's issuance at a future date of
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a final monograph, if it applies to the Company's products in question, would
not have a material adverse effect on its business, operating results or
financial condition.
The preclinical and clinical testing, manufacture, labeling, distribution,
sale, advertising, and marketing of new drugs are subject to extensive and
rigorous regulation by the FDA, and before they can be marketed new drugs must
undergo an extensive regulatory approval process. This process, the successful
completion of which cannot be assured in a timely manner or at all, includes
preclinical studies and clinical trials of each compound to establish its
safety and effectiveness and confirmation by the FDA that good laboratory,
clinical and manufacturing practices were maintained during testing and
manufacturing. The process can take many years and requires the expenditure of
substantial resources. There can be no assurance as to when, if ever, any
required FDA approvals would be obtained. There can be no assurance that the
Company's current or future products will not be regulated by the FDA as new
drugs, nor can there be any assurance that any future requirements will not
have a material adverse effect on the Company's business, financial condition
or results of operations or on the market price of the Common Stock.
Following drug discovery, the steps required before a new pharmaceutical
product may be marketed in the United States include (1) preclinical
laboratory and animal tests, (2) the submission to the FDA of an application
for an investigational new drug ("IND"), (3) clinical and other studies to
assess safety and parameters of use, (4) adequate and well-controlled clinical
trials to establish the safety and effectiveness of the drug, (5) the
submission of a new drug application ("NDA") to the FDA and (6) FDA approval
of the NDA prior to any commercial sale or shipment of the drug.
Typically, preclinical studies are conducted in the laboratory and in animal
model systems to gain preliminary information on the drug's pharmacology and
toxicology and to identify any potential safety problems that would preclude
testing in humans. The results of these studies are submitted to the FDA as
part of the IND application. Testing in humans may commence 30 days after
submission of the IND by the FDA unless the FDA objects, although companies
typically wait for affirmative approval from the FDA before commencing such
testing. A three phase clinical trial program is usually required for FDA
approval of a pharmaceutical product. Phase I clinical trials are designed to
determine the metabolism and pharmacologic effects of the drug in humans, the
side effects associated with increasing doses, and possibly, to obtain early
indication of efficacy. Phase II studies are conducted in an expanded
population to evaluate the effectiveness of the drug for a particular
indication and thus involve patients with the condition under study. These
studies are also intended to elicit additional safety data on the drug,
including evidence of the short-term side effects and other risks associated
with the drug. Phase III studies are generally designed to provide the
substantial evidence of safety and effectiveness of a drug required to obtain
FDA approval. The designation of a clinical trial as being of a particular
phase is not necessarily indicative that such a trial will be sufficient to
satisfy the requirements of a particular phase. For example, no assurance can
be given that a Phase III clinical trial will be sufficient to support an NDA
without further clinical trials. The FDA monitors and inspects the progress of
each of the three phases of clinical testing and may alter, suspend or
terminate the trials based on the data that have been accumulated to that
point and its assessment of the risk/benefit ratio to the patient. The total
time required for completing such clinical testing typically is many years.
Upon completion of clinical testing which the sponsor believe demonstrate that
the product is safe and effective for a specific indication, an NDA may be
submitted to the FDA. This application includes details of the manufacturing
and testing processes, preclinical studies and clinical trials. FDA approval
of the NDA is required before the applicant may market the new product in the
United States. The FDA may refuse to approve an NDA if applicable statutory
and/or regulatory criteria are not satisfied, or may require additional
testing or information.
Even after initial FDA approval had been obtained, further studies may be
required to provide additional data on safety or to gain approval for the use
of a product as a treatment in clinical indications other than those for which
the product was initially tested. The FDA may also require post-marketing
testing and surveillance programs to monitor the drug's effects.
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Once the sale of a product is approved, the FDA regulates production,
distribution, marketing, advertising and other activities under the FDC Act
and the FDA's implementing regulations. All manufacturing facilities, methods
and controls used for the manufacturing, processing, packing or holding of
drug products must be operated in conformity with FDA's GMP requirements. A
post-marketing testing, surveillance and reporting program may be required to
continuously monitor the product's usage and effects. Product approvals may be
withdrawn, or other actions may be ordered, or sanctions imposed if compliance
with regulatory requirements is not maintained.
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation
and Recovery Act and other similar federal, state and local regulations
governing permissible laboratory activities, waste disposal handling of toxic,
dangerous or radioactive materials and other matters. The Company believes
that it is in compliance in all material respects with such regulations.
EMPLOYEES
At December 31, 1996, the Company had 12 full-time employees, including
three persons engaged in direct sales functions at retail store locations. The
remaining nine persons are engaged in various corporate functions. In
addition, at December 31, 1996, there were 11 persons working in retail stores
for whom the Company was responsible for all or a portion of their salary. Of
those 11 persons, five were in the United States. The Company plans to hire
additional employees in 1997, including a Controller and additional
administrative, sales and marketing personnel.
The loss of any of the Company's senior management or other key research,
development, sales and marketing personnel, particularly if lost to
competitors, could have a material adverse effect on the Company's business,
operating results and financial condition, including its ability to attract
employees. In particular, the loss of Steven S. Porter, who is the Company's
President, Chief Executive Officer and Chairman of the Board, or Francine E.
Porter, who is the Company's Executive Vice President and Treasurer, would
have a material adverse effect on the Company's development and marketing
efforts. None of the Company's employees is represented by a labor union or is
the subject of a collective bargaining agreement with respect to his or her
employment by the Company. The Company has never experienced a work stoppage
and believes that its employee relations are good. See "Risk Factors--
Management of Growth" and "Risk Factors--Dependence on Key Personnel."
FACILITIES
The Company's principal administrative, sales and marketing offices are
located in approximately 4,000 square feet of space in Denver, Colorado. The
lease relating to this office space expires in October 1999. The Company
believes that suitable additional or alternative space will be available in
the future on commercially reasonable terms as needed.
LEGAL PROCEEDINGS
During 1995 and 1996, the Company sold Common Stock to several investors in
private placement transactions. In certain states in which securities were
sold, the Company may not have complied with all applicable requirements in
order to satisfy the exemptions from the registration or qualification
requirements in those states. Pursuant to the provisions of applicable state
laws, the Company delivered to certain stockholders, none of whom is
affiliated with the Company or any of its directors or officers, offers to
repurchase the shares they acquired, and under the laws of such states the
failure to accept such offers made in compliance with such state laws within
certain time periods (generally, 30 days from receipt of such offer)
terminates such purchasers' rescission rights under such state laws. All of
those stockholders have declined in writing the Company's offer to repurchase
their shares. As a result, the Company believes that the stockholders no
longer have rescission rights under such state laws respecting their shares.
32
<PAGE>
From October through December 1996, in Additional Closings of the Bridge
Financing, the Company issued Bridge Notes in the aggregate principal amount
of $250,000 and additional Bridge Warrants to purchase an estimated
approximately 31,250 shares of Common Stock. Such issuances may not have
complied with all applicable requirements to satisfy exemptions from the
registration or qualification requirements under securities laws of the United
States and certain states in which those securities were issued, possibly
entitling the purchasers of those securities to certain remedies, including
rescission rights, and possibly subjecting the Company and its officers and
directors to potential sanctions. The Bridge Notes will, however, be repaid in
full at the closing of this Offering, and to date no purchaser has made a
claim for rescission or other remedies. As a result, the Company believes that
even if such transactions were found to have violated federal or state
securities laws, such violations would not have a material adverse effect on
the Company's business, operating results or financial condition, although
there can be no assurances that this would be the case.
In January 1997, the Company received a letter from VideOne Marketing, Inc.
relating to the VideOne Agreement, pursuant to which VideOne produced for the
Company an infomercial offering The Wrinkle Patch and VideOne agreed to
provide certain distribution services for The Wrinkle Patch. The letter
asserts, among other things, that the Company breached certain of VideOne's
distribution rights and that the Company breached its obligations under the
VideOne Agreement by failing to pay VideOne royalties that VideOne alleges are
owed with respect to certain direct marketing sales of The Wrinkle Patch over
certain television channels. The letter also asserts that a dispute exists
concerning which party is obligated to pay for additional editing and
production costs previously incurred and that are expected to be incurred in
connection with further development of the infomercial. No complaint has been
filed, and the Company is unable to predict whether a complaint will be filed
in the future relating to the subject matter of the letter. The Company is
investigating the allegations made in the letter and believes that, if a
complaint is filed, it may have a number of defenses to any such claim. In
addition, the Company is investigating whether it may have claims against
VideOne relating to VideOne's performance under the VideOne Agreement.
Although the Company believes that the matters raised in the letter will be
resolved without material liability to the Company, there can be no assurance
that this will be the case and, if VideOne were finally to prevail in its
claims against the Company, such outcome could have a material adverse effect
on the Company's business, operating results and financial condition.
The Company is subject to various claims and business disputes in the
ordinary course of business; however, the Company is unaware of any present
claims or disputes which would have a material adverse effect on the Company's
business, operating results or financial condition.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, and their ages and
positions, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Steven S. Porter 47 President, Chief Executive Officer and Chairman
of the Board
Francine E. Porter 37 Executive Vice President, Secretary, Treasurer
and Director
Thomas G. Wiley 69 Chief Financial Officer and Director
Suzanne J. Porter 49 Vice President, Operations
S. Herbert Ostern 66 Vice President, International Sales
Marvin J. Rosenblum(1) 54 Director
Edward A. Lewis(1) 67 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
Each director holds office until the next annual meeting of stockholders and
until his or her successor is elected and qualified or until his or her
earlier resignation or removal. Each officer serves at the discretion of the
Board of Directors (the "Board").
Steven S. Porter is a co-founder of the Company and has served as its
President and Chief Executive Officer and Chairman of the Board since its
inception in August 1993. In January 1986, Mr. Porter and two other persons
founded GDP Technologies, Inc. ("GDP"), and from that time until August 1993,
Mr. Porter served as Executive Vice President of that company. GDP is
currently an inactive corporation, and Mr. Porter has devoted, and after this
Offering is expected to devote, substantially all of his business time and
efforts to the business of the Company.
Francine E. Porter, the wife of Steven S. Porter, is a co-founder of the
Company and has served as its Executive Vice President and a director since
its inception in August 1993. From March 1993 to August 1993, Mrs. Porter
served as a make-up artist for Bobbi Brown Professional Cosmetics. From April
1990 to March 1993, Mrs. Porter was self-employed on a part-time basis,
providing services as a make-up artist to a number of businesses in the
cosmetics industry.
Thomas G. Wiley has served as the Chief Financial Officer and a director of
the Company since January 1994. From October 1989 until January 1994, Mr.
Wiley was retired. From September 1988 through October 1989, Mr. Wiley served
as the President of TexPort Inc., a computer-related enterprise. From November
1984 to September 1988, Mr. Wiley was retired. From August 1980 to November
1984, Mr. Wiley served as the President of Computer Elections Systems, the
largest manufacturer of computerized voting equipment in the United States.
From March 1973 until October 1984, Mr. Wiley served as Executive Vice
President of Hale Technology, a venture capital firm. From July 1964 to
December 1972, Mr. Wiley served as Vice President, Finance of Electronic
Memories and Magnetics, an NYSE listed company engaged primarily in
manufacturing components and subsystems for computers.
Suzanne J. Porter, sister of Steven S. Porter, has served as the Vice
President, Operations of the Company since November 1993. From May 1989 to
October 1993, Ms. Porter served as Vice President, Operations for GDP. From
June 1974 to April 1989, Ms. Porter served in several positions for Business
Records Corporation and its predecessor, including as Vice President, Services
and Support.
S. Herbert Ostern has served as the Vice President, International Sales of
the Company since January 1994. Since June 1991, Mr. Ostern has provided
independent consulting services to a number of cosmetics companies. From April
1969 to June 1991, Mr. Ostern served as Senior Vice President and the Regional
Director for Estee Lauder International.
34
<PAGE>
Marvin J. Rosenblum has served as a director of the Company since January
1995. Since 1976 he has been an attorney in private practice in Chicago,
Illinois, concentrating in financial transactions, and licensing and
technology transfer arrangements in Europe and Asia.
Edward A. Lewis has served as a director of the Company since July 1995.
Since 1969, Mr. Lewis has been engaged in investment brokering, matching
companies with capital needs with investors interested in such companies.
SCIENTIFIC ADVISORY PANEL
The Company has engaged certain industry experts for the purpose of
consultation and advice regarding various aspects of its business plan,
product design and development and other matters relating to the Company. The
nature, scope and frequency of the consultations between the Company and each
adviser varies depending on the Company's current activities, the need for
scientific advice and the individual scientific adviser. Although the Company
expects to receive guidance from its advisers, each of the advisers has
substantial commitments to third parties and is able to devote only a small
amount of time to the affairs of the Company. The Company's Scientific
Advisory Board includes:
<TABLE>
<CAPTION>
NAME OCCUPATION/TITLE
---- ----------------
<C> <S>
Bernard Idson, Ph.D. Professor of Pharmacy, Pharmaceutical and
Cosmetic Consultant, Drug Dynamic Institute,
University of Texas
Joe M. McCord, Ph.D. Professor of Medicine, Head, Division of
Biochemistry and Molecular Biology, Webb-Waring
Institute for Biomedical Research, University of
Colorado
Noel H. Upfall, D.O. Private Medical Practitioner (Detroit, Michigan)
Guy F. Webster, M.D., Ph.D. Associate Professor of Dermatology, Director of
the Center for Cutaneous Pharmacology, Thomas
Jefferson University Medical College
(Philadelphia, Pennsylvania)
</TABLE>
Although he is not a member of the Scientific Advisory Panel, Richard G.
Hartigan, Jr. began providing consulting services to the Company in August
1996 and is expected to continue to consult with the Company. Since 1995, Mr.
Hartigan has served as the managing director of the Hartigan Group, which
provides marketing advice to cosmetic companies. From 1990 to 1995, Mr.
Hartigan served as President and Chief Executive Officer of Lancaster Group, a
cosmetic company. From 1965 to 1990, Mr. Hartigan was employed by Estee
Lauder, a cosmetics company, in several positions, the last of which was
Executive Vice President.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their services
as directors but are reimbursed for their reasonable expenses in attending
meetings of the Board. Directors are eligible to participate in the Incentive
Plan, and outside directors are eligible to participate in the Directors Plan.
See "--Employee Benefit Plans."
In March 1996, each director received a non-qualified stock option to
purchase 15,909 shares of Common Stock at an exercise price of $4.40 per
share. Each option is exercisable as to 6,818 shares upon grant and as to
approximately 454 of the remaining shares each month thereafter commencing
April 1, 1996. These options expire on March 24, 2001.
35
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company by, in all capacities during 1996,
(i) the Company's chief executive officer and (ii) the Company's other
executive officers whose salary and bonus (including consulting fees) exceeded
$100,000 during 1996 (of which there were none) (each a "Named Executive
Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
------------------ --------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
--------------------------- ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Steven S. Porter............ 1996 $67,500 $ -- 15,909 --
President, Chief Executive
Officer
and Chairman of the Board
</TABLE>
Option Grants in Last Fiscal Year. The following table sets forth each grant
of stock options made during the fiscal year ended December 31, 1996 to each
of the Named Executive Officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED DURING
OPTIONS FISCAL EXERCISE PRICE EXPIRATION
NAME GRANTED(#)(1) 1996(%)(2) ($/SH)(3) DATE
- ---- ------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Steven S. Porter......... 15,909 15.4% $4.40 03/24/01
</TABLE>
- --------
(1) The option is exercisable with respect to 6,818 of the shares upon grant
and approximately 454 of the remaining shares monthly thereafter
commencing April 1, 1996.
(2) Based on an aggregate of 103,060 options granted by the Company in the
year ended December 31, 1996 to employees of and consultants to the
Company, including the Named Executive Officer.
(3) The exercise price per share of the option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values. The
following table sets forth the information with respect to the number and
value of securities underlying unexercised options held by the Named Executive
Officers at December 31, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT DECEMBER IN-THE-MONEY OPTIONS AT
SHARES VALUE 31, 1996(#)(1) DECEMBER 31, 1996($)(2)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven S. Porter........ -- -- 10,909 5,000 39,272 18,000
</TABLE>
- --------
(1) Does not include 100,000 shares of Common Stock issuable upon exercise of
an option to be granted concurrently with the effective date of this
Offering, at an exercise price equal to 110% of the initial public
offering price of the Shares offered hereby.
(2) Based on the estimated initial public offering price of $8.00 per share,
minus the per share exercise price, multiplied by the number of shares
underlying the option.
No Named Executive Officer exercised any options in fiscal 1996, and no
Named Executive Officer acquired shares upon the exercise of stock options
during 1996.
36
<PAGE>
EMPLOYMENT AGREEMENTS
The Company is party to employment agreements with Steven Porter and
Francine Porter. The agreements become effective upon the closing of this
Offering. The agreements provide that the officer will devote all of his or
her business time and energy to the affairs of the Company. The agreements
have a term of three years and provide for annual salaries to Steven Porter
and Francine Porter of $150,000 and $125,000, respectively. The agreements
provide for grants of new stock options to Steven Porter and Francine Porter
to purchase 100,000 and 50,000 shares, respectively, at an exercise price
equal to 110% of the initial public offering price of the Shares. The options
will become immediately exercisable upon grant with respect to 25,000 shares
as to Mr. Porter and 12,500 shares as to Mrs. Porter, and the options will
vest as to the remaining 75,000 shares and 37,500 shares, respectively, over
three years, one-third at the end of each year. Either the Company or the
officer may terminate the agreement at any time upon notice to the other
party. The agreements provide that upon a termination of employment without
cause, the officer is entitled to severance compensation of the lesser of 18
months or the remaining term of the agreement (but in no event less than 6
months) of his or her salary, which would be paid at the same time as salary
payments would otherwise have been paid. The Company also has a number of
agreements with other officers describing certain terms of their employment.
See "Certain Transactions."
EMPLOYEE BENEFIT PLANS
1997 Equity Incentive Plan. In February 1997, the Board adopted the 1997
Equity Incentive Plan (the "Incentive Plan") and reserved a total of 300,000
shares of Common Stock for issuance thereunder. The Company's stockholders are
expected to approve the Incentive Plan before the effective date of this
Offering, and upon such approval the Incentive Plan will become effective upon
the effective date of this Offering. Of the shares reserved for issuance under
the Incentive Plan, options to purchase a total of 150,000 shares of Common
Stock will be granted to Steven Porter and Francine Porter upon the
effectiveness of this Offering. Shares that (i) are subject to an option under
the Incentive Plan but cease to be subject to such option for any reason other
than exercise of such option, (ii) are awarded under the Incentive Plan but
are forfeited or are repurchased by the Company at the original issue price or
(iii) are subject to an award that otherwise terminates without shares being
issued will, in each case, be redesignated as available for grant or issuance
under the Incentive Plan.
The Incentive Plan provides for the grant of stock options and stock bonuses
and the issuance of restricted stock by the Company to its employees,
officers, directors, consultants, independent contractors and advisers. No
person will be eligible to receive more than 250,000 shares in any calendar
year pursuant to grants under the Incentive Plan. The Incentive Plan is
currently administered by the Compensation Committee of the Board (the
administrator referred to as the "Committee"), consisting of Messrs. Lewis and
Rosenblum. The Incentive Plan permits the Committee to grant options that are
either incentive stock options, as defined in Section 422 of the Code, or
nonqualified stock options, on terms (including the exercise price, which may
not be less than 85% of the fair market value of the Common Stock, and the
vesting schedule) determined by the Committee, subject to certain statutory
and other limitations in the Incentive Plan. In addition to, or in tandem
with, awards of stock options, the Committee may grant participants restricted
stock awards to purchase Common Stock for not less than 85% of its fair market
value at the time of grant. The other terms of such restricted stock awards
may be determined by the Committee. The Committee may also grant stock bonus
awards of the Company's Common Stock either in addition to, or in tandem with,
other awards under the Incentive Plan, under such terms, conditions and
restrictions as the Compensation Committee may determine. Under the Incentive
Plan, stock bonuses may be awarded for the satisfaction of performance goals
established in advance. In the event of a merger, consolidation or similar
corporate transaction, any or all outstanding awards under the Incentive Plan
may be assumed, converted, replaced or substituted by the successor
corporation (if any), which assumption, conversion, replacement or
substitution will be binding on all participants in the Incentive Plan. In the
event such successor corporation (if any) does not assume or substitute
awards, such awards will expire in connection with such transaction at such
times and on such conditions as determined by the Board. The Incentive Plan
will terminate in February 2007, unless terminated earlier in accordance with
its provisions.
37
<PAGE>
Directors Plan. In February 1997, the Board adopted the 1997 Directors Stock
Option Plan (the "Directors Plan") and reserved a total of 50,000 shares of
Common Stock for issuance thereunder. The Company's stockholders are expected
to approve the Directors Plan before the effectiveness of this Offering, and
upon such approval the Directors Plan will become effective upon the
effectiveness of this Offering. Members of the Board who are not employees of
the Company, or any parent, subsidiary or affiliate of the Company, are
eligible to participate in the Directors Plan. Each eligible director who
first becomes a member of the Board on or after the date that the Directors
Plan becomes effective will automatically be granted an option to acquire
15,000 shares on the date such director first becomes a director. At each
annual meeting of stockholders of the Company, each eligible director will
automatically be granted an additional option to purchase 1,000 shares if such
director has served continually as a member of the Board since the date of
grant of such director's initial option, or if such director did not receive
an initial option, such director has served continuously as a member of the
Board since the Directors Plan became effective. All options issued under the
Directors Plan will vest as to 1/48 of the shares subject to the option per
month after the date of grant, provided the optionee continues as a member of
the Board or as a consultant of the Company. The exercise price of all options
granted under the Directors Plan will be the fair market value of the Common
Stock on the date of grant. In the event of a dissolution, a merger in which
the Company is not the surviving corporation, a sale of substantially all the
assets of the Company or certain other transactions, the successor corporation
may assume the outstanding options issued under the Directors Plan or may
substitute equivalent options or substantially similar consideration. In the
event such successor corporation refuses to assume or substitute those
options, then those options will accelerate at such times and on such
conditions as the Committee will determine.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY
The Company intends to enter into Indemnity Agreements with each of its
current directors and executive officers to give such directors and officers
additional contractual assurances regarding the scope of the indemnification
set forth in the Company's Bylaws and to provide additional procedural
protections. At present, there is no pending litigation or proceeding
involving a director, officer or employee of the Company regarding which
indemnification is sought, nor is the Company aware of any threatened
litigation that may result in claims for indemnification.
As permitted by Section 145 of the Delaware General Corporation Law (the
"DGCL"), the Bylaws of the Company provide that (i) the Company is required to
indemnify its directors and officers to the maximum extent permitted by the
DGCL, (ii) the Company may, in its discretion, indemnify other persons as set
forth in the DGCL, (iii) to the maximum extent permitted by the DGCL, the
Company is required to advance expenses, as incurred, to its directors and
officers in connection with a legal proceeding (subject to certain
exceptions), (iv) the rights conferred in the Bylaws are not exclusive and (v)
the Company is authorized to enter into indemnification agreements with its
directors, officers, employees and agents.
As permitted by the DGCL, the Company's Certificate of Incorporation
includes a provision that eliminates the personal liability of directors for
monetary damages for breach of fiduciary duty as a director except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit.
After this Offering, the Company intends to seek to obtain directors and
officers liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
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 Securities Act
and is, therefore, unenforceable.
38
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1994, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or
is to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer, holder of more than 5% of the Common Stock or any
member of the immediate family of any such person, had or will have a direct
or indirect material interest other than compensation agreements, see
"Management," and as described below.
The Company was founded by Steven S. and Francine E. Porter and incorporated
in August 1993. Mr. and Mrs. Porter received a total of 454,545 shares of
Common Stock in consideration of past services to the Company. Mr. and Mrs.
Porter subsequently transferred 2,362 of these shares to two third parties. In
August 1993, Scott Thring received 13,636 shares of Common Stock for services
rendered to the Company, and an option to purchase 13,636 shares of Common
Stock at an exercise price of $.22 per share, all of which are now
exercisable. In November 1993, the Company entered into a letter agreement
with Suzanne J. Porter, the sister of Steven Porter, to obtain her services as
Vice President, Operations, pursuant to which the Company issued to her
113,636 shares of Common Stock for services rendered to the Company. In
December 1993, the Company entered into a letter agreement with David Ross to
obtain his services as Vice President, Sales and Marketing, and Mr. Ross
received a total of 113,636 shares of Common Stock for services rendered to
the Company. In January 1994, the Company entered into a letter agreement with
S. Herbert Ostern to obtain his services as Vice President of International
Sales, pursuant to which the Company issued to him 22,727 shares of Common
Stock for services rendered to the Company, granted him an option to purchase
22,727 shares of Common Stock at an exercise price of $.22 per share,
exercisable as to 50% of the shares after one year of his continuous
employment and as to the remaining shares after two years of his continuous
employment, and agreed to pay him a commission of .5% of certain of the
Company's international net sales to be paid quarterly in arrears as long as
he remains an employee. Also in January 1994, the Company entered into a
letter agreement with Thomas G. Wiley to obtain his services as Chief
Financial Officer, pursuant to which the Company issued to him 22,727 shares
of Common Stock for services rendered to the Company and granted him an option
to purchase 22,727 shares of Common Stock at an exercise price of $.22 per
share, exercisable as to 50% of the shares after one year of his continuous
employment and as to the remaining shares after two years of his continuous
employment. In the aggregate, the Company issued 740,907 shares of Common
Stock to Mr. and Mrs. Porter, Ms. Suzanne Porter, Mr. Ross, Mr. Thring, Mr.
Wiley, and Mr. Ostern through April 1994. At the time of issuance of these
shares, the Company was being organized and operating activities had not
commenced. Consequently, for financial reporting purposes these shares were
deemed to be founders stock of nominal value at the date of issuance.
On April 17, 1995, Steven and Francine Porter, who are directors and
executive officers of the Company, assigned to the Company for nominal
consideration all right, title and interest they had in their invention
described in a patent application titled "Skin Care Composition And Methods,"
and any United States and foreign patents, and any applications which might
then or thereafter be filed for the described invention.
The Company paid to Edward Lewis, a director of the Company, a total of
$23,510 between April 1996 and June 1996, and in April 1996 issued to Mr.
Lewis 15,673 shares of Common Stock for services rendered to the Company.
Between June 1995 and June 1996, the Company issued to Hillary Management,
S.A., 136,440 shares of Common Stock at purchase prices between $1.10 per
share and $4.40 per share. Certain members of Edward Lewis' family have a
beneficial interest in 21,629 of these shares.
The Company borrowed certain amounts from several investors between November
1994 and July 1995 (the "1995 Note Financing"), giving to each such investor a
promissory note and an option to purchase a stated number of shares of Common
Stock. In connection with the 1995 Note Financing, Thomas G. Wiley, a director
and Chief Financial Officer of the Company, loaned the Company $20,000,
evidenced by a promissory note dated July 7, 1995. The note is due at the
earlier of September 30, 1996 or completion of this Offering. To secure
39
<PAGE>
payment, Steven Porter pledged 40,000 shares of his stock in GDP. In addition,
on July 7, 1995, the Company granted Mr. Wiley an option to purchase 9,090
shares of Common Stock at an exercise price of $1.10 per share exercisable
until the earlier of July 7, 2000, or the effective date of this Offering.
In January 1995, Marvin Rosenblum, a director of the Company, entered into
an agreement with the Company, pursuant to which (i) Mr. Rosenblum agreed to
provide financial consulting services and assist the Company in evaluating its
general business and planning, (ii) the Company sold to Mr. Rosenblum 68,181
shares of Common Stock at $0.73 per share, (iii) the Company granted to Mr.
Rosenblum an option, exercisable through April 30, 1995, to purchase 68,181
shares of Common Stock at an exercise price of $1.10 per share and (iv) Steven
and Francine Porter granted Mr. Rosenblum an option to purchase 68,181 shares
of Common Stock which they owned, at an exercise price of $1.10 per share,
with a term ending February 1, 2000. In April 1995, Mr. Rosenblum partially
exercised the 68,181 share option by purchasing 45,454 shares of Common Stock,
and transferred those shares to a third party. The remainder of that option
expired unexercised. In July 1995, the Company granted a five-year option to
Mr. Rosenblum to purchase 22,727 shares of Common Stock at an exercise price
of $1.10 per share. In connection with these transactions, the Company granted
Mr. Rosenblum piggyback registration rights and a right of first refusal to
purchase his pro rata share of certain future issuances of Common Stock, and
the Company and the Porters granted Mr. Rosenblum certain "tag along" rights
to sell a portion of his shares if any beneficial holder of 5% or more of the
Common Stock sold his shares. These rights of first refusal and tag along
rights terminate upon the registration of any class of the Company's
securities under the Exchange Act.
In November 1994, certain stockholders of the Company, including Steven and
Francine Porter, Suzanne Porter, Thomas Wiley and Scott Thring, executed an
agreement which, except in cases of transfers to certain family members of
such stockholders, granted a right of first refusal to the Company, and a
right of second refusal to the stockholders in the event any existing
stockholder desired to transfer his or her shares of Common Stock to any third
party. Under these rights, first the Company, and if the Company elected not
to exercise such right then the stockholders, could purchase the stock from
the selling stockholder at the same price and on the same terms as those
offered by the third party purchaser. This transfer restriction continued up
to six months after the closing of any initial public offering of Common
Stock, or such longer period, not to exceed one year from the date of the
initial public offering, as requested by the underwriters. In addition, the
agreement required that any person who acquired shares from such stockholders
after the date of its execution agree, as a condition of ownership, to the
restrictions described above. In June 1996, this agreement was terminated by
mutual agreement among the parties.
In August 1994, the Company issued to Dermal Technologies, Inc. 90,909
shares of Common Stock in exchange for (i) the assignment to the Company of
all Dermal Technologies' right, title and interest in certain transdermal
delivery technology and (ii) the introduction to Dermal Technologies' major
component suppliers. Additionally, for the services of Dermal Technologies'
principals in obtaining an agreement between the Company and a third party to
commercialize certain of the Company's products, the Company granted Dermal
Technologies royalty rights, based on sales of certain of its products, which
terminate on the close of this Offering. Such royalty payments have not been
significant.
Also in 1994, the Company entered into letter agreements with Bernard Idson,
Ph.D., Guy F. Webster, M.D., Ph.D., and Joseph M. McCord, Ph.D. to retain
their services as members of the Company's Scientific Advisory Board. Pursuant
to these agreements, the Company granted each adviser an option to purchase
4,545 shares of Common Stock at an exercise price of $.22 per share and agreed
to pay each consultant a retainer of $1,000 per month. Through December 31,
1996, $2,000 of these payments have been made, and approximately $61,000 of
the net proceeds of this Offering will be used to pay the remainder of these
payments. See "Use of Proceeds."
In connection with the Bridge Financing, if the Bridge Notes are not repaid
by specified dates, then Steven Porter, Francine Porter, Suzanne Porter,
Marvin Rosenblum, Edward Lewis, Thomas Wiley, Hillary Management, S.A., and
Dermal Technologies, Inc. have agreed to vote their shares of Common Stock in
favor
40
<PAGE>
of the directors designated by a representative of the Bridge Investors, and
the Company has agreed in certain circumstances to cause additional shares to
become subject to the voting agreement so that the representative of the
Bridge Investors can elect a majority of the directors of the Company. See
"Capitalization--Recent Financing Transactions."
No officer or director of the Company is an officer, director or shareholder
of either Dermal Technologies, Inc. or Hillary Management, S.A. Further,
although certain officers and directors of the Company are shareholders of GDP
Technologies, Inc., the Company has not entered into any contractual or other
relationship with that company, and does not expect to do so in the future.
The Company believes that, except for the issuance by the Company of the
shares deemed to be founders stock for financial reporting purposes as
described above, all of the transactions set forth above were made on terms no
less favorable to the Company than could have been obtained from unaffiliated
third parties. All future transactions between the Company and its officers,
directors and principal stockholders and their affiliates will be approved by
a majority of the Board, including a majority of the independent and
disinterested directors of the Board, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Common Stock as of December 31, 1996,
and as adjusted to reflect the sale of the shares of Common Stock offered
hereby, by (i) each person known by the Company to be the beneficial owner of
more than 5% of the Common Stock, (ii) each of the Company's directors, (iii)
each Named Executive Officer and (iv) all executive officers and directors as
a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)(2)
DIRECTORS, NAMED EXECUTIVE --------------- ---------------
OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT NUMBER PERCENT
---------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Steven S. Porter(3)............................. 489,453 32.3% 489,453 18.5%
Francine E. Porter(4)........................... 476,953 31.7 476,953 18.1
Marvin J. Rosenblum(5).......................... 171,361 10.8 171,361 6.3
Hillary Management, S.A.(6)..................... 136,440 9.2 136,440 5.2
David Ross...................................... 107,909 7.3 107,909 4.1
Suzanne T. Porter............................... 113,636 7.7 113,636 4.4
Dermal Technologies, Inc........................ 90,909 6.1 90,909 3.5
Thomas G. Wiley(7).............................. 66,816 4.4 66,816 2.5
Edward A. Lewis(8).............................. 27,947 1.9 27,947 1.1
All executive officers and directors
as a group (7 persons)(9)...................... 871,256 52.7 871,256 31.3
</TABLE>
- --------
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
168,750 shares from the Company is not exercised. See "Underwriting."
(3) Includes 452,181 shares held jointly with Francine Porter and 37,272
shares subject to options exercisable before March 2, 1997.
(4) Includes 452,181 shares held jointly with Steven Porter and 24,772 shares
subject to options exercisable before March 2, 1997.
(5) Includes 68,181 shares beneficially owned by Steven and Francine Porter
that are subject to an option exercisable by Mr. Rosenblum before March 2,
1997, and 34,999 shares subject to an option exercisable before March 2,
1997.
(6) Includes 21,629 shares in which certain members of Mr. Lewis' family have
a beneficial interest.
(7) Includes 44,089 shares subject to options exercisable before March 2,
1997.
(8) Includes 12,272 shares subject to options exercisable before March 2,
1997.
(9) Includes 176,131 shares subject to options exercisable before March 2,
1997.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 15,000,000 shares of $.001 par value Common Stock and
10,000,000 shares of $.001 par value Preferred Stock. As of January 31, 1997,
there were outstanding 1,478,299 shares of Common Stock held of record by
approximately 63 stockholders, options and warrants (excluding Bridge
Warrants) to purchase 345,036 shares of Common Stock, additional options to
purchase 150,000 shares of Common Stock that will be outstanding upon the
effectiveness of this Offering and Bridge Warrants to acquire an estimated
118,750 Bridge Shares.
COMMON STOCK
Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board may from time to time determine. Each
stockholder is entitled to one vote for each share of Common Stock held on all
matters submitted to a vote of stockholders. Cumulative voting for the
election of directors is not provided for in the Company's Certificate of
Incorporation, which means that the holders of a majority of the shares voted
can elect all of the directors then standing for election. The Common Stock is
not entitled to preemptive rights and is not subject to conversion or
redemption. Upon liquidation, dissolution or winding-up of the Company, the
assets legally available for distribution to stockholders are distributable
ratably among the holders of the Common Stock and any participating Preferred
Stock outstanding at that time after payment of liquidation preferences, if
any, on any outstanding Preferred Stock and payment of other claims of
creditors. Each outstanding share of Common Stock is, and all shares of Common
Stock to be outstanding upon completion of this Offering will be, fully paid
and nonassessable.
PREFERRED STOCK
The Board is authorized, subject to any limitations prescribed by Delaware
law, to provide for the issuance of shares of Preferred Stock in one or more
series, to establish from time to time the number of shares to be included in
each such series, to fix the rights, preferences and privileges of the shares
of each wholly unissued series and any qualifications, limitations or
restrictions thereon, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then
outstanding), without any further vote or action by the stockholders. The
Board may authorize the issuance of Preferred Stock with voting or conversion
rights that could adversely affect the voting power or other rights of the
holders of Common Stock. Thus, the issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the
Company. The Company has no current plans to issue any shares of Preferred
Stock.
OTHER SECURITIES
Representative's Warrants
In connection with this Offering, the Company has authorized the issuance to
the Representative of up to 112,500 Representative's Warrants and has reserved
112,500 shares of Common Stock for issuance upon exercise of the
Representative's Warrants. Each Representative's Warrant will entitle the
holder to purchase one share of Common Stock at a price of $ per share,
which is 120% of the initial public offering price of the Shares in this
Offering. The Representative's Warrants will, subject to certain conditions,
be exercisable any time from the first until the fifth anniversary of the date
of this Prospectus. See "Underwriting."
The Representative's Warrants also contain provisions to protect the holder
against dilution by adjustment of the exercise price in certain events, such
as stock dividends and distributions, stock splits and recapitalizations. The
Company is not required to issue fractional shares upon the exercise of a
Representative's Warrant, and the holder thereof will not possess any rights
as a stockholder of the Company until such holder exercises the
Representative's Warrants.
43
<PAGE>
The foregoing discussion of certain terms and provisions of the
Representative's Warrants is qualified in its entirety by reference to the
detailed provisions of the Representative's Warrant Agreement, the form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
For the life of the Representative's Warrants, the holders thereof have the
opportunity to profit from a rise in the market price of the Common Stock
without assuming the risk of ownership of the shares of Common Stock issuable
upon the exercise of the warrants, with the resulting dilution in the interest
of the Company's stockholders by reason of exercise of the warrants at a time
when the exercise price is less than the market price for the Common Stock.
Further, the terms on which the Company could obtain additional capital during
the life of the warrants may be adversely affected. The warrant holders may be
expected to exercise the Representative's Warrants at a time when the Company
would, in all likelihood, be able to obtain any needed capital by a new
offering of its securities on more favorable terms than those provided for by
the Representative's Warrants.
DELAWARE ANTI-TAKEOVER LAW
Upon the closing of this Offering, the Company will be subject to the
provisions of Section 203 of the DGCL (the "Anti-Takeover Law") regulating
corporate takeovers. The Anti-Takeover Law prevents certain Delaware
corporations, including those whose securities are listed on the Nasdaq
SmallCap Market, from engaging, under certain circumstances, in a "business
combination" (which includes a merger or sale of more than 10% of the
corporation's assets) with any "interested stockholder" (a stockholder who
owns 15% or more of the corporation's outstanding voting stock) for three
years following the date that such stockholder became an "interested
stockholder." A Delaware corporation may "opt out" of the Anti-Takeover Law
with an express provision in its original certificate of incorporation or an
express provision in its certificate of incorporation or bylaws resulting from
a stockholders' amendment approved by at least a majority of the outstanding
voting shares. The Company has not "opted out" of the provisions of the Anti-
Takeover Law.
REGISTRATION RIGHTS
Pursuant to a subscription agreement and certain purchase options, the
Company has granted Marvin J. Rosenblum, subject to certain exceptions, the
right to request inclusion of 68,181 shares of Common Stock and 90,909 shares
purchasable upon exercise of stock options previously granted by the Company
or Steven and Francine Porter, if the Company elects to register any of its
Common Stock under the Securities Act either for its own account or for the
account of any other stockholder. The Company is required to bear all
registration expenses, other than underwriting discounts and selling
commissions, incurred in connection with such registrations. The registration
rights relating to the 90,909 shares subject to the options described above
may be transferred to a permitted assignee or transferee of the options.
The Company granted to the investors in the 1995 Note Financing Transaction
the right to include the shares issuable to them upon exercise of the options
granted in the 1995 Note Financing Transaction, totalling approximately 95,763
shares of Common Stock, in any underwritten public offering which occurred
during the exercise period of their options (subject to the underwriter's
right to exclude such shares from a registration). The Company is required to
bear all registration expenses, other than underwriting discounts and selling
commissions, incurred in connection with the registration of the investors'
shares on one such registration.
In connection with the Bridge Financing, the Company agreed to file a
registration statement no later than nine months after the effectiveness of
this Offering to register the resale of the Bridge Shares. The Company has
agreed to keep such a registration statement effective until such shares have
been sold or until such shares can be sold without restriction pursuant to
Rule 144. If such registration statement does not remain effective, then the
Bridge Investors have certain additional demand registration rights. In
addition, the Bridge Investors have piggyback registration rights to require
the Company to include the Bridge Shares in registration statements filed by
the Company registering Common Stock under the Securities Act, either for its
own account or for the account of any other stockholder.
44
<PAGE>
The holders of approximately 121,120 shares of Common Stock purchased in a
private placement transaction concluded in June 1996 have piggyback
registration rights entitling them to have their shares included in future
registrations by the Company, subject to certain restrictions. The Company is
required to bear all registration expenses, other than underwriting discounts
and selling commissions, incurred in connection with the registration of the
shares.
The holders of the Representative's Warrants have the right to require the
Company to file a registration statement, commencing one year after the
effectiveness of this Offering, to register the sale of the shares of Common
Stock issuable upon exercise of the Representative's Warrants. The Company is
required to bear all registration expenses, other than underwriting discounts
and selling commissions, incurred in connection with the registration of the
shares underlying Representative's Warrants.
The Company has granted to David Ross piggyback registration rights
entitling him to have the shares of Common Stock held by him, totalling
107,909 shares as of December 31, 1996, included in future registrations by
the Company, subject to certain restrictions. Such registration rights expire
with respect to any such shares that may be distributed to the public pursuant
to Rule 144 within the succeeding six months without regard to the volume
restrictions of Rule 144.
These registration rights could result in substantial future expense to the
Company and could adversely affect the Company's ability to complete future
equity or debt financings. Furthermore, the registration and sale of Common
Stock of the Company held by or issuable to the holders of registration
rights, or even the potential of such sales, could have an adverse affect on
the market price of the securities offered hereby.
TRANSFER AGENT AND REGISTRAR AND WARRANT AGENT
The Transfer Agent and Registrar for the Company's Common Stock and the
Warrant Agent for the Warrants is Continental Stock Transfer & Trust Company.
LISTING
The Company has applied to list its Common Stock on the Nasdaq SmallCap
Market under the trading symbol "OSMO" and on the Boston Stock Exchange under
the trading symbol " ."
SHARES ELIGIBLE FOR FUTURE SALE
Before this Offering, there has been no market for the Common Stock. Future
sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time.
Upon completion of this Offering, assuming no exercise of options or
warrants after January 31, 1996, the Company will have outstanding
approximately 2,603,299 shares of Common Stock. Of these shares, the 1,125,000
shares sold in this Offering will be freely tradeable without restriction
under the Securities Act, unless purchased by "affiliates" of the Company as
that term is defined in Rule 144 under the Securities Act. The remaining
1,478,299 shares of Common Stock held by existing stockholders were issued and
sold by the Company in reliance on exemptions from the registration
requirements of the Securities Act. These shares may be sold in the public
market only if registered or pursuant to an exemption from registration such
as Rules 144, 144(k) or 701 under the Securities Act. Holders of approximately
1,363,572 shares have executed lock-up agreements providing that they will not
directly or indirectly sell, contract to sell, grant any option to purchase or
otherwise transfer or dispose of any securities of the Company until one year
from the closing of this Offering without the prior written consent of the
Representative. Additionally, a stockholder holding 107,909 shares of Common
Stock has agreed to these restrictions for a period of one year from the
closing of this Offering, except that 30,000 of his shares will not be so
restricted following the closing of this Offering.
45
<PAGE>
As a result of the foregoing lock-up agreements and securities law
restrictions, assuming no exercise of options or warrants after December 31,
1996, 30,000 shares of Common Stock other than the 1,125,000 shares offered
hereby will be eligible for resale without restriction immediately after the
effectiveness of this Offering pursuant to Rule 144 or Rule 144(k); and
approximately 1,220,442 additional shares of Common Stock will be eligible for
resale, pursuant to either Rule 701 or Rule 144, beginning one year from the
initial closing of this Offering. The remaining 227,857 shares will become
eligible for resale from time to time thereafter as the requisite holding
periods required by Rule 144 are met.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least two years (including
the holding period of any prior owner except an affiliate) is entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of (i) one percent of the number of shares of Common Stock then
outstanding (which, assuming no exercise of options or warrants after December
31, 1996, will equal approximately 2,603,299 shares immediately after this
Offering) or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to
such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares to be sold for at
least three years (including the holding period of any prior owner except an
affiliate), is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule
144.
The Securities and Exchange Commission has proposed reducing the initial
Rule 144 holding period to one year and the Rule 144(k) holding period to two
years. There can be no assurance as to when or whether such rule changes will
be enacted. If enacted, such rule change would cause additional shares issued
and paid for between one and two years before the date of sale to be eligible
for public resale upon expiration of the lock-up agreements.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with the holding period requirements of Rule 144. Any employee,
officer or director of or consultant to the Company who purchased his or her
shares pursuant to a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 further provides that non-
affiliates may sell such shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or
notice provisions of Rule 144. Each holder of Rule 701 shares is required to
wait until 90 days after the date of this Prospectus before selling such
shares.
Shortly after this Offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
certain outstanding options or reserved for issuance under the Incentive Plan
or Directors Plan. Based upon the number of outstanding options and reserved
shares as of December 31, 1996, such registration statement would cover
approximately 622,000 shares. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates of the Company, be available for sale in the open market
immediately following the expiration of lock-up provisions. See "Risk
Factors--Shares Eligible for Future Sale."
Additional shares of Common Stock issuable upon the exercise of certain
outstanding options and warrants will become eligible for public sale as a
result of registration rights agreements with the Company or the Company
otherwise agreeing to register such shares. See "Description of Capital
Stock--Registration Rights."
46
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company and the Underwriters named below, the Company has agreed to sell to
the Underwriters for whom National Securities Corporation is acting as
representative (in such capacity, the "Representative"), and the Underwriters
have severally and not jointly agreed to purchase, the Shares set forth below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ -----------
<S> <C>
National Securities Corporation.................................
-----------
Total.......................................................
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by their
counsel and various other conditions. The nature of the Underwriters'
obligations are such that they are committed to purchase all of the above
Securities if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the Shares to the public at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share of Common Stock.
The Underwriters may allow, and such dealers may allow, a concession not in
excess of $ per share of Common Stock to certain other dealers. After this
Offering, the public offering price and concessions and discounts may be
changed by the Representative. The Company has granted to the Underwriters an
option exercisable during the 45-day period commencing on the date of this
Prospectus to purchase from the Company, at the initial public offering price
less underwriting discounts and the non-accountable expense allowance, up to
an aggregate of 168,750 Shares for the sole purpose of covering over-
allotments, if any. To the extent that the Underwriters exercise the option,
each Underwriter will have a firm commitment, subject to certain conditions,
to purchase the number of the additional Shares proportionate to its initial
commitment.
The Representative has informed the Company that it does not expect sales to
discretionary accounts by the Underwriters to exceed five percent of the
Shares offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Representative a non-accountable expense allowance equal
to 3% of the gross proceeds derived from the sale of the Shares underwritten,
of which $50,000 has been advanced.
The Company has agreed to sell to the Representatives for $.0001 each the
Representative's Warrants to purchase from the Company up to 112,500 Shares at
an exercise price per Share equal to 120% of the initial public offering price
per Share offered hereby. The Representative's Warrants are exercisable for a
period of four years commencing one year from the date of this Prospectus and
are restricted from sale, transfer, assignment or hypothecation for a period
of 12 months from the date of this Prospectus, except to officers of the
Representative. The Representative's Warrants provide for adjustment in the
exercise price of the Representative's Warrants in the event of certain
mergers, acquisitions, stock dividends and capital changes. The
47
<PAGE>
Representative's Warrants grant to the holders thereof certain rights with
respect to the registration under the Securities Act of the securities
issuable upon exercise of the Representative's Warrants.
The offering prices set forth on the cover page of this Prospectus should
not be considered indications of the actual values of the Common Stock. Such
prices are subject to change as a result of market conditions and other
factors and no assurance can be given that the Common Stock can be resold at
its public offering price.
The Company, its officers and directors and other stockholders and option
holders holding approximately 1,363,572 shares of Common Stock have agreed
that for a period of 12 months following the closing of this Offering, they
will not offer, sell, contract to sell, grant any option for the sale or
otherwise dispose of any securities of the Company (other than intra-family
transfers or transfers to trust for estate planning purposes), without the
Representative's consent. Additionally, a stockholder holding 107,909 shares
of Common Stock has agreed to those restrictions for a period of 12 months
following the closing of this Offering, except that 30,000 of his shares will
not be so restricted after the closing of this Offering. These restrictions do
not apply to (i) the issuance of shares of Common Stock upon the exercise of
options and warrants outstanding prior to the sale of the Shares offered
hereby, or (ii) the issuance of shares of Common Stock, pursuant to the
Underwriters' over-allotment option.
The Company has agreed that for a period of five years from the closing of
the sale of the Shares offered hereby, it will nominate for election as a
director a person designated by the Representative, and during such time as
the Representative has not exercised such right, the Representative shall have
the right to designate an observer, who shall be entitled to attend all
meetings of the Board and receive all correspondence and communications sent
by the Company to the members of the Board. The Representative has not yet
identified to the Company the person who is to be nominated for election as a
director or designated as an observer. The Company has agreed to reimburse
designees of the Representative for their out-of-pocket expenses incurred in
connection with their attendance of meetings of the Board.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to
copies of each such agreement which are filed as exhibits to the Registration
Statement, of which this Prospectus forms a part. See "Available Information."
Determination of Offering Price
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price will be determined by
negotiations between the Company and the Representative. Among the factors
considered in determining the initial public offering price will be the
history and the prospects of the Company and the industry in which it
operates, the past and present operating results of the Company and the trends
of such results, the previous experience of the Company's executive officers
and the general condition of the securities markets at the time of this
Offering.
LEGAL MATTERS
The validity of the issuance of the Shares offered hereby will be passed
upon for the Company by Fenwick & West LLP, Palo Alto, California, and certain
legal matters relating only to patent matters will be passed upon for the
Company by Davis, Graham & Stubbs LLP, Denver, Colorado. Certain legal matters
in connection with this Offering will be passed upon for the Underwriters by
Camhy Karlinsky & Stein LLP, New York, New York.
48
<PAGE>
EXPERTS
The balance sheets as of December 31, 1995 and 1996, and the statements of
operations, stockholders' (deficit) equity, and cash flows for the years then
ended, have been audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report thereon appearing elsewhere herein
and in the Registration Statement of which this Prospectus forms a part, and
are included in reliance upon such report 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"), Denver, Colorado, a Registration Statement under the Securities
Act with respect to the shares of Common Stock. This Prospectus does not
contain all of the information set forth in the Registration Statement and its
exhibits. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and
exhibits. Statements contained in this Prospectus regarding the contents of
any contract or any other document to which reference is made are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement, including the exhibits
thereto, may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain prescribed rates.
49
<PAGE>
OSMOTICS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants.............. F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' (Deficit) Equity............................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Osmotics Corporation:
We have audited the accompanying balance sheets of OSMOTICS CORPORATION (a
Colorado corporation) as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' (deficit) equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Osmotics Corporation as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Arthur Andersen LLP
Denver, Colorado,
January 31, 1997
F-2
<PAGE>
OSMOTICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
--------- -----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash................................................. $ 37,352 $ 90,930
Trade accounts receivable, net of allowance for
doubtful accounts of $0 and $15,000, respectively... 50,343 478,306
Inventory, net of reserve for obsolesence of $0 and
$15,000, respectively............................... 183,694 234,113
Prepaid expenses..................................... 8,293 65,247
--------- -----------
Total current assets............................... 279,682 868,596
--------- -----------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment.................... 12,217 105,490
Less: Accumulated depreciation....................... (6,593) (22,580)
--------- -----------
Property and equipment, net.......................... 5,624 82,910
--------- -----------
OTHER ASSETS, net of accumulated amortization of $6,112
and $150, respectively................................ 5,467 15,940
--------- -----------
DEFERRED INITIAL PUBLIC OFFERING COSTS................. -- 404,347
--------- -----------
Total assets......................................... $ 290,773 $ 1,371,793
========= ===========
LIABILITIES AND
---------------
STOCKHOLDERS' (DEFICIT) EQUITY
------------------------------
CURRENT LIABILITIES:
Accounts payable..................................... $ 213,573 $ 281,370
Accrued initial public offering costs................ -- 365,811
Accrued compensation and other accrued liabilities... 150,437 275,648
Deferred revenue..................................... -- 141,130
Bridge financing, net of unamortized discount of
$90,000............................................. -- 660,000
Current portion of notes payable..................... 193,948 128,500
Current portion of capital leases payable............ -- 16,470
--------- -----------
Total current liabilities............................ 557,958 1,868,929
--------- -----------
LONG-TERM LIABILITIES:
Notes payable, net of current portion................ 5,653 --
Capital leases payable............................... -- 38,601
--------- -----------
Total long-term liabilities.......................... 5,653 38,601
--------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock, no par value, 6,000,000 shares autho-
rized, 1,153,770 and 1,478,299 shares issued and
outstanding at December 31, 1995 and 1996, respec-
tively.............................................. 609,414 1,815,839
Warrants............................................. 7,935 381,078
Accumulated deficit.................................. (890,187) (2,732,654)
--------- -----------
Total stockholders' (deficit) equity................. (272,838) (535,737)
--------- -----------
Total liabilities and stockholders' (deficit) equity. $ 290,773 $ 1,371,793
========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
OSMOTICS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1995 1996
--------- -----------
<S> <C> <C>
REVENUES............................................... $ 328,465 $ 1,254,800
COST OF PRODUCTS SOLD.................................. 160,000 435,201
--------- -----------
GROSS PROFIT........................................... 168,465 819,599
OPERATING EXPENSES:
General and administrative........................... 292,742 541,600
Selling and marketing................................ 600,087 1,587,765
Production management................................ 66,059 90,889
--------- -----------
LOSS FROM OPERATIONS................................... (790,423) (1,400,655)
OTHER INCOME (EXPENSE):
Interest expense..................................... (20,285) (443,480)
Other income (expense), net.......................... -- 1,668
--------- -----------
NET LOSS............................................... $(810,708) $(1,842,467)
========= ===========
PER SHARE DATA (Note 2):
Pro forma net loss per common and common equivalent
share............................................... $ (0.68) $ (1.27)
========= ===========
Shares used in computing pro forma net loss per
common and common equivalent share.................. 1,186,733 1,446,012
========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
OSMOTICS CORPORATION
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
-------------------- ------------------ ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT
--------- ---------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31,
1994................... 836,362 $ 25,000 34,403 $ 3,187 $ (79,479)
Common stock issued for
cash at $.74 per share
in January 1995........ 68,181 50,000 -- -- --
Common stock issued for
services in February,
April and June 1995, at
$1.10 per share........ 11,363 12,501 -- -- --
Stock options exercised
in April 1995 at $1.10
per share.............. 45,454 50,000 -- -- --
Common stock issued for
cash at $1.10 per share
in June and July 1995.. 45,454 50,000 -- -- --
Warrants issued to
lenders for purchase of
common stock at $1.10
per share.............. -- -- 61,360 4,748 --
Private placement of
common stock for cash
at $3.19 per share, net
of offering costs of
$46,879................ 146,956 421,913 -- -- --
Net loss................ -- -- -- -- (810,708)
--------- ---------- ------- -------- -----------
BALANCES, December 31,
1995................... 1,153,770 609,414 95,763 7,935 (890,187)
Private placement of
common stock for cash
at $3.19 per share, net
of offering costs of
$26,631................ 92,569 268,665 -- -- --
Common stock issued for
services--
In April 1996, at $3.19
per share............. 15,673 50,000 -- -- --
In June 1996, at $4.40
per share............. 2,045 9,000 -- -- --
In July 1996, at $4.40
per share............. 409 1,800 -- -- --
Private placement of
common stock for cash
at $4.40 per share, net
of offering costs of
$48,800................ 121,106 484,200 -- -- --
Warrants issued in
connection with Bridge
Financing.............. -- -- 93,750 * 375,000 --
Exercise of warrants
issued to lenders at
$1.10 per share in July
1996................... 22,727 26,857 (22,727) (1,857) --
Private placement of
common stock for cash
at $5.94 per share, net
of offering costs of
$49,897................ 70,000 365,903 -- -- --
Net loss................ -- -- -- -- (1,842,467)
--------- ---------- ------- -------- -----------
BALANCES, December 31,
1996................... 1,478,299 $1,815,839 166,786 $381,078 $(2,732,654)
========= ========== ======= ======== ===========
</TABLE>
- --------
* The estimated number of shares of common stock issuable upon exercise of
these warrants will be determined by the Company's initial public offering
price per share of common stock, which is assumed to be $8.00 per share
(see Notes 1 and 11).
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
OSMOTICS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1995 1996
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(810,708) $(1,842,467)
Adjustments--
Depreciation and amortization..................... 16,360 79,332
Amortization of debt discount (Note 4)............ -- 285,000
Common stock issued for services.................. 12,501 10,800
Provision for bad debt............................ -- 15,000
Inventory reserve................................. -- 15,000
Changes in--
Accounts receivable............................. (50,343) (442,963)
Inventory....................................... (183,694) (65,419)
Prepaid expenses and other assets............... (8,070) (56,956)
Accounts payable and accrued liabilities........ 288,873 193,853
Deferred revenue................................ -- 141,130
--------- -----------
Net cash flows from operating activities...... (735,081) (1,667,690)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (12,217) (12,535)
Other assets........................................ (750) (8,373)
--------- -----------
Net cash flows from investing activities........ (12,967) (20,908)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............. 618,792 1,269,096
Proceeds from issuance of notes payable and war-
rants.............................................. 135,000 21,000
Proceeds from Bridge Financing...................... -- 750,000
Payments on notes payable........................... -- (96,448)
Stock issuance costs................................ -- (111,805)
Debt issuance costs................................. -- (64,000)
Payments on capital leases.......................... -- (25,667)
--------- -----------
Net cash flows from financing activities...... 753,792 1,742,176
--------- -----------
NET INCREASE IN CASH.................................. 5,744 53,578
CASH, beginning of period............................. 31,608 37,352
--------- -----------
CASH, end of period................................... $ 37,352 $ 90,930
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.............................. $ -- $ 22,467
========= ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Property purchased under capital leases............. $ -- $ 80,738
Discount of notes payable equal to warrants issued
to lenders......................................... 4,748 375,000
Common stock issued for--
Stock offering costs.............................. 36,479 13,521
Accrued liabilities for--
Stock offering costs.............................. 10,400 --
Deferred initial public offering costs............ -- 365,811
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS RISKS
Osmotics Corporation (the "Company") develops and markets cosmetics skin
care products, including products using the Company's transdermal delivery
method. Its products are currently produced, based on Company specifications,
by independent contract manufacturers.
The Company was initially incorporated in the state of Colorado on August
18, 1993 as Porter Skinsystems, Ltd., and was subsequently renamed Osmotics
Corp. on November 1, 1993. On April 19, 1996, the Company was renamed Osmotics
Corporation. The Company intends to reincorporate in the state of Delaware
prior to the effective date of its initial public offering (Note 11). The
Company's corporate office is located in Denver, Colorado and its customers
are primarily located in the United States, England and France.
The Company began shipping its first product in April 1995 and has a limited
operating history. It has incurred losses and negative cash flow from
operations since its inception. The success of future operating results will
depend on many factors, including market acceptance and demand for the
Company's products, the intensity of future product and price competition
experienced, effective expansion of its sales force and distribution channels,
its ability to control costs and manage growth, and general economic
conditions. There can be no assurance that the Company will ever generate
significant revenues or achieve or sustain profitability. The Company's
revenues to date have been principally derived from four customers (Note 9),
the loss of which would have a material adverse effect on the Company's
results of operations and financial condition. During the period of time
required to achieve profitable operations, the Company will require additional
financing which may not be available.
The Company's capital requirements to date have been provided through
private placements of common stock (Note 3), notes payable and the Bridge
Financing (Note 4). At December 31, 1996, the Company's current liabilities
exceeded its current assets by approximately $1 million. The Company needs
additional funding to continue its operations through the remainder of 1997.
Consequently, there is substantial doubt as to the ability of the Company to
continue as a going concern. The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern and do not
include any adjustments that might result from the outcome of this
uncertainty. The Company plans to file a registration statement and sell
shares of its common stock in an initial public offering (the "Offering")
during the first quarter of 1997 (Note 11). If the Offering is delayed or
suspended, other financing sources will be needed. The Company currently has
no commitments for such alternative financing and has no assurance it would be
available.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost includes the purchase price of components and amounts due to
contract manufacturers based on items produced for the Company. Inventories
consist principally of raw materials and purchased components. Finished
products are generally shipped upon completion of production.
Property and Equipment
Property and equipment are stated at cost and depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, generally two to five years. Depreciation expense for the years ended
December 31, 1995 and 1996 was $6,593 and $20,063, respectively. Maintenance
and repairs are expensed as incurred and improvements are capitalized.
F-7
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Earnings Per Share
Earnings per share is computed using the weighted average number of common
and common equivalent shares outstanding for each period. Common equivalent
shares include stock options and warrants to purchase the Company's common
stock. Pursuant to Securities and Exchange Commission Accounting Staff
Bulletin No. 83, common and common equivalent shares issued during the twelve
months immediately preceding the Company's initial public offering filing date
have been included in the calculation of common and common equivalent shares,
regardless of whether their inclusion is dilutive, using the treasury stock
method and the anticipated public offering price as if they were outstanding
for all periods. Common stock equivalents, excluding those issued within
twelve months immediately preceding the Company's initial public offering
filing date, are excluded for loss periods because their inclusion would be
anti-dilutive (i.e., it would reduce the reported loss per share).
Revenue Recognition
Revenues are recognized upon shipment of products to customers. The Company
may accept product returns in its discretion, but retailers are not granted
the right to return unsold products. Generally, returns accepted by the
Company represent products returned to retailers by consumers and the Company
provides an allowance for such estimated returns which is included in deferred
revenue. Certain customers have full rights to return unsold products. These
shipments are treated as consignments and related revenue is deferred until
the products are sold by the consignees to consumers.
Credit Risk/Foreign Currency Risk/Off-Balance-Sheet Risk
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company's principal
customers (Note 9) accounted for 87% and 68% of the Company's accounts
receivable as of December 31, 1995 and 1996, respectively.
Transactions denominated in currencies other than U. S. dollars are recorded
based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period end translation) or
realized (upon settlement of the transactions). Certain sales during 1996 were
denominated in foreign currencies; however, no significant foreign exchange
gains or losses were incurred.
The Company has no significant financial instruments with off-balance-sheet
risk of accounting loss such as foreign exchange contracts, options contracts
or other foreign hedging arrangements.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, short-term trade
receivables and payables and notes and capital leases payable. The carrying
values of cash and short-term trade receivables and payables approximate fair
value. The fair value of notes and capital leases payable is estimated based
on current rates available for similarly secured debt with similar maturities,
and at December 31, 1996, approximates the carrying value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The current provision for income taxes represents actual or estimated
amounts payable or refundable on tax returns filed or to be filed for each
year. Deferred income tax assets and liabilities are recorded for the expected
future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets and
liabilities and carryforwards. The overall change in deferred tax assets and
liabilities for the period measures the deferred tax expense for the period.
Effects of changes in tax laws on deferred tax assets and liabilities are
reflected as adjustments to tax expense in the period of enactment. Deferred
tax assets are recognized for the expected future tax effects of all
deductible temporary differences, loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, more likely than
not based on current circumstances, are not expected to be realized (see Note
8).
(3) STOCKHOLDERS' (DEFICIT) EQUITY
The Board of Directors intends to approve the reincorporation of the Company
in the state of Delaware, which is expected to be consummated before the
effectiveness of the Offering. The reincorporation will result in a change in
the authorized capital stock of the Company to 15,000,000 shares of $0.001 par
value common stock and 10,000,000 shares of $0.001 par value preferred stock.
The reincorporation will be effected through a merger with an effective
exchange ratio of 2.2 shares of common stock of the Colorado corporation for
one share of common stock of the Delaware corporation. All share and per share
amounts included in the accompanying financial statements and notes for all
periods presented have been retroactively adjusted to reflect the stock
exchange.
Effective August 30, 1994, the Company issued 90,909 shares of common stock
to Dermal Technologies in consideration for certain services provided to the
Company and the Company recorded $20,000 of expense relating to these
services. Under the terms of a related agreement, Dermal Technologies is
entitled to receive a 1% royalty on all sales of Antioxidant Skin Care Derms.
The term of the royalty agreement terminates on the effective date of an
initial public offering.
Pursuant to a private placement memorandum dated August 1, 1995, the Company
issued 146,956 and 92,569 shares of common stock in exchange for cash of
$468,792 and $295,296 during 1995 and 1996, respectively.
Pursuant to a March 30, 1996 private placement memorandum, the Company
authorized the issuance of up to 227,272 shares of common stock at $4.40 per
share. As of December 31, 1996, the Company had received cash proceeds of
$533,000 in connection with the issuances of 121,106 shares of common stock.
In November and December 1996, the Company sold a total of 70,000 shares of
common stock in a private placement transaction, in reliance on Regulation S
of the Securities Act, to investors at $5.94 per share. Proceeds to the
Company, net of placement fees were $365,903.
Effective February 1, 1996, the Company entered into a six month agreement
with a consultant to provide consulting services to the Company in exchange
for a monthly fee comprised of shares of common stock valued at $1,800 and
$1,800 in cash each month over the term of the agreement. The Company recorded
the shares of common stock based on their market value at the date of issuance
to the consultant. As of December 31, 1996, the Company has issued 2,454
shares of the Company's common stock for $4.40 per share related to this
transaction, and the Company recognized the related $21,600 of consulting fees
in general and administrative expense in the accompanying 1996 statement of
operations.
F-9
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock Options
At various dates since inception, the Company's Board of Directors has
granted "nonqualified" stock options, as defined by the Internal Revenue Code
and related regulations, to purchase shares of the Company's common stock to
officers, employees, directors and consultants.
In February 1997, the Board of Directors adopted the 1997 Equity Incentive
Plan (the "Incentive Plan"). The Incentive Plan, which is expected to be
approved by the stockholders, is administered by a committee of the Board of
Directors (the "Committee") and becomes effective only upon the effective date
of a registration statement for an initial public offering.
The Incentive Plan provides that the Committee may award up to 300,000
shares of the Company's common stock in the form of nonqualified or incentive
stock options or stock bonuses and the issuance of restricted stock by the
Company to its employees, directors, consultants, independent contractors and
advisers. Nonqualified stock options or restricted stock awards to purchase
the Company's common stock may be awarded at a price not less than 85% of the
fair market value of the stock at the date of the award. Incentive stock
options must be awarded at a price not less than 100% of the fair market value
of the stock at the date of the award, or 110% of the fair market value for
awards to more than 10% stockholders. Options granted under the Incentive Plan
may have a term of up to 10 years. The Incentive Plan will terminate in
February 2007, unless terminated earlier in accordance with its provisions.
In February 1997, the Board of Directors adopted the 1997 Directors Stock
Option Plan (the "Directors Plan") and reserved a total of 50,000 shares of
Common Stock for issuance thereunder. The Directors Plan is expected to be
approved by the stockholders and becomes effective only upon the effective
date of a registration statement for an initial public offering. Members of
the Board of Directors who are not employees of the Company, or any parent,
subsidiary or affiliate of the Company, are eligible to participate in the
Directors Plan. Each eligible director who first becomes a member of the Board
of Directors on or after the date that the Directors Plan becomes effective
will automatically be granted an option to acquire 15,000 shares on the date
such director first becomes a director. At each annual meeting of stockholders
of the Company, each eligible director will automatically be granted an
additional option to purchase 1,000 shares if such director has served
continually as a member of the Board since the date of grant of such
director's initial option, or if such director did not receive an initial
option, such director has served continuously as a member of the Board of
Directors since the Directors Plan became effective. All options issued under
the Directors Plan will vest as to one-forty-eighth of the shares subject to
the option per month after the date of grant, provided the optionee continues
as a member of the Board of Directors or as a consultant of the Company. The
exercise price of all options granted under the Directors Plan will be the
fair market value of the common stock on the date of grant.
F-10
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of
compensation cost for such plans using the intrinsic value based method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), provided that pro forma disclosures are made of net income or loss
and net income or loss per share, assuming the fair value based method of SFAS
123 had been applied. The Company has elected to account for its stock-based
compensation plans under APB 25; accordingly, for purposes of the pro forma
disclosures presented below, the Company has computed the fair values of all
options granted during 1995 and 1996, using the Black-Scholes pricing model
and the following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Risk-free interest rate............................. 6.6% 5.5%
Expected dividend yield............................. 0% 0%
Expected lives outstanding 3.0 years 2.0 years
Expected volatility................................. 19.46% 19.46%
</TABLE>
To estimate lives of options for this valuation, it was assumed options will
be exercised upon becoming fully vested and the Company has completed an
initial public offering of its common stock. All options are initially assumed
to vest. Cumulative compensation cost recognized in pro forma net income or
loss with respect to options that are forfeited prior to vesting is adjusted
as a reduction of pro forma compensation expense in the period of forfeiture.
Because the Company's common stock is not yet publicly traded, the expected
market volatility was based on an approximation of the volatility of the
NASDAQ index for 1996. Actual volatility of the Company's common stock may
vary. Fair value computations are highly sensitive to the volatility factor
assumed; the greater the volatility, the higher the computed fair value of
options granted.
The total fair value of options granted was computed to be approximately
$45,053 and $79,356 for the years ended December 31, 1995 and 1996,
respectively. These amounts are amortized ratably over the vesting periods of
the options or recognized at date of grant if no vesting period is required.
Pro forma stock-based compensation, net of the effect of forfeitures, was
$36,284 and $78,346 for 1995 and 1996, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and pro forma net loss per
common share would have been reported as follows:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C> <C>
Net loss: As reported $810,708 $1,842,467
Pro forma $846,992 $1,920,813
EPS: As reported $(0.68) $(1.27)
Pro forma $(0.71) $(1.33)
</TABLE>
Weighted average shares used to calculate pro forma net loss per share were
determined as described in Note 2, except in applying the treasury stock
method to outstanding options, net proceeds assumed received upon exercise
were increased by the amount of compensation cost attributable to future
service periods and not yet recognized as pro forma expense.
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-11
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of stock options as of December 31, 1995 and 1996 and changes
during the years then ended is presented below:
<TABLE>
<CAPTION>
1995 1996
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...... 118,181 $ .55 169,894 $1.08
Granted............................. 120,409 $1.72 103,060 $4.64
Canceled............................ (23,242) $1.10 (954) $3.19
Exercised........................... (45,454) $1.10 -- --
------- -------
Outstanding at end of year............ 169,894 $1.08 272,000 $2.42
======= =======
Weighted average fair value of options
granted.............................. $ .374 $ .77
======= =======
</TABLE>
The following table summarizes information about the options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.22.................... 72,727 7.1 years $ .22 72,727 $ .22
$1.10................... 68,181 8.0 years $1.10 68,182 $1.10
$3.19-$5.94............. 131,092 9.8 years $4.66 77,515 $2.55
------- -------
$.22-$5.94.............. 272,000 8.3 years $2.42 218,424 $1.91
======= =======
</TABLE>
Summary of Potentially Dilutive Securities Outstanding
In addition to the options described above, the Company has issued certain
warrants for the purchase of common stock described elsewhere herein. A
summary of these potentially dilutive securities outstanding as of December
31, 1996 (and subsequently, as indicated) follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICE
--------- ----------
<S> <C> <C>
Outstanding stock options per above.................. 272,000 $.22-$5.40
Warrants issued to lenders (Note 4).................. 73,036 $ 1.10
Bridge Warrants (Note 4)............................. 93,750* $ .022
Additional issuances subsequent to December 31, 1996:
Bridge Warrants issued in January 1997 (Note 4).... 25,000* $ .022
Options to be granted in connection with employment
agreements
effective upon closing of the Offering (Note 11).. 150,000 $ 8.80 **
</TABLE>
- --------
* The estimated number of shares of common stock issuable upon exercise of
these warrants will be determined by the Company's initial public offering
price per share of common stock, which is assumed to be $8.00 per share.
** 110% of assumed initial public offering price of $8.00 per share.
F-12
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) BRIDGE FINANCING AND NOTES PAYABLE
During 1996, the Company entered into certain agreements ("Bridge
Financing") with individual investors (the "Bridge Investors") to obtain
bridge loans ("Bridge Notes") in the principal amount of $750,000. Each Bridge
Note bears interest at 12% per annum until six months following its issuance,
and 15% per annum thereafter, until maturity. Principal and interest under
each Bridge Note is due in four equal quarterly installments beginning nine
months following its issuance, unless an initial public offering becomes
effective before that date, at which time principal will be due five days
after receiving funds from the initial public offering. The Bridge Notes are
secured by a security interest, granted to a representative of the Bridge
Investors, in substantially all of the assets of the Company, including its
intellectual property. In connection with the Bridge Notes, the Company
granted warrants (the "Bridge Warrants") to purchase shares of the Company's
common stock. The Bridge Warrants entitle the holder to acquire for total
consideration of $.022 per Bridge Warrant a number of shares of common stock
equal to the principal amount of the holder's Bridge Notes ($750,000 in the
aggregate) divided by the initial public offering price of one share of common
stock. If an offering is not consummated before one year following the date a
Bridge Warrant is issued, then such Bridge Warrant will entitle the holder to
acquire a number of shares of common stock equal to the principal amount of
the holder's Bridge Note divided by $4.40 per share. In addition, under the
terms of the Bridge Financing, the Company has paid a placement fee and legal
costs of $72,500, which has been recorded as deferred debt issuance costs and
is being amortized to interest expense over the life of the notes.
The Company has accounted for the Bridge financing as a borrowing and a sale
of equity securities (i.e., the warrants). The $750,000 gross proceeds were
allocated between the debt and the warrants based on their relative fair
values at the date of issuance. Because of the nominal exercise price of the
warrants, the fair value of the warrants was estimated to approximate the fair
value of the underlying common stock (i.e., $750,000 in the aggregate). The
fair value of the debt is its principal amount of $750,000. Consequently, the
debt was recorded at an initial discounted amount of $375,000 and the discount
is being amortized to interest expense ($285,000 for the year ended December
31, 1996) over the term of the borrowing. The warrants were recorded at
$375,000. The $62,000 placement fee was treated as deferred debt expense and
is being amortized to interest expense over the life of the borrowings.
If the Company does not repay each Bridge Note within six months following
its issuance, then that Bridge Note allows for extended payment terms. If the
Company defaults in the payment of any of these installments, then holders of
approximately 884,074 shares of common stock have agreed to vote their shares
in favor of the directors designated by a representative of the Bridge
Investors, and the Company has agreed in certain circumstances to cause
additional shares to become subject to the voting agreement so that the
representative of the Bridge Investors can elect a majority of the directors
of the Company.
In January 1997, the Company issued additional Bridge Notes in the aggregate
principal amount of $200,000 and additional Bridge Warrants, in reliance on
Regulation S of the Securities Act.
During 1994 and 1995, the Company borrowed $203,949 from individual
investors (the "Notes"). In connection with the issuance of the Notes, the
investors received warrants to purchase 95,763 shares of the Company's common
stock exercisable at $1.10 per share. The warrants expire at the earlier of
five years from the date of the Notes or the effective date of an initial
public offering. The warrants were valued at their estimated fair value of
$7,935 and this amount is reflected in stockholders' equity and as a discount
of the notes payable. The discount is being amortized as interest expense
($3,505 and $4,348 for the years ended December 31, 1995 and 1996,
respectively) over the term of the Notes. The Notes are due at various dates
through January 1997, or upon a public offering of the Company's common stock.
The Notes bear interest at 10% per annum and are collateralized by a pledge of
certain equity securities owned by the Company's president. During 1996, two
F-13
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
lenders exercised such warrants to purchase 22,727 shares of common stock and
the Company repaid three of the Notes totaling $96,448.
In November 1996, the Company entered into an unsecured promissory note with
a shareholder of the Company to borrow up to $30,000 to fund additional
infomercial costs (Note 6). As of December 31, 1996, the Company had drawn
approximately $21,000 on this note. The note bears interest at 10% per annum
and it matures at the earliest of (i) November 1, 1997, (ii) five business
days following the closing of a qualified initial public offering, (iii) five
business days following the closing of a funding whereby the Company receives
gross proceeds of $2,000,000, or (iv) on the dissolution or winding up of the
Company.
The aggregate maturities of the Bridge Financing and the notes payable as of
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................. $788,500
--------
$788,500
========
</TABLE>
(5) CAPITAL LEASES
During 1996, the Company financed certain office furniture and equipment
through capital leases totaling $80,738.
The following is a schedule of future minimum lease payments under capital
leases, together with the present value of net minimum lease payments, as of
December 31, 1996:
<TABLE>
<S> <C>
1997............................................................ $ 21,374
1998............................................................ 21,031
1999............................................................ 14,032
2000............................................................ 8,382
2001............................................................ --
Thereafter...................................................... --
Less: interest.................................................. (9,748)
--------
Present value of future minimum lease payments.................. 55,071
Less: current portion........................................... (16,470)
--------
Capital lease obligations, long-term............................ $ 38,601
========
</TABLE>
(6) LICENSE AND DISTRIBUTION AGREEMENTS
Infomercial
In March 1996, the Company and VideOne Marketing, Inc. ("VideOne") entered
into an Infomercial Production and Product Management Agreement (the "VideOne
Agreement") to produce a Wrinkle Patch infomercial. Additionally, pursuant to
the VideOne Agreement VideOne has the exclusive right worldwide, subject to
certain exceptions, (i) to manage the direct response marketing and airing of
the infomercial and (ii) to distribute The Wrinkle Patch, including updates
and revisions, in certain direct response media categories.
In connection with an agreement with a shareholder of the Company, the
shareholder will pay VideOne for the set-up and production costs totaling
$98,898 in consideration for certain future royalties based solely on future
sales of Company products by VideOne.
F-14
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Distribution Agreements
In March 1996, the Company entered into a distribution agreement with an
individual shareholder, whereby this individual has exclusive rights to
market, sell and distribute all products manufactured by the Company in a
defined territory. At the time of entering such agreement, this individual
held 45,454 shares of the Company's common stock, which this individual
continues to hold. The distribution agreement expires on December 31, 2001,
with an option to extend for two additional five-year periods. The
distribution agreement is subject to earlier termination if this individual
fails to meet certain performance standards set forth in the agreement.
In May 1996, the Company entered into a distribution agreement with a third
party whereby the third party has the exclusive right to market, sell and
distribute all skin care products manufactured by the Company under the brand
name Spa-Sante to professional beauty establishments, including spas and
beauty salons, located in North America, Central America, Europe, the Middle
East and Africa. The third party distributor will market, sell and distribute
the products on behalf of the Company and retain a percentage of the selling
price of the products sold. Beginning in 1997, the third party has agreed to
pay all costs of sales. This agreement terminates in July 2001, and is
renewable at the third party distributor's election for two successive five-
year periods. The agreement is subject to earlier termination if the third
party distributor fails to satisfy certain performance goals.
In January 1997, the Company entered into a distribution agreement with a
third party whereby the third party has the exclusive right to market and sell
in France cosmetic products manufactured by the Company. The agreement
terminates in January 2000, and is renewable for additional periods of three
years each. The agreement is subject to earlier termination if the third party
fails to meet certain performance standards set forth in the agreement.
Licensing
The Company has agreed to supply on a non-exclusive basis to a third party
skin patches for inclusion in products to be sold by the third party under its
own label in all countries, other than countries located in the Pacific Rim.
The third party has agreed not to market and sell such products in the upscale
market (which is defined in the contract), and the Company has agreed not to
sell skin patches under the Osmotics trademark except in the up-scale market.
This agreement terminates in January 2002, and is renewable for successive
five-year periods unless either party elects otherwise.
(7) COMMITMENTS AND CONTINGENCIES
During 1995 and 1996, the Company sold common stock to several investors in
private placement transactions. In certain states in which securities were
sold, the Company may not have complied with all applicable requirements in
order to satisfy the exemptions from the registration or qualification
requirements in those states. Pursuant to the provisions of applicable state
laws, the Company delivered to certain stockholders, none of whom is
affiliated with the Company or any of its directors or officers, offers to
repurchase the shares they acquired, and under the laws of such states the
failure to accept such offers made in compliance with such state laws within
certain time periods (generally, 30 days from receipt of such offer)
terminates such purchasers' rescission rights under such state laws. All of
those stockholders have declined in writing the Company's offer to repurchase
their shares. As a result, the Company believes that the stockholders no
longer have rescission rights under such state laws respecting their shares.
From October through December 1996, in additional closings of the Bridge
Financing, the Company issued Bridge Notes in the aggregate principal amount
of $250,000 and additional Bridge Warrants to purchase an estimated
approximately 31,250 shares of Common Stock. Such issuances may not have
complied with all applicable requirements to satisfy exemptions from the
registration or qualification requirements under securities laws of the United
States and certain states in which those securities were issued, possibly
entitling the
F-15
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
purchasers of those securities to certain remedies, including rescission
rights, and possibly subjecting the Company and its officers and directors to
potential sanctions. The Bridge Notes will, however, be repaid in full at the
closing of this Offering, and to date no purchaser has made a claim for
rescission or other remedies. As a result, the Company believes that even if
such transactions were found to have violated federal or state securities
laws, such violations would not have a material adverse effect on the
Company's business, operating results or financial condition, although there
can be no assurances that this would be the case.
In January 1997, the Company received a letter from VideOne Marketing, Inc.
relating to the VideOne Agreement. The letter asserts, among other things,
that the Company breached certain of VideOne's distribution rights and that
the Company breached its obligations under the VideOne Agreement by failing to
pay VideOne royalties that VideOne alleges are owed with respect to certain
direct marketing sales of The Wrinkle Patch over certain television channels.
The letter also asserts that a dispute exists concerning which party is
obligated to pay for additional editing and production costs previously
incurred and that are expected to be incurred in connection with further
development of the infomercial. No complaint has been filed, and the Company
is unable to predict whether a complaint will be filed in the future relating
to the subject matter of the letter. The Company is investigating the
allegations made in the letter and believes that, if a complaint is filed, it
may have a number of defenses to any such claim. In addition, the Company is
investigating whether it may have claims against VideOne relating to VideOne's
performance under the VideOne Agreement. Although the Company believes that
the matters raised in the letter will be resolved without material liability
to the Company, there can be no assurance that this will be the case and, if
VideOne were finally to prevail in its claims against the Company, such
outcome could have a material adverse effect on the Company's business,
operating results and financial condition.
In April 1996, the Company entered into a lease for office space under a
noncancelable lease agreement which expires in 1999. The Company had
previously leased offices on a month-to-month basis. The Company also leases
certain office equipment under lease agreements which terminate in 1999.
Future minimum commitments under noncancelable leases in effect as of December
31, 1996 are as follows:
<TABLE>
<S> <C>
Year ended December 31,
1997........................................................... $ 45,428
1998........................................................... 45,428
1999........................................................... 37,856
--------
$128,712
========
</TABLE>
Rent expense for the years ended December 31, 1995 and 1996, was
approximately $22,000 and $44,000, respectively.
The Company and its cosmetic products are subject to regulation by the Food
and Drug Administration ("FDA") and the Federal Trade Commission ("FTC"), as
well as various other federal, state and local authorities. Such regulation
relates primarily to the ingredients, packaging, labeling, advertising and
marketing of the Company's products. Failure to comply with FDA requirements
in such matters can result in severe civil and criminal penalties, including
seizure of product, injunction against production, distribution, sales, and
prosecution. Cosmetics, in contrast to new drugs, do not require premarket
notification to, or approval by, the FDA, but must be properly labeled and
manufactured. The Company believes its products meet the statutory definition
of cosmetics and are not currently drugs. The FTC oversees the advertising of
cosmetic products, and prohibits false or misleading advertising. Management
believes it has taken appropriate steps to monitor and assure compliance with
material aspects of the above regulations. However, an assertion by the FDA,
FTC or similar authority of noncompliance by the Company could have a material
adverse effect on the Company's results of operations and financial condition.
F-16
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company is subject to various claims and business disputes in the
ordinary course of business. Management does not anticipate that the ultimate
outcome of these issues will have a material impact on the Company's financial
position or results of operations.
(8) INCOME TAXES
From its inception, the Company has generated losses for both financial
reporting and tax purposes. The federal net operating loss carryforward is
approximately $2,200,000 as of December 31, 1996. The deferred tax asset
related to this benefit of approximately $814,000 has been fully offset by a
valuation allowance, due to the Company's history of operating losses.
The Company's net operating loss carryforwards expire at various dates
through the year 2011. The Tax Reform Act of 1986 contains provisions which
may limit the net operating loss carryforwards available for use in any given
year if certain events occur, including changes in ownership interests.
(9) SIGNIFICANT CUSTOMERS
Below is a listing of major customers, each of which comprised more than 10%
of revenue:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Customer 1.............................. $288,639 88% $467,606 37%
Customer 2.............................. $ 38,855 12% $204,181 16%
Customer 3.............................. $ -- --% $229,374 18%
Customer 4.............................. $ -- --% $134,925 11%
</TABLE>
The Company's sales within the United States were $328,465 and $850,374 for
the years ended December 31, 1995 and 1996, respectively. The Company's sales
to retailers in London, England and Paris, France were $0 and $404,426 for the
years ended December 31, 1995 and 1996, respectively.
(10) ACCRUED COMPENSATION AND OTHER ACCRUED LIABILITIES
The components of accrued compensation and other accrued liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
-------- --------
<S> <C> <C>
Accrued consulting fees................................ $ 85,000 $121,000
Accrued commissions and royalties...................... 38,295 11,376
Accrued interest....................................... 17,146 66,409
Accrued payroll related items.......................... 9,996 56,863
Accrued audit fees..................................... -- 20,000
-------- --------
$150,437 $275,648
======== ========
</TABLE>
(11) SUBSEQUENT EVENTS
In January 1997, the Board of Directors authorized management of the Company
to resume the process, initiated in July 1996, of preparing a Registration
Statement with the Securities and Exchange Commission for the Company's
initial public offering. Once effective, the Registration Statement may permit
the Company to
F-17
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
sell shares of its common stock to the public. As of December 31, 1996, the
balance sheet includes approximately $404,000 of deferred costs directly
related to the Offering. The Company will also sell to the underwriter, upon
closing of the offering, warrants to purchase shares of common stock at an
exercise price equal to 120% of the initial public offering per share.
In 1997, the Company entered into employment agreements with Steven
and Francine Porter that are to become effective on the closing date of the
Offering. The agreements provide for salaries of $150,000 and $125,000 to
Steven and Francine Porter, respectively. Each agreement has a three year
term. The agreements also provide for grants of stock options of 100,000 and
50,000 shares to Steven and Francine Porter, respectively, at an exercise
price equal to 110% of the initial public offering price. On the effective
date of the offering 25% of the options become exercisable and the balance of
the shares vest at 25% at the end of each year thereafter. The agreements
provide that upon termination of employment by the Company without cause, the
respective officer is entitled to severance compensation for the lesser of 18
months or the remaining term of the employment agreement of his or her salary,
payable at the same time as the salary payments would otherwise have been
paid.
F-18
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 23
Management................................................................ 34
Certain Transactions...................................................... 39
Principal Stockholders.................................................... 42
Description of Capital Stock.............................................. 43
Shares Eligible for Future Sale........................................... 45
Underwriting.............................................................. 47
Legal Matters............................................................. 48
Experts................................................................... 49
Additional Information.................................................... 49
Index to Financial Statements............................................. F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,125,000 SHARES
OF COMMON STOCK
[LOGO OF OSMOTICS(R) APPEARS HERE]
-----------------
PROSPECTUS
-----------------
NATIONAL SECURITIES
CORPORATION
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
under section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the Bylaws of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and executive officers to the fullest extent permitted
by the Delaware General Corporation Law; (ii) the Registrant may, in its
discretion, indemnify other officers, employees and agents as set forth in the
Delaware General Corporation Law; (iii) upon receipt of an undertaking to
repay such advances if indemnification is determined to be unavailable, the
Registrant is required to advance expenses, as incurred, to its directors and
executive officers to the fullest extent permitted by the Delaware General
Corporation Law in connection with a proceeding (except if a determination is
reasonably and promptly made by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to the proceeding or, in
certain circumstances, by independent legal counsel in a written opinion that
the facts known to the decision-making party demonstrate clearly and
convincingly that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation); (iv) the rights conferred in the Bylaws are not exclusive and
the Registrant is authorized to enter into indemnification agreements with its
directors, officers, employees and agents; (v) the Registrant may not
retroactively amend the Bylaw provisions relating to indemnity; and (vi) to
the fullest extent permitted by the Delaware General Corporation Law, a
director or executive officer will be deemed to have acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the Registrant, and, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe that his or her conduct
was unlawful, if his or her action is based on the records or books of account
of the Registrant or on information supplied to him or her by officers of the
Registrant in the course of their duties or on the advice of legal counsel for
the Registrant or on information or records given or reports made to the
Registrant by independent certified public accountants or appraisers or other
experts.
The Registrant has entered into indemnity agreements with each of its
directors and executive officers. The indemnity agreements provide that
directors and executive officers will be indemnified and held harmless to the
fullest possible extent permitted by law including against all expenses
(including attorneys' fees), judgments, fines and settlement amounts paid or
reasonably incurred by them in any action, suit or proceeding, including any
derivative action by or in the right of the Registrant, on account of their
services as directors, officers, employees or agents of the Registrant or as
directors, officers, employees or agents of any other company or enterprise
when they are serving in such capacities at the request of the Registrant. The
Registrant will not be obligated pursuant to the agreements to indemnify or
advance expenses to an indemnified party with respect to proceedings or claims
(i) initiated by the indemnified party and not by way of defense, except with
respect to a proceeding authorized by the Board of Directors and successful
proceedings brought to enforce a right to indemnification under the indemnity
agreements, (ii) for any amounts paid in settlement of a proceeding unless the
Registrant consents to such settlement; (iii) on account of any suit in which
judgment is rendered against the indemnified party for an accounting of
profits made from the purchase or sale by the indemnified party of securities
of the Registrant pursuant to the provisions of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and related laws; (iv) on account
of conduct by an indemnified party that is finally adjudged to have been in
bad faith or conduct that the indemnified party did not reasonably believe to
be in, or not opposed to, the best interests of the Registrant; (v) on account
of any criminal action or proceeding arising out of conduct that the
indemnified party had reasonable cause to believe was unlawful; or (vi) if a
final decision by a court having jurisdiction in the matter shall determine
that such indemnification is not lawful.
II-1
<PAGE>
The indemnity agreement requires a director or executive officer to
reimburse the Registrant for expenses advanced only to the extent that it is
ultimately determined that the director or executive officer is not entitled,
under Delaware law, the Bylaws, his or her indemnity agreement or otherwise to
be indemnified for such expenses. The indemnity agreement provides that it is
not exclusive of any rights a director or executive officer may have under the
Certificate of Incorporation, Bylaws, other agreements, any majority-in-
interest vote of the stockholders or vote of disinterested directors, the
Delaware law, or otherwise.
The indemnification provision in the Bylaws, and the indemnity agreements
entered into between the Registrant and its directors and executive officers,
may be sufficiently broad to permit indemnification of the Registrant's
directors and executive officers for liabilities arising under the Securities
Act.
As authorized by the Registrant's Bylaws, the Registrant, with approval by
the Registrant's Board of Directors, intends, after the offering, to seek to
obtain directors and officers liability insurance.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Underwriting Agreement............................................... 1.01
Registrant's Certificate of Incorporation............................ 3.01
Registrant's Bylaws.................................................. 3.02
Form of Indemnity Agreement.......................................... 10.05
</TABLE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid in
connection with the sale of the shares of Common Stock being registered
hereby. All amounts are estimates except for the Securities and Exchange
Commission registration fee, the NASD filing fee, the Nasdaq SmallCap Market
filing fee and the Boston Stock Exchange Fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 3,681
NASD filing fee.................................................... 1,715
Nasdaq SmallCap Market filing fee.................................. 8,078
Boston Stock Exchange listing fee.................................. 7,500
Accounting fees and expenses....................................... 150,000
Legal fees and expenses............................................ 375,000
Printing fees and expenses......................................... 100,000
Blue sky fees and expenses......................................... 50,000
Transfer agent and registrar fees and expenses..................... 5,000
Miscellaneous...................................................... 49,026
--------
Total.......................................................... $750,000
========
</TABLE>
II-2
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Common Stock, and options of the Registrant issued to stockholders of
the Company, in connection with the reincorporation into Delaware were not
deemed "sold" as a result of Rule 145(a)(2) promulgated under the Securities
Act. The following table sets forth information regarding all securities sold
by the Registrant's Colorado predecessor since inception.
<TABLE>
<CAPTION>
NUMBER AGGREGATE
OF PURCHASE FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SHARES PRICE CONSIDERATION
------------------- ---------------------- --------------------- ------- --------- -------------
<S> <C> <C> <C> <C> <C>
7 Founders............. 08/18/93 and 04/29/94 Common Stock 740,907 Nominal Past Services
1 Technology Provider.. 08/30/94 Common Stock 90,909 $ 20,000 Property and
Past Services
1 Investor............. 01/23/95 Common Stock 68,181 50,000 Cash
1 Investor............. 04/11/95 and 04/30/95 Common Stock 45,454 50,000 Cash
1 Investor............. 06/29/95 and 07/31/95 Common Stock 45,454 50,000 Cash
9 Investors............ 11/23/94 thru 07/10/95 Notes and Warrants 95,763 204,169 Loans
19 Investors............ 08/01/95 thru 04/08/96 Common Stock 239,525 764,087 Cash
24 Investors............ 05/01/96 thru 06/30/96 Common Stock 121,106 533,000 Cash
2 Consultants.......... 11/23/94 and 06/12/95 Common Stock 15,908 67,500 Past Services
1 Consultant........... 04/04/96 Common Stock 15,673 49,999 Past Services
1 Consultant........... 07/31/96 Common Stock 2,454 9,000 Past Services
5 Investors............ 07/17/96 Notes and Warrants(1) 62,500 $500,000 Cash
2 Investors............ 07/29/96 Common Stock 22,727 $ 25,000 Cash
(Exercised Options)
2 Investors............ 12/03/96 Common Stock 70,000 $415,800 Cash
10 Investors............ 10/31/96 thru 01/31/97 Notes and Warrants(1) 56,250 $450,000 Cash
</TABLE>
- -------
(1) Estimated number of shares issuable upon exercise of warrants to acquire
shares of Common Stock. The number of shares issuable is based upon an
initial public offering price per share of $8.00 for the Shares offered
hereby. See "Capitalization."
Between August 1993 and the date of this registration statement, the Company
issued options to purchase a total of 340,181 shares of Common Stock, 272,000
of which were still outstanding on December 31, 1996, at exercise prices
ranging from $.22 to $5.94 per share, to a limited number of employees and
consultants. No consideration was paid to the Company by any recipient of any
of the foregoing options for the grant of any such options. As of the date of
this Prospectus, such options have been exercised to acquire a total of 45,454
shares of Common Stock.
All sales of Common Stock made pursuant to the exercise of stock options
granted under agreements with directors, officers, employees, consultants and
others for services unrelated to financing transactions were made pursuant to
an exemption from the registration requirements of the Securities Act afforded
by either Section 4(2) or Rule 701 promulgated under the Securities Act. All
other sales were made in reliance on Section 4(2) or Regulation S of the
Securities Act. These latter sales were made without general solicitation or
advertising. The purchasers were sophisticated investors who represented to
the Registrant that the shares were being acquired for investment.
II-3
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.
2.01 Form of Agreement and Plan of Merger by and between the Registrant and
Osmotics Corporation, a Colorado corporation.*
3.01 Registrant's Certificate of Incorporation.***
3.02 Registrant's Bylaws.***
4.01 Specimen Common Stock Certificate.*
4.02 Form of Representative's Warrant Agreement between National Securities
Corporation and Registrant.
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being issued.*
10.01 Registrant's 1997 Equity Incentive Plan.*
10.02 Registrant's 1997 Directors Stock Option Plan.*
10.03 Employment Agreement, dated as of , 1997, between Registrant and
Steven Porter.*
10.04 Employment Agreement, dated as of , 1997, between Registrant and
Francine Porter.*
10.05 Form of Indemnity Agreement to be entered into by Registrant with each
of its directors and executive officers.***
10.06 Subscription Agreement (and Consulting Agreement) dated as of January
23, 1995, between Registrant and Marvin J. Rosenblum.***
10.07 Distribution Agreement, dated as of March 19, 1996, between Registrant
and Mikio Ogawa.**/***
10.08 Distribution Agreement, dated as of May 24, 1996, between Registrant
and The Global Group International.**/***
10.09 Registration Rights Agreement dated July 17, 1996.***
10.10 Assignment, dated April 17, 1995, by Steven Porter and Francine Porter
to Registrant.*
10.11 Infomercial Production and Product Management Agreement, dated as of
March 5, 1996, between Registrant and VideOne Marketing, Inc.*
10.12 Sublease Agreement, dated April 9, 1996, between Registrant and
Barrett Resources Corporation.*
10.13 Distributorship Agreement, dated as of January 1997, between
Registrant and Fabel Paris.**
10.14 Sole Source Private Label Agreement, dated as of January 1997, between
Registrant and Fabel Paris.**
23.01 Consent of Fenwick & West LLP.
23.02 Consent of Arthur Andersen LLP, Independent Accountants.
23.03 Consent of Davis, Graham & Stubbs LLP, PC.
24.01 Power of Attorney.***
</TABLE>
- --------
* To be supplied.
** Confidential Treatment Requested.
*** Previously filed.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(2) For determining liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(3) For determining liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed as a
new registration statement for the securities offered therein, and that
offering of the securities at that time shall be deemed to be the initial
bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 24 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirement for filing on Form SB-2 and authorized this amendment to
Registration Statement to be signed on its behalf by the undersigned, in the
City of Denver, State of Colorado, on February 5, 1997.
OSMOTICS CORPORATION
/s/ Steven S. Porter
By: ___________________________
Steven S. Porter,
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act, this amendment to
Registration Statement was signed by the following persons in the capacities
and on the dates stated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ Steven S. Porter President, Chief Executive February 5, 1997
- ------------------------------------ Officer and Director
Steven S. Porter
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
Thomas G. Wiley* Chief Financial Officer February 5, 1997
- ------------------------------------ and Director
Thomas G. Wiley
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
ADDITIONAL DIRECTORS:
Francine E. Porter* Executive Vice President February 5, 1997
- ------------------------------------ and Director
Francine E. Porter
Edward A. Lewis* Director February 5, 1997
- ------------------------------------
Edward A. Lewis
Marvin J. Rosenblum* Director February 5, 1997
- ------------------------------------
Marvin J. Rosenblum
</TABLE>
*By: /s/ Steven S. Porter
Steven S. Porter,
(Attorney-in-fact)
II-7
<PAGE>
<TABLE>
<CAPTION>
ON
SEQUENTIAL
EXHIBIT NUMBERED
NUMBER EXHIBIT TITLE PAGE
------- ------------- ----------
<C> <S> <C>
1.01 Form of Underwriting Agreement.
2.01 Form of Agreement and Plan of Merger by and between the
Registrant and Osmotics Corporation, a Colorado
corporation.*
3.01 Registrant's Certificate of Incorporation.***
3.02 Registrant's Bylaws.***
4.01 Specimen Common Stock Certificate.*
4.02 Form of Representative's Warrant Agreement between
National Securities Corporation and Registrant.
5.01 Opinion of Fenwick & West LLP regarding legality of the
securities being issued.*
10.01 Registrant's 1997 Equity Incentive Plan.*
10.02 Registrant's 1997 Directors Stock Option Plan.*
10.03 Employment Agreement, dated as of , 1997, between
Registrant and Steven Porter.*
10.04 Employment Agreement, dated as of , 1997, between
Registrant and Francine Porter.*
10.05 Form of Indemnity Agreement to be entered into by
Registrant with each of its directors and executive
officers.***
10.06 Subscription Agreement (and Consulting Agreement) dated
as of January 23, 1995, between Registrant and Marvin J.
Rosenblum.***
10.07 Distribution Agreement, dated as of March 19, 1996,
between Registrant and Mikio Ogawa.**/***
10.08 Distribution Agreement, dated as of May 24, 1996, between
Registrant and The Global Group International.**/***
10.09 Registration Rights Agreement dated July 17, 1996.***
10.10 Assignment, dated April 17, 1995, by Steven Porter and
Francine Porter to Registrant.*
10.11 Infomercial Production and Product Management Agreement,
dated as of March 5, 1996, between Registrant and VideOne
Marketing, Inc.*
10.12 Sublease Agreement, dated April 9, 1996, between
Registrant and Barrett Resources Corporation.*
10.13 Distributorship Agreement, dated as of January 1997,
between Registrant and Fabel Paris.**
10.14 Sole Source Private Label Agreement, dated as of January
1997, between Registrant and Fabel Paris.**
23.01 Consent of Fenwick & West LLP.
23.02 Consent of Arthur Andersen LLP, Independent Accountants.
23.03 Consent of Davis, Graham & Stubbs LLP, PC.
24.01 Power of Attorney.***
</TABLE>
- --------
* To be supplied.
** Confidential Treatment Requested.
*** Previously filed.
<PAGE>
EXHIBIT 1.01
DRAFT 01/24/97
1,125,000 SHARES OF COMMON STOCK
OSMOTICS CORPORATION
UNDERWRITING AGREEMENT
Denver, Colorado
____________, 1997
National Securities Corporation
As Representative of the Several Underwriters
1001 Fourth Avenue, Suite 2200
Seattle, Washington 98154
Ladies and Gentlemen:
Osmotics Corporation, a Delaware corporation (the "Company"), hereby
agrees with National Securities Corporation ("National") and each of the
underwriters named in Schedule A hereto (collectively, the "Underwriters," which
term shall also include any underwriter substituted as hereinafter provided in
Section 11), for whom National is acting as representative (in such capacity,
National shall hereinafter be referred to as "you" or the "Representative") with
respect to the sale by the Company and the purchase by the Underwriters, acting
severally and not jointly, of the respective amount of shares (the "Shares") set
forth in said Schedule A of the Company's common stock, par value $.001 per
share (the "Common Stock"). The aggregate 1,125,000 Shares purchased by the
Underwriters are hereinafter referred to as the "Firm Securities."
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriters, acting severally and not
jointly, up to an additional 168,750 shares of Common Stock for the purpose of
covering over-allotments, if any. Such 168,750 shares of Common Stock are
hereinafter collectively to as the "Option Securities." The Company also
proposes to issue and sell to you warrants (the "Representative's Warrants")
pursuant to the Representative's Warrant Agreement (the "Representative's
Warrant Agreement") for the purchase of an additional 112,500 shares of Common
Stock. The shares of Common Stock issuable upon exercise of the
Representative's Warrants are hereinafter referred to as the "Representative's
Securities." The Firm Securities, the Option Securities, the Representative's
<PAGE>
Warrants and the Representative's Securities (collectively, hereinafter referred
to as the "Securities") are more fully described in the Registration Statement
and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, each of the Underwriters as of the
date hereof, and as of the Closing Date and the Option Closing Date, if any, as
follows:
(A) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No. 333-5306-D), including any
related preliminary prospectus (the "Preliminary Prospectus"), for the
registration of the Firm Securities, the Option Securities and the
Representative's Securities under the Securities Act of 1933, as amended (the
"Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act, and the
Regulations (as defined below) of the Commission under the Act. The Company will
not file any other amendment thereto to which the Underwriters shall have
objected in writing 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 or incorporated therein and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430(A) of the Regulations), 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 Regulations, is hereinafter called the
"Prospectus." For purposes hereof, "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 the Prospectus and no proceedings for a stop order
suspending the effectiveness of the Registration Statement have been instituted,
or, to the Company's knowledge, are 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
Regulations, and none of the Preliminary Prospectus, the Registration Statement
or 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 and warranty does not apply to statements made in reliance upon
and in conformity with written information furnished to the Company with respect
to the Underwriters by or on behalf of the Underwriters expressly for use in
such Preliminary Prospectus, Registration Statement or Prospectus.
-2-
<PAGE>
(C) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date (as defined in Section 2(c)
hereof) and each Option Closing Date (as defined in Section 2(b) hereof), if
any, and during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriters or a dealer, the
Registration Statement and the Prospectus, as amended or supplemented as
required, will contain all statements which are required to be stated therein in
accordance with the Act and the Regulations, and will conform in all material
respects to the requirements of the Act and the Regulations; neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, 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, in light of the circumstances under which they were made,
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 furnished to the Company in writing by or on behalf
of any Underwriter expressly for use in the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto.
(D) The Company and each of its subsidiaries have been duly
organized and are validly existing as corporations in good standing under the
laws of the respective states of their incorporation. The Company does not own
or control, directly or indirectly, any corporation, partnership, trust, joint
venture or other business entity other than the subsidiaries listed in Exhibit
21 of the Registration Statement. Each of the Company and its subsidiaries is
duly qualified and licensed and in good standing as a foreign corporation in
each jurisdiction in which its ownership or leasing of any properties or the
character of its operations require such qualification or licensing, except
where the failure to be so qualified or licensed would not have a material and
adverse effect on the condition, financial or otherwise, or the business
affairs, operations, properties, or results of operations of the Company and its
subsidiaries, taken as a whole (the "Business"). Each of the Company and its
subsidiaries has all requisite power and authority (corporate and other), and
has 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 and each of its
subsidiaries have been doing business in compliance in all material respects
with all such authorizations, approvals, orders, licenses, certificates,
franchises and permits and all federal, state, local and foreign laws, rules and
regulations; and neither the Company nor any of its subsidiaries have 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 Business. The
disclosures 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 in light of the circumstances in which they
were made.
-3-
<PAGE>
(E) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under the headings
"Capitalization" and "Descrip tion of Capital Stock" and will have the adjusted
capitalization set forth therein on the Closing Date and the Option Closing
Date, if any, 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 it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company conform
or, when issued and paid for, will conform, in all material respects to all
statements with respect thereto contained in the Registra tion Statement and the
Prospectus. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and are
fully paid and nonassessable. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company and the related notes
thereto included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or arrangements
and the options or other rights granted and exercised thereunder as set forth in
the Prospectus conforms in all material respects with the requirements of the
Act. All issued and outstanding securities of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, and 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.
(F) The Securities are not and will not be subject to any
preemptive or other similar rights of any stockholder, have been duly authorized
and, when issued, paid for and delivered in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable and will conform in all
material respects to the description 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, issue and sale of
the Securities has been duly and validly taken; and the certificates
representing the Securities will be in due and proper form. Upon the issuance
and delivery pursuant to the terms hereof of the Securities to be sold by the
Company hereunder, the Underwriters or the Representative, as the case may be,
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. No stockholder of the Company has
any right which has not been waived in writing to require the Company to
register the sale of any shares owned by such stockholder under the Act in the
public offering contemplated by this Agreement. No further approval or authority
of the stockholders or the Board of Directors of the Company will be required
for the issuance and sale of the Shares, the Option Shares and the
Representative's Warrants to be sold by the Company as contemplated herein.
-4-
<PAGE>
(G) The financial statements of the Company, together with the
related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, changes in stockholders' equity 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 Regulations, consistently
applied throughout the periods involved. There has been no material adverse
change or development involving a material prospective change in the Business,
whether or not arising in the ordinary course of business since the date 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 and its subsidiaries taken as a whole conform in all
material respects to the descriptions thereof contained in the Registration
Statement and the Prospectus. Financial information set forth in the Prospectus
under the headings "Prospectus Summary -Selected Financial Data,"
"Capitalization," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," fairly present, on the basis stated in the
Prospectus, the information set forth therein and have been derived from or
compiled on a basis consistent with that of the audited financial statements
included in the Prospectus.
(H) The Company (i) has paid all federal, state, local,
franchise, and foreign taxes for which it is liable, including, but not limited
to, withholding taxes and amounts payable under Chapters 21 through 24 of the
Internal Revenue Code of 1986, as amended (the "Code"), and has furnished all
information returns it is required to furnish pursuant to the Code, (ii) has
established adequate reserves for such taxes which are not due and payable, and
(iii) does not have any tax deficiency or claims outstanding, proposed or
assessed against it.
(I) No transfer tax, stamp duty or other similar tax is payable
by or on behalf of the Underwriters in connection with (i) the issuance by the
Company of the Securities, (ii) the purchase by the Underwriters of the Firm
Securities and the Option Securities from the Company and the purchase by the
Representative of the Representative's Warrants from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement, or
(iv) resales of the Firm Securities and the Option Securities in connection with
the distribution contemplated hereby.
(J) There is no action, suit, proceeding, inquiry, arbitration,
mediation, investigation, litigation or governmental proceeding (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or circumstances
that may give rise to the same), or involving the properties or businesses of,
the Company which (i) questions the validity of the capital stock of the
Company, this Agreement or the Representative's Warrant Agreement, or of any
action taken or to be taken by the Company pursuant to or in connection with
this Agreement or the Representative's Warrant 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 material respects), or (iii) might materially and adversely
affect the condition,
-5-
<PAGE>
financial or otherwise, or the business, affairs, position, stockholders'
equity, operation, properties, or results of operations of the Company and its
subsidiaries taken as a whole.
(K) The Company has the corporate power and authority to
authorize, issue, deliver, and sell the Securities and to enter into this
Agreement and the Representative's Warrant Agreement, and to consummate the
transactions provided for in such agreements; and this Agreement and the
Representative's Warrant Agreement have each been duly and properly authorized,
executed, and delivered by the Company. Each of this Agreement, the Warrant
Agreement and the Representative's Warrant Agreement constitutes a legal, valid
and binding obligation of the Company enforceable against the Company in
accordance with its respective terms (except as the enforceability thereof 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 contribu tion may be
limited by applicable law), and none of the issue and sale of the Securities,
execution by the Company, delivery or performance of this Agreement and the
Representative's Warrant Agreement, the consummation by the Company of the
transactions contemplated herein and therein, or the conduct of the Company's
businesses 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 breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or result in
the creation or imposition of any 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 articles of incorporation or by-laws of the Company, as
amended and restated, (ii) any 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 it is or may be bound or to which its properties or assets (tangible
or intangible) is or may be subject, or any indebtedness, 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 of any of their 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 issuance of the Securities pursuant to
the Prospectus and the Registration Statement, the performance of this
Agreement, the Representative's Warrant Agreement, and the transactions
contemplated hereby and thereby, including without limitation, any waiver of any
preemptive, first refusal or other rights that any entity or person may have for
the issue and/or sale of any of the Securities, 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 the Underwriters' purchase and distribution of the Firm
Securities, the Option Securities, and the Representative's Warrants to be sold
by the Company hereunder.
-6-
<PAGE>
(M) All executed agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed as exhibits to
the Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or businesses may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company enforceable
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 contribu tion may be limited by applicable law). The descriptions in the
Registration Statement of such agreements, contracts and other documents are
accurate in all material respects and fairly present the information required to
be shown with respect thereto by Form SB-2, and there are no contracts or other
documents which are required by the Act 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
complete and correct copies of the documents of which they purport to be copies.
(N) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus (i) the Company has not incurred any
material liabilities or obligations, indirect, direct or contingent, or entered
into any material verbal or written agreement or other transaction which is not
in the ordinary course of business or which could result in a material reduction
in the future earnings of the Company; (ii) the Company has not sustained any
material loss or interference with its business or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance;
(iii) the Company has not paid or declared any dividends or other distributions
with respect to its capital stock, and the Company is not in default in the
payment of principal or interest on any outstanding debt obligations; (iv) there
has not been any change in the capital stock (other than upon the sale of the
Firm Securities, the Option Securities and the Representative's Warrants
hereunder and upon the exercise of options and warrants described in the
Registration Statement) of, or indebtedness material to, the Company (other than
in the ordinary course of business); (v) the Company has not issued any
securities or incurred any liability or obligation, primary or contingent, for
borrowed money; and (vi) there has not been any material adverse change in the
condition (financial or otherwise), business, properties, results of operations,
or prospects of the Company and its subsidiaries.
(O) Except as disclosed in or specifically contemplated by the
Prospectus, and subject to the risks and uncertainties described in the
Prospectus in the headings entitled "Risk Factors A Protection of Intellectual
Property" and "Business A Intellectual Property and Other Proprietary Rights,"
(i) the Company has sufficient trademarks, trade names, patent rights,
copyrights, licenses, approvals and governmental authorizations to conduct its
business as now conducted; (ii) the expiration of any trademarks, trade names,
patent rights, copyrights, licenses, approvals or governmental authorizations
would not have a material adverse effect on the
-7-
<PAGE>
condition (financial or otherwise), business, results of operations or prospects
of the Company; (iii) the Company has no knowledge of any infringement by it or
its subsidiaries of trademark, trade name rights, patent rights, copyrights,
licenses, trade secret or other similar rights of others; and (iv) there is no
claim being made against the Company regarding trademark, trade name, patent,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company.
(P) No default exists in the due performance and observance of
any term, covenant or condition of any material license, contract, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement, or any other
material agreement or instrument evidenc ing an obligation for borrowed money,
or any other material agreement or instrument to which the Company is a party or
by which the Company may be bound or to which the property or assets (tangible
or intangible) of the Company is subject or affected, except for such defaults,
if any, which individually and in the aggregate would not have a material
adverse effect on the Business.
(Q) To the Company's knowledge, there are no pending
investigations involving the Company by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or to its knowledge threatened against or involving the Company. No
representation question exists respecting the employees of the Company. No
collective bargaining agreement, or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists or to its knowledge is
imminent.
(R) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute 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"). The Company does not maintain or contribute to a
defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or
any trust created thereunder) has engaged in a "prohibited transaction" within
the meaning of Section 406 of ERISA or Section 4975 of the Code, which could
subject the Company to any tax penalty on prohibited transactions and which has
not adequately been corrected. Each ERISA Plan is in compliance with all
material reporting, disclosure and other requirements of the Code and ERISA as
they relate to any such ERISA Plan. Determination letters have been received
from the Internal Revenue Service with respect to each ERISA Plan which is
intended to comply with Code Section 401(a), stating that such ERISA Plan and
the attendant trust are qualified
-8-
<PAGE>
thereunder. The Company has never completely or partially withdrawn from a
"multiemployer plan."
(S) None of the Company, nor any of its employees, directors,
stockholders, or affiliates (within the meaning of the Regulations) of any of
the foregoing has taken or will take directly or indirectly, any action designed
to or which has constituted or which might be expected to cause or result in
unlawful stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(T) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it, free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(U) Arthur Andersen, LLP ("Arthur Andersen"), whose report is
filed with the Commission as a part of the Registration Statement, are
independent certified public accountants as required by the Act and the
Regulations.
(V) The Company has caused to be duly executed legally binding
and enforceable agreements pursuant to which all persons or entities, other than
David Ross who has entered into a modified agreement as described in the
Prospectus, and Lee Millard who has refused to sign any such agreement, that
directly or beneficially own Common Stock, as of the effective date of the
Registration Statement, have agreed not to, directly or indirectly, offer, offer
to sell, sell, grant any option for the sale of, transfer, assign, pledge,
hypothecate or otherwise encumber or dispose of any shares of Common Stock or
Securities convertible into Common Stock, exercisable or exchangeable for or
evidencing any right to purchase or subscribe for any shares of Common Stock
(either pursuant to Rule 144 of the Regulations or otherwise) or dispose of any
interest therein for a period from the date of the Prospectus until twelve (12)
months following the date that the Registration Statement becomes effective,
without the prior written consent of National (the "Lock-up Agreements"). The
Company will cause the Transfer Agent (as defined herein) to place "stop
transfer" orders on the Company's stock ledgers in order to effect the Lock-up
Agreements.
(W) There are no claims, payments, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuance with
respect to the Company or any of its officers, directors, stockholders,
employees or affiliates that may affect the Underwriters' compensation as
determined by the Commission and the National Association of Securities Dealers,
Inc. (the "NASD").
(X) The Securities have been approved for quotation on the Nasdaq
SmallCap Market and the Boston Stock Exchange.
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<PAGE>
(Y) Neither the Company nor any of its 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 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 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). The Company's
internal accounting controls are sufficient to cause the Company to comply with
the Foreign Corrupt Practices Act of 1977, as amended.
(Z) 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 Regulations) of any of the
foregoing persons or entities has or has had, either directly or indirectly, (i)
an 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, or (ii) a beneficiary interest in any 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 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, principal shareholder (as such term is used in the Prospectus) of the
Company, or any affiliate or associate of any of the foregoing persons or
entities which are required to be disclosed in the Prospectus.
(AA) The Company is not, and does not intend to conduct its
business in a manner in which it would become an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(BB) Any certificate signed by any officer of the Company and
delivered to the Underwriters or to the Underwriters' Counsel (as defined in
Section 4(d) herein) shall be deemed a representation and warranty by the
Company to the Underwriters as to the matters covered thereby.
(CC) The minute books of the Company have been made available to
the Underwriters and contain a complete summary of all meetings and actions of
the directors and stockholders of the Company, since the time of its
incorporation, and reflect all transactions referred to in such minutes
accurately in all material respects.
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<PAGE>
(DD) The Company has not distributed and will not distribute
prior to the Closing Date any offering material in connection with the offering
and sale of the Shares in this offering other than the Prospectus, the
Registration Statement and the other materials permitted by the Act. Except as
described in the Prospectus, no holders of any Securities of the Company or of
any options, warrants or other convertible or exchangeable Securities of the
Company have the right to include any Securities issued by the Company as part
of the Registration Statement or to require the Company to file a registration
statement under the Act and no person or entity holds any anti-dilution rights
with respect to any Securities of the Company.
(EE) Each of the Company and its subsidiaries maintains insurance
by insurers of recognized financial responsibility of the types and in the
amounts as the Company believes are prudent and adequate for the business in
which it is engaged, including, but not limited to, insurance covering real and
personal property owned or leased by the Company and its subsidiaries against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect. The Company
has delivered to the Underwriter's Counsel satisfactory summaries of these
insurance policies. The Company has no reason to believe that it will not be
able to renew existing insurance coverage with respect to the Company as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business, in either case, at a cost that
would not have a material adverse effect on the financial condition, operations,
business, assets or properties of the Company. The Company has not failed to
file any material claims, has no material disputes with its insurance company
regarding any claims submitted under its insurance policies, and has complied in
material respects with all material provisions contained in its insurance
policies.
2. Purchase, Sale and Delivery of the Securities.
----------------------------------------------
(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 each Underwriter, and each Underwriter,
severally and not jointly agrees to purchase from the Company, at a price equal
to $__________ per Share, that number of Firm Securities set forth in Schedule A
opposite the name of such Underwriter, subject to such adjustment as the
Representative in its discretion shall make to eliminate any sales or purchases
of fractional shares, plus any additional numbers of Shares which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 11 hereof.
(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
Underwriters, severally and not jointly, to purchase all or any part of an
additional 168,750 shares of Common Stock at a price of $_____ per share of
Common Stock. The option granted hereby will expire 45 days after (i) the date
the Registration Statement becomes effective, if the Company has elected not to
rely on Rule 430A under the Regulations, or (ii) the date of this Agreement if
the Company has elected to rely upon Rule 430A under the Regulations, and may be
exercised in whole or in part from time to time (but not
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<PAGE>
on more than two (2) occasions) 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 Representative to the Company setting forth the
number of Option Securities as to which the several Underwriters are then
exercising the option and the time and date of payment and delivery for any such
Option Securities. Any such time and date of delivery (an "Option Closing Date")
shall be determined by the Representative, but shall not be later than three
full business days after the exercise of said option, nor in any event prior to
the Closing Date, as hereinafter defined, unless otherwise agreed upon by the
Representative and the Company. Nothing herein contained shall obligate the
Underwriters to exercise the over-allotment option described above. No Option
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 National,
at 1001 Fourth Avenue, Suite 2200, Seattle, Washington, or at such other place
as shall be agreed upon by the Representative and the Company. Such delivery and
payment shall be made at 9:00 a.m. (New York time) on ______________, 1997, or
at such other time and date as shall be agreed upon by the Representative and
the Company, but no more than four (4) business days after the date hereof (such
time and date of payment and delivery being herein called the "Closing Date").
In addition, in the event that any or all of the Option Securities are purchased
by the Underwriters, payment of the purchase price for, and delivery of
certificates for, such Option Securities shall be made at the above mentioned
office of National or at such other place as shall be agreed upon by the
Representative and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the certificates for
the Firm Securities and the Option Securities, if any, shall be made to the
Underwriters against payment by the Underwriters, of the purchase price for the
Firm Securities and the Option Securities, if any, to the order of the Company.
In the event such option is exercised, each of the Underwriters, acting
severally and not jointly, shall purchase that proportion of the total number of
Option Securities then being purchased which the number of Firm Securities set
forth in Schedule A hereto opposite the name of such Underwriter bears to the
total number of Firm Securities, subject in each case to such adjustments as the
Representative in their discretion shall make to eliminate any sales or
purchases of fractional shares. Certificates for the Firm Securities and the
Option 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 Underwriters may request in writing at least three (3)
business days prior to Closing Date or the relevant Option Closing Date, as the
case may be. The certificates for the Firm Securities and the Option Securities,
if any, shall be made available to the Representative at such office or such
other place as the Representative 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 Option Closing Date, as the case may be.
(D) On the Closing Date, the Company shall issue and sell to the
Representative Representative's Warrants at a purchase price of $0.0001 per
warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of 112,500 shares of Common
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<PAGE>
Stock. The Representative's Warrants shall expire five (5) years after the
effective date of the Registration Statement and shall be exercisable for a
period of four (4) years commencing one (1) year from the effective date of the
Registration Statement at a price equaling one hundred twenty percent (120%) of
the initial public offering price of the Shares. The Representative's Warrant
Agreement and form of Warrant Certificate shall be substantially in the form
filed as Exhibit 4.2 to the Registration Statement. Payment for the
Representative's Warrants shall be made on the Closing Date.
3. Public Offering of the Shares and the Redeemable Warrants. As soon
---------------------------------------------------------
after the Registration Statement becomes effective as the Representative deems
advisable, the Underwriters shall make a public offering of the Shares (other
than to residents of or in any jurisdiction in which qualification of the Shares
is required and has not become effective) at the price and upon the other terms
set forth in the Prospectus. The Representative may from time to time increase
or decrease the public offering price after distribution of the Shares has been
completed to such extent as the Representative, in its sole discretion, deems
advisable. The Underwriters may enter into one or more agreements as the
Underwriters, in each of their sole discretion, deem advisable with one or more
broker-dealers who shall act as dealers in connection with such public offering.
4. Covenants of the Company. The Company covenants and agrees with
------------------------
each of the Underwriters 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 Act or Exchange Act before termination of the offering of the Shares
by the Underwriters of which the Representative shall not previously have been
advised and furnished with a copy, or to which the Representative shall have
objected or which is not in compliance with the Act, the Exchange Act or the
Regulations.
(B) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representative and confirm the 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 of proceedings for that purpose, (iii) of the issuance by the
Commission or by any state Securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) of the receipt of any
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<PAGE>
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 authority shall enter a stop order or suspend such
qualification at any time, the Company will use its best efforts to obtain
promptly the lifting of such order.
(C) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) in accordance with the requirements of the
Act.
(D) The Company will give the Representative 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 Underwriters 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 Regulations),
and will furnish the Representative 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 amendment or supplement to which the
Representative or Camhy Karlinsky & Stein LLP ("Underwriters' Counsel") shall
reasonably object.
(E) The Company shall endeavor in good faith, in cooperation with
the Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the Securities
laws of such jurisdictions as the Representative may reasonably designate to
permit the continuance of sales and dealings therein for as long as may be
necessary to complete the distribution, and shall make such applications, file
such documents and 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 become subject to service of process in any such jurisdiction. In
each jurisdiction where such qualification shall be effected, the Company will,
unless the Representative 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 as are or may reasonably be required by the laws of such
jurisdiction to continue such qualification.
(F) During the time when a 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, as now and hereafter amended, and by
the 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 a 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 Underwriters' 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
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<PAGE>
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 or supplement the Prospectus to comply with the Act, the
Company will notify the Representative 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 satisfactory to Underwrit
ers' Counsel, and the Company will furnish to the Underwriters copies of such
amendment or supplement as soon as available and in such quantities as the
Underwriters may request.
(G) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning 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 Regulations, and to the Representative, an earnings statement
which will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the 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, the
Company will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
will make available to its stockholders unaudited quarterly reports of earnings,
and will deliver to the Representative:
(I) concurrently with furnishing such quarterly reports to
its stockholders, statements of income of the Company for each quarter
in the form furnished to the Company's stockholders;
(II) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the report thereon of independent
certified public accountants;
(III) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders;
(IV) as soon as they are available, copies of all reports
and financial statements furnished to or filed with the Commission,
the Nasdaq SmallCap Market or any Securities exchange;
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<PAGE>
(V) every press release and every material news item or
article of interest to the financial community in respect of the
Company or its affairs which was released or prepared by or on behalf
of the Company; and
(VI) any additional information of a public nature
concerning the Company (and any future subsidiaries) or its businesses
which the Representative may reasonably request.
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) The Company will maintain a transfer agent (the "Transfer
Agent") and, if necessary under the jurisdiction of incorporation of the
Company, a registrar (which may be the same entity as the transfer agent) for
the Common Stock and the Representative's Warrants.
(J) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative 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 Representative may reasonably
request.
(K) On or before the effective date of the Registration
Statement, the Company shall provide the Representative with true copies of duly
executed Lock-up Agreements. On or before the Closing Date, the Company shall
deliver instructions to the Transfer Agent authorizing it to place appropriate
stop transfer orders on the Company's ledgers.
(L) The Company shall use its best efforts to cause its officers,
directors, stockholders or affiliates (within the meaning of the Regulations)
not to take, directly or indirectly, any action designed to, or which might in
the future reasonably be expected to cause or result in, unlawful stabilization
or manipulation of the price of any Securities of the Company.
(M) The Company shall apply the net proceeds from the sale of the
Securities substantially in the manner, and subject to the conditions, set forth
under "Use of Proceeds" in the Prospectus.
(N) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to, a Form SR as
may be required pursuant to Rule 463 under the Act) from time to time, under the
Act, the Exchange Act, and the Regulations, and all such reports, forms and
documents filed will comply as to form and
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<PAGE>
substance with the applicable requirements under the Act, the Exchange Act, and
the Regulations.
(O) The Company shall cause the Securities to be quoted on the
Nasdaq SmallCap Market or Boston Stock Exchange, and for a period of two (2)
years from the date hereof shall use its best efforts to maintain the quotation
of the Securities to the extent outstanding.
(P) For a period of two (2) years from the Closing Date, the
Company shall furnish to the Representative, at the Company's sole expense,
monthly consolidated transfer sheets relating to the Common Stock.
(Q) For a period of five (5) years after the effective date of
the Registration Statement the Company shall, at the Company's sole expense,
take all necessary and appropriate actions to further qualify the Company's
Securities in all jurisdictions of the United States in order to permit
secondary sales of such Securities pursuant to the Blue Sky laws of those
jurisdictions which do not require the Company to qualify as a foreign
corporation or to file a general consent to service of process.
(R) The Company (i) prior to the effective date of the
Registration Statement, has filed a Form 8-A with the Commission providing for
the registration of the Common Stock under the Exchange Act and (ii) as soon as
practicable, will use its best efforts to take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions or
Moody's OTC Manual and to continue such inclusion for a period of not less than
five (5) years.
(S) The Company agrees that for a period of twelve (12) months
following the effective date of the Registration Statement it will not, without
the prior written consent of National, offer, issue, sell, contract to sell,
grant any option for the sale of or otherwise dispose of any Common Stock, or
Securities convertible into Common Stock, except for the issuance of the Option
Securities, the Representative's Warrants, and shares of Common Stock issued
upon the exercise of currently outstanding warrants or options, or options and
warrants granted in the ordinary course of business consistent with prior
practice.
(T) Until the completion of the distribution of the Securities,
the Company shall not without the prior written consent of National or
Underwriters' Counsel, 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.
(U) For a period equal to the lesser of (i) five (5) years from
the date hereof, and (ii) the sale to the public of the Representative's
Securities, the Company will not
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<PAGE>
take any action or actions which may prevent or disqualify the Company's use of
an appropriate form for the registration under the Act of the Representative's
Securities.
(V) The Company agrees that it shall use its best efforts, which
shall include, but shall not be limited to, the solicitation of proxies, to
elect one (1) designee of National to the Company's Board of Directors for a
period of five (5) years following the Closing, provided that such designee is
reasonably acceptable to the Company and that such director may be excluded from
consideration of certain confidential matters which, in the good faith judgment
of a majority of the other directors, such director's presence would not be
appropriate.
(W) The Company agrees that within forty-five (45) days after the
Closing it shall retain a public relations firm which is reasonably acceptable
to National. The Company shall keep such public relations firm, or any
replacement, for a period of two (2) years from the Closing. Any replacement
public relations firm shall be retained only with the consent of National, which
shall not be unreasonably withheld.
(X) The Company agrees that any and all future transactions
between the Company and its officers, directors, principal stockholders and the
affiliates of the foregoing persons will be on terms no less favorable to the
Company than could reasonably be obtained in arm's length transactions with
independent third parties, and that any such transactions also be approved by a
majority of the Company's outside independent directors disinterested in the
transaction.
(Y) The Company shall prepare and deliver, at the Company's sole
expense, to National within the one hundred and twenty (120) day period after
the later of the effective date of the Registration Statement or the latest
Option Closing Date, as the case may be, one bound volume containing all
correspondence with regulatory officials, agreements, documents and all other
materials in connection with the offering as requested by the Underwriters'
Counsel.
5. Payment of Expenses.
-------------------
(A) The Company hereby agrees to pay on each of the Closing Date
and each Option Closing Date (to the extent not previously paid) all expenses
and fees (other than fees of Underwriters' Counsel, except as provided in (iv)
below) incident to the performance of the obligations of the Company under this
Agreement, and the Representative's Warrant Agreement, including, without
limitation, (i) the fees and expenses of accoun tants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, filing, delivery and mailing (including the
payment of postage with respect thereto) of the Registration Statement and the
Prospectus and any amendments and supplements thereto and the duplication,
mailing (including the payment of postage with respect thereto) and delivery of
this Agreement, the Agreement Among Underwriters, the Selected Dealers
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<PAGE>
Agreements, the Powers of Attorney, 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 Underwriters and
such dealers as the Underwriters may request, in quantities as hereinabove
stated, (iii) the printing, engraving, issuance and delivery of the
certificates representing the Securities, (iv) 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 word processing and mailing the "Preliminary Blue Sky
Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal Investments
Survey," if any, and reasonable disbursements and fees of counsel in connection
therewith, (v) advertising costs and expenses, including but not limited to the
costs and expenses incurred by the Company and the Representative in connection
with the "road show," information meetings and presentations, bound volumes and
prospectus memorabilia and reasonable "tombstone" advertisement expenses, (vi)
experts, (vii) fees and expenses of the transfer agent and registrar, (viii) the
fees payable to the Commission and the NASD, (ix) issue and transfer taxes, if
any and (x) the fees and expenses incurred in connection with the listing of the
Common Stock on the Nasdaq SmallCap Market and the Boston Stock Exchange and any
other market or exchange.
(B) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 6, Section 10(a) or Section 11, the
Company shall reimburse and indemnify the Representative for all of its actual
out-of-pocket expenses on an accountable basis, including the fees and
disbursements of Underwriters' Counsel, less any amounts already paid pursuant
to Section 5(c) hereof provided that National shall notify the Company of any
single expense or any series of similar expenses which in the aggregate exceed
$5,000 (provided further that such notice requirement shall not apply to
National's actual out-of-pocket legal expenses).
(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
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, by deduction from the proceeds of the
offering contemplated herein 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. In the event the
Representative elects to exercise the over-allotment option described in Section
2(b) hereof, the Company further agrees to pay to the Representative on the
Option Closing Date (by certified or bank cashier's check or, at the
Representative'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 Option Securities.
6. Conditions of the Underwriters' Obligations. The obligations of
-------------------------------------------
the Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of officers of the Company made pursuant to
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the provisions hereof; and the performance by the Company on and as of the
Closing Date and each Option Closing Date, if any, of its covenants and
obligations hereunder and to the following further conditions:
(A) The Registration Statement shall have become effective not
later than 5:00 p.m., New York City time, on the date prior to the date of this
Agreement or such later date and time as shall be consented to in writing by the
Representative, and, at Closing Date and each Option 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 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 Underwriters' Counsel. If the Company has elected
to rely upon Rule 430A of the Regulations, the price of the Shares 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 Regulations within the
prescribed time period, and prior to Closing Date the Company shall have
provided evidence satisfactory to the Representative 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 Regulations.
(B) The Representative shall not have advised the Company that
the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Representative's opinion, is material, or omits
to state a fact which, in the Representative'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 Representative's reasonable opinion, is
material, or omits to state a fact which, in the Representative'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 Closing Date, the Underwriters shall have received the
favorable opinion of Fenwick & West LLP ("Fenwick & West"), counsel to the
Company, dated the Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
(i) the Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware, and is duly qualified or licensed to do business and is
in good standing as a foreign corporation in all jurisdictions of
the United States of America in which the nature of the
activities conducted by it or the character of the assets owned
or leased by it makes such license or qualification necessary,
except to the extent that the failure to so qualify would not
have a material adverse effect on the Company's business. To such
counsel's knowledge, (a) the Company
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has full corporate power and corporate authority to own or lease
all the assets owned or leased by it and to conduct its business
as described in the Prospectus, and (b) the Company has all
governmental licenses, permits, consents, orders, approvals and
other authorizations ("Permits") necessary to carry on its
business as described in the Prospectus, except for such Permits
the absence of which would not have a material adverse effect on
the Company's business.
(ii) except as described in the Prospectus, to such
counsel's knowledge the Company does not own an interest in any
corporation, limited liability company, partnership, joint
venture, trust or other business entity;
(iii) to such counsel's knowledge, at the dates set forth
in the Prospectus, the Company had a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus (except
for insignificant rounding or other differences) under the
captions "Capitalization" and "Description of Capital Stock." To
the knowledge of such counsel, the Company is not a party to or
bound by any instrument, agreement or other arrangement providing
for it to issue any capital stock, rights, warrants, options or
other Securities, except for this Agreement, the Representative's
Warrant Agreement, or as described in the Prospectus. The
statements set forth in the Prospectus under the captions
"Description of Capital Stock" and "Shares Eligible for Future
Sale," insofar as they purport to constitute a summary of the
terms of the Common Stock and warrants (including without
limitation the Representative's Warrants) which will be
outstanding after the Closing Date, are accurate in all material
respects. At the date set forth under "Capitalization" in the
Prospectus, all issued and outstanding Securities of the Company
have been duly authorized and validly issued and are
nonassessable and, to such counsel's knowledge, are fully paid;
and none of such Securities were issued in violation of any
preemptive or similar rights known to such counsel of any holders
of any security of the Company imposed by the Certificate of
Incorporation, Bylaws or any agreement known to such counsel to
which the Company is a party or by which to such counsel's
knowledge it is bound. The Securities to be sold by the Company
hereunder and under the Representative's Warrant Agreement are
not and will not be subject to any preemptive or other similar
rights of any stockholder imposed by the Certificate of
Incorporation, Bylaws or any agreement known to such counsel to
which the Company is a party or by which to such counsel's
knowledge it is bound, have been duly authorized and, when
issued, paid for and delivered in accordance with their terms,
will be validly issued, fully paid and nonassessable; all
corporate approvals and consents of the Board of Directors and
stockholders of the Company
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required to be taken for the authorization, issue and sale of the
Securities has been duly and validly taken. The certificates
representing the Securities are in due and proper form under
Delaware law. The Representative's Warrants constitute valid,
binding and enforceable obligations of the Company to issue and
sell, upon exercise thereof and payment therefor and subject to
the terms and conditions thereof and the Representative's Warrant
Agreement, the number and type of Securities of the Company
called for thereby (subject to the limitations regarding
enforceability of obligations set forth elsewhere in such
counsel's opinion). Upon the issuance and delivery of and payment
for the Securities pursuant to this Agreement, and upon
registration of such Securities in the names of the Underwriters
in the stock and warrant records of the Company, the Underwriters
will be the owners of such Securities, free and clear of any
adverse claim, assuming for purposes of such counsel's opinion
that the Underwriters are purchasing such Securities in good
faith and without notice of any adverse claim;
(iv) based solely upon the oral advice to such counsel
from the Staff of the Commission, (A) the Registration Statement
is effective under the Act, and, if applicable, filing of all
pricing information has been timely made in the appropriate form
under Rule 430A, (B) no stop order suspending the use of the
Preliminary Prospectus, the Registration Statement or Prospectus
or any part of any thereof or suspending the effectiveness of the
Registration Statement has been issued and (C) no proceedings for
that purpose have been instituted or are pending or, to such
counsel's knowledge, threatened or contemplated under the Act;
(v) each of any preliminary prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements
thereto (other than the financial statements and other financial
and statistical data included therein as to which such counsel
expresses no opinion) comply as to form in all material respects
with the requirements of the Act and the Regulations.
Such counsel shall state that, during the course of the
preparation of the Registration Statement and the Prospectus,
such counsel participated in conferences with officers and other
representatives of the Company, the Representative, Underwriters'
counsel and the independent public accountants of the Company, at
which conferences the contents of the Registration Statement and
the Prospectus and other related matters were discussed, and
although such counsel has not verified the accuracy, completeness
or fairness of the statements contained in the Registration
Statement or the Prospectus, nothing has come to such counsel's
attention that causes such counsel to believe that, as of its
effective date, the Registration Statement (other than financial
statements and any financial or
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statistical data derived therefrom as to which such counsel
expresses no opinion) contained an 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 or
that, as of its date, the Prospectus (other than the financial
statements and any financial or statistical data therein as to
which such counsel expresses no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading or that,
as of the date of such counsel's opinion, either the Registration
Statement or the Prospectus (other than the financial statements
and any financial or statistical data derived therefrom as to
which such counsel expresses no opinion) contains an untrue
statement of a material fact or omits to state a material fact
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(vi) to such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act 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; (B) the descriptions in the
Registration Statement and the Prospectus and any supplement or
amendment thereto of contracts and other agreements to which the
Company is a party that are expressly referred to in the
Registration Statement and the Prospectus, are accurate in all
material respects; (C) there is not pending or overtly threatened
against the Company any action, arbitration, proceeding,
litigation, governmental or other proceeding, domestic or foreign
(an "Action"), which (x) is required by the Regulations 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 material respects),
(y) questions the validity of the capital stock of the Company or
this Agreement or the Representative's Warrant Agreement, or of
any action taken or to be taken by the Company pursuant to or in
connection with any of the foregoing or in which there is a
reasonable possibility of an adverse decision which could
reasonably be expected to result in a material adverse change in
the business of the Company, which could reasonably be expected
to materially adversely affect the present or prospective ability
of the Company to perform its obligations under this Agreement or
the Representative's Warrant Agreement;
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<PAGE>
(vii) the Company has the corporate power and corporate
authority to enter into each of this Agreement and the
Representative's Warrant Agreement and to consummate the
transactions provided for therein; and each of this Agreement and
the Representative's Warrant Agreement has been duly authorized,
executed and delivered by the Company. Each of this Agreement and
the Representative's Warrant Agreement, assuming due
authorization, execution and delivery by each other party
thereto, constitutes a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its
terms (subject to the limitations regarding enforceability of
obligations set forth elsewhere in such counsel's opinion), and
to such counsel's knowledge none of the Company's execution,
delivery or performance of this Agreement and the
Representative's Warrant Agreement, the consummation by the
Company of the transactions contemplated herein or therein, or
the conduct of the Company's business as described in the
Registration Statement, the Prospectus, and any amendments or
supplements thereto, materially conflicts with or results in any
material breach or material violation of any of the terms or
provisions of, or constitutes a material default under, or result
in the creation or 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 pursuant to the
terms of (A) the Certificate of Incorporation or Bylaws, (B) any
material agreement or instrument of the Company identified by the
Company to such counsel as material to the business of the
Company, to which the Company is a party or by which it is bound
("Material Agreement"), or (C) any federal, state or local
statute, rule or regulation known to such counsel to be
applicable to the Company or any judgment, decree or order known
to such counsel of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body having
jurisdiction over the Company or any of its activities or
properties, in each case where such conflict, breach, violation
or default could reasonably be expected to have a material
adverse effect on the Company's business;
(viii) 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 Blue Sky
laws, as to which such counsel expressses no opinion or under
federal Securities laws, as to which such counsel expresses no
opinion pursuant to this subsection (viii)) is required in
connection with the issuance of the Firm Securities and
Representative's Warrant pursuant to the Prospectus and the
Registration Statement, the performance of this Agreement and the
Representative's Warrant Agreement, and the transactions
contemplated hereby and thereby;
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<PAGE>
(ix) to such counsel's knowledge, the description of the
real property lease agreements to which the Company is a party
that are expressly referred to in the Registration Statement and
Prospectus are accurate in all material respects;
(x) to the knowledge of such counsel, and except as
disclosed in the Registration Statement and the Prospectus, (A)
the Company is not in material breach of, or in material default
under, any term or provision of any Material Agreement, in each
case where such breach or default could reasonably be expected to
have a material adverse effect on the business of the Company,
and (B) the Company is not in material violation of any term or
provision of its Certificate of Incorporation or Bylaws, or in
material violation of any franchise, license, permit, judgment,
decree, order, statute, rule or regulation known to such counsel
to be applicable to the Company, in each case where such breach,
default or violation could reasonably be expected to have a
material adverse effect on the Company's business;
(xi) the statements in the Prospectus under "Dividend
Policy," "Description of Capital Stock," and "Shares Eligible for
Future Sale," insofar as such statements constitute a summary of
law, descriptions of statutes, licenses, rules or regulations or
legal conclusions expressly referred to therein, are correct in
all material respects;
(xii) the Common Stock has been accepted for quotation on
the Nasdaq SmallCap Market and the Boston Stock Exchange; and
(xiii) to such counsel's knowledge, except as disclosed in
the Registration Statement and Prospectus, no person,
corporation, trust, partnership, association or other entity has
the right under any Material Agreement or other agreement
identified in items ____ through ____ in the third paragraph of
such counsel's opinion 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.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws, rules and regulations of
the United States and the laws, rules and regulations of the State of Delaware,
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
satisfactory to Underwriters' Counsel) of other counsel acceptable to
Underwriters' Counsel, familiar with the applicable laws; (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
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<PAGE>
documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be delivered
to Underwriters' Counsel if requested. The opinion of such counsel shall state
that knowledge shall not include the knowledge of a director or officer of the
Company who is affiliated with such firm in his or her capacity as an officer or
director of the Company. 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.
At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of Fenwick & West, counsel to the Company, dated
the Option Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel confirming as of such Option Closing Date
the statements made by Fenwick & West in its opinion delivered on the Closing
Date.
(C) On or prior to each of the Closing Date and the Option
Closing Date, if any, Underwriters' Counsel shall have been furnished such
documents, certificates and opinions as they may reasonably require 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 of the Company or herein contained.
(D) Prior to each of the Closing Date and each Option Closing
Date, if any, (i) there shall have been no material adverse change nor
development involving a prospective change in the condition, financial or
otherwise, prospects, stockholders' equity 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 adverse to the Company; (iii) the Company
shall not be in default under any provision of any instrument relating to any
outstanding indebtedness which default has not been waived; (iv) the Company
shall not have issued any Securities (other than the Securities) or declared or
paid any dividend or made any distribution in respect of its capital stock of
any class and there has not been any change in the capital stock, or any
material increase in the debt (long or short term) or liabilities or obligations
of the Company (contingent or otherwise) except for the issuance of the Option
Securities, the Representative's Warrants, and shares of Common Stock issued
upon the exercise of currently outstanding warrants or options, or options and
warrants granted in the ordinary course of business consistent with prior
practice; (v) 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; (vi) no action, suit or proceeding, at law or in equity, shall have
been pending or threatened (or circum stances giving rise to same) against the
Company, or affecting any of its respective 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
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<PAGE>
Company, except as set forth in the Registration Statement and Prospectus; and
(vii) no stop order shall have been issued under the Act and no proceedings
therefor shall have been initiated, threatened or contemplated by the
Commission.
(E) At each of the Closing Date and each Option Closing Date, if
any, the Underwriters shall have received a certificate of the Company signed on
behalf of the Company by the principal executive officer of the Company, dated
the Closing Date or Option Closing Date, as the case may be, to the effect that
such executive has carefully examined the Registration Statement, the Prospectus
and this Agreement, and that:
(I) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the
Closing Date or the Option 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
Option Closing Date, as the case may be;
(II) No stop order suspending the effectiveness of the
Registration Statement or any part thereof 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 after
due inquiry, are contemplated or 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 by the Act to be 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 not misleading and neither the Preliminary Prospectus or
any supplement, as of their respective dates, 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; and
(IV) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (a) the Company has not incurred up to and including
the Closing Date or the Option 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
transactions not in the ordinary course of business; (d) there
has not been any change in the capital
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stock as described in the Registration Statement and Prospectus
or material 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 loss or damage to its
property or assets, whether or not insured, (f) there is no
litigation which is pending or threatened (or circumstances
giving rise to same) against the Company or any affiliated party
of any of the foregoing which is required to be set forth in an
amended or supplemented Prospectus which has not been set forth,
and (g) there has occurred no event required to be set forth in
an amended or supplemented Prospectus which has not been set
forth.
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.
(F) By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters.
(G) At the time this Agreement is executed, the Underwriters
shall have received a letter, dated such date, addressed to the Underwriters 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 Underwriters and Underwriters' Counsel, from Arthur Andersen:
(I) confirming that they are independent certified
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
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 Regulations thereunder and
that the Representative may rely upon the opinion of Arthur
Andersen 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 financial statements of the Company (with an
indication of the date of the latest available unaudited
interim financial statements), a reading of the latest
available minutes of the stockholders and board of directors
and the various committees of the board of directors of the
Company, consultations with officers and other employees of
the Company responsible for financial and accounting matters
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and other specified procedures and inquiries, nothing has
come to their attention which would lead them to believe
that (A) the unaudited financial statements and supporting
schedules of the Company included in the Registration
Statement, if any, do not comply as to form in all material
respects with the applicable accounting requirements of the
Act and the Regulations or are not fairly presented in
conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited 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 material increase in long-term debt of the
Company, or any material decrease in the stockholders'
equity or net current assets or net assets of the Company as
compared with amounts shown in the most recent balance sheet
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.
(IV) stating that they have compared specific dollar
amounts, numbers of shares, 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
(V) statements as to such other material matters
incident to the transaction contemplated hereby as the
Representative may reasonably request.
(H) At the Closing Date and each Option Closing Date, if
any, the Underwriters shall have received from Arthur Andersen a letter, dated
as of the Closing Date or the Option 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 6, except that the specified date referred to
shall be a date not more than five (5) days prior to Closing Date or the Option
Closing Date, as the case may be, 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 (iv) of Subsection (i) of this
Section 6 with respect to certain amounts, percentages and financial information
as specified by the Representative and deemed to be a part of the Registration
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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 (iv).
(I) On each of Closing Date and Option Closing Date, if any,
there shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Securities.
(J) No order suspending the sale of the Securities in any
jurisdiction designated by the Representative pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the Option
Closing Date, if any, and no proceedings for that purpose shall have been
instituted or shall be contemplated.
(K) On or before the Closing Date, the Company shall have
executed and delivered to the Representative, (i) the Representative's Warrant
Agreement, substantially in the form filed as Exhibit 4(b), to the Registration
Statement, in final form and substance satisfactory to the Representative, and
(ii) the Representative's Warrants in such denominations and to such designees
as shall have been provided to the Company.
(L) On or before the Closing Date, the Common Stock shall have
been duly approved for quotation on the Boston Stock Exchange.
(M) On or before the Closing Date, there shall have been
delivered to the Representative all of the Lock-up Agreements, subject to the
exceptions set forth in Section (v) above, in final form and substance
satisfactory to Underwriters' Counsel.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representative may terminate this
Agreement or, if the Represen tative so elect, they 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 each of the
Underwriters (for purposes of this Section 7 "Underwriters" shall include the
officers, directors, partners, employees, agents and counsel of the
Underwriters, including specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof), 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, from and against any and all
loss, liability, claim, damage, and expense whatsoever (including, but not
limited to, reasonable attorneys' fees and any and all reasonable expense
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement of any claim or litigation provided that the
indemnified persons may
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<PAGE>
not agree to any such settlement without the prior written consent of the
Company), as and when incurred, arising out of, based upon or in connection with
(i) any untrue statement or alleged untrue statement of a material fact
contained (A) in any Preliminary Prospectus, the Registration Statement or the
Prospectus (as from time to time amended and supplemented); or (B) in any
application or other document or communication (in this Section 7 collectively
called "application") executed by or on behalf of the Company or based upon
written information furnished by or on behalf of 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 Boston Stock
Exchange or any Securities exchange; or any omission or alleged omission to
state 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 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, or in
any application, as the case may be; or (ii) any breach of any representation,
warranty, covenant or agreement of the Company contained in this Agreement. 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) Each of the Underwriters agrees severally, but not jointly,
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 the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter or the Representative expressly for use in such
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or Prospectus directly
relating to the transactions effected by the Underwriters in connection with
this Offering. The Company acknowledges that the statements with respect to the
public offering of the Securities set forth under the heading "Underwriting" and
the stabilization legend in the Prospectus have been furnished by the
Underwriters expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriters or the Representative
for inclusion in the Prospectus.
(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 to so notify an indemnifying party shall not relieve it
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from any liability which it may have otherwise or which it may have under this
Section 7, except to the extent that it has been prejudiced in any material
respect by such failure). 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, to 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 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 indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which 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 the reasonable 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.
-32-
<PAGE>
In any case where the Company is a contributing party and the Underwriters are
the indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, 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 other than underwriting discounts and commissions) bear to
the total underwriting discounts received by the Underwriters 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 Underwriters, 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 subdivision (d) the Underwriters shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Securities purchased by the Underwriters hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 12(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 deemed to be representations, warranties and agreements of the Company
at the Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the respective
indemnity and contribution 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 any Underwriter, the Company, any controlling person of either
the Underwriter or the Company, and shall survive termination of this Agreement
or the issuance and delivery of the Securities to the Underwriters and the
Representative, as the case may be.
-33-
<PAGE>
9. Effective Date.
--------------
(A) This Agreement shall become effective at 5:00 p.m., New York
City time, on the date hereof. 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 Representative of telegrams to Securities dealers releasing
such shares for offering or the release by the Representative for publication of
the first newspaper advertisement which is subsequently published relating to
the Securities.
10. Termination.
-----------
(A) Subject to subsection (b) of this Section 10, the
Representative shall have the right to terminate this Agreement, if between the
date of this Agreement and the Closing Date or the Option Closing Date, as the
case may be, (i) if any domestic or international event or act or occurrence has
materially disrupted, or in the Representative's reasonable opinion will in the
immediate future materially disrupt the financial markets; or (ii) any material
adverse change in the financial markets shall have occurred; or (iii) 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 (iv) if the
United States shall have become involved in a war or major hostilities, or if
there shall have been an escalation in an existing war or major hostilities or a
national emergency shall have been declared in the United States; or (v) if a
banking moratorium has been declared by a state or federal authority; or (vi) if
the Company shall have sustained a loss material or substantial to the Company
by fire, flood, accident, hurricane, earthquake, theft, sabotage or other
calamity or malicious act which, whether or not such loss shall have been
insured, will, in the Representative's opinion, make it inadvisable to proceed
with the delivery of the Securities; or (viii) if there shall have been such a
material adverse change in the prospects or conditions of the Company, or such
material adverse change in the general market, political or economic conditions,
in the United States or elsewhere as in the Representative's judgment would make
it inadvisable to proceed with the offering, sale and/or delivery of the
Securities.
(B) If this Agreement is terminated by the Representative in
accordance with any of the provisions of Section 6, Section 10(a) or Section 11,
the Company shall promptly reimburse and indemnify the Underwriters pursuant to
Section 5(b) hereof. Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 10, 11 and 12 hereof),
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 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.
-34-
<PAGE>
11. Substitution of the Underwriters. If one or more of the
--------------------------------
Underwriters shall fail (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 6, Section 10 or
Section 12 hereof) to purchase the Securities which it or they are obligated to
purchase on such date under this Agreement (the "Defaulted Securities"), the
Representative shall have the right, within 24 hours thereafter, to make
arrangement for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth. If, however, the Representative shall not have completed such
arrangements within such 24-hour period, then:
(A) if the number of Defaulted Securities does not exceed 10% of
the total number of Firm Securities to be purchased on such date, the non-
defaulting Underwriters shall be obligated to purchase the full amount thereof
in the proportions that their respective underwriting obligations hereunder bear
to the underwriting obligations of all non-defaulting Underwriters, or
(B) if the number of Defaulted Securities exceeds 10% of the
total number of Firm Securities to be purchased on such date, this Agreement
shall terminate without liability on the part of any nondefaulting Underwriters.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the Closing
----------------------
Date or any Option 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 Option Closing Date, the Underwriters
may at the Representative's option, by notice from the Representative to the
Company, terminate the Underwriters' obligation to purchase Option Securities
from the Company on such date) without any liability on the part of any non-
defaulting party other than pursuant to Section 5, Section 7 and Section 10
hereof. No action taken pursuant to this Section shall relieve the Company from
liability, if any, in respect of such default.
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 Underwriters shall be directed to the
Representative, c/o National Securities Corporation, 1001 Fourth Avenue, Suite
2200, Seattle, Washington 98154, Attention: Steven A. Rothstein, with a copy,
which shall not constitute notice, to Camhy Karlinsky & Stein LLP, 1740
Broadway, 16th Floor, New York,
-35-
<PAGE>
New York 10019, Attention: Alan I. Annex, Esq. Notices to the Company shall be
directed to the Company at Steven S. Porter, Osmotics Corporation, 1125 E. 17th
Street, Suite 2310, Denver, Colorado 80202, with a copy, which shall not
constitute notice, to Fenwick & West LLP, Two Palo Alto Square, Palo Alto,
California 94306, Attention: C. Kevin Kelso, Esq.
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 representatives and assigns, 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. Construction. This Agreement shall be governed by and construed
------------
and enforced in accordance with the laws of the State of New York 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. Entire Agreement; Amendments. This Agreement and the
----------------------------
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representative
and the Company.
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,
OSMOTICS CORPORATION
By: ______________________________________
Name: Steven S. Porter
Title: Chief Executive Officer
-36-
<PAGE>
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
NATIONAL SECURITIES CORPORATION
By:
Name: Steven A. Rothstein
Title: Chairman
For itself and as Representative of the Underwriters named in Schedule A hereto.
-37-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
ERROR! BOOKMARK NOT DEFINED. NUMBER OF SHARES OF COMMON
NAME OF UNDERWRITERS STOCK TO BE PURCHASED
-------------------- ---------------------
<S> <C>
National Securities Corporation
TOTAL................... 1,125,000 1,125,000
</TABLE>
SCH. A-1
<PAGE>
EXHIBIT 4.02
01/24/97
________________________________________
OSMOTICS CORPORATION
AND
NATIONAL SECURITIES CORPORATION
REPRESENTATIVE'S
WARRANT AGREEMENT
DATED AS OF ____________, 1997
________________________________________
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of ____________, 1997,
between OSMOTICS CORPORATION, a Delaware corporation (the "Company"), and
NATIONAL SECURITIES CORPORATION and its assignees or designees (each hereinafter
referred to variously as a "Holder" or "Representative").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof and entered
into between the Company and the Representative, to act as the representative of
the several underwriters listed therein (the "Underwriters") in connection with
the Company's proposed public offering of 1,125,000 shares of Common Stock (as
hereinafter defined) at a public offering price of $________ per share to
purchase one (1) share of Common Stock at an exercise price of $____, per share
[120% of the initial public offering price per share of Common Stock] (the
"Public Offering").
WHEREAS, pursuant to the Underwriting Agreement, the Company proposes
to issue warrants (the "Representative's Warrants") to the Representative to
purchase up to an aggregate of 112,500 shares of Common Stock of the Company.
WHEREAS, the Representative's Warrants to be issued pursuant to this
Agreement will be issued on the Closing Date (as such term is defined in the
Underwriting Agreement) by the Company to the Representative in consideration
for, and as part of the Underwriters' compensation in connection with, the
Representative acting as the representative pursuant to the Underwriting
Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate of eleven dollars ($11.00), the
agreements herein
<PAGE>
set forth and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Grant. The Representative is hereby collectively granted the
-----
right to purchase, at any time from ___________, 1998 (one year from the
Effective Date of the Registration Statement) until 5:30 p.m., New York time, on
February __, 2002 (5 years from the Effective Date of the Registration
Statement), at which time the Representative's Warrants expire, up to an
aggregate of 112,500 shares of Common Stock, $.001 par value (the "Common
Stock"), at an initial exercise price (subject to adjustment as provided in
Section 11 hereof) of $____ per share of Common Stock [120% of the initial
- -------
public offering price per share], (the "Exercise Price"). Except as set forth
herein, the shares of Common Stock issuable upon exercise of the
Representative's Warrants are in all respects identical to the shares of Common
Stock being purchased by the Underwriters for resale to the public pursuant to
the terms and provisions of the Underwriting Agreement. The shares of Common
Stock issuable upon exercise of the Representative's Warrants are sometimes
hereinafter referred to as the "Securities."
2. Representative's Warrant Certificates. The Representative's
-------------------------------------
warrant certificates (the "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. Registration of Warrant. The Representative's Warrants shall be
-----------------------
numbered and shall be registered on the books of the Company when issued.
4. Exercise of Representative's Warrant.
------------------------------------
The Representative's Warrants initially are exercisable at an
aggregate Exercise Price (subject to adjustment as provided in Section 11
-------
hereof) per share of Common
-2-
<PAGE>
Stock as set forth in Section 8 hereof payable by certified or official bank
-------
check in New York Clearing House funds. Upon surrender of a Representative's
Warrant Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Exercise Price for the Securities purchased at the
Company's principal offices in Colorado presently located at 1125 17th Street,
Suite 2310, Denver, Colorado 80202 the registered holder of a Representative's
Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a
certificate or certificates for the shares of Common Stock so purchased. The
purchase rights represented by each Representative'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 Representative's Warrants).
Representative's Warrants may be exercised to purchase all or part of the shares
of Common Stock represented thereby. In the case of the purchase of less than
all of the shares of Common Stock purchasable under any Representative's Warrant
Certificate, the Company shall cancel said Representative's Warrant Certificate
upon the surrender thereof and shall execute and deliver a new Representative's
Warrant Certificate of like tenor for the balance of the shares of Common Stock
purchasable thereunder.
5. Issuance of Certificates. Upon the exercise of the
------------------------
Representative's Warrant, the issuance of certificates for shares of Common
Stock or other securities, properties or rights underlying such Representative's
Warrant 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 issuance thereof, and such
certificates shall (subject to the provisions of Sections 7 and 9 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 Holder and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the
-3-
<PAGE>
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 Representative's Warrant Certificates and the certificates
representing the shares of Common Stock or other securities, property or rights
issued upon exercise of the Representative's Warrant shall be executed on behalf
of the Company by the manual or facsimile signature of the then present
President or any 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 any Assistant Secretary of the Company. Representative's
Warrant Certificates shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer.
6. Transfer of Representative's Warrant. The Representative's
------------------------------------
Warrant shall be transferable only on the books of the Company maintained at its
principal office, where its principal office may then be located, upon delivery
thereof duly endorsed by the Holder or by its duly authorized attorney or
representative accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration transfer, the Company shall
execute and deliver the new Representative's Warrant to the person entitled
thereto.
7. Restriction On Transfer of Representative's Warrant. The Holder
---------------------------------------------------
of a Representative's Warrant Certificate, by its acceptance thereof, covenants
and agrees that the Representative's Warrant is being acquired as an investment
and not with a view to the distribution thereof, and that the Representative's
Warrant may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for the term of the Representative's Warrant,
except to officers or partners of the Underwriters, or by operation of law.
-4-
<PAGE>
8. Exercise Price.
---------------
8.1 Initial and Adjusted Exercise Price. Except as otherwise
-----------------------------------
provided in Section 11 hereof, the initial exercise price of each
-------
Representative's Warrant shall be $____ per share of Common Stock [120% of the
initial public offering price per share of Common Stock]. The adjusted exercise
price shall be the price which shall result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Section 11 hereof. Any transfer of a Representative's Warrant shall constitute
- -------
an automatic transfer and assignment of the registration rights set forth in
Section 9 hereof with respect to the Securities or other securities, properties
- -------
or rights underlying the Representative's Warrants.
8.2 Exercise Price. The term "Exercise Price" herein shall mean
--------------
the initial exercise price or the adjusted exercise price, depending upon the
context or unless otherwise specified.
9. Registration Rights.
-------------------
9.1 Registration Under the Securities Act of 1933. Each
---------------------------------------------
Representative's Warrant Certificate and each certificate representing shares of
Common Stock and any of the other securities issuable upon exercise of the
Representative's Warrant (collectively, the "Warrant Shares") shall bear the
following legend unless (i) such Representative's Warrant or Warrant Shares are
distributed to the public or sold to the underwriters for distribution to the
public pursuant to Section 9 hereof or otherwise pursuant to a registration
-------
statement filed under the Securities Act of 1933, as amended (the "Act"), or
(ii) the Company has received an opinion of counsel, in form and substance
reasonably satisfactory to counsel for the Company, that such legend is
unnecessary for any such certificate:
THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS
CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON
EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (I) AN
-5-
<PAGE>
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 REPRESEN-TATIVE'S
WARRANT REPRESENTED BY THE CERTIFICATE IS RESTRICTED IN
ACCORDANCE WITH THE REPRESENTATIVE'S WARRANT AGREEMENT
REFERRED TO HEREIN.
9.2 Piggyback Registration. If, at any time commencing after
----------------------
the effective date of the Registration Statement and expiring five (5) years
thereafter, the Company proposes to register any of its securities under the Act
(other than in connection with a merger or pursuant to Form S-4 or Form S-8) it
will give written notice by registered mail, at least twenty (20) days prior to
the filing of each such registration statement, to the Holders of the
Representative's Warrants and/or the Warrant Shares of its intention to do so.
If any of the Holders of the Representative's Warrants and/or Warrant Shares
notify the Company within ten (10) days after mailing of any such notice of its
or their desire to include any such securities in such proposed registration
statement, the Company shall afford such Holders of the Representative's
Warrants and/or Warrant Shares the opportunity to have any such Representative's
Warrants and/or Warrant Shares registered under such registration statement. In
the event that the managing underwriter for said offering advises the Company in
writing that in its opinion the number of securities requested to be included in
such registration exceeds the number which can be sold in such offering without
causing a diminution in the offering price or otherwise adversely affecting the
offering, the Company will include in such registration (a) first, the
-----
securities the Company proposes to sell, (b) second, the securities held by the
------
entities, if any, that made the demand for registration, (c) third, the
-----
Representative's Warrants and/or Warrant Shares requested to be
-6-
<PAGE>
included in such registration which in the opinion of such underwriter can be
sold, pro rata among all proposed selling shareholders.
--- ----
Notwithstanding the provisions of this Section 9.2, the Company shall
-------
have the right at any time after it shall have given written notice pursuant to
this Section 9.2 (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.
9.3 Demand Registration.
-------------------
(a) At any time commencing on the first date that the
Company has been subject to the requirements of Section 12 or 15(d) of the
Exchange Act for a period of at least 12 calendar months and expiring five (5)
years from the effective date of the Registration Statement, the Holders of the
Representative's Warrants and/or Warrant Shares representing a "Majority" (as
hereinafter defined) of the Representative's Warrants and/or Warrant Shares
shall have the right (which right is in addition to the registration rights
rights under Section 9.2 hereof), exercisable by written notice to the Company,
-------
to have the Company prepare and file with the Securities and Exchange Commission
(the "Commission"), on one occasion, 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 Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale by such
Holders and any other Holders of the Representative's Warrant and/or Warrant
Shares who notify the Company within fifteen (15) days after the Company mails
notice of such requestpursuant to Section 9.3(b) hereof (collectively, the
-------
"Requesting Holders") of their respective Warrant Shares for the earlier of (i)
nine (9) consecutive months or (ii) until the sale of all of the Warrant Shares
requested to be registered by the Requesting Holders.
(b) The Company covenants and agrees to give written notice
of any registration request under this Section 9.3 by any Holder or Holders
-------
representing a Majority of
-7-
<PAGE>
the Representative's Warrants and/or Warrant Shares to all other registered
Holders of the Representative's Warrants and the Warrant Shares within ten (10)
days from the date of the receipt of any such registration request.
(c) Intentionally omitted.
(d) Notwithstanding anything to the contrary contained
herein, if the Company shall not have filed a registration statement for the
Warrant Shares within the time period specified in Section 9.4(a) hereof
-------
pursuant to the written notice specified in Section 9.3(a) of the Holders of a
-------
Majority of the Representative's Warrants and/or Warrant Shares, the Company, at
its option, may repurchase (i) any and all Warrant Shares at the higher of the
Market Price (as defined in Section 9.3(e)) per share of Common Stock on (x) the
-------
date of the notice sent pursuant to Section 9.3(a) or (y) the expiration of the
-------
period specified in Section 9.4(a) and (ii) any and all Representative's Warrant
-------
at such Market Price less the exercise price of such Representative's Warrant.
Such repurchase shall be in immediately available funds and shall close within
two (2) days after the later of (i) the expiration of the period specified in
Section 9.4(a) or (ii) the delivery of the written notice of election specified
- -------
in this Section 9.3(d).
-------
(e) Definition of Market Price. As used herein, the phrase
--------------------------
"Market Price" at any date shall be deemed to be the last reported sale price,
or, in case no such reported sale takes place on such day, the average of the
last reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the shares of
Common Stock are listed or admitted to trading, or, if the shares of Common
Stock are not listed or admitted to trading on any national securities exchange,
the average closing sale price as furnished by the NASD through The Nasdaq Stock
Market, Inc. ("Nasdaq") or similar organization if Nasdaq is no longer reporting
such information, or if the shares of Common Stock are not quoted on Nasdaq, as
determined in good faith by resolution of the Board of Directors of the Company,
based on the best information available to it.
-8-
<PAGE>
9.4 Covenants of the Company With Respect to Registration. In
-----------------------------------------------------
connection with any registration under Sections 9.2 or 9.3 hereof, the Company
--------
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within one hundred and twenty (120) days of receipt of
any demand therefor, and to have any registration statements declared effective
at the earliest possible time, and shall furnish each Holder desiring to sell
Warrant Shares such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and
expenses of a single counsel for all Holders up to a maximum of $25,000 of legal
fees and costs and any underwriting or selling commissions), fees and expenses
in connection with all registration statements filed pursuant to Sections 9.2
--------
and 9.3(a) hereof including, without limitation, the Company's legal and
accounting fees, printing expenses, blue sky fees and expenses. The Holder(s)
will pay all costs, fees and expenses (including those of the Company) in
connection with the registration statement filed pursuant to Section 9.3(c).
-------
(c) The Company will use its commercially reasonable
efforts to take all necessary action which may be required in qualifying or
registering the Warrant Shares included in a registration statement for offering
and sale under the securities or blue sky laws of such states as reasonably are
requested by 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
Warrant 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 Securities Exchange Act of 1934, as amended
("Exchange Act"), against all loss, claim, damage, expense or liability
-9-
<PAGE>
(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 each of the Underwriters
contained in Section 7 of the Underwriting Agreement.
-------
(e) The Holder(s) of the Warrant Shares 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 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
-------
Underwritin g Agreement pursuant to which the Underwriters have agreed to
indemnify the Company.
(f) Nothing contained in this Agreement shall be construed
as requiring the Holder(s) to exercise their Representative's Warrant 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 Warrant Shares to be included in any registration
statement filed pursuant to Section 9.3 hereof, or permit any other registration
-------
statement (other than a registration statement on Form S-4 or S-8) to be or
remain effective during a ninety (90) day period following the effectiveness of
a registration statement filed pursuant to Section 9.3 hereof, without the prior
-------
written consent of National Securities Corporation or as otherwise
required by the terms of any existing registration
-10-
<PAGE>
rights granted prior to the date of this Agreement by the Company to the holders
of any of the Company's securities.
(h) The Company shall furnish to each Holder participating
in the offering and to each underwriter, if any, a signed counterpart, addressed
to such Holder or underwriter, of (i) an opinion of counsel to the Company,
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, an opinion dated the date
of the closing under the underwriting agreement), and (ii) a "cold comfort"
letter dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a 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, make "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 enter into an underwriting agreement
with the managing underwriters selected for such underwriting by Holders holding
a Majority of the Warrant Shares requested to be included in such underwriting,
which may be the Representative. Such agreement shall be satisfactory in form
and substance to the Company, each Holder and such
-11-
<PAGE>
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. The Holders shall be
parties to any underwriting agreement relating to an underwritten sale of their
Warrant Shares 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 underwriters 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 underwriters except as they may relate to
such Holders and their intended methods of distribution.
(k) For purposes of this Agreement, the term "Majority" in
reference to the Representative's Warrants or Warrant Shares, shall mean in
excess of fifty percent (50%) of the then outstanding Representative's Warrants
or Warrant Shares 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 family, persons acting as nominees or in conjunction therewith
or (ii) have not been resold to the public pursuant to a registration statement
filed with the Commission under the Act.
10. Obligations of Holders. It shall be a condition precedent to the
----------------------
obligations of the Company to take any action pursuant to Section 9 hereof that
-------
each of the selling Holders shall:
(a) Furnish to the Company such information regarding
themselves, the Warrant Shares held by them, the intended method of sale or
other disposition of such securities, the identity of and compensation to be
paid to any underwriters proposed to be employed in connection with such sale or
other disposition, and such other information as may reasonably be required to
effect the registration of their Warrant Shares.
(b) Notify the Company, at any time when a prospectus
relating to the Warrant Shares covered by a registration statement is required
to be delivered under the Act, of
-12-
<PAGE>
the happening of any event with respect to such selling Holder as a result of
which the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing.
11. Adjustments to Exercise Price and Number of Securities. The
------------------------------------------------------
Exercise Price in effect at any time and the number and kind of securities
purchased upon the exercise of the Representative's Warrant shall be subject to
adjustment from time to time only upon the happening of the following events:
11.1 Stock Dividend, Subdivision and Combination. In case the
-------------------------------------------
Company shall (i) declare a dividend or make a distribution on its outstanding
shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify
its outstanding shares of Common Stock into a greater number of shares, or (iii)
combine or reclassify its outstanding shares of Common Stock into a smaller
number of shares, the Exercise Price in effect at the time of the record date
for such dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that it shall equal the
price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
Such adjustment shall be made successively whenever any event listed above shall
occur.
11.2 Adjustment in Number of Securities. Upon each adjustment of
----------------------------------
the Exercise Price pursuant to the provisions of this Section 11, the number of
-------
Warrant Shares issuable upon the exercise at the adjusted Exercise Price of each
Representative's Warrant shall be adjusted to the nearest number of whole shares
of Common Stock by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant
-13-
<PAGE>
Shares issuable upon exercise of the Representative's Warrant immediately prior
to such adjustment and dividing the product so obtained by the adjusted Exercise
Price.
11.3 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.
11.4 Merger or Consolidation. In case of any consolidation 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 of each Representative's Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Representative's Warrant) to receive, upon exercise of such
Representative's 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 of Common Stock for which such Representative's 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 11. The above
-------
provision of this subsection shall similarly apply to successive consolidations
or mergers.
11.5 No Adjustment of Exercise Price in Certain Cases. No
------------------------------------------------
adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Representative's Warrant
or the Warrant Shares;
-14-
<PAGE>
(b) Upon the issuance or sale of Common Stock (or any other
security convertible, exercisable, or exchangeable into shares of Common Stock)
upon the direct or indirect conversion, exercise, or exchange of any options,
rights, warrants, or other securities or indebtedness of the Company outstanding
as of the date of this Agreement or granted pursuant to any stock option plan of
the Company in existence as of the date of this Agreement, pursuant to the terms
thereof; or
(c) If the amount of said adjustment shall be less than two
cents ($.02) per share, 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 Representative's Warrant.
12. Exchange and Replacement of Representative's Warrant Certificates.
-----------------------------------------------------------------
Each Representative'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 Representative's Warrant Certificate of like tenor and
date representing in the aggregate the right to purchase the same number of
Warrant Shares 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 Representative'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 Representative's Warrant, if mutilated, the Company will make and deliver a
new Warrant Certificate of like tenor, in lieu thereof.
13. 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
-15-
<PAGE>
Representative's Warrant, 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.
14. 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 Representative's
Warrant, such number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof. Every transfer agent
("Transfer Agent") for the Common Stock and other securities of the Company
issuable upon the exercise of the Representative's Warrant will be irrevocably
authorized and directed at all times to reserve such number of authorized shares
of Common Stock and other securities as shall be requisite for such purpose.
The Company will keep a copy of this Agreement on file with every Transfer Agent
for the Common Stock and other securities of the Company issuable upon the
exercise of the Representative's Warrant. The Company will supply every such
Transfer Agent with duly executed stock and other certificates, as appropriate,
for such purpose. The Company covenants and agrees that, upon exercise of the
Representative's Warrant and payment of the Exercise Price 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 Representative's Warrant shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon the exercise of the Representative's Warrant 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 SmallCap Market.
15. Notices to Representative'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
-16-
<PAGE>
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 Representative'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
(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 said events, the Company shall give written notice 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.
-17-
<PAGE>
16. Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) if to the registered Holder of the Representative's
Warrant, 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 4
-------
hereof or to such other address as the Company may designate by notice to the
Holders.
17. Supplements; Amendments; Entire Agreement. 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 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. The Company and the Representative may
from time to time supplement or amend this Agreement without the approval of any
holders of Representative's Warrant Certificates (other than the Representative)
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 Representative may deem necessary or desirable and
which the Company and the Representative deem shall not adversely affect the
interests of the Holders of Representative's Warrant Certificates.
18. Successors. All of 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.
19. Survival of Representations and Warranties. All statements in any
------------------------------------------
schedule, exhibit or certificate or other instrument delivered by or on behalf
of the parties hereto, or in
-18-
<PAGE>
connection with the transactions contemplated by this Agreement, shall be deemed
to be representations and warranties hereunder. Notwithstanding any
investigations made by or on behalf of the parties to this Agreement, all
representations, warranties and agreements made by the parties to this Agreement
or pursuant hereto shall survive.
20. Governing Law. This Agreement and each Representative's Warrant
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
21. 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.
22. 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.
23. Benefits of this Agreement. Nothing in this Agreement shall be
--------------------------
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Representative's
Warrant Certificates or Warrant Shares 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 Underwriters and any other Holder(s) of
the Representative's Warrant Certificates or Warrant Shares.
24. Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
-19-
<PAGE>
IN WITNESS OF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
ATTEST: OSMOTICS CORPORATION
____________________ By:_______________________________________
Secretary Name: Steven S. Porter
TITLE: CHIEF EXECUTIVE OFFICER
NATIONAL SECURITIES CORPORATION
By:_______________________________________
Name: Steven S. Rothstein
TITLE: CHAIRMAN
-20-
<PAGE>
EXHIBIT A
[FORM OF REPRESENTATIVE'S WARRANT CERTIFICATE]
THE REPRESENTATIVE'S WARRANT 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 REPRESENTATIVE'S WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO
HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ____________, 2002
Representative's Warrant No. _____
____ Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that ________, or registered
assigns, is the registered holder of Warrants to purchase initially, at any
time from ____________, 1998 until 5:30 p.m., New York time on ____________,
2002 ("Expiration Date"), up to ____ shares of fully-paid and non-assessable
common stock, no par value ("Common Stock") of Osmotics Corporation, a Delaware
corporation (the "Company"), at the initial exercise price, subject to
adjustment in certain events, of $____ per Share [120% of initial offering price
per Share] (the "Exercise Price") upon surrender of this Representative'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
Representative's Warrant Agreement dated as of ____________, 1997 among the
Company and National Securities Corporation (the "Warrant Agreement"). Payment
of the Exercise Price shall be made by certified or official bank check in New
York Clearing House funds payable to the order of the Company.
EXH. A-1
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Representative's Warrant evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Representative's Warrant evidenced by this Warrant Certificate are
part of a duly authorized issue of Representative's Warrant issued pursuant to
the Warrant Agreement, which 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
Representative's Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type 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 Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Representative's
Warrant; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair,
the rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Representative's Warrant shall be issued to the transferee(s) in exchange for
this Warrant Certificate, subject to the limitations provided herein and in the
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 Representative's Warrant
evidenced by this Certificate, the Company shall forthwith issue to the holder
hereof a new Warrant Certificate representing such numbered unexercised
Representative's Warrant.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this 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 Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
EXH. A-2
<PAGE>
This Warrant Certificate does not entitle any holder thereof to any of
the rights of a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of ____________, 1997.
ATTEST: OSMOTICS CORPORATION
___________________ By:_________________________________________
Secretary Name: Steven S. Porter
Title: Chief Executive Officer
EXH. A-3
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 4.11]
The undersigned hereby irrevocably elects to exercise the right,
represented by this 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
Osmotics Corporation (the "Company") in the amount of $_____, all in accordance
with the terms of Section 4.1 of the Representative's Warrant Agreement dated as
of ________ __, 1997 among the Company and National Securities Corporation. 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
________________________, and if said number of shares shall not be all the
shares purchasable hereunder, that a new Warrant Certificate for the balance of
the shares purchasable under the within Warrant Certificate be registered in the
name of the undersigned warrantholder or his assignee as below indicated and
delivered to the address stated below.
Dated: ___________________
Signature:____________________________________
(Signature must conform in all respects to
name of holder as specified on the face of the
Warrant Certificate.)
Address:______________________________________
______________________________________
______________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
Signature Guaranteed:___________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
EXH. A-4
<PAGE>
[FORM OF ASSIGNMENT]
(TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER
DESIRES TO TRANSFER THE WARRANT CERTIFICATE.)
FOR VALUE RECEIVED ____________________ here sells, assigns and transfers unto
[NAME OF TRANSFEREE] this Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
_____________________ Attorney, to transfer the within Warrant Certificate on
the books of the within-named Company, with full power of substitution.
Dated: ___________________
Signature:________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate.)
Address:__________________________________________
__________________________________________
__________________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
Signature Guaranteed:___________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
EXH. A-5
<PAGE>
Confidential Treatment Requested [ ]
EXHIBIT 10.13
OSMOTICS CORPORATION
DISTRIBUTORSHIP AGREEMENT
-------------------------
(Fabel Paris)
This Distributorship Agreement (this "Agreement") is made and entered
into as of 1.01.97., 1996, by and between Osmotics Corporation, a
Colorado corporation ("Osmotics"), and Fabel Paris, a company organized under
the laws of France ("Distributor").
RECITALS
--------
A. Osmotics is engaged in the development, manufacture and sale of
cosmetics products, perfumes and toiletries and Distributor is engaged in the
business of marketing and distributing cosmetics in international markets.
B. Distributor desires to obtain the right to market and distribute
certain of such cosmetics products in the Territory (as defined in Section 1(e))
------------
under the Osmotics Trademarks (as defined in Section 1(c)), and Osmotics desires
------------
to grant such rights to the Distributor, upon the terms and conditions set forth
in this Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows:
1. Definitions.
-----------
(A) "DISTRIBUTOR'S TRADEMARKS" shall mean the trademarks, logos
and other marks owned or licensed by Distributor, all as set forth on Exhibit A
---------
hereto, as the same may be amended from time to time by the parties.
(B) "INTELLECTUAL PROPERTY" shall mean the Osmotics Trademarks
and the patents, copyrights, trade secrets, know-how, proprietary information
and all other intellectual property rights owned or licensed by Osmotics
relating to the Products.
(C) "OSMOTICS TRADEMARKS" shall mean the trademarks, logos and
other marks owned or licensed by Osmotics relating to the Products, whether or
not registered, all as identified on Exhibit B hereto, as the same may be
---------
amended from time to time by the written agreement of the parties, including all
translations thereof.
<PAGE>
(D) "PRODUCTS" shall mean the cosmetics products listed in
Exhibit C hereto, as the same may be amended from time to time by the written
- ---------
agreement of the parties.
(E) "TERRITORY" shall mean the country or countries more
particularly described in Exhibit D attached hereto, as the same may be amended
---------
from time to time by the written agreement of the parties.
2. Distributorship.
---------------
(A) APPOINTMENT. Subject to the terms of this Agreement,
Osmotics hereby appoints Distributor as its exclusive authorized distributor to
market and sell the Products in the Territory and Distributor hereby accepts
such appointment. Osmotics shall not, during the term of this Agreement, appoint
another distributor or sales agent to sell the Products within the Territory,
except as set forth in Section 18(b).
-------------
(B) SUB-DISTRIBUTORS; RISKS. Distributor shall have the right to
appoint sub-distributors for the purpose of marketing and distributing the
Products in the Territory; provided, that any such sub-distributor shall agree
in writing to be bound by the operative terms and conditions of this Agreement.
Except as expressly provided otherwise in this Agreement, Distributor shall bear
all risks attendant to its capacity as Distributor including risks of credit,
currency devaluation, blocked currency, confiscation, expropriation, rebellion,
revolution, war, and all other risks of transaction within the Territory.
3. Distributor's General Obligations.
---------------------------------
(A) BEST EFFORTS. Distributor agrees to use its continuing
diligence and best efforts to market, promote, and distribute the Products and
to secure purchasers for the Products within the Territory. The Distributor's
best efforts hereunder shall include, without limitation, attendance at trade
shows, distribution of marketing brochures and other sales information,
advertising in appropriate trade journals and other publications and media, the
dedication of a reasonable portion of the time, efforts and responsibilities of
a reasonable number of sales persons located within the Territory and the
maintenance of facilities and inventory adequate to meet the requirements of the
market for the Products in the Territory, all at Distributor's expense.
Notwithstanding the foregoing obligations, to the extent permitted under the
laws of the Territory, Distributor shall not sell the Products to any customer
disapproved by Osmotics in writing.
(B) ADVERTISING AND PROMOTION. Distributor shall expend for
advertising and promoting the Products during each year an amount reasonably
calculated under the then-extant commercial circumstances to enhance the market
for, and increase the sales of, the Products within the Territory. All use of
advertising, merchandising and promotional material by Distributor, including,
without limitation, Product labeling, package inserts, and other descriptive
copy and all advertising, promotion and merchandising activities
<PAGE>
by Distributor shall be subject to Osmotics' prior written approval. Distributor
shall, upon Osmotics' request from time to time, promptly deliver to Osmotics
such statements as Osmotics requests showing the amount of expenditures made by
Distributor for promotion and advertising.
(C) SALES PERFORMANCE. Distributor shall achieve annual Net
Sales (as defined below) of the Products in the Territory equivalent in local
currency of the annual Sales Volume Targets set forth on Exhibit E. The term
---------
"Net Sales" shall mean the amount paid or payable to Distributor by its
customers for the Products, less the total of (I) refunds for returned
merchandise and (ii) freight and insurance charges and sales, excise and similar
taxes, if paid to Distributor by its customers. Osmotics may revise the Sales
Volume Targets at the time of any renewal of the term hereof by substituting an
amended Exhibit E setting forth the new Sales Volume Targets.
---------
(D) PRICING. To the extent permitted under the laws of the
Territory, Distributor will consult with Osmotics with reference to the
determination of retail prices, trade discounts, promotional discount, sales
incentives and special offers as Osmotics may determine and establish, and
Distributor shall to the best of its ability cause all of its customers to
maintain such retail prices, trade discounts, promotional discounts, sales
incentives and special offers and shall cease selling the Products to any of its
customers who fail to maintain the aforementioned retail prices, trade
discounts, promotional discounts, sales incentives and special offers.
(E) PRODUCT CONDITION AND PACKAGING. Distributor shall
distribute and sell the Products only in their original, unaltered condition and
packaging. Distributor shall not distribute or sell any Products the quality and
appearance of which do not conform to such quality standards as may be
prescribed by Osmotics and shall replace to the trade (at no cost to Osmotics)
any non-conforming Products sold. Distributor shall sell, handle, store,
transport, and use or apply the Products in a safe and reasonable manner and in
strict conformance with Osmotics' specifications therefor. Distributor shall
inform its customers regarding the proper usage and handling of the Products.
(F) RECORDS AND REPORTS. Distributor hereby acknowledges that
Osmotics requires accurate information regarding the present and future desires
or requirements of current and prospective customers for the Products, market
conditions, competitive products and prices, and other facts material to the
marketing of the Products in the Territory and that, due to the nature of the
cosmetics industry, Osmotics desires to maintain the ability to trace the
purchasers of the Products. Accordingly:
(i) Distributor shall keep true and accurate records of
inventory and sales of Products and of expenditures made pursuant to Section
-------
3(b). All of such records and the files upon which they are based shall be open
- ----
to inspection by Osmotics' authorized representatives during Distributor's
regular business hours for the purpose of monitoring Distributor's compliance
with the terms and conditions of this Agreement; provided that such
representatives shall agree to maintain the confidentiality of such records.
-3-
<PAGE>
(ii) Distributor shall deliver to Osmotics from time to
time as Osmotics may reasonably request a report showing the monetary volume of
Products sold by Distributor to its customers (by individual account) and such
other matters pertaining to Buyer's sales and compliance with this Agreement as
Osmotics may reasonably deem necessary.
(iii) Distributor shall keep Osmotics informed of its price
lists and shall inform Osmotics immediately of any actual or anticipated changes
in Distributor's organization or method of doing business which might affect the
performance of Distributor's duties hereunder. Distributor shall maintain market
intelligence within the Territory and keep Osmotics informed as to market
developments which relate to the type of products generally manufactured by
Osmotics. Distributor shall keep Osmotics fully informed of any changes in local
or general conditions and the activities of Osmotics' competitors in the
Territory which may affect Product sales in the Territory.
(G) TRANSLATIONS. To the extent necessary to the promotion and
distribution of the Products and subject to the prior approval of Osmotics,
Distributor shall, at its sole expense, procure the translation of the Osmotics
Trademarks and other package marking to the local language of the Territory.
Osmotics agrees to cooperate with Distributor in such translations and to
provide the Products, to the extent necessary, in packaging marked with such
translated Osmotics Trademarks and other marking.
4. Compliance with Laws. Distributor acknowledges that it will at
--------------------
all times be acting as an importer of the Products for distribution in
accordance with the provisions of this Agreement. Accordingly, all sales of
Products hereunder shall at all times be subject to the export control laws and
regulations of the United States, as the same may be amended from time to time.
The Distributor agrees that it shall not make any disposition, by way of trans-
shipment, re-export, diversion or otherwise, except as such laws and regulations
may expressly permit, of U.S. origin Products other than in and to the ultimate
country of destination specified on Distributor's order, which shall be limited
to the Territory unless the parties otherwise agree in writing. Distributor
shall strictly comply with all laws and regulations pertaining to the
importation, promotion, sale and distribution of the Products at any time in
force in the Territory and the United States. Without limiting the generality of
the foregoing provision, Distributor expressly agrees as follows:
(A) IMPORTATION OF PRODUCTS. Distributor shall arrange for
clearance through customs of all Products and the transportation thereof to
Distributor's facility solely at Distributor's cost and expense. Distributor
shall pay all customs, import, excise, sales, and other similar duties and taxes
payable in respect of the Products shipped to Distributor.
(B) AUTHORIZATIONS. Distributor shall obtain any licenses,
authorizations, permissions, and other documents, and shall comply with all
formalities for import, export, distribution, sale and/or other disposal of the
Products in, to and from the
-4-
<PAGE>
Territory solely at is cost and expense. Any right or privilege which may be
obtained by reason of any health or other registrations or authorizations with
respect to the Products will be exclusively for the benefit of Osmotics. Any
such health registrations or governmental authorizations in connection with the
sale and distribution of any of the Products shall at all times and for the
benefit of, and shall remain the property of, Osmotics. To the extent permitted
by the law of the Territory, Distributor will apply for any and all required or
permitted registrations and governmental authorizations with respect to the
Products in the name of Osmotics and shall forthwith take all necessary steps to
transfer any and all health and governmental authorizations with respect to the
Products to the name of Osmotics if otherwise registered.
5. Product Control; Diversion. Distributor shall not, directly or
--------------------------
indirectly, distribute in the Territory, Osmotics' Products purchased from any
person other than Osmotics. Distributor shall note seek customers for the
Products outside the Territory nor establish or maintain any branch or
distribution center outside the Territory for the sale of the Products. The
Distributor shall promptly advise Osmotics of any inquiries which it or any of
its affiliates may receive from any prospective customers for the supply of
Products outside the Territory. To the extent permissible under the laws of the
Territory, Distributor will sell the Products only to customers resident in or
carrying on business for resale or consumption only in the Territory.
6. Competing Products. Representative shall have the right to
------------------
market and distribute products and lines which compete directly with the
Products ("Competing Products"); provided, (a) that Distributor shall not,
directly or indirectly, be an owner, partner, officer, director, manager,
employee, or other representative (other than as an independent distributor) of
any person or entity which manufactures such Competing Products and (b) that no
such person or entity shall hold any interest, directly or indirectly, in
Distributor. Distributor shall from time to time, upon request, inform Osmotics
as to the particular types of Competing Products handled by it at such time, the
identity of the manufacturer of such Competing Products and Distributor's
relationship with such manufacturer.
7. General Obligations of Osmotics.
-------------------------------
(A) PRODUCT INFORMATION AND ASSISTANCE. Osmotics shall promptly
deliver to the Distributor information relating to the Products which Osmotics
reasonably believes to be necessary to enable the Distributor to market and sell
the Products. Upon Distributor's request, Osmotics shall provide additional
assistance and training to the Distributor at a site designated by the
Distributor at times as may be mutually agreed upon by the parties.
(B) OTHER ASSISTANCE. Osmotics shall assist Distributor to the
extent reasonably necessary to comply with any of its obligations under Section
-------
4. Notwithstanding the foregoing, Osmotics shall not be liable if any
- -
authorization is delayed, denied, revoked,
-5-
<PAGE>
restricted or not renewed.
8. Purchase and Delivery of Products.
---------------------------------
(A) PURCHASE ORDERS. The Distributor agrees to purchase all of
its requirements for the Products from Osmotics. All orders shall be made in
writing, telex and facsimile included. All orders placed by Distributor shall be
deemed offers to purchase which shall not be binding upon Osmotics unless and
until they have been accepted by Osmotics, such acceptance to be evidenced
solely by Osmotics' shipment of Products upon any such order. The terms of this
Agreement shall govern any purchases of Products by the Distributor,
notwithstanding any additional or contrary terms set forth in Distributor's
purchase order.
(B) PRODUCT PRICES. The current FOB prices of the Products are
set forth on Exhibit F, which shall be amended and superseded from time to time
---------
by Osmotics, immediately upon its redetermination of any of such prices, by its
delivery to Distributor of an amended Exhibit F setting forth the new FOB
---------
prices, which prices shall be effective upon the delivery to Distributor of such
amended Exhibit F.
---------
(C) PAYMENT; CURRENCY. Payment in full for any order shall be
due net 30 days following the date of shipment. Any and all sums due Osmotics
under the terms of this Agreement shall be paid in United States dollars (or
such other currency as Osmotics shall designate) at the rate of exchange
prevailing on the date payment is due, and at such place, in such manner and on
such credit terms, if any, as Osmotics shall determine. Osmotics shall have the
right to revise the place and the manner of payment and credit terms, if any, to
protect its interests.
9. Delivery; Risk of Loss; Security Interest.
-----------------------------------------
(A) SHIPMENT. Osmotics shall ship the Products ordered by
Distributor within the normal shipping schedule established by Osmotics from
time to time, but cannot guarantee a specific shipment date. Accordingly,
Osmotics' sole obligation to Distributor shall be to ship Products as promptly
as reasonably practicable following each order. All deliveries of Products shall
be made F.O.B. Osmotics' plant.
(B) RISK OF LOSS. Title and all risk of loss or damage to the
Products shall vest in the Distributor at the time of Osmotics' delivery of the
Products to the carrier notwithstanding any shipping and insurance arrangements
made by Osmotics on the Distributor's behalf. However, Osmotics reserves a
purchase money security interest in each Product delivered until full payment is
received. Osmotics may file this Agreement as a financing statement pursuant to
applicable law to evidence or perfect Osmotics' security interest. Distributor
agrees to execute any additional documents Osmotics deems necessary or desirable
to perfect or protect its security interest in the Products or to enable
Osmotics to exercise its rights and remedies hereunder.
-6-
<PAGE>
10. Insurance. Distributor represents that it currently maintains,
---------
and hereby agrees that it shall continue to maintain during the term of this
Agreement, comprehensive general liability insurance, property damage insurance,
and such other insurance in such amounts and with such coverages as are and
shall be customary in the Distributor's line of business and as required by law
including, but not limited to, workers' compensation and unemployment
compensation insurance. Distributor shall provide Osmotics with certificates
evidencing such insurance upon commencement of this Agreement and upon
commencement of each extension of this Agreement. Osmotics shall cause
Distributor to be added as a named insured on its product liability insurance
policy.
11. Warranty and Limitation of Liability.
------------------------------------
(A) WARRANTY; DISCLAIMER. Osmotics warrants to the Distributor
that, until the expiration date stated on the Products or, if none, one year
from the date of shipment, the Products shall conform to the description of such
Products as provided in Osmotics' written materials setting forth such
descriptions and such specification as may be required from time to time by the
United States government. THIS WARRANTY IS EXCLUSIVE AND OSMOTICS MAKES NO OTHER
REPRESENTATION OR WARRANTY TO DISTRIBUTOR OR ANY CUSTOMER OR OTHER THIRD PARTY,
EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE. Osmotics specifically
disclaims any warranty that the Products are free from infectious agents or
deleterious properties. This warranty shall not apply if Osmotics determines in
its sole discretion, that Distributor or any purchaser of the Product has
misused or mishandled the Products in any manner or has failed to use the
Products in accordance with instructions furnished by Osmotics. During the
warranty period, Osmotics will, at its option, refund the purchase price of or
replace any Product proved to Osmotics' satisfaction to be defective or
nonconforming; provided that Distributor returns the Product to the point of
shipment properly packed and shipment prepaid. Concurrently with any refund or
Product replacement, Osmotics shall reimburse Distributor for the cost of
shipping the defective Product to Osmotics .
(B) RETURNS. No returns of Products will be accepted unless
Distributor complies with Osmotics' return policy, as amended from time to time.
A copy of Osmotics' current return policy is attached hereto as Exhibit G.
---------
Replacement shall mean furnishing a new shipment (F.O.B. place of original
shipment) of the Product in an amount sufficient to replace any Product found to
be defective or nonconforming.
(C) LIMITATION OF LIABILITY. OSMOTICS' ENTIRE LIABILITY AND THE
DISTRIBUTOR'S (AND ITS CUSTOMERS') EXCLUSIVE REMEDY SHALL BE AS FOLLOWS:
IF THE DISTRIBUTOR RIGHTFULLY REJECTS THE PRODUCTS, OR JUSTIFIABLY REVOKES
ACCEPTANCE OF THE PRODUCTS, THE DISTRIBUTOR'S (AND ITS
-7-
<PAGE>
CUSTOMERS') SOLE REMEDY IS A REFUND OR CREDIT FOR ANY PAYMENTS MADE FOR THE
REJECTED OR REVOKED PRODUCTS UPON RETURN OF THE PRODUCTS TO OSMOTICS IN
ACCORDANCE WITH SECTION 11(a) ABOVE.
-------------
AFTER ACCEPTANCE OF THE PRODUCTS, DISTRIBUTOR'S AND ITS CUSTOMERS' SOLE REMEDY
IS FOR REFUND OR REPLACEMENT, PURSUANT TO THE TERMS OF THE WARRANTY SET FORTH IN
SECTIONS 11(a) and (b) ABOVE.
- ----------------------
OTHER THAN OSMOTICS' OBLIGATION TO REFUND OR REPLACE AS SET FORTH ABOVE,
OSMOTICS SHALL NOT BE LIABLE FOR ANY LOST PROFITS OR INCIDENTAL, CONSEQUENTIAL,
INDIRECT, SPECIAL OR OTHER DAMAGES OF ANY KIND, FOR ANY REASON WHATSOEVER
INCLUDING, BUT NOT LIMITED TO, DAMAGES BASED UPON NEGLIGENCE, BREACH OF
WARRANTY, STRICT LIABILITY, OR ANY OTHER THEORY, EXCEPT AS SET FORTH IN SECTION
-------
12(b).
- -----
INCIDENTAL AND CONSEQUENTIAL DAMAGES SHALL NOT BE RECOVERABLE EVEN IF THE
REPLACEMENT REMEDY FAILS ITS PURPOSE OR FOR ANY OTHER REASON.
12. Indemnification.
---------------
(A) OSMOTICS' RIGHT OF INDEMNIFICATION. Distributor agrees that
it shall indemnify and hold Osmotics harmless from and against all claims,
damages, losses, and expenses, including reasonable attorneys' fees, arising out
of or resulting from (I) the sale, handling, storage, transport, use or
application of the Products by Distributor, or its employees, agents, customers,
or anyone for whose actions any of them may be liable or (ii) any breach by the
Distributor of the terms or conditions of this Agreement, including any
misrepresentation by Distributor of its authority hereunder or any
representation or warranty made by the Distributor to Osmotics or with respect
to Osmotics and/or the Products, which were untrue when made or were not
authorized in writing by Osmotics.
(B) DISTRIBUTOR'S RIGHT OF INDEMNIFICATION. Osmotics agrees
that it shall indemnify and hold Distributor harmless from and against all
claims, damages, losses, and expenses, including reasonable attorneys' fees,
arising out of or resulting from any claim of any individual for personal injury
arising out of such individual's use of Products sold in the Territory; provided
that the foregoing right of indemnification shall not apply in any instance
where such alleged personal injury arose from the use of Products which have
been altered in any way following shipment by Osmotics, or which were used by
such individual other than in accordance with instructions provided by Osmotics,
or which were used in conjunction with products other than the Products. As a
condition to the enforceability of such right of indemnification, Distributor
shall give Osmotics timely written notice of any action brought against
Distributor or Osmotics and Osmotics shall have the right and option to direct
and control the defense of such action.
-8-
<PAGE>
13. Intellectual Property.
---------------------
(a) Subject to the terms and conditions of this Agreement,
Osmotics grants to the Distributor a limited exclusive license to use the
Intellectual Property in the Territory during the term of this Agreement as
necessary for the sole purpose of marketing and selling the Products within the
Territory pursuant to the terms of this Agreement.
(b) The Distributor acknowledges that Osmotics is the owner of
the Intellectual Property, including the Osmotics Trademarks, and all rights and
good will associated with the Intellectual Property. Distributor shall not claim
adversely to possess any right, title or interest in and to such Intellectual
Property or to assist any third party in so claiming. The Distributor agrees to
refrain from using the Intellectual Property, including the Osmotics Trademarks,
outside the Territory or in connection with products not covered by this
Agreement.
(c) Osmotics may, during the Distributor's normal business hours,
inspect all packaging, labels, advertising and other materials on which the
Osmotics Trademarks appear. Distributor shall deliver to Osmotics copies of
Distributor's promotional and advertising material bearing the Osmotics
Trademarks for Osmotics' approval, prior to use of such materials. Distributor
agrees not to use any packaging, labels, promotional, advertising or other
materials on which the Osmotics Trademarks appear that Osmotics finds
unsuitable, in its sole discretion.
(d) The Distributor agrees that, with respect to any Products
sold and marketed by it under the Osmotics Trademarks, it will use and display
the Osmotics Trademarks properly and shall take no actions jeopardizing the
existence or enforceability of the same. This shall include, but not be limited
to, providing any trademark notices required by any applicable law. Distributor
hereby undertakes fully and without any reservation whatsoever, to distribute,
advertise and promote the Products only under the Osmotics Trademarks and not to
remove the Osmotics Trademarks from the Products without Osmotics' prior written
consent.
(e) Upon termination of this Agreement for any reason, the
Distributor agrees to discontinue its use of all Intellectual Property,
including the Osmotics Trademarks. The Distributor also agrees not to attempt to
register or to use or to aid any third party in attempting to register or to use
any marks or names which may be, in the opinion of Osmotics, confusingly similar
to any of the Osmotics Trademarks. It is understood that this covenant shall
survive the termination or expiration of this Agreement.
(f) Upon termination of this Agreement, the Distributor agrees to
execute such documents and take such actions as Osmotics may deem reasonably
necessary or desirable to evidence the fact that the Distributor has ceased
using the Intellectual Property, including the Osmotics Trademarks, and that it
has no further rights therein.
-9-
<PAGE>
(g) The Distributor shall have the right to use Distributor's
Trademarks in connection with, but not on labeling on, the Products for the sole
purpose of indicating that the Distributor is the distributor of the Products in
the Territory, and for any other purpose and in such manner upon which the
parties may mutually agree in writing.
(h) If legal protection for any of the Intellectual Property,
including registration of the Osmotics Trademarks, has not been obtained in the
Territory and the Distributor and Osmotics mutually agree that it is necessary
or advisable to obtain the same, Osmotics and the Distributor shall immediately,
in Osmotics' name, take all necessary steps to obtain legal protection for such
Intellectual Property in the Territory. All expenses incurred by either
Osmotics or the Distributor in order to obtain and maintain legal protection for
such Intellectual Property shall be the sole responsibility of Osmotics.
14. Osmotics' Infringement.
----------------------
(a) Osmotics warrants that it has no actual knowledge, as of the
date hereof, that any part of the Intellectual Property infringes any patent,
design, trademark, copyright, or similar intellectual property right belonging
to any third party in the Territory.
(b) The Distributor shall notify Osmotics immediately of the
institution of any legal action or other proceeding brought against the
Distributor which is based upon a claim that the Intellectual Property or any
part thereof, infringes any patent, design, trade name or trademark, copyright
or other intellectual property right belonging to any third party in the
Territory (an "Osmotics Infringement Action"). Osmotics and the Distributor
shall cooperate in the defense of such Osmotics Infringement Action; provided
that Osmotics shall ultimately have the right to control the litigation and any
settlement thereof. Osmotics shall indemnify and hold the Distributor harmless
from and against all claims, damages, losses and expenses, including reasonable
attorneys' fees, incurred by the Distributor arising out of or resulting from an
Osmotics Infringement Action.
(c) The Distributor covenants and agrees to inform Osmotics of
any third party infringement of Osmotics' Intellectual Property, including the
Osmotics Trademarks, promptly following the Distributor's discovery of any such
infringement.
15. Distributor's Infringement.
--------------------------
(a) Distributor warrants that it has no actual knowledge, as of
the date hereof, that any part of the Distributor's Trademarks infringes any
patent, design, trademark, copyright, or similar intellectual property right
belonging to any third party.
(b) Osmotics shall notify the Distributor of the institution of
any legal action or other proceeding brought against Osmotics which is based
upon a claim that the Distributor's Trademarks or any part thereof, infringes
any patent, design, trade name or trademark, copyright or other intellectual
property right belonging to any third party (a
-10-
<PAGE>
"Distributor Infringement Action"). Osmotics and the Distributor shall cooperate
in the defense of such Distributor Infringement Action; provided that the
Distributor shall ultimately have the right to control the litigation and any
settlement thereof. The Distributor shall indemnify and hold Osmotics harmless
from and against all claims, damages, losses and expenses, including reasonable
attorneys' fees, incurred by Osmotics arising out of or resulting from a
Distributor Infringement Action.
(c) Osmotics covenants and agrees to inform the Distributor of
any third party infringement of the Distributor's Trademarks promptly following
Osmotics' discovery of any such infringement.
16. Proprietary Information.
-----------------------
(A) CONFIDENTIAL INFORMATION. In performing this Agreement, each
party may receive information of a confidential and proprietary nature regarding
the other, including information about such party's intellectual property and
its operations, including, but not limited to, research, formulas, marketing
plans, strategies, forecasts, budgets, and customer and supplier lists
(hereinafter called "Confidential Information"). Confidential Information shall
be held in strict confidence by the recipient, shall not be used except as
permitted hereunder, and shall not be disclosed to any third party without the
prior written consent of the disclosing party. The employees, agents, and
sublicensees of the recipient shall be bound to the same obligations of
confidentiality and restrictions on use as the recipient. Confidential
Information shall not include:
(i) information which is known to the recipient prior to the
date of receipt and not obtained or derived in any manner related to this
Agreement;
(ii) information which is or becomes part of the public domain
through no fault of the recipient; or
(iii) information which is obtained from a third party who
lawfully possesses such Confidential Information and is under no obligation to
keep such Confidential Information confidential.
(B) DISCLOSURE TO TRIBUNAL. If disclosure of Confidential
Information is required by law, regulation or order, other than as contemplated
by subsection (C) below, such Confidential Information may be disclosed by the
recipient; provided that the disclosing party is notified before the recipient
makes any such disclosure and the recipient uses its best efforts to ensure that
the disclosures are treated, to the extent possible, as confidential by the
government agency or other person or entity receiving Confidential Information.
(C) REGISTRATIONS. If, in connection with the obtaining of
any health or other registration or authorization with respect to the Products,
Distributor
-11-
<PAGE>
shall be required to present to a government agency or authority formulas with
respect to any one or more of the products and such formulas shall be furnished
by Osmotics to Distributor for such purpose, then, in such event Distributor
shall treat the said formulas in all respects as strictly confidential and as
trade secrets and will not disclose the same to any party other than the
aforesaid government agency or authority. Distributor shall promptly notify
Osmotics of any request for such formulas made by said government agency or
authority. Further, said formulas shall be disclosed by Distributor only to such
persons within Distributor's organization who require the same for the purpose
of the filing of formula statements with the said government agency or
authority, and at Osmotics' request, Distributor shall cause the aforesaid
people in Distributor's organization to sign such nondisclosure or trade secrets
agreements as Osmotics may require with respect to said formulas. In all other
respects, the said formulas shall be kept confidential by Distributor and shall
not be used for any purpose other than that described herein.
(d) The provisions of this Section 16 shall survive the
----------
termination or expiration of this Agreement.
17. Remedies. The parties acknowledge that a breach by either party
--------
of the provisions of Sections 12, 13, 14, 15 and 16 of this Agreement will cause
------------------------------
the other party irreparable injury for which it cannot be reasonably or
adequately compensated in money damages. The injured party shall, therefore, be
entitled, in addition to all other remedies available to it, to injunctive and
other equitable relief to prevent a breach of such provisions, or any part of
them, and to secure their enforcement. Nothing contained herein shall be
construed as prohibiting a party from pursuing any other remedies available to
it, including the recovery of damages, in the event of a breach of this
Agreement.
18. Term and Termination.
--------------------
(a) Unless sooner terminated as provided below, the term of this
Agreement shall commence as of the date set forth above and shall continue for
three years, where upon this Agreement shall automatically extend for
additional periods of three years each, unless either party gives written notice
to the other, that it does not intend so to extend this Agreement, at least 30
days prior to the expiration of the initial term or any renewal term hereof.
(b) If either party elects to terminate this Agreement pursuant
to Section 18(a), during the 30-day notice period provided therein, Osmotics or
-------------
any affiliate or both may appoint another distributor to serve in the Territory,
to place orders for, purchase, market and sell Products to any person and take
any other action it deems necessary to ensure the continuity of the marketing
and sale of the Products in the Territory. Distributor shall assist Osmotics or
such affiliate and any new distributor so appointed in making a smooth
transition to the new Product distribution
-12-
<PAGE>
arrangements. Osmotics shall not be entitled to any compensation, commission or
other remuneration in respect of any action taken or Products sold by Osmotics
or its affiliates pursuant to this Section 18(b).
-------------
19. Termination.
-----------
(A) AUTOMATIC TERMINATION. This Agreement shall immediately and
automatically terminate without notice to the Distributor upon either of the
following events:
(i) the attempted or actual assignment by Distributor
of this Agreement or any of its rights or obligations hereunder without the
prior written consent of Osmotics; or
(ii) the voluntary bankruptcy, dissolution or
liquidation of Distributor or the appointment of a receiver for any substantial
portion of the assets of Distributor.
(B) MATERIAL DEFAULT. In the event of a material default by
either party in the performance of this Agreement, the other party may give
written notice to the defaulting party specifying the nature and extent of the
default and requiring cure; and the defaulting party shall have sixty (60) days
thereafter to cure such default. If such default is not cured within such sixty
(60) day period, then the aggrieved party may by written notice declare this
Agreement immediately terminated.
(c) This Agreement may be terminated immediately by Osmotics by
notice in writing to Distributor upon either of the following events:
(i) there are any changes in the financial or
business condition or other circumstances of Distributor which, in the judgment
of Osmotics, are materially detrimental to the interests of Osmotics, including,
without limitation, any acquisition of any interest in Distributor by an entity
engaged in any business which, in the judgment of Osmotics, manufactures
Competing Products (or the acquisition by Distributor of any interest in any
such entity); or
(ii) the commencement of an involuntary bankruptcy
proceeding against Distributor which proceeding is not dismissed within sixty
(60) days; or
(iii) Distributor's failure to meet the Sales Volume
Target in any year, pursuant to Section 3(c).
------------
20. Disposition of Products Upon Termination. Osmotics assumes no
----------------------------------------
responsibility or obligation for or with respect to Products in the possession
of the
-13-
<PAGE>
Distributor at or after termination of this Agreement; provided, however, that
Osmotics shall have the right, at its option, within thirty (30) days after the
date of termination to purchase or cause to be purchased any or all of the
Products in the Distributor's inventory at a price equal to the "F.O.B." price
thereof to the Distributor. The Distributor shall pack and arrange for shipping
of such Products as are so purchased.
21. Force Majeure. Neither party to this Agreement shall be liable
-------------
to the other and neither shall be deemed in default hereunder for any failure or
delay in the performance of any of its covenants, agreements or obligations,
hereunder, other than the failure to pay money when due, caused by or arising
out of conditions of force majeure. In this clause, "conditions of force
majeure" shall mean any war, riot, social disturbance, act of God, strike,
lockout, trade dispute or labor disturbance, accident, breakdown of plant or
machinery, fire, flood, difficulty in obtaining workmen or materials or
transportation, any law, act or order of any court, board, government, or other
direct authority of competent jurisdiction, or any other cause beyond the
reasonable control of the party. The party affected by any condition of force
majeure as described in this provision shall promptly notify the other party in
writing and hereby agrees to use reasonable diligence to remove any such
conditions of force majeure as may occur from time to time; provided, however,
nothing contained herein shall require the settlement of strikes, lockouts, or
other labor difficulties by the party affected contrary to its wishes.
22. Notices. Any notices, payments or other communications required
-------
or permitted to be given or made hereunder shall be in writing in the English
language and shall be hand delivered or sent by registered airmail letter,
postage prepaid, express courier, and (except for payments) facsimile or telex
to the other party at its address set forth below or to such other address as
may from time to time be notified by one party to the other in accordance with
this Section.
If to Osmotics:
Osmotics Corporation
1125 17th Street, Suite 2310
Denver, Colorado 80202 USA
Attn: Steven Porter
Telephone: (303) 292-3350
Facsimile: (303) 293-2087
If to Distributor:
Fabel Paris
11-13, Rue Des Champs
92600 Asneires
Paris, France
-14-
<PAGE>
Attn: Michel Favier
Telephone: 01 47 91 44 77
Facsimile: 01 47 91 03 79
All notices, payments and other communications shall be effective (I) if sent by
registered airmail letter, when received or seven (7) days after mailing,
whichever is earlier; (ii) if hand delivered or sent by express courier, when
delivered; or (iii) if by facsimile or telex, when received by the machine to
which it was transmitted (a machine-generated transaction report produced by
sender bearing recipient's facsimile number being prima facie proof of receipt.)
23. Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties relating to the subject matter hereof and
supersedes all prior written and oral understand ings and agreements between
the parties. No modification or waiver of any term or condition of this
Agreement shall be valid or binding unless the same is in writing signed by both
parties.
24. Arbitration. Any controversy or claim arising out of or relating
-----------
to this Agreement, or the breach thereof shall be settled by arbitration in
Denver, Colorado in accordance with the commercial rules, then obtaining, of the
American Arbitration Association, and judgment upon the award rendered may be
entered in any court having jurisdiction thereof pursuant to Section 25.
----------
25. Choice of Law; Jurisdiction. This Agreement shall be governed by
---------------------------
and construed in accordance with the laws of the State of Colorado, USA, without
regard to its conflict of laws principles. Distributor hereby waives French
jurisdiction and consents to the jurisdiction and venue of the state and federal
courts of Colorado over any disputes arising hereunder. The English language
text of this Agreement shall be the authorized text for all purposes.
26. Assignability; Binding Effect. This Agreement may not be
-----------------------------
assigned, sublicensed or transferred by Distributor, by operation of law or
otherwise, without the prior written consent of Osmotics. For purposes of this
Agreement, a change in control of or a merger or consolidation involving
Distributor, shall be deemed an assignment. Subject to this condition, this
Agreement shall be binding upon and inure to the benefit of the successors and
assigns of the parties.
27. Authority. Each party to this Agreement warrants that it has the
---------
authority to execute and perform this Agreement and that this Agreement is the
valid and binding obligation of such party, enforceable against such party in
accordance with its terms.
28. Severability. If any provision of this Agreement shall be
------------
adjudged by a court to be void or unenforceable, the Agreement shall be deemed
-15-
<PAGE>
modified to the minimum extent necessary to avoid the illegality, but the void
or unenforceable provision shall in no way affect any other provision of this
Agreement or the validity or enforceability of the remainder of this Agreement.
29. Independent Contractors. It is expressly understood that the
-----------------------
relations of the parties are those of a purchaser, on the part of Distributor,
and seller of the Products on the part of Osmotics, and that each party is an
independent contractor with the sole responsibility for its own business. It is
further agreed that Distributor is not and shall not represent itself to be an
agent of Osmotics for any purpose. Neither Party has the right or authority to
assume or create any obligation of any kind for or on behalf of the other or to
bind the other party in any respect.
30. Governmental Approvals. The parties agree that if any
----------------------
governmental approvals or filings are required, the parties will jointly
cooperate to make all such filings and obtain all such approvals. If any such
approval will require substantive modifications to this Agreement and the
parties cannot agree upon modifications which will permit governmental approval,
either party may terminate this Agreement by written notice to the other without
further liability to the other except for obligations accrued to the date of
termination and obligations which are otherwise specified herein as surviving
termination.
IN WITNESS WHEREOF, the parties hereto have caused this
Distributorship Agreement to be executed by their respective duly authorized
representatives on the day and year first above written.
OSMOTICS CORPORATION
By______________________________________
Steven Porter, President
FABEL PARIS
By______________________________________
Michael Favier, Directeur General
-16-
<PAGE>
EXHIBIT A
DISTRIBUTOR'S TRADEMARKS
------------------------
[trademarks graphics]
A-1
<PAGE>
EXHIBIT B
OSMOTICS TRADEMARKS
-------------------
[trademarks graphics]
B-1
<PAGE>
EXHIBIT C
PRODUCTS
--------
Product U.S. Retail Price Distributor's Price
----------------------------------------------------------------------------
All products carrying the Osmotics brand label.
C-1
<PAGE>
EXHIBIT D
TERRITORY
---------
France
D-1
<PAGE>
Confidential Treatment Requested [ ]
EXHIBIT E
SALES VOLUME TARGETS
--------------------
FIRST YEAR sales by Fabel are to be [ ]
At the eleventh month of the first year Osmotics and Fabel will determine sales
goals for years two and three based on first year's performance.
E-1
<PAGE>
Confidential Treatment Requested [ ]
EXHIBIT F
RETAIL PRICES; DISTRIBUTOR'S PRICES
-----------------------------------
<TABLE>
<CAPTION>
U.S. Distributor's
Product Retail Price Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Antioxidant Skin Care Derms [ ] [ ]
Trial Size Antioxidant Skin Care Derms [ ] [ ]
Hydrating Cleanser [ ] [ ]
Balancing Cleanser [ ] [ ]
Firming Tonic Facial Mist [ ] [ ]
Balancing Tonic Facial Mist [ ] [ ]
Hydrating Complex SPF 15 [ ] [ ]
Balancing Complex SPF 15 [ ] [ ]
Antioxidant Eye Therapy [ ] [ ]
Daily Eye Protection SPF 15 [ ] [ ]
Intensive Moisture Therapy [ ] [ ]
Facial Renewal [ ] [ ]
Travel Kit Normal/Dry [ ] [ ]
Travel Kit Normal/Oily [ ] [ ]
</TABLE>
F-1
<PAGE>
Confidential Treatment Requested [ ]
EXHIBIT G
RETURN POLICY
-------------
Except as described below, no returns of Products will be accepted by Osmotics
unless agreed to in writing by Osmotics. When a defective Product claim is
received, Osmotics will immediately recheck its quality control records to
ensure the Product performed according to Osmotics' Certificate of Analysis upon
shipment.
Osmotics will retest Product Distributor believes to be defective and compare
its performance to that of Osmotics' retention samples.
a) If Osmotics' retention samples perform according to Osmotics'
original release specifications but the returned product does not, Osmotics
will assume the Product was compromised either in shipping or handling
after it left the Osmotics facility. In this case, Osmotics will assist
Distributor in filing a claim with Distributor's carrier but Osmotics will
assume no liability for the claim.
b) If the Product's performance compares favorably with Osmotics'
retention samples but Distributor wants to exchange the Product for a
different lot, Osmotics will exchange the lot for Distributor, but
Distributor will be charged a [ ] restocking fee.
G-1
<PAGE>
Confidential Treatment Requested [ ]
EXHIBIT 10.14
OSMOTICS CORPORATION
SOLE SOURCE PRIVATE LABEL AGREEMENT
-----------------------------------
(Fabel Paris)
This Sole Source Private Label Agreement (this "Agreement") is made
and entered into as of 01.1.97, by and between Osmotics Corporation, a Colorado
corporation ("Osmotics"), and Fabel Paris, a company organized under the laws of
France ("Buyer").
RECITALS
--------
A. Osmotics is engaged in the development, manufacture and sale of
cosmetics products, perfumes and toiletries and Buyer is engaged in the business
of marketing and distributing cosmetics in international markets.
B. Buyer desires to purchase for distribution and resale in the
Territory (as defined in Section 1(g)) and under Buyer's Trademarks (as defined
------------
in Section 1(b)), certain quantities of the Products (as defined in Section
------------ -------
1(f), and Osmotics desires to sell such Products to the Buyer, upon the terms
and conditions set forth in this Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows:
1. Definitions.
-----------
(A) "AGREEMENT" shall mean this document and any annex, exhibit,
attachment, schedule, addendum, or modification hereto, unless the context
otherwise indicates.
(B) "BUYER'S TRADEMARKS" shall mean the trademarks, logos and
other marks owned or licensed by Buyer and used in connection with the
promotion, distribution and sale of the Products, whether registered or not.
(C) "CUSTOMER" OR "CUSTOMERS" shall mean any purchaser or
purchasers of Products from Buyer.
(D) "INTELLECTUAL PROPERTY" shall mean the Osmotics Trademarks
and
<PAGE>
the patents, copyrights, trade secrets, formulas, know-how, proprietary
information and all other intellectual property rights owned or licensed by
Osmotics relating to the Products.
(E) "OSMOTICS TRADEMARKS" shall mean the trademarks, logos and
other marks owned or licensed by Osmotics relating to the Products, whether or
not registered, all as identified on Exhibit A hereto, as the same may be
---------
amended from time to time by Osmotics, including all translations thereof.
(F) "PRODUCTS" shall mean specially formulated cosmetic patches
("Pouched Patches") and related liquid solution ("Oil Solvent") developed and
manufactured by Osmotics and sold by Osmotics under the trademark WRINKLE PATCH,
and which Buyer desires to purchase for resale under Buyer's Trademarks.
(G) "TERRITORY" shall mean any country or countries, other than
the countries situated in the region commonly known as the Pacific Rim (the
"Excluded Territory"), as more specifically identified in Exhibit B, as the same
---------
may be amended from time to time by agreement of the parties.
2. Sole Source Agreement.
---------------------
(A) SOLE SOURCE; REQUIREMENTS. Subject to the terms and
conditions of this Agreement, Osmotics hereby agrees to supply Products to Buyer
from time to time in such quantities as Buyer shall request in a written order
pursuant to Section 6(a). Buyer acknowledges and agrees that Osmotics shall,
------------
during the initial term and any renewal term hereof, Osmotics shall be its sole
source manufacturer with respect to the Products, and Buyer shall not purchase
any product substantially similar to the Products from any other supplier for
sale or distribution within either the Territory or the Excluded Territory. The
Buyer agrees to purchase all of its requirements for the Products from Osmotics.
(B) PACKAGING. Products sold to Buyer hereunder shall be sold
and delivered in bulk. Buyer shall be solely responsible for providing all
packaging of the Products for resale under Buyer's Trademarks.
(C) NON-EXCLUSIVITY. The Buyer acknowledges and agrees that
nothing contained herein shall prevent Osmotics from selling Products in the
Territory under the Osmotics Trademarks. Osmotics reserves the right to appoint
sales representatives, agents, and/or distributors for the Products in or for
the Territory, and Osmotics reserves the right, for itself and its designees, at
any time, to sell the Products directly in the Territory, in each case without
thereby incurring any setoff or other payment obligation to the Buyer of any
type or nature.
(D) TRADE CHANNELS. Buyer acknowledges and agrees that Osmotics
will market and sell Products in the Territory under the Osmotics Trademarks
during and after the term hereof and the parties desire to avoid any marketing
conflict respecting the sale of
<PAGE>
Products under their respective trademarks. Accordingly, Buyer agrees that it
shall not market, promote or sell any Products under the Buyer's Trademarks in
the Up-Scale Market (as defined herein) and Osmotics agrees that it shall not
sell Products under the Osmotics Trademarks except in the Up-Scale Market. As
used herein, the term "Up-Scale Market" shall mean and refer to the entire trade
channel which is comprised of perfumeries and retail stores and establishments
such as those listed, by way of example, on Exhibit C hereto.
---------
(E) LIMITATIONS ON RESALE ACTIVITIES. The reselling activities
of Buyer with respect to the Products are hereby expressly subject to the
following provisions: (i) Buyer shall refrain from seeking Customers,
establishing any branch and establishing any distribution depot within any
country located within the Excluded Territory; (ii Buyer shall use only its name
or trade names and the Buyer's Trademarks in marketing, distributing and selling
the Products. Buyer shall not, without the prior written consent of Osmotics,
use any Osmotics Trademarks in connection therewith or for any other purpose,
and shall not use the name "Osmotics Corporation" or any trade name of Osmotics
for any reason in connection with its promotion and distribution of the Products
or disclose the terms and conditions of this Agreement to any third party,
except as required by applicable law or governmental authority; and (iii) Buyer
shall not sell or assign any Products to any discount house or similar retail
discount operation.
(F) BUSINESS RISKS. Except as expressly provided otherwise in
this Agreement, Buyer shall bear all risks attendant to its capacity as a
purchaser, exporter, importer and reseller of the Products, including risks of
credit, currency devaluation, blocked currency, confiscation, expropriation,
rebellion, revolution, war, and all other risks of transaction within the
Territory.
(G) INDEPENDENT CONTRACTORS. It is expressly understood that the
relations of the parties are those of a purchaser, on the part of Buyer, and
seller on the part of Osmotics, and that each party is an independent contractor
with the sole responsibility for its own business. Buyer shall not be
considered an agent, distributor or legal representative of Osmotics for any
purpose and neither the Buyer nor any director, officer, agent, employee, or
independent contractor of the Buyer shall be, or be considered, an agent or
employee of Osmotics. Buyer is not granted and shall not exercise the right or
authority to assume, create, or represent to have the authority to assume or
create contractual obligations or responsibilities on behalf of Osmotics,
including without limitation contractual undertakings and obligations based on
warranties or guarantees, on behalf of or in the name of Osmotics.
(H) OPERATIONS AND EXPENSES. All operations and activities of
the Buyer, including but not limited to its employees, agents, independent
contractors, facilities, and equipment, shall be subject to the sole control and
management of the Buyer. Buyer is solely responsible for its own costs and
expenses and Buyer shall not incur any costs or expenses on behalf of Osmotics.
The Buyer shall provide, at its own expense, such office space and facilities,
and hire and train such personnel, as may be required to carry out its
obligations under this Agreement.
-3-
<PAGE>
(I) RETAILER PRIVATE LABELS. Buyer may, and at the request of
Osmotics shall, accept orders for Products from third party retailers approved
or designated by Osmotics ("Designated Retailers") to be resold at retail by
such Designated Retailers under their own brand names and private labels. In
connection with its sales of Products to any Designated Retailer, and as a
condition of Osmotics' obligation to supply Products for resale by such
Designated Retailer, Buyer shall enter into an agreement with such Designated
Retailer containing the covenant of the Designated Retailer (in substance
satisfactory to Osmotics) that it will not, during or after the term of such
agreement, sell Competing Products. Buyer shall, upon the request of Osmotics or
any Designated Retailer, deliver Products to such Designated Retailer in
packaging provided or approved by such Designated Retailer.
3. Buyer's General Obligations.
---------------------------
(A) BEST EFFORTS. Buyer agrees to use its continuing diligence
and best efforts to market, promote, and distribute the Products and to secure
purchasers for the Products within the Territory.
(B) RECORDS AND REPORTS. Buyer hereby acknowledges that Osmotics
requires accurate information regarding the retail prices at which Products are
sold in certain locations within the Territory and that, due to the nature of
the cosmetics industry, Osmotics desires to maintain the ability to trace the
purchasers of the Products. Accordingly:
(i) Buyer shall keep true and accurate records of sales of
Products to its Customers. All of such records and the files upon which they are
based shall be open to inspection by Osmotics' authorized representatives during
Buyer's regular business hours for the purpose of monitoring Buyer's compliance
with the terms and conditions of this Agreement; provided, that such
representatives shall be required to agree to maintain the confidentiality of
such records except as necessary to the purposes contemplated by this Section 3.
---------
(ii) Buyer shall provide Osmotics with quarterly forecasts
of sales and any other information, such as special marketing events, which may
cause potential increases in demand, not later than thirty days prior to the end
of each quarter. Such reports, setting forth the required information
respecting the quarter immediately succeeding the following dates, shall be due
on the first day of December, March, June and September of each year during the
initial term and any renewal term hereof.
(iii) Buyer shall keep Osmotics informed of its price lists
(including retail) and shall inform Osmotics immediately of any actual or
anticipated changes in Buyer's organization or method of doing business which
might affect the performance of Buyer's duties hereunder.
-4-
<PAGE>
(C) RETAIL PRICING. To the extent permitted under the laws of
the Territory, Buyer will consult with Osmotics with reference to the
determination of retail prices, trade discounts, promotional discount, sales
incentives and special offers as Osmotics may determine and establish, and Buyer
shall to the best of its ability cause all of its customers to maintain such
retail prices, trade discounts, promotional discounts, sales incentives and
special offers and shall cease selling the Products to any of its customers who
fail to maintain the aforementioned retail prices, trade discounts, promotional
discounts, sales incentives and special offers.
4. Compliance with Laws. Buyer acknowledges that it will at all
--------------------
times be acting as an exporter and importer of the Products for distribution in
accordance with the provisions of this Agreement. Accordingly, all sales of
Products hereunder shall at all times be subject to the export control laws and
regulations of the United States, as the same may be amended from time to time.
The Buyer agrees that it shall not make any disposition, by way of trans-
shipment, re-export, diversion or otherwise, except as such laws and regulations
may expressly permit, of U.S. origin Products. Buyer shall strictly comply with
all laws and regulations pertaining to the exportation, importation, promotion,
sale and distribution of the Products at any time in force in countries within
the Territory and the United States. Without limiting the generality of the
foregoing provision, Buyer expressly agrees as follows:
(A) IMPORTATION OF PRODUCTS. Buyer shall arrange for clearance
through customs of all Products and the transportation thereof to Buyer's
facility in Paris, France solely at Buyer's cost and expense. Buyer shall pay
all customs, import, excise, sales, and other similar duties and taxes payable
in respect of the Products shipped to Buyer.
(B) AUTHORIZATIONS. Buyer shall obtain any licenses,
authorizations, permissions, and other documents, and shall comply with all
formalities for import, export, distribution, sale and/or other disposal of the
Products in, to and from Paris, France and within the Territory solely at its
cost and expense and in its own name.
5. General Obligations of Osmotics.
-------------------------------
(A) PRODUCT INFORMATION AND ASSISTANCE. Osmotics shall promptly
deliver to the Buyer information relating to the Products which Osmotics
reasonably believes to be necessary to enable the Buyer to market and sell the
Products. Upon Buyer's request and at its expense, Osmotics shall provide
additional assistance and training to the Buyer at a site designated by the
Buyer at times as may be mutually agreed upon by the parties.
(B) OTHER ASSISTANCE. Osmotics shall assist Buyer to the extent
reasonably necessary to comply with any of its obligations under Section 4.
---------
Notwithstanding the foregoing, Osmotics shall not be liable if any authorization
is delayed, denied, revoked, restricted or not renewed.
-5-
<PAGE>
Confidential Treatment Requested [ ]
6. Purchase and Delivery of Products.
---------------------------------
(A) PURCHASE ORDERS. All orders shall be made in writing, telex
and facsimile included. All orders placed by Buyer shall be deemed offers to
purchase upon transmission which shall not be binding upon Osmotics unless and
until they have been accepted by Osmotics, such acceptance to be evidenced
solely by Osmotics' shipment of Products upon any such order. The terms of this
Agreement shall govern any purchases of Products by the Buyer, notwithstanding
any additional or contrary terms set forth in Buyer's purchase order. Each order
shall be made not less than thirty days nor more than 45 days prior to the
Buyer's desired delivery date.
(B) PURCHASE PRICE. The purchase price for the Pouched Patches
shall be [ ]. The purchase price of the Oil Solvent shall be [ ]. The foregoing
prices are F.O.B. Osmotics' facility at Montrose, Colorado. The aggregate price
per order may vary if Buyer requests any additional or special shipping or
handling.
(C) PAYMENT; CURRENCY. Payment in full for any order shall be
due and payable net 60 days following the date of delivery by wire transfer of
immediately available funds pursuant to such instructions therefor as Osmotics
shall provide to Buyer from time to time in writing. Any and all sums due
Osmotics under the terms of this Agreement shall be paid in United States
dollars (or such other currency as Osmotics shall designate) at the rate of
exchange prevailing on the date payment is due, and at such place, in such
manner and on such credit terms, if any, as Osmotics shall determine. Osmotics
shall have the right to revise the place and the manner of payment and credit
terms, if any, to protect its interests.
7. Delivery; Risk of Loss; Security Interest.
-----------------------------------------
(A) SHIPMENT. Osmotics shall ship the Products ordered by
Buyer as soon as possible within the normal shipping schedule established by
Osmotics from time to time, but cannot guarantee a specific shipment date.
Accordingly, Osmotics' sole obligation to Buyer shall be to ship Products as
promptly as reasonably practicable following each order. All deliveries of
Products shall be made F.O.B. Osmotics' plant.
(B) RISK OF LOSS. Title and all risk of loss or damage to the
Products shall vest in the Buyer at the time of Osmotics' delivery of the
Products to the carrier notwithstanding any shipping and insurance arrangements
made by Osmotics on the Buyer's behalf. However, Osmotics reserves a purchase
money security interest in each Product delivered until full payment is
received. Osmotics may file this Agreement as a financing statement pursuant to
applicable law to evidence or perfect Osmotics' security interest. Buyer agrees
to execute any additional documents Osmotics deems necessary or desirable to
perfect or protect its security interest in the Products or to enable Osmotics
to exercise its rights and
-6-
<PAGE>
remedies hereunder.
8. Insurance. Buyer represents that it currently maintains, and
---------
hereby agrees that it shall continue to maintain during the term of this
Agreement, comprehensive general liability insurance, property damage insurance,
and such other insurance in such amounts and with such coverage as are and shall
be customary in the Buyer's line of business and as required by law. Buyer
shall provide Osmotics with certificates evidencing such insurance upon
commencement of this Agreement and upon commencement of each extension of this
Agreement. Osmotics shall cause Buyer to be added as a named insured on its
product liability insurance policy.
9. Warranty and Limitation of Liability.
------------------------------------
(A) WARRANTY; DISCLAIMER. Osmotics warrants to the Buyer that,
until the expiration date stated on the Products or, if none, one year from the
date of shipment, the Products shall conform to the description of such Products
as provided in Osmotics' written materials setting forth such descriptions and
such specification as may be required from time to time by the United States
government. THIS WARRANTY IS EXCLUSIVE AND OSMOTICS MAKES NO OTHER
REPRESENTATION OR WARRANTY TO BUYER OR ANY CUSTOMER OR OTHER THIRD PARTY,
EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE. Osmotics specifically
disclaims any warranty that the Products are free from infectious agents or
deleterious properties. This warranty shall not apply if Osmotics determines in
its sole discretion, that Buyer or any purchaser of the Product has misused or
mishandled the Products in any manner or has failed to use the Products in
accordance with instructions furnished by Osmotics. During the warranty period,
Osmotics will, at its option, refund the purchase price of or replace any
Product proved to Osmotics' satisfaction to be defective or nonconforming;
provided that Buyer returns the Product to the point of shipment properly packed
and shipment prepaid. Concurrently with any refund or Product replacement,
Osmotics shall reimburse Buyer for the cost of shipping the defective Product to
Osmotics.
(B) RETURNS. No returns of Products will be accepted unless
Buyer complies with Osmotics' return policy, as amended from time to time. A
copy of Osmotics' current return policy is attached hereto as Exhibit D.
---------
Replacement shall mean furnishing a new shipment (F.O.B. place of original
shipment) of the Product in an amount sufficient to replace any Product found to
be defective or nonconforming.
(C) LIMITATION OF LIABILITY. OSMOTICS' ENTIRE LIABILITY AND THE
BUYER'S (AND ITS CUSTOMERS') EXCLUSIVE REMEDY SHALL BE AS FOLLOWS:
IF THE BUYER RIGHTFULLY REJECTS THE PRODUCTS, OR JUSTIFIABLY REVOKES ACCEPTANCE
OF THE PRODUCTS, THE BUYER'S (AND ITS
-7-
<PAGE>
CUSTOMERS') SOLE REMEDY IS A REFUND OR CREDIT FOR ANY PAYMENTS MADE FOR THE
REJECTED OR REVOKED PRODUCTS UPON RETURN OF THE PRODUCTS TO OSMOTICS IN
ACCORDANCE WITH SECTION 9(a) ABOVE.
------------
AFTER ACCEPTANCE OF THE PRODUCTS, BUYER'S AND ITS CUSTOMERS' SOLE REMEDY IS FOR
REFUND OR REPLACEMENT, PURSUANT TO THE TERMS OF THE WARRANTY SET FORTH IN
SECTIONS 9(a) and (b) ABOVE.
- ---------------------
OTHER THAN OSMOTICS' OBLIGATION TO REFUND OR REPLACE AS SET FORTH ABOVE,
OSMOTICS SHALL NOT BE LIABLE FOR ANY LOST PROFITS OR INCIDENTAL, CONSEQUENTIAL,
INDIRECT, SPECIAL OR OTHER DAMAGES OF ANY KIND, FOR ANY REASON WHATSOEVER
INCLUDING, BUT NOT LIMITED TO, DAMAGES BASED UPON NEGLIGENCE, BREACH OF
WARRANTY, STRICT LIABILITY, OR ANY OTHER THEORY, EXCEPT AS SET FORTH IN SECTION
-------
10(b).
- -----
INCIDENTAL AND CONSEQUENTIAL DAMAGES SHALL NOT BE RECOVERABLE EVEN IF THE
REPLACEMENT REMEDY FAILS ITS PURPOSE OR FOR ANY OTHER REASON.
10. Indemnification.
---------------
(A) OSMOTICS' RIGHT OF INDEMNIFICATION. Buyer agrees that it
shall indemnify and hold Osmotics harmless from and against all claims, damages,
losses, and expenses, including reasonable attorneys' fees, arising out of or
resulting from (i) the sale, handling, storage, transport, use or application of
the Products by Buyer, or its employees, agents, customers, or anyone for whose
actions any of them may be liable or (ii) any breach by the Buyer of the terms
or conditions of this Agreement, including any misrepresentation by Buyer of its
authority hereunder or any representation or warranty made by the Buyer to
Osmotics or with respect to Osmotics and/or the Products, which were untrue when
made or were not authorized in writing by Osmotics.
(B) BUYER'S RIGHT OF INDEMNIFICATION. Osmotics agrees that it
shall indemnify and hold Buyer harmless from and against all claims, damages,
losses, and expenses, including reasonable attorneys' fees, arising out of or
resulting from any claim of any individual for personal injury arising out of
such individual's use of Products sold in the Territory; provided that the
foregoing right of indemnification shall not apply in any instance where such
alleged personal injury arose from the use of Products which have been altered
in any way following shipment by Osmotics, or which were used by such individual
other than in accordance with instructions provided by Osmotics, or which were
used in conjunction with products other than the Products. As a condition to the
enforceability of such right of indemnification, Buyer shall give Osmotics
timely written notice of any action brought against Buyer or Osmotics and
Osmotics shall have the right and option to direct and control the defense of
such action.
11. Intellectual Property.
---------------------
-8-
<PAGE>
(a) Osmotics does not grant to the Buyer any license to use any of
its Intellectual Property. Buyer agrees not to use any packaging, labels,
advertising or any other materials on which the Osmotics Trademarks appear.
(b) The Buyer acknowledges that Osmotics is the owner of the
Intellectual Property, including the Osmotics Trademarks, and all rights and
good will associated with the Intellectual Property. Buyer shall not claim
adversely to possess any right, title or interest in and to such Intellectual
Property or to assist any third party in so claiming.
(c) Upon the request of Osmotics, the Buyer agrees to provide
Osmotics information regarding its packaging, labels, advertising, and other
materials it uses in connection with its sales and marketing of the Product for
the purpose of monitoring the Buyer's compliance with Osmotic's Intellectual
Property rights.
12. Proprietary Information.
-----------------------
(A) CONFIDENTIAL INFORMATION. In performing this Agreement,
each party may receive information of a confidential and proprietary nature
regarding the other, including information about such party's intellectual
property and its operations, including, but not limited to, research, formulas,
marketing plans, strategies, forecasts, budgets, and customer and supplier lists
(hereinafter called "Confidential Information"). Confidential Information shall
be held in strict confidence by the recipient, shall not be used except as
permitted hereunder, and shall not be disclosed to any third party without the
prior written consent of the disclosing party. The employees, agents, and
sublicensees of the recipient shall be bound to the same obligations of
confidentiality and restrictions on use as the recipient. Confidential
Information shall not include:
(i) information which is known to the recipient prior to
the date of receipt and not obtained or derived in any manner related to this
Agreement;
(ii) information which is or becomes part of the public
domain through no fault of the recipient; or
(iii) information which is obtained from a third party who
lawfully possesses such Confidential Information and is under no obligation to
keep such Confidential Information confidential.
(B) DISCLOSURE TO TRIBUNAL. If disclosure of Confidential
Information is required by law, regulation or order, other than as contemplated
by subsection (c) below, such Confidential Information may be disclosed by the
recipient; provided that the disclosing party is notified before the recipient
makes any such disclosure and the recipient uses its best efforts to ensure that
the disclosures are treated, to the extent possible, as confidential by the
government agency or other person or entity receiving Confidential
-9-
<PAGE>
Information.
(C) REGISTRATIONS. If, in connection with the obtaining of
any health or other registration or authorization with respect to the Products,
Buyer shall be required to present to a government agency or authority formulas
with respect to the Products and such formulas shall be furnished by Osmotics to
Buyer for such purpose, then, in such event Buyer shall treat the said formulas
in all respects as strictly confidential and as trade secrets and will not
disclose the same to any party other than the aforesaid government agency or
authority. Buyer shall promptly notify Osmotics of any request for such formulas
made by said government agency or authority. Further, said formulas shall be
disclosed by Buyer only to such persons within Buyer's organization who require
the same for the purpose of the filing of formula statements with the said
government agency or authority, and at Osmotics' request, Buyer shall cause the
aforesaid people in Buyer's organization to sign such nondisclosure or trade
secrets agreements as Osmotics may require with respect to said formulas. In all
other respects, the said formulas shall be kept confidential by Buyer and shall
not be used for any purpose other than that described herein.
13. Covenant not to Compete. Buyer hereby covenants and agrees that
-----------------------
it shall not be an owner, partner, officer, director, manager, employee, or
other representative any person or entity which manufactures, markets or sells
products which compete directly with the Products ("Competing Products"), (b)
that no such person or entity shall hold any interest, directly or indirectly,
in Buyer and (c) that it shall not otherwise, directly or indirectly,
manufacture, promote or sell Competing Products under any contract, joint
venture or other arrangement.
14. Survival. The provisions of Sections 12 and 13 shall survive the
-------- ------------------
termination or expiration of this Agreement.
15. Remedies. The parties acknowledge that a breach by either party
--------
of the provisions of Sections 10, 11, 12 and 13 of this Agreement will cause the
--------------------------
other party irreparable injury for which it cannot be reasonably or adequately
compensated in money damages. The injured party shall, therefore, be entitled,
in addition to all other remedies available to it, to injunctive and other
equitable relief to prevent a breach of such provisions, or any part of them,
and to secure their enforcement. Nothing contained herein shall be construed as
prohibiting a party from pursuing any other remedies available to it, including
the recovery of damages, in the event of a breach of this Agreement.
16. Term and Termination. Unless sooner terminated as provided
--------------------
below, the term of this Agreement shall commence as of the date set forth above
and shall continue for five years, whereupon this Agreement shall automatically
extend for additional periods of five years each unless either party gives
written notice to the other that it does not intend so to extend this Agreement,
at least 90 days prior to the expiration of the initial term or any renewal term
hereof.
-10-
<PAGE>
17. Termination.
-----------
(A) AUTOMATIC TERMINATION. This Agreement shall immediately and
automatically terminate without notice to the Buyer upon either of the following
events:
(i) the attempted or actual assignment by Buyer of this
Agreement or any of its rights or obligations hereunder without the prior
written consent of Osmotics; or
(ii) the voluntary bankruptcy, dissolution or liquidation
of Buyer or the appointment of a receiver for any substantial portion of the
assets of Buyer.
(B) MATERIAL DEFAULT. In the event of a material default by
either party in the performance of this Agreement, the other party may give
written notice to the defaulting party specifying the nature and extent of the
default and requiring cure; and the defaulting party shall have sixty (60) days
thereafter to cure such default. If such default is not cured within such sixty
(60) day period, then the aggrieved party may by written notice declare this
Agreement immediately terminated.
(c) This Agreement may be terminated immediately by Osmotics by
notice in writing to Buyer upon either of the following events:
(i) there are any changes in the financial or business
condition or other circumstances of Buyer which, in the judgment of Osmotics,
are materially detrimental to the interests of Osmotics, including, without
limitation, any acquisition of any interest in Buyer by an entity engaged in any
business which, in the judgment of Osmotics, manufactures Competing Products (or
the acquisition by Buyer of any interest in any such entity); or
(ii) the commencement of an involuntary bankruptcy
proceeding against Buyer which proceeding is not dismissed within sixty (60)
days; or
18. Disposition of Products Upon Termination. Osmotics assumes no
----------------------------------------
responsibility or obligation for or with respect to Products in the possession
of the Buyer at or after termination of this Agreement; provided, however, that
Osmotics shall have the right, at its option, within thirty (30) days after the
date of termination to purchase or cause to be purchased any or all of the
Products in the Buyer's inventory at a price equal to the "F.O.B." price thereof
to the Buyer. The Buyer shall pack and arrange for shipping of such Products as
are so purchased.
19. Force Majeure. Neither party to this Agreement shall be liable
-------------
to the other and neither shall be deemed in default hereunder for any failure or
delay in the performance of any of its covenants, agreements or obligations,
hereunder, other than the failure to pay money when due, caused by or arising
out of conditions of force majeure. In
-11-
<PAGE>
this clause, "conditions of force majeure" shall mean any war, riot, social
disturbance, act of God, strike, lockout, trade dispute or labor disturbance,
accident, breakdown of plant or machinery, fire, flood, difficulty in obtaining
workmen or materials or transportation, any law, act or order of any court,
board, government, or other direct authority of competent jurisdiction, or any
other cause beyond the reasonable control of the party. The party affected by
any condition of force majeure as described in this provision shall promptly
notify the other party in writing and hereby agrees to use reasonable diligence
to remove any such conditions of force majeure as may occur from time to time;
provided, however, nothing contained herein shall require the settlement of
strikes, lockouts, or other labor difficulties by the party affected contrary to
its wishes.
20. Notices. Any notices, payments or other communications required
-------
or permitted to be given or made hereunder shall be in writing in the English
language and shall be hand delivered or sent by registered airmail letter,
postage prepaid, express courier, and (except for payments) facsimile or telex
to the other party at its address set forth below or to such other address as
may from time to time be notified by one party to the other in accordance with
this Section.
If to Osmotics:
Osmotics Corporation
1125 17th Street, Suite 2310
Denver, Colorado 80202 USA
Attn: Steven Porter
Telephone: (303) 292-3350
Facsimile: (303) 293-2087
If to Buyer:
Fabel Paris
11-13, Rue Des Champs
92600 Asneires
Paris, France
Attn: Michel Favier
Telephone: 01 47 91 44 77
Facsimile: 01 47 91 03 79
All notices, payments and other communications shall be effective (i) if sent by
registered airmail letter, when received or seven (7) days after mailing,
whichever is earlier; (ii) if hand delivered or sent by express courier, when
delivered; or (iii) if by facsimile or telex, when received by the machine to
which it was transmitted (a machine-generated transaction report produced by
sender bearing recipient's facsimile number being prima facie proof of receipt.)
21. Entire Agreement. This Agreement constitutes the entire
----------------
agreement
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<PAGE>
between the parties relating to the subject matter hereof and supersedes all
prior written and oral understand ings and agreements between the parties. No
modification or waiver of any term or condition of this Agreement shall be valid
or binding unless the same is in writing signed by both parties.
22. Arbitration. Any controversy or claim arising out of or relating
-----------
to this Agreement, or the breach thereof shall be settled by arbitration in
Denver, Colorado in accordance with the commercial rules, then obtaining, of the
American Arbitration Association, and judgment upon the award rendered may be
entered in any court having jurisdiction thereof pursuant to Section 23.
----------
23. Choice of Law; Jurisdiction. This Agreement shall be governed by
---------------------------
and construed in accordance with the laws of the State of Colorado, USA, without
regard to its conflict of laws principles. Buyer hereby waives French
jurisdiction and consents to the jurisdiction and venue of the state and federal
courts of Colorado over any disputes arising hereunder. The English language
text of this Agreement shall be the authorized text for all purposes.
24. Assignability; Binding Effect. This Agreement may not be
-----------------------------
assigned, sublicensed or transferred by Buyer, by operation of law or otherwise,
without the prior written consent of Osmotics. For purposes of this Agreement,
a change in control of or a merger or consolidation involving Buyer, shall be
deemed an assignment. Subject to this condition, this Agreement shall be
binding upon and inure to the benefit of the successors and assigns of the
parties.
25. Authority. Each party to this Agreement warrants that it has the
---------
authority to execute and perform this Agreement and that this Agreement is the
valid and binding obligation of such party, enforceable against such party in
accordance with its terms.
26. Severability. If any provision of this Agreement shall be
------------
adjudged by a court to be void or unenforceable, the Agreement shall be deemed
modified to the minimum extent necessary to avoid the illegality, but the void
or unenforceable provision shall in no way affect any other provision of this
Agreement or the validity or enforceability of the remainder of this Agreement.
27. Governmental Approvals. The parties agree that if any
----------------------
governmental approvals or filings are required, the parties will jointly
cooperate to make all such filings and obtain all such approvals. If any such
approval will require substantive modifications to this Agreement and the
parties cannot agree upon modifications which will permit governmental approval,
either party may terminate this Agreement by written notice to the other without
further liability to the other except for obligations accrued to the date of
termination and obligations which are otherwise specified herein as surviving
termination.
IN WITNESS WHEREOF, the parties hereto have caused this Sole Source
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<PAGE>
Private Label Agreement to be executed by their respective duly authorized
representatives on the day and year first above written.
OSMOTICS CORPORATION
By_____________________________________
Steven Porter, President
FABEL PARIS
By_____________________________________
Michel Favier, Directeur General
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<PAGE>
EXHIBIT A
DISTRIBUTOR'S TRADEMARKS
------------------------
[trademarks graphics]
A-1
<PAGE>
EXHIBIT B
EXCLUDED TERRITORY
------------------
Japan
Korea
Australia
New Zealand
Thailand
China
Malaysia
Hawaii
Singapore
Indonesia
B-1
<PAGE>
EXHIBIT C
Up-Scale Market
---------------
The following establishments within the Territory are representative of the
retail establishments included in the Up-Scale Market:
Galeries Lafayette
Sephora
Le Printemps
C-1
<PAGE>
Confidential Treatment Requested [ ]
Exhibit D
---------
RETURN POLICY
-------------
Except as described below, no returns of Products will be accepted by Osmotics
unless agreed to in writing by Osmotics. When a defective Product claim is
received, Osmotics will immediately recheck its quality control records to
ensure the Product performed according to Osmotics' Certificate of Analysis upon
shipment.
Osmotics will retest Product Buyer believes to be defective and compare its
performance to that of Osmotics' retention samples.
a) If Osmotics' retention samples perform according to Osmotics'
original release specifications but the returned Product does not, Osmotics
will assume the Product was compromised either in shipping or handling
after it left the Osmotics facility. In this case, Osmotics will assist
Buyer in filing a claim with Buyer's carrier but Osmotics will assume no
liability for the claim.
b) If the Product's performance compares favorably with Osmotics'
retention samples but Buyer wants to exchange the Product for a different
lot, Osmotics will exchange the lot for Buyer, but Buyer will be charged a
[ ] restocking fee.
C-2
<PAGE>
EXHIBIT 23.01
CONSENT OF COUNSEL
We consent to the reference to our firm under the caption "Legal Matters" in
Amendment No. 1 to the Registration Statement on Form SB-2 and in the related
Prospectus to be filed by Osmotics Corporation on or about February 6, 1997 in
connection with the registration of shares of its Common Stock,
Representative's Warrants, and Shares obtainable upon the exercise of such
warrants.
Fenwick & West LLP
Palo Alto, California
February 5, 1997
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 5, 1997
<PAGE>
EXHIBIT 23.03
CONSENT OF COUNSEL
We consent to the reference to our firm under the caption "Legal Matters" in
Amendment No. 1 to the Registration Statement on Form SB-2 and in the related
Prospectus to be filed by Osmotics Corporation in connection with the
registration of 1,125,000 of its Common Stock, Representative's Warrants and
shares obtainable upon the exercise of such warrants.
Davis, Graham & Stubbs LLP
Denver, Colorado
February 5, 1997
