<PAGE>
As filed with the Securities and Exchange Commission on November 12, 1997
Registration No. 333-33201
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Pre-Effective Amendment No. 3
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
FLEMINGTON PHARMACEUTICAL CORPORATION
(Name of Small Business Issuer in its charter)
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New Jersey 2834 22-2407152
(State or other jurisdiction of incorporation) (Primary Standard industrial (IRS Employer
classification number) Identification No.)
</TABLE>
43 Emery Avenue
Flemington, New Jersey 08822
(908) 782-3431
(Address and telephone number of registrant's principal executive offices)
Harry A. Dugger, III, Ph.D., President
Flemington Pharmaceutical Corporation
43 Emery Avenue
Flemington, New Jersey 08822
(908) 782-3431
(Name, address, including zip code and telephone number,
including area code, of agent for service)
* * * * * * * * *
Copies to:
GERARD S. DiFIORE, ESQ. STEVEN F. WASSERMAN, ESQ.
Reed Smith Shaw & McClay LLP Bernstein & Wasserman, LLP
One Riverfront Plaza 950 Third Avenue
Newark, New Jersey 07102 New York, New York 10022
(201) 622-1600 (212) 826-0730
(201) 622-4747 (fax) (212) 371-4730 (fax)
Approximate date of sale to public: As soon as practicable after the
Registration Statement becomes effective.
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. [ ]
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. [ ]
If any of the Units being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933, check the following box. [X]
<PAGE>
Pursuant to Rule 416 under the Securities Act of 1933, this
Registration Statement also covers such indeterminate number of additional
securities, if any, which may become issuable by virtue of the anti-dilution
provisions of the Warrants and the Unit Purchase Option.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Proposed
Title of Each Maximum Proposed Maximum
Class of Securities Amount to be Offering Price Aggregate Amount of
to be Registered Registered Per Unit (1) Offering Price(1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
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Units, each consisting of one share of
Common Stock,
par value $.01 per share and one 776,250(2) $5.90 $4,579,875.00 $1,387.84
Redeemable Class A Warrant
to purchase Common Stock(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share, underlying
the Class A Warrants(3) 776,250(2) $5.80 $4,502,250.50 $1,364.32
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriters' Unit Purchase
Option (4) 67,500 $ .001 $ 67.50 $ .02
- ------------------------------------------------------------------------------------------------------------------------------------
Units consisting of one share of Common Stock
and one Class A Warrant underlying
the Underwriters' Unit Purchase Option (5) 67,500 $9.735 $ 657,112.50 $ 199.13
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share,
underlying the Class A Warrant included
in the Underwriters' Unit
Purchase Option (6) 67,500 $5.80 $ 391,500.00 $ 118.67
- ------------------------------------------------------------------------------------------------------------------------------------
Total.............................. $3,069.98
Fee Previously Paid (no additional fee
necessary) $4,139.59
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457 solely for the purpose of calculating the
registration fee.
(2) Includes 101,250 Units included in the Underwriters' over-allotment option.
(3) Issuable upon exercise of the Class A Warrants.
(4) Issuable to the Underwriters.
(5) Issuable upon exercise of the Unit Purchase Option.
(6) Issuable upon exercise of the Class A Warrants included in the Unit
Purchase Option.
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
CROSS-REFERENCE SHEET
Showing Location in Prospectus of Part I Items of Form SB-2
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Item Number and Heading
In Form SB-2 Registration Statement Location in Prospectus
----------------------------------- ----------------------
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1 Front of Registration Statement and Outside Front Cover
of Prospectus............................................ Front of Registration Statement; Outside Front Cover Page
of Prospectus
2 Inside Front and Outside Back Cover Pages of Prospectus.. Inside Front and Outside Back Cover Pages of Prospectus
3 Summary Information and Risk Factors..................... Prospectus Summary; Risk Factors
4 Use of Proceeds.......................................... Prospectus Summary; Use of Proceeds; Management's
Discussion and Analysis of Financial Condition and Results
of Operations
5 Determination of Offering Price.......................... Outside Front Cover Page of Prospectus; Risk Factors;
Underwriting
6 Dilution................................................. Risk Factors; Dilution
7 Selling Security Holders................................. Not Applicable
8 Plan of Distribution..................................... Outside Front Cover Page of Prospectus; Prospectus Summary;
Underwriting
9 Legal Proceedings........................................ Business
10 Directors, Executive Officers, Promoters and Control
Persons.................................................. Management; Certain Transactions
11 Security Ownership of Certain Beneficial Owners and
Management............................................... Principal Stockholders
12 Description of Units..................................... Description of Units
13 Interest of Named Experts and Counsel.................... Legal Matters; Experts
14 Disclosure of Commission Position on Indemnification for
Securities Act Liabilities............................... Not Applicable
15 Organization Within Last Five Years...................... Not Applicable
16 Description of Business.................................. Prospectus Summary; Risk Factors; Business
17 Management's Discussion and Analysis or Plan
of Operation............................................. Management's Discussion and Analysis of Financial Condition
and Results of Operations
18 Description of Property.................................. Business
19 Certain Relationships and Related Transactions........... Certain Transactions; Management
20 Market for Common Equity and Related Stockholder Matters.
Outside Front Cover Page of Prospectus; Prospectus Summary;
Dividend Policy; Description of Units; Shares Eligible for
Future Sale
21 Executive Compensation................................... Management
22 Financial Statements..................................... Financial Statements
23 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to the registration or qualification under the securities laws of any such
State.
SUBJECT TO COMPLETION; DATED November __, 1997
PROSPECTUS [LOGO]
FLEMINGTON PHARMACEUTICAL CORPORATION
675,000 Units Consisting of 675,000 Shares of Common Stock and
675,000 Redeemable Class A Warrants
FLEMINGTON PHARMACEUTICAL CORPORATION, a New Jersey corporation (the "Company")
hereby offers 675,000 units (the "Units"), each Unit consisting of one share of
common stock, par value $.01 per share (the "Common Stock"), and one redeemable
Class A Common Stock Purchase Warrant (the "Class A Warrants"). Each Class A
Warrant entitles the holder to purchase one share of Common Stock at any time
during the period commencing one year from the date of this Prospectus and
ending on the fifth anniversary of the date of this Prospectus at an exercise
price of $5.80 per share, subject to adjustment. The Common Stock and the Class
A Warrants comprising the Units will be separately transferable immediately upon
issuance. The Company may redeem the Class A Warrants commencing ___, 1999 (18
months from the date of this Prospectus) or earlier with the consent of Monroe
Parker Securities, Inc., the representative (the "Representative") of the
several underwriters ("Underwriters") at a price of $.10 per Warrant, on not
less than 30 days prior written notice if the last sale price of the Common
Stock has been at least 200% of the current Warrant exercise price, subject to
adjustment, for at least twenty consecutive trading days ending within three
days prior to the date on which notice of redemption is given. See "DESCRIPTION
OF SECURITIES - Warrants."
(cover continued on following page)
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY INVESTORS WHO CAN AFFORD
TO SUSTAIN A LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" ON
PAGE ____ AND "DILUTION" ON PAGE _____.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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========================================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------------------------------------------------
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Per Unit................................. $ 5.90 $ .59 $ 5.31
- -------------------------------------------------------------------------------------------------------------------------
Total (3)................................ $3,982,500 $398,250 $3,584,250
========================================================================================================================
</TABLE>
(1) Excludes additional compensation to be received by the Underwriters in
the form of: (i) a 3% non-accountable expense allowance of $119,475
($137,396 if the Overallotment Option (as defined in note (3) below) is
exercised in full); (ii) an option (the "Underwriters' Option") to
purchase 67,500 Units, exercisable over a period of four years
commencing one year from the date of this Prospectus at an exercise
price equal to 165% of the public offering price of the Units being
offered hereby; and (iii) a two-year financial consulting agreement
providing for aggregate payments to the Representative of $75,000. The
Company has agreed under certain circumstances to pay the Underwriters
a Warrant solicitation fee of 5% of the exercise price received for
each Warrant exercise. In addition, the Company has agreed to indemnify
the Underwriters against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"UNDERWRITING."
(2) Before deducting expenses of the offering payable by the Company,
including the Underwriters' non-accountable expense allowance,
estimated to total $369,475 ($387,396 if the Over Allotment option is
exercised in full).
(3) The Company has granted the Underwriters an option, exercisable within
45 days after the date of this Prospectus, to purchase up to an
additional 101,250 Units (the "Overallotment Option") on the same terms
and conditions as set forth above solely for the purpose of covering
overallotments, if any. If the Overallotment Option is exercised in
full, the total price to public, underwriting discounts and commissions
and proceeds to Company will be $4,579,875, $457,988 and $4,121,887,
respectively, (exclusive of other expenses payable by the Company of
$250,000 and the Underwriters' non-accountable expenses allowance of
$137,396). See "UNDERWRITING."
------------------------------------------------------------------------------
MONROE PARKER
SECURITIES, INC.
------------------------------------------------------------------------------
The date of this Prospectus is November __, 1997
<PAGE>
(cover continued)
Prior to this offering, there has been no public market for the Units,
Common Stock or Warrants. The offering price of the Units and the exercise price
and the terms of the Warrants have been determined by negotiations between the
Company and the Representative, and are not necessarily related to net asset
value, projected earnings or other established criteria of value. There can be
no assurance that an active trading market in the Company's securities will
develop after the completion of this offering, or be sustained. The Units,
Common Stock and Warrants have been approved for inclusion on the NASD OTC
Bulletin Board under the symbols "FLEMU," "FLEM" and "FLEMW," respectively. The
OTC Bulletin Board System is an unorganized, inter-dealer, over-the-counter
market which provides significantly less liquidity than the Nasdaq Stock Market,
and quotes for securities included on the OTC Bulletin Board are not listed in
the financial sections of newspapers are those for the Nasdaq Stock Market. In
the event the securities are not included on the OTC Bulletin Board, quotes for
the securities may be included in the "pink sheets" for the over-the-counter
market. See "UNDERWRITING" and "RISK FACTORS - Possible Adverse Effect of "Penny
Stock" Rules".
The Units are being offered on a "firm commitment" basis by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to the Underwriters' right to reject orders in
whole or in part, and to the approval of certain legal matters by counsel and
certain other conditions. It is expected that delivery of certificates
representing the Common Stock and Warrants will be made against payment therefor
on or about , 1997.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
public accountants after the end of each fiscal year, commencing with its fiscal
year ending July 31, 1998 and will make available such other periodic reports as
the company may deem to be appropriate or as may be required by law. The Company
has registered the Units, the Common Stock and the Warrants under the Securities
Exchange Act of 1934 (the "Exchange Act") and, commencing on the date of this
Prospectus, will be subject to the reporting requirements of the Exchange Act
and will file all required information with the Securities and Exchange
Commission (the "Commission").
------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMPANY'S SECURITIES, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS.
ALTHOUGH THEY HAVE NO OBLIGATION TO DO SO, THE UNDERWRITERS MAY FROM
TIME TO TIME ACT AS MARKET MAKERS AND OTHERWISE EFFECT TRANSACTIONS IN THE
COMPANY'S SECURITIES. THE UNDERWRITERS, IF THEY PARTICIPATE IN THE MARKET, MAY
BECOME DOMINATING INFLUENCES IN THE MARKET FOR THE SECURITIES, HOWEVER, THERE
CAN BE NO ASSURANCE THAT THE UNDERWRITERS WILL OR WILL NOT CONTINUE TO BE A
DOMINATING INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED
HEREUNDER MAY BE SIGNIFICANTLY AFFECTED BY THE DEGREE OF THE UNDERWRITERS'
PARTICIPATION IN SUCH MARKET. THE UNDERWRITERS MAY DISCONTINUE SUCH ACTIVITIES
AT ANY TIME OR FROM TIME TO TIME.
SPECIAL STANDARDS FOR SECURITIES SOLD IN CALIFORNIA
EACH CALIFORNIA INVESTOR MUST HAVE AN ANNUAL GROSS INCOME OF AT LEAST
$65,000 AND A NET WORTH, EXCLUSIVE OF HOME, FURNISHINGS AND AUTOMOBILES, OF AT
LEAST $250,000 OR IN THE ALTERNATIVE, A NET WORTH, EXCLUSIVE OF HOME,
FURNISHINGS AND AUTOMOBILES, OF AT LEAST $500,000. IN ADDITION, AN INVESTOR'S
TOTAL PURCHASE MAY NOT EXCEED 10% OF SUCH INVESTOR'S NET WORTH.
4
<PAGE>
Comparison of Delivery Systems
Flemington's Delivery System
- ----------------- -------------------- ----------------
LINGUAL SPRAY OR FORMULATION + GLASS OF WATER
BITE CAPSULE TABLET OR CAPSULE
- ----------------- -------------------- ----------------
--------------------
STOMACH -------------
FORMULATION + WATER DISSOLUTION
-------------
STOMACH
SOLUTION OF DRUG
--------------------
--------------------
PORTAL BLOOD
--------------------
- ----------------- ------------------- ----------------
EXCRETION 1st Pass LIVER 1st Pass METABOLITES
- ----------------- ------------------- ----------------
----------------------
SYSTEMIC CIRCULATION
----------------------
----------------------
RECEPTOR
----------------------
----------------------
THERAPEUTIC EFFECTS
or
ADVERSE EFFECTS
----------------------
Diagram comparing conventional oral dosage formulations with the
Company's lingual spray and bite capsule formulations which bypass the
gastro-intestinal tract and avoid metabolism by the liver, rapidly delivering
the therapeutic agent directly into systemic circulation. The Company believes
that bypassing the digestive system increases the amount of active ingredient
reaching systemic circulation, thereby creating a quicker therapeutic effect
with less side effects than traditional delivery systems.
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere herein. Unless otherwise indicated, the information in this Prospectus
does not give effect to the exercise of (i) the Class A Warrants; (ii) the
Underwriters' Options; (iii) outstanding warrants; or (iv) options granted or
available for grant under the Company's 1992 Stock Option Plan and 1997 Stock
Option Plan (collectively the "Stock Option Plans") but does give effect to the
conversion of the Bridge Notes (as defined herein) into Common Stock concurrent
with the closing of this offering. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed under "Risk Factors."
The Company
Flemington Pharmaceutical Corporation, a New Jersey corporation (the
"Company"), is engaged in the development of novel application drug delivery
systems for presently marketed prescription and over-the-counter ("OTC") drugs.
The Company's patent-pending delivery systems are lingual sprays and soft
gelatin bite capsules, enabling drug absorption through the oral mucosa, and
more rapid absorption into the bloodstream than presently available oral
delivery systems. The Company's proprietary oral dosage delivery systems enhance
and greatly accelerate the onset of the therapeutic benefits which the drugs are
intended to produce. The Company refers to its delivery systems as
Immediate-Immediate Release (I2RTM) because its delivery systems are designed to
provide therapeutic benefits within minutes of administration. The Company's
development efforts for its novel drug delivery systems are concentrated on
drugs which are already available and proven in the marketplace. In addition to
increasing bioavailability by avoiding metabolism by the liver before entry into
the bloodstream, the Company believes that its proprietary delivery systems
offer the following significant advantages: (i) improved drug safety profile by
reducing the required dosage, including possible reduction of side-effects; (ii)
improved dosage reliability; (iii) allowing medication to be taken without
water; and (iv) improved patient convenience and compliance.
The Company has initially identified approximately 50 presently
marketed drugs that meet the Company's criteria for its drug delivery systems.
The Company will concentrate its product development activities on those
pharmaceuticals with significant prescription or OTC sales. The Company believes
that applying a novel application delivery system to existing drugs involves
less cost, time and risk than developing and commercializing a new chemical
entity. The Company believes that there is significant opportunity to combine
its delivery systems with existing pharmaceuticals to expand the market for an
existing drug, differentiate a product from a generic or brand name competition,
and possibly create new markets.
6
<PAGE>
In light of the material expense and delays associated with
independently developing and obtaining approval of pharmaceutical products, the
Company will only continue to develop such products through collaborative
arrangements with major pharmaceutical companies, which will fund that
development. To date, the Company has signed two such development agreements
with major pharmaceutical companies.
Since its inception in 1982, the Company has been a consultant to the
pharmaceutical industry, focusing on product development activities of various
European pharmaceutical companies, and since 1992 has used its consulting
revenues to fund its own product development activities. The Company's recent
focus on developing its own products evolved naturally out of its consulting
experience for other pharmaceutical companies. Substantially all of the
Company's revenues have been derived from its consulting activities. The
Company's business address is 43 Emery Avenue, Flemington, New Jersey 08822, and
its telephone number is (908) 782-3431.
The Offering
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Securities Offered: 675,000 Units, each Unit consisting of one share of Common
Stock and one Redeemable Class A Common Stock Purchase
Warrant (the "Warrants"). The Common Stock and Warrants
comprising the Units will be separately transferable
immediately upon issuance. See "Description of Securities."
Description of Warrants:
Exercise of Warrants.............................. Subject to redemption by the Company the Warrants may be
exercised at any time during the four-year period commencing
one year from the date of this Prospectus at an exercise
price of $5.80 per share, subject to adjustment.
Redemption of Warrants......................... The Warrants are redeemable by the Company commencing 18
months from the date of the Prospectus, or earlier with the
consent of the Representative, at $.10 per Warrant, on not
less than 30 days' prior written notice, provided that the
last sale price of the Common Stock is at least 200% of
the current Warrant exercise price, subject to adjustment,
for at least 20 consecutive trading days ending within three
days prior to the date on which notice of redemption is
given. See "Description of Securities."
</TABLE>
7
<PAGE>
Common Stock Outstanding:
Prior to this Offering............................ 2,597,390 shares(1)(2)
After this Offering............................... 3,872,390 shares(1)(2)
Proposed OTC Bulletin Board Symbols (2):
Units....................................FLEMU
Common Stock..............................FLEM
Warrants.................................FLEMW
(1) Unless otherwise indicated, all information in this Prospectus assumes
that: (i) no Warrants are exercised; (ii) the Underwriters' Options are
not exercised; (iii) no options under the Company's Stock Option Plans
are exercised; (iv) none of the Company's 100,000 outstanding warrants
and 600,000 non Plan options are exercised; and (v) the $300,000 in
convertible notes issued by the Company to Harry Dugger and John
Moroney (the "Bridge Notes" or "Bridge Financing") have been converted
into 600,000 shares of Common Stock concurrent with the consummation of
this offering. See "CAPITALIZATION", "DESCRIPTION OF SECURITIES" and
"UNDERWRITING."
(2) Notwithstanding inclusion on the OTC Bulletin Board there can be no
assurance that a trading market will develop for the Units, Common Stock
or the Warrants, or if any such market develops, that it will be
sustained. See "RISK FACTORS."
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Estimated Net Proceeds............................... Approximately $3,214,775 ($3,734,491 if the Overallotment
Option is exercised in full) after deducting underwriting
discounts and commissions of $398,250, and the
non-accountable expense allowance of $119,475 ($457,988
and $137,396, respectively, if the Overallotment Option is
exercised in full) and other offering expenses of
approximately $250,000, regardless of the number of Units
sold.
Use of Proceeds...................................... Research, clinical studies and stability testing, product
development, marketing and sales expenses and general
corporate purposes.
Risk Factors......................................... An investment in the Units involves a high degree of risk
and immediate substantial dilution. Prospective investors
should review and consider carefully the factors described
under "RISK FACTORS" and "DILUTION." The report of the
Company's auditors dated September 10, 1997 concerning the
Company's financial statements for each of the two years
in the period ended July 31, 1997 contains an explanatory
paragraph expressing substantial doubt with respect to the
Company's ability to continue as a going concern without
obtaining additional financing such as that contemplated
by this offering.
</TABLE>
8
<PAGE>
SUMMARY FINANCIAL DATA
Year Ended July 31
-----------------------------
Summary Operating Data 1997 1996
---- ----
Operating Revenues $915,000 $1,402,000
Consulting Fees (non-recurring) -- 2,070,000
Interest Income 18,000 31,000
------------ -----------
Total Revenues $933,000 $3,503,000
Expenses:
Operating Expenses 735,000 819,000
Product Development 171,000 172,000
Selling, general and
administrative expenses 437,000 410,000
Interest Expense 1,000 2,000
Consulting Fee Expenses -- 1,606,000
(non-recurring)
Total Expenses 1,344,000 3,009,000
------------ -----------
Net Income (Loss) $ (411,000) $ 494,000
------------ -----------
Per Common Share
Net Income (Loss) (.10) .12
Pro forma Net Income (Loss) (.14) .04
Balance Sheet Data
At July 31, 1997
-------------------------------
Actual As Adjusted(1)
---------- ---------------
Working Capital (Deficit) $(39,000) $ 3,253,000
Long-Term Convertible Debt $300,000 0
Total Assets 575,000 3,790,000
Total Liabilities 812,000 512,000
Shareholders' equity (Deficit) (237,000) 3,278,000
(1) As adjusted to give effect to the conversion of the $300,000 Bridge Notes
into 600,000 shares of Common Stock and receipt of the net proceeds of the
offering contemplated herein of $3,214,775 ($3,982,500 proceeds less discount
and commissions, 3% non accountable allowance and other offering expenses of
$398,250, $119,475 and $250,000, respectively), but does not give effect to the
possible exercise of: (i) the Underwriters' Options; (ii) the Class A Warrants;
(iii) any options issued or issuable under the Company's Stock Option Plans; and
(iv) other outstanding warrants. See "CAPITALIZATION" and "CERTAIN
TRANSACTIONS."
9
<PAGE>
RISK FACTORS
The securities offered hereby are speculative and involve a high degree
of risk. In analyzing this offering, prospective investors should give careful
consideration to the following risk factors, in addition to the other
information set forth elsewhere in this Prospectus.
Accumulated Deficit and Operating Losses; Anticipated Continuing
Losses; Limited Working Capital; Going Concern Qualification in Auditor's
Report. The Company had an accumulated deficit at July 31, 1997 of $1,160,000
and a working capital deficit of $39,000. The Company incurred operating losses
in three of the last five fiscal years ended July 31 including a net loss of
$411,000 for the year ended July 31, 1997. Because the Company has changed its
business focus from pharmaceutical consulting to product development, the
Company anticipates that it will incur substantial operating expenses in
connection with continued development, testing and approval of its proposed
products, and expects these expenses will result in continuing and, perhaps,
significant operating losses until such time, if ever, that the Company is able
to achieve adequate product sales levels. Additionally, the Company's financial
statements are presented on the basis that the Company is a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the ordinary course of business. The report of the Company's auditors dated
September 10, 1997 concerning the Company's financial statements for the two
years ended July 31, 1997 contains an explanatory paragraph expressing
substantial doubt with respect to the Company's ability to continue as a going
concern without obtaining additional financing such as that contemplated by this
offering. The financial statements do not reflect adjustments to amounts and
classification of recorded assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue in
existence. See Note 2 to the Financial Statements and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Dependence on Principal Clients. To date, substantially all of the
Company's revenues have been derived from consulting services rendered to a
limited number of clients, the loss of certain of which would have an adverse
effect on the Company. For the year ended July 31, 1997, consulting activities
relating to the Company's two largest clients, with which the Company has
written agreements, accounted for approximately 24% and 23%, respectively, of
the Company's revenues. The project for the Company's largest client in the year
ended July 31, 1996 was completed in that year and the Company does not expect
to perform any additional services for that client in the immediate future.
There can be no assurance that the Company's clients will continue to seek
consulting services from the Company or that the Company will continue to
provide consulting services to the industry. See "BUSINESS - Customer
Dependence."
Evolving Nature of Business; Entry into Product-Based Business.
Although the Company has received revenue from its own product development
activities, these revenues are insignificant as compared to the Company's
revenues from product development consultation work done for its clients. The
nature of the Company's revenue received from its own product development
consists of payments by major pharmaceutical companies for research and
bioavailability studies, pilot clinical trials, and similar milestone-related
payments. The Company expects to continue its consulting activities, although to
a lesser extent. The future growth and profitability of the Company will,
however, be dependent principally upon the Company's ability to successfully
complete the development of, obtain regulatory approvals for, and license out or
market, its own proposed products. Accordingly, the Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered in connection with the establishment of a new business in a highly
competitive industry, characterized by frequent new product introductions. The
Company anticipates that it will incur substantial operating expenses in
connection with the development, testing and approval of its proposed products
and expects these expenses to result in continuing and, perhaps, significant
operating losses until such time, if ever, that the Company is able to achieve
adequate levels of sales or license revenues. There can be no assurance that the
Company will be able significantly to increase revenues or achieve profitable
operations.
10
<PAGE>
Significant Capital Requirements; Dependence on Offering Proceeds for
Product Development and Commercialization. The Company has an immediate need for
the proceeds of this offering or other financing to fund planned expenditures in
connection with the research, development, testing and approval of its proposed
products. In the event the Company's cash flow from operations is insufficient
to meet current expenditures, proceeds of the offering will also be used for
general working capital purposes, including the payment of general overhead
expenses. These expenditures are expected to be significant. The Company
anticipates, based on its current proposed plans and assumptions relating to its
operations (including the timetable of, and costs associated with, new product
development), that the proceeds of this offering together with projected cash
flow from operations will be sufficient to satisfy its contemplated cash
requirements for approximately 24 months following the consummation of this
offering. If the Company's plans change, its assumptions change or prove to be
inaccurate, or if the proceeds of this offering and/or projected cash flow prove
to be insufficient to fund operations, due to unanticipated expenses, technical
problems or difficulties or otherwise, the Company could be required to seek
additional financing sooner than currently anticipated. The Company has no
current arrangements with respect to, or sources of, additional financing, and
there can be no assurance that additional financing will be available to the
Company on acceptable terms, if at all. Pursuant to the Underwriting Agreement,
the Company may not offer, sell, issue or transfer its capital stock within
thirty-six (36) months of the closing of this offering without the prior written
consent of the Representative. In view of the Company's very limited resources,
its anticipated expenses and the competitive environment in which the Company
operates, any inability to obtain additional financing could severely limit the
Company's ability to complete development and commercialization of its proposed
products. See "USE OF PROCEEDS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
No Commercially Available Products. The Company's principal efforts are
the development of, and obtaining regulatory approvals for, its proposed
products. The Company anticipates that marketing activities for its products,
whether by the Company or one or more licensees will not begin until 1998 at the
earliest. Accordingly, it is not anticipated that the Company will generate any
revenues from royalties or sales of products until regulatory approvals are
obtained and marketing activities begin. There can be no assurance that any of
the Company's proposed products will prove to be commercially viable, or if
viable, that they will reach the marketplace on the timetables desired by the
Company. The failure or the delay of these products to achieve commercial
viability would have a material adverse effect on the Company. See "BUSINESS -
Proposed Products" and " - Government Regulation."
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Product Development and Acceptance Risks. The development of the
Company's proposed products has not been completed and the Company will be
required to devote considerable effort and expenditures to complete such
development. Satisfactory completion of development, testing, government
approval and sufficient production levels of such products must be obtained
before the proposed products will become available for commercial sale. The
Company does not anticipate generating material revenue from product sales until
perhaps 1998 or thereafter. Other potential products remain in the conceptual or
very early development stage and remain subject to all the risks inherent in the
development of pharmaceutical products, including unanticipated development
problems, and possible lack of funds to undertake or continue development. These
factors could result in abandonment or substantial change in the development of
a specific formulated product. There can be no assurance that any of the
Company's proposed products will be successfully developed, be developed on a
timely basis or be commercially accepted once developed. The inability to
successfully complete development, or a determination by the Company, for
financial or other reasons, not to undertake to complete development of any
product, particularly in instances in which the Company has made significant
capital expenditures, could have a material adverse effect on the Company. See
"BUSINESS - Proposed Products."
Lack of Direct Consumer Marketing Experience; Dependence on Joint
Marketing Arrangements. The Company has no experience in marketing or
distribution at the consumer level of its proposed products. Moreover, the
Company does not have the financial or other resources to undertake extensive
marketing and advertising activities. Accordingly, the Company intends generally
to rely on marketing arrangements, including possible joint ventures or license
or distribution arrangements with third parties. The Company has not entered
into any significant agreements or arrangements with respect to the marketing of
its proposed products, and there can be no assurance that it will do so in the
future or that any such products can be successfully marketed. The Company's
strategy to rely on third party marketing arrangements could adversely affect
its profit margins. See "BUSINESS - Marketing and Distribution."
Dependence on Contract Manufacturing. The Company has agreements with
respect to the manufacture of its initially proposed products with its European
contract manufacturers. Under these agreements the Company is responsible to
obtain required regulatory approvals, begin commercialization within three
months after FDA marketing approval, pay royalties under certain circumstances,
and satisfy certain minimum purchase requirements. Additionally, these
agreements provide for negotiation and annual re-negotiation of terms relating
to per item cost. There can be no assurance that such terms can be negotiated on
terms satisfactory to the Company or that failure to negotiate such terms will
not result in the termination of any such agreement. The failure of the Company
to satisfy its obligations under any of these agreements could result in
modification or termination of such agreement. There can be no assurance that
the Company will have the ability to satisfy all of its obligations under these
agreements, and failure to do so could require the Company to obtain alternative
manufacturing arrangements, which could have an material adverse effect on the
Company. The Company's dependence upon third parties for the manufacture of its
products could have an adverse effect on the Company's profit margins and its
ability to deliver its products on a timely and competitive basis. See "BUSINESS
- - Joint Development Agreements."
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Compliance with Good Manufacturing Practices. The Company currently
intends to rely on third-party arrangements for the manufacture of its proposed
products. The manufacture of the Company's pharmaceutical products will be
subject to current Good Manufacturing Practices ("cGMP") prescribed by the FDA,
pre-approval inspections by the FDA or foreign authorities, or both, before
commercial manufacture of any such products and periodic cGMP compliance
inspections thereafter by the FDA. There can be no assurance that the Company's
European manufacturers will be able to comply with cGMP or satisfy pre- or
post-approval inspections in connection with the manufacture of the Company's
proposed products. The Company's gelatin capsule manufacturer
SCA-Lohnherstellungs AG ("Swisscaps") successfully completed an FDA pre-approval
inspection in connection with the approval of the Company's Abbreviated New Drug
Application ("ANDA") for Nifedipine. The Company's other manufacturer, Rapid
Spray GmbH & Co, KG. ("Rapid Spray") has not yet been inspected by the FDA.
Failure or delay by any such manufacturer to comply with cGMP or satisfy pre- or
post-approval inspections would have a material adverse effect on the Company.
See "BUSINESS - Manufacturing."
Foreign Manufacturing and Related Risks. The Company anticipates that
its initially proposed products will be manufactured by its European
manufacturers at facilities in Germany and Switzerland. The Company intends to
import completed manufactured products into the United States. In addition, the
raw materials necessary for the manufacture of the Company's products will, in
all likelihood, be purchased by the Company from suppliers in the United States
or Europe and delivered to its manufacturers' facilities by such suppliers.
Accordingly, the Company and its manufacturers may be subject to various import
duties applicable to both finished products and raw materials and may be
affected by various other import and export restrictions as well as other
developments impacting upon international trade. These international trade
factors will, under certain circumstances, have an impact both on the
manufacturing cost (which will, in turn, have an impact on the cost to the
Company of the manufactured product) and the wholesale and retail prices of the
products to be manufactured abroad. To the extent that transactions relating to
the foreign manufacture of the Company's proposed products and purchase of raw
materials involve currencies other than United States dollars, the operating
results of the Company will be affected by fluctuations in foreign currency
exchange rates. See "BUSINESS - Manufacturing."
Supplier Dependence. The Company believes that the active ingredients
used in the manufacture of its proposed pharmaceutical products are presently
available from numerous suppliers located in the United States, Europe and
Japan. The Company believes that certain raw materials, including inactive
ingredients, are available from a limited number of suppliers and that certain
packaging materials intended for use in connection with its spray products
currently are available only from sole source suppliers. Although the Company
does not believe it will encounter difficulties in obtaining the inactive
ingredients or packaging materials necessary for the manufacture of its
products, there can be no assurance that the Company will be able to enter into
satisfactory agreements or arrangements for the purchase of commercial
quantities of such materials. The Company has written supply agreements with
Dynamit Nobel for certain raw materials and with Rapid Spray for the
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nitroglycerin lingual spray product. With respect to other suppliers, the
Company operates primarily on a purchase order basis beyond which there is no
contract memorializing the Company's purchasing arrangements. The failure to
enter into agreements or otherwise arrange for adequate or timely supplies of
principal raw materials and the possible inability to secure alternative sources
of raw material supplies could have a material adverse effect on the Company's
ability to arrange for the manufacture of formulated products. In addition,
development and regulatory approval of the Company's products are dependent upon
the Company's ability to procure active ingredients and certain packaging
materials from FDA-approved sources. Since the FDA-a approval process requires
manufacturers to specify their proposed suppliers of active ingredients and
certain packaging materials in their applications, FDA approval of a
supplemental application to use a new supplier would be required if active
ingredients or such packaging materials were no longer available from the
originally specified supplier, which could result in manufacturing delays. See
"BUSINESS - Raw Materials and Suppliers."
Competition. The markets which the Company intends to enter are
characterized by intense competition. The Company or its licensees may be
competing against established pharmaceutical companies which currently market
products which are equivalent or functionally similar to those the Company
intends to market. Prices of drug products are significantly affected by
competitive factors and tend to decline as competition increases. In addition,
numerous companies are developing or may, in the future, engage in the
development of products competitive with the Company's proposed products. The
Company expects that technological developments will occur at a rapid rate and
that competition is likely to intensify as enhanced dosage from technologies
gain greater acceptance. Additionally, the markets for formulated products which
the Company has targeted for development are intensely competitive, involving
numerous competitors and products. Most of the Company's prospective competitors
possess substantially greater financial, technical and other resources than the
Company. Moreover, many of these companies possess greater marketing
capabilities than the Company, including the resources necessary to enable them
to implement extensive advertising campaigns. There can be no assurance that the
Company will have the ability to compete successfully. See "BUSINESS -
Competition."
Absence of Product Liability Insurance Coverage. The Company may be
exposed to potential product liability claims by consumers. The Company does not
presently maintain product liability insurance coverage. Although the Company
will seek to obtain product liability insurance before the commercialization of
any products, there can be no assurance that the Company will be able to obtain
such insurance or, if obtained, that any such insurance will be sufficient to
cover all possible liabilities to which the Company may be exposed. In the event
of a successful suit against the Company, insufficiency of insurance coverage
could have a material adverse effect on the Company. In addition, certain food
and drug retailers require minimum product liability insurance coverage as a
condition precedent to purchasing or accepting products for retail distribution.
Failure to satisfy such insurance requirements could impede the ability of the
Company or its distributors to achieve broad retail distribution of its proposed
products, which could have a material adverse effect on the Company. None of the
Company's European manufacturers have made any representations as to the safety
or efficacy of the products covered by their agreements or as to any products
which may be marketed or used under rights granted under any such agreements,
other than compliance with cGMP and product specifications. See "BUSINESS -
Product Liability."
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Extensive Government Regulation. The development, manufacture and
commercialization of pharmaceutical products is generally subject to extensive
regulation by various federal and state governmental entities. The FDA, which is
the principal United States regulatory authority, has the power to seize
adulterated or misbranded products and unapproved new drugs, to request their
recall from the market, to enjoin further manufacture or sale, to publicize
certain facts concerning a product and to initiate criminal proceedings. As a
result of federal statutes and FDA regulations, pursuant to which new
pharmaceuticals are required to undergo extensive and rigorous testing,
obtaining pre-market regulatory approval requires extensive time and
expenditures. Under the Federal Food, Drug and Cosmetic Act (the "FDC Act"), a
new drug may not be commercialized or otherwise distributed in the United States
without the prior approval of the FDA. The FDA approval processes relating to
new drugs differ, depending on the nature of the particular drug for which
approval is sought. With respect to any drug product with active ingredients not
previously approved by the FDA, a prospective drug manufacturer is required to
submit a new drug application ("NDA"), including complete reports of
pre-clinical, clinical and laboratory studies to prove such product's safety and
efficacy. The NDA process generally requires, before the submission of the NDA,
submission of an IND pursuant to which permission is sought to begin preliminary
clinical testing of the new drug. An NDA, based on published safety and efficacy
studies conducted by others, may also be required to be submitted for a drug
product with a previously approved active ingredient if the method of delivery,
strength or dosage form is changed. Alternatively, a drug having the same active
ingredient as a drug previously approved by the FDA may be eligible to be
submitted under an ANDA, which is significantly less stringent than the NDA
approval process. While the ANDA process requires a manufacturer to establish
bioequivalence to the previously approved drug, it permits the manufacturer to
rely on the safety and efficacy studies contained in the DNA for the previously
approved drug. The Company believes that some of its drug products developed in
capsule form will be substantially similar to products which have previously
obtained FDA approval and, accordingly, that approvals for such products can be
obtained by submitting an ANDA. The Company, however, may be required, before
submitting an ANDA, to submit a suitability petition, the purpose of which is to
permit the FDA to evaluate whether a change in strength, dosage form or method
of delivery is significant enough to require clinical trials and, therefore, an
NDA filing. There can be no assurance that the FDA will not require the Company
to conduct clinical trials for such products and otherwise comply with the NDA
approval process. The Company believes that products developed in spray dosage
form will require submission of an NDA. The Company estimates that the
development of new formulations of pharmaceutical products, including
formulation, testing and obtaining FDA approval, generally takes four to six
years for the ANDA process and six to eight years for the NDA process. There can
be no assurance that the Company's determinations will prove to be accurate or
that pre-marketing approval relating to its proposed products will be obtained
on a timely basis, or at all. The failure by the Company to obtain necessary
regulatory approvals, whether on a timely basis, or at all, would have a
material adverse effect on the Company.
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Patents and Protection of Proprietary Information. The Company holds a
United States patent covering its formulation for Nifedipine gelatin capsules,
which the Company believes is not material to its operations. The Company has
applied for United States and foreign patent protection for its proposed lingual
sprays and soft gelatin drug delivery processes. To the extent possible, the
Company intends to seek formulation patent protection or other proprietary
rights for those products utilizing the Company's oral dosage formulations.
There can be no assurance, however, that patents relating to such formulated
products or processes will in fact be granted or, if granted, will provide any
proprietary rights adequately protecting the Company. Other companies may
independently develop equivalent or superior technologies or processes and may
obtain patent or similar rights with respect thereto. Although the Company
believes that its technology has been independently developed and does not
infringe on the patents of others, there can be no assurance that the technology
does not and will not infringe on the patents of others.
If a process covered by a United States patent is utilized in the
manufacture of a product in a foreign country, the further manufacture, use or
sale of such products in the United States may constitute an infringement of the
United States patent. In the event of infringement, the Company or its European
manufacturers could, under certain circumstances, be required to modify the
infringing process or obtain a license. There can be no assurance that the
Company or the European manufacturers will be able to do so in a timely manner
or upon acceptable terms and conditions or at all. The failure to do any of the
foregoing could have a material adverse effect on the Company. In addition,
there can be no assurance that the Company will have the financial or other
resources necessary to enforce or defend a patent infringement or proprietary
rights violation action. If any of the products developed by the Company
infringes upon the patent or proprietary rights of others, the Company could,
under certain circumstances, be enjoined or become liable for damages, which
would have a material adverse effect on the Company. See "BUSINESS - Patents and
Protection of Proprietary Information."
Dependence on Existing Management and Key Personnel. The success of the
Company is substantially dependent on the efforts and abilities of its founder
Harry A. Dugger, III, Ph.D., and John J. Moroney, its Chairman. Decisions
concerning the Company's business and its management are and will continue to be
made or significantly influenced by these individuals. The Company has entered
into employment agreements with both Harry A. Dugger, III, Ph.D., and John J.
Moroney effective upon consummation of the offering contemplated herein. See
"MANAGEMENT - Employment Agreements." The loss or interruption of their
continued services would have a materially adverse effect on the Company's
business operations and prospects. Additionally, the Company's operations may be
materially adversely affected if it is unable to obtain and retain qualified
research, technical and marketing personnel. Only Dr. Dugger is required to
devote his full time to the Company. The Company has arranged for coverage under
a Key Man life insurance policy on Dr. Dugger to commence upon the completion of
this offering. See "BUSINESS - Employees", "- Marketing and Sales" and
"MANAGEMENT."
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Control by Current Stockholders, Officers and Directors. Management and
affiliates of the Company currently beneficially own (including shares they have
the right to acquire) approximately 63.4% of the outstanding Common Stock. Upon
completion of this offering, they will own approximately 54.8% of the Common
Stock. These persons are and will continue to be able to exercise control over
the election of the Company's directors and the appointment of officers,
increase the authorized capital, dissolve, merge or engage the Company in other
fundamental corporate transactions. Certain change in control provisions found
in the employment agreements of Dr. Dugger and Mr. Moroney may have the effect
of discouraging, delaying or preventing a change in control of the Company. See
"PRINCIPAL STOCKHOLDERS" and "CERTAIN TRANSACTIONS - Employment Agreements."
Ongoing Influence of the Underwriters. Pursuant to the provisions of
the Underwriting Agreement and the Financial Consulting Agreement, the
Underwriters are entitled to the following: (1) a finder's fee, payable in the
event the Underwriters introduce the Company to another party and as a result of
such introduction, a transaction such as a merger, acquisition, joint venture or
similar transaction is consummated at anytime during the five year period
following completion of this offering; (2) to select a person to serve as a
member of the Company's Board of Directors; (3) to serve, in the case of the
Representative, as the Company's non-exclusive financial consultant for a period
of two years following the effective date of this offering; and (4) to purchase
a total of 67,500 Units at $9.74 per Unit for a four-year period beginning one
year from the effective date of this Prospectus. These arrangements may result
in the Underwriters asserting undue influence on the Company.
Immediate and Substantial Dilution. Purchasers of the Shares offered
hereby will incur an immediate dilution of approximately $5.05 per share in net
tangible book value from the public offering price (estimated at $5.90 per Share
and assuming no exercise of the Overallotment Option). This represents an
immediate dilution of approximately 86% from the assumed initial public offering
price per Share. See "DILUTION."
Dividend Policy. The Company has never declared or paid a dividend on
its Common Stock, and management expects that a substantial portion of the
Company's future earnings will be retained for expansion or development of the
Company's business. The decision to pay dividends, if any, in the future is
within the discretion of the Board of Directors and will depend upon the
Company's earnings, capital requirements, financial condition and other relevant
factors such as contractual obligations. Management, therefore, does not
contemplate that the Company will pay dividends on the Common Stock in the
foreseeable future. See "DIVIDEND POLICY."
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No Public Market. Prior to this offering, there has been no public
market for the Units, the Common Stock or Warrants. Although the Units, Common
Stock and Warrants have been approved for inclusion on the OTC Bulletin Board,
there can be no assurance that a regular trading market for the securities will
develop after this Offering or that, if developed, it will be sustained, or that
the market price of such securities will not decline below the initial public
offering price. The OTC Bulletin Board is an unorganized, inter-dealer,
over-the-counter market which provides significantly less liquidity than the
Nasdaq Stock market, and quotes for stocks included on the OTC Bulletin Board
are not listed in the financial sections of newspapers as are those for the
Nasdaq Stock Market. Therefore, prices for securities traded solely on the OTC
Bulletin Board may be difficult to obtain and purchasers of the Units may be
unable to resell the securities offered hereby at or near their original
offering price or at any price. In the event the Securities are not included on
the OTC Bulletin Board, quotes for the securities may be included in the "pink
sheets" for the over-the-counter market. See "Possible Adverse Effect of "Penny
Stock" Rules in Liquidity for the Company's Securities," "Description of Common
Stock" and "Underwriting."
Arbitrary Offering Price. The initial offering price of the Units and
the exercise price and terms of the Warrants have been determined by
negotiations between the Company and the Representative and are not necessarily
related to the Company's assets, book value, earnings, net worth or other
established criteria of value. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. Regulatory
developments and economic and other external factors, as well as
period-to-period fluctuations in financial results, may also have a significant
impact on the market price of such securities.
Possible Restrictions on Market-Making Activities in Company's
Securities. The Underwriters have advised the Company that they intend to make a
market in the Company's securities. Regulation M, which was recently adopted to
replace Rule 10b-6 and certain other rules promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), may prohibit the
Underwriters from engaging in any market-making activities with regard to the
Company's securities for the period from five business days (or such other
applicable period as Regulation M may provide) prior to any solicitation by the
Underwriters of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Underwriters may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Underwriters may be
unable to provide a market for the Company's securities during certain periods
while the Warrants are exercisable. In addition, under applicable rules and
regulations under the Exchange Act, any person engaged in the distribution of
securities of any selling stockholder may not simultaneously engage in
market-making activities with respect to any securities of the Company for the
applicable "cooling off" period prior to the commencement of such distribution.
Accordingly, in the event the Underwriters are engaged in a distribution of the
securities of any selling stockholder, they will not be able to make a market in
the Company's securities during the applicable restrictive period. Any temporary
cessation of such market-making activities could have an adverse effect on the
market price of the Company's securities. See "Underwriting."
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Underwriters' Options and Additional Options and Warrants. The Company
has agreed to issue to the Underwriters an option to purchase 67,500 Units
exercisable at $9.74 (165% of the respective public offering price of the Units)
for a term of four years commencing one year from the effective date of this
Prospectus (the "Underwriters' Options"). In addition, the Company has reserved
up to 1,700,000 shares of its Common Stock for issuance upon exercise of stock
options which may be granted pursuant to the Company's 1992 Stock Option Plan
and 1997 Stock Option Plan (hereinafter the "Stock Option Plans"), of which
options to purchase an aggregate of 480,000 and 200,000 shares have been issued
with respect to the Plans, 100,000 shares reserved for issuance upon the
exercise of outstanding warrants and 600,000 options issued outside of the Stock
Option Plans. In addition, the Company has agreed with the Underwriters, under
certain circumstances, to register the Shares and the Warrants subject to the
Underwriters' Options for distribution to the public. Exercise of these
registration rights could involve a substantial expense to the Company and could
prove a hindrance to future financings. Exercise of the Underwriters' Options,
the outstanding warrants and stock options, and those which may be granted under
the Plan (collectively, the "Convertible Securities"), will reduce the
percentage of Common Stock held by the public stockholders. Further, the terms
on which the Company could obtain additional capital during the life of the
Convertible Securities may be adversely affected, and it should be expected that
the holders of the Convertible Securities would exercise them at a time when the
Company would be able to obtain equity capital on terms more favorable than
those provided for by such Convertible Securities. See "UNDERWRITING."
Potential Adverse Effect of Redemption of Warrants. The Warrants may be
redeemed by the Company commencing eighteen months from the date of this
Prospectus, or earlier with the consent of the Representative, at a redemption
price of $.10 per Warrant upon not less then thirty days prior written notice
provided the last sale price of the Common Stock on the NASD OTC Bulletin Board,
Nasdaq (or another national securities exchange) for twenty consecutive trading
days ending within three days of the notice of redemption, equals or exceeds
200% of the current Warrant exercise price, subject to adjustment. Redemption of
the Warrants could force the holders thereof to exercise the Warrants and pay
the exercise price at a time when it may be disadvantageous for the holders to
do so, to sell the Warrants at the then current market price when they might
otherwise wish to hold the Warrants, or to accept the redemption price, which is
likely to be substantially less than the market value of the Warrants at the
time of redemption. See "DESCRIPTION OF SECURITIES - Warrants."
Potential Adverse Effect from Class A Warrants. Upon completion of this
offering, 675,000 Class A Warrants will be issued. The exercise of such
Warrants, or a substantial portion thereof, and the sale of the resulting shares
of Common Stock could adversely affect the market price of the Company's Common
Stock. See "DESCRIPTION OF SECURITIES."
Current Prospectus and State Registration Required to Exercise
Warrants. The Warrants are being registered pursuant to a Registration Statement
filed with the Securities and Exchange Commission ("Commission") under the
Securities Act of 1933 (the "Securities Act"), of which this Prospectus is a
part, and after its effectiveness the Warrants may be traded, and upon exercise,
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their underlying share of Common Stock may be sold in the public market that may
develop for the securities for approximately one year thereafter. However,
unless such Registration Statement is kept current by the Company and measures
to qualify or keep such securities in certain states are taken, investors
purchasing the Warrants in this offering, although exercisable, will not be able
to exercise the Warrants or sell its underlying shares of Common Stock issuable
upon exercise of the Warrants in the public market. The Company has agreed to
use its best efforts to qualify and maintain a current registration statement
covering such shares of Common Stock. There can be no assurance, however, that
the Company will be able to maintain a current registration statement or to
effect appropriate qualifications under applicable state securities laws, the
failure of which may result in the exercise of the Warrants and the resale or
other disposition of Common Stock issued, upon such exercise, being unlawful.
See "Description of Securities -- Class A Warrants."
Possible Resales Under Rule 144. All 2,597,390 shares (3,197,390 shares
assuming the Bridge Notes are converted) of Common Stock held by the Company's
present stockholders and all shares of Common Stock issuable upon exercise of
outstanding stock options and those which may be granted under the 1992 and 1997
Stock Option Plans have not been registered under the Securities Act of 1933, as
amended (the "Act"), but may, under certain circumstances, be available for
public sale by means of ordinary brokerage transactions in the open market
pursuant to Rule 144, promulgated under the Act, subject to certain limitations.
In general, under Rule 144, a person (or persons whose shares are aggregated)
who has satisfied a one-year holding period may, under certain circumstances,
sell within any three-month period a number of securities which does not exceed
the greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume of the class during the four calendar weeks prior to such
sale. Rule 144 also permits, under certain circumstances, the sale of
securities, without any limitation, by a person who is not an affiliate of the
Company and who has satisfied a two-year holding period. Although certain of the
Company's principal stockholders, as well as all of its officers and directors
have agreed not to publicly offer, sell or otherwise dispose of directly or
indirectly, any of the Company's securities owned by them, for a period of
thirty-six (36) months following the consummation of this offering without the
prior written consent of the Representative, any substantial sale of Common
Stock pursuant to Rule 144 may have an adverse effect on the market price of the
Shares or the competent securities. See "SHARES ELIGIBLE FOR FUTURE SALE" and
"UNDERWRITING."
Representative's Limited Underwriting Experience. The Representative
has been actively engaged in the securities brokerage and investment banking
business since 1994. However the Representative has engaged in only limited
underwriting activities, and this offering is only the eighth public offering in
which the Representative has acted as the sole or managing underwriter. The
Representative has limited experience acting as a member of a syndicate in
underwritten offerings. There can be no assurance that the Representative's
limited experience as an underwriter of public offerings will not adversely
affect the proposed public offering of the Units, Common Stock and Warrants, the
subsequent development of a trading market, if any, or the market for an
liquidity of the Company's securities. Therefore, purchasers of the securities
offered hereby may suffer a lack of liquidity in their investment or a material
diminution of the value of their investment.
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Underwriters' Influence on the Market. A significant amount of the
Units offered may be sold to customers of the Underwriters. Such customers
subsequently may engage in transactions for the sale of purchase of such Units
and may otherwise effect transaction in such securities. If they participate in
the market, the Underwriters may exert substantial influence on the market, if
one develops, for the Units, Common Stock and Warrants. Such market making
activity may be discontinued at any time. The price and liquidity of the Units,
Common Stock and Warrants may be significantly affected by the degree, if any,
of the several Underwriters' participation in such market. See "Underwriting."
Possible Adverse Effect of "Penny Stock" Rules in Liquidity for the
Company's Securities. Commission regulations define a "penny stock" to be any
equity security that is not traded on a national securities exchange or Nasdaq
and that has a market price (as therein defined) of less than $5.00 per share,
subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require delivery prior to any transaction in a penny
stock, of a disclosure schedule prepared by the Commission relating to the penny
stock market. Disclosure is also required to be made about commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
If the securities offered hereby are included on the OTC Bulletin Board
and are trading at less than $5.00 per security at any time following the
effective date of this Offering, the Company's securities may become subject to
Rule 15g-9 under the Exchange Act that imposes additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally, such investors have
assets in excess of $1,000,000 or an individual annual income exceeding
$200,000, or, together with the investor's spouse, a joint income of $300,000).
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, among other things, the delivery, prior to the transaction, of a
risk disclosure document mandated by the Commission relating to the penny stock
market and the risks associated therewith. 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,
such rule may adversely affect the ability of broker-dealers to sell the
Company's securities and may adversely affect the ability of purchasers in this
offering to sell in the secondary market any of the securities acquired hereby.
21
<PAGE>
There can be no assurance that the Company's securities will qualify
for exemption from these restrictions. In any event, even if the Company's
securities were exempt from such restrictions, it would remain subject to
Section 15(b)(6) of the Exchange Act, which gives the Commission the authority
to prohibit any person that is engaged in unlawful conduct while participating
in a distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds that
such a restriction would be in the public interest. If the Company's securities
were subject to rules on penny stocks, the market liquidity for the Company's
securities could be severely adversely affected. In such event, the regulations
on penny stocks could limit the ability of broker-dealers to sell the Company's
securities and thus the ability of purchasers of the Company's securities to
sell their securities in the secondary market.
Future Unspecified Acquisitions. Although there are no such
transactions contemplated at this time, the Company may, in the future, expand
its business, in part, through the acquisition of compatible products or
businesses. In attempting to locate and consummate such acquisitions, the
Company may compete with other prospective purchasers of the acquisition
candidate, some of which may have greater resources than the Company. There can
be no assurance that suitable acquisition candidates could be identified and
acquired on terms favorable to the Company, or that the acquired product lines
or operations could be profitably operated or integrated into the Company's
operations. In addition, any internally generated growth experienced by the
Company could place significant demands on the Company's management, thereby
restricting or limiting its available time and opportunity to identify and
evaluate potential acquisition candidates. The target entity of any such
acquisition will not be subject to shareholder review and the Company's decision
to pursue such transactions is not subject to shareholder approval.
Potential Conflicts of Interest. The Company has entered into various
transactions with certain of its directors and principal shareholders and their
affiliates which could result in potential conflicts of interest. The Company
believes that all of such transactions and arrangements were fair and reasonable
to the Company and were on terms no less favorable than could have been obtained
from unaffiliated third parties. There can be no assurance, however, that future
transactions or arrangements between the Company and its affiliates, if any,
will continue to be advantageous to the Company, that conflicts of interest will
not arise with respect thereto, or that if conflicts do arise, they will be
resolved in a manner favorable to the Company. Any such future transactions will
be on terms no less favorable to the Company than could be obtained from
unaffiliated parties and will be approved by a majority of the independent and
disinterested members of the Board of Directors, outside the presence of any
interested directors and, to the extent deemed appropriate by the Board of
Directors, the Company will obtain shareholder approval or fairness opinions in
connection with any such transaction. See "MANAGEMENT" and "CERTAIN
TRANSACTIONS."
22
<PAGE>
Limitation on Directors' Liabilities under New Jersey Law. Pursuant to
the Company's Certificate of Incorporation and under New Jersey law, directors
of the Company are not liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty, except for liability in connection with a
breach of duty of loyalty, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for dividend
payments or stock repurchases illegal under New Jersey law or any transaction in
which a director has derived an improper personal benefit.
Indemnification of Directors under New Jersey Law. Pursuant to both the
Company's Certificate of Incorporation and New Jersey law, the Company's
officers and directors are indemnified by the Company for monetary damages for
breach of fiduciary duty, except for liability which arises in connection with
(i) a breach of duty or loyalty, (ii) acts or omissions not made in good faith
or which involve intentional misconduct or a knowing violation of law, (iii) for
dividend payments or stock repurchases illegal under New Jersey law, or (iv) any
transaction in which the officer or director derived an improper personal
benefit. The Company's Certificate of Incorporation does not have any effect on
the availability of equitable remedies (such as an injunction or rescissions)
for breach of fiduciary duty. However, as a practical matter, equitable remedies
may not be available in particular circumstances. The Company has arranged for
director and officer liability coverage to commence upon the closing of this
offering. SEE "MANAGEMENT -- Director and Officer Liability."
Authorization and Discretionary Issuance of Preferred Stock. The
Company's Certificate of Incorporation authorizes the issuance of "blank check"
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividends, liquidation, conversion, voting or other rights which
could adversely affect the relative voting power or other rights of the holders
of the Company's Common Stock. In the event of issuance, the preferred stock
could be used, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company, which could have the
effect of discouraging bids for the Company and thereby prevent stockholders
from receiving the maximum value for their shares. Although the Company has no
present intention to issue any shares of its preferred stock, there can be no
assurance that the Company will not do so in the future. See "DESCRIPTION OF
SECURITIES - Preferred Stock."
Pursuant to the terms of the Underwriting Agreement, the Company may
not, except with respect to certain qualifying acquisitions, issue capital stock
for a period of 36 months from the effective date of this Prospectus without
prior written consent of the Representative.
23
<PAGE>
Litigation Involving Biltmore Securities, Inc. ("Biltmore") May Affect
Securities. The Company has been advised by Biltmore (one of the Underwriters),
that on or about May 22, 1995, Biltmore and Elliot Lowenstern and Richard
Bronson, principals of Biltmore, and the Commission agreed to an offer of
settlement (the "Offer of Settlement") in connection with a complaint filed by
the Commission in the United States District Court for the Southern District of
Florida alleging violations of the federal securities laws, Section 17(a) of the
Securities Act, Section 10(b)and 15(c) of the Act, and Rules 10b-5, 10b-6 and
15cl-2 promulgated thereunder. The complaint also alleged that in connection
with the sale of securities in three (3) initial public offerings ("IPOs") in
1992 and 1993, Biltmore engaged in fraudulent sales practices. The proposed
Offer of Settlement was consented to by Biltmore and Messrs., Lowenstern and
Bronson without admitting or denying the allegations of the complaint. The Offer
of Settlement was approved by Judge Gonzales on June 6, 1995. Pursuant to the
final judgment (the "Final Judgment"), Biltmore:
o was required to disgorge $1,000,000 to the Commission, which
amount was paid in four (4) equal installments on or before June
22, 1995;
o agreed to the appointment of an independent consultant
("Consultant").
Consultant was obligated, on or before November 1, 1996 to review
Biltmore's policies, practices and procedures in six (6) areas relating to
compliance and sales practices;
o to formulate policies, practices and procedures for Biltmore that
the Consultant deems necessary with respect to Biltmore's
compliance and sales practices;
o to prepare a report devoted to and which details the
aforementioned policies, practices and procedures (the "Report");
o to deliver the Report to the President of Biltmore and to the
staff of the Southeast Regional office of the Commission;
o to prepare, if necessary, a supervisory procedures and compliance
manual for Biltmore, or to amend Biltmore's existing manual; and
o to formulate policies, practices and procedures designed to
provide mandatory on-going training to all existing and newly hired
employees of Biltmore. The Final Judgment further provides that,
within thirty (30) days of Biltmore's receipt of the Report, unless
such time is extended, Biltmore shall adopt, implement and maintain
any and all policies, practices and procedures set forth in the
Report.
On or about December 19, 1996, the Consultant completed the Report
which was thereafter delivered to Biltmore. The Report addresses the areas
relating to compliance and sales practices referred to above. Biltmore is
reviewing the Report and undertaking steps to implement the recommendations and
procedures in the Report, in accordance with the provisions of the Final
Judgment.
24
<PAGE>
The Final Judgment also provides that an independent auditor
("Auditor") shall conduct four (4) special reviews of Biltmore's policies,
practices and procedures, the first such review to take place six (6) months
after the Report has been delivered to Biltmore and thereafter at six-month
intervals. The Auditor is also authorized to conduct a review, on a random basis
and without notice to Biltmore, to certify that any persons associated with
Biltmore who have been suspended or barred by any Commission order are complying
with the terms of such orders.
On July 10, 1995, the action against Messrs., Lowenstern and Bronson
was dismissed with prejudice. Mr. Bronson agreed to a suspension from
associating in any supervisory capacity with any broker, dealer, municipal
securities dealer, investment advisor or investment company for a period of
twelve (12) months, dating from the beginning of such suspension. Mr. Lowenstern
agreed to a suspension from associating in any supervisory capacity with any
broker, dealer, municipal securities dealer, investment advisor or investment
company for a period of twelve (12) months commencing upon the expiration of Mr.
Bronson's suspension. Both suspensions have been completed.
In the event that the requirements of the foregoing judgment adversely
affect Biltmore's ability to act as a market maker for the securities, and
additional broker-dealers do not make a market in the Company's securities, the
market for, and the liquidity of, the Company's securities may be adversely
affected. In the event that other broker-dealers fail to make a market in the
Company's securities, the possibility exists that the market for and the
liquidity of the Company's securities may be adversely affected to such an
extent that public security holders may not have anyone to purchase their
securities when offered for sale at any price. In such event, the market for
liquidity and prices of the Company's securities may not exist. For additional
information regarding Biltmore, investors may call the National Association of
Securities Dealers, Inc. at (800) 289-9999.
Recent State Action Involving Biltmore--Possible Loss of Liquidity. The State of
Indiana commenced an action seeking, among other things, to revoke Biltmore's
license to do business in such state. The complaint alleged that Biltmore
offered and/or sold securities that were neither registered nor exempt, engaged
in dishonest or unethical practices in the securities business, failed to
reasonably supervise its agents and violated the antifraud provisions of the
Indiana Securities Act. The action was settled without any admission, finding or
judgment against Biltmore of any violation of the Indiana Securities Act and
Biltmore agreed to, among other things, resolve certain customer claims, the
payment of a fine and costs and restrictions with respect to the sale of
securities to Indiana residents. Specifically, Biltmore agreed that it will not
sell any securities to Indiana residents (i) which are not listed on the New
York Stock Exchange, the American Stock Exchange or Nasdaq; (ii) for which
Biltmore has served as lead underwriter or as a member of the selling syndicate;
or (iii) for which Biltmore is a market maker. Under the terms of the settlement
agreement, Biltmore continues to maintain its license in the State of Indiana.
The Company does not intend to seek qualification for the sale of the Securities
in the state of Indiana.
25
<PAGE>
On July 18, 1997, the State of Arkansas, Securities Department issued a
consent order in lieu of the filing of a complaint as settlement of all claims
against Biltmore and Elliot A. Lowenstern. The claims related to certain
practices constituting violations of the Arkansas Securities Act including
promising customers price appreciation, failing to disclose negative information
regarding stocks, representing that they knew of "inside information" and using
high pressure sales tactics during the period February 1992 to October 1993.
Biltmore and Mr. Lowenstern consented to the entry of the order without
admitting or denying any wrongdoing or violation. The consent order censured
Biltmore and Elliot A. Lowenstern and required that they pay the amount of
$25,000 for costs and expenses relating to the proceedings. The consent order
also required that Biltmore deliver to the Commissioner of Securities a copy of
the final report prepared by the independent consultant. All terms of the
consent order have been fully complied with.
On September 10, 1997, the State of California issued a Notice of
Intention to Issue Order Revoking Biltmore's Broker-Dealer Certificate. The
accusation alleges that it is appropriate for Biltmore's broker-dealer license
to be revoked in the public interest as a result of Biltmore being subject to
enforcement orders issued by the Commission, the Arkansas Securities Department
and the Indiana Securities Division. Biltmore intends to request a hearing and
contest the accusation. Such proceeding, if ultimately successful may adversely
affect the market for and liquidity of the Company's securities if additional
broker-dealers do not make a market in the Company's securities. Biltmore is one
of the several Underwriters of this firm commitment underwriting.
According to the records of the Central Registration Depository
maintained by the National Association of Securities Dealers Regulation, Inc.
("NASDR"), Messrs. Lowenstern and Bronson, the principals of Biltmore, have 46
and 44 recorded incidents respectively, some of which are disciplinary
complaints.
26
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares offered
hereby will be approximately $3,214,775 after deducting underwriting discounts
and commissions and other expenses of the offering ($3,734,491 if the
Overallotment Option is exercised in full). It is anticipated that such net
proceeds will be generally applied as follows:
<TABLE>
<CAPTION>
Approximate Approximate
Application of Proceeds Dollar Amount Percentage
<S> <C> <C>
Clinical studies and stability
testing (1) $1,600,000 49.8%
Product Development (2) $600,000 18.7%
Marketing and Sales Expenses (3) $400,000 12.4%
Working Capital and General
Corporate Purposes (4) $614,775 19.1%
---------- ------
TOTAL $3,214,775 100.0%
========== ======
</TABLE>
- ---------
(1) Includes costs and expenses for pilot clinical studies, stability
testing and costs associated with the FDA approval process. Pilot
clinical studies seek to demonstrate, in vivo, that a proposed drug
product provides a significantly accelerated onset of therapeutic
action or a given therapeutic effect at a significantly reduced dosage,
and have an average cost in the range of $100,000 to $200,000 per
study. These studies are conducted after the product development work
referenced in item (2) has been completed indicating that the product
would be suitable for the Company's delivery systems.
(2) Includes costs and expenses in connection with product formulation and
development which occurs earlier in the product development life cycle
than the pilot studies and testing referenced in item (1).
(3) Represents expenses for hiring marketing personnel and developing
marketing and sales and promotional programs, travel and related
expenses for attendance at seminars, trade shows and related functions,
and creation of brochures and similar promotional materials and trade
show displays.
(4) Represents costs expected to be incurred for the operation of the
Company if consulting revenues cannot fully support general operating
expenses.
The foregoing represents the Company's best estimate of the allocation
of the net proceeds of this offering, based on the current status of its
27
<PAGE>
proposed products, anticipated operating expenses, and current product
development and marketing plans. The allocation of proceeds and the timing of
expenditures relating to development of the Company's proposed products are
subject to numerous factors, including, among others, the stage of development
of a particular product, the timing of regulatory approvals, the extent of, and
costs associated with, clinical and other studies, the current status of the
Company's business and contemplated arrangements with third-parties with respect
to development and commercialization of its proposed products, as well as
unanticipated events causing delays. Accordingly, the Company cannot accurately
predict the amount or potential allocation of the proceeds of the offering to
any particular proposed product.
The Company anticipates, based on its current proposed plans and
assumptions relating to its operations (including the timetable of, and costs
associated with, new product development), that the proceeds of this offering
together with projected cash flow from operations will be sufficient to satisfy
its contemplated cash requirements for approximately twenty-four (24) months
following the consummation of this offering. If the Company's plans change, its
assumptions change or prove to be inaccurate or if the proceeds of this offering
and/or projected cash flow prove to be insufficient to fund operations
(including due to unanticipated expenses, technical problems or difficulties or
otherwise), the Company may find it necessary or advisable to reallocate some of
the proceeds within the above-described categories or to use portions thereof
for other purposes.
The Company may use a portion of the proceeds of this offering
allocated to working capital, together with the issuance of debt or equity
securities, to expand the Company's product line by acquiring rights to, or
developing, technology and/or products, or by acquiring companies which the
Company believes are compatible with the Company's business. The Company has no
agreements, commitments or other arrangements with respect to any such
acquisition, and there can be no assurance that the Company will be able to
successfully expand its operations.
Any additional net proceeds received upon the exercise of the
Underwriters' Options, the Class A Warrants or any options or warrants will be
used for working capital. Pending the use of the proceeds of this offering, the
funds will be deposited in interest or non-interest bearing accounts, or
invested in commercial paper, certificates of deposit, government securities or
similar instruments, short-term certificates of deposit, money market funds or
other short-term interest-bearing investments.
28
<PAGE>
DILUTION
As of July 31, 1997, the net tangible book value of the Company's
Common Stock was $(314,000) or $(.12) per share. Net tangible book value per
share represents the amount of the Company's tangible assets (total assets less
intangible assets) less the amount of its liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to (i) the sale of the
Units offered hereby (at an estimated public offering price of $5.90 per share
and attributing no value to the Class A Warrants) and the receipt of the
estimated net proceeds therefrom; and (ii) the conversion of the Bridge Notes
into 600,000 shares of Common Stock, and (iii) assuming no exercise of the Class
A Warrants, the Underwriters' Option, or other outstanding options and warrants;
the as adjusted net tangible book value of the Common Stock at July 31, 1997,
would have been $0.85 per share. This would result in an immediate dilution to
public investors (i.e., the difference between the public offering price of the
Shares and the net tangible book value after the offering) of $5.05 per share
(86%) and an aggregate increase in the net tangible book value of the present
stockholders, of approximately $0.97 per share. The following table illustrates
this per share dilution:
<TABLE>
<CAPTION>
<S> <C>
Public offering price per Share......................................................$5.90
Net tangible book value per share before Offering ......................$(0.12)
Increase per share attributable to public investors ....................$ 0.97
As adjusted net tangible book value per share after Offering ........................$0.85
Dilution to public investors ........................................................$5.05
</TABLE>
In the event the Overallotment Option is exercised in full, the as
adjusted net tangible book value after the offering, after deducting
underwriting discounts and estimated expenses to be paid by the Company, would
be $0.96 per share, which would result in dilution to public investors of $4.94
per share (84%).
29
<PAGE>
The following table summarizes the relative prices paid per share by
existing stockholders and public investors after giving effect to the sale of
the Units at an estimated offering price of $5.90 per Unit (attributing no value
to the Warrants included therein), and assuming no exercise of the Warrants, the
Underwriters' Option or other outstanding options and warrants.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
Price
Number (1) Percent Amount Percent Per Share
------- ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)......... 3,197,390 82.6% $1,176,000 22.8% $ 0.37
New investors.................... 675,000 17.4% $3,982,500 77.2% $ 5.90
---------- ----- ----------- -----
Total................... 3,872,390 100.0% $5,158,500 100.0%
</TABLE>
(1) Excludes shares of Common Stock issuable upon the exercise of (i) the
Class A Warrants; (ii) the Overallotment Option; (iii) the
Underwriters' Options; (iv) up to 500,000 options that may be granted
under the 1992 Stock Option Plan; (v) up to 500,000 options that may be
granted under the 1997 Stock Option Plan; (vi) 100,000 common stock
purchase warrants currently outstanding; and (vii) 600,000 non Plan
options.
(2) Includes 600,000 shares of Common Stock to be issued upon the
conversion of the Bridge Notes issued in connection with the Company's
$300,000 Bridge Financing.
DIVIDEND POLICY
The Company has never declared or paid a dividend on its Common Stock,
and management expects that a substantial portion of the Company's future
earnings, if any, will be retained for expansion or development of the Company's
business. The decision to pay dividends, if any, in the future is within the
discretion of the Board of Directors and will depend upon the Company's
earnings, capital requirements, financial condition and other relevant factors
such as contractual obligations. Management does not contemplate that the
Company will pay dividends on the Common Stock in the foreseeable future.
30
<PAGE>
CAPITALIZATION
The following tables set forth the capitalization of the Company as of
July 31, 1997 (i) on an actual basis; and (ii) as adjusted to give effect to the
sale of the Units offered by this Prospectus and the receipt of the estimated
net proceeds of this offering, assuming the estimated offering expenses as
described in Use of Proceeds.
<TABLE>
<CAPTION>
July 31, 1997
--------------------------------
Actual As Adjusted(2)
---------- ----------------
<S> <C> <C>
Long term convertible notes payable $ 300,000 $ --
----------- -------------
Stockholders' equity (deficit):
Preferred Stock, par value $.01 per share,
1,000,000 shares authorized; no shares outstanding -- --
Common Stock, par value $.01 per share, 10,000,000 shares authorized;
2,597,390 shares issued and outstanding (actual); 3,872,390 shares
issued and outstanding (as adjusted) (1) (2)...... 26,000 39,000
Additional paid in capital................................. 897,000 4,399,000
Accumulated deficit........................................ (1,160,000) (1,160,000)
------------ ------------
Total stockholders' equity (deficit)........................ $ (237,000) $ 3,278,000
============ ============
TOTAL CAPITALIZATION $ 63,000 $ 3,278,000
============ ============
</TABLE>
- ---------
(1) Does not include (i) shares of Common Stock reserved for issuance upon
exercise of the Underwriters' Options; (ii) 500,000 shares of Common
Stock reserved for issuance upon exercise of options granted or
available for grant under the 1992 Stock Option Plan; (iii) 500,000
shares of Common Stock reserved for issuance upon exercise of options
granted or available for grant under the 1997 Stock Option Plan; or
(iv) 700,000 shares of Common Stock reserved for issuance upon exercise
of outstanding warrants and nonplan options.
(2) Reflects the conversion of the $300,000 of Bridge Notes into 600,000
shares of Common Stock and net offering proceeds of $3,214,775
($3,982,500 gross proceeds less discounts and commissions, 3%
non-accountable expense allowance and other offering expenses.)
31
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data is qualified in its entirety by
reference to the Company's Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. The selected financial data for the two years
ended July 31, 1997 and 1996 have been derived from the Company's audited
financial statements included elsewhere herein. The information below should be
read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Statement of Operations Data(1) Year-Ended July 31,
---------------------------
1997 1996
<S> <C> <C>
REVENUES
Operating Revenues.............................. $ 915,000 $1,402,000
Consulting Fee (non-recurring).................. -0- 2,070,000
Interest Income................................. 18,000 31,000
---------- ---------
933,000 3,503,000
---------- ---------
COSTS AND EXPENSES
Operating Expenses.............................. 735,000 819,000
Product Development............................. 171,000 172,000
Selling, General and
Administrative Expenses....................... 437,000 410,000
Consulting Fee Expenses
(non-recurring)............................... -0- 1,606,000
Interest Expense................................ 1,000 2,000
---------- ---------
1,344,000 3,009,000
---------- ---------
NET INCOME (LOSS) $ (411,000) $ 494,000
---------- ---------
Weighted average number of 4,279,390 4,279,390
========= =========
common shares outstanding
Per Common Share:
Net income (loss) (.10) .12
Pro forma Net Income (.14) .04
</TABLE>
(1) Since inception, the Company has not declared any dividends on its
Common Stock. See "DIVIDEND POLICY."
32
<PAGE>
Balance Sheet Data
At July 31, 1997
--------------------------------
Actual As Adjusted(1)
---------- ---------------
Working Capital (deficit) $ (39,000) $3,253,000
Long Term Convertible Debt $ 300,000 $ -0-
Total Assets $ 575,000 $3,790,000
Total Liabilities $ 812,000 $ 512,000
Shareholders' equity (deficit) $(237,000) $3,278,000
(1) As adjusted to give effect to the receipt of the net proceeds from the
sale of the Units offered hereby, and the conversion of the Bridge
Notes, but does not give effect to the possible exercise of:(i) the
Underwriters' Options; (ii) the Class A Warrants; (iii) any options
issued or issuable under the Company's Stock Option Plans; and (iv)
other outstanding warrants. See "CAPITALIZATION" and "CERTAIN
TRANSACTIONS."
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Since its inception, substantially all of the Company's revenues have
been derived from consulting activities, primarily in connection with product
development for various pharmaceutical companies. The Company has had a history
of recurring losses from operations through July 31, 1995, and also for the year
ended July 31, 1997, giving rise to an accumulated deficit at July 31, 1997 of
approximately $1,160,000. During the fiscal year ended July 31, 1996, the
Company's revenues included a single (non-recurring) consulting transaction
producing a gross consulting fee of approximately $2,070,000 and net income of
$494,000. Although substantially all of the Company's revenues to date have been
derived from its consulting business, the future growth and profitability of the
Company will be principally dependent upon its ability to successfully develop
its products and to enter into license agreements with drug companies who will
market and distribute the final products. The Company's revenues from consulting
declined during the year ended July 31, 1997 and may continue to decline in the
future as the Company shifts its emphasis away from product development
consulting for its clients and towards development of its own products.
For the reasons stated above, the Company believes that its results of
operations for the periods ended July 31, 1997 are not necessarily indicative of
the Company's future results of operations. The Company anticipates that it will
incur substantial operating expenses in connection with the joint development,
testing and approval of its proposed delivery systems, and expects these
expenses will result in continuing and significant operating losses until such
time, if ever, that the Company is able to achieve adequate sales levels. See
"USE OF PROCEEDS" and "BUSINESS."
Results of Operations
Fiscal Year 1997 Compared to Fiscal Year 1996
Revenues (excluding the non-recurring item discussed below) for the
fiscal year ended July 31, 1997 ("fiscal 1997") decreased approximately $500,000
or 35% to $933,000 from $1,433,000 for the fiscal year ended July 31, 1996
("fiscal 1996"). In fiscal 1996, the Company incurred a non-recurring consulting
fee of $2,070,000 and associated expenses of $1,606,000.
The revenue decrease in fiscal 1997 was primarily attributable to
delays in commencement of follow-on clinical studies. Follow-on clinical studies
are requested by clients when results of pilot clinical studies (which precede
follow-on studies) confirm clients expectations as to whether a particular
product formation achieves the desired result sought by the client. Because the
results of five pilot clinical studies conducted during fiscal 1997 did not
confirm such results, those clients determined to reformulate their products and
suspend further studies until such time as the client completes reformulation.
No contracts are in place for these follow on studies. It has been the Company's
34
<PAGE>
experience, and is standard industry practice, that clients in such
circumstances revise their action plans and return to the Company (which
conducted the initial studies) to pursue newly formulated initial clinical
studies, and if confirming results are achieved, the Company typically conducts
the follow-on studies. For those reasons, the Company expects that revenues from
consulting activities in fiscal 1998 will likely exceed consulting revenues in
fiscal 1997.
Costs and expenses for fiscal 1997 (excluding expenses associated with
the 1996 non-recurring consulting fee) decreased approximately $59,000 or 4% to
approximately $1,344,000 from $1,403,000 for fiscal 1996. In fiscal 1997 the
Company incurred a $47,000 expense associated with seeking sources of financing.
The decrease was primarily attributable to reductions in operating expenses of
$84,000, partially offset by increases in selling, general and administrative
expenses of $27,000.
The net loss for fiscal 1997 was $411,000 compared to income of
$494,000 for fiscal 1996. This change is attributable primarily to reduced
revenues without a corresponding reduction in expenses.
Fiscal Year 1996 Compared to Fiscal Year 1995
Revenues for the fiscal year ended July 31, 1996 increased
approximately 188% to $3,503,000 from $1,215,000 for the fiscal year ended July
31, 1995 ("fiscal 1995"). The increase was primarily attributable to a single
non-recurring consulting contract producing a gross fee of approximately
$2,070,000. Excluding this non-recurring fee, revenues for fiscal 1996 increased
approximately 18% to $1,433,000 from $1,215,000 for fiscal 1995.
For fiscal 1996, the Company incurred non-recurring consulting fee
expenses of approximately $1,606,000, due to the single consulting transaction
described above. Excluding this non-recurring expense, costs and expenses
increased approximately 12% to $1,403,000 for fiscal 1996 from $1,251,000 for
fiscal 1995 due to increases in operating expenses of $37,000, and product
development expenses of $168,000. Interest expense for fiscal 1996 decreased 50%
to $2,000 from $4,000 during fiscal 1995. Selling, general and administrative
expenses decreased approximately 11% to $410,000 for fiscal 1996 from $461,000
for fiscal 1995.
The $168,000 increase in product development costs for fiscal 1996 was
the result of increased development activities in connection with a development
agreement with a major pharmaceutical company.
Giving effect to the non-recurring consulting fee, for fiscal 1996 the
Company had net income of $494,000 compared to a net loss of $36,000 for fiscal
1995. Excluding the effect of this non-recurring transaction, for fiscal 1996
the Company had net income of $30,000 compared to a net loss of $36,000 for
fiscal 1995.
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Liquidity and Capital Resources
From its inception, the Company's principal sources of capital have
been provided by consulting revenues, conversion of debt, as well as loans and
capital contributions from the Company's principal stockholders. At July 31,
1997, the Company had a working capital deficit of $39,000, compared to working
capital of $87,000 at July 31, 1996, representing a net decrease of working
capital of approximately $126,000. The report of the Company's independent
auditors on the Company's financial statements for each of the two years ended
July 31, 1997 contains an explanatory paragraph expressing substantial doubt
with respect to the Company's ability to continue as a going concern without
obtaining additional financing such as that contemplated by this offering.
Net cash used in operating activities was $97,000 in fiscal 1997
compared to $76,000 of net cash provided by operating activities in fiscal 1996.
In fiscal 1997 $208,000 in cash was provided by financing activities, and
capital expenditures for such period were $9,000. Therefore, notwithstanding a
$411,000 net loss for fiscal 1997, total cash flow for 1997 was $102,000
compared to $91,000 for fiscal 1996. Factors contributing to this increase
included a decrease in accounts payable of $52,000, partially offset by a
decrease in accounts receivable of $116,000, an increase in billings over cost
and earnings on uncompleted contracts of $105,000 and an increase in accrued
expenses and other current liabilities of $54,000. The Company, upon
consummation of the offering contemplated herein, will have obligations of
$200,000 and $150,000 per annum to its two executive officers, and under a
consulting agreement with the Representative is obliged to pay the
Representative $75,000 at the closing of this offering. See
"Management-Executive Compensation" and "UNDERWRITING."
Although there can be no assurance, the Company believes that the
proceeds from this offering together with revenues from operations, will be
sufficient to satisfy its cash requirements for at least the next twenty-four
(24) months. No assurance can be given that future unforeseen events will not
adversely affect the Company's ability to implement its expansion plan,
requiring it to seek additional financing, which may not be available on terms
acceptable to the Company, if at all. See "USE OF PROCEEDS."
Inflation
The Company does not believe that inflation has had a material effect
on its results of operations during the past three fiscal years. There can be no
assurance that the Company's business will not be affected by inflation in the
future.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. (SFAS) 121 "Accounting
for the Impairment of long-lived Assets and for long-lived Assets to be Disposed
Of," was issued in March 1995, and is effective for fiscal years beginning after
December 15, 1995, SFAS 121 requires that certain long-lived assets be reviewed
for possible impairment and written down to fair value, if appropriate. The
Company has adopted this new pronouncement for the year ended July 31, 1997,
however, the impact of the adoption has not had a material effect on the
Company's financial statements.
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Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation," requires companies to measure employee stock
compensation plans based on the fair value method of accounting. However, the
statement allows the alternative of continued use Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," with pro
forma disclosure of net income and earnings per share determined as if the fair
value based method has been applied in measuring compensation cost. The Company
has adopted the pro forma disclosure provisions of this new pronouncement in the
year ended July 31, 1997 and such adoption did not have a material effect on the
Company's financial statements.
SFAS No. 128, "Earnings per Share," was issued in February 1997, and is
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 requires that earnings per share be presented more in line with
earnings per share standards of other countries. The Company expects to adopt
SFAS 128 for the year ending July 31, 1998. The Company has not yet determined
the effect of the adoption of this new pronouncement on its financial
statements.
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BUSINESS OF THE COMPANY
Company Background
The Company is engaged in the development of novel application drug
delivery systems for presently marketed prescription and over-the-counter
("OTC") drugs. The Company's patent-pending delivery systems are lingual sprays
and soft gelatin bite capsules, enabling drug absorption through the oral
mucosa, and more rapid absorption into the bloodstream than presently available
oral delivery systems. The Company's proprietary dosage delivery systems enhance
and greatly accelerate the onset of the therapeutic benefits which the drugs are
intended to produce. The Company refers to its delivery systems as
Immediate-Immediate Release (I2RTM) because its delivery systems are designed to
provide therapeutic benefits within minutes of administration. The Company's
development efforts for its novel drug delivery systems are concentrated on
drugs which are already available and proven in the marketplace. In addition to
increased bioavailability by avoiding metabolism by the liver before entry into
the bloodstream, the Company believes that its proprietary delivery systems
offer the following significant advantages: (i) improved drug safety profile by
reducing the required dosage, including possible reduction of side-effects; (ii)
improved dosage reliability; (iii) allowing medication to be taken without
water; and (iv) improved patient convenience and compliance.
The Company was organized under the laws of the State of New Jersey in
May 1982 under the name Pharmaconsult, Inc., and in 1991 changed its name to
Flemington Pharmaceutical Corporation to reflect the change in nature of its
business. Since its inception in 1982, the Company has been a consultant to the
pharmaceutical industry, focusing on product development activities of various
European pharmaceutical companies, and since 1992 has used its consulting
revenues to fund its own product development activities. The Company's recent
focus on developing its own products evolved naturally out of its consulting
experience for other pharmaceutical companies. Substantially all of the
Company's revenues have been derived from its consulting activities. The
Company's business address is 43 Emery Avenue, Flemington, New Jersey 08822, and
its telephone number is (908) 782-3431.
Business Strategy
The Company's strategy is to concentrate its product development
activities primarily on those pharmaceuticals for which there already are
significant prescription and OTC sales, where the use of the Company's
innovative delivery systems will greatly enhance speed of onset of therapeutic
effect, reduce side effects through a reduction of the amount of active drug
substance required to produce a given therapeutic effect, and improve patient
convenience or compliance.
The Company has initially identified approximately 50 presently
marketed drugs that meet the Company's criteria for its drug delivery systems.
The Company will concentrate its product development activities on those
pharmaceuticals with significant prescription or OTC sales. The Company believes
that applying a novel application delivery system to existing drugs involves
less cost, time and risk than developing and commercializing a new chemical
entity. The Company believes that there is significant opportunity to combine
its delivery systems with existing pharmaceuticals to expand the market for an
existing drug, differentiate a product from a generic or brand name competition,
and possibly create new markets.
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In light of the material expense and delays associated with
independently developing and obtaining approval of pharmaceutical products, the
Company will only continue to develop such products through collaborative
arrangements with major pharmaceutical companies which will fund that
development. To date, the Company has signed two such development agreements
with major pharmaceutical companies, each of which is described below.
Recent Developments
The Company and Novartis, one of the world's largest pharmaceutical
companies ("Novartis") are parties to a letter agreement for the development of
an oral spray version of Clemastine, an antihistamine product, pursuant to which
the Company conducted a pilot bioavailability study of the spray version
product. Under this agreement, the Company will file an Investigatory New Drug
application ("IND") with the U.S. Food and Drug Administration ("FDA") and
complete a second pilot clinical study, at the expense of Novartis. If this
second pilot study is favorable, the Company and the Novartis will negotiate an
agreement to complete large scale clinical trials, seek approval by the FDA and
the Company will license the product to Novartis. The Company believes, based on
the results of the first pilot study, that the results of the second pilot study
should be favorable. There can be no assurance, however, that the results of the
second study will be favorable, nor can there be any assurance that, even if
favorable, the Novartis will decide to pursue the project further or that the
Company and the Novartis will be able successfully to negotiate a mutually
acceptable second agreement.
In November 1996, the Company entered into an Agreement with Altana
Inc. ("Altana"), a U.S. subsidiary of Altana GmbH, under which the Company
agreed to prepare for Altana an Abbreviated New Drug Application (ANDA) for the
Company's patent-pending lingual spray for treatment of angina. Under the terms
of the Agreement, Altana will, upon approval of the product by the FDA, market
the product in the U.S., and source all of its related product requirements from
the Company. The Company was paid a consulting fee for preparation of the ANDA
and will receive additional fees from Altana upon acceptance by the FDA of the
ANDA as filed and upon FDA approval. There can be no assurance, however, that
the FDA will accept the ANDA for filing, or that, if accepted, the FDA will
approve the application.
Patent Pending Delivery Systems
The Company has patent applications pending for two oral dosage
delivery systems, the Lingual (Oral) Spray and the Soft Gelatin Bite Capsule,
for which FDA approval is not a prerequisite for patent approval. The expected
year of marketability will vary depending upon the specific drug product with
which the delivery system will be utilized. Each individual use of the delivery
system will require registration and/or approval with the FDA prior to
marketability, and the amount of regulatory oversight required by the FDA will
also depend on the specific type of drug product for which the delivery system
is implemented. The following are descriptions of the two oral dosage delivery
systems for which patent applications are pending:
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Lingual (Oral) Spray. The Company's aerosol and pump spray formulations
release the drug in the form of a fine mist into the mouth for immediate
absorption into the bloodstream via the mucosal membranes. The Company believes
that this delivery system offers certain advantages, including improving the
safety profile of certain drugs by lowering the required dosage, improving dose
reliability, and allowing medication to be taken without water. Drug absorption
through the mucosal membranes of the mouth is rapid and minimizes the first-pass
metabolism effect (i.e., total or partial inactivation of a drug as it passes
through the gastrointestinal tract and liver).
Soft Gelatin Bite Capsule. The Company's soft gelatin bite capsule
formulation consists of a seamless gelatin shell surrounding a core substance
(usually a liquid solution). When crushed or chewed, the soft gelatin bite
capsule releases medication into the mouth, thereby allowing absorption through
the oral mucosa. The portion of the dose that is eventually swallowed is
introduced to the stomach in a solution ready for immediate absorption, thereby
maximizing absorption from the gastrointestinal tract into the bloodstream. The
result is rapid onset of the desired therapeutic effect.
Proposed Products
The Company's initial proposed products fall into the following
therapeutic classes:
o Antihistamines (Clemastine, Chlorpheniramine)
The Company is proceeding with the development of a product using
Clemastine with one of the world's largest pharmaceutical companies. The second
pilot clinical study is being conducted and is expected to be concluded by early
1998. In addition, the Company has concluded bioequivalency studies with respect
to its lingual spray formulation of Clemastine, and will file an IND for this
formulation following the completion of a second pilot study. Thereafter,
efficacy studies will be conducted and an NDA will be submitted to the FDA,
which is expected to be filed by mid 1999, following approval by the FDA, after
which commercial sales of the product can commence in mid 2000.
o Antihistamines with decongestants and other biologically
active amines (Nicotine, Dextromethorpham, Bromocryptine,
Levodopa)
The Company is currently investigating proposed products in this area
and intends to use a portion of the proceeds of this offering to conduct several
pilot clinical research studies and approach pharmaceutical companies with the
results. The Company anticipates that, assuming research results are similar to
those obtained for Antihistamines, that there will be significant interest by
pharmaceutical companies in signing development agreements with the Company for
such products. The earliest realistic date that the Company can be in a position
to have a marketable product in this area is late 2000. The Company has
developed its formulation for a nicotine product among this therapeutic class.
All other drugs within this class are at an earlier stage of development.
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o Sleep Inducers (Diphenhydramine)
The Company has developed its formulation for Diphenhydramine and has
finished initial stability testing. The Company intends to use a portion of the
proceeds of this offering to conduct initial pilot clinical studies, including
bioequivalency studies, and thereafter approach pharmaceutical companies with a
proposed product. The earliest time that the Company could reasonably expect to
have a commercially salable product in this category is mid 2000.
o Cardiovascular (Nitroglycerin)
The Company's Nitroglycerin product has been formulated and stability
testing has been completed. This product is subject to a license agreement with
a U.S. subsidiary of one of the largest pharmaceutical companies in Europe. See
"BUSINESS OF THE COMPANY -- Recent Developments." The Company expects that this
product will be filed with the FDA by late 1997, and available for commercial
sale within 6 to 12 months thereafter.
The following therapeutic classes are also being considered by the
Company for proposed products:
o Serotonin Uptake Inhibitors
o Analgesics (Morphine, Butorphanol, Piroxicam)
o Peptides (Calcitonin, Insulin)
o Hormones (Testosterone, Estradiol)
These therapeutic classes have been identified by the Company as viable
candidates for its novel drug delivery systems, but are earlier stages of
development than the other therapeutic classes noted above. The Company needs to
conduct additional research to prepare product formulations and conduct
stability testing for each of these classes. If product formulations can be
successfully developed and if stability tests are successful, the Company will
consider conducting pilot clinical studies and bioequivalency studies on an
individualized basis. Because of the early stage of development of these
therapeutic classes, the Company does not expect to be able to have a
commercially salable product before the year 2005, or perhaps thereafter.
The therapeutic classes identified above are commonly available and
widely accepted in the marketplace.
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The Company's proposed products are subjected to laboratory testing and
stability studies and tested for therapeutic comparison to the originators'
products by qualified laboratories and clinics. To the extent that two drugs'
active ingredients are substantially identical in terms of their rate and extent
of absorption in the human body (bioavailability), they are considered
bioequivalent. If the accumulated data demonstrates bioequivalency, submission
is then made to the FDA (through the filing of an ANDA) for its review and
approval to manufacture and market. If the accumulated data demonstrates that
there are differences in the two drugs' rate and extent of absorption into the
human body, or if it is intended to make additional or different claims
regarding therapeutic effect for the newly developed product, submission is made
to the FDA via a NDA for its review and approval under Section 505(b)(2) of the
FDC Act. An NDA submitted under this section of the FDC Act is generally less
complex than an ordinary NDA and is usually acted upon by FDA in a shorter
period of time. It is the Company's expectation that the majority of its
products in development will require the filing of this shorter version of an
NDA because the products are known chemical entities, but the Company or its
licensees will be making new claims as to therapeutic effects or lessened side
effects, or both.
The Company estimates that development of new formulations of
pharmaceutical products, including formulation, testing and obtaining FDA
approval, generally takes three to five years for the ANDA process. Development
of products requiring additional clinical studies under Section 505(b)(2) NDAs,
such as the Company anticipates for the majority of its product development,
including FDA approval, may take four to seven years. There can be no assurance
that the Company's determinations will prove to be accurate or that
pre-marketing approval relating to its proposed products will be obtained on a
timely basis, or at all. See "Government Regulation."
Marketing and Distribution
The Company intends, generally, to license products developed with its
technology to drug companies already selling such drug substances under their
own brand names, or to market its products to pharmaceutical wholesalers, drug
distributors, drugstore chains, hospitals, United States governmental agencies,
health maintenance organizations and other drug companies. It is anticipated
that promotion of the Company's proposed products will be characterized by an
emphasis on their distinguishing characteristics, such as dosage form and
packaging, as well as possible therapeutic advantages of such products. The
Company will seek to position its proposed products as alternatives or as line
extensions to brand-name products. The Company believes that to the extent that
the Company's formulated products are patent-protected, such formulations may
offer brand-name manufacturers the opportunity to expand their product lines.
Alternatively, products which are not patented may be offered to brand-name
manufacturers as substitute products after patent protection on existing
products expire.
Inasmuch as the Company does not have the financial or other resources
to undertake extensive marketing activities, the Company generally intends to
seek to enter into marketing arrangements, including possible joint ventures or
license or distribution arrangements, with third parties. The Company believes
that such third-party arrangements will permit the Company to maximize the
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promotion and distribution of its products while minimizing the Company's direct
marketing and distribution costs. Other than the Company's aforementioned
agreement for the Company's proposed lingual spray product for angina, the
Company has not entered into any agreements or arrangements with respect to the
marketing of its proposed products and there can be no assurance that it will do
so in the future. There can be no assurance that the Company's proposed products
can be successfully marketed. Strategies relating to marketing of the Company's
other proposed formulated products have not yet been determined; these will be
formulated in advance of anticipated completion of development activities
relating to the particular formulated product. The Company has no experience in
marketing or distribution of its proposed products.
Manufacturing
The Company has entered into agreements with each of Rapid Spray GmbH &
Co. KG ("Rapid Spray") of Laupheim, Germany and SCA-Lohnherstellungs AG
("Swisscaps") of Kirchberg, Switzerland, European pharmaceutical manufacturers,
regarding the manufacture of the Company's products in spray and gelatin bite
capsule dosage forms, respectively (the "Joint Development Agreements"). Under
the Joint Development Agreements the Company is responsible, among other things,
to conduct any necessary clinical trials and take all action necessary to comply
with the regulatory approval process. The Company will purchase all of its
clinical and commercial requirements for its proposed products from such
manufacturers, at a price to be negotiated by the parties.
In addition to protection afforded by patents for which the Company has
applications pending, each of the Joint Development Agreements provides that the
Company has exclusive rights to market its proposed products in the United
States, Europe and Japan. Each of the Joint Development Agreements also contains
certain minimum purchase requirements for the Company. It is anticipated that
the Company will arrange with third-party suppliers for supplies of active and
inactive pharmaceutical ingredients and packaging materials used in the
manufacture of the Company's proposed products. It is the Company's present
intent to seek to enter into similar manufacturing arrangements for other
products to be developed by it in the future.
The Joint Development Agreements provide for the manufacture of the
Company's products at prices to be mutually agreed upon and require
re-negotiation of certain terms relating to per unit cost on an annual basis.
The manufacture of the Company's pharmaceutical products will be subject to cGMP
prescribed by the FDA, and pre-approval inspections by the FDA and foreign
authorities prior to the commercial manufacture of any such products. See
"Government Regulation" and "Raw Materials and Suppliers."
The Company anticipates that its proposed products will be manufactured
by its European manufacturers at their respective facilities in Germany and
Switzerland. The Company intends to import completed manufactured products into
the United States. In addition, the raw materials necessary for the manufacture
of the Company's products will, in all likelihood, be purchased by the Company
from suppliers in the United States, Europe and Japan and delivered to its
manufacturers' facilities by such suppliers. Accordingly, the Company and its
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manufacturers may be subject to various import duties applicable to both
finished products and raw materials and may be affected by various other import
and export restrictions as well as other developments impacting upon
international trade. These international trade factors will, under certain
circumstances, have an impact both on the manufacturing cost (which will, in
turn, have an impact on the cost to the Company of the manufactured product) and
the wholesale and retail prices of the products to be manufactured abroad. To
the extent that transactions relating to the foreign manufacture of the
Company's proposed products and purchase of raw materials involve currencies
other than United States dollars (i.e., Swiss francs and German marks), the
operating results of the Company will be affected by fluctuations in foreign
currency exchange rates.
Raw Materials and Suppliers
The Company believes that the active ingredients used in the
manufacture of its proposed pharmaceutical products are presently available from
numerous suppliers located in the United States, Europe and Japan. Generally,
certain raw materials, including inactive ingredients, are available from a
limited number of suppliers and certain packaging materials intended for use in
connection with the Company's lingual spray products are only available from
sole source suppliers. Although the Company believes that it will not encounter
difficulties in obtaining the inactive ingredients or packaging materials
necessary for the manufacture of its products, there can be no assurance that
the Company or its manufacturers will be able to enter into satisfactory
agreements or arrangements for the purchase of commercial quantities of such
materials. The failure to enter into agreements or otherwise arrange for
adequate or timely supplies of principal raw materials and the possible
inability to secure alternative sources of raw material supplies could have a
material adverse effect on the ability to manufacture formulated products.
Development and regulatory approval of the Company's pharmaceutical
products are dependent upon the Company's ability to procure active ingredients
and certain packaging materials from FDA-approved sources. Since the FDA
approval process requires manufacturers to specify their proposed suppliers of
active ingredients and certain packaging materials in their applications, FDA
approval of a supplemental application to use a new supplier would be required
if active ingredients or such packaging materials were no longer available from
the specified supplier, which could result in manufacturing delays. Accordingly,
the Company will seek to locate alternative FDA approved suppliers.
Research and Development
During fiscal 1997 and 1996, respectively, the Company spent $171,000
and $172,000 on product research and development. In future periods, the Company
intends to continue to spend significant, and greatly increasing amounts, to
develop its products. See "USE OF PROCEEDS."
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Government Regulation
The development, manufacture and commercialization of pharmaceutical
products is, generally subject to extensive regulation by various federal and
state governmental entities. The FDA, which is the principal United States
regulatory authority, has the power to seize adulterated or misbranded products
and unapproved new drugs, to request their recall from the market, to enjoin
further manufacture or sale, to publicize certain facts concerning a product and
to initiate criminal proceedings. As a result of federal statutes and FDA
regulations, pursuant to which new pharmaceuticals are required to undergo
extensive and rigorous testing, obtaining pre-market regulatory approval
requires extensive time and expenditures.
Under the FDC Act, a new drug may not be commercialized or otherwise
distributed in the United States without the prior approval of the FDA. The FDA
approval process relating to a new drug differs, depending on the nature of the
particular drug for which approval is sought. With respect to any drug product
with active ingredients not previously approved by the FDA, a prospective drug
manufacturer is required to submit a new drug application ("NDA"), including
complete reports of pre-clinical, clinical and laboratory studies to prove such
product's safety and efficacy. The NDA process generally requires, before the
submission of the NDA, submission of an investigational new drug application
"IND" pursuant to which permission is sought to begin preliminary clinical
testing of the new drug. An NDA based on published safety and efficacy studies
conducted by others may also be required to be submitted for a drug product with
a previously approved active ingredient, if the method of delivery, strength or
dosage is changed. Alternatively, a drug having the same active ingredients as a
drug previously approved by the FDA may be eligible to be submitted under an
ANDA, which is significantly less stringent than the NDA approval process.
While the ANDA process requires a manufacturer to establish
bioequivalence to the previously approved drug, it permits the manufacturer to
rely on the safety and efficacy studies contained in the NDA for the previously
approved drug.
The NDA approval process generally requires between four to seven years
from NDA submission to pre-marketing approval. By contrast, the ANDA process
permits an expedited FDA review pursuant to which pre-marketing regulatory
approval can generally be obtained in three to five years. The ANDA process is
available for drugs with the same active ingredients, dosage form, strength and
method of delivery as a product which has previously received FDA approval
pursuant to the NDA process. Manufacturing information, including a review of
chemical and physical data, stability data, facilities and processes, must also
be evaluated by FDA before approval.
The Company believes that products developed in lingual spray and soft
gelatin bite capsule delivery systems (dosage forms) usually will require
submission of an NDA.
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The Company estimates that the development of new formulations of
pharmaceutical products, including formulation, testing and obtaining FDA
approval, generally takes three to five years for the ANDA process and four to
seven years for the NDA process. There can be no assurance that the Company's
determinations will prove to be accurate or that pre-marketing approval relating
to its proposed products will be obtained on a timely basis, or at all. The FDA
application procedure has become more rigorous and costly and the FDA currently
performs pre-approval and periodic inspections of each finished dosage form and
each active ingredient.
The manufacture of the Company's pharmaceutical products will be
subject to current Good Manufacturing Processes (cGMP) prescribed by the FDA,
pre-approval inspection by the FDA and foreign authorities prior to the
commercial manufacture of such products and periodic cGMP compliance inspection
by the FDA. The Company's European manufacturers will be required to be in
compliance with cGMP with respect to the manufacture of the Company's products.
There can be no assurance that the Company's manufacturers will be deemed to be
in compliance with cGMP with respect to any particular product. To the extent
that the Company's manufacturers are deemed not to be in compliance with cGMP,
there can be no assurance that the Company will be able to enter into other
suitable manufacturing arrangements with third parties which are in compliance
with cGMP.
Competition
The markets which the Company intends to enter are characterized by
intense competition. The Company will be competing against established
pharmaceutical companies which currently market products which are equivalent or
functionally similar to those the Company intends to market. Prices of drug
products are significantly affected by competitive factors and tend to decline
as competition increases. In addition, numerous companies are developing or may,
in the future, engage in the development of products competitive with the
Company's proposed products. The Company expects that technological developments
will occur at a rapid rate and that competition is likely to intensify as
enhanced delivery system technologies gain greater acceptance. Additionally, the
markets for formulated products which the Company has targeted for development
are intensely competitive, involving numerous competitors and products. The
Company will seek to enhance its competitive position by focusing its efforts on
its novel dosage forms.
Patents and Protection of Proprietary Information
The Company has applied for United States and foreign patent protection
for the delivery systems which are the primary focus of its development
activities. There can be no assurance, however, that its patent applications
will be granted, or, if granted, will provide any adequate protection to the
Company. The Company also intends to rely on whatever protection the law affords
to trade secrets, including unpatented know-how. Other companies, however, may
independently develop equivalent or superior technologies or processes and may
obtain patent or similar rights with respect thereto. Although the Company
believes that its technology has been developed independently and does not
infringe on the patents of others, there can be no assurance that the technology
does not and will not infringe on the patents of others. In the event of
infringement, the Company or its European manufacturers could, under certain
circumstances, be required to modify the infringing process or obtain a license,
There can be no assurance that the Company or its European manufacturers would
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be able to do either of those things in a timely manner or at all, and failure
to do so could have a material adverse effect on the Company and its business.
In addition, there can be no assurance that the Company will have the financial
or other resources necessary to enforce or defend a patent infringement or
proprietary rights violation action. If any of the products developed by the
Company infringe upon the patent or proprietary rights of others, the Company
could, under certain circumstances, be enjoined or become liable for damages,
which would have a material adverse effect on the Company.
The Company also relies on confidentiality and nondisclosure
arrangements with its licensees and potential development candidates. There can
be no assurance that other companies will not acquire information which the
Company considers to be proprietary. Moreover, there can be no assurance that
other companies will not independently develop know-how comparable to or
superior to that of the Company.
Product Liability
The Company may be exposed to potential product liability claims by
consumers. The Company does not presently maintain product liability insurance
coverage. Although the Company will seek to obtain product liability insurance
prior to the commercialization of any products, there can be no assurance that
the Company will obtain such insurance or, if obtained, that any such insurance
will be sufficient to cover all possible liabilities. In the event of a
successful suit against the Company, insufficiency of insurance coverage could
have a material adverse effect on the Company. In addition, certain food and
drug retailers require minimum product liability insurance coverage as a
condition precedent to purchasing or accepting products for retail distribution.
Failure to satisfy such insurance requirements could impede the ability of the
Company or its distributors to achieve broad retail distribution of its proposed
products, which would have a material adverse effect upon the business and
financial condition of the Company.
Customer Dependence
Since inception, substantially all of the Company's revenues have been
derived from consulting activities primarily in connection with product
development for various pharmaceutical companies. Among other things, the
Company works with its European clients to obtain regulatory approvals for new
drug formulations in the United States. For the year ended July 31, 1997,
consulting activities relating to the Company's two largest clients accounted
for approximately 24% and 23% respectively, of the Company's revenue. For the
year ended July 31, 1996 consulting activities relating to the Company's three
largest clients accounted for approximately 60%, 14% and 10% respectively, of
the Company's revenue. The contract with the Company's largest customer for
fiscal 1996, was non-recurring in nature.
47
<PAGE>
Employees
The Company currently has four full-time employees, two of whom are
executive officers of the Company, one of whom is a project manager and one of
who is engaged in administrative functions. In addition to the foregoing, the
Company has arrangements with two individuals acting as the Company's European
representatives. Following the closing of this offering, the Company expects
these arrangements to be formalized, although no assurance can be given that
mutually acceptable agreements will be reached. The success of the Company will
be dependent in part, upon its ability to hire and retain additional qualified
marketing, technical and financial personnel, including a Comptroller or Chief
Financial Officer. There can be no assurance that the Company will be able to
hire or retain such necessary personnel.
Legal Proceedings
The Company is not a party to any material legal proceedings.
Properties
The Company's executive offices are located in an approximately 800
square foot facility located at 43 Emery Avenue, Flemington, New Jersey. The
Company occupies the premises under a month to month tenancy. Should this
tenancy be terminated for any reason, there is ample comparable space available
in the area for the Company to occupy. Since the manufacture of the Company's
products are conducted by outside vendors, the Company does not own or lease any
production or manufacturing facilities. The Company believes the Flemington
facility will adequately serve its needs for the foreseeable future.
48
<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company and their ages and
positions with the Company are as follows:
Name Age Positions with the Company
John J. Moroney 43 Chairman of the Board
Harry A. Dugger, III, Ph.D. 61 President and Director
Jean-Marc Maurette, Ph.D. 52 Director
Robert F. Schaul 58 Secretary and Director
John R. Toedtman 51 Director
Jack J. Kornreich 58 Director
John J. Moroney, Chairman of the Board. Mr. Moroney has been Chairman
of the Company since May 1992. From May 1992 to November 1994, Mr. Moroney was
also the Company's Chief Executive Officer. Mr. Moroney currently is President
of Landmark Financial Corp., Harrington Park, New Jersey, a private financial
consulting company. From 1985 to 1992, Mr. Moroney was a Managing Director of
Corporate Finance for the investment banking firm of Ladenburg, Thalmann & Co.,
Inc., specializing in the pharmaceutical and health care industries. Mr. Moroney
received a BS in 1975 and an MBA in 1997, both from Fordham University.
Harry A. Dugger, III, Ph.D., President and Director. Dr. Dugger is a
founder of the Company and has been President and a director of the Company
since its inception in May 1982. Prior to founding the Company, from June 1980
to November 1982, Dr. Dugger was employed as Vice President of Research and
Development by Bauers-Kray Associates, a company engaged in the development of
pharmaceutical products. From 1964 to 1980, Dr. Dugger was Associate Section
Head for Research and Development at Sandoz Pharmaceuticals Corporation. Dr.
Dugger received an MS in Chemistry from the University of Michigan in 1960 and
received a Ph.D. in Chemistry from the University of Michigan in 1962.
Robert F. Schaul, Secretary and Director. Mr. Schaul has been a
Director of the Company since November 1991 and was Vice President, Secretary
and General Counsel of the Company from November 1991 to February 1995. He has
advised the Company since its formation. Since 1995, Mr. Schaul has been Vice
President and General Counsel of Landmark Financial Corp. From 1989 to 1991, Mr.
Schaul was a partner with the law firm of Glynn, Byrnes and Schaul, and for
49
<PAGE>
twenty years prior thereto was an attorney and partner with the law firm Kerby,
Cooper, English, Schaul & Garvin, specializing in business law and business
related litigation. Mr. Schaul received a BA from New York University in 1961
and a JD from Harvard University in 1964.
Jean-Marc Maurette, Ph.D., Director. Mr. Maurette has been a director
of the Company since June 1992 and from August 1986 to August 1996 was the
Company's European Representative, with his office in Paris, France. Before he
became European Representative to the Company, Mr. Maurette was a consultant in
the European biotechnology and pharmaceutical industry. From 1994 to August
1996, Mr. Maurette was Chief Operating Officer of Centre Europeen de
Bioprospective, Cedex, France, a technological development authority of the
Normandy region of France. From 1991 to 1994, Mr. Maurette was Licensing Manager
for Pharmascience Laboratories, a French manufacturer of nutritional food
supplements. From 1981 through August 1991, Mr. Maurette was President of L.A.B.
Sarl, a French subsidiary of L.A.B. GmbH & Co., a clinical pharmacology
contractor.
John R. Toedtman, Director. Mr. Toedtman has been a director since
August 1992. Mr. Toedtman has been a director of Vital Signs, Inc., a medical
device manufacturer, since 1988, and a director of Noxso Corporation, an air
pollution control process developer, since 1986. From May 1990 to May 1996, Mr.
Toedtman was Chairman and Chief Executive Officer of GenRx, Inc. (formerly
American Veterinary Products, Inc.), a veterinary generic pharmaceutical
manufacturer. Since 1986, Mr. Toedtman has been a consultant in the area of
financial planning, management and strategic planning.
Jack J. Kornreich has been a director of the Company since 1996. He is
presently retired. Before retirement, from 1989 to 1993, Mr. Kornreich was
Executive Vice President and General Counsel of Bolar (renamed Circa
Pharmaceuticals Corp. and now named Watson Pharmaceutical Corp.). From 1984 to
1989, Mr. Kornreich practiced law as a partner in the firm of Baum & Kornreich
(from 1980 to 1984 the firm was named Baum, Skigen & Kornreich). From 1975 to
1989, Mr. Kornreich was in private practice.
Director Compensation
The Directors of the Company are elected annually and serve until the
next annual meeting of stockholders and until a successor shall have been duly
elected and qualified. Directors of the Company who are not employees or
consultants do not receive any compensation for their services as members of the
Board of Directors, but may be reimbursed for expenses incurred in connection
with their attendance at meetings of the Board of Directors. Directors may be
removed with or without cause by a vote of the majority of the stockholders then
entitled to vote.
Subject to the terms of applicable employment agreements, officers of
the Company are appointed by and serve at the discretion of the Board of
Directors.
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<PAGE>
Compensation Committee
Harry A. Dugger, III, Ph.D. and John J. Moroney are members of the
Compensation Committee which reviews and makes recommendations with respect to
compensation of officers, employees and consultants, including the granting of
options under the Company's 1997 Stock Option Plan.
Executive Compensation
The following table sets forth a summary for the fiscal years ended
July 31, 1997, 1996, and 1995, respectively, of the cash and non-cash
compensation awarded, paid or accrued, by the Company to the President and to
the Company's two most highly compensated executive officers who were serving as
such at the end of fiscal 1997 (collectively, the "named executive officers").
The Company at no time during the last three fiscal years had more than three
named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Name and Fiscal Annual Options by All Other
Principal Position Year Compensation No. of Shares Compensation
- ---------------------- -------- ------------- --------------- ---------------
Salary Bonus
------- -----
<S> <C> <C> <C> <C> <C>
Harry A. Dugger, III, Ph.D., 1997 150,000 -- 300,000 $ -
President and CEO 1996 43,334 -- 200,000 -
1995 23,500 -- - -
John J. Moroney, Chairman 1997 -- -- 300,000 -
1996 -- -- 200,000 -
1995 -- -- - -
Robert Schaul, Secretary 1997 -- (1) -- -
1996 10,500 -- 20,000 -
1995 53,000 -- - -
</TABLE>
Except as otherwise provided herein, the Company does not have any
annuity, retirement, pension, deferred or incentive compensation plan or
arrangement under which any executive officers are entitled to benefits, nor
does the Company have any long-term incentive plan pursuant to which performance
Shares or other forms or compensation are paid. The Company does have a 401(k)
profit sharing plan in which all employees are eligible to participate.
Executive officers who qualify will be permitted to participate in the Company's
1992 and 1997 Stock Option Plans. See "Stock Option Plans." Executive officers
who are employees participate in the Company's group life, health and
hospitalization plan which is available generally to all employees.
- -------
(1) See "CERTAIN TRANSACTIONS-Legal Fees."
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<PAGE>
Employment Agreements
Effective as of the date of this Prospectus, the Company entered into
employment agreements with each of Dr. Harry A. Dugger, III, Ph.D. for his
services as President and Mr. John J. Moroney for his services as Chairman. Each
agreement is for a base term of three (3) years, and is thereafter renewable for
additional periods of one (1) year, unless the Company gives notice to the
contrary. The Agreements provide for a base salary of $200,000 and $150,000,
respectively and annual cost of living adjustments equal to the greater of the
increase the consumer price index or 7.5%, with additional such increases and
bonuses as shall be approved by the Board. Dr. Dugger will also receive an
additional cash bonus of $10,000 for each NDA of the Company's products which is
accepted for filing by the U.S. Food and Drug Administration as well as the use
of a Company owned or leased and insured automobile chosen by the Company
The agreements also provide for certain non-competition and
non-disclosure covenants of the executives. However, with respect to the
non-competition covenants, a state court may determine not to enforce such
provisions or only partially enforce such provisions. Additionally, the
agreements provide for certain Company paid fringe benefits such as disability
insurance and inclusion in pension, profit sharing, stock option, savings,
hospitalization and other benefit plans at such times as the Company shall adopt
them. The agreements also provide for the payment of certain additional
severance compensation in the event that at any time during the term thereof (i)
the agreement is terminated by the executive with good reason (as defined), in
which event the executive is entitled to the balance of his remaining contract
value payable over the remaining term of the contract or (ii) terminated by the
executive due to a change in control (as defined) in which event the executive
is entitled to the payment of 2.99 times his base salary at the time of the
Change in Control (as defined). The Company believes that the change in control
provisions in these agreements may tend to discourage attempts to acquire a
controlling interest in the Company and may also tend to make the removal of
management more difficult; however, the Company believes such provisions provide
security and decision-making independence for its executive officers.
In connection with these employment agreements the Company granted
stock options (outside of the Plans) to Dr. Dugger and Mr. Moroney to purchase
300,000 shares respectively, at an exercise price of $1.84 per share exercisable
at any time during the ten (10) years following the date of grant.
Stock Option Plans
The Company's 1992 Stock Option Plan and 1997 Stock Option Plan (the
"Plans") adopted by the Company's Board of Directors and stockholders in May
1992 and February 1997, respectively, provide for the issuance of options
("Options") to employees, officers and, under certain circumstances, directors
of and consultants to the Company ("Eligible Participants"). Options granted
under the Plans may be either "incentive stock options" ("ISOs") as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or
"nonqualified stock options" ("NQSOs"). The Plans do not provide for the
issuance of stock appreciation rights, restricted stock awards or deferred stock
awards.
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<PAGE>
Management believes that, in view of the anticipated expansion of the
Company's operations over the next several years, the Company will be faced with
an increasing need for additional qualified personnel. The Company believes that
its ability to offer employees potential equity ownership through the grant of
Options and other awards will enhance the Company's ability to attract and
retain qualified personnel, without unnecessarily depleting the Company's cash
resources.
The 1997 Stock Option Plan is administered by Harry A. Dugger, III,
Ph.D. and John J. Moroney, who constitute the Compensation Committee of the
Board of Directors ("Committee"), and the 1992 Stock Option Plan is administered
by the entire Board. For purposes of the following discussion, the term
Committee will be used to reference the Committee with respect to the 1997 Stock
Option Plan and the Board with respect to the 1992 Stock Option Plan, as
applicable. The Committee has sole discretion and authority, consistent with the
provisions of the Plans, to select the Eligible Participants to whom Options
will be granted under the Plans, the number of shares which will be covered by
each Option and the form and terms of the agreement to be used. All employees
and officers of the Company (except for members of the Committee) are eligible
to participate in the Plans. Directors are eligible to participate only if they
have been declared to be "eligible directors" by resolution of the Board of
Directors. Members of the Committee are not Eligible Participants.
At April 30, 1997, two persons were eligible to receive ISOs under the
Plans.
Options. The Committee is empowered to determine the exercise price of
Options granted under the Plans, but the exercise price of ISOs must be equal to
or greater than the fair market value of a share of Common Stock on the date the
Option is granted (110% with respect to optionees who own at least 10% of the
outstanding Common Stock). The Committee has the authority to determine the time
or times at which Options granted under the Plans become exercisable, but
Options expire no later than ten years from the date of grant (five years with
respect to Optionees who own at least 10% of the outstanding Common Stock of the
Company). Options are nontransferable, other than by will and the laws of
descent, and generally may be exercised only by an employee while employed by
the Company or within 90 days after termination of employment (one year from
termination resulting from death or disability).
No incentive stock option may be granted to an Employee if, as the
result of such grant, the aggregate fair market value (determined at the time
each option was granted) of the shares with respect to which incentive stock
options are exercisable for the first time by such Employee during any calendar
year (under all such plans of the Company and any parent and subsidiary) exceeds
$100,000. The Plans do not confer upon any Employee any right with respect to
the continuation of employment by the Company, nor do the Plans interfere in any
way with the Employee's right or the Company's right to terminate the Employee's
employment at any time.
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<PAGE>
A total of 1,000,000 shares of Common Stock is currently reserved for
issuance under the Plans, evenly divided among each of the 1992 and 1997 Stock
Option Plan. As of the date of this Prospectus, there are outstanding options to
purchase an aggregate of 482,000 shares and 200,000 of Common Stock under the
1992 Stock Option Plan and 1997 Stock Option Plan, respectively, of which ISOs
to purchase 54,348 shares were issued to each of Messrs. Dugger and Moroney,
NQSOs to purchase 145,652 shares were issued to each of Messrs. Dugger and
Moroney, and NQSOs to purchase 80,000 shares were issued (20,000 shares each) to
Messrs. Maurette, Kornreich, Schaul and Toedtman having an exercise price of
$1.67 per share. The options issued to Messrs. Dugger and Moroney have an
exercise price of $1.84 per share. All of the foregoing options vested
immediately upon grant.
Indemnification of Directors under New Jersey Law
Pursuant to both the Company's Certificate of Incorporation and New
Jersey law, the Company's officers and directors are indemnified by the Company
for monetary damages for breach of fiduciary duty, except for liability which
arises in connection with (i) a breach of duty or loyalty, (ii) acts or
omissions not made in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for dividend payments or stock repurchases
illegal under New Jersey law, or (iv) any transaction in which the officer or
director derived an improper personal benefit. The Company's Certificate of
Incorporation does not have any effect on the availability of equitable remedies
(such as an injunction or rescissions) for breach of fiduciary duty. However, as
a practical matter, equitable remedies may not be available in particular
circumstances. The Company has arranged for director and officer liability
coverage to commence upon the closing of this offering. SEE "RISK FACTORS --
Indemnification of Directors under New Jersey Law."
PRINCIPAL STOCKHOLDERS
The following table sets forth as of August 1, 1997 certain information
regarding the ownership of the Common Stock by (i) each person known by the
Company to be the beneficial owner of more than 5% of the Common Stock, (ii)
each of the Company's directors, and (iii) all of the Company's executive
officers and directors as a group. Beneficial ownership has been determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended. Under this Rule, certain shares may be deemed to be beneficially owned
by more than one person (such as where persons share voting power or investment
power). In addition, shares are deemed to be beneficially owned by a person if
the person has the right to acquire the shares (for example, upon exercise of an
option) within 60 days of the date as of which the information is provided; in
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned by such
person (and only such person) by reason of these acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in the
following table does not necessarily reflect the person's actual ownership or
voting power at any particular date.
54
<PAGE>
<TABLE>
<CAPTION>
Name and Address or Number in Amount and Nature of Percentage of Class
Group(2) Beneficial Ownership(1)
Before Offering After Offering
<S> <C> <C> <C>
Harry A. Dugger, III, Ph.D. 1,679,003(3) 47.3% 39.8%
John J. Moroney 873,080(4) 26.9% 22.2%
Robert F. Schaul 59,286(5) 2.3% 1.8%
Jean-Marc Maurette 40,476(5) 1.5% 1.2%
John R. Toedtman 20,000(5) * *
Jack R. Kornreich 39,310(5) 1.5 1.2
Watson Pharmaceutical
Corporation 389,350 15.0% 11.9%
311 Bonnie Circle
Corona, CA 91720
Estate of William D. Swift,
Jr., Columbus, Georgia 192,870 7.4% 5.9%
All Officers and Directors as a 2,711,115(3)(4)(5) 63.4% 54.8%
group (6 persons)
</TABLE>
- ---------
(*) less than 1%.
1 Except as otherwise indicated, each named holder has, to the Company's
knowledge, sole voting and investment power with respect to the shares
indicated. The "After Offering" column assumes that the Bridge Notes
are converted to Common Stock concurrently with the closing of this
offering.
2 With the exception of Watson Pharmaceutical Corporation and the Estate
of William D. Swift, Jr., the address of all holders in the table is
43 Emery Avenue, Flemington, New Jersey 08822.
3 Includes options to purchase 200,000 shares of common stock issued
under the 1992 Stock Option Plan; 450,000 shares issuable upon
conversion of the Bridge Notes, options to purchase 300,000 shares of
Common Stock issued outside of the Plans; 60,000 shares beneficially
owned by his daughter Christina Dugger Sommers and 60,000 shares
beneficially owned by his son Andrew Dugger. Dr. Dugger may be deemed
to be a "parent" of the Company as such term is defined under the
Federal securities laws.
4 Includes options to purchase 200,000 shares of common stock issued
under the 1992 Stock Option Plan; options to purchase 300,000 shares of
Commons Stock issued outside of the Plans; 150,000 shares issuable upon
conversion of the Bridge Notes; 73,080 shares owned jointly with his
wife, and 50,000 shares owned by each of his three sons, Matthew,
Timothy and Sean.
5 Includes options to purchase 20,000 shares of common stock issued
under the 1992 Stock Option Plan.
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<PAGE>
CERTAIN TRANSACTIONS
Stockholder Loans
During fiscal 1996 and 1995, Dr. Dugger and Mr. Moroney made periodic
advances to the Company for working capital and general corporate purposes.
Balances outstanding at the end of fiscal 1996 and fiscal 1995 were $15,000 and
$0, respectively. Loans made during fiscal 1997 are discussed immediately below.
Bridge Financing
In July 1997, the Company borrowed an aggregate of $300,000 from
Messrs. Moroney and Dugger, who financed this loan with proceeds realized upon
the private sale of a portion of their holdings of Common Stock, 450,000 and
150,000 shares were sold, respectively. This loan is evidenced by certain notes
which carry a term of 15 months and an interest rate of 7%. These notes are
convertible at the option of the holders into Common Stock at a conversion price
of $.50 per share, the same price at which Messrs. Dugger and Moroney sold their
shares. While the terms of the notes do not require them to be converted into
Common Stock, the Company has been advised by each of the holders that they will
exercise this conversion right after the closing of this offering.
Consulting Fees
During fiscal 1995, 1996 and 1997, the Company paid consulting fees to
Landmark Financial Corp., a corporation wholly owned by Mr. Moroney, of
$140,000, $563,000, and $15,000 respectively. Messrs. Moroney and Schaul are
President and Vice President, respectively, of Landmark Financial Corp. All but
approximately $45,000 of the $563,000 paid in fiscal 1996 to Landmark was earned
in connection with the non-recurring consulting fee of $2,070,000 received for
merger advice. All but $55,000 paid in fiscal 1995 was attributable to this
non-recurring transaction. These consulting fees were paid in connection with
services rendered to the Company by Landmark with respect to contracts with the
Company requiring Mr. Moroney's personal services.
Legal Fees
During fiscal 1997, the Company paid Mr. Schaul approximately
$53,000 in legal fees. See Note 4 to the financial statements.
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<PAGE>
Conversion Agreements
During fiscal 1994, Watson Pharmaceutical Corp. (formerly Circa
Pharmaceutical), a licensee that made advances to the Company in prior periods,
agreed to convert the principal amount of such advances, into an aggregate of
389,350 shares of the Company's common stock. The advances, which aggregated
$650,000, were made to the Company in 1991 and 1992.
During fiscal 1994, all holders of the Company's 9% Senior Notes (the
"9% Notes"), which were issued in a private placement in May 1992 when the
Company was then considering a public offering, agreed to convert an aggregate
of $737,500 principal amount of such notes into common stock of the Company at a
conversion price of $1.67 per share. Holders of the 9% Notes, which matured in
November 1993, received in cash all accrued interest through the date of
conversion, and also received at the time of issuance of the 9% Notes, an
aggregate of 127,204 shares of common stock.
Employment Agreements
See "MANAGEMENT - Employment Agreements."
All future transactions with officers, directors or five percent (5%)
stockholders of the Company will be on terms no less favorable to the Company
than those obtainable from third parties on an arms-length basis.
Future Affiliated Transactions
All future material affiliated transactions and loans will be made or
entered into on terms that are no less favorable to the Company than those that
could be obtained from unaffiliated third parties. All future material
affiliated transactions and loans, and any forgiveness of loans, must be
approved by a majority of the Company's independent directors who do not have an
interest in the transactions and who had access, at the Company's expense, to
the Company's counsel or independent counsel.
DESCRIPTION OF SECURITIES
General
The authorized capital stock of the Company consists of 10,000,000
shares of Common Stock, par value $.01, and 1,000,000 shares of Preferred Stock,
par value $.01 per share. The following statements are brief summaries of
certain provisions relating to the Company's capital stock.
57
<PAGE>
Preferred Stock
The Board of Directors is authorized to issue 1,000,000 shares of
Preferred Stock in one or more series with such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval,
to issue Preferred Stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of the Common Stock. In the event of issuance, the Preferred Stock could
be utilized, under certain circumstances, as a method of discouraging, delaying
or preventing an acquisition of a change in control of the Company. The Company
does not currently intend to issue any shares of its Preferred Stock and none is
currently outstanding.
Pursuant to the terms of the Underwriting Agreement, the Company may
not issue capital stock for a period of 36 months from the effective date of
this Prospectus without prior written consent of the Representative.
Description of Common Stock
As of July 30, 1997, the Company had outstanding 2,597,390 shares of
Common Stock held by 42 stockholders. Each holder of Common Stock is entitled to
one vote per share in the election of directors and on all other matters
submitted to a vote of stockholders. The Common Stock has no cumulative voting
rights. The holders of shares of Common Stock have no preemptive rights and are
entitled to share ratably in any dividends when, as and if declared by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining available for
distribution to them after payment of liabilities and after provision is made
for each class of stock, if any, having preference over the Common Stock. There
are no pre-emptive or conversion rights, and the shares are not subject to
redemption. All shares of Common Stock now outstanding and shares to be
outstanding upon completion of this offering are, and will be, fully paid and
non-assessable.
The Company's by-laws which govern the rights of stockholders of the
Company in accordance with statutory guidelines set forth under the Business
Corporation Act of the State of New Jersey, provide that such by-laws may be
amended by a majority vote of the stockholders or by a majority vote of the
Board of Directors. Any amendment of the by-laws by action of the Board of
Directors is subject to further amendment or repeal by a majority vote of the
stockholders.
Stockholders do not have cumulative voting rights for the election of
directors. Therefore, the holders of more than 50% of the shares voting for the
election of directors could, if they chose to do so, elect all of the directors,
and in such event, the holders of the remaining shares would not be able to
elect any directors. See "PRINCIPAL STOCKHOLDERS."
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<PAGE>
The Company has not paid any dividends since its organization. While
the payment of dividends rests within the discretion of the Board of Directors,
the Company presently intends to retain all earnings, if any, in the foreseeable
future for use in the development of its business. It is not anticipated that
dividends will be paid in the foreseeable future. Moreover, there can be no
assurance that dividends can or will ever be paid.
Presently, there is no market for any of the Company's securities and
there is no assurance that any such market will ever develop or, if developed,
will be sustained.
There are no provisions discriminating against any existing or
prospective holder of the Company's Common Stock as a result of such holder
owning a substantial amount of the Company's Common Stock.
With the exception of the authorized and unissued Preferred Stock,
there is no provision in the Company's charter or by-laws that would have the
effect of delaying, deferring or preventing a change in control in the Company
or that would operate only with respect to an extraordinary corporate
transaction involving the Company, such as a merger, reorganization, tender
offer, sale or transfer of substantially all of the Company's assets, or
liquidation.
Description of the Units
The Units offered hereby consist of one share of Common Stock and one
Redeemable Class A Common Stock Purchase Warrant.
Each of the Shares and Class A Warrants will be issued in fully
registered form and will be separately tradable immediately upon issuance.
American Stock Transfer and Trust Company will act as the Company's transfer
agent and registrar with respect to the Common Stock and warrant agent and
registrar with respect to the Warrants.
Description of the Class A Warrants
The following statements are summaries of the Warrant Agreement
(defined below) and are qualified in their entirety by reference to the Warrant
Agreement, which is incorporated herein in its entirety by reference.
The Warrants will be issued pursuant to a warrant agreement (the
"Warrant Agreement") between the Company and American Stock Transfer and Trust
Company, as Warrant Agent, and will be evidenced by Warrant certificates in
registered form.
Each Class A Warrant entitles the holder to purchase one share of
Common Stock at an exercise price, subject to adjustment, of $5.80 at any time
during the period commencing one year from the date of this Prospectus and
ending at 5:00 P.M., New York City time, on the fifth anniversary of the date of
this Prospectus (the "Expiration Date"), unless previously redeemed.
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<PAGE>
The Warrants are subject to redemption by the Company upon 30 days
written notice at $.10 per Warrant, commencing 18 months from the effective date
of the Prospectus or earlier with the consent of the Representative, if the last
sale price of the Common Stock has been at least 200% of the current Warrant
exercise price, subject to adjustment, for at least twenty consecutive trading
days ending within three days prior to the date on which notice of redemption is
given. The right to purchase the Company's Common Stock will be forfeited unless
exercised before the date of notice.
The Warrants provide for adjustment of the exercise price and for a
change in the number of shares issuable upon exercise if the Company (a) pays a
dividend or makes a distribution on its shares of Common Stock which is paid or
made in shares of Common Stock, (b) subdivides or reclassifies its outstanding
shares of Common Stock, (c) combines its outstanding shares of Common Stock into
a smaller number of shares of Common stock, (d) issues shares of Common Stock,
or issues rights or warrants to all holders of its Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities convertible
into Common Stock), at a price per share less than the then current market
price, or (e) distributes to all holders of its Common Stock evidences of its
indebtedness or assets (excluding any dividend paid in cash out of legally
available funds) subject to the limitation that adjustments by reason of any of
the foregoing need not be made until they result in a cumulative change in the
exercise price of at least $.10. The exercise price will not be adjusted upon
the exercise of Class A Warrants, the exercise of options common stock purchase
warrants outstanding on the date hereof, or upon the grant or exercise of stock
options pursuant to a plan, approved by the Company's stockholders, such as the
Company's 1992 Stock Option Plan or 1997 Stock Option Plan.
Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the Expiration Date (or earlier redemption date) at the office of
American Stock Transfer & Trust Company, the Warrant Agent, with the
Subscription Form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by payment of the full exercise price (by
certified or bank check payable to the order of the Company) for the number of
shares with respect to which the Warrants are being exercised. Shares issued
upon exercise of Warrants and payment in accordance with the terms of the
Warrants will be fully paid and non-assessable.
The exercise price of the Warrants were determined by negotiation
between the Company and the Representative and should not be construed to be
predictive of or to imply that any price increases will occur in the Company's
securities.
The Warrants do not confer upon the Warrant holder any voting or other
rights of a stockholder of the Company. Upon notice to the Warrant holders, the
Company has the right to reduce the exercise price or extend the Expiration Date
of the Warrants.
Description of Other Warrants
In May 1995, the Company entered into an agreement with Creative
Technologies, Inc. (f/k/a ETR Associates, Inc.) to assist the Company in finding
suitable business opportunities. In December of 1996, the Company amended this
agreement and issued warrants to purchase an aggregate of 100,000 shares of
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Common Stock at an exercise price of $2.50 per share. The warrants vest in
accordance with certain performance conditions in the agreement to be satisfied
by Creative.
Description of the Bridge Notes
In July 1997, Messrs. Moroney and Dugger loaned the Company $225,000
and $75,000, respectively. These loans were evidenced by notes carrying a term
of 15 months and an interest rate of 7%. These notes are convertible at the
option of the holders into Common Stock at a conversion price of $.50 per share
at anytime prior to full satisfaction of the notes. While the terms of these
notes do not require them to be converted into Common Stock, the Company has
been advised by each of the holders that they will exercise this conversion
right concurrent with the closing of this offering.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
3,272,390 shares (3,872,390 shares if Bridge Notes are converted) of Common
Stock. All securities acquired in this offering, other than those that may be
acquired by "affiliates" of the Company as defined in Rule 144 under the Act,
will be freely transferable without restriction or further registration under
the Act.
Immediately prior to this offering, 2,597,390 shares of Common Stock
were issued and outstanding. The Company has reserved for issuance an aggregate
of 3,785,000 shares of Common Stock as follows: (i) 500,000 shares under the
1992 Option Plan; (ii) 500,000 shares under the 1997 Stock Option Plan; (iii)
600,000 shares of conversion of the Bridge Notes; (iv) 700,000 shares under the
non-plan options and warrants; (v) 135,000 shares under the Underwriters' Unit
Purchase Option (including the underlying Warrants); and (vi) 1,350,000 shares
reserved for the Public Units (including the underlying Warrants). Therefore,
assuming the Over-allotment Option is not exercised, 3,617,610 shares of Common
Stock remain authorized and available for issuance subsequent to this offering.
All of the shares of the Common Stock currently outstanding are
restricted securities (the "Restricted Shares") as defined in Rule 144 under the
Act, and under certain circumstances may be sold without registration pursuant
to Rule 144. Approximately 636,195 of the Restricted Shares are held by
non-affiliates. All Restricted Shares have been beneficially owned for at least
two (2) years.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons who may be deemed to be
affiliates of the Company (as defined under the Act), who beneficially owns
restricted securities for at least one year, is entitled to sell within any
three month period a number of shares that does not exceed the greater of (i) 1%
of the then outstanding shares of Common Stock, or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. However, a person who is not an affiliate of the
Company and has beneficially owned restricted securities for at least two years
is entitled to sell such shares without regard to the volume or other resale
requirements pursuant to Rule 144(k).
Certain of the Company's principal stockholders, as well as all of its
officers and directors have agreed not to publicly offer, sell or otherwise
dispose of directly or indirectly, any of the Company's securities owned by
them, for a period of thirty-six (36) months from the date of this Prospectus,
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without the prior written consent of the Underwriters. Prior to this offering,
there has been no market for the Common Stock and no representations can be made
of the effect, if any, that market sales of Restricted Shares or the
availability of Restricted Shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Restricted Shares in the public market (pursuant to Rule 144 or otherwise) could
adversely affect the prevailing market price of the Common Stock.
In addition, the holders of the Placement Warrants as well as the
Underwriters' Options, contain provisions requiring registration of the Common
Stock underlying such instruments, which, if effected, could have an adverse
impact on the prevailing market price of the Common Stock.
Inclusion on the OTC Bulletin Board
The Units, Common Stock and Warrants have been approved for inclusion
on the OTC Bulletin Board under the symbols "FLEMU," "FLEM" and "FLEMW,"
respectively. The OTC Bulletin Board System is an unorganized, inter-dealer,
over-the-counter market which provides significantly less liquidity than the
Nasdaq Stock Market, and quotes for stocks included on the OTC Bulletin Board
are not listed in the financial sections of newspapers as are those for the
Nasdaq Stock Market. In the event the securities are not included on the OTC
Bulletin Board, quotes for the securities may be included in the "pink sheets"
for the over-the-counter market. Although the Units, Common Stock and Warrants
have been approved for inclusion on the OTC Bulletin Board, there can be no
assurance that a trading market for the Company's securities will develop or be
sustained, or at what price the securities will trade.
Transfer/Warrant Agent and Registrar
American Stock Transfer & Trust Company, New York, New York, is the
transfer and warrant agent and registrar for the securities of the Company.
New Jersey Shareholder Protection Act
The Company is subject to the New Jersey Shareholder Protection Act
(the "Protection Act") which restricts certain business combinations by the
Company with any of its 10% stockholders. Generally, the Protection act
prohibits a resident domestic New Jersey corporation with its principal
executive offices and significant business operations in New Jersey from
engaging in any business combination (defined generally as any merger,
consolidation, sale, lease, exchange, mortgage or pledge, or any stock transfer,
securities reclassification, liquidation or dissolution, excluding certain
transaction involving assets securities which have a market value below that
specific in the Protection Act) with an "Interested Shareholder" (defined
generally as any person who is the beneficial owner of 10% or more of the voting
power of the outstanding shares or any affiliate of the Corporation who at any
time within the five-year period immediately prior to the date of the business
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combination has been the beneficial owner of 10% or more of the voting power of
the outstanding share) for a period of five years from the date the Interested
Shareholder became an Interested Shareholder, unless such transaction is
approved by the board of directors prior to the date the shareholder became an
interested Shareholder. In addition, the Protection Act prohibits any business
combination at any time with an Interested Shareholder other than a transaction
that (i) is approved by the board of directors of the applicable company prior
to the date the Interested Shareholder became the Interested Shareholder; or
(ii) is approved by the affirmative vote of the holders of two-thirds of the
voting shares not beneficially owned by the Interested Shareholder at a meeting
called for that purpose; or (iii) satisfies certain stringent price and terms
criteria.
Certain stockholders may consider the Protection Act to have
disadvantageous effects. Tender offers or other non-open market acquisitions of
shares by persons attempting to acquire control through market purchases may
cause the market price of the shares to reach levels that are higher than would
be otherwise the case. The Protection act may discourage any or all of such
acquisitions, particularly those of less than all of the Company's shares, and
any thereby deprive certain holders of the Company's shares of an opportunity to
sell their shares at a temporarily higher market price.
These provisions could have the effect of delaying, deferring or
preventing a change of control of the Company. The Commission has indicated that
the use of authorized unissued shares of voting stock could have an
anti-takeover effect. In such cases, various specific disclosures to the
stockholders are required.
UNDERWRITING
The Underwriters named below, for whom Monroe Parker Securities, Inc.
is acting as the Representative, have severally agreed, subject to the terms and
conditions set forth in the underwriting agreement by and between the Company
and the Representative (the "Underwriting Agreement"), to purchase from the
Company, and the Company has agreed to sell to the several Underwriters, an
aggregate of 675,000 Units, at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus.
Number of
Name Shares and Warrants
---- -------------------
Monroe Parker Securities, Inc. 337,500
Biltmore Securities, Inc. 337,500
Total 675,000
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of certificates representing the
Units is subject to certain conditions precedent, and that the Underwriters will
purchase all of the Units offered hereby on a "firm commitment" basis if any are
purchased.
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The Underwriters have advised the Company that it proposes initially to
offer the Units directly to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $___ per Unit. After the initial public
offering, the public offering price and concession may be changed.
The Company has granted to the Underwriters an option, exercisable
during the 45-day period after the date of this Prospectus, to purchase up to an
aggregate of 101,250 additional Units at the initial per Unit public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus. The Underwriters may exercise this option only to cover
over-allotments, if any, made in connection with the sale of the Units offered
hereby.
The Company has agreed to pay to the Underwriters a non-accountable
expense allowance equal to 3% of the gross proceeds of this offering, including
any Units purchased pursuant to the Underwriters' over-allotment option, no
portion of which has been paid to date.
The Company and the Underwriters have agreed to indemnify each other
against, or to contribute to losses arising out of, certain civil liabilities in
connection with this offering, including liabilities under the Securities Act.
The Company and all of its current stockholders have agreed not to
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or rights to acquire shares of Common Stock without the prior written consent of
the Representative for a period of three years after the date of this
Prospectus.
The Company has agreed to sell to the Underwriters, for an aggregate
price of $67.50, the right to purchase up to an aggregate of 67,500 Units (the
"Underwriters' Options"). The Underwriters' Options will be exercisable for a
four-year period commencing one year after the date of the Prospectus, at a per
Unit exercise price equal to 165% of the initial per Unit public offering price
of the Units being offered hereby. The Units underlying the Underwriters'
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Options have the same terms and conditions as the Warrants to be sold to the
public in this offering, except that they are subject to redemption by the
Company at any time after the Underwriters' Options have been exercised and the
underlying Warrants are outstanding. The Underwriters' Options may not be sold,
assigned, transferred, pledged or hypothecated for a period of five years from
the date of this Prospectus except to the Underwriters or their officers.
The Company has agreed to file, during the four-year period beginning
one year from the date of this Prospectus, on two separate occasions (on only
one occasion at the cost of the Underwriters), at the request of the holders of
a majority of the Underwriters' Options and the underlying shares of Common
Stock and Warrants, and to use its best efforts to cause to become effective, a
post-effective amendment to the Registration Statement or a new registration
statement under the Securities Act, as required to permit the public sale of the
shares of Common Stock and Warrants issued or issuable upon exercise of the
Underwriters' Options. In addition, the Company has agreed to give advance
notice to holders of the Underwriters' Options of its intention to file certain
registration statements commencing one year and ending five years after the date
of the Prospectus, and in such case, holders of such Underwriters' Options or
underlying shares of Common Stock and Warrants shall have the right to require
the Company to include all or part of such shares of Common Stock and Warrants
underlying such Underwriters' Options in such registration statement at the
Company's expense.
For the life of the Underwriters' Options, the holders thereof are
given the opportunity to profit from a rise in the market price of the shares of
Common Stock and Warrants, which may result in a dilution of the interests of
other stockholders. As a result, the Company may find it more difficult to raise
additional equity capital if it should be needed for the business of the Company
while the Underwriters' Option are outstanding. The holders of the Underwriters'
Options might be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain additional equity capital on terms more
favorable to the Company than those provided by the Underwriters' Option. Any
profit realized on the sale of the shares of Common Stock issuable upon the
exercise of the Underwriters' Options may be deemed additional underwriting
compensation.
The Underwriting Agreement provides for the Underwriters to receive a
finder's fee, ranging from 5% of the first $3,000,00 down to 1% of the excess
over $10,000,000 of the consideration involved in any capital business
transaction (including mergers and acquisitions) consummated by the Company in
which the Underwriters introduced the other party to the Company during the
five-year period following the completion of the offering.
The Underwriting Agreement provides that, for a period of two years
from the date of the Prospectus, the Company will nominate a person selected by
the Representative, and reasonably acceptable to the Company, for election to
serve as a member of the Company's Board of Directors. As of the date of this
Prospectus, the Underwriters have not selected its nominee to the Company's
Board.
Upon the exercise of the Warrants, the Company will pay the
Underwriters a fee of 5% of the aggregate exercise price if (i) the market price
of its Common Stock on the date the Warrant is exercised is greater than the
then exercise price of the Warrants; (ii) the exercise of the Warrant was
solicited by a member of NASD and the customer states in writing that the
transaction was solicited and designates in writing the broker-dealer to receive
compensation for the exercise; (iii) the Warrant is not held in a discretionary
account; (iv) disclosure of compensation arrangements were made both at the time
of the offering and at the time of exercise of the Warrants; and (v) the
solicitation of exercise of the Warrant was not in violation of Regulation M
promulgated under the Exchange Act.
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The Commission has recently adopted Regulation M to replace Rule 10b-6
and certain other rules promulgated under the Exchange Act. Regulation M may
prohibit the Underwriters from engaging in any market making activities with
regard to the Company's securities for the period from five business days (or
such other applicable period as Regulation M may provide) prior to any
solicitation by the Underwriters of the exercise of Warrants until the later of
the termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriters may have to receive a fee for the
exercise of Warrants following such solicitation. As a result, the Underwriters
may be unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable.
Prior to this offering there has been no public trading market for the
Company's securities. The initial public offering price of the Units and the
exercise price and the terms of the Warrants have been determined by negotiation
between the Company and the Representative. Factors considered in determining
the initial public offering price, in addition to prevailing market conditions,
included the history of and prospects for the industry in which the Company
competes, an assessment of the Company's management, the prospects of the
Company, its capital structure and such other factors as were deemed relevant.
The foregoing includes a summary of all of the material terms of the
Underwriting Agreement and does not purport to be complete. Reference is made to
the copy of the Underwriting Agreement that is on file as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Representative has been actively engaged in the securities
brokerage and investment banking business since 1994. However the Representative
has engaged in only limited underwriting activities, and this offering is only
the eighth public offering in which the Representative has acted as the sole or
managing underwriter. The Representative has limited experience acting as a
member of a syndicate in underwritten offerings. See "RISK FACTORS -
Representative's Limited Underwriting Experience".
Pursuant to the provisions of the Financial Consulting Agreement, the
Representative will provide to the Company investment banking consulting
services, for which the Representative will be paid compensation of $75,000
(payable upon the closing of this Offering) in addition to reimbursement for all
reasonable out-of-pocket expenses incurred by the Representative in performing
under the Consulting Agreement. The term of the Consulting Agreement is two (2)
years, commencing upon the closing of this offering.
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The Underwriters have informed the Company that no sales will be made
to any account over which the Underwriters exercise discretionary authority.
Pursuant to both the Company's Certificate of Incorporation and New
Jersey law, the Company's officers and directors are indemnified by the Company
for monetary damages for breach of fiduciary duty, except for liability which
arises in connection with (i) a breach of duty or loyalty, (ii) acts or
omissions not made in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for dividend payments or stock repurchases
illegal under New Jersey law, or (iv) any transaction in which the officer or
director derived an improper personal benefit. The Company's Certificate of
Incorporation does not have any effect on the availability of equitable remedies
(such as an injunction or rescissions) for breach of fiduciary duty. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors, officers and controlling persons of the Company pursuant to the
foregoing provisions or otherwise, the Company has been advised that in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
Litigation Involving Biltmore May Affect Securities
The Company has been advised by Biltmore that on or about May 22, 1995
Biltmore and Elliot Lowenstern and Richard Bronson, principals of Biltmore, and
the Commission agreed to an offer of settlement (the "Offer of Settlement") in
connection with a complaint filed by the Commission in the United States
District Court for the Southern District of Florida alleging violations of the
federal securities laws, Section 17(a) of the Securities Act of 1933, as amended
(the "Securities Act"), Section 10(b)and 15(c) of the Act, and Rules 10b-5,
10b-6 and 15cl-2 promulgated thereunder. The complaint also alleged that in
connection with the sale of securities in three (3) IPOs in 1992 and 1993
Biltmore engaged in fraudulent sales practices. The proposed Offer of Settlement
was consented to by Biltmore and Messrs., Lowenstern and Bronson without
admitting or denying the allegations of the complaint. The Offer of Settlement
was approved by Judge Gonzales on June 6, 1995. Pursuant to the final judgment
(the "Final Judgment"), Biltmore:
o was required to disgorge $1,000,000 to the Commission, which
amount was paid in four (4) equal installments on or before June
22, 1995;
agreed to the appointment of an independent consultant ("Consultant").
Consultant was obligated, on or before November 1, 1996 to review
Biltmore's policies, practices and procedures in six (6) areas relating to
compliance and sales practices;
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o to formulate policies, practices and procedures for Biltmore that
the Consultant deems necessary with respect to Biltmore's
compliance and sales practices;
o to prepare a report devoted to and which details the
aforementioned policies, practices and procedures (the "Report");
o to deliver the Report to the President of Biltmore and to the
staff of the Southeast Regional office of the Commission;
o to prepare, if necessary, a supervisory procedures and compliance
manual for Biltmore, or to amend Biltmore's existing manual; and
o to formulate policies, practices and procedures designed to
provide mandatory on-going training to all existing and newly hired
employees of Biltmore. The Final Judgment further provides that,
within thirty (30) days of Biltmore's receipt of the Report, unless
such time is extended, Biltmore shall adopt, implement and maintain
any and all policies, practices and procedures set forth in the
Report.
On or about December 19, 1996, the Consultant completed the Report
which was thereafter delivered to Biltmore. The Report addresses the areas
relating to compliance and sales practices referred to above. Biltmore is
reviewing the Report and undertaking steps to implement the recommendations and
procedures in the Report, in accordance with the provisions of the Final
Judgment.
The Final Judgment also provides that an independent auditor
("Auditor") shall conduct four (4) special reviews of Biltmore's policies,
practices and procedures, the first such review to take place six (6) months
after the Report has been delivered to Biltmore and thereafter at six-month
intervals. The Auditor is also authorized to conduct a review, on a random basis
and without notice to Biltmore, to certify that any persons associated with
Biltmore who have been suspended or barred by any Commission order are complying
with the terms of such orders.
On July 10, 1995, the action against Messrs., Lowenstern and Bronson
was dismissed with prejudice. Mr. Bronson agreed to a suspension from
associating in any supervisory capacity with any broker, dealer, municipal
securities dealer, investment advisor or investment company for a period of
twelve (12) months, dating from the beginning of such suspension. Mr. Lowenstern
agreed to a suspension from associating in any supervisory capacity with any
broker, dealer, municipal securities dealer, investment advisor or investment
company for a period of twelve (12) months commencing upon the expiration of Mr.
Bronson's suspension. Both suspensions have been completed.
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In the event that the requirements of the foregoing judgment adversely
affect Biltmore's ability to act as a market maker for the securities, and
additional broker-dealers do not make a market in the Company's securities, the
market for, and the liquidity of, the Company's securities may be adversely
affected. In the event that other broker-dealers fail to make a market in the
Company's securities, the possibility exists that the market for and the
liquidity of the Company's securities may be adversely affected to such an
extent that public security holders may not have anyone to purchase their
securities when offered for sale at any price. In such event, the market for
liquidity and prices of the Company's securities may not exist. For additional
information regarding Biltmore, investors may call the National Association of
Securities Dealers, Inc. at (800) 289-9999.
Recent State Action Involving Biltmore--Possible Loss of Liquidity.
The State of Indiana commenced an action seeking, among other things,
to revoke Biltmore's license to do business in such state. The complaint alleged
that Biltmore offered and/or sold securities that were neither registered nor
exempt, engaged in dishonest or unethical practices in the securities business,
failed to reasonably supervise its agents and violated the antifraud provisions
of the Indiana Securities Act. The action was settled without any admission,
finding or judgment against Biltmore of any violation of the Indiana Securities
Act and Biltmore agreed to, among other things, resolve certain customer claims,
the payment of a fine and costs and restrictions with respect to the sale of
securities to Indiana residents. Specifically, Biltmore agreed that it will not
sell any securities to Indiana residents (i) which are not listed on the New
York Stock Exchange, the American Stock Exchange or Nasdaq; (ii) for which
Biltmore has served as lead underwriter or as a member of the selling syndicate;
or (iii) for which Biltmore is a market maker. Under the terms of the settlement
agreement, Biltmore continues to maintain its license in the State of Indiana.
The Company does not intend to seek qualification for the sale of the Securities
in the state of Indiana.
On July 18, 1997, the State of Arkansas, Securities Department issued a
consent order in lieu of the filing of a complaint as settlement of all claims
against Biltmore Securities and Elliot A. Lowenstern. The claims related to
certain practices constituting violations of the Arkansas Securities Act
including promising customers price appreciation, failing to disclose negative
information regarding stocks, representing that they knew of "inside information
and using high pressure sales tactics during the period February 1992 to October
1993. Biltmore and Mr. Lowenstern consented to the entry of the order without
admitting or denying any wrongdoing or violation. The consent order censured
Biltmore Securities and Elliot A. Lowenstern and required that they pay the
amount of $25,000 for costs and expenses relating to the proceedings. The
consent order also required that Biltmore deliver to the Commissioner of
Securities a copy of the final report prepared by the independent consultant.
All terms of the consent order have been fully complied with.
On September 10, 1997, the State of California issued a Notice of
Intention to Issue Order Revoking Biltmore's Broker-Dealer Certificate. The
accusation alleges that it is appropriate for Biltmore's broker-dealer license
to be revoked in the public interest as a result of Biltmore being subject to
enforcement orders issued by the Securities and Exchange Commission, the
Arkansas Securities Department and the Indiana Securities Division. Biltmore,
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Biltmore, intends to request a hearing and contest the accusation. Such
proceeding, if ultimately successful may adversely affect the market for and
liquidity of the Company's securities if additional broker-dealers do not make a
market in the Company's securities. Biltmore is one of the several Underwriters
of this firm commitment underwriting.
According to the records of the Central Registration Depository
maintained by the National Association of Securities Dealers Regulation, Inc.
("NASDR"), Messrs. Lowenstern and Bronson, the principals of Biltmore, have 46
and 44 recorded incidents respectively, some of which are disciplinary
complaints.
LEGAL MATTERS
The validity of the issuance of Common Stock offered hereby will be
passed upon for the Company by Reed Smith Shaw & McClay LLP, One Riverfront
Plaza, Newark, New Jersey. Certain legal matters will be passed upon for the
Underwriters by Bernstein & Wasserman, LLP, 950 Third Avenue, New York, New
York.
EXPERTS
The financial statements of Flemington Pharmaceutical Corporation at
July 31, 1997, and for each of the two years in the period ended July 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Wiss & Company, LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein. Such financial statements are included herein and
therein in reliance upon such report and upon the authority of such firm as
experts in accounting and auditing.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement on Form SB-2 (No. 333-33201) under
the Securities Act of 1933, as amended, with respect to the securities offered
hereby, reference is made to the Registration Statement and the financial
statements and exhibits filed as a part thereof. Statements contained in this
Prospectus as to the contents of any contract or any other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected and copied at the Public Reference Room of the Securities and Exchange
Commission Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Securities and Exchange Commission's regional offices at Seven World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of each such document may also be obtained
from the Securities and Exchange Commission at its principal office in
Washington, D.C. upon payment of the charges prescribed by the Securities and
Exchange Commission or are available at its Web site at www.sec.gov.
Upon consummation of this offering, the Company will become subject to
the informational requirements of the Exchange Act of 1934, as amended, and in
accordance therewith will file reports and other information with the Securities
and Exchange Commission. Such reports and other information can be inspected at
the public reference facilities maintained by the Securities and Exchange
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
the Securities and Exchange Commission's New York Regional Office, Seven World
Trade Center, Suite 1300, New York, New York 10048, and at its Midwest Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
each document may be obtained from the Public Reference Section of the
Securities and Exchange Commission at prescribed rates.
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FLEMINGTON PHARMACEUTICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Financial Statements:
Balance Sheet at July 31, 1997 F-3
Statements of Operations for the
Years Ended July 31, 1997 and 1996 F-4
Statement of Changes in Stockholders' Equity (Deficit)
for the Years Ended July 31, 1997 and 1996 F-5
Statements of Cash Flows for the
Years Ended July 31, 1997 and 1996 F-6
Notes to Financial Statements F-7 to 16
F-1
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Flemington Pharmaceutical Corporation
We have audited the balance sheet of Flemington Pharmaceutical Corporation as of
July 31, 1997 and the related statements of operations, changes in stockholders'
equity and cash flows for each of the two years in the period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Flemington Pharmaceutical
Corporation at July 31, 1997, and the results of its operations and its cash
flows for each of the two years in the period then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has had a recent history of recurring losses
from operations, giving rise to a stockholders' deficiency through July 31, 1997
and is currently developing pharmaceutical delivery systems which will require
substantial financing, including collaborative arrangements with pharmaceutical
companies, to fund anticipated product development costs. Resulting operating
losses and negative cash flows from operations are likely to occur until, if
ever, profitability can be achieved through successful collaborative
arrangements with pharmaceutical companies. These factors 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 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
WISS & COMPANY, LLP
Woodbridge, New Jersey
September 10, 1997
F-2
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
BALANCE SHEET
JULY 31, 1997
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C>
Cash $ 217,000
Accounts receivable - trade, less allowance for doubtful accounts of $40,000 238,000
Costs and estimated earnings in excess of billings on uncompleted contracts 12,000
Prepaid expenses and other current assets 6,000
----------
Total Current Assets $ 473,000
FURNITURE, FIXTURES AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION OF $70,000 13,000
DEFERRED OFFERING COSTS 77,000
DEPOSITS 12,000
------------
$ 575,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable - trade $ 216,000
Billings in excess of costs and estimated earnings on uncompleted contracts 277,000
Accrued expenses and other current liabilities 19,000
-----------
Total Current Liabilities $ 512,000
7% CONVERTIBLE NOTES PAYABLE - STOCKHOLDERS 300,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value:
Authorized 1,000,000 shares, none issued
Common stock, $.01 par value:
Authorized - 10,000,000 shares
Issued and outstanding - 2,597,390 shares 26,000
Additional paid-in capital 897,000
Accumulated deficit (1,160,000)
-----------
Total Stockholders' Equity (Deficit) (237,000)
-------------
$ 575,000
==============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
July 31,
----------------------------
1997 1996
------ -------
<S> <C> <C>
REVENUES:
Operating revenues $ 915,000 $1,402,000
Consulting fee (Note 2) - 2,070,000
Interest income 18,000 31,000
----------- ----------
933,000 3,503,000
----------- ----------
COSTS AND EXPENSES:
Operating expenses 735,000 819,000
Product development 171,000 172,000
Consulting fee expenses (Note 2) - 1,606,000
Selling, general and administrative expenses 437,000 410,000
Interest expense 1,000 2,000
----------- ----------
1,344,000 3,009,000
----------- ----------
NET INCOME (LOSS) (411,000) 494,000
PRO FORMA ADJUSTMENT:
Officers' salary 200,000 307,000
----------- -----------
PRO FORMA NET INCOME (LOSS) $ (611,000) $ 187,000
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,279,390 4,279,390
=========== ===========
PER COMMON SHARE:
Net income (loss) $ (.10) $ .12
=========== ===========
Pro forma net income (loss) $ (.14) $ .04
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
------------------------- Stockholders'
Par Paid-in Accumulated Equity
Shares Value Capital Deficit (Deficit)
------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 31, 1994 2,597,390 $ 26,000 $ 850,000 $(1,207,000) $(331,000)
YEAR ENDED JULY 31, 1995 -
Net loss - - - (36,000) (36,000)
--------- ------ ------- ---------- --------
BALANCE, JULY 31, 1995 2,597,390 26,000 850,000 (1,243,000) (367,000)
YEAR ENDED JULY 31, 1996 -
Net income - - - 494,000 494,000
--------- ------ ------- ---------- --------
BALANCE, JULY 31, 1996 2,597,390 26,000 850,000 (749,000) 127,000
YEAR ENDED JULY 31, 1997
Options issued for services - - 47,000 - 47,000
Net loss - - - (411,000) (411,000)
--------- ------ ------- ---------- --------
BALANCE, JULY 31, 1997 2,597,390 $ 26,000 $ 897,000 $(1,160,000) $ (237,000)
========= ====== ======= ========== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
July 31,
------------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (411,000) $ 494,000
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Provision for losses on accounts receivable 20,000 -
Options issued for services 47,000 -
Depreciation 6,000 5,000
Changes in operating assets and liabilities:
Accounts receivable 116,000 (184,000)
Deposits 18,000 3,000
Prepaid expenses and other current assets 4,000 -
Costs and estimated earnings in excess of billings
on uncompleted contracts 6,000 (18,000)
Accounts payable - trade (52,000) 38,000
Billings in excess of costs and estimated earnings on
uncompleted contracts 105,000 57,000
Accrued payroll (10,000) (338,000)
Accrued expenses and other current liabilities 54,000 19,000
----------- -----------
Net cash flows from operating activities (97,000) 76,000
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,000) -
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deferred offering costs (77,000) -
Proceeds of loans from stockholders 300,000 15,000
Repayments of stockholder loans (15,000) -
----------- -----------
Net cash flows from financing activities 208,000 15,000
----------- -----------
NET CHANGE IN CASH 102,000 91,000
CASH, BEGINNING OF YEAR 115,000 24,000
----------- -----------
CASH, END OF YEAR $ 217,000 $ 115,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ - $ 2,000
=========== ===========
Income taxes paid $ - $ -
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1 - Nature of the Business and Summary of Significant Accounting
Policies:
Nature of the Business - Flemington Pharmaceutical Corporation
(the "Company") is engaged in the development of novel
pharmaceutical products combining presently marketed drugs with
innovative patent-pending oral dosage delivery systems of the
Company, designed to enhance and accelerate the onset of the
therapeutic benefits which the drugs are intended to produce.
Management intends to develop these products in collaboration
with pharmaceutical companies having significant existing sales
of the pharmaceutical compounds being incorporated into the
Company's dosage delivery systems, thereby creating a more
effective, and more attractive product.
The Company has not materially commercialized any of its
proposed products and, accordingly, has not generated any
material revenue from product sales. Since inception,
substantially all of the Company's revenue has been derived from
providing consulting services to the pharmaceutical industry. To
date, the Company's drug development activities have been
largely funded through cash flow generated by its consulting
services. Management intends, as its drug development activities
intensify, to diminish the significance of the Company's efforts
devoted to consulting services.
Revenues and Costs - Revenues from contract clinical research
are recognized on the percentage-of-completion method.
Completion is measured by the relationship of total contract
costs incurred to total estimated contract costs for each study.
Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined.
Contract costs consist primarily of fees paid to outside clinics
for studies and an allocable portion of the Company's operating
expenses. General and administrative costs are charged to
expense as incurred.
Financial Instruments - Financial instruments include cash,
accounts receivable, accounts payable, loans from stockholders
and accrued expenses. The amounts reported for financial
instruments are considered to be reasonable approximations of
their fair values, based on market information available to
management.
Furniture, Fixtures and Equipment - Furniture, fixtures and
equipment are stated at cost. The Company provides for
depreciation using an accelerated method, based upon estimated
useful lives of 5 to 7 years for furniture, fixtures and
equipment.
F-7
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Income Taxes - Deferred income taxes result primarily from net
operating losses and the differences resulting from reporting on
the cash basis of accounting for tax reporting purposes. As a
result of these temporary differences, the Company has recorded
a deferred tax asset with an offsetting valuation allowance for
the same amount.
Deferred Contribution Profit Sharing Plan - The Company has a
401(K) retirement plan covering substantially all employees.
Company contributions are based on the discretion of the Board
of Directors. The Company made no contributions for the years
ended July 31, 1997 and 1996.
Deferred Offering Costs - Offering costs have been deferred,
pending the outcome of the offering contemplated herein. If the
offering is successful, these costs will be charged against
additional paid-in capital; otherwise, they will be charged to
expense.
Stock Compensation - Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
requires companies to measure employee stock compensation plans
based on the fair value method of accounting. However, the
statement allows the alternative of continued use of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," with pro forma disclosure of net income
and earnings per share determined as if the fair value based
method had been applied in measuring compensation cost. The
Company has determined it will continue to apply APB Opinion No.
25 in accounting for its stock options plans. The Company
charged $47,000 to operations in accordance with SFAS No. 123
for the year ended July 31, 1997 for options which have been
granted, to one of its consultants under an agreement which was
executed in May 1997 (See Note 7 for Stock Options). No other
compensation cost has been charged to operations during the
years ended July 31, 1997 and 1996 related to options, warrants
or any other equity instrument.
F-8
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
New Accounting Pronouncements - SFAS No. 128, "Earnings per
Share," was issued in February 1997, and is effective for
financial statements issued for periods ending after December
15, 1997. SFAS 128 requires that earnings per share be presented
more in line with earnings per share standards of other
countries. The Company expects to adopt SFAS 128 for the year
ending July 31, 1998. The Company has not yet determined the
effect of adoption of this new pronouncement on its financial
statements.
Risk Concentrations:
(a) Major Customers- During the year ended July 31, 1997, the
Company had revenue from two customers located in Germany
and France of approximately 24% and 23%, respectively, of
the Company's total revenue.
For the year ended July 31, 1996 the Company completed a
one time transaction with a customer located in the United
States which represented approximately 60% of the Company's
total revenue (see Note 2). During the year ended July 31,
1996, the Company had revenue from two other customers
located in France and Germany approximating 14% and 10%,
respectively, of the Company's total revenues.
(b) Accounts Receivable - At July 31, 1997, the Company had
unsecured accounts receivable from three customers located
in France, Germany and the United Arab Emirates
approximating 37%, 36% and 13%, respectively, of the
Company's total accounts receivable.
The Company has long standing relationships with its
principal customers and feels that credit risk associated
with these customers is limited. With regard to new
customers, the Company receives customer referrals through
long standing relationships.
(c) Significant Employees - All of the Company's consulting and
study reporting activities are performed by major
stockholders of the Company. As a result, the Company is
completely dependent upon these stockholders to continue
with these revenue activities.
(d) Supplier Dependence - The Company believes that certain raw
materials, including inactive ingredients, are available
only from a limited number of suppliers and that certain
packaging materials intended for use in connection with its
spray products currently are available only from sole
source suppliers. Although the Company does not believe it
will encounter difficulties in obtaining inactive
ingredients or packaging materials necessary for the
manufacture of its products there can be no assurance that
the Company will be able to enter into satisfactory
purchasing agreements or arrangements, thereby causing a
potential significant adverse effect on the Company's
ability to arrange for the manufacture of formulated
products.
F-9
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
See "Risk Factors" included elsewhere in this Prospectus
for additional information.
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 and
disclosures 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.
Pro forma Adjustments - An officer's salary, which will be
subject to an employment agreement to be effective upon the
consummation of the offering contemplated herein, has varied
during all periods presented. Accordingly, the pro forma effects
of such changes have been reported on the face of the statements
of operations.
Net Income or (Loss) Per Share - Net income (loss) per common
share is based upon the weighted average number of outstanding
common shares. However, common shares, options and warrants
issued after July 31, 1996, with per share prices significantly
less than the price of the shares in the offering contemplated
herein, have been treated as outstanding for all reported
periods.
Note 2 - Going Concern:
The Company's financial statements have been presented on the
basis that it is a going concern which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. The Company has had a recent history
of recurring losses from operations through July 31, 1995 and
for the year ended July 31, 1997. During the year ended July 31,
1996, the Company completed a non-recurring transaction
resulting in a consulting fee of approximately $2,070,000 before
related costs and expenses of approximately $1,606,000.
The Company's continued existence is dependent upon its ability
to achieve profitable operations or obtain additional financing.
The following represents the Company's principal operating and
liquidity problems and management's plans to overcome them.
Operating Trends and Future Prospects - Substantially all of the
Company's revenues, since inception, have been derived from
consulting services in connection with product development by
various pharmaceutical companies. The Company is presently
engaged in the development of pharmaceutical delivery systems.
The future growth and profitability of the Company will be
principally dependent upon its ability to successfully reach
collaborative arrangements with pharmaceutical companies for the
joint development of delivery systems and the successful
marketing of these delivery systems.
F-10
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Since 1992, the Company has been increasingly engaged in the
development of pharmaceutical delivery systems, none of which,
however, have been major contributors to the Company's sales
revenue. The Company anticipates that it will incur significant
operating expenses during the initial formation, testing and
marketing to the pharmaceutical companies, of its delivery
systems. The Company anticipates that once a pharmaceutical
company enters into a collaborative arrangement with the
Company, the costs associated with bringing the final product to
market, including, but not limited to, final testing, FDA
approval and all marketing costs, will be borne by the
pharmaceutical company and not by the Company.
Recent Financing Activities - The Company's capital requirements
have been and will continue to be significant. In the past, the
Company has financed its working capital requirements primarily
through cash flow generated from operations and loans from
stockholders. The Company is dependent on obtaining additional
financing to fund its future operations and working capital
requirements and is seeking to raise additional capital through
the initial public offering contemplated herein. The Company has
no other current arrangements with respect to, or sources of,
additional financing, and, if the initial public offering is not
successful, there can be no assurance that additional financing
will be available to the Company on acceptable terms, or at all.
In view of the Company's very limited resources, its anticipated
expenses and the competitive environment in which the Company
operates, any inability to obtain additional financing would
severely limit the Company's ability to complete development of
its pharmaceutical delivery systems.
Note 3 - Costs and Estimated Earnings on Uncompleted Contracts:
The following summarizes those contracts in process which are
being reported on the percentage of completion basis:
July 31,
1997
-----------
Gross Contract Values $802,000
========
Costs incurred on uncompleted contracts $323,000
Estimated earnings 88,000
--------
411,000
Less: Progress billings and advance
deposits to date 676,000
--------
$265,000
========
Included in the accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ (12,000)
Billings in excess of costs and estimated
earnings on uncompleted contracts 277,000
--------
$265,000
========
F-11
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 4 - Related Party Transactions:
Legal Fees - The Company has incurred legal fees with an
officer and director of the Company. These fees amount to
approximately $53,000 and $6,000 for the years ended July 31,
1997 and 1996, respectively.
Consulting Fees - During the years ended July 31, 1997 and 1996
the Company incurred consulting fees, with a company having
officers, including the consulting company's sole stockholder,
who are also directors and principal stockholders of the
Company, approximating $15,000 and $563,000, respectively.
Note 5 - Commitments and Contingencies:
Employment Agreement - The Company entered into separate
employment agreements with its President and Chairman of the
Board of Directors for a base annual salary of $200,000 and
$150,000, respectively. Each agreement has a base term of three
years effective upon the consummation of the public offering
contemplated herein. The agreements are thereafter renewable for
additional one year periods, unless the Company gives notice to
the contrary.
These agreements also provide for the granting, upon the
consummation of this offering, of options to these officers to
purchase a total of 600,000 shares, exercisable within a ten
year period of the date of issue at an exercise price of $1.84
per share.
Consulting Agreement - In December 1996, the Company entered
into agreement with a consulting company, (the "Consultant"),
for assistance in finding suitable business opportunities. The
agreement provides for the Company to pay a fee to the
Consultant of 10% of the consideration received by the Company
from projects identified in the agreement, net of expenses. The
agreement also provides for the Company to pay a 5% fee for
equity transactions arranged by the Consultant. In addition to
the above, the Company issued a warrant to the Consultant to
purchase up to 100,000 shares of the Company's common stock at
$2.50 per share, with vesting of 20,000 shares upon completion
of each successful project. No vesting has occurred through July
31, 1997 pursuant to this agreement.
Leases - The Company rents office space on a month to month
basis. Rent expense for the Company's facilities totalled
approximately $19,000 and $20,000, for the years ended July 31,
1997 and 1996, respectively.
Governmental Regulation - The development, manufacture and
commercialization of pharmaceutical products is subject to
extensive regulation by various federal and state governmental
entities.
F-12
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 6 - Income Taxes:
A summary of current and deferred income taxes included in the
statements of operations is as follows:
<TABLE>
<CAPTION>
Year Ended
July 31,
--------------------------------
1997 1996
------ -------
Current:
<S> <C> <C>
Federal $ - $ 18,000
State - 5,000
Benefit of operating loss carryforwards
- (23,000)
--------- ---------
- -
--------- ---------
Deferred:
Federal - -
State - -
--------- ---------
- -
--------- ---------
$ - $ -
======== =========
</TABLE>
The total income taxes are different than the amounts computed
by applying the U.S. statutory federal income tax rate of 34%
for the year ended July 31, 1996. The differences are summarized
as follows:
<TABLE>
<CAPTION>
<S> <C>
Income tax at statutory rate $ 168,000
Increase (decrease) resulting from:
State taxes, net of federal benefit 3,000
Other 2,000
Benefit of financial statement operating loss carryforward
(173,000)
---------
Provision for income taxes $ -
=========
The significant components of the Company's deferred tax asset
at July 31, 1997 are summarized as follows:
Cumulative deduction in excess of revenue under the cash
basis of accounting for income tax reporting exceeding
those for financial reporting purposes
$ 103,000
Non-employee compensation pursuant to SFAS 123
19,000
Net operating loss carryforwards 347,000
---------
469,000
Valuation allowance (469,000)
---------
Net deferred tax asset $ -
=========
</TABLE>
F-13
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax asset will not be
realized. The Company has determined, based on the Company's
prior history of recurring losses, that a full valuation
allowance is appropriate at July 31, 1996.
At July 31, 1997, the Company has federal and state net
operating loss carryforwards of approximately $867,000
which can be used to offset current and future taxable income
through the year 2012.
Note 7 - Stock Options:
At July 31, 1997, the Company had two plans to allow for the
issuance of stock options and other awards, the 1992 Stock
Option Plan (the "1992 Plan") and the 1997 Stock Option Plan
(the "1997 Plan").
The 1992 Plan - In May 1992, the Company adopted the 1992 Plan
under which 500,000 shares of common stock were reserved for
issuance either as incentive stock options ("ISOs") under the
Internal Revenue Code or as non-qualified options. ISOs may be
granted to employees and officers of the Company and
non-qualified options may be granted to consultants, directors,
employees and officers of the Company. Options to purchase the
Company's common stock may not be granted at a price less than
the fair market value of the common stock on the date of grant
and will expire not more than ten years from the date of grant.
ISOs' granted to a 10% or more stockholder may not be for less
than 110% of fair market value nor for a term of more than five
years.
Information on option activity for the 1992 Plan for the years
ended July 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
July 31,
--------------------------------------------------------
1997 1996
----------------------- ------------------------
Weighted- Weighted-
Shares Average Shares Average
Under Exercise Under Exercise
Option Price ` Option Price
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Balance - beginning of year - $ - - $ -
Options granted (a):
To 10% or more shareholders (b) 400,000 1.84 - -
To others 84,500 1.67
Options exercised - - - -
Options cancelled (2,500) 1.67 - -
------- ----- ----- -------
Balance - end of year 482,000 $1.76 - -
======= ===== ===== =======
Options exercisable -
end of year 482,000 $1.76 - $ -
======= ===== ===== =======
</TABLE>
(a) The weighted average fair value per option granted during
1997 was $.67 per option.
(b) Includes 54,348 incentive stock options, and 145,652
nonqualified options, respectively, each issued to the
President of the Company and to its Chairman of the Board,
for a total of 400,000 options.
F-14
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company uses the intrinsic value method of accounting to
measure compensation expense. If the fair value method had been
used to measure compensation expense, net loss would have
increased by approximately $324,000 or $.08 per share for the
year ended July 31, 1997 to $735,000 or $.18 per share.
The fair value of options granted in 1997 were estimated at the
date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions, respectively:
risk-free interest rates of 5.0%, dividend yield of 0.0%,
volatility factors of the expected market price of the Company's
Common Stock of 10% and a weighted-average expected life of the
options of 9 years.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's stock is not traded publicly, the employee
stock options have characteristics significantly different from
those of normal publicly traded options, and because changes in
the subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair
value of its employee stock options.
The 1997 Plan - In January 1997, the Company's Board of
Directors adopted the 1997 Plan, providing for the issuance of
options to employees, officers and under certain circumstances,
directors of and consultants to the Company. Options granted
under the plan may be either incentive stock options as defined
in the Internal Revenue Code or non-qualified stock options. The
total number of shares of common stock reserved and available
under the plan shall be 500,000 shares. In May 1997, the Company
issued an option to a consultant to purchase an aggregate of
200,000 shares of the Company's common stock at an exercise
price of the lesser of $5.00 per share, or the exercise price of
the warrants as offered in the offering contemplated herein. The
option is exercisable commencing February 1998 and expires in
April 2002.
See Note 5 for options and warrants relating to Employment and
Consulting Agreements.
F-15
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 8 - Stockholders' Equity (Deficit):
Preferred Stock - The Company's Certificate of Incorporation
authorizes the issuance of up to 1,000,000 shares of Preferred
Stock. None of such Preferred Stock has been designated or
issued to date. The Board of Directors is authorized to issue
shares of Preferred Stock from time to time in one or more
series and to establish and designate any such series and to fix
the number of shares and the relative conversion rights, voting
rights, terms of redemption and liquidation.
Bridge Financing - In July 1997, the Company borrowed an
aggregate of $300,000, at an interest rate of 7% per annum, from
two of its officer shareholders, who financed this loan with
proceeds realized upon the private sale of 600,000 shares of
their common stock in the Company. The loan matures in October
1998 and is evidenced by certain notes which are convertible
into 600,000 shares of the Company's common stock upon the
consummation of the offering contemplated herein.
F-16
<PAGE>
===============================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made hereby, and if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute as offer
to sell or a solicitation of any offer to buy any security by any person in any
jurisdiction in which such offer or solicitation would be unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, imply that the information in this Prospectus is correct as of
any time subsequent to the date of this Prospectus.
-----------------
TABLE OF CONTENTS
Page
----
Prospectus Summary.......................................................
The Company..............................................................
Risk Factors.............................................................
Use of Proceeds .........................................................
Dilution.................................................................
Dividend Policy .........................................................
Capitalization ..........................................................
Selected Financial Data .................................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations..........................
Business.................................................................
Management...............................................................
Principal Stockholders ..................................................
Certain Transactions.....................................................
Description of Units ....................................................
Shares Eligible for Future Sale .........................................
Underwriting ............................................................
Legal Matters ...........................................................
Experts .................................................................
Available Information ...................................................
Index to Financial Statements ........................................... F-1
----------------
Until , 1998 (90 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or nor
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.
===============================================================================
<PAGE>
===============================================================================
[LOGO]
FLEMINGTON
PHARMACEUTICAL
CORPORATION
675,000 Units consisting of 675,000 Shares
of Common Stock and 675,000
Class A Common Stock Purchase Warrants
----------
PROSPECTUS
----------
MONROE PARKER
SECURITIES, INC.
November___, 1997
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 14A:3-5(2) of the Business Corporation Act of the State of New
Jersey (the "Business Corporation Act") provides, in general, that a corporation
shall have the power to indemnify a corporate agent against his expenses and
liabilities in connection with any proceeding involving the corporate agent by
reason of his being or having been such a corporate agent, other than a
proceeding by or in the right of the corporation, if (a) such corporate agent
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation; and (b) with respect to any
criminal proceeding, such corporate agent had no reasonable cause to believe his
conduct was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall not in itself create a presumption that such corporate agent did meet the
applicable standards of conduct set forth in paragraphs (a) and (b) above.
Section 14A:3-5(3) of the Business Corporation Act provides, in
general, that a corporation shall have power to indemnify a corporate agent
against his expenses in connection with any proceeding by or in the right of the
corporation to procure a judgment in its favor which involves the corporate
agent by reason for his being or having been such corporate agent, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation. However, in such proceeding no
indemnification shall be provided in respect of any claim, issue or matter as to
which such corporate agent shall have been adjudged to be liable to the
corporation, unless and only to the extent that the Superior Court or the court
in which such proceeding was brought shall determine upon application that
despite the adjudication of liability, but in view of all circumstances of the
case, such corporate agent is fairly and reasonably entitled to indemnity for
such expenses as the Superior Court or such other court shall deem proper.
Section 14A:3-5(4) of the Business Corporation Act provides, in
general, that a corporation shall indemnify a corporate agent against expenses
to the extent that such corporate agent has been successful on the merits or
otherwise in any proceeding referred to in subsections 14A:3-5(2) and 14A:3-5(3)
or in defense of any claim, issue or matter therein.
Section 14A:3-5(9) of the Business Corporation Act provides, in
general, that a corporation shall have power to purchase and maintain insurance
on behalf of any corporate agent against any expenses incurred in any proceeding
and any liabilities asserted against him by reason of his being or having been a
corporate agent, whether or not the corporation would have the power to
indemnify him against such expenses and liabilities under the provision of this
section.
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The Business Corporation Act also provides that a corporation's
certificate of incorporation may provide that a director or officer shall not be
personally liable, or shall be liable only to the extent therein provided, to
the corporation or its shareholders for damages for breach of any duty owed to
the corporation or its shareholder, except that such provision shall not relieve
a director from liability for any breach of duty based upon an act or omission
(a) in breach of such person's duty of loyalty to the corporation or its
shareholders, (b) not in good faith or involving a knowing violation of law or
(c) resulting in receipt by such person of an improper personal benefit.
The Company's by-laws and Certificate of Incorporation provide that the
Company will indemnify its officers, directors, employees and agents to the
fullest extent permitted by the Business Corporation Act.
The Company's Certificate of Incorporation eliminates the personal
liability of the directors to the fullest extent permitted by the Business
Corporation Law.
Reference is made to Section of the Form of Underwriting Agreement
(Exhibit 1.1 ).
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemized statement of the estimated expenses to be
incurred by the Registrant in connection with this offering (excluding the
Underwriters' non-accountable expense allowance):
SEC registration fee................................ $4,139.57
NASD filing fee..................................... 1,807.32
Blue Sky fees and expenses ......................... 55,000.00
Legal fees and expenses............................. 100,000.00
Printing Fees....................................... 45,000.00
Accounting fees and expenses........................ 35,000.00
Transfer Agent's fees and expenses.................. 5,000.00
Miscellaneous expenses 4,053.11
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Total...................................... $250,000.00
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Item 26. Recent Sales of Unregistered Securities.
Within the past three years, the Registrant sold the following
securities, to the persons listed below without registration under the
Securities Act of 1933, as amended (the "Act").
The Bridge Financing
In July 1997, the Company borrowed an aggregate of $300,000 from
Messrs. Moroney and Dugger, who financed this loan with proceeds realized upon
the private sale of a portion of their holdings of Common Stock, 450,000 and
150,000 shares were sold, respectively. This loan is evidenced by certain
convertible subordinated notes due September 30, 1998 bearing an interest rate
of 7%. These notes are convertible at the option of the holders into Common
Stock at a conversion price of $.50 per share, the same price at which Messrs.
Dugger and Moroney sold their shares. While the terms of the notes do not
require them to be converted into Common Stock, the Company has been advised by
each of the holders that they will exercise this conversion right after the
closing of this offering.
The notes were sold for cash and offers and sales were made in reliance
on Section 4(2) of the Act.
In connection with the transaction described above, no general
advertisement or solicitation of offerees was made and all purchasers signed and
delivered to the Registrant agreements wherein they represented, among other
things, that the securities would be held for their own account, for investment
only and not with a view to the distribution thereof. The certificates
representing such securities bear legends restricting transferability in
transactions not registered under the Act, and the Registrant's records bear
stop transfer restrictions with respect thereto.
Item 27. Exhibits.
<TABLE>
<CAPTION>
Number Description
<S> <C>
1.1 - (4)Form of Underwriting Agreement
1.2 - (4)Form of Selected Dealers' Agreement
1.3 - (4)Financial Consulting Agreement
3.1 - (2)Certificate of Incorporation of the Registrant, as amended
3.2 - (2)By-Laws of the Registrant, as amended
4.1 - (4)Form of Warrant Agreement
4.2 - Form of Common Stock Certificate
4.3 (4)Form of Class A Warrant Certificate
4.4 - (4)Form of Underwriters' Option Agreement
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
5.1 - (3)Opinion of Reed Smith Shaw & McClay LLP
10.1 - (2)Employment Agreement with Harry A. Dugger, III, Ph.D.
10.2 - (3)Employment Agreement with John J. Moroney
10.3 - (2)Agreement dated December 7, 1996 between the Registrant and Altana, Inc.
10.4 - (2)Agreement dated December 19, 1996 between the Registrant and Sandoz
Pharmaceuticals
10.5 - (2)Registrant's 1992 Stock Option Plan
10.6 - (3)Form of Option Agreement under 1992 Stock Option Plan
10.7 - (2)Registrant's 1997 Stock Option Plan
10.8 - (3)Form of Option Agreement under 1997 Stock Option Plan
10.9 - (2)Agreement with Rapid Spray (Clemastine) dated June 2, 1992
10.10 - (2)Agreement with Rapid Spray (Nitroglycerin) dated June 2, 1992
10.11 (3)Agreement with Creative Technologies, Inc. dated December 26, 1996
11.1 - (3)Computation of earnings per share
23.1 - (1)Consent of Wiss & Company, LLP (included on page II-7)
23.2 - (3)Consent of Reed Smith Shaw & McClay LLP (included in Exhibit 5.1)
27.1 - (3)Financial Data Schedule - Fiscal Years Ended 1996 and 1997
</TABLE>
(1) Filed herewith.
(2) Filed as an exhibit to the Registration Statement (No. 333-33201)
on August 8, 1997.
(3) Filed as an exhibit to Amendment No. 1 to the Registration Statement
(No. 333-33201) on October 3, 1997.
(4) Filed as an exhibit to Amendment No. 2 to the Registration Statement
(No. 333-33201) on October 31, 1997.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement; and
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(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described under
Item 24, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the questions 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.
For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of a Registration
Statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 496(h) under the
Securities Act shall be deemed to be part of the Registration Statement as of
the time it was declared effective.
For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
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CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Prospectus constituting
part of the Registration Statement on Form SB-2 of our report dated September
10, 1997 relating to the financial statements of Flemington Pharmaceutical
Corporation which appears in such Prospectus. We also consent to the reference
to us under the caption "Experts" in the Prospectus.
WISS & COMPANY, LLP
Woodbridge, New Jersey
November _____, 1997
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SIGNATURES AND POWERS OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Pre-effective Amendment No. 1 to the Registration Statement on Form SB-2 to be
signed on its behalf by the undersigned, thereunder duly authorized, in the City
of Newark, State of New Jersey on November ____, 1997.
FLEMINGTON PHARMACEUTICAL CORPORATION
By:______________________________________
Harry A. Dugger, III, Ph.D., President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Harry A. Dugger, III and John J.
Moroney true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibit thereto, and any other
documents in connection therewith, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Pre-effective Amendment No.1 to the Registration Statement on Form SB-2 has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Signature
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<S> <C> <C>
Harry A. Dugger, III, Ph.D. President, Chief Executive Officer and
November ____, 1997 Chief Financial Officer ______________
(Principal Financial/Accounting and
Executive Officer)
John J. Moroney Chairman of the Board
November ____, 1997 *_____________
Robert F. Schaul Secretary and Director *_____________
November ____, 1997
Jean Marc Maurette Director *_____________
November ____, 1997
Jack R. Kornreich Director *______________
November ____, 1997
John R. Toedtman Director *______________
November ____, 1997
*By:_________________________
Harry A. Dugger, III
Attorney-in-Fact
</TABLE>
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Pre-effective Amendment No. 1 to the Registration Statement on Form SB-2 to be
signed on its behalf by the undersigned, thereunder duly authorized, in the City
of Newark, State of New Jersey on November 10, 1997.
FLEMINGTON PHARMACEUTICAL CORPORATION
By: /s/ Harry A. Dugger, III
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Harry A. Dugger, III, Ph.D., President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Signature
------ ------- ---------
<S> <C> <C>
Harry A. Dugger, III, Ph.D. President, Chief Executive Officer and /s/ Harry A. Dugger, III
November 10, 1997 Chief Financial Officer (Principal -------------------------
Financial/Accounting and Executive
Officer)
John J. Moroney
November 10, 1997 Chairman of the Board */s/ John J. Moroney
----------------------
Robert F. Schaul Secretary and Director */s/ Robert F. Schaul
November 10, 1997 ----------------------
Jean Marc Maurette Director */s/ Jean Marc Maurette
November 10, 1997 ------------------------
Jack R. Kornreich Director */s/ Jack R. Kornreich
November 10, 1997 ------------------------
John R. Toedtman Director */s/ John R. Toedtman
November 10, 1997 -------------------------
*By: /s/ Harry A. Dugger, III
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Harry A. Dugger, III
Attorney-in-Fact
</TABLE>
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1 See "CERTAIN TRANSACTIONS - Legal Fees."
