<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1997
REGISTRATION NO. 333-5306-D
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
OSMOTICS CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2844 84-1287070
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
--------------
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. [_]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<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
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share......... 1,125,000 $6.00 $6,750,000 $2,046(4)
- --------------------------------------------------------------------------------------------
Placement Agent's
Warrants................ 112,500 $.0001 $11 (2)
- --------------------------------------------------------------------------------------------
Common Stock issuable upon
exercise of Placement
Agent's Warrants(3)..... 112,500 $9.90 $1,113,750 $338(4)
- --------------------------------------------------------------------------------------------
Total.................. $2,384(4)
============================================================================================
</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act.
(2) No registration fee required pursuant to Rule 457 under the Securities
Act.
(3) 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 Placement Agent's Warrants.
(4) 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, MAY 21, 1997
[LOGO OF OSMOTICS(R)]
MINIMUM OFFERING OF 500,000 AND
MAXIMUM OFFERING OF 1,125,000 SHARES OF COMMON STOCK
----------
This Prospectus relates to the offering (the "Offering") of shares (the
"Shares") of common stock, $0.001 par value per share ("Common Stock"), by
Osmotics Corporation (the "Company"). All of the Shares offered hereby are
being sold by the Company.
This Offering is on a minimum basis (the "Minimum Offering") of 500,000
Shares (the "Minimum Shares") and a maximum basis (the "Maximum Offering") of
1,125,000 Shares (the "Maximum Shares"). The Minimum Shares are being offered
on a "best efforts, all or none" basis and the remaining Shares are being
offered on a "best efforts" basis.
All funds received from subscribers for the Shares will be held in an escrow
account for the benefit of the subscribers by Continental Stock Transfer &
Trust Company (the "Escrow Agent") until an initial closing (a "Closing") of
the Minimum Offering or earlier termination of the Offering. The Offering will
expire on the earlier to occur of (i) 60 days from the date of this Prospectus
and (ii) the sale of all of the Shares offered hereby, unless the Company and
National Securities Corporation ("National" or the "Placement Agent") agree to
extend the Offering for an additional 30-day period (the "Termination Date").
If the subscriptions for the Minimum Offering are not received by the
Termination Date, the Offering will terminate and all funds will be returned
promptly by the Escrow Agent without interest and without any deduction
therefrom. Pending each closing, subscriptions to be accepted at such closing
may be revoked, provided that written notice of revocation is sent by certified
or registered mail, return receipt requested, and is received by the Company or
the Placement Agent, as applicable, at least two (2) business days before such
closing. Refunds shall then be promptly made without interest and without
deduction. The Shares will be delivered promptly to subscribers after each
respective closing.
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. See
"Plan of Distribution" for a description of the factors considered in
determining the initial public offering price. The Company anticipates that the
Common Stock will be quoted on the OTC Electronic Bulletin Board under the
symbol "OSMO".
----------
THE SHARES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE
8 AND "DILUTION" ON PAGE 22.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================================
PRICE TO PUBLIC UNDERWRITING COMMISSION(1) PROCEEDS TO COMPANY(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $6.00 $0.60 $5.40
- ---------------------------------------------------------------------------------------------------------------
Total Minimum............................. $3,000,000 $300,000 $2,700,000
Total Maximum............................. $6,750,000 $675,000 $6,075,000
===============================================================================================================
</TABLE>
(1) Excludes (i) additional compensation payable to the Placement Agent in the
form of a non-accountable expense allowance equal to 1.8% of the gross
proceeds of this Offering, and (ii) the value of five-year warrants (the
"Placement Agent's Warrants") to purchase up to an aggregate of 112,500
shares of Common Stock, at an exercise price of $9.90 per share, that will
be sold to the Placement Agent at a nominal price. The Placement Agent will
be issued one Placement Agent's Warrant for every 10 Shares sold in this
Offering. In addition, see "Plan of Distribution" for information
concerning indemnification and contribution arrangements with the Placement
Agent and other compensation payable to the Placement Agent.
(2) Before deducting estimated expenses of $860,000 payable by the Company,
excluding the non-accountable expense allowance payable to the Placement
Agent.
----------
The Shares are being offered exclusively through the Placement Agent, on a
"best efforts" basis, and on an "all or none" basis as to the Minimum Offering.
The Placement Agent reserves the right to reject any order in whole or in part
and to withdraw, cancel or modify this Offering without notice.
NATIONAL SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[PICTURES OF ANTIOXIDANT SKIN CARE DERM PRODUCT]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY 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 OTC ELECTRONIC BULLETIN BOARD
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." Solely for
the purpose of calculations in this Prospectus, the number of Shares assumed to
be offered for the Minimum Offering and the Maximum Offering is 500,000 and
1,125,000 shares of Common Stock, respectively.
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
also supplies skin patches to third parties for inclusion in products to be
sold by the third parties under their own labels 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, in Geneva, Switzerland at eight Pharmacies Principale stores and also
introduced products into Brazil and Equador. In January 1997, the Company
launched products in France at Au Printemps, Samaritaine, Bon Marche, BHV and
Perfumerie Sephora stores. In May 1997, the Company launched products in over
50 additional pharmacies in Switzerland. 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."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company......... This Offering is on a minimum
basis of 500,000 shares of
Common Stock and a maximum basis
of 1,125,000 shares of Common
Stock.
Common Stock Outstanding Before this Offer-
ing(1)..................................... 1,478,299 shares
Common Stock to be Outstanding After the
Minimum Offering(1)........................ 1,978,299 shares
Common Stock to be Outstanding After the
Maximum Offering(1)........................ 2,603,299 shares
Certain terms............................... The Minimum Offering is being
offered by the Placement Agent
on a "best efforts, all or none"
basis and the remaining shares
of Common Stock are being
offered by the Placement Agent
on a "best efforts" basis, until
the earlier of (i) 60 days after
the date of this Prospectus and
(ii) the sale of all the Shares
being offered hereby, unless the
Company and the Placement Agent
agree to extend this Offering
for an additional 30-day period.
Proposed OTC Electronic Bulletin Board Sym-
bol........................................ OSMO
Use of Proceeds............................. For repayment of indebtedness
and general corporate purposes,
including marketing and sales
expenditures and working
capital. See "Use of Proceeds."
Risk Factors and Dilution................... The purchase of Shares offered
hereby involves a high degree of
risk and immediate and
substantial dilution.
Prospective investors should
review carefully and consider
the information set forth under
"Risk Factors" and "Dilution."
The Shares should not be
purchased by investors who
cannot afford the loss of their
entire investment. See "Risk
Factors."
</TABLE>
- --------
(1) Based upon shares issued and outstanding as of March 31, 1997. Does not
include 272,000 shares of Common Stock issuable upon exercise of options
outstanding as of March 31, 1997 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 March 31, 1997, at an exercise price of $1.10 per share;
(v) an estimated approximately 158,333 shares of Common Stock issuable upon
exercise of the Bridge Warrants at an exercise price of $0.022 per share;
and (vi) 50,000 shares of Common Stock issuable upon exercise of the
Placement Agent's Warrants if the Minimum Offering is sold and 112,500
shares of Common Stock issuable upon exercise of the Placement Agent's
Warrants if the Maximum Offering is sold, at an exercise price equal to
$9.90 per share.
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------- ------------
1995 1996 1996 1997
----- ------ ----- -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................... $ 328 $1,255 171 859
Loss from operations............................. (790) (1,401) (179) (418)
Net loss......................................... (811) (1,842) (190) (546)
Net loss per share(1)............................ (.68) (1.27) (0.15) (0.36)
Shares used in computing net loss per share(1)... 1,187 1,446 1,299 1,515
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------
AS ADJUSTED AS ADJUSTED
FOR MINIMUM FOR MAXIMUM
ACTUAL OFFERING(2) OFFERING(3)
------ ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 83 $ 728 $4,035
Current assets................................ 856 1,501 4,809
Current liabilities........................... 2,447 766 766
Total assets.................................. 1,503 1,595 4,903
Notes and capital lease payable............... 1,031 47 47
Total stockholders' equity (deficit).......... (982) 790 4,098
</TABLE>
- --------
(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 give effect to the issuance of the Minimum Shares offered
hereby at an initial public offering price of $6.00 per Share, and after
deducting estimated Placement Agent's commissions and estimated offering
expenses and after the application of the net proceeds therefrom. Assumes
no exercise of the Placement Agent's Warrants. See "Capitalization," "Use
of Proceeds" and "Plan of Distribution."
(3) Adjusted to give effect to the issuance of the Maximum Shares offered
hereby at an initial public offering price of $6.00 per Share, and after
deducting estimated Placement Agent's commissions and estimated offering
expenses and after the application of the net proceeds therefrom. Assumes
no exercise of the Placement Agent's Warrants. See "Capitalization," "Use
of Proceeds" and "Plan of Distribution."
----------------
The Osmotics(R) name logo 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.
6
<PAGE>
NOTICE TO CALIFORNIA INVESTORS
Each purchaser of Shares in California must meet one of the following
suitability standards: (1) any person who (a) has a net worth (excluding home,
furnishings and automobiles) of $250,000 or more and gross annual income of
$65,000 or more, or (b) has a net worth (excluding home, furnishings and
automobiles) of $500,000 or more; (2) any person who is an accredited investor
within the meaning of Regulation D under the Securities Act of 1933, as amended
(the "Securities Act"); (3) any entity that is a bank, savings and loan
association, trust company, insurance company, investment company registered
under the Investment Company Act of 1940, pension and profit sharing trust,
corporation or other entity, which together with the corporation's or other
entity's affiliates, has a net worth on a consolidated basis according to its
most recent regularly prepared statements (which shall have been reviewed, but
not necessarily audited, by outside accountants) of not less than $14,000,000
and subsidiaries of the foregoing; or (4) any person (other than a person
formed for the sole purpose of purchasing the Shares being offered hereby) who
purchases at least $1,000,000 aggregate amount of the Shares hereby offered.
7
<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 March 31, 1997, had a
working capital deficit of approximately $1,591,000 and an accumulated deficit
of approximately $3,279,000. 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 36% of the Company's
revenues from its inception in August 1995 to March 31, 1997 have been derived
from sales of products to Saks Fifth Avenue stores located in the United
States. Revenues from sales to Saks Fifth Avenue Stores accounted for
approximately 88% and 37% of the Company's revenues for the years ended
December 31, 1995 and 1996, respectively, and approximately 15% of the
Company's revenues for the three months ended March 31, 1997. Revenues from
sales to Self Care Catalog, Matchbox Agency, Neiman Marcus and House of Fraser
stores accounted for approximately 12%, 1%, 0% and 0% of the Company's
revenues, respectively, for the year ended December 31, 1995, 16%, 2%, 11% and
18% of the Company's revenues, respectively, for the year ended December 31,
1996 and 11%, 36%, 18% and 0% of the Company's revenues, respectively, for the
three months ended March 31, 1997. There can be no assurance that Saks Fifth
Avenue, Neiman Marcus, Self Care Catalog, Matchbox Agency or House of Fraser
stores 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
8
<PAGE>
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.
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."
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 certainty, the Company believes that the net proceeds of the
Minimum Offering, together with cash on hand, cash expected to be received
upon payment of outstanding accounts receivable at March 31, 1997, and cash
expected to be generated from operations, will be sufficient to pay existing
liabilities including notes payable and the Bridge Notes, but may be
insufficient to satisfy other anticipated cash requirements for the 12 months
after the date of this Prospectus, and that the Company may need to obtain
additional funds during such 12-month period through public or private debt or
equity financings, collaborative relationships, bank facilities or other
arrangements. If the Maximum Shares are sold in this Offering, the Company
believes that the net proceeds of the Maximum Offering, together with cash on
hand, cash expected to be received upon payment of outstanding accounts
receivable at March 31, 1997, and cash expected to be generated from
operations, will provide adequate funding for the Company's anticipated cash
requirements through at least 12 months after the date of this Prospectus.
Even if the Maximum Shares are sold in this Offering, 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."
Use of Proceeds. If the Minimum Shares and the Maximum Shares are sold in
this Offering, approximately 67.7% and 23.7%, respectively, of the estimated
net proceeds of this Offering are expected to be used to repay existing
outstanding notes of the Company issued in the Bridge Financing and other
outstanding notes, and other outstanding consultants' fees, and approximately
11.3% and 26.7%, respectively, of the estimated net proceeds of this Offering
are expected to be used for working capital and general corporate purposes.
See "Use of Proceeds" and "Capitalization--Recent Financing Transactions."
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 March 31, 1997. In addition, at December 31, 1995
and 1996 and March 31, 1997, there were four, 11 and 17 persons, respectively,
working in retail stores for whom the Company was responsible for all or a
portion of their salary. Of those 11 and 17 persons, 5 and 13, respectively,
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."
9
<PAGE>
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."
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
10
<PAGE>
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 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 PTO issued an initial office action in April 1997 which
rejected all the claims of the 1996 continuation in part application on the
basis that references not previously relied upon in the examination of the two
earlier applications. The Company plans to respond in due course by arguing in
favor of patentability. 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 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
11
<PAGE>
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, Secretary 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 contract
manufacturer to assemble components 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 assembling components 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 contract 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
12
<PAGE>
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. If the Minimum Offering or the Maximum
Offering is completed, the directors, executive officers and principal
stockholders of the Company and their affiliates will, in the aggregate,
beneficially own approximately 50.1% and approximately 38.8%, respectively, of
the Company's outstanding Common Stock, including shares issuable upon
exercise of outstanding options or warrants that are exercisable by such
persons before May 30, 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."
Exercise of Warrants and Options. As of March 31, 1997, 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 158,333 shares will be issuable upon exercise of the Bridge
Warrants at an exercise price of $.022 per share and (iv) 50,000 shares will
be issuable upon exercise of the Placement Agent's Warrants if only the
Minimum Shares are sold in this Offering and 112,500 shares will be issuable
upon exercise of the Placement Agent's Warrant if the Maximum Shares are sold
in this Offering, at an exercise price
13
<PAGE>
equal to $9.90 per share. 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 and Agreements; Anti-Takeover Effects of
Delaware Law. Upon completion of the Minimum 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 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. See
"Description of Capital Stock."
As is permitted by the Delaware General Corporation Law (the "DGCL"), the
Company's charter documents provide that the Company will indemnify its
directors and officers, and advance certain expenses to such persons in
connection with certain legal proceedings, to the maximum extent permitted by
the DGCL. The Company will also enter into indemnity agreements with each of
its current directors and executive officers. 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. See
"Management--Indemnification of Directors and Executive Officers and Limitation
of Liability."
Limits on Secondary Trading; Possible Illiquidity of Trading Market. The
Company anticipates that the Common Stock will be quoted on the OTC Electronic
Bulletin Board (the "Bulletin Board"), which is a significantly less liquid
market than the Nasdaq SmallCap Market or other stock exchanges. If at a future
date, the Company becomes able to satisfy the quantitative and other listing
requirements for listing of the Common Stock on the Nasdaq SmallCap Market or
another stock exchange, the Company may apply for such listing, although there
can be no assurance that the Company will apply for any such listing or that
its application would be accepted. As a result of the Common Stock being quoted
on the Bulletin Board, an investor may find it more difficult to dispose of, or
to obtain accurate quotations as to the price of, the Common Stock than if the
Common Stock were listed on the Nasdaq SmallCap Market or another stock
exchange. 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 was determined by negotiation among the Company and the Placement
Agent based upon a number of factors and may not be an indication of the market
price of the Common Stock following this Offering. See "Plan of Distribution"
for a discussion of the factors
14
<PAGE>
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, sales of a large number of shares
of Common Stock in the market 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 Common Stock. The number of shares of Common
Stock available for sale in the public market is limited by restrictions under
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 Placement Agent.
Based on shares issued and outstanding as of March 31, 1997, as a result of
the foregoing lock-up agreements and securities law restrictions, 37,500 shares
of Common Stock other than the Shares offered hereby will be eligible for
resale without restriction immediately after the Closing of this Offering
pursuant to Rule 144 or Rule 144(k), 6,818 shares of Common Stock will be
eligible for resale commencing 90 days after the date of this Prospectus
pursuant to Rule 144, 11,363 shares of Common Stock will be eligible for resale
commencing 120 days after the date of this Prospectus pursuant to Rule 144, and
approximately 1,422,618 additional shares of Common Stock will be eligible for
resale, pursuant to either Rule 701, Rule 144 or Rule 144(k), beginning one
year from the Closing of this Offering. The Company also intends to register on
a registration statement on Form S-8, following the Closing of this Offering, a
total of 622,000 shares of Common Stock (assuming no exercise of options or
warrants after March 31, 1997) 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."
Placement Agent's Warrants. At the closing of this Offering, the Company will
sell to the Placement Agent for nominal consideration the Placement Agent's
Warrants to purchase up to 112,500 shares of Common Stock. The Placement Agent
will be issued one Placement Agent's Warrant for every 10 Shares sold in this
Offering. The Placement Agent'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 $9.90 per share. As long as the Placement Agent's
Warrants or other outstanding warrants remain unexercised, the Company's
ability to obtain additional capital might be adversely affected. Moreover, the
Placement Agent 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 Placement
Agent'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 "Plan of Distribution."
Immediate and Substantial Dilution. Investors participating in this Offering
will incur immediate, substantial dilution of $5.61 per share in the as
adjusted net tangible book value of the Common Stock from the Minimum Offering.
The purchasers of Shares will incur immediate, substantial dilution of $4.43
per share in the as adjusted net tangible book value of the Common Stock from
the Maximum Offering. To the extent options and warrants to purchase Common
Stock are exercised, there will be further dilution. See "Dilution."
15
<PAGE>
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 41,667 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 and the
third party's obligations and performance 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."
16
<PAGE>
USE OF PROCEEDS
The gross proceeds to the Company from the sale of the Shares offered by the
Company hereby if the Minimum Offering is sold will be $3,000,000 and if the
Maximum Offering is sold will be $6,750,000. The net proceeds to the Company
if the Minimum Offering is sold are estimated to be approximately $1,786,000
and if the Maximum Offering is sold are estimated to be approximately
$5,093,500, after deducting estimated placement agent's commissions of
$354,000 if the Minimum Offering is sold and $796,500 if the Maximum Offering
is sold and offering expenses of approximately $860,000. The Company currently
expects to use the estimated net proceeds as follows:
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING
------------------------- -------------------------
APPROXIMATE APPROXIMATE APPROXIMATE APPROXIMATE
DOLLAR PERCENTAGE OF DOLLAR PERCENTAGE OF
APPLICATION OF NET PROCEEDS AMOUNT NET PROCEEDS AMOUNT NET PROCEEDS
- --------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Repayment of outstanding
debt(1)................... $1,078,500 60.4% $1,078,500 21.1%
Payment of outstanding
consultants' fees(2)...... 130,000 7.3 130,000 2.6
Marketing and sales of the
Company's products(3)..... 375,000 21.0 2,525,000 49.6
Working capital and general
corporate purposes........ 202,500 11.3 1,360,000 26.7
---------- ----------
$1,786,000 $5,093,500
</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. If more than the Minimum Shares are sold, 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.
The Company's capital requirements to date have been provided through
private placements of Common Stock, notes payable and the Bridge Financing. At
March 31, 1997, the Company's current liabilities, including approximately
$474,000 of accrued Offering costs, exceeded its current assets by
approximately $1,600,000. The Company believes that the net proceeds from the
Minimum Offering, together with cash on hand, cash expected to be received
upon payment of outstanding accounts receivable at March 31, 1997, and cash
expected to be generated from operations, will be sufficient to pay existing
liabilities, including notes payable and the Bridge Notes, but may be
insufficient to satisfy other anticipated cash requirements for the 12 months
after the date of this Prospectus, and that the Company may need to obtain
additional funds during such 12-month period. There can be no assurance that
the Company will be able to obtain necessary additional funding on acceptable
terms. Failure to obtain necessary funding would have a material adverse
effect on the Company's business, operating results and financial condition.
See "Risk Factors--Future Additional Capital Requirements; No Assurance Future
Capital Will be Available."
17
<PAGE>
The Company believes that the estimated net proceeds from the Maximum
Offering, together with cash on hand, cash expected to be received upon
payment of outstanding accounts receivable at March 31, 1997, and cash
expected to be generated from operations will be sufficient to meet the
Company's anticipated cash requirements for at least 12 months from the date
of this Prospectus. Even if the Maximum Shares are sold in this Offering,
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. Failure to obtain
necessary funding would have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors--Future
Additional Capital Requirements; No Assurance Future Capital Will be
Available."
Prior to expenditure, the net proceeds will be invested in short-term
interest-bearing securities or money market funds.
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.
18
<PAGE>
CAPITALIZATION
The following tables set forth, as of March 31, 1997, (1) the actual
capitalization of the Company, (2) the pro forma capitalization of the Company
to reflect 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 500,000 Shares
offered in the Minimum Offering and 1,125,000 Shares offered in the Maximum
Offering, after deducting Placement Agent's commissions and other estimated
expenses of the Minimum Offering and the Maximum Offering, respectively.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------------
AS ADJUSTED AS ADJUSTED
FOR MINIMUM FOR MAXIMUM
ACTUAL PRO FORMA OFFERING(1) OFFERING(2)
------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Notes and capital lease
payable(3)(4)....................... $ 1,031 $ 1,031 $ 47 $ 47
Stockholders' equity(4):
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, 1,978,299
and 2,603,299,
respectively(1)(2)(6)(7)........ 1,816 1 2 3
Additional paid-in capital(1)(2)... -- 1,815 3,686 6,993
Warrants(3)(7)..................... 481 481 475 475
Accumulated deficit................ (3,279) (3,279) (3,373) (3,373)
------- ------- ------- ------
Total stockholders' equity
(deficit)......................... (982) (982) 790 4,098
------- ------- ------- ------
Total capitalization........... $ 49 $ 49 $ 837 $4,145
======= ======= ======= ======
</TABLE>
- --------
(1) As adjusted to give effect to the issuance of the Minimum Shares offered
hereby at an initial offering price of $6.00 per share (after deducting
Placement Agent's commissions and other estimated expenses of this
Offering in aggregate of $1,214,000).
(2) As adjusted to give effect to the issuance of the Maximum Shares offered
hereby at an initial offering price of $6.00 per share (after deducting
Placement Agent's commissions and other estimated expenses of this
Offering in aggregate of $1,656,500).
(3) 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 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. At March 31, 1997, those Bridge
Notes are reflected in the balance sheet at $855,834 ($950,000, less
unamortized discount of $94,166).
(4) Loans to the Company (excluding the Bridge Notes) in the aggregate
principal amount of $128,500 outstanding at March 31, 1997, are also due
upon the Closing of this Offering.
(5) Before the 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.
19
<PAGE>
(6) Based upon shares issued and outstanding as of March 31, 1997. Does not
include 272,000 shares of Common Stock issuable upon exercise of options
outstanding as of March 31, 1997 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 March 31, 1997, at an exercise price of $1.10 per share;
(v) an estimated approximately 158,333 shares of Common Stock issuable upon
exercise of the Bridge Warrants at an exercise price of $0.022 per share;
and (vi) 50,000 shares of Common Stock issuable upon exercise of the
Placement Agent's Warrants if only the Minimum Shares are sold in this
Offering and 112,500 shares of Common Stock issuable upon exercise of the
Placement Agent's Warrants if the Maximum Shares are sold in this Offering,
at an exercise price equal to $9.90 per share.
(7) 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 is 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.
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 Placement
Agent 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 Warrants entitle the
holders 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
20
<PAGE>
effective before that date, at which time principal will be due five business
days after the Company receives funds from such an offering. The agent for the
Bridge Investors, on behalf of all the Bridge Investors, has agreed, until one
business day following the Closing of the Minimum Offering, not to declare any
amounts owing under the Bridge Notes to be due and payable. If an event of
default occurs with respect to the payment by the Company 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. 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."
21
<PAGE>
DILUTION
The net negative tangible book value of the Company as of March 31, 1997 was
approximately $(1,552,000) or $(1.05) 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 500,000
Shares offered by the Company hereby in the Minimum Offering (after deducting
the estimated Placement Agent's commissions and offering expenses of the
Minimum Offering), the adjusted net tangible book value of the Company as of
March 31, 1997 would have been approximately $773,000 or $0.39 per share. This
represents an immediate increase in net tangible book value of $1.44 per share
to existing stockholders and an immediate dilution of $5.61 per share to new
investors purchasing Shares at the initial public offering price. After giving
effect to the sale of the 1,125,000 Shares offered by the Company hereby in
the Maximum Offering (after deducting the estimated Placement Agent's
commissions and offering expenses of the Maximum Offering), the adjusted net
tangible book value of the Company as of March 31, 1997 would have been
approximately $4,081,000 or $1.57 per share. This represents an immediate
increase in net tangible book value of $2.62 per share to existing
stockholders and an immediate dilution of $4.43 per share to new investors
purchasing Shares at the initial public offering price. The following table
illustrates the per share dilution.
<TABLE>
<CAPTION>
MINIMUM
OFFERING
--------
<S> <C> <C>
Assumed initial public offering price per share............... $6.00
-----
Net tangible book value per share at March 31, 1997......... $(1.05)
------
Increase in net tangible book value per share attributable
to new investors........................................... 1.44
------
Pro forma net tangible book value per share after this
Offering..................................................... 0.39
-----
Net tangible book value dilution per share to new investors... $5.61
=====
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM
OFFERING
--------
<S> <C> <C>
Assumed initial public offering price per share............... $6.00
-----
Net tangible book value per share at March 31, 1997......... $(1.05)
------
Increase in net tangible book value per share attributable
to new investors........................................... 2.62
------
Pro forma net tangible book value per share after this
Offering..................................................... 1.57
-----
Net tangible book value dilution per share to new investors... $4.43
=====
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997,
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 Placement Agent's commissions and offering
expenses), based upon an initial public offering price of $6.00 per Share:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
----------------- ------------------ AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- ------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 1,478,299 74.7% $1,986,186 39.8% $1.34
New investors.............. 500,000 25.3 3,000,000 60.2 6.00
--------- ----- ---------- -----
Totals................... 1,978,299 100.0% $4,986,186 100.0%
========= ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED 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 22.7% $1.34
New investors.............. 1,125,000 43.2 6,750,000 77.3 6.00
--------- ----- ---------- -----
Totals................... 2,603,299 100.0% $8,736,186 100.0%
========= ===== ========== =====
</TABLE>
22
<PAGE>
The foregoing tables assume no exercise of outstanding stock options and
warrants. As a consequence, the foregoing tables do not include (i) 345,036
shares of Common Stock issuable upon exercise of stock options and warrants
outstanding as of March 31, 1997, 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
158,333 shares of Common Stock issuable upon exercise of the Bridge Warrants,
at an exercise price of $0.022 per share and (v) 50,000 shares of Common Stock
issuable upon exercise of the Placement Agent's Warrants if only the Minimum
Shares are sold in this Offering and 112,500 shares of Common Stock issuable
from exercise of the Placement Agent's Warrants if the Maximum Shares are sold
in this Offering, at an exercise price equal to 165% 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."
23
<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. The selected financial data as of March 31, 1997 and for
the three months ended March 31, 1996 and 1997 are derived from unaudited
financial statements of the Company and include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial position and the results of operations for the period. Operating
results for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the entire year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------- --------------
1995 1996 1996 1997
----- ------- ------ ------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................... $ 328 $ 1,255 $ 171 $ 859
Cost of products sold........................ 160 435 83 370
----- ------- ------ ------
Gross profit............................... 168 820 88 489
Operating expenses:
General and administrative................. 293 542 80 99
Selling and marketing...................... 600 1,588 161 782
Product management......................... 66 91 26 26
----- ------- ------ ------
Loss from operations......................... (791) (1,401) (179) (418)
Other income (expenses):
Interest expense........................... (20) (443) (11) (127)
Other income (expense)..................... -- 2 -- (1)
----- ------- ------ ------
Net loss..................................... $(811) $(1,842) $ (190) $ (546)
===== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------- ---------
1995 1996 1997
---- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................... $ 37 $ 91 $ 83
Current assets..................................... 280 869 856
Current liabilities................................ 558 1,869 2,447
Total assets....................................... 291 1,372 1,503
Notes payable and capital leases................... 200 844 1,031
Accumulated deficit................................ (890) (2,733) (3,279)
Total stockholders' deficit........................ (273) (536) (982)
</TABLE>
24
<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 March 31, 1997, had a working
capital deficit of $1,590,456 and an accumulated deficit of $3,278,954. 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 36% of the Company's revenues from initial shipments in April
1995 to March 31, 1997 have been derived from the sale of products to Saks
Fifth Avenue stores located in the United States. Revenues from sales to Saks
Fifth Avenue stores accounted for approximately 88%, 37% and 15% of the
Company's revenues for the years ended December 31, 1995 and 1996 and the
three months ended March 31, 1997, respectively. 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." Revenues from sales to Self Care
catalog, Matchbox Agency, Neiman Marcus and House of Fraser stores accounted
for approximately 12%, 1%, 0% and 0% of the Company's revenues, respectively,
for the year ended December 31, 1995, 16%, 2%, 11% and 18% of the Company's
revenues, respectively, for the year ended December 31, 1996 and 11%, 36%, 18%
and 0% of the Company's revenues, respectively, for the three months ended
March 31, 1997. Total foreign sales accounted for 0%, 32% and 50% of the
Company's revenues for the years ended December 31, 1995 and 1996 and three
months ended March 31, 1997, respectively. 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% and 13%
of the Company's revenues for the year ended December 31, 1996 and the three
months ended March 31, 1997, respectively. Revenues from sales of The Wrinkle
Patch accounted for approximately 12% and 12% of total revenues for the year
ended December 31, 1996 and the three months ended March 31, 1997,
respectively. Revenues from private label sales to third parties for sale
under their own label accounted for approximately 0%, 2% and 41% of the
Company's revenues for the years ended December 31, 1995 and 1996 and the
three months ended March 31, 1997, respectively.
25
<PAGE>
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. 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.
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.
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.
26
<PAGE>
Three Months Ended March 31, 1996 and 1997
Revenues. Total revenues for the three months ended March 31, 1997, were
$859,355, compared with $171,047 for the same period in 1996. The major
components of the increase were increases in private label sales to third
parties for sales under their own label and increases in the volume of
domestic and international retail sales of Osmotics label products. The
Company benefitted from significant advertising during the three months ended
March 31, 1997. The Company also benefitted 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. Revenues also
increased from sales of new products, primarily The Wrinkle Patch and, to a
lesser extent, Spa Sante label products.
Costs of Products Sold. Cost of products sold were $369,698 for the three
months ended March 31, 1997, compared to $82,722 for the same period in 1996.
The increase was due primarily to the increase in volume of sales. Cost of
products sold as a percentage of revenues was 43.0% for the three months ended
March 31, 1997, compared to 48.0% for the same period in 1996, due to the
costs decreasing 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 depending on several factors, including the mix of products sold, unit
sales prices, and actual material and manufacturing costs negotiated with
vendors.
Production Management. Production management expenses were $25,954 for the
three months ended March 31, 1997, compared to $26,676 for the same period in
1996.
Selling and Marketing. Selling and marketing expenses were $782,640 for the
three months ended March 31, 1997, compared to $160,887 for the same period in
1996. Major components of selling and marketing expenses include, among other
things, advertising, development expenses relating to the Company's products,
salaries, fringe benefits, public relations, trade shows and travel costs. The
increase was primarily due to increases in personnel, travel, 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 as a percentage of the
Company's revenues until sales volume increases, if any, are achieved.
General and Administrative. General and administrative costs were $99,283
for the three months ended March 31, 1997, compared to $79,843 for the same
period in 1996. 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 expense increased to $127,332 for the three months ended
March 31, 1997, from $10,756 for the same period in 1996, primarily because of
interest relating to promissory notes and Bridge Notes executed in 1996 and
1997, and amortization of the discount related to the Bridge Notes.
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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 $94,000 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.
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 March 31, 1997, the Company had received
approximately $3,161,000 from debt and equity transactions, while sales in the
same period were approximately $2,443,000. At March 31, 1997, the Company had
approximately $83,000 in cash.
Cash used in the Company's operations was $1,629,154 for the year ended
December 31, 1996 compared to $735,081 for the year ended December 31, 1995,
and $157,777 for the three months ended March 31, 1997 compared to $211,873
for the three months ended March 31, 1996. The increase in cash used in the
Company's operations in 1996 compared to 1995 was primarily due to expansion
of the Company's organization and increased sales. The decrease in cash used
in the Company's operations for the first quarter of 1997 compared to the
first quarter of 1996 was due primarily to an increase in accounts payable and
accrued liabilities as of the end of the first quarter of 1997 compared to the
first quarter of 1996. 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. The Company did not have any material capital
expenditures for the three months ended March 31, 1996 or for the three months
ended March 31, 1997.
From inception through March 31, 1997, the Company reported losses of
$3,278,954. At March 31, 1997, the Company had a working capital deficit of
$1,590,456. In the absence of this Offering, the Company will need 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 the Company's capital requirements cannot be predicted
with accuracy, the Company believes that the net proceeds of the Minimum
Offering, together with cash on hand, cash expected to be received upon
payment of outstanding accounts receivable at March 31, 1997, and cash
expected to be generated from operations, will be sufficient to pay existing
liabilities including notes payable and the Bridge Notes, but may be
insufficient to satisfy other anticipated cash requirements for the 12 months
after the date of this Prospectus, and that the Company may need to obtain
additional funds during such 12-month period through public or private debt or
equity financings, collaborative relationships, bank facilities or other
arrangements. If the Maximum Shares are sold in this Offering, the Company
believes that the net proceeds of the Maximum Offering, together with cash on
hand, cash expected to be received upon payment of outstanding accounts
receivable at March 31, 1997, and cash expected to be generated from
operations, will provide adequate funding for the Company's anticipated cash
requirements through at least 12 months after the date of this Prospectus.
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 costs controls. In
general, however, the Company's cash requirements are expected to increase
significantly over the next several years to meet new
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product development and implementation programs, and to fund anticipated
marketing and sale activities associated with expended 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 than anticipated 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 March 31, 1997, the Company had net operating loss carryforwards (NOLs)
for federal tax purposes of approximately $2,600,000. 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").
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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,
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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 a
number of agreements with third parties for private label sales by the third
party, and intends to pursue other opportunities
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to enter agreements with other third parties for private label sales. The
Company anticipates that it may ultimately sell a 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 or a combination
of such antioxidants, (2) products using Patches to deliver antioxidants to
different parts of a person's body, (3) products using different shaped
Patches to accommodate various facial contours, (4) 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 (5) hair, body and sun 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"), upper lip, brow
furrows or other targeted areas of the face, 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 humectants, vitamin B6 to regulate oil production
and antibacterial agents for acne breakout.
. Calming Cleansing Milk, which is a mild cleanser for dry, sensitive or
irritated skin types and contains soothing botanicals and anti-
inflammatory ingredients to reduce redness and irritation.
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. Firming Tonic Facial Mist, which is a product containing natural
botanicals and pure essential 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 pure essential oils sprayed on the face to regulate oil
control, tone, and hydrate normal to oily skin.
. Hydrating Complex SPF 15, which is a skin lotion containing antioxidant
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 and
nourishes 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.
. Facial Refining Masque, which is an exfoliating masque containing
natural enzymes to gently remove dead skin cells and refine the skin's
texture.
. 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,
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Switzerland at eight Pharmacies Principale stores. In January 1997, the
Company launched products in France at Au Printemps, Samaritaine, Bon Marche,
BHV and Perfumerie Sephora stores. In December 1996, the Company introduced
products in Brazil and Ecuador. In May 1997, the Company launched products in
over 50 pharmacies in Switzerland. 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.
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 Barth's, Taylor
Gifts, and Luminesence. 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, an Infomercial
Production and Product Management Agreement, dated as of March 5, 1996 (as
amended, the "VideOne Agreement"), between the Company and VideOne Marketing,
Inc. ("VideOne"), provides that 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. The agreement
provides that 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.
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A dispute exists between the Company and VideOne concerning the parties'
obligations and performance under the VideOne Agreement. See"--Legal
Proceedings."
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 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.
Other Agreements. The Company has entered into various agreements with third
parties to market or distribute the Company's products in various territories
including Venezuela, Greece, the Middle East and Brazil, and expects to enter
into agreements with third parties to market or distribute the Company's
products in various other countries, including Switzerland, Belgium, the
Philippines and Chile. The agreements entered into to date have terms ranging
from three to five years, subject to earlier termination if the third parties
fail to satisfy performance goals.
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 including CNN Headline News. 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 contract manufacturer, named
Franklin Medical, to assemble components 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 assembling components 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
contract 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."
35
<PAGE>
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.
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 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 PTO issued an initial office action in April 1997 which
rejected all the claims of the 1996 continuation in part application on the
basis that references not previously relied upon in the examination of the two
earlier applications. The Company plans to respond in due course by arguing in
favor of patentability. The Company also has filed an application under an
international treaty designating various foreign
36
<PAGE>
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 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,
37
<PAGE>
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
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
38
<PAGE>
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.
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 March 31, 1997, 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 March 31, 1997, there were 17 persons working in retail stores
for whom the Company was responsible for all or a portion of their salary. Of
those 17 persons, 13 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, Secretary 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
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<PAGE>
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.
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 41,667 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.
On March 5, 1997, VideOne filed a complaint against the Company and its
President and Chief Executive Officer, Steven S. Porter, in District Court,
Arapahoe County, State of Colorado. The lawsuit alleges various breaches of
the VideOne Agreement. VideOne alleges that the VideOne Agreement provides
that VideOne and the Company would share the costs of and produce an
infomercial for The Wrinkle Patch. VideOne also claims it had the sole and
exclusive worldwide right during the term of the agreement to manage direct
response marketing, namely, television; print media; outbound telemarketing;
package inserts; catalogs; radio; televised shopping; credit card syndication;
direct mail; seminars; and Internet web sites. VideOne claims the Company did
not cooperate with and systematically frustrated VideOne's efforts in
producing the infomercial and in marketing The Wrinkle Patch products.
VideOne's complaint asserts claims for breach of contract; breach of covenant
of good faith and fair dealing; fraud; negligent misrepresentation;
intentional interference with contractual relations; and interference with
prospective business advantage. VideOne seeks monetary damages, attorneys'
fees, pre- and post-judgment interest, costs and other expenses of litigation.
VideOne alleges its compensatory damages are no less than $1,000,000. VideOne
also seeks exemplary damages.
The Company and Mr. Porter submitted their answer and counterclaim on March
31, 1997. The Company denies the substantive allegations contained in
VideOne's complaint. As affirmative defenses, the Company alleges that it was
fraudulently induced to enter into the VideOne Agreement; that VideOne's
claims are barred by failure of consideration; that VideOne's claims are
barred by its material breaches of the VideOne Agreement; that VideOne's
claims are barred by its failure to give timely and adequate notice of alleged
breaches; that VideOne's claims are barred because the VideOne Agreement fails
in its essential purpose; that VideOne's claims are barred because the terms
and provisions of the VideOne Agreement are too vague and indefinite to be
enforced; that VideOne's claims are barred by waiver, estoppel and laches;
that VideOne's claims sounding in tort are barred in whole or part by
VideOne's own fault pursuant to state law; that VideOne's claims sounding in
tort are barred in whole or part by the fault attributable to responsible
nonparties pursuant to state law; and that
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<PAGE>
VideOne's claims based upon the Company's alleged representations are barred
by the merger clause of the VideOne Agreement.
The Company also filed counterclaims against VideOne and Richard M.
Bartenburg, Jr., a director and its Chief Executive Officer and President, and
David Cohen, its Chairman of the Board of Directors and Executive Producer.
The Company's counterclaims allege that the Company was fraudulently induced
to enter into the VideOne Agreement; that VideOne breached the warranties
contained in the VideOne Agreement; that VideOne breached the VideOne
Agreement; that VideOne and the individuals violated the Colorado Deceptive
Trade Practices Act; that VideOne and the individuals intentionally interfered
with the Company's prospective business advantage; that VideOne and the
individuals intentionally interfered with the Company's contractual relations;
and that VideOne abused process. The Company seeks money damages, interest,
costs, injunctive relief and declaratory relief.
The lawsuit is in its preliminary stages. Discovery has not yet commenced.
The Company intends to vigorously defend the claims made against it by VideOne
and to vigorously prosecute its claims against VideOne.
Although the Company believes that the matters raised in the VideOne
complaint 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.
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<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 President, Chief Executive Officer and Chairman
47 of the Board
Francine E. Porter Executive Vice President, Secretary, Treasurer
37 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
Richard G. Hartigan(1) Vice President, Corporate Development and
60 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.
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<PAGE>
Marvin J. Rosenblum has served as a director of the Company since January
1995. Since 1973 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.
Richard G. Hartigan, Jr. has served as Vice President, Corporate Development
and a director of the Company since February 1997. Since January 1995, Mr.
Hartigan has served as the managing director of the Hartigan Group, which
provides marketing advice to cosmetics companies. From October 1990 to January
1995, Mr. Hartigan served as President and Chief Executive Officer of
Lancaster Group, a cosmetics company. From September 1965 to September 1990,
Mr. Hartigan was employed by Estee Lauder, a cosmetics company, in several
positions, the last of which was Executive Vice President.
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
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>
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 person who at the time was a 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.
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<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 17,454 8,000
</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 an initial public offering price of $6.00 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.
44
<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.
45
<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.
46
<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, who was a director of the Company until
February 1997, 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
47
<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, Thomas Wiley, Hillary Management, S.A., and Dermal
Technologies, Inc. have agreed to vote their shares of Common Stock in favor
of the directors designated
48
<PAGE>
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.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Common Stock as of March 31, 1997, 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
SHARES BENEFICIALLY BENEFICIALLY
BENEFICIALLY OWNED AFTER OWNED AFTER
OWNED PRIOR TO THE MINIMUM THE MAXIMUM
OFFERING(1) OFFERING(1) OFFERING(1)
DIRECTORS, NAMED EXECUTIVE --------------- --------------- ---------------
OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
---------------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Steven S. Porter(2)............ 490,362 32.3% 490,362 24.3% 490,362 18.6%
Francine E. Porter(3).......... 477,862 31.8 477,862 23.8 477,862 18.2
Marvin J. Rosenblum(4)......... 172,270 11.3 172,270 8.6 172,270 6.5
Hillary Management, S.A.(5).... 136,440 9.2 136,440 6.9 136,440 5.2
David Ross..................... 107,909 7.3 107,909 5.5 107,909 4.1
Suzanne T. Porter.............. 113,636 7.7 113,636 5.7 113,636 4.4
Dermal Technologies, Inc....... 90,909 6.1 90,909 4.6 90,909 3.5
Thomas G. Wiley(6)............. 67,725 4.4 67,725 3.3 67,725 2.6
Richard G. Hartigan............ -- -- -- -- -- --
All executive officers and
directors
as a group (7 persons)(7)..... 846,947 51.5 846,947 39.5 846,947 30.6
</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) Includes 452,181 shares held jointly with Francine Porter and 38,181
shares subject to options exercisable before May 30, 1997.
(3) Includes 452,181 shares held jointly with Steven Porter and 25,681 shares
subject to options exercisable before May 30, 1997.
(4) Includes 68,181 shares owned by Steven and Francine Porter that are
subject to an option exercisable by Mr. Rosenblum before May 30, 1997, and
35,908 shares subject to an option exercisable before May 30, 1997.
(5) Includes 21,629 shares in which certain members of a former director's
family have a beneficial interest.
(6) Includes 44,998 shares subject to options exercisable before May 30, 1997.
(7) Includes 167,495 shares subject to options exercisable before May 30,
1997.
50
<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 May 15, 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
158,333 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
Placement Agent's Warrants
In connection with this Offering, the Company has authorized the issuance to
the Placement Agent of up to 112,500 Placement Agent's Warrants and has
reserved 112,500 shares of Common Stock for issuance upon exercise of the
Placement Agent's Warrants. Each Placement Agent's Warrant will entitle the
holder to purchase one share of Common Stock at a price of $9.90 per share,
which is 165% of the initial public offering price of the Shares in this
Offering. The Placement Agent's Warrants will, subject to certain conditions,
be exercisable any time from the first until the fifth anniversary of the date
of this Prospectus. The Placement Agent will be issued one Placement Agent's
Warrant for every 10 shares of Common Stock sold in this Offering. See "Plan
of Distribution."
The Placement Agent'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
Placement Agent's Warrant, and the holder thereof will not possess any rights
as a stockholder of the Company until such holder exercises the Placement
Agent's Warrants.
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<PAGE>
The foregoing discussion of certain terms and provisions of the Placement
Agent's Warrants is qualified in its entirety by reference to the detailed
provisions of the Placement Agent'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 Placement Agent'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 Placement Agent'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 Placement Agent's Warrants.
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.
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 Placement Agent'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.
52
<PAGE>
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 ESCROW AGENT
The Transfer Agent and Registrar for the Company's Common Stock, and the
Escrow Agent in connection with this Offering is Continental Stock Transfer &
Trust Company.
LISTING
The Company expects that the Common Stock will be quoted on the OTC
Electronic Bulletin Board under the symbol "OSMO."
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.
Assuming no exercise of options or warrants after May 15, 1997, the Company
will have issued and outstanding following completion of the Minimum Offering
and the Maximum Offering 1,978,299 and 2,603,299 shares of Common Stock,
respectively. The shares of Common Stock 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 1,352,209 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 Placement Agent.
Additionally, a stockholder holding 107,909 shares of Common Stock has agreed
to these restrictions for a period of one year from the effective date of the
Registration Statement for this Offering, except that 37,500 of his shares
will not be so restricted following the closing of this Offering. Further,
another stockholder holding 11,363 shares of Common Stock has agreed to these
restrictions for a period of 120 days following the Closing of this Offering.
The Placement Agent has represented that it will not release any Bridge Shares
before expiration of the lock-up period.
As a result of the foregoing lock-up agreements and securities law
restrictions, assuming no exercise of options or warrants after May 15, 1997,
37,500 shares of Common Stock other than the Shares offered hereby will be
eligible for resale without restriction immediately after the Closing of this
Offering pursuant to Rule 144 or Rule 144(k), 6,818 shares of Common Stock
will be eligible for resale commencing 90 days after the date of this
Prospectus pursuant to Rule 144, 11,363 shares of Common Stock will be
eligible for resale commencing 120 days after the date of this Prospectus
pursuant to Rule 144, and approximately 1,422,618 additional shares of Common
Stock will be eligible for resale, pursuant to either Rule 701, Rule 144, or
Rule 144(k) beginning one year from the Closing of this Offering.
53
<PAGE>
In general, under Rule 144, 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 one year (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 May 15,
1997, will equal approximately 2,603,299 total outstanding shares immediately
after this Offering if the Maximum Shares are sold) 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 two 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.
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 March 31, 1997, 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."
54
<PAGE>
PLAN OF DISTRIBUTION
The Minimum Offering is being offered on a "best efforts, all or none"
basis. The proceeds from the sale of the Common Stock will be held in an
escrow account for the benefit of the subscribers by the Escrow Agent until
the Minimum Shares have been sold or earlier termination of this Offering. In
the event that subscriptions for the Minimum Shares have not been received by
the Termination Date, this Offering will terminate and all funds will be
returned promptly by the Escrow Agent without any deductions therefrom or
interest thereon. In any event, this Offering will expire on the earlier to
occur of (i) 60 days after the date of this Prospectus and (ii) the sale of
the Maximum Shares, unless the Company and the Placement Agent agree to extend
this Offering for an additional 30-day period.
The Company has agreed to indemnify the Placement Agent against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Placement Agent a non-accountable expense allowance equal
to 1.8% 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 Placement Agent for $.0001 each the
Placement Agent's Warrants to purchase from the Company up to 112,500 Shares
at an exercise price of $9.90 per share. The Placement Agent'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 Placement Agent. The Placement Agent's Warrants
provide for adjustment in the exercise price of the Placement Agent's Warrants
in the event of certain mergers, acquisitions, stock dividends and capital
changes. The Placement Agent'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 Placement Agent'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 1,352,209 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
Placement Agent'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 effective date of the Registration Statement relating to this
Offering, except that 37,500 of his shares will not be so restricted after the
Closing of this Offering. Further, another stockholder holding 11,363 shares
of Common Stock has agreed to these restrictions for a period of 120 days
following the Closing of this Offering. These restrictions do not apply to the
issuance of shares of Common Stock upon the exercise of options and warrants
outstanding prior to the sale of the Shares offered hereby. The Placement
Agent has represented that it will not release any Bridge Shares before
expiration of the lock-up period.
55
<PAGE>
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 Placement Agent, and during such time as
the Placement Agent has not exercised such right, the Placement Agent 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 Placement Agent 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 Placement Agent 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."
Certain persons participating in this Offering may engage in transactions,
including stabilizing bids, syndicate covering transactions or the imposition
of penalty bids, which may involve the purchase of Common Stock. Such
transactions may stabilize or maintain the market price of the Common Stock at
a level above that which might otherwise prevail in the open market and, if
commenced, may be discontinued at any time.
Determination of Offering Price
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price was determined by
negotiations between the Company and the Placement Agent. Among the factors
considered in determining the initial public offering price were 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.
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.
56
<PAGE>
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.
57
<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,
---------------------- MARCH 31,
1995 1996 1997
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................... $ 37,352 $ 90,930 $ 83,080
Trade accounts receivable, net of allow-
ance for doubtful accounts of $0,
$15,000 and $15,000, respectively...... 50,343 478,306 531,305
Inventory, net of reserve for
obsolesence of $0, $15,000 and $15,000,
respectively........................... 183,694 234,113 216,875
Prepaid expenses........................ 8,293 65,247 25,088
--------- ----------- -----------
Total current assets.................. 279,682 868,596 856,348
--------- ----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment....... 12,217 105,490 106,364
Less: Accumulated depreciation.......... (6,593) (22,580) (29,279)
--------- ----------- -----------
Property and equipment, net............. 5,624 82,910 77,085
--------- ----------- -----------
OTHER ASSETS, net of accumulated
amortization of $150, $6,112 and $150,
respectively............................. 5,467 15,940 16,898
--------- ----------- -----------
DEFERRED INITIAL PUBLIC OFFERING COSTS.... -- 404,347 553,037
--------- ----------- -----------
Total assets............................ $ 290,773 $ 1,371,793 $ 1,503,368
========= =========== ===========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable........................ $ 213,573 $ 281,370 $ 532,309
Accrued initial public offering costs... -- 365,811 474,475
Accrued compensation and other accrued
liabilities............................ 150,437 275,648 340,510
Deferred revenue and product warranties. -- 141,130 106,921
Bridge financing, net of unamortized
discount of $0, $90,000 and $94,166,
respectively........................... -- 660,000 855,834
Current portion of notes payable........ 193,948 128,500 128,500
Current portion of capital leases pay-
able................................... -- 16,470 8,255
--------- ----------- -----------
Total current liabilities............... 557,958 1,868,929 2,446,804
--------- ----------- -----------
LONG-TERM LIABILITIES:
Notes payable, net of current portion... 5,653 -- --
Capital leases payable.................. -- 38,601 38,601
--------- ----------- -----------
Total long-term liabilities............. 5,653 38,601 38,601
--------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock, no par value, 6,000,000
shares authorized, 1,153,770, 1,478,299
and 1,478,299 shares issued and
outstanding at December 31, 1995 and
1996, and March 31, 1997, respectively. 609,414 1,815,839 1,815,839
Warrants................................ 7,935 381,078 481,078
Accumulated deficit..................... (890,187) (2,732,654) (3,278,954)
--------- ----------- -----------
Total stockholders' (deficit) equity.... (272,838) (535,737) (982,037)
--------- ----------- -----------
Total liabilities and stockholders'
(deficit) equity....................... $ 290,773 $ 1,371,793 $ 1,503,368
========= =========== ===========
</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 THREE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------- --------------------
1995 1996 1996 1997
--------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES......................... $ 328,465 $ 1,254,800 $ 171,047 $ 859,355
COST OF PRODUCTS SOLD............ 160,000 435,201 82,722 369,698
--------- ----------- --------- ---------
GROSS PROFIT..................... 168,465 819,599 88,325 489,657
OPERATING EXPENSES:
General and administrative..... 292,742 541,600 79,843 99,283
Selling and marketing.......... 600,087 1,587,765 160,887 782,640
Production management.......... 66,059 90,889 26,676 25,954
--------- ----------- --------- ---------
LOSS FROM OPERATIONS............. (790,423) (1,400,655) (179,081) (418,220)
OTHER INCOME (EXPENSE):
Interest expense............... (20,285) (443,480) (10,756) (127,332)
Other income (expense), net.... -- 1,668 -- (748)
--------- ----------- --------- ---------
NET LOSS......................... $(810,708) $(1,842,467) $(189,837) $(546,300)
========= =========== ========= =========
PER SHARE DATA (Note 2):
Pro forma net loss per common
and common equivalent share... $ (0.68) $ (1.27) $ (0.15) $ (0.36)
========= =========== ========= =========
Shares used in computing pro
forma net loss per common and
common equivalent share....... 1,186,733 1,446,012 1,299,098 1,515,303
========= =========== ========= =========
</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.............. -- -- 125,000 * 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 1,815,839 198,036 381,078 (2,732,654)
Warrants issued in
connection with Bridge
Financing.............. -- -- 33,333 100,000 --
Net loss................ -- -- -- -- (546,300)
--------- ---------- ------- -------- -----------
BALANCES, March 31, 1997
(unaudited)............ 1,478,299 $1,815,839 231,369 $481,078 $(3,278,954)
========= ========== ======= ======== ===========
</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 $6.00 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 THREE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------- --------------------
1995 1996 1996 1997
--------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss...................... $(810,708) $(1,842,467) $(189,837) $(546,300)
Adjustments--
Depreciation and amortiza-
tion....................... 16,360 79,332 9,254 6,699
Amortization of debt dis-
count (Note 4)............. -- 285,000 -- 95,834
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) (66,847) (52,999)
Inventory................. (183,694) (65,419) 45,700 17,238
Prepaid expenses and other
assets................... (8,070) (56,956) (321) 40,159
Accounts payable and ac-
crued liabilities........ 288,873 232,389 (9,822) 315,801
Deferred revenue and prod-
uct warranties........... -- 141,130 -- (34,209)
--------- ----------- --------- ---------
Net cash flows from op-
erating activities..... (735,081) (1,629,154) (211,873) (157,777)
--------- ----------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment.................... (12,217) (12,535) (3,434) (874)
Other assets.................. (750) (8,373) -- (958)
--------- ----------- --------- ---------
Net cash flows from in-
vesting activities....... (12,967) (20,908) (3,434) (1,832)
--------- ----------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of com-
mon stock.................... 618,792 1,269,096 226,296 --
Proceeds from issuance of
notes payable and warrants... 135,000 21,000 -- --
Proceeds from Bridge Financ-
ing.......................... -- 750,000 -- 200,000
Payments on notes payable..... -- (96,448) -- --
Stock issuance costs.......... -- (111,805) (8,100) --
Deferred initial public offer-
ing costs.................... -- (38,536) -- (40,026)
Debt issuance costs........... -- (64,000) -- --
Payments on capital leases.... -- (25,667) -- (8,215)
--------- ----------- --------- ---------
Net cash flows from fi-
nancing activities..... 753,792 1,703,640 218,196 151,759
--------- ----------- --------- ---------
NET INCREASE(DECREASE) IN CASH.. 5,744 53,578 2,889 (7,850)
CASH, beginning of period....... 31,608 37,352 37,352 90,930
--------- ----------- --------- ---------
CASH, end of period............. $ 37,352 $ 90,930 $ 40,241 83,080
========= =========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest........ $ -- $ 22,467 $ -- $ --
========= =========== ========= =========
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Property purchased under capi-
tal leases................... $ -- $ 80,738 $ -- $ --
Discount of notes payable
equal to warrants issued to
lenders...................... 4,748 375,000 -- 100,000
Common stock issued for--
Stock offering costs........ 36,479 13,521 13,080 --
Accrued liabilities for--
Stock offering costs........ 10,400 -- -- --
Deferred initial public of-
fering costs............... -- 365,811 -- 108,664
</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 March 31, 1997, the Company's current liabilities
exceeded its current assets by approximately $1.6 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 register and sell shares of its common stock
in an initial public offering (the "Offering") (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).
Interim Results (Unaudited)
The accompanying balance sheet as of March 31, 1997, the statements of
operations and of cash flows for the three months ended March 31, 1996 and
1997, and the statement of stockholders' (deficit) equity for the three months
ended March 31, 1997 are unaudited. In the opinion of management, the
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results of the interim
periods. Operating results for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
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 and product warranties. 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. As of December 31, 1996, deferred revenue and product warranties is
comprised of $80,000 related to sales treated as consignments and $61,130 of
allowance for estimated product warranty and returns.
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.
F-8
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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).
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128), which supersedes Accounting Principles Board Opinion No. 15,
"Earnings Per Share" ("APB No. 15"). SFAS No. 128 simplifies the requirements
for reporting earnings per share ("EPS") by requiring companies only to report
"basic" and "diluted" EPS. SFAS No. 128 is effective for both interim and
annual periods ending after December 15, 1997 but requires retroactive
restatement upon adoption. The Company will adopt SFAS No. 128 in the fourth
quarter of 1997. The Company does not believe such adoption will have a
material effect on either its previously reported earnings per share.
In March 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, "Disclosure of Information about Capital Structure" (SFAS No. 129),
which continues the existing requirements of APB No. 15 but expands the number
of companies subject to portions of its requirements. Specifically, SFAS No.
129 requires that entities previously exempt from the requirements of APB No.
15 disclose the pertinent rights and privileges of all securities other than
ordinary common stock. SFAS No. 129 is effective for periods ending after
December 15, 1997. The Company was not exempt from APB No. 15; accordingly,
the adoption of SFAS No. 129 will not have any effect on the Company.
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.
F-9
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
(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.
F-10
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-11
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
F-12
<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).............................. 125,000 $ .022
Additional issuances subsequent to December 31, 1996:
Bridge Warrants issued in January 1997 (Note 4)..... 33,333 $ .022
Options to be granted in connection with employment
agreements effective upon closing of the
Offering (Note 11)................................. 150,000 $ 6.60 *
</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 $6.00 per share.
** 110% of assumed initial public offering price of $6.00 per share.
F-13
<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. The Company
received $500,000 of proceeds from the Bridge Financings in July 1996 and had
additional closings totaling $250,000 in October through December 1996 (Note
7) for an aggregate principal balance of $750,000 as of December 31, 1996. The
Company issued additional Bridge Notes in the aggregate principal amount of
$200,000 in January 1997, increasing the aggregate principal balance of the
Bridge Notes to $950,000 as of January 31, 1997. 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 agent for the Bridge
Investors, on behalf of the Bridge Investors, has agreed, until one business
day following the Closing of the Minimum Offering, not to declare any amounts
owing under the Bridge Notes to be due and payable. 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 and
$950,000 as of December 31, 1996 and January 31, 1997, respectively, 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. The warrants relating to
the original Bridge Financing of $500,000 are exercisable immediately
following such time as the number of shares for which they are exercisable may
be determined with certainty. The warrants relating to the additional Bridge
Financings in July 1996 through January 1997 of $450,000, are not exercisable
until one year following the effective date of the Offering. 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 and $950,000 as of
December 31, 1996 and January 31, 1997, respectively, 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 $475,000 as
of December 31, 1996 and January 31, 1997, respectively, and the discount is
being amortized to interest expense ($285,000 and $96,000 for the year ended
December 31, 1996 and the three months ended March 31, 1997) over the term of
the borrowing. As the Bridge Notes will be repaid out of a portion of the net
proceeds of the Offering, the Company will expense any remaining unamortized
discount in the quarter in which the Offering is consummated.
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 an
event of default occurs with respect to the payment by the Company 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.
F-14
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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.
(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, the VideOne
Agreement provides that 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-15
<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 41,667 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
F-16
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
On March 5, 1997, VideOne Marketing, Inc. ("VideOne"), filed a complaint
against the Company and its President and Chief Executive Officer, Steven S.
Porter, in District Court, Arapahoe County, State of Colorado. The lawsuit
alleges various breaches of the VideOne Agreement between VideOne and the
Company. VideOne alleges that the VideOne Agreement provides that VideOne and
the Company would share the costs of and produce an infomercial for The
Wrinkle Patch. VideOne also claims it had the sole and exclusive worldwide
right during the term of the agreement to manage direct response marketing,
namely, television; print media; outbound telemarketing; package inserts;
catalogs; radio; televised shopping; credit card syndication; direct mail;
seminars; and Internet web sites. VideOne claims the Company did not cooperate
with and systematically frustrated VideOne's efforts in producing the
infomercial and in marketing The Wrinkle Patch products. VideOne's complaint
asserts claims for breach of contract; breach of covenant of good faith and
fair dealing; fraud; negligent misrepresentation; intentional interference
with contractual relations; and interference with prospective business
advantage. VideOne seeks monetary damages, attorneys' fees, pre- and post-
judgment interest, costs and other expenses of litigation. VideOne alleges its
compensatory damages are no less than $1,000,000. VideOne also seeks exemplary
damages.
The Company and Mr. Porter submitted their answer and counterclaim on March
31, 1997. The Company denies the substantive allegations contained in
VideOne's complaint. As affirmative defenses, the Company alleges that it was
fraudulently induced to enter into the VideOne Agreement; that VideOne's
claims are barred by failure of consideration; that VideOne's claims are
barred by its material breaches of the VideOne Agreement; that VideOne's
claims are barred by its failure to give timely and adequate notice of alleged
breaches; that VideOne's claims are barred because the VideOne Agreement fails
in its essential purpose; that VideOne's claims are barred because the terms
and provisions of the VideOne Agreement are too vague and indefinite to be
enforced; that VideOne's claims are barred by waiver, estoppel and laches;
that VideOne's claims sounding in tort are barred in whole or part by
VideOne's own fault pursuant to state law; that VideOne's claims sounding in
tort are barred in whole or part by the fault attributable to responsible
nonparties pursuant to state law; and that VideOne's claims based upon the
Company's alleged representations are barred by the merger clause of the
VideOne Agreement.
The Company also filed counterclaims against VideOne and Richard M.
Bartenburg, Jr., a director and its Chief Executive Officer and President, and
David Cohen, its Chairman of the Board of Directors and Executive Producer.
The Company's counterclaims allege that the Company was fraudulently induced
to enter into the VideOne Agreement; that VideOne breached the warranties
contained in the VideOne Agreement; that VideOne breached the VideOne
Agreement; that VideOne and the individuals violated the Colorado Deceptive
Trade Practices Act; that VideOne and the individuals intentionally interfered
with the Company's prospective business advantage; that VideOne and the
individuals intentionally interfered with the Company's contractual relations;
and that VideOne abused process. The Company seeks money damages, interest,
costs, injunctive relief and declaratory relief.
The lawsuit is in its preliminary stages. Discovery has not yet commenced.
The Company intends to vigorously defend the claims made against it by VideOne
and to vigorously prosecute its claims against VideOne.
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
F-17
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-18
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(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,
----------------- MARCH 31,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued consulting fees..................... $ 85,000 $121,000 $130,000
Accrued commissions and royalties........... 38,295 11,376 11,777
Accrued interest............................ 17,146 66,409 95,409
Accrued payroll related items............... 9,996 56,863 55,742
Accrued advertising......................... -- -- 27,582
Accrued audit fees.......................... -- 20,000 20,000
-------- -------- --------
$150,437 $275,648 $340,510
======== ======== ========
</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 sell shares of its common stock to the public. As of December
31, 1996 and March 31, 1997, the balance sheets include approximately $404,000
and $553,037, respectively, of deferred costs directly related to the
Offering. The Company will also sell to the placement agent, upon closing of
the Offering, warrants to purchase shares of common stock at an exercise price
equal to 165% of the initial public offering per share.
Upon closing of the Offering, the Company will enter into employment
agreements with Steven and Francine Porter that are to become effective on the
closing date of this 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-19
<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 OR
PLACEMENT AGENT. 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.............................................................. 8
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 22
Selected Financial Data................................................... 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 25
Business.................................................................. 30
Management................................................................ 42
Certain Transactions...................................................... 47
Principal Stockholders.................................................... 50
Description of Capital Stock.............................................. 51
Shares Eligible for Future Sale........................................... 53
Plan of Distribution...................................................... 55
Legal Matters............................................................. 56
Experts................................................................... 56
Additional Information.................................................... 57
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MINIMUM OFFERING OF 500,000 AND MAXIMUM OFFERING OF 1,125,000
SHARES OF COMMON STOCK
[LOGO OF OSMOTICS]
-----------------
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>
Placement Agent 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 OTC Electronic Bulletin
Board filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 2,384
NASD filing fee.................................................... 1,715
OTC Electronic Bulletin Board filing fee........................... 8,078
Accounting fees and expenses....................................... 150,000
Legal fees and expenses............................................ 425,000
Printing fees and expenses......................................... 100,000
Blue sky fees and expenses......................................... 50,000
Transfer agent and registrar fees and expenses..................... 5,000
Miscellaneous...................................................... 117,823
--------
Total.......................................................... $860,000
========
</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 $6.00 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 March 31, 1997, 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 Placement Agent 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 Placement Agent's Warrant Agreement between the Placement
Agent 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.***
27.01 Financial Data Schedule.
99.01 Escrow Agreement among the Registrant, the Placement Agent and the
Escrow Agent.
99.02 Form of Subscription Agreement.
</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 May 21, 1997.
OSMOTICS CORPORATION
By: /s/ Steven S. Porter
-----------------------------
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 May 21, 1997
- ----------------------------------- Officer and Director
Steven S. Porter
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
Thomas G. Wiley* Chief Financial Officer May 21, 1997
- ----------------------------------- and Director
Thomas G. Wiley
ADDITIONAL DIRECTORS:
Francine E. Porter* Executive Vice President May 21, 1997
- ----------------------------------- and Director
Francine E. Porter
Marvin J. Rosenblum* Director May 21, 1997
- -----------------------------------
Marvin J. Rosenblum
</TABLE>
*By: /s/ Steven S. Porter
-------------------------------
Steven S. Porter,
(Attorney-in-fact)
II-6
<PAGE>
<TABLE>
<CAPTION>
ON
SEQUENTIAL
EXHIBIT NUMBERED
NUMBER EXHIBIT TITLE PAGE
------- ------------- ----------
<C> <S> <C>
1.01 Form of Placement Agent 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 Placement Agent's Warrant Agreement between the
Placement Agent 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.***
27.01 Financial Data Schedule
99.01 Escrow Agreement among the Registrant, the Placement
Agent and the Escrow Agent.
99.02 Form of Subscription Agreement.
</TABLE>
- --------
* To be supplied.
** Confidential Treatment Requested.
*** Previously filed.
<PAGE>
DRAFT 5/20/97
EXHIBIT 1.01
OSMOTICS CORPORATION
PLACEMENT AGENT AGREEMENT
May ___, 1997
National Securities Corporation
1001 Fourth Avenue, Suite 2200
Seattle, Washington 98154
Ladies and Gentlemen:
The undersigned, Osmotics Corporation, a Delaware corporation (the
"Company"), hereby agrees with National Securities Corporation ("National" or
the "Placement Agent") as follows:
A. The Company hereby engages National to act as its exclusive
placement agent in connection with the issuance and sale by the Company (the
"Offering") on a minimum basis of 500,000 shares of common stock, par value
$.001 per share (the "Common Stock" or the "Shares") at a public offering price
of $6.00 per share resulting in gross proceeds of $3,000,000 (the "Minimum
Offering") and on a maximum basis of 1,125,000 Shares resulting in gross
proceeds of $7,200,000 (the "Maximum Offering").
The Shares will be offered pursuant to a Registration Statement (as
defined in Section 1(A) below) and will be subject to the terms and conditions
set forth therein and in the Subscription Agreements to be executed by each
purchaser and the Company.
At each Closing (as defined in Section 1(B) hereof), the Company shall
also issue and sell to National or its designees common stock purchase warrants
to purchase up to 112,500 Shares (the "Warrants"), each Warrant entitling the
holder thereof to purchase one share of Common Stock (the "Placement Agent's
Shares") under the terms and conditions set forth in the Placement Agent's
Warrant Agreement dated the date of the Closing (as hereinafter defined), by and
between the Company and National (the "Warrant Agreement"). National will also
be granted certain registration rights as more fully set forth in the Warrant.
The Warrants and the
<PAGE>
Placement Agent's Shares shall sometimes collectively be referred to as the
"Placement Agent's Securities."
The Shares, the Warrants and the Placement Agent's Shares
(collectively, hereinafter referred to as "Securities") are more fully described
in the Registration Statement and the Prospectus referred to below.
Such number of Shares resulting in gross proceeds of $3,000,000 will
be offered by National on a "best efforts, all or none" basis and such number of
Shares resulting in gross proceeds of $6,750,000 will be offered on a "best
efforts" basis. The Company will issue the appropriate number of Shares at each
closing (each, a "Closing"), including, without limitation, the closing on at
least $3,000,000 (the "Minimum Closing"), after subscriptions have been received
and accepted by the Company and when funds from investors have cleared the
banking system in the normal course of business. The Minimum Closing will occur
within seven (7) business days after the earlier of (a) the date on which the
Minimum Offering has been sold or (b) ninety days after the date hereof, unless
such date is extended as provided in Section 1(C).
The Offering shall commence on the date hereof and shall terminate on
the earlier to occur of (i) _________________ __, 1997, and (ii) the sale of all
the Shares being offered in the Offering, unless National and the Company agree
to extend the Offering for an additional 30-day period (such date, as the same
may be extended, is hereinafter referred to as the "Termination Date;" the
period commencing on the date hereof and ending on the Termination Date is
sometimes referred to herein as the "Offering Period").
1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, each of the Placement Agent as of
the date hereof, and as of the Closing Date and the Second 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 Shares and the Placement Agent's Securities under the
National's Shares 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 Placement Agent 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,
-2-
<PAGE>
"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 any 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 any 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 (i) statements made in reliance
upon and in conformity with written information furnished to the Company with
respect to the Placement Agent by or on behalf of the Placement Agent expressly
for use in such preliminary prospectus, Registration Statement or Prospectus, or
(ii) statements made in the initial preliminary prospectus which were revised in
any subsequent preliminary prospectus or the Registration Statement and
Prospectus.
(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 Second 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 Placement Agent 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 the Placement
Agent 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
-3-
<PAGE>
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,
except where the failure to have such authorizations, approvals, orders,
licenses, certificates, franchises or permits would not have a material and
adverse effect on the Business; 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 has 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.
(E) At the dates as of which such information is set forth in the
Prospectus, the Company had a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under the headings
"Capitalization" and "Description of Capital Stock" and will have the adjusted
capitalization set forth therein on the Closing Date and the Second 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 Registration 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
-4-
<PAGE>
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 Placement Agent 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 and Placement Agent's Warrants to be sold by the Company as
contemplated herein.
(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 and
its consolidated subsidiaries (of which there are none) 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.
Except as disclosed in the Prospectus, 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 and unaudited 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 (except for immaterial nonpayments, if
any), 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
-5-
<PAGE>
such taxes which are not due and payable, and (iii) does not have any material
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 Placement Agent in connection with (i) the issuance by the
Company of the Securities, (ii) the purchase by the Placement Agent of the
Warrants and the Placement Agent's Shares from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement, or
(iv) resales of the Shares 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, any involving 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 Placement Agent'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 Placement
Agent'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) could reasonably be expected to materially and adversely affect the
Business.
(K) The Company has the corporate power and authority to authorize,
issue, deliver, and sell the National's Shares and to enter into this Agreement
and the Placement Agent's Warrant Agreement, and to consummate the transactions
provided for in such agreements; and this Agreement and the Placement Agent's
Warrant Agreement have each been duly and properly authorized, executed, and
delivered by the Company. Each of this Agreement and the Placement Agent'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 contribution may be limited by applicable law), and none of the
issue and sale of the Securities, execution, delivery or performance by the
Company of this Agreement and the Placement Agent'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
-6-
<PAGE>
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 (iii) any statute, judgment,
decree, order, rule or regulation applicable to the Company of any arbitrator,
court, regulatory body or administrative agency or other governmental agency or
body (including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having jurisdiction over
the Company or any of its activities or properties, in each of the above
instances in subparagraph (ii) and (iii), which could reasonably be expected to
materially and adversely affect the Business.
(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 and sale of the Securities pursuant
hereto, and the Prospectus and the Registration Statement, the performance of
this Agreement and the Placement Agent'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 Placement Agent' purchase and distribution of the
Securities to be sold by the Company hereunder.
(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 contribution 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 reasonably be expected to
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
-7-
<PAGE>
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 Shares and the Placement Agent'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 Business.
(O) Except as disclosed in or specifically contemplated by the
Prospectus, and subject to the risks and uncertainties described in the
Prospectus under the headings entitled "Risk Factors -- Protection of
Intellectual Property" and "Business -- Intellectual Property and Other
Proprietary Rights," (i) the Company has sufficient trade names, licenses,
approvals and governmental authorizations to conduct its business as now
conducted; (ii) the expiration of any trade names, licenses, approvals or
governmental authorizations would not have a material adverse effect on the
Business; (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 reasonably be
expected to have a material adverse effect on the Business.
(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 evidencing 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 are 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 investigations involving
the Company by any governmental agency. There is no unfair labor practice
charge or complaint against the Company pending before 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,"
-8-
<PAGE>
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 thereunder. The Company has never completely or
partially withdrawn from a "multiemployer plan."
(S) Neither 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 or for such as do not
materially affect the value of the Company's real and personal property, taken
as a whole.
(U) To the Company's knowledge, Arthur Andersen LLP ("Arthur
Andersen"), whose report is filed with the Commission as a part of the
Registration Statement, is an independent certified public accountant as
required by the Act and the 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 and
including the day of like number in the twelfth consecutive month next 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
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place "stop transfer" orders on the Company's stock ledgers in order to effect
the Lock-up Agreements.
(W) Except as disclosed to the Placement Agent, 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 Placement
Agent's compensation as determined by the Commission and National Association of
Securities Dealers, Inc. (the "NASD").
(X) 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.
(Y) 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 of 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 beneficial 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.
(Z) 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.
(AA) Any certificate signed by any officer of the Company and
delivered to the Placement Agent or to the Placement Agent's Counsel (as defined
in Section 3(d) herein)
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shall be deemed a representation and warranty by the Company to the Placement
Agent as to the matters covered thereby.
(AB) The minute books of the Company have been made available to the
Placement Agent 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.
(AC) The Company has not distributed and will not distribute 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.
(AD) Except for policies the absence of which is disclosed in the
Prospectus, the Company 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 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 Placement Agent'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, except where such failure or noncompliance
could not reasonably be expected to have a material adverse effect on the
Business.
2. Closing and Second Closing. On the basis of the representations,
---------------------------
warranties, covenants and agreements herein contained, but subject to the terms
and conditions herein set forth, closings shall be held as follows and upon the
following conditions:
(A) Such number of Shares resulting in gross proceeds of $3,000,000
will be offered by National on a "best efforts, all or none" basis and such
number of Shares resulting in gross proceeds of $7,200,000 will be offered on a
"best efforts" basis during the Offering Period. National shall not be
obligated to sell any Shares and shall only be obligated to offer such number of
Shares resulting in gross proceeds of $3,000,000 on a "best efforts, all or
none"
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basis and such number of Shares resulting in gross proceeds of $6,750,000 on a
"best efforts" basis.
(B) Payment for the Shares by Purchasers shall be made by wire
transfer as more fully described in the Subscription Agreements. The minimum
purchase by any Purchaser shall be 25,000 Shares, except that the Company and
National reserve the right, in their sole discretion, to accept subscriptions of
less than such minimum investment.
(C) All funds received from subscriptions will be promptly transmitted
pursuant to the terms of an escrow agreement (the "Escrow Agreement") to
Continental Stock Transfer & Trust Company, as escrow agent (the "Escrow
Agent"). In the event that a Closing occurs, the funds received in respect of
the Shares closed on will be forwarded to the Company, against delivery of the
appropriate number of Shares offered, net of (i) the placement agent commission
equal to ten percent (10%) of the gross proceeds from the sale of the Shares
sold, (ii) a non-accountable expense allowance equal to one and one-eighth of
one percent (1.8%) of the gross proceeds from the sale of the Shares sold less
any advances and (iii) any other applicable fees and expenses provided herein.
(D) At each Closing, the Company shall cause to be paid by, at the
option National certified or official bank check or wire transfer, to the extent
not previously paid by the Company or the Escrow Agent to National the placement
agent commission referred to in paragraph 2.C hereof. In addition to the
foregoing, the Company shall be responsible for the fees and expenses identified
in Sections [5, 6 and 8] hereof, which expenses shall not be deemed to be
commissions.
(E) The Company reserves the right to reject any subscriber, in whole
or in part, in its sole discretion. Notwithstanding anything to the contrary
contained in this Section 2(E), the Company's right to reject a subscriber shall
lapse three (3) business days after receipt by the Company of the fully
completed and duly executed Subscription Agreements from National with respect
to such subscriber. Funds received by the Escrow Agent or the Company from any
Purchaser whose subscription is rejected will be returned to such Purchaser,
without deduction therefrom or interest thereon, but no sooner than such funds
have cleared the banking system in the normal course of business.
(F) If subscriptions for 500,000 Shares have been received and
accepted by the Company on or prior to the Termination Date, the closing (the
"Closing") will be held at such place as is agreed by the Placement Agent and
the Company. The date on which the Closing takes place shall be the "Closing
Date."
(G) If (i) subscriptions for 500,000 shares of Common Stock have been
received and accepted by the Company on or prior to the Termination Date, (ii)
the Closing occurs as provided in Subsection (a) of this Section 2, (iii) the
Company elects to extend the offering period as provided herein, (iv) additional
subscriptions are received and accepted by the Company and (v) the conditions in
Section 8 hereof have been satisfied or waived, there shall
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be a second Closing (the "Second Closing") held as provided in Subsection (a) of
this Section 2, but in no event shall the Second Closing take place later than
__________, 1997. The date on which the Second Closing takes place shall be the
"Second Closing Date."
(H) Purchase of the Warrants. On the Closing Date, the Company shall
------------------------
issue and sell to the Placement Agent the Warrants at a purchase price of
$0.0001 per Warrant, which warrants shall entitle the holders thereof to
purchase an aggregate of up to 112,500 Shares on the basis of one Share for each
ten Shares sold in the primary offering. The Warrants shall expire five (5)
years after the effective date of the Registration Statement and shall be
exercisable commencing one (1) year from the effective date of the Registration
Statement at a price equaling one hundred sixty-five percent (165%) of the
initial public offering price of the Shares. The Placement Agent'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 Warrants
shall be made on the Closing Date and the Second Closing Date, if any.
3. Covenants of the Company. The Company covenants and agrees with
------------------------
the Placement Agent 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 and the Warrants by the
Placement Agent of which the Placement Agent shall not previously have been
advised and furnished with a copy, or to which the Placement Agent 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 Placement Agent 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 any 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 Shares 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 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 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.
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<PAGE>
(C) The Company shall file the Prospectus (in form and substance
satisfactory to the Placement Agent) in accordance with the requirements of the
Act.
(D) The Company will give the Placement Agent 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
Placement Agent 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 Placement Agent 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 Placement
Agent or Camhy Karlinsky & Stein LLP ("Placement Agent's Counsel") shall
reasonably object.
(E) The Company shall endeavor in good faith, in cooperation with the
Placement Agent, 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 Placement Agent may reasonably designate to
permit the 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 Placement Agent agrees 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 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 Placement Agent's Counsel, the
Prospectus, as then amended or supplemented, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any time to
amend or supplement the Prospectus to comply with the Act, the Company will
notify the Placement Agent 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 Placement Agent's
Counsel, and the Company will furnish to the Placement Agent copies of
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<PAGE>
such amendment or supplement as soon as available and in such quantities as the
Placement Agent 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 Placement Agent, 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 twelve (12) consecutive months after the effective date of the
Registration Statement.
(H) During a period of five (5) years after the date hereof, until and
including the like day and month in 2002, the Company will furnish to its
stockholders, as soon as practicable, annual reports (including consolidated
financial statements of the Company and its consolidated subsidiaries audited by
independent public accountants) and will make available to its stockholders
consolidated unaudited quarterly reports (except for the last quarter of each
fiscal year) of earnings of the Company and its consolidated subsidiaries, and
will deliver to the Placement Agent:
(i) concurrently with furnishing such quarterly reports to its
stockholders, a consolidated statement of income of the Company and its
consolidated subsidiaries for each quarter in the form furnished to the
Company's stockholders;
(ii) concurrently with furnishing such annual reports to its
stockholders, a consolidated balance sheet of the Company and its consolidated
subsidiaries as at the end of the preceding fiscal year, together with
statements of consolidated operations, stockholders' equity, and cash flows of
the Company and its consolidated subsidiaries 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 other 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, Nasdaq or any
securities exchange;
(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
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<PAGE>
(vi) any additional information of a public nature concerning the
Company and its businesses which the Placement Agent may reasonably request.
During such five-year period, the foregoing financial statements
will be accompanied by similar financial statements for any significant
subsidiary which is not 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 Shares
and the Warrants.
(J) The Company will furnish to the Placement Agent, without charge,
at such place as the Placement Agent may designate, copies of each preliminary
prospectus, the Registration Statement, the Prospectus and any pre-effective or
post-effective amendments thereto (two of which copies will be signed and will
include all financial statements and exhibits), in each case as soon as
available and in such quantities as the Placement Agent may reasonably request.
(K) On or before the effective date of the Registration Statement, the
Company shall provide the Placement Agent 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) After the effective date of the Registration Statement, 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 substance with the applicable requirements under the Act, the
Exchange Act, and the Regulations.
(O) The Company shall use its best efforts to cause the Securities to
be quoted on the OTC Bulletin Board, 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.
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<PAGE>
(P) For a period of two (2) years from the Closing Date, the Company
shall furnish to the Placement Agent, at the Company's sole expense, monthly
transfer sheets relating to the Common Stock and Warrants.
(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 reasonable and appropriate actions to qualify the Securities in all
jurisdictions of the United States which do not require the Company to qualify
as a foreign corporation or to file a general consent to service of process in
order to permit secondary sales of such securities pursuant to the Blue Sky laws
of those jurisdictions.
(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 Securities 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 (or, if sooner, the date on which the Securities are listed on
the New York Stock Exchange, American Stock Exchange, or Nasdaq National
Market).
(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 the Placement Agent, 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
shares of Common Stock registered under the Act pursuant to the Registration
Statement, or except pursuant to incentive or benefit plans approved by the
Board of Directors of the Company, pursuant to options or warrants outstanding
on the Closing Date, or in connection with acquisitions of companies, products
or technologies.
(T) Until the completion of the distribution of the Securities in
connection with the initial public offering of the Securities, the Company shall
not without the prior written consent of the Placement Agent or Placement
Agent's 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.
(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 Placement Agent's Shares (or
the shares of Common Stock issuable upon exercise of the Placement Agent's
Warrants), the Company will not 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 Placement Agent's Shares (or the shares of Common Stock issuable
upon exercise of the Placement Agent's Warrants).
(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
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designated by National to the Company's Board of Directors for a period of five
(5) years following the Closing Date, 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, make such director's presence not
appropriate.
(W) The Company agrees that within forty-five (45) days after the
Closing Date it shall retain a public relations firm which is reasonably
acceptable to National. Provided that such public relations firm performs in a
commercially reasonable and satisfactory manner, the Company shall keep such
public relations firm and any replacement for a total period of two (2) years
from the Closing Date. 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 any of 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 and the latest
Second Closing Date, as the case may be, one bound volume each containing all
correspondence with regulatory officials, agreements, documents and all other
materials in connection with the offering to which such Registration Statement
relates as requested by Placement Agent's Counsel.
4. Payment of Expenses.
-------------------
(A) The Company hereby agrees to pay on each of the Closing Date and
each Second Closing Date (to the extent not previously paid) all expenses and
fees (other than fees of Placement Agent's Counsel, except as provided in (iv)
below) incident to the performance of the obligations of the Company under this
Agreement and the Placement Agent's Warrant Agreement, including, without
limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, 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 Selected Dealers 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 Placement Agent and such dealers as the
Placement Agent 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
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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
Placement Agent 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 quotation of the Common Stock on the OTC
Bulletin Board and any other market or exchange.
(B) If this Agreement is terminated by the Placement Agent in
accordance with the provisions of Section 5, Section 9(a) or Section 10, the
Company shall reimburse and indemnify the Placement Agent for all of its actual
out-of-pocket expenses on an accountable basis, including the fees and
disbursements of Placement Agent's Counsel, less any amounts already paid
pursuant to Section 4(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 4, it will pay to the
Placement Agent on the Closing Date by certified or bank cashier's check or, at
the election of the Placement Agent, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to one
and eight-tenths of one percent (1.8%) of the gross proceeds received by the
Company from the sale of the Shares, $30,000 of which has been paid to date.
5. Conditions of the Placement Agent's Obligations. The obligations of
-----------------------------------------------
the Placement Agent 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 Second Closing Date, if any, as if they had been
made on and as of the Closing Date or each Second Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Second Closing Date, if any,
of the statements of officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Second 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
Placement Agent, and, at Closing Date and each Second 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
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part of the Commission for additional information shall have been complied with
to the reasonable satisfaction of Placement Agent's 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 Placement Agent 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 Placement Agent shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Placement Agent's opinion, is material, or omits to state
a fact which, in the Placement Agent'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 Placement Agent's reasonable opinion, is material, or
omits to state a fact which, in the Placement Agent's reasonable opinion, is
material and is required to be stated therein or is necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(C) At the Closing Date, the Placement Agent shall have received the
favorable opinion of Fenwick & West LLP ("Fenwick & West"), counsel to the
Company, dated the Closing Date, addressed to the Placement Agent and in form
and substance satisfactory to Placement Agent's Counsel, to the effect that:
(i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of its jurisdiction of
incorporation, (B) 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 requires such qualification or
licensing, except where the failure to be so qualified or licensed would not
have a material adverse effect on the Company's business and (C) to such
counsel's knowledge, has all requisite corporate power and authority 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.
(ii) except as described in the Prospectus, and to such counsel's
knowledge, the Company does not currently engage in any substantial activities,
and 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, the Company has a duly
authorized, issued and outstanding capitalization as set forth in the
Prospectus, and any amendment or
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supplement thereto, under "Capitalization" and "Description of Capital Stock,"
and 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 Placement Agent's Warrant Agreement, and as described in the
Prospectus. The Securities and all other securities issued or issuable by the
Company which will be outstanding after the Closing Date conform in all material
respects to the statements with respect thereto contained in the Registration
Statement and the Prospectus. All issued and outstanding securities of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable; and none of such securities were issued in violation of any
preemptive rights in the Company's Articles of Incorporation, the Company's By-
laws, the agreements and instruments identified in such counsel's opinion as
having been reviewed for purposes of the opinion or other preemptive rights
known to such counsel of any holders of any security of the Company. The
Securities to be sold by the Company hereunder and under the Placement Agent's
Warrant Agreement are not and will not be subject to any preemptive rights in
the Company's Articles of Incorporation, the Company's By-laws, the agreements
and instruments identified in such counsel's opinion as having been reviewed for
purposes of the opinion or any other preemptive or similar rights of any
stockholder known to such counsel, have been duly authorized and, when issued,
paid for and delivered in accordance with their terms, will be validly issued,
fully paid and nonassessable and will conform in all material respects to the
description thereof contained in the Prospectus; 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 are in
due and proper form. The Warrants constitute valid, binding and enforceable
obligations of the Company to issue and sell, upon exercise thereof and payment
therefor, the number and type of securities of the Company called for thereby
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law). Upon the issuance
and delivery pursuant to this Agreement of the Securities to be sold by the
Company, the Company will convey, against payment therefor as provided herein,
to the Purchasers good and marketable title to the Securities free and clear of
all liens and other encumbrances;
(iv) if applicable, filing of all pricing information has been
timely made in the appropriate form under Rule 430A, and based solely upon the
oral advice of the Staff of the Commission, the Registration Statement is
effective under the Act and no stop order suspending the use of any 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 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 no opinion need
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be rendered) comply as to form in all material respects with the requirements of
the Act and the Regulations. Such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company and the Placement Agent and representatives of the independent public
accountants for the Company, at which conferences the contents of any
preliminary prospectus, the Registration Statement, the Prospectus, and any
amendments or supplements thereto were discussed, and, although such counsel is
not passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Preliminary
Prospectus, the Registration Statement and Prospectus, and any amendments or
supplements thereto, on the basis of the foregoing, no facts have come to the
attention of such counsel which lead them to believe that either the
Registration Statement or any amendment thereto, at the time such Registration
Statement or amendment became effective or the Preliminary Prospectus or
Prospectus or amendment or supplement thereto as of the date of such opinion
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading (it being understood that such counsel need express no opinion
with respect to the financial statements and schedules and other financial and
statistical data included in the Preliminary Prospectus, the Registration
Statement or Prospectus, and any amendments or supplements thereto);
(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 and the Company has
received no oral or written notice of any action, arbitration, suit, proceeding,
litigation, governmental or other proceeding against the Company (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, 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 this Agreement or the Placement Agent'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; and (D) there is not pending and the
Company has received no oral or written notice of any action, suit or proceeding
against the Company before any court or arbitrator or governmental body, agency
or official in which there is a reasonable possibility of an adverse decision
which may result in a material adverse change in the Business, 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
Placement Agent's Warrant Agreement, or which in any manner draws into question
the validity or enforceability of this Agreement or the Placement Agent's
Warrant Agreement;
(vii) the Company has the corporate power and authority to enter
into each of this Agreement and the Placement Agent's Warrant Agreement and to
consummate the
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transactions provided for therein; and each of this Agreement and the Placement
Agent's Warrant Agreement has been duly authorized, executed and delivered by
the Company. Each of this Agreement and the Placement Agent'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 (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, except as rights to indemnity or
contribution may be limited by applicable law). To such counsel's knowledge,
none of the Company's execution, delivery or performance of this Agreement and
the Placement Agent'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 conflicts with or results in any material
breach or violation of any of the terms or provisions of, or constitutes a
material default under, or results 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
articles of incorporation or by-laws of the Company, as amended, (B) any
license, contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders' agreement, note, loan or credit agreement or any other agreement
or instrument known to such counsel, to which the Company is a party or by which
it is bound, 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 (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, having jurisdiction over the Company or any of its
activities or properties, in each case where such conflict, breach, violation or
default would 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 no opinion need be
rendered or under federal securities laws, as to which no opinion need be
rendered pursuant to this subsection (viii)) is required in connection with the
issuance of the Securities pursuant to the Prospectus and the Registration
Statement, the performance of this Agreement and the Placement Agent's Warrant
Agreement, and the transactions contemplated hereby and thereby;
(ix) to such counsel's knowledge, the properties of the Company
conform in all material respects to the description thereof contained in the
Registration Statement and the Prospectus;
(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
license, contract, agreement, indenture,
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mortgage, installment sale agreement, deed of trust, lease, voting trust
agreement, stockholders' agreement, note, loan or credit agreement or any other
agreement or instrument evidencing an obligation for borrowed money, or other
agreement or instrument to which the Company is a party or by which the Company
is bound or to which the property or assets (tangible or intangible) of the
Company is subject, in each case where such breach or default would 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 articles of
incorporation or by-laws, as amended, 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 would 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" have been
reviewed by such counsel, and insofar as they refer to statements of law,
descriptions of statutes, licenses, rules or regulations or legal conclusions,
are correct in all material respects;
(xii) the Common Stock has been accepted for quotation on the OTC
Electronic Bulletin Board;
(xiii) to such counsel's knowledge and based upon a review of the
outstanding securities and the contracts furnished to such counsel by the
Company, except as disclosed in the Registration Statement and Prospectus, no
person, corporation, trust, partnership, association or other entity has the
right to include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration statement
or, if filed, to include any security in such registration statement; and
(xiv) assuming the authority and capacity of, and due execution
by the parties thereto other than the Company, each Lock-up Agreement is a
legal, valid and binding obligation of the party thereto, enforceable against
the party and any subsequent holder of the securities subject thereto in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or equitable,
and except as rights to indemnity or contribution may be limited by applicable
law).
In rendering such opinion, such counsel (A) need not express any
opinion as to matters involving the application of laws other than the laws,
rules and regulations of the United States (with such exceptions and limitations
as are set forth in such counsel's opinion) and the laws, rules and regulations
of the State of Delaware; and (B) as to matters of fact, to the extent they deem
proper, on certificates and written statements of responsible officers of the
Company and certificates or other written statements of officers of departments
of various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company, provided that copies of any such
statements or certificates shall be delivered to Placement Agent's Counsel if
requested.
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At each Second Closing Date, if any, the Placement Agent shall have
received the favorable opinion of Fenwick & West, counsel to the Company, dated
the Second Closing Date, addressed to the Placement Agent and in form and
substance satisfactory to Placement Agent's Counsel confirming as of such Second
Closing Date the statements made by Fenwick & West in its opinion delivered on
the Closing Date.
(D) On or prior to each of the Closing Date and the Second Closing
Date, if any, Placement Agent's 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 5, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company or herein contained.
(E) Prior to each of the Closing Date and each Second Closing Date, if
any, (i) there shall have been no material adverse change nor development
involving a prospective material adverse 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) except as disclosed in the Registration Statement or the
Prospectus, 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) except as disclosed in the
Registration Statement or the Prospectus, 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 Shares, the 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) there shall not have been pending
and the Company shall not have received oral or written notice of any action,
suit or proceeding, at law or in equity, (or circumstances 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 of the 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.
(F) At each of the Closing Date and each Second Closing Date, if any,
the Placement Agent shall have received a certificate of the Company signed on
behalf of the
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Company by the principal executive officer of the Company, dated the Closing
Date or Second 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 Second 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
Second 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 Second 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 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
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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.
(G) By the Closing Date, the Placement Agent will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Placement Agent.
(H) At the time this Agreement is executed, the Placement Agent shall
have received a letter, dated such date, addressed to the Placement Agent 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 Placement Agent and Placement Agent's 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 Placement Agent 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 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
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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 Placement Agent may
reasonably request.
(I) At the Closing Date and each Second Closing Date, if any, the
Placement Agent shall have received from Arthur Andersen a letter, dated as of
the Closing Date or the Second Closing Date, as the case may be, to the effect
that it reaffirms that statements made in the letter furnished pursuant to
Subsection (i) of this Section 5, except that the specified date referred to
shall be a date not more than five (5) days prior to Closing Date or the Second
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 5 with respect to certain amounts, percentages and financial information
as specified by the Placement Agent and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (iv).
(J) On each of Closing Date and Second Closing Date, if any, the
Company shall have duly executed and delivered the appropriate amount and
designation of Shares to National as agent for the respective Purchasers
thereof.
(K) No order suspending the sale of the Securities in any jurisdiction
designated by the Placement Agent pursuant to subsection (e) of Section 3 hereof
shall have been
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issued on either the Closing Date or the Second Closing Date, if any, and no
proceedings for that purpose shall have been instituted or shall be
contemplated.
(L) On or before the Closing Date, the Company shall have executed and
delivered to the Placement Agent, (i) the Placement Agent's Warrant Agreement,
substantially in the form filed as Exhibit 4(b), to the Registration Statement,
in final form and substance satisfactory to the Placement Agent, and on or
before the Closing Date and the Second Closing Date, if any, (ii) the Warrants
in such denominations and to such designees as shall have been provided to the
Company.
(M) On or before the Closing Date, there shall have been delivered to
the Placement Agent all of the Lock-up Agreements, subject to the exceptions set
forth in Section (V) above, in final form and substance satisfactory to
Placement Agent's Counsel.
If any condition to the Placement Agent's obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Second Closing Date,
as the case may be, is not so fulfilled, the Placement-Agent may terminate this
Agreement or, if the Placement Agent so elect, they may waive any such
conditions which have not been fulfilled or extend the time for their
fulfillment.
6. Indemnification.
---------------
(A) The Company agrees to indemnify and hold harmless the Placement
Agent (for purposes of this Section 6 "Placement Agent" shall include the
officers, directors, partners, employees, agents and counsel of the Placement
Agent), and each person, if any, who controls the Placement Agent ("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 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 6 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, or any securities exchange or the OTC
bulletin board; 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 the Placement
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Agent by or on behalf of the Placement Agent 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) The Placement Agent agrees to indemnify and hold harmless the
Company, each of its directors, employees, agents, 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 Placement Agent 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 the Placement
Agent by the Placement Agent 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 Placement Agent 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 "Plan of Distribution" and the
stabilization legend in the Prospectus have been furnished by the Placement
Agent expressly for use therein and constitute the only information furnished in
writing by or on behalf of the Placement Agent or the Placement Agent for
inclusion in the Prospectus.
(C) Promptly after receipt by an indemnified party under this Section
6 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 6, 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 from any
liability which it may have otherwise or which it may have under this Section 6,
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
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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 6 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 6, 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 6 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Securities or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. In any case where the Company
is a contributing party and the Placement Agent is the indemnified party, the
relative benefits received by the Company on the one hand, and the Placement
Agent, 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 commissions) bear to the total commissions received by the Placement
Agent 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 Placement Agent, 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
-31-
<PAGE>
the provisions of this subdivision (d) the Placement Agent shall not be required
to contribute any amount in excess of the commissions applicable to the
Securities purchased by the Placement Agent 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 6, 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.
7. 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 Second 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 6 hereof shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Placement Agent, the Company, any controlling person of
either the Placement Agent or the Company, and shall survive termination of this
Agreement or the issuance and delivery of the Securities to the Placement Agent.
8. Effective Date. This Agreement shall become effective at 5:00
--------------
p.m., New York City time, on the date hereof.
-32-
<PAGE>
9. Termination.
-----------
(A) Subject to subsection (b) of this Section 9, the Placement Agent
shall have the right to terminate this Agreement, if between the date of this
Agreement and the Closing Date or the Second Closing Date, as the case may be,
(i) if any domestic or international event or act or occurrence has materially
disrupted, or in the Placement Agent's reasonable opinion will in the immediate
future have a material and adverse effect on the securities markets generally;
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 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 Placement Agent's opinion,
make it inadvisable to proceed with the delivery of the Securities; or (viii) if
there shall have occurred either of the following which in the Placement Agent's
good faith judgment would make it inadvisable to proceed with the offering, sale
and/or delivery of the Securities: (X) a material adverse change in the
prospects or conditions of the Company, or (Y) a material adverse change in the
general market, political or economic conditions, in the United States or
elsewhere, in each case in this clause (Y) having a material and adverse effect
on the securities markets generally.
(B) If this Agreement is terminated by the Placement Agent in
accordance with any of the provisions of Section 5, Section 9(a) or Section 10,
the Company shall promptly reimburse and indemnify the Placement Agent pursuant
to Section 4(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 5, 9, and 10 hereof), and
whether or not this Agreement is otherwise carried out, the provisions of
Section 4 and Section 6 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.
10. Default by the Company. If the Company shall fail at the Closing
----------------------
Date to sell and deliver the number of Registered Securities which it is
obligated to sell hereunder on such date, then this Agreement shall terminate
without any liability on the part of any non-defaulting party other than
pursuant to Section 7, Section 9 and Section 12 hereof. No action taken
pursuant to this Section shall relieve the Company from liability, if any, in
respect of such default.
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<PAGE>
11. 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 Placement Agent shall be directed to the
Placement Agent, 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, 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.
12. Parties. This Agreement shall inure solely to the benefit of and
-------
shall be binding upon the Placement Agent, the Company and the controlling
persons, directors and officers referred to in Section 6 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 Placement Agent shall be deemed
to be a successor by reason merely of such purchase.
13. 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.
14. 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.
15. Entire Agreement; Amendments. This Agreement and the Placement
----------------------------
Agent'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 Placement Agent and the Company.
-34-
<PAGE>
If the foregoing correctly sets forth the understanding between the
Placement Agent 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
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
NATIONAL SECURITIES CORPORATION
By:
---------------------------------
Name: Steven A. Rothstein
Title: Chairman
-35-
<PAGE>
EXHIBIT 4.02
________________________________________
OSMOTICS CORPORATION
AND
NATIONAL SECURITIES CORPORATION
PLACEMENT AGENT'S
WARRANT AGREEMENT
DATED AS OF _____________________, 1997
________________________________________
<PAGE>
PLACEMENT AGENT'S WARRANT AGREEMENT dated as of _____________, 1997,
between OSMOTICS CORPORATION, a Delaware corporation (the "Company"), and
NATIONAL SECURITIES CORPORATION ("National") and its assignees or designees
(each hereinafter referred to variously as a "Holder" or "Placement Agent").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Placement Agent has agreed pursuant to the placement
agent agreement (the "Placement Agent Agreement"), dated as of the date hereof
and entered into between the Company and the Placement Agent, to act as the
Placement Agent in connection with the Company's proposed public offering (the
"Public Offering") of up to 1,125,000 shares of Common Stock (as hereinafter
defined) at a public offering price of $6.00 per share.
WHEREAS, pursuant to the Placement Agent Agreement, the Company
proposes to issue warrants (the "Placement Agent's Warrants") to the Placement
Agent to purchase up to an aggregate of 112,500 shares of Common Stock of the
Company on the basis of one share of Common Stock for every ten shares of Common
Stock sold in the Public Offering.
WHEREAS, the Placement Agent's Warrants to be issued pursuant to this
Agreement will be issued on the Closing Date and the Second Closing Date, if any
(as such term is defined in the Placement Agent Agreement) by the Company to the
Placement Agent in consideration for, and as part of the Placement Agent's
compensation in connection with, the
-2-
<PAGE>
Placement Agent's acting as the Placement Agent pursuant to the Placement Agent
Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by the
Placement Agent to the Company of an aggregate of twelve dollars ($12.00), the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant. The Placement Agent 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
___________, 2002 (5 years from the Effective Date of the Registration
Statement), at which time the Placement Agent'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 $9.90 per share of Common Stock (the "Exercise Price").
- -------
Except as set forth herein, the shares of Common Stock issuable upon exercise of
the Placement Agent'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 Placement Agent Agreement. The
shares of Common Stock issuable upon exercise of the Placement Agent's Warrants
are sometimes hereinafter referred to as the "Securities."
2. Placement Agent's Warrant Certificates. The Placement Agent'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
-3-
<PAGE>
appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Registration of Warrant. The Placement Agent's Warrants shall be
-----------------------
numbered and shall be registered on the books of the Company when issued.
4. Exercise of Placement Agent's Warrant.
-------------------------------------
4.1 Method of Exercise. The Placement Agent's Warrants initially
------------------
are exercisable at an aggregate Exercise Price (subject to adjustment as
provided in Section 11 hereof) per share of Common 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 Placement Agent'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 Placement Agent'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
Placement Agent'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 Placement Agent's Warrants). Placement Agent'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 Placement Agent's Warrant Certificate, the
Company shall cancel said Placement Agent's
-4-
<PAGE>
Warrant Certificate upon the surrender thereof and shall execute and deliver a
new Placement Agent's Warrant Certificate of like tenor for the balance of the
shares of Common Stock purchasable thereunder.
4.2 Exercise by Surrender of Placement Agent's Warrant. In
--------------------------------------------------
addition to the method of payment set forth in Section 4.1 and in lieu of any
cash payment required thereunder, the Holder(s) of the Placement Agent's
Warrants shall have the right at any time and from time to time to exercise the
Placement Agent's Warrants in full or in part by surrendering the Warrant
Certificate in the manner specified in Section 4.1 in exchange for the number of
shares of Common Stock equal to the product of (x) the number of shares of
Common Stock as to which the Placement Agent's Warrants are being exercised,
multiplied by (y) a fraction, the numerator of which is the Market Price (as
defined in Section 9.3 (e) hereof) of the shares of Common Stock minus the
Exercise Price of the shares of Common Stock and the denominator of which is the
Market Price per share of Common Stock. Solely for the purposes of this Section
4.2, Market Price shall be calculated either (i) on the date on which the form
of election attached hereto is deemed to have been sent to the Company pursuant
to Section 15 hereof ("Notice Date") or (ii) as the average of the Market Price
for each of the five trading days immediately preceding the Notice Date,
whichever of (i) or (ii) results in a greater Market Price.
5. Issuance of Certificates. Upon the exercise of the Placement
------------------------
Agent's Warrant, the issuance of certificates for shares of Common Stock or
other securities, properties or rights underlying such Placement Agent's Warrant
shall be made forthwith (and in any event within five (5) business days
thereafter) without charge to the Holder thereof including, without
-5-
<PAGE>
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 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 Placement Agent's Warrant Certificates and the certificates
representing the shares of Common Stock or other securities, property or rights
issued upon exercise of the Placement Agent'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. Placement Agent's
Warrant Certificates shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer.
6. Transfer of Placement Agent's Warrant. The Placement Agent'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
-6-
<PAGE>
and deliver the new Placement Agent's Warrant to the person entitled thereto.
7. Restriction On Transfer of Placement Agent's Warrant. The Holder
----------------------------------------------------
of a Placement Agent's Warrant Certificate, by its acceptance thereof, covenants
and agrees that the Placement Agent's Warrant is being acquired as an investment
and not with a view to the distribution thereof, and that the Placement Agent's
Warrant may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for the term of the Placement Agent's Warrant,
except to officers or partners of the Underwriters, or by operation of law.
8. Exercise Price.
---------------
8.1 Initial and Adjusted Exercise Price. Except as otherwise
-----------------------------------
provided in Section 11 hereof, the initial exercise price of each Placement
-------
Agent's Warrant shall be $9.90 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 Placement Agent'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 Placement Agent'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.
-7-
<PAGE>
9. Registration Rights.
-------------------
9.1 Registration Under the Securities Act of 1933. Each
---------------------------------------------
Placement Agent's Warrant Certificate and each certificate representing shares
of Common Stock and any of the other securities issuable upon exercise of the
Placement Agent's Warrant (collectively, the "Warrant Shares") shall bear the
following legend unless (i) such Placement Agent'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 PLACEMENT AGENT'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 PLACEMENT AGENT'S WARRANT REPRESENTED BY
THE CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE PLACEMENT AGENT'S
WARRANT AGREEMENT REFERRED TO HEREIN.
-8-
<PAGE>
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 Placement
Agent's Warrants and/or the Warrant Shares of its intention to do so. If any of
the Holders of the Placement Agent'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 Placement Agent's Warrants and/or
Warrant Shares the opportunity to have any such Placement Agent'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
-----
Placement Agent's Warrants and/or Warrant Shares requested to be 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
-------
-9-
<PAGE>
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 Placement
Agent's Warrants and/or Warrant Shares representing a "Majority" (as hereinafter
defined) of the Placement Agent's Warrants and/or Warrant Shares shall have the
right (which right is in addition to the registration 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 Placement Agent's Warrant and/or Warrant Shares who notify the Company
within fifteen (15) days after the Company mails notice of such request pursuant
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.
-10-
<PAGE>
(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 the Placement Agent's Warrants and/or Warrant Shares
to all other registered Holders of the Placement Agent'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
-------
Placement Agent'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 Placement Agent's Warrant at
-------
such Market Price less the exercise price of such Placement Agent'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
-11-
<PAGE>
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
bid price] as furnished by the NASD through The Nasdaq Stock Market, Inc.
("Nasdaq"), the OTC Electronic Bulletin Board, 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.
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
-12-
<PAGE>
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 (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Placement Agent contained in Section 6 of
---------
the Placement Agent Agreement.
(e) The Holder(s) of the Warrant Shares to be sold pursuant to
a
-13-
<PAGE>
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 6 of the Placement Agent
-------
Agreement pursuant to which the Placement Agent has agreed to indemnify the
Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Placement Agent'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 or as otherwise required by the terms of any
existing registration rights granted prior to the date of this Agreement by the
Company to the holders of any of the Company's securities.
-14-
<PAGE>
(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.
-15-
<PAGE>
(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 Placement Agent. Such agreement shall be satisfactory in form
and substance to the Company, each Holder and such managing underwriters, and
shall contain such representations, warranties and covenants by the Company and
such other terms as are customarily contained in agreements of that type used by
the managing underwriter. 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 Placement Agent's Warrants or Warrant Shares, shall mean in
excess of fifty percent (50%) of the then outstanding Placement Agent'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.
-16-
<PAGE>
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 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 Placement Agent's Warrant shall be subject to adjustment
from time to time only upon the happening of the following events:
-17-
<PAGE>
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
Placement Agent'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 Shares
issuable upon exercise of the Placement Agent'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
-18-
<PAGE>
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 Placement Agent's Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Placement Agent's Warrant) to receive, upon exercise of such
Placement Agent'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 Placement Agent'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:
-19-
<PAGE>
(a) Upon the issuance or sale of the Placement Agent's Warrant
or the Warrant Shares;
(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 Placement Agent's Warrant.
12. Exchange and Replacement of Placement Agent's Warrant Certificates.
------------------------------------------------------------------
Each Placement Agent'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 Placement Agent'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.
-20-
<PAGE>
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Placement Agent'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 Placement Agent'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 Placement Agent'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 Placement Agent'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 Placement Agent'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
-21-
<PAGE>
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 Placement
Agent'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 Placement Agent'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 Placement Agent'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 Placement Agent'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 Placement Agent's Warrant Holders. Nothing contained
--------------------------------------------
in this Agreement shall be construed as conferring upon the Holders the right to
vote or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders for the election of directors or any other matter, or
as having any rights whatsoever as a stockholder of the Company. If, however,
at any time prior to the expiration of the Placement Agent'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
-22-
<PAGE>
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.
-23-
<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 Placement Agent'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 Placement Agent 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 Placement Agent may
from time to time supplement or amend this Agreement without the approval of any
holders of Placement Agent's Warrant Certificates (other than the Placement
Agent) 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 Placement Agent may deem necessary
or desirable and which the Company and the Placement Agent deem shall not
adversely affect the interests of the Holders of Placement Agent's Warrant
Certificates.
-24-
<PAGE>
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 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 Placement Agent'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.
-25-
<PAGE>
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
Placement Agent and any other registered Holder(s) of the Placement Agent'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 Placement Agent'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.
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:________________________
Name: Steven S. Porter
Title: Chief Executive Officer
NATIONAL SECURITIES CORPORATION
By:_________________________
Name: Steven S. Rothstein
Title: Chairman
-26-
<PAGE>
EXHIBIT A
[FORM OF PLACEMENT AGENT'S WARRANT CERTIFICATE]
THE PLACEMENT AGENT'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 PLACEMENT AGENT'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
Placement Agent'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 nonassessable
common stock, par value $.001 ("Common Stock") of Osmotics Corporation, a
Delaware corporation (the "Company"), at the initial exercise price, subject to
adjustment in certain events, of $9.90 per Share (the "Exercise Price") upon
surrender of this Placement Agent'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 Placement Agent's Warrant Agreement dated
as of _________________, 1997 among the Company and National
EXH A-1
<PAGE>
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.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Placement Agent's Warrant evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Placement Agent's Warrant evidenced by this Warrant Certificate is
part of a duly authorized issue of Placement Agent's Warrants 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 Placement
Agent'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 Placement Agent'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 Placement Agent'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 Placement Agent's Warrant
evidenced by this Certificate, the Company shall forthwith issue to the holder
hereof a new Warrant Certificate representing such numbered unexercised
Placement Agent'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
EXH A-2
<PAGE>
Agreement shall have the meanings assigned to them in the Warrant Agreement.
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:________________________________
Name: Steven S. Porter
Title: Chief Executive Officer
EXH A-3
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 4.1]
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 Placement Agent's Warrant Agreement dated
as of ________ __, 1997 between 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 ELECTION TO PURCHASE PURSUANT TO SECTION 4.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ____ shares all in
accordance with the terms of Section 4.2 of the Placement Agent's Warrant
Agreement dated as of ________ __, 1997 between the Osmotics Corporation 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 ________________________.
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>
[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-6
<PAGE>
EXHIBIT 5.01
May 21, 1997
Osmotics Corporation
1125 17th Street, Suite 2310
Denver, Colorado 80202
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
SB-2, File Number 333-5306-D (as amended, the "Registration Statement") filed by
you with the Securities and Exchange Commission (the "Commission") on May 21,
1997, in connection with the registration under the Securities Act of 1933, as
amended, of (1) up to 1,125,000 shares of your Common Stock, (2) up to 112,500
Representative's Warrants, each Representative's Warrant exercisable to acquire
one share of Common Stock, and (3) up to 112,500 shares of Common Stock issuable
upon exercise of the Representative's Warrants. All of the foregoing securities
will be referred to collectively as the "Securities." The Securities are to be
sold to the public through the placement agent named in the Registration
Statement.
In rendering this opinion, we have examined the following:
(1) the Registration Statement, together with the Exhibits filed as
a part thereof;
(2) your registration statement on Form 8-A (File Number 000-22301),
filed with the Commission on March 26, 1997;
(3) the Prospectuses prepared in connection with the Registration
Statement;
(4) the minutes of meetings and actions by written consent of the
stockholders and Board of Directors that are contained in your
minute books and the minute books of your predecessor, Osmotics
Corporation, a Colorado Corporation ("Osmotics Colorado"), that
-----------------
are in our possession;
(5) the stock records for both you and Osmotics Colorado, that you
have provided to us, including records of the capital stock,
options and warrants you have issued as well as such stock
records provided by you respecting Osmotics Colorado; and
(6) a Management Certificate addressed to us and dated of even date
herewith executed by the Company containing factual and other
representations.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies, the legal capacity of all natural persons executing the same, the lack
of any undisclosed terminations, modifications, waivers or amendments to any
documents reviewed
<PAGE>
by us and the due execution and delivery of all documents where due execution
and delivery are prerequisites to the effectiveness thereof.
As to matters of fact relevant to this opinion, we have relied solely
upon our examination of the documents referred to above and have assumed the
current accuracy and completeness of the information obtained from public
officials and records included in the documents referred to above. We have made
no independent investigations or attempts to verify the accuracy of any such
information or to determine the existence or non-existence of any other factual
matters; however, we are not aware of any facts that would lead us to believe
-------
that the opinion expressed herein is not accurate.
Based upon the foregoing, it is our opinion that the Securities that
may be issued and sold by you, when issued and sold in the manner referred to in
the relevant Prospectus associated with the Registration Statement, will be
legally issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us, if any, in the
Registration Statement, and the Prospectus constituting a part thereof and any
amendments thereto which have been approved by us.
This opinion speaks only as of its date and is intended solely for your
use as an exhibit to the Registration Statement for the purpose of the above
sale of the Securities and is not to be relied upon for any other purpose.
Very truly yours,
Fenwick & West LLP
<PAGE>
EXHIBIT 10.11
INFOMERCIAL PRODUCTION
AND
PRODUCT MANAGEMENT AGREEMENT
This Production/Management Agreement ("Agreement") is dated as of March 5, 1996
and is made by and among VIDEONE MARKETING, INC., a Colorado corporation whose
principal place of business is located at 96 Inverness Drive East, Suite A,
Englewood, CO 80112 ("VIDEONE"), on the one hand and Osmotics Corp., a Colorado
corporation whose principal place of business is located at 1860 Blake Street,
Suite 610, Denver, CO 80202 ("CLIENT"), on the other hand.
NOW, THEREFORE, in consideration of the mutual promises and undertakings set
forth herein and intending to be legally bound hereby, the parties agree as
follows:
Whereas, CLIENT is desirous of having a project, titled "WRINKLE PATCH
INFOMERCIAL" (1 (one) long form (28:30) and 3 (three) short form (120, 60, 30
second) direct response commercials) herein after referred to as ("PROJECT"),
created and produced, and is willing to make certain financial commitments to
see that such a project is produced, in as expedient a manner as possible, based
upon the attached estimated timetable in Addendum A to be superseded by
Addendum E upon its construction. Addendum E will present a formal budget which
will supersede Addendum C as it will qualify the actual costs involved with the
production of the PROJECT. Payment schedule for PART A will be adjusted
accordingly. This agreement and its addenda may be amended from time to time in
writing by mutual agreement of the parties.
The parties agree as follows:
For, and in consideration of the sum of $83,778.00, profit participation in the
amount of 35% "ADJUSTED GROSS PROFITS" from Direct Response as defined herein,
3% of Gross Sales from the project including reorders from clients gained from
the project as management fees, and $15,120.00 Setup Fees; as described in
Addendum B, which will be due and payable as described therein, VIDEONE agrees
to immediately set forth producing the aforementioned PROJECT upon receipt of
the retainer described below.
PART A: INFOMERCIAL PRODUCTION
1. PRODUCTION
1.1 VIDEONE undertakes to produce the PROJECT and to perform the services
set out in this agreement, including without limitation the services and
responsibilities set out in Addendum E upon its construction. It is understood
that all the costs related to VIDEONE'S production of, the PROJECT including
management setup fees set out herein Addendum D and designated CLIENT costs
above are costs which CLIENT has agreed to pay pursuant to this Agreement.
1.2 VIDEONE warrants that the PROJECT shall be of the same high quality and
standards as the other video products produced by VIDEONE and are of a quality
and standard acceptable in the industry and suitable for broadcast, examples of
which have been reviewed by CLIENT and/or its agents. Both parties agree that
the PROJECT will be shot on Betacam SP tape.
1.3 VIDEONE further agrees that CLIENT shall have the opportunity, during the
production of the PROJECT, to be active in its production and to make
recommendations, suggestions, etc. to VIDEONE, including input into the
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script. CLIENT shall have the right to approve the final script. CLIENT will be
involved with the construction of Addendum E which will contain the final
schedule and budget. CLIENT understands that once Addendum E is approved,
changes to the script may cause changes to the budget and schedule. If such
changes occur due to CLIENT's request or fault, CLIENT shall be responsible for
the increased costs of production. If such changes occur due to any reason other
than CLIENT's fault, then CLIENT and VIDEONE shall negotiate in good faith as
expeditiously as possible regarding an allowance for such costs. VIDEONE agrees
to submit a sample of voice, talent, script and/or outline for CLIENT approval.
1.4 CLIENT is welcome to attend any editing sessions at their own expense. If
they elect not to attend, they will be provided with one (1) proof copy of the
rough and final edits at their request. CLIENT shall give written approval of
the final off-line (rough cut) before VIDEONE will proceed with on-line edit.
VIDEONE will not be held responsible for delays in the production schedule if
written response takes more than 48 hours from presentation of the rough cut.
Any CLIENT Requested changes to the final broadcast master (one-line edit) after
CLIENT's written approval of final off-line (rough cut) resulting in additional
costs shall be the responsibility of CLIENT over and above the production
contract. VIDEONE agrees to obtain and furnish copies upon request to CLIENT
all releases for music, artwork, stock footage, stock photography, on-camera
talent, models and any other copyrighted materials supplied by VIDEONE.
2. DELIVERY OF PROJECT
2.1 Completion shall be defined as the time at which VIDEONE presents
CLIENT the PROJECT in its final and finished form suitable for broadcast but
prior to price testing and insertion of 800 numbers.
3. PAYMENT PART A
3.1 CLIENT agrees to pay VIDEONE the total sum of $83,778.00 (See
Addendum C). It is expressly understood that the above budget includes only Part
A: Informercial Production. It is further understood that the budget for Part B:
Management will be per Addendum D. Actual budget and talent costs will be
itemized on Addendum E to be constructed after an approved script is delivered.
Monies shall be payable as follows:
(a) - $37,500 immediately upon the signing of this agreement.
(b) - $17,500 immediately upon approval of Addendum E as described above.
(c) - $17,500 immediately upon approval of Off-line Edit.
(d) - Balance upon delivery of project as described above.
3.2 VIDEONE agrees to utilize the funds hereunder to pay third party vendors on
a timely basis if the funds are designated for such purpose.
3.3 VIDEONE agrees to pay its share of the production costs on a timely basis
as set out in this Agreement including without limitation, its share of the
costs set out in Addendum E upon its construction. At no time shall VIDEONE
allow any liens or other claims to be placed on or against the PROJECT or CLIENT
as a result of VIDEONE's failure to make timely payments of its share of costs
and the PROJECT shall be delivered to CLIENT free and clear of any and all claim
and liens.
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4. OTHER CONSIDERATIONS
4.1 CLIENT agrees to provide assistance to VIDEONE in the production of
the program by designating a single agent or representative to work with the
company on the production of the product. This person shall be charged by the
CLIENT with using their best efforts to gain access for VIDEONE to written
materials, taped audio and/or video materials, computer-generated graphics,
models and animation, locations, personnel, etc., which may or may not be used
in the final PROJECT, which will enhance the quality of the PROJECT.
4.2 Release of this material may be subject to copyright agreements and may
require additional fees on the part of VIDEONE for their use. CLIENT agrees to
inform and provide funds for any material which is subject to additional fees at
the time of providing same.
4.3 CLIENT agrees to supply the Product(s) that are the subject of the Show in
such quantities and in accordance with such delivery schedules as VIDEONE may
require from time to time during the Term.
5. COPYRIGHT AND OWNERSHIP
5.1 The parties agree that the PROJECT is being undertaken by VIDEONE as a
Work For Hire project and that the PROJECT in its finished and final form,
together with the script, music, titles, graphics and interest in the copyrights
shall be the sole and exclusive property of CLIENT. To the extent that VIDEONE
may have any proprietary or intellectual interest in the PROJECT as a result of
the services contemplated in this Agreement, VIDEONE hereby assigns such right
to CLIENT. CLIENT expressly understands that a "VideOne Marketing, Inc." credit
will appear in all finished versions of the Show(s).
5.2 Any footage PROVIDED by CLIENT is the sole property of CLIENT and is only
made available to VIDEONE for use in the project, except for demonstration
purposes. This footage cannot be sold or reproduced in any other form without
the express consent of and compensation to CLIENT.
5.3 The field tapes will not leave the possession of VIDEONE, however, CLIENT
shall be permitted to request dubs of such tapes on 2 weeks notice for any use
that is not in conflict with the terms of this Agreement. In the event VIDEONE
has provided footage for use in the PROJECT (i.e. footage that has not been paid
for whether by CLIENT or VIDEONE as part of their Obligations pursuant to this
Agreement), VIDEONE hereby grants CLIENT the non-exclusive right to use any or
all of the video footage provided by VIDEONE and dubbed for CLIENT for any non-
commercial purpose CLIENT might deem desirable. Any Commercial, Private
Agencies or Companies that wish to use the VIDEONE footage for broadcast or
other than specified purposes will be able to at reasonable and standard rates
to cover additional releases from models, music or other copyrighted materials.
At the time of the request, VIDEONE will negotiate such fees. All contracts
will be made directly to VIDEONE from CLIENT or its agents.
5.4 VIDEONE shall not insert any footage into the PROJECT that is the subject
of Section 5.3 without CLIENT's prior written consent.
PART B: MANAGEMENT AGREEMENT
1. TERM
1.1 INITIAL TERM. This Agreement shall remain in full force and effect for a
term commencing on the date first herein above mentioned and ending one (1)
year(s) from such date (the "Initial Term").
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1.2 RENEWAL TERM. Upon expiration of the Initial Term or any Renewal Term, as
the case may be, this Agreement shall continue for four (4) successive annual
periods of one (1) year(s) except in regard to the exclusivity provisions in
PART B paragraph 6 hereof which shall be renewable for successive annual periods
provided the conditions set out therein are met (the "Renewal Term") unless
terminated pursuant to Section 2 below. Upon renewal, this Agreement shall
remain in full force and effect during each such Renewal Term.
1.3 TERM. The Initial Term and each Renewal Term(s) are referred to herein as
(the "Term").
2. TERMINATION
2.1 Without regard to the Term set forth in Section I hereof, either party
may terminate this Agreement in whole or in any portion hereof upon forty-five
(45) days written notice thereof to the other party upon the breach by the other
party of any of its representations, warranties, covenants or agreements
contained in this Agreement. Upon the expiration of such notice period, this
Agreement shall terminate (in whole or in part, as the case may be) without the
need for further action by either party; provided, however, that if the breach
upon which such notice of termination is based shall have been fully cured to
the reasonable satisfaction of the non-breaching party within such forty-five
(45) day period, then such notice of termination shall be deemed rescinded, and
this Agreement shall be deemed reinstated and in full force and effect.
2.2 In the event there is no breach, neither party may terminate the Agreement
except pursuant to the notice and conditions set out in this paragraph 2.
Either party upon sixty (60) days' prior written notice may terminate the
Agreement at the end of any Renewal Term as set out in paragraph 1.2 above, if
the Show does not have thirty (30) verified airings or does not generate in the
aggregate $20,000.00 in revenue in the first two (2) years of the Initial Term
and first Renewal Term. Upon such termination VIDEONE shall cease all further
activities regarding the project.
2.3 In the event CLIENT defaults under this Agreement in regard to payment of
its designated share of the costs of the PROJECT, VIDEONE shall have the right
to nevertheless air the Show, subject to the quality controls and other
obligations set out herein, at its expense, and to recoup its costs before any
such production costs are repaid to CLIENT. In such event CLIENT will use its
best efforts to supply VIDEONE with the Products that are the subject of the
Show on no less favorable terms in regard to cost and payment terms as
previously provided VIDEONE or as provided to any third party.
2.4 In the event the Show is prevented from being broadcast as a result of a
ruling by a regulatory body, the parties shall mutually determine as to whether
the Show can be modified at an acceptable additional cost so as to conform to
such regulations. In the event the parties agree to modify the Show, such
additional costs shall be borne in the same ratio as the production costs are
allocated in this Agreement. If one party wishes to pay for such modification
and the other does not, the party paying for such modification shall recover its
costs related to the modification on a preferred basis before recovery of
regular production costs by the non-paying party.
2.5 Upon termination of this Agreement, unless said termination is the result
of VIDEONE's breach, VIDEONE shall have and retain indefinitely the right to its
financial interest for Products that were placed prior to the effective date of
termination, together with the right to its financial interest for all reorders
and/or continuity programs from prior customers, subject to CLIENT's payment of
VIDEONE's share of proceeds as set forth in Addendum B hereof.
3. PRODUCT. The Product is titled "WRINKLE PATCH" (the "Product") and shall
be deemed to include all updates and revisions, but shall not include similar
products that have been distributed under a different name as
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of the effective date of this contract (i.e. Osmotics and/or Spa Sante). VIDEONE
shall have first right of refusal for Direct Response Marketing of all future
products related to the WRINKLE PATCH brand (i.e. full face patches, etc.).
4. RESPONSIBILITIES. Addendum F hereof details the mutual responsibilities of
the parties to this Agreement and their responsibilities for each item necessary
to prepare the Product and to prepare the approximately thirty (30) minute
commercial and all versions thereof, including all shortened spot or other
versions of same (the "Show"), to air the Show and thereafter, to receive,
process and fulfill orders for Product sales. The necessary outsourcing
(telemarketing, fulfillment, etc.) and the Costs associated with that
outsourcing, (minimums, set-up fees, and ongoing expense), will be solely the
responsibility of CLIENT.
5. AIRING OF THE SHOW. VIDEONE shall use its best efforts to acquire, at
CLIENT's expense, broadcast and cable time to air the Show in the most suitable
and desirable time slots. VIDEONE shall consult on a regular basis with CLIENT
regarding the slotting of the Show prior to acquiring such time and shall take
CLIENT's opinions under due consideration in the slotting of the show. In the
event the parties disagree regarding the placement of the Show, they shall
endeavor, in good faith to reach a mutually agreeable broadcast plan.
6. EXCLUSIVITY
6.1 VIDEONE shall the sole and exclusive worldwide (the "Territory") (except for
such territory and for such Term as defined below in section 6.5 as Excluded
Territory), right during the Term to manage the Direct Response marketing and
air the Show.
6.2 VIDEONE shall have the sole and exclusive right in the territory, upon the
terms set out below in paragraph 6.3, to distribute the Products in the
following Direct Response media (a) all forms of Direct Response Television
including 800/900/888 (and similar) telephone numbers; (b) Direct Response Print
media; (c) Outbound telemarketing; (d) Direct Response Package inserts; (e)
Catalogs (See Addendum H); (f) Direct Response Radio; (g) Televised shopping
(see Addendum H); (h) Credit card syndication; (i) Direct mail; (j) Seminars;
and (k) Internet websites.
6.3 (a) The parties shall begin to negotiate in good faith, as expeditiously
as possible but in any event within one hundred eighty (180) days hereafter,
regarding a mutual marketing plan for each of the Direct Response media
categories set out in paragraph 6.2 above which marketing plan shall include
among other things, target dates and schedules for each category; sales
objectives; performance standards that CLIENT and VIDEONE must meet for such
categories; cost allocations between the parties regarding marketing in such
categories and other terms and conditions standard in the industry for each such
category. In the event that the parties are not able to reach agreement on a
mutual marketing plan within sixty (60) days after commencing such good faith
negotiations, then at the request of either party, each party shall submit its
proposed mutual marketing plan to binding arbitration with the Judicial Arbiter
Group, Inc. or, if not available, a mutually acceptable private judicial service
in Denver, Colorado to select within thirty (30) days after commencing
arbitration one of the proposed plans from either CLIENT or VIDEONE on the basis
of commercial reasonableness and industry standards for such Direct Response
media categories. Notwithstanding the foregoing, CLIENT shall have the
exclusive right, in its sole discretion, to determine whether the Products may
be marketed in any of the categories set out above in paragraph 6.2. In the
event CLIENT decides not to market in a category it shall not be permitted
thereafter during the Term of this Agreement to market in such category except
pursuant to the terms of this Agreement.
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6.3 (b) Any such time as either party decides that it wishes to market the
Products in one of the categories set out in paragraph 6.2 pursuant to the
mutual marketing plan therefor, it shall so inform the other party in writing of
its desire to do so. The parties shall negotiate in good faith a separate
definitive mutual marketing agreement consistent with the mutual marketing plan
regarding the marketing of the Products in such category containing any
additional specific terms regarding allocation of costs and other terms standard
and common to the industry as may be required. In the event that the parties
are not able to reach agreement within sixty (60) days thereafter, after good
faith negotiations, either party then desiring to market the Products in such
Direct Response media category may submit its proposed mutual marketing
agreement to binding arbitration with the Judicial Arbiter Group, Inc. or, if
not available, a mutually acceptable private judicial service in Denver,
Colorado which shall enforce or reject such agreement within thirty (30) days
after commencing arbitration on the basis of whether it is within the mutual
marketing plan and commercially reasonable. CLIENT shall be free to seek an
agreement with another marketing partner in any Direct Response media category,
provided such agreement is consistent with the mutual marketing plan and further
provided, prior to execution of any such other marketing agreement by CLIENT,
CLIENT shall inform VIDEONE of the terms therein and VIDEONE shall have thirty
(30) days thereafter within which to exercise a right of first refusal to match
the terms therein. In the event VIDEONE indicates that it does not wish to
undertake the marketing of the Products in such category, CLIENT shall be free
to pursue such other marketing arrangement regarding that the Direct Response
media category and VIDEONE will be considered to have waived and relinquished
its exclusivity regarding such category.
6.4 Retail Sales. It is understood by VIDEONE that CLIENT currently sells and
will in the future sell the PRODUCT through retail and other marketing channels.
It is understood by CLIENT that the Infomercial and/or spots will drive retail
sales. CLIENT agrees to compensate VIDEONE for all retail sales inside the
United States not covered by the exclusivity provisions of this agreement
(below 6.5) in the following manner:
(a) The compensation referred to in this Section 6.4 shall begin after
the Show has 30 verified airings in the United States.
(b) The compensation shall cease at the point in time when the number
of PRODUCT units sold through retail channels equals seven (7)
times the aggregate number of such units sold through Direct
Response Broadcast of the SHOW.
(c) The compensation shall be seven percent (7%) of the Gross Revenue
received by CLIENT from retail sales.
6.5 Excluded Territory.
(a) VIDEONE acknowledges that CLIENT is already in the process of
selling the WRINKLE PATCH, including without limitation in and all
of the following :
(i) Quality Value Channel/AKA QVC's-Q2 Network
(ii) Self-Care Catalogue
(b) CLIENT shall provide current historical data on sales of the
WRINKLE PATCH in these areas within thirty (30) days after the
first airing of the infomercial or spots. VIDEONE shall be paid
the following compensation for sales generated in those areas in
the following manner.
(i) The compensation shall be of the Gross revenue
received by CLIENT over and above the average monthly
historical revenue received in the twelve months preceding
the start date referred to in Section 6.4(a).
6.6 Notwithstanding the Term set out in Part B, paragraph 1, regarding this
Agreement generally, the term of Exclusivity provisions of the paragraph 6 shall
be as follows:
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(a) Initial Term. The Exclusivity provisions shall remain in full force and
effect for a term commencing on the date of execution of this Agreement
(except for the Retail Sales Start Date as set out on paragraph 6.4(a)
and shall continue for one (1) year from such date.
(b) Renewal Term. Upon expiration of the Initial Term, this Agreement shall
continue for two (2) successive annual periods (the "Renewal Term")
unless terminated earlier pursuant to the terms of this Agreement and
provided VIDEONE meets the performance standards that shall be mutually
agreed to by the parties.
(c) The non-renewal of the Exclusivity provisions herein, unless for breach,
shall not effect the compensation due on retail sales to VIDEONE set out
in paragraph 6.4(a) hereof.
7. PAYMENTS PART B. The compensation due the parties under PART B of this
Agreement shall be as set forth in Addendum B hereof.
8. CUSTOMER NAMES AND INFORMATION. CLIENT shall maintain sole and exclusive
ownership of all information related to customer names and associated data
hereinafter "Customer List." Customer List rental rights shall be the sole and
exclusive right of CLIENT.
9. REPRESENTATIONS/INDEMNITIES
9.1 CLIENT represents that it is the sole and exclusive owner of the Product and
that it has reviewed the Product with adequate legal counsel which counsel has
opinioned that the Product meets all governmental and NIMA standards, all
information respecting the Product is accurate in all material respects, it has
the right to use (including the right to grant VIDEONE the right to use) the
names, likenesses (including, without limitation, photographs, illustrations,
films and videotapes), endorsements, and testimonials of all endorsers and other
persons which may appear in the Show and Product, it has the right to use
(including the right to grant VIDEONE the right to use) any and all trade names,
trademarks, patents, and copyrights associated with the Product, and that it has
no knowledge of any fact or information (including, without limitation, any
agreement with any third party governing any subject matter whatsoever in
connection with the Show and/or Product) which if disclosed to VIDEONE, would
affect VIDEONE's decision to sign this Agreement. CLIENT agrees to indemnify
VIDEONE for any and all costs or liabilities VIDEONE incurs (including
reasonable legal fees) in connection with the Show and Product. CLIENT expressly
acknowledges that VIDEONE has entered into this Agreement in express reliance on
the representations, warranties and covenants made by CLIENT with respect to the
Products. CLIENT further expressly acknowledges that by executing this Agreement
and performing its services hereunder, VIDEONE makes no certification regarding
the effectiveness, quality, character or fitness of any of the Products.
9.2 CLIENT makes no certification regarding the effectiveness of the Product
and VIDEONE is relying solely upon CLIENT's legal review regarding all
representations in the SHOW. VIDEONE agrees to make no representations in the
show or orally or in writing to any party regarding the Product without prior
written approval from CLIENT regarding such representations.
9.3 VIDEONE represents and warrants to CLIENT that it has the authority to
enter into this Agreement and that there is not now any agreement to provide
services which would prevent it from fulfilling its obligations hereunder, and
that during the term of this Agreement, VIDEONE will not enter into an agreement
which would in any way restrict its ability to provide services under this
Agreement.
9.4 VIDEONE and CLIENT agree to mutually defend, indemnify and hold harmless
each other from and against and in respect of any and all losses, damages,
costs, expenses (including reasonable attorneys' fees), of
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deficiencies which are incurred or suffered by, asserted against, or imposed
upon CLIENT to the extent such losses, damages, costs, expenses of deficiencies
shall be attributable to and result from a material breach by VIDEONE or CLIENT
of this Agreement or as a result of its unauthorized representations regarding
the Product.
10. TAXES. Each party shall be responsible for all taxes which are based on
its own net income. All sales, value added, and use taxes arising out of
transactions occurring under this Agreement shall be the responsibility of the
party conducting such transaction and each party hereby indemnifies and holds
the other harmless from any and all claims relating to sales or use taxes
collected or due by the party conducting each of the transactions hereof.
11. REPORTING/AUDITING. At any time within one (1) year after a monthly
payment is made hereunder, each party shall have the right (but not more than
once a quarter) to examine the other party's books and records for the purpose
of determining the accuracy of such statement. Such examination shall be
conducted (i) after each party provides at least ten (10) days prior written
notice of its election to examine books and records, (ii) during the other
party's normal business hours at the place where the party maintains its books
and records, and (iii) at the examining party's sole cost and expense. If it is
mutually determined by CLIENT and VIDEONE that CLIENT has under-paid VIDEONE by
an amount exceeding seven and one-half percent (7-1/2%) of all royalties then
earned by VIDEONE, then CLIENT shall pay the reasonable costs of such
examination (which reasonable cost will not include travel, living and other
personal expenses of examiner). Any determination that CLIENT has under-paid
VIDEONE shall not be deemed a breach of this Agreement unless CLIENT fails to
pay the agreed-upon shortfall within the prescribed time period.
12. INDEPENDENT CONTRACTOR. Neither party nor any of its officers, employees,
agents or representatives is an employee or agent of the other party for any
purpose whatsoever. Rather, each party is and shall at all times remain an
independent contractor. Each party shall have sole control of the manner and
means of performing its obligations under this Agreement. Except as otherwise
specifically provided herein, each party shall be responsible for expenses and
disbursements which it incurs in connection with this Agreement. Neither party
has, nor shall it hold itself out as having, any right, power or authority to
create any contract or obligation either express or implied, on behalf of, in
the name of, or binding upon the other party, unless specifically provided
herein or the other party shall consent thereto in writing. Each party shall
have the right to appoint and shall be solely responsible for its own sales
people, employees, agents and representatives, who shall be at such party's own
risk expense and supervision and shall not have any claim against the other
party for compensation or reimbursement.
13. TRADEMARKS/COPYRIGHTS. The parties hereto acknowledge that Client has
secured and shall maintain sole ownership of the trademark, copyright, and
patent(s) now existing or hereafter acquired in and to the Product.
14. INSURANCE. Prior to any airing or Direct Response offer, Client shall be
required to maintain comprehensive and general liability insurance, including
products and professional liability insurance, customarily maintained by
manufacturers similarly situated with a policy limit of not less than one
million dollars ($1,000,000.00) per occurrence and one million dollars
($1,000,000.00) in the aggregate. The parties agree that (i) the deductible on
any insurance policy acquired hereunder shall not exceed ten thousand dollars
($10,000.00), (ii) both parties shall be named as an additional insured on the
applicable insurance policies, (iii) the insurance policies shall be endorsed to
provide no less than ten (10) days notice if any insurance benefit decreases,
(iv) the insurance policies shall be in effect no later than ten (10) days prior
to the initial Product test marketing date (as determined by VIDEONE) and (v)
all insurance shall have no less than an "A" rating (or equivalent thereof) in
the
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Best Guide.
15. MISCELLANEOUS.
A. Headings: Headings are used for convenience and are not to be
interpreted as part of this Agreement.
B. Governing Law: This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Colorado. In the event of
any dispute under or relating to the terms of this Agreement or any
breach thereof, the same shall be settled by any court in the county of
Arapahoe having competent jurisdiction, and judgment upon any award
rendered may be entered in any court in the county of Denver having
jurisdiction thereof.
C. Severability: In the event any provision of this Agreement is held
to be unenforceable or contrary to law then the Agreement shall be
interpreted, to the extent possible, without such provision.
D. Notice: Any notice required by or provided pursuant to this
Agreement shall be given in writing by means of registered mail via the
U.S. Postal Service or any professional delivery service that requires
a signed, written receipt confirming delivery of the envelope or
package containing the notice. The notice shall be addressed to the
person signing this Agreement at the address, or such other address as
shall be provided by notice.
E. Further Action: The parties agree to execute such additional
documents and to perform all such other further acts as may be
necessary or desirable to carry out the purposes and intents of this
Agreement.
F. No Amendment: No amendment, modification, change or waiver of this
Agreement or any provision hereof shall be valid, unless in writing and
signed by all of the parties hereto.
G. No Waiver: No waiver by any party hereto of any breach of this
Agreement or any of its provisions shall be deemed to constitute a
waiver of any preceding or succeeding breach of the same or any other
provision hereof.
H. Entire Agreement: This Agreement constitutes the entire
understanding and agreements of the parties with respect to its subject
matter and any and all prior and contemporaneous agreements,
representations with respect to its subject matter are hereby
terminated and canceled in their entirety and are of no further force
and effect. This Agreement may be executed in one or more counter
parts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
I. Binding Terms: All of the terms and provisions contained herein
shall inure to the benefit of and shall be binding upon the parties
hereto and their respective heirs, legal representatives, successors,
and permitted assigns.
J. Approvals: Any request for approval required hereunder shall be
submitted to CLIENT. If CLIENT does not respond in writing or by
telephone with approval or disapproval within two (2) business days
from the date of CLIENT's receipt of VIDEONE's request therefore, then
CLIENT shall be deemed to have disapproved such request and VIDEONE
will be permitted
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to modify any previously agreed to schedules under this contract and
its addendum's to take into account the delay. Any approvals requested
hereunder shall not be unreasonably withheld by CLIENT.
K. Counterparts: This Agreement be executed in one or more
counterparts, each of which shall be deemed to be an original, and all
of which together shall constitute one and the same Agreement. This
Agreement may be executed and delivered via electronic facsimile
transmission with the same force and effect as if it were executed and
delivered by the parties simultaneously in the presence of one another.
L. Interpretation and Construction: This Agreement has been fully and
freely negotiated by all of the parties hereto, shall be considered as
having been drafted jointly by all of the parties hereto and shall not
be interpreted or construed against VIDEONE on account of its
participation in the drafting hereof or otherwise.
/s/ RICHARD M. BATENBURG, JR.
- -----------------------------------------------
VideOne Marketing, Inc., a Colorado Corporation
96 Inverness Drive East, Suite A
Englewood, CO 80112
BY: Richard M. Batenburg, Jr.
President & CEO
/s/ SUZANNE J. PORTER
- -----------------------------------------------
Osmotics Corp., a Colorado Corporation
1860 Blake Street, Suite 610
Denver, CO 80202
BY: Suzanne J. Porter
V.P. Operations
10
<PAGE>
ADDENDUM A
WEEK #1 PRODUCTION
WRITER/RESEARCH
SET DESIGN FOR BEFORE PICTURES
CASTING MODELS
CONCEPT MEETINGS
STILL PHOTOGRAPHER
ADMINISTRATION
BANKING/CREDIT CARDS
FULFILLMENT
LEGAL
WEEK #2 PRODUCTION
SHOOT BEFORE PICTURES
WRITER/RESEARCH/SCRIPT OUTLINE
SET DESIGN FOR SHOOT
TRAVEL ARRANGEMENTS
HOST CASTING
BUDGETING
ADMINISTRATION
BANKING
FULFILLMENT
LEGAL
TELEMARKETING
WEEK #3 PRODUCTION
SCRIPT DRAFT
HOST CASTING
ANIMATION
LOGO DESIGN
SCHEDULING
SHOOT TESTIMONIALS
SET BUILDING
ADMINISTRATION
TELEMARKETING/SCRIPTS
OFFER/UP SELL/GIVE AWAY/CONTINUITY PLAN
ACCOUNTING SET UP
MEDIA PLANS
Page 1
<PAGE>
ADDENDUM A
WEEK #4 PRODUCTION
SCRIPT FINAL
CREATE ADDENDUM E
SCHEDULING/FINAL
BUDGET/FINAL
ANIMATION
SHOOT FACTORY/INVENTOR
PROPS AND ARTWORK
SET BUILDING
ADMINISTRATION
MEDIA APPROVAL
WEEK #5 PRODUCTION
SHOOT AFTERS
SCRIPT REWRITE
SCHEDULING/DECISION
TITLE DESIGN
SHOOT PRODUCT
LOCATION FINAL
ADMINISTRATION
MEDIA APPROVAL
PRESS RELEASE
FINAL TELEMARKETING AND FULFILLMENT
SHIP INVENTORY
WEEK #6 PRODUCTION
SHOOT SHOW
RECORD SCRATCH VO
LOG TAPES
TITLE DESIGN
ADMINISTRATION
PROJECT ACCOUNTING
WEEK #7 PRODUCTION
EDIT 2 MINUTE SPOT
OFF LINE SHOW
EFFECTS DESIGN
800 NUMBERS FOR 2 MINUTE
SHIP BROADCAST DUBS
Page 2
<PAGE>
ADDEMDUM A
ADMINISTRATION
MANAGE TWO MINUTE MEDIA
MANAGE TELEMARKETING
MARKET TEST SPOT
OUTBOUND TELE-RESEARCH FOR TWO MINUTE SPOT
WEEK #8 PRODUCTION
RE-EDIT 2 MINUTE SPOT
OFF LINE SHOW/FIRST DRAFT
MUSIC
800 NUMBERS FOR 2 MINUTE
SHIP BROADCAST DUBS
ADMINISTRATION
MANAGE TWO MINUTE MEDIA
MANAGE TELEMARKETING
MARKET TEST SPOT
OUTBOUND TELE-RESEARCH FOR TWO MINUTE SPOT
WEEK #9 PRODUCTION
RE-EDIT OFF LINE
FINAL VO RECORDING
MUSIC
800 NUMBERS FOR 2 MINUTE
SHIP BROADCAST DUBS
ADMINISTRATION
FINALIZE HALF HOUR MEDIA
MANAGE TWO MINUTE MEDIA
MANAGE TELEMARKETING
MARKET TEST OFF LINE
OUTBOUND TELE-RESEARCH FOR TWO MINUTE SPOT
WEEK #10 PRODUCTION
ON LINE
800 NUMBERS FOR 1/2 HOUR
SHIP BROADCAST DUBS
ADMINISTRATION
MANAGE 1/2 HOUR MEDIA
MANAGE TWO MINUTE MEDIA
MANAGE TELEMARKETING
MARKET TEST ON LINE
Page 3
<PAGE>
ADDENDUM A
WEEK #11 PRODUCTION
RE-EDIT ON LINE/PRICE TEST
800 NUMBERS FOR 1/2 HOUR
SHIP BROADCAST DUBS
ADMINISTRATION
RE-EDIT TELEMARKETING SCREENS
MANAGE 1/2 HOUR MEDIA
MANAGE TWO MINUTE MEDIA
MANAGE TELEMARKETING
MARKET TEST ON LINE
OUTBOUND TELE-RESEARCH FOR 1/2 HOUR
WEEK #12 PRODUCTION
EDIT 60 & 30 SECOND
800 NUMBERS FOR 60 & 30 SECOND
800 NUMBERS FOR 1/2 HOUR
SHIP BROADCAST DUBS
ADMINISTRATION
MANAGE 1/2 HOUR MEDIA
MANAGE TWO MINUTE MEDIA
MANAGE TELEMARKETING
OUTBOUND TELE-RESEARCH FOR 1/2 HOUR
SET-UP ROLL OUT
Page 4
<PAGE>
ADDENDUM B
1. CLIENT shall pay VIDEONE $15,120.00 (see Addendum D) for the first 12 weeks
of Administrative costs, thereafter CLIENT shall pay VIDEONE 3% of gross sales,
as that term is defined hereunder, arising from all Product sales through the
media described in Section 6 hereof for the services of ongoing management of
the infomercial and future markets including all bookkeeping, but not tax
accounting.
The $15,120.00 shall be payable as follows:
$4,000.00 Due upon signing of this Agreement
$4,000.00 Due Four (4) Weeks after signing this Agreement
$4,000.00 Due Eight (8) Weeks after signing this Agreement
$3,120.00 Due Twelve (12) Weeks after signing this Agreement
3% of gross sales paid Monthly thereafter
2. CLIENT shall pay VIDEONE 35% of Adjusted Gross Sales, as that term is defined
hereunder, arising from all Product sales through the media as described in
Section 6 hereof, and reorders from same as described in Part B Section 6
hereof. This profit interest is in consideration for the contributed production
services as described in attached Addendum C due and payable quarterly.
3. In the event that CLIENT's merchant accounts are tied to an escrow account
the payments to VIDEONE shall be included in the instructions to the escrow
agent.
4. CLIENT shall collect, or cause to be collected, all proceeds of sales
of the Products. CLIENT shall transmit a statement, accompanied by payment of
VIDEONE's share of proceeds and management fees due to VIDEONE every thirty (30)
days.
5. DEFINITIONS.
(a) "Gross Sales" as that term is used herein, shall mean CLIENT's gross income
from Direct Response customers, including shipping and handling fees paid by the
customer less actual cost of Shipping & Handling.
(b) "Adjusted Gross Sales" shall be defined as the profit remaining after
"fixed costs".
(c) "Fixed Costs" are due upon CLIENT's receipt of invoice from VIDEONE and/or
outside Vendors the actual direct cost of:
1. Product purchasing/manufacturing costs including Insurance premiums
paid by CLIENT for public and general liability insurance and errors
and omissions insurance to the extent they are paid for coverage of
the Show and/or the Product.
2. Media/advertising, including a fifteen percent (15%) television
media buying commission.
3. Dubbing, trafficking and similar costs. (see Addendum D)
4. Credit card discount. (see Addendum D)
5. Inbound telemarketing/custom service. (see Addendum D)
6. Shipping, handling (fulfillment) and freight costs. (see
Addendum D)
7. Bad debt and returns.
8. Damaged goods.
9. Management Fees paid directly to VideOne Marketing, Inc.
(See #1 above)
10. Returns
<PAGE>
(d) "Direct Response Customers" shall mean any purchaser of any CLIENT product
whose initial contact was made as a result of a VIDEONE managed Direct Response
Vehicle of any kind.
6. PROJECT ACCOUNTING. VIDEONE shall keep and maintain a separate and distinct
accounting record for all costs associated with VIDEONE's activities under this
Agreement. CLIENT shall maintain a checking account in a manner consistent with
the costs which VIDEONE incurs in connection with the marketing and distribution
of the Show and Product, and in no event shall CLIENT allow said checking
account to fall short of such liabilities. CLIENT expressly acknowledges that
VIDEONE shall be paid the management fee set out above (Addendum B) associated
with VIDEONE's activities under this Agreement prior of CLIENT's share of
proceeds.
<PAGE>
ADDENDUM C
THE WRINKLE PATCH
ESTIMATE OF EXPENSES PRIOR TO FINAL SCRIPT & CASTING
PRODUCTION AMOUNT UNITS RATE TOTAL
-------------------------------------
WRITER/RESEARCH 2 WKS 1500 3000
RE-WRITE 1 WKS 1500 1500
PRODUCER/PREP 2 WKS 1650 3300
PRODUCER/SHOOT 2 DAY 500 1000
PRODUCER/SHOOT 10 1/2 DAY 300 3000
DIRECTOR/PREP 2 WKS 1750 3500
DIRECTOR/SHOOT 2 DAY 750 1500
DIRECTOR/SHOOT 10 1/2 DAY 400 4000
STILL PHOTOGRAPHY 4 1/2 DAY 600 2400
CAMERA CREW 10 1/2 DAY 850 8500
STUDIO SHOOT 2 DAY 1900 3800
TEST/MODELS 10 ALLOW 500 5000
HOST (2) 4 DAY 1200 4800
SET & DESIGN 1 ALLOW 3500 3500
PROPS 1 ALLOW 750 750
FLOWERS 1 ALLOW 500 500
CATERING 1 ALLOW 750 750
PROD. ASSISTANT 2 WKS 850 1700
PROD. ASSISTANT 1 WKS 850 850
HAIR AND MAKE-UP 2 DAY 350 700
PROD. ASSISTANT/SHOOT 12 DAY 200 2400
TRAVEL EXPENSES 1 ALLOW 5000 5000
LOCATION EXPENSES 6 ALLOW 350 2100
TAPE STOCK 30 30M 30 900
- --------------------------------------------------------------
TOTAL PRODUCTION 64,450
Page 1
<PAGE>
ADDENDUM C
POST-PRODUCTION AMOUNT UNITS RATE TOTAL
----------------------------------
POST PROD SUPERVISOR 3 WKS 1500 4500
EDIT - LOG 45 HRS 75 3375
EDIT - OFFLINE - EFFECTS 60 HRS 120 7200
EDIT - OFFLINE - ANIMATION 120 HRS 110 13200
DIRECTOR/EDIT OFFLINE 120 HRS 120 14400
EDIT - ONLINE 60 HRS 150 9000
ADDITIONAL ONLINE LABOR 60 HRS 35 2100
SCRATCH VO 1 ALLOW 300 300
ONLINE VO 1 ALLOW 700 700
RECORDING SESSIONS 1 ALLOW 350 350
TITLES AND GRAPHICS 1 ALLOW 3000 3000
ANIMATION 1 ALLOW 5500 5500
3-D LOGO AND TITLE 1 ALLOW 1750 1750
MUSIC BED 1 ALLOW 650 650
VHS DUBS AND SHIPPING 100 T-30 6 600
SHIPPING 12 WKS 100 1200
LEGAL 1 ALLOW 1500 1500
ACCOUNTING 12 WKS 400 4800
PHONE/OFFICE EXPENSES 12 WKS 250 3000
--------
TOTAL POST-PRODUCTION 77,125
- ---------------------------------------------------------------
SUB-TOTAL ALL PRODUCTION 141,575
PRODUCTION FEE (10%) 14,158
INSURANCE (3%) 4,247
--------
TOTAL COST $159,980
- ---------------------------------------------------------------
VIDEONE MARKETING, INC. CONSIDERATION 50% OF BUDGET $ 79,990
AMOUNT DUE VIDEONE MARKETING, INC. FROM SPA-SANTE $ 79,900
COMMERCIALS: 120, 60 & 30
AMOUNT UNITS RATE TOTAL
----------------------------------
WRITER 2 DAY 500 1000
ON-LINE 3 DAY 1500 4500
VO-TALENT 1 ALLOW 200 200
VO RECORD 1 ALLOW 180 180
TITLES AND GRAPHICS 1 ALLOW 750 750
TAPE STOCK 3 5M 25 75
--------
SUB-TOTAL 6705
PRODUCTION FEE (10%) 671
INSURANCE (3%) 201
--------
TOTAL COST $ 7,577
- ---------------------------------------------------------------
VIDEONE MARKETING, INC. CONSIDERATION 50% OF BUDGET $ 3,788
AMOUNT DUE VIDEONE MARKETING, INC. FROM SPA-SANTE $ 3,788
TOTAL DUE VIDEONE MARKETING, INC. FOR PRODUCTION $ 83,778
Page 2
<PAGE>
ADDENDUM D
INFOMERCIAL TRAFFICING (TEST-INFOMERCIAL)
AMOUNT UNITS RATE TOTAL
--------------------------------
800 NUMBERS 25 #'S 180 4500
PRICE CHANGE 1 ALLOW 240 240
BROADCAST 3/4" 50 ALLOW 78.5 3925
BROADCAST 1" 20 ALLOW 107.5 2150
BETA CAM 10 ALLOW 89.5 895
SHIPPING (FED/EX) 80 ALLOW 20 1600
SHIPPING (COUNTER) 5 ALLOW 65 325
VHS DUBS 120 TAPES 2 240
ADDITIONAL TRAFFICING 110 ALLOW 10 1100
MESSENGER 10 ALLOW 20 200
TOTAL 15,175
PRODUCTION FEE (10%) 1,518
INSURANCE (3%) 455
--------
TOTAL COST $ 17,148
- ------------------------------------------------------------------------
DISCOUNT 10% $ 1,715
TOTAL DUE $ 15,433
INFOMERCIAL TRAFFICING (COMMERCIAL)
AMOUNT UNITS RATE TOTAL
--------------------------------
800'S 15 #'S 60 900
BROADCAST 3/4" 30 ALLOW 48.5 1455
BROADCAST 1" 10 ALLOW 77.5 775
BETA CAM 5 ALLOW 69.5 347.5
SHIPPING (FED/EX) 45 ALLOW 20 900
SHIPPING (COUNTER) 3 ALLOW 65 195
VHS DUBS 80 TAPES 2 160
ADDITIONAL TRAFFICING 66 ALLOW 10 660
MESSENGER 6 ALLOW 20 120
TOTAL 5,512.5
PRODUCTION FEE (10%) 551
INSURANCE (3%) 165
--------
TOTAL COST $ 6,229
- ------------------------------------------------------------------------
DISCOUNT 10% $ 623
TOTAL DUE $ 5,606
Page 1
<PAGE>
ADDENDUM D
FULFILLMENT, TELEMARKETING, BANKING, ACCOUNTING,
ADMINISTRATION SET-UP THROUGH TESTING (SEE LIST)
AMOUNT UNITS RATE TOTAL
--------------------------------
SUSIE LOVE 12 WKS 900 10800
ACCOUNTING/BANKING 12 WKS 500 6000
TOTAL $ 16,800
- ------------------------------------------------------------------------
DISCOUNT 10% $ 1,680
TOTAL DUE $ 15,120
OUTSIDE FEES - BEYOND THE CONTROL OF VIDEONE MARKETING, INC. FOR ILLUSTRATION
PURPOSES ONLY
TELEMARKETING
AMOUNT UNITS RATE TOTAL
--------------------------------
SET-UP 1 ALLOW 750 750
SECURITY DEPOSIT 1 ALLOW 750 750
PROGRAMMING 1 ALLOW 320 320
MONTHLY MINIMUMS 2 MTHS 500 1000
TOTAL $ 2,820
- ------------------------------------------------------------------------
FULFILLMENT
SET-UP (CONTINUITY) 1 ALLOW 2300 2300
POSTAGE DEPOSIT 1 ALLOW 10000 10000
PROGRAMMING 1 ALLOW 320 320
SHIPPING TO FULFILLMENT 1 ALLOW 2000 2000
MONTHLY MINIMUMS 2 MTHS 500 1000
TOTAL $ 15,620
- ------------------------------------------------------------------------
PER KIT EXPENSES BASED ON 9000 UNITS (SUBJECT TO QUOTE)
TELEMARKETING 9000 UNITS 2.84 25560
FULFILLMENT 9000 UNITS 2.10 18900
SHIPPING 9000 UNITS 3.00 27000
CREDIT CARD 9000 UNITS 1.50 13500
INVENTORY 9000 UNITS 5.00 45000
SHIPPING BOXES 9000 UNITS 0.50 4500
TOTAL $134,460
- ------------------------------------------------------------------------
Page 2
<PAGE>
ADDENDUM F
1. RESPONSIBILITIES OF EACH PARTY
VIDEONE CLIENT ITEM
X Receive and process mail orders.
X Obtain direct response phone numbers.
X Sales tax collection and filings.
X Provide answering service scripts and
manage answering service(s).
X Write and produce the Show.
X Customize the show with direct response
phone numbers, addresses and, if
applicable, sales tax and shipping message
integrated into commercials.
X Perform as host or similar role, or
acquire services of host or similar role.
X Duplicate sub-masters for stations.
X Traffic tapes to stations.
X Provide order processing functions
including receipt of orders from answering
services, credit card authorization and
deposit, refund processing and the like.
X Provide order fulfillment for the Product
and the Upsell for all Product sales.
X Product development.
X Customer Service Function for the Product
and Upsell.
X Product usage.
X Shipping and/or manufacturing problems.
X Refund requests.
X Process returns.
X Answering service referrals.
X Inventory purchasing and maintenance of
all Product parts.
<PAGE>
EXHIBIT 23.01
CONSENT OF COUNSEL
We consent to the reference to our firm under the caption "Legal Matters" in
Amendment No. 3 to the Registration Statement on Form SB-2 and in the related
Prospectus to be filed by Osmotics Corporation on or about May 21, 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
May 21, 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
May 21, 1997
<PAGE>
EXHIBIT 23.03
CONSENT OF COUNSEL
We consent to the reference to our firm under the caption "Legal Matters" in
Amendment No. 3 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
May 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 83,080
<SECURITIES> 0
<RECEIVABLES> 546,305
<ALLOWANCES> 15,000
<INVENTORY> 216,875
<CURRENT-ASSETS> 25,088
<PP&E> 106,364
<DEPRECIATION> 29,279
<TOTAL-ASSETS> 1,503,368
<CURRENT-LIABILITIES> 2,446,804
<BONDS> 38,601
0
0
<COMMON> 1,815,839
<OTHER-SE> 481,078
<TOTAL-LIABILITY-AND-EQUITY> 1,503,368
<SALES> 859,355
<TOTAL-REVENUES> 859,355
<CGS> 369,698
<TOTAL-COSTS> 369,698
<OTHER-EXPENSES> 25,954
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 127,332
<INCOME-PRETAX> (546,300)
<INCOME-TAX> 0
<INCOME-CONTINUING> (546,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (546,300)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
<PAGE>
EXHIBIT 99.01
ESCROW AGREEMENT INFORMATION SHEET
1. THE ISSUER
----------
Name: Osmotics Corporation
---------------------------------------------------------------
Address: 1125 - 17th Street, Suite 2310, Denver, CO 80202
---------------------------------------------------------------
State of incorporation of organization: Delaware
------------------------------------
2. THE UNDERWRITER
---------------
Name: National Securities Corporation
---------------------------------------------------------------
Address: 1001 Fourth Avenue, Seattle, WA 98154
---------------------------------------------------------------
State of incorporation of organization: Washington
------------------------------------
3. THE SECURITIES
--------------
Description of the Securities to be offered (e.g. shares of or warrants for
common stock, debentures, units consisting shares and warrants, etc.):
Common Stock
-------------------------------------------------------------------------
Par value, if any: $.001 per share
-------------------------------------------------------
Offering price per share/unit/other: $6.00 per share
----------------------------------------
4. MINIMUM AMOUNTS REQUIRED FOR DISBURSEMENT OF THE ESCROW ACCOUNT
---------------------------------------------------------------
Aggregate dollar amount which must be collected before the Escrow Account
may be disbursed to the Issuer ("Minimum Dollar Amount"): $3,000,000
----------------
Total amount of securities which must be subscribed for before the Escrow
Account may be disbursed to the Issuer ("Minimum Securities Amount")
500,000 Shares
-------------------------------------------------------------------------
5. PLAN OF DISTRIBUTION OF THE SECURITIES
--------------------------------------
Offering Period: 60 calendar days
----
Extension Period, if any: 30 calendar days
----
Collection Period, if any: N/A business days
-----
6. TITLE OF ESCROW ACCOUNT: Continental Stock Transfer & Trust Company,
----------------------- -----------------------------------------------
Escrow Agent for the offering by Osmotics Corporation
-------------------------------------------------------------------------
7. ESCROW AGENT FEES
-----------------
Amount due on execution of the Escrow Agreement: $1,000.00 and $1,000.00
--------- ---------
upon completion of the escrow
Fee for each check disbursed pursuant to the terms of the Escrow
Agreement: $ 0
-------
Fee for each check returned pursuant to the terms of
the Escrow Agreement: $ 0
-------
Fee for Additional Closings, if any: $500.00
-------
<PAGE>
ESCROW AGREEMENT (PUBLIC OFFERING)
AGREEMENT made this ______ day of _____________________, 1997 by and among
the Issuer and the Underwriter whose names and addresses appear on the
Information Sheet (as defined herein) attached to this Agreement and Continental
Stock Transfer & Trust Company (the "Escrow Agent").
W I T N E S S E T H:
-------------------
WHEREAS, the Issuer has filed with the Securities and Exchange Commission
(the "Commission") a registration statement (the "Registration Statement")
covering a proposed public offering of its securities as described on the
Information Sheet;
WHEREAS, the Underwriter proposes to offer the Securities, as agent for the
Issuer, for sale to the public on a "best efforts, all or none" basis with
respect to the Minimum Securities Amount and Minimum Dollar Amount and at the
price per share or other unit all as set forth on the Information Sheet;
WHEREAS, the Issuer and the Underwriter propose to establish an escrow
account (the "Escrow Account"), to which subscription monies which are received
by the Escrow Agent from the Underwriter in connection with such public offering
are to be credited, and the Escrow Agent is willing to establish the Escrow
Account on the terms and subject to the conditions hereinafter set forth; and
WHEREAS, the Escrow Agent has an agreement with Chemical Bank to establish
a special bank account (the "Bank Account") into which the subscription monies,
which are received by the Escrow Agent from the Underwriter and credited to the
Escrow Account, are to be deposited;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. Information Sheet. Each capitalized term not otherwise defined
-----------------
in this Agreement shall have the meaning set forth for such term on the
information sheet which is attached to this Agreement and is incorporated by
reference herein and made a part hereof (the "Information Sheet").
2. Establishment of the Bank Account.
---------------------------------
2.1 The Escrow Agent shall establish a non-interest-bearing bank
account at the branch of Chemical Bank selected by the Escrow Agent, and bearing
the designation set forth on the Information Sheet (heretofore defined as the
"Bank Account"). The purpose of the Bank Account is for (a) the deposit of all
subscription monies (checks, cash or wire transfers) which are received by the
Underwriter from prospective purchasers of the Securities and are delivered by
the Underwriter to the Escrow Agent, (b) the holding of amounts of subscription
monies
<PAGE>
which are collected through the banking system, and (c) the disbursement
of collected funds, all as described herein.
2.2 On or before the date of the initial deposit in the Bank Account
pursuant to this Agreement, the Underwriter shall notify the Escrow Agent in
writing of the effective date of the Registration Statement (the "Effective
Date"), and the Escrow Agent shall not be required to accept any amounts for
credit to the Escrow Account or for deposit in the Bank Account prior to its
receipt of such notification.
2.3 The Offering Period, which shall be deemed to commence on the
Effective Date, shall consist of the number of calendar days or business days
set forth on the Information Sheet. The Offering Period shall be extended by an
Extension Period only if the Escrow Agent shall have received written notice
thereof at least five (5) business days prior to the expiration of the Offering
Period. The Extension Period, which shall be deemed to commence on the next
calendar day following the expiration of the Offering Period, shall consist of
the number of calendar days or business days set forth on the Information Sheet.
The last day of the Offering Period, or the last day of the Extension Period (if
the Escrow Agent has received written notice thereof as hereinabove provided),
is referred to herein as the "Termination Date". Except as provided in Section
4.3 hereof, after the Termination Date the Underwriter shall not deposit, and
the Escrow Agent shall not accept, any additional amounts representing payments
by prospective purchasers.
3. Deposits to the Bank Account.
----------------------------
3.1 The Underwriter shall promptly deliver to the Escrow Agent all
monies which it receives from prospective purchasers of the Securities, which
monies shall be in the form of checks, cash, or wire transfers. Upon the Escrow
Agent's receipt of such monies, they shall be credited to the Escrow Account.
All checks delivered to the Escrow Agent shall be made payable to "Continental
Stock Transfer & Trust Company, as Escrow Agent for the offering by [the
Issuer]". Any check payable other than to the Escrow Agent as required hereby
shall be returned to the prospective purchaser, or if the Escrow Agent has
insufficient information to do so, then to the Underwriter (together with any
Subscription Information, as defined below or other documents delivered
therewith) by noon of the next business day following receipt of such check by
the Escrow Agent, and such check shall be deemed not to have been delivered to
the Escrow Agent pursuant to the terms of this Agreement.
3.2 Promptly after receiving subscription monies as described in
Section 3.1, the Escrow Agent shall deposit the same into the Bank Account.
Amounts of monies so deposited are hereinafter referred to as "Escrow Amounts".
The Escrow Agent shall cause Chemical Bank to process all Escrow Amounts for
collection through the banking system. Simultaneously with each deposit to the
Escrow Account, the Underwriter (or the Issuer, if such deposit is made by the
Issuer) shall inform the Escrow Agent in writing of the name and address of the
prospective purchaser, the amount of Securities subscribed for by such
purchaser, and the aggregate dollar amount of such subscription (collectively,
the "Subscription Information").
-2-
<PAGE>
3.3 The Escrow Agent shall not be required to accept for credit to
the Escrow Account or for deposit into the Bank Account checks which are not
accompanied by the appropriate Subscription Information. Wire transfers and
cash representing payments by prospective purchasers shall not be deemed
deposited in the Escrow Account until the Escrow Agent has received in writing
the Subscription Information required with respect to such payments.
3.4 The Escrow Agent shall not be required to accept in the Escrow
Account any amounts representing payments by prospective purchasers, whether by
check, cash or wire, except during the Escrow Agent's regular business hours.
3.5 Only those Escrow Amounts, which have been deposited in the Bank
Account and which have cleared the banking system and have been collected by the
Escrow Agent, are herein referred to as the "Fund".
3.6 If the proposed offering is terminated before the Termination
Date, the Escrow Agent shall refund any portion of the Fund prior to
disbursement of the Fund in accordance with Article 4 hereof upon instructions
in writing signed by both the Issuer and the Underwriter.
4. Disbursement from the Bank Account.
----------------------------------
4.1 Subject to Section 4.3 below, if by the close of regular banking
hours on the Termination Date the Escrow Agent determines that the amount in the
Fund is less than the Minimum Dollar Amount or the Minimum Securities Amount, as
indicated by the Subscription Information submitted to the Escrow Agent, then in
either such case, the Escrow Agent shall promptly refund to each prospective
purchaser the amount of payment received from such purchaser which is then held
in the Fund or which thereafter clears the banking system, without interest
thereon or deduction therefrom, by drawing checks on the Bank Account for the
amounts of such payments and transmitting them to the purchasers. In such
event, the Escrow Agent shall promptly notify the Issuer and the Underwriter of
its distribution of the Fund.
4.2 Subject to Section 4.3 below, if at any time up to the close of
regular banking hours on the Termination Date, the Escrow Agent determines that
the amount in the Fund is at least equal to the Minimum Dollar Amount and
represents the sale of not less than the Minimum Securities Amount, the Escrow
Agent shall promptly notify the Issuer and the Underwriter of such fact in
writing. The Escrow Agent shall promptly disburse the Fund, by drawing checks
on the Bank Account in accordance with instructions in writing signed by both
the Issuer and the Underwriter as to the disbursement of the Fund, promptly
after it receives such instructions.
4.3 [This provision applies only if a Collection Period has been
provided for by the appropriate indication on the Information Sheet.] If the
Escrow Agent or the Underwriter has on hand at the close of business on the
Termination Date any uncollected amounts which when added to the Fund would
raise the amount in the Fund to the Minimum Dollar Amount, and result in the
Fund representing the sale of the Minimum Securities Amount, the Collection
-3-
<PAGE>
Period (consisting of the number of business days set forth on the Information
Sheet) shall be utilized to allow such uncollected amounts to clear the banking
system. During the Collection Period, the Underwriter (and the Issuer) shall
not deposit, and the Escrow Agent shall not accept, any additional amounts;
provided, however, that such amounts as were received by the Underwriter (or the
Issuer) by the close of business on the Termination Date may be deposited with
the Escrow Agent by noon of the next business day following the Termination
Date. If at the close of business on the last day of the Collection Period an
amount sufficient to raise the amount in the Fund to the Minimum Dollar Amount
and which would result in the Fund representing the sale of the Minimum
Securities Amount shall not have cleared the banking system, the Escrow Agent
shall promptly notify the Issuer and the Underwriter in writing of such fact and
shall promptly return all amounts then in the Fund, and any amounts which
thereafter clear the banking system, to the prospective purchasers as provided
in Section 4.2 hereof.
4.4 Upon disbursement of the Fund pursuant to the terms of this
Article 4, the Escrow Agent shall be relieved of all further obligations and
released from all liability under this Agreement. It is expressly agreed and
understood that in no event shall the aggregate amount of payments made by the
Escrow Agent exceed the amount of the Fund.
5. Rights, Duties and Responsibilities of the Escrow Agent. It is
-------------------------------------------------------
understood and agreed that the duties of the Escrow Agent are purely ministerial
in nature, and that:
5.1 The Escrow Agent shall notify the Underwriter, on a daily basis,
of the Escrow Amounts which have been deposited in the Bank Account and of the
amounts, constituting the Fund, which have cleared the banking system and have
been collected by the Escrow Agent.
5.2 The Escrow Agent shall not be responsible for or be required to
enforce any of the terms or conditions of the underwriting agreement or any
other agreement between the Underwriter and the Issuer nor shall the Escrow
Agent be responsible for the performance by the Underwriter or the Issuer of
their respective obligations under this Agreement.
5.3 The Escrow Agent shall not be required to accept from the
Underwriter (or the Issuer) any Subscription Information pertaining to
prospective purchasers unless such Subscription Information is accompanied by
checks, cash, or wire transfers meeting the requirements of Section 3.1, nor
shall the Escrow Agent be required to keep records of any information with
respect to payments deposited by the Underwriter (or the Issuer) except as to
the amount of such payments; however, the Escrow Agent shall notify the
Underwriter within a reasonable time of any discrepancy between the amount set
forth in any Subscription Information and the amount delivered to the Escrow
Agent therewith. Such amount need not be accepted for deposit in the Escrow
Account until such discrepancy has been resolved.
5.4 The Escrow Agent shall be under no duty or responsibility to
enforce collection of any check delivered to it hereunder. The Escrow Agent,
within a reasonable time, shall return to the Underwriter any check received
which is dishonored, together with the Subscription Information, if any, which
accompanied such check.
-4-
<PAGE>
5.5 The Escrow Agent shall be entitled to rely upon the accuracy, act
in reliance upon the contents, and assume the genuineness of any notice,
instruction, certificate, signature, instrument or other document which is given
to the Escrow Agent pursuant to this Agreement without the necessity of the
Escrow Agent verifying the truth or accuracy thereof. The Escrow Agent shall
not be obligated to make any inquiry as to the authority, capacity, existence or
identity of any person purporting to give any such notice or instructions or to
execute any such certificate, instrument or other document.
5.6 If the Escrow Agent is uncertain as to its duties or rights
hereunder or shall receive instructions with respect to the Bank Account, the
Escrow Amounts or the Fund which, in its sole determination, are in conflict
either with other instructions received by it or with any provision of this
Agreement, it shall be entitled to hold the Escrow Amounts, the Fund, or a
portion thereof, in the Bank Account pending the resolution of such uncertainty
to the Escrow Agent's sole satisfaction, by final judgment of a court or courts
of competent jurisdiction or otherwise; or the Escrow Agent, at its sole option,
may deposit the Fund (and any other Escrow Amounts that thereafter become part
of the Fund) with the Clerk of a court of competent jurisdiction in a proceeding
to which all parties in interest are joined. Upon the deposit by the Escrow
Agent of the Fund with the Clerk of any court, the Escrow Agent shall be
relieved of all further obligations and released from all liability hereunder.
5.7 The Escrow Agent shall not be liable for any action taken or
omitted hereunder, or for the misconduct of any employee, agent or attorney
appointed by it, except in the case of willful misconduct or gross negligence.
The Escrow Agent shall be entitled to consult with counsel of its own choosing
and shall not be liable for any action taken, suffered or omitted by it in
accordance with the advice of such counsel.
5.8 The Escrow Agent shall have no responsibility at any time to
ascertain whether or not any security interest exists in the Escrow Amounts, the
Fund or any part thereof or to file any financing statement under the Uniform
Commercial Code with respect to the fund or any part thereof.
6. Amendment; Resignation. This Agreement may be altered or amended
----------------------
only with the written consent of the Issuer, the Underwriter and the Escrow
Agent. The Escrow Agent may resign for any reason upon three (3) business days'
written notice to the Issuer and the Underwriter. Should the Escrow Agent resign
as herein provided, it shall not be required to accept any deposit, make any
disbursement or otherwise dispose of the Escrow Amounts or the Fund, but its
only duty shall be to hold the Escrow Amounts until they clear the banking
system and the Fund for a period of not more than five (5) business days
following the effective date of such resignation, at which time (a) if a
successor escrow agent shall have been appointed and written notice thereof
(including the name and address of such successor escrow agent) shall have been
given to the resigning Escrow Agent by the Issuer, the Underwriter and such
successor escrow agent, then the resigning Escrow Agent shall pay over to the
successor escrow agent the Fund, less any portion thereof previously paid out in
accordance with this Agreement; or (b) if the resigning Escrow Agent shall not
have received written notice signed by the Issuer, the Underwriter and a
successor escrow agent, then the resigning Escrow Agent shall promptly refund
the amount in the Fund to each prospective purchaser, without interest thereon
or
-5-
<PAGE>
deduction therefrom, and the resigning Escrow Agent shall promptly notify the
Issuer and the Underwriter in writing of its liquidation and distribution of the
Fund; whereupon, in either case, the Escrow Agent shall be relieved of all
further obligations and released from all liability under this Agreement.
Without limiting the provisions of Section 8 hereof, the resigning Escrow Agent
shall be entitled to be reimbursed by the Issuer and the Underwriter for any
expenses incurred in connection with its resignation, transfer of the Fund to a
successor escrow agent or distribution of the Fund pursuant to this Section 6.
7. Representations and Warranties. The Issuer and the Underwriter
------------------------------
hereby jointly and severally represent and warrant to the Escrow Agent that:
7.1 No party other than the parties hereto and the prospective
purchasers have, or shall have, any lien, claim or security interest in the
Escrow Amounts or the Fund or any part thereof.
7.2 No financing statement under the Uniform Commercial Code is on
file in any jurisdiction claiming a security interest in or describing (whether
specifically or generally) the Escrow Amounts or the Fund or any part thereof.
7.3 The Subscription Information submitted with each deposit shall,
at the time of submission and at the time of the disbursement of the Fund, be
deemed a representation and warranty that such deposit represents a bona fide
payment by the purchaser described therein for the amount of Securities set
forth in such Subscription Information.
7.4 All of the information contained in the Information Sheet is, as
of the date hereof, and will be, at the time of any disbursement of the Fund,
true and correct.
8. Fees and Expenses. The Escrow Agent shall be entitled to the Escrow
-----------------
Agent Fees set forth on the Information Sheet, payable as and when stated
therein. In addition, the Issuer and the Underwriter jointly and severally agree
to reimburse the Escrow Agent for any reasonable expenses incurred in connection
with this Agreement, including, but not limited to, reasonable counsel fees.
Upon receipt of the Minimum Dollar Amount, the Escrow Agent shall have a lien
upon the Fund to the extent of its fees for services as Escrow Agent.
9. Indemnification and Contribution
--------------------------------
9.1 The Issuer and the Underwriter (collectively referred to as the
"Indemnitors") jointly and severally agree to indemnify the Escrow Agent and its
officers, directors, employees, agents and shareholders (collectively referred
to as the "Indemnitees") against, and hold them harmless of and from, any and
all loss, liability, cost, damage and expense, including without limitation,
reasonable counsel fees, which the Indemnitees may suffer or incur by reason of
any action, claim or proceeding brought against the Indemnitees arising out of
or relating in any way to this Agreement or any transaction to which this
Agreement relates, unless such action, claim or proceeding is the result of the
willful misconduct or gross negligence of the Indemnities.
-6-
<PAGE>
9.2 If the indemnification provided for in Section 9.1 is applicable,
but for any reason is held to be unavailable, the Indemnitors shall contribute
such amounts as are just and equitable to pay, or to reimburse the Indemnitees
for, the aggregate of any and all losses, liabilities, costs, damages and
expenses, including counsel fees, actually incurred by the Indemnitees as a
result of or in connection with, and any amount paid in settlement of, any
action, claim or proceeding arising out of or relating in any way to any actions
or omissions of the Indemnitors.
9.3 The provisions of this Article 9 shall survive any termination of
this Agreement, whether by disbursement of the Fund, resignation of the Escrow
Agent or otherwise.
10. Governing Law and Assignment. This Agreement shall be construed in
----------------------------
accordance with and governed by the laws of the State of New York and shall be
binding upon the parties hereto and their respective successors and assigns;
provided, however, that any assignment or transfer by any party of its rights
under this Agreement or with respect to the Escrow Amounts or the Fund shall be
void as against the Escrow Agent unless (a) written notice thereof shall be
given to the Escrow Agent; and (b) the Escrow Agent shall have consented in
writing to such assignment or transfer.
11. Notices. All notices required to be given in connection with this
-------
Agreement shall be sent by registered or certified mail, return receipt
requested, or by hand delivery with receipt acknowledged, or by the Express Mail
service offered by the United States Post Office, and addressed, if to the
Issuer or the Underwriter, at their respective addresses set forth on the
Information Sheet, and if to the Escrow Agent, at its address set forth above,
to the attention of the Trust Department.
12. Severability. If any provision of this Agreement or the application
------------
thereof to any person or circumstance shall be determined to be invalid or
unenforceable, the remaining provisions of this Agreement or the application of
such provision to persons or circumstances other than those to which it is held
invalid or unenforceable shall not be affected thereby and shall be valid and
enforceable to the fullest extent permitted by law.
13. Execution in Several Counterparts. This Agreement may be executed in
---------------------------------
several counterparts or by separate instruments, and all of such counterparts
and instruments shall constitute one agreement, binding on all of the parties
hereto.
14. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings (written or oral) of the
parties in connection therewith.
-7-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day
and year first above written.
THE ISSUER CONTINENTAL STOCK
TRANSFER & TRUST COMPANY
By: By:
-------------------------- -------------------------
THE UNDERWRITER
By:
--------------------------
-8-
<PAGE>
EXHIBIT 99.02
SUBSCRIPTION AGREEMENT
Casull Arms Corporation
456 Fairview Road
Afton, Wyoming 83110
Gentlemen:
1. SUBSCRIPTION. The undersigned hereby subscribes
------------
for__________units ("Units"), each unit consisting of one share of common stock
and one redeemable common stock purchase warrant, of Casull Arms Corporation, a
Delaware corporation (the "Company"), in connection with the Company's offering
on a minimum basis of 400,000 Units (the "Minimum Offering") and a maximum basis
of 1,400,000 Units.
2. ACCEPTANCE OF SUBSCRIPTION. The undersigned is tendering payment
--------------------------
for the subscribed for Units by check or wire transfer in the amount of
$_____________________ to the order of Continental Stock Transfer & Trust
Company, as Escrow Agent (the "Escrow Agent") for Casull Arms Corporation. All
checks received from subscribers shall be delivered to the Escrow Agent at its
principal corporate trust office at 2 Broadway, New York, New York 10004. Wire
transfers to the Escrow Agent shall be made as follows:
Continental Stock Transfer & Trust Company aaf Casull Arms Corp.
Chase Manhattan Bank, 52 Broadway, New York, New York 10004;
Account # - 134-633458; ABA# - 021 000 021
All funds received from subscribers for Units will be held in an
escrow account by the Escrow Agent until a closing ("Closing") of the Minimum
Offering or earlier termination of the offering. The offering will expire on
the earlier to occur of (i) 60 days from the date of the prospectus relating to
the Units or (ii) the sale of all the Units being offered (the "Termination
Date"), unless the Company and the Placement Agent agree to extend this Offering
for an additional 30-day period. In the event that subscriptions for the
Minimum Offering are not received by the Termination Date, the offering will
terminate and all funds will be returned by the Escrow Agent without interest or
deduction.
This Subscription Agreement should be delivered to National
Securities Corporation, 422 W. Riverside, Suite 1300, Spokane, Washington 99201,
Attention: Mr. Mark Nevdahl. If this subscription is rejected by either the
Company or the Placement Agent, the amount tendered by the investor shall be
promptly returned in full to the undersigned by the Escrow Agent, without
interest or deduction, and this Subscription Agreement shall be null and void
and of no further force or effect. The Company and the Placement Agent shall
have the right to reject this subscription, in whole or in part.
3. REPRESENTATIONS AND WARRANTIES OF THE UNDERSIGNED. The
-------------------------------------------------
undersigned hereby represents and warrants to the Company that the undersigned
has received and had the opportunity to review the Form SB-2 Registration
Statement (Registration No. 333-16911) relating to the Units. The undersigned
has also had the opportunity to ask questions of and to receive answers from the
Company and its representatives, with respect to the Company and the terms and
conditions of this offering. The undersigned and the undersigned's
representatives, if any, have been offered access to the books and records of
the Company. All materials and information requested by the undersigned and the
undersigned's representatives, if any, including any information requested to
verify any information furnished, have been made available to the undersigned.
<PAGE>
Casull Arms Corporation
Page 2
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
(a) The Company has been duly and validly incorporated and is
validly existing and in good standing as a corporation under the laws of the
State of Delaware. The Company has all requisite power and authority to enter
into this Subscription Agreement and to be bound by the provisions and
conditions hereof.
(b) All corporate action required to be taken by the Company
prior to the issuance and sale of the Units has been taken; and the Units when
issued shall be duly and validly issued.
5. FURTHER DOCUMENTS. The parties agree to execute any and all such
-----------------
further instruments and documents, and to take any and all such further actions
reasonably required to effectuate this Subscription Agreement and the intent and
purposes hereof.
6. ASSIGNABILITY. This Subscription Agreement is not transferrable
-------------
or assignable by the undersigned.
7. APPLICABLE LAW. This Subscription Agreement shall be governed by
--------------
and construed in accordance with the internal laws of the State of New York,
applicable to contracts made and to be performed wholly within that state,
without regard to the conflict of law rules thereof.
8. MODIFICATION. This Subscription Agreement may not be amended,
------------
modified or terminated except by an instrument in writing signed by all parties
hereto.
9. COUNTERPARTS. This Subscription Agreement may be executed
------------
through the use of separate signature pages or in any number of counterparts,
and each of such counterparts shall, for all purposes, constitute one agreement
binding on all parties, notwithstanding that all parties are not signatories to
the same counterpart.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement this _____ day of 1997.
_________________________________________
Name of Investor:
Social Security or
Tax I.D. No._____________________________
ACCEPTED:
CASULL ARMS CORPORATION NATIONAL SECURITIES CORPORATION
By:________________________________ By:______________________________________
Name:___________________________ Name:_________________________________
Title:__________________________ Title:________________________________
Date:___________________________ Date:_________________________________
