As filed with the Securities and Exchange Commission on January 29, 1997
-------------------------------
Registration No. 333-17767
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO.1
TO
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
Telephone: (817)491-2770
Telecopier: (817)491-3533
(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
Telephone: (817) 491-2770
Telecopier: (817) 491-3533
(Name, address and telephone number of agent for service)
-------------------------
Copies to:
Fred Skolnik, Esq. Ilan K. Reich, Esq.
Gavin C. Grusd, Esq. Olshan Grundman Frome & Rosenweig LLP
Certilman Balin Adler & Hyman, LLP 505 Park Avenue
90 Merrick Avenue New York, NY 10022
East Meadow, NY 11514 Telephone: (212) 753-7200
Telephone: (516) 296-7000 Telecopier: (212) 755-1467
Telecopier: (516) 296-7111
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 $7.50 $ 975,000 $295.45
Common Shares (6) 100,000 $5.00 $ 500,000 $151.50
--------------
Total Registration Fee: $2,712.10[7]
==========================================================================================================
</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.
(7) $2,653.01 of the registration fee was paid with the original filing.
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 JANUARY 29, 1997
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. The Underwriter has agreed, but is not
obligated, to act as a market maker for the Company's Common Shares.
Although the Company anticipates that there will be additional market makers
for the Company's Common Shares, it has not identified any as of the date of
this Prospectus. 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) 564,375 Common Shares upon the
exercise of outstanding stock options and warrants. 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%), hiring of
additional personnel (10.5%),
product acquisition (9.5%),
repayment of indebtedness (7.7%),
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)....................... NCHE
- -----------------
(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) 564,375 Common
Shares upon the exercise of outstanding stock options and warrants.
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
---- ---- ---- ----
Revenues ................... $ 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. The Company has suffered recurring losses since inception
and 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 intends to use $400,000,
or 7.7% of the net proceeds of this Offering, to repay certain indebtedness;
accordingly, such amount will not be available to fund future business
activities. The Company plans to increase the reach and frequency of its
advertising and marketing programs and the expansion and enhancement of its
infrastructure, including, without limitation, hiring additional personnel, and
engaging consultants for particular tasks, such as marketing and computer system
enhancement and other projects, all of which the Company has designed to be
implemented over the 18 month period following the closing date of the Offering.
Based on the foregoing, 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 financing sooner than currently anticipated.
6
<PAGE>
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. It is noted that Jean R. Sperry, a Vice President and a
director of the Company will only devote 10% of his time to the Company's
business. 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
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 25% and 19%; 16% and 13%; 13% and 14%; and 13% and 13%
of the Company's operating 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. Pursuant to the
Schering Agreement, Schering supplies all raw materials and packaging
components for the production of Mag-Tab(R)SR according to the Company's
specifications, and Schering utilizes the quality control and manufacturing
processes provided by the Company. 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 was manufactured by Dow Hickam
Pharmaceuticals Inc. ("Dow Hickam"), a subsidiary of Mylan Pharmaceuticals Inc.,
until December 31, 1996, pursuant to an agreement (the "Dow Hickam Agreement")
under which the Company acquired the rights to Unifiber(R). Pursuant to the Dow
Hickam Agreement, Dow Hickam agreed to manufacture the Unifiber(R) product
in sufficient quantity to meet the Company's projected sales needs through 1997.
Since the Dow Hickam Agreement expired, Dow Hickam is no longer manufacturing
Unifiber(R). However, the Company has a 15 month supply, based on current sales
levels, of Unifiber(R) in inventory. The Company is currently in discussions
with other third party contractors to manufacture Unifiber(R), although no
understanding or agreement has been reached with any such manufacturer at this
time. Additionally, the Company has retained a consultant to assist it in
identifying appropriate third party contract manufacturer candidates. The
Company believes, but cannot assure, that there will be no difficulty engaging
another contract manufacturer. Based on identification of, and development of
discussions with, potential third party contract manufacturers, the Company
anticipates that it will engage a third party contractor to manufacture
Unifiber(R) by the second quarter of 1997.
Although the Company's policy is to maintain an approximately three
month supply of each of Mag-Tab(R)SR and Unifiber(R) (as noted above, the
Company has a 15 month supply of 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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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
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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. Significant 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. Dependence on 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. Potential of Material Adverse Effect of Product Liability Claims
on the Company. 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 million per policy
11
<PAGE>
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. Possible Significant Impact of Consumer Laws and Government
Regulation on the Company's Business and Products. 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
net proceeds for the following purposes: approximately $1,840,000, or 35.1% of
the net proceeds, to market and advertise the Company's products,
approximately $500,000, or 9.5% of the net proceeds, to acquire new products
and approximately $1,650,000, or 31.5% of the net proceeds, for working capital,
including general administrative costs. Many of the risks of expansion may
be unforeseeable or beyond the control of management. At present the Company
has not identified any product acquisition candidates, and it does not have any
current plans, proposals or arrangements with respect to any acquisitions;
however, it is actively seeking such candidates. 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. Furthermore, there can be no assurance
that the Company will identify any acquisition candidates or, if it does, that
it will be able to reach any agreements to acquire such products on terms
acceptable to the Company. To the extent that the Company may enter into any
agreements with related parties in the future (of which none are presently
contemplated), the Company anticipates that the terms of such agreements will be
commercially reasonable and no less favorable to the Company than the Company
could obtain from unrelated third parties. Additionally, the Company intends
that such agreements will be approved by a majority of disinterested directors.
See "Use of Proceeds" and " Business - General".
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. Management's Broad Discretion in Application of Proceeds. The
Company intends to use the net proceeds of this Offering as described in the
"Use of Proceeds" section of this Prospectus for the following purposes:
approximately $1,840,000, or 35.1% of the net proceeds, to market and advertise
the Company's products, approximately $550,000, or 10.5% of the net proceeds, to
hire additional personnel, approximately $500,000, or 9.5% of the net proceeds,
to acquire new products, approximately $400,000, or 7.7% of the net proceeds, to
repay indbtedness (including approximately $295,487, or 5.6% of the net
proceeds, to repay a loan to Mr. Brandon),approximately $300,000, or 5.7% of the
net proceeds, for reasearch and development, and approximately $1,650,000, or
31.5% of the net proceeds, for working capital. However, 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.
In order to be included on The Nasdaq SmallCap System, and to maintain
such listing, the Company would need a minimum of two market makers for its
Common Shares.
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.
Furthermore, under the proposed rules, the Company would be required
to have at least three market makers for its Common Shares for inclusion on The
Nasdaq SmallCap Market and two market makers to maintain such listing.
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
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<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.
The Underwriter has agreed, but is not obligated, to act as a market
maker for the Company's Common Shares. Although the Company anticipated it will
have additional market makers, it has not identified any as of the date of this
Prospectus. If the Company cannot engage additional market makers, it may not
satisfy the requirements for inclusion, or continued listing, on The Nasdaq
SmallCap Market.
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 and warrants 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, and an affiliate of Mr. Avery
to purchase up to an aggregate of 547,500 Common Shares
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<PAGE>
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", "Management - Executive Compensation", "Certain
Relationships and Related Transactions" and "Underwriting".
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 950,000 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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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%
Hiring of additional personnel (2) 550,000 10.5%
Product acquisition (3) 500,000 9.5%
Repayment of indebtedness (4) 400,000 7.7%
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, 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) 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.
(3) 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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At present, the Company has not identified any acquisition candidates, but it is
actively seeking such opportunities. See "Business - General".
(4) 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".
(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 or 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.
18
<PAGE>
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.
19
<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".
20
<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....................... 99,960 499,855 5,738,490
Accumulated Deficit (3).......................... (758,549) (1,158,549) (1,158,549)
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 $400,000
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(i) 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 $100,000 from the Bridge
Lender in the Bridge Financing transaction. In consideration 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 "Use of Proceeds" and
"Bridge Financing".
The fair value of the Bridge Lender's Common Shares at the date of
issuance, of approximately $400,000, 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.
In January 1997, the Company entered into a credit facility loan
agreement (the "Credit Agreement") with an affiliate of Allan R. Avery, a
director of the Company, to borrow up to $150,000. As of the date of this
Prospectus, the Company has borrowed $75,000. The outstanding amounts under the
Credit Agreement are due and payable on or before January 20, 1998. Interest
accrues on the unpaid amounts borrowed at the rate of 10% per annum. In
consideration for entering into the Credit Agreement, the Company issued to the
affiliate of Mr. Avery warrants to purchase an aggregate of 30,000 Common
Shares, at an exercise price of $6.00 per share, for a period of five years
commencing on the first anniversary date of this Prospectus. See "Certain
Relationships and Related Transactions".
Results of Operations
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Revenues 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 by the second quarter of 1997.
Accounts receivable for the nine months ended September 30, 1996 were
$217,188 compared to $84,566 for the nine months ended September 30, 1995, a
157% increase. This increase was due to (i) new revenues being generated by
Unifiber(R) that were not present in 1995, and (ii) increased purchase of
product by the Company's wholesale distributors in response to 5% promotional
allowance offered to them by the Company. Management anticipates that from time
to time it will continue the practice of offering its wholesalers and retail
pharmacy customers special promotional discounts, and as such, both revenues and
accounts receivables may vary significantly from month to month or quarter to
quarter. All of the accounts receivable outstanding at September 30, 1996 were
subsequently collected.
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
Revenues 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 incurred 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. The aggregate purchase price for the
acquisition of the rights to Unifiber(R) is the greater of $1,600,000 of 20% of
annual product sales, but in no event greater than $3,000,000. Of such purchase
price, $200,000 was paid at the time of acquisition, $200,000 will be paid in
March 1997 (as discussed above) and the remainder will be payable in increasing
annual installments from 1998 to 2001 of between $250,000 and $400,000. The
Company anticipates that it will pay the remaining annual Unifiber(R)
installment payments, 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. In order for
the Company to be obligated to pay the maximum amount of $3,000,000, net sales
of Unifiber(R) would have to total $15,000,000 over the next four years. In
such case, the Company would have estimated gross earnings from Unifiber(R) of
$9,000,000. Accordingly, the Company does not believe that payment of the
maximum amount under the Unifiber(R) acquisition agreement would have a negative
effect on the Company's financial position. 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 ended September 30, 1996 and September 30, 1995.
There was an increase in cash used for financing activities in the
nine month period ended September 30, 1996 of $133,227 as compared to the nine
month period ended 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 ended 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 ended September 30,
1995. The cash used for financing
25
<PAGE>
activities of $134,965 for the nine month period ended 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 that 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 in the normal course of business (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). 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 establishment of a Credit Agreement with an affiliate of Mr.
Avery providing the Company with a credit favility of up to $150,000, of which
$75,000 has been borrowed as of the date of the Prospectus. See "Certain
Relationships and Related Transactions".
3. 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".
4. 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, under the Credit Agreement, and in 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 manufactured Unifiber(R) for the Company through
December 31, 1996. Although Dow Hickam no longer manufacturers Unifiber(R) for
the Company, the Company currently has a 15 month inventory supply of the
product, based on current sales levels. By the second 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(R) 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 "Risk Factors - Risks Attendant to Expansion"
and "Use of Proceeds".
A glossary of certain terms used in this section is included in the
Prospectus beginning on page 57.
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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;
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- 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.
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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
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<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;
- Individuals receiving enteral naso-gastric feedings;
- Pregnant women needing a pure fiber supplement without
aspartame as a sweetener;
- 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 particular marketing programs for these
customers with a view to improving overall distribution in the near future.
These marketing programs include, among other things, seminars tied into medical
and healthcare conventions to link the Company's products with the subject
matter of such conventions, the undertaking of a 12 month clinical study with a
view to presenting the results thereof in healthcare and consumer publications,
and the use of identified contractors for sales and marketing projects in order
for the Company to implement multimarket promotions of its products.
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, 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 operating revenues of the Company
for the fiscal year ended December 31, 1995 and the nine months ended September
30, 1996, respectively: McKesson Drug Company, 25% and 19%; Cardinal Health
Company, 16% and 13%; Bergen Brunswig, 13% and 14%; and Amerisource Corporation,
13% 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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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 Mag-Tab(R)SR 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
Mag-Tab(R)SR 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.
Both the Laboratories Agreement and the CRAE Agreement provide that
the Company will sell Mag-Tab(R)SR to each of the Laboratories and CRAE,
respectively, in no less than established minimum order amounts on an
established cost-plus basis. Both agreements provide for payment to the
Company not later than 60 days from the date of shipment.
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.
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<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 Dow Hickam Agreement, which covered the Company's
acquisition of Unifiber(R) from Dow Hickam provided for Dow Hickam to
manufacture and package Unifiber(R) until December 31, 1996 in quantities
sufficient to handle all projected sales by the Company through 1997. At the
date of the Prospectus, the Company had a 15 month inventory supply of
Unifiber(R) based on current sales levels. Since its manufacturing obligations
have expired, Dow Hickam no longer manufacturers Unifiber(R). The Company
anticipates, but cannot assure, that it will contract with at least one or
several other potential contract manufacturers for Unifiber(R) by the second
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), (of which, as noted
above, it has a 15 month supply) 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 magnesium is presently emerging as a dietary supplement
(i.e. market of less than $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.
earle invested several
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<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. ("Konsyl"), 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 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
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<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 - Possible Significant Impact of Consumer Laws and Government
Regulation on the Company's Business and Products".
39
<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 - Potential of Material Adverse Effect of Product
Liability Claims on the Company".
40
<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. See "Financial Statements -
Notes to Financial Statements 13 and 15[B]".
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.
41
<PAGE>
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.
42
<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
- ---------------------
At the Closing of the Offering, 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.
At the Closing of the Offering, 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 through the end of
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 Option 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 (5) 9.1% 100,000(6) -0- --
523 Route 303
Orangeburg, New York
Thomas F. Reed 98,000(3)(7) 8.8% -0- 98,000(3)(7) 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)(6) (4)(6)
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) Alexa Dove is the sole stockholder, director and officer of Dominant
Construction Corp. (the "Selling Stockholder"). Peter M. Dove is the
General Manager of the Selling Stockholder and the husband of Alexa Dove.
Both Alexa and Peter M. Dove may be deemed to be beneficial owners of the
Common Shares owned by the Selling Seockholder.
(6) As noted below, the Selling Stockholder has agreed that it will not
transfer any of its Common Shares for a period of two years following the
date of this Prospectus without the prior consent of the Underwriter.
(7) 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 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 Underwriter has advised the
Company that it will not waive the transfer restriction with respect to
the Selling Stockholder for 30 days following the date of this Prospectus, and
that it has no plans to waive such transfer restriction prior to its expiration.
However, the Underwriter has informed the Company that it may contemplate the
waiver of such transfer restriction in the future if the sale of the Selling
Stockholder's Common Shares would not have an adverse effect on the market price
of the Company's Common Shares and the market could sustain such sale. The
foregoing notwithstanding, 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."
In January 1997, the Company entered into an unsecured Credit
Agreement with GEM Communications, Inc. ("GEM"), an entity wholly owned by Allan
R. Avery, a director of the Company, which provides for the Company to borrow up
to $150,000. The Credit Agreement further provides that all amounts borrowed
shall be repaid in full on or before January 20, 1998. Interest accrues on the
unpaid principal at the rate of 10% per annum and is payable upon demand. At
the date of this Prospectus, the Company has borrowed $75,000 under the Credit
Agreement, all of which is outstanding. As further consideration to enter into
the Credit Agreement, the Company issued to GEM warrants to purchase 30,000
Common Shares of the Company at an exercise price of $6.00 per share, such
warrants being exercisable for a period of five years commencing on the first
anniversary date of this Prospectus. The Company entered into the Credit
Agreement because it required additional financing to fund the Company's working
capital needs and no other sources of financing were available to the Company at
that time. The Company believes that the terms of the Credit Agreement and the
warrant are commercially reasonable and are at least as favorable as the Company
could have obtained from an unrelated third party. Amounts borrowed under the
Credit Agreement will be repaid out of operating revenues of the Company. No
part of the proceeds in this Offering will be utilized to repay the GEM loan.
To the extent that the Company may enter into any agreements with
related parties in the future (of which none are presently contemplpated), the
Company anticipates that the terms of such agreements will be commercially
reasonable and no less favorable to the Company than the Company could obtain
from unrelated third parties. Additionally, the Company intends that such
agreements will be approved by a majority of disinterested directors.
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>
This provision, however, does 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 Continental Stock
Transfer and Trust Company.
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 $7.50 per share (150% 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.
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.
The Underwriter has advised the Company that it will not waive the
transfer restrictions with respect to the Selling Stockholder for 30 days
following the date of this Prospectus, and that in any event, it has no plans to
waive such transfer restriction prior to its expiration. However, the
Underwriter has informed the Company that it may contemplate the waiver of such
transfer restriction in the future if the sale of the Selling Stockholder's
Common Shares would not have an adverse effect on the market price of the
Company's Common Shares and the market could sustain such sale. 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. See
"Principal and Selling Stockholders".
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 Underwriter does not intend to sell any of the Company's Common
Shares to accounts for which it exercises discretionary authority.
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 "NCHE", 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 qualitatively 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.
- --------------------------------------------------------------------------------
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.
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]
Revenues:
- ---------
<S> <C> <C> <C> <C>
Sales - Net $ 906,744 $ 323,553 $ 540,121 $ 415,330
Other Revenues -- 66,147 66,147 --
--------------- ---------------- --------------- --------------
Total Revenues 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 pharmaceutical 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. By the second 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 Company's 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, 1995
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, 1995
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 carry forwards of $595,000 expiring by 2010. The Tax Reform Act
of 1986 includes provisions which may limit the net operating loss carry
forwards 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 carry forwards 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 carry forwards 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
carry forwards 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, as part of the reincorporation of the
Company in Delaware, the Company also effectuated a 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
Until September 1996, the Company leased 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 $400,000 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 and 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 Warrants - 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, warrants to purchase up to 130,000
shares of common stock at an exercise price of 150% of the public offering price
of such shares, such warrants being exercisable for a three year period
commencing one year after the effective date of the proposed initial public
offering. The non-cash cost of such warrants, representing a cost of raising
capital, will be approximately $277,000 and will be recorded as a charge and
credit to stockholders' equity when the warrants are issued.
[H] Line of Credit - Related Party - In January 1997 the Company was extended a
$150,000 line of credit from a related party. $75,000 of this facility was
drawn upon in January 1997. Any amounts drawn on the line are to be repaid
on the first anniversary of the effective date of the initial public offering.
Interest is payable on demand at an annual rate of 10 percent. In further
consideration for the loan, the Company will issue warrants to purchase
30,000 shares of the Company's common stock. Such warrants become exercisable
for a five year period commencing on the first anniversary date of the initial
public offering at $6 per share.
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]
- --------------------------------------------------------------------------------
[16] Subsequent Events [Unaudited}{Continued}
[H] Line of Credit - Related Party [Continued} - The fair value of the warrants
at the date of issuance, of approximately $94,000, will be recorded as a debt
discount and will be amortized over the term of the debt into interest expense.
[17] Authoritative Pronouncements [Continued]
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. The
Company implemented SFAS No. 121 on January 1, 1996. In addition, because the
long lived assets are deemed material to the total assets of the Company, an
impairment of such long lived assets would have a material impact on the
Company's financial statements. As of September 30, 1996, management does not
believe an impairment of such long lived assets exists.
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 $ 2,712.10
NASD Filing Fee 2,000.00
Blue Sky Fees and Expenses 21,000.00
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 35,000.00
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 49,787.90
------------
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.
During the period November 1994 through March 1995, the Company
sold the following number of Common Shares in a private offering, for $2.00
per share in cash, to the following persons in the years indicated below:
1994
- ----
Number of Aggregate
Common Cash
Name Shares Consideration
- ---- --------- -------------
Roger G. Boyer 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
Allan Avery 7,500 15,000
------ -------
Total 27,500 $ 55,000
1995
- ----
Number of Aggregate
Common Cash
Name Shares Consideration
- ---- --------- -------------
David A. Wang 2,500 5,000
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 7,500 15,000
------ ------
Total 22,500 $ 45,000
II-2
<PAGE>
In December 1996, the Company borrowed $100,000 from Dominant
Construction Corp. (the "Bridge Lender") in a Bridge Financing transaction. In
consideraton for making the loan, the Company issued to the Bridge Lender
100,000 Common Shares.
In January 1997, the Company entered into a Credit Agreement with an
affiliate of Allan R. Avery which provided the Company with a $150,000 credit
facility of which the Company has borrowed $75,000. In consideration for
providing the credit facility, the Company issued Mr. Avery's affiliate a
warrant to purchase 30,000 Common Shares of the Company at an exercise price of
$6.00 per share, such warrant being exercisable for a period of five years
commencing on the first anniversary date of the Prospectus included in this
Registration Statement.
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, as amended.*
10.12 1996 Senior Executive Stock Option Plan.
10.13 1996 Non-Senior Executive Stock Option Plan.
10.14 Credit Agreement, dated January 20, 1997, between GEM
Communications, Inc. and the Company.
10.15 Promissory Note, dated January 20, 1997, by the Company to GEM
Communications, Inc.
10.16 Common Share Purchase Warrant, dated January 20, 1997, isseud to
GEM Communications to purchase 30,000 Common Shares.
23.1 Consent of Moore Stephens, P.C., 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.
27.0 Financial Data Schedule.
_____________________
*Previously filed.
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.
(e) Rule 424(c) Supplement; Post Effective Amendment.
The undersigned Company will, in the event the Underwriter in this
Offering enters into transactions with the Selling Stockholder, or
waives the "lock-up" restrictions applicable to such Selling
Stockholder's Common Shares:
(1) involving from 5% up to 10% of the Selling Stockholder's Common
Shares, file "sticker" supplements to the Prospectus pursuant to
Rule 424(c) under the Act; or
(2) involving over 10% of the Selling Stockholder's registered Common
Shares, file a post-effective amendment to the Registration
Statement.
>
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 January 28, 1997.
NICHE PHARMACEUTICALS, INC.
By:/s/ Stephen F. Brandon
----------------------------------------
Stephen F. Brandon, President
Chief Executive Officer, and Treasurer
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 January 28, 1997
Stephen F. Brandon Officer, Treasurer Principal
Accounting Officer and
Director
* Executive Vice President- January 28, 1997
Thomas F. Reed Corporate Development
and Director
* Vice President and Director January 28, 1997
Jean R. Sperry
* Director January 28, 1997
Allan R. Avery
* Director January 28, 1997
J. Leslie Glick
*By: /s/ Stephen F. Brandon
- --------------------------
Stephen F. Brandon
Attorney-in-Fact
II-7
<PAGE>
UNDERWRITING AGREEMENT
between
NICHE PHARMACEUTICALS, INC.
and
STERLING FOSTER & CO., INC.
Dated: , 1997
120243.3
<PAGE>
1,300,000 Shares of Common Stock
NICHE PHARMACEUTICALS, INC.
UNDERWRITING AGREEMENT
New York, New York
, 1997
Sterling Foster & Co., Inc.
125 Baylis Road
Melville, N.Y. 11747
Dear Sirs:
The undersigned, NICHE PHARMACEUTICALS, INC., a Delaware
corporation (the "Company"), hereby confirms its agreement with STERLING FOSTER
& CO., INC. (being referred to herein as "you," the "Representative" or the
"Underwriter"), as follows:
1. Purchase and Sale of Securities.
1.1 Firm Shares.
1.1.1 Purchase of Firm Shares. On the basis of the
representations and warranties and subject to the terms and conditions contained
herein, the Company will issue and sell to the Underwriter 1,300,000 shares (the
"Firm Shares") of the Company's Common Stock, $.01 par value per share (the
"Common Stock"), and the Underwriter agrees to purchase from the Company all of
such shares, at a purchase price of $5.00 per Firm Share. There will be an
underwriting discount of ten percent. The total gross discount and
non-accountable expense allowance shall be subject to approval by the National
Association of Securities Dealers, Inc. ("NASD").
1.1.2 Delivery and Payment. Delivery of and payment for the
Firm Shares shall be made at 10:00 A.M., New York time, on or before the fifth
business day following the effective date (the "Effective Date") of the
Registration Statement (as hereinafter defined), or at such other time as shall
be agreed upon by the Representative and the Company, at the offices of Sterling
Foster & Co., Inc. or at such other place as shall be agreed upon by the
Representative and the Company. The date of delivery and payment for the Firm
Shares is called the "Closing Date." Payment for the Firm Shares shall be made
on the Closing Date by certified or bank cashier's check(s) in New York Clearing
House (next day) funds, payable to the order of the Company upon delivery to the
Representative of certificates (in form and substance complying with applicable
law and satisfactory to the Representative) representing the Firm Shares for the
account of the Underwriter.
120243.3
<PAGE>
The Firm Shares shall be registered in such names and shall be in such
denominations as the Representative may request in writing at least two (2) full
business days prior to the Closing Date. The Company shall permit the
Representative to examine and package the Firm Shares for delivery at least one
(1) full business day prior to the Closing Date. The Company shall not be
obligated to sell or deliver the Firm Shares, except upon tender of payment by
the Underwriter for all the Firm Shares.
1.2 Overallotment Option.
1.2.1 Grant of Option. For the purposes of covering any
overallotments in connection with the distribution and sale of the Firm Shares,
the Underwriter is hereby granted an option (the "Overallotment Option") to
purchase up to an additional 195,000 shares of Common Stock (the "Option
Shares") from the Company. The Firm Shares and the Option Shares are hereinafter
collectively referred to as the "Shares." The purchase price to be paid for each
Option Share shall be the same as the price paid for each Firm Share pursuant to
Section 1.1.1 hereof.
1.2.2 Exercise of Option. The Overallotment Option may be
exercised by the Representative as to all or any part of the Option Shares at
any time, from time to time, within forty-five (45) days after the Effective
Date. The Underwriter shall not be under any obligation to purchase any Option
Shares prior to the exercise of the Overallotment Option. The Overallotment
Option granted hereby may be exercised by the giving of oral, written or
telegraphic notice (any such oral notice to be confirmed by letter or telecopy
within 24 hours of such oral notice) to the Company by the Representative
setting forth the number of Option Shares to be purchased, the date and time for
delivery of and payment for the Option Shares and stating that the Option Shares
referred to therein are to be used for the purpose of covering overallotments in
connection with the distribution and sale of the Firm Shares. If such notice is
given two (2) full business days prior to the Closing Date, the date set forth
therein for such delivery and payment shall be the Closing Date. If such notice
is given thereafter, the date set forth therein for such delivery and payment
shall not be earlier than five (5) full business days after the date of the
notice. If such delivery and payment for the Option Shares does not occur on the
Closing Date, the date and time of the closing for such Option Shares shall be
as set forth in the notice (the "Option Closing Date"). Upon exercise of the
Overallotment Option, the Company shall convey to the Underwriter the number of
Option Shares specified in such notice, and, subject to the terms and conditions
set forth herein, the Underwriter shall purchase all of the Option Shares.
1.2.3 Delivery and Payment. Payment for the Option Shares
shall be made by certified or bank cashier's check(s) in New York Clearing House
(next day) funds, payable to the order of the
120243.3
-2-
<PAGE>
Company and shall be made at the offices of the Representative or at such other
place as shall be agreed upon by the Representative and the Company, upon
delivery to you of certificates representing the Option Shares being purchased
for the account of the Underwriter. The certificates representing the Option
Shares to be delivered shall be in such denominations and registered in such
authorized names as the Representative requests not less than two (2) full
business days prior to the Closing Date or the Option Closing Date, as the case
may be. The Company will permit the Underwriter to examine and package the
Option Shares for delivery at the aforesaid office of the Company's transfer
agent or correspondent not less than one (1) full business day prior to such
Closing Date.
1.3 Representative's Warrants.
1.3.1 Purchase and Sale. The Company shall issue and sell to
you and/or to such persons as you may designate, on the Closing Date, warrants
for the purchase of an aggregate of 130,000 shares of Common Stock (the
"Representative's Warrants") for an aggregate purchase price of $100.00. The
Representative's Warrants and the shares of Common Stock issuable upon exercise
of the Representative's Warrants are hereinafter referred to collectively as the
"Representative's Securities." The Shares and the Representative's Securities
are hereinafter referred to collectively as the "Securities."
1.3.2 Delivery and Payment. Delivery and payment for the
Representative's Warrants shall be made on the Closing Date. The Company shall
deliver to the Representative, upon payment therefor, certificates for the
Representative's Warrants in the authorized name or names and in such authorized
denominations as the Representative may request. The Representative's Warrants
shall be exercisable for a period of three years commencing one year after the
Effective Date at an initial exercise price of $7.50 per share and shall be
substantially in the form of the Representative's common stock purchase warrant
attached hereto as Exhibit A.
2. Representations and Warranties of the Company. The Company represents
and warrants to the Underwriter that:
2.1 Filings under Securities Laws.
2.1.1 Pursuant to the Act. The Company has filed with the
Securities and Exchange Commission (the "Commission") a registration statement
and an amendment or amendments thereto, on Form SB-2 (Registration No.
333-17767), including any related prospectus subject to completion (a
"Preliminary Prospectus"), for the registration of the Securities under the
Securities Act of 1933, as amended (the "Act"), which registration statement and
amendment or amendments have been prepared by the Company in conformity with
120243.3
-3-
<PAGE>
the requirements of the Act, and the rules and regulations of the Commission
under the Act (the "Regulations"). Except as the context may otherwise
require, such registration statement, as amended, on file with the
Commission at the time the registration statement becomes effective (including
the prospectus, financial statements, schedules, exhibits and all other
documents filed as a part thereof or incorporated therein and all information
deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule
430A of the Regulations), is hereinafter called the "Registration Statement,"
and the form of the final prospectus dated the Effective Date (or, if
applicable, the form of final prospectus filed with the Commission pursuant to
Rule 424 of the Regulations), is hereinafter called the "Prospectus." The
Registration Statement has been declared effective on or prior to the effective
date of this Agreement.
2.1.2 Pursuant to the Exchange Act. The Company has filed with
the Commission a Form 8-A Registration Statement (File No. 0-_____) providing
for the registration under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), of the shares of Common Stock. Such registration of the Common
Stock has been declared effective by the Commission on the date hereof.
2.2 No Stop or Other Orders. Neither the Commission, nor any state
regulatory authority, has issued any order preventing or suspending the use of
any Preliminary Prospectus or has instituted or threatened to institute any
proceedings with respect to such an order.
2.3 Disclosures in Registration Statement.
2.3.1 Representation as to Contents. At the time the
Registration Statement became effective and at all times subsequent thereto up
to the Closing Date and any Option Closing Date, the Registration Statement and
the Prospectus shall contain all material statements that are required to be
stated therein in accordance with the Act and the Regulations, and shall in all
material respects conform to the requirements of the Act and the Regulations;
neither the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, on such dates, shall contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. When any Preliminary Prospectus was first
filed with the Commission (whether filed as part of the Registration Statement
for the registration of the Securities or any amendment thereof or pursuant to
Rule 424(a) of the Regulations) and when any amendment thereof or supplement
thereto was first filed with the Commission, such Preliminary Prospectus and any
amendments thereof and supplements thereto complied or will comply in all
material respects with the applicable provisions of the Act and the Regulations,
and did not
120243.3
-4-
<PAGE>
and will not contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The representation and warranty made in this Section 2.3.1 does
not apply to statements made or statements omitted in reliance upon and in
conformity with written information furnished to the Company with respect to the
Underwriter expressly for use in the Registration Statement, Preliminary
Prospectus, or Prospectus or any amendment thereof or supplement thereto. The
Company acknowledges that the information referred to in the immediately
preceding sentence consists solely of the information under the heading
"Underwriting" "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" in the Prospectus.
2.3.2 Disclosure Regarding Contracts. The description in the
Registration Statement and the Prospectus of contracts, instruments and other
documents is accurate in all material respects and presents fairly the
information required to be disclosed therein. There are no contracts,
instruments or other documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed with the Commission as
exhibits to the Registration Statement, which have not been so described or
filed. Each contract, instrument and other document (however characterized or
described) to which the Company is a party or by which its property or business
is or may be bound or affected and which is referred to in the Prospectus, or
is material to its business, has been duly and validly executed, is in full
force and effect and is enforceable against the parties thereto in accordance
with its terms and none of such contracts, instruments or documents has been
assigned by the Company. Neither the Company nor, to the best knowledge of the
Company, any other party thereto is in default thereunder and no event has
occurred which, with the lapse of time or the giving of notice, or both, would
constitute a default by the Company thereunder.
2.3.3 Prior Securities Transactions. No securities of the
Company have been sold by the Company or by or on behalf of, or for the benefit
of, any person or persons controlling, controlled by, or under common control
with the Company (or any predecessor), within three years prior to the date
hereof, except as disclosed in the Registration Statement.
2.4 Changes After Dates in Registration Statement.
2.4.1 No Material Adverse Change. Since the respective
dates as of which information is given in the Registration Statement and the
Prospectus, except as otherwise specifically stated therein, (i) there has been
no material adverse
120243.3
-5-
<PAGE>
change in the condition, financial or otherwise, or in the results of
operations, assets, properties, business or business prospects of the Company,
including, but not limited to, any material loss of, or interference with, its
business from fire, storm, explosion, flood or other casualty, whether or not
covered by insurance, or from any labor dispute or court or governmental action,
order or decree, whether or not arising in the ordinary course of business, and
(ii) there have been no transactions entered into by the Company, other than
those in the ordinary course of business, which are material with respect to the
condition, financial or otherwise, or to the results of operations, business or
business prospects of the Company.
2.4.2 Recent Securities Transactions, Etc. Subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as may otherwise be indicated or contemplated
herein or therein, the Company has not (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money; or (ii)
declared or paid any dividend or made any other distribution on or in respect to
its capital stock.
2.5 Independent Accountants. To the best knowledge of the Company,
Moore Stephens, P.C., whose report is filed with the Commission as part of the
Registration Statement, are independent accountants as required by the Act and
the Regulations. The statements included in the Registration Statement with
respect to such accountants are true and correct in all material respects.
2.6 Financial Statements. The financial statements, including the notes
thereto and supporting schedules, if any, included in the Registration Statement
and Prospectus fairly present the financial position, the results of operations
and cash flows of the Company at the dates and for the periods to which they
apply; and such financial statements have been prepared in conformity with
United States generally accepted accounting principles, consistently applied
throughout the periods involved; and the supporting schedules, if any, included
in the Registration Statement present fairly the information required to be
stated therein. No other financial statements or schedules are required to be
included in the Registration Statement. The selected financial data set forth in
the Prospectus under the captions "Summary Financial Information" and
"Capitalization" fairly present the information set forth therein on the basis
stated in the Registration Statement.
2.7 Capitalization. As used herein, the term the "Preferred Stock"
shall mean the Preferred Stock, $.01 par value per share, of the Company. The
Company had at the date or dates indicated in the Registration Statement and
Prospectus duly authorized, issued and outstanding capitalization as set forth
in the Registration Statement and the Prospectus. Based on the assumptions
stated in
120243.3
-6-
<PAGE>
the Registration Statement and the Prospectus, the Company will have on the
Closing Date the adjusted stock capitalization set forth therein. Except as set
forth in the Registration Statement and the Prospectus, on the Effective Date
and on the Closing Date and any Option Closing Date, there will be no options,
warrants, or other rights to purchase or otherwise acquire any authorized but
unissued shares of Common Stock or Preferred Stock or any security convertible
into shares of Common Stock or Preferred Stock, or any contracts or commitments
to issue or sell shares of Common Stock or Preferred Stock or any such options,
warrants, rights or convertible securities.
2.8 Representations Regarding Securities.
2.8.1 Outstanding Securities. All issued and outstanding
securities of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no rights of rescission
with respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of the
preemptive rights of any holder of any security of the Company or similar
contractual rights granted by the Company. The outstanding options and warrants
to purchase shares of Common Stock constitute the valid and binding obligations
of the Company, enforceable in accordance with their terms, except (i) such
enforceability may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, marshaling and/or similar laws, now or hereafter in
effect affecting creditors rights and remedies and (including such as made deny
giving effect to waivers of debtors' rights, (ii) as enforceability of any
indemnification provision may be limited under Federal and State laws, (iii)
that the remedy of specific performance and injunction and other forms of
equitable relief may be subject to the equitable defenses and to the discretion
of the courts before which any proceeding therefor may be brought (regardless of
whether such enforceability is considered a proceeding in equity or in law). The
authorized Common Stock, the Preferred Stock and the outstanding options and
warrants to purchase shares of Common Stock conform to all statements relating
thereto contained in the Registration Statement and the Prospectus. The offers
and sales of the outstanding Common Stock, and the options and warrants to
purchase shares of Common Stock, were at all relevant times either registered
under the Act and applicable state securities or Blue Sky Laws or were exempt
from such registration requirements.
2.8.2 Securities Sold Hereunder. The Securities have been duly
authorized and, when issued and paid for, will be validly issued, fully paid and
non-assessable and the holders thereof are not and will not be subject to
personal liability by reason of being such holders; the Securities are not and
will not be subject to the preemptive rights of any holders of any security of
the Company or similar contractual rights granted by the Company; and
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all corporate action required to be taken for the authorization, issuance and
sale of the Securities has been duly and validly taken. When issued, the
Representative's Warrants will constitute valid and binding obligations of the
Company to issue and sell, upon exercise thereof and payment therefor, the
number and type of securities of the Company called for thereby and the
Representative's Warrants are enforceable against the Company in accordance with
their respective terms, except (i) such enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, marshaling and/or
similar laws, now or hereafter in effect affecting creditors rights and remedies
and (including such as made deny giving effect to waivers of debtors' rights,
(ii) as enforceability of any indemnification provision may be limited under
Federal and State laws, (iii) that the remedy of specific performance and
injunction and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the courts before which any proceeding
therefor may be brought (regardless of whether such enforceability is considered
a proceeding in equity or in law).
2.9 No Registration Rights. No holder of any securities of the Company
or of any options or warrants of the Company exercisable for or convertible or
exchangeable into securities of the Company has the right to require the Company
to register any such securities of the Company under the Act or to include any
such securities in a registration statement to be filed by the Company,
including the Registration Statement, except as disclosed in the Prospectus.
2.10 Representations Regarding This Agreement. The Company has full
power and authority, corporate and otherwise, to enter into this Agreement. This
Agreement has been duly and validly authorized by the Company and constitutes
the valid and binding agreement of the Company, enforceable against it in
accordance with its terms, except (i) such enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, marshaling and/or
similar laws, now or hereafter in effect affecting creditors rights and remedies
and (including such as made deny giving effect to waivers of debtors' rights,
(ii) as enforceability of any indemnification provision may be limited under
Federal and State laws, (iii) that the remedy of specific performance and
injunction and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the courts before which any proceeding
therefor may be brought (regardless of whether such enforceability is considered
a proceeding in equity or in law). The execution, delivery and performance by
the Company of this Agreement, the consummation by the Company of the
transactions herein contemplated and the compliance by the Company with the
terms and conditions hereof have been duly authorized by all necessary corporate
action and do not and will not, with or without the giving of notice or the
lapse of time or both, (i) result in a breach of, or conflict with any of
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the terms and provisions of, or constitute a default under, or result in the
creation, modification, termination or imposition of any lien, charge or
encumbrance upon any property or assets of the Company pursuant to the terms of,
any indenture, mortgage, deed of trust, note, loan or credit agreement or any
other agreement or instrument evidencing an obligation for borrowed money, or
any other agreement or instrument to which the Company is a party or by which
the Company may be bound or to which any of the property or assets of the
Company is subject, which breach, conflict or default would have a material
adverse effect on the condition (financial or other), business, prospects or
properties of the Company; (ii) result in any violation of the provisions of the
Certificate of Incorporation or the By-Laws of the Company; (iii) violate any
existing applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over the
Company or any of its properties or business; or (iv) have a material adverse
effect on any permit, license, certificate, registration, approval, consent or
franchise concerning the Company; except in the case of (i) or (iii), where such
default, breach, violation or effect, either singly or in the aggregate, would
not have material adverse effect on the financial condition or results of
operations.
2.11 No Improper Payments. Neither the Company nor, to its knowledge,
any director, officer, employee or agent of the Company has made any payment of
funds of the Company or received or retained any funds in violation of any law,
rule or regulation or of a character required to be disclosed in the Prospectus.
2.12 No Defaults; Violations. Except as set forth in the Prospectus, no
default exists in the due performance and observance of any material term,
covenant or condition of any license, contract, indenture, mortgage, deed of
trust, note, loan or credit agreement, or any other agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which the Company is a party or by which the Company may be bound
or to which any of the properties or assets of the Company is subject. The
Company is not in violation of any term or provision of its Certificate of
Incorporation or By-Laws. The Company is not in violation of any franchise,
license, permit, applicable law, rule, regulation, judgment or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over such
company or any of its properties or business, which violation would result in a
material adverse change in the condition (financial or other), business,
prospects or properties.
2.13 Corporate Power; Licenses; Consents.
2.13.1 Conduct of Business. The Company has all requisite
corporate power and authority, and has all necessary authorizations, approvals,
orders, licenses, certificates and permits of and from all governmental
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regulatory officials and bodies to own or lease its properties and conduct
its business as described in the Prospectus, and such company is and has been
doing business in compliance with all such authorizations, approvals,
orders, licenses, certificates and permits and all federal, state and local
laws, rules and regulations, except where the failure to so comply would not
have a material adverse effect on the condition (financial or other),
business, prospects or properties of the Company.
2.13.2 Required Consents. The Company has obtained all
consents, authorizations, approvals and orders required in connection with the
execution and delivery of this Agreement and the performance of its obligations
hereunder. No consent, authorization or order of, and no filing with, any court,
government agency or other body is required for the valid issuance, sale and
delivery of the Securities pursuant to this Agreement and as contemplated by the
Prospectus, except those required under applicable federal and state securities
laws.
2.14 Title to Property; Insurance. The Company has good and marketable
title to, or valid and enforceable leasehold estates in, all items of real and
personal property (tangible and intangible) owned or leased by it, free and
clear of all liens, encumbrances, claims, security interests, defects and
restrictions (collectively, "Restrictions") of any material nature whatsoever,
other than those referred to in the Prospectus. The Company has adequately
insured its properties against loss or damage by fire or other casualty and
maintains such other insurance, in adequate amounts, as is usually maintained by
companies engaged in the same business or in similar businesses.
2.15 Litigation. Except as set forth in the Prospectus, there is no
action, suit, proceeding, inquiry, arbitration, investigation, litigation or
governmental proceeding pending or threatened against, or involving the
properties or business of, the Company which might materially and adversely
affect the financial position, prospects, value or the operation or the
properties or the business of the Company, or which question the validity of the
capital stock of the Company or this Agreement or of any action taken or to be
taken by the Company pursuant to, or in connection with, this Agreement. There
are no outstanding orders, judgments or decrees of any court, governmental
agency or other tribunal naming the Company and enjoining the Company from
taking, or requiring the Company to take, any action, or to which the Company,
or any of its properties or business, is bound or subject.
2.16 Organization; Good Standing. The Company has been duly
organized and is validly existing as a corporation and is in good standing under
the laws of its state of incorporation. The Company is duly qualified and
licensed and in good standing as a foreign corporation in each jurisdiction in
which ownership or leasing of any properties or the character of its operations
120243.3
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requires such qualification or licensing, except where the failure to qualify
would not have a material adverse effect on the condition (financial or
otherwise) business prospects or properties of the Company.
2.17 Taxes. The Company has filed all returns (as hereinafter defined)
required to be filed with taxing authorities prior to the date hereof or has
duly obtained extensions of time for the filing thereof. The Company has paid
all taxes (as hereinafter defined) shown as due on such returns that were filed
and has paid all taxes imposed on or assessed against it, other than any which
the Company is contesting in good faith. The provisions for taxes payable, if
any, shown on the financial statements filed with or as part of the Registration
Statement are sufficient for all accrued and unpaid taxes, whether or not
disputed, and for all periods to and including the dates of such financial
statements. No issues have been raised (and are currently pending) by any taxing
authority in connection with any of the returns or taxes asserted as due from
the Company, and no waivers of statutes of limitation with respect to the
returns or collection of taxes have been given by or requested from the Company
or any subsidiary thereof. The term "taxes" means all federal, state, local,
foreign, and other net income, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, lease, service, service use,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property, windfall profits, customs, duties or other taxes, fees, assessments,
or charges of any kind whatever, together with any interest and any penalties,
additions to tax, or additional amounts with respect thereto. The term "returns"
means all returns, declarations, reports, statements, and other documents
required to be filed in respect to taxes.
2.18 Transactions Affecting Disclosure to NASD.
2.18.1 Finders' Fees. To the best knowledge of the Company,
there are no claims, payments, issuances, arrangements or understandings for
services in the nature of finders' or origination fees with respect to the sale
of the Securities hereunder or any other arrangements, agreements,
understandings, payments or issuances with respect to the Company that may
affect the Underwriter's compensation, as determined by NASD, other than
payments to the Representative of a placement agent fee with respect to the
Companies private placement of a $100,000 promissory note and 100,000 Common
Shares which closed on December 9, 1996.
2.18.2 Payments Within Twelve Months. The Company has made any
direct or indirect payments (in cash, securities or otherwise) (i) to any
person, as a finder's fee, investing fee or otherwise, in consideration of such
person raising capital for the Company or introducing to the Company persons who
provided capital to the Company, (ii) to any NASD member, or (iii) to any person
or
120243.3
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entity that has any direct or indirect affiliation with an NASD member within
the twelve month period prior to December 12, 1996, the date on which the
Registration Statement was filed with the Commission (the "Filing Date") or
thereafter, other than payments to the Representatives.
2.18.3 Use of Proceeds. None of the net proceeds of the
offering will be paid by the Company to any participating NASD member or any of
its affiliates or associated persons. The Underwriter shall approve the
Company's proposed "Use of Proceeds" of the offering.
2.18.4 Insiders' NASD Affiliation. No officer, director or
holder of five percent (5%) or more of any class of securities of the Company
has any direct or indirect affiliation or association with any NASD member. No
beneficial owner of the unregistered securities of the Company has any direct or
indirect affiliation or association with any NASD member. The Company will
advise the Representative and the NASD if the Company becomes aware that any 5%
or greater shareholder, or any officer or director, of the Company becomes an
affiliate or associated person of an NASD member.
2.19 Internal Accounting Controls. The Company maintains, and the
Company will continue to maintain, a system of internal accounting control
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
2.20 Nasdaq Listing. As of the Effective Date, the Shares have been
approved for listing on the National Association of Securities Dealers Automated
Quotation ("Nasdaq") SmallCap Market System [and the Boston Stock Exchange].
2.21 Intangibles. The Company owns or possesses the requisite licenses
or rights to use all trademarks, service marks, service names, trade names,
patents and patent applications, copyrights and other rights (collectively, the
"Intangibles") owned or used by it. The Intangibles owned or used by the Company
has been registered in the United States Patent and Trademark Office and/or the
United States Copyright Office and have been fully maintained and are in full
force and effect. There is no claim or action by any person, or proceeding
pending or, to the knowledge of the Company, threatened, and the Company has not
received any notice of conflict with the asserted rights of others, which
challenges the exclusive
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right of the Company with respect to any Intangibles used in the conduct of the
business of the Company. To the knowledge of the Company, neither its
Intangibles, nor its current products, services and processes infringe on any
intangibles held by any third party. To the best knowledge of the Company, no
others have infringed or are infringing upon the Intangibles of the Company.
2.22 Employee Matters.
2.22.1 Relations With Employees. The Company has generally
enjoyed a satisfactory relationship with its employees and is in compliance with
all federal, state and local laws and regulations respecting the employment of
its employees and employment practices, terms and conditions of employment and
wages and hours relating thereto. There are no pending investigations involving
the Company by the U.S. Department of Labor or any other governmental agency
responsible for the enforcement of such federal, state or local laws and
regulations. There is no unfair labor practice charge or complaint against the
Company pending before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending or threatened against
or involving the Company or any predecessor entity, and none has ever occurred.
No issue concerning representation exists respecting the employees of the
Company and no collective bargaining agreement or modification thereof is
currently being negotiated by the Company. No grievance or arbitration
proceeding is pending or threatened under any expired or existing collective
bargaining agreement of the Company, if any.
2.22.2 Employee Benefit Plans. Other than as set forth in the
Registration Statement, the Company does not maintain, sponsor or contribute to,
nor is it required to maintain, sponsor or contribute to, any program or
arrangement that is an "employee pension benefit plan," an "employee welfare
benefit plan," or a, "multi-employer plan" (each, an "ERISA Plan") as such terms
are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). The Company has at
any time maintained or contributed to a defined benefit plan, as defined in
Section 3(35) of ERISA. If the Company does maintain or contribute to a defined
benefit plan, any termination of the plan on the date hereof would not give rise
to liability under Title IV of ERISA. No ERISA Plan (or any trust created
thereunder) has engaged in a "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), which could subject the Company to any tax penalty for
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all material reporting, disclosure and other
requirements of the Code and ERISA as they relate to any such ERISA Plan.
Determination letters have been received from the Internal Revenue Service with
respect to each ERISA Plan that is intended to comply with Code Section 401(a),
stating that such ERISA Plan and
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the attendant trust are qualified thereunder. The Company has not ever
completely or partially withdrawn from a "multi-employer plan."
2.23 Investment Company Representations. The Company is not an
"investment company" or an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended.
2.24 Officer's Certificate. Any certificate signed by any duly
authorized officer of the Company and delivered to you or to your counsel shall
be deemed a representation and warranty by such Company to the Representative as
to the matters covered thereby.
2.25 Lock-Up Agreements With Insiders. The Company has caused to be
duly executed legally binding agreements enforceable in accordance with their
respective terms, except (a) such enforceability may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, marshaling and/or similar
laws, now or hereafter in effect affecting creditors rights and remedies and
(including such as made deny giving effect to waivers of debtors' rights, (b) as
enforceability of any indemnification provision may be limited under Federal and
State laws, (c) that the remedy of specific performance and injunction and other
forms of equitable relief may be subject to the equitable defenses and to the
discretion of the courts before which any proceeding therefor may be brought
(regardless of whether such enforceability is considered a proceeding in equity
or in law) pursuant to which (i) the persons listed on Appendix I hereto and
their family members and affiliates (as defined in the securities laws)
(collectively, the "Insiders") agree not to sell any shares of Common Stock or
warrants or options to purchase Common Stock or securities convertible into
Common Stock owned by them (either pursuant to Rule 144 of the Regulations or
otherwise) for a period of two years following the Effective Date and (ii) the
persons listed on Appendix II hereto and their family members and affiliates (as
defined in the securities laws) (collectively, the "Non-Insider Shareholders")
agree not to sell any shares of Common Stock or warrants or options to purchase
Common Stock or securities convertible into Common Stock owned by them (either
pursuant to Rule 144 of the Regulations or otherwise) for a period of six (6)
months following the Effective Closing Date, except in any such case with the
prior written consent of the Representative (other than by the laws of descent
and distribution). In order to enforce such agreements, the Company shall impose
stop transfer instructions with respect to all such shares of Common Stock or
warrants or options to purchase Common Stock or securities convertible into
Common Stock until the end of the applicable period.
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2.26 No Stabilization or Manipulation. Neither the Company, nor any of
its officers, directors or controlling persons, has taken, or will take,
directly or indirectly, any action designed, or which reasonably might be
expected, to cause or result, under the Act, the Exchange Act or otherwise, in,
or that has constituted, stabilization or manipulation of the price of any
security of the Company or to facilitate the sale or resale of the Shares.
2.27 Subsidiaries. The representations and warranties made by the
Company in this Agreement shall, in the event that it has one or more
subsidiaries (the "subsidiary(ies)") also apply and be true with respect to each
subsidiary, individually (except as the context otherwise requires) and taken as
a whole with the respective company of which it is a subsidiary and all other
subsidiaries thereof, as if each representation and warranty contained herein
made specific reference to each subsidiary each time the term "Company" was
used. Except as described in the Prospectus, the Company does not own any
interest in any corporation, partnership, joint venture, trust or other business
entity.
2.28 Other Agreements. The Company shall enter into three-year
employment contracts with each of Steve F. Brandon and Thomas F. Reed and adopt
a 1996 Senior Executive Stock Option Plan, as described in the Prospectus, with
terms subject to the Underwriter's approval.
3. Representative's Representations and Warranties.
The Representative represents and warrants to the Company that:
3.1 Organization: Good Standing. The Representative has been duly
organized and is validly existing as a corporation and is in good standing under
the laws of its state of incorporation.
3.2 Corporate Power; Licenses; Consents. The Representative is
registered as a broker-dealer with the Securities and Exchange Commission and in
each state where such registration is required where the Representative acts as
a broker-dealer.
3.3 Binding Obligation; Enforceability. This Agreement and the
transactions contemplated hereby have been duly authorized by, an executed on
behalf of the Representative and constitute the valid and binding obligations of
the Representative, enforceable in accordance with its terms, except (i) such
enforceability may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, marshaling and/or similar laws, now or hereafter in
effect affecting creditors rights and remedies and (including such as made deny
giving effect to waivers of debtors' rights, (ii) as
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enforceability of any indemnification provision may be limited under Federal and
State laws, (iii) that the remedy of specific performance and injunction and
other forms of equitable relief may be subject to the equitable defenses and to
the discretion of the courts before which any proceeding therefor may be brought
(regardless of whether such enforceability is considered a proceeding in equity
or in law).
4. Covenants of the Company. The Company covenants and agrees with the
Underwriter as follows:
4.1 Amendments to Registration Statement. The Company shall deliver to
the Representative, prior to filing, any amendment or supplement to the
Registration Statement or Prospectus proposed to be filed after the Effective
Date and shall not file any such amendment or supplement to which the
Representative shall reasonably object.
4.2 Federal Securities Laws.
4.2.1 Compliance. During the time when a Prospectus is
required to be delivered under the Act, the Company shall use all reasonable
efforts to comply with all requirements imposed upon it by the Act, the
Regulations and the Exchange Act and by the regulations under the Exchange Act,
as from time to time in force, so far as necessary to permit the continuance of
sales of or dealings in the Shares in accordance with the provisions hereof and
the Prospectus. If at any time when a Prospectus relating to the Shares is
required to be delivered under the Act, any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for the
Underwriter, the Prospectus, as then amended or supplemented, includes any
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company shall notify the Representative promptly and prepare and file with the
Commission, subject to Section 4.1 hereof, an appropriate amendment or
supplement in accordance with Section 10 of the Act.
4.2.2 Filing of Final Prospectus. The Company shall file
the Final Prospectus (in form and substance satisfactory to the Representative)
with the Commission pursuant to the requirements of Rule 424 of the Regulations.
4.2.3 Exchange Act Registration. For a period of five years
from the Effective Date, the Company will use its best efforts to maintain
registration of the Common Stock under the provisions of the Exchange Act.
120243.3
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4.2.4 Financial Printer. The Preliminary Prospectuses shall
be printed by a financial printer selected by the Company and approved by the
Underwriter.
4.3 Blue Sky Filings. The Company shall endeavor in good faith, in
cooperation with the Representative and its counsel, at or prior to the time the
Registration Statement becomes effective, to qualify the Shares for offering and
sale under the securities laws of such jurisdictions as the Representative may
reasonably designate, provided that no such qualification shall be required in
any jurisdiction where, as a result thereof, the Company would be subject to
service of general process or would be required to qualify to do business as a
foreign corporation. In each jurisdiction where such qualification shall be
effected, the Company shall, unless the Representative agrees that such action
is not at the time necessary or advisable, use all reasonable efforts to file
and make such statements or reports at such times as are or may be required by
the laws of such jurisdiction. All blue sky work shall be undertaken by Olshan
Grundman Frome & Rosenzweig LLP, counsel to the Underwriter, and the Company
shall pay for all related expenses and disbursements incurred by such counsel.
4.4 Delivery of Filings to Underwriter. The Company shall deliver to
the Underwriter, without charge, from time to time during the period when the
Prospectus is required to be delivered under the Act or the Exchange Act, such
number of copies of each Preliminary Prospectus and the Prospectus as the
Underwriter may reasonably request and, immediately after the Registration
Statement or any amendment or supplement thereto is filed, deliver to the
Representative two (2) executed original Registration Statements, including
exhibits, and all post-effective amendments thereto and copies of documents
filed therewith or incorporated therein by reference and all executed original
consents of certified experts.
4.5 Effectiveness and Events Requiring Notice to the Representative.
The Company shall use its best efforts to cause the Registration Statement to
remain effective until the later of the completion by the Underwriter of the
distribution of the Shares (but in no event more than 9 months after the date on
which the Registration Statement shall have been declared effective) or 25 days
after the date on which the Registration Statement shall have been declared
effective and shall notify the Representative immediately and shall promptly
confirm the notice in writing of (i) the effectiveness of the Registration
Statement and any amendment thereto, (ii) the issuance by the Commission of any
stop order or of the initiation, or the threatening, of any proceeding for that
purpose, (iii) the issuance by any state securities commission of any
proceedings for the suspension of the qualification of the Shares for offering
or sale in any jurisdiction or of the initiation, or the threatening, of any
proceeding for that purpose, (iv) the mailing and delivery to the Commission for
filing of any amendment or supplement to the Registration Statement or
120243.3
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Prospectus, (v) the receipt of any comments or request for any additional
information from the Commission, and (vi) the happening of any event during
the period described in Section 4.4 hereof that makes any statement of a
material fact made in the Registration Statement or the Prospectus untrue or
that requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If the Commission or
any state securities commission shall enter a stop order or suspend such
qualification at any time, the Company shall make every reasonable effort to
obtain promptly the lifting of such order.
4.6 Unaudited Financials. The Company shall furnish to the
Representative as early as practicable prior to the date hereof and the Closing
Date, but no later than two (2) full business days prior thereto, a copy of the
latest available unaudited interim financial statements (the "Unaudited
Financials") of the Company prepared in a manner consistent with that included
in the Registration Statement (which in no event shall be as of a date more than
sixty (60) days prior to the Effective Date) which have been read by the
Company's independent accountants, as stated in their letter to be furnished
pursuant to Section 5.3 hereof.
4.7 Reports to the Underwriters.
4.7.1 Periodic Reports, Etc. For a period of five (5) years
following the Effective Date, the Company shall, simultaneously with the release
or filing thereof, as the case may be, furnish to the Representative, (i) copies
of such financial statements and other periodic and special reports as the
Company from time to time furnishes generally to holders of any class of its
securities, (ii) a copy of each periodic report the Company shall be required to
file with the Commission, (iii) a copy of every press release and every news
item and article with respect to the Company or its affairs which was released
by the Company, (iv) copies of each Form SR filed by the Company, (v) a copy of
each Form 8-K or Schedules 13D, 13G, 14D-1 or 13E-4 received or prepared by the
Company, and (vi) such additional documents and information with respect to the
Company and the affairs of any future subsidiaries of the Company as the
Representative may from time to time reasonably request.
4.7.2 Transfer Sheets. For a period of three years from the
Closing Date, the Company will furnish to the Representative at the Company's
sole expense such transfer sheets of the Company's securities as the
Representative may request, including the daily, weekly and monthly consolidated
transfer sheets of the transfer agent of the Company.
4.8 Delivery of Representative's Warrants. On the Closing
Date, the Company shall execute and deliver to the Representative
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the Representative's Warrants substantially in the form filed as Exhibit __ to
the Registration Statement.
4.9 Payment of Expenses.
4.9.1 General Expenses. The Company shall pay on each of the
Closing Date and any Option Closing Date to the extent not paid at the Closing
Date, all expenses incident to the performance of the obligations of the Company
under this Agreement, including, but not limited to, (i) the preparation,
printing, filing and mailing (including the payment of postage with respect to
such mailing) of the Registration Statement, the Preliminary Prospectuses and
the Prospectus and the printing and mailing of this Agreement and related
documents, including the cost of all copies thereof and any amendments or
supplements thereto supplied to the Underwriter in quantities as may be required
by the Underwriter, (ii) the printing, engraving, issuance and delivery of the
Shares and the Representative's Warrants, including any transfer taxes and other
taxes payable thereon, (iii) the qualification of the Shares under state or
foreign securities or Blue Sky laws, including the costs of printing and mailing
the "Preliminary Blue Sky Memorandum," and all amendments and supplements
thereto, fees and disbursements for the Underwriter's Blue Sky counsel, which
fees shall not exceed an aggregate of $35,000.00 ($15,000.00 of which has
already been paid),and fees and disbursements of local counsel, if any, retained
for such purpose, (iv) applications for assignments of a rating of the Shares by
qualified rating agencies, (v) filing fees, costs and expenses incurred in
registering the offering with the NASD, (vi) costs of placing "tombstone"
advertisements in publications that shall be reasonably selected by the
Representative, (vii) fees and disbursements of the transfer agent, (viii) the
Company's expenses associated with "due diligence" meetings arranged by the
Representative; (ix) the preparation, binding and delivery of four transaction
bound volume sets for the Representative; (x) any listing of the Shares on the
Nasdaq SmallCap Market System or on any securities exchange or any listing in
Standard & Poor's Corporation Records or Moody's OTC Industrial Manual, and (xi)
all other costs and expenses incident to the performance of its obligations
hereunder that are not otherwise specifically provided for in this Section
4.9.1. Since an important part of the public offering process is for the Company
to appropriately and accurately describe both the background of the principals
of the Company and the Company's competitive position in its industry, the
Company will engage, if requested by the Underwriter, and will pay for, an
investigative search firm of the Representative's choice to conduct an
investigation of principals of the Company and its predecessors and affiliates
designated by the Representative. The Representative may deduct from the net
proceeds of the offering payable to the Company on the Closing Date, or on any
Option Closing Date, the expenses set forth herein to be paid by the Company. If
this Agreement shall not be carried out for any reason
120243.3
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whatsoever, the Company shall remain liable for all of its actual out-of-pocket
expenses pursuant to this Section 4.9.1.
4.9.2 Representatives' Expenses. In addition to the expenses
payable pursuant to Section 4.9.1, the Company shall pay to the Representative a
non-accountable expense allowance in an amount not to exceed (i) $195,000 on the
Closing Date, and (ii) $29,250 on the final Option Closing Date, in each case by
certified or bank cashier's check or, at the election of the Representative, by
deduction from the proceeds of the offering contemplated hereby. If the offering
contemplated by this Agreement is not consummated for any reason, the Company
shall be liable for the accountable expenses of the Representatives, including,
but not limited to, legal fees, Blue Sky counsel fees, and "road show" and due
diligence expenses, to a maximum of $200,000, less any payments previously made
therefor.
4.10 Application of Net Proceeds. The Company shall apply the net
proceeds from the offering received by it in a manner consistent with the
application described under the caption "Use of Proceeds" in the Prospectus and
shall file such reports with the Commission with respect to the sale of the
Shares and the application of the proceeds therefrom as may be required pursuant
to Rule 463 under the Act.
4.11 Delivery of Earnings Statements to Security Holders. The
Company shall make generally available to its security holders as soon as
practicable, but not later than the first day of the fifteenth full calendar
month following the Effective Date, an earnings statement (which need not be
certified by independent public or independent certified public accountants
unless required by the Act or the Regulations, but which shall satisfy the
provisions of Rule 158(a) under Section 11(a) of the Act) covering a period of
at least twelve (12) consecutive months beginning on the date immediately after
the Effective Date.
4.12 Reservation of Shares. The Company shall reserve and keep
available that maximum number of its authorized but unissued shares of Common
Stock as is issuable upon the exercise of the Representative's Warrants.
4.13 Board of Directors. For a period of three years from the Effective
Date, the Company will (i) pay a financial consulting fee to the Underwriter, to
be accrued at the rate of $2,777.78 per month (which shall be prepaid in its
entirety on the Closing Date); and (ii) recommend and use its best efforts to
elect a designee of the Underwriter as a member of its Board of Directors. If
for whatever reason the Underwriter does not designate a member of the Company's
Board of Directors, the Underwriter shall nevertheless have the right to send a
representative (who need not be the same individual from meeting to meeting) to
observe each meeting of the Board of Directors. The Company agrees to give the
Underwriter
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written notice of each such meeting and to provide the Underwriter with an
agenda and minutes of the meeting no later than the time it gives such notice
and provides such items to the other directors. The Company agrees to provide
such director or representative of the Underwriter: (i) the same compensation
and expense reimbursement as would be paid to non-officer directors of the
Company; and (ii) the same indemnification and insurance protection as is
afforded generally to officers and directors of the Company.
4.14 Press Releases. The Company shall not issue a press release or
engage in any other publicity until twenty-five (25) days after the Effective
Date, without the Representative's prior written consent, which consent shall
not be unreasonably withheld.
4.15 Nasdaq Maintenance. For a period of five years from the date
hereof, the Company shall use its best efforts to maintain the listing of the
Common Stock on the Nasdaq SmallCap Market [and the Boston Stock Exchange] for
not less than five years, unless otherwise agreed to by the Underwriter.
4.16 Key Person Life Insurance. For a period of at least three years
following the Effective Date, the Company shall maintain key person life
insurance with an insurance company which is reasonably satisfactory to the
Representative in an amount no less than $2 million in the aggregate on the
lives of each of Steve F. Brandon and Thomas F. Reed, naming the Company as the
sole beneficiary thereof.
4.17 Disqualification of Form S-1 (or other appropriate form). For a
period equal to seven years from the date hereof, the Company will not take any
action or actions which may prevent or disqualify the Company's use of Form S-1
(or other appropriate form) for the registration under the Act of the shares
underlying the Representative's Warrants.
4.18 Transfer Agent. The Company shall retain a transfer agent
acceptable to the Underwriter for the Common Stock for a period of five years
following the Effective Date.
4.19 Accountants. For a period of three years from the Effective Date,
the Company will not effect a change in its accounting firm without the prior
written consent of the Representative, which consent will not be unreasonably
withheld, except that no such consent is required if the new firm is a member of
the so-called "Big Six."
4.20 Professional Services. The Company shall retain attorneys and
accountants acceptable to the Underwriter to assist the Company in preparation
of the Registration Statement and the Prospectus. If requested by the
Underwriter, the Company will retain a financial public relations firm and/or an
advertising
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agency to assist in the preparation of the Registration Statement and Prospectus
and for up to two years after the Effective Date.
4.21 Sale of Securities. The Company will not, without obtaining the
prior written of the Representative, (i) issue or sell in any manner, whether by
private placement, public offering or otherwise, any of its securities, other
than the Representative's Warrants, Common Stock upon the exercise of the
Representative's Warrants or any other currently outstanding warrant or option,
options (and Common Stock, upon the exercise thereof) under the Company's stock
option plans as currently in effect, or securities issued in connection with an
acquisition or corporate combination, for a period of two years following the
Closing Date, or (ii) permit or cause a private or public sale or private or
public offering of any of its securities (in any manner, including pursuant to
Rule 144 under the Act) owned nominally or beneficially by (A) any of the
Insiders for a period of two years following the Closing Date or (B) any of the
Non-Insider Shareholders for a period of six months following the Closing Date.
4.22 Exercise Price of Options/Warrants. For a period of twelve months
after the Effective Date, the Company will not grant or issue options to
purchase more than 150,000 shares of the Company's Common Stock pursuant to the
Company's 1996 Non-Senior Executive Stock Option Plan, and the exercise price of
such options shall not be less than the fair market value of the Common Stock on
the date of the grant.
4.23 Insiders Sales. During the three year period following the
Effective Date, the Underwriter shall have the right to purchase for the
Underwriter's account or to sell for the account of any of the Company's
officers or directors, by any persons or entities currently owning shares or
options to purchase five percent or more of the shares of Common Stock on the
Effective Date, or by the Insiders, any securities of the Company sold by the
Insiders pursuant to Rule 144 under the Act. Each of the Insiders will agree to
offer the Underwriter the exclusive opportunity to purchase or sell such
securities on terms at least as favorable to the Insiders as they can secure
elsewhere.
5. Conditions of the Underwriter's Obligations. The obligations of the
Underwriter to purchase and pay for the Shares, as provided herein, shall be
subject to the continuing accuracy of the representations and warranties of the
Company as of the date hereof and as of each of the Closing Date and any Option
Closing Date to the accuracy of the statements of officers of the Company made
pursuant to the provisions hereof and to the performance by the Company of its
obligations hereunder and to the following conditions:
5.1 Regulatory Matters.
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5.1.1 Effectiveness of Registration Statement. The
Registration Statement shall have become effective not later than 5:00 P.M.,
New York time, on the date of this Agreement or such later date and time as
shall be consented to in writing by you, and, at each of the Closing Date and
any Option Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for the purpose
shall have been instituted or shall be pending or contemplated by the Commission
and any request on the part of the Commission for additional information shall
have been complied with to the reasonable satisfaction of Olshan Grundman Frome
& Rosenzweig LLP, counsel to the Underwriter.
5.1.2 NASD Clearance. On or before the Effective Date, the
Representative shall have received clearance from the NASD as to the amount of
compensation allowable or payable to the Underwriter as described in the
Registration Statement.
5.1.3 No Blue Sky Stop Orders. No order suspending the sale of
the Shares in any jurisdiction designated by you pursuant to Section 4.3 hereof
shall have been issued either on the Closing Date or any Option Closing Date,
and no proceedings for that purpose shall have been instituted or shall be
contemplated.
5.2 Counsel Matters.
5.2.1 Closing Date Opinion of Counsel. On the Closing Date,
the Representative shall have received the favorable opinion of Certilman Balin
Adler & Hyman, LLP, counsel to the Company, dated the Closing Date, addressed to
the Underwriter and in form and substance satisfactory to Olshan Grundman Frome
& Rosenzweig LLP, counsel to the Underwriter, to the effect that:
(i) The Company has been duly organized and is
validly existing as a corporation and is in good standing under the laws of its
state of incorporation and is duly qualified and licensed and in good standing
as a foreign corporation in Texas, which to the knowledge of such counsel is the
only jurisdiction in which its ownership or leasing of any properties or the
character of its operations requires such qualification or licensing (except
where the failure to be so qualified or licensed would not have a material
adverse effect on the Company).
(ii) The Company has all requisite corporate power
and authority, and, to such counsel's knowledge, has all necessary
authorizations, approvals, orders, licenses, certificates and permits of and
from all governmental or regulatory officials and bodies, to own or lease its
properties and to conduct its business as described in the Prospectus, and, to
such counsel's knowledge, is in compliance with all such authorizations,
approvals, orders, licenses, certificates and permits and all federal, state and
local laws, rules and regulations. The Company has all requisite corporate
120243.3
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power and authority to enter into this Agreement and to carry out the terms and
conditions hereof. To such counsel's knowledge, no consents, approvals,
authorizations or orders of, and no filing with any court or governmental agency
or body (other than such as may be required under the Act and applicable Blue
Sky laws), is required for the valid authorization, issuance, sale and
delivery of the Securities, and the consummation of the transactions and
agreements contemplated by this Agreement and the Representative's Warrants,
and as contemplated by the Prospectus or, if required, all such authorizations,
approvals, consents, orders, registrations, licenses and permits have been duly
obtained and are in full force and effect and have been disclosed to the
Representatives.
(iii) All issued and outstanding securities
of the Company have been duly authorized and validly issued and are fully
paid and non-assessable; to such counsel's knowledge, the holders thereof have
no rights of rescission with respect thereto and are not subject to personal
liability by reason of being such holders; and, to such counsel's knowledge,
none of such securities were issued in violation of the preemptive rights of
any holders of any security of the Company or similar contractual rights
granted by the Company. The outstanding options and warrants, if any, to
purchase shares of Common Stock constitute the valid and binding obligations
of the Company, enforceable in accordance with their respective terms,
except (i) such enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, marshaling and/or similar laws, now
or hereafter in effect affecting creditors rights and remedies and (including
such as made deny giving effect to waivers of debtors' rights, (ii) as
enforceability of any indemnification provision may be limited under Federal
and State laws, (iii) that the remedy of specific performance and
injunction and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the courts before which any proceeding
therefor may be brought (regardless of whether such enforceability is
considered a proceeding in equity or in law). Prior to the completion of the
offering, the offers and sales of the outstanding Common Stock and options and
warrants to purchase shares of Common Stock have been at all relevant times
either registered under the Act and the applicable state securities or Blue
Sky Laws or exempt from such registration requirements. The authorized and
outstanding capital stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus.
(iv) The Securities have been duly authorized
and, when issued, paid for and delivered in accordance herewith, will be validly
issued, fully paid and non-assessable; the holders thereof are not and will not
be subject to personal liability by reason of being such holders. The Securities
are not and will not be subject to the preemptive rights of any holders of any
security of the Company pursuant to the provisions of the Company's
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Certificate of Incorporation or, to such counsel's knowledge, similar
contractual rights granted by the Company. All corporate action required to be
taken for the authorization, issuance and sale of the Securities has been duly
and validly taken. When issued, the Representative's Warrants will constitute
valid and binding obligations of the Company to issue and sell, upon exercise
thereof and payment therefor, the number and type of securities of the Company
called for thereby and the Representative's Warrants, when issued, will be
enforceable against the Company in accordance with their terms, except (a) such
enforceability may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, marshaling and/or similar laws, now or hereafter in
effect affecting creditors rights and remedies and (including such as made deny
giving effect to waivers of debtors' rights, (b) as enforceability of any
indemnification provision may be limited under Federal and State laws, (c) that
the remedy of specific performance and injunction and other forms of equitable
relief may be subject to the equitable defenses and to the discretion of the
courts before which any proceeding therefor may be brought (regardless of
whether such enforceability is considered a proceeding in equity or in law).
(v) To such counsel's knowledge, except as set
forth in the Prospectus, or for Common Shares included in the Prospectus, no
holders of any securities of the Company or of any options, warrants or
securities of the Company exercisable for or convertible or exchangeable into
securities of the Company has the right to require the Company to register any
such securities under the Act or to include any such securities in a
registration statement to be filed by the Company.
(vi) The Shares have been approved for listing on
Nasdaq SmallCap Market System [and the Boston Stock Exchange].
(vii) This Agreement has been duly and validly
authorized, executed and delivered by the Company and constitutes the valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except (a) such enforceability may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, marshaling and/or similar
laws, now or hereafter in effect affecting creditors rights and remedies and
(including such as made deny giving effect to waivers of debtors' rights, (b) as
enforceability of any indemnification provision may be limited under Federal and
State laws, (c) that the remedy of specific performance and injunction and other
forms of equitable relief may be subject to the equitable defenses and to the
discretion of the courts before which any proceeding therefor may be brought
(regardless of whether such enforceability is considered a proceeding in equity
or in law). The Representative's Warrants have been duly and validly authorized,
executed and delivered by the Company and constitute the valid and binding
obligations of the Company, enforceable against the Company in
120243.3
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accordance with their terms, except (a) such enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, marshaling and/or
similar laws, now or hereafter in effect affecting creditors rights and remedies
and (including such as made deny giving effect to waivers of debtors' rights,
(b) as enforceability of any indemnification provision may be limited under
Federal and State laws, (c) that the remedy of specific performance and
injunction and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the courts before which any proceeding
therefor may be brought (regardless of whether such enforceability is considered
a proceeding in equity or in law).
(viii) The execution, delivery and performance of
this Agreement and the Representative's Warrants, the issuance and sale of the
Securities, the consummation of the transactions contemplated hereby and thereby
and the compliance by the Company with the terms and provisions hereof and
thereof, do not and will not, with or without the giving of notice or the lapse
of time, or both, (a) to such counsel's knowledge, conflict with, or result in a
breach of, any of the terms or provisions of, or constitute a default under, or
result in the creation or modification of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Company pursuant to the
terms of, any material mortgage, deed of trust, note, indenture, loan, contract,
commitment or other material agreement or instrument known to such counsel, to
which the Company is a party or by which the Company or any of its properties or
assets may be bound, (b) result in any violation of any of the provisions of the
Certificate of Incorporation or the By-Laws of the Company, (c) to such
counsel's knowledge, violate any statute or any judgment, order or decree, rule
or regulation applicable to the Company of any court, domestic or foreign, or of
any federal, state or other regulatory authority or other governmental body
having jurisdiction over the Company, its properties or assets, or (d) to such
counsel's knowledge have a material adverse effect on any permit, license,
certification, registration, approval, consent, or franchise of the Company.
(ix) The Registration Statement, each Preliminary
Prospectus and the Prospectus and any post-effective amendments or supplements
thereto (other than the financial statements and notes thereto and other
financial, numerical, accounting and statistical data included therein or
omitted therefrom, as to which no opinion need be rendered) comply as to form in
all material respects with the requirements of the Act and the Regulations. The
Securities and all other securities issued or issuable by the Company conform in
all material respects to the description thereof contained in the Registration
Statement and the Prospectus. All statements in the Prospectus (other than those
set forth under the caption "Underwriting, "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
120243.3
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Trading and Securities of Issuer Underwritten by Underwriter") have been
reviewed by such counsel and, insofar as they refer to statements of law,
descriptions of statutes, licenses, rules or regulations, or legal conclusions
are correct in all material respects. Each statute or regulation or legal or
governmental proceeding required to be described in the Prospectus is not
described as required, and all contracts, instruments or other documents known
to such counsel, of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement are so described or filed as required.
(x) Such counsel has participated in one or more
personal or telephonic conferences with officers and other representatives of
the Company, representatives of the independent public accountants for the
Company, the Representative and/or counsel to the Underwriter at which the
contents of the Registration Statement and Prospectus and related matters were
discussed and, although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and Prospectus (except as otherwise
expressly set forth in its opinion), on the basis of the foregoing (relying as
to the factual matters upon the statements of officers and other representatives
of the Company and State officials) no facts have come to the attention of such
counsel that caused it to believe that the Registration Statement (other than
the financial statements and notes thereto and other financial, numerical,
statistical and accounting data included therein, or omitted therefrom, as to
which no opinion is requested or need be rendered) as amended or supplemented,
at the time such Registration Statement became effective, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading (other
than information omitted therefrom in reliance on Rule 430A under the Act), or
the Prospectus (other than the financial statements and notes thereto and other
financial, numerical, statistical and accounting data included therein, or
omitted therefrom, as to which no opinion is requested or need be rendered) as
amended or supplemented, as of its date, contained an untrue statement of
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(xi) The Registration Statement is effective
under the Act and to such counsel's knowledge no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted, are pending or are threatened under the
Act or applicable state securities laws.
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(xii) To such counsel's knowledge, there is no
claim or action by any person pertaining to, or proceeding, pending or
threatened, which challenges the exclusive rights of the Company with respect to
any Intangibles used in the conduct of its business (including, but not limited
to, any such licenses or rights described in the Prospectus as being owned or
possessed by the Company).
(xiii) To such Counsel's knowledge, except as
described in the Prospectus, no default exists in the due performance and
observance of any term, covenant or condition of any material license, contract,
indenture, mortgage, deed of trust, note, loan or credit agreement, or any other
material agreement, instrument or other document evidencing an obligation for
borrowed money, or any other material agreement, instrument or other document to
which the Company is a party or by which the Company may be bound or to which
any of the properties or assets of the Company is subject. To such Counsel's
knowledge, the Company is not in violation of any term or provision of its
Certificate of Incorporation or By-Laws, or, to the best of such counsel's
knowledge, any material franchise, license, permit, applicable law, rule,
regulation, judgment or decree of any governmental agency or court, domestic or
foreign, having jurisdiction over the Company or any of its properties or
business, except as described in the Prospectus.
(xiv) To such counsel's knowledge, except as set
forth in the prospectus, there are no claims, payments, issuances, arrangements
or understandings for services in the nature of a finder's or origination fee
with respect to the sale of the Securities hereunder or financial consulting
arrangements or any other arrangements, agreements, understandings, payments or
issuances that may affect the Underwriter's compensation, as determined by the
NASD, in connection with the order and sale of the Shares.
(xv) To such counsel's knowledge, except as
described in the Prospectus, the Company does not own any interest in any
corporation, partnership, joint venture, trust or other business entity.
(xvi) To such counsel's knowledge, except as set
forth in the Prospectus, there is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending, or
threatened against the Company, which would have a material adverse effect on
the Company.
5.2.2 Option Closing Date Opinion of Counsel. On the Option
Closing Date, if any, the Representative shall have received the opinion of
Certilman Balin Adler & Hyman, LLP, counsel to the Company, and dated the Option
Closing Date, addressed to the Underwriter and in form and substance reasonably
satisfactory to
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Olshan Grundman Frome & Rosenzweig LLP, counsel to the Underwriter, confirming,
as of the Option Closing Date, the statements made by such counsel to the
Company in their opinion delivered on the Closing Date.
5.2.3 Reliance. In rendering such opinions, such
counsel may rely (i) as to matters involving the application of laws other than
the laws of the United States, the General Corporation Law of the States of
Delaware and New York and jurisdictions in which they are admitted, to the
extent such counsel deems proper and to the extent specified in such opinion,
if at all, upon an opinion or opinions (in form and substance satisfactory to
Underwriter's counsel) of other counsel reasonably acceptable to Underwriter's
counsel, familiar with the applicable laws, (ii) as to matters of fact, to the
extent they deem proper, (A) on certificates or other written statements of
responsible officers of the Company and (B) on certificates or other written
statements of officers or departments of various jurisdictions having custody
of documents respecting the corporate existence or good standing of the
Company, provided that copies of any such statements or certificates shall
be delivered to Underwriter's counsel, (iii) as to matters described in the
Prospectus under "Risk Factors - Uncertainty of Protection of Patents and
Proprietary Rights" and "Business-Patents and Proprietary Rights", on advice of
Thompson & Howison, LLP (which has been re-confirmed as of the opinion date) and
(iv) as to matter described in the Prospectus under "Risk Factors - Uncertainty
of Third Party Reimbursement and Product Pricing", "Risk Factors - Consumer
Loans and Governmental Regulation", "Business-Governmental Regulations" and
"Business-Third Party Reimbursement", on advice of Arent & Fox (which has been
re-confirmed as of the opinion date). Such opinions of counsel shall include a
statement to the effect that they may be relied upon by the Underwriter and
counsel for the Underwriter. Such opinion may assume the due authorization,
execution and delivery of all documentation referred to therein by the parties
thereto other than the Company.
5.2.4 Subsidiaries. In the event that the Company has one or
more subsidiaries (the "subsidiaries"), the opinions referred to in this Section
5.2 shall also be given with respect to each subsidiary (except as the context
otherwise requires), as if the provisions calling for such opinions made
specific reference to each subsidiary each time the term "Company" was used.
5.3 Cold Comfort Letter. At the time this Agreement is executed, and at
each of the Closing Date and any Option Closing Date, you shall have received a
letter, addressed to the Underwriter and in form and substance satisfactory in
all respects (including the non-material nature of the changes or decreases, if
any, referred to in clause (iii) below) to you and to Olshan Grundman Frome &
Rosenzweig LLP, counsel to the Underwriter, from Moore Stephens, P.C., dated,
respectively, as of the date of this
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Agreement, as of the Closing Date and as of any Option Closing Date:
(i) Confirming that they are independent
accountants with respect to the Company and its subsidiaries (collectively, the
"Entities") within the meaning of the Act and the applicable Regulations;
(ii) Stating that in their opinion the financial
statements of the Entities (including the unaudited financial information for
the Company) included in the Registration Statement and Prospectus comply as to
form in all material respects with the applicable accounting requirements of the
Act and the Regulations;
(iii) Stating that, based on performance of the
procedures specified by the American Institute of Certified Public Accountants
for a review of the latest available unaudited interim financial statements of
the Entities (as defined in SAS No. 71 Interim Financial Interpretation) with an
indication of the date of such unaudited financial statements, a reading of the
latest available minutes of the stockholders and Boards of Directors of the
Entities and the various committees of the Boards of Directors of the Entities,
consultations with officers and other employees of the Entities responsible for
financial and accounting matters and other specified procedures and inquiries,
nothing has come to their attention which would lead them to believe that (a)
the unaudited financial statements of the Entities, included in the Registration
Statement do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Regulations or are not fairly
presented in conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the audited financial statements
of the Company included in the Registration Statement, (b) at a date not later
than five (5) days prior to the Effective Date, Closing Date or any Option
Closing Date, as the case may be, there was any change in the capital stock or
long-term debt of the Company, or any decrease in the stockholders' equity of
the Company as compared with amounts shown in the most recent balance sheet
included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any decrease,
setting forth the amount of such decrease, and (c) during the period from
January 1, 1996 to a specified date not later than five (5) days prior to the
Effective Date, Closing Date or Option Closing Date, if any, as the case may be,
there was any decrease in revenues or net earnings (or increase in net loss per
share) of the Company or net earnings (or increase in net loss per share) of the
Company per share of its common stock, in each case as compared with the
corresponding period in the preceding year and as compared with the
corresponding period in the preceding quarter, other than as set forth in or
contemplated by the Registration Statement, or, if there was any such decrease
(or increase, as the case may be), setting forth the amount of such decrease;
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(iv) Stating that they have compared specific
dollar amounts, numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the Entities set forth
in the Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Entities, with the results
obtained from the application of specified readings, inquiries and other
appropriate procedures (which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set forth in the letter
and found them to be in agreement;
(v) Stating that they have not (and are not
aware) during the immediately preceding five year period brought to the
attention of the management of any of the Entities any reportable condition with
respect to the Company's internal controls related to internal structure, design
or operation, as defined in the Statement on auditing Standards No. 60 --
"Communication of Internal Control Structure Related Matters Noted in an Audit;"
and
(vi) Statements as to such other matters incident
to the transactions contemplated hereby as you may reasonably
request.
5.4 Certificates.
5.4.1 Officers' Certificates. At each of the Closing Date and
any Option Closing Date the Representative shall have received a certificate of
the Company signed by its respective Chief Executive Officer and Principal
Accounting Officer, dated the Closing Date or any Option Closing Date, as the
case may be, respectively, to the effect that the Company has performed all
covenants and complied with all conditions required by this Agreement to be
performed or complied with by the Company prior to and as of the Closing Date,
or any Option Closing Date, as the case may be, and that the conditions set
forth in Section 5.5 hereof have been satisfied as of such date and that, as of
the Closing Date and any Option Closing Date, as the case may be, the
representations and warranties of the Company set forth in Section 2 hereof are
true and correct. In addition, the Representative shall have received such other
and further certificates of officers of the Company, and such other evidence
including certified copies of applicable documentation, as the Representative
may reasonably request.
5.4.2 Secretary's Certificate. At each of the Closing Date and
the Option Closing Date, if any, the Representative shall have received a
certificate of the Company signed by the Secretary of the Company, dated the
Closing Date or any Option Closing Date, as the case may be, respectively,
certifying (i) that the Certificate of Incorporation and By-Laws,
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as amended, of the Company are true and complete, have not been modified and are
in full force and effect, (ii) that the resolutions relating to the offering
contemplated by this Agreement are in full force and effect and have not been
modified, (iii) all correspondence between the Company or its counsel and the
Commission, (iv) all correspondence between the Company or its counsel and
Nasdaq and (v) as to the incumbency of the officers of the Company. The
documents referred to in such certificate shall be attached to such certificate.
5.5 No Material Changes. Prior to and on each of the Closing Date and
any Option Closing Date, (i) there shall have been no material adverse change or
development involving a prospective material change in the condition or
prospects or the business activities, financial or otherwise, of the Company
from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus, (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the Company
from the latest date as of which the financial condition of the Company is set
forth in the Registration Statement and the Prospectus which is materially
adverse to the Company, (iii) the Company shall not be in default under any
provision of any instrument relating to any outstanding indebtedness which
default would have a material adverse effect on the Company, (iv) no material
amount of the assets of the Company shall have been pledged or mortgaged, except
as set forth in the Registration Statement and Prospectus, (v) no action, suit
or proceeding, at law or in equity, shall be pending or threatened against the
Company or affecting any of its property or business before or by any court or
federal or state commission, board or other administrative agency wherein an
unfavorable decision, ruling or finding may materially adversely affect the
business, operations, prospects or financial condition or income of the Company,
except as set forth in the Registration Statement and Prospectus, (vi) no stop
order shall have been issued under the Act and no proceedings therefor shall
have been initiated or threatened by the Commission, and (vii) the Registration
Statement and the Prospectus and any amendments or supplements thereto shall
contain all material statements that are required to be stated therein in
accordance with the Act and the Regulations and shall conform in all material
respects to the requirements of the Act and the Regulations, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto shall contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
5.6 Delivery of Representative's Warrants. The Company shall have
delivered to the Representative executed copies of the Representative's
Warrants, registered in such authorized names and in such authorized
denominations as the Representative shall have requested.
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5.7 Opinion of Counsel for the Underwriter. All proceedings taken in
connection with the authorization, issuance or sale of the Securities as herein
contemplated shall be reasonably satisfactory in form and substance to you and
to Olshan Grundman Frome & Rosenzweig LLP, counsel to the Underwriter, and you
shall have received from such counsel a favorable opinion, dated the Closing
Date and any Option Closing Date, with respect to such of these proceedings as
you may reasonably require. On or prior to the Effective Date, the Closing Date
and any Option Closing Date, as the case may be, counsel for the Underwriter
shall have been furnished with such documents, certificates and opinions as they
may reasonably require for the purpose of enabling them to review or pass upon
the matters referred to in this Section 5.7, or in order to evidence the
accuracy, completeness or satisfaction of any of the representations, warranties
or conditions herein contained.
5.8 Conditions to Obligation of the Company. The obligation of the
Company to deliver the shares of Commmon Stock to the Underwriter hereunder
shall be subject to the conditions that the Registration Statement shall have
become effective not later than 5:00 p.m., New York City time, on the next day
following the date of this Agreement, or such other time and date, not later
than 5:00 p.m., New York City time, on the seventh day thereafter, as may be
approved by the Company, and no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for that purpose
shall have been instituted or shall be pending or contemplated by the Commission
at the Closing Date.
In case of any of the conditions specified in this Section 5.8 shall
not be fulfilled, this Agreement may be terminated by the Company by giving
notice to you. Any such termination shall be without liability of the
Underwriter to the Company; provided, however, that in event of any such
termination the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company under this Agreement and shall be responsible for such costs and
expenses in accordance with Section 4.9.2.
6. Indemnification.
6.1 Indemnification of the Underwriter.
6.1.1 By the Company. Subject to the conditions set forth
below, the Company agrees to indemnify and hold harmless the Underwriter, its
directors, officers and employees and each person, if any, who controls the
Underwriter (a "controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, against any and all loss, liability,
claim, damage and expense whatsoever (including but not limited to any and all
legal or other expenses reasonably incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever) to which they or any of them
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may become subject under the Act, the Exchange Act or any other statute or at
common law or otherwise or under the laws of foreign countries, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in (i) the Registration Statement, any Preliminary Prospectus or
the Prospectus (as from time to time each may be amended or supplemented); (ii)
in any post-effective amendment or amendments or any new registration statement
and prospectus in which is included securities of the Company issued or issuable
upon exercise of the Representatives' Warrants; or (iii) any application or
other document or written communication (in this Section 6 collectively called
"application") executed by the Company or based upon written information
furnished by the Company in any jurisdiction in order to qualify the Securities
under the securities laws thereof or filed with the Commission, any state
securities commission or agency, or Nasdaq or any securities exchange; or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, unless such statement
or omission was made in reliance upon and in conformity with written information
furnished to the Company with respect to any of the Underwriter by or on behalf
of such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or in any application, as the case may be; provided, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of the Representative, or any person controlling the
Representative, if a copy of the Prospectus (as then amended or supplemented if
the Company shall have furnished any amendments or supplements thereto) was not
set or given by or on behalf of the Representative to the person asserting such
losses, claims, damages or liabilities, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the Shares to
such person, and if the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such loss, claim, damage or liability. The
Company agrees promptly to notify the Representative of the commencement of any
litigation or proceedings against the Company or any of their respective
officers, directors or controlling persons in connection with the issue and sale
of the Securities or in connection with the Registration Statement or the
Prospectus.
6.1.2 Procedure. If any action is brought against the
Underwriter or any controlling person in respect of which indemnity may be
sought against the Company pursuant to Section 6.1.1, the Underwriter shall
promptly notify the Company in writing of the institution of such action, but
the failure to so notify the Company shall not relieve them from any liability
they may have hereunder, unless such failure results in the forfeiture by the
Company of material substantive rights and defenses, and the Company shall
assume the defense of such action, including the
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employment and fees of counsel (subject to the reasonable approval of such
Underwriter) and payment of actual expenses incurred in connection therewith.
Such Underwriter or controlling person shall have the right to employ its or
their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such Underwriter or such controlling person unless
(i) the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, (ii) the Company shall
not have employed counsel to have charge of the defense of such action, or (iii)
such indemnified party or parties shall have reasonably concluded that there may
be defenses available to it or them which are different from or additional to
those available to the Company (in which case the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events the fees and expenses of not more than one
additional firm of attorneys selected by such Underwriter and/or controlling
person shall be borne by the Company. Notwithstanding anything to the contrary
contained herein, if an Underwriter or controlling person shall assume the
defense of such action as provided above, the Company shall have the right to
approve the terms of any settlement of such action which approval shall not be
unreasonably withheld.
6.2 Indemnification of the Company. The Underwriter agrees to indemnify
and hold harmless the Company, its directors, officers, agents, employees and
controlling persons, against any and all loss, liability, claim, damage and
expense described in the foregoing indemnity from the Company to the Underwriter
set forth in Section 6.1.1, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions directly
relating to the transactions effected by the Underwriter in connection with this
offering, made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any amendment or supplement thereto, or in any application in
reliance upon, and in strict conformity with, written information furnished to
the Company with respect to an Underwriter by such Underwriter expressly for use
in such Preliminary Prospectus, the Registration Statement or the Prospectus or
any amendment or supplement thereto or in any such application. In case any
action shall be brought against the Company based on any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment or supplement thereto
or any application, and in respect of which indemnity may be sought against the
Underwriter, such Underwriter shall have the rights and duties given to the
Company, and the Company shall have the rights and duties given to the
Underwriter, by the provisions of Section 6.1.2.
6.3 Contribution.
6.3.1 Contribution Rights. In order to provide for
just and equitable contribution under the Act in any case in which (i) any
person entitled to indemnification under this Section 6
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makes claim for indemnification pursuant hereto but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 6 provides for indemnification in such case, or (ii)
contribution under the Act, the Exchange Act or otherwise may be required on the
part of any such person in circumstances for which indemnification is provided
under this Section 6, then, and in each such case, each applicable indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
liabilities, claims, damages and expenses of the nature contemplated by said
indemnity agreement (i) in such proportion as is appropriate to reflect the
relative benefits received, or sought to be received, by the Company on the one
hand and the Underwriter on the other hand from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriter on the other hand; provided,
however, that, no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 6.3, the Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the sum of (a) the amount paid by such Underwriter to the Company
as its purchase price for such Shares plus (b) the amount of any damages which
such Underwriter has otherwise been required to pay in respect of such losses,
liabilities, claims, damages and expenses. For purposes of this Section 6, each
respective director, officer and employee of any Underwriter, and each
respective person, if any, who controls an Underwriter within the meaning of
Section 15 of the Act shall have the same rights to contribution as such
Underwriter.
6.3.2 Contribution Procedure. Within fifteen (15) days after
receipt by any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim for
contribution in respect thereof is to be made against another party (the
"contributing party"), notify the contributing party of the commencement
thereof, but the omission to so notify the contributing party will not relieve
it from any liability which it may have to any other party other than for
contribution hereunder. In case any such action, suit or proceeding is brought
against any party, and such party notifies a contributing party or its
representative of the commencement thereof within the aforesaid (15) fifteen
days, the contributing party will be entitled to
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participate therein with the notifying party and any other contributing party
similarly notified. Any such contributing party shall not be liable to any party
seeking contribution on account of any settlement of any claim, action or
proceeding effected by such party seeking contribution without the written
consent of such contributing party. The contribution provisions contained in
this Section 6 are intended to supersede, to the extent permitted by law, any
right to contribution under the Act, the Exchange Act or otherwise available.
7. Covenants of the Representative. The Representative, covenants and
agrees with the Company as follows:
7.1 Compliance with NASD Rules of Fair Practice. The
representative hereby agrees to comply with the National Association of
Securities Dealers Regulation, Inc.'s Rules of Fair Practice.
7.2 Waiver of "Lock-Up". The Representative shall not consummate any
transactions with the Company's bridge lender described in the Prospectus, or
waive the "lock-up" applicable to such bridge lender's securities until the
Company has complied with its undertaking to the Registration Statement to file
"sticker" supplements to the Prospectus pursuant to Rule 424(c) of the Act, or
to file a post-effective amendment to the to Registration Statement.
8. Representations and Agreements to Survive Delivery. Except as the context
otherwise requires, all representations, warranties and agreements contained in
this Agreement shall be deemed to be representations, warranties and agreements
at the Closing Date and any Option Closing Date, and such representations,
warranties and agreements of the Underwriter and the Company, including the
indemnity agreements contained in Section 6 hereof, shall remain operative and
in full force and effect regardless of any investigation made by or on behalf of
any of the Underwriter, the Company or any controlling person of any thereof,
and shall survive termination of this Agreement or the issuance and delivery of
the Shares to the Underwriter.
9. Effective Date of This Agreement and Termination Thereof.
9.1 Effective Date. This Agreement shall become effective upon its
execution, except that you may, at your option, delay its effectiveness until
11:00 A.M., New York time, on the first full business day following the
Effective Date or at the time of the initial public offering of the Shares,
whichever is earlier. The time of the initial public offering, for the purpose
of this Section 9 shall mean the time, after the Registration Statement becomes
effective, of the release by you for publication of the first newspaper
advertisement which is subsequently published relating to the Shares or the
time, after the Registration
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Statement becomes effective, when the Shares are first released by you for
offering to the public by the Underwriter or dealers by letter or telegram,
whichever shall first occur. You may prevent this Agreement from becoming
effective without liability to any other party, except as noted below, by giving
the notice indicated below in this Section 9 before the time this Agreement
becomes effective. You agree to give the undersigned notice of the commencement
of the offering described herein.
9.2 Termination. You shall have the right to terminate this Agreement
at any time prior to the Closing Date, (i) if any domestic or international
event or act or occurrence has materially disrupted, or in your opinion will in
the immediate future materially disrupt, general securities markets in the
United States; (ii) if trading on the New York Stock Exchange or the American
Stock Exchange, or in the over-the-counter market shall have been suspended, or
minimum or maximum prices for trading shall have been fixed, or maximum ranges
for prices for securities shall have been required in the over-the-counter
market by the NASD or by order of the Commission or any other government
authority having jurisdiction, (iii) if the United States shall have become
involved in a war or material hostilities, (iv) if a banking moratorium has been
declared by a New York State or federal authority, (v) if a moratorium on
foreign exchange trading has been declared which materially adversely affects
the United States securities market, (vi) if the Company shall have sustained a
material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage
or other calamity or malicious act which, whether or not such loss shall have
been insured, will, in your opinion, make it inadvisable to proceed with the
delivery of the Shares, (vii) if Steve F. Brandon or Thomas F. Reed shall no
longer serve or be available to serve the Company in their respective
capacities, (viii) if the Company has breached any of its representations,
warranties or obligations hereunder, or failed to expeditiously proceed with the
offering or to cooperate with you in requesting effectiveness of the
Registration Statement at such time as you may deem appropriate, or (ix) if the
Underwriter shall have become aware after the date hereof of such a material
adverse change in the condition (financial or otherwise), business or prospects
of the Company, or such material adverse change in general market conditions as
in your judgment would make it impracticable to proceed with the offering, sale
and/or delivery of the Shares or to enforce contracts made by the Underwriter
for the sale of the Shares.
9.3 Notice. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
9.4 Expenses. In the event that this Agreement shall not be
carried out for any reason whatsoever within the time specified
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herein or any extensions thereof pursuant to the terms herein, the obligations
of the Company to pay the expenses related to the transactions contemplated
herein shall be governed by Section 4.9 hereof.
9.5 Indemnification. Notwithstanding any contrary provision contained
in this Agreement, any election hereunder or any termination of this Agreement,
and whether or not this Agreement is otherwise carried out, the provisions of
Section 6 shall not be in any way affected by such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
10. Miscellaneous.
10.1 Notices. All communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be mailed,
delivered or telecopied and confirmed:
If to the Underwriter or the Representative:
Sterling Foster & Co., Inc.
125 Baylis Road
Melville, New York 11747
Telecopier: (516) 843-8103
Attention: Sherman Drusin
Copy to: Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Telecopier: (212) 755-1467
Attention: Ilan K. Reich, Esq.
If to the Company:
Niche Pharmaceuticals, Inc.
200 North Oak
P.O. Box 449
Roanoke, Texas 76262
Telecopier: (817) 491-2770
Attention: Steve F. Brandon
Copy to: Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, New York 10017
Telecopier: (516) 296-7111
Attention: Fred Skolnik, Esq.
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10.2 Headings. The headings contained herein are for the sole purpose
of convenience of reference, and shall not in any way limit or affect the
meaning or interpretation of any of the terms or provisions of this Agreement.
10.3 Amendment. This Agreement may only be amended by a
written instrument executed by each of the parties hereto.
10.4 Entire Agreement. This Agreement (together with the other
agreements and documents being delivered pursuant to or in connection with this
Agreement) constitute the entire agreement of the parties hereto with respect to
the subject matter hereof, and supersede all prior agreements and understandings
of the parties, oral and written, with respect to the subject matter hereof.
10.5 Binding Effect. This Agreement shall inure solely to the benefit
of and shall be binding upon the Underwriter, the Company and the controlling
persons, directors and officers referred to in Section 6 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained.
10.6 Governing Law; Jurisdiction. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of New York,
without giving effect to conflict of laws rules of such State. Any action,
proceeding or claim against any of the parties hereto arising out of or relating
in any way to this Agreement shall be brought and enforced in the courts of the
State of New York or the federal court for the Southern District of New York,
and the parties hereto irrevocably submit to such jurisdiction, which
jurisdiction shall be exclusive. The parties hereto hereby waive any objection
to such exclusive jurisdiction and that such courts represent an inconvenient
forum. Except as otherwise provided in this Agreement, the prevailing party(ies)
in any such action shall be entitled to recover from the other party(ies) all of
its or their reasonable attorneys' fees and expenses relating to such action or
proceeding and/or incurred in connection with the preparation therefor.
10.7 Execution in Counterparts. This Agreement may be executed in one
or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement, and shall become
effective when one or more counterparts has been signed by each of the parties
hereto and delivered to each of the other parties hereto.
10.8 Waiver, Etc. The failure of any of the parties hereto to
at any time enforce any of the provisions of this Agreement shall not be deemed
or construed to be a waiver of any such provision,
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nor to in any way affect the validity of this Agreement or any provision hereof
or the right of any of the parties hereto to thereafter enforce each and every
provision of this Agreement. No waiver of any breach, non-compliance or
non-fulfillment of any of the provisions of this Agreement shall be effective
unless set forth in a written instrument executed by the party or parties
against whom or which enforcement of such waiver is sought; and no waiver of any
such breach, non-compliance or non-fulfillment shall be construed or deemed to
be a waiver of any other or subsequent breach, non-compliance or
non-fulfillment.
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If the foregoing correctly sets forth the understanding
between the Underwriter and Company, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement between us.
Very truly yours,
NICHE PHARMACEUTICALS, INC.
By:
Name:
Title:
Accepted as of the date first above written.
Melville, New York
STERLING FOSTER & CO., INC.
By:
Name:
Title:
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APPENDIX I
[Insiders]
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APPENDIX II
[Non-Insider Shareholders]
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page
1. Purchase and Sale of Securities..........................................................................1
1.1 Firm Shares.....................................................................................1
1.1.1 Purchase of Firm Shares.......................................................1
1.1.2 Delivery and Payment..........................................................1
1.2 Overallotment Option............................................................................2
1.2.1 Grant of Option...............................................................2
1.2.2 Exercise of Option............................................................2
1.2.3 Delivery and Payment..........................................................2
1.3 Representative's Warrants.......................................................................3
1.3.1 Purchase and Sale.............................................................3
1.3.2 Delivery and Payment..........................................................3
2. Representations and Warranties of the Company............................................................3
2.1 Filings under Securities Laws...................................................................3
2.1.1 Pursuant to the Act...........................................................3
2.1.2 Pursuant to the Exchange Act..................................................4
2.2 No Stop or Other Orders.........................................................................4
2.3 Disclosures in Registration Statement...........................................................4
2.3.1 Representation as to Contents.................................................4
2.3.2 Disclosure Regarding Contracts................................................5
2.3.3 Prior Securities Transactions.................................................5
2.4 Changes After Dates in Registration Statement...................................................5
2.4.1 No Material Adverse Change....................................................5
2.4.2 Recent Securities Transactions, Etc...........................................6
2.5 Independent Accountants.........................................................................6
2.6 Financial Statements............................................................................6
2.7 Capitalization..................................................................................6
2.8 Representations Regarding Securities............................................................7
2.8.1 Outstanding Securities........................................................7
2.8.2 Securities Sold Hereunder.....................................................7
2.9 No Registration Rights..........................................................................8
2.10 Representations Regarding This Agreement........................................................8
2.11 No Improper Payments............................................................................9
2.12 No Defaults; Violations.........................................................................9
2.13 Corporate Power; Licenses; Consents.............................................................9
2.13.1 Conduct of Business...........................................................9
2.13.2 Required Consents............................................................10
2.14 Title to Property; Insurance...................................................................10
2.15 Litigation.....................................................................................10
2.16 Organization; Good Standing....................................................................10
2.17 Taxes..........................................................................................11
2.18 Transactions Affecting Disclosure to NASD......................................................11
2.18.1 Finders' Fees................................................................11
2.18.2 Payments Within Twelve Months................................................11
2.18.3 Use of Proceeds..............................................................12
2.18.4 Insiders' NASD Affiliation...................................................12
2.19 Internal Accounting Controls...................................................................12
2.20 Nasdaq Listing....................................................................................12
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Page
2.21 Intangibles....................................................................................12
2.22 Employee Matters...............................................................................13
2.22.1 Relations With Employees.....................................................13
2.22.2 Employee Benefit Plans.......................................................13
2.23 Investment Company Representations.............................................................14
2.24 Officer's Certificate..........................................................................14
2.25 Lock-Up Agreements With Insiders...............................................................14
2.26 No Stabilization or Manipulation...............................................................15
2.27 Subsidiaries...................................................................................15
2.28 Other Agreements...............................................................................15
3. Representative's Representations and Waranties. . . . . . 15
3.1 Organization: Good Standing. . . . . . . . . . . . . 15
3.2 Corporate Power; Licenses; Consents. . . . . . . . . 15
3.3 Binding Obligation; Enforceability. . . . . . . . . . 15
4. Covenants of the Company................................................................................16
4.1 Amendments to Registration Statement...........................................................16
4.2 Federal Securities Laws........................................................................16
4.2.1 Compliance...................................................................16
4.2.2 Filing of Final Prospectus...................................................17
4.2.3 Exchange Act Registration....................................................17
4.2.4 Financial Printer............................................................17
4.3 Blue Sky Filings...............................................................................17
4.4 Delivery of Filings to Underwriter.............................................................17
4.5 Effectiveness and Events Requiring Notice to the
Representative.................................................................................18
4.6 Unaudited Financials...........................................................................18
4.7 Reports to the Underwriters....................................................................18
4.7.1 Periodic Reports, Etc........................................................18
4.7.2 Transfer Sheets..............................................................19
4.8 Delivery of Representative's Warrants..........................................................19
4.9 Payment of Expenses............................................................................19
4.9.1 General Expenses.............................................................19
4.9.2 Representatives' Expenses....................................................20
4.10 Application of Net Proceeds....................................................................20
4.11 Delivery of Earnings Statements to Security
Holders........................................................................................20
4.12 Reservation of Shares..........................................................................21
4.13 Board of Directors.............................................................................21
4.14 Press Releases.................................................................................21
4.15 Nasdaq Maintenance.............................................................................21
4.16 Key Person Life Insurance......................................................................21
4.17 Disqualification of Form S-1 (or other appropriate
form)..........................................................................................22
4.18 Transfer Agent.................................................................................22
4.19 Accountants....................................................................................22
4.20 Professional Services..........................................................................22
4.21 Sale of Securities.............................................................................22
4.22 Exercise Price of Options/Warrants.............................................................22
120243.3
(ii)
<PAGE>
Page
4.23 Insiders Sales.................................................................................23
5. Conditions of the Underwriter's Obligations.............................................................24
5.1 Regulatory Matters.............................................................................24
5.1.1 Effectiveness of Registration Statement......................................24
5.1.2 NASD Clearance...............................................................24
5.1.3 No Blue Sky Stop Orders......................................................24
5.2 Counsel Matters................................................................................24
5.2.1 Closing Date Opinion of Counsel..............................................24
5.2.2 Option Closing Date Opinion of Counsel.......................................30
5.2.3 Reliance.....................................................................30
5.2.4 Subsidiaries.................................................................31
5.3 Cold Comfort Letter............................................................................31
5.4 Certificates...................................................................................32
5.4.1 Officers' Certificates.......................................................32
5.4.2 Secretary's Certificate......................................................33
5.5 No Material Changes............................................................................33
5.6 Delivery of Representative's Warrants..........................................................34
5.7 Opinion of Counsel for the Underwriter.........................................................34
5.8 Conditions to Obligation of the Company........................................................34
6. Indemnification.........................................................................................35
6.1 Indemnification of the Underwriter.............................................................35
6.1.1 By the Company...............................................................35
6.1.2 Procedure....................................................................36
6.2 Indemnification of the Company.................................................................36
6.3 Contribution...................................................................................37
6.3.1 Contribution Rights..........................................................37
6.3.2 Contribution Procedure.......................................................38
7. Covenants of the Representative.........................................................................38
7.1 Compliance with NASD Rules of Fair Practice...........................................38
7.2 Waiver of "Lock-Up" . . . . . . . . . . . . . . .
. 38
8. Representations and Agreements to Survive Delivery......................................................38
9. Effective Date of This Agreement and Termination
Thereof.................................................................................................39
9.1 Effective Date.................................................................................39
9.2 Termination....................................................................................39
9.3 Notice.........................................................................................40
9.4 Expenses.......................................................................................40
9.5 Indemnification................................................................................40
10. Miscellaneous...........................................................................................41
10.1 Notices........................................................................................41
10.2 Headings.......................................................................................41
10.3 Amendment......................................................................................41
120243.3
(iii)
<PAGE>
Page
10.4 Entire Agreement...............................................................................41
10.5 Binding Effect.................................................................................42
10.6 Governing Law; Jurisdiction....................................................................42
10.7 Execution in Counterparts......................................................................42
10.8 Waiver, Etc....................................................................................42
120243.3
(iv)
<PAGE>
INDEX OF DEFINITIONS
Term Section
Act...........................................................................................................2.1.1
Application...................................................................................................5.1.1
Asset Purchase Agreement.......................................................................................2.28
Closing Date..................................................................................................1.1.2
Code.........................................................................................................2.22.2
Commission....................................................................................................2.1.1
Common Stock....................................................................................................1.1
Company......................................................................................Introductory Paragraph
Controlling Person............................................................................................6.1.1
Control Persons................................................................................................2.25
Effective Date................................................................................................1.1.2
ERISA........................................................................................................2.22.2
ERISA Plan...................................................................................................2.22.2
Exchange Act..................................................................................................2.1.2
Firm Shares...................................................................................................1.1.1
Insiders.......................................................................................................2.25
Intangibles....................................................................................................2.21
Merger.........................................................................................................2.27
NASD..........................................................................................................1.1.1
Non-Insider Shareholders.......................................................................................2.25
Nasdaq.........................................................................................................2.20
Option Closing Date...........................................................................................1.2.2
Option Shares.................................................................................................1.2.1
Overallotment Option..........................................................................................1.2.1
Preferred Stock.................................................................................................2.7
Preliminary Prospectus........................................................................................2.1.1
Prospectus....................................................................................................2.1.1
Registration Statement........................................................................................2.1.1
Regulations...................................................................................................2.1.1
Representative...............................................................................Introductory Paragraph
Representative's Securities...................................................................................1.3.1
Representative's Warrants.....................................................................................1.3.1
Restrictions...................................................................................................2.14
Returns........................................................................................................2.17
Securities....................................................................................................1.3.1
Shares........................................................................................................1.2.1
Subsidiaries...................................................................................................2.27
Taxes..........................................................................................................2.17
Unaudited Financials............................................................................................4.6
Underwriter..................................................................................Introductory Paragraph
You..........................................................................................Introductory Paragraph
120243.3
(v)
<PAGE>
</TABLE>
Financial Consulting Agreement
January ____, 1997
CONFIDENTIAL
Niche Pharmaceuticals, Inc.
200 North Oak
P.O. Box 449
Roanoke, Texas 76262
Attention: Stephen F. Brandon
Gentlemen:
This will confirm the engagement of Sterling Foster & Company, Inc.
("Sterling Foster") as financial advisor to Niche Pharmaceuticals (the
"Company") to perform such general financial consulting services as Sterling
Foster and the Company may agree upon from time to time. Sterling Foster's
engagement hereunder shall extend for three years from the Effective Date of the
Underwriting Agreement between Sterling Foster and the Company (the
"Underwriting Agreement"), and may be extended by mutual agreement. The
provisions of this Agreement relating to the payment of fees and expenses and
indemnification and contribution will survive any termination of this Agreement.
Capitalized terms used herein which are not defined herein have those
meanings ascribed to them in the Underwriting Agreement.
As compensation for Sterling Foster's services, the Company will pay
Sterling Foster a monthly fee of $2,778.78 payable in its entirety on the
Closing Date. Fees payable to Sterling Foster for additional services will be
mutually agreed upon, and where appropriate, will be the subject of separate
engagement letters.
The Company will furnish Sterling Foster with such information as
Sterling Foster believes appropriate to its assignment (all such information so
furnished being the "Information"). The Company recognizes and confirms that
Sterling Foster (a) will use and rely primarily on the
<PAGE>
Information and on information available from generally recognized public
sources in performing the services contemplated by this Agreement without having
independently verified the same, (b) does not assume responsibility for the
accuracy or completeness of the Information and such other information and (c)
will not make any appraisal of any assets of the Company. To the best of the
Company's knowledge, the Information to be furnished by the Company when
delivered, will be true and correct in all material respects and will not
contain any material misstatement of fact or omit to state any material fact
necessary to make the statements contained therein not misleading. The Company
will promptly notify Sterling Foster if it learns of any material inaccuracy or
misstatement in, or material omission from, any Information theretofore
delivered to Sterling Foster.
It is understood that Sterling Foster is being engaged hereunder solely
to provide the services described above to the Company and that Sterling Foster
is not acting as an agent or fiduciary of, and shall have no duties or liability
to, the equity holders of the Company or any other third party in connection
with its engagement hereunder, all of which are hereby expressly waived.
In consideration of Sterling Foster's agreement to engage in financial
consulting services for the Company, the Company agrees to indemnify and hold
harmless Sterling Foster and its employees and affiliates from any claims,
losses, damages, expenses or liabilities related to or arising out of Sterling
Foster's performance of services in connection with this Agreement. This
obligation requires that (i) Sterling Foster give prompt written notice to the
Company of any such claim, action, or demand, (ii) Sterling Foster allows the
Company to control the defense and related settlement negotiations and (iii)
Foster Sterling fully assist, at the Company's expense, in the defense. The
Company will not, however, be responsible for any claims, losses, damages,
expenses, or liabilities that result from gross negligence or willful misconduct
by Sterling Foster or any of its affiliates. Should any legal dispute arise
between the Company and Sterling Foster, the prevailing party shall be entitled
to reimbursement of reasonable attorney fees.
THIS AGREEMENT WILL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY IN SUCH STATE.
EACH OF THE COMPANY AND STERLING FOSTER AGREE THAT
ANY ACTION OR PROCEEDING BASED HEREON, OR ARISING OUT
OF STERLING FOSTER'S ENGAGEMENT HEREUNDER, SHALL BE
BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF
THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY
OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK. THE COMPANY
AND STERLING FOSTER EACH HEREBY IRREVOCABLY SUBMIT TO
THE JURISDICTION OF THE COURTS OF THE STATE OF NEW
YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK AND
OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH
ACTION OR PROCEEDING AS SET FORTH ABOVE AND
IRREVOCABLY AGREE TO BE BOUND BY ANY JUDGEMENT
RENDERED THEREBY IN
<PAGE>
CONNECTION WITH SUCH ACTION OR PROCEEDING. EACH OF
THE COMPANY AND STERLING FOSTER HEREBY IRREVOCABLY
WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO
THE LAYING OF VENUE OF ANY SUCH ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY
CLAIM THAT ANY SUCH ACTION OR PROCEEDING HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM.
The Company (for itself, anyone claiming through it or its name, and on
behalf of its equity holders) and Sterling Foster each hereby irrevocably waive
any right they may have to a trial by jury in respect of any claim based upon or
arising out of this Agreement or the transactions contemplated hereby. This
Agreement may not be assigned by either party without the prior written consent
of the other party.
This Agreement embodies the entire agreement and understanding between
the parties hereto and supersedes all prior agreements and understandings
relating to the subject matter hereof. If any provision of this Agreement is
determined to be invalid or unenforceable in any respect, such determination
will not affect such provision in any other respect or any other provision of
this Agreement, which will remain in full force and effect. This Agreement may
not be amended or otherwise modified or waived except by an instrument in
writing signed by both Sterling Foster and the Company.
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to Sterling Foster the enclosed original copy of this
Agreement.
Very truly yours,
STERLING FOSTER & COMPANY, INC.
By:________________________________
Name:
Title:
Accepted as of the date written above.
NICHE PHARMACEUTICALS, INC.
By:_________________________________
Name:
Title:
<PAGE>
<TABLE>
<S> <C> <C> <C>
NUMBER Niche SHARES
NP Pharmaceuticals, Inc.
INCORPORATED UNDER THE LAWS OF DELAWARE CUSIP 65369P 10 2
See reverse side for
certain definitions
COMMON STOCK
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $.01 EACH OF THE COMMON STOCK OF
Niche Pharmaceuticals, Inc.
transferable on the books of the Corporation in person or by duly authorized
attorney, upon surrender of this certificate properly endorsed. This Certificate
is not valid until countersigned by the Transfer Agent and registered by the
Registrar.
Witness the seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
Niche Pharmaceuticals, Inc.
CORPORATE
SEAL
1996
DELAWARE
--------------------------------- -------------------------------------------------
SECRETARY PRESIDENT, CHIEF EXECUTIVE OFFICER AND TREASURER
COUNTERSIGNED AND REGISTERED: CONTINENTAL STOCK
TRANSFER & TRUST COMPANY TRANSFER AGENT AND REGISTRAR
-------------------------------------------------
Authoritzed Officer
</TABLE>
<PAGE>
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT -............Custodian..................
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act...........................................
tenants in common (STATE)
Additional abbreviations may also be used though not in
the above list.
Niche Pharmaceuticals, Inc.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof of the
Corporation and the qualifications, limitations, or restrictions of such
preferences and/or rights. This certificate and the shares represented thereby
are issued and shall be held subject to all the provisions of the Certificate of
Incorporation and all amendments thereto and resolutions of the Board of
Directors providing for the issue of shares of Preferred Stock (copies of which
may be obtained from the secretary of the Corporation), to all of which the
holder of this certificate by acceptance hereof assents.
For value received, ___________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
shares of the capital stock represented by the within certificate, and do hereby irrevocably constitute and appoint
_________________________________________________________________________________ Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated______________________________
-------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE
OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- ------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
</TABLE>
COMMON STOCK PURCHASE WARRANT
NICHE PHARMACEUTICALS, INC.
Dated: ____________, 1997
120737.3
<PAGE>
THE REGISTERED HOLDER OF THIS WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT
WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT EXCEPT AS HEREIN PROVIDED.
NOT EXERCISABLE PRIOR TO ________ __, 1998.* VOID AFTER 5:00 P.M. EASTERN TIME,
________ __, 2001.**
COMMON STOCK PURCHASE WARRANT
For the Purchase of 130,000 Shares of Common Stock
of
NICHE PHARMACEUTICALS, INC.
(A Delaware Corporation)
1. Warrant.
THIS CERTIFIES THAT, in consideration of $100.00 duly paid by
or on behalf of Sterling Foster & Co., Inc. (or registered assigns succeeding to
ownership hereof pursuant to the provisions of Section 3.1 hereof) (the "Holder"
or "Representative"), as registered owner of this Warrant, to Niche
Pharmaceuticals, Inc.(the "Company"), the Holder is entitled, at any time and
from time to time on or after ________ __, 1998, and at or before 5:00 p.m.,
Eastern Time, ________ __, 2001, but not thereafter, to subscribe for, purchase
and receive, in whole or in part, up to one hundred and thirty thousand
(130,000) shares of Common Stock, $.01 par value (the "Common Stock"), of the
Company. If ________ __, 2001 is a day on which banking institutions are
authorized by law to close, then this Warrant may be exercised on the next
succeeding day that is not such a day in accordance with the terms hereof, at
or before 5:00 p.m. Eastern Time or such next succeeding day. This Warrant is
initially exercisable as to each share of Common Stock covered thereby at $7.50
per share, or 150% of the offering price per share of Common Stock (the
"Exercise Price") set forth on the cover page of the prospectus pursuant to
which 1,300,000 shares of Common Stock of the Company are being offered to the
ublic (the "Prospectus"). The term "Exercise Price" shall mean the initial
exercise price or such exercise price, as adjusted in the manner provided
herein, depending on the context. This Warrant, together with warrants of like
tenor, was originally issued pursuant to an Underwriting Agreement
dated ________ __, 1997 between the Company and the Representative.
* One year from date of issuance.
** Four years from date of issuance.
120737.3
<PAGE>
2. Exercise.
In order to exercise this Warrant, the exercise form attached
hereto must be duly executed, completed and delivered to the Company, together
with this Warrant and payment of the Exercise Price for the shares of the Common
Stock being purchased. If the rights represented hereby shall not be exercised
at or before 5:00 p.m., Eastern Time, on ________ __, 2001, this Warrant shall
become and be void and without further force or effect and all rights
represented hereby shall cease and expire.
3. Transfer.
3.1 General Restrictions. The registered Holder of this
Warrant, by its acceptance hereof, agrees that it shall not sell, transfer or
assign or hypothecate this Warrant to anyone other than the Representative or an
officer or partner of the Representative prior to ____*____ __, 1998 in
compliance with the provisions of the Corporate Financing Rule, Section
2710(c)(7) of the National Association of Securities Dealers Regulation, Inc. In
order to make any permitted assignment, the Holder must deliver to the Company
the assignment form attached hereto duly executed and completed, together with
this Warrant and payment of all transfer taxes, if any, payable in connection
therewith. The Company shall immediately transfer the number of Warrants
specified in the assignment form on the books of the Company and shall execute
and deliver a new warrant or warrants of like tenor to the appropriate
assignee(s) expressly evidencing the right to purchase the number of shares of
Common Stock purchasable hereunder or such portion of such number as shall be
contemplated by such assignment.
3.2 Restrictions Imposed by the Act. The securities purchased
upon exercise of this Warrant shall not be transferred unless and until (i) the
Company has received the opinion of counsel for the Holder (reasonably
acceptable to the Company and its counsel) that the securities may be sold
pursuant to an exemption from registration under the Securities Act of 1933, as
amended (the "Act"), the availability of which is established to the reasonable
satisfaction of the Company, or (ii) a registration statement relating to such
securities has been filed by the Company and declared effective by the
Securities and Exchange Commission (the "Commission").
- --------------
* First anniversary of the closing of the IPO.
120737.3
-2-
<PAGE>
Each certificate for securities purchased upon exercise of
this Warrant shall bear a legend as follows unless such securities have been
registered under the Act:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"). The securities may not be offered for sale, sold or
otherwise transferred except pursuant to an effective
registration statement under the Act, or pursuant to an
exemption from registration under the Act."
4. New Warrants to be Issued.
4.1 Partial Exercise or Transfer. Subject to the restrictions
in Section 3 hereof, this Warrant may be exercised or assigned in whole or in
part. In the event of the exercise or assignment hereof in part only, upon
surrender of this Warrant for cancellation, together with the duly executed
exercise or assignment form and funds sufficient to pay any required transfer
tax, the Company shall cause to be delivered to the Holder without charge a new
warrant or new warrants of like tenor with this Warrant in the name of the
Holder evidencing the right to purchase, in the aggregate, the remaining number
of underlying shares of Common Stock purchasable hereunder after giving effect
to any such partial exercise or assignment.
4.2 Lost Certificate. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
and of an indemnification in favor of the Company, reasonably satisfactory to
it, the Company shall execute and deliver a new warrant of like tenor and date.
Any such new warrants executed and delivered as a result of such loss, theft,
mutilation or destruction shall constitute an additional contractual obligation
on the part of the Company replacing the Company's contractual obligations
pursuant to such lost, stolen, mutilated or destroyed warrant.
5. Registration Rights.
5.1 Demand Registration.
5.1.1 Grant of Right. The Company, upon written
demand (the "Demand Notice") of the Holder(s) agrees to register all or part of
the shares of Common Stock underlying such Warrants (the "Registrable
Securities") for up to five occasions. On such occasions, the Company shall file
a Registration Statement covering the Registrable Securities within thirty (30)
days after receipt of the Initial Demand Notice and shall use its best efforts
to have such registration statement declared effective promptly thereafter. The
demand for registration may be made at any time during a period
120737.3
-3-
<PAGE>
of five years beginning one year after the date of the Prospectus (the
"Effective Date"). The Company covenants and agrees to give written notice of
its receipt of any Initial Demand Notice by any Holder(s) to all other
registered Holders of the Warrants and/or the Registrable Securities within five
(5) days after the date of the receipt of any such Initial Demand Notice.
5.1.2 Terms. The Company shall bear all fees and
expenses attendant to registering the Registrable Securities relating to the
first three (3) exercises of the Holder(s) demand rights set forth in Section
5.1.1. The Holder(s) shall bear all the fees and expenses attendant to
regulating the Registrable Securities relating to the remaining exercises of the
Holders demand rights after the first three (3) demand rights have been
exercised, the Holder(s) shall pay any and all underwriting commissions and the
expenses of any legal counsel selected by the Holder(s) to represent them in
connection with any and all sale of the Registrable Securities and any
applicable transfer taxes. The Company agrees to use its prompt efforts to cause
the filing required herein to become effective and to qualify or register the
Registrable Securities in such states as are reasonably requested by the
Holder(s); provided, however, that in no event shall the Company be required to
register the Registrable Securities in a state in which such registration would
cause (i) the Company to be obligated to qualify to do business as a foreign
corporation in such State or to pay income, franchise or other similar taxes
solely as a result of such registration or to be subject to service of general
process, or (ii) the principal stockholders of the Company to be obligated to
escrow their shares of capital stock of the Company. The Company shall use best
efforts to cause any registration statement filed pursuant to the demand rights
granted under Section 5.1.1 to remain effective for a period of at least twelve
(12) consecutive months after the effective date of such registration statement.
5.1.3 Repurchase of Warrants and Registrable
Shares. Anything in this Section 5.1 to the contrary notwithstanding, the
Company shall have no such obligation to prepare and file a registration
statement as provided for in this Section 5.1 if, within twenty (20) days after
it receives a demand therefor, it agrees to purchase the Warrants and/or the
underlying Registrable Securities from the Holder(s) thereof at a price, in the
case of the Warrants, equal to the product of multiplying the number of Warrants
or underlying Common Stock sought to be registered by the difference between (a)
the Exercise Price and (b) the current market price of the Common Stock. The
current market price of the Common Stock shall be as follows:
(i) if traded on a securities exchange or the Nasdaq National
Market System, the fair market value shall be deemed to the average of the
closing prices of the Common Stock on such
120737.3
-4-
<PAGE>
exchange or System over the 10 day period preceding the demand for
registration;
(ii) if traded over-the-counter, the fair market value shall
be deemed to be the average of the closing or last bid and asked prices of the
Common Stock over the 10 day period preceding the demand for registration; and
(iii) if there is no public market for the Common Stock, then fair
market value shall be determined by the Board of Directors of the Company.
5.2 "Piggy-Back" Registration.
5.2.1 Grant of Right. In addition to the demand
right of registration, the Holder(s) of the Warrants shall have the right for a
period of five (5) years beginning one year after the Effective Date, to include
the Registrable Securities as part of any other registration of securities filed
by the Company (other than in connection with a transaction contemplated by Rule
145(a) promulgated under the Act or pursuant to Form S-8) provided, however,
that if, in the written opinion of the Company's managing underwriter or
underwriters, if any, for such offering, the inclusion of the Registrable
Securities, when added to the securities being registered by the Company or the
selling shareholder(s), will exceed the maximum amount of the Company's
securities that can be marketed (i) at a price reasonably related to their then
current market value, or (ii) without materially and adversely affecting the
entire terms of the offering, the Company shall nevertheless register all or any
portion of the Registrable Securities required to be so registered but such
Registrable Securities shall not be sold by the Holder(s) until 180 days after
the registration statement for such offering has become effective and provided
further that, if any securities are registered for sale on behalf of other
shareholders in such offering and such shareholders have not agreed to defer
such sale until the expiration of such 180-day period, the number of securities
to be sold by all shareholders in such public offering during such 180- day
period shall be apportioned pro rata among all such selling shareholders,
including all holders of the Registrable Securities, according to the total
amount of securities of the Company owned by said selling shareholders,
including all holders of the Registrable Securities.
5.2.2 Terms. The Company shall bear all fees and
expenses attendant to registering the Registrable Securities, but the Holder(s)
shall pay any and all underwriting commissions, the expenses of any legal
counsel selected by the Holder(s) to represent them in connection with the sale
of the Registrable Securities and applicable transfer taxes, if any. In the
event of such a proposed registration, the Company shall furnish the then
Holder(s) of outstanding Registrable Securities with not less than
120737.3
-5-
<PAGE>
thirty (30) days' written notice prior to the proposed date of filing of such
registration statement. Such notice to the Holder(s) shall continue to be given
for each registration statement filed by the Company until such time as all of
the Registrable Securities have been registered and sold. The holders of the
Registrable Securities shall exercise the "piggyback" rights provided for herein
by giving written notice, within twenty (20) days after the receipt of the
Company's notice of its intention to file a registration statement. The Company
shall use best efforts to cause any registration statement filed pursuant to the
above "piggyback" rights to remain effective for at least twelve (12) months
from the date that the Holder(s) of the Registrable Securities are first given
the opportunity to sell all of such securities.
5.3 General Terms.
5.3.1 Indemnification. The Company shall indemnify
the Holder(s) of the Registrable Securities to be sold pursuant to any
registration statement hereunder and each person, if any, who controls such
Holder(s) within the meaning of Section 15 of the Act or Section 20(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), against all
loss, claim, damage, expense or liability (including all reasonable attorneys'
fees and other expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from such registration
statement but only to the same extent and with the same effect as the provisions
pursuant to which the Company has agreed to indemnify the Underwriter contained
in Section 6 of the Underwriting Agreement. The Holder(s) of the Registrable
Securities to be sold pursuant to such registration statement, and their
successors and assigns, shall severally, and not jointly, indemnify the Company
against all loss, claim, damage, expense or liability (including all reasonable
attorneys' fees and other expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holder(s), or their successors or assigns, in
writing, for specific inclusion in such registration statement to the same
extent and with the same effect as the provisions contained in Section 6 of the
Underwriting Agreement pursuant to which the Underwriter has agreed to indemnify
the Company.
5.3.2 Exclusivity. The Company shall not permit
the inclusion of any securities other than the Registrable Securities to be
included in any registration statement filed pursuant to Section 5.1 hereof
without the prior written consent of the Representative.
120737.3
-6-
<PAGE>
5.3.3 Documents Delivered to Holders. The Company
shall furnish to each Holder participating in any of the foregoing offerings and
to each underwriter of any such offering, if any, a signed counterpart,
addressed to such Holder or underwriter, of (i) an opinion of counsel to the
Company, dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, an opinion dated the date
of the closing under any underwriting agreement related thereto), and (ii) a
"cold comfort" letter dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, a letter
dated the date of closing under the underwriting agreement) signed by
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities as appropriate for the form of registration statement
used. The Company shall also deliver promptly to each Holder participating in
the offering requesting the correspondence and memoranda described below and to
the managing underwriter copies of all correspondence between the Commission and
the Company, its counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to the registration statement and
permit each Holder and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as any such Holder shall reasonably request.
Following the effective date of any such registration, the Company shall upon
the request of any owner of Warrants and/or Registrable Securities forthwith
supply such a number of prospectuses meeting the requirements of the Act, as
shall be reasonably requested to make a public offering of the Registrable
Securities from time to time offered or sold by such owner.
5.3.4 Underwriting Agreement. The Company shall
enter into an underwriting agreement with the managing underwriter(s) selected
by any Holder(s) whose Registrable Securities are being registered pursuant to
this Section 5. Such agreement shall be reasonably satisfactory in form and
substance to the Company, each Holder and such managing underwriters, and shall
contain such representations, warranties and covenants by the
120737.3
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<PAGE>
Company and such other terms as are customarily contained in agreements of that
type used by the managing underwriter. The Holder(s) shall be parties to any
underwriting agreement relating to an underwritten sale of their Registrable
Securities and may, at their option, require that any or all of the
representations, warranties and covenants of the Company to or for the benefit
of such underwriters shall also be made to and for the benefit of such
Holder(s). Such Holder(s) shall not be required to make any representations or
warranties to or agreements with the Company or the underwriters except as they
may relate to such Holder(s) and their intended methods of distribution.
6. Adjustments to Exercise Price and Number of Securities.
6.1 Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
6.2 Adjustment in Number of Shares. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Section 6, the number of
shares of Common Stock issuable upon the exercise of this Warrant shall be
adjusted to the nearest full number obtained by multiplying the Exercise Price
in effect immediately prior to such adjustment by the number of shares of Common
Stock issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
6.3 Recapitalization. For the purpose of this Warrant, the
term "Common Stock" shall also mean any other class of stock resulting from
successive changes or reclassifications of Common Stock consisting solely of
changes in par value, or from par value to no par value, or from no par value to
par value.
6.4 Merger or Consolidation. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder(s) a supplemental warrant providing that the holder of each warrant
then outstanding or to be outstanding shall have the right thereafter (until the
stated expiration of such warrant) to receive, upon exercise of such warrant,
the kind and amount of shares of stock and other securities and property
receivable upon such consolidation or merger, by a holder of the number of
shares of Common Stock of the Company for which such warrants might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrants shall provide for adjustments which shall be
identical to
120737.3
-8-
<PAGE>
the adjustments provided in Section 6. The above provision of this Section shall
similarly apply to successive consolidations or mergers.
6.5 No Adjustment of Exercise Price in Certain Cases.
No adjustment of the Exercise Price shall be made:
(i) Upon the issuance or sale of the shares of Common Stock
issuable upon the exercise of (i) this Warrant or (ii) the options granted under
the stock option plans described in the Prospectus; or
(ii) If the amount of said adjustment shall be less than $.10
per share of Common Stock, provided, however, that in such case, any adjustment
that would otherwise be required then to be made shall be carried forward and
shall be made at the time of and together with the next subsequent adjustment
which, together with any adjustment so carried forward, shall amount to at least
$.10 per share of Common Stock.
6.6 Redemption of Warrants. Except as provided in Section
5.1.3 hereof, this Warrant cannot be redeemed by the Company without the prior
written consent of the Holder.
6.7 Dividends and Other Distributions. In the event that the
Company shall at any time prior to the exercise in full of this Warrant declare
a non-cash dividend (other than a dividend consisting solely of shares of Common
Stock) or otherwise distribute to its stockholders any assets, property, rights,
evidences of indebtedness, securities (other than shares of Common Stock),
whether issued by the Company or by another, or any other thing of value other
than cash, the Holder of this Warrant shall thereafter be entitled, in addition
to the shares of Common Stock or other securities and property receivable upon
the exercise thereof, to receive, upon the exercise of such Warrant, the same
property, assets, rights, evidences of indebtedness, securities or any other
thing of value that it would have been entitled to receive at the time of such
dividend or distribution as if the Warrant had been exercised immediately prior
to such dividend or distribution. At the time of any such dividend or
distribution, the Company shall make appropriate reserves to ensure the timely
performance of the provisions of this Section 6.10.
6.8 Elimination of Fractional Interests. The Company shall not
be required to issue certificates representing fractions of shares of Common
Stock upon the exercise of the Warrant, nor shall it be required to issue scrip
or pay cash in lieu of any fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights as shall be issuable upon the exercise thereof.
120737.3
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<PAGE>
7. Reservation and Listing. The Company shall at all times reserve and keep
available out of its authorized shares of Common Stock, solely for the purpose
of issuance upon exercise of the Warrant, such number of shares of Common Stock
or other securities, properties or rights as shall be issuable upon the exercise
thereof. The Company covenants and agrees that, upon exercise of the Warrant and
payment of the Exercise Price therefor, all shares of Common Stock and other
securities issuable, properties and rights upon such exercise shall be duly and
validly issued, fully paid and nonassessable and not subject to preemptive
rights of any stockholder. The Company further covenants and agrees that upon
exercise of this Warrant and payment of the Exercise Price therefor, all shares
of Common Stock and other securities issuable upon such exercises shall be duly
and validly issued, fully paid and nonassessable and not subject to preemptive
rights of any stockholder. As long as this Warrant shall be outstanding, the
Company shall use its best efforts to cause all shares of Common Stock issuable
upon exercise of the Warrant to be listed (subject to official notice of
issuance) on all securities exchanges (or, if applicable on NASDAQ) on which the
Common Stock may then be listed and/or quoted.
8. Certain Notice Requirements.
8.1 Holder's Right to Receive Notice. Nothing herein shall be
construed as conferring upon the Holder the right to vote or consent or to
receive notice as a stockholder for the election of directors or any other
matter, or as having any rights whatsoever as a stockholder of the Company. If,
however, at any time prior to the expiration of the Warrant and its exercise,
any of the events described in Section 8.2 shall occur, then, in one or more of
said events, the Company shall give written notice of such event at least
fifteen (15) days prior to the date fixed as a record date or the date of
closing the transfer books for the determination of the stockholders entitled to
such dividend, distribution, conversion or exchange of securities or
subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such record date or
the date of the closing of the transfer books, as the case may be.
8.2 Events Requiring Notice. The Company shall be required to
give the notice described in this Section 8 upon one or more of the following
events: (i) if the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of retained earnings, as indicated by the accounting
treatment of such dividend or distribution on the books of the Company, or (ii)
the Company shall offer to all the holders of its Common Stock any additional
shares of capital stock of the Company or securities convertible into or
exchangeable for shares
120737.3
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<PAGE>
of capital stock of the Company, or any option, right or warrant to subscribe
therefor, or (iii) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business shall be proposed.
8.3 Notice of Change in Exercise Price. The Company shall,
promptly after an event requiring a change in the Exercise Price pursuant to
Section 6 hereof, send notice to the Holders of such event and change (the
"Price Notice"). The Price Notice shall describe the event causing the change
and the method of calculating same and shall be certified as being true and
accurate by the Company's Chief Executive Officer and Chief Financial Officer,
or principal accounting officer if the Company does not have a Chief Financial
Officer.
8.4 Transmittal of Notices. All notices, requests, consents
and other communications under this Warrant shall be in writing and shall be
deemed to have been duly given or made when hand delivered, or when delivered by
responsible overnight courier:
(i) If to the registered Holder of this Warrant,
to:
Sterling Foster & Co., Inc.
125 Baylis Road
Melville, New York 11747
Attention: Sherman Drusin
with a copy to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attention: Ilan K. Reich, Esq.
(ii) if to the Company, to:
Niche Pharmaceuticals, Inc.
200 North Oak
P.O. Box 449
Roanoke, Texas 76262
Attention: Steve F. Brandon
with a copy to:
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, New York 10017
Attention: Fred Skolnik, Esq.
Either of the Holder or the Company may change the foregoing address by notice
given pursuant to this Section 8.4.
120737.3
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<PAGE>
9. Miscellaneous.
9.1 Amendments. The Company and the Holder may from time to
time supplement or amend this Warrant without the approval of any other Holder
in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
or to make any other provisions in regard to matters or questions arising
hereunder which the Company and Representative may deem necessary or desirable
and which the Company and Representative deem shall not adversely affect the
interest of the Holder. All other modifications or amendments shall require the
written consent of the party against whom enforcement of the modification or
amendment is sought.
9.2 Headings. The headings contained herein are for the sole
purpose of convenience of reference, and shall not in any way limit or affect
the meaning or interpretation of any of the terms or provisions of this Warrant.
9.3 Entire Agreement. This Warrant (together with the other
agreements and documents being delivered pursuant to or in connection with this
Warrant) constitute the entire agreement of the parties hereto with respect to
the subject matter hereof, and supersede all prior agreements and understandings
of the parties, oral and written, with respect to the subject matter hereof.
9.4 Binding Effect. This Warrant shall inure solely to the
benefit of and shall be binding upon, the Holder and the Company and their
permitted assignees, respective successors, legal representatives and assigns,
and no other person shall have or be construed to have any legal or equitable
right, remedy or claim under or in respect of or by virtue of this Warrant or
any provisions herein contained.
9.5 Governing Law; Submission to Jurisdiction. This
Warrant shall be governed by and construed and enforced in accordance with the
laws of the State of Delaware, without giving effect to conflict of laws rules
of such state. Any action, proceeding or claim against the Company or the
Holder arising out of, or relating in any way to this Warrant shall be brought
and enforced in the courts of the State of New York or of the United States of
America for the Southern District of New York, and the Company and the Holder
irrevocably submit to such jurisdiction, which jurisdiction shall be exclusive.
The parties hereto waive any objection to such exclusive jurisdiction and that
such courts represent an inconvenient forum. The prevailing party in any such
action shall be entitled to recover from the other party all of its reasonable
attorneys' fees and expenses relating to such action or proceeding and/or
incurred in connection with the preparation therefor.
120737.3
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<PAGE>
9.6 Waiver, Etc. The failure of the Company or the Holder to
at any time enforce any of the provisions of this Warrant shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Warrant or any provision hereof or the right of the Company or
any Holder to thereafter enforce each and every provision of this Warrant. No
waiver of any breach, noncompliance or nonfulfillment of any of the provisions
of this Warrant shall be effective unless set forth in a written instrument
executed by the party or parties against whom or which enforcement of such
waiver is sought; and no waiver of any such breach, noncompliance or
nonfulfillment shall be construed or deemed to be a waiver of any other or
subsequent breach, noncompliance or nonfulfillment.
120737.3
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officer on the ___ day of ________, 1997.
NICHE PHARMACEUTICALS, INC.
By:
Name:
Title:
120737.3
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<PAGE>
Form to be used to exercise Warrant:
NICHE PHARMACEUTICALS, INC.
200 North Oak
P.O. Box 449
Roanoke, Texas 76262
Date: ________________, 19__
The Undersigned hereby elects irrevocably to exercise the
within Warrant and to purchase __________ shares of Common Stock of Niche
Pharmaceuticals, Inc. and hereby makes payment of $_____________ (at the rate of
$_____ per share) in payment of the Exercise Price pursuant thereto. Please
issue the shares as to which this Warrant is exercised in accordance with the
instructions given below.
Signature
Signature Guaranteed
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name
(Print in Block Letters)
Address
NOTICE: The signature to this form must correspond with the
name as written upon the face of the within Warrant in every particular without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, or by a trust company or by a firm having
membership on a registered national securities exchange.
120737.3
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<PAGE>
Form to be used to assign Warrant:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer
of the within Warrant):
FOR VALUE RECEIVED, ________________________________ does
hereby sell, assign and transfer unto __________________________ the right to
purchase ____________ shares of Common Stock of Niche Pharmaceuticals, Inc. (the
"Company") evidenced by the within Warrant and does hereby authorize the Company
to transfer such right on the books of the Company.
Dated:__________________, 19__
Signature
Signature Guaranteed
NOTICE: The signature to this form must correspond with the
name as written upon the face of the within Warrant in every particular without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, or by a trust company or by a firm having
membership on a registered national securities exchange.
120737.3
-16-
<PAGE>
Niche Pharmaceuticals, Inc.
________, 1997
Page 1
January 28, 1997
Niche Pharmaceuticals, Inc.
200 North Oak
P.O. Box 449
Roanoke, TX 76262
Re: Registration Statement on Form SB-2 (Registration No. 333-17767)
Gentlemen:
In our capacity as counsel to Niche Pharmaceuticals, Inc., a
Delaware corporation (the "Company"), we have been asked to render this opinion
in connection with the Company's Registration Statement on Form SB-2
(Registration No. 333-17767) (the "Registration Statement"), being filed
contemporaneously by the Company with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, covering the issuance of 1,625,000
Common Shares, $.01 par value, of the Company (the "Issuable Shares") (including
1,300,000 Issuable Shares being offered for sale to the public ((the "Public
Offering")), 195,000 Issuable Shares covering an overallotment option granted by
the Company to the underwriter of the Public Offering and 130,000 Issuable
Shares underlying the underwriter's Common Share Purchase Warrant), and 100,000
Common Shares (the "Resale Shares") which are being registered for resale by a
selling stockholder. The Issuable Shares and Resale Shares are collectively
referred to as the "Shares".
In connection with our opinion, we have examined the
Certificate of Incorporation and By-Laws of the Company, the Registration
Statement, as amended, and certain agreements entered into, and instruments and
warrants issued, by the Company in connection with the issuance of the Shares.
We are also familiar with proceedings of the Board of Directors of the Company
or otherwise have relied upon representations made by officers of the Company,
relating to the authorization of the issuance of the Shares. We have also
examined such other instruments and documents as we deemed relevant under the
circumstances.
For purposes of the opinions, we have assumed (i) the
authenticity of all documents submitted to us as originals, (ii) the conformity
to the originals of all documents submitted as
<PAGE>
certified, photostatic or facsimile copies and the authenticity of the
originals, (iii) the legal capacity of natural persons, (iv) the due
authorization, execution and delivery of all documents by all parties and the
validity and binding effect thereof and (v) the conformity to the proceedings of
the Board of Directors of all minutes of such proceedings and all
representations, oral and written, made by officers of the Company with respect
thereto. We have also assumed that the corporate records furnished to us by the
Company include all corporate proceedings taken by the Company to date.
Based solely upon and subject to the foregoing, including the
assumptions made, we are of the opinion that (i) the Issuable Shares have been
duly and validly authorized, and when issued and fully paid for, shall be duly
and validly authorized and issued, and fully paid and nonassessable Common
Shares, $.01 par value, of the Company; and (ii) the Resale Shares are duly and
validly authorized and issued, fully paid and nonassessable Common Shares, $.01
par value, of the Company.
We hereby consent to the use of our opinion as herein set
forth as an exhibit to the Registration Statement and to the use of our name
under the caption "Legal Matters" in the Prospectus forming a part of the
Registration Statement.
This opinion is as of the date hereof, and we do not
undertake, and hereby disclaim, any obligation to advise you of any changes in
any of the matters set forth herein.
We are rendering this opinion only as to the matters expressly
set forth herein, and no opinion should be inferred as to any other matters.
This opinion is for your exclusive use only and is to be
utilized and relied upon only in connection with the matters expressly set forth
herein.
Very truly yours,
CERTILMAN BALIN ADLER & HYMAN, LLP
<PAGE>
LOAN AGREEMENT
This LOAN AGREEMENT ("Agreement") is made and entered into effective
the 11 day of January, 1991, by and between STEPHEN F. BRANDON ("Lender") and
NICHE PHARMACEUTICALS, INC., a Texas corporation ("Borrower").
WHEREAS, Borrower desires to obtain a loan from Lender and Lender is
willing to make such loan on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
herein contained, the parties agree as follows:
1. LOAN. Lender shall make available to Borrower an aggregate sum of
Five Hundred Thousand Dollars ($500,000.00) for loan to Borrower. Borrower may
from time to time during the term of this Agreement make requests for advances
on the loan, such advances not to exceed in the aggregate the principal sum of
Five Hundred Thousand Dollars ($500,000.00). Any amounts advanced under the loan
shall bear interest at the rate of ten percent (10%) per annum.
2. REPAYMENT. Borrower shall repay any or all amounts advanced by
Lender hereunder upon demand by Lender therefor. Borrower's obligation to repay
to Lender any amounts advanced hereunder shall be represented by Borrower's
promissory note to Lender executed contemporaneously herewith and attached
hereto.
3. 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
<PAGE>
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.
4. 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.
5. PARAGRAPH HEADINGS. The paragraph headings contained herein are for
convenience only, and do not purport to accurately summarize 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.
6. APPLICATION LAW. This Agreement shall be subject to, construed in
accordance with, and governed by, the laws of the State of Texas. Venue of any
legal proceeding hereunder shall be in Tarrant County, Texas.
7. 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.
8. MISCELLANEOUS. 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
<PAGE>
been contained herein. If, moreover, any one or more of the provisions contained
in this Agreement shall, for any reason, be held to be excessively as to time,
duration, 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.
9. COUNTERPARTS. This Agreement may be executed in multiple counter-
parts, but all counterparts taken together shall constitute one and the same
agreement, binding upon all of the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Loan Agreement
effective the date set forth above.
LENDER:
/s/ Stephen F. Brandon
----------------------
STEPHEN F. BRANDON
BORROWER:
NICHE PHARMACEUTICALS, INC.,
A Texas corporation
By: /s/ Stephen F. Brandon
------------------------------
STEPHEN F. BRANDON, President
<PAGE>
AMENDED
1996 STOCK OPTION PLAN
FOR
NICHE PHARMACEUTICALS, INC.
1. Purpose. The purpose of this Plan is to advance the interest
of Niche Pharmaceuticals, Inc. (the "Company") by providing an additional
incentive to attract and/or retain qualified and competent employees, upon whose
efforts and judgment the success of the Company and its Subsidiaries is largely
dependent, through the encouragement of stock ownership in the Company by such
employees.
2. Definitions. As used herein, the following terms shall have
the meaning indicated:
(a) "Board" shall mean the Board of Directors of the
Company.
(b) "Committee" shall mean the Stock Option Committee
appointed by the Board pursuant to Section 13 hereof.
(c) "Fair Market Value" shall mean the fair market value per
Share determined by the Board in good faith and without regard to any
restriction other than a restriction which, by its terms, will never lapse.
(d) "Incentive Stock Option" shall mean an incentive
stock option as defined in Section 422A of the Code.
(e) "Code" shall mean the Internal Revenue Code of 1986,
as amended from time to time.
(f) "Option" (when capitalized) shall mean any option
granted under this Plan.
(g) "Optionee" shall mean a person to whom a stock option is
granted under this Plan or any person who succeeds to the rights of such person
under this Plan by reason of the death of such person.
(h) "Plan" shall mean this 1996 Stock Option Plan for Niche
Pharmaceuticals lnc., as amended from time to time.
(i) "Share(s)" shall mean a share or shares of the
common stock, One Cent ($.01) par value per share, of the Company.
-1-
<PAGE>
(j) "Subsidiary" shall mean any corporation (other than the
Company) in any unbroken chain of corporations beginning with the Company if at
the time of the granting of the Option, each of the corporations other than the
last corporation in the unbroken chain owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
3. Shares of Stock Subject to Options.
(a) The Company may grant to Optionees from time to time
Options to purchase an aggregate of up to 105,000 Shares from Shares held in the
Company's treasury or from authorized and unissued Shares. If any Option granted
under the Plan shall terminate, expire, or be canceled as to any Shares, new
Options may thereafter be granted covering such Shares.
(b) The maximum aggregate Fair Market Value (determined at
the date of grant) of the Shares with respect to which an Optionee may be
granted one or more Incentive Stock Options (under this Plan and all plans of
the Company, any parent [as defined in Section 425 of the Code] and Subsidiary
of the Company) which are exercisable for the first time in any calendar year
shall not exceed $100,000.
4. Options and Employment Provisions.
(a) Optionees shall be those persons selected by the Board
from among the class of regular employees and non-employee directors,
consultants, and advisors of the Company and of any Subsidiary.
(b) In granting Options, the Board shall take into
consideration the contribution the employee has made or may make to the success
of the Company or its Subsidiaries and such other factors as the Board shall
determine. The Board shall also have the authority to consult with and receive
recommendations from officers and other personnel of the Company and its
Subsidiaries with regard to these matters. The Board may from time to time in
granting Options under the Plan prescribe such other terms and conditions
concerning such Options as it deems appropriate, including, without limitation,
relating an Option to achievement of specific goals established by the Board or
to the continued employment of the Optionee for a specified period of time,
provided that such terms and conditions are not more favorable to an Optionee
than those expressly permitted herein.
(c) The Options granted to employees under this Plan shall be
in addition to regular salaries, pension, life insurance or other benefits
related to their employment with the Company or its Subsidiaries. Neither the
Plan nor any Option granted under the Plan shall confer upon any person any
right to continuance of employment by the Company or its Subsidiaries.
(d) The Board in its sole discretion shall determine in
each case whether period of
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<PAGE>
military or government service shall constitute a continuation of employment for
the purpose of this Plan or any Option.
5. Option Price. The option price per Share of any Option shall be any
price determined by the Board; provided however, that the option price per share
of an Incentive Stock Option shall not be less than the Fair Market Value per
Share on the date such Option is granted.
6. Exercise of Options. An Option shall be deemed exercised when the
Company has received written notice of such exercise in accordance with the
terms of the Option, and full payment of the aggregate option price of the
Shares as to which the Option is exercised has been made. Unless further limited
by the Board in any Option, the option price of any Shares purchased shall be
paid solely in cash, by certified or cashier's check, by money order, with
Shares or by a combination of the above; provided, however, that the Board in
its sole discretion may accept a personal check in full or partial payment of
any Shares. If paid in whole or in part with Shares, the value of the shares
surrendered shall be their Fair Market Value. Nothing herein shall prohibit the
Company, in its sole discretion, from lending to an Optionee, guaranteeing a
loan to an Optionee, or otherwise assisting an Optionee in obtaining the cash
necessary to exercise all or a portion of an Option granted hereunder.
7. Exercisability of Options. Any Option shall become
exercisable in such amounts and at such intervals as the Board shall provide in
such Option, except as otherwise provided in this Section 7.
(a) The expiration date of an Option shall be determined
by the Board at the time of grant, but in no event shall an Option be
exercised after the expiration of ten (10) years from the date of grant of the
Option.
(b) Unless otherwise provided in any Option, each
outstanding Option shallbecome immediately fully exercisable:
(i) If the shareholders of the Company
shall approve a plan of merger, consolidation,
reorganization, liquidation or dissolution in which
the Company does not survive (unless the approved
merger, consolidation, reorganization, liquidation
or dissolution is subsequently abandoned); or
(ii) If the shareholders of the Company
shall approve a plan for the sale, lease, exchange
or other disposition of all or substantially all the
property and assets of the Company (unless such plan
is subsequently abandoned).
(c) The Board may in its sole discretion accelerate the
date on which an Option may be exercised.
8. Termination of Option Period.
(a) The unexercised portion of any Option shall
automatically and without notice terminate and become null and void three
months after the date on which the Optionee's employment is terminated for any
reason.
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<PAGE>
(b) After the occurrence of any event described in Section
7(b)(i) or (ii), the Board in its sole discretion, may, after giving appropriate
written notice to any Optionee holding one or more outstanding unexercised
Options, cancel any Option which has not been exercised within thirty (30) days
(or such other period as the Board shall determine) after the date of such
notice.
9. Adjustment of Shares.
(a) If at any time while the Plan is in effect or unexercised
Options are outstanding there shall be any increase or decrease in the number of
issued and outstanding Shares through the declaration of a stock dividend or
through any recapitalization resulting in a stock split-up, combination or
exchange of shares, then and in such event:
(i) appropriate adjustment shall be made in
the maximum number of Shares then subject to being
optioned under the Plan, so that the same
proportion of the Company's issued and outstanding
Shares shall continue to be subject to being so
optioned; and
(ii) appropriate adjustment shall be made
in the number of Shares and the exercise price per
Share thereof then subject to any outstanding
Option, so that the same proportion of the
Company's issued and outstanding Shares shall
remain subject to purchse at the same aggregate
exercise price.
The Board may change the terms of Options outstanding under this Plan, with
respect to the option price or the number of Shares subject to the Options, or
both, when, in the Board's sole discretion, such adjustments become appropriate
by reason of a corporate transaction (as defined in Treasury Regulation ss.
1,425-1(a)(1)(ii)). Except as otherwise expressly provided herein, the issuance
by the Company of shares of its capital stock of any class, or securities
convertible to shares of capital stock of any class, either in connection with
direct sale or upon the exercise of rights or warrants to subscribe therefor, or
upon conversion of shares or obligations of the Company convertible into such
shares or other securities, shall not affect, and no adjustment by reason
thereof shall be made with respect to the number of or exercise price of Shares
then subject to outstanding Options granted under the Plan.
(b) Without limiting the generality of the foregoing, the
existence of outstanding Options granted under the Plan shall not affect in any
manner the right or power of the Company to make, authorize or consummate (1)
any or all adjustments, recapitalization, reorganizations or other changes in
the Company's capital structure or its business; (2) any merger or consolidation
of the Company; (3) any issue by the Company of debt securities, or preferred or
preference stock which would rank above the Shares subject to outstanding
Options; (4) the dissolution or liquidation of the Company; (5) any sale,
transfer or assignment of all or any part of the assets or business of the
Company; or (6) any other corporate act or proceeding, whether of a similar
character or otherwise.
10. Nontransferability of Options. Options shall not be
transferable by the Optionee
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<PAGE>
otherwise than by will or the laws of descent and distribution, and shall be
exercisable during the Optionee's lifetime only by the Optionee.
11. Issuance of Shares.
(a) No person shall be, or have any of the rights or
privileges of, a shareholder of the Company with respect to any of the Shares
issuable upon the exercise of any Option, unless and until certificates
representing such Shares shall have been issued and delivered.
(b) The time of issuance and delivery of certificates may be
postponed for such period as may be required to comply with the registration
requirements under the Securities Act of 1933, as amended (the "Act"), the
Securities Exchange Act of 1934, as amended, listing requirements of applicable
securities exchanges on which the Shares may then be listed, and the
requirements under other laws or regulations applicable to the issuance of such
Shares.
(c) Notwithstanding anything contained herein to the
contrary, the Company shall not be required to sell or issue Shares under any
Option if the issuance thereof would constitute a violation by the Optionee or
the Company of any provision of any law or regulation of any governmental
authority or any national securities exchange or other forum in which Shares are
traded; and, as a condition of any sale or issuance of Shares under any Option,
the Board may obtain such agreements or undertakings, if any, as the Board may
deem necessary or advisable to assure compliance with any such law or
regulation.
(d) The Company shall not be required to register the Shares
under the Act. Shares issued upon the exercise of any Option without
registration of such Shares under the Act shall be "restricted securities" under
the federal securities laws because such Shares will have been acquired from the
Company in a transaction not involving a public offering. Under the federal
securities laws and applicable regulations, such Shares will be subject to the
terms of Rule 144 under the Act. The certificates representing any such Shares
shall bear an appropriate legend restricting transfer and the transfer agent of
the Company shall be given stop transfer instructions with respect to such
Shares.
(e) In no event shall a holder of unregistered Shares issued
upon the exercise of any Option dispose of any of the Shares unless and until:
(i) there is then in effect a registration
statement under the Act covering such proposed
disposition and such disposition is made in
accordance with said registration statement; or
(ii) such holder shall have notified the Company of
the details of the proposed disposition and, if the
Company requests, shall have provided the Company
with an opinion of counsel for such holder, in form
satisfactory to the Company to the effect that such
disposition will not require registration of the
Shares under the Act.
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<PAGE>
12. Options for 10% Shareholders. Notwithstanding any other provisions
of the Plan to the contrary, an Incentive Stock Option shall not be granted to
any person owning directly (or indirectly through attribution under Section
425(d) of the Code) at the date of grant, stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company (or of its
parent [as defined in Section 425 of the Code] or a Subsidiary at the date of
grant) unless the option price of such Option is at least 110% of the Fair
Market Value of the Shares subject to such Option on the date the Option is
granted, and the period during which the Option may be exercised does not exceed
five (5) years from the date of grant.
13. Administration of the Plan.
(a) The Plan shall be administered by the Board. The Board,
in its sole discretion, however, may appoint a committee (herein called the
"Committee") consisting of not less than two (2) members of the Board to
administer the Plan. Except for the powers set forth in Section 15, the
Committee shall have all of the powers with respect to the Plan. Any member of
the Committee may be removed at any time, without or without cause, by
resolution of the Board and any vacancy occurring in the membership of the
Committee may be filled by appointment by the Board.
(b) The Board, from time to time, may adopt rules and
regulations for carrying out the purposes of the Plan. The Board shall have sole
discretion and authority to interpret, enforce and construe the provisions of
the Plan. The determinations and the interpretation and construction of any
provision of the Plan by the Board shall be final and conclusive.
(c) Any and all decisions or determinations of the Board (or
the Committee) shall be made either (I) by a majority vote of the members of the
Board (or the Committee) at a meeting or (ii) without a meeting by the written
approval of a majority of the members of the Board (or the Committee).
14. Interpretation.
(a) The Plan shall be administered and interpreted so that
all Incentive Stock Options granted under the Plan will qualify as Incentive
Stock Options under Section 422A of the Code. If any provision of the Plan
should be held invalid for the granting of Incentive Stock Options or illegal
for any reason, such determination shall not affect the remaining provisions
hereof, but instead the Plan shall be construed and enforced as if such
provision had never been included in the Plan.
(b) This Plan shall be governed by the laws of the State
of Texas.
(c) Headings contained in this Agreement are for
convenience only and shall in no manner be construed as part of this Plan.
(d) Any reference to the masculine, feminine or neuter
gender shall be a reference to such other gender as is appropriate.
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<PAGE>
15. Amendment and Discontinuation of the Plan. The Committee, subject
to the approval of the Board of Directors (and the shareholders to the extent
required by Section 422A of the Code), may from time to time amend the Plan or
any Option, provided, however, that (except to the extent provided in Section 9)
no such amendment may (a) without approval by the shareholders of the Company
increase the number of Shares reserved for Options or change the class of
employees eligible to receive Options, (b) permit the granting of any Incentive
Stock Option at an option price less than that determined in accordance with
Sections 5 and 12, (c) permit the granting of Options which expire beyond the
maximum period described in Section 7(a) or Section 12, if applicable, or (d)
extend the termination date of the Plan as set forth in Section 16; and
provided, further, that (except to the extent provided in Section 8) no
amendment or suspension of the Plan or any Option issued hereunder shall modify
(within the meaning of Section 425(h) of the Code) any Incentive Stock Option,
or substantially impair any Option, previously granted to any Optionee without
the consent of such Optionee.
16. Effective Date and Termination Date. The effective date of
the Plan is October 1, 1995, and the Plan shall terminate on the 10th
anniversary of the effective date.
CERTIFIED to be the 1996 Stock Option Plan of Niche Pharmaceuticals,
Inc., adopted by its Board of Directors and Shareholders effective the _______
day of ______________1996.
NICHE PHARMACEUTICALS, INC.
By:___________________________________
STEPHEN F. BRANDON, President
ATTEST:
Secretary
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<PAGE>
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.
NICHE PHARMACEUTICALS, INC.
1996 Senior Executive Stock Option Plan
---------------------------------------
1. Purpose of the Plan. The Niche Pharmaceuticals, Inc.
1996 Senior Executive Stock Option Plan (the "Plan") is intended to advance the
interests of Niche Pharmaceuticals, Inc. (the "Company") by providing an
incentive and reward for certain senior executives (the "Senior Executives") who
are in a position to contribute substantially to the progress and success of the
Company, to closely align the interests of the Senior Executives with the
interests of stockholders of the Company by linking benefits to stock
performance and to retain the services of such Senior Executives. This is
accomplished by providing for the granting of "Options" to the Senior
Executives.
2. Administration. The Plan shall be administered by the Board
of Directors of the Company (the "Board of Directors") or by a committee (the
"Committee") chosen by the Board of Directors. Except as herein specifically
provided, the interpretation and construction by the Board of Directors or the
Committee of any provision of the Plan or of any Option granted under it shall
be final and conclusive. The receipt of Options by Directors, or any members of
the Committee, shall not preclude their vote on any matters in connection with
the administration or interpretation of the Plan.
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<PAGE>
3. Shares Subject to the Plan. The stock subject to
Options granted under the Plan shall be shares of the Company's common stock,
par value $.01 per share (the "Common Stock"), whether authorized but unissued
or held in the Company's treasury, or shares purchased from stockholders
expressly for use under the Plan. The maximum number of shares of Common Stock
which may be issued pursuant to Options granted under the Plan shall not exceed
in the aggregate four hundred five thousand (405,000) shares, subject to
adjustment in accordance with the provisions of Section 11 hereof. The Company
shall, at all times while the Plan is in force, reserve such number of shares of
Common Stock as will be sufficient to satisfy the requirements of all
outstanding Options granted under the Plan.
4. Participation; Number of Options.
(a) The Senior Executives that shall be eligible to
receive Options under the Plan shall be Stephen F. Brandon
("Brandon"), Thomas F. Reed ("Reed"), Jean Sperry ("Sperry") and
Allan Avery ("Avery").
(b) The Board of Directors may grant to the following
Senior Executives Options covering the number of shares set forth next to their
respective names below:
Name Number of Shares Underlying Options
---- -----------------------------------
Brandon 283,500
Reed 72,900
Sperry 24,300
Avery 24,300
2
<PAGE>
5. Options under the Plan. The Options granted under
the Plan shall be subject to the following terms and conditions:
(a) The option price of the shares subject to an
Option shall be Five Dollars ($5.00) per share, subject to adjustment in
accordance with the provisions of Section 11 hereof.
(b) The Options shall vest to the extent of one-third
(1/3) of the number of shares covered thereby in each of 1998, 1999 and 2000,
respectively, upon the date that the Company's audited financial statements for
the fiscal years ended December 31, 1997, 1998 and 1999, respectively, are
issued, provided that the Company's cumulative pre-tax income from operations
from January 1, 1997 through December 31, 1997, 1998 or 1999, as the case may
be, as reflected in the Company's audited financial statements through the end
of the particular fiscal year, exceeds $300,000, $3,000,000 or $7,500,000,
respectively, without giving effect to any deferred financing costs resulting
from the issuance by the Company to Dominant Construction Corp. of 100,000
shares of Common Stock, in the Company's bridge financing transaction which
closed on December 9, 1996 (the "Cumulative Goals"), provided, however, that, in
the event a Cumulative Goal through the end of a particular year is not met, the
installment of Options which would have vested for that particular year had the
Cumulative Goal been met will nevertheless
3
<PAGE>
vest in a future year if the Cumulative Goal which relates to the vesting of
Options through the end of that future year is met. As an example of the
foregoing, in the event the Company's pre-tax income from operations (as
determined above) for the first fiscal year ended December 31, 1997 equals
$200,000, the initial one-third installment of the Option will not then vest;
however, in the event the cumulative pre-tax income from operations for the
fiscal year ended December 31, 1997 and 1998 equal $3,100,000, then at such
time, the Option will vest to the extent of two-thirds of the shares covered
thereby.
(c) The Options granted under the Plan shall expire
on December 31, 2006 at 5:00 p.m. Roanoke, Texas time (subject to earlier
termination as expressly provided in Section 9 hereof).
6. Stock Option Agreement. Each Option granted under
the Plan shall be authorized by the Board of Directors or the
Committee, and shall be evidenced by a Stock Option Agreement which
shall be executed by the Company and by the Senior Executive to
whom such Option is granted.
7. Rights of Option Holders. The holder of any Option
granted under the Plan shall have none of the rights of a
stockholder with respect to the stock covered by his Option until
such stock shall be transferred to him upon the exercise of his
Option.
4
<PAGE>
8. Transferability. No Option granted under the Plan shall be
transferable by the Senior Executive to whom it was granted otherwise than by
Will or the laws of descent and distribution, and, during the lifetime of such
Senior Executive, shall not be exercisable by any other person, but only by him.
9. Termination of Employment or Death.
(a) Subject to the terms of the Stock Option
Agreement, if the employment or services of a Senior Executive shall be
terminated for cause or voluntarily by the Senior Executive, then his Option
shall expire forthwith. Subject to the terms of the Stock Option Agreement, and
except as provided in subsections (b) and (c) of this Section 9, if such
employment or services shall terminate for any other reason, then such Option
may be exercised at any time within three (3) months after such termination,
subject to the provisions of subsection (d) of this Section 9. For purposes of
the Plan, the retirement of a Senior Executive either pursuant to a pension or
retirement plan adopted by the Company or at the normal retirement date
prescribed from time to time by the Company shall be deemed to be termination of
such Senior Executive's employment other than voluntarily or for cause. For
purposes of this subsection (a), a Senior Executive who leaves the employ or
services of the Company to become an employee or non-employee Director of, or a
consultant or advisor to, a
5
<PAGE>
subsidiary corporation of the Company or a corporation (or subsidiary or parent
corporation of the corporation) which has assumed the Option of the Company as a
result of a corporate reorganization, etc., shall not be considered to have
terminated his employment.
(b) If the Senior Executive holding an Option under
the Plan dies (i) while employed by, or while serving as a non-employee Director
for or a consultant or advisor to, the Company or a subsidiary corporation of
the Company, or (ii) within three (3) months after the termination of his
employment or services other than voluntarily by the Senior Executive or for
cause, then such Option may, subject to the provisions of subsection (d) of this
Section 9, be exercised by the estate of the Senior Executive, or by a person
who acquired the right to exercise such Option by bequest or inheritance or by
reason of the death of such Senior Executive at any time within one (1) year
after such death.
(c) Subject to the terms of the Stock Option
Agreement, if the Senior Executive holding an Option under the Plan ceases
employment or services because of permanent and total disability (within the
meaning of Section 22(e)(3) of the Code) while employed by, or while serving as
a non-employee Director for or consultant or advisor to, the Company or a
subsidiary corporation of the Company, then such Option may, subject to the
6
<PAGE>
provisions of subsection (d) of this Section 9, be exercised at any time within
one (1) year after his termination of employment, termination of Directorship or
termination of consulting or advisory services, as the case may be, due to the
disability.
(d) An Option may not be exercised pursuant to this
Section 9 except to the extent that the Senior Executive was entitled to
exercise the Option at the time of termination of employment, termination of
Directorship, termination of consulting or advisory services, or death, and in
any event may not be exercised after the expiration of the Option.
(e) For purposes of this Section 9, the employment
relationship of the Senior Executive will be treated as continuing intact while
he is on military or sick leave or other bona fide leave of absence (such as
temporary employment by the Government) if such leave does not exceed ninety
(90) days, or, if longer, so long as his right to reemployment is guaranteed
either by statute or by contract.
10. Exercise of Options.
(a) Upon vesting, any Option granted under the Plan
shall be exercisable as provided herein, in whole at any time, or in part from
time to time, prior to expiration. The Board of Directors or the Committee, in
its absolute discretion, may provide in any Stock Option Agreement that the
7
<PAGE>
exercise of any Options granted under the Plan shall be subject (i) to such
condition or conditions as it may impose, and (ii) to such limitations as it may
impose.
(b) An Option granted under the Plan shall be
exercised by the delivery by the holder thereof to the Company at its principal
office (attention of the Secretary) of written notice of the number of shares
with respect to which the Option is being exercised. Such notice shall be
accompanied, or followed within ten (10) days of delivery thereof, by payment of
the full option price of such shares, and payment of such option price shall be
made by the holder's delivery of (i) his check payable to the order of the
Company, or (ii) previously acquired Common Stock, the fair market value of
which shall be determined as of the date of exercise, or by the holder's
delivery of any combination of the foregoing (i) and (ii). In addition, the
holder shall, upon notification of the amount due and prior to or concurrently
with delivery to the holder of a certificate representing such shares, pay
promptly any amount necessary to satisfy applicable Federal, state or local tax
withholding requirements (the "Withholding Tax"). Alternatively, the Holder and
the Company can agree prior to the delivery to the Holder of a certificate
representing such shares, that the Company can withhold such number of shares
issuable upon the exercise of the Option having a fair market value as
determined as of the date of exercise equal to the amount necessary to satisfy
the Withholding Tax.
8
<PAGE>
11. Adjustment Upon Change in Capitalization.
(a) In the event that the outstanding Common Stock
is hereafter changed by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split-up, combination of shares,
reverse split, stock dividend or the like, an appropriate adjustment shall be
made by the Board of Directors or the Committee in the aggregate number of
shares available under the Plan, and in the number of shares and option price
per share subject to outstanding Options. If the Company shall be reorganized,
consolidated, or merged with another corporation, the holder of an Option shall
be entitled to receive upon the exercise of his Option the same number and kind
of shares of stock or the same amount of property, cash or securities as he
would have been entitled to receive upon the happening of any such corporate
event as if he had been, immediately prior to such event, the holder of the
number of shares covered by his Option.
(b) Any adjustment in the number of shares shall
apply proportionately to only the unexercised portion of the Option granted
hereunder. If fractions of a share would result from any such adjustment, the
adjustment shall be revised to the next lower whole number of shares.
9
<PAGE>
12. Further Conditions of Exercise.
(a) Unless prior to the exercise of the Option the
issuance of the shares issuable upon such exercise have been registered with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, the notice of exercise shall be accompanied by a representation or
agreement of the person or estate exercising the Option to the Company to the
effect that such shares are being acquired for investment purposes and not with
a view to the distribution thereof, or such other documentation as may be
required by the Company, unless in the opinion of counsel to the Company such
representation, agreement or documentation is not necessary to comply with such
Act.
(b) The Company shall not be obligated to deliver
any Common Stock until it has been listed on each securities exchange on which
the Common Stock may then be listed and until there has been qualification under
or compliance with such federal or state laws, rules or regulations as the
Company may deem applicable. The Company shall use reasonable efforts to obtain
such listing, qualification and compliance.
13. Effectiveness of the Plan. The Plan was adopted by
the Board of Directors on December 11, 1996.
10
<PAGE>
14. Termination, Modification and Amendment.
(a) The Plan (but not Options previously granted
under the Plan) shall terminate on December 10, 2006, which is within ten (10)
years from the date of its adoption by the Board of Directors, or sooner as
hereinafter provided, and no Option shall be granted after termination of the
Plan.
(b) The Board of Directors may at any time, on or
before the termination date referred to in Section 14(a) hereof, terminate the
Plan, or from time to time make such modifications or amendments to the Plan as
it may deem advisable.
(c) No termination, modification, or amendment of
the Plan may, without the consent of the Senior Executive to whom any Option
shall have been granted, adversely affect the rights conferred by such Option.
15. Not a Contract of Employment. Nothing contained in the
Plan or in any Stock Option Agreement executed pursuant hereto shall be deemed
to confer upon any Senior Executive to whom an Option is or may be granted
hereunder any right to remain in the employ or service of the Company or a
subsidiary corporation of the Company or any entitlement to any remuneration or
other benefit pursuant to any consulting or advisory arrangement.
16. Use of Proceeds. The proceeds from the sale of
shares pursuant to Options granted under the Plan shall constitute general funds
of the Company.
11
<PAGE>
17. Indemnification of Board of Directors or Committee.
In addition to such other rights of indemnification as they may have, the
members of the Board of Directors or the Committee, as the case may be, shall be
indemnified by the Company to the extent permitted under applicable law against
all costs and expenses reasonably incurred by them in connection with any
action, suit, or proceeding to which they or any of them may be a party by
reason of any action taken or failure to act under or in connection with the
Plan or any rights granted thereunder and against all amounts paid by them in
settlement thereof or paid by them in satisfaction of a judgment of any such
action, suit or proceeding, except a judgment based upon a finding of bad faith.
Upon the institution of any such action, suit, or proceeding, the member or
members of the Board of Directors or the Committee, as the case may be, shall
notify the Company in writing, giving the Company an opportunity at its own cost
to defend the same before such member or members undertake to defend the same on
his or their own behalf.
18. Definitions. For purposes of the Plan, the terms
"parent corporation" and "subsidiary corporation" shall have the meanings set
forth in Sections 424(e) and 424(f) of the Code, respectively, and the masculine
shall include the feminine and the neuter as the context requires.
19. Governing Law. The Plan shall be governed by, and all
questions arising hereunder shall be determined in accordance with, the laws of
the State of Delaware.
12
K:\WPDOC\CORP\NICHE\STKOPT\SENIOSOP.AGM
<PAGE>
NICHE PHARMACEUTICALS, INC.
1996 Non-Senior Executive Stock Option Plan
1. Purpose of the Plan. The Niche Pharmaceuticals, Inc.
--------------------
1996 Non-Senior Executive Stock Option Plan (the "Plan") is intended to advance
the interests of Niche Pharmaceuticals Inc. (the "Company") by inducing
individuals, or entities which are included in the definition of "employee" for
purposes of a Form S-8 registration statement filed under the Securities Act of
1933, as amended, of outstanding ability and potential to join and remain with,
or provide consulting or advisory services to, the Company, by encouraging
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.
2. Administration. The Plan shall be administered by the
Board of Directors of the Company (the "Board of Directors") or by a committee
(the "Committee") chosen by the Board of Directors.
1
<PAGE>
Except as herein specifically provided, the interpretation and construction by
the Board of Directors or the Committee of any provision of the Plan or of any
Option granted under it shall be final and conclusive. The receipt of Options by
Directors, or any members of the Committee, shall not preclude their vote on any
matters in connection with the administration or interpretation of the Plan.
3. Shares Subject to the Plan. The stock subject to Options
granted under the Plan shall be shares of the Company's common stock, par value
$.01 per share (the "Common Stock"), whether authorized but unissued or held in
the Company's treasury, or shares purchased from stockholders expressly for use
under the Plan. The maximum number of shares of Common Stock which may be issued
pursuant to Options granted under the Plan shall not exceed in the aggregate one
hundred fifty thousand (150,000) shares, subject to adjustment in accordance
with the provisions of Section 12 hereof. The Company shall at all times while
the Plan is in force reserve such number of shares of Common Stock as will be
sufficient to satisfy the requirements of all outstanding Options granted under
the Plan. In the event any Option granted under the Plan shall expire or
terminate for any reason without having been exercised in full or shall cease
for any reason to be exercisable
2
<PAGE>
in whole or in part, the unpurchased shares subject thereto shall again be
available for Options under the Plan.
4. Participation. The class of individuals that shall be
eligible to receive Options under the Plan shall be (a) with respect to
Incentive Stock Options described in Section 6 hereof, all employees (including
officers) of either the Company or any subsidiary corporation of the Company,
other than Ineligible Persons (as hereinafter defined), and (b) with respect to
Nonstatutory Stock Options described in Section 7 hereof, all employees
(including officers) and non-employee Directors of, or consultants and advisors
to, either the Company or any subsidiary corporation of the Company, other than
Ineligible Persons; provided, however, that Nonstatutory Stock Options shall not
be granted to any such consultants and advisors unless (i) bona fide services
have been or are to be rendered by such consultant or advisor and (ii) such
services are not in connection with the offer or sale of securities in a capital
raising transaction. Notwithstanding the foregoing, persons (the "Ineligible
Persons") that are eligible to receive options under the Company's 1996 Senior
Executive Stock Option Plan are not eligible to receive Options under this Plan.
The Board of Directors or the Committee, in its sole discretion, but subject to
the provisions of the Plan,
3
<PAGE>
shall determine the employees and non-employee Directors of, and the consultants
and advisors to, the Company and its subsidiary corporations to whom Options
shall be granted, and the number of shares to be covered by each Option, taking
into account the nature of the employment or services rendered by the
individuals being considered, their annual compensation, their present and
potential contributions to the success of the Company, and such other factors as
the Board of Directors or the Committee may deem relevant.
5. Stock Option Agreement. Each Option granted under the Plan
shall be authorized by the Board of Directors or the Committee, and shall be
evidenced by a Stock Option Agreement which shall be executed by the Company and
by the individual to whom such Option is granted. The Stock Option Agreement
shall specify the number of shares of Common Stock as to which any Option is
granted, the period during which the Option is exercisable, and the option price
per share thereof.
6. Incentive Stock Options. The Board of Directors or
the Committee may grant Options under the Plan, which Options are intended to
meet the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and which are subject to the following terms and
conditions and any other terms and conditions as may at any time be required by
4
<PAGE>
Section 422 of the Code(referred to herein as an "Incentive Stock Option"):
(a) No Incentive Stock Option shall be granted to
individuals other than employees of the Company or of a subsidiary
corporation of the Company.
(b) Each Incentive Stock Option under the Plan must
be granted prior to December 10, 2006, which is within ten (10) years from the
date the Plan was adopted by the Board of Directors.
(c) The option price of the shares subject to any
Incentive Stock Option shall not be less than the fair market value of the
Common Stock at the time such Incentive Stock Option is granted; provided,
however, if an Incentive Stock Option is granted to an individual who owns, at
the time the Incentive Stock Option is granted, more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of a
parent or subsidiary corporation of the Company, the option price of the shares
subject to the Incentive Stock Option shall be at least one hundred ten percent
(110%) of the fair market value of the Common Stock at the time the Incentive
Stock Option is granted.
(d) No Incentive Stock Option granted under the Plan
shall be exercisable after the expiration of ten (10) years from the date of its
grant. However, if an Incentive Stock Option is granted to an individual who
5
<PAGE>
owns, at the time the Incentive Stock Option is granted, more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of a parent or subsidiary corporation of the Company, such
Incentive Stock Option shall not be exercisable after the expiration of
five (5) years from the date of its grant. Every Incentive Stock Option
granted under the Plan shall be subject to earlier termination as
expressly provided in Section 10 hereof.
(e) For purposes of determining stock ownership
under this Section 6, the attribution rules of Section 424(d) of the Code shall
apply.
(f) For purposes of the Plan, fair market value
shall be determined by the Board of Directors or the Committee. If the Common
Stock is listed on a national securities exchange or traded on the
Over-the-Counter market, fair market value shall be the closing selling price
or, if not available, the closing bid price or, if not available, the high bid
price of the Common Stock quoted on such exchange, or on the Over-the-Counter
market as reported by the National Association of Securities Dealers Automated
Quotation (NASDAQ) system or if the Common Stock is not listed on NASDAQ, then
by the National Quotation Bureau, Incorporated, as the case may be, on the day
immediately preceding
6
<PAGE>
the day on which the Option is granted, or, if there is no trading or bid price
on that day, the closing selling price, closing bid price or high bid price on
the most recent day which precedes that day and for which such prices are
available.
7. Nonstatutory Stock Options. The Board of Directors or the
Committee may grant Options under the Plan which are not intended to meet the
requirements of Section 422 of the Code, as well as Options which are intended
to meet the requirements of Section 422 of the Code but the terms of which
provide that they will not be treated as Incentive Stock Options (referred to
herein as a "Nonstatutory Stock Option"). Nonstatutory Stock Options which are
not intended to meet those requirements shall be subject to the following terms
and conditions:
(a) A Nonstatutory Stock Option may be granted to
any individual or entity eligible to receive an Option under the Plan pursuant
to Section 4(b) hereof.
(b) The option price of the shares subject to a
Nonstatutory Stock Option shall be determined by the Board of Directors or the
Committee, in its sole discretion, at the time of the grant of the Nonstatutory
Stock Option.
(c) A Nonstatutory Stock Option granted under the
Plan may be of such duration as shall be determined by the Board of
7
<PAGE>
Directors or the Committee (subject to earlier termination as expressly provided
in Section 10 hereof).
8. Rights of Option Holders. The holder of any Option
granted under the Plan shall have none of the rights of a stockholder with
respect to the stock covered by his Option until such stock shall be
transferred to him upon the exercise of his Option.
9. Transferability. No Option granted under the Plan
shall be transferable by the individual or entity to whom it was granted
otherwise than by Will or the laws of descent and distribution, and, during the
lifetime of such individual, shall not be exercisable by any other person, but
only by him.
10. Termination of Employment or Death.
(a) Subject to the terms of the Stock Option
Agreement, if the employment of an employee by, or the services of a
non-employee Director for, or consultant or advisor to, the Company or a
subsidiary corporation of the Company shall be terminated for cause or
voluntarily by the employee, non-employee Director, consultant or advisor, then
his or its Option shall expire forthwith. Subject to the terms of the Stock
Option Agreement, and except as provided in subsections (b) and (c) of
8
<PAGE>
this Section 10, if such employment or services shall terminate for any other
reason, then such Option may be exercised at any time within three (3) months
after such termination, subject to the provisions of subsection (d) of this
Section 10. For purposes of the Plan, the retirement of an individual either
pursuant to a pension or retirement plan adopted by the Company or at the normal
retirement date prescribed from time to time by the Company shall be deemed to
be termination of such individual's employment other than voluntarily or for
cause. For purposes of this subsection (a), an employee, non-employee Director,
consultant or advisor who leaves the employ or services of the Company to become
an employee or non-employee Director of, or a consultant or advisor to, a
subsidiary corporation of the Company or a corporation (or subsidiary or parent
corporation of the corporation) which has assumed the Option of the Company as a
result of a corporate reorganization, etc., shall not be considered to have
terminated his employment or services.
(b) Subject to the terms of the Stock Option
Agreement, if the holder of an Option under the Plan dies (i) while employed by,
or while serving as a non-employee Director for, or a consultant or advisor to,
the Company or a subsidiary corporation of the Company, or (ii) within three (3)
months after the
9
<PAGE>
termination of his employment or services other than voluntarily by the employee
or non-employee Director, consultant or advisor, or for cause, then such Option
may, subject to the provisions of subsection (d) of this Section 10, be
exercised by the estate of the employee or non-employee Director, consultant or
advisor, or by a person who acquired the right to exercise such Option by
bequest or inheritance or by reason of the death of such employee or
non-employee Director, consultant or advisor at any time within one (1) year
after such death.
(c) Subject to the terms of the Stock Option
Agreement, if the holder of an Option under the Plan ceases employment or
services because of permanent and total disability (within the meaning of
Section 22(e)(3) of the Code) while employed by, or while serving as a
non-employee Director for or consultant or advisor to, the Company or a
subsidiary corporation of the Company, then such Option may, subject to the
provisions of subsection (d) of this Section 10, be exercised at any time within
one (1) year after his termination of employment, termination of Directorship or
termination of consulting or advisory services, as the case may be, due to the
disability.
(d) An Option may not be exercised pursuant to this
Section 10 except to the extent that the holder was entitled to
10
<PAGE>
exercise the Option at the time of termination of employment, termination of
Directorship, termination of consulting or advisory services, or death, and in
any event may not be exercised after the expiration of the Option.
(e) For purposes of this Section 10, the employment
relationship of an employee of the Company or of a subsidiary corporation of the
Company will be treated as continuing intact while he is on military or sick
leave or other bona fide leave of absence (such as temporary employment by the
Government) if such leave does not exceed ninety (90) days, or, if longer, so
long as his right to reemployment is guaranteed either by statute or by
contract.
11. Exercise of Options.
(a) Unless otherwise provided in the Stock Option
Agreement, any Option granted under the Plan shall be exercisable in whole at
any time, or in part from time to time, prior to expiration. The Board of
Directors or the Committee, in its absolute discretion, may provide in any Stock
Option Agreement that the exercise of any Options granted under the Plan shall
be subject (i) to such condition or conditions as it may impose, including, but
not limited to, a condition that the holder thereof remain in the employ or
service of, or continue to provide consulting or
11
<PAGE>
advisory services to, the Company or a subsidiary corporation of the Company for
such period or periods from the date of grant of the Option as the Board of
Directors or the Committee, in its absolute discretion, shall determine; and
(ii) to such limitations as it may impose, including, but not limited to, a
limitation that the aggregate fair market value of the Common Stock with respect
to which Incentive Stock Options are exercisable for the first time by any
employee during any calendar year (under all plans of the Company and its parent
and subsidiary corporations) shall not exceed one hundred thousand dollars
($100,000). In addition, in the event that under any Stock Option Agreement the
aggregate fair market value of the Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by any employee during any
calendar year (under all plans of the Company and its parent and subsidiary
corporations) exceeds one hundred thousand dollars ($100,000), the Board of
Directors or the Committee may, when shares are transferred upon exercise of
such Options, designate those shares which shall be treated as transferred upon
exercise of an Incentive Stock Option and those shares which shall be treated as
transferred upon exercise of a Nonstatutory Stock Option.
(b) An Option granted under the Plan shall be
12
<PAGE>
exercised by the delivery by the holder thereof to the Company at its principal
office (attention of the Secretary) of written notice of the number of shares
with respect to which the Option is being exercised. Such notice shall be
accompanied, or followed within ten (10) days of delivery thereof, by payment of
the full option price of such shares, and payment of such option price shall be
made by the holder's delivery of (i) his check payable to the order of the
Company, or (ii) previously acquired Common Stock, the fair market value of
which shall be determined as of the date of exercise, or by the holder's
delivery of any combination of the foregoing (i) and (ii). In addition, with
respect to a Nonstatutory Stock Option issued under the Plan, the holder shall,
upon notification of the amount due and prior to or concurrently with delivery
to the holder of a certificate representing such shares, pay promptly any amount
necessary to satisfy applicable Federal, state or local tax withholding require-
ments (the "Withholding Tax"). Alternatively, the holder and the Company can
agree prior to the delivery to the holder of a certificate representing such
shares, that the Company may withhold such number of shares issuable upon the
exercise of the Nonstatutory Stock Option having a fair market value as deter-
mined as of the date of exercise equal to the amount necessary to satisfy the
Withholding Tax.
12. Adjustment Upon Change in Capitalization.
(a) In the event that the outstanding Common Stock
is hereafter changed by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split-up, combination of shares,
reverse split, stock dividend or the like, an appropriate adjustment shall be
made by the Board of Directors or the Committee in the aggregate number of
shares available under the Plan, in the number of shares and option price per
share subject to outstanding Options, and in any limitation on exerciseability
referred to in Section 11(a)(ii) hereof which is set forth in outstanding
Incentive Stock Options. If the Company
13
<PAGE>
shall be reorganized, consolidated, or merged with another corporation, the
holder of an Option shall be entitled to receive upon the exercise of his Option
the same number and kind of shares of stock or the same amount of property, cash
or securities as he would have been entitled to receive upon the happening of
any such corporate event as if he had been, immediately prior to such event, the
holder of the number of shares covered by his Option; provided, however, that in
such event the Board of Directors or the Committee shall have the discretionary
power to take any action necessary or appropriate to prevent any Incentive Stock
Option granted hereunder which is intended to be an "incentive stock option"
from being disqualified as such under the then existing provisions of the Code
or any law amendatory thereof or supplemental thereto.
(b) Any adjustment in the number of shares shall
apply proportionately to only the unexercised portion of the Option granted
hereunder. If fractions of a share would result from any such adjustment, the
adjustment shall be revised to the next lower whole number of shares.
13. Further Conditions of Exercise.
(a) Unless prior to the exercise of the Option the
issuance of the shares issuable upon such exercise has been registered with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
14
<PAGE>
amended, the notice of exercise shall be accompanied by a representation
or agreement of the person or estate exercising the Option to the Company to the
effect that such shares are being acquired for investment purposes and not
with a view to the distribution thereof, or such other documentation as may be
required by the Company, unless in the opinion of counsel to the Company such
representation, agreement or documentation is not necessary to comply with
such Act.
(b) The Company shall not be obligated to deliver
any Common Stock until it has been listed on each securities exchange on which
the Common Stock may then be listed or until there has been qualification under
or compliance with such federal or state laws, rules or regulations as the
Company may deem applicable. The Company shall use reasonable efforts to obtain
such listing, qualification and compliance.
14. Effectiveness of the Plan. The Plan was adopted by the
Board of Directors on December 11, 1996. The Plan shall be subject to approval
on or before December 10, 1997, which is within one (1) year of adoption of the
Plan by the Board of Directors, by the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Company entitled to
vote thereon, present in person or by proxy when such approval is
15
<PAGE>
sought. In the event such stockholder approval is withheld or otherwise not
received on or before the latter date, the Plan and, subject to the terms of the
Stock Option Agreement, all Incentive Stock Options that may have been granted
hereunder shall become null and void.
15. Termination, Modification and Amendment.
(a) The Plan (but not Options previously granted
under the Plan) shall terminate on December 10, 2006, which is within ten (10)
years from the date of its adoption by the Board of Directors, or sooner as
hereinafter provided, and no Option shall be granted after termination of the
Plan.
(b) The Plan may from time to time be terminated,
modified, or amended by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock of the Company entitled to vote thereon,
present in person or by proxy when such action is sought.
(c) The Board of Directors may at any time, on or
before the termination date referred to in Section 15(a) hereof, terminate the
Plan, or from time to time make such modifications or amendments to the Plan as
it may deem advisable; provided, however, that the Board of Directors shall not,
without approval by the affirmative vote of the holders of a majority of the
16
<PAGE>
outstanding shares of capital stock of the Company entitled to vote thereon,
present in person or by proxy when such approval is sought, increase (except
as otherwise provided by Section 12 hereof) the maximum number of
shares as to which Incentive Stock Options may be granted hereunder, change the
designation of the employees or class of employees eligible to receive Incentive
Stock Options, or make any other change which would prevent any Incentive
Stock Option granted hereunder which is intended to be an "incentive stock
option" from disqualifying as such under the then existing provisions of the
Code or any law amendatory thereof or supplemental thereto.
(d) No termination, modification, or amendment of
the Plan may, without the consent of the individual or entity to whom any Option
shall have been granted, adversely affect the rights conferred by such Option.
16. Not a Contract of Employment. Nothing contained in the
Plan or in any Stock Option Agreement executed pursuant hereto shall be deemed
to confer upon any individual or entity to whom an Option is or may be granted
hereunder any right to remain in the employ or service of the Company or a
subsidiary corporation of the Company or any entitlement to any remuneration or
other benefit pursuant to any consulting or advisory arrangement.
17
<PAGE>
17. Use of Proceeds. The proceeds from the sale of shares
pursuant to Options granted under the Plan shall constitute general funds of the
Company.
18. Indemnification of Board of Directors or Committee. In
addition to such other rights of indemnification as they may have, the members
of the Board of Directors or the Committee, as the case may be, shall be
indemnified by the Company to the extent permitted under applicable law against
all costs and expenses reasonably incurred by them in connection with any
action, suit, or proceeding to which they or any of them may be a party by
reason of any action taken or failure to act under or in connection with the
Plan or any rights granted thereunder and against all amounts paid by them in
settlement thereof or paid by them in satisfaction of a judgment of any such
action, suit or proceeding, except a judgment based upon a finding of bad faith.
Upon the institution of any such action, suit, or proceeding, the member or
members of the Board of Directors or the Committee, as the case may be, shall
notify the Company in writing, giving the Company an opportunity at its own cost
to defend the same before such member or members undertake to defend the same on
his or their own behalf.
19. Definitions. For purposes of the Plan, the terms
18
<PAGE>
"parent corporation" and "subsidiary corporation" shall have the meanings set
forth in Sections 424(e) and 424(f) of the Code, respectively, and the masculine
shall include the feminine and the neuter as the context requires.
20. Governing Law. The Plan shall be governed by, and
all questions arising hereunder shall be determined in accordance
with, the laws of the State of Delaware.
K:\WPDOC\CORP\NICHE\STKOPT\NONSREXE.96
19
<PAGE>
LOAN AGREEMENT
This LOAN AGREEMENT ("Agreement") is made and entered into effective
the 20th day of January, 1997, by and between Allan Avery, GEM Communications,
Inc. and Niche Pharmaceuticals, Inc., a Delaware corporation ("Borrower").
WHEREAS, Borrower desires to obtain from Lender and Lender is willing
to make such loan on the term and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
herein contained, the parties agree as follows:
1. LOAN. Lender shall make available to Borrower an aggregate sum of
One Hundred- Fifty Thousand Dollars ($150,000) for loan to Borrower. Borrower
may from time to time during the term of this Agreement make requests for
advances on the loan, such advances not to exceed in the aggregate the principal
sum of One Hundred-Fifty Thousand Dollars ($150,000). Any amounts advanced under
the loan shall bear interest at the rate of ten percent (10%) per annum.
2. REPAYMENT. Borrower shall repay any or all amounts advanced
by Lender hereunder upon demand by Lender therefor. Borrower's obligation to
repay to Lender any amounts advanced hereunder shall be represented by
Borrower's promissory note to Lender executed contemporaneously herewith and
attached hereto.
3. TERM. This Agreement shall be in effect for a period of one
(1) year from the effective date hereof.
4. 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.
5. PARAGRAPH HEADINGS. The paragraph headings contained herein
are for convenience only, and do not purport to accurately summarize 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.
6. 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;
<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
arising 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.
7. APPLICABLE LAW. This Agreement shall be subject to, construed
in accordance with and governed by, the laws of the State of Texas, Venue of any
legal proceeding hereunder shall be in Denton County, Texas.
8. 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.
9. MISCELLANEOUS. 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 provision had
never been contained herein . If, moreover, any one or more of the provisions
contained in this Agreement shall, for any reason, be held to be excessively
broad as to time, duration, 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.
<PAGE>
10. 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.
IN WITNESS WHEREOF, the parties have executed this Loan Agreement
effective the date set forth above.
LENDER:
/s/ Allan R. Avery
ALLAN AVERY, PRESIDENT
BORROWER:
NICHE PHARMACEUTICALS, INC.
a Delaware Corporation
/s/ Stephen F. Brandon
STEPHEN F. BRANDON, PRESIDENT/CEO
<PAGE>
PROMISSORY NOTE
$150,000 Roanoke, Texas January 20, 1997
For value received Niche Pharmaceuticals, Inc. ("MAKER") promise to pay
to the order of ALLAN AVERY, GEM COMMUNICATIONS, INC. ("HOLDER") at 40 Richards
Avenue, Norwalk, CT 06854, the sum of One Hundred-Fifty Thousand Dollars
($150,000), 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.
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 Delaware Corporation
By /s/ Stephen F. Brandon
STEPHEN F. BRANDON, President/CEO
<PAGE>
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), Registration No.
333-17767, 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
January 28, 1997
/s/ Sherman A. Drusin
SHERMAN A. DRUSIN
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CURRENCY> 1
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> Dec-31-1996 Dec-31-1995
<PERIOD-START> Jan-01-1996 Jan-01-1995
<PERIOD-END> Sep-30-1996 Dec-31-1995
<EXCHANGE-RATE> 1 1
<CASH> 21,237 156,772
<SECURITIES> 0 0
<RECEIVABLES> 217,188 84,656
<ALLOWANCES> 0 0
<INVENTORY> 56,729 105,401
<CURRENT-ASSETS> 295,154 346,829
<PP&E> 13,724 20,173
<DEPRECIATION> 35,544 27,926
<TOTAL-ASSETS> 1,417,009 1,513,196
<CURRENT-LIABILITIES> 664,102 414,333
<BONDS> 1,410,444 1,615,824
0 0
0 0
<COMMON> 1,052 1,050
<OTHER-SE> (658,589) (518,011)
<TOTAL-LIABILITY-AND-EQUITY> 1,417,009 1,513,196
<SALES> 906,744 540,121
<TOTAL-REVENUES> 906,744 606,268
<CGS> 342,362 183,146
<TOTAL-COSTS> 342,362 183,146
<OTHER-EXPENSES> 563,612 334,941
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 144,042 91,800
<INCOME-PRETAX> 770 88,181
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (140,588) (1,003)
<EPS-PRIMARY> (13) 0
<EPS-DILUTED> (13) 0
</TABLE>
