<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 1997
REGISTRATION NO. 333-25445
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 5
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DEPOMED, INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 8731 94-3229046
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
---------------
1170 B CHESS DRIVE,
FOSTER CITY, CALIFORNIA 94404
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JOHN W. FARA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1170 B CHESS DRIVE
FOSTER CITY, CALIFORNIA 94404
(415) 513-0990
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
Copies to:
JULIAN N. STERN LAWRENCE B. FISHER
STEPHEN C. FERRUOLO ORRICK, HERRINGTON & SUTCLIFFE LLP
HELLER EHRMAN WHITE & MCAULIFFE 666 FIFTH AVENUE
525 UNIVERSITY AVENUE NEW YORK, NEW YORK 10103
PALO ALTO, CALIFORNIA 94301 TELEPHONE: (212) 506-5000
TELEPHONE: (415) 324-7000 FACSIMILE: (212) 506-5151
FACSIMILE: (415) 324-0638
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness 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 426(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration 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 of 1933, 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: [_]
--------------
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, DATED OCTOBER 6, 1997
PROSPECTUS
[LOGO OF DEPOMED, INC.]
DEPOMED, INC.
1,200,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE WARRANT
----------
DepoMed, Inc., a California corporation (the "Company"), hereby offers (the
"Offering") 1,200,000 units (the "Units"), each unit consisting of one share
(the "Shares") of common stock, no par value (the "Common Stock") and one
redeemable common stock purchase warrant (the "Warrants"). The Units, Shares
and Warrants are sometimes hereinafter collectively referred to as the
"Securities." The Shares and Warrants comprising the Units are detachable and
will trade separately three months after issuance, subject to earlier
separability in the discretion of National Securities Corporation, the
representative of the several Underwriters (the "Representative"), and the
Company. Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock at an exercise price of $ per share [125% of the
initial public offering price per Unit], at any time during the period
commencing on , 1998 [twelve months from the date of the Prospectus] until
, 2002 [5 years after the date of this Prospectus]. Commencing , 1999 [18
months from the date of the Prospectus], the Warrants are subject to redemption
by the Company, in whole but not in part, at $0.10 per Warrant, on 30 days'
prior written notice provided that the average closing bid price of the Common
Stock as reported on the Nasdaq SmallCap Market ("Nasdaq") equals or exceeds
200% of the then-current Warrant exercise price per share, for any 20 trading
days within a period of 30 consecutive trading days ending on the fifth trading
day prior to the date of the notice of redemption. See "Description of
Securities--Warrants."
Prior to this Offering, there has been no public market for the Units, Common
Stock or the Warrants and there can be no assurance that such a market will
develop after the completion of this Offering, or, if developed, that it will
be sustained. It is currently anticipated that the initial public offering
price will be $6.10 per Unit. For information regarding the factors considered
in determining the initial public offering price of the Units and the terms of
the Warrants, see "Risk Factors" and "Underwriting." Application has been made
to have the Units, Shares and Warrants approved for quotation on Nasdaq under
the symbols "DPMDU," "DPMD" and "DPMDW," respectively.
----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
COMMENCING ON PAGE 7 AND "DILUTION."
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3).................................. $ $ $
================================================================================
</TABLE>
(1) Does not include additional compensation payable to the Representative, in
the form of a non-accountable expense allowance. In addition, see
"Underwriting" for information concerning indemnification and contribution
arrangements with the Underwriters and other compensation payable to the
Representative.
(2) Before deducting expenses payable by the Company estimated at $ ,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Representative an option, exercisable within
45 days after the date of this Prospectus, to purchase up to 180,000
additional Units upon the same terms and conditions as set forth above,
solely to cover over-allotments, if any (the "Over-Allotment Option"). If
such Over-Allotment Option is exercised in full, the total Price to Public,
Underwriting Discount, Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
----------
The Units are being offered by the Underwriters, subject to prior sale, when,
as and if delivered to and accepted by the Underwriters and subject to approval
of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the Units will be made against payment at the offices of National
Securities Corporation, Seattle, Washington, on or about , 1997.
NATIONAL SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
CONVENTIONAL TABLET ADMINISTRATION VS.
DEPOMED'S GASTRIC RETENTION (GR) SYSTEM
Conventional Tablet
Intact tablet in stomach Tablet dissolves and passes into
intestine
DepoMed's GR System
An immediate-release tablet generally stays in the stomach less than 30
minutes compared to DepoMed's GR System which is designed to stay in the
stomach for 4-6 hours.
Most products using the Company's GR System or Reduced Irritation (RI) System
would be subject to FDA and other regulatory approvals, which have not been
applied for or received, and which, when applied for, may not be obtained for
several years, if at all.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON
STOCK AND WARRANTS, INCLUDING PURCHASES OF THE UNITS, COMMON STOCK AND/OR
WARRANTS TO STABILIZE THEIR RESPECTIVE MARKET PRICES, PURCHASES OF THE UNITS
COMMON STOCK AND/OR WARRANTS TO COVER SOME OR ALL OF A SHORT POSITION
MAINTAINED BY THE UNDERWRITERS IN THE UNITS, COMMON STOCK AND/OR WARRANTS,
RESPECTIVELY, AND THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risk and
uncertainties. The Company's actual results could differ materially from those
anticipated in such forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following summary is qualified in its entirety by the more
detailed information and the Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. Except as otherwise noted, all information in
this Prospectus (i) assumes no exercise of the Over-Allotment Option, (ii)
gives effect to a one-for-three reverse stock split of the Common Stock which
became effective on July 30, 1997, (iii) assumes the Warrants and the
Representative's Warrants are not exercised, (iv) assumes no exercise of 83,333
warrants to purchase Common Stock (the "Bridge Warrants") issued in connection
with the Company's Bridge Financing (the "Bridge Financing") completed in April
1997, and (v) reflects the conversion of all outstanding shares of Series A
Preferred Stock and Series B Preferred Stock (collectively, the "Preferred
Stock") into 908,622 shares of Common Stock effective automatically upon the
closing of the Offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of Securities,"
"Underwriting" and Notes to Financial Statements.
THE COMPANY
DepoMed, Inc. (the "Company") is a development stage company engaged in the
development of new and proprietary oral drug delivery technologies. Utilizing
these technologies, the Company has developed two types of oral drug delivery
systems, the Gastric Retention System (the "GR System") and the Reduced
Irritation System (the "RI System" and, collectively with the GR System, the
"DepoMed Systems"). The GR System is designed to be retained in the stomach for
an extended period of time while it delivers the incorporated drug or drugs,
and the RI System is designed to reduce the gastrointestinal ("GI") irritation
that is a side effect of many drugs. In addition, the DepoMed Systems are
designed to provide continuous, controlled delivery of an incorporated drug.
The Company intends to develop products utilizing the DepoMed Systems in
collaboration with pharmaceutical and biotechnology companies, from which the
Company expects to receive license fees, research and development funding,
milestone payments and royalties. The Company also intends to develop either
independently or jointly certain over-the-counter ("OTC") products utilizing
off-patent drugs in the DepoMed Systems.
The Company currently has a joint research and development agreement with
Bristol-Myers Squibb Company ("BMS") to develop a product incorporating a BMS
proprietary compound into the GR System. In addition, the Company has entered
into a feasibility study with GalaGen Inc. ("GalaGen") to use the GR System to
enhance local effectiveness and/or provide continuous, controlled delivery of
GalaGen's proprietary immunoglobulin (a protein of the immune system) products.
The Company is also independently developing a reduced irritation aspirin
product and an enhanced absorption calcium supplement product and has
identified certain other product candidates expected to benefit from the
DepoMed Systems. In April 1997, the Company and Oakmont Pharmaceuticals, Inc.
("Oakmont") signed a letter of intent to enter into an agreement pursuant to
which Oakmont will manufacture the Company's reduced irritation aspirin and
enhanced absorption calcium supplement products and have rights to distribute
and sell these products in territories to be determined. The letter of intent
also provides for the Company and Oakmont each to offer rights to future
products to the other party.
The DepoMed Systems include proprietary formulations of drug-containing
polymeric units that allow multihour delivery of an incorporated drug
continuously into the stomach either for prolonged, local treatment in the
stomach or for enhanced absorption in the GI tract. The Company believes that
the GR System has the ability to enhance the bioavailability (blood levels) of
drugs that are preferentially absorbed in the stomach, allow for
3
<PAGE>
more effective treatment of local stomach disorders, and provide continuous and
extended delivery of drugs to the upper part of the small intestine, the site
where many drugs are absorbed most efficiently. The RI System is designed to
reduce the irritation to the GI tract caused by many commonly used drugs,
including aspirin. The Company believes the RI System has the potential to make
such drugs less irritating and therefore more widely used.
In addition to the benefits described above, the Company believes that the
DepoMed Systems may offer additional advantages including multihour release
patterns for drugs of almost any solubility and the ability to use drug
combinations previously not feasible due to the pharmacokinetic (absorption,
distribution, metabolism and excretion) differences of drugs. The Company
believes that by reducing the frequency of drug administration, use of the
DepoMed Systems may lead to reduced costs and improved patient compliance.
Also, by providing new formulations of existing products using the DepoMed
Systems, the Company believes that it will be able to provide future
collaborative partners with the ability to extend their patent franchises on
such products.
The Company intends to have the DepoMed Systems used with as many
pharmaceutical products as possible with an emphasis on pharmaceutical products
which command a large market share or are in large market segments and where
the Company believes the DepoMed Systems will provide an advantage over other
drug delivery systems. The Company's primary strategy for the development and
commercialization of the DepoMed Systems involves establishing collaborative
relationships with pharmaceutical and biotechnology companies to develop
improved therapeutic products. The Company also intends to develop improved
products using off-patent and/or OTC drugs that utilize the DepoMed Systems
either independently or jointly by entering into collaborative partnerships
with pharmaceutical, biotechnology or other health care companies.
The Company was incorporated in the State of California in August 1995.
Pursuant to a settlement agreement between M6 Pharmaceuticals, Inc. ("M6") on
the one hand, and Dr. John W. Shell and DepoMed Systems, Inc. ("DSI") on the
other hand, the Company obtained substantially all the assets, and assumed
certain liabilities, attributable to the business conducted by DSI prior to its
merger into M6. The Company's executive offices are located at 1170 B Chess
Drive, Foster City, California 94404 and its telephone number is (415) 513-
0990.
4
<PAGE>
THE OFFERING
Securities offered...................
1,200,000 Units, each unit consisting of
one share of Common Stock and one
Warrant. The shares of Common Stock and
Warrants will be detachable three months
after issuance, subject to earlier
separability in the discretion of the
Representative and the Company.
Terms of Warrants....................
Each Warrant entitles the holder thereof
to purchase, at any time commencing ,
1998 [one year after the date of this
Prospectus], until , 2002 [five years
after the date of this Prospectus], one
share of Common Stock at a price of $
per share [125% of the initial public
offering price per Unit]. Commencing
, 1999 [18 months after the date of
this Prospectus], the Warrants are
subject to redemption by the Company, in
whole but not in part, at $.10 per
Warrant provided that the average
closing bid price of the Common Stock as
reported on the Nasdaq equals or exceeds
200% of the then-current Warrant
exercise price per share for any 20
trading days within a period of 30
consecutive trading days ending on the
fifth trading day prior to the date of
the notice of redemption. See
"Description of Securities."
Common Stock outstanding prior to 4,263,447 shares of Common Stock.
the Offering(1).....................
Securities to be outstanding after 5,463,447 shares of Common Stock and
the Offering(1)(2)............. 1,200,000 Warrants.
Use of proceeds...................... For research and development, laboratory
and facilities capital expenditures,
repayment of certain indebtedness and
working capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq symbols:
Units.......................... DPMDU
Common Stock.......................
DPMD
Warrants...........................
DPMDW
Risk Factors......................... An investment in the Securities offered
hereby involves a high degree of risk
and immediate and substantial dilution,
and should be made only by investors who
can afford the loss of their entire
investment. See "Risk Factors" and
"Dilution."
- --------
(1) Excludes 340,000 shares of Common Stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $2.77 per
share under the Company's 1995 Stock Option Plan (the "Stock Plan"). Also
excludes 235,000 shares of Common Stock issuable upon exercise of stock
options available for grant under the Stock Plan. See "Management--1995
Stock Option Plan" and Note 7 of Notes to the Financial Statements.
(2) Excludes 83,333 Bridge Warrants. See "Description of Securities--Bridge
Warrants."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
INCEPTION
(AUGUST 7, 1995) YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1995 1996 1996 1997
---------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Product development rev-
enue................... $ -- $ 317,971 $ -- $ 351,737
Operating expenses:
Research and develop-
ment................. 138,816 390,496 181,947 328,603
General and adminis-
trative.............. 155,157 393,676 246,396 430,743
Purchase of in-process
research and develop-
ment................. 298,154 -- -- --
--------- --------- --------- ---------
Total operating ex-
penses............. 592,127 784,172 428,343 759,346
Loss from operations.... (592,127) (466,201) (428,343) (407,609)
Interest expense, net... 8,541 6,572 1,567 20,110
--------- --------- --------- ---------
Net loss................ $(600,668) $(472,773) $(429,910) $(427,719)
========= ========= ========= =========
Pro forma net loss per
share.................. $ (0.11) $ (0.10) $ (0.10)
========= ========= =========
Shares used in computing
pro forma net loss per
share(1)............... 4,350,986 4,328,947 4,482,758
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
----------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit)......... $ (653,348) $5,146,652
Total assets....... 1,459,840 5,943,809
Notes payable to
shareholders...... 1,316,031 --
Deficit accumulated
during the devel-
opment stage...... (1,501,160) (1,501,160)
Total shareholders'
equity (net capi-
tal deficiency)... (478,005) 5,321,995
</TABLE>
- --------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing pro forma net loss
per share.
(2) Adjusted to give effect to (i) the Bridge Financing, and (ii) the receipt
of the estimated net proceeds of the Offering upon an assumed initial
public offering price of $6.10 per Unit and the initial application of the
net proceeds therefrom. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. An investment in the
Securities offered hereby involves a high degree of risk and should be made
only by investors who can afford the loss of their entire investment.
Prospective investors should carefully review and consider the risk factors
described below and other information in this Prospectus before purchasing the
Securities.
EARLY STAGE OF DEVELOPMENT; WORKING CAPITAL DEFICIT; LIMITED REVENUES; LIMITED
OPERATING HISTORY
The Company is at an early stage of development and is subject to all
business risks associated with a new enterprise, including constraints on the
Company's financial and personnel resources, lack of established credit
facilities and collaborative partnering relationships, and uncertainties
regarding product development and future revenues. At June 30, 1997, the
Company had an accumulated deficit of $1,501,160 and a working capital deficit
of $653,348. The Company anticipates that it will continue to incur
substantial additional operating losses for at least the next several years
and expects cumulative losses to increase as the Company's research and
development efforts expand. The Company has had only minimal revenues to date
from collaborative research and development arrangements and feasibility
studies, and no revenues from product sales. There can be no assurance as to
when or whether it will be able to develop significant sources of revenue or
that its operations will become profitable, even if it is able to
commercialize any products.The Company has only a limited history of
operations, consisting primarily of development of its products and
sponsorship of research. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes to Financial
Statements.
GOING CONCERN DISCLOSURE IN INDEPENDENT AUDITORS' REPORT
The report of the Company's independent auditors with respect to the
Company's financial statements included in this Prospectus includes a "going
concern" modification, indicating that the Company's losses and deficits in
working capital and shareholders' equity raise substantial doubt about the
Company's ability to continue as a going concern. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Notes to
Financial Statements.
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT
The Company's research and development programs are at an early stage of
development. Substantial additional research and development will be necessary
in order for the Company to develop the DepoMed Systems, and there can be no
assurance that the DepoMed Systems will be developed or that products
utilizing the DepoMed Systems will be commercialized by the Company or third
parties in a timely manner or at all. In addition to further research and
development related to the DepoMed Systems, products utilizing the DepoMed
Systems will require clinical testing, regulatory approval and substantial
additional investment prior to commercialization. There can be no assurance
that products utilizing the DepoMed Systems will be successfully developed,
prove to be safe and efficacious in clinical trials, meet applicable
regulatory standards, be capable of being produced in commercial quantities at
acceptable costs, be eligible for third-party reimbursement from governmental
or private insurers, be successfully marketed or achieve market acceptance.
Further, the DepoMed Systems may prove to have undesirable or unintended side
effects that may prevent or limit their commercial use. The Company or its
collaborative partners may find that products that appeared promising in
preclinical studies do not demonstrate efficacy in larger-scale clinical
trials and/or that such products will not receive regulatory approvals.
Accordingly, any product development program undertaken by the Company may be
curtailed, redirected or eliminated at any time which could have a material
adverse effect on the Company. See "Business--The DepoMed Systems."
7
<PAGE>
NEED FOR SUBSTANTIAL ADDITIONAL FUNDS
The Company anticipates that the net proceeds from this Offering will enable
it to meet its capital and operational requirements for at least the 12 months
following the date of this Prospectus. However, this expectation is based on
the Company's current operating plan which can change as a result of many
factors, and the Company could require additional funding sooner than
anticipated. The Company's cash needs may also vary materially from those now
planned because of results of research and development, relationships with
possible collaborative partners, changes in the focus and direction of the
Company's research and development programs, competitive and technological
advances, results of clinical testing, requirements of the United States Food
and Drug Administration ("FDA") and comparable foreign regulatory agencies and
other factors. The Company will require substantial funds of its own or from
third parties to conduct research and development, preclinical and clinical
testing, and to manufacture (or have manufactured) and market (or have
marketed) the products utilizing the DepoMed Systems. The net proceeds of this
Offering are not expected to be sufficient to fund the Company's operations
through commercialization of products yielding sufficient revenues to support
the Company's operations. The Company has no credit facility or other
committed sources of capital. To the extent capital resources are insufficient
to meet future capital requirements, the Company will have to raise additional
funds to continue the development of the DepoMed Systems. There can be no
assurance that such funds will be available on favorable terms, or at all. To
the extent that additional capital is raised through the sale of equity or
convertible debt securities, the issuance of such securities could result in
dilution to the Company's shareholders. If adequate funds are not available,
the Company may be required to curtail operations significantly or to obtain
funds through entering into collaboration agreements on unattractive terms.
The Company's inability to raise capital would have a material adverse effect
on the Company. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON AND NEED FOR COLLABORATIVE PARTNERS
The Company's strategy for the research, development, clinical testing,
manufacturing and commercialization of products utilizing the DepoMed Systems
requires entering into collaborative arrangements with pharmaceutical and
biotechnology companies. The Company has received substantially all of its
revenues since inception from BMS and GalaGen and intends to enter into
collaborative arrangements with other companies to fund the continued
development of the DepoMed Systems, commercialize potential products utilizing
the DepoMed Systems and assist in obtaining regulatory approval. Although the
Company has entered into a joint research agreement with BMS and a feasibility
study with GalaGen, there can be no assurance that either BMS or GalaGen will
choose to continue to fund these projects or enter into arrangements to
commercialize products utilizing the DepoMed Systems or, if they do, that any
products utilizing the DepoMed Systems will be successfully developed or
commercialized. In August 1997, GalaGen announced that the clinical
development program of one of its immunoglobulin products was put on hold.
There can be no assurance that GalaGen will choose to resume development of
that product. Although the Company has entered into a letter of intent with
Oakmont pursuant to which Oakmont will manufacture the Company's reduced
irritation aspirin and enhanced absorption calcium supplement products and
have rights to distribute and sell these products in certain territories,
there can be no assurance that the Company and Oakmont will enter into a
definitive agreement or, if they do, that the Company will be successful in
developing these products or Oakmont will be successful in manufacturing,
distributing or marketing them. Further, there can be no assurance that any of
the Company's present or future collaborative partners will perform their
obligations as expected or will devote sufficient resources to the
development, clinical testing or marketing of the Company's potential products
developed under the collaborations or that the Company will be able to
negotiate future collaborative arrangements on acceptable terms, if at all, or
that such collaborations will be successful. Any parallel development by a
collaborative partner of alternative technologies, preclusion of the Company
from entering into competitive arrangements, failure to obtain timely
regulatory approvals, premature termination of an agreement, or failure by a
collaborative partner to devote sufficient resources to the development and
commercialization of products utilizing the DepoMed Systems could have a
material adverse effect on the Company.
8
<PAGE>
The Company's agreements with its collaborative partners are likely to be
complex. There may be provisions within such agreements which give rise to
disputes regarding the rights and obligations of the parties. These and other
possible disagreements could lead to delays in collaborative research,
development or commercialization of potential products, or could require or
result in litigation or arbitration, which would be time-consuming and
expensive, and could have a material adverse effect on the Company. See
"Business--Collaborative Relationships."
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results will depend upon variations in
revenues recognized under collaborative agreements, including milestones,
royalties, license fees and other contract revenues, and the timing of new
product introductions by the Company and its collaborative partners. The
Company's quarterly operating results may also fluctuate significantly
depending on other factors, including the introduction of new products by the
Company's competitors, regulatory actions, market acceptance of the DepoMed
Systems, adoption of new technologies, manufacturing costs and capabilities,
changes in government funding, and third-party reimbursement policies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION; TECHNOLOGICAL CHANGE
Competition in the areas of pharmaceutical products and drug delivery
systems is intense and is expected to become more intense in the future. Other
companies that have oral drug delivery technologies that are competitive with
the DepoMed Systems include ALZA Corporation ("ALZA"), Elan Corporation plc
("Elan"), Jago Pharma AG ("JAGO"), Kos Pharmaceuticals, Inc. ("Kos") and
Flamel Aromatic SA ("Flamel"), all of which have oral tablet products designed
to release the incorporated drugs over time. Each of these companies has a
patented technology with attributes different from those of the Company's, and
in some cases with different sites of delivery to the GI tract. These
competing technologies may prove superior, either generally or in particular
market segments, in terms of factors such as cost, consumer satisfaction or
drug delivery profile.
The Company's principal competitors in the business of developing and
applying drug delivery systems all have substantially greater financial,
technological, marketing, personnel and research and development resources
than the Company. In addition, the Company may face competition from
pharmaceutical and biotechnology companies that may develop or acquire drug
delivery systems or technologies. Many of the Company's potential
collaborative partners have devoted and are continuing to devote significant
resources in the development of their own drug delivery systems and
technologies. Potential products utilizing the DepoMed Systems will compete
both with products employing advanced drug delivery systems and with products
in conventional dosage forms. New drugs or future developments in alternative
technologies may provide therapeutic or cost advantages over products
utilizing the DepoMed Systems. There can be no assurance that developments by
others will not render the Company's potential products utilizing the DepoMed
Systems or technologies noncompetitive or obsolete. In addition, the Company's
competitive success will depend heavily on entering into collaborative
relationships on reasonable commercial terms, commercial development of
products utilizing the DepoMed Systems, regulatory approvals, protection of
intellectual property and market acceptance of such products. See "Business--
Competition."
NO ASSURANCE OF FDA APPROVAL; GOVERNMENT REGULATION
FDA Approval Process. In the United States, pharmaceutical products,
including any drugs utilizing the DepoMed Systems, are subject to rigorous
regulation by the FDA. If a company fails to comply with applicable
requirements, it may be subject to administrative or judicially imposed
sanctions such as civil penalties, criminal prosecution of the company or its
officers and employees, injunctions, product seizure or detention, product
recalls, total or partial suspension of production, FDA withdrawal of approved
applications or FDA refusal to approve pending premarket approval
applications, or supplements to approved applications.
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Prior to commencement of clinical studies involving human beings,
preclinical testing of new pharmaceutical products is generally conducted on
animals in the laboratory to evaluate the potential efficacy and the safety of
the product. The results of these studies are submitted to the FDA as a part
of an Investigational New Drug ("IND") application, which must become
effective before clinical testing in humans can begin. Typically, clinical
evaluation involves a time consuming and costly three-phase process. In Phase
I, clinical trials are conducted with a small number of subjects to determine
the early safety profile, the pattern of drug distribution and metabolism. In
Phase II, clinical trials are conducted with groups of patients afflicted with
a specific disease in order to determine preliminary efficacy, optimal dosages
and expanded evidence of safety. In Phase III, large-scale, multi-center,
comparative trials are conducted with groups of patients afflicted with a
target disease in order to provide enough data to demonstrate the efficacy and
safety required by the FDA. The FDA closely monitors the progress of each of
the three phases of clinical testing and may, at its discretion, reevaluate,
alter, suspend or terminate the testing based upon the data which have been
accumulated to that point and its assessment of the risk/benefit ratio to the
patient.
The results of the preclinical and clinical testing on a drug are submitted
to the FDA in the form of a New Drug Application ("NDA") for approval prior to
commencement of commercial sales. In responding to an NDA, the FDA may grant
marketing approval, request additional information or deny the application if
the FDA determines that the application does not satisfy its regulatory
approval criteria. There can be no assurance that approvals will be granted on
a timely basis, if at all. Failure to receive approval for any products
utilizing the DepoMed Systems could have a material adverse effect on the
Company.
Most OTC products are subject to an OTC monograph issued by the FDA. If an
OTC product complies with an FDA monograph, it will not require the submission
and approval of an NDA to be lawfully marketed. Such products are subject to
various FDA regulations such as FDA's current good manufacturing practices
("cGMP") requirements, general and specific OTC labeling requirements
(including warning statements), the restriction against advertising for
conditions other than those stated in product labeling, and the requirement
that in addition to active ingredients OTC drugs contain only safe and
suitable inactive ingredients. Facilities which manufacture OTC products are
subject to FDA inspection and failure to comply with applicable regulatory
requirements may lead to administrative or judicially imposed penalties. If an
OTC product differs from the terms of a monograph, it will, in most cases,
require FDA approval of an NDA for the product to be marketed.
Other Regulations. Even if required FDA approval has been obtained with
respect to a product, foreign regulatory approval of a product must also be
obtained prior to marketing the product internationally. Foreign approval
varies from country to country and the time required for approval may delay or
prevent marketing. In certain instances the Company or its collaborative
partners may seek approval to market and sell certain of its products outside
of the United States before submitting an application for United States
approval to the FDA. The regulatory procedures for approval of new
pharmaceutical products vary significantly among foreign countries. The
clinical testing requirements and the time required to obtain foreign
regulatory approvals may differ from that required for FDA approval. Although
there is now a centralized European Union ("EU") approval mechanism in place,
each EU country may nonetheless impose its own procedures and requirements,
many of which are time consuming and expensive, and some EU countries require
price approval as part of the regulatory process. Thus, there can be
substantial delays in obtaining required approvals from both the FDA and
foreign regulatory authorities after the relevant applications are filed, and
approval in any single country may not be a meaningful indication that the
product will thereafter be approved in another country.
The Company is also subject to regulation under various federal and state
laws regarding, among other things, occupational safety, environmental
protection, hazardous substance control and product advertising and promotion.
In connection with its research and development activities and its
manufacturing, the Company is subject to federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials
and wastes. See "Business--Government Regulation."
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NO MANUFACTURING, MARKETING OR SALES CAPABILITIES
The Company does not have internal manufacturing, marketing or sales
resources. In view of its early stage of development and limited resources,
the Company does not anticipate spending a material portion of the net
proceeds of this Offering to acquire resources and develop capabilities in
these areas. Although the Company intends to acquire pilot manufacturing
equipment with a portion of the net proceeds from this Offering, the Company
does not intend to acquire or establish its own dedicated manufacturing
facilities for the foreseeable future. See "Use of Proceeds." Rather, the
Company's manufacturing strategy will be to utilize the facilities of its
collaborative partners or to develop manufacturing relationships with
established contract manufacturers to make products utilizing the DepoMed
Systems. In addition, the Company does not intend to establish an internal
sales and marketing capability, but will seek to rely on its collaborative
partners or distributor arrangements to market and sell the products utilizing
the DepoMed Systems. In April 1997, the Company and Oakmont signed a letter of
intent to enter into an agreement pursuant to which Oakmont will manufacture
the Company's reduced irritation aspirin and enhanced absorption calcium
supplement products and to have rights to distribute and sell these products
in territories to be determined. There can be no assurance that the Company
will be able to enter into manufacturing, marketing or sales agreements on
reasonable commercial terms, or at all, with Oakmont or any other third party.
Failure to do so could have a material adverse effect on the Company.
Manufacturers of products utilizing the DepoMed Systems will be subject to
applicable cGMP requirements prescribed by the FDA or other rules and
regulations prescribed by foreign regulatory authorities. There can be no
assurance that the Company will be able to enter into manufacturing agreements
either domestically or abroad with companies whose facilities and procedures
comply with cGMP or applicable foreign standards. Should such agreements be
entered into, the Company will be dependent on such manufacturers for
continued compliance with cGMP and applicable foreign standards. Failure by a
manufacturer of products utilizing the DepoMed Systems to maintain cGMP or
applicable foreign standards could result in significant time delays or the
inability of the Company to commercialize the DepoMed Systems and could have a
material adverse effect on the Company. At the present time, due to ongoing
consolidation in the chemical and pharmaceutical industries, the Company
believes there is a worldwide excess of manufacturing capacity available to
the Company. As a result, the Company believes that it will be able to enter
into agreements with suppliers and manufacturers on reasonable commercial
terms. However, there can be no assurance that there will be manufacturing
capacity available to the Company at the time the Company is ready to
commercialize the DepoMed Systems. There also can be no assurance that any
products utilizing the DepoMed Systems can be manufactured at a cost or in
quantities required to make it commercially viable. The Company's inability to
contract on acceptable terms and with qualified suppliers for the manufacture
of any products utilizing the DepoMed Systems or delays or difficulties in its
relationships with manufacturers, would have a material adverse effect on the
Company.
Contract manufacturers must adhere to cGMP regulations strictly enforced by
the FDA on an ongoing basis through its facilities inspection program.
Contract manufacturing facilities must generally pass a pre-approval plant
inspection before the FDA will approve an NDA. Certain material manufacturing
changes that occur after approval are also subject to FDA review and clearance
or approval. There can be no assurance that the FDA or other regulatory
agencies will approve the process or the facilities by which any of the
products utilizing the DepoMed Systems may be manufactured. The Company's
dependence on third parties for the manufacture of products utilizing the
DepoMed Systems may adversely affect the Company's ability to develop and
deliver products utilizing the DepoMed Systems on a timely and competitive
basis. See "Business--Collaborative Relationships" and "Business--
Manufacturing, Marketing and Sales."
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain and
maintain patent protection for its technologies and to preserve its trade
secrets. It is the policy of the Company to file patent applications in the
United States and foreign jurisdictions. The Company currently holds two
issued United States and three pending United States patent applications, and
has applied for patents in numerous foreign countries, some of which have been
granted and others are still pending. No assurance can be given that the
Company's patent applications will
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be approved or that any issued patents will provide competitive advantages for
the DepoMed Systems or the Company's technologies or will not be challenged or
circumvented by competitors. With respect to already issued patents and any
patents which may issue from the Company's applications, there can be no
assurance that claims allowed will be sufficient to protect the DepoMed
Systems or the Company's technologies. Patent applications in the United
States are maintained in secrecy until a patent issues, and the Company cannot
be certain that others have not filed patent applications for technology
covered by the Company's pending applications or that the Company was the
first to file patent applications for such technology. Competitors may have
filed applications for, or may have received patents and may obtain additional
patents and proprietary rights relating to, compounds or processes that may
block the Company's patent rights or compete without infringing the patent
rights of the Company. In addition, there can be no assurance that any patents
issued to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide proprietary protection or
commercial advantage to the Company.
The Company also relies on trade secrets and proprietary know-how which it
seeks to protect, in part, through confidentiality agreements with employees,
consultants, collaborative partners and others. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any such breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. Although
potential collaborative partners and the Company's research partners and
consultants are not given access to proprietary trade secrets and know-how of
the Company until they have executed confidentiality agreements, these
agreements may be breached by the other party thereto or may otherwise be of
limited effectiveness or enforceability.
The ability to develop the DepoMed Systems or the Company's technologies and
to commercialize products using the DepoMed Systems or such technologies will
depend on not infringing the patents of others. Although the Company is not
aware of any claim of patent infringement against it, claims concerning
patents and proprietary technologies determined adversely to the Company could
have a material adverse effect on the Company. In addition, litigation may
also be necessary to enforce any patents issued or licensed to the Company or
to determine the scope and validity of third-party proprietary rights. There
can be no assurance that the Company's issued or licensed patents would be
held valid by a court of competent jurisdiction. Whether or not the outcome of
litigation is favorable to the Company, the cost of such litigation and the
diversion of the Company's resources during such litigation could have a
material adverse effect on the Company.
The pharmaceutical industry has experienced extensive litigation regarding
patent and other intellectual property rights. Accordingly, the Company could
incur substantial costs in defending itself in suits that may be brought
against the Company claiming infringement of the patent rights of others or in
asserting the Company's patent rights in a suit against another party. The
Company may also be required to participate in interference proceedings
declared by the United States Patent and Trademark Office for the purpose of
determining the priority of inventions in connection with the patent
applications of the Company or other parties. Adverse determinations in
litigation or interference proceedings could require the Company to seek
licenses (which may not be available on commercially reasonable terms) or
subject the Company to significant liabilities to third parties, and could
therefore have a material adverse effect on the Company. See "Business--
Patents and Proprietary Rights."
RELATIONSHIPS OF ADVISORS WITH OTHER ENTITIES
Certain members of the Company's Policy Advisory Board and Development
Advisory Board are employed on a full-time basis by academic or research
institutions. In some cases, members of the Policy Advisory Board and
Development Advisory Board also act as consultants to the other companies. In
addition, except for work performed specifically for and at the direction of
the Company, any inventions or processes discovered by such persons will be
the intellectual property of their institutions or other companies. If the
Company desires access to inventions which are not its property, it will be
necessary for the Company to obtain licenses to such inventions from these
institutions or companies. In addition, invention assignment agreements
executed by such
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persons in connection with their relationships with the Company may be subject
to the rights of their primary employers or other third parties with whom they
have consulting relationships. See "Business--Advisors to the Company."
HEALTHCARE REFORM; UNCERTAIN AVAILABILITY OF HEALTHCARE REIMBURSEMENT
The healthcare industry is changing rapidly as the public, government,
medical professionals, third-party payors and the pharmaceutical industry
examine ways to contain or reduce the cost of health care. Changes in the
healthcare industry could impact the Company's business, particularly to the
extent that the Company develops the DepoMed Systems for use in prescription
drug applications. In certain foreign markets pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, there have been, and the Company expects that there will continue to
be, a number of federal and state proposals to implement similar government
control or cost containment, particular with respect to Medicare payments. In
addition, emphasis on managed care in the United States has increased and is
expected to continue to increase the pressure on pharmaceutical pricing. While
the Company cannot predict whether any such legislative or regulatory
proposals will be adopted or the effect such proposals or managed care efforts
may have on its business, the announcement of such proposals or efforts could
have a material adverse effect on the Company's ability to raise capital, and
the adoption of such proposals or efforts could have a material adverse effect
on the Company. Further, to the extent that such proposals or efforts have a
material adverse effect on pharmaceutical and biotechnology companies or other
healthcare providers that are prospective collaborative partners for the
Company, the Company's ability to establish collaborations may be adversely
affected. In addition, in both domestic and foreign markets, sales of products
utilizing the DepoMed Systems will depend in part on the availability of
reimbursement from third-party payors such as government health administration
authorities, private health insurers and other organizations. Third-party
payors are increasingly challenging the price and cost-effectiveness of
prescription pharmaceutical products. Significant uncertainty exists as to the
reimbursement status of newly approved healthcare products. There can be no
assurance that products utilizing the DepoMed Systems will be considered cost
effective or that adequate third-party reimbursement will be available to the
Company's collaborators to maintain price levels sufficient to realize an
appropriate return on the Company's investment in the DepoMed Systems.
DEPENDENCE ON MANAGEMENT AND OTHER KEY EMPLOYEES
The success of the Company is dependent in large part upon the continued
services of John W. Shell and John W. Fara, its Chairman and Chief Scientific
Officer, and President and Chief Executive Officer, respectively, and other
members of the Company's executive management, and on the Company's ability to
attract and retain key management and operating personnel. The Company has
applied for key man life insurance on the lives of Drs. Shell and Fara in the
amount of $2,000,000 each. Management and scientific personnel are in high
demand and are often subject to competing offers. In particular, the Company's
success will depend, in part, on its ability to attract and retain the
services of its executive officers and scientific and technical personnel. The
loss of the services of one or more members of management or key employees or
the inability to hire additional personnel as needed may have a material
adverse effect on the Company. See "Business--Employees" and "Management--
Executive Officers and Directors."
SUBSTANTIAL CONTROL BY OFFICERS, DIRECTORS AND THEIR AFFILIATES
Following the Offering, the Company's officers and directors and their
affiliates will beneficially own or control approximately 60.1% of the
outstanding shares of Common Stock. Accordingly, such officers, directors and
their affiliates may be able to influence the outcome of shareholder votes,
including votes concerning election of directors, adoption of amendments to
the Company's Articles of Incorporation and Bylaws and approval of mergers and
other significant corporate transactions. See "Principal Shareholders."
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RISK OF PRODUCT LIABILITY; UNCERTAINTY OF AVAILABILITY OF PRODUCT LIABILITY
INSURANCE
The Company's business involves exposure to potential product liability
risks that are inherent in the production and manufacture of pharmaceutical
products. Any such claims could have a material adverse effect on the Company.
The Company does not currently have any product liability insurance. Although
the Company has applied to obtain product liability insurance, there can be no
assurance that it will be able to obtain or maintain such insurance on
acceptable terms, that the Company will be able to secure increased coverage
as the commercialization of its potential products utilizing the DepoMed
Systems proceeds or that any insurance will provide adequate protection
against potential liabilities. Claims or losses in excess of the limit of any
liability insurance coverage obtained by the Company could have a material
adverse effect on the Company. See "Business--Product Liability."
ABSENCE OF DIVIDENDS
The Company has never declared or paid cash dividends on its Common Stock
and does not intend to pay any cash dividends in the foreseeable future. See
"Dividend Policy."
NO PUBLIC MARKET FOR THE SECURITIES; ARBITRARY DETERMINATION OF PUBLIC
OFFERING PRICES
Prior to the Offering, there has been no public market for the Securities,
and there can be no assurance that an active trading market will develop, or,
if developed, be sustained in any of the Securities after the Offering. The
initial public offering price of the Securities and the exercise price and
terms of the Warrants have been determined arbitrarily by negotiations between
the Company and the Representative and do not necessarily bear any
relationship to the Company's asset value, net worth or other established
criteria of value. Factors considered in such negotiations, in addition to
prevailing market conditions, included the history and prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure and certain
other factors as were deemed relevant. Accordingly, the initial public
offering price of the Securities and the exercise price and terms of the
Warrants may not be indicative of prices that may prevail at any time or from
time to time in the public market for the Securities. See "Underwriting."
NO ASSURANCE OF NASDAQ SMALLCAP MARKET LISTING; RISK OF LOW-PRICED
SECURITIES; RISK OF APPLICATION OF PENNY STOCK RULES
The Board of Governors of the National Association of Securities Dealers,
Inc. has established certain standards for the initial listing and continued
listing of a security on the Nasdaq SmallCap Market. The standards for initial
listing require, among other things, that an issuer have net tangible assets
of $4,000,000; that the minimum bid price for the listed securities be $4.00
per share; that the minimum market value of the public float (the shares held
by non-insiders) be at least $5,000,000; and that there be at least three
market markers for the issuer's securities. The maintenance standards require,
among other things, that an issuer have net tangible assets of at least
$2,00,000; that the minimum bid price for the listed securities be $1.00 per
share; that the minimum market value of the public float be at least
$1,000,000; and that there be at least two market makers for the issuer's
securities. A deficiency in either the market value of the public float or the
bid price maintenance standard will be deemed to exist if the issuer fails the
individual stated requirement for ten consecutive trading days. There can be
no assurance that the Company will continue to satisfy the requirements for
maintaining a Nasdaq SmallCap Market listing. If the Company's securities were
to be excluded from the Nasdaq SmallCap Market, it would adversely affect the
prices of such securities and the ability of holders to sell them, and the
Company would be required to comply with the initial listing requirement to be
relisted on the Nasdaq SmallCap Market.
If the Company is unable to satisfy maintenance requirements and the price
per share were to drop below $5.00, then unless the Company satisfied certain
net asset tests, the Company's securities would become subject to certain
penny stock rules promulgated by the Securities and Exchange Commission (the
"Commission"). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the Commission that provides
information
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about penny stocks and the nature and level of risks in the penny stock
market. The broker-dealer also must provide the customer with current bid and
offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser's written agreement to the
transaction. These disclosure requirements may have the effect of reducing the
level of trading activity in the secondary market for a stock that becomes
subject to the penny stock rules. If the Securities become subject to the
penny stock rules, investors in the Offering may find it more difficult to
sell their Securities.
PRICE VOLATILITY
The securities markets have from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market prices of the common stock of
many publicly traded pharmaceutical or biotechnology companies have in the
past been, and can in the future be expected to be, especially volatile.
Announcements of technological innovations or new products by the Company or
its competitors, developments or disputes concerning patents or proprietary
rights, publicity regarding actual or potential medical results relating to
products under development by the Company or its competitors, regulatory
developments in both the United States and foreign countries, delays in the
Company's testing and development schedules, public concern as to the safety
of biopharmaceutical or biotechnology products and economic and other external
factors, as well as period-to-period fluctuations in the Company's financial
results, may have a significant impact on the market price of the Securities.
POTENTIAL ADVERSE EFFECT OF REPRESENTATIVE'S WARRANTS
At the consummation of the Offering, the Company will sell to the
Representative for nominal consideration the Representative's Warrants to
purchase up to 117,917 Units. The Representative's Warrants will be
exercisable for a period of four years commencing , 1998 [one year after
the effective date of this Offering], at an exercise price of $ per Unit
[125% of the initial public offering price per Unit]. The Warrants obtained
upon exercise of the Representative's Warrants will be exercisable for a
period of four years commencing one year after the effective date of this
Offering, at an exercise price of $ per share [125% of the initial public
offering price per Unit]. For the term of the Representative's Warrants, the
holders thereof will have, at nominal cost, the opportunity to profit from a
rise in the market price of the Securities without assuming the risk of
ownership, with a resulting dilution in the interest of other security
holders. As long as the Representative's Warrants remain unexercised, the
Company's ability to obtain additional capital may be adversely affected.
Moreover, the Representative may be expected to exercise the Representative's
Warrants at a time when the Company would, in all likelihood, be able to
obtain any needed capital through a new offering of its securities on terms
more favorable to the Company than those provided by the Representative's
Warrants. See "Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
Commencing , 1999 [18 months after the date of this Prospectus], the
Warrants are subject to redemption at $0.10 per Warrant on 30 days' prior
written notice to the Warrant holders if the average closing bid price of the
Common Stock as reported on the Nasdaq equals or exceeds 200% of the then-
current Warrant exercise price per share for any 20 trading days within a
period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption. If the Warrants are redeemed, holders of
the Warrants will lose their rights to exercise the Warrants after the
expiration of the 30 day notice of redemption period. Upon receipt of a notice
of redemption, holders would be required to: (i) exercise the Warrants and pay
the exercise price at a time when it may be disadvantageous for them to do so,
(ii) sell the Warrants at the current market price, if any, when they might
otherwise wish to hold the Warrants or (iii) accept the redemption price which
is likely to be substantially less than the market value of the Warrants at
the time of redemption. See "Description of Securities--Warrants."
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MANAGEMENT'S DISCRETION IN USE OF PROCEEDS
Approximately $700,000 or approximately 12% of the estimated net proceeds of
the Offering has been allocated to working capital and general corporate
purposes. Accordingly, the Company's Board of Directors will have discretion
with respect to the allocation of such net proceeds. See "Use of Proceeds."
DILUTION; DISPARITY OF CONSIDERATION
Purchasers of shares of Common Stock in this Offering will experience an
immediate and substantial dilution of $5.13 per share, or 84.1%, based on an
assumed initial public offering price of $6.10 per Unit. Additional dilution
to future net tangible book value per share may occur upon exercise of
outstanding stock options and warrants and may occur, in addition, if the
Company issues additional equity securities in the future. The current
shareholders of the Company, including officers and directors, acquired their
shares of Common Stock for nominal consideration or for consideration
substantially less than the public offering price of the Units offered hereby.
As a result, new investors will bear substantially all of the risks inherent
in an investment in the Company. See "Dilution" and "Certain Transactions."
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by shareholders and option holders or through
the exercise of the Warrants could have an adverse effect on the market prices
of the Securities. Upon completion of this Offering, the Company will have
5,463,447 shares of Common Stock outstanding, of which the 1,200,000 Shares
offered hereby (and the 1,200,000 Warrants) will be transferable without
restriction under the Securities Act. The Company, all officers and directors
of the Company and all holders of shares of Common Stock, options or other
securities exercisable for or convertible into Common Stock have entered into
contractual arrangements (the "Lock-Up Agreements") and have agreed not to
directly or indirectly, issue, agree or offer to sell, transfer, assign,
distribute, grant an option for purchase of sale of, pledge, hypothecate or
otherwise encumber or dispose of any beneficial interest in such securities
for a period of 12 months following the date of this Prospectus (the "Lock-Up
Period") without the prior written consent of the Representative. As a result,
notwithstanding the possible earlier eligibility for sale under the provisions
of Rules 144, 144(k) and 701 under the Securities Act of 1933, as amended (the
"Securities Act"), shares subject to the Lock-Up Agreements will not be
saleable until the Lock-Up Period expires or the terms of the Lock-Up
Agreements are waived by the Representative. Assuming that the Representative
does not release the shareholders from the Lock-Up Agreements, after the Lock-
Up Period all of the shares will be eligible for sale in the public market. Of
such shares, 3,355,991 shares of Common Stock will be eligible for sale under
Rule 144 (subject to volume limitations imposed by such rule), 815,789 shares
of Common Stock will be eligible for sale under Rule 144(k), and 91,667 shares
will be eligible for sale under Rule 701. In addition, the Company intends to
register on Form S-8 under the Securities Act, as soon as possible after the
Effective Date, shares of Common Stock issuable under options granted under
the Stock Plan. Such registration becomes effective immediately upon its
filing with the Securities and Exchange Commission (the "Commission"). As of
the date of this Prospectus options to purchase a total of 340,000 shares of
Common Stock were outstanding and options to purchase an additional 235,000
shares of Common Stock were reserved for future issuance under the Stock Plan.
See "Management--1995 Stock Option Plan" and Note 7 of Notes to the Financial
Statements.
No prediction can be made as to the effect that future sales of Common
Stock, or the availability of shares of Common Stock for future sale, will
have on the market prices of the Securities prevailing from time to time. The
sale or issuance, or the potential for sale or issuance, of Common Stock after
the Lock-Up Period could have an adverse impact on the market prices of the
Securities. Sales of substantial amounts of Common Stock or the perception
that such sales could occur could adversely affect prevailing market prices
for the Securities. See "Underwriting" and "Shares Eligible for Future Sale."
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CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS
The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants and such shares have been registered, qualified
or deemed to be exempt under the securities or "blue sky" laws of the state of
residence of the exercising holder of the Warrants. Although the Company has
undertaken to use its best efforts to have all of the shares of Common Stock
issuable upon exercise of the Warrants registered or qualified on or before
the exercise date and to maintain a current prospectus relating thereto until
the expiration of the Warrants, there is no assurance that it will be able to
do so. The value of the Warrants may be greatly reduced if a current
prospectus covering the Common Stock issuable upon the exercise of the
Warrants is not kept effective or if such Common Stock is not qualified or
exempt from qualification in the states in which the holders of the Warrants
reside. Although the Securities will not knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise
qualified for sale, investors may purchase the Warrants in the secondary
market or move to a jurisdiction in which the shares underlying the Warrants
are not registered or qualified during the period that the Warrants are
exercisable, the Company will be unable to issue shares to those persons
desiring to exercise their Warrants unless and until the shares are qualified
for sale in jurisdictions in which such purchasers reside, or an exemption
from such qualification exists in such jurisdictions, and holders of the
Warrants would have no choice but to attempt to sell the Warrants in a
jurisdiction where such sale is permissible or allow them to expire
unexercised. See "Description of Securities--Warrants."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby (assuming an initial public price of $6.10 per Unit), after deduction
of underwriting discounts and other estimated expenses relating to the
Offering, are estimated to be approximately $5,800,000 (or $6,783,000 if the
Over-Allotment Option is exercised in full). The Company intends to use the
net proceeds as follows:
<TABLE>
<CAPTION>
NET PROCEEDS PERCENT OF TOTAL
------------ ----------------
<S> <C> <C>
Research and development expenses.......... $3,000,000 52%
Laboratory and facilities capital
expenditures.............................. 500,000 9
Repayment of certain indebtedness.......... 1,600,000 27
Working capital and general corporate
purposes.................................. 700,000 12
---------- ---
Total.................................... $5,800,000 100%
========== ===
</TABLE>
Research and Development Expenses. The Company intends to continue investing
in the further development of its oral drug delivery technologies and the
DepoMed Systems. The Company also intends to continue to develop a reduced
irritation aspirin product and an enhanced absorption calcium supplement
product internally. The Company intends to conduct or fund clinical trials, as
required, on such products and will undertake the associated regulatory
activities.
Laboratory and Facilities Capital Expenditures. The Company intends to spend
a portion of the net proceeds of this Offering to make capital investments in
laboratories and related facilities, including the leasing of laboratory,
testing and pilot manufacturing facilities, leasehold improvements and
purchase of laboratory and pilot scale manufacturing equipment.
Repayment of Certain Indebtedness. Approximately $1,000,000 of the net
proceeds of this Offering will be used to repay indebtedness of the Company
incurred in connection with the Bridge Financing. In connection with the
Bridge Financing, the Company issued promissory notes (the "Bridge Notes") in
the aggregate principal amount of $1,000,000 to fund working capital and
general corporate purposes. Interest accrues on the Bridge Notes at the rate
of 6% per annum and the Bridge Notes will become due and payable on the
consummation of the Offering. Approximately $600,000 of the net proceeds of
this Offering will be used to repay other indebtedness of the Company,
including unpaid salaries and five promissory notes held by officers of the
Company. As of June 30, 1997, $1,250,667 of principal was outstanding and
$65,364 of interest was outstanding on such promissory notes. Interest accrues
on $150,667 of principal at the rate of 6% per annum and on the remaining
$100,000 at the rate of 6.5% per annum. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Certain Transactions."
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering, based on the current state of its
operations, its current plans and current economic conditions. Proceeds may be
reapportioned among categories listed above. The amount and timing of
expenditures will vary depending upon a number of factors, including progress
of the Company's operations, technical advances, terms of collaborative
arrangements, changes in competitive conditions and determinations with
respect to the commercial potential of products utilizing the DepoMed Systems.
The Company currently anticipates that the net proceeds of this Offering
will enable it to meet its operational and capital requirements for at least
the 12 months following the date of this Prospectus. However, there can be no
assurance the net proceeds of this Offering will satisfy the Company's
requirements for any particular period of time. Further, the net proceeds of
this Offering are not expected to be sufficient to fund the Company's
operations through commercialization of products yielding sufficient revenues
to support the Company's operations. To the extent capital resources are
insufficient to meet future capital requirements, the Company will have to
raise additional funds to continue the development of the DepoMed Systems.
There can be no assurance that such funds will be available on favorable
terms, or at all. See "Risk Factors--Need for Substantial Additional Funds."
Pending application of the net proceeds of the Offering, the Company intends
to invest such net proceeds in interest-bearing, short-term investment grade
financial instruments.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its earnings for future growth
and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 (i) on an actual basis, and (ii) pro forma as adjusted to give effect
to (a) the estimated net proceeds from the sale of the Units offered hereby at
an assumed initial public offering price of $6.10 per Unit and the initial
application of the estimated net proceeds therefrom and (b) the conversion of
the Preferred Stock into 908,622 shares of Common Stock upon consummation of
the Offering. This table should be read in conjunction with the Company's
Financial Statements and related Notes thereto and Selected Financial Data
appearing elsewhere in this Prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ---------------------
<S> <C> <C>
Bridge Notes................................ $ 1,014,025 $ --
=========== ==========
Shareholders' equity (net capital
deficiency):
Preferred stock, no par value, 10,000,000
shares authorized, 2,725,868 shares
issued and outstanding, actual; 5,000,000
shares authorized, none issued and
outstanding, pro forma as adjusted....... $ 961,259 $ --
Common stock, no par value, 25,000,000
shares authorized, 3,354,825 shares
issued and outstanding, actual; 5,463,447
shares issued and outstanding, pro forma
as adjusted(1)........................... 526,300 7,287,559
Deferred compensation....................... (464,404) (464,404)
Deficit accumulated during the development
stage...................................... (1,501,160) (1,501,160)
----------- ----------
Total shareholders' equity (net capital
deficiency).............................. (478,005) 5,321,995
----------- ----------
Total capitalization...................... $ (478,005) $5,321,995
=========== ==========
</TABLE>
- --------
(1) Excludes 330,000 shares of Common Stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $2.69
per share and 245,000 shares of Common Stock reserved for future grants of
options under the Stock Plan as of June 30, 1997. Since June 1997, the
Board of Directors has granted options to purchase an additional 10,000
shares of Common Stock at an exercise price of $5.40 per share. 235,000
shares of Common Stock are reserved for future grants of options under the
Stock Plan as of the date of this Prospectus. See "Management--1995 Stock
Option Plan" and Note 7 of Notes to the Financial Statements.
19
<PAGE>
DILUTION
As of June 30, 1997, the pro forma net tangible book value (deficit) of the
Company's Common Stock was $(478,005), or approximately $(0.11) per share of
Common Stock after giving effect to the conversion of the Preferred Stock into
Common Stock upon consummation of the Offering. Pro forma net tangible book
value per share represents the total amount of tangible assets less total
liabilities divided by the number of shares of Common Stock issued and
outstanding. After giving effect to the sale of the Units offered hereby at an
assumed initial public offering price of $6.10 per Unit (after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company), the pro forma net tangible book value of the Company at June
30, 1997 would have been $5,321,995, or approximately $0.97 per share of
Common Stock. This represents an immediate increase in net tangible book value
of $1.09 per share of Common Stock to existing shareholders of Common Stock
and an immediate dilution in net tangible book value of $5.13 per share of
Common Stock or 84.1% to new investors. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Unit................ $6.10
Pro forma net tangible book value (deficit) per share prior to
this Offering................................................ (0.11)
Increase per share attributable to this Offering.............. 1.09
-----
Pro forma net tangible book value per share after this
Offering..................................................... 0.97
-----
Dilution per share to new investors........................... $5.13
=====
</TABLE>
The computations in the table set forth above assume that the Over-Allotment
Option is not exercised. If the Over-Allotment Option is exercised in full,
the pro forma net tangible book value as of June 30, 1997 would have been
$6,304,995 or $1.12 per share of Common Stock, resulting in dilution to new
investors of $4.98 per share of Common Stock.
The following table summarizes, on a pro forma basis to reflect the same
adjustments described above, the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average price per share
paid by (i) existing shareholders of Common Stock at June 30, 1997, and (ii)
new shareholders in the Offering, assuming the sale of the Common Stock and
Warrants offered hereby at an assumed initial public offering price of $6.10
per Unit. The calculations are based upon total consideration given by new
investors and existing shareholders before any deduction of underwriting
discounts and offering expenses payable by the Company.
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
----------------- ------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1).... 4,263,447 78% $1,037,750 12% $0.24
New investors(2)............ 1,200,000 22% 7,320,000 88% $6.10
--------- --- ---------- ---
Total..................... 5,463,447 100% $8,357,750 100%
========= === ========== ===
</TABLE>
- --------
(1) Excludes 330,000 shares of Common Stock issuable upon exercise of stock
options with a weighted average exercise price of $2.69 per share and
245,000 shares of Common Stock reserved for future grants of options under
the Stock Plan as of June 30, 1997. Since June 1997, the Board of
Directors has granted options to purchase an additional 10,000 shares of
Common Stock at an exercise price of $5.40 per share. 235,000 shares of
Common Stock are reserved for future grants of options under the Stock
Plan as of the date of this Prospectus. See "Management--1995 Stock Option
Plan" and Note 7 of Notes to the Financial Statements.
(2) Reflects initial public offering price of the Units.
20
<PAGE>
SELECTED FINANCIAL DATA
The selected statements of operations data for the period from inception
(August 7, 1995) to December 31, 1995 and for the year ended December 31, 1996
and the balance sheet data at December 31, 1996 are derived from financial
statements of the Company which have been audited by Ernst & Young LLP,
independent auditors. The selected historical information as of June 30, 1997
and for the six months ended June 30, 1996 and 1997 and for the period from
inception (August 7, 1995) to June 30, 1997 are derived from unaudited interim
financial statements of the Company which are included elsewhere in this
Prospectus and include, in the opinion of management, all adjustments
(consisting only of normal, recurring adjustments) necessary for the fair
presentation of its results for such periods. Results for the six months ended
June 30, 1997 are not necessarily indicative of results for any other interim
period or for the entire year. The selected financial data set forth below is
qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and related Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
INCEPTION
INCEPTION SIX MONTHS ENDED (AUGUST 7,
(AUGUST 7, 1995) YEAR ENDED JUNE 30, 1995) TO
TO DECEMBER 31, DECEMBER 31, -------------------- JUNE 30,
1995 1996 1996 1997 1997
---------------- ------------ --------- --------- -----------
STATEMENTS OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C>
Product development
revenue................ $ -- $ 317,971 $ -- $ 351,737 $ 669,708
Operating expenses:
Research and
development.......... 138,816 390,496 181,947 328,603 857,915
General and
administrative....... 155,157 393,676 246,396 430,743 979,576
Purchase of in-process
research and
development.......... 298,154 -- -- -- 298,154
--------- --------- --------- --------- -----------
Total operating
expenses........... 592,127 784,172 428,343 759,346 2,135,645
Loss from operations.... (592,127) (466,201) (428,343) (407,609) (1,465,937)
Interest expense, net... 8,541 6,572 1,567 20,110 35,223
--------- --------- --------- --------- -----------
Net loss................ $(600,668) $(472,773) $(429,910) $(427,719) $(1,501,160)
========= ========= ========= ========= ===========
Pro forma net loss per
share.................. $ (0.11) $ (0.10) $ (0.10)
========= ========= =========
Shares used in computing
pro forma net loss per
share(1)............... 4,350,986 4,328,947 4,482,758
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
<S> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Working capital
(deficit)............. $ (516,688) $ (653,348)
Total assets........... 333,127 1,459,840
Notes payable to
shareholders.......... 294,238 1,316,031
Capital lease
obligation, non-
current portion....... 34,634 50,512
Deficit accumulated
during development
stage................. (1,073,441) (1,501,160)
Total shareholders'
equity (net capital
deficiency)........... (381,432) (478,005)
</TABLE>
- --------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing pro forma net loss
per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and related
Notes thereto appearing elsewhere in this Prospectus. Except for the
historical information contained herein, the discussion in this Prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.
GENERAL
Since its inception in August 1995, the Company has devoted substantially
all its efforts to research and development conducted on its own behalf and
through collaborations with pharmaceutical partners in connection with the
DepoMed Systems. The Company's primary activities since inception (August 7,
1995) have been, in addition to research and development, establishing its
offices and research facilities, recruiting personnel, filing patent
applications, developing a business strategy and raising capital. To date, the
Company has received only limited revenue, all of which has been from
collaborative research and feasibility arrangements. At its inception in 1995,
the Company acquired $298,154 of in-process research and development
technology. This amount was recognized as operating expense in 1995. There was
no such expense in 1996. The Company has generated a cumulative net loss of
$1,501,160 for the period from its inception through June 30, 1997.
The Company intends to continue investing in the further development of its
drug delivery technologies and the DepoMed Systems. The Company also intends
to develop generic compounds, such as a reduced irritation aspirin product and
an enhanced absorption calcium supplement product, internally. Depending upon
a variety of factors, including collaborative arrangements, available
personnel and financial resources, the Company will conduct or fund clinical
trials on such products and will undertake the associated regulatory
activities. The Company will need to make additional capital investments in
laboratories and related facilities, including the purchase of laboratory and
pilot scale manufacturing equipment. As additional personnel are hired in 1997
and beyond, expenses can be expected to increase from their 1996 levels.
Within the next 12 months, the Company will also require additional space for
laboratory, testing and pilot manufacturing facilities. See "Use of Proceeds."
RESULTS OF OPERATIONS
The Company commenced operations in August 1995. Because of the difference
in the length of the reported periods, the comparison of the period from
inception to December 31, 1995 to the year ended December 31, 1996 is not
meaningful and has not been presented.
Six Months Ended June 30, 1996 and 1997
Revenue for the six months ended June 30, 1997 was $351,737 and consisted
entirely of amounts earned under the research and development arrangement with
BMS. There was no revenue earned for the six months ended June 30, 1996.
Research and development expenses for the six months ended June 30, 1997
were $328,603, compared to $181,947 during the six months ended June 30, 1996.
The increase was due to the hiring of additional employees and related
expenses.
General and administrative expenses for the six months ended June 30, 1997
were $430,743, compared to $246,396 during the six months ended June 30, 1996.
The increase was due to the hiring of additional employees and related
expenses.
22
<PAGE>
Year Ended December 31, 1996
Revenue in 1996 was $317,971, primarily the result of the joint research
agreement with BMS.
Research and development expenses in 1996 were $390,496, primarily
consisting of personnel costs and laboratory supply expenses.
General and administrative expenses in 1996 were $393,676, primarily
consisting of personnel costs, facilities expenses and fees paid to outside
financial consultants.
The Company records and amortizes over related vesting periods deferred
compensation representing the difference between the exercise price of options
granted and the deemed fair value of its Common Stock at the time of grant.
Options generally vest over four years. Deferred compensation of $517,050 has
been recorded and is being amortized to both research and development expenses
as well as general and administrative expenses over the related vesting
periods.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed operations principally from the
sale of preferred stock. In 1995, the Company issued 2,447,368 shares of
Series A Preferred Stock for net proceeds of $682,759. During the six months
ended June 30, 1997, the Company issued 278,500 shares of Series B Preferred
Stock for an aggregate purchase price of $278,500. In 1996, the Company
borrowed $50,000 from an officer of the Company, which the Company intends to
repay with a portion of the net proceeds of this Offering. See "Use of
Proceeds" and "Certain Transactions."
In April 1997, the Company completed the Bridge Financing and issued the
Bridge Notes to fund working capital and general corporate purposes. The
Bridge Notes bear interest at the rate of 6% per annum and are due and payable
upon the closing of this Offering. The Company intends to use a portion of the
net proceeds of this Offering to repay the entire principal amount of and the
accrued interest on the Bridge Notes. In connection with the Bridge Financing,
the Company issued Bridge Warrants entitling the investors to purchase the
number of shares of Common Stock which equals 50% of their investment divided
by the initial public offering price per share of the Common Stock. A total of
81,250 shares of Common Stock will be issuable upon exercise of the Bridge
Warrants at an exercise price of $6.00 per share of Common Stock. A total of
2,083 shares of Common Stock will be issuable upon exercise of the Bridge
Warrants at an exercise price of $7.63 per share of Common Stock. The Bridge
Warrants may be exercised at any time beginning April 7, 1998 until April 7,
2002. See "'Use of Proceeds" and Note 9 of Notes to Financial Statements.
Cash used in operations in the six months ended June 30, 1997 was $598,166
compared to $311,792 for the six months ended June 30, 1996. During the six
months ended June 30, 1997 the net loss and increases in capitalized offering
costs and accounts receivable more than offset increases in accounts payable
and amortization of deferred compensation. The offering costs are anticipated
to be capitalized as expenses of the Offering. During the six months ended
June 30, 1996 increases in accrued compensation and accounts payable were
offset by the net loss and a decrease in other current liabilities.
Cash used in operations in 1996 was $391,316 compared to $194,019 for the
period from inception to December 31, 1995. The period from inception to
December 31, 1995 included a non-recurring charge of $298,154 for the
acquisition of in-process research and development technology. Cash used in
operations is expected to increase in 1997 as a result of increased
expenditures and working capital requirements to support product development
and expanded and continuing research activities.
Cash used in investing activities in the six months ended June 30, 1997
totaled $45,896 and consisted of purchases of laboratory equipment, furniture
and office equipment. Cash provided by investing activities in the six months
ended June 30, 1996 totaled $67,101 and consisted of sales of short term
investments offset by purchases of laboratory equipment.
Cash used in investing activities primarily related to capital expenditures
for property and equipment. Capital expenditures in 1996 were $28,708. Capital
expenditures for the period from inception to December 31,
23
<PAGE>
1995 were $49,645. In addition, in 1996, $56,393 of equipment was acquired and
financed under a capital lease. For the period from inception to December 31,
1995 $65,563 of equipment was acquired and financed under a capital lease.
Capital expenditures in both years were primarily for research and development
equipment. Capital expenditures during the 12 months following the date of
this Prospectus may include pilot manufacturing equipment, such as tablet
presses for proof of principle, and product development and quality control
laboratory equipment. In the future the Company may seek lease financing for
certain additional equipment. Upon completion of the Offering, the Bridge
Notes, the promissory notes issued to the officers of the Company and accrued,
unpaid salaries will be paid with a portion of the net proceeds from this
Offering. See "Use of Proceeds"
The Company anticipates that the net proceeds from this Offering, will
enable it to meet its capital and operational requirements for at least the 12
months following the date of this Prospectus. Cash needs of the Company may
vary materially from those now planned because of results of research and
development, relationships with possible collaborative partners, changes in
the focus and direction of the Company's research and development programs,
competitive and technological advances, results of clinical testing,
requirements of the FDA and comparable foreign regulatory processes and other
factors. The Company will require substantial funds of its own or from third
parties to conduct research and development, preclinical and clinical testing,
and to manufacture (or have manufactured) and market (or have marketed) the
products utilizing the DepoMed Systems. The net proceeds of this Offering are
not expected to be sufficient to fund the Company's operations through
commercialization of products yielding sufficient revenues to support the
Company's operations. The Company has no credit facility or other committed
sources of capital. To the extent capital resources are insufficient to meet
future capital requirements, the Company will have to raise additional funds
to continue the development of its technologies. There can be no assurance
that such funds will be available on favorable terms, or at all. To the extent
that additional capital is raised through the sale of equity or convertible
debt securities, the issuance of such securities could result in dilution to
the Company's shareholders. If adequate funds are not available, the Company
may be required to curtail operations significantly or to obtain funds through
entering into collaboration agreements on unattractive terms. The Company's
inability to raise capital would have a material adverse effect on the
Company.
NET OPERATING LOSSES
The Company has not generated any taxable income to date. At December 31,
1996, the net operating losses available to offset future taxable income for
federal income tax purposes were approximately $500,000. Because the Company
has experienced ownership changes, future utilization of carry forwards may be
limited in any fiscal year pursuant to Internal Revenue Code regulations. The
carryforwards expire at various dates beginning in 2010 through 2011 if not
utilized. As a result of the annual limitation, anticipated and future losses,
all or a portion of these carryforwards may expire before becoming available
to reduce the Company's federal income tax liabilities.
24
<PAGE>
BUSINESS
The Company is a development stage company engaged in the development of new
and proprietary oral drug delivery technologies. Utilizing these technologies,
the Company has developed two types of oral drug delivery systems, the GR
System and the RI System. The GR System is designed to be retained in the
stomach for an extended period of time while it delivers the incorporated drug
or drugs and the RI System is designed to reduce the GI irritation that is a
side effect of many drugs. In addition, the DepoMed Systems are designed to
provide continuous, controlled delivery of an incorporated drug.
The Company intends to develop products utilizing the DepoMed Systems in
collaboration with pharmaceutical and biotechnology companies, from which the
Company expects to receive license fees, research and development funding,
milestone payments and royalties. The Company also intends to develop either
independently or jointly certain OTC and products utilizing off-patent drugs
in the DepoMed Systems.
The Company currently has a joint research and development agreement with
BMS to develop a product incorporating a BMS proprietary compound into the GR
System. In addition, the Company has entered into a feasibility study with
GalaGen to use the GR System to enhance local effectiveness and/or provide
continuous, controlled delivery of GalaGen's proprietary immunoglobulin
products. The Company is also independently developing a reduced irritation
aspirin product and enhanced absorption calcium supplement product and has
identified certain other product candidates expected to benefit from the
DepoMed Systems. In April 1997, the Company and Oakmont signed a letter of
intent to enter into an agreement pursuant to which Oakmont will manufacture
the Company's reduced irritation aspirin and enhanced absorption calcium
supplement products and have rights to distribute and sell these products in
territories to be determined. The letter of intent also provides for the
Company and Oakmont each to offer rights to future products to the other
party.
The DepoMed Systems include proprietary formulations of drug-containing
polymeric units that allow multihour delivery of an incorporated drug
continuously into the stomach either for prolonged, local treatment in the
stomach or for enhanced absorption in the GI tract. The Company believes that
the GR System has the ability to enhance the bioavailability of drugs that are
preferentially absorbed in the stomach, allow for more effective treatment of
local stomach disorders, and provide continuous and extended delivery of drugs
to the upper part of the small intestine, the site where many drugs are
absorbed most efficiently. The RI System is designed to reduce the irritation
to the GI tract caused by many commonly used drugs, including aspirin. The
Company believes the RI System has the potential to make such drugs less
irritating and therefore more widely used.
In addition to the benefits described above, the Company believes that the
DepoMed Systems may offer additional advantages including: multihour release
rate patterns for drugs of almost any solubility and the ability to use drug
combinations previously not feasible due to pharmacokinetic differences
between drugs. The Company believes that by reducing the frequency of drug
administration, use of the DepoMed Systems may lead to reduced costs and
improved patient compliance. Also, by providing new formulations of existing
products using the DepoMed Systems, the Company believes that it will be able
to provide future collaborative partners with the ability to extend their
patent franchises on such products.
The Company intends to have the DepoMed Systems used with as many
pharmaceutical products as possible with an emphasis on pharmaceutical
products which command a large market share or are in large market segments
and where the Company believes the DepoMed Systems will provide an advantage
over other drug delivery systems. The Company's primary strategy for the
development and commercialization of the DepoMed Systems involves establishing
collaborative relationships with pharmaceutical and biotechnology companies to
develop improved therapeutic products. The Company also intends to develop
off-patent drugs and/or OTC products that utilize the DepoMed Systems either
independently or jointly by entering into collaborative partnerships with
pharmaceutical, biotechnology or other health care companies.
25
<PAGE>
THE DRUG DELIVERY INDUSTRY
Drug delivery companies apply proprietary technologies to create new
pharmaceutical products utilizing drugs developed by others. These products
are generally novel, cost-effective dosage forms that provide any of several
benefits including better control of drug concentration in the blood, improved
safety and efficacy, improved patient compliance and ease of use. The Company
believes that drug delivery technologies can provide pharmaceutical companies
with a means of developing new products as well as extending existing patent
franchises.
The increasing need to deliver medication to patients efficiently and with
fewer side effects has accelerated the pace of invention of new drug delivery
systems and the development and maturation of the drug delivery industry.
Today, medication can be delivered to a patient through many different
delivery systems including transdermal (through the skin), injection, implant
and oral methods. However, these delivery methods continue to have certain
limitations. Transdermal patches are often inconvenient to apply, can be
irritating to the skin and the rate of release can be difficult to control.
Injections are uncomfortable for most patients. In most cases both injections
and implants must be administered in a hospital or physician's office and,
accordingly, are frequently not suitable for home use. Oral administration
remains the preferred method of administering medication. However,
conventional oral drug administration also has limitations. Because capsules
and tablets have limited effectiveness in providing controlled drug delivery,
they frequently result in drug release that is too rapid, causing incomplete
absorption of the drug, irritation to the GI tract and other side effects. In
addition, they lack the ability to provide localized therapy. The Company
believes that the need for frequent dosing of many drugs administered by
capsules and tablets also can impede patient compliance with the prescribed
regimen.
In recent years, drug delivery companies have been able to develop
innovative and efficient solutions to some of the limitations of conventional
oral drug administration. For example, the improved oral delivery system
developed by ALZA in the 1980s reduced the side effects and dosing frequency
of the hypertension drug, Procardia(R). The improved product, Procardia XL(R),
has substantially increased the sales of the drug and, because of the new
formulation, the patent franchise on Procardia(R) was extended. The Company
believes that the DepoMed Systems have the potential to offer similar
opportunities of improved therapy and extended patent life to pharmaceutical
and biotechnology companies.
THE DEPOMED SYSTEMS
The DepoMed Systems are based on the Company's proprietary oral drug
delivery technologies which are designed to include formulations of drug-
containing polymeric units that allow multihour delivery of an incorporated
drug. Although the Company's formulations are proprietary, the polymers
utilized in the DepoMed Systems are commonly used in the food and drug
industries. The Company has formulated these polymers into cylinders and
spheres that are contained in gelatin capsules for ease of administration. By
using different formulations of the polymers, the Company believes that the
DepoMed Systems are able to provide continuous, controlled delivery of drugs
of varying molecular complexity and solubility.
The DepoMed Systems are designed to address certain limitations of drug
delivery and to provide for orally administered, conveniently dosed, cost-
effective drug therapy that provides continuous, controlled delivery of a drug
over a multihour period. The Company believes that the DepoMed Systems can
provide one or more of the following therapeutic advantages over conventional
methods of drug administration:
. Enhance Safety and Efficacy through Controlled Delivery. The Company
believes that the DepoMed Systems may improve the ratio of therapeutic
effect to toxicity by decreasing the initial peak concentrations of drug
associated with toxicity, while maintaining levels of a drug at
therapeutic, subtoxic concentrations for an extended period of time.
Many drugs demonstrate optimal efficacy when concentrations are
maintained at therapeutic levels over an extended period of time. When a
drug is administered intermittently, the therapeutic concentration is
often exceeded for some period of time, and then the concentration
rapidly drops below effective levels. Excessively high concentrations
are a major cause of side effects, and subtherapeutic concentrations are
ineffective.
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. Greater Patient and Caregiver Convenience. The Company believes that the
DepoMed Systems may offer once-daily dosing for certain drugs that are
currently required to be administered several times daily. Such once-
daily dosing promotes compliance to dosing regimens. Patient
noncompliance with dosing regimens has been associated with increased
costs of medical therapies by prolonging treatment duration, increasing
the likelihood of secondary or tertiary disease manifestation and
contributing to over-utilization of medical personnel and facilities. By
improving patient compliance, providers and third-party payors may
reduce unnecessary expenditures and improve therapeutic outcomes.
. Expand Types of Drugs Capable of Oral Delivery. Some drugs, including
certain proteins (complex organic compounds of high molecular weight,
containing numerous amino acids) and peptides (low molecular weight
compounds consisting of two or more amino acids), because of their large
molecular size and susceptibility to degradation in the GI tract, must
currently be administered by injection or by continuous infusion, which
is typically done in a hospital or other clinical setting. The Company
believes the Depomed Systems may be able to deliver some of these drugs
orally.
. Proprietary Reformulation of Generic Products. The Company believes that
the DepoMed Systems may offer the potential to produce improved
formulations of off-patent drugs. These proprietary formulations may be
differentiated from existing generic products by virtue of reduced
dosing requirements, improved efficacy, decreased toxicity or additional
indications.
THE GASTRIC RETENTION SYSTEM
The GR System consists of a proprietary formulation of drug-containing
polymeric cylinders which, if taken with a meal, remain in the stomach for an
extended period of time to provide continuous, controlled delivery of an
incorporated drug. The GR System's design is based in part on principles of
human gastric emptying and GI transit. Following a meal, liquids and small
particles flow continuously from the stomach into the intestine leaving behind
the larger nondigested particles until the digestive process is complete. As a
result, drugs in liquid form or those consisting of small particles tend to
empty rapidly from the stomach and continue into the intestine, often before
the drug has time to act locally or to be absorbed. The drug-containing
polymeric cylinders of the GR System are formulated into easily swallowed
cylinder shapes which are designed to swell upon ingestion. The cylinders
attain a size after ingestion sufficient to be retained in the stomach for
multiple hours while delivering the drug content.
The Company has demonstrated multihour gastric retention in humans who have
been given the GR System with food. In addition, the Company is currently
developing an enhanced version of the GR System designed to be retained in the
stomach without the ingestion of food. This process is expected to allow for
treatment regimens unrelated to meal times, as well as for retention that is
more prolonged and with minimum patient to patient variation in retention
time. The Company believes that this feature will make medical treatment less
disruptive to a patient's normal schedule.
The expected advantages of the GR System over conventional oral drug
delivery systems include the following:
More Efficient GI Drug Absorption. The Company believes that the GR System
can be used for improved oral administration of drugs that are currently
inadequately absorbed when delivered as conventional tablets or capsules. Many
drugs are primarily absorbed in the stomach, duodenum or upper small
intestine, through which drugs administered in conventional oral dosage forms
pass quickly. In contrast, the GR System is designed to be retained in the
stomach allowing for constant multihour flow of drugs to certain areas of the
GI tract. Accordingly, for such drugs, the Company believes that the GR System
offers a significantly enhanced opportunity for increased absorption. Unlike
some insoluble systems, at the end of its useful life the polymer contained in
the GR System dissolves and is passed through the GI tract and eliminated.
Under its joint research agreement with BMS, the Company currently is
developing a product utilizing this feature of the GR System. See "--
Collaborative Relationships."
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Gastric Delivery for Local Therapy and Absorption. The Company believes that
the GR System can be used to deliver drugs which can efficiently eradicate GI-
dwelling microorganisms, such as H. pylori, the bacterium which is a cause of
ulcers. The Company is currently conducting a feasibility study with GalaGen
on the use of the GR System for the local gastric delivery of an
immunoglobulin product which may be effective against H. pylori. See "--
Collaborative Relationships."
The Company is currently developing a calcium supplement product which
utilizes the GR System. Calcium supplements are essential in the treatment of
osteoporosis (disease characterized by decreased bone density). It is
estimated that 20 million people in the United States suffer from osteoporosis
and that another 17 million people are at risk. New medications for this
debilitating condition are effective but calcium supplementation is essential.
In addition, it is estimated that 30 million people in the United States are
under long-term treatment with corticosteroids (general class of hormonal
agents), such as prednisone, which can cause significant bone loss.
Accordingly, calcium supplementation is recommended as concomitant treatment
with these drugs. Current calcium supplement products are mostly in the form
of calcium carbonate, which is soluble only in an acidic medium and which
consequently must be retained in the stomach for an extended period of time
for efficient dissolution and subsequent absorption. However, conventional
calcium carbonate products pass through the stomach too quickly for a
significant amount of the calcium to dissolve. The Company believes that the
GR System will provide for the more efficient dissolution and absorption of an
orally administered calcium compound by keeping the product in the stomach for
an extended period of time.
The Company believes that a possible future application of the GR System is
the incorporation of a nonsystemic antacid into the GR System that would be
designed to provide sustained local action. Although currently used antacid
products are nonsystemic, their duration time is short. Accordingly,
individuals who need through-the-night protection from excess stomach acid
must resort to systemic antacids, such as Zantac(R) or Tagamet(R), which have
a longer on-set of action. The Company believes that the GR System may be
designed to provide continuous, controlled local delivery which is expected to
allow for a nonsystemic antacid product with more immediate and sustained
action. It is estimated that several million people in the United States
regularly take antacids.
Rational Drug Combinations. The Company believes that the GR System may
allow for rational combinations of drugs with different biological half-lives.
Physicians frequently prescribe multiple drugs for treatment of a single
medical condition. For example, a physician may prescribe a combination of
captopril/hydrochlorothiazide or nifedipine/triampterine for a patient with a
heart condition. Single product combinations have not been considered feasible
because the different biological half-lives of these combination drugs would
result in an overdosage of one drug and/or an underdosage of the other. By
incorporating different drugs into different polymeric cylinders in the same
capsule, the GR System is designed to release each of its incorporated drugs
continuously at a rate and duration (dose) appropriately adjusted for the
specific biological half-lives of the drugs. The Company believes that future
rational drug combination products using the GR System have the potential to
simplify drug administration, increase patient compliance, and reduce medical
costs.
Potential for Oral Delivery of Peptides and Proteins. Based on laboratory
studies conducted by the Company, the GR System is expected to protect drugs
prior to their delivery in the stomach. This feature coupled with gastric
retention could allow for continuous delivery of peptides and proteins (i.e.,
labile drugs) into the upper portion of the small intestine, the most likely
site of possible absorption for many such drugs. The Company believes that
this mechanism will allow effective oral delivery of some drugs that currently
require administration by injection. In addition, the Company believes that
the GR System can be formulated to provide for continuous, controlled delivery
of insoluble or particulate matter, including protein or antigen-laden
vesicles, such as liposomes, and microspheres or nanoparticles.
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THE REDUCED IRRITATION SYSTEM
The RI System is designed to provide for significant reduction in local GI
irritation from the effects of certain drugs. Local tissue damage occurs when
solid crystals of a drug remain at any one site of the GI tract for long
periods of time. The RI System consists of an outer capsule, which is designed
to rapidly disintegrate upon ingestion to deliver multiple small, spherical
pellets. The spherical pellets are composed of an inert matrix of polymeric
material in which the active ingredient is homogeneously dispersed in its
solid state. The spherical pellets persist for a period of time, but
ultimately dissolve and the polymer is eliminated.
The RI System is designed to reduce irritation through three distinct
mechanisms. First, the small spheres of the RI System are designed to deliver
an incorporated drug in solution state, in contrast to a solid or crystalline
state which may cause ulcers. Second, the dispersion of the spherical pellets
within the stomach contributes further to the dilution of the local drug
effects. Third, controlled delivery contributes to the reduction of GI
irritation by delivering the incorporated drug over a longer period of time.
In addition to the reduced irritation aspirin that the Company is currently
developing, the Company believes that other GI irritating compounds such as
potassium chloride and erythromycin (a frequently used antibiotic) may benefit
from the RI System.
The Company is currently developing an aspirin product which utilizes the RI
System and is designed to reduce the GI irritation which is common when
aspirin is administered in conventional tablet or capsule form. Aspirin usage
has been expanding with important new medical indications, including the
prevention and treatment of cardiovascular disease. Aspirin is widely
recognized for its ability to cause damage to the GI tract and local
irritation of the stomach and intestine which often relates to GI discomfort
and a patient's intolerance to this drug. The irritation properties of aspirin
are mostly local, not systemic in origin. Local damage begins and is sustained
by high local drug concentration against the mucosa (the membraneous lining of
the GI tract), particularly when aspirin is administered in a solid,
crystalline state as from a rapidly dissolving tablet. These crystals in
contact with the mucosa provide a stagnant pool of saturated drug solution
against the cell walls, resulting in damage from both cellular mechanisms and
from back diffusion of acid into the mucosal cells and into the submucosal
capillaries, causing tissue necrosis (morbidity) and bleeding. To minimize
local damage, the RI System is designed to deliver its drug in solution, in a
controlled manner from a dispersion of polymeric units.
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The figure below shows the results from a preliminary study completed for
the Company by SRI International. Using a standard animal model (considered by
the Company predictive of local GI irritation in humans), the irritant
properties of aspirin were reduced by approximately 72% when delivered from
the RI System, compared to the same dose of aspirin administered in
conventional tablet form.
COMPARATIVE IRRITATION RESPONSES IN THE RABBIT COLONIC MUCOSAL MODEL
[GRAPH APPEARS HERE]
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PRODUCTS UNDER DEVELOPMENT
The following table summarizes the Company's principal product development
initiatives:
<TABLE>
<CAPTION>
DEPOMED POTENTIAL
SYSTEM PROGRAM PARTNER INDICATIONS EXPECTED BENEFIT
------- ---------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
GR BMS Proprietary Bristol-Myers Confidential(2) . Less frequent
Compound Squibb dosing
Company(1)
GR Anti-infective GalaGen H. pylori . Prolonged,
Immunoglobulin Inc.(3) gastric continuous
infection delivery to
gastric mucosa
GR Calcium In-house Osteoporosis, . Improved
Supplement other calcium calcium
deficiencies absorption
RI Aspirin In-house Multiple, . Reduced
including gastric
cardiovascular irritation
therapy
. Prolonged low
dose delivery
</TABLE>
- --------
(1) The Company entered into an option agreement relating to this compound
with BMS in July 1996. See "--Collaborative Relationships."
(2) The potential indication may not be disclosed pursuant to the terms of the
agreement between the Company and BMS. See "--Collaborative
Relationships."
(3) The Company entered into a feasibility study relating to this
immunoglobulin with GalaGen in May 1996. See "--Collaborative
Relationships."
The products listed in the above table are in various stages of development.
For the BMS compound, an early stage pharmacokinetic trial was conducted in
humans in January 1997 and the product is now undergoing further clinical
testing. The GalaGen immunoglobulin is being tested in vitro for the ability
of the GR System to protect and deliver the product in an acid and enzyme rich
environment like the stomach. The calcium supplement and aspirin products are
in pre-clinical development by the Company. As no clinical trials will be
required for the initial commercialization of the calcium supplement product,
that product will be available for manufacturing, marketing and sale upon
completion of development. The Company expects to initiate a clinical trial
for its reduced irritation aspirin product during the first half of 1998. See
"--Business Strategy" and "--Government Regulation."
BUSINESS STRATEGY
The Company intends to have the DepoMed Systems used with as many
pharmaceutical products as possible with an emphasis on pharmaceutical
products which command a large market share or are in large market segments
and where the Company believes the DepoMed Systems will provide an advantage
over other drug delivery systems.
The Company's primary strategy for the development and commercialization of
the DepoMed Systems involves establishing collaborative relationships with
pharmaceutical and biotechnology companies to develop improved therapeutic
products. The products will be jointly developed, with the collaborative
partner having primary responsibility to clinically test, manufacture, market
and sell the products. The Company has retained and intends to continue to
retain ownership of its technologies developed for its collaborative partners.
The Company believes this practice will provide the Company with the
flexibility of entering into collaborative arrangements with other potential
partners should the initial partner decide not to pursue the commercialization
of a particular product which utilizes the DepoMed Systems. The Company
believes that its partnering strategy will enable it to reduce its cash
requirements while developing a larger potential product portfolio. By
providing new formulations of existing products using the DepoMed Systems, the
Company believes that it will not only be able to offer its partners improved
products but also may provide them with the ability to extend their patent
franchises on such products. The Company believes that the potential for such
renewed franchises will be
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especially attractive to pharmaceutical companies whose patents on existing
products are close to expiration. In addition, the Company believes that the
DepoMed Systems may offer pharmaceutical and biotechnology companies
formulations for products based on new molecular entities, such as antigens
and peptides, that can be safely and effectively administered orally.
Collaborations with pharmaceutical and biotechnology companies are expected to
provide near-term revenues from sponsored development activities and future
revenues from license fees and royalties relating to the sale of products.
In addition to the Company's current programs with BMS and GalaGen, the
Company's goal is to enter into one additional development program with a
major pharmaceutical company over the next twelve months. To meet this goal,
the Company has identified as potential partners six companies that the
Company believes have drugs which can derive potential benefits if
incorporated into the DepoMed Systems. The Company has initiated preliminary
discussions with several of these companies. There can be no assurance that
any of these discussions will lead to the Company's entering into a
development agreement with a collaborative partner or, if such agreement is
entered into, that such collaboration will lead to the successful development
of a product.
The Company also intends to develop OTC and/or off-patent drug products that
utilize the DepoMed Systems either independently or jointly by entering into
collaborative partnerships with pharmaceutical, biotechnology or other
healthcare companies. To reduce costs and time-to market, the Company intends
to select those products that treat indications with clear-cut clinical end-
points and that are reformulations of existing compounds already approved by
the FDA. The Company believes that products utilizing the DepoMed Systems will
provide favorable product differentiation in the highly competitive generic
and OTC drug product markets at costs below those of other drug delivery
systems, thereby enabling the Company and its collaborative partners to
compete more effectively in marketing improved off-patent and OTC drug
products. By funding the initial development costs of these improved products,
the Company believes that it may be able to enter into collaborative marketing
arrangements that provide the Company with higher royalty rates or other more
favorable payment terms on product sales. The Company is also seeking to
establish alliances with overseas sales and marketing partners for the initial
sale of the Company's future generic products. The Company believes that due
to the more favorable regulatory environments in some foreign countries, it
may be able to generate revenues from these markets while awaiting FDA
approval in the United States.
Pursuant to this business strategy, two products utilizing the DepoMed
Systems are currently under development: an enhanced absorption OTC calcium
supplement product and a reduced irritation aspirin product. Since calcium
supplements are regarded as food supplements rather than drugs by the FDA, no
clinical trials are required. The Company, consequently, believes that
development time for the calcium supplement product will be shorter than
products that require FDA review and approval. The Company believes that an
OTC calcium supplement product can be developed by the Company and
commercialized within three years from the date of this Prospectus. During
that time, the Company will need to undertake studies to support its claims of
enhanced absorption, develop a manufacturing relationship with a contract
manufacturer and enter into a collaborative marketing arrangement for the
calcium supplement product. There can be no assurance that the studies will be
successfully completed or that the Company will be successful in entering into
a manufacturing relationship or marketing arrangement for the calcium
supplement within three years or at all, or, even if the Company does so, that
the product will be successfully commercialized.
The Company's reduced irritation aspirin product will require the submission
of an NDA to the FDA. Because clinical trials and FDA review and approval will
be required to support the claim of reduced gastric irritation relating to the
aspirin product, commercialization of the reduced irritation aspirin product
is expected to take at least one year longer than the OTC calcium supplement
product. There can be no assurance that the clinical trials will be successful
or that the Company will be successful in obtaining the required FDA approval
to market the reduced irritation aspirin product, or, if it does, that the
Company's reduced irritation aspirin product will be successfully
commercialized.
In addition to the calcium supplement and reduced irritation aspirin
products, the Company has a target list of off-patent drugs which the Company
believes can derive potential benefits if incorporated into the DepoMed
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Systems. The Company intends to select one such off-patent drug for
development within twelve months following completion of the Offering. There
can be no assurance that the Company will have sufficient funds to complete
the development of the off-patent drug product chosen or, even if developed,
that the product will be successfully commercialized.
COLLABORATIVE RELATIONSHIPS
Bristol-Myers Squibb Company. In July 1996, the Company and BMS entered into
a joint research agreement to develop a product incorporating a BMS
proprietary compound into the GR System. Pursuant to the agreement, BMS has an
option to obtain an exclusive, worldwide license to products incorporating the
BMS compound utilizing the GR System. Based on a pharmacokinetic study in
humans that was conducted in January 1997, a dosage level (drug release rate
and duration) for the product has been selected. Further clinical testing is
now in progress, while process scale-up and manufacturing methodologies are
being finalized. If such license is entered into, the Company will receive a
royalty on net sales of the products as well as certain milestone payments.
The option expires in February 1999. There can be no assurance, however, that
BMS will exercise the option or that, if it does, any resulting product will
be approved by the FDA or, if approved, will be successfully commercialized.
GalaGen Inc. In May 1996, the Company and GalaGen entered into a feasibility
study involving the use of the GR System to deliver oral immunoglobulin
products developed by GalaGen. Of two immunoglobulin products evaluated for
incorporation into the GR System to date, one product, for the treatment of H.
pylori gastric infection, has proceeded to a feasibility study. If the outcome
of the feasibility study is favorable, the Company may enter into a
development agreement with GalaGen. There can be no assurance, however, that
such feasibility study will be concluded successfully, and even if
successfully concluded that the Company will be able to enter into an
agreement with GalaGen on reasonable commercial terms or at all.
Oakmont Pharmaceuticals, Inc. In April 1997, the Company and Oakmont signed
a letter of intent to enter into an agreement pursuant to which Oakmont will
manufacture the Company's reduced irritation aspirin and enhanced absorption
calcium supplement products and have rights to distribute and sell these
products in territories to be determined. The letter of intent also provides
for the Company and Oakmont each to offer rights to future products to the
other party. There can be no assurance that the Company and Oakmont will enter
into a definitive agreement or, if they do, that the Company will be
successful in developing these products or Oakmont will be successful in
manufacturing, distributing or marketing them.
COMPETITION
Other companies that have oral drug delivery technologies competitive with
the DepoMed Systems include ALZA, Elan, JAGO, KOS, and Flamel, all of which
have oral tablet products designed to release the incorporated drugs over
time. Each of these companies has a patented technology with attributes
different from those of the Company's, and in some cases with different sites
of delivery to the GI tract. The Company believes that it is the only drug
delivery company that is currently developing products for oral drug delivery
systems both for enhanced retention in the stomach of an orally administered
tablet (the GR System) and the safer oral administration of otherwise locally
irritating drugs (the RI System). The Company believes that this combination
of oral drug delivery technologies differentiates the Company from other oral
drug delivery companies and will enable the Company to interest pharmaceutical
companies in incorporating their proprietary drugs into the DepoMed Systems
and also to differentiate any OTC and/or off-patent drugs that utilize the
DepoMed Systems from those of other drug delivery companies.
Competition in the areas of pharmaceutical products and drug delivery
systems is intense and is expected to become more intense in the future.
Competing technologies may prove superior, either generally or in particular
market segments, in terms of factors such as cost, consumer satisfaction or
drug delivery profile. The Company's principal competitors in the business of
developing and applying drug delivery systems all have substantially greater
financial, technological, marketing, personnel and research and development
resources than the Company. In addition, the Company may face competition from
pharmaceutical and biotechnology companies that may
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<PAGE>
develop or acquire drug delivery technologies. Many of the Company's potential
collaborative partners have devoted and are continuing to devote significant
resources in the development of their own drug delivery systems and
technologies. Products incorporating the Company's technologies will compete
both with products employing advanced drug delivery systems and with products
in conventional dosage forms. New drugs or future developments in alternate
drug delivery technologies may provide therapeutic or cost advantages over any
potential products which utilize the DepoMed Systems. There can be no
assurance that developments by others will not render any potential products
utilizing the DepoMed Systems noncompetitive or obsolete. In addition, the
Company's competitive success will depend heavily on entering into
collaborative relationships on reasonable commercial terms, commercial
development of products incorporating the DepoMed Systems, regulatory
approvals, protection of intellectual property and market acceptance of such
products.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain and
maintain patent protection for its technologies and to preserve its trade
secrets. It is the policy of the Company to file patent applications in the
United States and foreign jurisdictions. The Company currently holds two
issued United States and three pending United States patent applications, and
has applied for patents in numerous foreign countries, some of which have been
granted and others of which are still pending. No assurance can be given that
the Company's patent applications will be approved or that any issued patents
will provide competitive advantages for the DepoMed Systems or the Company's
technologies or will not be challenged or circumvented by competitors. With
respect to already issued patents and any patents which may issue from the
Company's applications, there can be no assurance that claims allowed will be
sufficient to protect the Company's technologies. Patent applications in the
United States are maintained in secrecy until a patent issues, and the Company
cannot be certain that others have not filed patent applications for
technology covered by the Company's pending applications or that the Company
was the first to file patent applications for such technology. Competitors may
have filed applications for, or may have received patents and may obtain
additional patents and proprietary rights relating to, compounds or processes
that may block the Company's patent rights or compete without infringing the
patent rights of the Company. In addition, there can be no assurance that any
patents issued to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection or commercial advantage to the Company.
The Company also relies on trade secrets and proprietary know-how which it
seeks to protect, in part, through confidentiality agreements with employees,
consultants, collaborative partners and others. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any such breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. Although
potential collaborative partners and the Company's research partners and
consultants are not given access to proprietary trade secrets and know-how of
the Company until they have executed confidentiality agreements, these
agreements may be breached by the other party thereto or may otherwise be of
limited effectiveness or enforceability.
The ability to develop the Company's technologies and to commercialize
products using such technologies will depend on not infringing the patents of
others. Although the Company is not aware of any claim of patent infringement
against it, claims concerning patents and proprietary technologies determined
adversely to the Company could have a material adverse effect on the Company.
In addition, litigation may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third-party
proprietary rights. There can be no assurance that the Company's issued or
licensed patents would be held valid by a court of competent jurisdiction.
Whether or not the outcome of litigation is favorable to the Company, the cost
of such litigation and the diversion of the Company's resources during such
litigation could have a material adverse effect on the Company.
The pharmaceutical industry has experienced extensive litigation regarding
patent and other intellectual property rights. Accordingly, the Company could
incur substantial costs in defending itself in suits that may be brought
against the Company claiming infringement of the patent rights of others or in
asserting the Company's
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<PAGE>
patent rights in a suit against another party. The Company may also be
required to participate in interference proceedings declared by the United
States Patent and Trademark Office for the purpose of determining the priority
of inventions in connection with the patent applications of the Company or
other parties. Adverse determinations in litigation or interference
proceedings could require the Company to seek licenses (which may not be
available on commercially reasonable terms) or subject the Company to
significant liabilities to third parties, and could therefore have a material
adverse effect on the Company.
MANUFACTURING, MARKETING AND SALES
The Company intends to develop products utilizing the DepoMed Systems for
its collaborators and, in some cases, retain rights to manufacture commercial
quantities of such products. The manufacture and incorporation of drugs into
hydrophilic (readily absorbing moisture), polymer matrix pellets used in the
DepoMed Systems is accomplished by using a variety of standard techniques.
These include direct compression, compression using high speed rotary tablet
press or, alternatively, by an extrusion/spheronization process, which results
in very small spherical bodies. The Company does not have any internal
manufacturing, marketing or sales resources. In view of its early stage of
development and limited resources, the Company does not anticipate spending a
material portion of the net proceeds of this Offering to acquire resources and
develop capabilities in these areas. Although the Company intends to acquire
pilot manufacturing equipment with a portion of the net proceeds of the
Offering, the Company does not intend to acquire or establish its own
dedicated manufacturing facilities for the foreseeable future. See "Use of
Proceeds." Rather, the Company's manufacturing strategy will be to utilize the
facilities of its collaborative partners, or to develop manufacturing
relationships with established contract manufacturers to make products
utilizing the DepoMed Systems. In addition, the Company does not intend to
establish an internal sales and marketing capability, but will seek to rely on
its collaborative partners or distributor arrangements to market and sell the
products utilizing the DepoMed Systems. In April 1997, the Company and Oakmont
signed a letter of intent to enter into an agreement pursuant to which Oakmont
will manufacture the Company's reduced irritation aspirin and enhanced
absorption calcium supplement products and have rights to distribute and sell
these products in territories to be determined. There can be no assurance that
the Company will be able to enter into manufacturing, marketing or sales
agreements on reasonable commercial terms, or at all, with Oakmont or with
another third party. Failure to do so could have a material adverse effect on
the Company.
Manufacturers of products utilizing the DepoMed Systems will be subject to
applicable cGMP requirements prescribed by the FDA or other rules and
regulations prescribed by foreign regulatory authorities. There can be no
assurance that the Company will be able to enter into manufacturing agreements
either domestically or abroad with companies whose facilities and procedures
comply with cGMP or applicable foreign standards. Should such agreements be
entered into, the Company will be dependent on such manufacturers for
continued compliance with cGMP and applicable foreign standards. Failure by a
manufacturer of products utilizing the DepoMed Systems to maintain cGMP or
applicable foreign standards could result in significant time delays or the
inability of the Company to commercialize the DepoMed Systems and could have a
material adverse effect on the Company. At the present time, due to ongoing
consolidation in the chemical and pharmaceutical industries, the Company
believes there is a worldwide excess of manufacturing capacity available to
the Company. As a result, the Company believes that it will be able to enter
into agreements with suppliers and manufacturers on reasonable commercial
terms. However, there can be no assurance that there will be manufacturing
capacity available to the Company at the time the Company is ready to
commercialize products utilizing the DepoMed Systems. There also can be no
assurance that any products utilizing the DepoMed Systems can be manufactured
at a cost or in quantities required to make them commercially viable. The
Company's inability to contract on acceptable terms and with qualified
suppliers for the manufacture of any products or delays or difficulties in its
relationships with manufacturers, would have a material adverse effect on the
Company.
Contract manufacturers must adhere to cGMP regulations strictly enforced by
the FDA on an ongoing basis through its facilities inspection program.
Contract manufacturing facilities must generally pass a pre-approval plan
inspection before the FDA will approve an NDA. Certain material manufacturing
changes that occur after approval are also subject to FDA review and clearance
or approval. There can be no assurance that the FDA or
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<PAGE>
other regulatory agencies will approve the process or facilities by which any
of the products utilizing the DepoMed Systems may be manufactured. The
Company's dependence on third parties for the manufacture of products
utilizing the DepoMed Systems may adversely affect the Company's ability to
develop and deliver such products on a timely and competitive basis.
GOVERNMENT REGULATION
The Company is subject to regulation under various federal laws regarding
pharmaceutical products and also various federal and state laws regarding,
among other things, occupational safety, environmental protection, hazardous
substance control and product advertising and promotion. In connection with
its research and development activities, the Company is subject to federal,
state and local laws, rules, regulations and policies governing the use,
generation, manufacture, storage, air emission, effluent discharge, handling
and disposal of certain materials and wastes. The Company believes that it has
complied with these laws and regulations in all material respects and it has
not been required to take any action to correct any material noncompliance.
FDA Approval Process. In the United States, pharmaceutical products,
including any drugs utilizing the DepoMed Systems, are subject to rigorous
regulation by the FDA. If a company fails to comply with applicable
requirements, it may be subject to administrative or judicially imposed
sanctions such as civil penalties, criminal prosecution of the company or its
officers and employees, injunctions, product seizure or detention, product
recalls, total or partial suspension of production, FDA withdrawal of approved
applications or FDA refusal to approve pending new drug applications,
premarket approval applications, or supplements to approved applications.
Prior to commencement of clinical studies involving human beings,
preclinical testing of new pharmaceutical products is generally conducted on
animals in the laboratory to evaluate the potential efficacy and the safety of
the product. The results of these studies are submitted to the FDA as a part
of an IND application, which must become effective before clinical testing in
humans can begin. Typically, clinical evaluation involves a time consuming and
costly three-phase process. In Phase I, clinical trials are conducted with a
small number of subjects to determine the early safety profile and the
pharmacokinetic pattern of a drug. In Phase II, clinical trials are conducted
with groups of patients afflicted with a specific disease in order to
determine preliminary efficacy, optimal dosages and expanded evidence of
safety. In Phase III, large-scale, multi-center, comparative trials are
conducted with patients afflicted with a target disease in order to provide
enough data to demonstrate the efficacy and safety required by the FDA. The
FDA closely monitors the progress of each of the three phases of clinical
testing and may, at its discretion, re-evaluate, alter, suspend or terminate
the testing based upon the data which have been accumulated to that point and
its assessment of the risk/benefit ratio to the patient.
The results of the preclinical and clinical testing on drugs are submitted
to the FDA in the form of an NDA for approval prior to commencement of
commercial sales. In responding to an NDA, the FDA may grant marketing
approval, request additional information or deny the application if the FDA
determines that the application does not satisfy its regulatory approval
criteria. There can be no assurance that approvals will be granted on a timely
basis, if at all. Failure to receive approval for any products utilizing the
DepoMed Systems could have a material adverse effect on the Company.
OTC products that comply with monographs issued by the FDA are subject to
various FDA regulations such as cGMP requirements, general and specific OTC
labeling requirements (including warning statements), the restriction against
advertising for conditions other than those stated in product labeling, and
the requirement that in addition to approved active ingredients OTC drugs
contain only safe and suitable inactive ingredients. OTC products and
manufacturing facilities are subject to FDA inspection, and failure to comply
with applicable regulatory requirements may lead to administrative or
judicially imposed penalties. If an OTC product differs from the terms of a
monograph, it will, in most cases, require FDA approval of an NDA for the
product to be marketed.
36
<PAGE>
Other Regulations. Even if required FDA approval has been obtained with
respect to a product, foreign regulatory approval of a product must also be
obtained prior to marketing the product internationally. Foreign approval
procedures vary from country to country and the time required for approval may
delay or prevent marketing. In certain instances the Company or its
collaborative partners may seek approval to market and sell certain of its
products outside of the U.S. before submitting an application for U.S.
approval to the FDA. The regulatory procedures for approval of new
pharmaceutical products vary significantly among foreign countries. The
clinical testing requirements and the time required to obtain foreign
regulatory approvals may differ from that required for FDA approval. Although
there is now a centralized EU approval mechanism in place, each EU country may
nonetheless impose its own procedures and requirements, many of which are time
consuming and expensive, and some EU countries require price approval as part
of the regulatory process. Thus, there can be substantial delays in obtaining
required approval from both the FDA and foreign regulatory authorities after
the relevant applications are filed, and approval in any single country may
not be a meaningful indication that the product will thereafter be approved in
another country.
PRODUCT LIABILITY
The Company's business involves exposure to potential product liability
risks that are inherent in the production and manufacture of pharmaceutical
products. Any such claims could have a material adverse effect on the Company.
The Company does not currently have any product liability insurance. Although
the Company has applied for product liability insurance, there can be no
assurance that it will be able to obtain or maintain such insurance on
acceptable terms, that the Company will be able to secure increased coverage
as the commercialization of the DepoMed Systems proceeds or that any insurance
will provide adequate protection against potential liabilities.
ADVISORS TO THE COMPANY
The Company has two groups of advisors that advise the Company on business
and scientific issues and on future opportunities. As compensation for these
services, the Company has granted the advisors options to purchase shares of
the Company's Common Stock. These options vest over four years.
The Policy Advisory Board
Members of the Policy Advisory Board advise management of the Company on
medical, regulatory and business issues relating to the Company.
Carl C. Peck, M.D. Dr. Peck is Professor of Pharmacology and Medicine and
founding Director of the Center for Drug Development Science at Georgetown
University Medical Center, Washington, D.C. Formerly he served as Assistant
Surgeon General in the U.S. Public Health Service and as Director of the
Center for Drug Evaluation and Research (CDER) at the FDA. Dr. Peck holds an
M.D. degree from the University of Kansas. Dr. Peck advises the Company on
drug development, experimental design and analysis, and regulatory affairs.
John Urquhart, M.D. Dr. Urquhart is Professor of Pharmacoepidemiology at
Maastricht University in Maastricht, The Netherlands. He is also Chief
Scientist of AARDEX, Ltd. in Zurich, Switzerland and Adjunct Professor of
Biopharmaceutical Sciences at the University of California, San Francisco.
Earlier he was Chief Scientist at ALZA, holding various management positions
including President of ALZA Research. Dr. Urquhart holds an M.D. degree from
Harvard University. Dr. Urquhart advises the Company on new product
opportunities and product specifications.
James B. Wiesler. Mr. Wiesler is the retired Vice Chairman of the Bank of
America, where he was in charge of global consumer banking. Mr. Wiesler
currently serves as a director of Science Applications International
Corporation and of the Sidney Kimmel Cancer Center in San Diego. Additionally,
he serves on the Board of Trustees of Sharp Memorial Hospital and Alexian
Brothers Hospital. Mr. Wiesler advises the Company on financial and business
strategy issues.
37
<PAGE>
The Development Advisory Board
Members of the Development Advisory Board provide the Company with expertise
on medical, scientific and product development issues, including government
regulations, clinical trial design and manufacturing issues related to the
DepoMed Systems. In certain cases, the advisors also provide consulting
services to the Company in their area of expertise and receive compensation
for such consulting services.
Harriet Benson, Ph.D. Dr. Benson, who was until recently Vice President for
Regulatory Affairs of ALZA, advises the Company on matters relating to state
and federal compliance issues and other regulatory affairs.
Roy Kuramoto, Ph.D. Until his recent retirement, Dr. Kuramoto was Senior
Vice President in charge of world-wide manufacturing operations for Syntex
Corporation. Dr. Kuramoto advises the Company on issues related to pilot
scale-up and manufacturing methodologies.
John Palmer, M.D., Ph.D. Dr. Palmer is Chairman Emeritus and Professor in
the Department of Pharmacology, University of Arizona Medical School. Dr.
Palmer advises the Company on matters related to preclinical study design and
clinical pharmacology.
Virgil Place, M.D. Dr. Place is the founder and Chairman of Vivus, Inc., a
medical device company. Dr. Place advises the Company on issues related to
product design, regulatory procedures, and medical affairs.
EMPLOYEES
As of September 1, 1997, the Company had eight full-time employees. None of
the Company's employees is represented by a collective bargaining agreement,
nor has the Company experienced any work stoppage. The Company believes that
its relations with its employees are good.
FACILITIES
The Company leases approximately 3,300 square feet in Foster City,
California, under a non-cancellable lease which expires on February 28, 1999,
and which includes an option to renew for an additional five years. The
Company will need to lease additional space for laboratory, testing and pilot
manufacturing facilities within 12 months following the date of this
Prospectus. See "Use of Proceeds."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
October 1, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John W. Shell, Ph.D..... 72 Founder, Chairman of the Board and Chief Scientific Officer
John W. Fara, Ph.D...... 55 President, Chief Executive Officer and Director
John N. Shell........... 44 Vice President, Operations and Director
John F. Hamilton........ 53 Vice President, Finance and Chief Financial Officer
G. Steven Burrill....... 53 Director
Judson A. Cooper(1)..... 39 Director
Joshua Schein, 37 Director
Ph.D.(1)...............
</TABLE>
- --------
(1) Member of Audit Committee
John W. Shell, Ph.D., has served as Chairman of the Board of Directors of
the Company since its inception in August 1995, and served as the Company's
President and Chief Executive Officer from May 1995 to December 1996 when he
became the Company's Chief Scientific Officer. Dr. Shell founded DSI in 1991,
and served as its Chairman and Chief Executive Officer until its merger with
M6 in 1994, and served as President of the DepoMed Division of M6 from March
1994 until May 1995. Prior to founding DSI, from 1987 until 1990 he was Vice
President for Research at Johnson & Johnson's IOLAB division. His experience
also includes eight years as a Senior Research Scientist at The Upjohn
Company, six years as Director of Research for Allergan Pharmaceuticals and
fifteen years with ALZA dating from its founding in 1968. Dr. Shell served as
Vice President of the pharmaceutical division, and later as Vice President for
Business Development for ALZA. Dr. Shell received B.A., B.S. and Ph.D. degrees
from the University of Colorado.
John W. Fara, Ph.D., has served as a director of the Company since November
1995 and as its President and Chief Executive Officer since December 1996.
From February 1990 to June 1996 he was President and Chief Executive Officer
of Anergen, Inc., a biotechnology company. Prior to February 1990 he was
President of Prototek, Inc., a biotechnology company ("Prototek"). Prior to
his tenure at Prototek, he was Director of Biomedical Research and then Vice
President of Business Development during ten years with ALZA. Dr. Fara
received a B.S. from the University of Wisconsin and a Ph.D. from University
of California, Los Angeles.
John N. Shell has served as a director of the Company since its inception in
August 1995 and Director of Operations for the Company until December 1996,
when he was named Vice President, Operations. From May 1994 to August 1995,
Mr. Shell served in a similar capacity at the DepoMed Division of M6. Prior to
1994, Mr. Shell served as Materials Manager for Ebara International
Corporation, a multi-national semiconductor equipment manufacturer, and as
Materials Manager for ILC Technology, an electro-optics and electronics
manufacturer. Mr. Shell received his B.A. from the University of California,
Berkeley.
John F. Hamilton has served as the Company's Vice President, Finance and
Chief Financial Officer since January 1997. Prior to joining the Company, Mr.
Hamilton was Vice President and Chief Financial Officer of Glyko, Inc. and
Glyko Biomedical Ltd., a carbohydrate instrument and reagents company from May
1992 to September 1996. Previously he was President and Chief Financial
Officer of Protos Corporation, a drug design subsidiary of Chiron Corporation,
from June 1988 to May 1992 and held various positions with Chiron Corporation,
including Treasurer, from September 1987 to May 1992. Mr. Hamilton received a
B.A. from the University of Pennsylvania and an M.B.A. from the University of
Chicago.
G. Steven Burrill was named as a director of the Company on August 1, 1997.
He founded and has served as Chief Executive Officer of Burrill & Company, a
private merchant bank, since January 1, 1997, and its
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<PAGE>
predecessor firm, Burrill & Craves, since 1994. Prior to that, Mr. Burrill
served for 28 years with Ernst & Young LLP as a partner and as chairman of the
firm's Manufacturing/High Technology Industry Services Group. Mr. Burrill is
also a director of Genitope Corporation, Hambro Health International, Maxim
Pharmaceuticals, Inc., NuGene Technologies and Promega Corporation.
Judson A. Cooper has served as a director of the Company since August 1995.
Mr. Cooper has served as Executive Vice President of SIGA Pharmaceuticals,
Inc. ("SIGA"), a biotechnology company, since November 1996, and a director of
SIGA since December 1995. Mr. Cooper served as President of SIGA from December
1995 until November 1996. Mr. Cooper also serves as Chief Financial Officer
and a director of Virologix Corporation ("Virologix"), a biotechnology
company. Additionally, Mr. Cooper serves as President and a director of
Callisto Pharmaceuticals, Inc. ("Callisto"), a biotechnology company. Mr.
Cooper has been a private investor since September 1993. From 1991 to 1993,
Mr. Cooper served for two years as a Vice President of D. Blech & Company,
Incorporated. Mr. Cooper is a graduate of the Kellogg School of Management.
Mr. Cooper is a principal of CSO.
Joshua Schein, Ph.D., has served as a director of the Company since December
1995. Dr. Schein has served as Executive Vice President of SIGA since December
1996 and Chief Financial Officer, Secretary and a director of SIGA since
December 1995. Dr. Schein has served as Executive Vice President of Virologix
since February 1997, Secretary and a director of Virologix since December
1995, and President of Virologix from December 1995 to February 1997. Dr.
Schein has also served as Chief Financial Officer, Secretary and Director of
Callisto since November 1996. From October 1994 to December 1995, Dr. Schein
served as a Vice President of Investment Banking at Josephthal Lyon and Ross
Incorporated, and from June 1991 until September 1994 as a Vice President at
D. Blech & Company, Incorporated. Dr. Schein received a Ph.D. in neurosciences
from the Albert Einstein College of Medicine, and an M.B.A. from Columbia
University Graduate School of Business. Dr. Schein has been a principal of CSO
since December 1995.
BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION
All directors are elected at the annual meeting of shareholders and hold
office until the election and qualification of their successors at the next
annual meeting of shareholders. Officers of the Company serve at the
discretion of the Board of Directors (the "Board"). Mr. John N. Shell is Dr.
Shell's son. There are no other family relationships.
The Board currently has an Audit Committee consisting of Mr. Cooper and Dr.
Schein. The Audit Committee oversees the actions taken by the Company's
independent auditors and reviews the Company's internal financial and
accounting controls and policies.
The Company intends to appoint an additional independent director to the
Board after the consummation of this Offering.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from the Company
for their services as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with their attendance at
meetings of the Board of Directors. Upon his election to the Board of
Directors in 1995, John W. Fara received an option to purchase 16,666 shares
of Common Stock at an exercise price of $0.09 per share. Upon his election to
the Board of Directors in August 1997, G. Steven Burrill received an option to
purchase 10,000 shares of Common Stock at an exercise price of $5.40 per
share.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid by the Company in
the fiscal year ended December 31, 1996 to the Company's Chief Executive
Officer and former Chief Executive Officer (now the Company's Chairman and
Chief Scientific Officer) (collectively, the "Named Executive Officers"). No
other executive officer earned in excess of $100,000 during fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------------
AWARDS
----------------------
ANNUAL COMPENSATION COMMON STOCK
NAME AND PRINCIPAL POSITION SALARY($) UNDERLYING OPTIONS (#)
- --------------------------- ------------------- ----------------------
<S> <C> <C>
John W. Fara,
President and Chief Executive Offi-
cer(1)............................. $ 21,917(2) 83,333
John W. Shell,
Chairman and Chief Scientific Offi-
cer(3)............................. 185,000 --
</TABLE>
- --------
(1) Dr. Fara became President and Chief Executive Officer in December 1996.
Dr. Fara devoted 40% of his time to the Company until February 1997, when
he assumed his duties on a full-time basis.
(2) Includes $15,750 that Dr. Fara received in connection with services
performed as a consultant to the Company prior to his appointment as
President and Chief Executive Officer.
(3) Dr. Shell served as President and Chief Executive Officer of the Company
until December 1996.
The following table provides information concerning grants of options to
purchase the Company's Common Stock made to each of the Named Executive
Officers during the fiscal year ended December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
POTENTIAL REALIZED
PERCENT VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (1)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------
NAME GRANTED (2)(3) IN FY-1996 (4) ($/SH) (5) DATE 5% 10%
---- -------------- -------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
John W. Fara............ 83,333 96% $0.90 10/25/06 $ 47,167 $ 119,531
John W. Shell........... -- -- -- -- -- --
</TABLE>
- --------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price.
(2) The options reflected in this table were all granted under the Stock Plan.
The date of grant is 10 years prior to the expiration date listed. For
additional material terms of the options, see "Management--1995 Stock
Option Plan."
(3) The options vest at a rate of 25% per year over four years from the grant
date.
(4) Based on an aggregate of 86,667 options granted to employees of the
Company in fiscal 1996.
(5) The exercise price per share of options granted represented the fair value
of the underlying shares of Common Stock on the dates the options were
granted as determined by the Board of Directors. The Company's Common
Stock was not traded publicly at the time of the option grants to the
Named Executive Officers.
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<PAGE>
None of the Named Executive Officers exercised options to purchase Common
Stock during the year ended December 31, 1996. The following table sets forth
certain information regarding the value of exercised and unexercised stock
options held by each of the Named Executive Officers as of December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1996 AT DECEMBER 31, 1996(1)
-------------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
John W. Fara...... 4,167 95,833 $25,042 $508,458
John W. Shell..... -- -- -- --
</TABLE>
- --------
(1) The value of the options is based upon the difference between the exercise
price and the assumed value of $6.10 per share.
1995 STOCK OPTION PLAN
The Stock Plan was adopted by the Board and approved by the shareholders in
September 1995 and subsequently amended. As of June 30, 1997, a total of
666,667 shares of Common Stock were reserved for issuance under the Stock
Plan. As of June 30, 1997, options to purchase a total of 91,667 shares of
Common Stock had been exercised, options to purchase a total of 330,000 shares
at a weighted average exercise price of $2.69 per share were outstanding, and
245,000 shares remained available for future option grants. Since June 1997,
the Board of Directors has granted options to purchase an additional 10,000
shares of Common Stock at an exercise price of $5.40 per share. 235,000 shares
of Common Stock are reserved for future grants of options under the Stock Plan
as of the date of this Prospectus.
The purpose of the Stock Plan is to attract, retain and motivate officers,
key employees, consultants and directors of the Company by giving them the
opportunity to acquire stock ownership in the Company. The Stock Plan provides
for the granting to employees of the Company (including officers and employee
directors) of "incentive stock options" within the meaning of Section 422 of
the Code and for the grant of nonstatutory stock options to employees,
consultants and directors of the Company. To the extent an optionee would have
the right in any calendar year to exercise for the first time incentive stock
options for shares having an aggregate fair market value (under all plans of
the Company and determined for each share as of the grant date) in excess of
$100,000, any such excess options shall be automatically converted to a
nonstatutory stock option.
The Stock Plan is administered by the Board of Directors or a committee of
the Board of Directors (the "Administrator"). The Administrator determines the
type and terms of options and purchase rights granted under the Stock Plan,
including the number of shares covered, exercise price, term and condition for
exercise of the option. The exercise price of all stock options granted under
the Stock Plan must be at least 100% of the fair market value of the Common
Stock of the Company on the grant date. The term of an incentive stock option
may not exceed ten years from the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of stock of the Company, the exercise price of any stock option
granted shall be at least 110% of the fair market value of the Common Stock on
the grant date and the term of such option may not exceed five years. Payment
of the exercise price may be in cash, check, or, at the discretion of the
administrator, by promissory notes or shares of stock held by the optionee, or
a combination thereof.
No option may be transferred by the optionee other than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations
order ("QDRO"). During the lifetime of an optionee, only the optionee (or the
optionee's spouse pursuant to a QDRO) may exercise an option. An option shall
be exercisable on or after each vesting date in accordance with the terms set
forth in the option agreement; provided, however, that
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<PAGE>
the right to exercise an option must vest at the rate of at least 20% per year
over five years from the grant date. In the event of a change in control of
the Company all outstanding options will become fully vested.
In the event of certain changes in control of the Company or a sale of
substantially all its assets, the Administrator may cancel each outstanding
option upon payment in cash to the optionee of the amount by which any cash
and any other property which the optionee would have received for the shares
of stock covered by the vested portion of the option exceeds the exercise
price of the option. The Board may amend, suspend or terminate the Stock Plan
as long as such action does not adversely affect any outstanding option or
purchase right and provided that shareholder approval shall be required for
any amendment to (i) increase the number of shares subject to the Stock Plan,
(ii) materially change eligibility for the grant of options or purchase
rights, or (iii) materially increase the benefits accruing to participants. If
not terminated earlier, the Stock Plan will terminate in 2005.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company entered into employment agreements with two-year terms with John
W. Fara and John W. Shell in February 1997. Pursuant to these agreements, Drs.
Fara and Shell each receive an annual base salary of $185,000. Dr. Fara's
agreement provides for him to receive his salary and benefits for the
remainder of the two-year term of the agreement in the event of his
termination without cause (as defined in the agreement) or in the event of his
involuntary termination following a change in control (as defined in the
agreement). Dr. Shell's employment agreement provides that either party may
terminate employment at any time upon 90 days written notice. Each employment
agreement provides that the employee will not disclose confidential
information of the Company during and after employment and will not compete
with the Company during the term of employment with the Company.
In the event of a change in control of the Company, all outstanding unvested
options, including those held by Drs. Fara and Shell, will become immediately
exercisable.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation limit the liability of directors for
monetary damages to the maximum extent permitted by California law. Such
limitation of liability has no effect on the availability of equitable
remedies, such as injunctive relief or recission. The Company is also
empowered under its Articles of Incorporation to enter into indemnification
agreements with its director and officers and to purchase insurance on behalf
of any person whom it is required to indemnify. The Company's Bylaws provide
that the Company will indemnify its directors and officers as a contractual
obligation and may indemnify its employees and agents against certain
liabilities to the fullest extent permitted by California law. The Company
intends to enter into indemnification agreements with each of its current
directors and officers.
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<PAGE>
CERTAIN TRANSACTIONS
In March 1994, DepoMed Systems, Inc. ("DSI") a company founded and
principally owned by Dr. John W. Shell was merged into M6 Pharmaceuticals,
Inc. ("M6"). In July 1995 DSI and Dr. Shell instituted an action against M6
relating to the merger and related events. In August 1995, pursuant to a
settlement agreement (the "Settlement Agreement") between DSI and Dr. Shell,
on the one hand, and M6, on the other hand, M6 transferred all of the
intellectual property and other technology assets of DSI to the Company, and
the Company assumed certain liabilities related thereto.
In September 1995, the Company issued 2,066,667 shares of its Common Stock
to Dr. Shell and other shareholders of DSI in cancellation of the M6 stock
received in the merger. See "Principal Shareholders."
In September 1995, the Company issued 1,196,491 shares of Common Stock to
CSO Ventures LLC ("CSO") in consideration of the prior agreement of CSO to
lend the Company $100,000 to finance the litigation against M6 and to assist
the Company in its initial financing. In September 1995, the Company also
entered into a consulting agreement with CSO, pursuant to which CSO provided
financial advisory services to the Company for an annual fee of $120,000. The
consulting agreement terminated in September 1996. In March 1997, the Company
entered into a consulting agreement with CSO which provides for business
development, operations and financial advisory services to be performed by CSO
for an annual fee of $120,000. The agreement has a term of one year and is
renewed automatically unless terminated by either party with 60 days written
notice. Dr. Schein and Mr. Cooper are members of CSO and also are directors of
the Company.
In November 1995, the Company sold 1,025,000 shares of Series A Preferred
Stock to David P. Ash and 815,000 shares of Series A Preferred to Amore
Perpetuo, Inc., each a principal shareholder of the Company. In February 1997,
the Company sold 25,000 shares of Series B Preferred Stock to John F.
Hamilton, the Company's Chief Financial Officer. See "Principal Shareholders."
Pursuant to the terms of the Settlement Agreement, the Company assumed two
promissory notes issued to Dr. Shell by DSI in December 1992 and December 1993
for the aggregate principal amount of $100,667 (the "DSI Notes"). In November
1996, the Company issued a promissory note to Dr. Shell (the "1996 Note" and
together with the DSI Notes the "Shell Notes") for the principal amount of
$50,000. The Shell Notes bear interest at 6% per annum. The Shell Notes will
become due and payable upon completion of this Offering. As of June 30, 1997,
the aggregate principal amount and related interest on the Shell Notes totaled
$176,006. The Company intends to repay the Shell Notes with a portion of the
net proceeds from this Offering. See "Use of Proceeds."
Pursuant to the terms of the Settlement Agreement, the Company assumed
promissory notes (the "Stern Notes") issued to Julian N. Stern, Secretary of
the Company, by DSI. The Stern Notes bear interest at 6.5% per annum. The
Stern Notes will become due and payable upon completion of this Offering. The
Company intends to repay the Stern Notes with a portion of the net proceeds
from this Offering. As of June 30, 1997, the aggregate principal amount of the
Stern Notes and related interest totaled $126,000. See "Use of Proceeds."
An agreement was entered into between the Company and John W. Fara at the
time he was appointed President and Chief Executive Officer, which provides
for Dr. Fara to receive an incentive bonus equal to the greater of 1% of the
proceeds of the Company's initial public offering of securities or $100,000,
payable upon the completion of such offering. Pursuant to that agreement, Dr.
Fara will receive compensation of $100,000 upon completion of the Offering.
In September 1997, the Company and G. Steven Burrill, a director of the
Company, agreed that the Company will enter into a two year, renewable
agreement with Burrill & Company, a private merchant bank of which Mr. Burrill
is Chief Executive Officer, to provide assistance in the development of
strategic partnerships with pharmaceutical and biotechnology companies.
Compensation under this agreement will include a 7% fee in cash or stock (as
mutually agreed) based upon the value of any successful transaction with which
Burrill & Company is principally involved for the Company, plus a retainer of
$10,000 per month and normal expenses associated with its activities on behalf
of the Company.
Subsequent to December 31, 1996, the Company has granted options to purchase
Common Stock to officers and directors, including options to purchase 30,000
shares of Common Stock to Mr. Hamilton and options to purchase 66,667 shares
of Common Stock to Dr. Fara, in January and April 1997, respectively, at an
exercise price of $3.00 per share of Common Stock. In June 1997, the Company
granted options to purchase 25,000 shares of Common Stock to Mr. Hamilton at
an exercise price of $5.25 per share of Common Stock. Upon his election as a
director, the Company granted G. Steven Burrill options to purchase 10,000
shares of Common Stock at an exercise price of $5.40 per share.
44
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997 and, as
adjusted to reflect the sale of the Securities offered hereby, by (i) each
person who is known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers, and (iv) by all current directors and executive
officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT BEFORE PERCENT AFTER
NAME OF BENEFICIAL OWNER OWNED (1)(2) OFFERING (2) OFFERING (2)
------------------------ ------------------- -------------- -------------
<S> <C> <C> <C>
CSO Ventures LLC (3).......... 1,196,491 28.1% 21.9%
Cygnus, Inc. (4).............. 400,000 9.4 7.3
David P. Ash (5).............. 341,667 8.0 6.3
Amore Perpetuo, Inc. (6)...... 271,666 6.4 5.0
John W. Shell (7)............. 1,566,666 36.7 28.7
John N. Shell (8)............. 504,167 11.8 9.2
John W. Fara (9).............. 29,167 * *
G. Steven Burrill (10)........ 1,667 * *
Judson A. Cooper (11)......... 1,196,491 28.1 21.9
Joshua Schein (11)............ 1,196,491 28.1 21.9
All directors and executive
officers
as a group (7 persons) (12).. 3,306,491 76.9% 60.1%
</TABLE>
- --------
* Less than one percent of the outstanding shares of Common Stock.
(1) Assumes no exercise of the Over-Allotment Option. Except pursuant to
applicable community property laws or as indicated in the footnotes to
this table, to the Company's knowledge, each shareholder identified in
the table possesses sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by such shareholder.
(2) Applicable percentage of ownership for each shareholder is based on
4,263,447 shares of Common Stock outstanding as of September 30, 1997,
together with applicable options for such shareholders. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission, and includes voting and investment power with
respect to the shares. Shares of Common Stock subject to outstanding
options are deemed outstanding for computing the percentage of ownership
of the person holding such options, but are not deemed outstanding for
computing the percentage ownership of any other person.
(3) CSO Ventures LLC ("CSO") has informed the Company that 299,122 shares are
held on behalf of Richard B. Stone. Mr. Stone's address is 135 East 57th
Street, New York, New York 10022. CSO's address is 666 3rd Avenue, 30th
Floor, New York, New York 10017. The principals of CSO are Judson Cooper,
Joshua Schein and Steven Oliviera.
(4) These shares are being held by Dr. John W. Shell for delivery to Cygnus,
Inc., formerly Cygnus Therapeutics Systems ("Cygnus") if certain
conditions are met, including the timely tender for cancellation of
certificates representing shares of M6 held by Cygnus. Cygnus, Inc.'s
address is 400 Penobscot Drive, Redwood City, California 94063. Cygnus is
engaged in the development of diagnostic and drug delivery systems, with
its current efforts primarily focused on three core areas: a painless,
automatic glucose monitoring device, transdermal drug delivery systems
and mucosal drug delivery systems.
(5) Includes 30,000 shares of Common Stock held by the children of Mr. Ash.
(6) Amore Perpetuo, Inc.'s address is 4616 West Sahara Avenue #65, Las Vegas,
Nevada 89012. Mr. Alfred Anzalone is the principal of Amore Perpetuo,
Inc.
(7) Includes 400,000 shares of Common Stock held on behalf of Cygnus, of
which Dr. Shell disclaims beneficial ownership. See footnote 4. Dr.
Shell's address is 1170 B Chess Drive, Foster City, California 94404.
(8) Includes 4,167 shares of Common Stock issuable upon exercise of
outstanding options which will vest within 60 days of September 30, 1997.
Mr. Shell's address is 1170 B Chess Drive, Foster City, California 94404.
(9) Represents 29,167 shares of Common Stock issuable upon exercise of
outstanding options which will vest within 60 days of September 30, 1997.
Dr. Fara's address is 1170 B Chess Drive, Foster City, California 94404.
(10) Represents 1,667 shares of Common Stock issuable upon exercise of
outstanding options which will vest within 60 days of September 30, 1997.
Mr. Burrill's address is 1170 B Chess Drive, Foster City, California
94404.
(11) Represents shares beneficially owned by CSO, of which Mr. Cooper and Dr.
Schein disclaim beneficial ownership.
(12) Includes 35,000 shares of Common Stock issuable upon exercise of
outstanding options which will vest within 60 days of September 30, 1997.
Also includes 1,196,491 shares owned by CSO, of which Mr. Cooper and Dr.
Schein disclaim beneficial ownership, and 8,333 shares of Common Stock
held by John F. Hamilton, the Company's Chief Financial Officer.
45
<PAGE>
DESCRIPTION OF SECURITIES
The following description of the securities of the Company and certain
provisions of the Company's Articles of Incorporation and Bylaws to be
effective upon completion of the Offering is a summary and is qualified in its
entirety by the provisions of the Articles of Incorporation and Bylaws, which
have been filed as exhibits to the Company's Registration Statement, of which
this prospectus is a part.
Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 25,000,000 shares of Common Stock, no par value and
5,000,000 shares of Preferred Stock, no par value (the "Preferred Stock").
COMMON STOCK
Upon completion of this Offering, there will be 5,463,447 shares of Common
Stock issued and outstanding. Holders of Common Stock are entitled to one vote
per share on all matters to be voted upon by the shareholders of the Company.
Subject to the preferences that may be applicable to any future shares of
Preferred Stock outstanding, the holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to the prior liquidation rights of any future shares of
Preferred Stock outstanding. The holders of Common Stock have no preemptive,
redemption, conversion, sinking fund or other subscription rights. The
outstanding shares of Common Stock are, and the shares offered by the Company
in the Offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
Upon the closing of this Offering, the Board of Directors will have the
authority, without further action by the shareholders, to issue up to
5,000,000 shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms in redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any
series or the designation of such series without any further vote or action by
the shareholders. 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 and could have
the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plans to issue any shares of Preferred
Stock.
THE UNITS
Each Unit consists of one share of Common Stock and one Warrant, which
entitles the registered holder thereof to purchase one share of Common Stock
at an initial exercise price of $ per share [125% of the initial public
offering price per Unit]. The shares of Common Stock and Warrants are
detachable and will trade separately three months after the issuance, subject
to earlier separability in the discretion of the Representative and the
Company.
BRIDGE WARRANTS
In connection with the Bridge Financing, the Company issued Bridge Warrants
entitling the investors to purchase the number of shares of Common Stock which
equals 50% of their investment divided by the initial public offering price
per share of the Common Stock. A total of 81,250 shares of Common Stock will
be issuable upon exercise of the Bridge Warrants at an exercise price of $6.00
per share of Common Stock. A total of 2,083 shares of Common Stock will be
issuable upon exercise of the Bridge Warrants at an exercise price of $7.63
per share of Common Stock. The Bridge Warrants may be exercised at any time
beginning April 7, 1998 until April 7, 2002. The holders of the Bridge
Warrants are also entitled to certain registration rights. See "--Registration
Rights."
46
<PAGE>
WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects
by reference to the actual text of the Warrant Agreement between the Company,
and Continental Stock Transfer & Trust Company (the "Warrant Agent"), a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time commencing , 1998 [12 months after the
date of this Prospectus], until , 2002 [5 years after the date of this
Prospectus], one share of Common Stock at a price of $ per share [125% of
the initial public offering price per Unit], subject to adjustment in
accordance with the anti-dilution provisions referred to below. The holder of
any Warrant may exercise such Warrant by surrendering the certificate
representing the Warrant to the Warrant Agent, with the subscription form
thereon properly completed and executed, together with payment of the exercise
price. The Warrants may be exercised at any time in whole or in part at the
applicable exercise price until the expiration of the Warrants. No fractional
shares will be issued upon the exercise of the Warrants. The exercise price of
the Warrants bears no relationship to any objective criteria and should in no
event be regarded as an indication of any future market price of the
securities offered hereby.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment, upon
the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock or for a period of two
years from the date of this Prospectus, the sale by the Company of shares of
its Common Stock or other securities convertible into Common Stock at a price
below the initial public offering price of the Common Stock, excluding shares
of Common Stock issued in connection with incentive or benefit plans of the
Company, strategic alliances, joint ventures or other corporate partnerships.
Additionally, an adjustment will be made in the case of a reclassification or
exchange of Common Stock, consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger in which the Company
is the surviving corporation) or sale of all or substantially all of the
assets of the Company, in order to enable warrantholders to acquire the kind
and number of shares of stock or other securities or property receivable in
such event by a holder of the number of shares of Common Stock that might have
been purchased upon the exercise of the Warrant.
Redemption Provisions. Commencing , 1999 [18 months after the date of
this Prospectus], the Warrants are subject to redemption at $.10 per Warrant
on 30 days' prior written notice provided that the average closing bid price
of the Common Stock as reported on the Nasdaq equals or exceeds 200% of the
then-current Warrant exercise price per share for any 20 trading days within a
period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption. In the event the Company exercises the
right to redeem the Warrants, such Warrants will be exercisable until the
close of business on the business day immediately preceding the date for
redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price.
Transfer, Exchange and Exercise. The Warrants are in registered form and may
be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants become wholly void and of no value. If
a market for the Warrants develops, the holder may sell the Warrants instead
of exercising them. There can be no assurance, however, that a market for the
Warrants will develop, or if it develops, that it will continue.
Warrantholders Not Shareholders. The Warrants do not confer upon holders any
voting, dividend or other rights as shareholders of the Company.
Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than
47
<PAGE>
30 days on not less than 30 days' prior written notice to the warrantholders
and the Representative. Modification of the number of securities purchasable
upon the exercise of any Warrant, the exercise price and the expiration date
with respect to any Warrant requires the consent of two-thirds of the
warrantholders.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. Although the Company will use its best
efforts to have all of the shares of Common Stock issuable upon exercise of
the Warrants registered or qualified on or before the exercise date and to
maintain a current prospectus relating thereto until the expiration of the
Warrants, there can be no assurance that it will be able to do so.
The Warrants are separately transferable immediately upon issuance. Although
the Securities will not knowingly be sold to purchasers in jurisdictions in
which the Securities are not registered or otherwise qualified for sale,
purchasers may buy Warrants in the aftermarket or may move to jurisdictions in
which the shares underlying the Warrants are not so registered or qualified
during the period that the Warrants are exercisable. In this event, the
Company would be unable to issue shares to those persons desiring to exercise
their Warrants and holders of Warrants would have no choice but to attempt to
sell the Warrants in a jurisdiction where such sale is permissible or allow
them to expire unexercised.
REGISTRATION RIGHTS
Certain holders of the Common Stock or their transferees are entitled to
certain rights with respect to the registration of shares under the Securities
Act. Registration rights are held with respect to 92,834 shares of Common
Stock to be issued upon conversion of the Company's Series B Preferred Stock
upon consummation of this Offering under the terms of the agreements between
the Company and holders of Series B Preferred Stock (the "Registrable
Securities"). Subject to certain limitations in such agreements, the holders
of Registrable Securities have "piggyback" rights to request that their shares
be registered for public resale with respect to up to four registrations of
the Company's securities. However, if such piggyback rights are exercised in
connection with an underwritten offering of the Company's Common Stock, the
underwriter of such offering has the right to reduce to 20% of the total the
number of such shares to be included in such public offering or, in the case
of the initial public offering, to exclude such shares entirely. In addition,
at a time when the Company is eligible to register securities on Form S-3,
holders of Registrable Securities not already registered may demand that the
Company file a Form S-3, provided that the aggregate offering price of the
Registrable Securities would be at least $1,000,000. The Company will pay
certain expenses in connection with the exercise of the foregoing rights.
These registration rights expire five years after an initial public offering
of the Company's securities.
Registration rights are also held with respect to 83,333 shares of Common
Stock issuable upon exercise of the Bridge Warrants (the "Bridge Shares")
under the terms of the agreement between the Company and holders of the Bridge
Warrants. Subject to certain limitations in such agreement, the holders of
Bridge Shares have the right to require the Company, on one occasion, to
register the Bridge Shares under the Securities Act. In addition, the holders
of the Bridge Shares have "piggyback" rights to request that their shares be
registered for public resale with respect to one registration of the Company's
securities. However, if such piggyback registration rights are exercised in
connection with an underwritten offering of the Company's Common Stock, the
underwriter of such offering has the right to reduce or eliminate such shares
to be included in such public offering. The Company will pay certain expenses
(excluding underwriting discounts and commissions) relating to such
registrations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock and the
Warrant Agent for the Warrants is Continental Stock Transfer & Trust Company,
New York, New York.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 5,463,447 shares of
Common Stock outstanding, of which the 1,200,000 Shares offered hereby (and
the 1,200,000 Warrants) will be transferable without restriction under the
Securities Act. The other 4,263,447 outstanding shares of Common Stock are
"restricted securities" (as that term is defined in Rule 144 promulgated under
the Securities Act) which may be publicly sold only if registered under the
Securities Act or if sold in accordance with an applicable exemption from
registration, such as Rule 144. In general, under the revised holding period
requirements of Rule 144, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted securities for at least one year, is entitled to
sell (together with any person with whom such individual is required to
aggregate sales) within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or, if the Common Stock is quoted on the Nasdaq Stock Market or
another national securities exchange, the average weekly trading volume during
the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements, and the
availability of current public information regarding the Company. A person who
has not been an affiliate of the Company for at least three months, and who
has beneficially owned restricted securities for at least two years, is
entitled to sell such restricted shares under Rule 144(k) without regard to
any of the limitations described above.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 generally may be relied upon with
respect to the sale of shares purchased from the Company by its employees,
directors, officers or consultants prior to the date of this Prospectus
pursuant to written compensatory benefit plans such as the Stock Plan and
written contracts such as option agreements. Rule 701 is also available for
sales of shares acquired by persons pursuant to the exercise of options
granted prior to the effective date of this Prospectus, regardless of whether
the option exercise occurs before or after the effective date of this
Prospectus. Securities issued in reliance on Rule 701 are "restricted
securities" within the meaning of Rule 144 and, beginning 90 days after the
date of this Prospectus, may be sold by persons other than affiliates of the
Company subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its one-year minimum holding
period requirement.
As of June 30, 1997, options granted under the Stock Plan to purchase a
total of 330,000 shares of Common Stock were outstanding and options to
purchase an additional 245,000 shares of Common Stock were reserved for future
issuance under the Stock Plan. Of the options granted under the Stock Plan,
7,917 of such options were currently exercisable as of June 30, 1997, with the
remaining outstanding options to become exercisable at the rate of 30,000
options in 1997 and 87,500 in 1998, 85,417 in 1999 and 129,167 options in 2000
and thereafter. Since June 1997, the Board of Directors has granted options to
purchase an additional 10,000 shares of Common Stock at an exercise price of
$5.40 per share. Shares of Common Stock issued upon the exercise of
outstanding options will be "restricted securities" and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available. Potential exemptions include those available under
Rule 144 and Rule 701.
No prediction can be made as to the effect that future sales of Common
Stock, or the availability of shares of Common Stock for future sale, will
have on the market prices of the Common Stock and Warrants prevailing from
time to time. Pursuant to the Lock-Up Agreements, the Company, all officers
and directors of the Company and all holders of shares of Common Stock,
options or other securities exercisable for or convertible into Common Stock
have agreed not to, directly or indirectly, issue, agree or offer to sell,
transfer, assign, distribute, grant an option for purchase or sale of, pledge,
hypothecate or otherwise encumber or dispose of any beneficial interest in
such securities for a period of 12 months following the date of this
Prospectus without the prior written consent of the Representative. The
Representative has no general policy with respect to the release of shares
prior to the expiration of the lock-up period and no present intention to
waive or modify any of these restrictions on the sale of Company securities.
Assuming that the Representative does not release the shareholders from the
Lock-Up Agreements, after the Lock-Up Period all of the shares will be
eligible for sale in the public market. Of such shares, 3,355,991 shares of
Common Stock will be eligible for sale under Rule 144 (subject to volume
limitations imposed by such rule), 815,789 shares of Common Stock will be
eligible for sale under Rule 144(k), and 91,667 shares will be eligible for
sale under Rule 701. The sale or issuance, or the potential for sale or
issuance, of Common Stock after such 12-month period could have an adverse
impact on the market prices of the Common Stock and/or the Warrants. Sales of
substantial amounts of Common Stock or the perception that such sales could
occur could adversely affect prevailing market prices for the Common Stock
and/or the Warrants. See "Underwriting."
49
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement (the "Underwriting Agreement"), to purchase from
the Company and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the respective number of Units set forth opposite their
names:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF UNITS
------------ ---------------
<S> <C>
National Securities Corporation...........................
---------
Total................................................... 1,200,000
=========
</TABLE>
The Underwriters are committed to purchase all the Units offered hereby, if
any of such Units are purchased. The Underwriting Agreement provides that the
obligations of the several Underwriters are subject to conditions precedent
specified therein.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Units to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less concessions not in excess of $ per Unit. Such
dealers may reallow a concession not in excess of $ per Unit to certain
other dealers. After the commencement of the Offering, the public offering
price, concession and reallowance may be changed by the Representative.
The Representative has informed the Company that it does not expect sales to
discretionary accounts by the Underwriters to exceed five percent of the Units
offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that Underwriters may be required to make. The Company has also
agreed to pay to the Representative a non-accountable expense allowance equal
to 2 1/2% of the gross proceeds derived from the sale of the Units
underwritten, of which $50,000 has been paid to date.
The Company has granted to the Underwriters the Over-Allotment Option,
exercisable during the 45-day period from the date of this Prospectus, to
purchase from the Company up to an additional 180,000 Units at the initial
public offering price per Unit, offered hereby, less underwriting discounts.
Such option may be exercised only for the purpose of covering over-allotments,
if any, incurred in the sale of the Units offered hereby. To the extent such
option is exercised in whole or in part, each Underwriter will have a firm
commitment, subject to certain conditions, to purchase the number of the
additional Units proportionate to its initial commitment.
In connection with this Offering, the Company has agreed to sell to the
Representative, for $.0001 per warrant, warrants to purchase from the Company
up to 117,917 Units (the "Representative's Warrants"). The Representative's
Warrants are initially exercisable at a price of $ per Unit [125% of the
initial public offering price per Unit] for a period of four years, commencing
one year after the date of this Prospectus and are restricted from sale,
transfer, assignment or hypothecation for a period of 12 months from the date
of this Prospectus, except to officers of the Representative. The Warrants
issuable upon exercise of the Representative's Warrants are initially
exercisable at $ per Warrant [125% of the initial public offering price
per Unit] for a period of four years, commencing one year from the date of
this Prospectus. The Representative's Warrants provide for adjustment in the
number of securities issuable upon the exercise thereof as a result of certain
subdivisions and combinations of the Common Stock. The Representative's
Warrants grant to the holders thereof certain rights of registration for the
securities issuable upon exercise thereof.
50
<PAGE>
The Company's directors, and executive officers, and all holders of shares
of Common Stock, options, warrants or other securities convertible,
exercisable or exchangeable for Common Stock have agreed not to offer, sell,
or otherwise dispose of any shares of Common Stock for a period of 12 months
following the date of this Prospectus without the prior written consent of the
Representative. An appropriate legend shall be placed on the certificates
representing such securities. The Representative has no general policy with
respect to the release of shares prior to the expiration of the lock-up period
and no present intention to waive or modify any of these restrictions on the
sale of Company securities.
Upon the exercise of any Warrants more than one year after the date of this
Prospectus, which exercise was solicited by the Representative, and to the
extent not inconsistent with the guidelines of the National Association of
Securities Dealers, Inc. ("NASD") and the Rules and Regulations of the
Commission, the Company has agreed to pay the Representative a commission
which shall not exceed five percent (5%) of the aggregate exercise price of
such Warrants in connection with bona fide services provided by the
Representative relating to any warrant solicitation undertaken by the
Representative. In addition, the individual must designate the firm entitled
to payment of such warrant solicitation fee. A warrant solicitation fee will
only be paid to the Representative or another NASD member when such NASD
member is specifically designated in writing as the soliciting broker.
However, no compensation will be paid to the Representative in connection with
the exercise of the Warrants if (i) the market price of the Common Stock is
lower than the exercise price, (ii) the Warrants were held in a discretionary
account, or (iii) the exercise of Warrants is not solicited by the
Representative. Unless granted an exemption by the Commission from its Rule
101 under Regulation M promulgated under the Securities Act, the
Representative will be prohibited from engaging in any market making
activities with regard to the Company's securities for the period from five
business days (or such applicable periods as Rule 101 under Regulation M may
provide) prior to any solicitation of the exercise of the Warrants until the
later of the termination of such solicitation activity or the termination (by
waiver or otherwise) of any right the Representative may have to receive a
fee. As a result, the Representative may be unable to continue to provide a
market for the Company's securities during certain periods while the Warrants
are exercisable. If the Representative has engaged in any of the activities
prohibited by Rule 101 under Regulation M during the period described above,
the Representative undertakes to waive unconditionally its rights to receive a
commission on the exercise of such Warrants.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Securities.
Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase the Units, the Common Stock and/or Warrants for the
purpose of stabilizing their respective market prices. The Underwriters also
may create a short position for the account of the Underwriters by selling
more Securities in connection with the Offering than they are committed to
purchase from the Company, and in such case may purchase Securities in the
open market following completion of the Offering to cover all or a portion of
such short position. The Underwriters may also cover all or a portion of such
short position, up to 180,000 Units, by exercising the Over-Allotment Option
referred to above. In addition, the Representative may impose "penalty bids"
under contractual arrangements with the Underwriters whereby it may reclaim
from an Underwriter (or dealer participating in the Offering) for the account
of other Underwriters, the selling concession with respect to the Units that
are distributed in the Offering but subsequently purchased for the account of
the Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the prices of the Securities at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
Prior to this Offering, there has been no public market for the Units,
Common Stock or the Warrants. Consequently, the initial public offering price
of the Units, and the exercise price of the Warrants has been determined by
negotiation between the Company and the Representative and does not
necessarily bear any relationship to the Company's asset value, net worth or
other established criteria of value. The factors considered in such
negotiations, in addition to prevailing market conditions, included the
history of and prospects for the
51
<PAGE>
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure, the market
for initial public offerings and certain other factors as were deemed
relevant.
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 a
copy of each such agreement which are filed as exhibits to the Registration
Statement of which this Prospectus is a part. For a more complete description
thereof, see "Additional Information."
LEGAL MATTERS
The legality of the Units offered hereby will be passed upon for the Company
by Heller Ehrman White & McAuliffe, Palo Alto, California. Julian N. Stern,
the Secretary of the Company, is the owner of 83,333 shares of Common Stock
and is the sole stockholder and employee of a professional corporation that is
a partner of Heller Ehrman White & McAuliffe. Orrick, Herrington & Sutcliffe
LLP, New York, New York has acted as counsel to the Underwriters in connection
with the Offering.
EXPERTS
The financial statements of DepoMed, Inc. at December 31, 1996 and for the
period from inception (August 7, 1995) to December 31, 1995 and for the year
ended December 31, 1996 appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form SB-2 under the Securities Act
(the "Registration Statement") with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock,
reference is made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contracts or other document referred to 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 may be inspected by anyone without charge at the
Commission's principal office in Washington, D.C., and copies of all or any
part of the Registration Statement may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, upon
payment of certain fees prescribed by the Commission. The Commission maintains
an Internet World Wide Web site that contains reports, proxy and information
reports and other materials that are filed through the Commission's Electronic
Data Gathering, Analysis and Retrieval System. The site can be accessed at
http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by its independent auditors.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statement of Shareholders' Equity (Net Capital Deficiency)................. F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
DepoMed, Inc.
We have audited the accompanying balance sheet of DepoMed, Inc. (a
development stage company) as of December 31, 1996, and the related statements
of operations, shareholders' equity (net capital deficiency), and cash flows
for the period from inception (August 7, 1995) to December 31, 1995 and for
the year ended December 31, 1996. 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 DepoMed, Inc. (a
development stage company) at December 31, 1996, and the results of its
operations and its cash flows for the period from inception (August 7, 1995)
to December 31, 1995 and for the year ended December 31, 1996 in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and net capital deficiency raise substantial doubt
about its ability to continue as a going concern. Management's plans as to
these matters are also described in Note 1. The 1996 financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 31, 1997, except for
Note 9, as to which the date is
July 30, 1997
F-2
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
EQUITY
(NET CAPITAL
DEFICIENCY)
DECEMBER 31, JUNE 30, AT JUNE
1996 1997 30, 1997
------------ ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 10,802 $ 626,589
Accounts receivable................... 120,898 186,875
Other current assets.................. 31,537 420,521
----------- ----------
Total current assets................ 163,237 1,233,985
Property and equipment, net............. 155,139 215,408
Other assets............................ 14,751 10,447
----------- ----------
$ 333,127 $1,459,840
=========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable...................... $ 51,746 $ 194,271
Accrued compensation.................. 291,374 333,649
Notes payable to shareholders......... 294,238 302,006
Notes payable......................... -- 1,014,025
Capital lease obligation, current
portion.............................. 19,803 27,201
Other current liabilities............. 22,764 16,181
----------- ----------
Total current liabilities........... 679,925 1,887,333
Capital lease obligation, non-current
portion................................ 34,634 50,512
Commitments
Shareholder's equity (net capital
deficiency):
Preferred stock, no par value,
10,000,000 shares
authorized (5,000,000 pro forma);
2,447,368 and 2,725,868 shares issued
and outstanding at December 31, 1996
and June 30, 1997, respectively (none
pro forma); aggregate liquidation
preference of $750,000 and $1,028,500
at December 31, 1996 and June 30,
1997, respectively................... 682,759 961,259 $ --
Common stock, no par value, 25,000,000
shares
authorized; 3,354,825 shares issued
and outstanding at December 31, 1996
and June 30, 1997, respectively,
(4,263,447 shares pro forma)......... 284,250 526,300 1,487,559
Deferred compensation................. (275,000) (464,404) (464,404)
Deficit accumulated during the
development stage.................... (1,073,441) (1,501,160) (1,501,160)
----------- ---------- -----------
Total shareholders' equity (net
capital deficiency)................ (381,432) (478,005) $ (478,005)
----------- ---------- -----------
$ 333,127 $1,459,840
=========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
INCEPTION SIX MONTHS ENDED (AUGUST 7,
(AUGUST 7, 1995) YEAR ENDED JUNE 30 , 1995) TO
TO DECEMBER 31, DECEMBER 31, ----------------------- JUNE 30 ,
1995 1996 1996 1997 1997
---------------- ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product development
revenue................ $ -- $ 317,971 $ -- $ 351,737 $ 669,708
Operating expenses:
Research and
development.......... 138,816 390,496 181,947 328,603 857,915
General and
administrative....... 155,157 393,676 246,396 430,743 979,576
Purchase of in-process
research and
development.......... 298,154 -- -- -- 298,154
--------- --------- --------- --------- -----------
Total operating
expenses........... 592,127 784,172 428,343 759,346 2,135,645
Loss from operations.... (592,127) (466,201) (428,343) (407,609) (1,465,937)
Interest expense, net... 8,541 6,572 1,567 20,110 35,223
--------- --------- --------- --------- -----------
Net loss................ $(600,668) $(472,773) $(429,910) $(427,719) $(1,501,160)
========= ========= ========= ========= ===========
Pro forma net loss per
share.................. $ (0.11) $ (0.10) $ (0.10)
========= ========= =========
Shares used in computing
pro forma net loss per
share.................. 4,350,986 4,328,397 4,482,758
========= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
FROM INCEPTION (AUGUST 7, 1995) TO JUNE 30, 1997
<TABLE>
<CAPTION>
DEFICIT TOTAL
ACCUMULATED SHAREHOLDERS'
CONVERTIBLE PREFERRED STOCK COMMON STOCK DURING EQUITY
----------------------------- ------------------- DEFERRED DEVELOPMENT (NET CAPITAL
SHARES AMOUNT SHARES AMOUNT COMPENSATION STAGE DEFICIENCY)
-------------- ------------- --------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at inception
(August 7, 1995)....... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common
shares to founders on
August 7, 1995 in
exchange for shares
held by them in M6
Pharmaceuticals, Inc... -- -- 2,066,667 -- -- -- --
Issuance of common
shares for cash to
investors at
approximately $0.0009
per share on November
15, 1995............... -- -- 1,196,491 1,000 -- -- 1,000
Issuance of Series A
convertible preferred
stock for cash to
investors at
approximately $0.31 per
share on November 15,
1995, net of issuance
costs of $67,241....... 2,447,368 682,759 -- -- -- -- 682,759
Net loss................ -- -- -- -- -- (600,668) (600,668)
-------------- ------------- --------- --------- ---------- ------------ ----------
Balances at December 31,
1995................... 2,447,368 682,759 3,263,158 1,000 -- (600,668) 83,091
Issuance of common
shares for cash at
various dates at $0.09
per share to employees
and the Company's
counsel pursuant to
stock option
agreements............. -- -- 91,667 8,250 -- -- 8,250
Deferred compensation
related to grants of
certain stock options.. -- -- -- 275,000 (275,000) -- --
Net loss................ -- -- -- -- -- (472,773) (472,773)
-------------- ------------- --------- --------- ---------- ------------ ----------
Balances at December 31,
1996................... 2,447,368 $ 682,759 3,354,825 $ 284,250 $ (275,000) $ (1,073,441) $ (381,432)
Issuance of Series B
convertible preferred
stock to investors for
cash at $1.00 per share
(unaudited)............ 278,500 278,500 -- -- -- -- 278,500
Deferred compensation
related to grants of
certain stock options
(unaudited)............ -- -- -- 242,050 (242,050) -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- -- 52,646 -- 52,646
Net loss (unaudited).... -- -- -- -- -- (427,719) (427,719)
-------------- ------------- --------- --------- ---------- ------------ ----------
Balances at June 30,
1997 (unaudited)....... 2,725,868 $ 961,259 3,354,825 $ 526,300 $ (464,404) $ (1,501,160) $ (478,005)
============== ============= ========= ========= ========== ============ ==========
</TABLE>
F-5
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
INCEPTION SIX MONTHS ENDED (AUGUST 7,
(AUGUST 7, 1995) YEAR ENDED JUNE 30, 1995) TO
TO DECEMBER 31, DECEMBER 31, ----------------------- JUNE 30,
1995 1996 1996 1997 1997
---------------- ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............. $(600,668) $(472,773) $(429,910) $(427,719) $(1,501,160)
Adjustments to
reconcile net loss
to net cash used in
in operating
activities:
Depreciation and
amortization....... 12,234 32,878 16,464 27,586 72,698
Accrued interest
expense on notes... 2,930 10,688 5,176 21,793 35,411
Amortization of
deferred
compensation
expense............ -- -- -- 52,646 52,646
Purchase of in-
process research
and development.... 298,154 -- -- -- 298,154
Changes in assets
and liabilities:
Accounts
receivable....... -- (120,898) -- (65,977) (186,875)
Other current
assets........... (9,144) (22,393) -- (388,984) (420,521)
Other assets...... (10,076) (4,675) 3,162 4,272 (10,479)
Accounts
payable.......... 12,000 39,746 36,605 142,525 194,271
Accrued
compensation..... 62,283 161,615 80,808 42,275 266,173
Other current
liabilities...... 38,268 (15,504) (24,097) (6,583) 16,181
--------- --------- --------- --------- -----------
Net cash used in
operating
activities..... (194,019) (391,316) (311,792) (598,166) (1,183,501)
--------- --------- --------- --------- -----------
Cash flows from
investing activities:
Expenditures for
property and
equipment........... (49,645) (28,708) (12,481) (45,896) (124,249)
Purchases of short-
term investments.... (79,582) -- -- -- (79,582)
Sales of short-term
investments......... -- 79,582 79,582 -- 79,582
--------- --------- --------- --------- -----------
Net cash provided by
(used in) investing
activities.......... (129,227) 50,874 67,101 (45,896) (124,249)
--------- --------- --------- --------- -----------
Cash flows from
financing activities:
Payments on capital
lease obligations... (22,506) (45,013) (12,706) (18,651) (86,170)
Proceeds on issuance
of notes............ -- 50,000 -- 1,000,000 1,050,000
Proceeds on issuance
of common stock..... 1,000 8,250 300 -- 9,250
Proceeds on issuance
of preferred stock.. 682,759 -- -- 278,500 961,259
--------- --------- --------- --------- -----------
Net cash provided by
(used in) financing
activities.......... 661,253 13,237 (12,406) 1,259,849 1,934,339
--------- --------- --------- --------- -----------
Net increase
(decrease) in cash
and cash
equivalents......... 338,007 (327,205) (257,097) 615,787 626,589
Cash and cash
equivalents at
beginning of
period.............. -- 338,007 338,007 10,802 --
--------- --------- --------- --------- -----------
Cash and cash
equivalents at end
of period........... $ 338,007 $ 10,802 $ 80,910 $ 626,589 $ 626,589
========= ========= ========= ========= ===========
Supplemental schedule
of noncash financing
and investing
activities:
Acquisition of
property and
equipment under
capital leases...... $ 65,563 $ 56,393 $ -- $ 41,927 $ 163,883
========= ========= ========= ========= ===========
Assumption of net
liabilities of M6
Pharmaceuticals at
inception (August 7,
1995)............... $ 298,154 $ -- $ -- $ -- $ 298,154
========= ========= ========= ========= ===========
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for
interest............ $ 6,493 $ 5,695 $ 2,402 $ 9,316 $ 21,504
========= ========= ========= ========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Organization
DepoMed, Inc. (the "Company"), a development stage company, was incorporated
in the State of California on August 7, 1995. The Company is engaged in the
research and development of oral drug delivery systems. The Company's primary
activities since incorporation have been establishing its offices and research
facilities, recruiting personnel, conducting research and development,
performing business and strategic planning and raising capital.
Basis of Presentation
In the course of its development activities, the Company has sustained
continuing operating losses and expects such losses to continue over the next
several years. Management plans to continue to finance the operations with a
combination of stock sales, such as the initial public offering contemplated
by the Company and, in the longer term, revenues from corporate alliances and
technology licenses. The Company's ability to continue as a going concern is
dependent upon the successful execution of financings and, ultimately, upon
achieving profitable operations. If adequate funds are not available, the
Company may be required to delay, reduce the scope of, or eliminate one or
more of its development programs. During the six months ended June 30, 1997,
the Company raised $278,500 in gross proceeds from the private placement of
Series B preferred stock.
In March 1994, DepoMed Systems, Inc. ("DSI"), a company founded and
principally owned by Dr. John W. Shell, the founder of the Company, was merged
into M6 Pharmaceuticals, Inc. ("M6"). In August 1995, pursuant to a settlement
agreement (the "1995 Settlement Agreement") among M6, DSI and Dr. Shell, M6
transferred all of the assets related to the research, development, marketing,
production and sale of oral drug delivery systems and technology developed by
or under the direction of Dr. Shell to the Company, and the Company assumed
certain net liabilities totaling $298,154 related thereto. Such amount has
been reflected in the statement of operations as a charge for the purchase of
in-process research and development.
Unaudited Pro Forma Shareholders' Equity (Net Capital Deficiency)
If the offering contemplated by this Prospectus is consummated, all of the
convertible preferred shares outstanding as of the closing date will
automatically be converted into 908,622 shares of common stock based on the
shares of convertible preferred stock outstanding as of June 30, 1997. Pro
forma shareholders' equity at June 30, 1997, as adjusted for the conversion of
preferred stock, is disclosed on the balance sheet.
Interim Financial Information
The financial information at June 30, 1997, for the six months ended June
30, 1996 and 1997 and for the period from inception (August 7, 1995) to June
30, 1997 is unaudited but includes all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such date and the operating results
and cash flows for those periods. Results for the six months ended June 30,
1997 are not necessarily indicative of results for any other interim period or
for the entire year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with an
original maturity from the date of purchase of three months or less to be cash
equivalents. As of December 31, 1995, cash equivalents primarily
F-7
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
consist of U.S. treasury bills. All other liquid investments are classified as
short-term investments and consist of treasury bills with maturities in excess
of three months. The Company places its cash, cash equivalents and short-term
investments with high quality, U.S. financial institutions and to date has not
experienced losses on any of its balances.
Depreciation and Amortization
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, generally three to five
years. Leasehold improvements are amortized over the lesser of the lease term
or the estimated useful lives of the related assets, generally four years.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under SFAS 123, stock-based compensation expense
is measured using either the intrinsic value method as prescribed by
Accounting Principles Board Opinion No. 25 ("APBO 25") or the fair-value
method described in SFAS 123. Beginning in 1996, the Company implemented SFAS
123 using the intrinsic-value method. Accordingly, adoption of the SFAS 123
had no material effect on the Company's financial position or results of
operations.
Net Loss Per Share
Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except that
pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins, common and common equivalent shares issued during the 12-month
period prior to the initial filing of the proposed offering at prices below
the assumed public offering price have been included in the calculation as if
they were outstanding for all periods presented (using the treasury stock
method for stock options at the estimated public offering price).
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PERIOD FROM INCEPTION YEAR ENDED JUNE 30,
(AUGUST 7, 1995) TO DECEMBER 31, --------------------
DECEMBER 31, 1995 1996 1996 1997
--------------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Net loss per share...... $ (0.19) $ (0.13) $ (0.12) (0.10)
========= ========= ========= =========
Shares used in computing
net loss per share..... 3,109,443 3,535,197 3,513,158 3,604,275
========= ========= ========= =========
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred shares not included
above that will automatically convert upon completion of the Company's initial
public offering (using the as-if-converted method) from the original date of
issuance.
F-8
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
Pro forma net loss per share for the period from inception (August 7, 1995)
to December 31, 1995 is as follows:
<TABLE>
<S> <C>
Pro forma net loss per share................................. $ (0.18)
==========
Shares used in computing pro forma net loss per share........ 3,317,824
==========
</TABLE>
Impact of Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute loss per share and to restate all prior periods. The
impact is expected to result in no change to loss per share for any of the
periods presented and the six-month periods ended June 30, 1997 and June 30,
1996.
Revenue Recognition
Product development revenue relates to the reimbursement of costs incurred
for research and development and the achievement of milestones as specified in
the related agreement and are recorded as earned.
(3) RESEARCH ARRANGEMENTS
Bristol-Myers Squibb Company
In July 1996, the Company and Bristol-Myers Squibb Company ("BMS") entered
into a joint research agreement to develop a product incorporating a BMS
proprietary compound into the DepoMed Gastric Retentive ("GR") System.
Pursuant to the agreement, the Company has achieved all the specified
milestones and has, therefore, recorded approximately $198,000 in product
development revenues in 1996, the entire fee specified in the agreement. The
amounts receivable under the agreement totaled $57,778 as of December 31,
1996.
Pursuant to the agreement, BMS has an option to obtain an exclusive,
worldwide license to products incorporating the BMS compound utilizing the GR
System. If such license is entered into, the Company will receive a royalty on
net sales of the products as well as certain milestone payments. The option
expires in February 1999.
Also in 1996 and the six month period ended June 30, 1997, the Company
performed contract research services for BMS under an arrangement whereby BMS
reimbursed specific research costs relating to the same product. Revenue
recognized in accordance with this arrangement amounted to $110,000 and
$351,737 and the amounts receivable under the arrangement totaled $63,120 and
$182,025 as of December 31, 1996 and June 30, 1997, respectively.
GalaGen Inc.
In May 1996, the Company and GalaGen Inc. ("GalaGen") entered into a
feasibility study involving the use of the GR System to deliver oral
immunoglobulin products developed by GalaGen. If the outcome of the
feasibility study is favorable, the Company may enter into a development
agreement with GalaGen.
F-9
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Furniture and office equipment.......................... $ 15,590
Laboratory equipment.................................... 153,957
Leasehold improvements.................................. 30,704
--------
200,251
Less accumulated depreciation and amortization.......... (45,112)
--------
$155,139
========
</TABLE>
Property and equipment includes assets under capitalized leases of $121,956
at December 31, 1996. Accumulated amortization related to assets under capital
leases totaled $33,412 at December 31, 1996, respectively.
(5) LEASES
The Company leases its facilities under a noncancelable operating lease. The
facilities lease expires in 1999 and includes an option to renew the lease for
an additional five years. Future minimum lease payments under the capital
leases and operating leases at December 31, 1996, together with the present
value of the minimum lease payments, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
<S> <C> <C>
Year ending December 31,
1997................................................ $ 38,676 $ 27,272
1998................................................ 39,468 23,316
1999................................................ 6,600 19,820
-------- --------
Total minimum payments required....................... $ 84,744 70,408
========
Less amount representing interest..................... (15,971)
--------
Present value of future lease payments................ 54,437
Less current portion.................................. (19,803)
--------
Noncurrent portion.................................... $ 34,634
========
</TABLE>
Rent expense for the period from inception (August 7, 1995) to December 31,
1995, for the year ended December 31, 1996 and for the period from inception
(August 7, 1995) to December 31, 1996 was approximately $15,840, $36,960 and
$52,800, respectively.
(6) RELATED PARTY TRANSACTIONS
CSO Ventures LLC
In September 1995, the Company issued 1,196,491 shares of Common Stock to
CSO Ventures LLC ("CSO") in consideration of the prior agreement of CSO to
lend the Company $100,000 to finance the litigation against M6 and to assist
the Company in its initial financing. In September 1995, the Company also
entered into
F-10
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
a consulting agreement with CSO, pursuant to which CSO provided financial
advisory services to the Company for an annual fee of $120,000. The consulting
agreement terminated in September 1996. In March 1997, the Company entered
into a consulting agreement with CSO which provides for business development,
operations and financial advisory services to be performed by CSO for an
annual fee of $120,000. The agreement has a term of one year and is renewed
automatically unless terminated by either party with 60 days written notice.
Two members of CSO are also directors of the Company. Through December 31,
1996 and June 30, 1997, the Company has paid $120,000 and $150,000,
respectively, in fees to CSO under these arrangements.
Promissory Note to Chairman of the Board
DSI entered into a promissory note with an individual who is the Company's
founder, a shareholder and the Chairman of the Board of Directors, in each of
December 1992 and December 1993 in the aggregate principal amount of $100,667.
These notes are among the liabilities assumed by the Company pursuant to the
1995 Settlement Agreement. In November 1996, the Company entered into a
promissory note with the same individual in the aggregate principal amount of
$50,000. All the notes bear interest at 6% per annum on the outstanding
principal balance. The notes are due upon the Company's receipt of at least $1
million in net proceeds in additional equity financing to the Company. The
aggregate principal balance of all outstanding notes including the related
interest due the Chairman is $171,488 and $176,006 as of December 31, 1996 and
June 30, 1997, respectively.
Promissory Note to Shareholder
In July 1993, DSI signed two promissory notes with a shareholder who is also
the secretary to the Board of Directors. These notes are among the liabilities
assumed by the Company pursuant to the 1995 Settlement Agreement. The
principal of the notes aggregates $100,000, bears interest at 6.5% per annum,
and is due at the earlier of the Company's receipt of at least $500,000 in net
proceeds from additional equity financing, but not later than December 31,
1997. The aggregate principal balance of all outstanding notes including the
related interest due the shareholder is $122,750 and $126,000 as of December
31, 1996 and June 30, 1997, respectively.
(7) SHAREHOLDERS' EQUITY
Convertible Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock,
designated as Series A convertible preferred stock (2,505,000 shares
designated) and Series B preferred stock (500,000 shares designated).
Preferred shareholders are entitled to receive noncumulative dividends at the
rate of $0.02451616 and $0.08 per annum, for each share of Series A, and
Series B preferred shares outstanding, respectively, when and if declared by
the Board of Directors, payable in preference to common stock dividends. No
dividends have been declared or paid by the Company.
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of the Series A and Series B preferred shares shall be entitled to
receive, prior to and in preference to any distribution of any of the assets
or surplus funds of the Company to the common shareholders, $0.306452 and
$1.00, respectively, for each share of Series A and Series B preferred stock,
respectively, held by them, and all declared but unpaid dividends on the
preferred shares.
The holders of each share of preferred stock shall be entitled to the number
of votes equal to the number of shares of common stock into which such shares
of preferred stock could be converted at the record date for determination of
the shareholders entitled to vote on such matter.
F-11
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
Each share of preferred stock is convertible at any time at the option of
the holder into shares of common stock at the then effective conversion price.
The conversion price per share of Series A and Series B preferred stock shall
be $0.919356 and $3.00, respectively, and is subject to adjustment as
specified in the articles of incorporation. Conversion of preferred shares is
automatic upon the closing of a public offering registered under the
Securities Act of 1933, with aggregate proceeds of not less than $3,500,000.
Such conversion shall be deemed to have been made immediately prior to the
closing of such underwritten public offering of securities.
Common Shares
The Company is authorized to issue 25,000,000 shares of common stock.
Holders of common stock are entitled to one vote per share on all matters to
be voted upon by the shareholders of the Company.
Subject to the preferences that may be applicable to any outstanding shares
of preferred stock, the holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors.
1995 Stock Option Plan
The Company's 1995 Stock Option Plan ( the "Plan") was adopted by the Board
of Directors and approved by the shareholders in September 1995, and has
subsequently been amended. As of December 31, 1996 a total of 416,667 shares
of common stock have been reserved for issuance under the Plan. The Plan
provides for the granting to employees of the Company, including officers and
employee directors, of incentive stock options, and for the granting of
nonstatutory stock options to employees and consultants of the Company.
The exercise price of all stock options granted under the Plan must be at
least 100% of the fair value of the common stock of the Company on the grant
date. The term of an incentive stock option may not exceed ten years from the
date of grant. An option shall be exercisable on or after each vesting date in
accordance with the terms set forth in the option agreement; provided,
however, that the right to exercise an option generally vests at the rate of
at least 25% per year over four years from the grant date.
Stock-Based Compensation
During 1996, the Company adopted SFAS 123. In accordance with the Statement,
the Company applies APBO 25 in accounting for option grants to employees under
the Plan and, accordingly, does not recognize compensation expense for options
granted to employees at fair value, only those options granted at prices below
fair value. The valuation related to stock options granted to non-employees
was immaterial and, therefore, no value was recorded in the financial
statements.
The Company used the minimum value method to determine the fair value of
stock options at the grant date issued in 1995 and 1996 using the following
weighted average assumptions for 1995 and 1996, respectively: risk free
interest rates of 6.6% and 6.4%, respectively, and a weighted average expected
option life of 2 and 4 years, respectively. The weighted average estimated
fair value of employee stock options granted during 1995 and 1996 was $0.0014
and $1.13 per share, respectively.
The effect of applying the minimum value method of SFAS 123 in determining
the fair values of stock options in 1995 and 1996 did not result in pro forma
net loss and loss per share that are materially different from historical
amounts reported. Therefore, such pro forma information is not presented
herein. Future pro forma results of operations may be materially different
from actual amounts reported.
F-12
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
A summary of the Company's stock option activity, and related information
for the period from inception (August 7, 1995) to June 30, 1997 follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------
SHARES NUMBER
AVAILABLE OF PRICE PER AGGREGATE
FOR GRANT SHARES SHARE PRICE
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Shares authorized....................... 250,000
Options granted......................... (120,000) 120,000 0.09 10,800
-------- ------- ---- -------
Balanced at December 31, 1995............ 130,000 120,000 0.09 10,800
Shares authorized....................... -- -- -- --
Options granted at fair value........... (3,334) 3,334 0.09 300
Options granted below fair value........ (83,333) 83,333 0.90 75,000
Options cancelled....................... -- -- -- --
Options exercised....................... -- (91,667) 0.09 (8,250)
-------- ------- ---- -------
Balance at December 31, 1996............. 43,333 115,000 0.68 77,850
Shares authorized....................... 416,667 -- -- --
Options granted at fair value........... (61,667) 61,667 5.68 350,000
Options granted below fair value........ (153,333) 153,333 3.00 460,000
Options cancelled....................... -- -- -- --
Options exercised....................... -- -- -- --
-------- ------- ---- -------
Balance at June 30, 1997................. 245,000 330,000 2.69 887,850
======== ======= ==== =======
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$0.09 to $0.90. The following table summarizes information about options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------ ---------------------
WEIGHTED REMAINING WEIGHTED
AVERAGE CONTRACTUAL NUMBER AVERAGE
NUMBER OF EXERCISE LIFE (IN OF EXERCISE
EXRCISE PRICESE OPTIONS PRICE YEARS) OPTIONS PRICE
- --------------- --------- -------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
$0.09................... 31,667 $0.09 8.87 7,083 $ 0.09
$0.90................... 83,333 0.90 9.83 -- --
-------
115,000
=======
</TABLE>
Exercise prices for options outstanding as of June 30, 1997 ranged from
$0.09 to $6.00. The following table summarizes information about options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------ ---------------------
WEIGHTED REMAINING WEIGHTED
AVERAGE CONTRACTUAL NUMBER AVERAGE
NUMBER OF EXERCISE LIFE (IN OF EXERCISE
EXRCISE PRICESE OPTIONS PRICE YEARS) OPTIONS PRICE
- --------------- --------- -------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
$0.09................... 31,667 $0.09 8.36 7,083 $ 0.09
$0.90................... 83,333 0.90 9.32 -- --
$3.00................... 153,333 3.00 9.66 -- --
$5.25 -- $6.00.......... 61,667 5.68 9.96 -- --
-------
330,000
=======
</TABLE>
F-13
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
In December 1996, the Company granted an option to purchase 83,333 shares of
common stock at $0.90 per share. Deferred compensation of $275,000 was
recorded on this option grant based on the deemed fair value of common stock
on the date of grant of approximately $4.20. In January 1997, the Company
granted options to purchase 81,667 shares of common stock at $3.00 per share
and additional deferred compensation of approximately $98,000 has been
recorded in the six months ended June 30, 1997 based on the deemed fair value
of common stock on the grant date of $4.20. In April 1997, the Company granted
options to purchase 71,666 shares of common stock at $3.00 per share. In June
1997, the Company granted options to purchase 26,666 shares of common stock at
an exercise price of $5.25 per share and options to purchase 35,000 shares at
an exercise price equal to the closing price of the Company's anticipated
initial public offering. Deferred compensation of approximately $144,000
related to certain of the aforementioned stock options was recorded in the six
months ended June 30, 1997. The fair value of the underlying common stock, as
determined by the Board of Directors approximated $4.80 in April 1997 and
$5.25 in June 1997.
(8) INCOME TAXES
As of December 31, 1996 the Company had federal net operating loss
carryforwards of approximately $500,000. The primary difference between the
accumulated deficit and the net operating loss carryforwards relates to the
exclusion of deferred compensation which will not be paid prior to March 15,
1997 for tax purposes. The net operating loss carryforwards will expire at
various dates beginning on 2010 through 2011 if not utilized.
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986. The annual limitations may result in the
expiration of net operating losses before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amount used for income tax purposes.
Significant components of the Company's deferred tax assets as of December
31 are as follows:
<TABLE>
<CAPTION>
INCEPTION
(AUGUST 7,
1995) TO
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforward................ $ 65,000 $ 380,000
Deferred compensation.......................... 50,000 120,000
--------- ---------
Total deferred tax assets...................... 115,000 500,000
Valuation allowance for deferred tax assets.... (115,000) (500,000)
--------- ---------
Total........................................ $ -- $ --
========= =========
</TABLE>
F-14
<PAGE>
DEPOMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(9) SUBSEQUENT EVENTS
In January 1997, the board of directors authorized management of the Company
to file a registration statement with the SEC permitting the Company to sell
shares of its common stock and warrants to the public. If the initial public
offering is consummated under the terms currently anticipated, all of the
preferred stock outstanding will automatically convert into 908,622 shares of
common stock. Unaudited pro forma shareholders' equity, as adjusted for the
assumed conversion of the preferred shares, is set forth on the balance sheet.
Also in January 1997, the board of directors of the Company authorized a 3-
for-1 reverse stock split, in which three shares of common stock will be
exchanged for one share of common stock. The stock split became effective on
July 30, 1997. Effective upon closing of the initial public offering, the
Company will become authorized to issue 5,000,000 shares of preferred stock
and 25,000,000 shares of common stock. All share and per share amounts, as
well as the dividend and liquidation preferences from preferred stock,
included in the accompanying financial statements have been retroactively
adjusted to reflect the reverse stock split.
In April 1997, the Company arranged a financing facility of up to $1,000,000
of one-year notes to accredited investors (the "Bridge Financing"). The terms
of the borrowing include a mandatory payment requirement upon the closing of
an initial public offering prior to the Bridge Financing's maturity. The
Bridge Financing bears interest at the rate of 6% per annum and further
provides for the issuance of warrants upon the closing of an initial public
offering (the "Bridge Warrants"). The Bridge Warrants entitle the investors to
purchase the number of shares of Common Stock which equals 50% of their
investment divided by the initial public offering price of the Common Stock,
exercisable at a price equal to the initial public offering price of the
Common Stock. The Bridge Warrants may be exercised during the 4 year period
beginning April 7, 1998.
In April 1997, the Board of Directors approved an increase of 250,000 shares
to the Company's 1995 Stock Option Plan.
Oakmont Pharmaceuticals, Inc.
In April 1997, the Company and Oakmont signed a letter of intent to enter
into an agreement pursuant to which Oakmont will manufacture the Company's
reduced irritation aspirin and enhanced absorption calcium supplement products
and have rights to distribute and sell these products in territories to be
determined. The letter of intent also provides for the Company and Oakmont
each to offer rights to future products to the other party.
F-15
<PAGE>
GR SYSTEM
Following ingestion, the polymeric
pellets of the GR System swell to promote
retention (see lower right of photo),
while providing continuous drug delivery.
RI AND GR SYSTEMS
Numerous polymeric pellets of the Reduced
Irritation (RI) System (left) disperse
within the stomach and upper small
intestine and provide controlled delivery
of the incorporated drug in solution
state.
Polymeric pellets of the Gastric
Retention (GR) System (right) are shown
for comparison.
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE 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.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 25
Management............................................................... 39
Certain Transactions..................................................... 44
Principal Shareholders................................................... 45
Description of Securities................................................ 46
Shares Eligible for Future Sale.......................................... 49
Underwriting............................................................. 50
Legal Matters............................................................ 52
Experts.................................................................. 52
Additional Information................................................... 52
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
[DEPOMED LOGO]
DEPOMED, INC.
1,200,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE WARRANT
-----------------
PROSPECTUS
-----------------
NATIONAL SECURITIES
CORPORATION
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant has the power to indemnify its directors and officers against
liability for certain acts pursuant to Section 317 of the California
Corporations Code. Article IV of the registrant's Third Amended and Restated
Articles of Incorporation provides as follows:
"The liability of the directors of this corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
This corporation is also authorized, to the fullest extent permissible
under California law, to indemnify its agents (as defined in Section 317 of
the California Corporations Code), whether by by-law, agreement or
otherwise, for breach of duty to this corporation and its shareholders in
excess of that expressly permitted by Section 371 and to advance defense
expenses to its agents in connection with such matters as they are
incurred, subject to the limits on such excess indemnification set forth in
Section 204 of the California Corporations Code. If, after the effective
date of this Article, California law is amended in a manner which permits a
corporation to limit the monetary or other liability of its directors or to
authorize indemnification of, or advancement of such defense expenses to,
its directors or other persons, in any such case to a greater extent than
is permitted on such effective date, the references in this Article to
"California law" shall to that extent be deemed to refer to California law
as so amended."
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following-table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in
connection with the sale of the Common Stock being registered. All amounts are
estimated except the Commission Registration Fee, the NASD Filing Fee and the
Nasdaq SmallCap Application Fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 15,670
NASD Filing Fee.................................................... 2,750
Nasdaq SmallCap Application Fee.................................... 10,000
Blue Sky Qualification Fees and Expenses........................... 35,000
Accounting Fees and Expenses....................................... 200,000
Legal Fees and Expenses............................................ 225,000
Transfer Agent and Registrar Fees.................................. 5,000
Printing and Engraving............................................. 220,000
Miscellaneous...................................................... 37,991
--------
Total.......................................................... $751,411
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the registrant has issued the securities set
forth below which were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
In March 1994, DepoMed Systems, Inc. ("DSI") a company founded and
principally owned by Dr. John W. Shell was merged into M6 Pharmaceuticals,
Inc. ("M6"). In August 1995, pursuant to a settlement agreement between DSI
and Dr. Shell, on the one hand, and M6, on the other hand, M6 transferred all
of the intellectual property and other technology assets attributable to DSI
to the Company, and the Company assumed certain liabilities related thereto.
In September 1995, the Company issued 2,066,667 shares of its Common Stock to
Dr. Shell and other prior shareholders of DSI in cancellation of the M6 stock
received in the merger. The shares were issued under section 4(2) of the
Securities Act.
II-1
<PAGE>
In September 1995, the Company also issued 1,196,491 shares of Common Stock
to CSO Ventures LLC ("CSO") in consideration of the prior agreement of CSO to
lend the Company $100,000 to finance the litigation against M6 and to assist
the Company in its initial financing. The shares were issued under section
4(2) of the Securities Act.
In November 1995, the Company sold 2,447,368 shares of Series A Preferred
Stock to certain accredited investors. The shares were issued under section
4(2) of the Securities Act.
In the first quarter of 1997, the Company sold 278,500 shares of Series B
Preferred Stock to eight accredited investors. The shares were issued under
section 4(2) of the Securities Act. See "Principal Shareholders."
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
*3.1 Third Amended and Restated Articles of Incorporation
*3.2 Form of Amended and Restated Articles of Incorporation (to become
effective upon closing of the Offering)
*3.3 Bylaws
*3.4 Certificate of Amendment to the Third Amended and Restated Articles of
Incorporation
*4.1 Specimen Common Stock Certificate
*4.2 Specimen Warrant Certificate (previously filed as Exhibit A to the
Form of Warrant Agreement)
4.3 Form of Representative's Warrant Agreement including form of
Representative's Warrant
4.4 Form of Warrant Agreement
*4.5 Form of Lock-up Agreement
*5.1 Opinion of Heller Ehrman White & McAuliffe
*10.1 1995 Incentive Stock Plan, as amended
*+10.2 Agreement dated July 11, 1996 between the Company and Bristol-Myers
Squibb Company
*+10.3 Feasibility Agreement dated May 13, 1996 between the Company and
GalaGen Inc.
*10.4 Agreement dated March 18, 1997 between the Company and CSO Ventures
LLC
*10.5 Lease Agreement between the Company and 1170 Chess Drive Limited
Partnership dated September 2, 1992
*10.6 First Amendment to lease agreement dated January 1, 1996 between the
Company and SKW II Real Estate Partnership
*10.7 Employment Agreement between DepoMed, Inc. and John W. Shell
*10.8 Employment Agreement between DepoMed, Inc. and John W. Fara
*10.9 Agreement re: Settlement of Lawsuit, Conveyance of Assets and
Assumption of Liabilities dated August 28, 1995 by and among DepoMed
Systems, Inc., Dr. John W. Shell and M6 Pharmaceuticals, Inc.
*10.10 Form of Indemnification Agreement between the Company and its
directors and executive officers
10.11 Letter Agreement dated October 25, 1996 between the Company and John
W. Fara
**10.12 Form of Agreement between the Company and Burrill & Company
11.1 Statement re: computation of net loss per share
23.1 Consent of Ernst & Young LLP, Independent Auditors
*23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1)
24.1 Power of Attorney (included on pages II-4 and II-5)
*27.1 Financial Data Schedule
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment granted.
II-2
<PAGE>
ITEM 28. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes that it will:
(a) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act,
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement, and
(iii) Include any additional or changed material information on the
plan of distribution.
(b) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(c) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of this offering.
(2) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of each issue.
(4) The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act, 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 pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act as part of this registration statement as
of the time it was declared effective.
(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of such securities at that time as the initial
bona fide offering of those securities.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Amendment No. 5
to the Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Foster City, California
on October 3, 1997.
DEPOMED, INC.
/s/ John F. Hamilton
By:
----------------------------------
John F. Hamilton
Vice President, Finance, Chief
Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints John W.
Fara, John W. Shell and John F. Hamilton his true and lawful attorneys-in-fact
and agents, each acting alone, will full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective
amendments) to the Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act
of 1933, as amended, and all post-effective amendments thereto, and to file
the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to the Registration Statement on Form SB-2 has been signed by the
following persons in the capacities and on the dates indicated.
Chairman of the
/s/ John W. Shell Board of Directors October 3, 1997
- ------------------------------- and Chief
John W. Shell, Ph.D. Scientific Officer
President, Chief
/s/ John W. Fara Executive Officer October 3, 1997
- ------------------------------- and Director
John W. Fara, Ph.D. (Principal
Executive Officer)
Vice President,
/s/ John N. Shell Operations and October 3, 1997
- ------------------------------- Director
John N. Shell
Vice President,
/s/ John F. Hamilton Finance Chief October 3, 1997
- ------------------------------- Financial Officer
John F. Hamilton (Principal
Financial Officer)
/s/ G. Steven Burrill Director October 3, 1997
- -------------------------------
G. Steven Burrill
- ------------------------------- Director October , 1997
Judson A. Cooper
- ------------------------------- Director October , 1997
Joshua Schein, Ph.D.
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
PAGE DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
*3.1 Third Amended and Restated Articles of Incorporation
*3.2 Form of Amended and Restated Articles of Incorporation
(to become effective upon closing of the Offering)
*3.3 Bylaws
*3.4 Certificate of Amendment to the Third Amended and
Restated Articles of Incorporation
*4.1 Specimen Common Stock Certificate
*4.2 Specimen Warrant Certificate (previously filed as
Exhibit A to the Form of Warrant Agreement)
4.3 Form of Representative's Warrant Agreement including
form of Representative's Warrant
4.4 Form of Warrant Agreement
*4.5 Form of Lock-up Agreement
*5.1 Opinion of Heller Ehrman White & McAuliffe
*10.1 1995 Incentive Stock Plan, as amended
*+10.2 Agreement dated July 11, 1996 between the Company and
Bristol-Myers Squibb Company
*+10.3 Feasibility Agreement dated May 13, 1996 between the
Company and GalaGen Inc.
*10.4 Agreement dated March 18, 1997 between the Company and
CSO Ventures LLC
*10.5 Lease Agreement between the Company and 1170 Chess
Drive Limited Partnership dated September 2, 1992
*10.6 First Amendment to lease agreement dated January 1,
1996 between the Company and SKW II Real Estate
Partnership
*10.7 Employment Agreement between DepoMed, Inc. and John W.
Shell
*10.8 Employment Agreement between DepoMed, Inc. and John W.
Fara
*10.9 Agreement re: Settlement of Lawsuit, Conveyance of
Assets and Assumption of Liabilities dated August 28,
1995 by and among DepoMed Systems, Inc., Dr. John W.
Shell and M6 Pharmaceuticals, Inc.
*10.10 Form of Indemnification Agreement between the Company
and its directors and executive officers
10.11 Letter Agreement dated October 25, 1996 between the
Company and John W. Fara
**10.12 Form of Agreement between the Company and Burrill &
Company
11.1 Statement re: computation of net loss per share
23.1 Consent of Ernst & Young LLP, Independent Auditors
*23.2 Consent of Heller Ehrman White & McAuliffe (included
in Exhibit 5.1)
24.1 Power of Attorney (included on pages II-4 and II-5)
*27.1 Financial Data Schedule
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment granted.
<PAGE>
EXHIBIT 1.1
1,200,000 UNITS, EACH UNIT CONSISTING OF
ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE WARRANT
DEPOMED, INC.
UNDERWRITING AGREEMENT
----------------------
New York, New York
_____________, 1997
NATIONAL SECURITIES CORPORATION
As Representative of the
Several Underwriters listed on Schedule A hereto
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154
Ladies and Gentlemen:
DepoMed, Inc., a California corporation (the "Company"), confirms its
agreement with National Securities Corporation ("National") and each of the
underwriters named in Schedule A hereto (collectively, the "Underwriters," which
term shall also include any underwriter substituted as hereinafter provided in
Section 11), for whom National is acting as representative (in such capacity,
- -------
National shall hereinafter be referred to as "you" or the "Representative"),
with respect to the sale by the Company and the purchase by the Underwriters,
acting severally and not jointly, of the respective number of units ("Units")
set forth in Schedule A hereto, each Unit consisting of one share ("Shares") of
the Company's Common Stock, no par value ("Common Stock") and one warrant to
acquire one additional share of Common Stock (the
<PAGE>
"Redeemable Warrants"). The shares of Common Stock and the Redeemable Warrants
comprising the Units will not be separately transferable for a period of three
months after the date hereof or such earlier date as shall be determined by the
Representative and the Company (the "Separation Date"). The 1,200,000 Units are
hereinafter referred to as the "Firm Securities." Each Redeemable Warrant is
exercisable commencing on ___________, 1998 [one year after date of Prospectus]
until __________, 2002 [5 years after date of Prospectus], unless previously
redeemed by the Company, at an initial exercise price of $____ per share of
Common Stock [125% of initial public offering price per Unit]. The Redeemable
Warrants may be redeemed by the Company at a redemption price of $.10 per
Redeemable Warrant at any time after __________, 1999 [18 months after date of
Prospectus] on thirty (30) days' prior written notice, provided that the closing
bid price of the Common Stock equals or exceeds 200% of the then current
exercise price per share for any twenty (20) trading days within a period of
thirty (30) consecutive trading days ending on the fifth trading day prior to
the notice of redemption, all in accordance with the terms and conditions of the
Warrant Agreement (herein defined).
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriters, acting severally and not
jointly, up to an additional 180,000 Units for the purpose of covering over-
allotments, if any. Such 180,000 Units are hereinafter collectively to as the
"Option Securities." The Company also proposes to issue and sell to you
warrants (the "Representative's Warrants") pursuant to the Representative's
Warrant Agreement (the "Representative's Warrant Agreement") for the purchase of
an additional 117,917 Units. The shares of Common Stock and Redeemable Warrants
issuable upon exercise of the Representative's Warrants are hereinafter referred
to as the "Representative's Securities." The Firm Securities, the Option
Securities, the Representative's Warrants and the Representative's Securities
(collectively, hereinafter referred to as the "Securities") are more fully
described in the Registration Statement and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, each of the Underwriters as of the date
hereof, and as of the Closing Date (as hereinafter defined) and each Option
Closing Date (as hereinafter defined), 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. 333-25445), including any related
preliminary prospectus ("Preliminary Prospectus"), for the registration of the
Firm Securities, the Option Securities and the Representative's Securities under
the Securities Act of 1933, as amended (the "Act"), which registration statement
and amendment or amendments have been prepared by the Company in conformity with
the requirements of the Act, and the rules and regulations (the "Regulations")
of the Commission under the Act. The Company will promptly file a further
amendment to said registration statement in the form heretofore delivered to the
Underwriters and will not file any other amendment thereto to which the
Underwriters shall have objected in writing after having been furnished with a
copy thereof. Except as the context may otherwise require, such
2
<PAGE>
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 (including, but not limited to those documents or
information incorporated by reference 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, "Rules and Regulations" mean the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has issued
any order preventing or suspending the use of any Preliminary Prospectus, the
Registration Statement or Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are pending
or threatened. Each of the Preliminary Prospectus, the Registration Statement
and Prospectus at the time of filing thereof conformed with the requirements of
the Act and the Rules and Regulations, and none of the Preliminary Prospectus,
the Registration Statement or 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 or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements made in
reliance upon and in conformity with written information furnished to the
Company with respect to the Underwriters by or on behalf of the Underwriters
expressly for use in such Preliminary Prospectus, Registration Statement or
Prospectus or any amendment thereof or supplement thereto.
(c) When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date (as defined herein) and each Option
Closing Date (as defined herein), if any, and during such longer period as the
Prospectus may be required to be delivered in connection with sales by the
Underwriters or a dealer, the Registration Statement and the Prospectus will
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and will conform to the requirements
of the Act and the Rules and Regulations; neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
-------- -------
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with information furnished
to the Company in writing by or on behalf of any Underwriter expressly for use
in the Preliminary Prospectus, Registration Statement or Prospectus or any
amendment thereof or supplement thereto.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of its incorporation.
Except as set forth in the
3
<PAGE>
Prospectus, the Company does not own an interest in any corporation,
partnership, trust, joint venture or other business entity. The Company 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. The
Company has all requisite power and authority (corporate and other), and has
obtained any and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials and bodies (including, without limitation, those having jurisdiction
over environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; the Company is and has been
doing business in compliance with all such authorizations, approvals, orders,
licenses, certificates, franchises and permits and all applicable federal,
state, local and foreign laws, rules and regulations; and the Company has not
received any notice of proceedings relating to the revocation or modification of
any such authorization, approval, order, license, certificate, franchise, or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would materially and adversely affect the
condition, financial or otherwise, or the earnings, position, prospects, value,
operation, properties, business or results of operations of the Company. 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 required to be stated therein or
necessary to make the statements contained therein not misleading in light of
the circumstances under which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set forth
therein on the Closing Date and each Option Closing Date, if any, based upon the
assumptions set forth therein, and the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement,
the Warrant Agreement, the Representative's Warrant 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
respects to all statements with respect thereto contained in the Registration
Statement and the Prospectus. All issued and outstanding securities of the
Company have been duly authorized and validly issued and are fully paid and non-
assessable and the holders thereof have no rights of rescission with respect
thereto, and are not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation of the preemptive
rights of any holders of any security of the Company or similar contractual
rights granted by the Company. 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 non-assessable and will conform
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,
4
<PAGE>
the Underwriters or the Representative, as the case may be, will acquire good
and marketable title to such Securities free and clear of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever.
(f) 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,
income, changes in cash flow, changes in stockholders' equity and the results of
operations of the Company at the respective dates and for the respective periods
to which they apply and such financial statements have been prepared in
conformity with generally accepted accounting principles and the Rules and
Regulations, consistently applied throughout the periods involved and such
financial statements as are audited have been examined by Ernst & Young LLP, who
are independent certified public accountants within the meaning of the Act and
the Rules and Regulations, as indicated in their reports filed therewith. There
has been no adverse change or development involving a prospective adverse change
in the condition, financial or otherwise, or in the earnings, position,
prospects, value, operation, properties, business, or results of operations of
the Company, 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, conform in all material respects to
the descriptions thereof contained in the Registration Statement and the
Prospectus. Financial information (including, without limitation, any pro forma
financial information) set forth in the Prospectus under the headings "Summary
Financial Information," "Selected Financial Data," "Capitalization," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," fairly present, on the basis stated in the Prospectus, the
information set forth therein, and have been derived from or compiled on a basis
consistent with that of the audited financial statements included in the
Prospectus; and, in the case of pro forma financial information, if any, the
assumptions used in the preparation thereof are reasonable and the adjustments
used therein are appropriate to give effect to the transactions and
circumstances referred to therein. The amounts shown as accrued for current and
deferred income and other taxes in such financial statements are sufficient for
the payment of all accrued and unpaid federal, state, local and foreign income
taxes, interest, penalties, assessments or deficiencies applicable to the
Company, whether disputed or not, for the applicable period then ended and
periods prior thereto; adequate allowance for doubtful accounts has been
provided for unindemnified losses due to the operations of the Company; and the
statements of income do not contain any items of special or nonrecurring income
not earned in the ordinary course of business, except as specified in the notes
thereto.
(g) The Company (i) has paid all federal, state, local, and foreign taxes
for which it is liable, including, but not limited to, withholding taxes and
amounts payable under Chapters 21 through 24 of the Internal Revenue Code of
1986, as amended (the "Code"), and has furnished all information returns it is
required to furnish pursuant to the Code, (ii) has established adequate reserves
for such taxes which are not due and payable, and (iii) does not have any tax
deficiency or claims outstanding, proposed or assessed against it.
5
<PAGE>
(h) No transfer tax, stamp duty or other similar tax is payable by or on
behalf of the Underwriters in connection with (i) the issuance by the Company of
the Securities, (ii) the purchase by the Underwriters of the Firm Securities and
the Option Securities from the Company and the purchase by the Representative of
the Representative's Warrants from the Company, (iii) the consummation by the
Company of any of its obligations under this Agreement, or (iv) resales of the
Firm Securities and the Option Securities in connection with the distribution
contemplated hereby.
(i) The Company maintains insurance policies, including, but not limited
to, general liability and property insurance, which insures each of the Company
and its employees, against such losses and risks generally insured against by
comparable businesses. The Company (A) has not failed to give notice or present
any insurance claim with respect to any matter, including but not limited to the
Company's business, property or employees, under any insurance policy or surety
bond in a due and timely manner, (B) does not have any disputes or claims
against any underwriter of such insurance policies or surety bonds or has failed
to pay any premiums due and payable thereunder, or (C) has failed to comply with
all conditions contained in such insurance policies and surety bonds. There are
no facts or circumstances under any such insurance policy or surety bond which
would relieve any insurer of its obligation to satisfy in full any valid claim
of the Company.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or threatened against (or circumstances that may
give rise to the same), or involving the properties or business of, the Company
which (i) questions the validity of the capital stock of the Company, this
Agreement, the Warrant Agreement or the Representative's Warrant Agreement, or
of any action taken or to be taken by the Company pursuant to or in connection
with this Agreement, the Warrant Agreement or the Representative's Warrant
Agreement, (ii) is required to be disclosed in the Registration Statement which
is not so disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all material respects), or (iii) might
materially and adversely affect the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value, operation,
properties, business or results of operations of the Company.
(k) The Company has full legal right, power and authority to authorize,
issue, deliver and sell the Securities, enter into this Agreement, the Warrant
Agreement and the Representative's Warrant Agreement and to consummate the
transactions provided for in this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement; and this Agreement, the Warrant Agreement
and the Representative's Warrant Agreement have each been duly and properly
authorized, executed and delivered by the Company. Each of this Agreement, the
Warrant Agreement and the Representative's Warrant Agreement constitutes a
legal, valid and binding agreement of the Company enforceable against the
Company in accordance with its terms, and none of the Company's issue and sale
of the Securities, execution or delivery of this Agreement, the Warrant
Agreement or the Representative's Warrant Agreement, its performance
6
<PAGE>
hereunder and thereunder, its consummation of the transactions contemplated
herein and therein, or the conduct of its business as described in the
Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
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
certificate of incorporation or by-laws of the Company, (ii) any license,
contract, collective bargaining agreement, indenture, mortgage, deed of trust,
lease, voting trust agreement, stockholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the Company is a party
or by which the Company is or may be bound or to which its or assets (tangible
or intangible) is or may be subject, or any indebtedness, or (iii) any statute,
judgment, decree, order, rule or regulation applicable to the Company of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties.
(l) No consent, approval, authorization or order of, and no filing with,
any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the performance of this Agreement,
the Warrant Agreement and the Representative's Warrant Agreement and the
transactions contemplated hereby and thereby, including without limitation, any
waiver of any preemptive, first refusal or other rights that any entity or
person may have for the issue and/or sale of any of the Securities, except such
as have been or may be obtained under the Act or may be required under state
securities or Blue Sky laws in connection with the Underwriters' purchase and
distribution of the Firm Securities and the Option Securities, and the
Representative's Warrants 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 or they
may be bound or to which its or their respective assets, properties or business
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, as the case may be, enforceable against it in accordance with its
terms. The descriptions in the Registration Statement of agreements, contracts
and other documents are accurate 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) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, the Company has not (i) issued
any securities or incurred any liability or
7
<PAGE>
obligation, direct or contingent, for borrowed money, (ii) entered into any
transaction other than in the ordinary course of business, or (iii) declared or
paid any dividend or made any other distribution on or in respect of its capital
stock of any class, and there has not been any change in the capital stock, or
any change in the debt (long or short term) or liabilities or material adverse
change in or affecting the general affairs, management, financial operations,
stockholders' equity or results of operations of the Company.
(o) No default exists in the due performance and observance of any term,
covenant or condition of any license, contract, collective bargaining agreement,
indenture, mortgage, installment sale agreement, lease, deed of trust, voting
trust agreement, stockholders agreement, partnership agreement, note, loan or
credit agreement, purchase order, or any other 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 is
subject or affected.
(p) The Company has generally enjoyed a satisfactory employer-employee
relationship with its employees and is in compliance with all federal, state,
local, and foreign laws and regulations respecting employment and employment
practices, terms and conditions of employment and wages and hours. There are no
pending investigations involving the Company by the U.S. Department of Labor, or
any other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor
practice charge or complaint against the Company pending before the National
Labor Relations Board or any lockout, strike, picketing, boycott, dispute,
slowdown or stoppage pending or threatened against or involving the Company, or
any predecessor entity, and none has ever occurred. No representation question
exists respecting the employees of the Company, and 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, is imminent.
(q) The Company does not maintain, sponsor or contribute to any program
or arrangement that is an "employee pension benefit plan," an "employee welfare
benefit plan," or a "multiemployer plan" as such terms are defined in Sections
3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not
maintain or contribute, now or at any time previously, 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 or the Subsidiaries to any tax penalty on prohibited transactions and
which has not adequately been corrected. Each ERISA Plan is in compliance with
all 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. None of the Company has ever
completely or partially withdrawn from a
8
<PAGE>
"multiemployer plan."
(r) Neither the Company, nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules and
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, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
(s) Except as otherwise disclosed in the Prospectus, none of the patents,
patent applications, trademarks, service marks, trade names and copyrights, and
licenses and rights to the foregoing presently owned or held by the Company, are
in dispute so far as known by the Company or are in any conflict with the right
of any other person or entity. The Company (i) owns or has the right to use,
free and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects or other restrictions or equities of any kind whatsoever, all
patents, trademarks, service marks, trade names and copyrights, technology and
licenses and rights with respect to the foregoing, used in the conduct of its
business as now conducted or proposed to be conducted without infringing upon or
otherwise acting adversely to the right or claimed right of any person,
corporation or other entity under or with respect to any of the foregoing and
(ii) is not obligated or under any liability whatsoever to make any payment by
way of royalties, fees or otherwise to any owner or licensee of, or other
claimant to, any patent, trademark, service mark, trade name, copyright, know-
how, technology or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise.
(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, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(u) Ernst & Young LLP, whose report is filed with the Commission as a
part of the Registration Statement, are independent certified public accountants
as required by the Act and the Rules and Regulations.
(v) The Company has caused to be duly executed legally binding and
enforceable agreements (the "Lock-up Agreements") pursuant to which each of the
Company's officers, directors, stockholders and holders of securities
exchangeable or exercisable for or convertible into shares of Common Stock has
agreed not to, directly or indirectly, issue, offer, offer to sell, sell, grant
any option for the sale or purchase of, assign, transfer, pledge, hypothecate or
otherwise encumber or dispose of any shares of Common Stock or securities
convertible into, 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 Rules and Regulations or otherwise) or dispose of any beneficial
interest therein for a period of not less than twelve (12) months following the
effective date of the Registration Statement without the prior written consent
of the
9
<PAGE>
Representative and the Company. During the 12 month period commencing on
the effective date of the Registration Statement, the Company shall not, without
the prior written consent of the Representative, sell, contract or offer to
sell, issue, transfer, assign, pledge, distribute, or otherwise dispose of,
directly or indirectly, any shares of Common Stock or any options, rights or
warrants with respect to any shares of Common Stock except for (i) options
issued under the Company's 1995 Stock Option Plan to employees, consultants and
directors and (ii) shares of Common Stock, options or warrants issued to outside
parties in connection with strategic alliances, joint ventures or other
corporate partnerships with the Company. The Company will cause the Transfer
Agent (as hereinafter defined) to mark an appropriate legend on the face of
stock certificates representing all of such securities and to place "stop
transfer" orders on the Company's stock ledgers.
(w) There are no claims, payments, issuances, 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,
partners, employees or affiliates, that may affect the Underwriters'
compensation, as determined by the National Association of Securities Dealers,
Inc. ("NASD").
(x) The Units, Common Stock and Redeemable Warrants have been approved
for quotation on the Nasdaq SmallCap Market ("Nasdaq").
(y) None of 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 (a) might subject the
Company, or any other such person to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign), (b) if
not given in the past, might have had a material adverse effect on the assets,
business or operations of the Company, or (c) if not continued in the future,
might adversely affect the assets, business, condition, financial or otherwise,
earnings, position, properties, value, operations or prospects of the Company.
The Company's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(z) Except as set forth in the Prospectus, no officer, director,
stockholder or partner of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Rules and 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,
10
<PAGE>
or (ii) a beneficiary interest in any contract or agreement to which the Company
is a party or by which it may be bound or affected. Except as set forth in the
Prospectus under "Certain Transactions," there are no existing agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings or transactions, between or among the Company, and
any officer, director, or 5% or greater securityholder of the Company, or any
partner, affiliate or associate of any of the foregoing persons or entities.
(aa) Any certificate signed by any officer of the Company, and delivered
to the Underwriters or to Underwriters' Counsel (as defined herein) shall be
deemed a representation and warranty by the Company to the Underwriters as to
the matters covered thereby.
(bb) The minute books of the Company have been made available to the
Underwriters and contain a complete summary of all meetings and actions of the
directors (including committees thereof) 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.
(cc) Except and to the extent 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 in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
(dd) The Company has as of the effective date of the Registration
Statement (i) entered into an employment agreement with each of John W. Fara and
John W. Shell in the form filed as Exhibit 10.8 and Exhibit 10.7, respectively,
to the Registration Statement and (ii) purchased term key person insurance on
the lives of each of John W. Fara and John W. Shell in the amount of $2 million
which policies name the Company as the sole beneficiary thereof.
(ee) The Company confirms as of the date hereof that it is in compliance
with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act
------
Relating to Disclosure of Doing Business with Cuba, and the Company further
- --------------------------------------------------
agrees that if it or any affiliate commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after the
date the Registration Statement becomes or has become effective with the
Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's,
or any affiliate's, business with Cuba or with any person or affiliate located
in Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to the
Department.
(ff) The Company is not, and upon the issuance and sale of the Securities
as herein contemplated and the application of the net proceeds therefrom as
described in the Prospectus under the caption "Use of Proceeds" will not be, an
"investment company" or an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company
11
<PAGE>
Act of 1940, as amended (the "1940 Act").
(gg) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparations of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(hh) The Company has entered into a warrant agreement substantially in
the form filed as Exhibit 4.4 to the Registration Statement (the "Warrant
Agreement") with Continental Stock Transfer and Trust Company, as Warrant Agent,
in form and substance satisfactory to the Representative, with respect to the
Redeemable Warrants and providing for the payment of the commission contemplated
by Section 4(v).
2. Purchase, Sale and Delivery of the Securities.
---------------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$____ per Unit [92% of initial public offering price per Unit], that number of
Firm Securities set forth in Schedule A opposite the name of such Underwriter,
subject to such adjustment as the Representative in its sole discretion shall
make to eliminate any sales or purchases of fractional shares, plus any
additional number of Firm Securities which such Underwriter may become obligated
to purchase pursuant to the provisions of Section 11 hereof.
-------
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 180,000 Units at a price of $_____ per Unit [92% of initial public
offering price per Unit]. The option granted hereby will expire forty-five (45)
days after (i) the date the Registration Statement becomes effective, if the
Company has elected not to rely on Rule 430A under the Rules and Regulations, or
(ii) the date of this Agreement if the Company has elected to rely upon Rule
430A under the Rules and Regulations, and may be exercised in whole or in part
from time to time only for the purpose of covering over-allotments which may be
made in connection with the offering and distribution of the Firm Securities
upon notice by the Representative to the Company setting forth the number of
Option Securities as to which the several Underwriters are then exercising the
option and the time and date of payment and delivery for any such Option
Securities. Any such time and date of delivery (an "Option Closing Date") shall
be determined by the Representative, but shall not be later than three (3) full
business days after the exercise of said option, nor in any event prior to the
Closing Date, as hereinafter defined, unless otherwise agreed upon by the
Representative and the Company.
12
<PAGE>
Nothing herein contained shall obligate the Underwriters to make any over-
allotments. No Option Securities shall be delivered unless the Firm Securities
shall be simultaneously delivered or shall theretofore have been delivered as
herein provided.
(c) Payment of the purchase price for, and delivery of certificates for,
the Firm Securities shall be made at the offices of the Representative at 1001
Fourth Avenue, Suite 2200, Seattle, Washington 98154, or at such other place as
shall be agreed upon by the Representative and the Company. Such delivery and
payment shall be made at 10:00 a.m. (New York City time) on ___________, 1997 or
at such other time and date as shall be agreed upon by the Representative and
the Company, but not less than three (3) nor more than five (5) full business
days after the effective date of the Registration Statement (such time and date
of payment and delivery being herein called the "Closing Date"). In addition,
in the event that any or all of the Option Securities are purchased by the
Underwriters, payment of the purchase price for, and delivery of certificates
for, such Option Securities shall be made at the above-mentioned office of the
Representative or at such other place as shall be agreed upon by the
Representative and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the certificates for
the Firm Securities and the Option Securities, if any, shall be made to the
Underwriters against payment by the Underwriters, severally and not jointly, of
the purchase price for the Firm Securities and the Option Securities, if any, to
the order of the Company for the Firm Securities and the Option Securities, if
any, by New York Clearing House funds. In the event such option is exercised,
each of the Underwriters, acting severally and not jointly, shall purchase that
proportion of the total number of Option Securities then being purchased which
the number of Firm Securities set forth in Schedule A hereto opposite the name
of such Underwriter bears to the total number of Firm Securities, subject in
each case to such adjustments as the Representative in its discretion shall make
to eliminate any sales or purchases of fractional shares. Certificates for the
Firm Securities and the Option Securities, if any, shall be in definitive, fully
registered form, shall bear no restrictive legends and shall be in such
denominations and registered in such names as the Underwriters may request in
writing at least two (2) business days prior to the Closing Date or the relevant
Option Closing Date, as the case may be. The certificates for the Firm
Securities and the Option Securities, if any, shall be made available to the
Representative at such office or such other place as the Representative may
designate for inspection, checking and packaging no later than 9:30 a.m. on the
last business day prior to the Closing Date or the relevant Option Closing Date,
as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representative Representative's Warrants at a purchase price of $.0001 per
warrant, which Representative's Warrants shall entitle the holders thereof to
purchase an aggregate of 117,917 Units. The Representative's Warrants shall be
exercisable for a period of four (4) years commencing one (1) year from the
effective date of the Registration Statement at a price equaling one hundred
twenty-five percent (125%) of the initial public offering price of the Units.
The Representative's Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit 4.3 to the Registration Statement.
Payment for the Representative's Warrants shall be made on the Closing Date.
13
<PAGE>
3. Public Offering of the Units. As soon after the Registration Statement
----------------------------
becomes effective as the Representative deems advisable, the Underwriters shall
make a public offering of the Units (other than to residents of or in any
jurisdiction in which qualification of the Units is required and has not become
effective) at the price and upon the other terms set forth in the Prospectus.
The Representative may from time to time increase or decrease the
respective public offering price after distribution of the Units has been
completed to such extent as the Representative, in its sole discretion deems
advisable. The Underwriters may enter into one of more agreements as the
Underwriters, in each of their sole discretion, deem advisable with one or more
broker-dealers who shall act as dealers in connection with such public offering.
4. Covenants and Agreements of the Company. The Company covenants and
---------------------------------------
agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Units by the Underwriters of which
the Representative shall not previously have been advised and furnished with a
copy, or to which the Representative shall have objected or which is not in
compliance with the Act, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof, the
Company will advise the Representative and confirm the notice in writing (i)
when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any post-
effective amendment to the Registration Statement becomes effective; (ii) of the
issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose; (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose; (iv) of the receipt of any 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 make every effort to
obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on
14
<PAGE>
the earlier of (i) the second business day following the execution and delivery
of this Agreement and (ii) the fifth business day after the effective date of
the Registration Statement.
(d) The Company will give the Representative notice of its intention to
file or prepare any amendment to the Registration Statement (including any post-
effective amendment) or any amendment or supplement to the Prospectus (including
any revised prospectus which the Company proposes for use by the Underwriters in
connection with the offering of the Securities which differs from the
corresponding prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether or not such revised prospectus is required
to be filed pursuant to Rule 424(b) of the Rules and Regulations), and will
furnish the Representative with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such prospectus to which the Representative or Orrick,
Herrington & Sutcliffe LLP ("Underwriters' Counsel") shall object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
--------
however, the Company shall not be required to qualify as a foreign corporation
- -------
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative 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 or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered under
the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus
relating to the Securities is required to be delivered under the Act, any event
shall have occurred as a result of which, in the opinion of counsel for the
Company or Underwriters' Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Act, the Company will notify the Representative promptly and
prepare and file with the Commission an appropriate amendment or supplement in
accordance with Section 10 of the Act, each such amendment or supplement to be
satisfactory to Underwriters' Counsel, and the Company will furnish to the
Underwriters copies of such amendment or supplement as soon as available and in
such quantities as the Underwriters may
15
<PAGE>
request.
(g) As soon as practicable, but in any event not later than forty-five
(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 (ninety (90) days in the event that the end of
such fiscal quarter is the end of the Company's fiscal year), the Company shall
make generally available to its security holders, in the manner specified in
Rule 158(b) of the Rules and Regulations, and to the Representative, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and 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 seven (7) years after the date hereof, the Company
will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the Representative:
i. concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in the
form furnished to the Company's stockholders and certified by the Company's
principal financial or accounting officer;
ii. concurrently with furnishing such annual reports to its stockholders,
a balance sheet of the Company as at the end of the preceding fiscal year,
together with statements of operations, stockholders' equity, and cash flows
of the Company for such fiscal year, accompanied by a copy of the
certificate thereon of independent certified public accountants;
iii. as soon as they are available, copies of all reports (financial or
other) mailed to stockholders;
iv. as soon as they are available, copies of all reports and financial
statements furnished to or filed with the Commission, the NASD 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
vi. any additional information of a public nature concerning the Company
(and any future subsidiary) or its businesses which the Representative may
request.
During such seven-year period, if the Company has an active subsidiary, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiary(ies) are consolidated, and
will be accompanied by similar financial statements
16
<PAGE>
for any significant subsidiary which is not so consolidated.
(i) The Company will maintain a transfer agent and warrant agent
("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 its Common Stock and Redeemable Warrants.
(j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may request.
(k) On or before the effective date of the Registration Statement, the
Company shall provide the Representative with true original copies of duly
executed Lock-up Agreements. During the 12 month period commencing on the
effective date of the Registration Statement, the Company shall not, without the
prior written consent of the Representative, sell, contract or offer to sell,
issue, transfer, assign, pledge, distribute, or otherwise dispose of, directly
or indirectly, any shares of Common Stock or any options, rights or warrants
with respect to any shares of Common Stock except for (i) options issued under
the Company's 1995 Stock Option Plan to employees, consultants and directors and
(ii) shares of Common Stock, options or warrants issued to outside parties in
connection with strategic alliances, joint ventures or other corporate
partnerships with the Company. On or before the Closing Date, the Company shall
deliver instructions to the Transfer Agent authorizing it to place appropriate
legends on the certificates representing the securities subject to the Lock-up
Agreements and to place appropriate stop transfer orders on the Company's
ledgers.
(l) None of the Company, nor any of its officers, directors,
stockholders, nor any of its affiliates (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or which
might in the future reasonably be expected to cause or result in, stabilization
or manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.
(n) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
17
<PAGE>
(o) The Company shall furnish to the Representative as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in their letters to be
furnished pursuant to Sections 6(l) and 6(m) hereof.
--------
(p) The Company shall cause the Units, Common Stock and Redeemable
Warrants to be quoted on Nasdaq and, for a period of seven (7) years from the
date hereof, use its best efforts to maintain the Nasdaq listing of the Common
Stock and the Redeemable Warrants to the extent outstanding.
(q) For a period of five (5) years from the Closing Date, the Company
shall furnish to the Representative at the Representative's reasonable request
and the Company's sole expense, (i) daily consolidated transfer sheets relating
to the Units, Common Stock and Redeemable Warrants (ii) the list of holders of
all of the Company's securities and (iii) a Blue Sky "Trading Survey" for
secondary sales of the Company's securities prepared by counsel to the Company.
(r) As soon as practicable, (i) but in no event more than five (5)
business days before the effective date of the Registration Statement, file a
Form 8-A with the Commission providing for the registration under the Exchange
Act of the Securities and (ii) but in no event more than thirty (30) days after
the effective date of the Registration Statement, take all necessary and
appropriate actions to be included in Standard and Poor's Corporation
Descriptions and Moody's OTC Manual and to continue such inclusion for a period
of not less than seven (7) years.
(s) The Company hereby agrees that, except for the 666,667 shares
reserved for future issuance under the Company's 1995 Stock Option Plan, it will
not, for a period of twelve (12) months from the effective date of the
Registration Statement, adopt, propose to adopt or otherwise permit to exist any
employee, officer, director, consultant or compensation plan or similar
arrangement, permitting (i) the grant, issue, sale or entry into any agreement
to grant, issue or sell any option, warrant or other contract right (x) at an
exercise price that is less than the greater of the public offering price of the
Shares set forth herein and the fair market value on the date of grant or sale
or (y) to any of its executive officers or directors or to any holder of 5% or
more of the Common Stock; (ii) the maximum number of shares of Common Stock or
other securities of the Company purchasable at any time pursuant to options or
warrants issued by the Company to exceed such 666,667 shares reserved for future
issuance under the Company's 1995 Stock Option Plan; (iii) the payment for such
securities with any form of consideration other than cash; or (iv) the existence
of stock appreciation rights, phantom options or similar arrangements.
(t) Until the completion of the distribution of the Securities, the
Company shall not, without the prior written consent of the Representative and
Underwriters' Counsel, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect
18
<PAGE>
to the Company or its activities or the offering contemplated hereby, other than
trade releases issued in the ordinary course of the Company's business
consistent with past practices with respect to the Company's operations.
(u) For a period equal to the lesser of (i) seven (7) years from the date
hereof, and (ii) the sale to the public of the Representative's Securities, the
Company will not take any action or actions which may prevent or disqualify the
Company's use of Form SB-2 (or other appropriate form) for the registration
under the Act of the Representative's Securities. The Company further agrees to
use its best efforts to file such post-effective amendments to the Registration
Statement, as may be necessary, in order to maintain its effectiveness and to
keep such Registration Statement effective while any of the Redeemable Warrants
remain outstanding.
(v) Commencing one year and one day from the date hereof, if the Company
engages the Representative as a warrant solicitation agent under the terms of
the Warrant Agreement, the Company shall pay the Representative a commission
equal to five percent (5%) of the exercise price of the Redeemable Warrants,
payable on the date of the exercise thereof on the terms provided in the Warrant
Agreement; provided, however, the Representative shall be entitled to receive
-------- -------
the commission contemplated by this Section 4(v) only if: (i) the Representative
has provided actual services in connection with the solicitation of the exercise
of a Redeemable Warrant by a Warrantholder and (ii) the Warrantholder exercising
a Redeemable Warrant affirmatively designates in writing on the exercise form on
the reverse side of the Redeemable Warrant Certificate that the exercise of such
Warrantholder's Redeemable Warrant was solicited by the Representative.
(w) For a period of three (3) years after the effective date of the
Registration Statement, the Company agrees that the Representative shall have
the right to designate one (1) person to attend all meetings of the Board of
Directors of the Company (the "Board"). The Company shall send to such person
all notices and other correspondence and communications sent by the Company to
members of the Board. Such designee(s) of the Representative shall be
reimbursed for all out-of-pocket expenses incurred in connection with their
attendance of meetings of the Board.
(x) The Company agrees that for a period of 12 months from the effective
date of the Registration Statement, prior to the delivery of Common Stock
certificates to Cygnus, Inc. as described in footnote 4 of the "Principal
Shareholders" section in the Prospectus, it will use its reasonable best efforts
to provide the Representative with a Lock-up Agreement executed by Cygnus, Inc.
5. Payment of Expenses.
-------------------
(a) The Company hereby agrees to pay on each of the Closing Date and the
Option Closing Date (to the extent not paid at the Closing Date) all expenses
and fees (other than fees of Underwriters' Counsel, except as provided in (iv)
below) incident to the performance of the obligations of the Company under this
Agreement, the Warrant Agreement and the
19
<PAGE>
Representative'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
(including mailing and handling charges), 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
printing, mailing (including the payment of postage with respect thereto) and
delivery of this Agreement, the Warrant Agreement, the Representative's Warrant
Agreement, the Agreement Among Underwriters, the Selected Dealer Agreements, and
related documents, including the cost of all copies thereof and of the
Preliminary Prospectuses and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Underwriters and such dealers as the
Underwriters may request, in quantities as hereinabove stated, (iii) the
printing, engraving, issuance and delivery of the Securities including, but not
limited to, (x) the purchase by the Underwriters of the Firm Securities and the
Option Securities and the purchase by the Representative of the Representative's
Warrants from the Company, (y) the consummation by the Company of any of its
obligations under this Agreement, the Warrant Agreement and the Representative's
Warrant Agreement, and (z) resale of the Firm Securities and the Option
Securities by the Underwriters in connection with the distribution contemplated
hereby, (iv) the qualification of the Securities under state or foreign
securities or "Blue Sky" laws and determination of the status of such securities
under legal investment laws, including the costs of printing and mailing the
"Preliminary Blue Sky Memorandum", the "Supplemental Blue Sky Memorandum" and
"Legal Investments Survey," if any, and disbursements and fees of counsel in
connection therewith (such counsel fees not to exceed $35,000 if the Securities
are listed on Nasdaq or elsewhere or $20,000 if the Securities are listed on the
Nasdaq National Market or a national exchange), (v) advertising costs and
expenses, including but not limited to costs and expenses in connection with the
"road show", information meetings and presentations, bound volumes and
prospectus memorabilia and "tomb-stone" advertisement expenses, (vi) costs and
expenses in connection with due diligence investigations (not to exceed
$15,000), including but not limited to the fees of any independent counsel,
expert or consultant retained, (vii) fees and expenses of the Transfer Agent and
registrar and all issue and transfer taxes, if any, (viii) applications for
assignment of a rating of the Securities by qualified rating agencies, (ix) the
fees payable to the Commission and the NASD, and (x) the fees and expenses
incurred in connection with the quotation of the Securities on Nasdaq and any
other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6 (except Sections 6(c), 6(k) and 6(o)) or
------- --------
Section 12, the Company shall reimburse and indemnify the Underwriters for all
- -------
of their actual out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the Underwriters and all Blue Sky counsel fees
(excluding filing fees) and disbursements (less amounts previously paid pursuant
to Section 5(c) hereof).
(c) The Company further agrees that, in addition to the expenses payable
pursuant to subsection (a) of this Section 5, it will pay to the Representative
-------
on the Closing Date by certified or bank cashier's check or, at the election of
the Representative, by deduction from the proceeds of the offering of the Firm
Securities, a non-accountable expense allowance equal to 2 1/2% of the
20
<PAGE>
gross proceeds received by the Company from the sale of the Firm Securities,
$50,000 of which has been paid to date. In the event the Representative elects
to exercise the overallotment option described in Section 2(b) hereof, the
-------
Company further agrees to pay to the Representative on each Option Closing
Date, by certified or bank cashier's check, or at the Representative's election,
by deduction from the proceeds of the Option Securities purchased on such Option
Closing Date, a non-accountable expense allowance equal to 2 1/2% of the gross
proceeds received by the Company from the sale of such Option Securities.
6. Conditions of the Underwriters' Obligations. The obligations of the
-------------------------------------------
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of the 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 Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement shall have become effective not later than
12:00 P.M., New York time, on the date of this Agreement or such later date and
time as shall be consented to in writing by the Representative, and, at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Units and any price-
related information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) of the Rules and Regulations within the
prescribed time period and, prior to the Closing Date, the Company shall have
provided evidence satisfactory to the Representative of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A of
the Rules and Regulations.
21
<PAGE>
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to each of the Closing Date and each Option Closing Date,
if any, the Representative shall have received from Underwriters' Counsel, such
opinion or opinions with respect to the organization of the Company, the
validity of the Securities, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
(d) At the Closing Date, the Underwriters shall have received the
favorable opinion of Heller Ehrman White & McAuliffe, counsel to the Company,
dated the Closing Date, addressed to the Underwriters in substantially the form
attached hereto as Schedule C.
(e) At the Closing Date, the Underwriters shall have received the
favorable opinion of Townsend and Townsend and Crew, patent counsel to the
Company, dated the Closing Date, addressed to the Underwriters in substantially
the form attached hereto as Schedule B.
(f) At the Closing Date, the Underwriters shall have received the
favorable opinion of Hyman, Phelps & McNamara, P.C., regulatory counsel to the
Company, dated the Closing Date, addressed to the Underwriters in substantially
the form attached hereto as Schedule D.
(g) At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinions of each of Heller Ehrman White & McAuliffe,
counsel to the Company, Townsend and Townsend and Crew, patent counsel to the
Company and Hyman, Phelps & McNamara, P.C., regulatory counsel to the Company,
dated such Option Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel confirming as of such Option
Closing Date the statements made by each of Heller Ehrman White & McAuliffe,
Townsend and Townsend and Crew and Hyman, Phelps & McNamara, P.C., in their
respective opinions delivered on the Closing Date.
(h) On or prior to each of the Closing Date and each Option Closing Date,
if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
-------
satisfaction of any of the representations, warranties or conditions of the
Company, or herein
22
<PAGE>
contained.
(i) Prior to each of the Closing Date and each Option Closing Date, if
any, (i) there shall have been no material adverse change nor development
involving a prospective change in the condition, financial or otherwise,
earnings, position, value, properties, results of operations, prospects,
stockholders' equity or the business activities of the Company, whether or not
in the ordinary course of business, from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus; (ii) there
shall have been no transaction, not in the ordinary course of business, entered
into by the Company, from the latest date as of which the financial condition of
the Company is set forth in the Registration Statement and Prospectus which is
materially adverse to the Company; (iii) the Company shall not be in material
default under any provision of any instrument relating to any outstanding
indebtedness; (iv) the Company shall not have issued any securities (other than
the Securities) or declared or paid any dividend or made any distribution in
respect of its capital stock of any class and there has not been any change in
the capital stock or any material change in the debt (long or short term) or
liabilities or obligations of the Company (contingent or otherwise); (v) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus;
(vi) no action, suit or proceeding, at law or in equity, shall have been pending
or threatened (or circumstances giving rise to same) against the Company, or
affecting any of its properties or businesses before or by any court or federal,
state or foreign commission, board or other administrative agency wherein an
unfavorable decision, ruling or finding may materially adversely affect the
business, operations, earnings, position, value, properties, results of
operations, prospects or financial condition or income of the Company; 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.
(j) At each of the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
i. The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the Closing Date or the Option
Closing Date, as the case may be, and the Company has complied with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to such
Closing Date or Option Closing Date, as the case may be;
ii. No stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued, and no proceedings for that
purpose have been instituted or are pending or, to the best of each of such
person's knowledge, are contemplated or threatened under the Act;
iii. The Registration Statement and the Prospectus and, if any, each
amendment and
23
<PAGE>
each supplement thereto, contain all statements and information required 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 thereto included any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
and
iv. Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, (a) the Company has not
incurred up to and including the Closing Date or the Option Closing Date, as
the case may be, other than in the ordinary course of its business, any
material liabilities or obligations, direct or contingent; (b) the Company
has not paid or declared any dividends or other distributions on its capital
stock; (c) the Company has not entered into any material transactions not in
the ordinary course of business; (d) there has not been any change in the
capital stock or long-term debt or any increase in the short-term borrowings
(other than any increase in the short-term borrowings in the ordinary course
of business) of the Company; (e) the Company has not sustained any material
loss or damage to its properties 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 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
(j) are to such documents as amended and supplemented at the date of such
certificate.
(k) By the Closing Date, the Underwriters will have received clearance
from the NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
(l) At the time this Agreement is executed, the Underwriters shall have
received a letter, dated such date, addressed to the Underwriters in form and
substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from Ernst & Young LLP:
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 Rules and Regulations thereunder and that
the Representative may rely upon the opinion of Ernst &
24
<PAGE>
Young LLP 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, 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
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or are not
fairly presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
financial statements of the Company included in the Registration Statement,
or (B) at a specified date not more than five (5) days prior to the
effective date of the Registration Statement, there has been any change in
the capital stock or long-term debt of the Company, or any decrease in the
stockholders' equity or net current assets or net assets of the Company as
compared with amounts shown in the June 30, 1997 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, and (C) during the period from
June 30, 1997 to a specified date not more than five (5) days prior to the
effective date of the Registration Statement, there was any decrease in net
revenues, net earnings or increase in net earnings per common share of any
of the Company or the Subsidiaries, in each case as compared with the
corresponding period beginning June 30, 1996, other than as set forth in or
contemplated by the Registration Statement, or, if there was any such
decrease, setting forth the amount of such decrease;
iv. setting forth, at a date not later than five (5) days prior to the
date of the Registration Statement, the amount of liabilities of the Company
and the Subsidiaries taken as a whole (including a break-down of commercial
paper and notes payable to banks);
v. 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;
vi. statements as to such other matters incident to the transaction
contemplated hereby
25
<PAGE>
as the Representative may request.
(m) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Ernst & Young LLP a letter, dated as of
the Closing Date or the Option Closing Date, as the case may be, to the effect
that they reaffirm that statements made in the letter furnished pursuant to
subsection (l) of this Section, except that the specified date referred to shall
- ---------- -------
be a date not more than five (5) days prior to the Closing Date or the Option
Closing Date, as the case may be, and, if the Company has elected to rely on
Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of subsection (l) of this
----------
Section with respect to certain amounts, percentages and financial information
as specified by the Representative 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 (v).
(n) On each of the Closing Date and each Option Closing Date, if any,
there shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Securities.
(o) No order suspending the sale of the Securities in any jurisdiction
designated by the Representative pursuant to subsection (e) of Section 4 hereof
---------- -------
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(p) On or before the Closing Date, the Company shall have executed and
delivered to the Representative, (i) the Representative's Warrant Agreement
substantially in the form filed as Exhibit 4.3 to the Registration Statement, in
final form and substance satisfactory to the Representative, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company.
(q) On or before the Closing Date, the Firm Securities and Option
Securities shall have been duly approved for quotation on Nasdaq, subject to
official notice of issuance.
(r) On or before the Closing Date, there shall have been delivered to the
Representative all of the Lock-up Agreements, in form and substance satisfactory
to Underwriters' Counsel.
(s) On or before the Closing Date, the Company shall have executed and
delivered to the Representative and the Transfer Agent the Warrant Agreement
substantially in the form filed as Exhibit 4.4 to the Registration Statement, in
final form and substance satisfactory to the Representative.
If any condition to the Underwriters' obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Representative may terminate this Agreement or,
if the Representative so elects, it may waive
26
<PAGE>
any such conditions which have not been fulfilled or extend the time for their
fulfillment.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriter" shall include the
-------
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any, who controls the
-------
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, suits and litigation in respect
thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any such claim, action, proceeding, investigation, inquiry, suit or litigation,
commenced or threatened, or any claim whatsoever), as such are incurred, to
which the Underwriter or such controlling person may become subject under the
Act, the Exchange Act or any other statute or at common law or otherwise or
under the laws of foreign countries, arising out of or based upon (A) any untrue
statement or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the Securities; or
(iii) in any application or other document or written communication (in this
Section 7 collectively called "application") executed by the Company or based
- -------
upon written information furnished by the Company in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, AMEX or any other
securities exchange; (B) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be. The indemnity agreement in
this subsection (a) shall be in addition to any liability which the Company may
----------
have at common law or otherwise.
The foregoing indemnity with respect to any untrue statement contained in
or omission from a Preliminary Prospectus shall not inure to the benefit of any
Underwriter (or any person controlling such Underwriter) from whom the person
asserting any such loss, liability, claim, damage or expense purchased any of
the Securities which are the subject thereof if (1) the Company shall sustain
the burden of proving that such asserting person did not receive a copy of the
Prospectus (or the Prospectus as amended or supplemented) at or prior to the
written
27
<PAGE>
confirmation of the sale of such Securities to such person and the
untrue statement contained in or omitted from such Preliminary Prospectus was
corrected in the Prospectus (or the Prospectus as amended or supplemented); and
(2) the Company shall have complied with its covenant pursuant to Section 4(f)
of this Agreement.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Firm Securities and the Option Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriters expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriters for
inclusion in the Prospectus.
(c) Promptly after receipt by an indemnified party under this Section 7
-------
of notice of the commencement of any claim, action, suit, investigation,
inquiry, proceeding or litigation, such indemnified party shall, if a claim in
respect thereof is to be made against one or more indemnifying parties under
this Section 7, notify each party against whom indemnification is to be sought
-------
in writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 7 except to the extent that it has been prejudiced in any
-------
material respect by such failure or from any liability which it may have
otherwise). In case any such claim, action, suit, investigation, inquiry,
proceeding or litigation 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 thereof 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 thereof within a reasonable
time after notice of commencement thereof, 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
28
<PAGE>
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 thereof on behalf of the indemnified party or parties), in any of which
events such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one claim, action, suit, investigation, inquiry, proceeding or litigation or
separate but similar or related claims, actions, suits, investigations,
inquiries, proceedings or litigation in the same jurisdiction arising out of the
same general allegations or circumstances. Anything in this Section 7 to the
-------
contrary notwithstanding, an indemnifying party shall not be liable for
any settlement of any claim, action, suit, investigation, inquiry, proceeding or
litigation effected without its written consent; provided, however, that such
-----------------
consent was not unreasonably withheld. An indemnifying party will not, without
the prior written consent of the indemnified parties, settle, compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, suit, investigation, inquiry, proceeding or litigation in respect
of which indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such claim, action,
suit, investigation, inquiry, proceeding or litigation), unless such settlement,
compromise or consent (i) includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit, investigation,
inquiry, proceeding or litigation and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) In order to provide for just and equitable contribution in any case
in which (i) an indemnified party makes claim for indemnification pursuant to
this Section 7, but it is judicially determined (by the entry of a final
-------
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
-------
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Firm Securities and the Option Securities or (B) if the allocation provided
by clause (A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable considerations.
In any case where the Company is the contributing party and the Underwriters are
the indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Firm Securities
and the Option Securities (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the Cover Page of the Prospectus. Relative fault
shall be determined by
29
<PAGE>
reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, or by
the Underwriters, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal or
----------
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), the Underwriters shall not be required to
----------
contribute any amount in excess of the underwriting discount applicable to the
Firm Securities and the Option Securities purchased by the Underwriters
hereunder. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 7, each person, if any, who controls the Company or the Underwriter
- -------
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 or the Underwriter, as the case may be,
subject in each case to this subsection (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 subsection (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 subsection (d), or to the extent that such party or
----------
parties were not adversely affected by such omission. The contribution
agreement set forth above shall be in addition to any liabilities which any
indemnifying party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All representations,
--------------------------------------------------
warranties and agreements contained in this Agreement or contained in
certificates of officers of the Company submitted pursuant hereto, shall be
deemed to be representations, warranties and agreements at the Closing Date and
the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
-------
regardless of any investigation made by or on behalf of any Underwriter, the
Company, any controlling person of any Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters and the Representative, as the case may be.
30
<PAGE>
9. Effective Date. This Agreement shall become effective at 10:00 a.m., New
--------------
York City time, on the next full business day following the date hereof, or at
such earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Securities for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
-------- ------- --------
Agreement shall at all times be effective. For purposes of this Section 9, the
-------
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Representative of telegrams to securities
dealers releasing such securities for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. Termination.
-----------
(a) Subject to subsection (b) of this Section 10, the Representative
---------- -------
shall have the right to terminate this Agreement, (i) if any domestic or
international event or act or occurrence has materially adversely disrupted, or
in the Representative's opinion will in the immediate future materially
adversely disrupt, the financial markets; or (ii) if any material adverse change
in the financial markets shall have occurred; or (iii) if trading generally
shall have been suspended or materially limited on or by, as the case may be,
any of the New York Stock Exchange, the American Stock Exchange, the NASD, the
Commission or any governmental authority having jurisdiction over such matters;
or (iv) if trading of any of the securities of the Company shall have been
suspended, or any of the securities of the Company shall have been delisted, on
any exchange or in any over-the-counter market; (v) 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 (vi) if a banking moratorium
has been declared by a state or federal authority; or (vii) if a moratorium in
foreign exchange trading has been declared; or (viii) if the Company shall have
sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which, whether or not such loss shall have been insured, will, in the
Representative's opinion, make it inadvisable to proceed with the offering, sale
and/or delivery of the Securities; or (ix) if there shall have been such a
material adverse change in the conditions or prospects of the Company, or such
material adverse change in the general market, political or economic conditions,
in the United States or elsewhere, that, in each case, in the Representative's
judgment, would make it inadvisable to proceed with the offering, sale and/or
delivery of the Securities or (x) if either John W. Fara or John W. Shell shall
no longer serve the Company in his present capacity.
(b) If this Agreement is terminated by the Representative in accordance
with the provisions of Section 10(a) the Company shall promptly reimburse and
-------
indemnify the Representative for all of its actual out-of-pocket expenses in an
amount not to exceed $100,000, including the fees and disbursements of counsel
for the Underwriters and all Blue Sky counsel fees (excluding filing fees) and
disbursements (less amounts previously paid pursuant to Section 5(c) above).
-------
Notwithstanding any contrary provision contained in this Agreement, if this
Agreement shall not be carried out within the time specified herein, or any
extension thereof granted to the Representative, by reason of any failure on the
part of the Company to perform
31
<PAGE>
any undertaking or satisfy any condition of this Agreement by it to
be performed or satisfied (including, without limitation, pursuant to
Section 6 (except if this Agreement is terminated pursuant to Sections
- ------- --------
6(c), 6(k) or 6(o)) or Section 12) then, the Company shall promptly
-------
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the reasonable fees and disbursements of counsel for the
Underwriters (less amounts previously paid pursuant to Section 5(c) above). In
-------
addition, the Company shall remain liable for all Blue Sky counsel fees and
disbursements, expenses and filing fees (such counsel fees not to exceed $35,000
if the Securities are listed on Nasdaq or elsewhere or $20,000 if the Securities
are listed on the Nasdaq National Market or a national exchange).
Notwithstanding any contrary provision contained in this Agreement, any election
hereunder or any termination of this Agreement (including, without limitation,
pursuant to Sections 6, 10, 11 and 12 hereof), and whether or not this Agreement
--------
is otherwise carried out, the provisions of Section 5 and Section 7 shall not be
------- -------
in any way affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
11. Substitution of the Underwriters. If one or more of the Underwriters
--------------------------------
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
------- ------- -------
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representative
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Firm Securities to be purchased on such date, the non-
defaulting Underwriters shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total number
of Firm Securities, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriters (or, if such default shall occur
with respect to any Option Securities to be purchased on an Option Closing
Date, the Underwriters may at the Representative's option, by notice from
the Representative to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date).
No action taken pursuant to this Section 11 shall relieve any defaulting
-------
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default which does not result in a termination of
this Agreement, the Representative shall have the right to postpone the Closing
Date for a period not exceeding seven (7) days in order to effect any required
changes in the Registration Statement or Prospectus
32
<PAGE>
or in any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the Closing Date
----------------------
or at any Option Closing Date, as applicable, to sell and deliver the number of
Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the Underwriters
may at the Representative's option, by notice from the Representative to the
Company, terminate the Underwriters' obligation to purchase Option Securities
from the Company on such date) without any liability on the part of any non-
defaulting party other than pursuant to Section 5, Section 7 and Section 10
------- ------- -------
hereof. No action taken pursuant to this Section 12 shall relieve the Company
-------
from liability, if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative at National Securities Corporation, 1001 Fourth Avenue, Suite
2200, Seattle, Washington 98154, Attention: Steven A. Rothstein, Chairman, with
a copy to Orrick, Herrington & Sutcliffe LLP, 666 Fifth Avenue, New York, New
York 10103, Attention: Lawrence B. Fisher, Esq. Notices to the Company shall
be directed to the Company at 1170 B Chess Drive, Foster City, California,
94404, Attention: John W. Fara, President and Chief Executive Officer, with a
copy to: Heller Ehrman White & McAuliffe, 525 University Avenue, Palo Alto,
California 94301, Attention: Julian N. Stern, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and shall
-------
be binding upon, the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
-------
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained.
No purchaser of Securities from any Underwriter shall be deemed to be a
successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed and
------------
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement, the Warrant Agreement
----------------------------
and the Representative's Warrant Agreement constitute the entire agreement of
the parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representative
and the Company.
33
<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
DEPOMED, INC.
By: _____________________________
John W. Fara
President and Chief Executive
Officer
Confirmed and accepted as of
the date first above written.
NATIONAL SECURITIES CORPORATION
For itself and as Representative
of the several Underwriters named
in Schedule A hereto.
By:_______________________________
Steven A. Rothstein
Chairman
34
<PAGE>
SCHEDULE A
----------
NUMBER OF
FIRM SECURITIES
NAME OF UNDERWRITERS TO BE PURCHASED
-------------------- ---------------
National Securities Corporation....................
Total................................................... 1,200,000
=========
A-1
<PAGE>
EXHIBIT 4.3
_____________________________________________________________________
DEPOMED, INC.
AND
NATIONAL SECURITIES CORPORATION
-------------
REPRESENTATIVE'S
WARRANT AGREEMENT
DATED AS OF ____________, 1997
- ---------------------------------------------------------------------
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______________, 1997 between
DEPOMED, INC., a California corporation (the "Company"), and NATIONAL SECURITIES
CORPORATION (hereinafter referred to variously as the "Holder" or the
"Representative").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company proposes to issue to the Representative warrants
("Warrants") to purchase up to an aggregate 117,917 units (the "Units") each
Unit consisting of one share of Common Stock, no par value, of the Company and
one redeemable Common Stock purchase warrant of the Company ("Redeemable
Warrants"), each Redeemable Warrant to purchase one additional share of Common
Stock; and
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between the
Company and the several Underwriters listed therein to act as the Representative
in connection with the Company's proposed public offering of up to 1,200,000
Units, each Unit consisting of one share of Common Stock and one Redeemable
Warrant (the "Public Warrants") at a public offering price of $______ per Unit
(the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the Representative
acting as the Representative pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
<PAGE>
Representative to the Company of an aggregate twelve dollars ($12.00), the
agreements herein set forth and other good and valuable consideration, hereby
acknowledged, the parties hereto agree as follows:
1. Grant. The Representative (or its designees) is hereby granted
-----
the right to purchase, at any time from _____________, 1998 [one year after date
of this Agreement], until 5:30 P.M., New York time, on ___________, 2002 [five
years after date of this Agreement], up to an aggregate of 117,917 Units at an
initial exercise price (subject to adjustment as provided in Section 8 hereof)
-------
of $_____ per Unit [125% of initial public offering price of Unit], subject to
the terms and conditions of this Agreement. One Redeemable Warrant is
exercisable to purchase one additional share of Common Stock at an initial
exercise price of $______ [125% of initial public offering price of Unit] from
________, 1998 [one year after date of this Agreement] until 5:30 p.m. New York
time on ________, 2002 [5 years after date of this Agreement], at which time the
Redeemable Warrants shall expire. Except as set forth herein, the Units, shares
of Common Stock and the Redeemable Warrants issuable upon exercise of the
Warrants are in all respects identical to the Units, shares of Common Stock and
the Public Warrants being purchased by the Underwriters for resale to the public
pursuant to the terms and provisions of the Underwriting Agreement. The Units,
shares of Common Stock and the Redeemable Warrants issuable upon exercise of the
Warrants are sometimes hereinafter referred to collectively as the "Securities."
2. Warrant Certificates. The warrant certificates (the "Warrant
--------------------
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant.
-------------------
3.1 Method of Exercise. The Warrants initially are exercisable at
------------------
an aggregate
2
<PAGE>
initial exercise price (subject to adjustment as provided in Section 8 hereof)
-------
per Unit set forth in Section 6 hereof payable by certified or official bank
-------
check in New York Clearing House funds, subject to adjustment as provided in
Section 8 hereof. Upon surrender of a Warrant Certificate with the annexed Form
- -------
of Election to Purchase duly executed, together with payment of the Exercise
Price (as hereinafter defined) for the Units purchased at the Company's
principal executive offices in New York (presently located at 1170 B Chess
Drive, Foster City, California 94404) the registered holder of a Warrant
Certificate ("Holder" or "Holders") shall be entitled to receive a certificate
or certificates for the shares of Common Stock so purchased and a certificate or
certificates for the Redeemable Warrants so purchased. The purchase rights
represented by each Warrant Certificate are exercisable at the option of the
Holder thereof, in whole or in part (but not as to fractional shares of the
Common Stock and Redeemable Warrants underlying the Warrants). In the event the
Company redeems all of the Public Warrants (other than the Redeemable Warrants
underlying the Warrants), then the Warrants may only be exercised if such
exercise is accompanied by the simultaneous exercise of the Redeemable
Warrant(s) underlying the Warrants being so exercised. Warrants may be exercised
to purchase all or part of the shares of Common Stock together with an equal or
unequal number of the Redeemable Warrants represented thereby. In the case of
the purchase of less than all the Units purchasable under any Warrant
Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Units purchasable thereunder.
3.2 Exercise by Surrender of Warrant. In addition to the method of
--------------------------------
payment set forth in Section 3.1 and in lieu of any cash payment required
-------
thereunder, the Holder(s) of the Warrants shall have the right at any time and
from time to time to exercise the Warrants in full or in part by surrendering
the Warrant Certificate in the manner specified in Section 3.1 hereof.
-------
3
<PAGE>
The number of Units to be issued pursuant to this Section 3.2 shall be equal to
-------
the difference between (a) the number of Units in respect of which the Warrants
are exercised and (b) a fraction, the numerator of which shall be the number of
Units in respect of which the Warrants are exercised multiplied by the Exercise
Price and the denominator of which shall be the Market Price (as defined in
Section 3.3 hereof) of the Units. In the event that, at the time of the exercise
of the Representative's Warrants pursuant to this Section 3.2, the Market Price
-------
per Unit is unavailable, such Market Price shall be equal to the sum of the
respective Market Prices per share of Common Stock and per Public Warrant.
Solely for the purposes of this paragraph, 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 14 hereof ("Notice Date")
or (ii) as the average of the Market Prices for each of the five trading days
preceding the Notice Date, whichever of (i) or (ii) is greater.
3.3 Definition of Market Price. As used herein, the phrase "Market
--------------------------
Price" at any date shall be deemed to be (i) when referring to the Units or the
Common Stock, the last reported sale price, or, in case no such reported sale
takes place on such day, the average of the last reported sale prices for the
last three (3) trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading or by the Nasdaq SmallCap Market ("Nasdaq SmallCap") or by the National
Association of Securities Dealers Automated Quotation System ("Nasdaq"), or, if
the Common Stock is not listed or admitted to trading on any national securities
exchange or quoted by Nasdaq, the average closing bid price as furnished by the
National Association of Securities Dealers, Inc. ("NASD") through Nasdaq or
similar organization if Nasdaq is no longer reporting such information, or if
the Common Stock is not quoted on Nasdaq, as determined in good faith (using
customary valuation methods) by resolution of the members of the Board of
Directors of the
4
<PAGE>
Company, based on the best information available to it or (ii) when
referring to a Redeemable Warrant, the last reported sales price, or, in the
case no such reported sale takes place on such day, the average of the last
reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Redeemable
Warrants are listed or admitted to trading or by Nasdaq, or, if the Redeemable
Warrants are not listed or admitted to trading on any national securities
exchange or quoted by Nasdaq, the average closing bid price as furnished by the
NASD through Nasdaq or similar organization if Nasdaq is no longer reporting
such information, or if the Redeemable Warrants are not quoted on Nasdaq or are
no longer outstanding, the Market Price of a Redeemable Warrant shall equal the
difference between the Market Price of the Common Stock and the Exercise Price
of the Redeemable Warrant.
4. Issuance of Certificates. Upon the exercise of the Warrants, the
------------------------
issuance of certificates for shares of Common Stock and Redeemable Warrants
and/or other securities, properties or rights underlying such Warrants and, upon
the exercise of the Redeemable Warrants, the issuance of certificates for shares
of Common Stock and/or other securities, properties or rights underlying such
Redeemable Warrants shall be made forthwith (and in any event within five (5)
business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Sections 5
--------
and 7 hereof) be issued in the name of, or in such names as may be directed by,
the Holder thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any such certificates in a name other than that of the
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
5
<PAGE>
of such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
The Warrant Certificates and the certificates representing the shares
of Common Stock and the Redeemable Warrants underlying the Warrants and the
shares of Common Stock underlying the Redeemable Warrants (and/or other
securities, property or rights issuable upon the exercise of the Warrants or the
Redeemable Warrants) shall be executed on behalf of the Company by the manual or
facsimile signature of the then Chairman or Vice Chairman of the Board of
Directors or President or Vice President of the Company. Warrant Certificates
shall be dated the date of execution by the Company upon initial issuance,
division, exchange, substitution or transfer. Certificates representing the
shares of Common Stock and Redeemable Warrants, and the shares of Common Stock
underlying each Redeemable Warrant (and/or other securities, property or rights
issuable upon exercise of the Warrants) shall be dated as of the Notice Date
(regardless of when executed or delivered) and dividend bearing securities so
issued shall accrue dividends from the Notice Date.
5. Restriction On Transfer of Warrants. The Holder of a Warrant
-----------------------------------
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers of the Representative.
6
<PAGE>
6. Exercise Price.
--------------
6.1 Initial and Adjusted Exercise Price. Except as otherwise
-----------------------------------
provided in Section 8 hereof, the initial exercise price of each Warrant shall
-------
be $_____ per Unit [125% of the initial public offering price of the Unit]. 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 8 hereof. Any transfer of a Warrant shall constitute
-------
an automatic transfer and assignment of the registration rights set forth in
Section 7 hereof with respect to the Securities or other securities, properties
- -------
or rights underlying the Warrants.
6.2 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>
7. Registration Rights.
-------------------
7.1 Registration Under the Securities Act of 1933. The Warrants, the
---------------------------------------------
shares of Common Stock and Redeemable Warrants included in the Units or other
securities issuable upon exercise of the Warrants, and the shares of Common
Stock or other securities issuable upon exercise of the Redeemable Warrants
(collectively, the "Warrant Securities") have been registered under the
Securities Act of 1933, as amended (the "Act") pursuant to the Company's
Registration Statement on Form SB-2 (Registration No. 333-25445) (the
"Registration Statement"). All of the representatives and warranties of the
Company contained in the Underwriting Agreement relating to the Registration
Statement, the Preliminary Prospectus and Prospectus (as such terms are defined
in the Underwriting Agreement) and made as of the dates provided therein, are
incorporated by reference herein. The Company agrees and covenants promptly to
file post-effective amendments to such Registration Statement as may be
necessary in order to maintain its effectiveness and otherwise to take such
action as may be necessary to maintain the effectiveness of the Registration
Statement as long as any Warrants are outstanding. In the event that, for any
reason, whatsoever, the Company shall fail to maintain the effectiveness of the
Registration Statement, the certificates representing the Warrant Securities
shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"), and
may not be offered or sold except pursuant to (i) an effective
registration statement under the Act, (ii) to the extent applicable,
Rule 144 under the 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 to the
issuer, that an exemption from registration under such Act is
available.
7.2 Piggyback Registration. If, at any time commencing after the
----------------------
date hereof and expiring seven (7) years thereafter, the Company proposes to
register any of its securities
8
<PAGE>
under the Act (other than pursuant to Form S-4, Form S-8 or a comparable
registration statement) it will give written notice by registered mail, at least
thirty (30) days prior to the filing of each such registration statement, to the
Representative and to all other Holders of the Warrants and/or the Warrant
Securities of its intention to do so. If the Representative or other Holders of
the Warrants and/or Warrant Securities notify the Company within twenty (20)
business days after receipt of any such notice of its or their desire to include
any such securities in such proposed registration statement, the Company shall
afford the Representative and such Holders of the Warrants and/or Warrant
Securities the opportunity to have any such Warrant Securities registered under
such registration statement.
Notwithstanding the provisions of this Section 7.2, the Company shall
-------
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
-------
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3 Demand Registration.
-------------------
(a) At any time commencing after the date hereof and expiring five
(5) years thereafter, the Holders of the Warrants and/or Warrant Securities
representing a "Majority" (as hereinafter defined) of such securities (assuming
the exercise of all of the Warrants) shall have the right (which right is in
addition to the registration rights under Section 7.2 hereof), exercisable by
-------
written notice to the Company, to have the Company prepare and file with the
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
Representative and Holders, in order to comply with the provisions of the Act,
so as to permit a public offering and sale of their
9
<PAGE>
respective Warrant Securities for six (6) consecutive months by such Holders and
any other Holders of the Warrants and/or Warrant Securities who notify the
Company within ten (10) days after receiving notice from the Company of such
request.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
-------
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Securities
within the time period specified in Section 7.4(a) hereof pursuant to the
-------
written notice specified in Section 7.3(a) of a Majority of the Holders of the
-------
Warrants and/or Warrant Securities, the Company may, at its option, upon the
written notice of election of a Majority of the Holders of the Warrants and/or
Warrant Securities requesting such registration, repurchase (i) any and all
Warrant Securities of such Holders at the higher of the Market Price per Unit on
(x) the date of the notice sent pursuant to Section 7.3(a) or (y) the expiration
-------
of the period specified in Section 7.4(a) and (ii) any and all Warrants of such
-------
Holders at such Market Price less the Exercise Price of such 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 7.4(a) or (ii) the delivery of the written notice of election specified
- -------
in this Section 7.3(c).
-------
(d) If all of the Holders are able to sell the Warrant Securities
pursuant to Rule 144 under the Securities Act of 1933, as amended, and without
regard to the volume limitations thereunder, the Holders' rights under Section
-------
7.2 and 7.3(a) shall terminate.
7.4 Covenants of the Company With Respect to Registration. In
-----------------------------------------------------
connection with any registration under Section 7.2 or 7.3 hereof, the Company
-------
covenants and agrees as
10
<PAGE>
follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor, shall use
its best efforts to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Securities such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
- --------
legal and accounting fees, printing expenses, blue sky fees and expenses.
(c) The Company will take all necessary action which may be required
in qualifying or registering the Warrant Securities 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
Securities 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
11
<PAGE>
same effect as the provisions pursuant to which the Company has agreed to
indemnify each of the Underwriters contained in Section 7 of the Underwriting
Agreement.
(e) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
-------
Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or
- -------
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 7 of the Underwriting
-------
Agreement pursuant to which the Underwriters have agreed to indemnify the
Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities
other than the Warrant Securities to be included in any registration statement
filed pursuant to Section 7.3 hereof, or permit any other registration statement
-------
to be or remain effective during the effectiveness of a registration statement
filed pursuant to Section 7.3 hereof (other than (i) shelf registrations
-------
effective prior thereto and (ii) registrations on Form S-4 or S-8), without the
prior written consent of the Holders of the Warrants and Warrant Securities
representing a Majority of such securities.
(h) The Company shall furnish to each Holder participating in the
offering and
12
<PAGE>
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) relating to the due incorporation of the Company, the
validity of the shares being issued, the due execution and delivery of the
underwriting agreement and Rule 10b-5, 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, covering substantially the same matters with respect to
such registration statement (and the prospectus included therein) and, with
respect to events subsequent to the date of such financial statements, as are
customarily covered in accountants' letters delivered to underwriters in
underwritten public offerings of securities.
(i) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within 15 months thereafter,
make "generally available to its security holders" (within the meaning of Rule
158 under the Act) an earnings statement (which need not be audited) complying
with Section 11(a) of the Act and covering a period of at least 12 consecutive
-------
months beginning after the effective date of the registration statement.
(j) The Company shall deliver promptly to each Holder participating in
the offering requesting the correspondence and memoranda described below and to
the managing underwriters, copies of all correspondence between the Commission
and the Company, its counsel or auditors and all memoranda relating to
discussions with the Commission or its staff with respect to the registration
statement and permit each Holder and underwriter to do such investigation, upon
reasonable advance notice, with respect to information contained in or
13
<PAGE>
omitted from the registration statement as it deems reasonably necessary to
comply with applicable securities laws or rules of the NASD. Such investigation
shall include access to books, records and properties and opportunities to
discuss the business of the Company with its officers and independent auditors,
all to such reasonable extent and at such reasonable times and as often as any
such Holder or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested pursuant to Section 7.3(a) to be
included in such underwriting, which may be the Representative. Such agreement
shall be satisfactory in form and substance to the Company, each Holder and such
managing underwriter(s), and shall contain such representations, warranties and
covenants by the Company and such other terms as are customarily contained in
agreements of that type used by the managing underwriter(s). The Holders shall
be parties to any underwriting agreement relating to an underwritten sale of
their Warrant Securities whether pursuant to Section 7.2 or Section 7.3(a) and
may, at their option, require that any or all of the representations, warranties
and covenants of the Company to or for the benefit of such underwriter(s) shall
also be made to and for the benefit of such Holders. Such Holders shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriter(s) except as they may relate to such Holders and
their intended methods of distribution.
(l) For purposes of this Agreement, the term "Majority" in reference
to the Holders of Warrants or Warrant Securities, shall mean in excess of fifty
percent (50%) of the then outstanding Warrants or Warrant Securities 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 and (ii) have
14
<PAGE>
not been resold to the public pursuant to a registration statement filed with
the Commission under the Act.
8. Adjustments to Exercise Price and Number of Securities.
------------------------------------------------------
8.1 Subdivision and Combination. In case the Company shall at any
---------------------------
time subdivide or combine the outstanding shares of Common Stock, the Exercise
Price shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
8.2 Stock Dividends and Distributions. In case the Company shall
---------------------------------
pay a dividend in, or make a distribution of, shares of Common Stock or of the
Company's capital stock convertible into Common Stock, the Exercise Price shall
forthwith be proportionately decreased. An adjustment made pursuant to this
Section 8.2 shall be made as of the record date for the subject stock dividend
- -------
or distribution.
8.3 Adjustment in Number of Securities. Upon each adjustment of the
----------------------------------
Exercise Price pursuant to the provisions of this Section 8, the number of
-------
Warrant Securities issuable upon the exercise at the adjusted exercise price of
each Warrant shall be adjusted to the nearest full amount by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
8.4 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 Certificate of Incorporation of the Company as may be 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
15
<PAGE>
par value to par value.
8.5 Merger or Consolidation. In case of any consolidation of the
-----------------------
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of securities of the Company for which such Warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8. The above provision of this
-------
subsection shall similarly apply to successive consolidations or mergers.
8.6 No Adjustment of Exercise Price in Certain Cases. No adjustment
------------------------------------------------
of the Exercise Price shall be made if the amount of said adjustment shall be
less than two cents (24) per Warrant Security, 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 (24) per Warrant Security.
9. Exchange and Replacement of Warrant Certificates. Each 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
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant
16
<PAGE>
Securities in such denominations as shall be designated by the Holder thereof at
the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any 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 Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be
-----------------------------------
required to issue certificates representing fractions of shares of Common Stock
or Redeemable Warrants upon the exercise of the Warrants, nor shall it be
required to issue scrip or pay cash in lieu of fractional interests, it being
the intent of the parties that all fractional interests shall be eliminated by
rounding any fraction up to the nearest whole number of shares of Common Stock
or Redeemable Warrants or other securities, properties or rights.
11. Reservation and Listing of Securities. The Company shall at all
-------------------------------------
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Warrants and the
Redeemable Warrants, such number of shares of Common Stock or other securities,
properties or rights as shall be issuable upon the exercise thereof. The
Company covenants and agrees that, upon exercise of the Warrants and payment of
the Exercise Price therefor, all shares of Common Stock, Redeemable Warrants 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. The Company further covenants and agrees that upon exercise of the
Redeemable Warrants underlying the Warrants and payment of the respective
Redeemable Warrant exercise price therefor, all shares
17
<PAGE>
of Common Stock and other securities issuable upon such exercises shall be duly
and validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Warrants shall be outstanding, the
Company shall use its best efforts to cause all shares of Common Stock issuable
upon the exercise of the Warrants and Redeemable Warrants and all Redeemable
Warrants underlying the Warrants to be listed (subject to official notice of
issuance) on all securities exchanges on which the Common Stock or the Public
Warrants issued to the public in connection herewith may then be listed and/or
quoted on Nasdaq SmallCap or Nasdaq.
12. Notices to 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 Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its shares
of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings or capital surplus (in accordance with applicable
law), 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
18
<PAGE>
(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 thirty (30) 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.
19
<PAGE>
13. Redeemable Warrants. The form of the certificate representing
-------------------
Redeemable Warrants (and the form of election to purchase shares of Common Stock
upon the exercise of Redeemable Warrants and the form of assignment printed on
the reverse thereof) shall be substantially as set forth in Exhibit "A" to the
Warrant Agreement dated as of the date hereof by and between the Company and
Continental Stock Transfer and Trust Company (the "Redeemable Warrant
Agreement"). Each Redeemable Warrant issuable upon exercise of the Warrants
shall evidence the right to initially purchase a fully paid and non-assessable
share of Common Stock at an initial purchase price of $____ per share [125% of
the initial public offering price per Unit] from _________, 1998 [one year after
date of Prospectus] until 5:30 p.m. New York time on _________, 2002 [five years
after date of Prospectus] at which time the Redeemable Warrants, unless the
exercise period has been extended, shall expire. The exercise price of the
Redeemable Warrants and the number of shares of Common Stock issuable upon the
exercise of the Redeemable Warrants are subject to adjustment, whether or not
the Warrants have been exercised and the Redeemable Warrants have been issued,
in the manner and upon the occurrence of the events set forth in Section 8 of
the Redeemable Warrant Agreement, which is hereby incorporated herein by
reference and made a part hereof as if set forth in its entirety herein.
Subject to the provisions of this Agreement and upon issuance of the Redeemable
Warrants underlying the Warrants, each registered holder of such Redeemable
Warrant shall have the right to purchase from the Company (and the Company shall
issue to such registered holders) up to the number of fully paid and non-
assessable shares of Common Stock (subject to adjustment as provided herein and
in the Redeemable Warrant Agreement), free and clear of all preemptive rights of
stockholders, provided that such registered holder complies with the terms
governing exercise of the Redeemable Warrant set forth in the Redeemable Warrant
Agreement, and pays the applicable exercise price, determined in accordance with
the terms of the Redeemable Warrant Agreement. Upon exercise of the
20
<PAGE>
Redeemable Warrants, the Company shall forthwith issue to the registered holder
of any such Redeemable Warrant in his name or in such name as may be directed by
him, certificates for the number of shares of Common Stock so purchased. Except
as otherwise provided in this Agreement, the Redeemable Warrants underlying the
Warrants shall be governed in all respects by the terms of the Redeemable
Warrant Agreement. The Redeemable Warrants shall be transferable in the manner
provided in the Redeemable Warrant Agreement, and upon any such transfer, a new
Redeemable Warrant Certificate shall be issued promptly to the transferee. The
Company covenants to, and agrees with, the Holder(s) that without the prior
written consent of the Holder(s), which will not be unreasonably withheld, the
Redeemable Warrant Agreement will not be modified, amended, canceled, altered or
superseded, and that the Company will send to each Holder, irrespective of
whether or not the Warrants have been exercised, any and all notices required by
the Redeemable Warrant Agreement to be sent to holders of Redeemable Warrants.
14. 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 Warrants, to the address
of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
-------
hereof or to such other address as the Company may designate by notice
to the Holders.
15. Supplements and Amendments. The Company and the Representative
--------------------------
may from time to time supplement or amend this Agreement without the approval of
any Holders of Warrant Certificates (other than the Representative) in order to
cure any ambiguity, to correct
21
<PAGE>
or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Representative may deem necessary or desirable and which the Company and the
Representative deem shall not adversely affect the interests of the Holders of
Warrant Certificates.
16. Successors. All the covenants and provisions of this Agreement
----------
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close of
-----------
business on__________, 2004. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
-------
business on_________, 2010.
18. Governing Law; Legal Costs and Expenses. This Agreement and each
---------------------------------------
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York 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.
The Company, the Representative and the Holders agree that the
prevailing party(ies) in any action, proceeding or claim arising out of, or
relating in any way to this Agreement shall be entitled to recover from the
other party(ies) all of its/their reasonable legal costs and expenses relating
to such action or proceeding and/or incurred in connection with the preparation
therefor.
19. Entire Agreement; Modification. This Agreement (including the
------------------------------
Underwriting Agreement and the Redeemable Warrant 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
22
<PAGE>
signed by the party against whom enforcement of the modification or amendment is
sought.
20. 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.
21. 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.
22. Benefits of this Agreement. Nothing in this Agreement shall be
--------------------------
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Warrant Certificates or
Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole benefit of the Company and
the Representative and any other registered Holders of Warrant Certificates or
Warrant Securities.
23. 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.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
DEPOMED, INC.
By:_________________________________
Name:
Title:
Attest:
- ----------------------------
Secretary
NATIONAL SECURITIES CORPORATION
By:_________________________________
Name:
Title:
24
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS 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
No. W- Warrants to Purchase
____ Units
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 __________ Units, each Unit
consisting of one fully-paid and non-assessable share of common stock, no par
value ("Common Stock"), of DEPOMED, INC., a California corporation (the
"Company"), and one Redeemable Warrant of the Company (one Redeemable Warrant
entitling the owner to purchase one fully-paid and non-assessable share of
Common Stock) at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $_____ per Unit upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the warrant
agreement dated as of_________, 1997 between the Company and NATIONAL SECURITIES
CORPORATION (the "Warrant Agreement"). Payment of the Exercise Price shall be
made by certified or official bank check in New York Clearing House funds
payable to the order of the Company or by surrender of this Warrant Certificate.
A-1
25
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of 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 Warrants.
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 Warrants; 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 Warrants 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 Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
A-2
26
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of_____________, 1997
DEPOMED, INC.
By:____________________________________
Name:
Title:
A-3
27
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[_] _______________________ shares of Common Stock;
[_] _______________________ Redeemable Warrants;
[_] _______________________ shares of Common Stock together with an
equal number of Redeemable Warrants; or
[_] _______________________ shares of Common Stock together with
_______________________ Redeemable Warrants.
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 DepoMed, Inc. in
the amount of $_______________________, all in accordance with the terms of
Section 3.1 of the Representative's Warrant Agreement dated as of _________,
1997 between DepoMed, Inc. 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.)
____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
A-4
28
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right, represented
by this Warrant Certificate, to purchase:
[_] _______________________ shares of Common Stock;
[_] _______________________ Redeemable Warrants;
[_] _______________________ shares of Common Stock together with an
equal number of Redeemable Warrants; or
[_] _______________________ shares of Common Stock together with
_______________________ Redeemable Warrants.
and herewith tenders in payment for such securities ________ Warrants all in
accordance with the terms of Section 3.2 of the Representative's Warrant
Agreement dated as of ________, 1997 between DepoMed, Inc. 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.)
_____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
A-5
29
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ____________________________________ hereby sells,
assigns and transfers unto
___________________________________________________________________________
(Please print name and address 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.)
_______________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
A-6
30
<PAGE>
EXHIBIT 4.4
______________________________________________________________________________
DEPOMED, INC.
AND
CONTINENTAL STOCK TRANSFER AND TRUST COMPANY
AND
NATIONAL SECURITIES CORPORATION
____________
WARRANT AGREEMENT
DATED AS OF _________, 1997
______________________________________________________________________________
<PAGE>
AGREEMENT, dated this ___ day of _________, 1997, by and among
DEPOMED, INC., a California corporation (the "Company"), CONTINENTAL STOCK
TRANSFER AND TRUST COMPANY, as Warrant Agent (the "Warrant Agent") and NATIONAL
SECURITIES CORPORATION ("National" or the "Representative").
W I T N E S S E T H:
WHEREAS, in connection with (i) the offering to the public of up to
1,200,000 units (the "Units"), each Unit consisting of one share of Common Stock
(as defined in Section 1) and one redeemable common stock purchase warrant (the
"Warrants"), each warrant entitling the holder thereof to purchase one
additional share of Common Stock, (ii) the over-allotment option to purchase up
to an additional 180,000 Units (the "Over-allotment Option"), and (iii) the sale
to National of warrants (the "Representative's Warrants") to purchase up to
117,917 Units, the Company will issue up to 1,497,917 Warrants (subject to
increase as provided in the Representative's Warrant Agreement); and
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the Warrants
and the rights of the holders thereof.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, National, the
holders of certificates representing the Warrants and the Warrant Agent, the
parties hereto agree as follows:
1
<PAGE>
SECTION 1. Definitions. As used herein, the following terms shall
-----------
have the following meanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Common Stock" shall mean the authorized stock of the Company
of any class, whether now or hereafter authorized, which has the right to
participate in the voting and in the distribution of earnings and assets of the
Company without limit as to amount or percentage.
(c) "Commission" shall mean the Securities and Exchange
Commission.
(d) "Corporate Office shall mean the office of the Warrant Agent
(or its successor) at which at any particular time its business in New York, New
York, shall be administered, which office is located on the date hereof at 2
Broadway.
(e) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(f) "Exercise Date" shall mean, subject to the provisions of
Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent
shall have received both (i) the Warrant Certificate representing such Warrant,
with the exercise form thereon duly executed by the Registered Holder thereof or
his attorney duly authorized in writing, and (ii) payment in cash or by official
bank or certified check made payable to the Warrant Agent for the account of the
Company, of the amount in lawful money of the United States of America equal to
the applicable Purchase Price (as hereinafter defined) in good funds.
(g) "Initial Public Offering Price" shall mean $______ per Unit.
(h) "Initial Warrant Exercise Date" shall mean _________, 1998
[one year after date of Prospectus].
(i) "Initial Warrant Redemption Date" shall mean ________, 1999
[18 months after date of Prospectus].
2
<PAGE>
(j) "NASD" shall mean the National Association of Securities
Dealers, Inc.
(k) "Nasdaq" shall mean the Nasdaq Stock Market.
(l) "Purchase Price" shall mean, subject to modification and
adjustment as provided in Section 8, $______ [125% of initial public offering
price per Unit] and further subject to the Company's right, in its sole
discretion, to decrease the Purchase Price for a period of not less than 30 days
on not less than 30 days' prior written notice to the Registered Holders and
National.
(m) "Redemption Date" shall mean the date (which may not occur
before the Initial Warrant Redemption Date) fixed for the redemption of the
Warrants in accordance with the terms hereof.
(n) "Redemption Price" shall mean the price at which the Company
may, at its option, redeem the Warrants, in accordance with the terms hereof,
which price shall be $0.10 per Warrant, subject to adjustment from time to time
pursuant to the provisions of Section 9 hereof.
(o) " Registered Holder" shall mean the person in whose name any
certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(p) "Transfer Agent" shall mean Continental Stock Transfer and
Trust Company, or its authorized successor.
(q) "Underwriting Agreement" shall mean the underwriting
agreement dated __________, 1997 [date of Prospectus] between the Company and
the several underwriters listed therein relating to the purchase for resale to
the public of the 1,200,000 Units.
(r) "Representative's Warrant Agreement" shall mean the agreement
dated as of _________, 1997 [date of Prospectus] between the Company and
National relating to and governing the terms and provisions of the
Representative's Warrants.
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(s) "Warrant Certificate" shall mean a certificate representing
each of the Warrants substantially in the form annexed hereto as Exhibit A.
(t) "Warrant Expiration Date" shall mean, unless the Warrants are
redeemed as provided in Section 9 hereof prior to such date, 5:30 p.m. (New York
time), on ________, 2002 [five years after date of Prospectus], or the
Redemption Date as defined herein, whichever date is earlier; provided that if
--------
such date shall in the State of New York be a holiday or a day on which banks
are authorized to close, then 5:30 p.m. (New York time) on the next following
day which, in the State of New York, is not a holiday or a day on which banks
are authorized to close. Upon five business days' prior written notice to the
Registered Holders, the Company shall have the right to extend the Warrant
Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
----------------------------------------------
(a) Each Warrant shall initially entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase at the Purchase Price
therefor from the Initial Warrant Exercise Date until the Warrant Expiration
Date one share of Common Stock upon the exercise thereof in accordance with the
terms hereof, subject to modification and adjustment as provided in Section 8.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
(subject to modification and adjustment as provided in Section 8) shall be
executed by the Company and delivered to the Warrant Agent.
(c) Upon exercise of the Representative's Warrants as provided
therein, Warrant Certificates representing all or a portion of 117,917 Warrants
to purchase up to an aggregate of 117,917 shares of Common Stock (subject to
modification and adjustment as provided in Section 8 hereof and in the
Representative's Warrant Agreement), shall be countersigned, issued
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and delivered by the Warrant Agent upon written order of the Company signed by
its Chairman of the Board, Chief Executive Officer, President or a Vice
President and by its Treasurer or an Assistant Treasurer or its Secretary or an
Assistant Secretary.
(d) From time to time, up to the Warrant Expiration Date or the
Redemption Date, whichever date is earlier, the Warrant Agent shall countersign
and deliver Warrant Certificates in required denominations of one or whole
number multiples thereof to the person entitled thereto in connection with any
transfer or exchange permitted under this Agreement. Except as provided herein,
no Warrant Certificates shall be issued except (i) Warrant Certificates
initially issued hereunder and those issued on or after the Initial Warrant
Exercise Date, upon the exercise of fewer than all Warrants held by the
exercising Registered Holder, (ii) Warrant Certificates issued upon any transfer
or exchange of Warrants, (iii) Warrant Certificates issued in replacement of
lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7,
(iv) Warrant Certificates issued pursuant to the Representative's Warrant
Agreement, and (v) at the option of the Company, Warrant Certificates in such
form as may be approved by its Board of Directors, to reflect any adjustment or
change in the Purchase Price, the number of shares of Common Stock purchasable
upon exercise of the Warrants or the Redemption Price therefor made pursuant to
Section 8 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any
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stock exchange on which the Warrants may be listed, or to conform to usage. The
Warrant Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or
destroyed Warrant Certificates) and issued in registered form. Warrants shall be
numbered serially with the letter W on the Warrants.
(b) Warrant Certificates shall be executed on behalf of the Company by
its Chairman of the Board, Chief Executive Officer, President or any Vice
President and by its Treasurer or an Assistant Treasurer or its Secretary or an
Assistant Secretary, by manual signatures or by facsimile signatures printed
thereon, and shall have imprinted thereon a facsimile of the Company's seal.
Warrant Certificates shall be manually countersigned by the Warrant Agent and
shall not be valid for any purpose unless so countersigned. In case any officer
of the Company who shall have signed any of the Warrant Certificates shall cease
to be such officer of the Company before the date of issuance of the Warrant
Certificates or before countersignature by the Warrant Agent and issue and
delivery thereof, such Warrant Certificates, nevertheless, may be countersigned
by the Warrant Agent, issued and delivered with the same force and effect as
though the person who signed such Warrant Certificates had not ceased to be such
officer of the Company. After countersignature by the Warrant Agent, Warrant
Certificates shall be delivered by the Warrant Agent to the Registered Holder
promptly and without further action by the Company, except as otherwise provided
by Section 4(a) hereof.
SECTION 4. Exercise.
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(a) Warrants in denominations of one or whole number multiples thereof
may be exercised by the Registered Holder thereof commencing at any time on or
after the Initial Warrant Exercise Date, but not after the Warrant Expiration
Date, upon the terms and subject to the conditions set forth herein and in the
applicable Warrant Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date and the person
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entitled to receive the securities deliverable upon such exercise shall be
treated for all purposes as the holder, upon exercise thereof, as of the close
of business on the Exercise Date. If Warrants in denominations other than whole
number multiples thereof shall be exercised at one time by the same Registered
Holder, the number of full shares of Common Stock which shall be issuable upon
exercise thereof shall be computed on the basis of the aggregate number of full
shares of Common Stock issuable upon such exercise. As soon as practicable on or
after the Exercise Date and in any event within five business days after such
date, if one or more Warrants have been exercised, the Warrant Agent on behalf
of the Company shall cause to be issued to the person or persons entitled to
receive the same a Common Stock certificate or certificates for the shares of
Common Stock deliverable upon such exercise, and the Warrant Agent shall deliver
the same to the person or persons entitled thereto. Upon the exercise of any one
or more Warrants, the Warrant Agent shall promptly notify the Company in writing
of such fact and of the number of securities delivered upon such exercise and,
subject to subsection (b) below, shall cause all payments of an amount in cash
or by check made payable to the order of the Company, equal to the Purchase
Price, to be deposited promptly in the Company's bank account.
(b) At any time upon the exercise of any Warrants after one year and
one day from the date hereof, the Warrant Agent shall, on a daily basis, within
two business days after such exercise, notify National of the exercise of any
such Warrants and shall, on a weekly basis (subject to collection of funds
constituting the tendered Purchase Price, but in no event later than five
business days after the last day of the calendar week in which such funds were
tendered), remit to National an amount equal to five percent (5%) of the
Purchase Price of such Warrants then being exercised unless National shall have
notified the Warrant Agent that the payment of such amount with respect to such
Warrant is violative of the General Rules and Regulations promulgated under the
Exchange Act, or the rules and regulations of the NASD or applicable state
securities or "blue
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sky" laws, or the Warrants are those underlying the Representative's Warrants in
which event, the Warrant Agent shall remit the full Purchase Price to the
Company; provided, that the Warrant Agent shall not be obligated to pay any
amounts pursuant to this Section 4(b) during any week that such amounts payable
are less than $1,000 and the Warrant Agent's obligation to make such payments
shall be suspended until the amount payable aggregates $1,000, and provided
further, that, in any event, any such payment (regardless of amount) shall be
made not less frequently than monthly. Notwithstanding the foregoing, National
shall be entitled to receive the commission contemplated by this Section 4(b) as
Warrant solicitation agent only if: (i) National has provided actual services in
connection with the solicitation of the exercise of a Warrant by a Registered
Holder and (ii) the Registered Holder exercising a Warrant affirmatively
designates in writing on the exercise form on the reverse side of the Warrant
Certificate that the exercise of such Registered Holder's Warrant was solicited
by National.
(c) The Company shall not be required to issue fractional shares on
the exercise of Warrants. Warrants may only be exercised in such multiples as
are required to permit the issuance by the Company of one or more whole shares.
If one or more Warrants shall be presented for exercise in full at the same time
by the same Registered Holder, the number of whole shares which shall be
issuable upon such exercise thereof shall be computed on the basis of the
aggregate number of shares purchasable on exercise of the Warrants so presented.
If any fraction of a share would, except for the provisions provided herein, be
issuable on the exercise of any Warrant (or specified portion thereof), the
Company shall pay an amount in cash equal to such fraction multiplied by the
then current market value of a share of Common Stock, determined as follows:
(1) If the Common Stock is listed, or admitted to unlisted trading
privileges on a national securities exchange, or is traded on Nasdaq, the
current market value of a share of Common Stock shall be the closing sale price
of the Common Stock at the end of the regular trading session
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<PAGE>
on the last business day prior to the date of exercise of the Warrants on
whichever of such exchanges or Nasdaq had the highest average daily trading
volume for the Common Stock on such day; or
(2) If the Common Stock is not listed or admitted to unlisted trading
privileges on any national securities exchange, or listed, quoted or reported
for trading on Nasdaq, but is traded in the over-the-counter market, the current
market value of a share of Common Stock shall be the average of the last
reported bid and asked prices of the Common Stock reported by the National
Quotation Bureau, Inc. on the last business day prior to the date of exercise of
the Warrants; or
(3) If the Common Stock is not listed, admitted to unlisted trading
privileges on any national securities exchange, or listed, quoted or reported
for trading on Nasdaq, and bid and asked prices of the Common Stock are not
reported by the National Quotation Bureau, Inc., the current market value of a
share of Common Stock shall be an amount, not less than the book value thereof
as of the end of the most recently completed fiscal quarter of the Company
ending prior to the date of exercise, determined by the members of the Board of
Directors of the Company exercising good faith and using customary valuation
methods.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc.
------------------------------------------------------
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be issuable upon exercise of the
Warrants shall, at the time of delivery thereof, be duly and validly issued and
fully paid and nonassessable and free from all preemptive or similar rights,
taxes, liens and charges with respect to the issue thereof, and that upon
issuance such shares shall be listed on
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each securities exchange, if any, on which the other shares of outstanding
Common Stock of the Company are then listed.
(b) The Company covenants that if any securities to be reserved for
the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will file a registration statement under the federal securities laws or
a post-effective amendment, use its best efforts to cause the same to become
effective and to keep such registration statement current while any of the
Warrants are outstanding and deliver a prospectus which complies with Section
10(a)(3) of the Act, to the Registered Holder exercising the Warrant (except, if
in the opinion of counsel to the Company, such registration is not required
under the federal securities law or if the Company receives a letter from the
staff of the Commission stating that it would not take any enforcement action if
such registration is not effected). The Company will use its best efforts to
obtain appropriate approvals or registrations under state "blue sky" securities
laws with respect to any such securities. However, Warrants may not be exercised
by, or shares of Common Stock issued to, any Registered Holder in any state in
which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
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(d) The Warrant Agent is hereby irrevocably authorized as the Transfer
Agent to requisition from time to time certificates representing shares of
Common Stock or other securities required upon exercise of the Warrants, and the
Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
-------------------------------------
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office,
and, upon satisfaction of the terms and provisions hereof, the Company shall
execute and the Warrant Agent shall countersign, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at its office, books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with customary
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants
of the same class.
(c) With respect to all Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription or
exercise form, as the case may be, on the reverse thereof shall be duly endorsed
or be accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof or his attorney-in-fact duly
authorized in writing.
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(d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates. In addition, the
Company may require payment by such Holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange
in case of mutilated Warrant Certificates shall be promptly canceled by the
Warrant Agent and thereafter retained by the Warrant Agent until termination of
this Agreement.
(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the
------------------
Warrant Agent of evidence satisfactory to them of the ownership of and the loss,
theft, destruction or mutilation of any Warrant Certificate and (in the case of
loss, theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or the
Warrant Agent that a new Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall also comply
with such other reasonable regulations and pay such other reasonable charges as
the Warrant Agent may prescribe.
SECTION 8. Adjustment of Purchase Price and Number of Shares of
----------------------------------------------------
Common Stock Deliverable.
- ------------------------
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(a) Except as hereinafter provided, in the event the Company shall, at
any time or from time to time after the date hereof and until ________, 1999
[two years after date of Prospectus], issue or sell any shares of Common Stock
for a consideration per share less than the Initial Public Offering Price of the
Units or issue any shares of Common Stock as a stock dividend to the holders of
Common Stock, or subdivide or combine the outstanding shares of Common Stock
into a greater or lesser number of shares (any such issuance, subdivision or
combination being herein called a "Change of Shares"), then, and thereafter upon
each further Change of Shares, the Purchase Price for the Warrants (whether or
not the same shall be issued and outstanding) in effect immediately prior to
such Change of Shares shall be changed to a price (including any applicable
fraction of a cent to the nearest cent) determined by dividing (i) the sum of
(a) the total number of shares of Common Stock outstanding immediately prior to
such Change of Shares, multiplied by the Purchase Price in effect immediately
prior to such Change of Shares and (b) the consideration, if any, received by
the Company upon such sale, issuance, subdivision or combination, by (ii) the
total number of shares of Common Stock outstanding immediately after such Change
of Shares; provided, however, that in no event shall the Purchase Price be
-----------------
adjusted pursuant to this computation to an amount in excess of the Purchase
Price in effect immediately prior to such computation, except in the case of a
combination of outstanding shares of Common Stock.
For the purposes of any adjustment to be made in accordance with this
Section 8(a), the following provisions shall be applicable:
(A) In case of the issuance or sale of shares of Common Stock (or of
other securities deemed hereunder to involve the issuance or sale of shares of
Common Stock) for a consideration part or all of which shall be cash, the amount
of the cash portion of the consideration therefor deemed to have been received
by the Company shall be (i) the subscription price, if shares of Common Stock
are offered by the Company for subscription, or (ii) the public offering price
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(before deducting therefrom any compensation paid or discount allowed in the
sale, underwriting or purchase thereof by underwriters or dealers or others
performing similar services, or any expenses incurred in connection therewith),
if such securities are sold to underwriters or dealers for public offering
without a subscription offering, or (iii) the gross amount of cash actually
received by the Company for such securities, in any other case.
(B) In case of the issuance or sale (otherwise than as a dividend or
other distribution on any stock of the Company, and otherwise than on the
exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash deemed to have been
received by the Company shall be the value of such consideration as determined
in good faith by the Board of Directors of the Company, using customary
valuation methods and on the basis of prevailing market values for similar
property or services.
(C) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of shareholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
(D) The reclassification of securities of the Company other than
shares of Common Stock into securities including shares of Common Stock shall be
deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive
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<PAGE>
such shares, and the value of the consideration allocable to such shares of
Common Stock shall be determined as provided in subsection (B) of this Section
8(a).
(E) The number of shares of Common Stock at any one time outstanding
shall be deemed to include the aggregate maximum number of shares issuable
(subject to readjustment upon the actual issuance thereof) upon the exercise of
options, rights or warrants and upon the conversion or exchange of convertible
or exchangeable securities.
(b) Upon each adjustment of the Purchase Price pursuant to this
Section 8, the number of shares of Common Stock purchasable upon the exercise of
each Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Purchase
Price in effect prior to such adjustment and dividing the product so obtained by
the applicable adjusted Purchase Price.
(c) In case the Company shall at any time after the date hereof until
______, 1999 [two years after date of Prospectus] issue options, rights or
warrants to subscribe for shares of Common Stock, or issue any securities
convertible into or exchangeable for shares of Common Stock, for a consideration
per share (determined as provided in Sections 8(a) and 8(b) and as provided
below) less than the Initial Public Offering Price of the Units, or without
consideration (including the issuance of any such securities by way of dividend
or other distribution), the Purchase Price for the Warrants (whether or not the
same shall be issued and outstanding) in effect immediately prior to the
issuance of such options, rights or warrants, or such convertible or
exchangeable securities, as the case may be, shall be reduced to a price
determined by making the computation in accordance with the provisions of
Sections 8(a) and 8(b) hereof, provided that:
--------
(A) The aggregate maximum number of shares of Common Stock, as the
case may be, issuable or that may become issuable under such options, rights or
warrants (assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be
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deemed to be issued and outstanding at the time such options, rights or warrants
were issued, for a consideration equal to the minimum purchase price per share
provided for in such options, rights or warrants at the time of issuance, plus
the consideration, if any, received by the Company for such options, rights or
warrants; provided, however, that upon the expiration or other termination of
-----------------
such options, rights or warrants, if any thereof shall not have been exercised,
the number of shares of Common Stock deemed to be issued and outstanding
pursuant to this subsection (A) (and for the purposes of subsection (E) of
Section 8(a) hereof) shall be reduced by the number of shares as to which
options, warrants and/or rights shall have expired, and such number of shares
shall no longer be deemed to be issued and outstanding, and the Purchase Price
then in effect shall forthwith be readjusted and thereafter be the price that it
would have been had adjustment been made on the basis of the issuance only of
the shares actually issued plus the shares remaining issuable upon the exercise
of those options, rights or warrants as to which the exercise rights shall not
have expired or terminated unexercised.
(B) The aggregate maximum number of shares of Common Stock issuable or
that may become issuable upon conversion or exchange of any convertible or
exchangeable securities (assuming conversion or exchange in full even if not
then currently convertible or exchangeable in full) shall be deemed to be issued
and outstanding at the time of issuance of such securities, for a consideration
equal to the consideration received by the Company for such securities, plus the
minimum consideration, if any, receivable by the Company upon the conversion or
exchange thereof; provided, however, that upon the termination of the right to
-------- -------
convert or exchange such convertible or exchangeable securities (whether by
reason of redemption or otherwise), the number of shares of Common Stock deemed
to be issued and outstanding pursuant to this subsection (B) (and for the
purposes of subsection (E) of Section 8(a) hereof) shall be reduced by the
number of shares as to which the conversion or exchange rights shall have
expired or
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<PAGE>
terminated unexercised, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price that it would have been had
adjustment been made on the basis of the issuance only of the shares actually
issued plus the shares remaining issuable upon conversion or exchange of those
convertible or exchangeable securities as to which the conversion or exchange
rights shall not have expired or terminated unexercised.
(C) If any change shall occur in the price per share provided for in
any of the options, rights or warrants referred to in subsection (A) of this
Section 8(c), or in the price per share or ratio at which the securities
referred to in subsection (B) of this Section 8(c) are convertible or
exchangeable, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the exercise or
conversion or exchange thereof, and the Company shall be deemed to have issued
upon such date new options, rights or warrants or convertible or exchangeable
securities.
(d) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than (1) a merger
with a subsidiary of the Company in which merger the Company is the continuing
corporation or (2) any consolidation or merger of the Company with or into
another corporation which, in either instance, does not result in any
reclassification or change of the then outstanding shares of Common Stock or
other capital stock issuable upon exercise of the Warrants (other than a change
in par value, or from par value to no par value, or from no par value to par
value or as a result of subdivision or combination)) or in case of any sale or
conveyance to
17
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another corporation of the property of the Company as an entirety
or substantially as an entirety, then, as a condition of such reclassification,
change, consolidation, merger, sale or conveyance, the Company, or such
successor or purchasing corporation, as the case may be, shall make lawful and
adequate provision whereby the Registered Holder of each Warrant then
outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance and shall forthwith file at the Corporate Office of the Warrant Agent
a statement signed by its Chief Executive Officer, President or a Vice President
and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary evidencing such provision. Such provisions shall include provision
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Sections 8(a), (b) and (c). The above provisions of
this Section 8(d) shall similarly apply to successive reclassifications and
changes of shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.
(e) Irrespective of any adjustments or changes in the Purchase Price
or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(e) hereof, continue to express the Purchase Price per
share and the number of shares purchasable thereunder as the Purchase Price per
share and the number of shares purchasable thereunder were expressed in the
Warrant Certificates when the same were originally issued.
(f) After each adjustment of the Purchase Price pursuant to this
Section 8, the Company will promptly prepare a certificate signed by the
Chairman, Chief Executive Officer
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or President, and by the Treasurer or an Assistant Treasurer or the Secretary or
an Assistant Secretary, of the Company setting forth: (i) the Purchase Price as
so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise
of each Warrant, after such adjustment, and (iii) a brief statement of the facts
accounting for such adjustment. The Company will promptly file such certificate
with the Warrant Agent and cause a brief summary thereof to be sent by ordinary
first class mail to each Registered Holder at his last address as it shall
appear on the registry books of the Warrant Agent. No failure to mail such
notice nor any defect therein or in the mailing thereof shall affect the
validity thereof except as to the holder to whom the Company failed to mail such
notice, or except as to the holder whose notice was defective. The affidavit of
an officer of the Warrant Agent or the Secretary or an Assistant Secretary of
the Company that such notice has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.
(g) No adjustment of the Purchase Price shall be made as a result of
or in connection with (A) the issuance or sale of shares of Common Stock
pursuant to options, warrants, stock purchase agreements and convertible or
exchangeable securities outstanding or in effect on the date hereof and on the
terms described in the final prospectus relating to the public offering
contemplated by the Underwriting Agreement; (B) stock options to be granted
under the Company's 1995 Stock Option Plan to employees, consultants and
directors; (C) shares of Common Stock, options or warrants issued to outside
parties in connection with strategic alliances, joint ventures or other
corporate partnerships with the Company, or (D) the issuance or sale of shares
of Common Stock if the amount of said adjustment shall be less than $.10,
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 that shall amount, together
with any adjustment so carried forward, to at least $.10. In addition,
Registered Holders shall not be
19
<PAGE>
entitled to cash dividends paid by the Company prior to the exercise of any
Warrant or Warrants held by them.
SECTION 9. Redemption.
----------
(a) Commencing on the Initial Warrant Redemption Date, the Company
may, on 30 days' prior written notice, redeem all the Warrants at ten cents
($.10) per Warrant, provided, however, that before any such call for redemption
-------- -------
of Warrants can take place, the average closing bid price for the Common Stock
as reported by Nasdaq, if the Common Stock is then traded on Nasdaq, (or the
average closing sale price, if the Common Stock is then traded on a national
exchange) shall have equalled or exceeded 200% of the then current exercise
price per share for any twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to the date on
which the notice contemplated by (b) and (c) below is given (subject to
adjustment in the event of any stock splits or other similar events as provided
in Section 8 hereof).
(b) In case the Company shall exercise its right to redeem all of the
Warrants, it shall give or cause to be given notice to the Registered Holders of
the Warrants, by mailing to such Registered Holders a notice of redemption,
first class, postage prepaid, at their last address as shall appear on the
records of the Warrant Agent. Any notice mailed in the manner provided herein
shall be conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice. Not less than four (4) trading days
prior to the mailing to the Registered Holders of the Warrants of the notice of
redemption, the Company shall deliver or cause to be delivered to National a
similar notice telephonically and confirmed in writing together with a list of
the Registered Holders (including their respective addresses and number of
Warrants beneficially owned) to whom such notice of redemption has been or will
be given.
20
<PAGE>
(c) The notice of redemption shall specify (i) the redemption price,
(ii) the Redemption Date, which shall in no event be less than thirty (30) days
after the date of mailing of such notice, (iii) the place where the Warrant
Certificate shall be delivered and the redemption price shall be paid, (iv) if
National is engaged as a Warrant solicitation agent, that National shall receive
the commission contemplated by Section 4(b) hereof, and (v) that the right to
exercise the Warrant shall terminate at 5:30 p.m. (New York time) on the
business day immediately preceding the date fixed for redemption. No failure to
mail such notice nor any defect therein or in the mailing thereof shall affect
the validity of the proceedings for such redemption except as to a holder (a) to
whom notice was not mailed or (b) whose notice was defective. An affidavit of
the Warrant Agent or the Secretary or Assistant Secretary of the Company that
notice of redemption has been mailed shall, in the absence of fraud, be prima
facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:30 p.m. (New
York time) on the business day immediately preceding the Redemption Date. The
redemption price payable to the Registered Holders shall be mailed to such
persons at their addresses of record.
(e) The Company shall indemnify National and each person, if any, who
controls National within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from the registration
statement or prospectus referred to in Section 5(b) hereof to the same extent
and with the same effect (including the provisions regarding contribution) as
the provisions pursuant to which the Company has agreed to indemnify National
contained in Section 7 of the Underwriting Agreement.
(f) Five business days prior to the Redemption Date, the Company shall
furnish to National (i) an opinion of counsel to the Company, dated such date
and addressed to
21
<PAGE>
National, and (ii) a "cold comfort" letter dated such date addressed to
National, 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.
SECTION 10. Concerning the Warrant Agent.
----------------------------
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company and National, and its duties shall be determined solely
by the provisions hereof. The Warrant Agent shall not, by issuing and
delivering Warrant Certificates or by any other act hereunder, be deemed to make
any representations as to the validity or value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or other
property delivered upon exercise of any Warrant or whether any stock issued upon
exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustments,
when made, or with respect to the method employed in making the same. It shall
not (i) be liable for any recital or statement of fact contained herein or for
any action taken, suffered or omitted by it in reliance on any Warrant
Certificate or other document or instrument believed by it in good faith to be
genuine and to have been signed or presented by the proper party or parties,
(ii) be responsible for any failure on the part of the Company to comply with
any of its
22
<PAGE>
covenants and obligations contained in this Agreement or in any
Warrant Certificate, or (iii) be liable for any act or omission in connection
with this Agreement except for its own negligence, bad faith or willful
misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company or for National) and
shall incur no liability or responsibility for any action taken, suffered or
omitted by it in good faith in accordance with the opinion or advice of such
counsel.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed by
the Chairman of the Board of Directors, Chief Executive Officer, President or
any Vice President (unless other evidence in respect thereof is herein
specifically prescribed). The Warrant Agent shall not be liable for any action
taken, suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand reasonably believed by it to be
genuine.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and save it harmless from and against any and all losses, expenses and
liabilities, including judgments, costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution of its duties and powers hereunder
except losses, expenses and liabilities arising as a result of the Warrant
- ------
Agent's negligence, bad faith or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a result
of the Warrant Agent's own gross negligence or willful misconduct), after giving
30 days' prior written notice to the Company. At least 15 days prior to the
date such resignation is to become effective, the Warrant
23
<PAGE>
Agent shall cause a copy of such notice of resignation to be mailed to the
Registered Holder of each Warrant Certificate at the Company's expense. Upon
such resignation, or any inability of the Warrant Agent to act as such
hereunder, the Company shall appoint in writing a new warrant agent. If the
Company shall fail to make such appointment within a period of 15 days after it
has been notified in writing of such resignation by the resigning Warrant Agent,
then the Registered Holder of any Warrant Certificate may apply to any court of
competent jurisdiction for the appointment of a new warrant agent. Any new
warrant agent, whether appointed by the Company or by such a court, shall be a
bank or trust company having a capital and surplus, as shown by its last
published report to its stockholders, of not less than $10,000,000 or a stock
transfer company. After acceptance in writing of such appointment by the new
warrant agent is received by the Company, such new warrant agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named herein as the Warrant Agent, without any further assurance,
conveyance, act or deed; but if for any reason it shall be necessary or
expedient to execute and deliver any further assurance, conveyance, act or deed,
the same shall be done at the expense of the Company and shall be legally and
validly executed and delivered by the resigning Warrant Agent. Not later than
the effective date of any such appointment the Company shall file notice thereof
with the resigning Warrant Agent and shall forthwith cause a copy of such notice
to be mailed to the Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph.
24
<PAGE>
Any such successor warrant agent shall promptly cause notice of its succession
as warrant agent to be mailed to the Company and to the Registered Holders of
each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any of its
or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effect as though it were not Warrant Agent.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of two years from the
date of exercise any Warrant Certificate received by it upon such exercise.
SECTION 11. Modification of Agreement.
-------------------------
The Warrant Agent and the Company may by supplemental agreement make
any changes or corrections in this Agreement (i) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained; or (ii) that they may
deem necessary or desirable and which shall not adversely affect the interests
of the holders of Warrant Certificates; provided, however, that no change in the
-------- -------
number or nature of the securities purchasable upon the exercise of any Warrant,
or to increase the Purchase Price therefor or to accelerate the Warrant
Expiration Date, shall be made without the consent in writing of the Registered
Holders representing not less than 66b% of the Warrants then outstanding, other
than such changes as are presently specifically prescribed by this Agreement as
originally executed. In addition, this Agreement may not be modified, amended
or supplemented without the prior written consent of National, other than to
cure any ambiguity or to correct any provision which is inconsistent with any
other provision of this Agreement or to make any such change that is necessary
or desirable and which shall not adversely affect the interests of National and
except as may be required by law.
25
<PAGE>
SECTION 12. Notices.
-------
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class registered or certified mail, postage prepaid, as follows: if
to the Registered Holder of a Warrant Certificate, at the address of such holder
as shown on the registry books maintained by the Warrant Agent; if to the
Company at 1170 B Chess Drive, Foster City, California 94404, Attention: John
W. Fara, President and Chief Executive Officer, or at such other address as may
have been furnished to the Warrant Agent in writing by the Company; and if to
the Warrant Agent, at its Corporate Office. Copies of any notice delivered
pursuant to this Agreement shall also be delivered to National Securities
Corporation, 1001 Fourth Avenue, Suite 2200, Seattle, Washington 98154-1100,
Attention: General Counsel, or at such other address as may have been furnished
to the Company and the Warrant Agent in writing.
SECTION 13. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without giving effect to conflicts of laws.
SECTION 14. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
Company, National, the Warrant Agent and their respective successors and assigns
and the holders from time to time of Warrant Certificates or any of them.
Nothing in this Agreement is intended or shall be construed to confer upon any
other person any right, remedy or claim, in equity or at law, or to impose upon
any other person any duty, liability or obligation.
SECTION 15. Termination.
-----------
This Agreement shall terminate at the close of business on the
Expiration Date of all of the Warrants or such earlier date upon which all
Warrants have been exercised or redeemed,
26
<PAGE>
except that the Warrant Agent shall account to the Company for cash held by it
and the provisions of Section 10 hereof shall survive such termination.
SECTION 16. Counterparts.
------------
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
[SEAL] DEPOMED, INC.
By: ___________________________________
Name:
Title
Attest:
By: ___________________________
Name:
Title:
CONTINENTAL STOCK TRANSFER AND
TRUST COMPANY,
As Warrant Agent
By: __________________________________
Name:
Title:
NATIONAL SECURITIES CORPORATION
By: __________________________________
Name: Steven A. Rothstein
Title: Chairman
28
<PAGE>
EXHIBIT A
---------
No. W______ VOID AFTER ________, 2002
WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
DEPOMED, INC.
CUSIP_____
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and nonassessable share of Common Stock, no par value,
of Depomed, Inc., a California corporation (the "Company"), at any time between
_______, 1998 (the "Initial Warrant Exercise Date"), and the Expiration Date (as
hereinafter defined) upon the presentation and surrender of this Warrant
Certificate with the Subscription Form on the reverse hereof duly executed, at
the corporate office of Continental Stock Transfer and Trust Company, as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of $_____
subject to adjustment (the "Purchase Price"), in lawful money of the United
States of America in cash or by check made payable to the Warrant Agent for the
account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued pursuant
to and are subject in all respects to the terms and conditions set forth in the
Warrant Agreement (the "Warrant Agreement"), dated _________, 1997, between the
Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant Agreement, the
Purchase Price and the number of shares of Common Stock subject to purchase upon
the exercise of each Warrant represented hereby are subject to modification or
adjustment.
Each Warrant represented hereby is exercisable at the option of the Registered
Holder, but no fractional interests will be issued. In the case of the exercise
of less than all the Warrants represented hereby, the Company shall cancel this
Warrant Certificate upon the surrender hereof and shall execute and deliver a
new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant
Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:30 p.m. (New York time) on the date
which is forty-eight (48) months after the Initial Warrant Exercise Date. If
each such date shall in the State of New York be a holiday or a day on which the
banks are authorized to close, then the Expiration Date shall mean 5:30 p.m.
(New York time) on the next following day which in the State of New York is not
a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to the
exercise of this Warrant unless a registration statement under the Securities
Act of 1933, as amended (the "Act"), with respect to such securities is
effective or an exemption thereunder is available. The Company
1
<PAGE>
has covenanted and agreed that it will file a registration statement under the
Federal securities laws, use its best efforts to cause the same to become
effective, use its best efforts to keep such registration statement current, if
required under the Act, while any of the Warrants are outstanding, and deliver a
prospectus which complies with Section 10(a)(3) of the Act to the Registered
Holder exercising this Warrant. This Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered Holder
shall not be entitled to any rights of a stockholder of the Company, including,
without limitation, the right to vote or to receive dividends or other
distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be redeemed
at the option of the Company, at a redemption price of $0.10 per Warrant, at any
time commencing after ________, 1999, provided that the average closing bid
price for the Common Stock as reported by Nasdaq (or the closing sale price, if
the Common Stock is then traded on a national exchange), shall have equalled or
exceeded 200% of the then current exercise price per share for any twenty (20)
trading days within a period of thirty (30) consecutive trading days ending on
the fifth trading day prior to the Notice of Redemption, as defined below.
Notice of redemption (the "Notice of Redemption") shall be given not later than
the thirtieth day before the date fixed for redemption, all as provided in the
Warrant Agreement. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to the Warrants except to receive the
$.10 per Warrant upon surrender of this Warrant Certificate.
Under certain circumstances, National Securities Corporation may be entitled to
receive an aggregate of five percent (5%) of the Purchase Price of the Warrants
represented hereby.
Prior to due presentment for registration of transfer hereof, the Company and
the Warrant Agent may deem and treat the Registered Holder as the absolute owner
hereof and of each Warrant represented hereby (notwithstanding any notations of
ownership or writing hereon made by anyone other than a duly authorized officer
of the Company or the Warrant Agent) for all purposes and shall not be affected
by any notice to the contrary, except as provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance with
the laws of the State of New York without giving effect to conflicts of laws.
This Warrant Certificate is not valid unless countersigned by the Warrant Agent.
2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly
executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated:
DEPOMED, INC.
[SEAL]
By: ________________________________
Name:
Title:
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER AND TRUST COMPANY,
as Warrant Agent
By: __________________
Authorized Officer
<PAGE>
SUBSCRIPTION FORM
-----------------
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise ________________________ Warrants represented by this Warrant
Certificate, and to purchase the securities issuable upon the exercise of such
Warrants, and requests that certificates for such securities shall be issued in
the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
______________________
______________________
______________________
(please print or type name and address)
and be delivered to
______________________
______________________
______________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
4
<PAGE>
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by
National Securities Corporation. [_]
2. The exercise of this Warrant was solicited by
_______________________________. [_]
3. The exercise of this Warrant was not
solicited. [_]
Dated:_______________________ X ________________________________
__________________________________
__________________________________
Address
__________________________________
Social Security or Taxpayer
Identification Number
__________________________________
Signature Guaranteed
__________________________________
5
<PAGE>
ASSIGNMENT
----------
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED,_______________________, hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
__________________________________
__________________________________
__________________________________
(please print or type name and address)
___________________ of the Warrants represented by this Warrant Certificate, and
hereby irrevocably constitutes and appoints _____________________ Attorney to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
Dated:______________________ X________________________________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
6
<PAGE>
EXHIBIT 10.11
October 25, 1996
Dr. John W. Fara
12385 Parker Ranch Road
Saratoga, CA 95070
Dear John:
With the unanimous and enthusiastic consent of the other Directors of DepoMed's
Board of Directors, it is a pleasure for me to extend an offer to you to join
DepoMed as its President and Chief Executive Officer, effective January 1, 1997.
Regarding the timing, please see also item #6, below. This position reports to
the Chairman of the Board of Directors.
1. As we informally discussed, the annual salary of this position is $185,000.
In addition to this base salary, you will be entitled to participate in all
compensation and benefit plans of the company, including a comprehensive medical
and dental plan, which is currently fully funded by the company. The company
also offers a 401(k) pension plan for those employees who may elect to
participate after three months of service.
2. Consistent with current corporate policy, you will be entitled, initially,
to two weeks vacation each year, any portion of which can be carried over for a
period of three months, after which it will lapse; and entitled also to the
various holidays that are observed by the Company.
3. In addition to your present option to acquire 50,000 shares of company stock
at a price of $.03 per share, you will be granted an option to acquire an
additional 250,000 shares, at an exercise price of $0.30 per share, to be vested
over a four year period, so that one-fourth of the initial total (62,500 shares)
becomes vested on the anniversary dates of your employment, on each of the
successive four years.
4. You will also be provided an employment contract, which is a document that
is separate from this letter, for two calendar years, until December 31, 1998.
5. As you know, the Company is planning an Initial Public Offering (IPO),
currently scheduled for completion shortly after the first of the year, 1997.
Your efforts in this undertaking will be important to its success. Accordingly,
the Company will provide for
<PAGE>
you an incentive bonus, pending successful completion of the IPO, of 1% of the
offering, or a minimum of $100,000.
6. Your designation as the Company's Chief Executive Officer will also favorably
influence the outcome of the IPO. As a consequence, the Company asks that your
name in this context be a part of the prospectus for the offering, the
publication of which is scheduled to predate your official employment starting
date by approximately one or two months. The Company would expect to compensate
you for any activities or services performed on behalf of the Company during
this interim by pro-rated amount of your future salary level.
7. As a condition of employment, it will be necessary that you sign a copy of
the Company's "Confidential Information, Secrecy, and Invention Agreement".
8. This offer is contingent upon final approval by DepoMed's Board of
Directors, and as I'm sure you will understand under the present circumstances,
it is also contingent upon the Company's successful completion of the
comtemplated IPO, or other funding of comparable size.
Needless to say, it is a pleasure for me to extend this offer to you. Please
let me know if I may clarify any part, or if you would like to discuss any
aspect of the offer.
Sincerely,
/s/ John W. Shell, Ph.D.
- --------------------------
John W. Shell, Ph.D.
Chairman
<PAGE>
EXHIBIT 11.1
DEPOMED, INC.
STATEMENT RE: COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PERIOD FROM INCEPTION JUNE 30 ,
(AUGUST 7, 1995) TO YEAR ENDED -------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 1996 1997
--------------------- ----------------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding..... 2,859,993 3,285,747 3,263,708 3,354,825
Common equivalent shares
pursuant to Staff
Accounting Bulletin
Nos. 55, 64 and 83..... 249,450 249,450 249,450 249,450
--------- --------- --------- ---------
Shares used in computing
net loss per share..... 3,109,443 3,535,197 3,513,158 3,604,275
========= ========= ========= =========
Shares used in computing
pro forma net loss per
share:
Shares from above..... 3,535,197 3,513,158 3,604,275
Assumed conversion of
preferred stock at
the date of
issuance............. 815,789 815,789 878,483
--------- --------- ---------
Shares used in
computing pro forma
net loss per share... 4,350,986 4,328,947 4,482,758
========= ========= =========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data"and "Experts" and to the use of our report dated January 31,
1997 (except for Note 9, as to which the date is July 30, 1997) included in
Amendment No. 5 to the Registration Statement (Form SB-2, No. 333-25445) and
related Prospectus of DepoMed, Inc. for the registration of shares of its
common stock and warrants.
/s/ ERNST & YOUNG LLP
Palo Alto, California
October 3, 1997
