As filed with the Securities and Exchange Commission on December 12, 1996
-------------------------------
Registration No. 333
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-------------------------
NICHE PHARMACEUTICALS, INC.
(Name of Small Business Issuer in its Charter)
Delaware 2834 75-2376714
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code No.) Identification Number)
incorporation or
organization)
200 North Oak
P.O. Box 449
Roanoke, Texas 76262
(817) 491-2770
(Address and telephone number of principal executive offices)
(Address of principal place of business or intended principal place of business)
-------------------------
Stephen F. Brandon, President
NICHE PHARMACEUTICALS, INC.
200 North Oak
P.O. Box 449
Roanoke, Texas 76262
(817) 491-2770
(Name, address and telephone number of agent for service)
-------------------------
Copies to:
Fred Skolnik, Esq. Ilan K. Reich, Esq.
Gavin C. Grusd, Esq. Kenneth A. Schlesinger, Esq.
Certilman Balin Adler & Hyman, LLP Olshan Grundman Frome & Rosenweig LLP
90 Merrick Avenue 505 Park Avenue
East Meadow, NY 11514 New York, NY 10022
(516) 296-7000 (212) 753-7200
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of the registration statement.
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
[Cover continued on next page.]
<PAGE>
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Titles of Each Class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered (1) per Share (2) Price (2) Registration Fee
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares (3) 1,495,000 $5.00 $7,475,000 $2,265.15
Underwriter's Common Share
Purchase Warrants (4) 130,000 --- $ 100 ---
Common Shares (5) 130,000 $6.00 $ 780,000 $236.36
Common Shares (6) 100,000 $5.00 $ 500,000 $151.50
--------------
Total Registration Fee: $2,653.01
==========================================================================================================
</TABLE>
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended
("Securities Act"), this Registration Statement covers such additional
indeterminate number of Common Shares and Underwriter's Common Stock
Purchase Warrants (the "Underwriter's Warrants") as may be issued by reason
of adjustments in the number of shares of Common Stock and Underwriter's
Warrants pursuant to antidilution provisions contained in the Underwriter's
Warrants. Because such additional shares of Common Stock and Underwriter's
Warrants will, if issued, be issued for no additional consideration, no
registration fee is required.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Includes 195,000 Common Shares subject to the Underwriter's overallotment
option.
(4) To be issued to the Underwriter.
(5) Issuable upon exercise of the Underwriter's Warrants.
(6) Registered on behalf of selling stockholder.
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 or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
SUBJECT TO COMPLETION, DATED December 12, 1996
PROSPECTUS
Niche Pharmaceuticals, Inc.
1,300,000 Shares of Common Stock, par value $.01 per share
Offering Price Per Share - $5.00
---------------
Niche Pharmaceuticals, Inc., a Delaware corporation (the "Company"),
hereby offers 1,300,000 shares of common stock, par value $.01 per share (the
"Common Shares"). See "Risk Factors" and "Description of Securities." The "Risk
Factors" section begins on page 6 of this Prospectus.
The Company has applied for inclusion of the Common Shares on The
Nasdaq SmallCap Market, although there can be no assurances that an active
trading market will develop even if the securities are accepted for quotation.
See "Risk Factors - Lack of Prior Market for Common Shares; No Assurance of
Public Trading Market" and "Risk Factors - Penny Stock Regulations May Impose
Certain Restrictions on Marketability of Securities.".
Prior to this offering (the "Offering"), there has been no public
market for the Common Shares. It is currently anticipated that the initial
public offering price will be $5.00 per Common Share. The price of the Common
Shares has been determined by negotiations between the Company and Sterling
Foster & Co., Inc., the underwriter of this Offering (the "Underwriter"), and
does not necessarily bear any relationship to the Company's assets, book value,
net worth or results of operations or any other established criteria of value.
The Underwriter may enter into arrangements with one or more broker-dealers to
act as co-underwriters of this Offering. For additional information regarding
the factors considered in determining the initial public offering price of the
Common Shares, see "Risk Factors - Arbitrary Offering Price; Possible Volatility
of Stock Price", "Risk Factors - Lack of Prior Market for Common Shares; No
Assurance of Public Trading Market", "Description of Securities" and
"Underwriting".
The registration statement of which this Prospectus forms a part also
covers the resale of 100,000 Common Shares issued to a certain unaffiliated
bridge lender (the "Selling Stockholder"). The Company will not receive any of
the proceeds from the resale of the Common Shares by the Selling Stockholder.
The Common Shares held by the Selling Stockholder may be resold at any time
following the date of this Prospectus, subject to an agreement with the
Underwriter restricting the transfer of such Common Shares for a period of two
years without the Underwriter's consent. The resale of the Common Shares by the
Selling Stockholder is subject to Prospectus delivery and other requirements of
the Securities Act of 1933, as amended (the "Act"). Sales of such Common Shares
or the potential of such sales at any time may have an adverse effect on the
market price of the Common Shares offered hereby. See "Principal and Selling
Stockholders" and "Risk Factors - Shares Eligible for Future Sale May Adversely
Affect the Market."
----------------
[Cover Continued on Next Page]
<PAGE>
AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK
VALUE OF THE COMMON SHARES OFFERED HEREBY AND SHOULD BE
CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" 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.
Price Underwriting Discounts Proceeds to
to Public and Commissions (1) Company (2)
Per Share.......... $5.00 $0.50 $4.50
Total (3).......... $6,500,000 $650,000 $5,850,000
(1) Does not reflect additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $195,000
($224,250 if the Overallotment Option (as hereinafter defined) is
exercised in full), (ii) a three year financial advisory and investment
banking agreement providing for aggregate fees of $100,000 payable in
advance at the closing of this Offering, and (iii) a warrant (to be
purchased by the Underwriter for $100) to purchase 130,000 Common Shares
(10% of the total number of Common Shares sold pursuant hereto) (the
"Underwriter's Warrant"), exercisable for a period of three years,
commencing one year from the date of this Prospectus. The Company and
the Underwriter have agreed to indemnify each other against certain
liabilities, including liabilities under the Act. The Company has
been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is
therefore unenforceable. See "Underwriting".
(2) Before deducting expenses of the Offering payable by the Company
estimated at $610,000, including the Underwriter's non-accountable
expense allowance and financial advisory fee referred to in footnote
(1) (not assuming exercise of the Overallotment Option), registration
fees, transfer agent fees, NASD fees, Blue Sky filing fees and
expenses, legal fees and expenses, and accounting fees and expenses.
See "Use of Proceeds" and "Underwriting."
(3) Does not include 195,000 additional Common Shares to cover overallotments
which the Underwriter has an option to purchase for 45 days from the date
of this Prospectus at the initial public offering price, less the
Underwriter's discount (the "Overallotment Option"). If the Overallotment
Option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $7,475,000,
$747,500, and $6,727,500, respectively. See "Underwriting".
---------------
[Cover Continued on Next Page]
2
<PAGE>
The Common Shares are offered by the Underwriter on a "firm
commitment" basis, when, as and if delivered to and accepted by the Underwriter,
and subject to prior sale, allotment and withdrawal, modification of the offer
with notice, receipt and acceptance by the Underwriter named herein and subject
to its right to reject orders in whole or in part and to certain other
conditions. It is expected that the delivery of the certificates representing
the Common Shares and payment therefor will be made at the offices of the
Underwriter on or about _________, 1997.
S T E R L I N G F O S T E R
I N V E S T M E N T B A N K E R S
The date of this Prospectus is _________, 1997.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ SMALLCAP MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
A SIGNIFICANT PORTION OF THE COMMON SHARES TO BE SOLD IN THIS
OFFERING MAY BE SOLD TO CUSTOMERS OF THE UNDERWRITER. SUCH SALES MAY AFFECT THE
MARKET FOR AND LIQUIDITY OF THE COMPANY'S SECURITIES IN THE EVENT THAT
ADDITIONAL BROKER-DEALERS DO NOT MAKE A MARKET IN THE COMPANY'S SECURITIES, AS
TO WHICH THERE CAN BE NO ASSURANCE. SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN
TRANSACTIONS FOR THE SALE OR PURCHASE OF THE COMMON SHARES THROUGH AND/OR WITH
THE UNDERWRITER.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME
TO TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE MARKET FOR THE COMMON SHARES. HOWEVER, THERE IS NO
ASSURANCE THAT THE UNDERWRITER WILL OR WILL NOT CONTINUE TO BE A DOMINATING
INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED HEREBY MAY BE
SIGNIFICANTLY AFFECTED BY THE DEGREE, IF ANY, OF THE UNDERWRITER'S PARTICIPATION
IN SUCH MARKET. THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR
FROM TIME TO TIME. SEE "RISK FACTORS - LACK OF PRIOR MARKET FOR COMMON SHARES;
NO ASSURANCE OF PUBLIC TRADING MARKET".
2
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information (including
financial statements and notes thereto) contained in this Prospectus and is
qualified in its entirety by the more detailed information appearing elsewhere
herein. In addition, unless otherwise indicated to the contrary, the information
appearing herein does not give effect to the issuance of (a) 195,000 Common
Shares upon exercise of the Overallotment Option; (b) 130,000 Common Shares upon
exercise of the Underwriter's Warrant; or (c) 534,375 Common Shares upon the
exercise of outstanding stock options. However, all references to Common Shares
and prices per share in this Prospectus give retroactive effect to a 1.25 for 1
stock split effectuated on October 15, 1996 as part of the Company's
reincorporation in the State of Delaware. See "Underwriting." Each prospective
investor is urged to read this Prospectus in its entirety.
The Company
Niche Pharmaceuticals, Inc. (the "Company") manufactures through
third party contractors, and markets and distributes, non-prescription
pharmaceutical and nutraceutical dietary supplement products. The Company seeks
to exploit product niches that have generally been overlooked or neglected by
the major drug companies because of the relatively small perceived size of the
market for such products. The Company's current products are a patented,
state-of-the-art, sustained release magnesium supplement marketed under the name
Mag-Tab(R)SR, and a dietary fiber supplement marketed as Unifiber(R).
The Company markets its products to virtually all of the drug and
dietary supplement wholesalers in the United States which, in turn, supply
retail pharmacies, numerous state and federal institutions, and group and
managed care purchasing organizations ("GPOs") acting on behalf of hospitals,
extended care facilities and nursing homes.
The Company commenced operations in 1991 as a Texas corporation, and
was reincorporated as a Delaware corporation on October 15, 1996. The Company
maintains its executive offices at 200 North Oak, Roanoke, Texas 76262;
telephone number (817) 491-2770.
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating the Company and its business.
The Offering
Common Shares Being Offered 1,300,000 shares
Common Shares Outstanding Prior to
the Offering ..................... 1,101,500 shares
Common Shares to be Outstanding
After the Offering (1)............ 2,401,500 shares
3
<PAGE>
Use of Proceeds................... The net proceeds to the Company
from the sale of the 1,300,000
Common Shares offered hereby are
estimated to be $5,240,000. The
net proceeds are expected to be
applied in the following
approximate percentages for the
following purposes: marketing and
advertising (35.1%), repayment of
indebtedness (7.7%), hiring of
additional personnel (10.5%),
product acquisition (9.5%),
research and development (5.7%) and
working capital (31.5%). See "Use
of Proceeds".
Risk Factors...................... An investment in the securities
offered hereby involves a high
degree of risk and immediate
substantial dilution of the book
value of the Common Shares and
should be considered only by
persons who can afford the loss of
their entire investment. See "Risk
Factors" and "Dilution."
Proposed Nasdaq SmallCap Market
Symbol(2)....................... [NICH]
- -----------------
(1) Does not give effect to the issuance of (i) 195,000 Common Shares
upon exercise of the Overallotment Option; (ii) 130,000 Common Shares
upon exercise of the Underwriter's Warrant; or (iii) 534,375 Common
Shares upon the exercise of outstanding stock options.
See "Underwriting."
(2) Although the Company has applied for inclusion of the Common Shares
on The Nasdaq SmallCap Market, there can be no assurance that the
Company's securities will be included for quotation, or, if so
included, that the Company will be able to continue to meet the
requirements for continued quotation, or that a public trading market
will develop or, if such market develops, that it will be sustained.
See "Risk Factors - Lack of Prior Market for Common Shares; No
Assurance of Public Trading Market".
4
<PAGE>
Summary Financial Information
The following summary financial information has been derived from the
financial statements of the Company included elsewhere in this Prospectus. The
information should be read in conjunction with the financial statements and the
related notes thereto. All amounts are in dollars except number of Common
Shares. See "Financial Statements."
Statement of Operations Data
Nine Months Ended Years Ended
September 30, December 31
--------------------- ----------------------
1996 1995 1995 1994
---- ---- ---- ----
Net sales ................... $ 906,744 $389,700 $ 606,268 $ 415,330
Gross profit ................ 564,382 303,587 423,122 279,858
Operating income ............ 77 91,905 88,181 4,508
Net income (loss) ........... (140,588) 37,767 (1,003) (62,340)
Net income (loss)
per share(1) . ............. (.13) .03 --- (.06)
Weighted average number
of Common Shares
outstanding(1)............. 1,101,500 1,101,500 1,101,500 1,101,500
Balance Sheet Data
<TABLE>
<CAPTION>
September 30, 1996 December 31,1995
Pro Forma
Actual Pro Forma (1) As Adjusted(1)(2) Actual
------ ------------- ----------------- ---------
<S> <C> <C> <C> <C>
Working capital (deficit) $ (368,948) $ (368,948) $ 4,571,052 $ (67,504)
Total assets. . . . . . . 1,417,009 1,517,009 6,357,009 1,513,196
Total liabilities. . . . . . . 2,074,546 2,174,546 1,774,546 2,030,157
Total stockholders' equity (deficit) (657,537) (657,537) 4,582,463 (516,961)
- ----------------
</TABLE>
(1) Adjusted to give retroactive effect to the issuance of 100,000 Common
Shares pursuant to a certain December 1996 bridge financing discussed
herein (the "Bridge Financing"). See "Bridge Financing."
(2) Adjusted to give effect of the receipt and application of the net proceeds
of approximately $5,240,000 from the sale of the Common Shares offered
hereby. See "Use of Proceeds".
5
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative and
involves a high degree of risk and substantial dilution and should only be
purchased by investors who can afford to lose their entire investment.
Prospective purchasers, prior to making an investment, should carefully consider
the following risks and speculative factors, as well as other information set
forth elsewhere in this Prospectus, associated with this Offering, including the
information contained in the financial statements herein.
1. Going Concern Uncertainty; No History of Earnings; Accumulated
Deficit; Working Capital Deficit and Stockholders' Deficit. The report of the
Company's independent auditors on the Company's financial statements for the
years ended December 31, 1995 and 1994 indicates that such financial statements
have been prepared assuming that the Company will continue as a going concern,
and references a note to such financial statements which states that such
financial statements have been prepared in conformity with generally accepted
accounting principles which contemplates continuation of the Company as a going
concern, and the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The note states that the ability
of the Company to continue as a going concern is dependent upon the success of
the Company's marketing efforts and its ability to obtain sufficient funding to
continue operations. For the year ended December 31, 1995 and nine months ended
September 30, 1996, the Company had a net loss of $1,003 and $140,588,
respectively. As of December 31, 1995 and September 30, 1996, the Company's
accumulated deficit totaled $617,961 and $758,549, respectively. In addition, as
of December 31, 1995 and September 30, 1996, the Company had a working capital
deficit of $67,504 and $368,948, respectively. Moreover, as of December 31, 1995
and September 30, 1996, the Company had a stockholders deficit of $516,961 and
$657,537, respectively. Further, as noted above, a substantial portion of the
Company's assets consists of intangible assets. The amortization expense with
respect thereto will have a material adverse effect upon the Company's results
of operations. There can be no assurance that the Company will be able to
operate profitably. The Company is subject to many business risks which include,
but are not limited to, unforeseen marketing and promotional expenses, potential
negative publicity with respect to the Company's industry and products, and
intense competition. Many of the risks may be beyond the control of the Company.
There can be no assurance that the Company will successfully implement its
business plan in a timely or effective manner, or that management of the Company
will be able to market and sell enough products to generate sufficient revenues
to continue as a going concern. See "Business" and "Financial Statements".
2. Dependence on Offering Proceeds; Possible Need for Additional
Financing. The Company's cash requirements have been and will continue to be
significant. The Company is dependent on the proceeds from this Offering in
order to further expand its operations. The Company believes that the net
proceeds of this Offering, together with anticipated increased revenues from
operations, will be sufficient to conduct the Company's operations for at least
18 months. In the event that the Company's plans change, or the costs of
operations prove greater than anticipated, the Company could be required to
curtail its expansion plans or seek additional
6
<PAGE>
financing sooner than currently anticipated. The Company believes that its
operations would be restricted absent expansion. The Company has no current
arrangements with respect to additional financing and there can be no assurance
that such additional financing, if available, will be on terms acceptable to the
Company. See "Use of Proceeds" and "Management's Discussion and Analysis
Liquidity and Capital Resources".
3. NASD Complaint Against Underwriter and Others Alleging Violations
of Exchange Act and NASD Rules of Fair Practice. The Market Surveillance
Committee of the National Association of Securities Dealers Regulation, Inc.
("NASD") filed a complaint on September 18, 1996 (the "Complaint") against the
Underwriter and various individuals associated or formerly associated with the
Underwriter (collectively, the "Respondents") alleging various violations of the
Exchange Act and the NASD Rules of Fair Practice. The Complaint involves three
companies whose initial public offerings were underwritten by the Underwriter.
The Complaint alleges the use of fraudulent and manipulative devices in
connection with the distribution and sale of securities of such companies;
failure to comply with undertakings to submit various documents and information
to the NASD's Corporate Financing Department for review and receipt of unfair
and unreasonable underwriting compensation in connection with transactions
involving securities held by stockholders of such companies; fraudulent sales
practices and unauthorized transactions with customers of the Underwriter;
inadequate supervision of the activities of sales representatives relating to
the various alleged violations; and inadequate written supervisory procedures to
prevent the allegedly violative conduct. The Company has been advised by the
Underwriter that it has not yet filed an answer to the complaint and that it is
the intention of the Underwriter and, to the best of the Underwriter's
knowledge, the intention of the other Respondents to deny all material
allegations and alleged violations and to vigorously contest the proceeding. An
unfavorable outcome or resolution of the Complaint may adversely affect the
market for, and liquidity of, the Company's securities if the Underwriter is
unable to make a market in the Company's securities and other broker-dealers do
not make a market in the Company's securities.
4. Private Investigation Concerning Trading in Securities of Issuer
Underwritten by Underwriter. The Company was advised that the Securities and
Exchange Commission (the "Commission") issued an order on March 17, 1995
authorizing a private investigation concerning trading in the securities of
Lasergate Systems, Inc. The Underwriter acted as underwriter of a public
offering of securities of Lasergate Systems, Inc. in October 1994, and has acted
as a market maker of such issuer's securities since that time. An unfavorable
resolution of the Commission's investigation may adversely affect the market
for, and liquidity of, the Company's securities if the Underwriter is unable to
make a market in the Company's securities and other broker-dealers do not make a
market in the Company's securities.
5. Dependence on Key Management and Qualified Personnel. The Company
is highly dependent upon the efforts of its senior management. The loss of the
services of one or more members of the senior management could significantly
impede the achievement of development objectives. Although the Company intends
to obtain a $1,000,000 key-man insurance policy on the life of each of Stephen
F. Brandon, Chairman of the Board, Chief Executive Officer and President
7
<PAGE>
of the Company, and Thomas F. Reed, Executive Vice President - Corporate
Development and a Director of the Company, the Company does not believe the
proceeds of any policies obtained would be adequate to compensate for the loss
of either of them. The Company is also highly dependent upon its ability to
attract and retain qualified key management personnel. There is always
competition for qualified personnel in the areas of the Company's activities,
and there can be no assurance that the Company will be able to continue to
attract and retain qualified personnel necessary for the development of its
existing business and its expansion into areas and activities requiring
additional expertise, such as marketing. The loss of, or failure to recruit,
managerial personnel could have a material adverse effect on the Company. In
addition, the Company relies on consultants to assist it in formulating its
research and development strategy and in conducting clinical trials of its
products. All of the Company's consultants are employed by other employers, or
are principals of other companies or professional practices, and each such
consultant may have commitments to, or consulting or advisory contracts with,
other entities that may limit their availability to the Company. See
"Management".
6. Reliance on Two Products. The Company currently relies entirely on
the sales of its two products, Mag-Tab(R)SR and Unifiber(R), to produce
revenues. Revenues from the sale of Mag-Tab(R)SR and Unifiber(R) (i) for the
year ended December 31, 1995 were approximately $516,000, or 85% of revenues,
and approximately $90,000, or 15% of revenues, respectively, and (ii) for the
nine months ended September 30, 1996 were approximately $465,000, or 51.3% of
revenues, and approximately $434,000, or 47.9% of revenues, respectively.
Although the Company plans to seek other product acquisitions in the future,
sales of these two products are expected to account for all of the Company's
revenues for the foreseeable future. Certain factors, such as a decline in
market demand, no future market acceptance and increased competition for
superior or alternative products, could have a material adverse effect on the
Company's financial condition and results of operations. See "Business -
Products".
7. Dependence on Major Customers. A significant portion of the
Company's products is ultimately sold or supplied to consumers and patients
through pharmacies throughout the United States. However, the Company does not
supply these outlets directly. The Company markets its products to virtually all
of the drug and dietary supplement wholesalers in the United States which, in
turn, supply pharmacies, healthcare institutions, and GPOs acting on behalf of
such healthcare institutions. For the fiscal year ended December 31, 1995 and
the nine months ended September 30, 1996, four drug and dietary supplement
wholesalers accounted for 22% and 19%; 14% and 13%; 12% and 14%; and 12% and 13%
of the Company's revenues, respectively. Although each of these wholesalers
currently supplies most of the pharmacies, GPOs and healthcare institutions on a
nonexclusive basis, the loss of any one of these customers could have a material
adverse effect on the Company's financial condition and results of operations.
See "Business - Sales and Marketing".
8. No Manufacturing Capability or Experience; Dependence on Others.
The Company currently does not have facilities or personnel capable of directly
manufacturing any of its own products. The Company has no current plans to
manufacture its products and is dependent on third parties in this regard.
8
<PAGE>
The Company has an exclusive agreement (the "Schering Agreement")
with Schering Plough, Inc. ("Schering") for the manufacture of Mag-Tab(R)SR.
Schering, a Food and Drug Administration ("FDA") regulated company, manufactures
Mag-Tab(R)SR for the Company at FDA Good Manufacturing Practices standards
("GMPs") for drug products, although, as a nutritional supplement, Mag-Tab(R)SR
is not required to comply with those standards. The Company relies solely on
Schering for the manufacture and packaging of this product. The initial term of
the Schering Agreement expires in July 1997 and is automatically renewable for
successive two year terms, unless written notice of termination is given by
either party at least one year prior to the expiration of the initial or a
successive term. Neither party has given any notice of termination. Accordingly,
the expiration date of the Schering Agreement has been extended to July 1999.
The terms of the Schering Agreement provide that, in the event of early
termination by Schering, Schering will, at the Company's request, provide the
Company with a supply of Mag-Tab(R)SR up to the total amount of product
purchased by the Company in the previous year. In the event the Schering
Agreement is terminated or expires and the Company does not renew its
relationship with Schering, the Company believes, but cannot assure, that it
will be able to engage an alternative manufacturer on comparable terms to the
Schering Agreement to manufacture Mag-Tab(R)SR at drug product GMPs levels.
The Company's Unifiber(R) product is being manufactured by Dow Hickam
Pharmaceuticals Inc. ("Dow Hickam"), a subsidiary of Mylan Pharmaceuticals Inc.,
pursuant to an agreement (the "Dow Hickam Agreement") which expires on December
31, 1996. Pursuant to the Dow Hickam Agreement, Dow Hickam is obligated to
manufacture the Unifiber(R) product in sufficient quantity to meet the Company's
projected sales needs through 1997. During the fourth quarter of 1996 or the
first quarter of 1997, the Company expects to engage another third party
contractor to manufacture Unifiber(R). The Company is currently investigating
such manufacturing options and believes, but cannot assure, that there will be
no difficulty engaging another contract manufacturer.
Although the Company's policy is to maintain an approximately three
month supply of each of Mag-Tab(R)SR and Unifiber(R), the failure to engage, or
delays in engaging, a manufacturer for either product could result in the
Company being unable to fill orders on a timely basis, or at all, resulting in
cancellation of orders, reduced sales, loss of customers, loss of goodwill, and
other events which could have a material adverse effect on the Company.
Additionally, if the Company is unable to engage a manufacturer on terms at
least as favorable as the Schering Agreement or the Dow Hickam Agreement, the
costs of goods sold may be raised, reducing profit margins. See "Business -
Manufacturing".
9. Uncertainty of Third Party Reimbursement and Product Pricing.
Although reimbursement or funding from third party healthcare payors currently
represents an immaterial portion of the Company's revenues, future profitability
of the Company may depend in part upon the availability of reimbursement or
funding from third party healthcare payors such as government programs (e.g.,
Medicaid), private insurance plans and managed care plans. The United States
Congress is considering a number of legislative and regulatory reforms that may
affect companies engaged in the healthcare industry in the United States.
Although the Company cannot predict
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<PAGE>
whether these proposals will be adopted or the effects such proposals may have
on its business, the existence and pendency of such proposals could have a
material adverse effect on the Company.
In addition, third party payors are continuing their efforts to
contain or reduce the cost of healthcare through various means. For example,
third party payors are increasingly challenging the prices charged for medical
and healthcare products and services. A third party payor may deny reimbursement
if it determines that a product was not used in accordance with cost-effective
treatment methods or for other reasons. There can be no assurances that Mag-Tab
(R)SR and Unifiber(R) will continue to qualify for reimbursement by Medicaid in
accordance with guidelines established by the Health Care Financing
Administration, by state government payors, or by commercial insurance carriers.
Also, the trend toward managed healthcare in the United States and the
concurrent growth of organizations, such as health maintenance organizations,
which can control or significantly influence the purchase of healthcare services
and products, as well as legislative proposals to reform healthcare or reduce
government insurance programs, may result in lower prices for pharmaceutical
products. The cost containment measures that healthcare providers are
instituting and the effect of any healthcare reform could materially adversely
affect the Company's ability to sell its products. See "Business - Third Party
Reimbursement".
10. Uncertainty of Protection of Patents and Proprietary Rights. The
Company's success will depend in part on its ability to obtain and enforce
patent protection for its patented products, preserve its trade secrets, and
operate without infringing on the proprietary rights of third parties, both in
the United States and in other countries. In the absence of patent protection,
the Company's business may be adversely affected by competitors who develop
substantially equivalent technology. Because of the substantial length of time
and expense associated with bringing new products through development to the
marketplace, the pharmaceutical and nutraceutical industries place considerable
importance on obtaining and maintaining patent and trade secret protection for
new technologies, products and processes. The Company currently owns a United
States patent related to its Mag- Tab(R)SR product which will expire in March
2008, and a patent application relating to Mag-Tab(R)SR is pending in Canada.
The Unifiber(R) technology is not patentable. The trademark "Unifiber(R)" is
registered in the United States. See "Business - Patents and Proprietary
Information."
There can be no assurance that the Company will have sufficient
resources to protect its patent from infringers, that the Company will acquire
or develop additional products that are patented or patentable, or that present
or future patents will provide sufficient protection to the Company's present or
future technologies, products and processes. In addition, there can be no
assurance that others will not independently develop substantially equivalent
proprietary information, design around the Company' s current patents or future
patents, or obtain access to the Company's know-how, or that others will not
successfully challenge the validity of the Company's current patent or future
patents, or be issued patents which may prevent the sale of one or more of the
Company's products, or require licensing and the payment of significant fees
or royalties by the Company to third parties in order to enable the Company
to conduct its business. No assurance can be given as to the degree of
protection or competitive advantage any patents issued to the Company will
afford, the validity of any such patents or the Company's ability to avoid
infringing any patents
10
<PAGE>
issued to others. Further, there can be no guarantee that any patents issued to,
or acquired or licensed by, the Company will not be infringed by the products of
others. Litigation and other proceedings involving the defense and prosecution
of patent claims can be expensive and time consuming, even in those instances in
which the outcome is favorable to the Company, and can result in the diversion
of resources from the Company's other activities. An adverse outcome could
subject the Company to significant liabilities to third parties, require the
Company to obtain licenses from third parties or require the Company to cease
any related research and development activities or sales of infringing products.
See "Business - Patents and Proprietary Rights".
11. Competition. The Company is engaged in the pharmaceutical and
nutraceutical industry, which is characterized by extensive research efforts,
rapid technological progress and intense competition. There are many public and
private companies, including well-known companies engaged in developing and
marketing pharmaceuticals and nutraceuticals, that represent significant
competition to the Company. Existing products and therapies and improvements
thereto do and will compete directly with products the Company manufactures and
markets, and may manufacture and market in the future. Many of the Company's
competitors have substantially greater financial and technical resources,
production and marketing capabilities and experience than does the Company.
Competitors who do not rely on third party contract manufacturers may
be able to compete more effectively on price. Additionally, other technologies
are, or may in the future become, the basis for competitive products.
Competition may increase further as a result of the potential advances from
structure-based drug design and greater availability of capital for investment
in this field. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
than the Company's products or products which the Company may acquire in the
future, or that would render the Company's technology and products obsolete or
noncompetitive. See "Business - Competition."
12. Market Acceptance of Company's Products. The Company's continued
success will depend upon broad acceptance and adoption by physicians and dietary
specialists of the Company's products and the therapeutic benefits of such
products, as well as the Company's ability to broaden sales of its products to
patients of these physicians and dietary specialists. In order to penetrate this
market more effectively, the Company has expanded its sales and marketing
activities, including targeted direct mail, field sales activity, attendance at
medical conventions and meetings, development of product advocate programs,
medical and trade journal advertising and telemarketing. There can be no
assurance that these or other activities or programs will be successful in
obtaining broader market acceptance for the Company's products. Failure to do so
could have a material adverse effect on the Company's business. See "Business -
Sales and Marketing".
13. Product Liability. The Company's business involves the risk of
product liability claims inherent to the pharmaceutical business. If such claims
arise in the future they could have a material adverse impact on the Company.
The Company maintains product liability insurance on an occurrence basis in the
amount of $3 million per occurrence and an aggregate amount of $3
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<PAGE>
million per policy term period. The term of the policy is 12 months which is
renewable for successive 12 month periods. Additionally, the Company attempts to
reduce its risk by obtaining indemnity undertakings with respect to such claims
from the third party contract manufacturers of its products. There is no
assurance that such coverage or indemnification will be sufficient to protect
the Company from product liability claims, or that product liability insurance
will be available to the Company at reasonable cost, if at all, in the future.
Currently, there are no pending or threatened claims known to the Company. See
"Business - Product Liability Insurance; Indemnification".
14. Consumer Laws and Government Regulation. The Company is subject
to the Federal Food, Drug and Cosmetics Act (including the Dietary Supplement
Health and Education Act of 1994), the Federal Trade Commission Act, the Fair
Packaging and Labeling Act, the Consumer Product Safety Act, the Federal
Hazardous Substance Act and product safety laws in foreign jurisdictions as well
as to the jurisdiction of the Consumer Product Safety Commission. Such
regulation subjects the Company to the possibility of requirements of repurchase
or recall of products found to be defective and the possibility of fines,
penalties, seizure of its products, injunction, and criminal prosecution for
repeated violations of the law. The FDA regulates product labeling, including
product claims. The Federal Trade Commission ("FTC") also regulates product
claims made in advertising. Existing and future government regulations could
impact certain products of the Company. Additionally, products which the Company
may acquire in the future (if any) may be subject to FDA approval and
regulation, which could be time consuming and costly. See "Business - Government
Regulation".
15. Risks Attendant to Expansion. The Company intends to utilize a
significant portion of the net proceeds of this Offering to expand its business.
In this regard, the Company intends to allocate a substantial portion of the
proceeds to market and advertise the Company's products, acquire new products
and for working capital, including general administrative costs. Many of the
risks of expansion may be unforeseeable or beyond the control of management.
There can be no assurance that the Company will successfully implement its
business plan in a timely or effective manner, or that the Company will be able
to generate sufficient revenue to continue as a going concern. See "Use of
Proceeds".
16. Control by Existing Management and Stockholders; Effect of
Certain Anti-Takeover Considerations. Upon completion of the Offering, the
Company's directors, executive officers and certain principal stockholders and
their affiliates will own beneficially approximately 42% of the Common Shares
(without giving effect to the exercise of the Overallotment Option).
Accordingly, such holders, if acting together, may have the ability to exert
significant influence over the election of the Company's Board of Directors and
other matters submitted to the Company's stockholders for approval. The voting
power of these holders may discourage or prevent any proposed takeover of the
Company unless the terms thereof are approved by such holders. Pursuant to the
Company's Certificate of Incorporation, Preferred Shares may be issued by the
Company in the future without stockholder approval and upon such terms as the
Board of Directors may determine. The rights of the holders of Common Shares
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Shares that may be issued in the future. The issuance of
Preferred Shares
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<PAGE>
could have the effect of discouraging a third party from acquiring a majority of
the outstanding Common Shares of the Company and preventing stockholders from
realizing a premium on their Common Shares. The Certificate of Incorporation
also provides for staggered terms for the members of the Board of Directors. A
staggered Board of Directors and certain provisions of the Company's by-laws and
of Delaware law applicable to the Company could delay or make more difficult a
merger, tender offer or proxy contest involving the Company. See "Management",
"Principal and Selling Stockholders" and "Description of Securities".
17. Broad Discretion in Application of Proceeds. While the Company
intends to use the net proceeds of this Offering as described in the "Use of
Proceeds" section of this Prospectus, management of the Company has broad
discretion to adjust the application and allocation of such net proceeds in
order to address changed circumstances and opportunities, including, without
limitation, the possible acquisition of additional products which the Company
has not yet identified. As a result of the foregoing, the success of the Company
will be substantially dependent upon the discretion and judgment of the
management of the Company with respect to the application and allocation of the
net proceeds of this Offering. Pending use of the proceeds, the funds will be
invested in certificates of deposit, high grade commercial paper and government
securities or other low risk investments. See "Use of Proceeds".
18. Arbitrary Offering Price; Possible Volatility of Stock Price. The
initial public offering price of the Common Shares was determined by negotiation
between the Company and the Underwriter, may not be indicative of the market
price for such securities in the future, and does not necessarily bear any
relationship to the Company's assets, book value, net worth or results of
operations of the Company or any other established criteria of value. Among the
factors considered in determining the price of the Common Shares were the
history of, and prospects for, the industry in which the Company operates,
estimates of the business potential of the Company, the present state of the
development of the Company's business, the Company's financial condition, an
assessment of the Company's management, the general condition of the securities
markets at the time of this Offering, and the demand for similar securities of
comparable companies. It should be noted that the stock market in recent years
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of many smaller companies. Frequently, such
fluctuations have been unrelated or disproportionate to the operating
performance of such companies. These fluctuations, as well as general economic
and market conditions, may have a material adverse effect on the market price of
the Common Shares. See "Description of Securities", "Underwriting" and
"Financial Statements".
19. Lack of Prior Market for Common Shares; No Assurance of Public
Trading Market. Prior to this Offering, no public trading market existed for the
Common Shares. There can be no assurances that a public trading market for the
Common Shares will develop or that a public trading market, if developed, will
be sustained. Although the Company anticipates that, upon completion of this
Offering, the Common Shares will be eligible for inclusion on The Nasdaq
SmallCap Market, no assurance can be given that the Common Shares will be listed
thereon. Under prevailing rules of The Nasdaq Stock Market, Inc., in order to
qualify for initial quotation of securities on The
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<PAGE>
Nasdaq SmallCap Market, a company, among other things, must have at least
$4,000,000 in total assets, $2,000,000 in total capital and surplus, $1,000,000
in market value of public float and a minimum bid price of $3.00 per share.
Although the Company may, upon the completion of this Offering, qualify for
initial quotation of the Common Shares on The Nasdaq SmallCap Market, in order
for the Common Shares to continue to be listed thereon, the Company, among other
things, generally must have $2,000,000 in total assets, $1,000,000 in total
capital and surplus, $1,000,000 in market value of public float and a minimum
bid price of $1.00 per share.
The Nasdaq Stock Market, Inc. has proposed a rule change which, if
adopted, would impose substantially more stringent criteria for the initial
and continued listing of securities on The Nasdaq SmallCap Market. The
proposed new rules provide that, for initial listing on The Nasdaq SmallCap
Market, a company would need to have, among other things, (i) either net
tangible assets (i.e., net of goodwill) of $4,000,000, a market capitalization
of $50,000,000 or net income for two of the last three fiscal years of $750,000,
(ii) a minimum market value of public float of $5,000,000, (iii) a minimum bid
price of $4.00 per share, and (iv) either one year of operating history or
a market capitalization of $50,000,000. For continued listing on The Nasdaq
SmallCap Market, a company would need to have, among other things,
(i) either net tangible assets of $2,000,000, a market capitalization of
$35,000,000, or net income for two of the last three fiscal years of $500,000
and (ii) a minimum market value of public float of $1,000,000. Additionally,
for both initial listing and continued listing on The NASDAQ SmallCap Market,
companies would be required to have at least two independent directors, and an
Audit Committee, a majority of the members of which would need to be independent
directors.
If the Company is unable to satisfy the requirements for quotation on
The Nasdaq SmallCap Market under the current rules, or the proposed rules,
if adopted, trading, if any, in the Common Shares offered hereby would be
conducted in the over-the-counter market in what is commonly referred to as the
"pink sheets" or on the NASD OTC Electronic Bulletin Board. As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the securities offered hereby. The above-
described rules may adversely affect the liquidity of the market for the
Company's securities. If a trading market does in fact develop for the Common
Shares offered hereby, there can be no assurance that it will be maintained. In
any event, because certain restrictions may be placed upon the sale of
securities at prices under $5.00 per share, if the price of the Common Shares
falls below such threshold, unless such Common Shares qualify for an exemption
from the "penny stock" rules, such as a listing on The Nasdaq SmallCap Market,
some brokerage firms will not effect transactions in the Company's securities
and it is unlikely that any bank or financial institution will accept such
securities as collateral. Such factors could have a material adverse effect on
the market for the Common Shares. See "Risk Factors - 'Penny Stock' Regulations
May Impose Certain Restrictions on Marketability of Securities" and
"Underwriting".
Although it has no legal obligation to do so, the Underwriter may
from time to time act as a market maker and may otherwise effect and influence
transactions in the Company's securities. However, there is no assurance that
the Underwriter will continue to effect and influence transactions in the
Company's securities. The prices and liquidity of the Company's Common Shares
14
<PAGE>
may be significantly affected by the degree, if any, of the Underwriter's
participation in the market. The Underwriter may voluntarily discontinue such
participation at any time. Further, the market for, and liquidity of, the
Company's Common Shares may be materially adversely affected by the fact that a
significant portion of the Common Shares may be sold to customers of the
Underwriter.
20. "Penny Stock" Regulations May Impose Certain Restrictions on
Marketability of Securities. The Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
less than $5.00 per share, subject to certain exceptions. If, as anticipated,
the Common Shares offered hereby are authorized for quotation on The Nasdaq
SmallCap Market upon the completion of this Offering, such securities will
initially be exempt from the definition of "penny stock." If the Common Shares
offered hereby are removed from listing on The Nasdaq SmallCap Market at any
time, the Company's Common Shares may become subject to rules that impose
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the Commission relating to the penny stock market. The broker-dealer must also
disclose the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
"penny stock" rules may restrict the ability of broker-dealers to sell the
Company's Common Shares and may affect the ability of purchasers in this
Offering to sell the Company's Common Shares in the secondary market as well as
the price at which such purchasers can sell any such Common Shares.
21. Immediate and Substantial Dilution; Equity Securities Sold
Previously at Below Offering Price. Upon completion of this Offering, assuming
no exercise of the Overallotment Option, and without giving effect to the
exercise of the Underwriter's Warrant, but giving retroactive effect to the
issuance of the 100,000 Common Shares to the bridge lender (the "Bridge Lender")
in the Bridge Financing in the gross amount of $100,000 (see "Bridge
Financing"), the pro forma net tangible book value per share of the Company's
Common Shares as of September 30, 1996 would have been $1.45. At the initial
public offering price of $5.00 per share, investors in this Offering will
experience an immediate dilution of approximately $3.55 or 71% in pro forma net
tangible book value per share, and existing investors will experience an
increase of approximately $3.05 per share. The present stockholders of the
Company have acquired their respective equity interest at costs substantially
below the public offering price. Accordingly, to the extent that the Company
incurs losses, the public investors will bear a disproportionate risk of such
losses. The exercise of certain options granted to Stephen F. Brandon, Thomas F.
Reed, Jean R. Sperry, Allan R. Avery and J. Leslie Glick, the executive officers
and directors of the Company, to purchase up to an aggregate of 517,500 Common
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<PAGE>
Shares will result in further dilution to the public investors. Messrs. Brandon,
Reed, Sperry and Avery, and Dr. Glick are subject to an agreement with the
Underwriter restricting the transferability of their Common Shares for a period
of two years from the date of this Prospectus without the consent of the
Underwriter. See "Dilution" and "Management - Executive Compensation".
22. No Dividends. The Company has never paid any dividends on its
Common Shares and does not intend to pay dividends on its Common Shares in the
foreseeable future. Any earnings which the Company may realize in the
foreseeable future are anticipated to be retained to finance the growth of the
Company. See "Dividend Policy".
23. Shares Eligible for Future Sale May Adversely Affect the Market.
All of the Company's outstanding Common Shares are "restricted securities" and,
in the future, may be sold in compliance with Rule 144 or pursuant to
registration under the Act (see discussion below with respect to the Bridge
Lenders). Rule 144 currently provides, in essence, that a person holding
"restricted securities" for a period of two years may sell an amount every three
months up to the greater of (a) one percent of the Company's issued and
outstanding securities of that class of securities or (b) the average weekly
volume of sales of such securities during the four calendar weeks preceding the
sale if there is adequate current public information available concerning the
Company. Additionally, non-affiliates (who have not been affiliates of the
Company for at least three months) may sell their "restricted securities" in
compliance with Rule 144 without volume limitations after they have held such
securities for a period of three years. An aggregate of 955,000 Common Shares
have been owned by the holders thereof (all affiliates of the Company) for more
than three years. However, an aggregate of 879,500 of such Common Shares are
subject to an agreement with the Underwriter restricting their transferability
for a period of two years without the Underwriter's consent. Additionally, the
holders of an aggregate of 122,000 Common Shares have entered into an agreement
with the Underwriter restricting the transferability of such Common Shares for a
period of six months.
The Company is registering for resale the 100,000 Common Shares
issued to the Bridge Lender. Such shares may be resold at any time following the
date of this Prospectus, subject to an agreement between the Bridge Lender and
the Underwriter restricting the transferability of such Common Shares for a
period of two years without the Underwriter's consent. Prospective investors
should be aware that the possibility of resales by the Selling Stockholder and
other stockholders of the Company may have a material depressive effect on the
market price of the Company's Common Shares in any market which may develop,
and, therefore, the ability of any investor to sell his Common Shares may be
dependent directly upon the number of Common Shares that are offered and sold.
See "Bridge Financing" and "Principal and Selling Stockholders".
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,300,000 Common
Shares offered hereby, are estimated to be $5,240,000 (after deducting
underwriting discounts of $650,000 and
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<PAGE>
other expenses of this Offering estimated to be $610,000, including the
Underwriter's non-accountable expense allowance in the amount of 3% of the gross
proceeds of the Offering, and a $100,000 financial consulting fee payable to the
Underwriter at the closing) (but not considering any exercise of the
Overallotment Option or the Underwriter's Warrant). The Company, based upon all
currently available information, intends to utilize such net proceeds
approximately as follows:
Approximate Approximate
Amount of Percentage
Net Proceeds of Net Proceeds
Marketing and advertising (1) $ 1,840,000 35.1%
Repayment of indebtedness (2) 400,000 7.7%
Hiring of additional personnel (3) 550,000 10.5%
Product acquisition (4) 500,000 9.5%
Research and development (5) 300,000 5.7%
Working capital (6) 1,650,000 31.5%
Total $ 5,240,000 100.0%
============ ==========
(1) The Company intends to utilize funds to create sales force literature, and
direct sales brochures and advertisements, hold educational symposia for
physicians, undertake medical, pharmacy and trade journal advertising and direct
mail campaigns, and supply product samples to physicians and pharmacies.
(2) To be used for the repayment of (i) a promissory note in the aggregate
principal amount of $100,000, issued in connection with the Company's Bridge
Financing transaction; and (ii) a certain loan made to the Company by Mr.
Brandon in January 1991, currently in the principal amount of $295,487, which is
due in January 1998, and which may be prepaid without penalty. Interest accrues
on the Bridge Financing promissory note at the rate of 10% per annum. Interest
accrues on Mr. Brandon's loan at the rate of 10% per annum and is paid monthly.
See "Bridge Financing" and "Certain Relationships and Related Transactions."
(3) Upon the closing of this Offering, the Company intends to hire additional
employees, including a national field sales manager, a controller and six to
twelve field sales representatives.
(4) Part of the Company's strategy to develop its business includes the
acquisition of unique products that meet important patient needs in the
underserved, neglected areas of medicine and healthcare (a strategy that the
Company pursued in the acquisition of Mag-Tab(R)SR and Unifiber(R)). It is
anticipated that, if less than the full amount or none of the proceeds allocated
for product acquisition is utilized for such purpose, the unused amount will be
reallocated to working capital.
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<PAGE>
At present, the Company has not identified any acquisition candidates, but it is
actively seeking such opportunities. See "Business - General".
(5) The Company intends to fund clinical studies of its products and research on
new formulations of Mag-Tab(R)SR, including a liquid, a unit dosage package, and
a combination magnesium supplement product containing other nutrients. See
"Business - Products - Mag- Tab(R)SR".
(6) To be used for general operating and overhead expenses, the manufacture of
product, and the payment of a $200,000 installment payment, due in March 1997,
in connection with the acquisition of the rights to Unifiber(R). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Business - General".
The amounts set forth above are estimates. Should a reapportionment
or redirection of funds be determined to be in the best interests of the
Company, the actual amount expended to finance any category of expenses may be
increased or decreased by the Company, at its discretion.
The Company believes that the proceeds of this Offering will enable
it to increase its annual revenues through the expansion of its business and
development of product lines. As a result, the Company believes that the net
proceeds of this Offering, together with anticipated increased revenues from
operations, will be sufficient to conduct the Company's operations for at least
18 months.
It is anticipated that, to the extent that the Company's expenditures
are less than projected and/or the proceeds of this Offering increase as a
result of the exercise by the Underwriter of its Overallotment Option, the
resulting balances will be retained and used for general working capital
purposes. Conversely, to the extent that such expenditures require the
utilization of funds in excess of the amounts anticipated, additional financing
may be sought from other sources, such as debt financing from financial
institutions. The Underwriting Agreement generally restricts the Company from
issuing additional equity or debt securities, in either public or private
offerings, or from obtaining debt financing, for a period of three years
following the date of this Prospectus without the prior written approval of the
Underwriter, which approval may not be unreasonably withheld. Even if the
Underwriter consents to the Company obtaining debt financing, there can be no
assurance that such additional financing, if available, will be on terms
commercially reasonable as acceptable to the Company. See "Risk Factors -
Dependence on Offering Proceeds; Possible Need for Additional Financing" and
"Risk Factors - Risks Attendant to Expansion".
Pending use of the proceeds, the funds will be invested in
certificates of deposit, high grade commercial paper and government securities,
or other low risk investments.
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DILUTION
All references herein to pro forma net tangible book value, pro forma
net tangible book value per Common Share, and the number of Common Shares
outstanding on a pro forma basis give retroactive effect to the December 1996
issuance of 100,000 Common Shares in the Bridge Financing and assume no exercise
of the Underwriter's Overallotment Option or the Underwriter's Warrant. See
"Bridge Financing" and "Underwriting." As of September 30, 1996, the Company had
an aggregate of 1,101,500 Common Shares outstanding on a pro forma basis and a
pro forma net tangible book value deficit of ($1,764,641), or ($1.60) per Common
Share. Pro forma net tangible book value (deficit) per share represents the
total amount of the Company's pro forma tangible assets, less the total amount
of its pro forma liabilities, divided by the total number of Common Shares
outstanding on a pro forma basis.
After giving effect to the sale of 1,300,000 Common Shares by the
Company at the Offering price of $5.00 per Common Share, with net proceeds of
$5,240,000, the pro forma net tangible book value of the Company as of September
30, 1996 would be $3,475,359, or $1.45 per Common Share. This amount represents
an immediate dilution (the difference between the price per Common Share to
purchasers in this Offering and the pro forma net tangible book value per Common
Share as of September 30, 1996, after giving effect to the issuance of the
1,300,000 Common Shares) of approximately $3.55 per Common Share to new
investors and an immediate increase (the difference between the pro forma net
tangible book value per Common Share as of September 30, 1996, after giving
effect to the issuance of the 1,300,000 Common Shares, and the net tangible book
value (deficit) per Common Share as of September 30, 1996, before giving effect
to the Offering) of approximately $3.05 per Common Share to the Company's
current stockholders. Such increase to the Company's current stockholders is
solely attributable to the cash price paid by purchasers of the Common Shares
offered for sale by the Company.
The following table illustrates the per share dilution as of September 30, 1996:
Public offering price per share(1)....................... $5.00
Pro forma net tangible book value (deficit) per share
before giving effect to the Offering................... (1.60)
----
Increase per share attributable to the sale of the
Common Shares offered hereby.......................... 3.05
----
Pro forma net tangible book value per share after the
Offering(2)........................................... 1.45
----
Dilution per share to purchasers in the Offering (3) .... $3.55
====
(1) Before deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
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<PAGE>
(2) After deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(3) Does not give effect to the exercise of the Underwriter's Overallotment
Option or the Underwriter's Warrant. See "Underwriting".
The following table sets forth the relative cost and ownership
percentage of the Common Shares offered hereby as compared to the Common Shares
outstanding immediately prior to the Offering.
<TABLE>
<CAPTION>
Common Shares Average
Acquired Total Consideration Price
---------------------- --------------------- ---------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Current Stockholders........ 1,101,500 46.0% $ 101,012 1.5% $ .09
Purchasers of Common
Shares in the Offering.. 1,300,000(1) 54.0% $6,500,000 98.5% $5.00
--------- ------ --------- ----
Total................... 2,401,500(1) 100.0% $6,601,012 100.0%
========= ====== ========== =======
</TABLE>
(1) Assumes no exercise of the Underwriter's Overallotment Option. See
"Underwriting".
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<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Company as of September 30, 1996 and as adjusted to give effect to the issuance
and sale of the 1,300,000 Common Shares offered by the Company at $5.00 per
Common Share, and the application of net proceeds of approximately $5,240,000
therefrom. This table should be read in conjunction with the financial
statements of the Company, including the notes thereto, appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
September 30, 1996
-------------------------------------------
Pro forma
Actual Pro Forma (1) As Adjusted(2)
------ ------------- --------------
<S> <C> <C> <C>
Short-Term Debt.................................... $ 542,952 $ 642,952 $ 542,952
========== ========== ==========
Long-Term Debt..................................... $1,410,444 $ 1,410,444 $1,110,444
Stockholders' Equity (Deficit):
Common Shares, $.00105 par value, 15,000,000
shares authorized, 1,001,500 shares issued and
outstanding (actual), 1,101,500 shares issued
and outstanding (pro forma)(1), and 2,401,500
shares issued and outstanding, (pro forma,
as adjusted)..................................... 1,052 1,157 2,522
Additional Paid-in Capital....................... 99,960 399,855 5,638,490
Accumulated Deficit (3).......................... (758,549) (1,058,549) (1,058,549)
Total Stockholders' Equity (Deficit)............... (657,537) (657,537) 4,582,463
Total Capitalization............................... 752,907 752,907 5,692,907
</TABLE>
(1) Gives retroactive effect to the Bridge Financing. (See "Bridge Financing")
(2) Reflects the issuance of the 1,300,000 Common Shares of the Company offered
hereby, and the anticipated application of the net proceeds of $5,240,000
therefrom, after deducting underwriting discounts and commissions and
estimated expenses of the Offering.
(3) Accumulated Deficit (pro forma) and Accumulated Deficit (pro forma,
as adjusted) include a deferred financing charge of $300,000
resulting from the Company's Bridge Financing transaction. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview".
DIVIDEND POLICY
Holders of the Company's Common Shares are entitled to dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. The Company has not declared or paid any dividends in the
past and does not currently anticipate declaring or paying any dividends in the
foreseeable future. The Company intends to retain earnings, if any, to finance
the development and expansion of its business. Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent upon
future earnings, if any, the Company's financial condition, capital
requirements, general business conditions, and other factors. Therefore, there
can be no assurance that any dividends will ever be paid.
BRIDGE FINANCING
In December 1996, the Company borrowed $100,000 from an unaffiliated
lender (the "Bridge Lender") in a financing in which the Underwriter acted as
the placement agent. In consideration for making the loan to the Company, the
Bridge Lender received (i) a $100,000 promissory note (the "Bridge Note") and
(ii) 100,000 Common Shares.
The Bridge Note bears interest at the rate of 10% per annum and is
due and payable upon the earlier of December 9, 1997 or (ii) the closing date of
the initial underwritten public offering of the Company's securities described
in this Prospectus. The Company intends to use a portion of the proceeds of this
Offering to repay the Bridge Lender. See "Use of Proceeds."
The Company entered into the Bridge Financing transaction because it
required additional financing to fund costs and expenses relating to this
Offering, and no other sources of financing were
21
<PAGE>
available to the Company at that time. As part of the Bridge Financing
transaction, the Company agreed to register the Common Shares issued to the
Bridge Lender by the Company for resale under the Act. Therefore, the
Registration Statement, of which this Prospectus forms a part, includes the
100,000 Common Shares held by the Bridge Lender. See "Principal and Selling
Stockholders" and "Underwriting."
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was formed in 1991 as a Texas corporation and
reincorporated in Delaware in October 1996. Since inception, the Company has
focused its business strategy on marketing, distributing, and acquiring
non-prescription pharmaceutical and nutraceutical products. During 1991, the
Company acquired its first product, Mag-Tab(R)SR, a patented sustained-release
magnesium supplement. Mag-Tab(R)SR was the Company's only product until November
1995, at which time the Company acquired and began selling its second product,
Unifiber(R), a dietary fiber supplement. See "Business".
The Company's revenues are generated from sales of its products to
wholesale drug and dietary supplement distributors, which, in turn, supply
retail pharmacies, direct retail pharmacy accounts, and international
distributors who purchase the Company's products for resale to patient or
consumer end users. Since 1991, annual revenues of the Company have grown from
approximately $130,000 to more than $606,000 for the year ended December 31,
1995. For 1995, approximately $516,000 of revenues was attributed to sales of
MagTab(R)SR, while the remainder was attributed to sales of Unifiber(R). For the
nine months ended September 30, 1996, the Company had revenues of $906,744,
approximately $465,000 of which was attributed to MagTab(R)SR and approximately
$434,000 of which was attributed to Unifiber(R).
The Company believes that it may be able to achieve greater sales
results with sufficient working capital to pursue its marketing strategies and
acquire other products. Historically, working capital had been made available by
stockholder and director loans, and bank loans, including, (i) a loan from
Stephen F. Brandon, Chief Executive Officer, President and Chairman of the Board
of the Company, originally in the principal amount of $500,000, of which
$295,487 remains outstanding, (ii) loans from certain stockholders and directors
in the aggregate principal amount of $112,500, (iii) a $250,000 credit facility
from one of the Company's banks, of which approximately $144,000 and $113,000
was due and outstanding at December 31, 1995 and September 30, 1996,
respectively, guaranteed by the U.S. Small Business Administration, the
repayment of which is secured by a pledge of all of the Common Shares held by
Mr. Brandon and (iv) a $300,000 unsecured loan by another bank. See "Use of
Proceeds" and "Certain Relationships and Related Transactions".
22
<PAGE>
In December 1996, the Company borrowed an aggregate of $100,000 from
the Bridge Lender in the Bridge Financing transaction. In exchange for making
the loan to the Company, the Bridge Lender received (i) a $100,000 Bridge Note
and (ii) 100,000 Common Shares. The Company has granted the Bridge Lender
certain "piggyback" registration rights with respect to such Common Shares. The
Bridge Note bears interest at the rate of 10% per annum. The Bridge Note is due
and payable upon the earlier of (i) December 9, 1997 or (ii) the closing of any
initial public offering of the Company's securities. See "Bridge Financing".
The fair value of the Bridge Lender's Common Shares at the date of
issuance, of approximately $300,000, is a non-cash charge which will be recorded
as a deferred financing cost and amortized over the earlier of (i) the one year
term of the Bridge Note or (ii) the period commencing upon the closing of the
Bridge Financing and ending upon the closing of this Offering, if the Offering
closes prior to the payment of the Note.
Results of Operations
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Net sales for the nine months ended September 30, 1996 were $906,744
compared to $389,700 for the nine months ended September 30, 1995, a 133%
increase. The increase in sales was attributable to (i) revenues generated by
the sale of Unifiber(R) product, the rights to which the Company acquired in
November 1995, and, therefore, such product did not generate revenues during the
first nine months of 1995, and (ii) increased demand for Mag-Tab(R)SR in certain
of the Company's geographic markets.
Gross profit for the nine months ended September 30, 1996 was
$564,382 compared to $303,587 for the nine months ended September 30, 1995, an
86% increase. Gross profit as a percentage of revenues for the nine months ended
September 30, 1996 decreased to approximately 62% as compared to approximately
78% for the nine months ended September 30, 1995. The decrease in profit margin
was due principally to the higher manufacturing cost of Unifiber(R) compared to
that of MagTab(R)SR. The Company believes, but cannot assure, that gross margins
and the cost of sales for Unifiber(R) can be improved by contracting with an
alternate third party contract manufacturer, whereby packaging and freight costs
can be reduced. The Company anticipates engaging another third party contract
manufacturer in the fourth quarter of 1996 or the first quarter of 1997.
Selling, general and administrative expenses were $563,612 for the
nine months ended September 30, 1996 compared to $211,682 for the nine months
ended September 31, 1995, a 166% increase. Of this increase, approximately
$90,000 resulted from increased marketing activities. Additionally, the Company
added an Executive Vice President, a national key account sales manager, a
contracts and bids manager, and a telemarketing manager, which accounted for
approximately $120,000 of new salary expense and approximately $63,000 resulted
from an
23
<PAGE>
increase in depreciation and amortization. The balance of the increase in
selling, general, and administrative expense was attributed to increased
operating and administrative expenses.
Interest expense for the nine months ended September 30, 1996 was
$144,042 compared to $55,056 for the nine months ended September 30, 1995, a
162% increase. Of this increase, $84,804 was imputed interest relating to the
Unifiber(R) acquisition.
Overall, the Company had net operating income of $770 for the nine
months ended September 30, 1996 compared to net operating income of $91,905 for
the nine months ended September 30, 1995, a 99% decrease. The Company
experienced a net loss of $140,588 for the nine months ended September 30, 1996
compared to a net income of $37,767 for the nine months ended September 30,
1995. The primary reason for this difference was the significant increase in
amortization expense relating to Unifiber(R) and the imputed interest attributed
to the Unifiber(R) acquisition.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales for the year ended December 31, 1995 were $606,268 compared
to $415,330 for the year ended December 31, 1994, a 46% increase. The increase
in revenues resulted from an increased demand for Mag-Tab(R)SR and the November
and December 1995 revenues for Unifiber(R).
Gross profit for the year ended December 31, 1995 was $423,122
compared to $279,858 for the year ended December 31, 1994, a 51% increase. The
increase was primarily due to the additional revenues from the sale of
Unifiber(R) product. Gross profit as a percentage of revenues for the year ended
December 31, 1995 compared to the year ended December 31, 1994 increased to
approximately 70% from approximately 67%. This net increase was due to inclusion
of the settlement of a lawsuit, offset by smaller gross margins on Unifiber(R)
compared to Mag-Tab(R)SR. Additionally, cost of sales increased marginally due
to the increased freight costs associated with the shipping and receiving of
Unifiber(R).
Selling, general and administrative expenses for the year ended
December 31, 1995 was $334,941 compared to $275,350 in the year ended December
31, 1994, a 22% increase. This increase reflects increased salaries and
marketing costs incurred by the Company. The increased expenses include the
salary of a new contracts and bids administrator as well as acquisition costs
related to new management information software programs needed to support
Unifiber(R) and Mag- Tab(R)SR contract sales and chargebacks. The capability to
handle contract sales and rebates electronically positions the Company to
compete favorably with other companies that serve the large number of existing
GPOs and the expanding managed healthcare marketplace.
Interest expense for the year ended December 31, 1995 was $91,800
compared to $67,274 for the year ended December 31, 1994, a 36% increase. The
increase was due principally to imputed interest related to the Unifiber(R)
acquisition.
24
<PAGE>
The Company's net loss for the year ended December 31, 1995 was
$1,003, compared to a net loss for the year ended December 31, 1994 of $62,340.
The reduction in loss came primarily from the addition of Unifiber(R) revenues
and from other income which was derived from the settlement of a litigation.
Liquidity and Capital Resources
At September 30, 1996, the Company had a working capital deficit of
$368,948, as compared to a working capital deficit of $67,504 at December 31,
1995. The increase in the working capital deficit primarily resulted from the
reclassification of a $200,000 installment payment due in March 1997 in
connection with the acquisition of the rights to Unifiber(R), from a long-term
liability to a current liability and losses in the nine month period ended
September 30, 1996. The Company intends to pay the March 1997 $200,000
Unifiber(R) installment payment out of the working capital portion of the net
proceeds of this Offering. Additionally, the Company anticipates that it will
pay the remaining annual Unifiber(R) installment payments, which increase in
$50,000 increments each year until 2001, from revenues, the Company's available
credit facility from a bank, and possibly funds from additional debt or equity
financings, if required and if available and consented to by the Underwriter.
However, given the length of the remaining payment period, the Company cannot
assure that the above sources will be sufficient or available to meet the
installment payments or that circumstances which are currently unforeseeable
will not adversely impact the Company's ability to make such installment
payments. See "Use of Proceeds" and "Underwriting".
Due to increased sales during the nine month period ended September
30, 1996, the Company's accounts receivable as of September 30, 1996 was
$217,188, compared to $84,656 as of December 31, 1995, a 157% increase.
During the nine months ended September 30, 1996, a nominal amount of
net cash was provided by operating activities. Such result was due to a decrease
in inventory of $48,673, an increase in accounts payable and accrued expenses of
$47,198 and imputed interest relating to the acquisition of Unifiber(R) of
$84,804, and depreciation and amortization expenses of $88,044, offset by the
Company's $140,588 loss for such period and an increase in accounts receivable
of $132,532. There were no significant differences in cash generated by
operating activities in the nine month periods ended September 30, 1996 and
1995.
No significant investing activities occurred in the nine month
periods ending September 30, 1996 and September 30, 1995.
There was an increase in cash used for financing activities in the
nine month period ending September 30, 1996 of $133,227 as compared to the nine
month period ending September 30, 1995. This was primarily due to the payment of
notes payable - stockholders of $57,378, and payment of deferred offering costs
of $47,364 in the nine month period ending September 30, 1996 as compared to
cash received from the issuance of common stock of $45,000 less the repayment of
stockholders' loan of $14,300 in the nine month period ending September 30,
1995. The cash used for financing
25
<PAGE>
activities of $134,965 for the nine month period ending September 30, 1996 was
the primary reason for the decrease in cash of $135,535 for that period. For the
nine month period ended September 30, 1995 cash increased by a nominal amount.
In December 1996, the Company received $100,000 in the Bridge
Financing transaction. Such proceeds are being used to fund the costs and
expenses of this Offering. See "Bridge Financing" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Overview".
At present, the Company's sales and marketing efforts are focused on
expanding the promotion of its existing products to physicians and other
healthcare professionals. The Company believes that the Company's existing
United States markets for its products have the potential for substantial
expansion. Additionally, the Company intends to utilize a portion of the
proceeds from this Offering to expand the Company's product lines, which the
Company believes will result in increased product sales and the ability to
compete more aggressively in the niche market segments of the pharmaceutical and
neutraceutical industries. The Company, however, cannot assure that it will
identify any products which meet the Company's acquisition criteria in the near
future, or at all. Additionally, even if such a product is identified, there can
be no assurance that the Company will be able to acquire such product. See "Use
of Proceeds".
The Company believes that it has a diverse and growing market for its
products. While the Company is dependent on third party contract manufacturers
to supply its products, it believes it has developed relationships with
alternative manufacturers who could supply finished product should the Company
have this need. At the present the Company's sales are geographically dispersed
across the United States.
The Company believes that the net proceeds from the Offering,
together with anticipated revenues from operations, should be sufficient to fund
operations for at least 18 months. Management intends to utilize approximately
35% (or $1,840,000) and approximately 10% (or $500,000) of the net proceeds of
the Offering to expand its business through the marketing and advertising of its
products, and for the acquisition of new products, respectively. In addition,
part of the net proceeds will be used to repay approximately $300,000 of related
party debt, and the $100,000 Bridge Financing. Furthermore, the Company will use
part of the net proceeds to pay the March 1997 $200,000 installment payment in
connection with the acquisition of the rights to Unifiber(R). On a long-term
basis, the Company believes that the growth of sales of its product lines will
ultimately result in revenues sufficient to fund the Company's operations. To
the extent that cash flow is not sufficient to fund operations, it would be
necessary for the Company to seek external debt or equity financing or scale
back operations. Management cannot ensure that financing would be obtainable on
terms favorable to the Company, or at all. See "Risk Factors - Dependence on
Offering Proceeds; Possible Need for Additional Financing" and "Use of
Proceeds".
The Company's independent certified accountants issued a modified
going concern opinion with regard to the December 31, 1995 financial statements
based upon an accumulated deficit of
26
<PAGE>
$617,961 and a working capital deficit of $67,504 at December 31, 1995. Such
financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and
commitments (including, without limitation, the Company's lease for its premises
which requires minimum rental payments aggregating $67,099 in 1997 and 1998, and
payments under employment agreements which the Company intends to enter into,
which will require minimum payments aggregating $221,000 over a three year
period, commencing on the closing date of the Offering) in the normal course of
business. The continuation of the Company as a going concern is dependant upon
its ability to generate sufficient cash from operations and financing
activities. The Company's working capital deficit raises substantial doubt about
the entity's ability to continue as a going concern. The Company's viable plans
to address the foregoing included and include the following:
1. The generation of an additional $100,000 in gross proceeds through
the Bridge Financing transaction in December 1996. See "Bridge Financing".
2. The closing of this Offering with anticipated net proceeds of
approximately $5,240,000, a portion of which will be used to satisfy certain
outstanding obligations of the Company. See "Use of Proceeds".
3. An increase in revenues by substantially increasing its marketing
activities, both in and outside the United States. See "Business-Sales and
Marketing".
The Company believes that the increase in capital obtained in the
Bridge Financing transaction and this Offering will enhance the Company's
potential for a transition to profitable operations in the future.
The Company believes that these plans can be effectively implemented
in the next twelve months. There can be no assurances, however, that the Company
will be successful in these endeavors. The Company's ability to continue as a
going concern is dependent on the implementation and success of these plans. The
financial statements do not include any adjustments in the event the Company is
unable to continue as a going concern.
Impact of Inflation
Inflation has not been a major factor in the Company's business.
However, there can be no assurance that this will continue.
27
<PAGE>
BUSINESS
General
The Company manufactures through third party contractors, and markets
and distributes, non-prescription pharmaceutical and nutraceutical dietary
supplement products. The Company seeks to exploit product niches that have
generally been overlooked or neglected by the major drug and dietary supplement
companies because of the relatively small perceived size of the market for such
products. The Company's current products are a patented, state-of-the-art,
sustained release magnesium supplement marketed under the name Mag-Tab(R)SR, and
a dietary fiber supplement marketed as Unifiber(R).
In 1991, the Company acquired all rights to Mag-Tab(R)SR, which is
manufactured for the Company by Schering Plough Corporation ("Schering"). See
"Risk Factors - No Manufacturing Capability or Experience; Dependence on Others"
and "Business - Manufacturing".
In November 1995, the Company acquired all rights to Unifiber(R) from
Dow Hickam Pharmaceuticals Inc. ("Dow Hickam"), a subsidiary of Mylan
Pharmaceuticals Inc. Pursuant to the acquisition agreement (the "Dow Hickam
Agreement"), Dow Hickam has agreed to manufacture Unifiber(R) for the Company
through December 31, 1996 in sufficient quantity to meet the Company's projected
sales through 1997. During the fourth quarter of 1996 or the first quarter of
1997, the Company anticipates that it will engage another third party contractor
to manufacture Unifiber(R). The Company is currently investigating such
manufacturing options and believes, but cannot assure, there will be no
difficulty engaging another contract manufacturer. See "Risk Factors - No
Manufacturing Capability or Experience; Dependence on Others" and "Business
Manufacturing".
The Company markets Mag-Tab(R)SR and Unifiber nationally to virtually
all of the drug wholesalers in the United States, which, in turn, supply retail
pharmacies, state and federal institutions, and group and managed care
purchasing organizations ("GPOs") acting on behalf of hospitals, extended care
facilities and nursing homes. See "Business - Sales and Marketing".
In addition to manufacturing and selling Mag-Tab(R)SR and
Unifiber(R), the Company intends to explore opportunities to add, through
acquisition or licensing, other unique products that meet important needs in the
underserved, neglected areas of medicine and healthcare, or that do not fit the
strategic plans of the major drug and dietary supplement companies. At present,
the Company has not identified any acquisition candidates but it is actively
seeking such opportunities. See "Use of Proceeds".
28
<PAGE>
Industry
- --------
Magnesium
Numerous scientific articles, published in medical journals by
leading academic physicians, have clearly shown that magnesium is an important
metabolic electrolyte, and that magnesium depletion accompanies many medical
disorders. Mag-Tab(R)SR and other magnesium formulations are administered in
pharmacologic or physiologic doses because magnesium replacement is critical to
preventing complications from magnesium deficiency associated with certain
serious medical conditions.
Magnesium, the second most abundant intracellular cation, is also one
of the most crucial, being an essential cofactor in more than 300 enzymatic
reactions in the human body. Neuromuscular transmission and protein metabolism
also depend on proper magnesium balance. Data show, for example, that up to 10%
percent of all hospitalized persons and 50% of those in critical care units are
magnesium deficient. The scope of the problem is underscored by a study,
reported in the Journal of the American Medical Association (Vol. 263, p. 3063,
1990). The investigators measured magnesium levels from more than 1,000 blood
serum specimens that had been provided for electrolyte determinations. Almost
half of these specimens demonstrated hypomagnesemia (low- serum magnesium), and
yet magnesium measurements were specifically requested on only 10% of the
specimens. In the Company's opinion, those findings probably underestimated the
true incidence of magnesium deficiency as serum magnesium levels do not
correlate well with magnesium tissue stores. The body stores about 24 grams of
magnesium, but less than 1% of that is in the serum. Consequently, while a low
serum magnesium level always indicates a severe deficiency, a normal level does
not rule out inadequate body stores. Conversely, high magnesium serum levels are
rare and occur only in the presence of severe kidney disease. Many factors
contribute to hypomagnesemia or low magnesium body stores. Anything that impairs
magnesium absorption through the small bowel or promotes excessive loss through
the kidney, including diarrhea, malabsorption syndrome, diabetes, renal
disorders, drugs (such as amino glycosides), chemotherapy agents, diuretics used
for hypertension, and alcohol, can lead to magnesium deficiency.
In 1992, the National Council on Magnesium and Cardiovascular Disease
stated that an increased oral intake of magnesium should be seriously considered
to counter magnesium depletion associated with the following diseases and
conditions:
Cardiovascular
- Congestive heart failure, ventricular arrhythmias,
essential hypertension, and diuretic therapy with or
without associated hypokalemia (low potassium).
Co-Morbid Conditions
- Diabetes;
- Alcohol intake;
29
<PAGE>
- Weight loss, especially liquid preparations;
- Diarrhea, transient or associated with chronic inflammatory
bowel disease.
Other published data have indicated that oral magnesium
supplementation may be effective to counter magnesium depletion associated with
PMS symptoms, migraine headaches, chronic fatigue syndrome, dementias (such as
Alzheimer's disease) and osteoporosis.
The Company's market research shows that approximately 46,000
physicians are responsible for 90% or more of ethical uses for oral magnesium
products and that those physicians are primarily family practitioners,
cardiologists, internists, neurologists, obstetricians/gynecologists and
endocrinologists. The Company believes that most primary care physicians, such
as family practice physicians, are unaware of the causes, frequency, and serious
consequences of magnesium deficiency. However, recent clinical studies have
shown that magnesium given intravenously, after myocardial infarction, improves
mortality rates. Moreover, recent published data have given the average
physician a much greater awareness of magnesium deficiency.
The current United States oral magnesium market is under $10 million,
but independent market research indicates that the total potential for current
future applications of magnesium is estimated to exceed $1 billion. This
estimated potential is based on physician surveys of intent to recommend an oral
magnesium supplement for certain conditions, as well as target population counts
of certain conditions where published scientific data links magnesium deficiency
as a complicating factor.
A recent Gallup poll revealed that 74% of the United States
population is magnesium deficient. Published articles indicate that the
conditions discussed above are often accompanied by magnesium deficiency. Based
on the target population counts of these conditions, there are at least 20
million people in the United States who could benefit from oral magnesium
supplementation from a product such as Mag-Tab(R)SR. In addition to such target
population potential, healthcare publications also discuss the potential value
of oral magnesium supplementation in other situations, thereby indicating that
the total United States market potential for magnesium products may actually
exceed 50 million people. In support of the prospects for a rapidly growing
magnesium market in the United States, a comparison may be made to the European
market, which represents 3% less than the United States. in terms of the world
healthcare dollar market (i.e. 28% vs 31%). However, consistent with its early
adoption of low cost nutritional usage, oral magnesium products in Europe are
approaching $500 million in sales. In France alone, with a population of only
20% of that in the United States, oral magnesium product sales exceeded $110
million in 1994.
Notwithstanding all the publicity that magnesium is receiving, the
Company believes it may still take several years and significant financial
resources to fully educate the majority of physicians on why and when to
routinely recommend a magnesium supplement. Part of the Company's marketing
strategy is to facilitate physician education and awareness of the potential of
magnesium products in order to achieve Mag-Tab(R)SR's full market potential.
30
<PAGE>
Fiber
Dietary fiber refers to certain plant foods not digested in the human
small intestine. This includes relatively indigestible carbohydrates and
carbohydrate-like components of food, such as cellulose, lignin, hemicelluloses,
pentosans, gums and pectins.
All fibers can be grouped into two broad categories: water-insoluble
fibers, which include cellulose, lignin and many hemicelluloses; and soluble
fibers, which include pectin, gums, certain hemicelluloses and storage
polysaccharides. Unifiber(R) is composed of 75% powdered cellulose combined with
corn syrup solids and xanthan gum.
Physiological effects of dietary fibers differ in the small intestine
and colon. For example, fibers such as guar delay absorption and slow transit in
the small intestine, but are rapidly degraded by colonic bacteria and have a
relatively minor influence on colonic function. In contrast, cellulose and bran
(which is high in insoluble fiber) have little physiological effect on the small
intestine and undergo little degradation by colonic bacteria; however, both
accelerate colonic transit and increase stool bulk and weight.
In recent years, much has been written about the importance of
dietary fiber in a healthy diet and its recognized role in healthy bowel habits,
its possible benefits in a variety of conditions, including diverticulosis,
irritable bowel syndrome and glycemic responses in diabetics, elevated lipids
often associated with cardiovascular disease, and its possible protective
effects against colon cancer. Much of the impetus for study of dietary fiber in
these conditions (particularly colon cancer) has resulted from earlier
publications of epidemiological studies in diverse cultures and populations
consuming high-fiber diets. However, fiber is not the only variable to be taken
into account in establishing correlations. For example, the high fiber content
in these cultures and populations are also typically low in fat. Additionally,
significant differences in environment cannot be overlooked.
Recent animal and clinical pharmacology studies have attempted to
determine the role of high-fiber foods and certain fiber entities (including
cellulose) in the prophylaxis and/or treatment of specific diseases under more
controlled conditions. The data are not always consistent, however, and whether
or not a dietary supplement such as Unifiber(R), or any other dietary fiber, has
any meaningful effects to promote healthy bowel functions in these situations
has yet to be ascertained.
Although, as indicated above, there are certain as yet unresolved
questions regarding dietary fiber in disease therapy, there now appears to be no
question that fiber is considered an important part of the diet. In 1986, the
National Institutes of Health recommended that Americans increase their daily
fiber intake from about 11 grams per day to between 20 and 30 grams per day. The
preferred approach of healthcare professionals to accomplish this is by
increasing the intake of fiber- rich foods as part of a balanced diet. However,
it is also recognized that certain individuals cannot, or will not, consume
adequate amounts of fiber due to such reasons as poor dentition or palatability.
This situation is common among elderly and institutionalized individuals, for
example, which is significant in that these populations tend to be predisposed
to constipation. Fiber supplementation
31
<PAGE>
is appropriate in these individuals, and the Company believes that the use of
Unifiber(R) as a dietary fiber supplement is well suited for such individuals
due to its flexibility in mixing with foods and its taste properties. Fiber
supplementation programs with Unifiber(R) in nursing homes support this position
and have been particularly helpful in promoting healthy bowel function without
laxatives.
The $250 million market for bulk fiber products has grown, and is
anticipated to continue to grow, for the foreseeable future at the approximate
rate of 15-20% per year. See "Business Competition". These dietary fiber
products are normally used to treat or prevent constipation by promoting normal
bowel function. The target populations that the Company believes would benefit
from daily fiber supplementation include:
- Individuals undergoing kidney dialysis;
- Institutionalized individuals who are in state hospitals or
extended care facilities; o Individuals receiving enteral
naso-gastric feedings; o Pregnant women needing a pure fiber
supplement without aspartame as a sweetener; o Individuals with bowel
function problems associated with Diabetes.
Products
- --------
Mag-Tab(R)SR
Mag-Tab(R)SR is currently the only patented, true sustained release
magnesium supplement product on the market. The patent for Mag-Tab(R)SR is for
the formula composition and the manufacturing process that enables magnesium
L-lactate dihydrate to be compressed into a sustained release tablet formulation
containing 3-10 mEq of elemental magnesium lactate. The benefit of this patented
formulation is that its delivery mechanism releases a highly absorbable
magnesium lactate to the distal intestine, ensuring 10-12 hours of prolonged
absorption at any given pH level, without exceeding the renal threshold and
without the gastrointestinal side effects that are often seen with many
competitive brands. Mag-Tab(R)SR administration maintains higher serum levels
over a 12 hour period than its major competitor, SlowMag(R). Mag-Tab(R)SR's
patent expires in March 2008. See "Business - Competition" and "Business -
Patents and Proprietary Rights."
Mag-Tab(R)SR is currently marketed in caplet form packaged in 60
caplet and 100 caplet sizes. The Company also plans to market other dosage forms
of Mag-Tab(R)SR in the future, such as a liquid, a unit dosage and a combination
magnesium supplement product containing other nutrients.
Unifiber(R)
Unifiber(R) (comprised of 75% powdered cellulose) is a unique bulk
bowel management product which offers measurable differential advantages to its
users. Unifiber(R) is a non-patented proprietary dietary fiber supplement with
significant advantages over competitive brands. As compared to all other bulk
fiber supplements, Unifiber(R) requires no forced fluid intake, is electrolyte-
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<PAGE>
free, contains no aspartame, and is an ultrafine, tasteless, non-gelling powder
that mixes with virtually any soft food or liquid substance. See "Business -
Competition."
The Company plans to conduct a number of open label trials with key
physician groups, certified renal dieticians, and other decision makers of
long-term care facilities to promote Unifiber(R) acceptance with the target
groups discussed under "Business - Industry - Fiber" . No such trials have been
undertaken to date and the Company cannot predict the results of such trials.
Sales and Marketing
- -------------------
The Company uses a very selective and targeted approach to market its
products. Its overall strategy involves several steps, including securing
meaningful retail distribution and creating a loyal core base of physicians and
dietary specialists to recommend the use of the Company's products. In
implementing its strategy, the Company uses multiple promotional techniques to,
among others, 21,000 targeted physicians, including targeted direct mail, field
activity using its own or contracted sales forces, attendance at medical
conventions and meetings, developing product advocate programs, medical and
trade journal advertising, and telemarketing in the most lucrative metropolitan
and rural markets.
To create physician and healthcare professional awareness of
Mag-Tab(R)SR's benefits, the Company's marketing materials have focused
primarily on (i) education regarding magnesium deficiency, and (ii) emphasis on
the features and benefits of Mag-Tab(R)SR's unique sustained release formulation
as compared to competitive products.
The majority of bulk fiber product sales are accounted for by
physician recommendation and consumer purchases from retail pharmacies. The
Company's marketing strategy with Unifiber(R) is to focus on certain target
populations and market segments where fiber supplementation is important and
where the product's functions show it to be the product of choice. This
opportunity is with certain subsets of persons listed above in "Business -
Industry - Fiber", whose daily fiber supplementation requires special
consideration.
The Company employs a wholesale oriented policy for the supply of its
products. This practice results in greater profitability for the Company and
creates cooperation and goodwill with the wholesale drug and dietary supplement
distributors. The Company also offers incentive programs to its wholesalers
wherein the Company provides discounts in return for product promotion by the
wholesalers.
Currently, virtually all of the drug and dietary supplement
wholesalers in the United States stock two sizes of Mag-Tab(R)SR (60 and 100
caplet packages) and three sizes of Unifiber(R) (5 ounce, 9 ounce and 16 ounce
powdered cellulose packages) for the benefit of their retail and hospital
pharmacy customers. It is estimated that the current national retail
distribution has reached approximately 20% of all the retail outlets for
Mag-Tab(R)SR and slightly less for Unifiber(R). The Company is targeting the
proper corporate decision makers at major wholesale and chain pharmacy
33
<PAGE>
headquarters and is developing unique marketing programs for these customers
with a view to improving overall distribution in the near future.
To complement these activities, direct mail promotional materials are
being mailed to approximately 65,000 targeted independent and chain pharmacists
in key metropolitan markets across the United States. Trade journal advertising
is also planned to help reinforce the distribution and physician marketing
programs. The Company believes that these tactics will improve Mag- Tab(R)SR and
Unifiber(R) availability in retail outlets and increase demand for the products.
However, based on results of operations to date and the limited time that the
Company has been implementing its marketing strategy, the Company cannot predict
the effect of its marketing strategies or whether they will be successful at
all.
The Company's direct customers for both Mag-Tab(R)SR and Unifiber(R)
comprise virtually all of the drug and dietary supplement wholesalers in the
United States, and GPOs, and state and federal institutions, such as state and
county supported hospitals that are affiliated with medical schools and the
Veterans Administration hospital system. The following drug and dietary
supplement wholesalers, which supply retail and hospital pharmacies nationwide,
account for the following percentage of annual revenues of the Company for the
fiscal year ended December 31, 1995 and the nine months ended September 30,
1996, respectively: McKesson Drug Company, 22% and 19%; Cardinal Health Company,
14% and 13%; Bergen Brunswig, 12% and 14%; and Amerisource Corporation, 12% and
13%. The Company believes that its relationship with these customers is
excellent. However, the loss of any one of these customers may have a
substantial adverse effect on the financial condition of the Company. See "Risk
Factors - Dependence on Major Customers".
GPOs and institutional and government accounts are growing markets
for the sale of Mag- Tab(R)SR and Unifiber(R). The Company utilizes direct
marketing strategies to help penetrate these markets by creating specifications
for the Company's products. Such strategies include providing bids to GPOs and
government institutions; encouraging selection of Company products due to cost
effectiveness and other previously discussed advantages over the competitive
products and therapies; and participating in state Medicaid reimbursement
programs.
In addition to the above programs and strategies, the Company intends
to initiate a press and other media release program through its advertising
agency to create product awareness and corporate image. In the past, these
tactics have been effective in generating new demand and creating opportunities
to evaluate new products, services and possible marketing/licensing agreements;
however, results of this program with GPOs and institutional and government
accounts cannot be predicted.
Within the United States, the Company distributes its products from
its warehouse in Roanoke, Texas (see "Business - Property") via UPS, Federal
Express, common carriers (both land and sea) or United States Postal Service.
The Company has virtually no backlog since orders are generally shipped out the
same day as they are received.
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<PAGE>
Foreign Distribution
- --------------------
The Company has a distribution agreement with Laboratorios Rider S.A.
("Laboratorios") of Santiago, Chile, pursuant to which Laboratorios is granted
the exclusive right to distribute and market the Company's products in Chile and
Argentina (the "Laboratorios Agreement"). The initial term of the Laboratorios
Agreement expires in November 1997 and is automatically renewable for successive
three year periods unless terminated by either party at least 180 days prior to
the termination of the initial or any renewal term. Based on the Company's
current relationship with Laboratorios, the Company anticipates, but cannot
assure, that the Laboratorios Agreement will be renewed at the end of the
initial term.
In April 1996, the Company entered into an exclusive marketing and
distribution agreement with Corporation for Russian American Enterprise ("CRAE")
pursuant to which CRAE has the right to exclusively market and distribute the
Company's products in Russia and the other republics comprising the former
Soviet Union (the "CRAE Agreement"). The 24-month term of the CRAE Agreement
commences on the first date that either of the Company's products is
commercially sold in CRAE's territory, which sales will be subject to prior
approval from the jurisdictions in its territory. The Company anticipates that
such approval will not be obtained in the foreseeable future, and the Company
does not anticipate that any material revenues will develop as a result of the
CRAE Agreement.
To date, revenues from foreign sales have been nominal.
Manufacturing
- -------------
The Company does not currently manufacture its own products and has
no current plans to do so. It plans to continue to avoid this capital expense by
utilizing third party contract manufacturing in FDA-approved facilities.
Mag-Tab(R)SR
Mag-Tab(R)SR is manufactured and packaged by Schering, a major
FDA-regulated pharmaceutical company, via a long-term exclusive manufacturing
agreement (the "Schering Agreement"). The initial term of the Schering Agreement
expires in July 1997 and is automatically renewable for successive two year
terms thereafter unless written notice of termination is given by either party
at least one year prior to the expiration of the initial or successive term.
Since neither party has given any notice of termination, the expiration date of
the Schering Agreement has been extended to July 1999.
The Schering Agreement provides for the manufacture of Mag-Tab(R)SR
in compliance with FDA Good Manufacturing Practices standards ("GMPs") required
for the manufacture of FDA- regulated drugs, even though Mag-Tab(R)SR, as a
dietary supplement, currently need not comply with such drug product GMPs.
35
<PAGE>
The Company believes that its relationship with Schering is excellent
and anticipates that its relationship will continue for the foreseeable future.
In the event the Schering Agreement is terminated or expires and the Company
does not renew its relationship with Schering, the Company believes, but cannot
assure, that it will be able to engage another third party to manufacture Mag-
Tab(R)SR in compliance with GMPs on terms comparable to those set forth in the
Schering Agreement. See "Risk Factors - No Manufacturing Capability or
Experience; Dependence on Others".
Unifiber(R)
The terms of the Company's acquisition of Unifiber(R) from Dow Hickam
provide for Dow Hickam to manufacture and package enough Unifiber(R) by December
31, 1996 to handle all projected sales by the Company through 1997. The Company
anticipates, but cannot assure, that it will contract with at least one or
several other potential contract manufacturers for Unifiber(R) during the fourth
quarter of 1996 or first quarter of 1997 to manufacture Unifiber(R) on
comparable terms with Dow Hickam in compliance with FDA food GMPs at current
manufacturing standards. Dow Hickam has agreed not to compete with the Company
with respect to Unifiber(R) anywhere in the world until 2002. See "Risk Factors
- - No Manufacturing Capability or Experience; Dependence on Others".
Although the Company's policy is to maintain an approximately three
month supply of each of Mag-Tab(R)SR and Unifiber(R), failure to engage or
delays in engaging a manufacturer for either product could result in the Company
being unable to fill orders on a timely basis, or at all, resulting in
cancellation of orders, reduced sales, loss of customers, loss of goodwill, and
other events which could have a material adverse effect on the Company.
Additionally, if the Company is unable to engage a manufacturer on terms at
least as favorable as the Schering Agreement or the arrangement with Dow Hickam,
the costs of goods sold may be raised, thereby reducing profit margins. See
"Risk Factors - No Manufacturing Capability or Experience; Dependence on
Others."
Competition
- -----------
The Company competes in both the magnesium supplement market and
dietary fiber market with companies that have substantially greater resources,
including capital, research and development resources, and manufacturing and
marketing capabilities with respect to well established products. Accordingly,
there can be no assurance that the Company will be able to compete successfully
with respect to either of its products.
Mag-Tab(R)SR
Because the magnesium market is presently an emerging dietary
supplement (i.e. under $10 million), there are few current competitors. The
market leader is G.D. Searle ("Searle"), which is estimated to possess more than
a 70% market share with its product, SlowMag(R). SlowMag(R) is an enteric coated
dosage form (not sustained-release) of magnesium chloride. Searle invested
several
36
<PAGE>
million dollars towards physician and pharmacy promotion when it launched this
product in 1989 and 1990 and, as a result, Searle has been a major factor in the
magnesium supplement market. SlowMag(R) is the only dietary supplement product
that Searle has in its product line. Even though Searle has greatly reduced its
promotional efforts with respect to SlowMag(R) in recent years, the product has
grown over 30% in unit volume since 1992.
The other major competitor of the Company in the magnesium supplement
market is Blaine Co., Inc. ("Blaine") whose product's trade name is MagOx(R)
(magnesium oxide tablets). Blaine, a company with no field sales force, has
gained significant market share from SlowMag(R) in recent years. MagOx's(R)
market share is currently approximately 15%, a position the Company believes
Blaine has accomplished through steady direct mail promotion to targeted
physicians and specialists.
Mag-Tab(R)SR's patented sustained release formulation provides
significant advantages over its major competitors, MagOx(R) and SlowMag(R).
Compared to MagOx(R), (i) Mag-Tab(R)SR's formula (magnesium L-lactate dihydrate)
is 600% more soluble at any given pH level, thus assuring better
bioavailability, and (ii) published data suggest that the insolubility of
magnesium oxide tablets (MagOx(R)) causes it to be poorly absorbed, thereby
leading to a high potential for gastrointestinal side effects such as diarrhea.
Compared to SlowMag(R), Mag-Tab(R)SR provides 33% more elemental magnesium per
dose, thus providing individuals with a dosage regimen requiring fewer tablets
at less daily cost. In addition, Mag-Tab(R)SR's 12-hour sustained release
formulation allows patients to take their dose twice daily, resulting in better
overall patient compliance.
Unifiber(R)
Currently, Proctor and Gamble is the leader in the dietary fiber
market, as its Metamucil(R) (psyllium) product line has an approximately 70%
market share. Metamucil(R) is promoted primarily via consumer advertising and
limited professional sampling. The Metamucil(R) product line is offered in a
wide range of flavors and sizes with each product containing almost a totally
different set of ingredients in the formulation. The Company believes that this
diversity, along with the numerous line extensions on the retail shelf, makes it
difficult for health care professionals and patients to determine the right
formula for their specific needs, as the various formulae may have different
effects on consumers who are pregnant or have renal disease or diabetes.
Other competitors in the dietary fiber market include SmithKline
Beecham with Citrucel(R) (methyl cellulose) (with approximately a 10% market
share), and several other companies that also have a psyllium product, such as
Konsyl(R) (with approximately a 5% market share). Citrucel(R)'s initial
promotional campaign focused on the non-gelling, better tasting, "low gas"
features of the product. After establishing an ethical base with the
gastroenterologist, Citrucel(R) marketing has shifted more towards the consumer.
Konsyl(R), owned by Konsyl Pharmaceuticals, Inc., is an older psyllium product
similar to Metamucil(R), whose initial base of business was established via
ethical marketing to colo-rectal surgeons and obstetrician/gynecologists.
Currently, Konsyl(R) continues to market to these physician groups but has also
initiated consumer promotion.
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<PAGE>
Compared to the aforementioned competitive products, the Company
believes that Unifiber(R) offers a number of unique advantages, including the
following: (i) there is no requirement for additional forced fluid intake, and
(ii) Unifiber(R) is electrolyte-free, contains no aspartame and is an ultrafine,
tasteless, non-gelling powder that mixes with virtually any soft food or liquid
substance. These characteristics are attractive to renal dieticians, home health
care professionals, diabetic educators, long-term care providers and consumers.
The Company's competitive position in both the magnesium and fiber
markets also depends on its ability to attract and retain qualified personnel,
obtain and defend patent and other intellectual property protection, or
otherwise develop or acquire proprietary products or processes, and secure
sufficient capital resources to manufacture, market, distribute and sell its
products. See "Risk Factors - Uncertainty of Protection of Patents and
Proprietary Rights" and "Risk Factors Dependence on Key Management and Qualified
Personnel".
Patents and Proprietary Rights
- ------------------------------
The Company owns a patent on Mag-Tab(R)SR in the United States, which
expires in March 2008. A patent application with respect to Mag-Tab(R)SR is
currently pending in Canada. Additionally, the trademark "Mag-Tab(R)SR" is a
registered trademark in the United States. Unifiber(R) is not patented; however,
Unifiber(R) is a registered trademark in the United States.
The Company's policy is to actively seek, when appropriate,
intellectual property protection for its products and proprietary information by
means of United States and foreign patents, trademarks and contractual
arrangements. In addition, the Company relies upon trade secrets and contractual
arrangements to protect certain of its proprietary information and products.
The Company's success will depend in part on its ability to enforce
its current patent, obtain patent protection for any products which may be
developed or acquired by the Company in the future, preserve its trade secrets,
and operate without infringing on the proprietary rights of third parties, both
in the United States and other countries. In the absence of patent protection,
the Company's business may be adversely affected by competitors who develop
substantially equivalent technology. Because of the substantial length of time
and expense associated with bringing new products through development to the
marketplace, the pharmaceutical and nutraceutical industries place considerable
importance on obtaining and maintaining patent and trade secret protection for
new technologies, products and processes. There can be no assurance that the
Company will have sufficient resources to protect its patent from infringers,
that the Company will develop or acquire additional products that are patented
or patentable, or that present or future patents will provide sufficient
protection to the Company's present or future technologies, products and
processes. In addition, there can be no assurance that others will not
independently develop substantially equivalent proprietary information, design
around the Company's patent, or future patents, if any, or obtain access to the
Company's know-how, or that others will not successfully challenge the validity
of the Company's patents or be issued patents which may prevent the sale of one
or more of the Company's products, or require licensing and the payment of
significant fees or royalties by
38
<PAGE>
the Company to third parties in order to enable the Company to conduct its
business. No assurance can be given as to the degree of protection or
competitive advantage the Company's current patent or any patents issued to, or
acquired by, the Company will afford, the validity of such patents, or the
Company's ability to avoid violating or infringing any patents issued to others.
Further, there can be no guarantee that any patents issued to, or licensed by,
the Company will not be infringed by products of others. Litigation and other
proceedings involving a defense and prosecution of patent claims can be
expensive and time consuming, even in those instances in which the outcome is
favorable to the Company, and can result in the diversion of resources from the
Company's other activities. An adverse outcome could subject the Company to
significant liabilities to third parties, require the Company to obtain licenses
from third parties or require the Company to cease any related research and
development, and sales of infringing products. See "Risk Factors - Uncertainty
of Protection of Patents and Proprietary Rights".
The Company does not currently undertake basic research and
development activities to develop new products. Instead, the Company's strategy
is to contract with third party manufacturers or dietary supplement development
companies to formulate new dosage forms of its existing products and to target
for licensing or acquisition products that are already developed and tested.
This would also include existing products with sales revenues, which are
generally owned by large pharmaceutical or nutraceutical companies but which are
neglected by them. The Company depends on the unpatentable knowledge, experience
and skills of scientific and technical consultants to conduct clinical trials
commissioned by the Company from time to time, as well as to develop new
formulations of its existing products. The Company requires that each of its
executive employees, consultants, manufacturers, and distributors execute a
contract containing a confidentiality agreement with respect to the Company's
proprietary rights. There can be no assurance, however, that these agreements
will provide meaningful protection for the Company's proprietary information in
the event of an unauthorized use or disclosure of such confidential information.
Government Regulation
- ---------------------
The Company is subject to the Federal Food, Drug and Cosmetic Act (
including the Dietary Supplement Health and Education Act of 1994), the Federal
Trade Commission Act, the Fair Packaging and Labeling Act, the Consumer Product
Safety Act, the Federal Hazardous Substance Act and product safety laws in
foreign jurisdictions, as well as to the jurisdiction of the Consumer Product
Safety Commission. Such regulation subjects the Company to the possibility of
requirements of repurchase or recall of products found to be defective and the
possibility of fines, penalties, seizure of its products, injunction and
criminal prosecution for repeated violations. The FDA regulates product
labeling, including claims. In addition, the FTC regulates product claims made
in advertising. Existing and future governmental regulations could impact
certain products of the Company. Additionally, products which the Company may
acquire in the future (if any) may be subject to FDA approval and regulation,
which could be time consuming and costly. See "Risk Factors - Consumer Laws and
Government Regulation".
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<PAGE>
Third Party Reimbursement
- -------------------------
Health care reform in the United States is currently an area of
national attention. Certain reforms may influence customer purchases and, if
adopted, could impose limitations on the prices the Company may be able to
charge in the United States, or on the amount of reimbursement available from
government agencies and private third party payors for magnesium supplements and
dietary fiber.
In the United States, the Health Care Financing Administration
("HCFA") establishes guidelines for coverage and the reimbursement of healthcare
providers treating Medicare and Medicaid patients. The Medicare program has
detailed coverage and reimbursement rules, but the program does not currently
provide reimbursements for drugs or nutritional supplements. The Medicaid
program, which is a Federal program, is state administered. Therefore, although
Medicaid reimbursement codes currently exist for Mag-Tab(R)SR and Unifiber(R),
HCFA does not control the policy of every state. At present, approximately 15
states approve patient reimbursement under Medicaid for the Company's products.
There can be no guarantee that Mag-Tab(R)SR, Unifiber(R) or any new products of
the Company will be covered in the future by Medicaid or other third party
payors, and, if covered, there can be no guarantee as to the level of
reimbursement that will be provided. See "Risk Factors - Uncertainty of Third
Party Reimbursement and Product Pricing".
Product Liability Insurance; Indemnification
- --------------------------------------------
The Company's business involves the inherent risk of product
liability claims. If such claims arise in the future, they could have a material
adverse impact on the Company. The Company maintains product liability insurance
on an occurrence basis in the amount of $3 million per occurrence and an
aggregate amount of $3 million per policy term period. The policy term of 12
months is renewable for successive 12 month periods. There is no assurance that
such coverage will be sufficient to protect the Company from risks to which it
may be subject, or that product liability insurance will be available to the
Company at a reasonable cost, if at all, in the future. Mag-Tab(R)SR and
Unifiber(R) have been on the market for approximately seven and twelve years,
respectively. The Company is not aware of any adverse side effects resulting
from the use of these products. However, the Company cannot assure that users
will not experience adverse side effects from these products in the future, or
that claims will not be brought against the Company arising from the use of
these products.
Additionally, the Company attempts to reduce its risk by obtaining
indemnity undertakings with respect to product liability claims from the third
party manufacturers of its products. The Company may acquire and market other
products in the future, which may be the subject of claims against the Company,
that may or may not be covered by any or adequate insurance or indemnities.
Currently, the Company is not aware of any pending or threatened claims against
it. See "Risk Factors - Product Liability".
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<PAGE>
Employees
- ---------
The Company currently has seven employees, three of whom are engaged
in direct sales and marketing activities. The remaining employees provide
services with regard to finance, administration, product development, and
customer service. No employees of the Company are covered by any collective
bargaining agreements, and management considers its employee relations to be
excellent. The Company intends to use part of the proceeds from this Offering to
hire additional employees in 1997, including a full-time controller, a national
field sales manager and six to twelve field sales representatives. See "Use of
Proceeds."
Property
- --------
The Company's principal executive offices and warehouse are located
at 200 North Oak, Roanoke, Texas, a 5,000 square foot leased facility. The lease
provides for a term ending on August 31, 2001 and a current monthly rental of
$2,000 (which increases in $200 increments each year until 2000) plus costs of
utilities and taxes. The lease is renewable for an additional five years by the
Company at a monthly rental of $2,600. The Company believes that its existing
facilities are adequate for the foreseeable future. Additionally, there is
unimproved space adjacent to the building, allowing for expansion of the current
facility if the Company determines that expansion is necessary. The lease grants
the Company an option to purchase the real property (including the Company's
premises and the adjacent space) for a period of 24 months commencing on
September 1, 1996 at a price equal to $20,000 above its market value as
determined by an appraiser. The Company has no current plans to exercise the
option, or lease or acquire any other real estate.
Litigation
- ----------
There is no litigation pending against the Company, nor is the
Company aware of any threatened litigation, or any proceeding contemplated by a
governmental authority, against it.
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MANAGEMENT
The names and ages of, and the positions held by, the executive
officers and directors of the Company are set forth below.
Class of
Name Age Positions Held Directorship(1)
- ---- --- -------------- ---------------
Stephen F. Brandon 50 Chief Executive Officer, Class III
President, Treasurer and
Chairman of the Board
Thomas F. Reed 51 Executive Vice President - Class I
Corporate Development,
Secretary and Director
Jean R. Sperry 69 Vice President and Director Class II
Allan R. Avery 36 Director Class III
J. Leslie Glick 56 Director Class I
- --------------------
(1) The Company's Certificate of Incorporation provides for three
classes of directors. The term of each class is three years, except that the
initial term of office of the Class I directors will expire at the Company's
annual meeting of stockholders in 1997 and the initial term of office of the
Class II directors will expire at the Company's annual meeting in 1998.
Stephen F. Brandon has served as Chief Executive Officer, President
and Chairman of the Board of the Company since its inception in 1991. He was
elected Treasurer of the Company in October 1996. From 1988 to 1991, Mr. Brandon
pursued entrepreneurial activities and served as Executive Vice President of
Sales & Marketing at Lectus Associates, a pharmaceutical marketing firm created
by him and two other associates. From 1970 to 1988, Mr. Brandon held numerous
sales and sales management positions with Marion Laboratories, Inc. ("Marion"),
a major United States pharmaceutical company.
Thomas F. Reed has served as Executive Vice President-Corporate
Development and a director of the Company since 1991. Mr. Reed was elected
Secretary of the Company in October 1996. Prior to joining the Company, Mr. Reed
had a 21-year career with Marion, where he held various management positions,
including Director of Pharmaceutical Marketing, Company Vice President, and
President of the International Products Division. In such capacities, Mr. Reed
was responsible for overseeing the marketing of Marion's prescription products,
managing the strategic development and market introduction of Marion's two most
successful products (Cardizem (R) and Carafate (R)), and marketing,
manufacturing, licensing and distribution operations.
Jean R. Sperry has served as Vice President and a director of the
Company since 1991. Mr. Sperry is responsible for developing marketing
strategies, sales plans, and strategic alliances and devotes approximately 10%
of his working time to the Company's business. For more than 30 years prior to
joining the Company, Mr. Sperry served in various sales and marketing capacities
with Marion, including National Sales Manager, Vice President of Sales and
Senior Vice President of Marketing.
Allan R. Avery has been a director of the Company since February
1996. Since 1990, Mr. Avery has served as the President and Chief Executive
Officer of GEM Communications Inc., a health care communications company which
he founded. From 1990 to 1991, Mr. Avery was Vice President of Client Services
at PRO Communications, a pharmaceutical education project company. Prior
thereto, Mr. Avery held various sales and marketing positions at Marion during a
nine year career.
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<PAGE>
J. Leslie Glick, Ph.D. has been a director of the Company since
October 1996. Since 1992, Dr. Glick has been the Editor-in-Chief of Technology
Management, a management journal. He has also been an adjunct professor of
technology management in the Graduate School of Management & Technology at the
University of Maryland University College since 1988. Additionally, from 1987
to 1993, Dr. Glick served as Chief Executive Officer, President and Chairman of
the Board of Bionix Corporation, a biotechnology company. From 1977 to 1987, Dr.
Glick served as President and Chief Executive Officer of Genex Corporation, a
publicly-traded biotechnology company. Dr. Glick has also acted as a consultant
to the Underwriter since June 1996.
The Company has undertaken to have a designee of the Underwriter
serve as a director of the Company for a period of three years. The Company has
been advised by the Underwriter of its intention to designate Sherman A. Drusin
to such position.
Sherman A. Drusin has been the Director of Corporate Finance for the
Underwriter since March 1995. In addition, he is President and Director of
Preferred Benefit Plans, Inc., an estate planning company. Previously, he was
Vice President for Corporate Finance for J. Gregory & Company, an investment
banking firm. For 25 years prior to his work in the investment banking field,
Mr. Drusin was Chief Executive Officer, President and a director of several
computer software companies. He currently serves on the Board of Directors of In
Time Systems International Inc., a publicly traded computer software and
consulting company, Applewood's, Inc., a publicly traded distributor of beauty
and body care products, the Sterling Foster Foundation, and the Make-A-Wish
Foundation of Metro New York. Furthermore, he is an advisor to the Board of
Directors of several publicly traded corporations.
There are no family relationships between the executive officers and
directors of the Company.
Executive Compensation
- ----------------------
The following table provides summary information concerning cash and
certain other compensation paid or accrued by the Company to, or on behalf of,
Mr. Brandon, the Company's Chief Executive Officer, during the last three fiscal
years. No executive officer of the Company had a combined salary and bonus in
excess of $100,000 for any year during such period.
43
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
Awards Payouts
---------------------- -------
Restricted Securities
Name and Principal Other Annual Stock Underlying LTIP All other
Positions Year Salary Bonus Compensation(1) Award(s) Options Payouts Compensation
- --------------- ---- ------ ------ --------------- ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen F. Brandon 1995 $48,000 - $12,000 - - - -
Chief Executive 1994 41,400 - 12,000 - - - -
Officer, President 1993 3,000 - 12,000 - - - -
and Chairman of the
Board
</TABLE>
(1) Represents annual club dues paid by the Company on behalf of Mr. Brandon.
Each director of the Company is entitled to be reimbursed for
reasonable out-of-pocket expenses incurred in attending meetings of the Board of
Directors of the Company. The members of the Board of Directors intend to meet
at least quarterly.
Employment Agreements
- ---------------------
The Company intends to enter into an employment agreement with Mr.
Brandon pursuant to which he shall serve as the Company's Chief Executive
Officer, President and Chairman of the Board for a period of three years from
the date of this Prospectus at a salary of $120,000 per annum.
The Company intends to also enter into an employment agreement with
Mr. Reed pursuant to which he shall serve as the Company's Executive Vice
President-Corporate Development for a period of three years from the date of
this Prospectus at a salary of $96,000 per annum.
The employment agreements for Messrs. Brandon and Reed will each
further provide for reimbursement of business expenses. Additionally, Mr.
Brandon's employment agreement will provide for reimbursement of club dues not
to exceed $15,000 on an annual basis. The employment agreements will also
provide for the payment of full salary in the event of disability for three
months and 50% of salary if such disability continues for the next three month
period. The Company will have the right to terminate the employment agreements
in the event disability continues for more than six consecutive months or for
150 business days in any nine month period. The employment agreements will
contain a restrictive covenant precluding Messrs. Brandon and Reed,
respectively, from competing with the Company during the term, and for a period
of one year after the termination, of the employment agreement, without the
Company's consent. Furthermore, the employment agreements will entitle Messrs.
Brandon and Reed to participate in any health, compensatory or other plan or
program adopted by the Company for the benefit of its executive employees.
44
<PAGE>
Stock Options
- -------------
1996 Senior Executive Stock Option Plan
In December, 1996, the Board of Directors of the Company adopted the
1996 Senior Executive Stock Option Plan (the "1996 Senior Executive Plan") which
provides for the grant of options to a certain senior management group for the
purchase of up to 405,000 Common Shares of the Company. The purpose of the 1996
Senior Executive Plan is to provide an incentive and reward for such senior
management group to contribute substantially to the progress and success of the
Company, to closely align the interests of such employees with the interests of
the stockholders of the Company by linking benefits to performance and to retain
the services of such employees. In furtherance of that purpose, the 1996 Senior
Executive Plan provides for the grant to Messrs. Brandon, Reed, Sperry and Avery
of options to purchase 283,500, 72,900, 24,300, and 24,300 Common Shares of the
Company, respectively, at an exercise price of $5.00 per share (the "Senior
Executive Plan Options"). The Senior Executive Plan Options shall terminate in
December 2006 and vest in one-third increments in each of 1998, 1999, and 2000
following the issuance of audited financial statements for the prior year,
provided the Company's cumulative pre-tax income from operations exceeds
$300,000 (without giving effect to any deferred financing cost resulting from
the issuance of 100,000 Common Shares to the Bridge Lender in the Company's
Bridge Financing transaction), $3,000,000 and $7,500,000 for the fiscal years
ended December 31, 1997, December 31, 1998 and December 31, 1999, respectively
(the "Cumulative Goals"). In the event a particular Cumulative Goal is not
reached through December 31 of any given year, the particular installment of
such Senior Executive Plan Options will nevertheless vest in a future year if
the Cumulative Goal for a succeeding year is met. Following the grant of the
Senior Executive Plan Options described herein, no further Senior Executive Plan
Options will be available under the 1996 Senior Executive Plan.
1996 Stock Option Plan
In February 1996, the Board of Directors of the Company adopted, and
the stockholders of the Company approved the adoption of, the 1996 Stock Option
Plan (the "1996 Option Plan") which provides for the grant of options for the
purchase of up to 131,250 Common Shares of the Company. The purpose of the 1996
Option Plan is to advance the interests of the Company by providing additional
incentive to, and to attract and retain, qualified competent employees,
non-employee directors, consultants and advisors through the encouragement of
stock ownership in the Company by such persons.
In February 1996, pursuant to the 1996 Stock Plan, the Company
granted to Messrs. Reed and Sperry options to purchase 12,500 and 75,000 Common
Shares, respectively, at an exercise price of $1.50 per share. Messrs. Reed's
and Sperry's options vest in February 1997 and expire in February 2006.
45
<PAGE>
In July 1996, pursuant to the 1996 Option Plan, the Company granted
to each of Mr. Avery and Dr. Glick options to purchase 12,500 Common Shares at
an exercise price of $1.50 per share. The options vest to the extent of 20% per
year over a period of five years commencing in July 1997 and terminate in July
2006. Other than the options already granted as described herein, no further
options will be granted under the 1996 Option Plan.
1996 Non-Senior Executive Stock Option Plan
In December 1996, the Company adopted and the stockholders approved
the 1996 Non- Senior Executive Stock Option Plan (the "1996 Non-Senior Executive
Plan") which provides for the grant of options to employees, non-employee
directors, consultants and advisors of the Company, other than eligible
optionees under the 1996 Senior Executive Plan, to purchase up to 150,000 Common
Shares. The purpose of the 1996 Non-Senior Executive Plan is to provide an
incentive and reward the eligible employees, non-employee directors, consultants
and advisors to contribute to the progress and success of the Company, to
closely align the interests of such eligible optionees with the interests of the
stockholders of the Company by linking benefits to performance, to retain the
services of such employees, non-employee directors, consultants and advisors,
and to attract new employees, non-employee directors, consultants and advisors.
No options have been granted under the 1996 Non-Senior Executive Plan as of the
date of this Prospectus.
No options were granted during the fiscal year ended December 31,
1995 to any executive officer of the Company. As of December 31, 1995, no
options were held by any executive officer of the Company.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of the date of
this Prospectus with respect to the beneficial ownership of the outstanding
Common Shares of the Company by (i) any holder of more than 5% of the
outstanding Common Shares; (ii) the Company's directors; and (iii) the directors
and executive officers of the Company as a group; and (iv) the Selling
Stockholder:
46
<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Common Number of Common
Shares Common Shares
Beneficially Percentage of Shares Beneficially Percentage of
Name and Address of Owned Prior Class Prior to Offered Owned After Class After
Beneficial Owner to Offering Offering Hereby Offering Offering (1)
- ---------------- ----------- -------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Stephen F. Brandon 731,500(2)(3) 66.4% -0- 731,500(2)(3) 30.5%
200 North Oak
P.O. Box 449
Roanoke, Texas
Jean R. Sperry 122,500(3)(4) 10.4% -0- 122,500(3)(4) 4.9%
200 North Oak
P.O. Box 449
Roanoke, Texas
Dominant Construction
Corp. 100,000 9.1% 100,000 -0- --
523 Route 303
Orangeburg, New York
Thomas F. Reed 98,000(3)(5) 8.8% -0- 98,000(3)(5) 4.1%
12704 Eaton Circle
Leawood, Kansas
Gerald L. Beckloff,
M.D 75,500 6.9% -0- 75,500 3.1%
Commerce Plaza II,
Suite 720
7400 West 110th Street
Overland Park, Kansas
Allan R. Avery 15,000(3) 1.4% -0- 15,000(3) *
40 Richards Avenue
Norwalk, Connecticut
J. Leslie Glick -0- -0- -0- -0- --
10899 Deborah Drive
Potomac, Maryland
All Directors and
executive officers 967,000(2)(3) 81.3% -0- 967,000(2)(3) 38.9%
as a group (five (4)(5) (4)(5)
persons)..........
</TABLE>
- --------------------
* Less than 1%
(1) Does not give effect to the exercise of the Underwriter's Overallotment
Option or the Underwriter's Warrant. See "Underwriting".
(2) Mr. Brandon's shares are pledged as security for the epayment of
indebtedness. See "Principal and Selling Stockholders-Changes in Control".
(3) Does not include shares issuable upon the exercise of options granted under
the 1996 Senior Executive Plan, the exercisability of which is subject to
the attainment of certain performance goals. See "Management-Stock
Options".
47
<PAGE>
(4) Includes 75,000 share issuable upon the exercise of options which are
exercisable within 60 days of the date hereof. See "Management-Stock
Options".
(5) Includes 12,500 shares issuable upon the exercise of options which are
exercisable within 60 days of the date hereof. See "Management-Stock
Options".
The Registration Statement, of which this Prospectus forms a part,
also covers the resale of 100,000 Common Shares issued to a Bridge Lender (the
"Selling Stockholder") by the Company in connection with the Bridge Financing
completed in December 1996. See "Bridge Financing".
The Company will not receive any of the proceeds from the resale of
the Common Shares by the Selling Stockholder. The Common Shares held by the
Selling Stockholder may be resold at any time following the date of this
Prospectus, subject to an agreement between the selling stockholder and the
Underwriter restricting the transfer of the Common Shares for a period of two
years without the Underwriter's consent. The sale of such Common Shares or the
potential of such sales at any time may have an adverse effect on the market
prices of the Common Shares offered hereby. See "Risk Factors-Shares Eligible
For Future Sale May Adversely Affect the Market".
The Common Shares offered may be sold from time to time directly by
the Selling Stockholder. Alternatively, the Selling Stockholder may from time to
time offer such Common Shares through underwriters, dealers, or agents. The
distribution of Common Shares by the Selling Stockholder may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Stockholder in connection with such sales of Common Shares. The Common Shares
offered by the Selling Stockholder may be sold by one or more of the following
methods, without limitation: (i) a block trade in which a broker or dealer so
engaged will attempt to sell the Common Shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (ii)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (iii) ordinary brokerage
transactions in which the broker solicits purchasers; and (iv) face-to-face
transactions between seller and purchasers without a broker-dealer. In effecting
sales, brokers or dealers engaged by the Selling Stockholder may arrange for
other brokers or dealers to participate . The Selling Stockholder, and
intermediaries through whom such Common Shares are sold, under certain
circumstances, may be deemed "underwriters" within the meaning of the Act with
respect to the Common Shares offered, and any profits realized or commissions
received may be deemed underwriting compensation.
At the time a particular offer of Common Shares is made by or on
behalf of the Selling Stockholder, to the extent required, a Prospectus
Supplement will be prepared which will set forth the number of Common Shares
being offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, the purchase price paid by any underwriter for
48
<PAGE>
Common Shares purchased from the Selling Stockholder and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, and the
proposed selling price to the public.
Changes in Control
- ------------------
Mr. Brandon has pledged to the First National Bank of Grapevine,
Grapevine, Texas (the "Lender") and the United States Small Business
Administration (the "SBA") all of his 731,500 Common Shares of the Company,
representing approximately 66% of the Common Shares outstanding prior to the
Offering and 30% of the Common Shares after the Offering (assuming the
Underwriter's Overallotment Option is not exercised). Such pledge was made in
furtherance of a loan by the Lender in the original principal amount of $250,000
to the Company and a guaranty of the loan by the SBA. In the event of a default
under the loan (the principal amount of which as of September 30, 1996 was
$113,000), the Lender and the SBA have the right to foreclose on the Common
Shares which could result in, among other things, the Lender and the SBA
obtaining voting control over a significant portion of the outstanding Common
Shares of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is obligated to repay to Mr. Brandon a loan in the
outstanding principal amount of $295,487 (the "Brandon Loan"). The Brandon Loan
accrues interest at the rate of 10% per annum, payable monthly, and is payable
on January 11, 1998. The Brandon Loan, originally in the principal amount of
$500,000, was made on January 11, 1991 and the term has been renewed for
successive one year terms each year since January 1992. The Company intends to
prepay the remaining principal balance out of the proceeds of this Offering. See
"Use of Proceeds."
DESCRIPTION OF SECURITIES
Common Shares
- -------------
The Company is authorized to issue up to 15,000,000 Common Shares,
par value $.01 per share, of which 1,101,500 shares are issued and outstanding
as of the date of this Prospectus. All of the issued and outstanding Common
Shares are validly issued, fully paid and non-assessable.
Holders of the Common Shares of the Company are entitled to share
equally on a per share basis in such dividends as may be declared by the Board
of Directors out of funds legally available therefor. There are presently no
plans to pay dividends with respect to the Common Shares. See "Dividend Policy."
Upon liquidation, dissolution or winding up of the Company, after payment of
creditors and the holders of any senior securities of the Company, including
Preferred Shares, if any, the assets of the Company will be divided pro rata on
a per share basis among the holders of the Common Shares. The Common Shares are
not subject to any liability for further assessments. There are no conversion or
redemption privileges nor any sinking fund provisions with respect to the
49
<PAGE>
Common Shares, and the Common Shares are not subject to call. The holders of the
Common Shares do not have any preemptive or other subscription rights.
Holders of the Common Shares are entitled to cast one vote for each
share held at all stockholders' meetings, including the annual meeting for the
election of directors. The Common Shares do not have cumulative voting rights.
The Company has agreed with the Underwriter that it will not issue
any Common Shares (other than pursuant to outstanding options and warrants, the
Underwriter's Warrant, or grants under the 1996 Non-Senior Executive Plan) for a
period of three years from the date of the Prospectus without the prior written
consent of the Underwriter. See "Underwriting".
Preferred Shares
- ----------------
The Company's Certificate of Incorporation authorizes 2,000,000
"blank check" Preferred Shares, par value $.01 per share, whereby the Board of
Directors of the Company shall have the authority, without further action by the
holders of the outstanding Common Shares, to issue Preferred Shares from time to
time in one or more series, to fix the number of shares constituting any series
and the stated value thereof, if different from the par value, and to fix the
terms of any such series, including dividend rights, dividend rates, conversion
or exchange rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price and the liquidation preference of
such series. As of the date of this Prospectus, there are no Preferred Shares
issued and outstanding, and the Company has no plans to issue any Preferred
Shares. The Company has agreed with the Underwriter that it will not issue any
Preferred Shares for a period of three years from the date of this Prospectus
without the prior written consent of the Underwriter. See "Underwriting".
Delaware Anti-Takeover Law
- --------------------------
The Company is governed by the provisions of Section 203 of the
General Corporation Law of Delaware, an anti-takeover law enacted in 1988. In
general, the law prohibits a Delaware public corporation from engaging in a
'business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless it is approved in a prescribed manner. As a result of
Section 203, potential acquirors of the Company may be discouraged from
attempting to effect acquisition transactions with the Company, thereby possibly
depriving holders of the Company's securities of certain opportunities to sell
or otherwise dispose of such securities at above-market prices pursuant to such
transactions.
Limitation on Liability of Directors; Indemnification
- -----------------------------------------------------
Article X of the Company's Certificate of Incorporation eliminates
the personal liability of directors to the Company and its stockholders for
monetary damages for breach of fiduciary duty as a director to the fullest
extent permitted by Section 102 of the Delaware General Corporation Law,
50
<PAGE>
provided that this provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the Delaware General Corporation Law (with respect to unlawful
dividend payments and unlawful stock purchases or redemptions), or (iv) for any
transaction from which the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of
Incorporation and its by-laws provisions to indemnify its directors, officers,
employees and agents and to purchase insurance with respect to liability arising
out of the performance of their duties as directors, officers, employees and
agents as permitted by Section 145 of the Delaware General Corporation law. The
Delaware General Corporation law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors, officers, employees and agents may be entitled under the
Company's by-laws or any agreement, or by vote of stockholders, or otherwise.
The effect of the foregoing is to require the Company, to the extent
permitted by law, to indemnify the directors, officers, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
In connection with the Offering, the Underwriter has agreed to
indemnify the Company, its directors, and each person who controls it within the
meaning of Section 15 of the Act with respect to any statement in or omission
from the registration statement or the Prospectus or any amendment or supplement
thereto if such statement or omission was made in reliance upon information
furnished in writing to the Company by the Underwriter specifically for or in
connection with the preparation of the registration statement, the Prospectus,
or any such amendment or supplement thereto.
Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that, in the opinion
of the Commission, such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
The Company intends to obtain liability insurance coverage for its
officers and directors in the amount of $1,000,000 per person.
Transfer Agent
- --------------
The transfer agent for the Company's Common Shares is _________.
51
<PAGE>
UNDERWRITING
General
- -------
Subject to the terms and conditions of the Underwriting Agreement, a
copy of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriter has agreed to purchase the 1,300,000
Common Shares offered hereby from the Company on a "firm commitment" basis, if
any are purchased. The Underwriter has advised the Company that it proposes to
offer the Common Shares to the public at a price of $5.00 per Common Share, as
set forth on the cover page of this Prospectus, and that it may allow to certain
dealers who are NASD members concessions not to exceed $____ per Common Share,
of which an amount not in excess of $___ per Common Share may be reallowed to
other dealers who are members of the NASD. After the Offering, the public
offering price, concession and reallowance may be changed by the Underwriter.
The Company has granted an Overallotment Option to the Underwriter,
exercisable during the 45 day period from the date of this Prospectus, to
purchase up to a maximum of 195,000 additional Common Shares at the Offering
price, less the underwriting discount, to cover overallotments, if any.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter against certain liabilities in
connection with the Registration Statement, including liabilities arising under
the Act. Insofar as indemnification for liabilities arising under the Act may be
provided to officers, directors or persons controlling the Company, the Company
has been informed that, in the opinion of the Commission, such indemnification
is against public policy and is therefore unenforceable.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance of equal to 3% of the aggregate Offering price of the Common
Shares offered hereby, including any Common Shares purchased pursuant to the
Overallotment Option.
The Company has agreed to sell to the Underwriter, or its designees,
for an aggregate purchase price of $100, a warrant (the "Underwriter's Warrant")
to purchase 130,000 Common Shares. The Underwriter's Warrant shall be
exercisable during a three year period commencing one year from the Effective
Date. Any profits realized upon the sale of the Common Shares issuable upon
exercise of the Underwriter's Warrant may be deemed to be additional
underwriting compensation. The exercise price of the Common Shares issuable upon
exercise of the Underwriter's Warrant shall be $6.00 per share (120% of the
initial public offering price of the Common Shares). The exercise price of the
Underwriter's Warrant and the number of Common Shares covered thereby are
subject to adjustment in certain events to prevent dilution. For the life of the
Underwriter's Warrant, the holders thereof are given, at a nominal cost, the
opportunity to profit from a rise in the market price of the Company's Common
Shares with a resulting dilution in the interest of other stockholders. The
Company may find it more difficult to raise capital for its
52
<PAGE>
business if the need should arise while the Underwriter's Warrant is
outstanding. At any time when the holders of the Underwriter's Warrant might be
expected to exercise it, the Company would probably be able to obtain additional
capital on more favorable terms. The Company has granted the Underwriter certain
"demand" and "piggyback" registration rights with respect to the Underwriter's
Warrant and the underlying Common Shares.
Upon the closing of the sale of the Common Shares offered hereby, the
Company will enter into a three year financial advisory and investment banking
agreement with the Underwriter, pursuant to which the Company will be obligated
to pay the Underwriter $100,000 in advance for financial and investment advisory
services to the Company.
The Company has granted the Underwriter a right of first refusal to
underwrite or place any public or private offering of securities by the Company
for a period of three years following the date of this Prospectus, on the same
terms that are offered to the Company by a third party. Additionally, for a
period of three years following the date of this Prospectus, the Underwriter has
been granted the right to purchase from any officer, director or holder of 5% or
more of the Company's Common Shares, or any of their respective affiliates
(collectively, the "Insiders"), for its account, or to sell for the account of
any of such Insiders, any of the Company's securities which the Insiders propose
to sell pursuant to Rule 144 promulgated under the Act, on terms at least as
favorable as the Insiders can secure elsewhere.
The Company has also agreed to have a designee of the Underwriter
serve as a director of the Company, or as an observer of the Board of Directors,
for a period of three years following the date of this Prospectus. See
"Management".
The Insiders and the Selling Stockholder have agreed that they will
not transfer any of their Common Shares for a period of two years following the
date of this Prospectus without the prior consent of the Underwriter. In
addition, all other persons who are holders of the Company's Common Shares
immediately prior to the date of this Prospectus have agreed that they will not
transfer their Common Shares for a period of six months following the date of
this Prospectus, without obtaining the prior consent of the Underwriter.
The Company has agreed not to issue any securities for a period of
three years from the date of this Prospectus, without prior written consent of
the Underwriter (not to be unreasonably withheld), subject to certain
exceptions. See "Description of Securities".
The Underwriter, a registered broker-dealer, purchases and sells
securities on behalf of its customers. The Underwriter also engages in
investment banking activities and provides companies with financial advisory
services.
The foregoing is a summary of certain provisions of the Underwriting
Agreement and Underwriter's Warrant which have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part.
53
<PAGE>
Determination of Public Offering Price
- --------------------------------------
Prior to this Offering, there has been no public market for the
Common Shares. The initial public offering price for the Common Shares has been
determined by negotiations between the Company and the Underwriter. Among the
factors considered in the negotiations were an analysis of the areas of activity
in which the Company is engaged, the present state of the Company's business,
the Company's financial condition, the Company's prospects, an assessment of
management, the general condition of the securities market at the time of this
Offering and the demand for similar securities of comparable companies. The
public offering price of the Shares does not necessarily bear any relationship
to assets, earnings, book value or other criteria of value applicable to the
Company. See "Risk Factors - Arbitrary Offering Price; Possible Volatility of
Stock Price".
The Company anticipates that the Common Shares will be listed for
quotation on The Nasdaq SmallCap Market under the symbol ["NICH"], but there can
be no assurance that an active trading market will develop, even if the
securities are accepted for quotation. The Underwriter intends to make a market
in the Common Shares of the Company. See "Risk Factors - NASD Complaint Against
Underwriter and Others Alleging Violations of Exchange Act and NASD Rules of
Fair Practice" and "Risk Factors - Private Investigation Concerning Trading in
Securities of Issuer Underwritten by Underwriter".
LEGAL MATTERS
The validity of the securities being offered hereby will be passed
upon for the Company by Certilman Balin Adler & Hyman, LLP, 90 Merrick Avenue,
East Meadow, New York 11554. Certilman Balin Adler & Hyman, LLP has served, and
continues to serve, as counsel to the Underwriter in matters unrelated to this
Offering. Certain legal matters will be passed upon for the Underwriter by
Olshan Grundman Frome & Rosenzweig LLP, 505 Park Avenue, New York, New York
10022.
EXPERTS
The financial statements of the Company as of December 31, 1995 and
for the years ended December 31, 1995 and 1994 included in this Prospectus have
been audited by Moore Stephens, P.C., 331 Madison Avenue, New York, New York
10017, independent certified public accountants, as set forth in their report
thereon appearing elsewhere herein and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
54
<PAGE>
ADDITIONAL INFORMATION
This Prospectus constitutes part of a Registration Statement on Form
SB-2 filed by the Company with the Commission under the Act and omits certain
information contained in the Registration Statement. Reference is hereby made to
the Registration Statement and to its exhibits for further information with
respect to the Company and the Common Shares offered hereby. Statements
contained herein concerning provisions of documents are necessarily summaries of
such documents, and each statement is qualified in its entirety by reference to
the copy of the applicable document filed with the Commission.
The Registration Statement, including the exhibits thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, Washington, D.C. 20549, and at the offices of
the Commission located at 7 World Trade Center, New York, NY 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, Washington, D.C. 20549 at prescribed rates.
Furthermore, the Commission maintains a Web site that will contain reports,
proxy and information statements and other information regarding the Company.
The address of such Web site is http://www.sec.gov.
GLOSSARY
As used in this Prospectus, the terms set forth have the following
meanings:
amino glycosides - bactericidal antibiotics used primarily in the treatment of
gram negative infections.
aspartame - an artificial sweetener (a compound formed from two amino acids,
phenylalanine and aspartate, and methanol).
bioavailability - an absolute term that indicates measurement of both the rate
and total amount (extent) of supplement or nutrient that reaches the general
circulation from an administered dosage form.
cellulose - a fibrous form of polysaccharide constituting the supporting
framework of plant.
co-morbid - joint factor related to disease.
cofactor - the substance that activates an enzyme.
dentition - the process and time of teething.
distal - farthest point of the medical line when referencing the anatomy of a
living organism..
55
<PAGE>
diverticulosis - inflammation in the intestinal tract.
elemental magnesium - the absolute amount of the mineral magnesium contained in
the salt presentation (e.g. the amount of magnesium cation in magnesium
L-lactate dihydrate).
enteral - within or by way of the intestine.
enteric - pertaining to the intestinal tract.
enzymatic reaction - a catalytic reaction produced by living cells.
epidemiological - pertaining to the study of infectious disease.
ethical pharmaceutical - refers to pharmaceuticals that are dependent on
healthcare professionals' recommendation or prescription for use.
glycemic- condition of sugar or glucose in the blood.
guar - a legume.
gum - any resinlike substance given off by plants.
hemicellulose - a polysaccharide that is intermediate in complexity between
sugar and cellulose.
intracellular cation - magnesium, potassium, calcium and sodium are the four
major cations or positively charged ions in fluids. Their relative
concentrations determine the integrity of the cell membrane and the electrical
potential of tissues. All of the cations work together to maintain proper cell
function.
lignin - a polymer that functions as a natural binder and support for the
cellulose fiber of woody plants.
lipid - fats that are insoluble in water.
magnesium L-lactate dihydrate- a highly soluble magnesium salt containing 10%
elemental magnesium by weight (e.g. 850 milligrams of magnesium L-lactate
dihydrate contains 84 milligrams of elemental magnesium).
metabolic electrolyte - electrically conducting ions, i.e. negatively or
positively charged atoms, that are associated with the chemical process of
maintaining life.
myocardial infarction - development of an area of necrotic tissue in the heart.
56
<PAGE>
naso-gastric - the area between the nasal cavity and the stomach.
nutraceutical - pertaining to nutritional supplements.
pectin - a plant carbohydrate that forms a gelatinous mass.
pentogens - any one of a group of complex carbohydrates found with cellulose in
many woody plants and yielding pentoses, i.e. five-carbon sugars, upon
hydrolysis.
pharmaceutical - an oral, injectable, liquid, or topical dosage form of a
chemical entity dispensed by healthcare professionals.
pharmacologic - the activity of a supplement or nutrient which will produce a
physiologic or qualitavely different effect in a living organism.
physiologic - the dose of a naturally occurring agent, within the range of
concentrations or potencies that would occur naturally, capable of affecting the
activity, functions, and/or processes of a living organism.
polysaccharide - a carbohydrate consisting of a polymer of simple sugars, which,
as a dietary or nutritional supplement, is capable of affecting the activities,
functions, and/or processes of a living organism.
prophylaxis - the preventive treatment of disease.
renal - pertaining to, or in the region of, the kidneys.
serum - the liquid portion of whole blood.
ventricular arrhythmias - an irregularity of the heart's action affecting one of
the lower chambers of the heart, which propel blood into the arteries.
57
<PAGE>
NICHE PHARMACEUTICALS, INC.
AS OF DECEMBER 31, 1995.
<PAGE>
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Page to Page
Independent Auditor's Report....................................... F-1....
Balance Sheets as of September 30, 1996
[Unaudited] and December 31, 1995.................................. F-2.... F-3
Statements of Operations for the nine
months ended September 30, 1996 and 1995
[Unaudited] and for the years ended
December 31, 1995 and 1994......................................... F-4....
Statements of Stockholders' [Deficit]
for the nine months ended September 30,
1996 [Unaudited] and for the years ended
December 31, 1995 and 1994......................................... F-5....
Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995
[Unaudited] and for the years ended
December 31, 1995 and 1994......................................... F-6.... F-7
Notes to Financial Statements...................................... F-8.... F-17
. . . . . . . . . . . . . . .
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Niche Pharmaceuticals, Inc.
Roanoke, Texas
We have audited the accompanying balance sheet of Niche
Pharmaceuticals, Inc. as of December 31, 1995, and the related statements of
operations, stockholders' [deficit], and cash flows for each of the two years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 Niche
Pharmaceuticals, Inc. as of December 31, 1995, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
financial statements and as discussed in Note 3 to the financial statements, the
Company has suffered recurring losses since its inception in 1991; has an
accumulated deficit at December 31, 1995 of $617,961; and has a working capital
deficit of $67,504. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Moore Stephens, P.C.
MOORE STEPHENS, P.C.
Certified Public Accountants.
New York, New York
November 15, 1996
F-1
<PAGE>
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
- --------------------------------------------------------------------------------
September 30, December 31,
1 9 9 6 1 9 9 5
[Unaudited]
Assets:
Current Assets:
Cash $ 21,237 $ 156,772
Accounts Receivable 217,188 84,656
Inventory 56,729 105,401
--------------- ---------------
Total Current Assets 295,154 346,829
--------------- ---------------
Property and Equipment - Net 13,724 20,173
--------------- ---------------
Other Assets:
Intangible Assets - Net 1,059,740 1,140,166
Miscellaneous Receivable and Deposit 1,027 6,028
Deferred Offering Costs 47,364 --
--------------- ---------------
Total Other Assets 1,108,131 1,146,194
--------------- ---------------
Total Assets $ 1,417,009 $ 1,513,196
=============== ===============
Substantially all assets are pledged.
The Accompanying Notes are an Integral Part of These Financial Statements.
F-2
<PAGE>
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1 9 9 6 1 9 9 5
[Unaudited]
<S> <C> <C>
Liabilities and Stockholders' [Deficit]:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 121,150 $ 73,952
Note Payable - Bank 300,000 300,000
Current Portion of Long-Term Debt 42,952 40,381
Notes Payable - Product Acquisition and Financing 200,000 --
--------------- ---------------
Total Current Liabilities 664,102 414,333
--------------- ---------------
Long-Term Liabilities:
Long-Term Debt - Less Current Maturities 70,873 103,679
Note Payable - Product Acquisition and Financing 931,584 1,046,780
Notes Payable - Stockholders 407,987 465,365
--------------- ---------------
Total Long-Term Liabilities 1,410,444 1,615,824
--------------- ---------------
Commitments and Contingencies [14] -- --
--------------- ---------------
Stockholders' [Deficit]:
Preferred Stock, $.01 Par Value, 2,000,000 Shares
Authorized, No Shares Issued and Outstanding -- --
Common Stock, $.00105 Par Value, 15,000,000 Shares
Authorized, 1,001,500 and 1,000,000 Shares Issued
and Outstanding in 1996 and 1995, Respectively 1,052 1,050
Additional Paid-in Capital 99,960 99,950
Accumulated [Deficit] (758,549) (617,961)
--------------- ---------------
Total Stockholders' [Deficit] (657,537) (516,961)
--------------- ---------------
Total Liabilities and Stockholders' [Deficit] $ 1,417,009 $ 1,513,196
=============== ===============
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
F-3
<PAGE>
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
------- ------- ------- -------
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C>
Sales - Net $ 906,744 $ 389,700 $ 606,268 $ 415,330
Cost of Sales 342,362 86,113 183,146 135,472
--------------- ---------------- --------------- ---------------
Gross Profit 564,382 303,587 423,122 279,858
Selling, General and
Administrative Expenses 563,612 211,682 334,941 275,350
--------------- ---------------- --------------- ---------------
Income from Operations 770 91,905 88,181 4,508
--------------- ---------------- --------------- ---------------
Other [Expense] Income:
Interest Expense (144,042) (55,056) (91,800) (67,274)
Interest Income 2,684 918 2,616 426
--------------- ---------------- --------------- ---------------
Other [Expense] (141,358) (54,138) (89,184) (66,848)
--------------- ---------------- --------------- ---------------
Net [Loss] Income $ (140,588) $ 37,767 $ (1,003) $ (62,340)
=============== ================ =============== ===============
Net [Loss] Income Per
Share $ (.13) $ .03 $ -- $ (.06)
=============== ================ =============== ===============
Weighted Average Number
of Shares 1,101,500 1,101,500 1,101,500 1,101,500
=============== ================ =============== ===============
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
F-4
<PAGE>
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' [DEFICIT]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Total
Number of Par Value Paid-in Accumulated Stockholders'
Shares [$.00105] Capital [Deficit] [Deficit]
------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance - January 1,
1994 950,000 $ 998 $ 2 $ (554,618) $ (553,618)
Stock Issuance 27,500 28 54,972 -- 55,000
Net [Loss] -- -- -- (62,340) (62,340)
--------------- -------------- --------------- -------------- --------------
Balance - December 31,
1994 977,500 1,026 54,974 (616,958) (560,958)
Stock Issuance 22,500 24 44,976 -- 45,000
Net [Loss] -- -- -- (1,003) (1,003)
--------------- -------------- --------------- -------------- --------------
Balance - December 31,
1995 1,000,000 1,050 99,950 (617,961) (516,961)
Stock Issuance 1,500 2 10 -- 12
Net [Loss] -- -- -- (140,588) (140,588)
--------------- -------------- --------------- -------------- --------------
Balance - September 30,
1996 [Unaudited] 1,001,500 $ 1,052 $ 99,960 $ (758,549) $ (657,537)
=============== ============== =============== ============== ==============
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
F-5
<PAGE>
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
------- ------- ------- -------
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C>
Operating Activities:
Net [Loss] Income $ (140,588) $ 37,767 $ (1,003) $ (62,340)
--------------- ---------------- --------------- ---------------
Adjustments to Reconcile Net [Loss]
Income to Net Cash [Used for]
Provided by Operating Activities:
Depreciation and Amortization 88,044 25,081 51,626 33,997
Amortization of Imputed Interest
Discount 84,804 -- 18,845 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (132,532) (16,315) (61,139) 2,119
Inventory 48,673 (3,158) (94,514) 17,162
Other Assets 5,000 (5,000) (5,488) 463
Increase [Decrease] in:
Accounts Payable and Accrued
Expenses 47,198 (28,995) 2,516 (34,656)
--------------- ---------------- --------------- ---------------
Total Adjustments 141,187 (28,387) (88,154) 19,085
--------------- ---------------- --------------- ---------------
Net Cash - Operating Activities 559 9,380 (89,157) (43,255)
--------------- ---------------- --------------- ---------------
Investing Activities:
Purchases of Property and
Equipment (1,169) (7,480) (14,745) (407)
Payment for Purchases of Intangible
Assets -- -- (59,469) --
--------------- ---------------- --------------- ---------------
Net Cash - Investing Activities (1,169) (7,480) (74,214) (407)
--------------- ---------------- --------------- ---------------
Financing Activities:
Principal Payments on Long-Term
Debt (30,235) (30,138) (35,381) (33,720)
Principal Payments on Notes Payable -
Stockholders (57,378) (2,300) (33,974) --
Proceeds of Note Payable - Bank -- -- 300,000 --
Proceeds from the Issuance of
Capital Stock 12 45,000 45,000 55,000
[Repayment] Proceeds of
Stockholders' Loans -- (14,300) (14,300) 14,300
Payment for Deferred Offering Costs (47,364) -- -- --
----------- ------ ------- ----
Net Cash - Financing Activities (134,965) (1,738) 261,345 35,580
--------------- ---------------- --------------- ---------------
Net [Decrease] Increase in Cash (135,535) 162 97,974 (8,082)
Cash - Beginning of Periods 156,772 58,798 58,798 66,880
--------------- ---------------- --------------- ---------------
Cash - End of Periods $ 21,237 $ 58,960 $ 156,772 $ 58,798
=============== ================ =============== ===============
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
F-6
<PAGE>
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
------- ------- ------- -------
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 65,838 $ 55,548 $96,046 $76,769
</TABLE>
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
The Company purchased the rights, title and interest in a pharmaceutical
product [See Note 4]. In connection with the purchase, the Company paid $200,000
during 1995 and assumed an obligation discounted to its net present value at the
date of acquisition of $1,227,935 [net of discount of $472,065]. The $200,000
paid at closing was used to purchase inventory and a portion of intangible
assets.
The Accompanying Notes are an Integral Part of These Financial Statements.
F-7
<PAGE>
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[1] Principles of Organization and Business
Niche Pharmaceuticals, Inc., a Delaware corporation [the "Company"], was
incorporated pursuant to the laws of the State of Delaware on October 14, 1996.
The Company is the successor to Niche Pharmaceuticals, Inc., a Texas corporation
["Niche Pharmaceuticals - Texas"] which was incorporated pursuant to the laws of
the State of Texas in 1991. The Company was organized to enable Niche
Pharmaceuticals - Texas to merge with and into the Company in November 1996 in
order to effectuate a reincorporation in the State of Delaware. Pursuant to the
terms of the merger, the Company effectuated a 1.25 to 1 stock split of all
shares of common stock on the date of merger. These financial statements have
been prepared giving retroactive effect to the merger.
The Company manufactures, through contract manufacturers, markets and
distributes non-prescription and nutraceutical dietary supplement products. The
pharmaceutical and nutraceutical industry is characterized by extensive research
efforts, rapid technological progress and intense competition. There are many
public and private companies, engaged in developing and marketing
pharmaceuticals and nutraceuticals, that represent significant competition to
the Company.
[2] Summary of Significant Accounting Policies
[A] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
[B] Economic Dependency - The Company has an exclusive agreement with a
pharmaceutical manufacturer and distributor for the manufacture and packaging of
one of its products. The initial term of the such agreement expires in July 1997
and is automatically renewable for successive two year terms, unless written
notice of termination is given by either party at least one year prior to the
expiration of the initial or a successive term. Neither party has given any
notice of termination. Accordingly, the expiration date of this agreement has
been extended to July 1999. The terms of this agreement provide that, in the
event of early termination by such manufacturer and distributor, such
manufacturer and distributor will, at the Company's request, provide the Company
with a supply of up to the total amount of product purchased by the Company in
the previous year. If the relationship with such manufacturer and distributor
were to cease, the Company believes, but cannot assure, that it will be able to
engage an alternative manufacturer on comparable terms to such agreement to
manufacture such product at comparable levels.
The Company's other product is being manufactured by another manufacturer and
distributor, pursuant to an agreement which expires on December 31, 1996.
Pursuant to such agreement, the manufacturer and distributor is obligated to
manufacture this product in sufficient quantity to meet the Company's projected
sales needs, which the Company estimates to be approximately $1,000,000, for
1997. During the fourth quarter of 1996 or the first quarter of 1997, the
Company expects to engage another third party contractor to manufacture this
product. The Company is currently investigating such manufacturing options and
believes, but cannot assure, that there will be no difficulty engaging another
contract manufacturer.
The Company earned a substantial portion of its revenues from four customers
during each of the years ended December 31, 1995 and 1994. Revenues from these
customers were approximately 25%, 16%, 13% and 13% of operating revenues,
exclusive of amounts received in settlement with a supplier [See Note 14] in
1995 and 22%, 16%, 11% and 10% of operating revenues in 1994. Amounts included
in accounts receivable from these customers were $13,118, $5,198, $5,045 and
$7,417 at December 31, 1995. The loss of any one of these customers may have a
substantial adverse effect on the Company.
F-8
<PAGE>
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
[C] Concentration of Credit Risk - The Company extends credit to its customers
which results in accounts receivable arising from its normal business
activities. The Company does not require collateral from its customers, but
routinely assesses the financial strength of the customers and, based upon
factors surrounding the credit risk of the customers, believes that its
receivable credit risk exposure is limited. Such estimate of the financial
strength of the customers may be subject to change in the near term.
[D] Inventories - Inventories, which consist solely of finished products, are
stated at the lower of cost or market. Cost is determined on the first-in,
first-out [FIFO] method.
[E] Property and Equipment - Property and equipment are recorded at cost.
Expenditures for normal repairs and maintenance are charged to earnings as
incurred. When assets are retired or otherwise disposed of, their costs and
related accumulated depreciation are removed from the accounts and the resulting
gains or losses are included in operations. Depreciation and amortization are
recorded using the straight-line method over the shorter of the estimated lives
of the related asset or the remaining lease term. Estimated useful lives are as
follows:
Office Equipment 5 - 7 Years
Computer Equipment 5 Years
Furniture and Fixtures 5 - 7 Years
Leasehold Improvements 5 Years
[F] Intangibles - Intangibles include contract rights, trademarks, patents,
educational materials, clinical data, covenants-not-to compete and organization
costs. Amortization of intangibles is being recognized on the straight-line
method based upon the economic lives of the assets. The Company continually
reevaluates the carrying values of these assets, by reviewing the estimated
useful lives to determine whether current events and circumstances warrant
adjustments to the carrying value and estimates of useful lives. At this time,
the Company believes that no significant impairment of these assets has occurred
and that no reduction of the estimated useful lives is warranted. Estimated
useful lives are as follows:
Contract Rights 15 Years
Trademarks 10-15 Years
Patent 17 Years
Educational Materials, Clinical Data and
Covenant-not-to Compete 7 Years
Organization Costs 5 Years
[G] Deferred Offering Costs - These costs represent legal and accounting fees in
connection with the proposed public offering of the Companies common stock.
These costs will be charged to additional paid-in capital upon completion of the
proposed public offering. If the offering is not completed, these costs will be
expensed.
[H] Earnings Per Share - Earnings per share are based on 1,101,500 shares issued
for all periods presented including the 100,000 shares in the bridge financing
[See Note 16A]. Shares or equivalents issued within a one year period prior to
the initial filing of the initial public offering of the registration statement
are treated as outstanding for all periods presented.
[I] Advertising and Marketing - Advertising and marketing expense, primarily
comprised of print media distributed to current and potential customers, is
expensed as incurred. Advertising and marketing expense amounted to $40,397 and
$48,206 for the years ended December 31, 1995 and 1994, respectively.
F-9
<PAGE>
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
[J] Stock Options and Similar Equity Instruments Issued to Employees - The
Company uses the intrinsic value method to recognize compensation expense
related to stock options and similar equity instruments issued to employees,
which is based on the difference between the fair market value of the common
stock and the exercise price at the grant date.
[K] Cash and Cash Equivalents - The Company considers all highly liquid invest-
ments with maturities of three months or less when purchased to be cash
equivalents. The Company had no cash equivalents at December 31, 1995.
[3] Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplates continuation of the
Company as a going concern, and the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. As of December
31, 1995, the Company had an accumulated deficit of $617,961 and a working
capital deficit of $67,504.
The ability of the Company to continue as a going concern is dependent upon the
success of the Company's marketing efforts and its ability to obtain sufficient
funding to continue operations. The Company has been funded through December 31,
1995 by loans from its principal stockholders, and through third party debt
which has been guaranteed by various stockholders and by the sale of stock [See
Notes 7, 8 and 9]. The ability of the Company to effect its transition,
ultimately, to profitable operations is dependent upon obtaining adequate
financing through a private placement or initial public offering and achieving
an increase in revenues. The Company has acquired a product that has proven
market acceptance and management plans to increase revenues by substantially
increasing its marketing activities both in and outside the United States.
Management believes that these plans can be effectively implemented in the next
twelve months. There can be no assurance that management will be successful in
these endeavors. The Company's ability to continue as a going concern is
dependent on the implementation and success of these plans. The financial
statements do not include any adjustments in the event the Company is unable to
continue as a going concern [See Notes 16A and 16B].
[4] Product Acquisition and Financing
On October 17, 1995, pursuant to an agreement between a pharmaceutical
manufacturer and the Company, the Company purchased all rights, title and
interest to a product manufactured by such pharmaceutical manufacturer. Such
agreement requires the Company to pay the greater of $1,700,000 [$200,000 was
paid at the date of acquisition] or 20% of the annual product sales payable over
a five year installment period with a maximum payment of $3,000,000. Such
installment plan did not include a stated rate of interest, therefore, the
payments were discounted to a net present value of $1,227,935 using an imputed
interest rate of 11% which resulted in a discount of $472,065 that will be
amortized over the life of the agreement using the effective interest method.
The note is guaranteed by the principal stockholder of the Company.
The following is a summary of the minimum payments required to be made March 31
of each year indicated below under this agreement as of December 31, 1995:
Years Ending Minimum Payment Due
December 31,
1997 $ 200,000
1998 250,000
1999 300,000
2000 350,000
2001 400,000
--------------
Total 1,500,000
Less: Unamortized Discounts 453,220
Net Present Value Due $ 1,046,780
--------------------- ==============
F-10
<PAGE>
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[4] Product Acquisition [Continued]
The cost of this product was allocated to the following assets:
Asset Amount
Inventory $ 140,531
Trademark 300,000
Educational Materials 50,000
Clinical Data 200,000
Covenant-not-to Compete 100,000
Contract Rights 437,404
--------------
Total $ 1,227,935
----- ==============
Interest expense from discount amortization amounted to $18,845 for the year
ended December 31, 1995.
[5] Property and Equipment
Property and equipment consist of the following at December 31, 1995:
Furniture and Fixtures $ 21,289
Machinery and Equipment 19,283
Leasehold Improvements 7,527
--------------
Total 48,099
Less: Accumulated Depreciation 27,926
Total $ 20,173
----- ==============
Depreciation expense for the years ended December 31, 1995 and 1994 amounted to
$5,250 and $4,148, respectively.
[6] Intangibles
Intangibles consist of the following at December 31, 1995:
Original Cost
Contract Rights $ 442,404
Organizational Costs 122,039
Patents 84,000
Trademarks 303,000
Educational Material 50,000
Clinical Data 200,000
Covenant-not-to Compete 100,000
--------------
Total 1,301,443
Less: Accumulated Amortization (161,277)
Total $ 1,140,166
----- ==============
Amortization expense for the years ended December 31, 1995 and 1994 amounted to
$46,376 and $29,849, respectively.
F-11
<PAGE>
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[7] Long-Term Debt
Long-term debt consists of a note payable to a bank, in the original principal
amount of $250,000 payable with interest currently calculated at the prime rate
plus 2.25% [10.75% at December 31, 1995]. Such interest rate is adjusted
annually. The amount due is payable in monthly installments of approximately
$4,400 including principal and interest through April 1999. The note is
collateralized by the Company's accounts receivable, inventory, working capital,
intangibles and the common shares of the Company held by its principal
stockholder. In addition, the repayment of the note is guaranteed by the
Company's principal stockholder and, in part, by the United States Small
Business Administration.
Long-term debt consists of the following at December 31, 1995:
Total Long-Term Debt $ 144,060
Less: Current Portion 40,381
--------------
Total $ 103,679
----- ==============
At December 31, 1995, aggregate maturities of long-term debt are as follows:
Year Ending Amount
December 31,
1996 $ 40,381
1997 42,663
1998 48,683
1999 12,333
--------------
Total $ 144,060
----- ==============
Interest expense on this debt for the years ended December 31, 1995 and 1994 was
$17,747 and $17,340, respectively.
[8] Note Payable - Bank
Pursuant to an agreement dated October 11, 1995, the Company borrowed $300,000
from a bank, evidenced by a note payable. The note bears interest at the bank's
prime rate plus 1% [calculated at 9.50% at December 31, 1995]. Interest is due
quarterly and the note matures on October 11, 1996 [See Notes 9 and 15C]. The
note payable is unsecured and guaranteed by a stockholder of the Company. The
stockholders' notes payable are subordinated to this debt. Interest expense on
this note for the year ended December 31, 1995 was $6,600. The weighted average
interest rate in this short-term debt was 9.5% for the year ended December 31,
1995.
[9[ Notes Payable - Stockholders December 31,
1 9 9 5
Unsecured note to stockholder, interest at
10% per annum, made January 11, 1991 in the
original amount of $500,000, due January 11,
1998 with automatic renewal of one year
periods until written notice of termination
at least 30 days prior to the end of the
initial or any renewal term. $ 352,865
Unsecured note to stockholder, interest at
10% per annum, made December 10, 1991 in the
in the original amount of $37,500, due January
10, 1998, unless accelerated pursuant to the
terms of the agreement. 37,500
Total - Forward $ 390,365
F-12
<PAGE>
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #6
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[9] Notes Payable - Stockholders
December 31,
1 9 9 5
Total - Forwarded $ 390,365
Unsecured note to stockholder, interest at 10%
per annum, made December 10, 1991 in the
original amount of $37,500, due January 10,
1998, unless accelerated pursuant to the terms
of the agreement. 37,500
Unsecured note to stockholder, interest at 10%
per annum, made December 10, 1991 in the
original amount of $37,500, due January 10,
1998, unless accelerated pursuant to the terms
of the agreement. 37,500
Total Notes Payable - Long-Term $ 465,365
------------------------------- ==========
At December 31, 1995, aggregate maturities of notes payable - stockholders is as
follows:
Year Ending
December 31,
1996 $ --
1997 --
1998 465,365
---------------
Total $ 465,365
----- ===============
These notes are subordinated to the note payable - bank [See Note 8].
Interest expense on the notes for the years ended December 31, 1995 and 1994 was
$48,608 and $49,934, respectively.
[10] Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing the fair value, to
the extent practicable, for financial instruments which are recognized or
unrecognized in the balance sheet. The fair value of the financial instruments
disclosed therein is not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider the tax
consequences of realization on settlement. For certain financial instruments,
including cash, accounts receivable, payables and accrued expenses, it was
estimated that the carrying value approximates fair value because of the near
term maturities of such obligations. Management believes that the fair value of
the Company's stockholders' debt approximates its carrying value. The fair value
of the product financing, long-term debt and notes payable - bank is based on
current rates at which the Company could borrow funds at similar rates and
maturities. The carrying value of long-term debt approximates fair value.
[11] Income Taxes
For financial reporting purposes, at December 31, 1995, the Company has net
operating loss carryforwards of $595,000 expiring by 2010. The Tax Reform Act of
1986 includes provisions which may limit the net operating loss carryforwards
available for use in any given year if certain events occur, including
significant changes in stock ownership. If the Company is successful in
completing an initial public offering [See Note 15E], utilization of the
Company's net operating loss carryforwards to offset future income may be
limited due to income tax regulations regarding substantial changes in company
ownership.
F-13
<PAGE>
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #7
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[11] Income Taxes [Continued]
The expiration dates of net operating loss carryforwards are as follows:
December 31, Amount
2006 $ 114,000
2007 289,000
2008 126,000
2009 52,000
2010 14,000
----------
Total $ 595,000
----- ==========
A deferred tax asset arising primarily from the benefits of net operating loss
carryforwards of approximately $202,000 is offset by an allowance of $202,000
due to the uncertainty of its ultimate realization.
[12] Stockholders' Deficiency
The Company originally sold 20,000 shares of stock at $5 per share [50,000
shares as adjusted for stock splits] during the period November 1, 1994 through
March 31, 1995 in a private placement.
During 1994, the Board of Directors declared a 3.8 to 1 split. In addition, in
February 1996, the Board of Directors declared a 2 to 1 stock split for
stockholders of record. In addition, prior to the effective date of the proposed
public offering [See Note 15E], the Company has also agreed to effectuate 1.25
to 1 stock split. The financial statements have been retroactively restated to
reflect all such stock splits which reduced the par value of the Company's
shares from $.01 to $.00105.
Preferred Shares - Pursuant to the Company's Certificate of Incorporation [the
"Certificate of Incorporation"], preferred stock may be issued by the Company in
the future without stockholder approval and upon such terms as the Board of
Directors may determine. The rights of holders of common shares will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
shares that may be issued in the future.
[13] Other Related Party Transactions
The Company leases its office and warehouse space on a month to month basis from
its president and principal stockholder [See Note 15B]. Rental expense for the
office and warehouse for the years ended December 31, 1995 and 1994 was $16,749
and $15,261, respectively.
[14] Commitments and Contingencies
The Company reached a settlement in its lawsuit with a supplier in which the
Company sought a recovery from such supplier for damages it sustained as a
result of conduct on the part of such supplier pertaining to one of its
products. The Company received net proceeds of $66,147 during 1995 and agreed to
terminate all litigation in return. Such amount has been included in revenue for
the year ended December 31, 1995.
The Company leases equipment for its operations under five (5) noncancelable
operating leases expiring at various dates through November 1998.
F-14
<PAGE>
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #8
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[14] Commitments and Contingencies [Continued]
Future minimum rental payments under the above noncancelable operating leases as
of December 31, 1995 are as follows:
Years ending Amount
December 31,
1996 $ 39,735
1997 36,293
1998 30,806
----------
Total $ 106,834
----- ==========
[15] Subsequent Events
[A] 1996 Stock Option Plan - In February 1996, the Board of Directors of the
Company adopted, and the stockholders of the Company approved the adoption of,
the 1996 Stock Option Plan [the "1996 Stock Plan"] which provides for the grant
of options for the purchase of up to 131,250 common shares of the Company.
In February 1996, pursuant to the 1996 Stock Plan, the Company granted to two
directors of the Company options to purchase 12,500 and 75,000 common shares,
respectively, at an exercise price of $1.50 per share.
In July 1996, pursuant to the 1996 Option Plan, the Company granted to each of
two other directors options to purchase 12,500 common shares at an exercise
price of $1.50 per share. The options vest to the extent of 20% per year over a
period of five years commencing in July 1997 and terminate in July 2006.
[B] Lease of Premises - In September 1996, the principal stockholder sold the
office and warehouse premises to a third party [See Note 13]. Effective
September 1996, the Company entered into a five (5) year noncancellable
operating lease with the new owners of the same premises. The lease, which
expires in August of 2001, requires an annual rental of $24,000 for the first
year, with annual increases of $2,400 each year for the next three (3) years.
The Company has the option to renew the lease for a period of up to five (5)
years at a monthly rental of $2,600. The Company pays property taxes, insurance,
utilities and certain repairs related to the leased property.
[C] Renewal of Note Payable - Bank - On October 11, 1996, this note was renewed
by the bank with a maturity date of October 11, 1997, with terms similar to the
original note payable [See Note 8].
[16] Subsequent Events [Unaudited]
[A] Bridge Loan - In December 1996, the Company borrowed $100,000 in a bridge
loan financing from unaffiliated persons at the rate of 10% simple annual
interest. Such loans are to be repaid at the earlier of the closing of the
proposed public offering or the first anniversary date of the bridge loan
closing. In further consideration of the bridge loan, the Company issued 100,000
shares of common stock. The fair value of the common stock at the date of
issuance, of approximately $300,000 will be recorded as a deferred financing
cost and amortized over the lesser of a one year term or the life of the debt.
The shares of common stock will be registered as part of the proposed initial
public offering.
F-15
<PAGE>
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #9
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[16] Subsequent Events [Unaudited] [Continued]
[B] Proposed Initial Public Offering - The Company is offering for public sale
1,300,000 shares of common stock at a price of $5.00 per share. Although no
assurance can be given that the proposed initial public offering will be
successful, the Company intends to utilize the net proceeds from the proposed
initial public offering of approximately $5,240,000 for the partial repayment of
debt, product acquisition, research and development, hiring of additional
personnel and working capital purposes.
[C] 1996 Senior Executive Stock Option Plan - This Plan provides for the grant
of options to a certain management group for the purchase of up to 405,000
common shares of the Company. The 1996 Executive Plan provides for the grant to
executives and directors of the Company options to purchase 405,000 common
shares of the Company, respectively, at an exercise price of $5.00 per share
[the "Executive Plan Options"]. The Executive Plan Options shall terminate in
2006 and vest in one-third increments in each of 1998, 1999 and 2000 following
the issuance of audited financial statements for the prior year, provided the
Company's cumulative pre-tax income from operations exceeds $300,000, without
giving effect to any charge to earnings resulting from an issuance of common
shares to bridge lenders [See Note 16A], $3,000,000 and $7,500,000 for the
fiscal years ending December 31, 1997, December 31, 1998 and December 31, 1999,
respectively [the "Cumulative Goals"]. In the event a particular Cumulative Goal
is not reached through December 31 of any given year, the particular installment
of such Executive Plan Options will nevertheless vest in a future year if the
Cumulative Goal for a succeeding year is met.
[D] 1996 Non-Executive Stock Option Plan - This Plan provides for the grant of
options to employees of the Company other than to eligible optionees under the
1996 Senior Executive Stock Option Plan to purchase up to 150,000 common shares.
No options have been granted under the 1996 Non-Executive Stock Option Plan.
[E] Consulting Agreement - Pursuant to the proposed underwriting agreement, the
Company anticipates entering into a three-year consulting agreement with the
underwriter to provide services with its mergers and acquisitions and general
business management. The fee for such services will be $100,000.
[F] Employment Agreement - The Company intends to enter into an employment
agreement with the President Chief Executive Officer, and Executive Vice
President on the closing date of the initial public offering for an initial term
of three years, providing for a salary of $120,000 and $96,000, per annum,
respectively.
[G] Underwriter's Purchase Options - As a part of the consideration of its
services in connection with the Company's proposed initial public offering
described herein [See Note 16B], the Company has agreed to issue to the
underwriter, for nominal consideration, a warrant to purchase up to 100,000
shares of common stock at an exercise price of 120% of the public offering price
of such shares and warrants for a three year period commencing one year after
the effective date of the proposed initial public offering. The non-cash cost of
such options, representing a cost of raising capital, will be approximately
$554,000 and will be recorded as a charge and credit to stockholders' equity
when options are issued.
[17] Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] issued the Statement of
Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in March of
1995. SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 is effective for
financial statements issued for fiscal years beginning after December 15, 1995.
Adoption of SFAS No. 121 could have a material impact on the Company's future
financial statements.
F-16
<PAGE>
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #10
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[17] Authoritative Pronouncements [Continued]
The FASB has also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
recognition for stock options and similar equity instruments issued to employees
as contrasted to the intrinsic valued based method of accounting prescribed by
Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued
to Employees." The optional recognition requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Company will continue to apply Opinion No. 25 in
recognizing its stock based employee arrangements. The disclosure requirements
of SFAS No. 123 are effective for financial statements for fiscal years
beginning after December 15, 1995. The Company adopted the disclosure
requirements on January 1, 1996. SFAS 123 also applies to transactions in which
an entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for based on the fair value
of the consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. This requirement is effective for
transactions entered into after December 15, 1995.
[18] Unaudited Interim Statements
The financial statements as of September 30, 1996 and for the periods ended
September 30, 1996 and 1995 are unaudited. In the opinion of management, the
interim financial statements include all adjustments which are necessary in
order to make the interim financial statements not misleading. The results for
interim periods are not necessarily indicative of the results to be obtained for
a full fiscal year.
. . . . . . . . . . . . .
F-17
<PAGE>
- ---------------------------------------
No dealer, salesman or other person
has been authorized to give any information or
to make any representations not contained in
this Prospectus and if given or made, such
information or representations must not be
relied upon as having been authorized by the
Company or the Underwriter. 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. This Prospectus does not
constitute an offer of any securities other than
the securities to which it relates or an offer to
any person in any jurisdiction in which such an
offer would be unlawful.
-----------
TABLE OF CONTENTS
Page
Prospectus Summary...............................
Risk Factors.....................................
Use of Proceeds..................................
Dilution.........................................
Capitalization...................................
Dividend Policy..................................
Bridge Financing.................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................
Business.........................................
Management.......................................
Principal and Selling Stockholders...............
Certain Relationships and Related Transactions...
Description of Securities........................
Underwriting.....................................
Legal Matters....................................
Experts..........................................
Additional Information...........................
Glossary.........................................
Financial Statements.............................
-------------
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 is in
addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
====================================================
58
<PAGE>
1,300,000 Shares of Common Stock
NICHE PHARMACEUTICALS, INC.
------------
PROSPECTUS
S T E R L I N G F O S T E R
I N V E S T M E N T B A N K E R S
, 1997
===========================================
59
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Article X of the Company's Certificate of Incorporation eliminates
the personal liability of directors to the Company and its stockholders for
monetary damages for breach of fiduciary duty as a director to the fullest
extent permitted by Section 102 of the Delaware General Corporation Law,
provided that this provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the Delaware General Corporation Law (with respect to unlawful
dividend payments and unlawful stock purchases or redemptions), or (iv) for any
transaction from which the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of
Incorporation and its by-laws provisions to indemnify its directors, officers,
employees and agents and to purchase insurance with respect to liability arising
out of the performance of their duties as directors, officers, employees and
agents as permitted by Section 145 of the Delaware General Corporation law. The
Delaware General Corporation law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors, officers, employees and agents may be entitled under the
Company's by-laws, any agreement, vote of stockholders or otherwise.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers, directors, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
In connection with the Offering, the Underwriter has agreed to
indemnify the Company, its directors, and each person who controls it within the
meaning of Section 15 of the Act with respect to any statement in or omission
from the registration statement or the Prospectus or any amendment or supplement
thereto if such statement or omission was made in reliance upon information
furnished in writing to the Company by the Underwriter specifically for or in
connection with the preparation of the registration statement, the Prospectus,
or any such amendment or supplement thereto.
The Company intends to obtain has liability insurance coverage for
its officers and directors in the amount of $1,000,000 per person.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT MAY
BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY PURSUANT
TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT, IN THE OPINION
OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS AGAINST
PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS THEREFORE UNENFORCEABLE.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses to be incurred by the Company in connection
with the issuance and distribution of the securities being registered, other
than underwriting discounts and commissions, are estimated as follows:
SEC Registration Fee $ 2,653.01
NASD Filing Fee 3,000.00
Blue Sky Fees and Expenses 15,000.00
Registrant's Counsel Fees and Expenses 125,000.00
Accountant's Fees and Expenses 35,000.00
Underwriter's Non-Accountable Expense Allowance 195,000.00
Underwriter's Consulting Fee 100,000.00
Printing Expenses 75,000.00
NASDAQ Listing Fees 7,500.00
Blue Sky Counsel Fees 35,000.00
Transfer Agent and Registrar's Fee and Expenses 2,000.00
Miscellaneous Expenses 14,846.99
------------
Estimated Total $610,000.00
Item 26. Recent Sales of Unregistered Securities.
The Company sold the following Common Shares during the past three
years. The number of Common Shares referred to herein gives effect to a 2 for 1
stock split on February 8, 1996, and a 1.25 for 1 stock split effective as of
October 15, 1996 in connection with the Company's reincorporation in the State
of Delaware.
In November 1994, the Company sold the following number of Common
Shares in a private offering, for $2.00 per share in cash, to the following
persons:
Number of Aggregate
Common Cash
Name Shares Consideration
- ---- --------- -------------
Roger G. Boyer 2,500 $ 5,000
David A. Wang 2,500 5,000
Frank E. Putt 2,500 5,000
Joseph A. Spinella 2,500 5,000
B.J. Shaw 2,500 5,000
Richard L. Shumate, Jr. 2,500 5,000
Billy J. Baxley 7,500 15,000
Ronald Tennissen 2,500 5,000
Don J. Teague 2,500 5,000
W. Craig Carlisle 2,500 5,000
Ron L. Montgomery 2,500 5,000
Robert T. Meyer 2,500 5,000
Allan Avery 15,000 30,000
------ -------
Total 50,000 $100,000
II-2
<PAGE>
In December 1996, the Company borrowed $100,000 from Dominant
Construction Corp. (the "Bridge Lender") in a Bridge Financing transaction. In
exchange for making the loan, the Company issued to the Bridge Lender 100,000
Common Shares.
All the foregoing transactions were private transactions not
involving a public offering and were exempt from the registration provisions of
the Act pursuant to Section 4(2) thereof. Except as otherwise indicated below,
sales of the Common Shares were without the use of an underwriter, and the
certificates evidencing the securities relating to the foregoing transactions
bear restrictive legends permitting the transfer thereof only upon registration
of such securities or an exemption under the Act.
The Underwriter of this Offering acted as placement agent for the
Company in connection with the Bridge Financing on a "best efforts, all or none"
basis. The Underwriter received a placement fee of 7% of the gross proceeds of
the bridge financing, or $7,000. The Company also paid the fees and
disbursements of the Underwriter's counsel in connection with representing the
Underwriter in its capacity of placement agent in the Bridge Financing
transaction.
Item 27. Exhibits.
Exhibit
Number Title of Exhibit
------ ----------------
1.1 Form of Underwriting Agreement by and between the Company and the
Underwriter.*
1.2 Form of Financial Consulting Agreement between the Underwriter and
the Company.*
2.1 Agreement of Merger between the Company and Niche Pharmaceuticals,
Inc., a Texas corporation.
3.1 Articles of Incorporation of the Company.
3.2 By-Laws of the Company.
4.1 Specimen Common Share Certificate.*
4.2 Form of Underwriter's Common Share Purchase Warrant.*
5.1 Opinion of Certilman Balin Adler & Hyman, LLP, counsel for the
Company.*
10.1 Loan Agreement, dated January 11, 1991, between Stephen F. Brandon
and the Company.*
10.2 $500,000 Promissory Note (the "Brandon Note"), dated January 11,
1991, by the Company to Stephen F. Brandon.
II-3
<PAGE>
10.3 Letter Agreement dated November 22, 1996, between Stephen F. Brandon
and the Company, extending the payment date of the Brandon Note to
January 11, 1998.
10.4 Authorization and Loan Agreement among the U.S. Small Business
Administration (dated January 9, 1992), the Company (dated April 8,
1992), and First National Bank of Grapevine (dated April 8, 1992).
10.5 $250,000 Promissory Note, dated April 8, 1992, of the Company to
First National Bank of Grapevine.
10.6 $300,000 Promissory Note, dated October 11, 1996, of the Company to
Mercantile Bank of Kansas City.
10.7 Purchase Agreement, dated October 17, 1995, between the Company and
Dow Hickam Pharmaceuticals, Inc.
10.8 Lease, dated July 30, 1996, between Eva L. Zweifel Huntsman and the
Company.
10.9 Third Party Manufacturing Agreement between the Company (dated
December 24, 1991) and Schering Corporation (dated January 27, 1992)
10.10 Form of Employment Agreement, between the Company and Stephen F.
Brandon.
10.11 1996 Stock Option Plan.*
10.12 1996 Senior Executive Stock Option Plan.*
10.13 1996 Non-Senior Executive Stock Option Plan.*
23.1 Consent of Moore Stephens, PC, independent certified public
accountants.
23.2 Consent of Certilman Balin Adler & Hyman, LLP (included in its
opinion filed as Exhibit 5.1 hereto).*
23.3 Consent of Sherman A. Drusin, the Underwriter's designee to the
Company's Board of Directors.
27. Financial Data Schedule.
*To be filed by amendment.
II-4
<PAGE>
Item 28. Undertakings.
(a) Rule 415 Offering.
The undersigned Company will:
(1) 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 Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the registration statement; and
(iii) include any additional or changed material information on the
plan of distribution.
(2) for determining liability under the 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.
(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Equity Offerings of Nonreporting Small Business Issuers.
The undersigned Company will provide to the Underwriter, at the
closing specified in the underwriting agreement, Common Share certificates in
such denominations and registered in such names as required by the Underwriter
to permit prompt delivery to each purchaser.
(c) Indemnification.
Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions referred to in Item 24 of this Registration
Statement, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling persons of the Company 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
Company 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 Act and will be governed by the final adjudication of such
issue.
(d) Rule 430A.
The undersigned Company will:
(1) for determining any liability under the 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 Company under Rule 424(b)(1) or (4)
or 497(h) under the Act, as part of this Registration Statement as of
the time the Commission declared it effective;
(2) for determining any liability under the 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 that offering of the securities at that time as the
initial bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Company certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Roanoke, State of Texas, on December 11, 1996.
NICHE PHARMACEUTICALS, INC.
By:/s/ Stephen F. Brandon
----------------------------------------
Stephen F. Brandon, President
Chief Executive Officer, and Treasurer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Stephen F. Brandon and Thomas F. Reed,
and each of them, with full power to act as his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, and each of his substitutes, full power and
authority to do and perform each and every act and thing requisite or 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
attorney-in-fact and agent, and each of his substitutes, may lawfully do or
cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/Stephen Brandon President, Chief Executive December 11, 1996
Stephen F. Brandon Officer, Treasurer and
Director
/s/Thomas F. Reed Executive Vice President- December 11, 1996
Thomas F. Reed Corporate Development
and Director
/s/Jean R. Perry Vice President and Director December 11, 1996
Jean R. Sperry
/s/Allan R. Avery Director December 11, 1996
Allan R. Avery
/s/J. Leslie Glick Director December 11, 1996
J. Leslie Glick
II-7
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EXHIBIT 2.1
AGREEMENT OF MERGER (the "Agreement"), dated as of October 7, 1996, by
and between NICHE PHARMACEUTICALS, INC., a Delaware corporation ("Niche
Delaware"), and NICHE PHARMACEUTICALS, INC., a Texas corporation ("Niche
Texas").
Niche Delaware is a corporation duly organized and existing
under the laws of the State of Delaware and has an authorized capitalization of
15,000,000 shares of Common Stock, par value $.01 per share, 10 shares of which
are outstanding and are held by Niche Texas, and 2,000,000 shares of Preferred
Stock, par value $.01 per share, none of which are outstanding.
Niche Texas is a corporation duly organized and existing under
the laws of the State of Texas and has an authorized capitalization of 1,000,000
shares of Common Stock par value $.01 per share.
The respective Boards of Directors of Niche Delaware and Niche
Texas have determined that, for the purpose of effecting the reincorporation of
Niche Texas in the State of Delaware, it is advisable and to the advantage of
such two corporations that Niche Texas merge with and into Niche Delaware upon
the terms and conditions herein provided.
The respective Boards of Directors of Niche Delaware and Niche
Texas have approved this Agreement and the Boards of Directors of Niche Delaware
and Niche Texas have directed that this Agreement be submitted to a vote of
their respective stockholders.
NOW THEREFORE, in consideration of the mutual agreements and
covenants set forth herein, Niche Delaware and Niche Texas, subject to the terms
and conditions hereinafter set forth, hereby agree, as follows:
I
MERGER
1.1 Merger. In accordance with the provisions of this Agreement, the
Delaware General Corporation Law ("Delaware Law") and the Texas Business
Corporation Act ("Texas Law"), Niche Texas shall be merged with and into Niche
Delaware (the "Merger"). Niche Delaware shall be and is hereinafter sometimes
referred to as the "Surviving Corporation." Niche Delaware and Niche Texas are
sometimes hereinafter referred to as the "Constituent Corporations."
1.2 Filing and Effectiveness. The Merger shall become effective (the
"Effective Date of the Merger") for all purposes, including, without limitation,
accounting and operational purposes, except for purposes of the State of Texas,
when the following actions shall have been completed:
(a) The Agreement and the Merger shall have been adopted and
approved by the stockholders of each Constituent Corporation in accordance with
the requirements of Delaware and Texas Law; and
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(b) An executed Certificate of Ownership and Merger meeting
the requirements of Delaware Law, shall have been filed with the Secretary of
State of the State of Delaware in accordance with the applicable laws of such
State; and
1.3 Texas Filing. An executed Articles of Merger meeting the
requirements of Texas Law, shall be filed with the Secretary of State of the
State of Texas in accordance with the applicable laws of such State,
contemporaneously with the filing of the Certificate of Ownership and Merger
with the Secretary of State of the State of Delaware described in Section
1.2(b).
1.4 By-laws. The By-laws of Niche Delaware as in effect on the
Effective Date of the Merger shall continue in full force and effect as the
By-laws of the Surviving Corporation.
1.5 Directors and Officers. The directors and officers of Niche
Delaware immediately prior to the Effective Date of the Merger shall be the
directors and officers of the Surviving Corporation until their successors shall
have been elected and shall qualify or until otherwise provided by law, the
Certificate of Incorporation of the Surviving Corporation and the By-laws of the
Surviving Corporation.
1.6 Effect of Merger. Upon the Effective Date of the Merger, the
separate existence of Niche Texas shall cease and Niche Delaware, as the
Surviving Corporation, (i) shall continue to possess all of its rights and
property as constituted immediately prior to the Effective Date of the Merger
and shall succeed, without other transfer, to all of the rights and property of
Niche Texas, and (ii) shall continue to be subject to all of its debts and
liabilities as constituted immediately prior to the Effective Date of the Merger
and shall succeed, without other transfer, to all of the debts and liabilities
of Niche Texas in the same manner as if Niche Delaware had itself incurred them,
pursuant to Delaware and Texas Law.
II
MANNER OF CONVERSION OF STOCK
2.1 Niche Texas Capital Stock. The Common Shares of Niche Texas issued
and outstanding on the Effective Date of the Merger shall, by virtue of the
Merger and without any action by the holder of such shares or the Surviving
Corporation, be converted into fully paid and nonassessable shares of Common
Stock, par value $.01 per share, of the Surviving Corporation on the basis of
one and one-fourth (1 1/4) shares of Common Stock of the Surviving Corporation
for each one (1) share of Common Stock of Niche Texas.
2.2 Fractional Shares. No fractional shares of Common Stock of the
Surviving Corporation or cash in lieu thereof shall be issued or paid in
connection with the conversion pursuant to Section 2.1. If fractional shares
would otherwise result from such conversion, stockholders who would be entitled
to receive such fractional shares if they were to be issued shall instead
receive a full share.
2
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2.3 1996 Stock Option Plan. On the Effective Date of the Merger, the
1996 Stock Option Plan of Niche Texas shall become the 1996 Stock Option Plan of
the Surviving Corporation and the number of shares of Common Stock authorized
for issuance upon the exercise of options granted under the 1996 Stock Option
Plan shall be increased on the basis of one and one-fourth (1 1/4) shares of
Common Stock of the Surviving Corporation for each one (1) share of Common Stock
of Niche Texas.
2.4 Niche Texas Rights and Options. On the Effective Date of the
Merger, each outstanding right and option to acquire shares of Common Stock of
Niche Texas shall become, respectively, rights and options to acquire shares of
the Surviving Corporation's Common Stock on the basis of one and one-fourth (1
1/4) shares of the Surviving Corporation's Common Stock for each one (1) share
of Common Stock of Niche Texas issuable pursuant to any such right or option, as
the case may be, at a price per share equal to the purchase (or conversion)
price under such Niche Texas right or option prevailing at the Effective Date of
the Merger divided by one and one-fourth (1 1/4).
2.5 Niche Delaware Capital Stock. Any then outstanding shares of Common
Stock of Niche Delaware which are owned by Niche Texas immediately prior to the
Merger shall be canceled at the Effective Date of the Merger.
III
MISCELLANEOUS
3.1 Niche Delaware Certificate of Incorporation. Annexed hereto
as Exhibit A is the Certificate of Incorporation of Niche Delaware.
3.2 Abandonment. At any time before the Effective Date of the Merger,
the Agreement may be terminated and the Merger may be abandoned for any reason
whosoever by the Board of Directors of either Niche Texas or Niche Delaware or
both, notwithstanding approval of the Agreement by the stockholders of Niche
Texas, the stockholders of Niche Delaware or both.
3.3 Registered Office. The registered office of the Surviving
Corporation in the State of Delaware is located at 15 East North Street, Dover,
Delaware, and United Corporate Services, Inc. is the registered agent of the
Surviving Corporation at such address.
3.4 Agreement. Executed copies of this Agreement will be on file at the
principal place of business of the Surviving Corporation at 200 North Oak,
Roanoke, Texas, and copies thereof will be furnished to the stockholders of each
Constituent Corporation upon request and without cost.
3.5 Governing Law. The Agreement shall in all respects be construed,
interpreted and enforced in accordance with and governed by the laws of the
State of Delaware, and, so far as applicable, the merger provisions of Texas
Law.
3
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3.6 Counterparts. The Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original.
IN WITNESS WHEREOF, this Agreement, having been first approved by
resolutions of the Board of Directors of Niche Delaware and Niche Texas, is
hereby executed on behalf of each of such two corporations by their respective
officers thereunto duly authorized.
NICHE PHARMACEUTICALS, INC.,
a Delaware corporation
By:/s/ Stephen F. Brandon
Stephen F. Brandon, President
NICHE PHARMACEUTICALS, INC.,
a Texas corporation
By:/s/Stephen F. Brandon
Stephen F. Brandon, President
K:\WPDOC\CORP\NICHE\AGREEMNT\MERGER.996
4
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
NICHE PHARMACEUTICALS, INC.
The undersigned, being of legal age, in order to form a corporation
pursuant to the provisions of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
ARTICLE I
The name of the corporation (hereinafter referred to as the
"Corporation") is NICHE PHARMACEUTICALS, INC.
ARTICLE II
The registered office of the Corporation is located in the County of
Kent at 15 East North Street, Dover, Delaware 19901. The name of the
Corporations's registered agent at said address is United Corporate Services,
Inc.
ARTICLE III
The nature of the business of the Corporation, and the objects and
purposes proposed to be transacted, promoted and carried on by it, shall be to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
(a) The aggregate number of shares of stock which the Corporation shall
have the authority to issue is 17,000,000, of which 15,000,000 are shares of
Common Stock, with a par value of $.01 per share, and 2,000,000 are shares of
Preferred Stock, with a par value of $.01 per share.
(b) The Board of Directors hereby is vested with the authority to
provide for the issuance of the Preferred Stock, at any time and from time to
time, in one or more series, each of such series
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to have such voting powers, designations, preferences and relative
participating, optional, conversion and other rights, and such qualifications,
limitations or restrictions thereon as expressly provided in the resolution or
resolutions duly adopted by the Board of Directors providing for the issuance of
such shares or series thereof. The authority which hereby is vested in the Board
of Directors shall include, but not be limited to, the authority to provide for
the following matters relating to each series of the Preferred Stock:
(i) The designation of any series.
(ii) The number of shares initially constituting any such
series.
(iii) The increase, and the decrease, to a number not less
than the number of the outstanding shares of any such series, of the number of
shares constituting such series theretofore fixed.
(iv) The rate or rates and the times at which dividends
on the shares of Preferred Stock or any series thereof shall be paid, and
whether or not such dividends shall be cumulative, and, if such dividends shall
be cumulative, the date or dates from and after which they shall accumulate.
(v) Whether or not the shares of Preferred Stock or series
thereof shall be redeemable, and, if such shares shall be redeemable, the terms
and conditions of such redemption, including but not limited to the date or
dates upon or after which such shares shall be redeemable and the amount per
share which shall be payable upon such redemption, which amount may vary under
different conditions and at different redemption dates.
(vi) The amount payable on the shares of Preferred Stock
or series thereof in the event of the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided, however, that the
holders of shares ranking senior to other shares shall be entitled to be
2
<PAGE>
paid, or to have set apart for payment, not less than the liquidation value of
such shares before the holders of shares of the Common Stock or the holders of
any other series of Preferred Stock ranking junior to such shares.
(vii) Whether or not the shares of Preferred Stock or
series thereof shall have voting rights, in addition to the voting rights
provided by law, and, if such shares shall have such voting rights, the
terms and conditions thereof, including but not limited to the right of the
holders of such shares to vote as a separate class either alone or with the
holders of shares of one or more other class or series of Preferred Stock and
the right to have more than one vote per share.
(viii) Whether or not a sinking fund shall be provided for
the redemption of the shares of Preferred Stock or series thereof, and, if such
a sinking fund shall be provided, the terms and conditions thereof.
(ix) Whether or not a purchase fund shall be provided for
the shares of Preferred Stock or series thereof, and, if such a purchase fund
shall be provided, the terms and conditions thereof.
(x) Whether or not the shares of Preferred Stock or series
thereof shall have conversion privileges, and, if such shares shall have
conversion privileges, the terms and conditions of conversion, including but
not limited to any provision for the adjustment of the conversion rate or the
conversion price.
(xi) Any other relative rights, preferences, qualifica-
tions, limitations and restrictions.
3
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ARTICLE V
The name and mailing address of the incorporator of the
Corporation is:
Name Mailing Address
Gavin C. Grusd Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, New York 11554
ARTICLE VI
No action required or permitted to be taken at any annual or
special meeting of stockholders of the Corporation may be taken without a
meeting, except upon the written consent of the holders of 100% of the shares of
capital stock of the Corporation entitled to vote on such action, unless such
action has been authorized by the Board of Directors, in which event such action
may be taken by the written consent of the holders of not less than a majority
of the shares of capital stock entitled to vote on such action.
ARTICLE VII
The following provisions are inserted for the management of
the business and for the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the Corporation
and of its directors and stockholders.
(a) The number of directors of the Corporation shall be such
as from time to time shall be fixed by, or in the manner provided in, the
By-Laws. Election of directors need not be by ballot unless the By-Laws so
provide.
(b) The Board of Directors shall have the power without the
assent or vote of the stockholders:
4
<PAGE>
(i) To make, alter, amend, change, add to or repeal the
By-Laws of the Corporation; to fix and vary the amount to be reserved for any
proper purpose; to authorize and cause to be executed mortgages and liens
upon all or any part of the property of the Corporation; to determine the use
and disposition of any surplus or net profits; and to fix the time for the
declaration and payment of dividends.
(ii) To determine from time to time whether, and to what
times and places, and under what conditions the accounts and books of the
Corporation (other than the stock ledger) or any of them, shall be open to the
inspection of the stockholders.
(c) The Board of Directors in their discretion may submit any
contract or act for approval or ratification at any annual meeting of the
stockholders, at any meeting of the stockholders called for the purpose of
considering any such act or contract, or through a written consent in lieu of a
meeting in accordance with the requirements of the General Corporation Law of
Delaware as amended from time to time, and any contract or act that shall be so
approved or be so ratified by the vote of the holders of a majority of the stock
of the Corporation which is represented in person or by proxy at such meeting
(or by written consent whether received directly or through a proxy) and
entitled to vote thereon (provided that a lawful quorum of stockholders be there
represented in person or by proxy) shall be as valid and as binding upon the
Corporation and upon all the stockholders as though it had been approved,
ratified, or consented to by every stockholder of the Corporation, whether or
not the contract or act would otherwise be open to legal attack because of
directors' interest, or for any other reason.
(d) In addition to the powers and authority hereinbefore
or by statute expressly conferred upon them, the directors are hereby empowered
to exercise all such powers
5
<PAGE>
and do all such acts and things as may be exercised or done by the Corporation;
subject, nevertheless, to the provisions of the statutes of Delaware, this
Certificate of Incorporation, and to any By-Laws from time to time made by the
stockholders; provided, however, that no ByLaws so made shall invalidate any
prior act of the directors which would have been valid if such By-Law had not
been made.
ARTICLE VIII
Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver appointed for the Corporation under the provisions
of Section 291 of Title 8 of the Delaware Code or on the application of trustees
in dissolution or of any receiver or receivers appointed for the Corporation
under the provisions of Section 279 of Title 8 of the Delaware Code, order a
meeting of the creditors or class of creditors and/or of the stockholders or
class of stockholders of the Corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors, and/or on all the stockholders or class of stockholders, of the
Corporation, as the case may be, and also on the Corporation.
6
<PAGE>
ARTICLE IX
The original By-Laws shall be adopted by the incorporator of
the Corporation. Thereafter, the Board of Directors or the stockholders may
adopt, amend or repeal the By-Laws in such manner as may be by law or therein
provided, but any By-Laws made by the Board of Directors is subject to amendment
or repeal by the stockholders of the Corporation.
ARTICLE X
No director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty or loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit, it being the intention of the foregoing provisions to
eliminate the liability of the Corporation's directors to the Corporation or its
stockholders to the fullest extent permitted by Section 102(b)(7) of the
Delaware General Corporation Law, as amended from time to time.
ARTICLE XI
The directors of the Corporation shall be elected in three
classes. The number of directors in each class shall be fixed from time to time
by the Board of Directors of the corporation; provided, however that the number
of directors in any class shall not exceed the number of directors in any other
class by more than one. The initial term of office of the first class of
directors shall expire at the first annual meeting of stockholders after their
election, the initial term of office of the second class of directors shall
expire at the second annual meeting of
7
<PAGE>
stockholders after their election and the initial term of office of the third
class of directors shall expire at the third annual meeting of stockholders
after their election. At each annual meeting of stockholders after 1999, the
directors elected to succeed those whose terms have expired shall be identified
as being of the same class as the directors they succeed and shall be elected to
hold office until the third succeeding annual meeting of stockholders after
their election. Notwithstanding the foregoing, however, each director shall hold
office until his successor shall have been duly elected and qualified, unless he
shall resign, become disqualified, disabled or shall otherwise be removed.
If the number of directors is changed, any increase or
decrease in directors shall be apportioned among the classes so as to maintain
all classes as equal in number as possible, and any additional director elected
to any class shall hold office for a term which shall coincide with the term of
the other directors in such class. No increase in the number of directors shall
shorten the term of any incumbent director.
Any vacancy occurring in the Board of Directors caused by
the death, resignation, or removal of a director, and any newly created
directorship resulting from an increase in the number of directors, may be
filled by a majority of the directors then in office, although less than a
quorum. Each director chosen to fill a vacancy or newly created directorship
shall hold office until the next election of the class for which such director
shall have been chosen and until his successor shall be duly elected and
qualified.
8
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Notwithstanding the foregoing paragraphs of this Article,
whenever the holders of any preferred stock issued by the Corporation shall
have the right, voting as a class or otherwise, to elect directors, the then
authorized number of directors of the Corporation shall be increased by the
number of the additional directors so to be elected, and the holders of such
preferred stock shall be entitled, as a class or otherwise, to elect such
additional directors. Any directors so elected shall hold office until the
next annual meeting of stockholders or until their rights to hold such office
shall terminate pursuant to the provisions of such preferred stock, whichever is
earlier.
ARTICLE XII
(a) Each person who was or is made a party or is threatened to
be made a party to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader
9
<PAGE>
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including without
limitation, attorneys fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith and such indemnification shall continue as
to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that, except as provided in paragraph (b) hereof, the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Article shall be
a contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the Delaware General Corporation Law
requires, the payment of such expenses incurred by a director or officer in his
or her capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director or officer,
to repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this Article or
otherwise. The Corporation may, by action of its Board of Directors, provide
indemnification to employees and agents of the Corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
10
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(b) If a claim under paragraph (a) of this Article is not paid
in full by the Corporation within thirty days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the Delaware General Corporation Law for the Corporation to indemnify the
claimant for the amount claimed, but the burden of proving such defense shall be
on the Corporation. Neither the failure of the Corporation (including its Board
of Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant has
not met such applicable standard or conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
(c) The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition conferred
in this Article shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute,
11
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provision of the Certificate of Incorporation, By-Law, agreement, vote of
stockholders or disinterested directors or otherwise.
(d) The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the Delaware General Corporation Law.
ARTICLE XIII
The Corporation reserves the right to amend, alter, change or
repeal any provision of this Certificate of Incorporation in the manner now or
hereafter prescribed by law, and all rights and powers conferred herein on
stockholders, directors and officers are subject to this reserved power.
IN WITNESS WHEREOF, the undersigned hereby executes this
document and affirms that the facts set forth herein are true under penalties of
perjury this 4th day of October, 1996.
/s/Gavin C. Grusd
Gavin C. Grusd, Incorporator
K:\WPDOC\CORP\NICHE\CERTIFIC\CERT.INC
12
EXHIBIT 3.2
BY-LAWS
OF
NICHE PHARMACEUTICALS, INC.
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. - The registered office shall be
established and maintained at c/o United Corporate Services, Inc., 15 East North
Street, Dover, Delaware 19901 and United Corporate Services, Inc. shall be the
registered agent of this corporation in charge thereof.
SECTION 2. OTHER OFFICES. - The corporation may have other offices,
either within or without the State of Delaware, at such place or places as the
Board of Directors may from time to time appoint or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. - Annual meetings of stockholders for the
election of directors and for such other business as may be stated in the notice
of the meeting, shall be held at such place, either within or without the State
of Delaware, and at such time and date as the Board of Directors, by resolution,
shall determine and as set forth in the notice of meeting. To be properly
brought before an annual meeting, business must be (a) specified in the notice
of meeting (or any supplement thereto) given by, at the direction of or upon
authority granted by the Board of Directors, (b) otherwise brought before the
meeting by, at the direction of or upon authority granted by the Board of
Directors, or (c) subject to Article VIII hereof, otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice must be received at the principal executive offices of the
Company not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that, in the event that less than 70 days' notice of the date
of the meeting is given to stockholders and public disclosure of the meeting
date, pursuant to a press release, is either not made or is made less than 70
days prior to the meeting date, then notice by the stockholder to be timely must
be so received not later than the close of business on the tenth day following
the earlier of (a) the day on which such notice of the date of the annual
meeting was mailed to stockholders or (b) the day on which any such public
disclosure was made.
A stockholder's notice to the Secretary must set forth as to
each matter the stockholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be brought before the annual
meeting, and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the Company's books, of the stockholder
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proposing such business, (c) the class and number of shares of the Company which
are beneficially owned by the stockholder, and (d) any material interest of the
stockholder in such business. Notwithstanding anything in the By-Laws to the
contrary, but subject to Article II, Section 8 hereof, no business shall be
conducted at an annual meeting except in accordance with the procedures set
forth in this Section 1. The Chairman of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting in accordance with the provisions of this Section 1,
and, if he should so determine, he shall so declare to the meeting, and any such
business not properly brought before the meeting shall not be transacted.
If the date of the annual meeting shall fall upon a legal holiday,
the meeting shall be held on the next succeeding business day. At each annual
meeting, the stockholders entitled to vote shall elect a Board of Directors and
they may transact such other corporate business as shall be stated in the notice
of the meeting.
SECTION 2. SPECIAL MEETINGS. - Special meetings of stockholders for
any purpose or purposes may be called by the President or the Chairman of the
Board of the corporation and such meetings may be held at such time and place,
within or without the State of Delaware, as shall be stated in the notice of the
meeting.
SECTION 3. VOTING. - Each stockholder entitled to vote in accordance
with the terms of the Certificate of Incorporation and in accordance with the
provisions of these By-Laws shall be entitled to one vote, in person or by
proxy, for each share of stock entitled to vote held by such stockholder, but no
proxy shall be voted after three years from its date unless such proxy provides
for a longer period. Upon the demand of any stockholder, the vote for directors
and the vote upon any question before the meeting, shall be by ballot. All
elections for directors shall be decided by plurality vote; all other questions
shall be decided by majority vote except as otherwise provided by the
Certificate of Incorporation or the laws of the State of Delaware.
A complete list of the stockholders entitled to vote at the
ensuing election, arranged in alphabetical order, with the address of each, and
the number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 4. QUORUM . - Except as otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the presence, in person or by
proxy, of stockholders holding a majority of the stock of the corporation
entitled to vote shall constitute a quorum at all meetings of the stockholders.
In case a quorum shall not be present at any meeting, a majority in interest of
the stockholders entitled to vote thereat, present in person or by proxy, shall
have power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite
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amount of stock entitled to vote shall be present. At any such adjourned meeting
at which the requisite amount of stock entitled to vote shall be represented,
any business may be transacted which might have been transacted at the meeting
as originally noticed; but only those stockholders entitled to vote at the
meeting as originally noticed shall be entitled to vote at any adjournment or
adjournments thereof. If the adjournment is for more than thirty (30) days, or
if after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote the meeting.
SECTION 5. NOTICE OF MEETINGS. - Written notice, stating the place,
date and time of the meeting, and the general nature of the business to be
considered, shall be given to each stockholder entitled to vote thereat at his
address as it appears on the records of the corporation, not less than ten nor
more than sixty days before the date of the meeting. No business other than that
stated in the notice shall be transacted at any meeting without the unanimous
consent of all the stockholders entitled to vote thereat.
SECTION 6. ACTION WITHOUT MEETING. - Unless otherwise provided by the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM. - The number of directors shall be fixed
from time to time by the Board of Directors of the corporation. The directors
shall be elected as provided below and each director shall be elected to serve
until his successor shall be elected and shall qualify. A director need not be a
stockholder.
Unless otherwise provided in the Certificate of Incorpora-
tion, directors shall be elected in three classes. The number of directors
in each class shall be fixed from time to time by the Board of Directors
of the corporation; provided, however that the number of directors in any
class shall not exceed the number of directors in any other class by more
than one. The initial term of office of the first class of directors shall
expire at the first annual meeting of stockholders after their election, the
initial term of office of the second class of directors shall expire at the
second annual meeting of stockholders after their election and the initial
term of office of the third class of directors shall expire at the third
annual meeting of stockholders after their election. At each annual meeting
of stockholders after 1999, the directors elected to succeed those whose terms
have expired shall be identified as being of the same class as the directors
they succeed and shall be elected to
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hold office until the third succeeding annual meeting of stockholders after
their election. Notwithstanding the foregoing, however, each director shall hold
office until his successor shall have been duly elected and qualified, unless he
shall resign, become disqualified, disabled or shall otherwise be removed.
If the number of directors is changed, any increase or
decrease in directors shall be apportioned among the classes so as to maintain
all classes as equal in number as possible, and any additional director elected
to any class shall hold office for a term which shall coincide with the term of
the other directors in such class. No increase in the number of directors shall
shorten the term of any incumbent director.
Any vacancy occurring in the Board of Directors caused by the
death, resignation, or removal of a director, and any newly created directorship
resulting from an increase in the number of directors, may be filled by a
majority of the directors then in office, although less than a quorum. Each
director chosen to fill a vacancy or newly created directorship shall hold
office until the next election of the class for which such director shall have
been chosen and until his successor shall be duly elected and qualified.
Notwithstanding the foregoing paragraphs of this Section,
whenever the holders of any preferred stock issued by the corporation shall have
the right, voting as a class or otherwise, to elect directors, the then
authorized number of directors of the corporation shall be increased by the
number of the additional directors so to be elected, and the holders of such
preferred stock shall be entitled, as a class or otherwise, to elect such
additional directors. Any directors so elected shall hold office until the next
annual meeting of stockholders or until their rights to hold such office shall
terminate pursuant to the provisions of such preferred stock, whichever is
earlier.
SECTION 2. RESIGNATIONS. - Any director, member of a committee or
other officer may resign at any time. Such resignation shall be made in writing,
and shall take effect at the time specified therein, and if no time be
specified, at the time of its receipt by the President or Secretary. The
acceptance of a resignation shall not be necessary to make it effective.
SECTION 3. VACANCIES - If the office of any director, member of a
committee or other officer becomes vacant, the remaining directors in office,
though less than a quorum by a majority vote, may appoint any qualified person
to fill such vacancy, who shall hold office for the unexpired term and until his
successor shall be duly chosen.
SECTION 4. REMOVAL. - Any director or directors may be removed either
for or without cause at any time by the affirmative vote of the holders of a
majority of all the shares of stock outstanding and entitled to vote at an
election of directors (notwithstanding the classification of the Board into
members having staggered terms), at a special meeting of the stockholders called
for the purpose and the vacancies thus created may be filled, at the meeting
held for the purpose of removal, by the affirmative vote of a majority in
interest of the stockholders entitled to vote, except
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that any director elected by the holders of preferred stock may only be removed
by the holders of a majority of the shares of that class or series thereof
entitled to vote at an election of such director.
SECTION 5. INCREASE OF NUMBER. - The number of directors may be
increased by amendment of these By-Laws by the affirmative vote of a majority of
the directors, though less than a quorum, or, by the affirmative vote of a
majority in interest of the stockholders, at the annual meeting or at a special
meeting called for that purpose, and by like vote the additional directors may
be chosen at such meeting to hold office until the next annual election and
until their successors are elected and qualify.
SECTION 6. POWERS. - The Board of Directors shall exercise all of
the powers of the corporation except such as are by law, or by the Certificate
of Incorporation of the corporation or by these By-Laws conferred upon or
reserved to the stockholders.
SECTION 7. COMMITTEES. - The Board of Directors may, by resolution or
resolutions passed by a majority of the whole board, designate one or more
committees, each committee to consist of two or more of the directors of the
corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of any member or
such committee or committees, the member or members thereof present at any such
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution
of the Board of Directors, or in these By-Laws, shall have and may exercise all
the powers and authority of the Board of Directors in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power of authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of a dissolution,
or amending the By-Laws of the corporation; and unless the resolution, these
By-Laws, or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
SECTION 8. MEETINGS. - The newly elected Board of Directors may hold
their first meeting for the purpose of organization and the transaction of
business, if a quorum be present, immediately after the annual meeting of the
stockholders; or the time and place of such meeting may be fixed by consent, in
writing, of all the directors.
Unless restricted by the Certificate of Incorporation or
elsewhere in these By-laws, members of the Board of Directors or any committee
designated by such Board may participate in
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a meeting of such Board or committee by means of conference telephone or similar
communications equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation by such means shall constitute
presence in person at such meeting.
Regular meetings of the Board of Directors may be scheduled by
a resolution adopted by the Board. The Chairman of the Board or the President or
Secretary may call, and if requested by any two directors, must call a special
meeting of the Board and give five days' notice by mail, or two days' notice
personally or by telegraph or cable to each director. The Board of Directors may
hold an annual meeting, without notice, immediately after the annual meeting of
Stockholders.
SECTION 9. QUORUM. - A majority of the directors shall constitute a
quorum for the transaction of business. If at any meeting of the board there
shall be less than a quorum present, a majority of those present may adjourn the
meeting from time to time until a quorum is obtained, and no further notice
thereof need be given other than by announcement at the meeting which shall be
so adjourned.
SECTION 10. COMPENSATION. - Directors shall not receive any stated
salary for their services as directors or as members of committees, but by
resolution of the board a fixed fee and expenses of attendance may be allowed
for attendance at each meeting. Nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity as an
officer, agent or otherwise, and receiving compensation therefor.
SECTION 11. ACTION WITHOUT MEETING. - Any action required or permitted
to be taken at any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting, if prior to such action a written
consent thereto is signed by all members of the board, or of such committee as
the case may be, and such written consent is filed with the minutes of
proceedings of the board or committee.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. - The officers of the corporation shall be a
President, a Treasurer, and a Secretary, all of whom shall be elected by the
Board of Directors and who shall hold office until their successors are elected
and qualified. In addition, the Board of Directors may elect a Chairman, a Chief
Executive Officer, a Chief Financial Officer, a Chief Operating Officer, one or
more Vice-Presidents and such Assistant Secretaries and Assistant Treasurers as
they may deem proper. None of the officers of the corporation need be directors.
The officers shall be elected at the first meeting of the Board of Directors
after each annual meeting. More than two offices may be held by the same person.
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SECTION 2. OTHER OFFICERS AND AGENTS. - The Board of Directors may
appoint such other officers and agents as it may deem advisable, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board of Directors.
SECTION 3. CHAIRMAN. - The Chairman of the Board of Directors, if
one be elected, shall preside at all meetings of the Board of Directors and he
shall have and perform such other duties as from time to time may be assigned to
him by the Board of Directors.
SECTION 4. PRESIDENT. - Unless a chief executive officer or other
officer is elected and has been assigned the powers and the duties of
supervision and management by the Board of Directors, the President shall be the
chief executive officer of the corporation and shall have the general powers and
duties of supervision and management usually vested in the office of President
of a corporation, subject to the control of the Board of Directors. Except as
the Board of Directors shall authorize the execution thereof in some other
manner, he shall execute bonds, mortgages and other contracts in behalf of the
corporation, and shall cause the seal to be affixed to any instrument requiring
it and when so affixed the seal shall be attested by the signature of the
Secretary or the Treasurer or Assistant Secretary or an Assistant Treasurer.
SECTION 5. VICE-PRESIDENT. - Each Vice-President shall have such
powers and shall perform such duties as shall be assigned to him by the
directors.
SECTION 6. TREASURER. - The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the corporation. He shall
deposit all moneys and other valuables in the name and to the credit of the
corporation in such depositaries as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the corporation
as may be ordered by the Board of Directors, or the President, taking proper
vouchers for such disbursements. He shall render to the President and Board of
Directors at the regular meetings of the Board of Directors, or whenever they
may request it, an account of all his transactions as Treasurer and of the
financial condition of the corporation. If required by the Board of Directors,
he shall give the corporation a bond for the faithful discharge of his duties in
such amount and with such surety as the board shall prescribe.
SECTION 7. SECRETARY. - The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors, and all other notices
required by the law or by these By-Laws, and in case of his absence or refusal
or neglect so to do, any such notice may be given by any person thereunto
directed by the President, or by the directors, or stockholders, upon whose
requisition the meeting is called as provided in these By-Laws. He shall record
all the proceedings of the meetings of the corporation and of the directors in a
book to be kept for that purpose, and shall perform such other duties as may be
assigned to him by the directors or the President. He shall have the custody of
the seal of the corporation and shall affix the same to all instruments
requiring it, when authorized by the directors or the President, and attest the
same.
SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. -
Assistant Treasurers and Assistant Secretaries, if any, shall be elected and
shall have such powers and shall perform such duties as shall be assigned to
them, respectively, by the directors.
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ARTICLE V
MISCELLANEOUS
SECTION 1. CERTIFICATES OF STOCK. - A certificate of stock, signed by
the Chairman or Vice-Chairman of the Board of Directors, if they be elected,
President or Vice-President, and the Treasurer or an Assistant Treasurer, or
Secretary or Assistant Secretary, shall be issued to each stockholder certifying
the number of shares owned by him in the corporation. When such certificates are
countersigned (1) by a transfer agent other than the corporation or its
employee, or, (2) by a registrar other than the corporation or its employee, the
signatures of such officers may be facsimiles.
SECTION 2. LOST CERTIFICATES. - A new certificate of stock may be
issued in the place of any certificate theretofore issued by the corporation,
alleged to have been lost or destroyed, and the directors may, in their
discretion, require the owner of the lost or destroyed certificate, or his legal
representatives, to give the corporation a bond, in such sum as they may direct,
not exceeding double the value of the stock, to indemnify the corporation
against any claim that may be made against it on account of the alleged loss of
any such certificate, or the issuance of any such new certificate.
SECTION 3. TRANSFER OF SHARES. - The shares of stock of the corporation
shall be transferrable only upon its books by the holders thereof in person or
by their duly authorized attorneys or legal representatives, and upon such
transfer the old certificate shall be surrendered to the corporation by the
delivery thereof to the person in charge of the stock and transfer books and
ledgers, or to such other person as the directors may designate, by whom they
shall be cancelled, and new certificates shall thereupon be issued. A record
shall be made of each transfer and whenever a transfer shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer.
SECTION 4. STOCKHOLDERS RECORD DATE. - (a) In order that the
corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the board of directors. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
b) In order that the corporation may determine the stock-
holders entitled to consent to corporate action in writing without a meeting,
the board of directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record is adopted by the
board of directors.
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(c) In order that the corporation may determine the stock-
holders entitled to receive payment of any dividend or other distribution or
allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose
of any other lawful action, the board of directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted.
SECTION 5. DIVIDENDS. - Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the capital
stock of the corporation as and when they deem expedient. Before declaring any
dividend there may be set apart out of any funds of the corporation available
for dividends, such sum or sums as the directors from time to time in their
discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
directors shall deem conducive to the interests of the corporation.
SECTION 6. SEAL. - The corporate seal shall be circular in form and
shall contain the name of the corporation, the year of its creation and the
words "Corporate Seal, Delaware, 1996". Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
SECTION 7. FISCAL YEAR. - The fiscal year of the corporation shall
be determined by resolution of the Board of Directors.
SECTION 8. CHECKS. - All checks, drafts or other orders for the payment
of money, notes or other evidences of indebtedness issued in the name of the
corporation shall be signed by such officer or officers, agent or agents of the
corporation, and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
SECTION 9. NOTICE AND WAIVER OF NOTICE. - Whenever any notice is
required by these By-Laws to be given, personal notice is not meant unless
expressly so stated, and any notice so required shall be deemed to be sufficient
if given by depositing the same in the United States mail, postage, prepaid,
addressed to the person entitled thereto at his address as it appears on the
records of the corporation, and such notice shall be deemed to have been given
on the day of such mailing. Stockholders not entitled to vote shall not be
entitled to receive notice of any meetings except as otherwise provided by
Statute.
Whenever any notice whatever is required to be given under
the provisions of any law, or under the provisions of the Certificate of
Incorporation of the corporation of these By-Laws, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent thereto.
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ARTICLE VI
AMENDMENTS
These By-Laws may be altered or repealed and By-Laws may be made at any
annual meeting of the stockholders or at any special meeting thereof if notice
of the proposed alteration or repeal of By-Law or By-Laws to be made be
contained in the notice of such special meeting, by the affirmative vote of a
majority of the stock issued and outstanding and entitled to vote thereat, or by
the affirmative vote of a majority of the Board of Directors, at any regular
meeting of the Board of Directors, or at any special meeting of the Board of
Directors, if notice of the proposed alteration or repeal of By-Law or By-Laws
to be made, be contained in the notice of such special meeting.
ARTICLE VII
INDEMNIFICATION
No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except with respect to (1) a breach of the director's duty of loyalty to the
corporation or its stockholders, (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3)
liability which may be specifically defined by law or (4) a transaction from
which the director derived an improper personal benefit, it being the intention
of the foregoing provision to eliminate the liability of the corporation's
directors to the corporation or its stockholders to the fullest extent permitted
by law. The corporation shall indemnify to the fullest extent permitted by law
each person that such law grants the corporation the power to indemnify.
ARTICLE VIII
NOTICE AND QUALIFICATION OF STOCKHOLDER
NOMINEES TO BOARD
Only persons who are nominated in accordance with the
procedures set forth in this Article VIII shall be qualified for election as
directors. Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
for the election of Directors at the meeting who complies with the procedures
set forth in this Article VIII. In order for persons nominated to the Board of
Directors, other than those persons nominated by or at the direction of the
Board of Directors, to be qualified to serve on the Board of Directors, such
nomination shall be made pursuant to timely notice in writing to the Secretary
of the corporation. To be timely, a stockholder's notice must be received at the
principal executive offices of the Company not less than 60 days nor more than
90 days prior to the meeting; provided, however, that, in the event that less
than 70 days' notice of the date of the meeting is given to stockholders and
public disclosure of the meeting date, pursuant to a press release, is either
not made or is made less than 70 days prior to the meeting date, then notice by
the stockholder to be timely must be so received not later than the close of
business on the tenth day following the earlier of (a) the day on which such
notice of the date of the meeting was mailed to stockholders or (b) the day on
which such public disclosure was made.
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A stockholder's notice to the Secretary must set forth (a) as
to each person whom the Stockholder proposes to nominate for election or
re-election as a director (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the corporation which are
beneficially owned by such person and (iv) any other information relating to
such person that is required to be disclosed in solicitation of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended
from time to time (including, without limitation, such documentation as is
required by Regulation 14A to confirm that such person is a bona fide nominee);
and (b) as to the stockholder giving the notice (i) the name and address, as
they appear on the corporation's books, of such stockholder and (ii) the class
and number of shares of the corporation which are beneficially owned by such
stockholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a Director shall furnish to the Secretary
of the corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be qualified
for election as a Director of the corporation unless nominated in accordance
with the procedures set forth in this Article VIII. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with procedures prescribed by the By-Laws,
and, if he should so determine, he shall so declare to the meeting, and the
defective nomination shall be disregarded.
11
EXHIBIT 10.2
PROMISSORY NOTE
$500,000.00 Grapevine, Texas January 11. 1991
For value received I, we, or either of us ("MAKER") promise to pay to
the order of STEPHEN F. BRANDON ("HOLDER") at 1701 W. Northwest Highway,
Grapevine, Texas 76051, the sum of Five Hundred Thousand Dollars ($500,000.00),
or so much thereof as may be advanced and outstanding, with interest from date
of any advance at the rate of ten percent (10%) per annum; and with interest
from maturity at the highest lawful rate of interest permissible under
applicable law as of the date thereof. Interest is payable on demand. Principal
under paragraph 3 of loan agreement shall be as the following: TERM. This
Agreement shall be in effect for a period of one (1) year from the effective
date hereof. This Agreement shall be automatically renewed and extended for
successive one year periods unless either party shall give written notice of
termination at least thirty (30) days prior to the end of the initial or any
renewal term.
The undersigned and any holder hereof intend to conform strictly to
applicable usury law. All present and future agreements between MAKER and HOLDER
are hereby expressly limited so that in no event shall actual or constructive
interest contracted for, charged or received ever transcend the highest lawful
rate permitted by applicable law. If fulfillment hereof or of any such agreement
would at any time so transcend then said obligation shall be automatically
reduced to said limit by reducing principal, or by refund to the extent said
excess is greater than principal then outstanding. To the extent permitted under
applicable law, all such actual or constructive interest shall be spread
throughout the full stated term so as to be uniform during same.
MAKER hereby severally waives presentation for payment, notice of
non-payment, protest, notice of protest, notice of intent to accelerate the
maturity hereof, notice of intent to make demand in full hereunder and diligence
in bringing suit against any party hereto, and consent that the time of payment
may be extended without notice thereof to any of the sureties or endorsers on
the NOTE; and if this NOTE is placed in the hands of an attorney for collection
or suit is brought on same, or if collected through the probate or bankruptcy
court then MAKER agrees to pay the owner or holder of this NOTE, in addition to
the full amount due, a reasonable sum for attorney's fees; and MAKER agrees that
failure to pay any installment or principal or interest when due, or default
under any document evidencing or securing this NOTE, or whenever HOLDER in good
faith deems itself insecure, gives the HOLDER the right to declare the principal
and accrued but unpaid interest hereunder immediately due and payable in full
without notice.
NICHE PHARMACEUTICALS, INC
a Texas corporation
BY: /s/ Stephen F. Brandon
STEPHEN F. BRANDON, President
EXHIBIT 10.3
Stephen F. Brandon
200 North Oak Street
Roanoke, Texas 76262
(817) 491-2770
November 22, 1996
Niche Pharmaceuticals, Inc.
200 North Oak Street
P.O. Box 449
Roanoke, Texas 76262
Dear Sirs:
I hereby agree to extend the due date of my loan to Niche Pharmaceuticals, Inc.,
originally dated January 11, 1991, in the original principal amount of $500,000
(of which a principal balance of $295,487 remains outstanding as of the due date
hereof), from January 11, 1997 to January 11, 1998.
Sincerely,
/s/ Stephen F. Brandon
Stephen F. Brandon
READ AND AGREED
NICHE PHARMACEUTICALS, INC.
BY:/s/ Stephen F. Brandon, President
EXHIBIT 10.4
LOAN NUMBER: GP-467,719-30-10-DAL
Guaranty Loan
U.S. SMALL BUSINESS ADMINISTRATION
Dallas District Office
1100 Commerce Street
Dallas, Texas 75242
AUTHORIZATION AND LOAN AGREEMENT
FIRST NATIONAL BANK OF GRAPEVINE
1400 SOUTH MAIN STREET
GRAPEVINE, TEXAS 76051
Your request dated December 12, 1991 for SBA to Guarantee 85% of a Loan in the
amount of $250,000 to be made by Lender to:
NICHE PHARMACEUTICALS, INC.
300 TROPHY CLU8 DRIVE #400
ROANORE, TEXAS 76262
is hereby approved pursuant to Section 7(a) of the Small Business Act
as amended.
1. The following forms are herewith enclosed:
a. The original copy of this Authorization shall be executed at
the time of first disbursement and retained in loan file by
the Lender. (A copy of the Authorization and all documents
should be given to the Borrower.) Please return a signed copy
of the Authorization to this office.
b. Three copies of SBA Note. The original executed copy must be
retained by you and one executed copy must be sent to SBA
immediately after first disbursement.
c. Copies of the SBA Settlement Sheet, Form 1050, are to be
completed and executed by Lender and Borrower to reflect each
disbursement. Prompt reporting of disbursements is necessary.
Return the first two copies ("Denver FOD" copy and "Servicing
Office" copy) to SBA.
d. Compensation Agreements, Form 159, shall be executed by
Borrower, his representative and Lender and returned to SBA if
Borrower has employed an attorney, accountant or other
representative, or if Borrower is charged fees for services by
Lender or an associate of Lender. If no such fees have
<PAGE>
been charged, please write "None" and return the original
form, executed by the Lender and the Borrower, to SBA.
ADDITIONAL FORMS NEEDED
e. GUARANTY, SBA 148 - A sample to use in completing this form is
also enclosed. ALL BLANKS MUST BE COMPLETED PROPERLY. THIS
IS A VERY IMPORTANT DOCUMENT FOR THE COLLATERALIZATION OF THE
LOAN. Return one executed copy.
f. Resolution of Board of Directors, SBA 160 - Return executed
ORIGINAL to SBA.
g. COPIES OF THE FOLLOWING DOCUMENTS ARE NOT REQUIRED BY SBA AT
THIS TIME. The original of each must be retained in your
COLLATERAL FILE; and in the event of a request for SBA to
purchase its Guaranty at a later date, the properly executed
originals will be required.
(l) Standby Agreement, SBA Form 155.
GUARANTY FEE:
SBA's Guaranty fee is 2% of guaranteed loan amount, or $4,250.00, and paid by
the Lender within 90 days of the date of this Authorization and may be charged
to the Borrower only after Lender has paid fee and initial disbursement made.
This fee may be deducted from the loan proceeds. If initial disbursement can be
made within the 90-day period, we prefer to have the guaranty fee paid when the
closing documents are returned to the Legal Division.
2. This Authorization is subject to:
a. Provisions of the Guaranty Agreement between Lender and SBA
dated 9-21-78.
b. First disbursement of the Loan being made not later than six
(6) months, and no disbursement being made later than twelve
(12) months, from the date of this Authorization, unless such
time is extended pursuant to prior written consent by SBA.
c. Receipt by Lender of evidence satisfactory to it in its sole
discretion, that there has been no unremedied adverse change
since the date of the Application, or since any of the
preceding disbursements, in the financial or any other
condition of Borrower, which would warrant withholding or not
making any such disbursement or any further disbursement.
d. The representations made by Borrower in its loan application,
the requirements or conditions set forth in Lender's
application form, including the supporting documents thereto,
the conditions set forth herein and any future conditions
imposed by Lender (with prior SBA approval).
3. Terms of Loan:
a. Repayment terms, interest rate, and maturity
(1) Six (6) monthly payments of interest only, beginning
one (1) month(s) from date of Note, thereafter
monthly installment of $4,214.00, including principal
and interest, on the same date of each succeeding
calendar month thereafter until paid in full,
provided that all
1
<PAGE>
principal and interest not sooner paid shall become
due and payable seven (7) years from the date of
Note; with the further provision that each said
installment payment, when received, shall be applied
by the holder hereof, first to interest accrued to
the date of receipt of said payment, and the balance,
if any, on account of the principal hereof.
(2) The interest rate as of the date of Note is eight and
three-quarters percent (8.75%) per annum.
(3) Undersigned further agrees that, upon expiration of
the calendar year in which first disbursement is
made, the rate of interest herein shall increase or
decrease to become a rate of two and one-quarter
percent (2.25%) per annum over the minimum prime
lending rate for large U.S. money center commercial
banks as published in the Money Rates Section of the
Wall Street Journal. The change of the rate of
interest herein shall be determined and become
effective as of the first day of each such period, as
appropriate, of each calendar year. Holder shall give
written notice to the undersigned of each increase or
decrease in the interest rate within thirty days
after effective date of change. If the undersigned
shall be in default in payment due on the
indebtedness therein, and the SBA purchases its
guaranteed portion of said indebtedness, the rate of
interest on the guaranteed and unguaranteed portion
therein shall become fixed at the rate in effect as
of the initial date of default. If the undersigned
shall not be in default in payment, the guaranteed
and unguaranteed portion therein shall be fixed at
the rate in effect as of the date of purchase by SBA.
Lender has the right to raise or lower the monthly
payment to assure such payment will amortize the note
within the bounds of the stated maturity.
(4) Notwithstanding rate of interest provided herein, the
interest rate shall not exceed the maximum rate
permitted under applicable law.
(5) Note (SBA Form 147) to state the Borrower shall
provide Lender with written notice of intent to repay
part or all of the loan at least three (3) weeks
prior to the anticipated prepayment date. A
prepayment is any payment made ahead of schedule that
exceeds twenty (20) percent of the then outstanding
principal balance. If Borrower makes a prepayment and
fails to give at least three weeks advance notice of
intent to prepay, then, notwithstanding any other
provision to the contrary in this Note or other
document, Borrower shall be required to pay Lender
three weeks interest on the unpaid principal as of
the date of such prepayment.
b. Use of Proceeds
(1) Approximately $75,000 to purchase inventory.
(2) Approximately $175,000 for working capital to be
disbursed as deemed necessary by Lender.
(3) Proceeds not expended for purposes indicated above
may be disbursed as additional working capital
provided it does not exceed $10,000.
2
<PAGE>
Any balance in excess of the amount stated above
shall be applied to the loan in the inverse order of
maturity and SBA notified.
c. Collateral
(1) First security interest lien on:
(a) equipment excluding titled motor vehicles;
(b) inventory;
(c) accounts;
(d) fixtures (Fixtures Financing Statement
(UCC-l) to be filed in the Deed of Trust
Records of the county where the fixtures
are located and must contain the name of
the record owner of the real estate, a
legal description of the real estate and the
street address where the fixtures are
located);
(e) general intangibles;
(f) Assignment with U.S. Patent and Trademark
Office, Washington, D.C. of all patent
rights currently owned or hereafter
acquired, foreign or domestic (including but
not limited to U.S. Patent #5,002,774).
(g) All now owned and hereafter acquired
(including but not limited to goods
described in Exhibit B, bank and SBA loan
case files).
(2) Prior to first disbursement, the appropriate UCC lien
searches must be made to determine Lender's priority
of lien. Certificate of Search must be obtained from
County Clerk and Secretary of State, including search
of the Federal Tax Lien Records, State Tax Lien
Records, and Judgement Lien Records.
(3) Pledge to Lender by Stephen F. Brandon of all his
shares of stock in Niche Pharmaceuticals. Inc.
(representing 89% of shares outstanding). Lender is
to retain stock certificates in its possession until
pledge is reassigned or released.
(4) Personal guaranty on SBA Form 148 executed by Stephen
F. Brandon and Darlene T. Brandon.
4. To further induce Lender to make and SBA to guarantee this Loan, Lender
and SBA impose the following conditions:
a. Execution of all documents required in Item 1 above.
b. Reimbursable Expenses. Borrower will, on demand, reimburse
Lender for any and all expenses incurred, or which may be
hereafter incurred, by Lender from time to time in connection
with or by reason of Borrower's application for, and the
making and administration of the Loan.
c. Books, Records, and Reports. Borrower will at all times keep
proper books of account in a manner satisfactory to Lender
and/or SBA. Borrower hereby authorizes Lender or SBA to make
or cause to be made at Borrower's expense and in such manner
and at such times as Lender or SBA may require, (a)
inspections and audits of any books, records and papers in the
custody or control of Borrower or others, relating to
Borrower's financial or business conditions, including the
making of copies thereof and extracts
3
<PAGE>
therefrom, and (b) inspections and appraisals of any of
Borrower's assets. Borrower will furnish to Lender and SBA for
the 3 month period ending 3-31-92 and quarterly thereafter (no
later than 2 months following the expiration of any such
period) and at such other times and in such form as Lender may
prescribe, Borrower's financial and operating statements.
Borrower hereby authorizes all Federal, State and municipal
authorities to furnish reports of examinations, records, and
other information relating to the conditions and affairs of
Borrower and any desired information from reports, returns,
files, and records of such authorities upon request therefor
by Lender or SBA.
d. Borrower shall not execute any contracts for management
consulting services without prior approval of Lender and SBA.
e. Distributions and Compensations. Borrower will not, without
the prior written consent of Lender or SBA (a) if Borrower is
a corporation, declare or pay any dividend or make any
distribution upon its capital stock, or purchase or retire any
of its capital stock, or consolidate, or merge with
any other company, or give any preferential treatment, make
any advance, directly or indirectly, other than reasonable
compensation for services, by way of loan, gift, bonus, or
otherwise, to any company directly or indirectly controlling
or affiliated with or controlled by Borrower, or any other
company, or to any officer, director, or employee of Borrower,
or of any such company (b) if Borrower is a partnership or
individual, make any distribution of assets of the business of
Borrower, other than reasonable compensation for services, or
give any preferential treatment, make any advance, directly or
indirectly, by way of loan, gift, bonus, or otherwise, to any
partner or any of its employees or to any company directly or
indirectly controlling or affiliated with or controlled by
Borrower, or any other company.
f. Other Provisions
(1) Note (SBA Form 147) and all loan documents to be
executed by corporate officers authorized in a
Resolution of Board of Directors.
(2) Assignment of life insurance on Stephen F. Brandon in
the amount of $250,000 which shall be decreasing term
unless SBA approves an assignment of existing
permanent type insurance. No additional life
insurance is to be purchased from business income or
assets without prior written approval of SBA.
Disbursement must be made upon receipt of evidence
from insurance company or its agent that the named
insured has applied for insurance in at least the
indicated amount and has paid the first month
premium.
(3) Fire and extended coverage insurance on all insurable
property that id pledged as collateral for this loan
in the maximum amount available, up to and including
the amount of this loan, with a New York Standard
Mortgage Clause. The "New York Standard Mortgage
Clause" should, in effect, state that the insurance
as to the interest of the Lender shall not be
invalidated by any act or neglect of the mortgagor or
owner of the property (including arson or a related
act); by foreclosure or other proceedings relating to
the property; by any change in the title or ownership
of the property;
4
<PAGE>
nor by the occupation of the premises for purposes
more hazardous than those permitted by this policy.
(4) The Borrower agrees to obtain Federal Flood Insurance
if any proceeds of this loan will be used to improve
property located, or to be located, in a presently
classified Special Flood Hazard Area or if any
collateral securing this loan is located or is to be
located in such area. The amount of required flood
insurance is the lesser of (1) the insurable value of
the property, or (2) the maximum amount of insurance
available.
(5) Written subordination of landlord's lien on premises
located at 300 Trophy Club Drive #400 - Trophy Club,
Texas.
(6) Prior to first disbursement, Borrower must furnish to
Lender a copy of lease indicating a term for at least
the term of the loan (options for renewal are
acceptable).
(7) Standby Agreement covering all of Borrower's
indebtedness to Stephen F. Brandon, stated to be
$386,839.00, and all accrued and future interest
thereon (provided that Borrower may pay interest not
exceeding 10% per annum so long as there is no
default on this SBA guaranty loan).
(8) Standby Agreement covering all of Borrower's
indebtedness to Jean R. Sperry, stated to be
$37,500.00, and all accrued and future interest t h e
r e o n (provided that Borrower may pay interest not
exceeding 10% per annum so long as there is no
default on this SBA guaranty loan).
(9) Standby Agreement covering all of Borrower's
indebtedness to Thomas F. Reed, stated to be
$37,500.00, and all accrued and future interest
thereon (provided that Borrower may pay interest not
exceeding 10% per annum so long as there is no
default on this SBA guaranty loan).
(10) Standby Agreement covering all of Borrower's
indebtedness to Gerald L. Beckloff, M.D., stated to
be $37,500.00, and all accrued and future interest
thereon (provided that Borrower may pay interest not
exceeding 10% per annum so long as there is no
default on this SBA guaranty loan).
(11) Borrower will not incur any debt or liability
except (a) normal trade obligations which are
unsecured, or (b) with prior permission of Lender.
This includes, but is not limited to, leased
equipment.
(12) Prior to disbursement, Lender to have evidence of
corporate good standing with Texas Secretary of
State's Office.
(13) Borrower, if an unincorporated business or
profession (proprietorship/partnership), to file in
the office of the County Clerk in which the business
operates, an assumed name certificate, before
disbursement, and furnish the Lender a photocopy of
said certificate. If a corporation, the assumed
name must be registered with the Texas Secretary of
5
<PAGE>
State, and with the County Clerk of the County in
which the registered office of the corporation is
located; and, if applicable, the County Clerk of the
County(ies) in which the company with the assumed
name operates. (Refer to Section 36.01 et seq.,
V.T.C.A. Business and Commerce Code, relating to
filing of assumed name certificates).
(14) Prior to first disbursement, Lender is to be in
receipt of evidence of injection of at least $112,500
by Principals for use solely in business.
(15) Prior to first disbursement, Borrower shall furnish
to Lender an Employer Identification Number issued
by Internal Revenue Service.
(16) While the outstanding principal balance of the
loan is $100,000.00 or more, annual year end
financial statements will be furnished Lender
containing as a minimum an accountant's review as
defined by the American Institute of Certified
Public Accountants as follows:
Review of financial statement. Performing inquiry
and analytical procedures that provide the
accountant with a reasonable basis for expressing
limited assurance that there are no material
modifications that should be made to the
statements in order for them to be in conformity
with generally accepted accounting
principles or, if applicable, with another
comprehensive basis of accounting.
(17) Borrower agrees that he shall make monthly progress
reports to Lender.
(18) If SBA or Lender receives notification that another
party intends to perfect a purchase money security
interest in inventory, SBA or Lender, with SBA
written approval, may accelerate the payment of any
or all of the obligations of the Borrower to Lender
or SBA. Lender shall notify SBA in writing within
five (5) days of receipt of any notification of an
intent to perfect a purchase money security
interest in inventory.
(19) Prior to first disbursement, Borrower shall
execute an affidavit (SBA Form 1624) certifying that
the Borrower is not debarred, suspended, proposed for
debarment, declared ineligible or voluntarily
excluded from participation in this transaction by
any federal department or agency.
(20) Prior to disbursement, Lender will make reasonable
inquiry to insure that Borrower is current on all
Federal and State taxes, including, but not limited
to, income taxes, payroll taxes, real estate taxes
and sales taxes. Borrower to execute an affidavit
certifying that all taxes are current and future
taxes will be paid when due.
(21) Lender agrees that, in the event of a default by the
Borrower, it will execute any right of off-set
available to it. All funds received are to be placed
against the outstanding loan balance prior to the
bank requesting that SBA honor its guaranty.
6
<PAGE>
(22) By execution of this Agreement, Borrower certifies
that the financial information contained in the Loan
Application upon which this Authorization & Loan
Agreement is predicated, represents an accurate
statement of its assets and liabilities as of this
date. Those persons executing this Agreement
acknowledge both in their representative capacity
and as individual obligors that the Lender and SBA's
approval of this loan is given in reasonable reliance
on the accuracy of all financial information
contained in said Application.
(23) THE WRITTEN LOAN AGREEMENTS REPRESENT THE FINAL
AGREEMENTS BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
5. Parties Affected:
This agreement shall be binding upon Borrower and Borrower's successors
and assigns. No Provision stated herein shall be waived without the
prior written consent of SBA. The Loan shall be administered as
provided in the Guaranty Agreement.
PATRICIA SAIKI, Administrator
BY: /S/ W. David Long January 9, 1992
W. David Long, Chief FD Date of Authorization
Borrower and Lender hereby agrees to the conditions imposed herein, and further
acknowledges that this Authorization and Loan Agreement does not create a
commitment by Lender to disburse any funds pursuant hereto:
ATTEST: NICHE PHARMACEUTICALS, INC.
/s/ Larry D. Flynn 4/8/92 BY: /s/ Stephen F. Brandon 4/8/92
Larry D. Flynn, Secretary Date Stephen F. Brandon, President Date
ATTEST: First National Bank of Grapevine
(Name of Lender)
/s/ Randall H. McCauley 4/8/92 BY:/s/ Jon J. Collins 4/8/92
Randall H. McCauley, Vice President Date Jon J. Collins, President Date
NOTE: Corporate borrowers must execute this Authorization, in corporate name
by duly authorized officer indicating office held; partnership
borrowers must execute in firm name, together with signature of all
general partners.
7
<PAGE>
SECTION ll--PERSONAL PROPERTY
All items listed herein must show manufacturer or make, model, year, and serial
number. Items with no serial number must be clearly identified (use additional
sheet if more space is required).
<TABLE>
<CAPTION>
Description - Show Manufacturer, Year Original Market Current Lien Name of
Model, Serial No. Acquired Cost Value Balance Lienholder
----------------- -------- ---- ----- ------- ----------
<S> <C> <C> <C> <C> <C>
SEE ATTACHED
"Schedule A"
All product rights for MagTab SR, including any patent rights; tradenames and
trademarks; copyrights; tool and die equipment; advertising, promotional
educational and training material; clinical and medical studies; and all
targeted sales data including customer, physician and distributor lists.
</TABLE>
All information contained herein is TRUE and CORRECT to the best of my
knowledge. I understand that FALSE statements may result in forfeiture of
benefits and possible fine and prosecution by the U.S. Attorney General
(Ref. 18 U.S.C. 100).
/s/ Stephen F. Brandon Date 10/1/91
- ---------------------- ---- -------
Date
- ---------------------- ----
8
<PAGE>
SCHEDULE "A"
Collateral
Current Receivables $ 38,759
Inventory (MagTab(R)SR 60's & lOO's) $ 200,000
at selling price (31,000 bottles
Samples, Literature & Promotional Items $ 68,200
* 136,064 pieces of literature
* 2,303 - Tic-Tac's
* 2,288 - Roller pens
* 13,279 - Yellow highliters
MagTab(R)SR Cash Flow Marketable $2,500,000
Value 5 x 1992 Cash Flow
Machinery & Equipment $ 16,859
* 1 Novel System
3 Servers
3 Monitors
* 1 IBM Clone PC
* 1 Mitsubishi monitor
* 1 Epson laser printer
* 1 Epson dot-matrix printer
* 1 Panasonic FAX
* 1 Atlas II phone system
* 1 Xerox copying machine
* 1 Smith-Corona memory typewriter
* 2 sets tool & dye equipment
upper & lower punches for MagTab(R)SR
Furniture & Fixtures $ 17,340
Reception Area
1 Secretarial desk
1 Lateral file cabinet
1 Computer table
1 Brass lamp
1 Secretarial chair
2 Reception chairs
1 Lamp table
Work Room
1 work station
1 chair
Office #1
1 Oak desk
1 Oak credenza
1 Swivel chair
2 Chairs
1 Lamp table
1 Brass lamp
Office #2
1 Conference table
4 Chairs
1 Bookcase
Office #3
1 Executive desk
1 Credenza
2 Bookcases
1 Leather couch
2 Side chairs
1 Lamp table
1 Brass lamp
Supply Room
1 File cabinet
2 Lateral file cabinets
1 Literature cabinet
1 Supply cabinet
1 Small Sanyo refrigerator
1 Kenmore microwave
9
EXHIBIT 10.5
Expiration Date 12-31-87
U. S. Small Business Administration
S8A LOAN NUMBER
---------------
GP-467,719-30-10-DAL
NOTE
Roanoke, Texas
--------------
(City and State)
$ 250,000.00 (Date) April 8, 1992
----------- -------- ----
For value received, the undersigned promises to pay to the order
of First National Bank of Grapevine
-----------------------------------------------------------------------------
(Payee)
at its office in the city of Grapevine, State of Texas or at holder's option, at
such other place as may be designated from time to time by the holder
Two Hundred Fifty Thousand Dollars and no/100------ dollars,
- --------------------------------------------------------------------------------
(Write out amount)
with interest on unpaid principal computed from the date of each advance to the
undersigned at the rate of 8.75 percent per annum, payment to be made in
installments as follows:
Six (6) monthly payments of interest only, beginning one (l) month(s) from date
of Note, thereafter monthly installment of $4,214.00, including principal and
interest, on the same date of each succeeding calendar month thereafter until
paid in fu11, provided that all principa1 and interest not sooner paid shall
become due and payable seven (7) years from the date of Note; with the further
provision that each said installment payment, when received, shall be applied by
the holder hereof, first to interest accrued to the date of receipt of said
payments, and the balance, if any, on account of the principal hereof.
The interest rate as of the date of Note is eight and three-quarters percent
(8.75%) per annum.
Undersigned further agrees that, upon expiration of the calender year in which
first disbursement is made, the rate of interest herein shall
Page 1
<PAGE>
increase or decrease to become a rate of two and one-quarter percent (2.25%) per
annum over the minimum prime lending rate for large U.S. money center commercial
banks as published in the Money Rates Section of the Wall Street Journal. The
change of the rate of interest herein shall be determined and become effective
as of the first day of each such period, as appropriate of each calendar year.
Holder shall give written notice to the undersigned of each increase or decrease
in the interest rate within thirty days after effective date of change. If the
undersigned shall be in default in payment due on the indebtedness therein, and
the SBA purchases its guaranteed portion of said indebted ness, the rate of
interest on the guaranteed and unguaranteed portion therein shall become fixed
at the rate in effect as of the initial date of default. If the undersigned
shall not be in default in the rate in effect as of the date of purchase by SBA.
Lender has the right to raise or lower the monthly payment to assure such
payment will amortize the note within the bounds of the stated maturity.
Notwithstanding rate of interest provided herein, the interest rate shall not
exceed the maximum rate permitted under applicable law.
If this Note contains a fluctuating interest rate, the notice provision
is not a pre-condition for fluctuation (which shall take place regardless of
notice). Payment of any installment of principal or interest owing on this Note
may be made prior to the maturity date thereof without penalty. Borrower shall
provide lender with written notice of intent to prepay part or all of this loan
at least three (3) weeks prior to the anticipated prepayment date. A prepayment
is any payment made ahead of schedule that exceeds twenty (20) percent of the
then outstanding principal balance. If borrower makes a prepayment and fails to
give at least three weeks advance notice of intent to prepay, then,
notwithstanding any other provision to the contrary in this note or other
document borrower shall be required to pay lender three weeks interest on the
unpaid principal as of the date preceding such prepayment.
The term "Indebtedness" as used herein shall mean the indebtedness
evidenced in this Note, including principal, interest, and expenses, whether
contingent, now due hereafter to become due and whether heretofore or
contemporaneously herewith or hereafter contracted. The term "Collateral" as
used in this Note shall mean any funds, guaranties, or other property or rights
therein of any nature whatsoever or the proceeds thereof which may have been,
are, or hereafter may be, hypothecated, directly or indirectly by the
undersigned or others, in
Page 2
<PAGE>
connection with, or as security for, the Indebtedness or any part thereof. The
Collateral, and each part thereof, shall secure the Indebtedness and each part
thereof. The covenants and conditions set forth or referred to in any and all
instruments of hypothecation constituting the Collateral are hereby incorporated
in this Note as covenants and conditions of the undersigned with the same force
and effect as though such covenants and conditions were fully set forth herein.
The Indebtedness shall immediately become due and payable, without notice
or demand, upon the appointment of a receiver or liquidator, whether voluntary
or involuntary, for the undersigned or for any of its property, or upon the
filing of a petition by or against the undersigned under the provisions of any
State insolvency law or under the provisions of the Bankruptcy Reform Act of
1978, as amended, or upon the making by the undersigned of an assignment for the
benefit of its creditors. Holder is authorized to declare all or any part of the
Indebtedness immediately due and payable upon the happening of any of the
following events: (1) Failure to pay any part of the Indebtedness when due; (2)
nonperformance by the undersigned of any agreement with, or any condition
imposed by, Holder or Small Business Administration (hereinafter called "SBA"),
with respect to the Indebtedness; (3) Holder's discovery of the undersigned's
failure in any application of the undersigned to Holder or SBA to disclose any
fact deemed by Holder to be material or of the making therein or in any of the
said agreements, or in any affidavit or other documents submitted in connection
with said application or the indebtedness, of any misrepresentation by, on
behalf of, or for the benefit of the undersigned; (4) the reorganization (other
than a reorganization pursuant to any of the provisions of the Bankruptcy Reform
Act of 1978, as amended) or merger or consolidation of the undersigned (or the
making of any agreement therefor) without the prior written consent of Holder;
(5) the undersigned's failure duly to account, to Holder's satisfaction, at such
time or times as Holder may require, for any of the Collateral, or proceeds
thereof, coming into the control of the undersigned; or (6) the institution of
any suit affecting the undersigned deemed by Holder to affect adversely its
interest hereunder in the Collateral or otherwise. Holder's failure to exercise
its rights under this paragraph shall not constitute a waiver thereof.
Upon the nonpayment of the Indebtedness, or any part thereof, when due,
whether by acceleration or otherwise, Holder is empowered to sell, assign, and
deliver the whole or any part of the Collateral at public or private sale,
without demand, advertisement or notice of the time or
Page 3
<PAGE>
place of sale or of any adjournment thereof, which are hereby expressly waived.
After deducting all expenses incidental to or arising from such sale or sales,
Holder may apply the residue of the proceeds thereof to the payment of the
Indebtedness, as it shall deem proper, returning the excess, if any, to the
undersigned. The undersigned hereby waives all right of redemption or
appraisement whether before or after sale.
Holder is, further empowered to collect or cause to be collected or
otherwise to be converted into money all or any part of the Collateral, by suit
or otherwise, and to surrender, compromise, release, renew, extend, exchange, or
substitute any item of the Collateral in transactions with the undersigned or
any third party, irrespective of any assignment thereof by the undersigned, and
without prior notice to or consent of the undersigned or any assignee. Whenever
any item of the Collateral shall not be paid when due, or otherwise shall be in
default, whether or not the indebtedness, or any part thereof, has become due,
Holder shall have the same rights and powers with respect to such item of the
Collateral as are granted in this paragraph in case of nonpayment of the
Indebtedness, or any part thereof, when due. None of the rights, remedies,
privileges, or powers of Holder expressly provided for herein shall be
exclusive, but each of them shall be cumulative with and in addition to every
other right, remedy, privilege, and power now or hereafter existing in favor of
Holder, whether at law or equity, by statute or otherwise.
The undersigned agrees to take all necessary steps to administer,
supervise, preserve, and protect the Collateral; and regardless of any action
taken by Holder, there shall be no duty upon Holder in this respect. The
undersigned shall pay all expenses of any nature, whether incurred in or out of
court, and whether incurred before or after this Note shall become due at its
maturity date or otherwise, including but not limited to reasonable attorney's
fees and costs, which Holder may deem necessary or proper in connection with the
satisfaction of the Indebtedness or the administration, supervision,
preservation, protection of (including, but not limited to, the maintenance of
adequate insurance) or the realization upon the Collateral. Holder is authorized
to pay at any time and from time to time any or all of such expenses, add the
amount of such payment to the amount of the Indebtedness, and charge interest
thereon at the rate specified herein with respect to the principal amount of
this Note.
The security rights of Holder and its assigns hereunder shall not be
impaired by Holder's sale, hypothecation or rehypothecation of any note
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of the undersigned or any item of the Collateral, or by any indulgence,
including but not limited to (a) any renewal, extension, or modification which
Holder may grant with respect to the Indebtedness or any part thereof, or (b)
any surrender, compromise, release, renewal, extension, exchange, or
substitution which Holder may grant in respect of the Collateral, or (c) any
indulgence granted in respect of any endorser, guarantor, or surety. The
purchaser, assignee, transferee, or pledgee of this Note, the Collateral, and
guaranty, and any other document (or any of them), sold, assigned, transferred,
pledged, or repledged, shall forthwith become vested with and entitled to
exercise all the powers and rights given by this Note and all applications of
the undersigned to Holder or SBA, as if said purchaser, assignee, transferee, or
pledgee were originally named as Payee in this Note and in said application or
applications.
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Expiration Date: 12-31-87
U.S. Small Business Administration
S8A LOAN NUMBER
---------------
GP-467,719-30-10-DAL
This promissory note is given to secure a loan which SBA is making or
in which it is participating and, pursuant to Part 101 of the Rules and
Regulations of SBA (13 C.F.R. 101.1(d)), this instrument is to be construed and
(when SBA is the Holder or a party in interest) enforced in accordance with
applicable Federal law.
NICHE PHARMACEUTICALS, INC.
/s/ Stephen F. Brandon
Stephen F. Brandon, President
Attest:
/s/ Larry D. Flynn
Larry D. Flynn, Secretary
Note.-Corporate applicants must execute Note, in corporate name, by
duly authorized officer, and seal must be affixed and duly attested; partnership
applicants must execute Note in firm name, together with signature of a general
partner.
Page 6
EXHIBIT 10.6
PROMISSORY NOTE
$ 300,000.00 Date: October 11, 1996
------------ ----------------
FOR THE VALUE RECEIVED, the undersigned, NICHE PHARMACEUTICALS,
INC. a Delaware Corporation ("Borrower") hereby unconditionally
promise to pay, to the order of Mercantile Bank, a Kansas state
bank, ("Bank")
ON OCTOBER 11, 1997, THE PRINCIPAL AMOUNT OF THREE HUNDRED THOUSAND AND 00/100
DOLLARS. BORROWER FURTHER PROMISES TO PAY TO THE ORDER OF BANK INTEREST ON THE
PRINCIPAL AMOUNT FROM TIME TO TIME OUTSTANDING HEREUNDER AT THE RATE OF 1.0%
OVER THE "PRIME RATE", ADJUSTABLE DAILY. INTEREST SHALL BE PAYABLE IN
CONSECUTIVE QUARTERLY INSTALLMENTS COMMENCING ON JANUARY 11, 1997 AND DUE ON THE
11TH DAY OF EACH QUARTER THEREAFTER.
After maturity, interest shall be payable on demand on the outstanding
principal balance at a rate equal to 2.0% per annum in excess of the otherwise
payable rate. In addition, if Borrower fails to make any payment of any
principal or interest on this Note when due, Borrower promises to pay to the
order of Bank on demand a late fee in an amount not to exceed the greater of $
25.00 or 5.0 % of each late payment. All payments received by Bank shall be
applied first to the payment of billed and unpaid late fees and the costs and
expenses hereinafter described, next to billed and unpaid interest hereon, and
the remainder to principal. For purposes of this Note the term "PRIME rate"
shall be the interest rate announced from time to time by Bank as its "PRIME
rate" on commercial loans (which rate shall fluctuate as and when said PRIME
rate shall change). Interest shall be computed on the basis of a year consisting
of 360 days and paid for actual days elapsed.
All required payments shall be made in immediately available funds in
lawful money of the United States of America at the Office of Bank situated at
4700 W. 50th Place, Roeland Park, Kansas 66205 or at such other place as the
holder may designate in writing. The acceptance by the holder hereof of any
principal or interest due after the date it is due as described above shall not
be held to establish a custom or waive any rights of the holder to enforce
prompt payment of any other principal or interest payments or otherwise.
Bank may record the date and amount of all loans and all payments
hereunder in the records it maintains. Bank's books and records showing the
account between Bank and Borrower shall be conclusive evidence of the amounts
outstanding under this Note.
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<PAGE>
Borrower has the right to prepay this Note in whole or in part at any
time without penalty or premium, provided: (1) all billed and unpaid interest
shall accompany such prepayment; (2) there is not a default under any of the
terms of this Note at the time of prepayment; and (3) all prepayments shall be
credited and applied to the installments of principal in inverse order of their
stated maturity.
Borrower agrees to pay to Bank, upon demand by Bank, all reasonable
costs, charges and expenses (including, but not limited to, the reasonable fees
and expenses of any attorney [including, but not limited to, any attorney
employed by Bank or any affiliate of Bank] retained by Bank, to the extent
permitted by applicable law) incurred by Bank in connection with (a) the
collection or enforcement of Borrower's liabilities and obligations under this
Note, (b) the collection and enforcement of Bank's right in and to any
"Collateral" (hereinafter defined), and/or (c) any litigation, contest, dispute
or other proceeding (whether instituted by Bank, Borrower or any other person or
entity) in any way relating to Borrower's liabilities and obligations hereunder
and/or to the Collateral. Borrower's obligations, as aforesaid, shall survive
payment of this Note. For purpose of this Note, the term "affiliate of Bank"
shall mean Mercantile Bancorporation Inc. ("MBI") and any banking or non-banking
subsidiary of MBI, whether owned or controlled by controlling or under common
control with MBI directly or indirectly through any subsidiary.
Presentment, demand for payment, protest and notice of dishonor and of
protest are hereby severally waived by all parties hereto, whether as make,
endorser or guarantor to Bank.
TO INDUCE BANK TO ACCEPT THIS AGREEMENT AND ALL OTHER AGREEMENTS
RELATED HERETO, BORROWER HEREBY IRREVOCABLY AGREES THAT, SUBJECT TO BANK'S SOLE
AND ABSOLUTE ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT
ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT OR ANY AGREEMENT RELATED
HERETO OR ANY COLLATERAL HELD BY BANK IN CONNECTION HEREWITH OR THEREWITH SHALL
BE LITIGATED ONLY IN COURTS HAVING SUITS WITHIN THE STATE OF KANSAS OR THE STATE
OF MISSOURI. BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY
LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN EITHER OF SAID JURISDICTIONS.
BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF
ANY LITIGATION BROUGHT IN ACCORDANCE WITH THIS SECTION. BORROWER AND BANK
IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY ACTION IN WHICH
BORROWER AND BANK ARE PARTIES.
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<PAGE>
The liabilities and obligations or Borrower under this Note shall be
secured by (a) THIS NOTE IS UNSECURED . and (b) any and all balances, credits,
deposits or monies of or in the name of Borrower now or hereafter maintained
with, and any and all other property of or in name of Borrower now or hereafter
in the possession of Bank; and (c) any and all of Bank's security interests,
liens or encumbrances heretofore, now and/or from time to time hereafter granted
by Borrower and/or any endorser of guarantor to Bank, including, but not limited
to, the security interests granted pursuant to the N/A (collectively the
"Collateral").
Borrower hereby grants to Bank a security interest in the Collateral
for the payment of all liabilities and obligations of Borrower under this Note,
and all renewals and extensions thereof and for the payment of all other present
and future obligations to Bank regardless of whether currently contemplated or
agreed upon. In addition to and not in limitation of all rights of offset that
Bank or any other holder of this Note may have under applicable law, Bank or
such other holder of this Note shall have the right to appropriate and apply to
the payment of this Note any and all balances, credits, deposits, accounts or
monies of the Borrower then or thereafter with Bank or other holder.
If any of the following events ("Events of Default") shall occur": (a)
the Obligor (which term shall mean the undersigned and each other party
primarily or secondarily liable to Bank on this Note) shall fail to make any
payment on this Note as and when the same shall become due and payable; (b) the
Obligor shall fail to perform or observe any terms, conditions, warranties,
representations, undertakings, covenants and provisions to be performed,
discharged, kept, observed or compiled with under any agreement, instrument,
document, loan agreement, security agreement, mortgage deeds or trust or any
other written matter heretofore, now and/or from time to time hereafter executed
by or on behalf of the Obligor and delivered to Bank; (c) any Obligor shall (i)
apply for or consent to the appointment of a receiver, trustee, custodian or
liquidator of itself for all or a substantial part of its assets, (ii) be
unable, or admit in writing its inability, to pay its debts as they mature,
(iii) make a general assignment for the benefit of creditors, (iv) be
adjudicated a bankrupt or insolvent, (v) file a voluntary petition in
bankruptcy, or seek an arrangement with creditors, or take advantage of any
insolvency law or file an answer admitting the material allegations of a
petition filed against itself in any bankruptcy, reorganization or insolvency
proceedings or (vi) take any action to effectuate any of the foregoing; (d) an
injunction, attachment or
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<PAGE>
judgment shall be issued against any of the property or assets of any Obligor;
(e) any Obligor shall become insolvent in either the equity or bankruptcy sense
of the term; (f) any obligor shall have a judgment entered against it by a court
having jurisdiction in the premises, and such judgment shall not be appealed in
good faith or satisfied by such Obligor within thirty (30) days after the entry
of such judgment; (g) any Obligor shall fail (and such failure shall not have
been cured or waived) to perform or observe any term, provision or condition of,
or any other default or event of default shall occur under, any agreement,
document or instrument evidencing or securing any outstanding indebtedness of
such Obligor for borrowed money (other than this Note), if the effect of such
failure or default is to cause or permit such indebtedness to be declared to be
due and payable or otherwise accelerated, or to be required to be prepaid (other
than by a regularly scheduled required prepayment), prior to the stated maturity
thereof; (h) a default or event of default shall occur under or within the
meaning of any agreement, document or instrument evidencing, securing,
guaranteeing the payment of or otherwise relating to this note or any such
agreement, document or instrument shall cease to be in full force and effect;
(i) any guaranty of this Note shall be declared null and void by a court of
competent jurisdiction, or if the validity or enforceability thereof shall be
contested or denied by any party thereto, or if any party thereto shall deny
that it has any further liability or obligation thereunder or if any party
thereto shall fail to comply with or observe any of the terms, provisions or
conditions contained in said guaranty; (j) any material change in the ownership
or management of any Obligor, occasioned by death, termination, or resignation;
(k) any Obligor, without the prior written consent of Bank, becomes a party to
any reorganization, merger or consolidation; (l) death of any Obligor who is a
natural person or of any partner of any Obligor which is a partnership; (m)
dissolution, termination of existence of operations, merger, consolidation, or
transfer of a substantial part of the property of any Obligor which is a
corporation or partnership; (n) sale, transfer, assignment or other conveyance
of any real property which is collateral for this Note without the prior written
consent of Bank; (o) any Obligor shall be declared by Bank to be in default on,
or pursuant to the terms of, (i) any other present or future obligation to Bank,
including, but not limited to, any loan, line of credit, revolving credit,
guaranty or letter of credit reimbursement obligation, or (ii) any other present
or future agreement purporting to convey to Bank a lien or encumbrance upon, or
a security interest in, any of the property or assets of such Obligor, or (p)
Bank shall determine that the prospects for repayment of this Note have been
adversely affected or Bank otherwise in good faith believes the ability of the
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<PAGE>
undersigned to repay this Note is in doubt; then, and in each such event, the
holder of this Note may, at its option, declare the entire outstanding principal
amount of and all billed/due and unpaid interest on this Note and all other
amounts payable by the Borrower hereunder to be immediately due and payable,
whereupon all of the unpaid principal amount, billed/due interest and all such
other amounts shall become and be immediately due and payable without
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by the Borrower, and the holder of this Note may
exercise any and all other rights and remedies which it may have under any other
agreement, document or instrument evidencing, securing or guaranteeing the
payment of this Note or under applicable law.
Notwithstanding anything contained herein to the contrary, in no event
shall interest accrue under this Note at a rate in excess of the highest rate
permitted by applicable law, and if interest (including, but not limited to, any
charge or fee held to be interest by a court of competent jurisdiction) in
excess thereof shall be paid, then the excess shall constitute a payment of, and
be applied to, the principal balance hereof then outstanding, or at Bank's
election, shall be repaid to the undersigned.
To the extent that Bank receives any payment on account of Borrower's
liabilities and any such payment(s) or any part thereof is subsequently
invalidated, declared to be fraudulent or preferential, set aside, subordinated
and/or required to be repaid to a trustee, receiver or any other party under any
bankruptcy act, state or Federal law, common law or equitable cause, then, to
the extent of such payment(s) received, Borrower's liabilities or part thereof
intended to be satisfied and any and all liens, security interests, mortgages
and/or other encumbrances upon or pertaining to any Collateral of Borrower and
theretofore created and/or existing in favor of Bank as security for the payment
of such Borrower's liabilities shall be revived and continue in full force and
effect, as if such payment(s) had not been received by Bank and applied on
account of Borrower's liabilities.
The undersigned warrant(s) and represent(s) that all loan proceeds of the
indebtedness evidenced hereby are to be used exclusively for business purposes
and not for personal, family, or household purposes of any of the undersigned.
All obligations of the BORROWER (if more that one) hereunder are joint and
several. This Note shall be governed by and construed in accordance with the
laws of the State of Kansas.
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<PAGE>
BORROWER
NICHE PHARMACEUTICALS, INC.
BY: Stephen F. Brandon
TITLE: President / CEO
/s/ Stephen F. Brandon
- ---------------------------
MAILING ADDRESS
P.O. Box 449, 200 N. Oak
ROANOKE, TX 76262
- --------------------------
- --------------------------
K:\WPDOC\CORP\NICHE\AGREEMNT\PROMISSO.
-6-
EXHIBIT 10.7
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT ("Agreement") is made this 17 day of
October,1995 by and between NICHE PHARMACEUTICALS, INC, a Texas corporation
("Purchaser") and Dow Hickam Pharmaceuticals, Inc., a
Texas corporation ("Seller").
WHEREAS, Seller owns all right, title and interest in and to that
certain product known as Unifiber(R) (the "Product"); and
WHEREAS, Purchaser desires to purchase, and Seller desires to sell, all
of Seller's right, title and interest in and to the Product, on the terms and
conditions herein set forth;
NOW, THEREFORE, in consideration of the premises, and the mutual
covenants and conditions herein contained, the parties agree as follows:
1. PURCHASE AND SALE. Seller shall sell to Purchaser and Purchaser
shall purchase from Seller on the terms and conditions set forth in this
Agreement, all of Seller's right, title and interest, both tangible and
intangible, in and to the Product, free and clear of all claims, liens, security
interests and encumbrances, including but not limited to the following:
A. All state and federal patent, trademark, trade dress,
trade name and copyright rights, whether registered or not;
B. All right, title and interest in and to contracts,
commitments, and orders for the Product and all deposits and
pre-payments, if any, held by Seller therefor;
C. All advertising, promotional and educational materials
and literature, including all artwork related thereto;
D. All educational and training materials;
E. All clinical and medical data, studies and information
within the possession or knowledge of Seller concerning the
Product;
F. All targeted sales data regarding physician, nurse and
other customer users. Purchasers or distributors of the
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<PAGE>
Product, including customer, physician, nurse and distributor lists,
and all chargeback lists pertaining to product bids or contracts, and;
G. All goodwill associated with the Product; and
H. Seller shall provide to Purchaser as set forth in Sections
6 and 10 (sub-sections A, B, and C), finished/packaged inventory of
Product, which shall be a six (6) months supply of each unit offered
for sale. The unit breakdown of this inventory shall be based on the
previous six (6) months net unit sales.
2. PURCHASE PRICE. The total purchase price to be paid by Purchaser to
Seller for all the property, assets, inventory and rights of Seller in and to
the Product and the Covenant Not to Compete (as set forth herein below) shall be
a minimum sum of ONE MILLION SEVEN HUNDRED THOUSAND and No/100 DOLLARS
($1,700,000.00) or 20% of annual Unifiber Net Sales over the five (5) year
installment period with a maximum payment cap of Three Million Dollars
($3,000,000).
3. PAYMENT OF PURCHASE PRICE. At the Closing Date, Purchaser shall pay
to Seller the sum of TWO HUNDRED THOUSAND and No/100 DOLLARS ($200,000.00) The
balance of the purchase price shall be paid in five (5) annual installments.
Such installments shall be as follows:
Purchaser shall pay to Seller the greater of
Due Date Minimum
On or Before Payment or Maximum Payment
-------------- --------------------------------------
Down Payment October 31, 1995 $ 200,000.00
installment One March 31, 1997 $ 200,000.00 or 20% of net sales
Installment Two March 31, 1998 $ 250,000.00 or 20% of net sales
Installment Three March 31, 1999 $ 300,000.00 or 20% of net sales
Installment Four March 31, 2000 $ 350,000.00 or 20% of net sales
Installment Five March 31, 2001 $ 400,000.00 or 20% of net sales
TOTAL $1,700,000.00 or 20% of net sales
capped at $3,000,000
2
<PAGE>
Each such installment shall be due and payable beginning on or before March 31,
1997 and each successive anniversary date thereof over the following four (4)
years and shall be accompanied by a declaration made by an authorized
representative of Purchaser certifying the accuracy of the Net Sales and
Installment payment calculations. For purposes of this Agreement, Net Sales
shall mean (i) the gross amount invoiced by Purchaser, or its affiliates, if
any, to bona fide customers, wholesalers or distributors in arm's length
transactions excluding those sales to affiliates of Purchaser who are purchasing
for resale to a third party, or (ii) the gross amount which would have been
invoiced had such sales been made as a bona fide, arm's length sale of the
Product, less:
A. quantity and/or normal and customary cash discounts
allowed or taken;
B. customs, duties, and taxes (not including sales or
income taxes payable by Purchaser or its affiliate paid
related to such sale; and,
C. rebates, administrative fees, reimbursements or other
similar payments to or for Medicaid or any other government
programs.
4. GUARANTEE. Purchaser shall cause to be executed and
delivered to Seller prior to or upon Closing Date, a personal
guarantee for al1 amounts due to Seller hereunder from Stephen F.
Brandon, majority shareholder of Purchaser.
5. CLOSING DATE. The consummation of this transaction shall be on such
date after December 31, 1995 as Seller and Purchaser agree that all or
substantially all of the distributors or purchasers of the Product have been
notified of the pending change in ownership of the Product (the "Closing Date").
However, in no event shall such closing be later than January 31, 1996. An
actual physical
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<PAGE>
Closing Date is not required and the parties may exchange and deliver documents
and other property and things hereunder by mail, overnight delivery, wire
transfer or other means.
6. SELLER'S DELIVERY AT CLOSING DATE. At the Closing Date,
Seller shall deliver to Purchaser the following:
A. Such bills of sale, assignments and other instruments
deemed necessary or proper to transfer to Purchaser all of the rights
and interests in and to the Product being sold pursuant to this
Agreement, free and clear of all liens, charges and encumbrances
whatsoever; and
B. Any payment which may be due from Seller to Purchaser
as set forth in Section 10;
C. All inventory that is remaining, if any, due to the
Purchaser pursuant to Section lH, hereunder after deducting
those quantities set forth in Section 10, subsections A and C;
and
D. Possession of all properties and assets described in
this Agreement.
7. CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS. The obligation of
Purchaser to consummate the purchase of the Product as contemplated by this
Agreement is subject to and contingent upon Purchaser and Purchaser's agents and
representatives having the right to review, inspect, and approve the inventory
of the Product to be delivered pursuant to this and all of Seller's books and
records relating to the Product, including but not limited to all clinical data
and studies, all educational, advertising and promotional materials and artwork,
and all targeted sales data.
Seller shall cooperate with Purchaser in making all of the documents,
things and properties mentioned in this paragraph available and accessible to
Purchaser during the inspection period. Purchaser agrees not to disseminate or
disclose any of Seller's proprietary information to any party except as
necessary to determine manufacturing capabilities, and then only after obtaining
a nondisclosure agreement from such party or parties. If any of the conditions
set forth in this paragraph are not satisfied, then Purchaser shall have the
right, but not the obligation to terminate
4
<PAGE>
this Agreement by delivering to Seller written notice of termination within ten
(10) days from the date of this Agreement, and thereafter neither Seller nor
Purchaser shall have any obligations or liability whatsoever to the other with
respect to this Agreement.
8. CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS. The obligation of
Seller to consummate the sale of the Product as contemplated by this Agreement
is subject to and contingent upon satisfaction of each and all of the following
conditions. Purchaser shall deliver to Seller:
A. Two Hundred Thousand dollars ($200,000.00) cash or cash
equivalent as a Down Payment on or about October 31, 1995 as set forth
in the Escrow Agreement which is incorporated by reference as if fully
set forth herein. If the arrangement contemplated herein does not
close, Seller shall return the cash Down Payment plus seven (7%)
percent interest to Purchaser.
B. Purchaser shall deliver to Seller the personal guaranty of
Stephen F. Brandon which shall be incorporated herein by reference as
if fully set forth herein.
9. CONDUCT OF BUSINESS PENDING CLOSING DATE
A. Pending the Closing Date, Seller shall continue to ship the
Product and bill and collect all revenues therefrom in the same manner
as previously, provided, however, that Seller shall with regards to
current Product bid contracts or new contract bids will consult with
Purchaser to insure that the customers receive reasonable attention and
a timely bid or quote. The amounts of Products sold by Seller prior to
the Closing Date shall be deducted from those amounts due to Purchaser
pursuant to Section 10H, hereunder. On the Closing Date, Seller shall
pay to Purchaser an amount equal Seller's Net Sales made during the
time from November 1, 1995 to the Closing Date subtracting five (5%)
percent of the total for administrative expenses related to the sales.
Further, Seller agrees not to enter into any commitments, arrangements,
or other matters that would materially affect the manufacture or sale
of the Product, including any promotional incentives that would cause
wholesalers or other direct accounts to purchase
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<PAGE>
more than normal inventory needs, without the prior written consent of
Purchaser. To accomplish the foregoing, Seller agrees to assure the
stability of enough Product to supply normal demand, without
back-orders, until the Closing Date, and to accept returns on all
out-dated Product that was sold or in distribution prior to the Closing
Date. As soon as is reasonably practical after the execution of this
Agreement, Seller and Purchaser will jointly notify all distributors
and Purchasers of the Product of the change in ownership of the
Product, with instructions on ordering and handling returns of the
Product. After the Closing Date, in the event Purchaser, in good faith,
accepts returns of Product delivered by Seller prior to the Closing
Date, Seller agrees to reimburse Purchaser for such reasonable amounts
returned Product upon presentment thereof by Purchaser.
B. For no more than five (5) total business days and upon
fifteen (15) days notice to Seller, Seller agrees at Seller's
convenience to assist Purchaser with training Purchaser's bids &
contract manager on utilizing the order net software and other follow
up programs necessary to manage chargebacks and rebates from the buyers
of the Product. Purchaser shall pay all reasonable travel and other
expenses associated with any and all of the training set forth above.
C. On or about December 27, 1995, Seller shall deliver to
Purchaser Product in the following amounts:
CANISTER SIZE QUANTITY
5 oz 4000 units
9 oz 2000 units
16 oz 4000 units
These amounts shall deducted from those amounts due to Purchaser pursuant to
Section 1H. hereunder. In the event, any of the conditions precedent are not met
and the arrangement contemplated hereunder does not close. Purchaser shall
promptly return the above referenced quantities to Seller.
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<PAGE>
10. CONDUCT OF BUSINESS AFTER CLOSING DATE,
A. Seller agrees to let Purchaser ship and invoice Sellers
labeled Product to the trade until Seller's labeled inventory is
exhausted and Purchaser has acquired inventory of the Product with
Purchaser's label affixed which shall in no event be later than
December 31, 1997.
B. Seller agrees not to disseminate to the trade any
communication whether oral or written which pertains to the Product
without first receiving written approval from the Purchaser.
C. Seller agrees to take reasonable steps to make sure that
all of Seller's employees including outside sales, marketing, inside
order support staff, manufacturing, returns, shipping and receiving,
are instructed to refer to the Purchaser any and all inquiries and
orders pertaining to the Product.
D. As set forth in Section 13, Seller agrees to provide
manufacturing and packaging for Product through December 31, 1996.
Purchaser reserves the right to order up to 12 months of Product
inventory to be packaged on or before December 31, 1996. Further,
Purchaser agrees to accept delivery during 1997 of this aforementioned
inventory in no less than quarterly shipments until said inventory is
exhausted.
11. ASSUMPTION OF CERTAIN OBLIGATIONS. Purchaser agrees to assume all
contractual obligations and bid commitments of Seller relating to the Product.
Such assumption shall be as of the Closing Date. Purchaser shall indemnify and
hold harmless Seller from and against any such assumed obligations. All other
liabilities, trade accounts, security interests, liens and encumbrances
affecting the Product and the assets which are the subject hereof shall be
satisfied or discharged by Seller prior to the Closing Date.
12. PURCHASE OF ADDITIONAL INVENTORY. In addition to the assets set
forth in paragraph 1, Purchaser agrees to purchase from Seller, and Seller
agrees to sell to Purchaser, additional quantities of Product through December
31, 1996 to be delivered prior to December 31, 1997 at the prices set forth on
Exhibit "A." Said purchases shall be made based upon a forecasts subrnitted by
Purchaser to Seller no later than July 31, 1996. Purchaser shall not be
obligated to purchase from Seller more than eighty percent (80%) of said
forecast and Seller shall not be obligated
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<PAGE>
to sell to Purchaser more than one hundred twenty percent (120%) of said
forecast. In addition, Seller further agrees to ship to Purchaser such inventory
on a quarterly or as needed basis until such Product supplies are exhausted.
13. REPRESENTATIONS AND WARRANTIES OF SELLER. In addition to any other
representations and warranties contained in other paragraphs of this Agreement,
Seller hereby, makes the following representations and warranties to Purchaser,
the fulfillment and accuracy of which is a condition precedent to Purchaser's
obligations under this Agreement, and which representations and warranties shall
survive the Closing Date regardless of what investigations Purchaser shall have
made with respect thereto prior to the Closing Date. Each of the individual
representations and warranties (i) constitutes a material part of the
bargained-for consideration and is being relied upon by Purchaser, and (ii) is
true in all respect as ofthe date of this Agreement, and shall be true in all
respects on the Closing Date.
A. Seller is the sole owner of the Product and all rights
associated therewith, with full right to sell or dispose of it as
Seller may choose and no other person or persons whatsoever have any
claim, right, title, interest or lien in, to or on the Product;
B. No litigation, actions or proceedings, legal, equitable,
administrative, through arbitration, or otherwise, are pending or
threatened which might affect the Product or the consummation of the
purchase and sale described in this Agreement;
C. Seller owes no obligations and has contracted no liabilities
which affect the Product or which might affect the consurnmation of
the purchase and sale described in this Agreement;
D. Seller is a corporation, duly organized, validly existing
and currently in good standing under the laws of the State of Texas
and has full power to own, lease and operate its properties and
carry on its business as and where it is being conducted;
E. The execution and performance of this Agreement, and the
consummation of the transactions contemplated hereby, have been duly
authorized by Seller's Board of Directors and no other or further
corporate action by Seller is necessary, nor is any governmental or
court approval required, and this Agreement constitutes the valid and
binding obligation of Seller, enforceable in accordance with its terms;
8
<PAGE>
F. To the best of the knowledge of Seller, there is no fact
that materially adversely affects or in the future may materially
adversely affect the Product which has not been set forth in this
Agreement;
G. A true and correct list of all patent, trademark and
copyright registrations or pending applications held by Seller with
respect to the Product is attached hereto as Exhibit "B". With respect
to any pending application, Seller has no knowledge that any such
pending application will not be registered in due course but makes no
guarantees as to whether or not such pending applications will issue;
and,
H. Seller will throughout the term of this Agreement, act in
accordance with all applicable statutes, laws and regulations.
REPRESENTATIONS AND WARRANTIES OF PURCHASER. In addition to
any other representations and warranties contained in other paragraphs of this
Agreement, Purchaser hereby makes the following representations and warranties
to seller, the fulfillment and accuracy of which is a condition precedent to
Seller's obligations under this Agreement, and which representations and
warranties shall survive the Closing Date regardless of what investigations
Seller shall have made with respect thereto prior to the Closing Date. Each of
the individual representations and warranties (i) constitutes a material part of
the bargained-for consideration and is being relied upon by Seller, and (ii) is
true in all respect as of the date of this Agreement, and shall be true in al]
respects on the Closing Date.
A. Purchaser is a corporation, duly organized, validly existing
and currently in good standing under the laws of the State of Texas
and has full power to own, lease, and operate its properties and
carry on its business as and where it is being conducted;
B. The execution and perforrnance of this Agreement, and the
consummation of the transactions contemplated hereby, have been duly
authorized by Purchaser's Board of Directors and no other or further
corporate action by Purchaser is necessary, nor is any governmental or
court approval required, and this Agreement conslitutes the valid and
binding obligation of Purchaser, enforceable in accordance with its
terms; and,
9
<PAGE>
C. Purchaser will throughout the term of this Agreement act in
accordance with all applicable local, state, statutes, laws and
regulations.
14. COVENANT NOT TO COMPETE. In consideration of the purchase of the
Product and the payment to Seller of the purchase price, Seller, and Seller's
affiliates, subsidiaries, parent, jointly and severally, agree not to, either
directly or indirectly, as principal, agent, employee, consultant, guarantor,
lender or otherwise, manufacture or market the Product for so long as Purchaser
is manufacturing and/or marketing the Product, nor shall any such party or
parties manufacture or market any powdered cellulose dosage form of a dietary
fiber food supplement, anywhere in the world, for a period of seven (7) years
from the Closing Date. The parties agree that the restrictions contained in this
paragraph are reasonable in time, scope and area and are a material part of the
bargained-for consideration in the purchase and sale of the Product and without
which Purchaser would not have entered into this Agreement.
15. COSTS AND EXPENSES. All costs and expenses in conducting the
purchase and s ale described in this Agreement in the manner prescribed
by this Agreement shall be home by the parties in the following manner:
A. Each party shall pay the fee of the attorney representing it
in negotiating this Agreement and supervising the purchase and sale
described herein; and
B. Seller shall bear any and all debts, liabilities,
obligations, charges and expenses ("Liabilities"), known or which may
hereinafter become known, regardless of kind or character, incurred
with respect to the Product prior to the Closing Date except to the
extent such Liabilities are caused by the negligence of intentional
misconduct of Purchaser.
16. INDEMNIFICATION. Seller shall indernnify and hold Purchaser and the
property of Purchaser free and harmless from any and all claims, losses,
damages, deficiencies, injuries and liabilities (including reasonable attorney's
fees incurred in defense thereof), arising from any rnisrepresentation, breach
of warranty or non-fulfillment of any agreement made herein, or on account of
Seller's ownership, manufacture, distribution or sale of the Product prior to
the Closing Date, including all Product inventory sold to Purchaser pursuant to
the provisions of this Agreement, unless it is deterrnined that the liability is
on account of Purchaser's handling of such Product inventory.
10
<PAGE>
Purchaser shall indemnify and hold Seller and the property of Seller
free and harmless from any and all claims, losses, damages, injuries and
liabilities (including reasonable attorney's fees incurred in defense thereof),
arising from or in connection with any misrepresentation, breach of warranty or
non-fulfillment of any agreement made herein or on account of Purchaser's
ownership, manufacture, distribution or sale of the Product after the Closing
Date, except Product inventory sold to Purchaser pursuant to the provisions of
this Agreement, unless it is determined that the liability is on account of
Purchaser's handling of such Product inventory.
17. WAIVER OF BREACH. Failure of any party to protest a breach by any
other party or waiver by any party of a breach shall not operate as or be
construed as a waiver of rights or remedies as to that breach and a waiver by
any party of a breach shall not operate as or be construed as a waiver of rights
or remedies as to any subsequent breach by any other party.
18. SUCCESSORS AND ASSIGNS. The rights and obligations of the parties
under this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of the parties. However, neither party shall assign this
Agreement without the prior written consent of the other party, which consent
shall not be unreasonably withheld.
19. ENTIRE AGREEMENT. This instrument contains the entire Agreement
between the parties concerning the subject matter hereof, and it may not be
amended orally, but only by an agreement in writing, signed by the party against
whom enforcement of any waiver, change modification, extension, or discharge is
sought.
20. PARAGRAPH HEAVINGS. The paragraph headings contained herein are
for convenience only, and do not purport to accurately surnmarize the
contents of the paragraph they head, and shall not modify, or in any way
affect the provisions of this Agreement or be of any relevance in the
construction thereof.
21. MEDIATION AND ARBITRATION OF DISPUTES.
A. Should either Party reasonably believe the other has
committed a breach of this Agreement, such Party shall notify the other
in writing stating its belief that a breach has been committed and
setting forth its reasons for such belief;
11
<PAGE>
B. If the Party in receipt of such notice does not respond
within thirty (30) days, except in the event of an alleged breach of
Paragraph 3, which time shall be ten (10) days, of its receipt of same,
or if it does respond and the Party receiving such response is not
satisfied with the response or the proposed remedy, such Party may
thereafter demand arbitration;
C. Should the Parties fail to resolve any controversy or claim
ansmg out of or relating to the interpretation or application of any
term or provision set forth herein, or the alleged breach thereof, such
controversy or claim shall be resolved by arbitration in accordance
with the Rules of the American Arbitration Association;
D. Judgment upon any award rendered pursuant to Paragraph 23 C
herein may be entered in any court having jurisdiction of the Party
against whom the award is rendered;
E. Any award rendered pursuant to the terms and conditions set
forth herein shall be final and binding; and
F. Any arbitration held pursuant to this Agreement shall be
held in Austin, Texas. Each Party shall bear its own expenses and shall
equally share the administrative expenses of the hearing, including
arbitration fees, the expenses of a court reporter, hearing room, etc.
22. APPLICABLE LAW. This Agreement shall be subject to, construed in
accordance with, and governed by the laws of the State of Texas.
23. MUTUAL PREPARATION. Each party has read the foregoing Agreement,
fully understands the contents thereof, and is under no duress or pressure of
any sort to execute it. This Agreement was mutually prepared and shall not be
construed against any party by reason of his role in such preparation.
24. SEVERABILITY. In case any one or more of the provisions contained
in this Agreement shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions of this Agreement, but this Agreement
shall be construed as if such invalid, illegal, or unenforceable provisions had
never been contained here. If, moreover, any one of more of the provisions
contained in this Agreement shall, for any reason, be held to be excessively
broad as to time, duration,
12
<PAGE>
geographical scope, activity, or subject, it shall be construed, by limiting and
reducing it, so as to be enforceable to the extent compatible with the
applicable law as it shall then appear.
25. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, but all counterparts taken together shall constitute one and the
same agreement, binding upon all of the parties hereto.
26. FORCE MAJEURE.
A. Except as provided for elsewhere herein with respect to
alternative sources of supply, either Party to this Agreement is
totally or partially prevented or delayed in the performance of any of
its obligations under this Agreement by force majeure and if such Party
gives written notice thereof to the other Party, within five (5)
working days of the occurrence of such event, specifying the matters
constituting force majeure together with such evidence as it reasonably
can give and specifying the period for which it is estimated that such
prevention or delay will continue, then the Party so prevented or
delayed shall be excused from the performance as from the date of such
notice. If the period of any actual non-performance of Purchaser
because of Purchaser's force majeure conditions plus the anticipated
future period of Purchaser's non performance because of such conditions
will exceed an aggregate one hundred eighty (180) days within any
twenty-four (24) month period. Seller may terminate this Agreement by
notice to Purchaser.
B. For the purpose of this Agreement, the term "force majeure"
shall be deemed to include any cause affecting the performance of the
obligations set forth in this Agreement arising from or attributable to
acts, events, omissions or accidents beyond the reasonable control of
the Party who is obligated to perform and in particular but without
limiting the generality thereof shall include strikes, lock-outs or
other industrial action, civil commotion, riot, invasion, war, threat
of or preparation for war, fire, explosion, storm, flood, earthquake,
subsidence, epidemic or other natural physical disaster, impossibility
of the use of railways, shipping aircraft, motor transport, or other
means of public or private transport.
C. As soon as practicable after such notification, the Parties
shall consult together to decide how, if at all, the effects of the
force majeure can be mitigated, and what, if any, modification of
13
<PAGE>
the terms set forth herein may be required in order to arrive at an
equitable solution.
27. NOTICES. Any notice required under this Agreement shall be in
writing sent by registered or certified mail or by telex or telegrams,
and shall be deemed to be effective on the date of mailing. Unless
otherwise changed by notice in writing from Purchaser to Seller.
Purchaser may serve notice to Seller as follows:
Dow Hickam Pharrnaceuticals, Inc.
10410 Corporate Drive
P. O. Box 2006
Sugar Land, Texas 77487
Attn.: David Satter
Phone: (713) 240-1000
Fax: (713) 240-7411
Unless otherwise changed by notice from Seller to Purchaser, Seller may serve
notice to Purchaser as follows:
Niche Pharmaceuticals, Inc.
200 North Oak Street
P. O. Box 449
Roanoke, Texas 76262-0449
Attn.: Steve Brandon, President/CEO
Phone: (817) 491-2770
Fax: (817) 491-3533
28. FURTHER ASSISTANCE. Purchaser and Seller agree to duly execute and
deliver, or cause to be duly executed and delivered, such further instruments
and do and cause to be done such further acts and things, including, without
limitation, the filing of such additional assignments, agreements, documents and
instruments, that may be necessary or as the other party hereto may at any time
and from time to time reasonably request in connection with this Agreement or to
carry out more effectively the provisions and purpose of, or to better assure
and confirm unto such other Party its rights and remedies under this Agreement.
29. AUDIT. Purchaser shall keep accurate books and records using
14
<PAGE>
Generally Accepted Accounting Principles ("GAAP") which shall:
A. contain inforrnation reasonably necessary for determination
of all payments due pursuant to this Agreement;
B. be maintained at Purchaser's principal offices; and
C. be available for inspection by Seller or Seller's agent
upon reasonable written notice to Purchaser.
Seller's right to inspect Purchaser's books and records shall
be;
A. those books and records containing information reasonably
necessary to verify the accuracy of Purchaser's payments;
B. Purchaser's regular hours of business; and
C. reasonable duration
30. CONFIDENTIALITY. The Secrecy Agreement executed between the Parties
hereto on May 24, 1993 shall apply to this Agreement as if fully set forth
herein and is hereby incorporated by reference. The term of the Secrecy
Agreement shall be exlended until the later of March 31, 2002 or the termination
of this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this
PURCHASE AGREEMENT as of the date set forth above.
SELLER: PURCHASER:
Dow Hickam Pharmaceuticals, Inc. Niche Pharmaceuticals, Inc.
a Texas corporation a Texas corporation
BY: /s/ David Satter BY: /s/ Stephen F. Brandon
Executive Vice President
Its: and Chief Financial Officer Stephen F. Brandon, President/CEO
DATE: October 6, 1995 DATE: October 9, 1995
-------------------------- ------------------
15
EXHIBIT 10.8
OFFICE LEASE
1. THIS LEASE CONTRACT, executed in duplicate, this 30th day of July 1996, by
and between Eva L. Zweifel-Huntsman, P. O. Box 1620, Roanoke, Texas 76262
hereinafter called "Lessor", and Niche Pharmaceuticals, Inc., 200 North Oak
Street, P. O. Box 449, Roanoke, Texas 76262 hereinafter called "Lessee".
WITNESSETH:
2. That the Lessor has and does hereby lease unto the Lessee, and the Lessee
does hereby lease from Lessor, the use and occupancy of "All vacant property
designated as parking, all office space, all warehouse space, and all fixtures"
in the office building located at 200 North Oak Street, Roanoke, Texas 76262.
TERM
3. TO HAVE AND TO HOLD the same for the term of sixty (60) months ensuing from
the 1st day of September, 1996, and to become fully completed and ended the 31st
day of August, 2001.
RENT
4. LESSEE SHALL PAY TO LESSOR as rent at P. O. Box 1620, Roanoke, Texas 76262,
the sums of $141,600 payable in monthly installments per Schedule "A", the first
such installment being due on the first day of the first calendar month of said
term, and another such installment being due and payable on the first day of
each and every succeeding month of said term in advance, until the full payment
of the total sum shall be made. Such monthly rental payments are to be made by
bank draft or check, payable to the order of LESSOR, and forwarded to Northwest
Bank, Roanoke, Texas for direct deposit into LESSOR's account at said Bank. Such
rental payments must be received by said Bank for deposit on or before the 1st
day of each month while this lease is in effect. In the event any payment is
more than ten (10) days late, there shall be a penalty of sixty ($60) dollars
for every ten (10) days late.
USE
5. The leased premises shall be used by the Lessee, its successors and assigns,
as business offices and for no other purposes, and shall be subject to the
following conditions, each and every one of which Lessee covenants and agrees to
keep and perform:
RIGHTS OF LESSOR IN EVENT OF DEFAULT
FIRST: Lessee agrees to pay to Lessor the sums herein specified and to comply
with the terms and provisions of this lease, and;
(a) In case of the non-payment of this said rent at the said time and place, or
in case the leased premises shall be deserted or vacated, this lease, at the
option of the Lessor, shall be terminated; or, if the Lessor so elects the
Lessor shall have the right to enter the leased premises at the agent of the
Lessee, either by force or otherwise, without being liable to any prosection
therefor, and to relet the premises as the agent of the Lessee, and to receive
the rent therefor, and the Lessee shall pay the Lessor any deficiency that may
arise by reason of such re-letting, on demand at the office of the Lessor in P.
O. Box 1620, Roanoke, Texas 76262.
<PAGE>
(b) In case the Lessee shall fail to comply with any term and provision of this
lease other than the payment of a sum at the time an place provided herein and
shall fail within ten (10) days after notice to the Lessee of such breach to
cure the breach specified in that notice or if Lessee shall file any petition in
bankruptcy or shall be declared or adjudged a bankrupt under the laws of the
United States, or shall make an assignment for the benefit or creditors, or
commit any act of insolvency or should become insolvent, or shall make any
transfer of property the purpose of which might tend to defeat the collection of
the rent due or to become due under this lease, and in any of said events, the
Lessor shall have the option to terminate this lease or to declare the entire
amount of the rent which would become due and payable during the remainder of
the term covered by this lease or any portion thereof which the Lessor may elect
so to declare to be due and payable immediately, without notice to the Lessee,
and to demand payment thereof and to enforce such payment by the ordinary legal
methods; but in this event the Lessee (if he shall have paid the rent thus
demanded for any unexpired portion of said term), shall have the right to
underlet the premises (notwithstanding the restrictions contained in Article
Second of the conditions of this lease) or the unexpired portion of said term
which has been so paid for, to any suitable and unobjectionable tenant to be
used for the purpose for which Lessee may use said premises as herein provided
and for no other purpose and to collect the rent therefor for his own
reimbursement, or if the same is collected by the Lessor, to require the same to
be paid over to him on demand.
SECOND: Neither the premises leased by the terms of this lease nor any part
thereof shall be assigned, let, or underlet, or used or permitted to be used for
any purpose other than that hereinabove mentioned without the prior written
consent of Lessor:
THIRD: The Lessee shall not commit waste not suffer nor permit waste to be
committed on said premises. Lessee will keep the building, and all other
improvements to the extent covered by this lease in sound condition and good
repair and will neither do nor permit to be done anything to the said premises
that may impair the value thereof. Said Lessee shall take good care of the
leased premises and fixtures therein and shall quit and surrender said premises
at the end or other termination of said term in as good condition as the
reasonable use thereof will permit, and shall not make any alterations,
additions or improvements in said premises without the written consent of said
Lessor, and all alterations, additions, or improvements which shall be made by
either of the parties hereto upon the premises except office furniture, never
attached to the building or any part thereof, put in at the expense of the
Lessee, shall be the property of the said Lessor and shall remain upon and be
surrendered with the premises as a part thereof at the termination of this lease
without disturbance, molestation or injury. Lessee by moving into the leased
premises and taking possession thereof, shall accept and shall be held to have
accepted the leased premises as suitable for the purposes for which the same are
leased, and shall accept and shall be held to have accepted the said building
and each and every appurtenance hereof, and said Lessee by said act waivers any
and all defect therein.
-2-
<PAGE>
LOSS OR DAMAGE TO PREMISES
FOURTH: If the leased premises or the building are made untenantable by fire or
other casualty, including damage or casualties of war, Lessor shall immediately
take such action as is necessary to reconstruct, repair, restore and
rehabilitate the premises and the building, provided, however, that if a
registered architect selected by Lessor should certify that such repairs and
rehabilitation to the leased premises cannot be accomplished by using standard
working methods and procedures so as to make the leased premises tenantable
within one hundred eighty (180) days from the date of said fire or other
casualty, either party shall have the right to terminate this lease by giving to
the other notice or such election within thirty (30) days after the occurrence
of said fire or other casualty or ten (10) days after receipt of the architect's
certificate, whichever occurs last. If said fire or other casualty results in
the total destruction of the building, this lease shall automatically terminate
as of the date of said fire or other casualty. In case of fire or other casualty
not resulting in termination of this lease , rent shall be abated on a per diem
basis while the premises are untenantable and, in case of termination of this
lease, rent shall be apportioned on a per diem basis and be paid to the date of
the fire or other casualty. In case of damage or destruction to the leased
premises due to such fire or other casualty, Lessor may re-enter and re-possess
the same or any part thereof for the purpose of removing or repairing the loss
or damage.
PERSONAL OR PROPERTY RISKS
FIFTH: Said Lessor shall not be liable for any damage to any property at any
time in said premises or building from gas, smoke, water, rain, or snow, which
may leak into, issue or form from any part of said building of which the
premises hereby leased are part, or from the pipes or plumbing work of the same,
or from any other place or quarter, The Lessee further agrees to indemnify and
hold the Lessor harmless from any and all damages or claims which the said
Lessor may be compelled to pay on account of injuries to the person or property
of any other tenant in this building or to any other person rightfully in said
building for any purpose whatsoever, where the injuries aforesaid are caused by
the negligence or misconduct of the Lessee, his agents, servants or employees.
The LANDLORD shall not be liable for personal injuries or property damage or
loss from theft, vandalism, fire, water, hurricane, rain, explosion or other
causes whatsoever, unless the same is due to the negligence or fault of
LANDLORD. LANDLORD shall have no duty to furnish smoke detectors except as
required by statute. When smoke detectors are furnished, LANDLORD shall test
same and provide initial batteries at Lease commencement; thereafter Tenant
shall pay for the replacement of smoke detector batteries, if any, as needed.
TENANTS INSURANCE: TENANT is hereby notified that LANDLORD insurance does not
insure TENANT against loss of personal property on the PREMISES due to fire,
theft, vandalism or other causes. TENANT is responsible for insurance on TENANTS
own property for fire and casualty loss and for TENANT'S employees for liability
insurance coverage.
DEFAULT: In the event the TENANT shall default in the prompt payment of rent
when same is due, or fail to perform any of the provision of this Lease, or in
the event the TENANT shall abandon the PREMISES, or leave them vacant, LANDLORD,
without further notice, may re-enter the PREMISES by summary proceedings, or by
force, without being liable for prosecution therefor. LANDLORD may also take
possession of said PREMISES, and remove all persons or property therefrom, and
may elect to either cancel this LEASE, or to relet the PREMISES, and receive the
rent therefor. Such rent shall be applied first to the expenses incurred by
LANDLORD, in entering and reletting, and then to the payment due under this
LEASE, TENANT shall remain liable for any deficiency in the total amount due
under said LEASE. TENANT'S absence from the PREMISES for ten (10) consecutive
days while all or any portion of rent is delinquent, shall be deemed an
abandonment of the PREMISES. If TENANT otherwise violates the terms of this
LEASE, LANDLORD may terminate TENANT'S right of occupancy by giving thirty (30)
days notice in writing. LANDLORD shall specifically have the right to institute
and maintain the statutory suit of Forcible Entry and Detainer in the proper
Court, and obtain a writ for possession hereby. In addition to all other
remedies provided herein, TENANT agrees to compensate LANDLORD for all
reasonable expenses necessary to enforce this LEASE and to collect the rental or
damages for breach of this LEASE, including, but not limited to all court costs
and reasonable attorney's fees incurred in connection therewith.
INSPECTION: LANDLORD shall have the right to enter the PREMISES with twelve (12)
hours notice to examine same or to make repairs .
-3-
<PAGE>
REALTOR' COMMISSION: LANDLORD agrees to pay the within named commission in cash
equal to zero (0%) percent (%) for negotiating this LEASE payable upon execution
of this LEASE unless otherwise stipulated. If any renewals are granted TENANT,
LANDLORD agrees to pay such an additional commission on the date such renewals
are effective even though with charges. The commission due for each renewal is
to be calculated as though a new lease had been made for such period of time.
Should the PREMISES be sold to the TENANT during the term of this LEASE and all
renewals and extension thereof, or within one hundred-eighty (180) days
following the expiration date of LEASE and said renewals and extensions, the
LANDLORD agrees to pay the within named zero (0%) percent sales commission in
cash equal to zero (0%) percent of the selling price of said property. All
commission are payable in Denton County, Texas .
FAIR HOUSING: IN ACCORDANCE WITH THE LAW, THIS PROPERTY IS OFFERED WITHOUT
RESPECT TO RACE, COLOR, RELIGION, SEX, OR NATIONAL ORIGIN OF TENANT.
MISC: This LEASE shall constitute a full understanding between the parties
herein, and no other Agreement unless in writing and signed by the parties
hereto shall be binding upon the subject property, except the attached Rental
Application, if any, which shall become a part of the LEASE. References to
LANDLORD shall apply to LANDLORD.
SPECIAL CONDITIONS: See Schedule "B"
THIS IS A LEGAL BINDING CONTRACT: IF NOT UNDERSTOOD, SEEK COMPETENT ADVICE.
TENANT acknowledges receipt of a copy of the LEASE.
EXECUTED this the 30th day of July, 1996.
Eva L. Zweifel-Huntsman /s/Eva L. Zweifel-Huntsman
NAME LANDLORD
Stephen F. Brandon, President /s/Stephen F. Brandon, President
NAME TENANT
-4-
<PAGE>
SCHEDULE "A
Monthly Installments For 200 North Oak Street, Roanoke, Texas 76262
Year Dates Monthly Rent
- ------ ------------------------------------- ------------
Year 1 Sept. 1, 1996 through August 31, 1997 $2000.00
Year 2 Sept. 1, 1997 through August 31, 1998 $2200.00
Year 3 Sept. 1, 1998 through August 31, 1999 $2400.00
Year 4 Sept. 1, 1999 through August 31, 2000 $2600.00
Year 5 Sept. 1, 2000 through August 31, 2001 $2600.00
-5-
<PAGE>
SCHEDULE "B"
SPECIAL CONDITIONS:
1) Niche Pharmaceuticals, Inc. or Steve F. Brandon will have an option to
purchase 200 North Oak Street at $20,000 over market price which shall be
determined by a mutual appraiser. This option to purchase shall exist
for a period of up to twenty-four (24) months from the effective date of
this agreement.
2) Niche Pharmaceuticals, Inc. will have the option to renew its lease on
200 North Oak Street for a period of up to five (5) years at a monthly
rent of $2,600.00.
3) In addition to the monthly rent, Niche Pharmaceuticals, Inc. agrees to
pay all yearly property taxes on 200 North Oak Street as part of this
LEASE agreement.
4) Niche Pharmaceuticals, Inc. agrees to maintain and pay for the property
insurance premiums for 200 North Oak Street. The loss payee will be Eva
L. Zweifel-Huntsman and/or any lending institution who may have a lien on
such property.
5) Eva L. Zweifel-Huntsman agrees to construct and build for Niche
Pharmaceuticals, Inc. lease hold improvements such as additional
warehouse space or increased office space. The cost of such leasehold
improvements shall be negotiated in good faith by both parties to this
lease agreement and such approval by the LANDLORD shall not be
unreasonably withheld. Pursuant to such leasehold improvements made by
the LANDLORD, Niche Pharmaceuticals, Inc. agrees to pay agreed upon
additional monthly rent for such improvements.
6) TENANT agrees to pay for all repairs up to four-hundred dollars ($400)
and the LANDLORD agrees to pay for all repairs over four-hundred dollars
($400).
7) TENANT shall pay promptly as they become due all charges for the
furnishing of water, electricity, garbage service, and other public
utilities to the leased premises during the term of this Lease.
8) TENANT agrees to consign the special Sub-Lease agreement to the Owner/
LANDLORD of said property, which outlines the term and conditions of the
lease agreement with Sam Lee and Steve F. Brandon for U.S. Post Office
Parking.
-6-
EXHIBIT 10.9
THIRD PARTY
MANUFACTURING AGREEMENT
1.0 PARTIES
- --- -------
1.1 BUYER: NICHE PHARMACEUTICALS, INCORPORATED
ROANOKE, TX 76262
("BUYER")
1.2 SELLER: SCHERING CORPORATION
KENILWORTH, NJ 07033
("SCHERING")
2.0 PRODUCTS
- --- --------
The items specified on Exhibit A attached hereto ("Products").
3.0 PURPOSE
- --- -------
3.1 BUYER requires an assured source of supply of Products and SCHERING
agrees to produce such Products in accordance with the description and
specifications identified in Exhibit A and Exhibit B attached hereto and made
part hereof.
3.2 SCHERING shall sell to BUYER and BUYER shall purchase from SCHERING
during the term of this Agreement all of BUYER's requirements of Products. BUYER
represents to SCHERING that it has all necessary approvals of the Food & Drug
Administration for the Products.
4.0 PRICE
- --- -----
4.1 Pilot Batches: The price per pilot batch shall be as set
forth in Exhibit A.
4.2 Products: The purchase price of products shall be as set forth in
Exhibit A. BUYER acknowledges that this purchase price is based upon BUYER's
agreement to purchase all of its requirements of Products exclusively from
SCHERING.
4.3 Payment: Payment for all services performed and product delivered
will be made in U.S. Dollars within thirty (30) days after receipt of SCHERING's
invoice. Invoices will be generated based upon completion of service or shipment
of product.
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4.4 Taxes: BUYER shall reimburse SCHERING for any federal, state or
local excise or other tax, assessment, license fee or other charge or increase
thereof, which SCHERING may be required to pay upon the sale, products,
transportation or use of the Products. In no event shall BUYER be required to
reimburse SCHERING for taxes based on income or franchise fees.
5.0 MANUFACTURING AND QUALITY CONTROL
- --- ---------------------------------
5.1 SCHERING shall supply all raw materials and packaging components
for the product of pilot batches according to specifications provided by BUYER.
The pilot batches shall be manufactured in accordance with Good Manufacturing
Procedures (GMP's). All pilot production is on a best efforts basis. As SCHERING
has no experience with the manufacture of Product, there can be no guarantees as
to the success of pilot production. SCHERING and BUYER agree that BUYER's
manufacturing representative be present to review manufacturing procedures and
witness the manufacture of all pilot batches.
5.2 For manufacture of Products, SCHERING shall supply all raw
materials and packaging components according to specifications provided by
BUYER.
5.3 SCHERING shall utilize the quality control and manufacturing
process provided SCHERING by the BUYER employing the same methodology or
equivalent techniques agreed to by SCHERING and the BUYER.
5.4 SCHERING shall provide validation services at the price
set forth in Exhibit A.
5.5 SCHERING shall provide accelerated stability testing for pilot
batches at the prices and according to the conditions set forth in Exhibit A.
6.0 ARTWORK AND LABELING
- --- --------------------
6.1 All artwork shall be supplied by BUYER and must be
compatible with SCHERING's packaging equipment.
7.0 SHIPMENT AND RISK OF LOSS
- --- -------------------------
7.1 Shipment shall be by whatever means BUYER instructs and
SCHERING determines is reasonable, provided that shipment is made
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in accordance with all relevant statutory requirements.
7.2 The purchase prices in Article 4.0 hereof are F.O.B. Kenilworth,
New Jersey. Delivery of Products will be to one location in accordance with
BUYER's shipping instructions. SCHERING's delivery to said carrier or trucker
will constitute delivery to BUYER. BUYER will bear all risk of loss, delay, or
damage in transit as well as freight and insurance.
7.3 Claims: The weights, tares and tests affixed by SCHERING's invoice
shall govern unless proven to be incorrect. Claims relating to quantity,
quality, weight, condition and loss of or damage to any of the Products sold
under this Agreement shall be waived by BUYER unless made within thirty (30)
days of receipt of product by BUYER.
8.0 TERM
- --- ----
8.1 This Agreement shall be effective as of December 1, 1991, and shall
continue in full force and effect for a period of five (5) years commencing with
the date of first commercial sale of Products by BUYER. This Agreement or any
renewal thereof shall be automatically renewed and extended on the same terms
and conditions at the expiration of the term for a renewal period of two (2)
years thereafter unless either party shall notify the other party in writing at
least one (1) year prior to the expiration of the initial term of renewal term
of its intention not to renew or amend this Agreement.
9.0 ESTIMATES AND PURCHASE ORDERS
- --- -----------------------------
9.1 SCHERING will order components of Products, printed labeling,
package materials in containers based on the lead time required to fill BUYER's
estimated requirements. BUYER agrees to purchase from SCHERING all Products
manufactured for BUYER by SCHERING in accordance with BUYER's most recent
written estimates and/or purchase orders. Upon change in artwork requested by
BUYER or upon termination of this Agreement, BUYER shall purchase any inventory
of Products manufactured for it by SCHERING and remaining at the date of
termination along with any components, printed labeling, packaging materials and
containers which were acquired and/or prepared by SCHERING based on forecast
pursuant to this Agreement. Any inventory of packaging components rendered
obsolete as a result of a change shall be purchased from SCHERING by BUYER.
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9.2 At the initiation of this Agreement, BUYER will provide SCHERING
with a written forecast indicating BUYER's projected needs for the succeeding
year.
9.3 BUYER shall place orders in increments of single batches, i.e.,
approximately 1.6 million tablets per batch.
9.4 At the end of each calendar quarter during the term of this
Agreement or any subsequent agreement, BUYER shall provide SCHERING with more
specific data as to its projected needs for the following four (4) calendar
quarters. The parties acknowledge that any data provided to SCHERING by BUYER
concerning its projected needs shall be estimates and shall not be binding on
BUYER unless and until confirmed by BUYER's written purchase order.
9.5 BUYER shall issue written purchase orders to SCHERING at least
ninety (90) days prior to the requested delivery date if the requirements are at
or below the previously supplied estimates and one hundred twenty (120) days if
requirements exceed the previous estimates by 25%.
9.6 BUYER's purchase orders shall designate the desired quantities of
Products, delivery dates and destinations. SCHERING shall promptly fill and ship
all orders of Products in accordance with BUYER's instructions.
10.0 WARRANTIES
- ---- ----------
10.1 SCHERING warrants that products delivered to BUYER under this
Agreement shall, at the time of delivery:
10.1.1 Meet the specifications for products set forth
in Exhibit "B" attached hereto;
10.1.2 Shall be in good, usable and merchantable
condition; and
10.1.3 Shall be in compliance with all applicable
Federal laws and regulations.
10.2 BUYER shall have a period of thirty (30) days from date of receipt
of the Products to inspect and reject any shipment of Products on the grounds
that it does not comply with the provisions of Article 10.1 hereof. All or part
of any shipment may be held for SCHERING's disposition and at SCHERING's expense
if found to be
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not in compliance with the specifications set forth in Exhibit "B" hereof,
provided SCHERING confirms such noncompliance through generally acceptable
quality control procedures.
10.3 SCHERING will indemnify and hold BUYER harmless for the
administrative and product costs associated with a product recall should such
recall arise from SCHERING's willful misconduct or negligence in the manufacture
of product. Any claim for indemnification hereunder shall be supported by
reference to generally accepted quality control procedures mutually agreeable to
SCHERING and BUYER.
10.4 Notwithstanding the provisions of Article 12.0 hereof, BUYER's
exclusive remedy and SCHERING's exclusive liability under this Agreement or
otherwise (including negligence) shall be for damages which shall in no event
exceed so much of the purchase price as is applicable to that portion of the
particular shipment with respect to which damages are claimed. BUYER assumes all
risks and liability, and SCHERING assumes no liability, with respect to
unloading and discharge of the Products, storage, handling, sale and use of the
products including its use alone or in combination with other substances or in
the operation of any process, and the compliance or noncompliance with all
federal, state and local laws and regulations applicable to the Products. Other
than as expressly stated in this Agreement, neither party shall be liable to the
other for any incidental or consequential damages arising in connection with
this Agreement or the Products sold hereunder.
11.0 PATENT INDEMNITY
- ---- ----------------
11.1 SCHERING shall indemnify and hold BUYER harmless from all costs,
damages and expenses (including attorney's fees) arising out of any suit or
action brought against BUYER based upon a claim that any process o technical
data owned by SCHERING infringes a U.S. patent or any other proprietary rights.
11.2 BUYER will indemnify and hold SCHERING harmless from all costs,
damages and expenses (including attorney's fees) arising out of any suit or
action against SCHERING based on a claim (i) that any process or technical data
or other Product or manufacturing specifications furnished by BUYER infringes on
a U.S. patent or other proprietary rights or (ii) that sale or distribution of
the Products by BUYER infringes a U.S. patent(s).
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12.0 GENERAL INDEMNITIES/CONSEQUENTIAL DAMAGES
- ---- -----------------------------------------
12.1 SCHERING will indemnify and hold BUYER harmless for any and all
liability, damage, loss, cost or expense (including reasonable attorney's fees)
resulting from any third party claims made or suits brought against BUYER which
arise from SCHERING's negligence in the manufacture of products hereunder or
SCHERING's breach of the warranty set forth in Article 10.1 hereof. Upon filing
of any such claim or suit, BUYER shall immediately notify SCHERING.
12.2 BUYER will indemnify and hold SCHERING harmless from any and all
liability, damage, loss, cost or expense (including reasonable attorney's fees)
resulting from any third party claims made or suits brought against SCHERING
which arise from BUYER's willful misconduct or negligence in the specifications
for, or handling, distribution, marketing or sale of Products hereunder. Upon
filing of any such claim or suit, SCHERING shall immediately notify BUYER.
12.3 The applicable provisions of the "cross-indemnities" in Articles
12.1 and 12.2 hereof shall also apply to SCHERING's production and BUYER's use
of the Products produced from pilot batches.
12.4 BUYER shall provide to SCHERING evidence of Product liability and
contractual liability insurance reasonably satisfactory to SCHERING of not less
than $2 million per occurrence prior to SCHERING delivering initial commercial
product naming SCHERING as an insured under such policy. Insurance shall
maintain in force for the term of this Agreement and any subsequent renewals.
Failure to demonstrate proof of valid in-force coverage or such other evidence
of coverage for third party liability as shall be satisfactory to SCHERING, or
failure to maintain such coverage shall be terms for immediate termination of
this Agreement by SCHERING.
12.5 SCHERING shall self-insure or maintain Product liability
insurance to the extent of $2 million dollars.
13.0 REGULATORY FILINGS AND APPROVALS
- ---- --------------------------------
13.1 BUYER certifies that it will list its Product with the Food and
Drug Administration (Report of Private Label Distribution) and that SCHERING
shall not file for registration.
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13.2 BUYER shall fulfill all approval and reporting requirements of
applicable Federal and State regulatory agencies with respect to the Products
supplied by SCHERING hereunder, provided that SCHERING shall cooperate with
BUYER in providing any data or other information readily available to SCHERING
concerning the Products which will enable BUYER to secure the approvals
necessary for the Products.
14.0 FORCE MAJEURE
- ---- -------------
14.1 BUYER and SCHERING shall not be considered in default of their
obligations hereunder to the extent that performance of such obligations is
delayed, hindered or prevented by Force Majeure. Force Majeure includes, without
limitation, inclement weather, strikes, lockouts, inability to procure labor or
materials or fuels due to shortages, fires, riots, incendiarism, interference by
civil or military authorities, compliance with the regulations or order of any
government authority, or the outbreak of war or insurgence, or acts of war
(declared or undeclared) and any other cause which is beyond the reasonable
control of either party. Specifically excluded from this definition are those
acts of the Federal Government or any agency thereof, or judicial action which
could have been avoided by compliance with such laws or regulations, publicly
available and reasonably expected to be known by BUYER and SCHERING.
15.0 FAILURE TO MARKET/REPURCHASE OF OBLIGATIONS
- ---- -------------------------------------------
15.1 SCHERING represents and BUYER acknowledges that significant
capital investment is involved and valuable resources have been allocated and
opportunities forgone by SCHERING in order to manufacture Products.
Consequently, in the event BUYER wishes to cancel this Agreement or any
subsequent agreement relating to the supply of Products by SCHERING, prior to
the expiration date hereof, it may do so by first paying SCHERING and amount
equivalent to the last twelve months' purchases of Product from SCHERING.
15.2 In the event SCHERING wishes to cancel this Agreement or any
subsequent Agreement relating to the supply of Products by SCHERING prior to the
expiration date hereof, SCHERING agrees to sell to BUYER at BUYER's request
under the current terms and conditions of this Agreement or subsequent renewal a
supply of product of not more than the total purchased amount of Product for the
immediately prior one (1) year period.
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16.0 TERMINATION
- ---- -----------
16.1 In the event that either party hereto shall at any time commit a
material breach of any of its obligations hereunder, the non-breaching party
may, at its option, terminate this Agreement by giving the other party at least
one hundred and eighty (180) calendar days' prior written notice. Unless the
breaching party cures the breach within the aforesaid notice period, this
Agreement shall be deemed terminated.
16.2 Any termination of this Agreement shall not release the parties
from liabilities and obligations accrued as of the date thereof including but
not limited to BUYER's reimbursement of SCHERING's cost of materials purchased
for the products prior to notice of termination.
17.0 NON-WAIVER OF RIGHTS
- ---- --------------------
17.1 Failure by SCHERING or BUYER at any time to enforce any of the
terms or conditions of this Agreement shall not affect or impair such terms or
conditions in any way, or the right of SCHERING or BUYER at any time to avail
itself of such remedies as it may have for any breach of such terms or
conditions under the provisions of this Agreement, in equity or at law.
18.0 TRADEMARKS AND TRADE NAMES
- ---- --------------------------
18.1 BUYER hereby acknowledges that it does not have, and shall not
acquire, any interest in any of SCHERING's trademarks or trade names for the
Products unless otherwise expressly agreed.
18.2 BUYER agrees not to use any trade names or trademarks of SCHERING,
including but without limitation the trade name and trademark "SCHERING," except
as specifically authorized by SCHERING in writing both as to the names or marks
which may be used and as to the manner and prominence of use.
18.3 SCHERING agrees to Niche's use of the statement "Manufactured by
Schering Corporation, Kenilworth, NJ 07033" on Product's primary label in a
format and manner acceptable to SCHERING and authorized in writing.
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19.0 CONFIDENTIALITY
- ---- ---------------
19.1 The parties hereby acknowledge that any and all information,
knowledge, technology and trade secrets relating to the production, processing
and testing of Products may be used only in the production of Products under
this Agreement.
19.2 BUYER shall maintain in confidence all information, knowledge,
technology and trade secrets relating to the Products as purchased from SCHERING
or developed solely by SCHERING after the date of this Agreement and disclosed
to BUYER and BUYER shall not use such SCHERING information, knowledge,
technology and trade secrets for itself or for any third party nor disclose the
same to any third party without the express written consent of SCHERING.
19.3 SCHERING shall maintain in confidence all information, knowledge,
technology and trade secrets relating to formula for the Products as purchased
from BUYER after the date of this Agreement and disclosed to SCHERING and
SCHERING shall not use such BUYER formulae, information, knowledge, technology
and trade secrets for itself or for any third party nor disclose the same to any
third party without the express written consent of BUYER.
19.4 The obligations set forth above shall not apply to any
information, data, technology, or trade secret disclosed by one party to the
other, either in anticipation of or pursuant to this Agreement or any other
agreement between the parties, if it is (a) already known to the receiving party
as of the date such disclosure is made; (b) available to the receiving party
from printed publications as of the date such disclosure is made or becomes
available from printed publications through no fault of the receiving party; or
(c) disclosed to said receiving party by an independent third party through no
fault of the receiving party.
20.0 NOTICES
- ---- -------
20.1 Any notice required to be given herein shall be deemed to have
been sufficiently given to either party for all of the purposes hereof if given
by telephone, telex or cable and confirmed by registered mail, postage prepaid,
addressed as follows:
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TO SCHERING: SCHERING-PLOUGH CORPORATION
Manager, Third-Party Business Development
P.O. Box 526
Kenilworth, NJ 07033
TO BUYER: NICHE PHARMACEUTICALS, INCORPORATED
President, CEO
300 Trophy Club Dr., S-400
Roanoke, TX 76262
or to such other address as either of the parties shall designate by notice
given as herein required. Notices shall be effective seven (7) calendar days
after mailing of confirmation.
21.0 AMENDMENTS AND WAIVER
- ---- ---------------------
21.1 This agreement cannot be amended in any respect except in writing
duly executed by both parties. No waiver of compliance with any provisions or
conditions of this Agreement and no approvals provided for in this Agreement
shall be effective unless evidenced by a written instrument executed by the
party to be charged.
22.0 ASSIGNMENT
- ---- ----------
22.1 Neither party hereto shall assign this Agreement or any part
thereof or any interest herein without the written approval of the other party
hereto except as herein otherwise provided and such approval may not be
unreasonably withheld.
23.0 GOVERNING LAW
- ---- -------------
23.1 This Agreement shall be governed by the laws of the State
of New Jersey.
24.0 ENTIRE AGREEMENT
- ---- ----------------
24.1 This Agreement constitutes the entire understanding between the
parties and shall supersede any prior agreements between the parties hereto.
Each party acknowledges that there are no other understandings which relate to
the matters covered herein or which are inconsistent with any provisions of this
Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
duplicate effective as of the date of the latest of the signatures hereto.
NICHE PHARMACEUTICALS, INC. SCHERING CORPORATION
By: /s/ Steve F. Brandon By: /s/ RML
Title: President /CEO Title: Vice President
Date: 12/24/91 Date: 1/27/92
RML/mlb
attachments: Exhibit A, Exhibit B
12/20/91
#20 A:NICHE
EXHIBIT 10.10
Draft 120596
EMPLOYMENT AGREEMENT, dated as of , by and
between Niche Pharmaceuticals, Inc., a Delaware corporation (the
"Company"), and Stephen F. Brandon, (the "Employee").
RECITALS
WHEREAS, the Company and the Employee desire to enter into an
employment agreement which will set forth the terms and conditions upon which
the Employee shall be employed by the Company and upon which the Company shall
compensate the Employee;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants hereinafter set forth, the parties hereto have agreed, and do
hereby agree, as follows:
1. EMPLOYMENT; TERM
The Company will employ the Employee in its business, and the
Employee will work for the Company therein, as its Chief Executive Officer,
President, Treasurer and Chairman of the Board for a term commencing as of and
terminating on ____________________________________________ (the "Employment
Period"). Such employment may be terminated by the Company at any time for
"cause". As used in this Agreement, "cause" shall include, but not necessarily
be limited to, the Employee's commission of any act in the performance of his
duties constituting common law fraud, a felony or other gross malfeasance of
duty, any misrepresentation or breach of any covenant on the Employee's part
herein set forth, or the Employee's engagement in misconduct which is materially
injurious to the Company or its subsidiaries.
2. DUTIES
During the Employment Period, the Employee shall serve as the
Company's Chief Executive Officer, President, Treasurer and Chairman of the
Board. As Chief Executive Officer, President, Treasurer and Chairman of the
Board of the Company, he shall implement executive policy, perform duties of an
executive character consisting of administrative and managerial responsibilities
on behalf of the Company, he shall preside at all
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meetings of the Board of Directors, and he shall have such further duties of an
executive character as shall, from time to time, be delegated or assigned to him
by the Board of Directors of the Company consistent with the Employee's
position.
3. DEVOTION OF TIME
During the Employment Period, the Employee shall expend all of
his working time for the Company; shall devote his best efforts, energy and
skill to the services of the Company and the promotion of its interests; and
shall not take part in activities detrimental to the best interests of the
Company.
4. COMPENSATION
4.1 For all services to be rendered by the Employee during the
Employment Period and in consideration of the Employee's representations and
covenants set forth in this Agreement, the Employee shall be entitled to the
compensation set forth in Paragraph 4.2.
4.2 The Employee shall be entitled to receive from the Company
during the Employment Period minimum compensation at the rate of One Hundred and
Twenty Thousand Dollars ($120,000) per annum. The Employee shall be entitled to
such additional increments as shall be determined from time to time by the Board
of Directors of the Company. All amounts due hereunder shall be payable in
accordance with the Company's standard payroll practices.
5. REIMBURSEMENT OF EXPENSES
The Company shall pay directly, or reimburse the Employee for,
all reasonable and necessary expenses and disbursements incurred by the Employee
for and on behalf of the Company in the performance of his duties during the
Employment Period, including, without limitation, all reasonable expenses
incurred by the Employee for food, lodging and transportation, if he is required
to perform any of his duties away from his primary place of residence. For such
purposes, the Employee shall submit to the Company, not less than once in each
calendar month, reports of such expenses and other disbursements in form
normally used by the Company. Additionally, the Company shall pay directly, or
reimburse the
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Employee for, his monthly membership dues and charges for and at the Club at
Trophy Club, Trophy Club, Texas, which shall not exceed $15,000 on an annual
basis.
6. DISABILITY
6.1 If, during the Employment Period, the Employee shall, in
the opinion of a majority of the members of the Board of Directors of the
Company (excluding the Employee), as confirmed by competent medical evidence,
become physically or mentally incapacitated to perform his duties for the
Company hereunder ("Disabled") for a continuous period, then for the first three
(3) months of such period he shall receive his full salary, and for the next
three (3) months he shall receive fifty percent (50%) of his salary. In no event
shall the Employee be entitled to receive any payments under this Paragraph 6.1
beyond the expiration or termination date of this Agreement. Effective with the
date of his resumption of full employment, the Employee shall be re-entitled to
receive his full salary. If such illness or other incapacity shall endure for a
continuous period of at least six (6) months or for at least one hundred fifty
(150) business days during any nine (9) month period, the Company shall have the
right, by written notice, to terminate the Employee's employment hereunder as of
a date (not less than five (5) days after the date of the sending of such
notice) to be specified in such notice. The Employee agrees to submit himself
for appropriate medical examination to a physician of the Company's designation
as necessary for purposes of this Paragraph 6.1.
6.2 The obligations of the Company under this Paragraph 6 may
be satisfied, in whole or in part, by payments to the Employee under disability
insurance provided by the Company.
7. RESTRICTIVE COVENANT
7.1 The services of the Employee are unique and extraordinary
and essential to the business of the Company, especially since the Employee
shall have access to the Company's customer lists, trade secrets and other
privileged and confidential information essential to the Company's business.
Therefore, the Employee agrees that, if the term of his employment hereunder
shall expire or his employment shall at any time terminate for any reason
whatsoever, with or without cause, the Employee will not at any time within one
(1) year after such expiration or termination (the
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"Restrictive Covenant Period"), without the prior written approval of the
Company, directly or indirectly, anywhere in the United States of America,
whether individually or as a principal, officer, employee, partner, director,
agent of or consultant for any entity, (i) engage or participate in a business
which, as of such expiration or termination date, is similar to or competitive
with, directly or indirectly, that of the Company and shall not make any
investments in any such similar or competitive entity; (ii) cause or seek to
persuade any director, officer, employee, customer, subscriber, account, agent
or supplier of the Company to discontinue the status, employment or relationship
of such person or entity with the Company, or to become employed in any activity
similar to or competitive with the activities of the Company; (iii) cause or
seek to persuade any prospective customer, subscriber or account of the Company
(which at the date of cessation of the Employee's employment with the Company
was then actively being solicited by the Company) to determine not to enter into
a business relationship with Company; (iv) hire or retain any director, officer
or employee of the Company; or (v) solicit or cause or authorize to be
solicited, for or on behalf of him or any third party, any business which is
competitive, directly or indirectly, with the Company from (a) others who are,
or were within one (l) year prior to the cessation of his employment with the
Company, customers, subscribers or accounts of the Company, or (b) any
prospective customer, subscriber or account of the Company which at the date of
such cessation was then actively being solicited by the Company. The foregoing
restrictions set forth in this Paragraph 7.1 shall apply likewise during the
Employment Period.
7.2 (a) The Employee agrees to promptly disclose in writing to
the Board of Directors of the Company all ideas, processes, methods, devices,
business concepts, inventions, improvements, discoveries, know-how and other
creative achievements (hereinafter referred to collectively as "discoveries"),
whether or not the same or any part thereof is capable of being patented,
trademarked, copyrighted, or otherwise protected, which the Employee, while
employed by the Company, conceives, makes, develops, acquires or reduces to
practice, whether acting alone or with others and whether during or after usual
working hours, and which are related to the Company's business or interests, or
are used or usable by the Company, or arise out of or in connection with the
duties performed by the Employee. The Employee hereby transfers and assigns to
the Company all right, title and interest
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in and to such discoveries (whether conceived, made, developed, acquired or
reduced to practice on or prior to the date hereof or hereafter), including any
and all domestic and foreign copyrights and patent and trademark rights therein
and any renewals thereof. On request of the Company, the Employee will, without
any additional compensation, from time to time during, and after the expiration
or termination of, the Employment Period, execute such further instruments
(including, without limitation, applications for copyrights, letters patent,
trademarks and assignments thereof) and do all such other acts and things as may
be deemed necessary or desirable by the Company to protect and/or enforce its
right in respect of such discoveries. All expenses of filing or prosecuting any
patent, trademark or copyright application shall be borne by the Company, but
the Employee shall cooperate in filing and/or prosecuting any such application.
(b) The Employee acknowledges and agrees that, prior to his
employment by the Company, he did not conceive, make, develop, acquire or
reduce to practice any discovery which is related to the Company's business
or interests or is used or usable by the Company.
7.3 (a) The Employee represents that he has been informed that
it is the policy of the Company to maintain as secret all confidential
information relating to the Company, including, without limitation, any and all
knowledge or information with respect to secret or confidential methods,
processes, plans, materials, customer lists or data, or with respect to any
other confidential or secret aspect of the Company's activities, and further
acknowledges that such confidential information is of great value to the
Company. The Employee recognizes that, by reason of his employment with the
Company, he has acquired and will acquire confidential information as aforesaid.
The Employee confirms that it is reasonably necessary to protect the Company's
goodwill, and, accordingly, hereby agrees that he will not, directly or
indirectly (except where authorized by the Board of Directors of the Company for
the benefit of the Company), at any time during the term of this Agreement or
thereafter divulge to any person, or use, or cause or authorize any person, firm
or other entity to use, any such confidential information.
(b) The Employee agrees that he will not, at any time, remove
from the Company's premises any drawings, notebooks,
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data or other confidential information relating to the business and procedures
heretofore or hereafter acquired, developed and/or used by the Company, except
where necessary in the fulfillment of his duties hereunder.
(c) The Employee agrees that, upon the expiration
or termination of this Agreement for any reason whatsoever, he shall promptly
deliver to the Company any and all drawings, notebooks, data and other documents
and material, including all copies thereof, in his possession or under his
control relating to any confidential information or discoveries, or which is
otherwise the property of the Company.
(d) For purposes hereof, the term "confidential
information" shall mean all information given to the Employee, directly or
indirectly, by the Company and all other information relating to the Company
otherwise acquired by the Employee during the course of his employment with the
Company, other than information which (i) was in the public domain at the time
furnished to, or acquired by, the Employee, or (ii) thereafter enters the public
domain other than through disclosure, directly or indirectly, by the Employee or
others in violation of an agreement of confidentiality or nondisclosure.
7.4 For purposes of this Paragraph 7, the term "Company" shall
mean and include any and all subsidiaries, parents and affiliated entities of
the Company in existence from time to time.
8. VACATIONS
The Employee shall be entitled to reasonable vacations during
the Employment Period, the time and duration thereof to be determined by mutual
agreement between the Employee and the Company.
9. PARTICIPATION IN EMPLOYEE BENEFIT PLANS
The Employee and any beneficiary of the Employee shall be
accorded the right to participate in and receive benefits under and in
accordance with the provisions of any pension, profit sharing, insurance, bonus,
deferred compensation, medical and dental insurance or reimbursement or other
plan or program of the
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Company either in existence as of the date hereof or hereafter adopted for the
benefit of its executive employees.
10. SERVICE AS OFFICER OF SUBSIDIARIES; SERVICE AS DIRECTOR
During the Employment Period, the Employee shall, if elected
or appointed, serve as (a) an officer of any subsidiaries of the Company in
existence or hereafter created or acquired and (b) a Director of the Company
and/or any such subsidiaries of the Company, in each case without any additional
compensation for such services.
11. EARLIER TERMINATION
The Employee's employment hereunder shall automatically
terminate upon his death and may terminate at the option of the Company upon:
(a) the Employee's incapacity in accordance with the provisions
set forth in Paragraph 6.l hereof;
(b) one (1) day's prior written notice to the Employee
in the event the Company terminates his employment
hereunder for cause as set forth in Paragraph 1 hereof;
(c) the Employee's voluntarily leaving the employ
of the Company.
Upon the termination of the Employee's employment, the Employment Period shall
be deemed to have ended.
12. INJUNCTIVE RELIEF
The Employee acknowledges and agrees that, in the event he shall
violate any of the restrictions of Paragraph 3 or 7 hereof, the Company will be
without an adequate remedy at law and will therefore be entitled to enforce such
restrictions by temporary or permanent injunctive or mandatory relief in any
court of competent jurisdiction without the necessity of proving damages and
without prejudice to any other remedies which it may have at law or in equity.
The Employee acknowledges and agrees that, in addition to
7
<PAGE>
any other state having proper jurisdiction, any such relief may be sought in,
and for such purpose the Employee consents to the jurisdiction of, the courts of
the State of Texas.
13. NO RESTRICTIONS
The Employee hereby represents that neither the execution of
this Agreement nor his performance hereunder will (a) violate, conflict with or
result in a breach of any provisions of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under
the terms, conditions or provisions of any contract, agreement or other
instrument or obligation to which the Employee is a party, or by which he may be
bound, or (b) violate any order, judgment, writ, injunction or decree applicable
to the Employee. In the event of a breach hereof, in addition to the Company's
right to terminate this Agreement, the Employee shall indemnify the Company and
hold it harmless from and against any and all claims, losses, liabilities and
expenses (including reasonable attorneys' fees) incurred or suffered in
connection with or as a result of the Company's entering into this Agreement or
employing the Employee hereunder.
14. ARBITRATION
14.1 Except with regard to Paragraph 12 hereof and any other
matters that are not a proper subject of arbitration, all disputes between the
parties hereto concerning the performance, breach, construction or
interpretation of this Agreement or any portion thereof, or in any manner
arising out of this Agreement or the performance thereof, shall be submitted to
binding arbitration, in accordance with the rules of the American Arbitration
Association, which arbitration shall be carried out in the manner hereinafter
set forth.
14.2 Within twenty (20) days after written notice by one party
to the other of its demand for arbitration, which demand shall set forth the
name and address of its arbiter, the other party shall select its arbiter and so
notify the demanding party. Within twenty (20) days thereafter, the two arbiters
so selected shall select the third arbiter. The decision of any two (2) arbiters
shall be binding upon the parties. In default of either side naming its arbiter
as aforesaid or in default of the selection
8
<PAGE>
of the said arbiter as aforesaid, the American Arbitration Association shall
designate such arbiter upon the application of either party. The arbitration
proceeding shall take place at a mutually agreeable location in Dallas, Texas or
such other location as agreed to by the parties.
14.3 A party who files a notice of demand for arbitration must
assert in the demand all claims then known to that party on which arbitration is
permitted to be demanded. When a party fails to include a claim through
oversight, inadvertence or excusable neglect, or when a claim has matured or
been acquired subsequently, the arbitrators may permit amendment. A demand for
arbitration shall be made within a reasonable time after the claim has arisen,
and in no event shall it be made after the date when institution of legal or
equitable proceedings based on such claim would be barred by the applicable
statute of limitations.
14.4 The award rendered by the arbitrators shall be final,
binding and conclusive, and judgment may be entered upon it in accordance with
applicable law in the appropriate court in the State of Texas, with no right of
appeal therefrom.
14.5 Each party shall pay its or his own expenses of
arbitration, and the expenses of the arbitrators and the arbitration proceeding
shall be equally shared; provided, however, that, if, in the opinion of a
majority of the arbitrators, any claim or defense was unreasonable, the
arbitrators may assess, as part of their award, all or any part of the
arbitration expenses of the other party (including reasonable attorneys' fees)
and of the arbitrators and the arbitration proceeding against the party raising
such unreasonable claim or defense.
15. ASSIGNMENT
This Agreement, as it relates to the employment of the Employee,
is a personal contract and the rights and interests of the Employee hereunder
may not be sold, transferred, assigned, pledged or hypothecated.
16. NOTICES
Any notice required or permitted to be given pursuant to this
Agreement shall be deemed to have been duly given when
9
<PAGE>
delivered by hand or sent by certified or registered mail, return receipt
requested and postage prepaid, overnight mail or telecopier as follows:
If to the Employee:
Stephen F. Brandon
5 Crickett Court
Roanoke, Texas 76262
If to the Company:
Niche Pharmaceuticals, Inc.
200 North Oak
P.O. Box 449
Roanoke, Texas 76262
Attention: Tom F. Reed, Executive Vice President
Telecopier Number: (817) 491-3533
with a copy to:
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, New York ll554
Attention: Fred S. Skolnik, Esq.
Telecopier Number: (516) 296-7111
or at such other address as any party shall designate by notice to the other
party given in accordance with this Paragraph 16.
17. GOVERNING LAW
This Agreement shall be governed by, and construed and enforced
in accordance with, the laws of the State of Texas applicable to agreements made
and to be performed entirely in Texas.
18. WAIVER OF BREACH; PARTIAL INVALIDITY
The waiver by either party of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of
10
<PAGE>
any subsequent breach. If any provision, or part thereof, of this Agreement
shall be held to be invalid or unenforceable, such invalidity or
unenforceability shall attach only to such provision and not in any way affect
or render invalid or unenforceable any other provisions of this Agreement, and
this Agreement shall be carried out as if such invalid or unenforceable
provision, or part thereof, had been reformed, and any court of competent
jurisdiction or arbiters, as the case may be, are authorized to so reform such
invalid or unenforceable provision, or part thereof, so that it would be valid,
legal and enforceable to the fullest extent permitted by applicable law.
19. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the
parties and there are no representations, warranties or commitments except as
set forth herein. This Agreement supersedes all prior agreements,
understandings, negotiations and discussions, whether written or oral, of the
parties hereto relating to the transactions contemplated by this Agreement. This
Agreement may be amended only by a writing executed by the parties hereto.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year above written.
NICHE PHARMACEUTICALS, INC.
By:__________________________________
Tom F. Reed,
Executive Vice President
__________________________________
STEPHEN F. BRANDON
K:\WPDOC\CORP\NICHE\AGREEMNT\SFBEMPLO.N96
11
EXHIBIT 23.1
CONSENT OF MOORE STEPHENS, P.C.; INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Expert" and
to the use of our report dated November 15, 1996 in the Registration Statement
(Form SB-2) and related Prospectus of Niche Pharmaceuticals, Inc. (the
"Company") covering the registration of 1,725,000 of the Company's Common Shares
and 130,000 of the Company's Warrants.
New York, New York
December 12, 1996
/s/ Moore Stephens, P.C.
------------------------
MOORE STEPHENS, P.C.
EXHIBIT 23.3
CONSENT OF SHERMAN A. DRUSIN
The undersigned consents to the reference to him under the caption
"Management" in the Registration Statement (Form SB-2) and related Prospectus of
Niche Pharmaceuticals, Inc. (the "Company") covering the registration of
1,725,000 of the Company's Common Shares and 130,000 of the Company's Warrants.
Melville, New York
December 12, 1996
/s/ Sherman A. Drusin
SHERMAN A. DRUSIN
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