<PAGE>
================================================================================
As filed with the Securities and Exchange Commission on October 31, 1997
Registration No. 333-33201
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Pre-Effective Amendment No. 2
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
FLEMINGTON PHARMACEUTICAL CORPORATION
(Name of Small Business Issuer in its charter)
New Jersey 2834 22-2407152
--------------- ----------------------- ------------------
(State or other (Primary Standard (IRS Employer
jurisdiction of industrial classification Identification No.)
incorporation) number)
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.
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriter's 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 Underwriter's 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 Underwriter's 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 Underwriter's over-allotment option.
(3) Issuable upon exercise of the Class A Warrants.
(4) Issuable to the Underwriter.
(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
<TABLE>
<CAPTION>
Item Number and Heading
In Form SB-2 Registration Statement Location in Prospectus
-------------
<S> <C> <C>
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
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Item Number and Heading
In Form SB-2 Registration Statement Location in Prospectus
-------------
<S> <C> <C>
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>
iv
<PAGE>
3
SUBJECT TO COMPLETION; DATED October __, 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 ___, 1998 (18 months from the date of this Prospectus) or earlier
with the consent of Monroe Parker Securities, Inc. (the "Underwriter") 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.
<TABLE>
<CAPTION>
====================================================================================================================
Underwriting
Price to Public Discounts and Proceeds to Company(2)
Commissions(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 Underwriter 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 "Underwriter's Option") to purchase 67,500
Units, exercisable over a period of four years commencing one year from the
date of this Prospectus at
<PAGE>
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 Underwriter of $75,000. The
Company has agreed under certain circumstances to pay the Underwriter a
Warrant solicitation fee of 5% of the exercise price received for each
Warrant exercise. In addition, the Company has agreed to indemnify the
Underwriter 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 Underwriter's 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 Underwriter 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 Underwriter's
non-accountable expenses allowance of $137,396). See "UNDERWRITING."
================================================================================
MONROE PARKER
SECURITIES, INC.
================================================================================
The date of this Prospectus is October __, 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 Underwriter, 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
Underwriter, subject to prior sale, when, as and if delivered to and accepted
by the Underwriter, and subject to the Underwriter's 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.
3
<PAGE>
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM
TIME TO TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE
COMPANY'S SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY
BECOME A DOMINATING INFLUENCE IN THE MARKET FOR THE SECURITIES, HOWEVER, THERE
CAN BE NO ASSURANCE THAT THE UNDERWRITER 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 UNDERWRITER'S
PARTICIPATION IN SUCH MARKET. THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES
AT ANY TIME OR FROM TIME TO TIME.
4
<PAGE>
[DIAGRAM TO BE INSERTED HERE]
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
Underwriter's 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 (I(2)R(TM)) 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 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
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
Underwriter, 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."
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 Underwriter's 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."
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.
8
<PAGE>
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.
9
<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 Underwriter's 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."
10
<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. 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
11
<PAGE>
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.
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. 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
12
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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."
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
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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."
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
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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 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 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
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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."
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
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<PAGE>
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.
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
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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."
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. See "PRINCIPAL STOCKHOLDERS."
Ongoing Influence of the Underwriter. Pursuant to the provisions of the
Underwriting Agreement and the Financial Consulting Agreement, the Underwriter
is entitled to the following: (1) a finder's fee, payable in the event the
Underwriter introduces 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 any time 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 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 Underwriter's 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 Underwriter. 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 Underwriter has advised the Company that it intends 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
Underwriter 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
Underwriter 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 Underwriter may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Underwriter 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 Underwriter is engaged in a distribution of the
securities of any selling stockholder, it 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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Underwriter's Options and Additional Options and Warrants. The Company
has agreed to issue to the Underwriter 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 "Underwriter's 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 Underwriter, under
certain circumstances, to register the Shares and the Warrants subject to the
Underwriter's 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 Underwriter, 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."
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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,
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 Underwriter, 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."
Underwriter's Limited Underwriting Experience. The Underwriter
has been actively engaged in the securities brokerage and investment banking
business since 1994. However the Underwriter has engaged in only limited
underwriting activities, and this offering is only the eighth public offering in
which the Underwriter has acted as the sole or managing underwriter. The
Underwriter has limited experience acting as a member of a syndicate in
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underwritten offerings. There can be no assurance that the Underwriter'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.
Underwriter's Influence on the Market. A significant amount of the
Units offered may be sold to customers of the Underwriter. Such customers
subsequently may engage in transactions for the sale of purchase of such Units
and may otherwise effect transactions in such securities. If they participate in
the market, the Underwriter 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 Underwriter's 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
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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.
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
23
<PAGE>
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."
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.
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
24
<PAGE>
effective date of this Prospectus without prior written consent of the
Underwriter.
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. SEE "MANAGEMENT -- Director
and Officer Liability."
25
<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:
Approximate Approximate
Application of Proceeds Dollar Amount Percentage
Research, clinical studies and
stability testing (1) $1,600,000.00 49.8%
Product Development (2) $600,000.00 18.7%
Marketing and Sales Expenses (3) $400,000.00 12.4%
Working Capital and General
Corporate Purposes (4) $614,775.00 19.1%
----------- -----
TOTAL $3,214,775.00 100.0%
============= ======
(1) Includes costs and expenses for research, pilot clinical studies and
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.
26
<PAGE>
(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
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
Underwriter's 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.
27
<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 Underwriter's 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:
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
- ----------
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%).
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
Underwriter's Option or other outstanding options and warrants.
28
<PAGE>
<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 Underwriter's 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 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.
29
<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 Underwriter's 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.)
30
<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.
Statement of Operations Data(1) Year-Ended July 31,
----------------------
1997 1996
---------- ----------
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
common shares outstanding 4,279,390 4,279,390
========= =========
Per Common Share:
Net income (loss) (.10) .12
Pro forma Net Income (loss) (.14) .04
(1) Since inception, the Company has not declared any dividends on its Common
Stock. See "DIVIDEND POLICY."
31
<PAGE>
Balance Sheet Data
At July 31, 1997
-----------------------------
Actual As Adjusted(1)
$(39,000) $3,253,000
Working Capital (deficit)
$ 300,000 $ -0-
Long Term Convertible Debt
$ 575,000 $3,790,000
Total Assets
$ 812,000 $ 512,000
Total Liabilities
$(237,000) $3,278,000
Shareholders' equity (deficit)
(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 Underwriter's
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."
32
<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
33
<PAGE>
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 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.
34
<PAGE>
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 Underwriter is obliged to pay the
Underwriter $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
35
<PAGE>
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.
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.
36
<PAGE>
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 (I(2)R(TM))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.
37
<PAGE>
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.
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 other party's expense. 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 further 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
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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:
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 will 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
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<PAGE>
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.
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)
o Appetite Suppressants (Fenfluramine)
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. The Company estimates that worldwide sales
of the above products are in the tens of billions of dollars.
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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 products 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
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maximize the 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
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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 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.
The Company estimates that the development of new formulations of
pharmaceutical products, including formulation, testing and obtaining FDA
approval, generally takes three to
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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
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required to modify the infringing process or obtain a license, There can be no
assurance that the Company or its European manufacturers would 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.
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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 feet 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.
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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
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Financial Corp. From 1989 to 1991, Mr. Schaul was a partner with the law firm of
Glynn, Byrnes and Schaul, and for 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 his
employment by 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 Pharmaceutical Co., Inc.
(renamed Circa Pharmaceuticals Corp. and now named Watson Pharmaceutical
Corp.). From 1980 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 1980, 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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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 Options by All Other
Principal Position Year Annual 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.
- ----------
1 See "CERTAIN TRANSACTIONS - Legal Fees."
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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.
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.
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,
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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.
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)
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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.
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. 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
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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.
<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 J. 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, 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.
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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.
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.
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Legal Fees
During fiscal 1997, the Company paid Mr. Schaul approximately $53,000
in legal fees. See Note 4 to the financial statements.
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
can 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
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<PAGE>
following statements are brief summaries of certain provisions relating to the
Company's capital stock.
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 Underwriter.
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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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 two shares of Common Stock and two
Redeemable Class A Common Stock Purchase Warrants.
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 Underwriter, 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 Underwriter 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
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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
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.
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).
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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,
without the prior written consent of the Underwriter. 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
Underwriter's 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
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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
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
Subject to the terms and conditions set forth in the underwriting
agreement by and between the Company and the Underwriter (the "Underwriting
Agreement"), the Underwriter has agreed to purchase from the Company, and the
Company has agreed to sell to the Underwriter, 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.
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The Underwriting Agreement provides that the obligations of the
Underwriter to pay for and accept delivery of certificates representing the
Units are subject to certain conditions precedent, and that the Underwriter
will purchase all of the Units offered hereby on a "firm commitment" basis if
any are purchased.
The Underwriter has 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 Underwriter 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 Underwriter 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 Underwriter a non-accountable
expense allowance equal to 3% of the gross proceeds of this offering, including
any Units purchased pursuant to the Underwriter's over-allotment option, no
portion of which has been paid to date.
The Company and the Underwriter 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 Underwriter for a period of three years after the date of this
Prospectus.
The Company has agreed to sell to the Underwriter, for an aggregate
price of $67.50, the right to purchase up to an aggregate of 67,500 Units (the
"Underwriter's Options"). The Underwriter's 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 Underwriter's
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
63
<PAGE>
Underwriter's Options have been exercised and the underlying Warrants are
outstanding. The Underwriter's 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 Underwriter or its 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 Underwriter), at the request of the holders of
a majority of the Underwriter's 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
Underwriter's Options. In addition, the Company has agreed to give advance
notice to holders of the Underwriter's 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 Underwriter's 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 Underwriter's Options in such registration statement at the
Company's expense.
For the life of the Underwriter's 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 Underwriter's Options are outstanding. The holders of the
Underwriter's 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
Underwriter's Options. Any profit realized on the sale of the shares of Common
Stock issuable upon the exercise of the Underwriter's Options may be deemed
additional underwriting compensation.
The Underwriting Agreement provides for the Underwriter 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 Underwriter 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 Underwriter, and reasonably acceptable to the Company, for election to
serve as a member of the Company's
64
<PAGE>
Board of Directors. As of the date of this Prospectus, the Underwriter has not
selected its nominee to the Company's Board.
Upon the exercise of the Warrants, the Company will pay the
Underwriter 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.
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 Underwriter 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 Underwriter 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 Underwriter 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 Underwriter. 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 Underwriter has been actively engaged in the securities brokerage
and investment banking business since 1994. However the Underwriter has engaged
in only limited underwriting activities, and this offering is only the eighth
public offering in which the Underwriter has acted as the sole or managing
underwriter. The Underwriter has limited experience acting as a member of a
65
<PAGE>
syndicate in underwritten offerings. See "RISK FACTORS -Underwriter's Limited
Underwriting Experience".
Pursuant to the provisions of the Financial Consulting Agreement, the
Underwriter will provide to the Company investment banking consulting
services, for which the Underwriter 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 Underwriter in performing
under the Consulting Agreement. The term of the Consulting Agreement is two (2)
years, commencing upon the closing of this offering.
The Underwriter has informed the Company that no sales will be made
to any account over which the Underwriter exercises 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.
66
<PAGE>
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
Underwriter 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.
67
<PAGE>
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.
INDEX TO FINANCIAL STATEMENTS
Auditors' Report ..................................................... F-2
Balance Sheets.........................................................F-3
Statements of Operations...............................................F-4
Statements of Changes in Capital Deficiency............................F-5
Statement of Cash Flows................................................F-6
Notes to Financial Statements..........................................F-7
68
<PAGE>
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
<PAGE>
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.
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.
F-15
<PAGE>
FLEMINGTON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 Underwriter. 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.
_______________, 1997
================================================================================
<PAGE>
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.
II-1
<PAGE>
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
Underwriter's 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
-----------
Total........................................ $250,000.00
===========
II-2
<PAGE>
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.
Number Description
1.1 - (1)Form of Underwriting Agreement
1.2 - (1)Form of Selected Dealers' Agreement
1.3 - (1)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 - (1)Form of Warrant Agreement
4.2 - Form of Common Stock Certificate
4.3 (1)Form of Class A Warrant Certificate
4.4 - (1)Form of Underwriter's Option Agreement
5.1 - (3)Opinion of Reed Smith Shaw & McClay LLP
II-3
<PAGE>
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
(1) Filed herewith.
(2) Filed as an exhibit to the Registration Statement
(No. 333-33201) on August 8, 1997.
(3) Filed as an exhibit toAmendment No. 1 to the Registration
Statement (No. 333-33201) on October 3, 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
(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
II-4
<PAGE>
(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
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
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.
II-5
<PAGE>
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
October 31, 1997
II-6
<PAGE>
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 October ____, 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
---- ----- ---------
<S> <C> <C>
Harry A. Dugger, III, Ph.D. President, Chief Executive Officer and ____________*
October ____, 1997 Chief Financial Officer
(Principal Financial/Accounting and
Executive Officer)
John J. Moroney Chairman of the Board
October ____, 1997 *_____________
Robert F. Schaul Secretary and Director *_____________
October ____, 1997
Jean Marc Maurette Director *_____________
October ____, 1997
Jack R. Kornreich Director *_____________
October ____, 1997
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Name Title Signature
---- ----- ---------
<S> <C> <C>
John R. Toedtman Director *_____________
October ____, 1997
*By: ___________________________
Harry A. Dugger, III
Attorney-in-Fact
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
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 October ___, 1997.
FLEMINGTON PHARMACEUTICAL CORPORATION
By: /s/ Harry A. Dugger, III
-----------------------------------------
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
October ___, 1997 Chief Financial Officer (Principal ------------------------
Financial/Accounting and Executive
Officer)
John J. Moroney
October ___, 1997 Chairman of the Board */s/ John J. Moroney
-------------------------
Robert F. Schaul Secretary and Director */s/ Robert F. Schaul
October ___, 1997 -------------------------
Jean Marc Maurette Director */s/ Jean Marc Maurette
October ___, 1997 -------------------------
Jack R. Kornreich Director */s/ Jack R. Kornreich
October ___, 1997 -------------------------
John R. Toedtman Director */s/ John R. Toedtman
October ___, 1997 -------------------------
*By: /s/ Harry A. Dugger, III
-----------------------------
Harry A. Dugger, III
Attorney-in-Fact
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
Number Description
1.1 - (1)Form of Underwriting Agreement
1.2 - (1)Form of Selected Dealers' Agreement
1.3 - (1)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 - (1)Form of Warrant Agreement
4.2 - Form of Common Stock Certificate
4.3 (1)Form of Class A Warrant Certificate
4.4 - (1)Form of Underwriters' Option Agreement
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-6)
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
(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.
<PAGE>
675,000 Units (each Unit consisting of one (1) share of Common Stock,
par value $.01 per share and one (1) Warrant for Common Stock)
FLEMINGTON PHARMACEUTICAL CORPORATION
UNDERWRITING AGREEMENT
New York, New York
__________, 1997
Monroe Parker Securities, Inc.
2500 Westchester Avenue
Purchase, New York 10577
Flemington Pharmaceutical Corporation, a New Jersey corporation (the
"Company"), proposes to issue and sell to you (the "Underwriter"), an aggregate
of 675,000 Units ("Units"), each Unit consisting of one (1) share of Common
Stock, par value $.01 per share ("Common Stock"), and one (1) Class A Redeemable
Purchase Warrant for Common Stock ("Warrants"). The Units, Common Stock and
Warrants may be collectively referred to hereinafter as the "Securities". Each
Warrant entitles the registered holder thereof to purchase one (1) share of
Common Stock at an exercise price of $5.80 per share for a period of four (4)
years, commencing __________, 1998 (one (1) year from the Effective Date)
through __________, 2002. The Warrants are subject to redemption by the Company
upon not less than thirty (30) days' notice at any time after ___________, 1998
(eighteen (18) months from the Effective Date) or earlier with the consent of
the Underwriter, at $.10 per warrant, if the closing sale price per share of
Common Stock has equaled or exceeded 200% of the then exercise price of the
Warrants on all 20 business days ending on the third day prior to the written
notice of redemption. In addition, the Company proposes to grant to the
Underwriter the option referred to in Section 2(b) to purchase all or any part
of an aggregate of 101,250 additional Units.
Unless the context otherwise requires, the aggregate of 675,000 Units
to be sold by the Company (together with the additional Units sold pursuant to
Section 2(b)) and the shares of Common Stock and the Warrants comprising the
Units, are herein called the "Units." The Common Stock to be outstanding after
giving effect to the sale of the Units are also called the "Shares."
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You have advised the Company that you desire to purchase the Units.
The Company confirms the agreements made by it with respect to the purchase of
the Units by the Underwriter as follows:
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with you that:
(a) A registration statement (File No. 333-_______) on Form
SB-2 relating to the public offering of the Units, including a form of
prospectus subject to completion, copies of which have heretofore been delivered
to you, has been prepared in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission under the Act and one or more
amendments to such registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(i) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, a prospectus in the
form most recently included in an amendment to such registration statement (or,
if no such amendment shall have been filed in such registration statement), with
such changes or insertions as are required by Rule 430A under the Act or
permitted by Rule 424(b) under the Act and as have been provided to and approved
by you prior to the execution of this Agreement, or (ii) if such registration
statement, as it may have been amended, has not been declared by the Commission
to be effective under the Act, an amendment to such registration statement,
including a form of prospectus, a copy of which amendment has been furnished to
and approved by you prior to the execution of this Agreement. As used in this
Agreement, the term "Company" means Flemington Pharmaceutical Corporation and/or
each of its subsidiaries ("Subsidiaries"); the term "Registration Statement"
means such registration statement, as amended at the time when it was or is
declared effective, including all financial schedules and exhibits thereto and
including any information omitted therefrom pursuant to Rule 430A under the Act
and included in the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); and the term
"Prospectus" means the prospectus first filed with the Commission pursuant to
Rule 424(b) under the Act, or, if no prospectus is required to be filed pursuant
to said Rule 424(b), such term means the prospectus included in the Registration
Statement; except that if such registration statement or prospectus is amended
or such prospectus is supplemented, after the effective date of such
registration statement and prior to the Option Closing Date (as hereinafter
defined), the terms "Registration Statement" and "Prospectus" shall include such
registration statement and prospectus as so amended, and the term "Prospectus"
shall include the prospectus as so supplemented, or both, as the case may be.
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(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. At the time the Registration
Statement becomes effective and at all times subsequent thereto up to and on the
First Closing Date (as hereinafter defined) or the Option Closing Date, as the
case may be, (i) the Registration Statement and Prospectus will in all respects
conform to the requirements of the Act and the Rules and Regulations; and (ii)
neither the Registration Statement nor the Prospectus will include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make statements therein not misleading; provided,
however, that the Company makes no representations, warranties or agreements as
to information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of the Underwriter specifically for use
in the preparation thereof. It is understood that the statements set forth in
the Prospectus with respect to stabilization, under the heading "Underwriting",
and the identity of counsel to the Underwriter under the heading "Legal
Matters" constitute for purposes of this Section and Section 6(b) the only
information furnished in writing by or on behalf of the Underwriter for
inclusion in the Registration Statement and Prospectus, as the case may be.
(c) The Company and its Subsidiaries have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation with full corporate
power and authority to own their properties and conduct their business as
described in the Prospectus and are duly qualified or licensed to do business as
foreign corporations and are in good standing in each other jurisdiction in
which the nature of their business or the character or location of their
properties require such qualification, except where the failure to so qualify
will not materially adversely affect the Company's or Subsidiaries' business,
properties or financial condition.
(d) The authorized, issued and outstanding capital stock of
the Company and its Subsidiaries, including the predecessors of the Company, is
as set forth the Company's financial statements contained in the Registration
Statement; the shares of issued and outstanding capital stock of the Company and
its Subsidiaries set forth therein have been duly authorized, validly issued and
are fully paid and nonassessable; except as set forth in the Prospectus, no
options, warrants, or other rights to purchase, agreements or other obligations
to issue, or agreements or other rights to convert any obligation into, any
shares of capital stock of the Company or its Subsidiaries have been granted or
entered into by the Company or its Subsidiaries; and the capital stock conforms
to all statements relating thereto contained in the Registration Statement and
Prospectus.
(e) The Units and the shares of Common Stock, when paid for,
issued and delivered pursuant to this Agreement, will have been duly authorized,
issued and delivered and will constitute valid and legally binding obligations
of the Company enforceable in accordance with their terms, except as
enforceability may be limited by bankruptcy, insolvency or other laws affecting
the right of creditors generally or by general equitable principles, and
entitled to the rights and preferences provided by the Certificate of
Incorporation, which will be in the
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form filed as an exhibit to the Registration Statement. The terms of the Common
Stock conform to the description thereof in the Registration Statement and
Prospectus.
The Warrants, when paid for, issued and delivered pursuant to
this Agreement, will have been duly authorized, issued and delivered and will
constitute valid and legally binding obligations of the Company enforceable in
accordance with their terms, except as enforceability may be limited by
bankruptcy, insolvency or other laws affecting the right of creditors generally
or by general equitable principles, and entitled to the benefits provided by the
warrant agreement pursuant to which such Warrants are to be issued (the "Warrant
Agreement"), which will be substantially in the form filed as an exhibit to the
Registration Statement. The shares of Common Stock issuable upon exercise of the
Warrants have been reserved for issuance upon the exercise of the Warrants and
when issued in accordance with the terms of the Warrants and Warrant Agreement,
will be duly and validly authorized validly issued, fully paid and
non-assessable and free of preemptive rights. The Warrant Agreement has been
duly authorized and, when executed and delivered pursuant to this Agreement,
assuming due authorization, execution and delivery by the transfer agent, will
have been duly executed and delivered and will constitute the valid and legally
binding obligation of the Company enforceable in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency or other laws
affecting the rights of creditors generally or by general equitable principles.
The Warrants and Warrant Agreement conform to the respective descriptions
thereof in the Registration Statement and Prospectus.
The Purchase Option (as defined in the Registration
Statement), when paid for, issued and delivered pursuant to this Agreement will
constitute valid and legally binding obligations of the Company enforceable in
accordance with their terms and entitled to the benefits provided by the
Purchase Option, except as enforceability may be limited by bankruptcy,
insolvency or other laws affecting the rights of creditors generally or by
general equitable principles. The Securities issuable upon exercise of the
Purchase Option (and the shares of Common Stock issuable upon exercise of the
Warrants) when issued and paid for in accordance with this Agreement, the
Purchase Option and the Warrant Agreement, will be duly authorized, validly
issued, fully paid and non-assessable and free of preemptive rights.
(f) This Agreement has been duly and validly authorized,
executed and delivered by the Company. The Company has full power and authority
to authorize, issue and sell the Units to be sold by it hereunder on the terms
and conditions set forth herein, and no consent, approval, authorization or
other order of any governmental authority is required in connection with such
authorization, execution and delivery or in connection with the authorization,
issuance and sale of the Units or the Purchase Option, except such as may be
required under the Act or state securities laws.
(g) Except as described in the Prospectus, or which would not
have a material adverse effect on the condition (financial or otherwise),
business prospects, net worth or properties of the Company and the Subsidiaries
taken as a whole (a "Material Adverse
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Effect"), the Company and its Subsidiaries are not in violation, breach or
default of or under, and consummation of the transactions herein contemplated
and the fulfillment of the terms of this Agreement will not conflict with, or
result in a breach or violation of, any of the terms or provisions of, or
constitute a default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any of the property or assets of the Company or its
Subsidiaries pursuant to the terms of any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or
its Subsidiaries is a party or by which the Company or its Subsidiaries may be
bound or to which any of the property or assets of the Company or its
Subsidiaries is subject, nor will such action result in any violation of the
provisions of the certificate of incorporation or the by-laws of the Company or
its Subsidiaries, as amended, or any statute or any order, rule or regulation
applicable to the Company or its Subsidiaries of any court or of any regulatory
authority or other governmental body having jurisdiction over the Company or its
Subsidiaries.
(h) Subject to the qualifications stated in the Prospectus,
the Company and its Subsidiaries have good and marketable title to all
properties and assets described in the Prospectus as owned by them, free and
clear of all liens, charges, encumbrances or restrictions, except such as are
not materially significant or important in relation to their business; all of
the material leases and subleases under which the Company or its Subsidiaries is
the lessor or sublessor of properties or assets or under which the Company and
its Subsidiaries holds properties or assets as lessee or sublessee as described
in the Prospectus are in full force and effect, and, except as described in the
Prospectus, the Company and its Subsidiaries are not in default in any material
respect with respect to any of the terms or provisions of any of such leases or
subleases, and, to the best knowledge of the Company, no claim has been asserted
by anyone adverse to rights of the Company or its Subsidiaries as lessor,
sublessor, lessee or sublessee under any of the leases or subleases mentioned
above, or affecting or questioning the right of the Company or its Subsidiaries
to continued possession of the leased or subleased premises or assets under any
such lease or sublease except as described or referred to in the Prospectus; and
the Company and its Subsidiaries own or lease all such properties described in
the Prospectus as are necessary to their operations as now conducted and, except
as otherwise stated in the Prospectus, as proposed to be conducted as set forth
in the Prospectus.
(i) Wiss & Company, LLP, which has given its report on certain
financial statements filed with the Commission as a part of the Registration
Statement, is with respect to the Company, independent public accountants as
required by the Act and the Rules and Regulations.
(j) The financial statements, and schedules together with
related notes, set forth in the Prospectus or the Registration Statement present
fairly the financial position and results of operations and changes in cash flow
position of the Company and its Subsidiaries on the basis stated in the
Registration Statement, at the respective dates and for the respective periods
to which they apply. Said statements and schedules and related notes have been
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prepared in accordance with generally accepted accounting principles applied on
a basis which is consistent during the periods involved except as disclosed in
the Prospectus and Registration Statement.
(k) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus and except as otherwise
disclosed or contemplated therein, the Company and its Subsidiaries have not
incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business, or entered into any transaction not in the ordinary
course of business, which would have a Material Adverse Effect, and there has
not been any change in the capital stock of, or any incurrence of short-term or
long-term debt by, the Company or its Subsidiaries or any issuance of options,
warrants or other rights to purchase the capital stock of the Company or its
Subsidiaries or any material adverse change or any development involving, so far
as the Company or its Subsidiaries can now reasonably foresee a prospective
adverse change in the condition (financial or otherwise), net worth, results of
operations, business, key personnel or properties of it which would have a
Material Adverse Effect.
(l) Except as set forth in the Prospectus, there is not now
pending or, to the knowledge of the Company, threatened, any action, suit or
proceeding to which the Company or its Subsidiaries is a party before or by any
court or governmental agency or body, which might result in any material adverse
change in the financial condition, business prospects, net worth, or properties
of the Company or its Subsidiaries, nor are there any actions, suits or
proceedings related to environmental matters or related to discrimination on the
basis of age, sex, religion or race; and no labor disputes involving the
employees of the Company or its Subsidiaries exist or to the knowledge of the
Company, are threatened which might be expected to have a Material Adverse
Effect.
(m) Except as disclosed in the Prospectus, the Company and its
Subsidiaries have filed all necessary federal, state and foreign income and
franchise tax returns required to be filed as of the date hereof and have paid
all taxes shown as due thereon; and there is no tax deficiency which has been,
or to the knowledge of the party, may be asserted against the Company or its
Subsidiaries.
(n) Except as disclosed in the Registration Statement or
Prospectus, the Company and its Subsidiaries have sufficient licenses, permits
and other governmental authorizations currently necessary for the conduct of
their business or the ownership of their properties as described in the
Prospectus and is in all material respects complying therewith and owns or
possesses adequate rights to use all material patents, patent applications,
trademarks, service marks, trade-names, trademark registrations, service mark
registrations, copyrights and licenses necessary for the conduct of such
businesses and have not received any notice of conflict with the asserted rights
of others in respect thereof. To the best knowledge of the Company, none of the
activities or business of the Company and its Subsidiaries are in violation of,
or cause the Company or its Subsidiaries to violate, any law, rule, regulation
or
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order of the United States, any state, county or locality, or of any agency or
body of the United States or of any state, county or locality, the violation of
which would have a Material Adverse Effect.
(o) The Company and its Subsidiaries have not, directly or
indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution in violation
of law or (ii) made any payment to any state, federal or foreign governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments or contributions required or allowed by applicable
law. The Company's and Subsidiaries' internal accounting controls and procedures
are sufficient to cause the Company and its Subsidiaries to comply in all
material respects with the Foreign Corrupt Practices Act of 1977, as amended.
(p) On the Closing Dates (hereinafter defined) all transfer or
other taxes, (including franchise, capital stock or other tax, other than income
taxes, imposed by any jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Securities to the Underwriter
hereunder will have been fully paid or provided for by the Company and all laws
imposing such taxes will have been complied with in all material respects.
(q) All contracts and other documents of the Company which
are, under the Rules and Regulations, required to be filed as exhibits to the
Registration Statement have been so filed.
(r) Except as disclosed in the Registration Statement, the
Company has no Subsidiaries.
(s) Except as disclosed in the Registration Statement, the
Company has not entered into any agreement pursuant to which any person is
entitled either directly or indirectly to compensation from the Company for
services as a finder in connection with the proposed public offering.
(t) Except as previously disclosed in writing by the Company
to the Underwriter or as disclosed in the Registration Statement, no officer,
director or stockholder of the Company has any National Association of
Securities Dealers, Inc. (the "NASD") affiliation.
(u) No other firm, corporation or person has any rights to
underwrite an offering of any of the Company's securities.
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2. Purchase, Delivery and Sale of the Units.
(a) Subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warranties, and agreements herein
contained, the Company agrees to issue and sell to the Underwriter and the
Underwriter agree to buy from the Company at $5.31 per Unit, at the place and
time hereinafter specified, 675,000 Units (the "First Units").
Delivery of the First Units against payment therefor shall
take place at the offices of Bernstein & Wasserman, LLP, 950 Third Avenue, New
York, New York (or at such other place as may be designated by agreement between
the Underwriter and the Company) at 10:00 a.m., New York time, on __________,
1997, or at such later time and date as the Underwriter may designate in
writing to the Company at least two business days prior to such purchase, but
not later than __________, 1997 such time and date of payment and delivery for
the First Units being herein called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants an option to the Underwriter (the
"Over-Allotment Option") to purchase all or any part of an aggregate of an
additional 101,250 Units to cover over allotments at the same price per Unit as
the Underwriter shall pay for the First Units being sold pursuant to the
provisions of subsection (a) of this Section 2 (such additional Units being
referred to herein as the "Option Units"). This option may be exercised within
45 days after the effective date of the Registration Statement upon written
notice by the Underwriter to the Company advising as to the amount of Option
Units as to which the option is being exercised, the names and denominations in
which the certificates for such Option Units are to be registered and the time
and date when such certificates are to be delivered. Such time and date shall be
determined by the Underwriter but shall not be earlier than four nor later than
ten full business days after the exercise of said option (but in no event more
than 55 days after the Effective Date), nor in any event prior to the First
Closing Date, and such time and date is referred to herein as the "Option
Closing Date." Delivery of the Option Units against payment therefor shall take
place at the offices of Bernstein & Wasserman, LLP, 950 Third Avenue, New York,
NY 10022 (or at such other place as may be designated by agreement between the
Underwriter and the Company). The option granted hereunder may be exercised only
to cover over-allotments in the sale by the Underwriter of First Units referred
to in subsection (a) above. No Option Units shall be delivered unless all First
Units shall have been deliver to the Underwriter as provided herein.
(c) The Company will make the certificates for the Units to be
purchased by the Underwriter hereunder available to you for checking at least
two full business days prior to the First Closing Date or the Option Closing
Date (which are collectively referred to herein as the "Closing Dates"). The
certificates shall be in such names and denominations as you may request, at
least three full business days prior to the Closing Dates. Delivery of the
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certificates at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriter.
Definitive certificates in negotiable form for the Units to be
purchased by the Underwriter hereunder will be delivered by the Company to you
for the account of the Underwriter against payment of the respective purchase
prices by the Underwriter, by wire transfer or certified or bank cashier's
checks in New York Clearing House funds, payable to the order of the Company.
In addition, in the event the Underwriter exercises the option
to purchase from the Company all or any portion of the Option Units pursuant to
the provisions of subsection (b) above, payment for such Units shall be made to
or upon the order of the Company by wire transfer or certified or bank cashier's
checks payable in New York Clearing House funds at the offices of Bernstein &
Wasserman, LLP, 950 Third Avenue, New York, N.Y., at the time and date of
delivery of such Units as required by the provisions of subsection (b) above,
against receipt of the certificates for such Units by you for your account
registered in such names and in such denominations as you may reasonably
request.
It is understood that the Underwriter proposes to offer the
Units to be purchased hereunder to the public upon the terms and conditions set
forth in the Registration Statement, after the Registration Statement becomes
effective.
3. Covenants of the Company. The Company covenants and agrees with the
Underwriter that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective. If required, the Company will file
the Prospectus and any amendment or supplement thereto with the Commission in
the manner and within the time period required by Rule 424(b) under the Act.
Upon notification from the Commission that the Registration Statement has become
effective, the Company will so advise you and will not at any time, whether
before or after the effective date, file any amendment to the Registration
Statement or supplement to the Prospectus of which you shall not previously have
been advised and furnished with a copy or to which you or your counsel shall
have reasonably objected in writing or which is not in compliance with the Act
and the Rules and Regulations. At any time prior to the later of (A) the
completion by the Underwriter of the distribution of the Units contemplated
hereby (but in no event more than nine months after the date on which the
Registration Statement shall have become or been declared effective) and (B) 90
days after the date on which the Registration Statement shall have become or
been declared effective, the Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the Registration
Statement or Prospectus which, in the opinion of counsel to the Company and the
Underwriter, may be reasonably necessary or advisable in connection with the
distribution of the Units.
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As soon as the Company is advised thereof, the Company will
advise you, and provide you copies of any written advice, of the receipt of any
comments of the Commission, of the effectiveness of any post-effective amendment
to the Registration Statement, of the filing of any supplement to the Prospectus
or any amended Prospectus, of any request made by the Commission for an
amendment of the Registration Statement or for supplementing of the Prospectus
or for additional information with respect thereto, of the issuance by the
Commission or any state or regulatory body of any stop order or other order or
threat thereof suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Units for offering in any jurisdiction,
or of the institution of any proceedings for any of such purposes, and will use
its best efforts to prevent the issuance of any such order, and, if issued, to
obtain as soon as possible the lifting thereof.
The Company has caused to be deliver to you copies of each
Preliminary Prospectus, and the Company has consented and hereby consents to the
use of such copies for the purposes permitted by the Act. The Company authorizes
the Underwriter and dealers to use the Prospectus in connection with the sale
of the Units for such period as in the opinion of counsel to the Underwriter
and the Company the use thereof is required to comply with the applicable
provisions of the Act and the Rules and Regulations. In case of the happening,
at any time within such period as a Prospectus is required under the Act to be
delivered in connection with sales by the Underwriter or dealer of any event of
which the Company has knowledge and which materially affects the Company or the
securities of the Company, or which in the opinion of counsel for the Company
and counsel for the Underwriter should be set forth in an amendment of the
Registration Statement or a supplement to the Prospectus in order to make the
statements therein not then misleading, in light of the circumstances existing
at the time the Prospectus is required to be delivered to a purchaser of the
Units or in case it shall be necessary to amend or supplement the Prospectus to
comply with law or with the Rules and Regulations, the Company will notify you
promptly and forthwith prepare and furnish to you copies of such amended
Prospectus or of such supplement to be attached to the Prospectus, in such
quantities as you may reasonably request, in order that the Prospectus, as so
amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material facts necessary in order to make the
statements in the Prospectus, in the light of the circumstances under which they
are made, not misleading. The preparation and furnishing of any such amendment
or supplement to the Registration Statement or amended Prospectus or supplement
to be attached to the Prospectus shall be without expense to the Underwriter,
except that in case the Underwriter is required, in connection with the sale
of the Units to deliver a Prospectus nine months or more after the effective
date of the Registration Statement, the Company will upon request of and at the
expense of the Underwriter, amend or supplement the Registration Statement and
Prospectus and furnish the Underwriter with reasonable quantities of
prospectuses complying with Section 10(a)(3) of the Act.
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The Company will comply with the Act, the Rules and
Regulations and the Securities Exchange Act of 1934 (the "Exchange Act") and the
rules and regulations thereunder in connection with the offering and issuance of
the Securities.
(b) The Company will furnish such information as may be
required and to otherwise cooperate and use its best efforts to qualify or
register the Units for sale under the securities or "blue sky" laws of such
jurisdictions as you may designate and will make such applications and furnish
such information as may be required for that purpose and to comply with such
laws, provided the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or to execute a general consent of service
of process in any jurisdiction in any action other than one arising out of the
offering or sale of the Units. The Company will, from time to time, prepare and
file such statements and reports as are or may be required to continue such
qualification in effect for so long a period as the counsel to the Company and
the Underwriter deem reasonably necessary.
(c) If the sale of the Units provided for herein is not
consummated as a result of the Company not performing its obligations hereunder
in all material respects, the Company shall pay all costs and expenses incurred
by it which are incident to the performance of the Company's obligations
hereunder, including but not limited to, all of the expenses itemized in Section
8, including the accountable expenses of the Underwriter (including the
reasonable fees and expenses of counsel to the Underwriter), if the offering
is not consummated.
(d) The Company will use its best efforts to (i) cause a
registration statement under the Exchange Act to be declared effective
concurrently with the completion of this offering and will notify you in writing
immediately upon the effectiveness of such registration statement, and (ii) to
obtain no later than ______, 1997 and keep current a listing in the Standard &
Poors or Moody's OTC Industrial Manual.
(e) For so long as the Company is a reporting company under
either Section 12(g) or 15(d) of the Exchange Act, the Company, at its expense,
will furnish to its stockholders an annual report (including financial
statements audited by independent public accountants), in reasonable detail and
at its expense, will furnish to you during the period ending five (5) years from
the date hereof, (i) as soon as practicable after the end of each fiscal year,
but no earlier than the filing of such information with the Commission a balance
sheet of the Company and any of its Subsidiaries as at the end of such fiscal
year, together with statements of income, surplus and cash flow of the Company
and any Subsidiaries for such fiscal year, all in reasonable detail and
accompanied by a copy of the certificate or report thereon of independent
accountants; (ii) as soon as practicable after the end of each of the first
three fiscal quarters of each fiscal year, but no earlier than the filing of
such information with the Commission, consolidated summary financial information
of the Company for such quarter in reasonable detail; (iii) as soon as they are
publicly available, a copy of all reports (financial or other) mailed to
security holders; (iv) as soon as they are available, a copy of all non-
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confidential reports and financial statements furnished to or filed with the
Commission or any securities exchange or automated quotation system on which any
class of securities of the Company is listed; and (v) such other information as
you may from time to time reasonably request.
(f) In the event the Company has an active subsidiary or
Subsidiaries, such financial statements referred to in subsection (e) above will
be on a consolidated basis to the extent the accounts of the Company and its
subsidiary or Subsidiaries are consolidated in reports furnished to its
stockholders generally.
(g) The Company will deliver to you at or before the First
Closing Date two signed copies of the Registration Statement including all
financial statements and exhibits filed therewith, and of all amendments
thereto, and will deliver to the Underwriter such number of conformed copies
of the Registration Statement, including such financial statements but without
exhibits, and of all amendments thereto, as the Underwriter may reasonably
request. The Company will deliver to or upon your order, from time to time until
the effective date of the Registration Statement, as many copies of any
Preliminary Prospectus filed with the Commission prior to the effective date of
the Registration Statement as you may reasonably request. The Company will
deliver to the Underwriter on the effective date of the Registration
Statement and thereafter for so long as a Prospectus is required to be delivered
under the Act, from time to time, as many copies of the Prospectus, in final
form, or as thereafter amended or supplemented, as the Underwriter may from
time to time reasonably request.
(h) The Company will make generally available to its security
holders and to the registered holders of its Warrants and deliver to you as soon
as it is practicable to do so but in no event later than 90 days after the end
of twelve months after its current fiscal quarter, an earnings statement (which
need not be audited) covering a period of at least twelve consecutive months
beginning after the effective date of the Registration Statement, which shall
satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of
the Securities substantially for the purposes set forth under "Use of Proceeds"
in the Prospectus and, except as set forth therein, shall not use any proceeds
to pay any (i) debt for borrowed funds, or (ii) debt or obligation owed to any
insider outside of salary in the ordinary course of business.
(j) The Company will promptly prepare and file with the
Commission any amendments or supplements to the Registration Statement,
Preliminary Prospectus or Prospectus and take any other action, which in the
opinion of counsel to the Underwriter and counsel to the Company, may be
reasonably necessary or advisable in connection with the distribution of the
Securities, and will use its best efforts to cause the same to become effective
as promptly as possible.
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(k) The Company will reserve and keep available the maximum
number of its authorized but unissued securities which are issuable upon
exercise of the Purchase Option outstanding from time to time.
(l) (1) For a period of thirty six (36) months from the First
Closing Date no officer, director or shareholder of any securities prior to the
offering will, directly or indirectly, offer, sell (including any short sale),
grant any option for the sale of, acquire any option to dispose of, or otherwise
dispose of any shares of Common Stock without the prior written consent of the
Underwriter, other than as set forth in the Registration Statement. In order
to enforce this covenant, the Company shall impose stop-transfer instructions
with respect to the securities owned by every shareholder prior to the offering
until the end of such period (subject to any exceptions to such limitation on
transferability set forth in the Registration Statement). If necessary to comply
with any applicable Blue-sky Law, the shares held by such shareholders will be
escrowed with counsel for the Company or otherwise as required.
(2) Except for the issuance of shares of capital stock by
the Company in connection with a dividend, recapitalization, reorganization or
similar transactions or as result of the exercise of warrants or options to
purchase up to 500,000 shares of Common Stock pursuant to an incentive/qualified
stock option plan disclosed in or issued or granted pursuant to plans disclosed
in the Registration Statement (so long as options granted pursuant to such plan
shall be exercisable at not less than the fair market value on the date of
grant), the Company shall not, for a period of thirty six (36) months following
the First Closing Date, directly or indirectly, offer, sell, issue or transfer
any shares of its capital stock, or any security exchangeable or exercisable
for, or convertible into, shares of the capital stock or (including stock
options) register any of its capital stock (under any form of registration
statement including Form S-8), without the prior written consent of the
Underwriter. Options granted pursuant to plans must be exercisable at the
fair market value on the date of grant. Notwithstanding the foregoing
provisions, the Company may issue securities during said thirty six (36) month
period in connection with acquisitions by the Company which would have a
positive effect on the Company's income statement based upon generally accepted
accounting principles.
(m) Upon completion of this offering, the Company will make
all filings required, including registration under the Exchange Act, to obtain
the listing of the Units, Common Stock and the Warrants on the NASD Electronic
Bulletin Board, and will use its best efforts to effect and maintain such
listing for at least five years from the date of this Agreement.
(n) Except for the transactions contemplated by this Agreement
and as disclosed in the Prospectus, the Company represents that it has not taken
and agrees that it will not take, directly or indirectly, any action designed to
or which has constituted or which might
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<PAGE>
reasonably be expected to cause or result in the stabilization or manipulation
of the price of any of the Securities.
(o) On the First Closing Date and simultaneously with the
delivery of the Units, the Company shall execute and deliver to you the Purchase
Option. The Purchase Option will be substantially in the form filed as an
Exhibit to the Registration Statement.
(p) On the First Closing Date, the Company will have in force
key person life insurance on the life of Harry Dugger in an amount of not less
than $1,000,000, payable to the Company, and will use its best efforts to
maintain such insurance during the three year period commencing with the First
Closing Date. In addition, the Company shall enter into employment agreements
with such individual and Mr. Moroney, upon terms and conditions satisfactory to
the Underwriter.
(q) So long as any Warrants are outstanding and the exercise
price of the Warrants is less than the market price of the Common Stock, the
Company shall use its best efforts to cause post-effective amendments to the
Registration Statement to become effective in compliance with the Act and
without any lapse of time between the effectiveness of any such post-effective
amendments and cause a copy of each Prospectus, as then amended, to be delivered
to each holder of record of a Warrant and to furnish to the Underwriter as many
copies of each such Prospectus as such Underwriter or dealer may reasonably
request. The Company shall not call for redemption of any of the Warrants unless
a registration statement covering the securities underlying the Warrants has
been declared effective by the Commission and remains current at least until the
date fixed for redemption.
(r) For a period of five (5) years following the Effective
Date, the Company will maintain registration with the Commission pursuant to
Section 12(g) of the Exchange Act and will provide to the Underwriter copies of
all filings made with the Commission pursuant to the Exchange Act. In the event
that the Company fails to maintain registration with the Commission pursuant to
Section 12(g) during such five year period, the Company will provide reasonable
access to an independent accountant designated by the Underwriter, to all
books, records and other documents or statements that reflect the Company's
financial status at least once each quarter, at the Company's expense.
(s) The Company agrees to pay the Underwriter a warrant solicitation
fee of 5.0% of the exercise price of any of the Warrants exercised beginning one
(1) year after the Effective Date (not including warrants exercised by the
Underwriter) if (a) the market price of the Company's Common Stock on the date
the Warrant is exercised is greater than the exercise price of the Warrant, (b)
the exercise of the Warrant was solicited by the Underwriter and the holder of
the warrant designates the Underwriter in writing as having solicited such
Warrant, (c) the Warrant is not held in a discretionary account, (d) disclosure
of the compensation arrangement is made upon the sale and exercise of the
Warrants, (e) soliciting the exercise is not in violation of Regulation M under
the Securities Exchange Act of 1934,
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<PAGE>
and (f) solicitation of the exercise is in compliance with the NASD Notice to
Members 81-38 (September 22, 1981).
(t) The Company shall retain American Stock Transfer & Trust
Company as its transfer agent for the Common Stock and as its warrant agent for
the Warrants for a period of five (5) years from the Effective Date. For a
period of two years from the Effective Date, at the request of the
Underwriter, the Company shall provide promptly, at the expense of the
Company, copies of the Company's monthly transfer sheets furnished to it by its
transfer agent and copies of the securities position listings provided to it by
the Depository Trust Company.
(u) The Company hereby agrees that:
(i) The Company will pay a finder's fee to the
Underwriter, equal to five percent (5%) of the first $3,000,000 of the
consideration involved in any transaction, 4% of the next $3,000,000 of
consideration involved in the transaction, 3% of the next $2,000,000, 2% of the
next $2,000,000 and 1% of the excess, if any, for future consummated
transactions, if any, introduced by the Underwriter (including mergers,
acquisitions, joint ventures, and any other business for the Company introduced
by the Underwriter) consummated by the Company (an "Introduced Consummated
Transaction"), in which the Underwriter introduced the other party to the
Company during a period ending five years following the First Closing Date; and
(ii) Any finder's fee due hereunder will be paid in
cash or other consideration that is acceptable to the Underwriter, at the
closing of the particular Introduced Consummated Transaction for which the
finder's fee is due.
(v) Upon the First Closing Date and simultaneously with the
delivery of the Securities, the Company shall execute and deliver to the
Underwriter, a two year financial consulting agreement in the form attached
as an Exhibit to the Registration Statement which shall require the Company to
pay the Underwriter $75,000 (the "Financial Consulting Agreement").
(w) For a period of two (2) years following the Effective Date
the Company, at its expense, shall cause its regularly engaged independent
certified public accountants to review (but not audit) the Company's financial
statements for each of the first three (3) fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's
10-Q quarterly report and the mailing of quarterly financial information to
stockholders, provided that the Company shall not be required to file a report
of such accountants relating to such review with the Commission. The Company
will retain its present legal counsel and independent certified public
accountants for at least one year from the Closing Date.
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<PAGE>
(x) For the two (2) year period commencing on the First
Closing Date, the Company shall recommend and use its best efforts to elect a
designee of the Underwriter as a member of the Company's Board of Directors.
Such designee shall serve on the Compensation Committee of the Board of
Directors so long as such designee would qualify as disinterested for the
purpose of Section 162(m) of the Internal Revenue Code of 1986, as amended.
Alternatively, the Underwriter may appoint an advisor who will be able to
attend all meetings of the Board of Directors. However, the Board of Directors
shall have the right to require such advisor to execute a confidentiality
agreement satisfactory to the Company. The Underwriter shall also have the
right to written notice no later than notice to other directors of each meeting
and to obtain copies of the minutes, if requested, from all Board of Directors
meetings for two (2) years following the Effective Date of the Registration
Statement, whether or not a nominee of the Underwriter attends or
participates in any such Board meeting. To the extent permitted by law, the
Company will indemnify the Underwriter and its designee for the actions of
such designee as a director of the Company. The Company will use its best
efforts to obtain liability insurance not to exceed $50,000 per year in premiums
to cover acts of officers and directors, including said designee. The Company
agrees to reimburse the Underwriter immediately upon the Underwriter's
request therefor of any reasonable travel and lodging expenses directly incurred
by the Underwriter in connection with its designee or Underwriter
attending Company Board meetings on the same basis for other Board members and
such designee shall be entitled to receive no more or less compensation than is
paid to other non-management directors of the Company.
(y) For a period of thirty (30) days from and after the
Effective Date, the Company will not issue a press release or engage in any
publicity other than promotion by the Company of its products and services and
other press releases in the ordinary course of its business, without the
Underwriter's prior written consent, unless required by law.
4. Conditions of Underwriter's Obligation. The obligations of the
Underwritesr to purchase and pay for the Units which it has agreed to purchase
hereunder, are subject to the accuracy (as of the date hereof, and as of the
Closing Dates) of and compliance with the representations and warranties of the
Company herein, to the performance by the Company of its obligations hereunder,
and to the following conditions:
(a) The Registration Statement shall have become effective and
you shall have received notice thereof not later than 10:00 A.M., New York time,
on the day following the date of this Agreement, or at such later time or on
such later date as to which you may agree in writing; on or prior to the Closing
Dates no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that or a similar purpose shall
have been instituted or shall be pending or, to your knowledge or to the
knowledge of the Company, shall be contemplated by the Commission; any request
on the part of the Commission for additional information shall have been
complied with to the satisfaction of the Commission; and no stop order shall be
in effect denying or suspending effectiveness of
16
<PAGE>
such qualification nor shall any stop order proceedings with respect thereto be
instituted or pending or threatened. If required, the Prospectus shall have been
filed with the Commission in the manner and within the time period required by
Rule 424(b) under the Act.
(b)(A) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of Reed Smith Shaw & McClay,
counsel for the Company, in form and substance satisfactory to counsel for the
Underwriter, to the effect that:
(i) the Company and its Subsidiaries have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of organization, with all requisite
corporate power and authority to own their properties and conduct their business
as described in the Registration Statement and Prospectus and are duly qualified
or licensed to do business as foreign corporations and are in good standing in
each other jurisdiction in which the ownership or leasing of their properties or
conduct of their business requires such qualification except where the failure
to qualify or be licensed will not have a Material Adverse Effect;
(ii) the authorized capitalization of the Company as
of _______, 1997 is as set forth in the Registration Statement; the Securities
as set forth in the Registration Statement have been duly authorized and upon
payment of consideration therefor, will be validly issued, fully paid and
non-assessable and conform in all material respects to the description thereof
contained in the Prospectus; to such counsel's knowledge the outstanding shares
of capital stock of the Company and its Subsidiaries have not been issued in
violation of the preemptive rights of any shareholder and to such counsel's
knowledge the shareholders of the Company do not have any preemptive rights or
other rights to subscribe for or to purchase, nor are there any restrictions
upon the voting or transfer of any of the capital stock except as provided in
the Prospectus or as required by law. The Securities, the Purchase Option and
the Warrant Agreement conform in all material respects to the respective
descriptions thereof contained in the Prospectus; the shares of Common Stock,
and the shares of Common Stock issuable upon exercise of Warrants, the Purchase
Option, and the Warrant Agreement will have been duly authorized and, when
issued and delivered in accordance with their respective terms, will be duly and
validly issued, fully paid, non-assessable, free of preemptive rights to the
best of their knowledge; to the best of their knowledge, all prior sales by the
Company of the Company's securities, have been made in compliance with or under
an exemption from registration under the Act and applicable state securities
laws; a sufficient number of shares of Common Stock has been reserved for
issuance upon exercise of the Warrants and Common Stock has been reserved for
issuance upon exercise of the Warrants contained in the Purchase Option and to
the best of such counsel's knowledge, neither the filing of the Registration
Statement nor the offering or sale of the Securities as contemplated by this
Agreement gives rise to any registration rights other than those which have been
waived or satisfied for or relating to the registration of any shares of Common
Stock;
17
<PAGE>
(iii) this Agreement, the Purchase Option, and the
Warrant Agreement have been duly and validly authorized, executed and delivered
by the Company;
(iv) the certificates evidencing the Securities as
described in the Registration Statement comply in all material respects with the
descriptions set forth therein, and comply with the New Jersey General
Corporation Law, as in effect on the date hereof; each Warrant will be
exercisable for one share of the Common Stock of the Company, respectively, and
at the prices provided for in the Warrant Agreement;
(v) except as otherwise disclosed in the Registration
Statement, such counsel knows of no pending or threatened legal or governmental
proceedings to which the Company or its Subsidiaries are a party which would
materially adversely affect the business, property, financial condition or
operations of the Company or its Subsidiaries; or which question the validity of
the Securities, this Agreement, the Warrant Agreement or the Purchase Option, or
of any action taken or to be taken by the Company pursuant to this Agreement,
the Warrant Agreement or the Purchase Option; to such counsel's knowledge there
are no governmental proceedings or regulations required to be described or
referred to in the Registration Statement which are not so described or referred
to;
(vi) the execution and delivery of this Agreement,
the Purchase Option or the Warrant Agreement and the incurrence of the
obligations herein and therein set forth and the consummation of the
transactions herein or therein contemplated, will not result in a breach or
violation of, or constitute a default under the certificate of incorporation or
by-laws of the Company or its Subsidiaries, or to the best knowledge of counsel
after due inquiry, in the performance or observance of any material obligations,
agreement, covenant or condition contained in any bond, debenture, note or other
evidence of indebtedness or in any material contract, indenture, mortgage, loan
agreement, lease, joint venture or other agreement or instrument to which the
Company or its Subsidiaries is a party or by which they or any of their
properties is bound or in violation of any order, rule, regulation, writ,
injunction, or decree of any government, governmental instrumentality or court,
domestic or foreign the result of which would have a Material Adverse Effect;
(vii) the Registration Statement has become effective
under the Act, and to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for that purpose have been instituted or are pending before, or
threatened by, the Commission; the Registration Statement and the Prospectus
(except for the financial statements and other financial data contained therein,
or omitted therefrom, as to which such counsel need express no opinion) as of
the Effective Date comply as to form in all material respects with the
applicable requirements of the Act and the Rules and Regulations;
(viii) in the course of preparation of the
Registration Statement and the Prospectus such counsel has participated in
conferences with the President of the Company
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<PAGE>
with respect to the Registration Statement and Prospectus and such discussions
did not disclose to such counsel any information which gives such counsel reason
to believe that the Registration Statement or any amendment thereto at the time
it became effective contained any untrue statement of a material fact required
to be stated therein or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus or any supplement thereto contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make statements
therein, in light of the circumstances under which they were made, not
misleading (except, in the case of both the Registration Statement and any
amendment thereto and the Prospectus and any supplement thereto, for the
financial statements, notes thereto and other financial information (including
without limitation, the pro forma financial information) and schedules contained
therein, as to which such counsel need express no opinion);
(ix) all descriptions in the Registration Statement
and the Prospectus, and any amendment or supplement thereto, of contracts and
other agreements to which the Company or its Subsidiaries is a party are
accurate and fairly present in all material respects the information required to
be shown, and such counsel is familiar with all contracts and other agreements
referred to in the Registration Statement and the Prospectus and any such
amendment or supplement or filed as exhibits to the Registration Statement, and
such counsel does not know of any contracts or agreements to which the Company
or its Subsidiaries is a party of a character required to be summarized or
described therein or to be filed as exhibits thereto which are not so
summarized, described or filed;
(x) no authorization, approval, consent, or license
of any governmental or regulatory authority or agency is necessary in connection
with the authorization, issuance, transfer, sale or delivery of the Securities
by the Company, in connection with the execution, delivery and performance of
this Agreement by the Company or in connection with the taking of any action
contemplated herein, or the issuance of the Purchase Option or the Securities
underlying the Purchase Option, other than registrations or qualifications of
the Securities under applicable state or foreign securities or Blue Sky laws and
registration under the Act; and
(xi) the Units, shares of Common Stock and the
Warrants have been duly authorized for quotation on the NASD Electronic Bulletin
Board.
(xii) Except as disclosed in the Registration
Statement, to the best knowledge of such counsel, the Company has sufficient
licenses, permits, and other governmental authorizations currently necessary for
the conduct of its business or the ownership of its properties as described in
the Prospectus and is in all material respects complying therewith. To the best
knowledge of such counsel, the business of the Company is not in violation of,
or will not cause the Company to violate any law, rule, regulation, or order of
the United States, any state, county, or locality, or of any agency or body of
the United States, or of any state, county, or locality, the violation of which
would have a
19
<PAGE>
Material Adverse Effect and are in compliance with all rules and regulations
pertaining to the business of the Company.
Such opinion shall also cover such matters incident to the
transactions contemplated hereby as the Underwriter or counsel for the
Underwriter shall reasonably request. In rendering such opinion, such counsel
may rely upon certificates of any officer of the Company or public officials as
to matters of fact; and may rely as to all matters of law other than the law of
the United States or of the State of New York or New Jersey upon opinions of
counsel satisfactory to you, in which case the opinion shall state that they
have no reason to believe that you and they are not entitled to so rely.
(B) At the First Closing Date, you shall have received the
opinion of special patent counsel, in form and substance satisfactory to you,
identifying any patent searches conducted with respect to the Company's patents
and patent applications and providing that the description in the Registration
Statement with respect to the status of such patents and patent applications is
accurate, that the Company owns the entire right, title and interest in and to
such patents and patent applications as described in the Prospectus and has not
received any notice of conflict with the asserted rights of others in respect
thereof, that no third party has any rights to any of the patents and patent
applications, no interference has been declared or provoked with respect to any
of the patents or patent applications, there have been no inventorship
challenges with respect to any of the patents and patent applications, and that
the statements in the Prospectus under the captions "Risk Factors - Patents and
Protection of Proprietary Information", "Business - Patents and Protection of
Proprietary Information" are true and correct.
(c) Intentionally Omitted.
(d) All corporate proceedings and other legal matters relating
to this Agreement, the Registration Statement, the Prospectus and other related
matters shall be satisfactory to or approved by Bernstein & Wasserman, LLP,
counsel to the Underwriter.
(e) You shall have received a letter prior to the Effective
Date and again on and as of the First Closing Date from Wiss & Company, LLP,
independent public accountants for the Company, substantially in the form
reasonably acceptable to you, providing you with such "cold comfort" as you may
reasonably require.
(f) At the Closing Dates, (i) the representations and
warranties of the Company contained in this Agreement shall be true and correct
in all material respects with the same effect as if made on and as of the
Closing Dates taking into account for the Option Closing Dates the effect of the
transactions contemplated hereby and the Company or its Subsidiaries shall have
performed all of its obligations hereunder and satisfied all the conditions on
its part to be satisfied at or prior to such Closing Date; (ii) the Registration
Statement and the Prospectus and any amendments or supplements thereto shall
contain all
20
<PAGE>
statements which are required to be stated therein in accordance with the Act
and the Rules and Regulations, and shall in all material respects conform to the
requirements thereof, and neither the Registration Statement nor the Prospectus
nor any amendment or supplement thereto shall contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading; (iii) there shall
have been, since the respective dates as of which information is given, no
material adverse change, or to the Company or its Subsidiaries's knowledge, any
development involving a prospective material adverse change, in the business,
properties, condition (financial or otherwise), results of operations, capital
stock, long-term or short-term debt or general affairs of the Company or its
Subsidiaries from that set forth in the Registration Statement and the
Prospectus, except changes which the Registration Statement and Prospectus
indicate might occur after the effective date of the Registration Statement, and
the Company or its Subsidiaries shall not have incurred any material liabilities
or entered into any material agreement not in the ordinary course of business
other than as referred to in the Registration Statement and Prospectus; (iv)
except as set forth in the Prospectus, no action, suit or proceeding at law or
in equity shall be pending or threatened against the Company or its Subsidiaries
which would be required to be set forth in the Registration Statement, and no
proceedings shall be pending or threatened against the Company or its
Subsidiaries before or by any commission, board or administrative agency in the
United States or elsewhere, wherein an unfavorable decision, ruling or finding
would materially and adversely affect the business, property, condition
(financial or otherwise), results of operations or general affairs of the
Company or its Subsidiaries, and (v) you shall have received, at the First
Closing Date, a certificate signed by each of the President and the principal
operating officer of the Company or its Subsidiaries, dated as of the First
Closing Date, evidencing compliance with the provisions of this subsection (f).
(g) Upon exercise of the Over-Allotment Option provided for in
Section 2(b) hereof, the obligations of the Underwriter to purchase and pay for
the Option Units referred to therein will be subject (as of the date hereof and
as of the Option Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective
at the Option Closing Date, and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose shall have
been instituted or shall be pending, or, to your knowledge or the knowledge of
the Company, shall be contemplated by the Commission, and any reasonable request
on the part of the Commission for additional information shall have been
complied with to the satisfaction of the Commission.
(ii) At the Option Closing Date there shall have been delivered to you
the signed opinions of Reed Smith Shaw & McClay, counsel to the Company, and ,
special patent counsel to the Company, dated as of the Option Closing Date, in
form and substance reasonably satisfactory to Bernstein & Wasserman, LLP,
counsel to the Underwriter, which opinion shall be substantially the same in
scope and substance as the
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opinion furnished to you at the First Closing Date pursuant to Sections 4(b)
hereof, except that such opinion, where appropriate, shall cover the Option
Securities.
(iii) At the Option Closing Date there shall have be
delivered to you a certificate of the President and the principal operating
officer of the Company, dated the Option Closing Date, in form and substance
reasonably satisfactory to Bernstein & Wasserman, LLP, counsel to the
Underwriter, substantially the same in scope and substance as the certificate
furnished to you at the First Closing Date pursuant to Section 4(f) hereof.
(iv) At the Option Closing Date there shall have been
delivered to you a letter in form and substance satisfactory to you from Wiss &
Company, LLP, dated the Option Closing Date and addressed to the Underwriter
confirming the information in their letter referred to in Section 4(e) hereof
and stating that nothing has come to their attention during the period from the
ending date of their review referred to in said letter to a date not more than
five business days prior to the Option Closing Date, which would require any
change in said letter if it were required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option
Closing Date in connection with the sale and issuance of the Option Units shall
be reasonably satisfactory in form and substance to you, and you and Bernstein &
Wasserman, LLP, counsel to the Underwriter, shall have been furnished with
all such documents, certificates, and opinions as you may reasonably request in
connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties or statements of the
Company or its compliance with any of the covenants or conditions contained
herein.
(h) No action shall have been taken by the Commission or the
NASD the effect of which would make it improper, at any time prior to the
Closing Date, for members of the NASD to execute transactions (as principal or
agent) in the Securities and no proceedings for the taking of such action shall
have been instituted or shall be pending, or, to the knowledge of the
Underwriter or the Company, shall be contemplated by the Commission or the NASD.
The Company and the Underwriter represent that at the date hereof each has no
knowledge that any such action is in fact contemplated against it by the
Commission or the NASD.
(i) If any of the conditions herein provided for in this
Section shall not have been fulfilled in all material respects as of the date
indicated, this Agreement and all obligations of the Underwriter under this
Agreement may be canceled at, or at any time prior to, each Closing Date by the
Underwriter notifying the Company of such cancellation in writing or by
telegram at or prior to the applicable Closing Date. Any such cancellation shall
be without liability of the Underwriter to the Company.
5. Conditions of the Obligations of the Company, The obligation of
the Company to sell and deliver the Units is subject to the following
conditions:
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(a) The Registration Statement shall have become effective not
later than 10:00 A.M. New York time, on the day following the date of this
Agreement, or on such later date as the Company and the Underwriter may agree in
writing.
(b) At the Closing Dates, no stop orders suspending the
effectiveness of the Registration Statement shall have been issued under the Act
or any proceedings therefor initiated or threatened by the Commission.
If the conditions to the obligations of the Company provided
for in this Section have been fulfilled on the First Closing Date but are not
fulfilled after the First Closing Date and prior to the Option Closing Date,
then only the obligation of the Company to sell and deliver the Units on
exercise of the Over-Allotment Option provided for in Section 2(b) hereof shall
be affected.
6. Indemnification.
(a) The Company agrees (i) to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against
any losses, claims, damages or liabilities, joint or several (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees), to which
such Underwriter or such controlling person may become subject, under the Act
or otherwise, and (ii) to reimburse, as incurred, the Underwriters and such
controlling persons for any legal or other expenses reasonably incurred in
connection with investigating, defending against or appearing as a third party
witness in connection with any losses, claims, damages or liabilities; insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
relating to (i) and (ii) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in (A) the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, (B) any blue sky application or other document executed by
the Company specifically for that purpose containing written information
specifically furnished by the Company and filed in any state or other
jurisdiction in order to qualify any or all of the Securities under the
securities laws thereof (any such application, document or information being
hereinafter called a "Blue Sky Application"), or arise out of or are based upon
the omission or alleged omission to state in the Registration Statement, any
Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or
in any Blue Sky Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be required to indemnify the Underwriter and any
controlling person or be liable in any such case to the extent, but only to the
extent, that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written information
furnished to the Company by or on behalf of the Underwriter specifically for
use in the preparation of the Registration
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<PAGE>
Statement or any such amendment or supplement thereof or any such Blue Sky
Application or any such preliminary Prospectus or the Prospectus or any such
amendment or supplement thereto, provided, further that the indemnity with
respect to any Preliminary Prospectus shall not be applicable on account of any
losses, claims, damages, liabilities or litigation arising from the sale of
Securities to any person if a copy of the Prospectus was not delivered to such
person at or prior to the written confirmation of the sale to such person. This
indemnity will be in addition to any liability which the Company may otherwise
have.
(b) The Underwriter will indemnify and hold harmless the
Company, each of its directors, each nominee (if any) for director named in the
Prospectus, each of its officers who have signed the Registration Statement and
each person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and reasonable attorneys' fees) to which the Company or any
such director, nominee, officer or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or any Blue Sky Application in reliance upon and in
conformity with written information furnished to the Company by the Underwriter
specifically for use in the preparation thereof and for any violation by the
Underwriter in the sale of such Securities of any applicable state or federal
law or any rule, regulation or instruction thereunder relating to violations
based on unauthorized statements by Underwriter or its representative; provided
that such violation is not based upon any violation of such law, rule or
regulation or instruction by the party claiming indemnification or inaccurate or
misleading information furnished by the Company or its representatives,
including information furnished to the Underwriter as contemplated herein. This
indemnity agreement will be in addition to any liability which the Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify in writing the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to
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<PAGE>
the provisions herein stated, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that the reasonable fees and expenses of such counsel shall be at the expense of
the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party or (ii) the named
parties to any such action (including any impleaded parties) include both the
indemnified party and the indemnifying party and in the reasonable judgment of
the counsel to the indemnified party, it is advisable for the indemnified party
to be represented by separate counsel (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of such
indemnified party, it being understood, however, that the indemnifying party
shall not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys for the indemnified party,
which firm shall be designated in writing by the indemnified party). No
settlement of any action against an indemnified party shall be made without the
consent of the indemnified party, which shall not be unreasonably withheld in
light of all factors of importance to such indemnified party. If it is
ultimately determined that indemnification is not permitted, then an indemnified
party will return all monies advanced to the indemnifying party.
7. Contribution.
In order to provide for just and equitable contribution under the Act
in any case in which the indemnification provided in Section 6 hereof is
requested but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case, notwithstanding the fact that the express provisions of
Section 6 provide for indemnification in such case, then the Company and each
person who controls the Company, in the aggregate, and the Underwriter shall
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (which shall, for all purposes of this Agreement, include, but
not be limited to, all reasonable costs of defense and investigation and all
reasonable attorneys' fees) (after contribution from others) in such proportions
that the Underwriter is responsible in the aggregate for that portion of such
losses, claims, damages or liabilities represented by the percentage that the
underwriting discount for each of the Units appearing on the cover page of the
Prospectus bears to the public offering price appearing thereon and the Company
shall be responsible for the remaining portion; provided, however, that if such
allocation is not permitted by applicable
25
<PAGE>
law then allocated in such proportion as is appropriate to reflect relative
benefits but also the relative fault of the Company and the Underwriter and
controlling persons, in the aggregate, in connection with the statements or
omissions which resulted in such damages and other relevant equitable
considerations shall also be considered. The relative fault shall be determined
by reference to, among other things, whether in the case of an untrue statement
of a material fact or the omission to state a material fact, such statement or
omission relates to information supplied by the Company or the Underwriter and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The Company and the
Underwriter agree that it would not be just and equitable if the respective
obligations of the Company and the Underwriter to contribute pursuant to this
Section 7 were to be determined by pro rata or per capita allocation of the
aggregate damages or by any other method of allocation that does not take
account of the equitable considerations referred to in this Section 7. No person
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who is not guilty of
such fraudulent misrepresentation. As used in this paragraph, the word "Company"
includes any officer, director, or person who controls the Company within the
meaning of Section 15 of the Act. If the full amount of the contribution
specified in this paragraph is not permitted by law, then the Underwriter and
each person who controls the Underwriter shall be entitled to contribution from
the Company, its officers, directors and controlling persons, and the Company,
its officers, directors and controlling persons shall be entitled to
contribution from the Underwriter to the full extent permitted by law. The
foregoing contribution agreement shall in no way affect the contribution
liabilities of any persons having liability under Section 11 of the Act other
than the Company and the Underwriter. No contribution shall be requested with
regard to the settlement of any matter from any party who did not consent to the
settlement; provided, however, that such consent shall not be unreasonably
withheld in light of all factors of importance to such party.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or the
sale of the Securities to the Underwriter is consummated, the Company will pay
all costs and expenses incident to the performance of this Agreement by the
Company including, but not limited to, the fees and expenses of counsel to the
Company and of the Company's accountants; the costs and expenses incident to the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including the financial statements therein and all amendments and
exhibits thereto), Preliminary Prospectus and the Prospectus, as amended or
supplemented, the fee of the NASD in connection with the filing required by the
NASD relating to the offering of the Units contemplated hereby; all expenses,
including reasonable fees not to exceed $40,000 and disbursements of counsel to
the Underwriter, in connection with the qualification of the Securities under
the state securities or blue sky laws which the Underwriter shall designate;
the cost of printing and furnishing to the Underwriter copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, and the Blue Sky Memorandum, any fees relating to the listing of the
Units, Common Stock and Warrants on Nasdaq or any
26
<PAGE>
other securities exchange, the cost of printing the certificates representing
the Securities; fees for bound volumes and prospectus memorabilia and the fees
of the transfer agent and warrant agent. The Company shall pay any and all taxes
(including any transfer, franchise, capital stock or other tax imposed by any
jurisdiction) on sales to the Underwriter hereunder. The Company will also pay
all costs and expenses incident to the furnishing of any amended Prospectus or
of any supplement to be attached to the Prospectus as called for in Section 3(a)
of this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses, the Company shall
at the First Closing Date pay to the Underwriter a non-accountable expense
allowance of $119,475. In the event the overallotment option is exercised, the
Company shall pay to the Underwriter at the Option Closing Date an additional
amount in the aggregate equal to 3% of the gross proceeds received upon exercise
of the overallotment option. In the event the transactions contemplated hereby
are not consummated by reason of any action by the Underwriter (except if such
prevention is based upon a breach by the Company of any covenant, representation
or warranty contained herein or because any other condition to the Underwriters'
obligations hereunder required to be fulfilled by the Company is not fulfilled)
the Company shall not be liable for any expenses of the Underwriter, including
the Underwriters' legal fees. In the event the transactions contemplated hereby
are not consummated by reason of the Company being unable to perform its
obligations hereunder in all material respects, the Company shall be liable for
the actual accountable out-of-pocket expenses of the Underwriter, including
reasonable legal fees.
(c) Except as disclosed in the Registration Statement, no
person is entitled either directly or indirectly to compensation from the
Company, from the Underwriter or from any other person for services as a finder
in connection with the proposed offering, and the Company agrees to indemnify
and hold harmless the Underwriter, against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
reasonable attorneys' fees), to which the Underwriter or person may become
subject insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon the claim of any person (other
than an employee of the party claiming indemnity) or entity that he or it is
entitled to a finder's fee in connection with the proposed offering by reason of
such person's or entity's influence or prior contact with the indemnifying
party.
9. Effective Date.
The Agreement shall become effective upon its execution except
that you may, at your option, delay its effectiveness until 11:00 A.M., New York
time on the first full business day following the effective date of the
Registration Statement, or at such earlier time on such business day after the
effective date of the Registration Statement as you in your discretion shall
first commence the public offering of the Units. The time of the initial public
offering shall mean the time of release by you of the first newspaper
advertisement with
27
<PAGE>
respect to the Securities, or the time when the Securities are first generally
offered by you to dealers by letter or telegram, whichever shall first occur.
This Agreement may be terminated by you at any time before it becomes effective
as provided above, except that Sections 3(c), 6, 7, 8, 12, 13, 14 and 15 shall
remain in effect notwithstanding such termination.
10. Termination.
(a) After this Agreement becomes effective, this Agreement,
except for Sections 3(c), 6, 7, 8, 12, 13, 14 and 15 hereof, may be terminated
at any time prior to the First Closing Date, by you if in your judgment (i)
trading in securities on the New York Stock Exchange or the American Stock
Exchange having been suspended or limited, (ii) material governmental
restrictions have been imposed on trading in securities generally (not in force
and effect on the date hereof), (iii) a banking moratorium has been declared by
federal or New York, New Jersey or California state authorities, (iv) an
outbreak of major international hostilities involving the United States or other
substantial national or international calamity has occurred, (v) the passage by
the Congress of the United States or by any state legislative body of similar
impact, of any act or measure, or the adoption of any orders, rules or
regulations by any governmental body or any authoritative accounting institute
or board, or any governmental executive, which is reasonably believed likely by
the Underwriter to have a material adverse impact on the business, financial
condition or financial statements of the Company; or (vi) any material adverse
change having occurred, since the respective dates of which information is given
in the Registration Statement and Prospectus, in the earnings, business
prospects or general condition of the Company, financial or otherwise, whether
or not arising in the ordinary course of business.
(b) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 10, the
Company shall be promptly notified by you, by telephone or telegram, confirmed
by letter.
11. Purchase Option.
At or before the First Closing Date, the Company will sell the
Underwriter or its designees for a consideration of $10, and upon the terms and
conditions set forth in the form of Purchase Option annexed as an exhibit to the
Registration Statement, a Purchase Option to purchase an aggregate of 67,500
Units. In the event of conflict in the terms of this Agreement and the Purchase
Option with respect to language relating to the Purchase Option, the language of
the Purchase Option shall control.
12. Representations and Warranties of the Underwriter.
The Underwriter represents and warrants to the Company that it
is registered as a broker-dealer in all jurisdictions in which it is offering
the Units and that it will comply with
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<PAGE>
all applicable state or federal laws relating to the sale of the Units,
including but not limited to, violations based on unauthorized statements by the
Underwriter or its representatives.
13. Representations, Warranties and Agreements to Survive Delivery.
The respective indemnities, agreements, representations,
warranties and other statements of the Company and the Underwriter and the
undertakings set forth in or made pursuant to this Agreement will remain in full
force and effect until three years from the date of this Agreement, regardless
of any investigation made by or on behalf of the Underwriter, the Company or
any of its officers or directors or any controlling person and will survive
delivery of and payment of the Securities and the termination of this Agreement.
14. Notice.
Any communications specifically required hereunder to be in
writing, if sent to the Representative, will be mailed, delivered or telecopied
and confirmed to them at Monroe Parker Securities, Inc., 2500 Westchester
Avenue, Purchase, New York 10577, with a copy sent to Bernstein & Wasserman,
LLP, 950 Third Avenue, New York, New York 10022, Attention: Stuart Neuhauser,
Esq. or if sent to the Company, will be mailed, delivered or telecopied and
confirmed to it at 43 Emery Avenue, Flemington, NJ 08822, with a copy sent to
Reed Smith Shaw & McClay, One Riverfront Plaza, Newark, NJ 07102-5311, Attn:
Gerard S. Difiore, Esq. Notice shall be deemed to have been duly given if mailed
or transmitted by any standard form of telecommunication.
15. Parties in Interest.
The Agreement herein set forth is made solely for the benefit
of the Underwriter, the Company, any person controlling the Company or the
Underwriter, and directors of the Company, nominees for directors (if any)
named in the Prospectus, its officers who have signed the Registration
Statement, and their respective executors, administrators, successors, assigns
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser, as
such purchaser, from the Underwriter of the Units.
16. Applicable Law.
This Agreement will be governed by, and construed in
accordance with, of the laws of the State of New York applicable to agreements
made and to be entirely performed within New York.
17. Counterparts.
This agreement may be executed in one or more counterparts
each of which shall be deemed to constitute an original and shall become
effective when one or more counterparts have been signed by each of the parties
hereto and delivered to the other parties (including by fax, followed by
original copies by overnight mail).
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<PAGE>
18. Entire Agreement; Amendments.
This Agreement constitutes the entire agreement of the parties
hereto and supersedes all prior written or oral agreements, understandings and
negotiations with respect to the subject matter hereof. This Agreement may not
be amended except in writing, signed by the Underwriter and the Company.
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the Underwriters in accordance with
its terms.
Very truly yours,
FLEMINGTON PHARMACEUTICAL CORPORATION
By: __________________________________
Name:
Title:
The foregoing Underwriting Agreement is hereby confirmed and
accepted as of the date first above written.
MONROE PARKER SECURITIES, INC.
By: ____________________________________
Name: Stephen J. Drescher
Title: Director Corporate Finance
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<PAGE>
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. NO
OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE
CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY
SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY
KIND, AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE
DATE.
FLEMINGTON PHARMACEUTICAL CORPORATION
675,000 UNITS CONSISTING OF
675,000 SHARES OF COMMON STOCK, $.01 PAR VALUE
AND
675,000 CLASS A REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
SELECTED DEALERS AGREEMENT
_______ __, 1997
Dear Sirs:
1. Monroe Parker Securities, Inc. (the "Underwriter"), has agreed to
offer on a firm commitment basis, subject to the terms and conditions and
execution of the Underwriting Agreement, 675,000 Units each consisting of one
(1) share of Common Stock, par value $.01 per share ("Common Stock") of
Flemington Pharmaceutical Corporation (the "Company") and one (1) Class A
Redeemable Common Stock Purchase Warrant ("Warrant") (hereinafter, collectively
referred to as the "Units"; including any shares of Common Stock and Warrants
offered pursuant to an over-allotment option, the "Firm Units"). Each Warrant is
exercisable to purchase one (1) share of Common Stock. The Firm Units are more
particularly described in the enclosed Preliminary Prospectus, additional copies
of which, as well as the Prospectus (after effective date), will be supplied in
reasonable quantities upon request.
2. The Underwriter is soliciting offers to buy Units, upon the terms
and conditions hereof, from Selected Dealers, who are to act as principals,
including you, who are (i) registered with the Securities and Exchange
Commission ("the Commission") as broker-dealers under the Securities Exchange
Act of 1934, as amended ("the 1934 Act"), and members in good standing
<PAGE>
with the National Association of Securities Dealers, Inc. ("the NASD"), or (ii)
dealers of institutions with their principal place of business located outside
the United States, its territories and possessions and not registered under the
1934 Act who agree to make no sales within the United States, its territories
and possessions or to persons who are nationals thereof or residents therein
and, in making sales, to comply with the NASD's interpretation with respect to
free-riding and withholding. The Units are to be offered to the public at a
price of $5.90 per Unit. Selected Dealers will be allowed a concession of not
less than __% of the aggregate offering price. You will be notified of the
precise amount of such concession prior to the effective date of the
Registration Statement. The offer is solicited subject to the issuance and
delivery of the Units and their acceptance by the Underwriter, to the
approval of legal matters by counsel and to the terms and conditions as herein
set forth.
3. Your offer to purchase may be revoked in whole or in part without
obligation or commitment of any kind by you any time prior to acceptance and no
offer may be accepted by us and no sale can be made until after the registration
statement covering the Units has become effective with the Commission. Subject
to the foregoing, upon execution by you of the Offer to Purchase below and the
return of same to us, you shall be deemed to have offered to purchase the number
of Units set forth in your offer on the basis set forth in paragraph 2 above.
Any oral notice by us of acceptance of your offer shall be immediately followed
by written or telegraphic confirmation preceded or accompanied by a copy of the
Prospectus. If a contractual commitment arises hereunder, all the terms of this
Selected Dealers Agreement shall be applicable. We may also make available to
you an allotment to purchase Units, but such allotment shall be subject to
modification or termination upon notice from us any time prior to an exchange of
confirmations reflecting completed transactions. All references hereafter in
this Agreement to the purchase and sale of the Units assume and are applicable
only if contractual commitments to purchase are completed in accordance with the
foregoing.
4. You agree that in re-offering the Units, if your offer is accepted
after the Effective Date, you will make a bona fide public distribution of same.
You will advise us upon request of the Units purchased by you remaining unsold,
and we shall have the right to repurchase such Units upon demand at the public
offering price less the concession as set forth in paragraph 2 above. Any of the
Units purchased by you pursuant to this Agreement are to be re-offered by you to
the public at the public offering price, subject to the terms hereof and shall
not be offered or sold by you below the public offering price before the
termination of this Agreement.
5. Payment for Units which you purchase hereunder shall be made by you
on such date as we may determine by certified or bank cashier's check payable in
New York Clearinghouse funds to Monroe Parker Securities, Inc. Certificates for
the Securities shall be delivered as soon as practicable at the offices of
Monroe Parker Securities, Inc., 2500 Westchester Avenue, Purchase, New York
10577. Unless specifically authorized by us, payment by you may not be deferred
until delivery of certificates to you.
6. A registration statement covering the offering has been filed with
the Commission
2
<PAGE>
in respect to the Units. You will be promptly advised when the registration
statement becomes effective. Each Selected Dealer in selling the Units pursuant
hereto agrees (which agreement shall also be for the benefit of the Company)
that it will comply with the applicable requirements of the Securities Act of
1933 and of the 1934 Act and any applicable rules and regulations issued under
said Acts. No person is authorized by the Company or by the Underwriter to
give any information or to make any representations other than those contained
in the Prospectus in connection with the sale of the Units. Nothing contained
herein shall render the Selected Dealers a member of the underwriting group or
partners with the Underwriter or with one another.
7. You will be informed by us as to the states in which we have been
advised by counsel the Units have been qualified for sale or are exempt under
the respective securities or blue sky laws of such states, but we have not
assumed and will not assume any obligation or responsibility as to the right of
any Selected Dealer to sell Units in any state.
8. The Underwriter shall have full authority to take such action as
we may deem advisable in respect of all matters pertaining to the offering or
arising thereunder. The Underwriter shall not be under any liability to you,
except such as may be incurred under the Securities Act of 1933 and the rules
and regulations thereunder, except for lack of good faith and except for
obligations assumed by us in this Agreement, and no obligation on our part shall
be implied or inferred herefrom.
9. Selected Dealers will be governed by the conditions herein set forth
until this Agreement is terminated. This Agreement will terminate when the
offering is completed. Nothing herein contained shall be deemed a commitment on
our part to sell you any Units; such contractual commitment can only be made in
accordance with the provisions of paragraph 3 hereof.
10. You represent that you are a member in good standing of the
National Association of Securities Dealers, Inc. ("Association") and registered
as a broker-dealer or are not eligible for membership under Section I of the
By-Laws of the Association who agree to make no sales within the United States,
its territories or possessions or to persons who are nationals thereof or
residents therein and, in making sales, to comply with the NASD's interpretation
with respect to free-riding and withholding. Your attention is called to the
following: (a) Rules 2730, 2740,2420 and 2750 of the NASD Conduct Rules of the
Association and the interpretations of said Section promulgated by the Board of
Governors of such Association including the interpretation with respect to
"Free-Riding and Withholding"; (b) Section 10(b) of the 1934 Act and Rules
10b-6 and 10b-10 of the general rules and regulations promulgated under said
Act; (c) Securities Act Release #3907; (d) Securities Act Release #4150; and (e)
Securities Act Release #4968 requiring the distribution of a Preliminary
Prospectus to all persons reasonably expected to be purchasers of Units from you
at least 48 hours prior to the time you expect to mail confirmations. You, if a
member of the Association, by signing this Agreement, acknowledge that you are
familiar with the cited law, rules and releases, and agree that you will not
directly and/or indirectly violate any provisions of applicable law in
connection with your participation in the distribution of the Units.
3
<PAGE>
11. In addition to compliance with the provisions of paragraph 10
hereof, you will not, until advised by us in writing or by wire that the entire
offering has been distributed and closed, bid for or purchase Units or its
component securities in the open market or otherwise make a market in such
securities or otherwise attempt to induce others to purchase such securities in
the open market. Nothing contained in this paragraph 11 shall, however, preclude
you from acting as agent in the execution of unsolicited orders of customers in
transactions effectuated for them through a market maker.
12. You understand that the Underwriter may in connection with the
offering engage in stabilizing transactions. If the Underwriter contracts for
or purchases in the open market in connection with such stabilization any Units
sold to you hereunder and not effectively placed by you, the Underwriter may
charge you the Selected Dealer's concession originally allowed you on the Units
so purchased, and you agree to pay such amount to us on demand.
13. By submitting an Offer to Purchase you confirm that your net
capital is such that you may, in accordance with Rule 15c3-1 adopted under the
1934 Act, agree to purchase the number of Units you may become obligated to
purchase under the provisions of this Agreement.
14. You agree that (i) you shall not recommend to a customer the
purchase of Firm Units unless you shall have reasonable grounds to believe that
the recommendation is suitable for such customer on the basis of information
furnished by such customer concerning the customer's investment objectives,
financial situation and needs, and any other information known to you, (ii) in
connection with all such determinations, you shall maintain in your files the
basis for such determination, and (iii) you shall not execute any transaction in
Firm Units in a discretionary account without the prior specific written
approval of the customer.
4
<PAGE>
15. You represent that neither you nor any of your affiliates or
associates owns any Common Stock of the Company.
16. All communications from you should be directed to us at the office
of Monroe Parker Securities, Inc., 2500 Westchester Avenue, Purchase, New York
10577. All communications from us to you shall be directed to the address to
which this letter is mailed.
Very truly yours,
MONROE PARKER SECURITIES, INC.
By:_______________________________________
Name:
Title:
ACCEPTED AND AGREED TO AS OF THE ______
DAY OF ____________, 1997
[Name of Dealer]
By: ____________________________
Its
5
<PAGE>
TO: Monroe Parker Securities, Inc.
2500 Westchester Avenue
Purchase, New York 10577
We hereby subscribe for Units of Flemington Pharmaceutical Corporation
in accordance with the terms and conditions stated in the foregoing letter. We
hereby acknowledge receipt of the Prospectus referred to in the first paragraph
thereof relating to said Units. We further state that in purchasing said Units
we have relied upon said Prospectus and upon no other statement whatsoever,
whether written or oral. We confirm that we are a dealer actually engaged in the
investment banking or securities business and that we are either (i) a member in
good standing of the National Association of Securities Dealers, Inc. (the
"NASD") or (ii) a dealer with its principal place of business located outside
the United States, its territories and its possessions and not registered as a
broker or dealer under the Securities Exchange Act of 1934, as amended, who
hereby agrees not to make any sales within the United States, its territories or
its possessions or to persons who are nationals thereof or residents therein. We
hereby agree to comply with the provisions of Rule 2740 of the NASD Conduct
Rules, and if we are a foreign dealer and not a member of the NASD, we also
agree to comply with the NASD's interpretation with respect to free-riding and
withholding, to comply, as though we were a member of the NASD, with the
provisions of Rules 2730 and 2750 of the NASD Conduct Rules.
Name of
Dealer: ___________________________________
By: ____________________________________
Address: ___________________________________
___________________________________
Dated: _________________, 1997
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FINANCIAL CONSULTING AGREEMENT
Agreement made this ____ day of _______, 1997 by and between
Monroe Parker Securities, Inc.("Consultant") and Flemington Pharmaceutical
Corporation (the "Company").
WHEREAS, the Company desires to obtain Consultant's consulting
services in connection with the Company's business and financial affairs, and
Consultant is willing to render such services as hereinafter more fully set
forth.
NOW, THEREFORE, the parties hereby agree as follows:
1. The Company hereby engages and retains Consultant and
Consultant hereby agrees to use its best efforts, to render to the Company the
consulting services hereinafter described for a period of two (2) years
commencing as of, and conditioned upon, the closing of the underwriting
contemplated in the Registration Statement on Form SB-2, No. 333-_______,
declared effective by the Securities and Exchange Commission on __________,
1997.
2. Consultant's services hereunder shall consist of
consultations with the Company concerning investment banking and other financial
matters to be determined by the Company.
3. The Company agrees that Consultant shall not be precluded
during the term of this Agreement from providing other consulting services or
engaging in any other business activities whether or not such consulting
services or business activities are pursued for gain, profit or other pecuniary
advantage and whether or not such consulting activities are in direct or
indirect competition with the business activities of the Company.
4. The Company agrees to pay to Consultant for its services
hereunder the sum of $75,000 of the gross proceeds of the Company's initial
public offering. The Company agrees that the entire sum due to Consultant
hereunder shall be paid in full on the date hereof.
5. Consultant shall be entitled to reimbursement by the
Company of such reasonable out-of-pocket expenses as Consultant may incur in
performing services under this Agreement.
<PAGE>
6. All final decisions with respect to consultations or
services rendered by Consultant pursuant to this Agreement shall be those of the
Company, and there shall be no liability on the part of the Consultant in
respect thereof. This Agreement and the Underwriting Agreement dated __________,
1997 contain the entire agreement of the parties hereto with respect to the
subject matter hereof, and there are no representations or warranties other than
as shall be herein or therein set forth. No waiver or modification hereof shall
be valid unless in writing. No waiver of any term, provision or condition of
this Agreement, in any one or more instance, shall constitute a waiver of any
other provision thereof, whether or not similar, nor shall such waiver
constitute a continuing waiver.
7. This Agreement shall be governed, construed and enforced in
accordance with the laws of the State of New York, without regard to the
principals of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have caused the
agreement to be signed as of the day and year first above written.
FLEMINGTON PHARMACEUTICAL CORPORATION
By:____________________________
Name:
Title:
MONROE PARKER SECURITIES, INC.
By:___________________________
Name: Stephen J. Drescher
Title: Director
Corporate Finance
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WARRANT AGREEMENT
AGREEMENT, dated as of this ____ day of _______, 1997, by and between
FLEMINGTON PHARMACEUTICAL CORPORATION, a New Jersey corporation ("Company"), and
American Stock Transfer & Trust
Company, as Warrant Agent (the "Warrant Agent").
WITNESSETH:
WHEREAS, in connection with a public offering of up to 776,250 Units,
each consisting of one (1) share of Common Stock, par value $.01 per share, and
one (1) Class A Redeemable Common Stock Purchase Warrant (the "Warrant")
pursuant to an underwriting agreement (the "Underwriting Agreement") dated
__________, 1997 between the Company and Monroe Parker Securities, Inc.
("Monroe"), and the issuance to Monroe or its designees of a Purchase Option to
purchase 67,500 additional Units, consisting of 67,500 shares of Common Stock
and 67,500 Warrants (the "Purchase Option"), the Company will issue up to
843,750 Warrants;
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
<PAGE>
(a) "Common Stock" shall mean the common stock of the Company
which at the date hereof consists of __________ authorized shares, par value
$.01 per share, and shall also include any capital stock of any class of the
Company thereafter authorized which shall not be limited to a fixed sum or
percentage in respect to the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution, or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include (i) only shares of such
class designated in the Company's Certificate of Incorporation as Common Stock
on the date of the original issue of the Warrants or (ii), in the case of any
reclassification, change, consolidation, merger, sale, or conveyance of the
character referred to in Section 9(c) hereof, the stock, securities, or property
provided for in such section or (iii), in the case of any reclassification or
change in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination or consisting of a change
in par value, or from par value to no par value, or from no par value to par
value, such shares of Common Stock as so reclassified or changed.
(b) "Corporate Office" shall mean the office of the Warrant
Agent (or its successor) at which at any particular time its principal business
shall be administered, which office is located at the date hereof at 40 Wall
Street, New York, New York 10005.
(c) "Exercise Date" shall mean, as to any Warrant, the date on
which the Warrant Agent shall have received both (i) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (ii)
payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean ______, 1998
(one (1) year from the Effective Date).
(e) "Purchase Price" shall mean the purchase price per share
to be paid upon exercise of each Warrant in accordance with the terms hereof,
which price shall be $5.80 per share, subject to adjustment from time to time
pursuant to the provisions of Section
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<PAGE>
9 hereof, and subject to the Company's right, upon approval of a majority of the
holders of shares of Common Stock of the Company, to reduce the Purchase Price
upon notice to all warrantholders.
(f) "Redemption Price" shall mean the price at which the
Company may, at its option, redeem the Warrants, in accordance with the terms
hereof, which price shall be $0.10 per Warrant.
(g) "Registered Holder" shall mean as to any Warrant and as of
any particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the Warrant
Agent pursuant to Section 6.
(h) "Transfer Agent" shall mean American Stock Transfer &
Trust Company, as the Company's transfer agent, or its authorized successor, as
such.
(i) "Warrant Expiration Date" shall mean 5:00 P.M. (New York
time) on __________, 2002 or the Redemption Date as defined in Section 8,
whichever is earlier; provided that if such date shall in the State of New York
be a holiday or a day on which banks are authorized or required to close, then
5:00 P.M. (New York time) on the next following day which in the State of New
York is not a holiday or a day on which banks are authorized or required to
close. Upon notice to all warrantholders the Company shall have the right to
extend the Warrant Expiration Date.
2. Warrants and Issuance of Warrant Certificates.
(a) A Warrant initially shall entitle the Registered Holder of
the Warrant Certificate representing such Warrant to purchase one share of
Common Stock upon the exercise thereof, in accordance with the terms hereof,
subject to modification and adjustment as provided in Section 9.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
shall be executed by the Company and delivered to the Warrant Agent. Upon
written order of the Company signed by its President or Chairman or a Vice
President and by its Secretary or an Assistant Secretary, the Warrant
Certificates shall be countersigned, issued, and delivered by the Warrant Agent.
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<PAGE>
(c) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing up to an aggregate of 843,750 shares of
Common Stock, subject to adjustment as described herein, upon the exercise of
Warrants in accordance with this Agreement.
(d) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
whole number denominations to the persons entitled thereto in connection with
any transfer or exchange permitted under this Agreement; provided that no
Warrant Certificates shall be issued except (i) those initially issued
hereunder, (ii) those issued on or after the Initial Warrant Exercise Date, upon
the exercise of fewer than all Warrants represented by any Warrant Certificate,
to evidence any unexercised Warrants held by the exercising Registered Holder,
(iii) those issued upon any transfer or exchange pursuant to Section 6; (iv)
those issued in replacement of lost, stolen, destroyed, or mutilated Warrant
Certificates pursuant to Section 7; (v) those issued pursuant to the Purchase
Option; and (vi) those issued at the option of the Company, in such form as may
be approved by the its Board of Directors, to reflect any adjustment or change
in the Purchase Price, the number of shares of Common Stock purchasable upon
exercise of the Warrants or the Redemption Price therefor made pursuant to
Section 9 hereof.
(e) Pursuant to the terms of the Purchase Option, Monroe or
its designees may purchase up to 67,500 Units, consisting of 67,500 shares of
Common Stock and 67,500 Warrants. The Purchase Option shall not be transferred,
sold, assigned or hypothecated for a period of one (1) year from the Effective
Date, except that it may be transferred to persons who are officers of Monroe or
selling group members in the offering.
3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the
form annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers, or other marks of
identification or designation and such legends, summaries, or endorsements
printed, lithographed, or engraved thereon as the Company may deem appropriate
and as are not
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<PAGE>
inconsistent with the provisions of this Agreement, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or with
any rule or regulation of any stock exchange on which the Warrants may be
listed, or to conform to usage or to the requirements of Section 2(b). The
Warrant Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange, or in lieu of mutilated, lost, stolen, or
destroyed Warrant Certificates) and issued in registered form. Warrant
Certificates shall be numbered serially with the letter W.
(b) Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, President, or any Vice President and by
its Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal. Warrant Certificates shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned. In
case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be an officer of the Company or to hold the
particular office referenced in the Warrant Certificate before the date of
issuance of the Warrant Certificates or before countersignature by the Warrant
Agent and issue and delivery thereof, such Warrant Certificates may nevertheless
be countersigned by the Warrant Agent, issued and delivered with the same force
and effect as though the person who signed such Warrant Certificates had not
ceased to be an officer of the Company or to hold such office. After
countersignature by the Warrant Agent, Warrant Certificates shall be delivered
by the Warrant Agent to the Registered Holder without further action by the
Company, except as otherwise provided by Section 4 hereof.
4. Exercise. Each Warrant may be exercised by the Registered Holder
thereof at any time on or after the Initial Exercise Date, but not after the
Warrant Expiration Date, upon the terms and subject to the conditions set forth
herein and in the applicable Warrant Certificate. A Warrant shall be deemed to
have been exercised immediately prior to the close of business on the Exercise
Date and the person entitled to receive the securities deliverable upon such
exercise shall be treated for all purposes as the holder of those securities
upon the exercise of the Warrant as of the close of business on the Exercise
Date. As soon as practicable on or after the Exercise Date the Warrant Agent
shall
5
<PAGE>
deposit the proceeds received from the exercise of a Warrant and shall notify
the Company in writing of the exercise of the Warrants. Promptly following, and
in any event within five days after the date of such notice from the Warrant
Agent, the Warrant Agent, on behalf of the Company, shall cause to be issued and
delivered by the Transfer Agent, to the person or persons entitled to receive
the same, a certificate or certificates for the securities deliverable upon such
exercise (plus a certificate for any remaining unexercised Warrants of the
Registered Holder), unless prior to the date of issuance of such certificates
the Company shall instruct the Warrant Agent to refrain from causing such
issuance of certificates pending clearance of checks received in payment of the
Purchase Price pursuant to such Warrants. Upon the exercise of any Warrant and
clearance of the funds received, the Warrant Agent shall promptly remit the
payment received for the Warrant (the "Warrant Proceeds") to the Company or as
the Company may direct in writing.
5. Reservation of Shares; Listing; Payment of Taxes, etc.
(a) The Company covenants that it will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issue upon exercise of Warrants, such number of shares of Common Stock as shall
then be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon exercise
of the Warrants shall, at the time of delivery, be duly and validly issued,
fully paid, nonassessable, and free from all taxes, liens, and charges with
respect to the issue thereof, (other than those which the Company shall promptly
pay or discharge) and that upon issuance such shares shall be listed on each
national securities exchange or eligible for inclusion in each automated
quotation system, if any, on which the other shares of outstanding Common Stock
of the Company are then listed or eligible for inclusion.
(b) The Company covenants that if any securities to be
reserved for the purpose of exercise of Warrants hereunder require registration
with, or approval of, any governmental authority under any federal securities
law before such securities may be validly issued or delivered upon such
exercise, then the Company will, to the extent the Purchase Price is less than
the Market Price (as hereinafter defined), in good faith and as expeditiously as
reasonably possible, endeavor to secure such registration or
6
<PAGE>
approval and will use its reasonable efforts to obtain appropriate approvals or
registrations under state "blue sky" securities laws. With respect to any such
securities, however, Warrants may not be exercised by, or shares of Common Stock
issued to, any Registered Holder in any state in which such exercise would be
unlawful.
(c) The Company shall pay all documentary, stamp, or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance, or delivery of any shares upon exercise
of the Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to
requisition the Company's Transfer Agent from time to time for certificates
representing shares of Common Stock issuable upon exercise of the Warrants, and
the Company will authorize the Transfer Agent to comply with all such proper
requisitions. The Company will file with the Warrant Agent a statement setting
forth the name and address of the Transfer Agent of the Company for shares of
Common Stock issuable upon exercise of the Warrants.
6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and
upon satisfaction of the terms and provisions hereof, the Company shall execute
and the Warrant Agent shall countersign, issue, and deliver in exchange therefor
the Warrant Certificate or Certificates which the Registered Holder making the
exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with its regular
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office,
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<PAGE>
the Company shall execute and the Warrant Agent shall issue and deliver to the
transferee or transferees a new Warrant Certificate or Certificates representing
an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for
any exchange or registration of transfer of Warrant Certificates. In addition,
the Company may require payment by such holder of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly cancelled
by the Warrant Agent and thereafter retained by the Warrant Agent until
termination of this Agreement or resignation as Warrant Agent, or disposed of or
destroyed, at the direction of the Company.
(f) Prior to due presentment for registration of transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary. The Warrants which are being publicly offered with
shares of Common Stock pursuant to the Underwriting Agreement will be
immediately detachable from the Common Stock and transferable separately
therefrom.
7. Loss or Mutilation. Upon receipt by the Company and the Warrant
Agent of evidence satisfactory to them of the ownership of and loss, theft,
destruction, or mutilation of any Warrant Certificate and (in case of loss,
theft, or destruction) of indemnity satisfactory to them, and (in the case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
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and the Warrant Agent shall (in the absence of notice to the Company and/or
Warrant Agent that the Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall comply with such
other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
8. Redemption.
(a) Subject to the provisions of Section 2(e), on not less
than thirty (30) days notice given at any time after eighteen (18) months after
the Initial Warrant Exercise Date, or earlier with the consent of Monroe, the
Warrants may be redeemed, at the option of the Company, at a redemption price of
$0.10 per Warrant, provided the Market Price of the Common Stock receivable upon
exercise of the Warrant shall equal or exceed 200% of the then exercise price of
the Warrants per share (the "Target Price"), subject to adjustment as set forth
in Section 8(f) below. Market Price for the purpose of this Section 8 shall mean
the average closing sale price for all twenty (20) consecutive trading days
ending on the third day prior to the date of the notice of redemption, which
notice shall be mailed no later than five days thereafter, of the Common Stock
as reported by the NASD Bulletin Board, Nasdaq Stock Market, Inc. or any
national securities exchange on which the Common Stock is traded.
(b) If the conditions set forth in Section 8(a) are met, and
the Company desires to exercise its right to redeem the Warrants, it shall mail
a notice of redemption to each of the Registered Holders of the Warrants to be
redeemed, first class, postage prepaid, not later than the thirtieth day before
the date fixed for redemption, at their last address as shall appear on the
records maintained pursuant to Section 6(b). Any notice mailed in the manner
provided herein shall be conclusively presumed to have been duly given whether
or not the Registered Holder receives such notice.
(c) The notice of redemption shall specify (i) the redemption
price, (ii) the date fixed for redemption, (iii) the place where the Warrant
Certificates shall be delivered and the redemption price paid, and (iv) that the
right to exercise the
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Warrant shall terminate at 5:00 P.M. (New York time) on the business day
immediately preceding the date fixed for redemption. The date fixed for the
redemption of the Warrant shall be the Redemption Date. No failure to mail such
notice nor any defect therein or in the mailing thereof shall affect the
validity of the proceedings for such redemption except as to a Registered Holder
(A) to whom notice was not mailed or (B) whose notice was defective. An
affidavit of the Warrant Agent or of the Secretary or an Assistant Secretary of
the Company that notice of redemption has been mailed shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00
P.M. (New York time) on the business day immediately preceding the Redemption
Date. On and after the Redemption Date, Holders of the Warrants shall have no
further rights except to receive, upon surrender of the Warrant, the redemption
price.
(e) From and after the Redemption Date specified, the Company
shall, at the place specified in the notice of redemption, upon presentation and
surrender to the Company by or on behalf of the Registered Holder thereof of one
or more Warrant Certificates evidencing Warrants to be redeemed, deliver or
cause to be delivered to or upon the written order of such Holder a sum in cash
equal to the redemption price of each such Warrant. From and after the
Redemption Date and upon the deposit or setting aside by the Company of a sum
sufficient to redeem all the Warrants called for redemption, such Warrants shall
expire and become void and all rights hereunder and under the Warrant
Certificates, except the right to receive payment of the redemption price, shall
cease.
(f) If the shares of the Company's Common Stock are subdivided
or combined into a greater or smaller number of shares of Common Stock, the
Target Price shall be proportionally adjusted by the ratio which the total
number of shares of Common Stock outstanding immediately prior to such event
bears to the total number of shares of Common Stock to be outstanding
immediately after such event.
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9. Adjustment of Exercise Price and Number of Shares of Common Stock or
Warrants.
(a) Subject to the exceptions referred to in Section 9(g)
below, in the event the Company shall, at any time or from time to time after
the date hereof, sell any shares of Common Stock for a consideration per share
less than the Market Price of the Common Stock (as defined in Section 8) on the
date of the sale or issue any shares of Common Stock as a stock dividend to the
holders of Common Stock, or subdivide or combine the outstanding shares of
Common Stock into a greater or lesser number of shares (any such sale, issuance,
subdivision, or combination being herein called a "Change of Shares"), then, and
thereafter upon each further Change of Shares, the Purchase Price in effect
immediately prior to such Change of Shares shall be changed to a price
(including any applicable fraction of a cent) determined by multiplying the
Purchase Price in effect immediately prior thereto by a fraction, the numerator
of which shall equal the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares and the number of
shares of Common Stock which the aggregate consideration received (determined as
provided in subsection 9(f) below) for the issuance of such additional shares
would purchase at such current Market Price per share of Common Stock, and the
denominator of which shall equal the number of shares of Common Stock
outstanding immediately after the issuance of such additional shares. Such
adjustment shall be made successively whenever such an issuance is made.
Upon each adjustment of the Purchase Price pursuant
to this Section 9, the total number of shares of Common Stock purchasable upon
the exercise of each Warrant shall (subject to the provisions contained in
Section 9(b) hereof) be such number of shares (calculated to the nearest tenth)
purchasable at the Purchase Price in effect immediately prior to such adjustment
multiplied by a fraction, the numerator of which shall be the Purchase Price in
effect immediately prior to such adjustment and the denominator of which shall
be the Purchase Price in effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the Purchase
Price hereunder, to adjust the number of Warrants outstanding, in lieu of the
adjustment in the number of shares of Common Stock purchasable upon the exercise
of each Warrant as
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<PAGE>
hereinabove provided, so that each Warrant outstanding after such adjustment
shall represent the right to purchase one share of Common Stock. Each Warrant
held of record prior to such adjustment of the number of Warrants shall become
that number of Warrants (calculated to the nearest tenth) determined by
multiplying the number one by a fraction, the numerator of which shall be the
Purchase Price in effect immediately prior to such adjustment and the
denominator of which shall be the Purchase Price in effect immediately after
such adjustment. Upon each adjustment of the number of Warrants pursuant to this
Section 9, the Company shall, as promptly as practicable, cause to be
distributed to each Registered Holder of Warrant Certificates on the date of
such adjustment Warrant Certificates evidencing, subject to Section 10 hereof,
the number of additional Warrants to which such Holder shall be entitled as a
result of such adjustment or, at the option of the Company, cause to be
distributed to such Holder in substitution and replacement for the Warrant
Certificates held by him prior to the date of adjustment (and upon surrender
thereof, if required by the Company) new Warrant Certificates evidencing the
number of Warrants to which such Holder shall be entitled after such adjustment.
(c) In case of any reclassification, capital reorganization,
or other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization, or other change of outstanding shares of Common Stock), or in
case of any sale or conveyance to another corporation of the property of the
Company as, or substantially as, an entirety (other than a sale/leaseback,
mortgage, or other financing transaction), the Company shall cause effective
provision to be made so that each holder of a Warrant then outstanding shall
have the right thereafter, by exercising such Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization, or other change,
consolidation, merger, sale, or conveyance by a holder of the number of shares
of Common Stock that might have been purchased upon exercise of such Warrant
immediately prior to such reclassification, capital reorganization, or other
change, consolidation, merger, sale, or conveyance. Any such provision shall
include provision for adjustments that shall be as
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<PAGE>
nearly equivalent as may be practicable to the adjustments provided for in this
Section 9. The Company shall not effect any such consolidation, merger, or sale
unless prior to or simultaneously with the consummation thereof the successor
(if other than the Company) resulting from such consolidation or merger or the
corporation purchasing assets or other appropriate corporation or entity shall
assume, by written instrument executed and delivered to the Warrant Agent, the
obligation to deliver to the holder of each Warrant such shares of stock,
securities, or assets as, in accordance with the foregoing provisions, such
holders may be entitled to purchase and the other obligations under this
Agreement. The foregoing provisions shall similarly apply to successive
reclassification, capital reorganizations, and other changes of outstanding
shares of Common Stock and to successive consolidations, mergers, sales, or
conveyances.
(d) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(d) hereof, continue to express the Purchase Price per
share, the number of shares purchasable thereunder, and the Redemption Price
therefor as the Purchase Price per share, and the number of shares purchasable
and the Redemption Price therefore were expressed in the Warrant Certificates
when the same were originally issued.
(e) After each adjustment of the Purchase Price pursuant to
this Section 9, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant after such adjustment, and, if the
Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the registered holder of each Warrant shall then be entitled,
and the adjustment in Redemption Price resulting therefrom, and (iii) a brief
statement of the facts accounting for such adjustment. The Company will promptly
file such certificate with the Warrant Agent and cause a brief summary thereof
to be sent by ordinary first class mail to Monroe and to each registered holder
of Warrants at his or her last address as it shall appear on the registry books
of the Warrant Agent. No failure to mail such
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notice nor any defect therein or in the mailing thereof shall affect the
validity thereof except as to the holder to whom the Company failed to mail such
notice, or except as to the holder whose notice was defective. The affidavit of
an officer of the Warrant Agent or the Secretary or an Assistant Secretary of
the Company that such notice has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.
(f) For purposes of Section 9(a) and 9(b) hereof, the
following provisions (i) to (vii) shall also be applicable:
(i) The number of shares of Common Stock outstanding
at any given time shall include shares of Common Stock owned or held by or for
the account of the Company and the sale or issuance of such treasury shares or
the distribution of any such treasury shares shall not be considered a Change of
Shares for purposes of said sections.
(ii) No adjustment of the Purchase Price shall be
made unless such adjustment would require an increase or decrease of at least
$.10 in such price; provided that any adjustments which by reason of this
subsection (ii) are not required to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment which,
together with any adjustment(s) so carried forward, shall require an increase or
decrease of at least $.10 in the Purchase Price then in effect hereunder.
(iii) In case of (1) the sale by the Company for cash
of any rights or warrants to subscribe for or purchase, or any options for the
purchase of, Common Stock or any securities convertible into or exchangeable for
Common Stock without the payment of any further consideration other than cash,
if any (such convertible or exchangeable securities being herein called
"Convertible Securities"), or (2) the issuance by the Company, without the
receipt by the Company of any consideration therefor, of any rights or warrants
to subscribe for or purchase, or any options for the purchase of, Common Stock
or Convertible Securities, in each case, if (and only if) the consideration
payable to the Company upon the exercise of such rights, warrants, or options
shall consist of cash, whether or not such rights, warrants, or options, or the
right to convert or exchange such Convertible Securities, are immediately
exercisable, and the price
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<PAGE>
per share for which Common Stock is issuable upon the exercise of such rights,
warrants, or options or upon the conversion or exchange of such Convertible
Securities (determined by dividing (x) the minimum aggregate consideration
payable to the Company upon the exercise of such rights, warrants, or options,
plus the consideration received by the Company for the issuance or sale of such
rights, warrants, or options, plus, in the case of such Convertible Securities,
the minimum aggregate amount of additional consideration, if any, other than
such Convertible Securities, payable upon the conversion or exchange thereof, by
(y) the total maximum number of shares of Common Stock issuable upon the
exercise of such rights, warrants, or options or upon the conversion or exchange
of such Convertible Securities issuable upon the exercise of such rights,
warrants, or options) is less than the fair market value of the Common Stock on
the date of the issuance or sale of such rights, warrants, or options, then the
total maximum number of shares of Common Stock issuable upon the exercise of
such rights, warrants, or options or upon the conversion or exchange of such
Convertible Securities (as of the date of the issuance or sale of such rights,
warrants, or options) shall be deemed to be outstanding shares of Common Stock
for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been
sold for cash in an amount equal to such price per share.
(iv) In case of the sale by the Company for cash of
any Convertible Securities, whether or not the right of conversion or exchange
thereunder is immediately exercisable, and the price per share for which Common
Stock is issuable upon the conversion or exchange of such Convertible Securities
(determined by dividing (x) the total amount of consideration received by the
Company for the sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, other than such Convertible
Securities, payable upon the conversion or exchange thereof, by (y) the total
maximum number of shares of Common Stock issuable upon the conversion or
exchange of such Convertible Securities) is less than the fair market value of
the Common Stock on the date of the sale of such Convertible Securities, then
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of such Convertible Securities (as of the date of the sale of such
Convertible Securities) shall be deemed to be outstanding shares of Common Stock
for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been
sold for cash in an amount equal to such price per share.
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<PAGE>
(v) In case the Company shall modify the rights of
conversion, exchange, or exercise of any of the securities referred to in
subsection (iii) above or any other securities of the Company convertible,
exchangeable, or exercisable for shares of Common Stock, for any reason other
than an event that would require adjustment to prevent dilution, so that the
consideration per share received by the Company after such modification is less
than the market price on the date prior to such modification, the Purchase Price
to be in effect after such modification shall be determined by multiplying the
Purchase Price in effect immediately prior to such event by a fraction, of which
the numerator shall be the number of shares of Common Stock outstanding
multiplied by the market price on the date prior to the modification plus the
number of shares of Common Stock which the aggregate consideration receivable by
the Company for the securities affected by the modification would purchase at
the market price and of which the denominator shall be the number of shares of
Common Stock outstanding on such date plus the number of shares of Common Stock
to be issued upon conversion, exchange, or exercise of the modified securities
at the modified rate. Such adjustment shall become effective as of the date upon
which such modification shall take effect.
(vi) On the expiration of any such right, warrant, or
option or the termination of any such right to convert or exchange any such
Convertible Securities, the Purchase Price then in effect hereunder shall
forthwith be readjusted to such Purchase Price as would have obtained (a) had
the adjustments made upon the issuance or sale of such rights, warrants,
options, or Convertible Securities been made upon the basis of the issuance of
only the number of shares of Common Stock theretofore actually delivered (and
the total consideration received therefor) upon the exercise of such rights,
warrants, or options or upon the conversion or exchange of such Convertible
Securities and (b) had adjustments been made on the basis of the Purchase Price
as adjusted under clause (a) for all transactions (which would have affected
such adjusted Purchase Price) made after the issuance or sale of such rights,
warrants, options, or Convertible Securities.
(vii) In case of the sale for cash of any shares
of Common Stock, any Convertible Securities, any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or Convertible
Securities, the consideration received
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<PAGE>
by the Company therefore shall be deemed to be the gross sales price therefor
without deducting therefrom any expense paid or incurred by the Company or any
underwriting discounts or commissions or concessions paid or allowed by the
Company in connection therewith.
(g) No adjustment to the Purchase Price of the Warrants or to
the number of shares of Common Stock purchasable upon the exercise of each
Warrant will be made, however,
(i) upon the sale or exercise of the Warrants,
including without limitation the sale or exercise of any of the Warrants
comprising the Purchase Option; or
(ii) upon the sale of any shares of Common Stock in
the Company's initial public offering, including, without limitation, shares
sold upon the exercise of any over-allotment option granted to the Underwriters
in connection with such offering; or
(iii) upon the issuance or sale of Common Stock or
Convertible Securities upon the exercise of any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or Convertible
Securities, whether or not such rights, warrants, or options were outstanding on
the date of the original sale of the Warrants or were thereafter issued or sold
other than issuances of preferred stock in connection with acquisitions by the
Company; or
(iv) upon the issuance or sale of Common Stock upon
conversion or exchange of any Convertible Securities, whether or not any
adjustment in the Purchase Price was made or required to be made upon the
issuance or sale of such Convertible Securities and whether or not such
Convertible Securities were outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold; or
(v) upon the issuance or sale of Common Stock or
Convertible Securities in a private placement unless the issuance or sale price
is less than 85% of the fair market value of the Common Stock on the date of
issuance, in which case the adjustment shall only be for the difference between
85% of the fair market value and the issue or sale price; or
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<PAGE>
(vi) upon the issuance or sale of Common Stock or
Convertible Securities to shareholders of any corporation which merges into the
Company or from which the Company acquires assets and some or all of the
consideration consists of equity securities of the Company, in proportion to
their stock holdings of such corporation immediately prior to the acquisition
but only if no adjustment is required pursuant to any other provision of this
Section 9.
(h) Intentionally Omitted.
(i) Any determination as to whether an adjustment in the
Purchase Price in effect hereunder is required pursuant to Section 9, or as to
the amount of any such adjustment, if required, shall be binding upon the
holders of the Warrants and the Company if made in good faith by the Board of
Directors of the Company.
(j) If and whenever the Company shall grant to the holders of
Common Stock, as such, rights or warrants to subscribe for or to purchase, or
any options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant, or option to purchase Common
Stock, the Company shall concurrently therewith grant to each Registered Holder
as of the record date for such transaction of the Warrants then outstanding, the
rights, warrants, or options to which each Registered Holder would have been
entitled if, on the record date used to determine the stockholders entitled to
the rights, warrants, or options being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common Stock
then issuable upon exercise (assuming, for purposes of this Section 9(j), that
exercise of Warrants is permissible during periods prior to the Initial Warrant
Exercise Date) of his or her Warrants. Such grant by the Company to the holders
of the Warrants shall be in lieu of any adjustment which otherwise might be
called for pursuant to this Section 9.
10. Fractional Warrants and Fractional Shares.
(a) If the number of shares of Common Stock purchasable upon
the exercise of each Warrant is adjusted pursuant to Section 9 hereof, the
Company nevertheless shall not be required to issue fractions of shares, upon
exercise of the Warrants or otherwise, or to distribute certificates that
evidence fractional shares. With
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<PAGE>
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of such fractional share, determined as
follows:
(i) If the Common Stock is listed on a national
securities exchange or admitted to unlisted trading privileges on such exchange
or listed for trading on the Nasdaq Stock Market, Inc., the current value shall
be the last reported sale price of the Common Stock on such exchange or market
on the last business day prior to the date of exercise of this Warrant or if no
such sale is made on such day, the average of the closing bid and asked prices
for such day on such exchange or market; or
(ii) If the Common Stock is not listed or admitted to
unlisted trading privileges, the current value shall be the mean of the last
reported bid and asked prices reported by the NASD Bulletin Board on the last
business day prior to the date of the exercise of this Warrant; or
(iii) If the Common Stock is not so listed or
admitted to unlisted trading privileges and bid and asked prices are not so
reported, the current value shall be an amount determined in such reasonable
manner as may be prescribed by the Board of Directors of the Company.
11. Warrant Holders Not Deemed Stockholders. No holder of Warrants
shall, as such, be entitled to vote or to receive dividends or be deemed the
holder of Common Stock that may at any time be issuable upon exercise of such
Warrants for any purpose whatsoever, nor shall anything contained herein be
construed to confer upon the holder of Warrants, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue or reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger, or conveyance or otherwise), or to receive
notice of meetings, or to receive dividends or subscription rights, until such
Holder shall have exercised such Warrants and been issued shares of Common Stock
in accordance with the provisions hereof.
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12. Rights of Action. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Warrants, and
any Registered Holder of a Warrant, without consent of the Warrant Agent or of
the holder of any other Warrant, may, in such Registered Holder's own behalf and
for such Registered Holder's own benefit, enforce against the Company such
Registered Holder's right to exercise his Warrants for the purchase of shares of
Common Stock in the manner provided in the Warrant Certificate and this
Agreement.
13. Agreement of Warrant Holders. Every Registered Holder of a Warrant,
by his or her acceptance thereof, consents and agrees with the Company, the
Warrant Agent and every other Registered Holder of a Warrant that:
(a) The Warrants are transferable only on the registry books
of the Warrant Agent by the Registered Holder thereof in person or by his or her
attorney duly authorized in writing and only if the Warrant Certificates
representing such Warrants are surrendered at the office of the Warrant Agent,
duly endorsed or accompanied by a proper instrument of transfer satisfactory to
the Warrant Agent and the Company in their sole discretion, together with
payment of any applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the
person in whose name the Warrant Certificate is registered as the holder and as
the absolute, true, and lawful owner of the Warrants represented thereby for all
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice or knowledge to the contrary, except as otherwise expressly provided in
Section 7 hereof.
14. Cancellation of Warrant Certificates. If the Company shall purchase
or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be delivered to the Warrant
Agent and cancelled by it and retired. The Warrant Agent shall also cancel
Common Stock following exercise of any or all of the Warrants represented
thereby or delivered to it for transfer, split-up, combination, or exchange.
15. Concerning the Warrant Agent. The Warrant Agent acts hereunder as
agent and in a ministerial capacity for the Company,
20
<PAGE>
and its duties shall be determined solely by the provisions hereof. The Warrant
Agent shall not, by issuing and delivering Warrant Certificates or by any other
act hereunder be deemed to make any representations as to the validity, value,
or authorization of the Warrant Certificates or the Warrants represented thereby
or of any securities or other property delivered upon exercise of any Warrant or
whether any stock issued upon exercise of any Warrant is fully paid and
nonassessable.
The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustment,
when made, or with respect to the method employed in making the same. It shall
not (i) be liable for any recital or statement of facts contained herein or for
any action taken, suffered, or omitted by it in reliance on any Warrant
Certificate or other document or instrument believed by it in good faith to be
genuine and to have been signed or presented by the proper party or parties,
(ii) be responsible for any failure on the part of the Company to comply with
any of its covenants and obligations contained in this Agreement or in any
Warrant Certificate, or (iii) be liable for any act or omission in connection
with this Agreement except for its own negligence or wilful misconduct.
The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order,
or demand of the Company shall be sufficiently evidenced by an instrument signed
by the Chairman of the Board, President, any Vice President, its Secretary, or
Assistant Secretary (unless other evidence in respect thereof is herein
specifically prescribed). The Warrant Agent shall not be liable for any action
taken, suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order, or demand believed by it to be genuine.
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The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; it further agrees to indemnify the Warrant Agent and save it
harmless against any and all losses, expenses, and liabilities, including
judgments, costs, and counsel fees, for anything done or omitted by the Warrant
Agent in the execution of its duties and powers hereunder except losses,
expenses, and liabilities arising as a result of the Warrant Agent's negligence
or wilful misconduct.
The Warrant Agent may resign its duties and be discharged from
all further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or wilful misconduct), after giving
60 days' prior written notice to the Company. At least 15 days prior to the date
such resignation is to become effective, the Warrant Agent shall cause a copy of
such notice of resignation to be mailed to the Registered Holder of each Warrant
Certificate at the Company's expense. Upon such resignation, or any inability of
the Warrant Agent to act as such hereunder, the Company shall appoint a new
warrant agent in writing. If the Company shall fail to make such appointment
within a period of 30 days after it has been notified in writing of such
resignation by the resigning Warrant Agent, then the Registered Holder of any
Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a new warrant agent. Any new warrant agent, whether appointed by
the Company or by such a court, shall be a bank or trust company having a
capital and surplus, as shown by its last published report to its stockholders,
of not less than $10,000,000 or a stock transfer company. After acceptance in
writing of such appointment by the new warrant agent is received by the Company,
such new warrant agent shall be vested with the same powers, rights, duties, and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act, or deed; but if for any reason
it shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act, or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
22
<PAGE>
Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party or any corporation succeeding to the trust business of the Warrant Agent
shall be a successor warrant agent under this Agreement without any further act,
provided that such corporation is eligible for appointment as successor to the
Warrant Agent under the provisions of the preceding paragraph. Any such
successor warrant agent shall promptly cause notice of its succession as warrant
agent to be mailed to the Company and to the Registered Holder of each Warrant
Certificate.
The Warrant Agent, its subsidiaries and affiliates, and any of
its or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effects as though it were not Warrant
Agent. Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
16. Modification of Agreement. The Warrant Agent and the Company may by
supplemental agreement make any changes or corrections in this Agreement (i)
that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or manifest mistake or error herein
contained; or (ii) that they may deem necessary or desirable and which shall not
adversely affect the interests of the holders of Warrant Certificates; provided,
however, that this Agreement shall not otherwise be modified, supplemented, or
altered in any respect except with the consent in writing of the Registered
Holders of Warrant Certificates representing not less than 50% of the Warrants
then outstanding; and provided, further, that no change in the number or nature
of the securities purchasable upon the exercise of any Warrant, or the Purchase
Price therefor, or the acceleration of the Warrant Expiration Date, shall be
made without the consent in writing of the Registered Holder of the Warrant
Certificate representing such Warrant, other than such changes as are
specifically prescribed by this Agreement as originally executed or are made in
compliance with applicable law.
17. Notices. All notices, requests, consents, and other communications
hereunder shall be in writing and shall be deemed to
23
<PAGE>
have been made when delivered or mailed first class registered or certified
mail, postage prepaid as follows: if to the Registered Holder of a Warrant
Certificate, at the address of such Holder as shown on the registry books
maintained by the Warrant Agent; if to the Company, 43 Emery Avenue, Flemington,
New Jersey 08822, Attention: President, with a copy sent to Reed Smith Shaw &
McClay, One Riverfront Plaza, Newark, NJ 07102-5311, Attention: Gerard S.
Difiore, Esq. or at such other address as may have been furnished to the Warrant
Agent in writing by the Company; and if to the Warrant Agent, at its Corporate
office.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without reference to
principles of conflicts of law.
19. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Company and the Warrant Agent and their respective successors
and assigns, and the holders from time to time of Warrant Certificates. Nothing
in this Agreement is intended or shall be construed to confer upon any other
person any right, remedy, or claim, in equity or at law, or to impose upon any
other person any duty, liability, or obligation.
20. Termination. This Agreement shall terminate at the close of
business on the Warrant Expiration Date of all the Warrants or such earlier date
upon which all Warrants have been exercised, except that the Warrant Agent shall
account to the Company for cash held by it and the provisions of Section 15
hereof shall survive such termination.
21. Counterparts. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
FLEMINGTON PHARMACEUTICAL CORPORATION
By: _____________________________
Its: Chief Executive Officer
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By: ______________________________
Its: Authorized Officer
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<PAGE>
EXHIBIT A
[Form of Face of Warrant Certificate]
No. W Warrants
VOID AFTER ________ __, 2002
STOCK PURCHASE WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
FLEMINGTON PHARMACEUTICAL CORPORATION
THIS CERTIFIES THAT FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Class A Common Stock Purchase Warrants ("Warrants") specified above.
Each Warrant initially entitles the Registered Holder to purchase, subject to
the terms and conditions set forth in this Certificate and the Warrant Agreement
(as hereinafter defined), one fully paid and nonassessable share of Common
Stock, par value $.01 per share ("Common Stock"), of FLEMINGTON PHARMACEUTICAL
CORPORATION, a New Jersey corporation (the "Company"), at any time between the
Initial Warrant Exercise Date and the Expiration Date (as hereinafter defined),
upon the presentation and surrender of this Warrant Certificate with the
Subscription Form on the reverse hereof duly executed, at the corporate office
of AMERICAN STOCK TRANSFER & TRUST COMPANY as Warrant Agent, or its successor
(the "Warrant Agent"), accompanied by payment of $5.80 (the "Purchase Price") in
lawful money of the United States of America in cash or by official bank or
certified check made payable to Flemington Pharmaceutical Corporation.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement") dated ________ __,
1997, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modifications or adjustment.
<PAGE>
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Initial Warrant Exercise Date" shall mean ________ __, 1998.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
________ __, 2002, or such earlier date as the Warrants shall be redeemed. If
such date shall in the State of New York be a holiday or a day on which the
banks are authorized to close, then the Expiration Date shall mean 5:00 p.m.
(New York time) the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. This Warrant shall not be exercisable by a Registered Holder in any
state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any transfer fee in addition
to any tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
2
<PAGE>
This Warrant may be redeemed at the option of the Company, at a
redemption price of $.10 per Warrant at any time after ________ __, 1998 or
earlier with the consent of Monroe Parker Securities, Inc., provided the Market
Price (as defined in the Warrant Agreement) for the securities issuable upon
exercise of such Warrant shall exceed 200% of the then exercise price of the
Warrants. Notice of redemption shall be given not later than the thirtieth day
before the date fixed for redemption, all as provided in the Warrant Agreement.
On and after the date fixed for redemption, the Registered Holder shall have no
rights with respect to this Warrant except to receive the $.10 per Warrant upon
surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New Jersey without reference to
principles of conflicts of law.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
FLEMINGTON PHARMACEUTICAL CORPORATION
By: ______________________________
Its: Chief Executive Officer
Date: ______________________
[Seal]
3
<PAGE>
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By: ______________________________
Its: Authorized Officer
4
<PAGE>
[Form of Reverse of Warrant Certificate]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
_____ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
--------------------------------------------
(please insert social security or other identifying number)
and be delivered to
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below:
--------------------------------------------
--------------------------------------------
--------------------------------------------
(Address)
<PAGE>
---------------------------------
(Date)
---------------------------------
(Taxpayer Identification Number)
If this Warrant has been solicited by a member of the National Association of
Securities Dealers, Inc., the name of such firm is:__________:
SIGNATURE GUARANTEED
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto
--------------------------------------------
(please insert social security or other identifying number)
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
(please print or type name and address)
of the Warrants represented by this Warrant Certificate, and hereby irrevocably
constitutes and appoints _________________________________ Attorney to transfer
this Warrant Certificate on the books of the Company, with full power of
substitution in the premises.
2
<PAGE>
---------------------------------
(Date)
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN RULE 17Ad-15 UNDER THE
SECURITIES AND EXCHANGE ACT OF 1934) WHICH MAY INCLUDE A COMMERCIAL BANK OR
TRUST COMPANY, SAVINGS ASSOCIATION, CREDIT UNION OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
3
<PAGE>
Option to Purchase
67,500 Units
FLEMINGTON PHARMACEUTICAL CORPORATION
PURCHASE OPTION
Dated: __________, 1997
THIS CERTIFIES that Monroe Parker Securities, Inc., 2500 Westchester
Avenue, Purchase, NY 10577 (hereinafter sometimes referred to as the "Holder"),
is entitled to purchase from FLEMINGTON PHARMACEUTICAL CORPORATION (hereinafter
referred to as the "Company"), at the prices and during the periods as
hereinafter specified, up to 67,500 Units ("Units"), each Unit consisting of one
(1) share of Common Stock, par value $.01 per share ("Common Stock"), and one
(1) Class A Redeemable Common Stock Purchase Warrant ("Warrant"). Each Warrant
entitles the registered holder thereof to purchase one (1) share of Common Stock
at an exercise price of $5.80 per share. The Warrants (hereinafter, the
"Warrants") are exercisable for a four year period, commencing __________,
1998(one (1) year from the Effective Date). Hereinafter, the Units, shares of
Common Stock and Warrants shall be referred to as an "Option Securities" or
"Securities."
The Securities have been registered under a Registration Statement on
Form SB-2 (File No. 333-________) declared effective by the Securities and
Exchange Commission on __________, 1997 (the "Registration Statement"). This
Option (the "Option") to purchase 67,500 Units was originally issued pursuant to
an underwriting agreement between the Company and Monroe Parker Securities, Inc.
as Underwriter (the "Underwriter"), in connection with a public offering
of 675,000 Units (collectively, the "Public Securities") through the
Underwriter, in consideration of $10.00 received for the Option.
Except as specifically otherwise provided herein, the Common Stock and
the Warrants issued pursuant to this Option shall bear the same terms and
conditions as described under the caption
<PAGE>
"Description of Securities" in the Registration Statement, and the Warrants
shall be governed by the terms of the Warrant Agreement dated as of __________,
1997, executed in connection with such public offering (the "Warrant
Agreement"), except that the holder shall have registration rights under the
Securities Act of 1933, as amended (the "Act"), for the Option, the Units, the
Common Stock and the Warrants included in the Option, and the shares of Common
Stock underlying the Warrants, as more fully described in paragraph 6 of this
Option. In the event of any reduction of the exercise price of the Warrants
included in the Public Securities, the same changes to the Warrants included in
the Option and the components thereof shall be simultaneously effected.
1. The rights represented by this Option shall be exercised at the
prices, subject to adjustment in accordance with paragraph 8 of this Option, and
during the periods as follows:
(a) Between __________, 1998 (one (1) year from the Effective
Date) and __________, 2002, inclusive, the Holder shall have the option to
purchase Units hereunder at a price of $9.74 per Unit (subject to adjustment
pursuant to paragraph 8 hereof) (the "Exercise Price").
(b) After __________, 2002, the Holder shall have no right to
purchase any Units hereunder.
2. The rights represented by this Option may be exercised at any time
within the period above specified, in whole or in part, by (i) the surrender of
this Option (with the purchase form at the end hereof properly executed) at the
principal executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); (ii) payment to the Company
of the Exercise Price then in effect for the number of Option Securities
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any; and (iii) delivery to the Company of a duly executed
agreement signed by the person(s) designated in the purchase form to the effect
that such person(s) agree(s) to be bound by the provisions of paragraph 6 and
subparagraphs (b), (c) and (d) of paragraph 7 hereof. This Option shall be
deemed to have been exercised, in whole or in part to the extent specified,
immediately prior to the close of business on the date this Option is
surrendered and payment is made in accordance
2
<PAGE>
with the foregoing provisions of this paragraph 2, and the person or persons in
whose name or names the certificates for shares of Common Stock and Warrants
shall be issuable upon such exercise shall become the holder or holders of
record of such Common Stock and Warrants at that time and date. The Common Stock
and Warrants and the certificates for the Common Stock and Warrants so purchased
shall be delivered to the Holder within a reasonable time, not exceeding ten
(10) days, after the rights represented by this Option shall have been so
exercised.
3. This Option shall not be transferred, sold, assigned, or
hypothecated for a period of one (1) year from the Effective Date, except that
it may be transferred to successors of the Holder, and may be assigned in whole
or in part to any person who is an officer of the Holder or selling group member
of the offering during such period. Any transfer after one (1) year must be
accompanied with an immediate exercise of the Option. Any such assignment shall
be effected by the Holder (i) executing the form of assignment at the end hereof
and (ii) surrendering this Option for cancellation at the office or agency of
the Company referred to in paragraph 2 hereof, accompanied by a certificate
(signed by an officer of the Holder if the Holder is a corporation), stating
that each transferee is a permitted transferee under this paragraph 3 hereof;
whereupon the Company shall issue, in the name or names specified by the Holder
(including the Holder) a new Option or Options of like tenor and representing in
the aggregate rights to purchase the same number of Option Securities as are
purchasable hereunder.
4. The Company covenants and agrees that all shares of Common Stock
which may be issued as part of the Option Securities purchased hereunder and the
Common Stock which may be issued upon exercise of the Warrants will, upon
issuance, be duly and validly issued, fully paid and nonassessable. The Company
further covenants and agrees that during the periods within which this Option
may be exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of its Common Stock to provide for the exercise of
this Option and that it will have authorized and reserved a sufficient number of
shares of Common Stock for issuance upon exercise of the Warrants included in
the Option Securities.
5. This Option shall not entitle the Holder to any voting, dividend, or
other rights as a stockholder of the Company.
3
<PAGE>
6. (a) During the period set forth in paragraph l(a) hereof, the
Company shall advise the Holder or its transferee, whether the Holder holds the
Option or has exercised the Option and holds Option Securities or any of the
securities underlying the Option Securities, by written notice at least 20 days
prior to the filing of any post-effective amendment to the Registration
Statement or of any new registration statement or post-effective amendment
thereto under the Act covering any securities of the Company, for its own
account or for the account of others (other than a registration statement on
Form S-4 or S-8 or any successor forms thereto), and will for a period of five
years from the effective date of the Registration Statement, upon the request of
the Holder within 10 days of the receipt of the Company's notice, include in any
such post-effective amendment or registration statement, such information as may
be required to permit a public offering of the Option, all or any of the Units,
Common Stock, or Warrants included in the Units or the Common Stock issuable
upon the exercise of the Warrants (the "Registrable Securities"). The Company
shall supply prospectuses and such other documents as the Holder may request in
order to facilitate the public sale or other disposition of the Registrable
Securities, use its best efforts to register and qualify any of the Registrable
Securities for sale in such states as such Holder designates provided that the
Company shall not be required to qualify as a foreign corporation or a dealer in
securities or execute a general consent to service of process in any
jurisdiction in any action and do any and all other acts and things which may be
reasonably necessary or desirable to enable such Holders to consummate the
public sale or other disposition of the Registrable Securities, and furnish
indemnification in the manner provided in paragraph 7 hereof. The Holder shall
furnish information and indemnification as set forth in paragraph 7 except that
the maximum amount which may be recovered from the Holder shall be limited to
the amount of proceeds received by the Holder from the sale of the Registrable
Securities. The Company shall use its best efforts to cause the managing
underwriter or underwriters of a proposed underwritten offering to permit the
holders of Registrable Securities requested to be included in the registration
to include such securities in such underwritten offering on the same terms and
conditions as any similar securities of the Company included therein.
Notwithstanding the foregoing, if the managing underwriter or underwriters of
such offering advises the holders of Registrable Securities that the total
amount of securities which they intend to
4
<PAGE>
include in such offering is such as to materially and adversely affect the
success of such offering, then the amount of securities to be offered for the
accounts of holders of Registrable Securities shall be eliminated, reduced, or
limited to the extent necessary to reduce the total amount of securities to be
included in such offering to the amount, if any, recommended by such managing
underwriter or underwriters (any such reduction or limitation in the total
amount of Registrable Securities to be included in such offering to be borne by
the holders of Registrable Securities proposed to be included therein pro rata).
The Holder will pay its own legal fees and expenses and any underwriting
discounts and commissions on the securities sold by such Holder and shall not be
responsible for any other expenses of such registration.
(b) If any 50% holder (as defined below) shall give notice to
the Company at any time during the period set forth in paragraph l(a) hereof to
the effect that such holder desires to register under the Act this Option or any
of the underlying securities contained in the Option Securities underlying the
Option under such circumstances that a public distribution (within the meaning
of the Act) of any such securities will be involved then the Company will
promptly, but no later than 60 days after receipt of such notice, file a
post-effective amendment to the current Registration Statement or a new
registration statement pursuant to the Act, to the end that the Option and/or
any of the Securities underlying the Option Securities may be publicly sold
under the Act as promptly as practicable thereafter and the Company will use its
best efforts to cause such registration to become and remain effective for a
period of 120 days (including the taking of such steps as are reasonably
necessary to obtain the removal of any stop order); provided that such holder
shall furnish the Company with appropriate information in connection therewith
as the Company may reasonably request in writing. The 50% holder (which for
purposes hereof shall mean any direct or indirect transferee of such holder)
may, at its option, request the filing of a post-effective amendment to the
current Registration Statement or a new registration statement under the Act
with respect to the Registrable Securities on only one occasion during the term
of this Option. The Holder may at its option request the registration of the
Option and/or any of the securities underlying the Option in a registration
statement made by the Company as contemplated by Section 6(a) or in connection
with a request made pursuant to this Section 6(b) prior to acquisition of the
Securities issuable upon
5
<PAGE>
exercise of the Option and even though the Holder has not given notice of
exercise of the Option. The 50% holder may, at its option, request such
post-effective amendment or new registration statement during the described
period with respect to the Option or separately as to the Common Stock and/or
Warrants included in the Option and/or the Common Stock issuable upon the
exercise of the Warrants, and such registration rights may be exercised by the
50% holder prior to or subsequent to the exercise of the Option. Within ten
business days after receiving any such notice pursuant to this subsection (b) of
paragraph 6, the Company shall give notice to the other holders of the Options,
advising that the Company is proceeding with such post-effective amendment or
registration statement and offering to include therein the securities underlying
the Options of the other holders. Each holder electing to include its
Registrable Securities in any such offering shall provide written notice to the
Company within twenty (20) days after receipt of notice from the Company. The
failure to provide such notice to the Company shall be deemed conclusive
evidence of such holder's election not to include its Registrable Securities in
such offering. Each holder electing to include its Registrable Securities shall
furnish the Company with such appropriate information (relating to the
intentions of such holders) in connection therewith as the Company shall
reasonably request in writing. All costs and expenses of only one such
post-effective amendment or new registration statement shall be borne by the
Company, except that the holders shall bear the fees of their own counsel and
any underwriting discounts or commissions applicable to any of the securities
sold by them.
The Company shall be entitled to postpone the filing
of any registration statement pursuant to this Section 6(b) otherwise required
to be prepared and filed by it if (i) the Company is engaged in a material
acquisition, reorganization, or divestiture, (ii) the Company is currently
engaged in a self-tender or exchange offer and the filing of a registration
statement would cause a violation of Regulation M under the Securities Exchange
Act of 1934, (iii) the Company is engaged in an underwritten offering and the
managing underwriter has advised the Company in writing that such a registration
statement would have a material adverse effect on the consummation of such
offering or (iv) the Company is subject to an underwriter's lock-up as a result
of an underwritten public offering and such underwriter has refused in writing,
the Company's request to waive such lock-up. In the event of such
6
<PAGE>
postponement, the Company shall be required to file the registration statement
pursuant to this Section 6(b), within 60 days of the consummation of the event
requiring such postponement.
The Company will use its best efforts to maintain
such registration statement or post-effective amendment current under the Act
for a period of at least six months (and for up to an additional three months if
requested by the Holder) from the effective date thereof. The Company shall
supply prospectuses, and such other documents as the Holder may reasonably
request in order to facilitate the public sale or other disposition of the
Registrable Securities, use its best efforts to register and qualify any of the
Registrable Securities for sale in such states as such holder designates,
provided that the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or execute a general consent to service of
process in any jurisdiction in any action and furnish indemnification in the
manner provided in paragraph 7 hereof.
(c) The term "50% holder" as used in this paragraph 6 shall
mean the holder of at least 50% of the Common Stock and the Warrants underlying
the Option (considered in the aggregate) and shall include any owner or
combination of owners of such securities, which ownership shall be calculated by
determining the number of shares of Common Stock held by such owner or owners as
well as the number of shares then issuable upon exercise of the Warrants.
7. (a) Whenever pursuant to paragraph 6 a registration statement
relating to the Option or any shares or warrants issued or issuable upon the
exercise of any Options, is filed under the Act, amended or supplemented, the
Company will indemnify and hold harmless each holder of the securities covered
by such registration statement, amendment, or supplement (such holder being
hereinafter called the "Distributing Holder"), and each person, if any, who
controls (within the meaning of the Act) the Distributing Holder, and each
underwriter (within the meaning of the Act) of such securities and each person,
if any, who controls (within the meaning of the Act) any such underwriter,
against any losses, claims, damages, or liabilities, joint or several, to which
the Distributing Holder, any such controlling person or any such underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions in
7
<PAGE>
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any such registration
statement or any preliminary prospectus or final prospectus constituting a part
thereof or any amendment or supplement thereto, or arise out of or are based
upon the omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; and will reimburse
the Distributing Holder and each such controlling person and underwriter for any
legal or other expenses reasonably incurred by the Distributing Holder or such
controlling person or underwriter in connection with investigating or defending
any such loss, claim, damage, liability, or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage, or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in said
registration statement, said preliminary prospectus, said final prospectus, or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder or any other Distributing
Holder, for use in the preparation thereof.
(b) The Distributing Holder will indemnify and hold harmless
the Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, each person,
if any, who controls the Company (within the meaning of the Act) against any
losses, claims, damages, or liabilities, joint and several, to which the Company
or any such director, officer, or controlling person may become subject, under
the Act or otherwise, insofar as such losses, claims, damages, or liabilities
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in said registration statement, said preliminary
prospectus, said final prospectus, or said amendment or supplement, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in said registration statement, said preliminary prospectus,
said final prospectus, or said amendment or supplement in reliance upon and in
conformity with written information furnished by such Distributing Holder for
use in the preparation thereof; and will reimburse the Company or any such
director, officer, or controlling
8
<PAGE>
person for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability, or
action.
(c) Promptly after receipt by an indemnified party under this
paragraph 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Paragraph 7.
(d) In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
paragraph 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof.
8. The Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of this Option shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding after giving effect to such action, and the numerator
9
<PAGE>
of which shall be the number of shares of Common Stock outstanding immediately
prior to such action. Notwithstanding anything to the contrary contained in the
Warrant Agreement, in the event an adjustment to the Exercise Price is effected
pursuant to this Subsection (a) (and a corresponding adjustment to the number of
Option Securities is made pursuant to Subsection (d) below), the exercise price
of the Warrants shall be adjusted so that it shall equal the price determined by
multiplying the exercise price of the Warrants by a fraction, the denominator of
which shall be the number of shares of Common Stock outstanding immediately
after giving effect to such action and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
In such event, there shall be no adjustment to the number of shares of Common
Stock or other securities issuable upon exercise of the Warrants. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(b) In case the Company shall fix a record date for the
issuance of 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 (the "Subscription Price") (or having a conversion
price per share) less than the current market price of the Common Stock (as
defined in Subsection (e) below) on the record date mentioned below, the
Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the number of shares then comprising an Option
Securities by the product of the Exercise Price in effect immediately prior to
the date of such issuance multiplied by a fraction, the numerator of which shall
be the sum of the number of shares of Common Stock outstanding on the record
date mentioned below and the number of additional shares of Common Stock which
the aggregate offering price of the total number of shares of Common Stock so
offered (or the aggregate conversion price of the convertible securities so
offered) would purchase at such current market price per share of the Common
Stock, and the denominator of which shall be the sum of the number of shares of
Common Stock outstanding on such record date and the number of additional shares
of Common Stock offered for subscription or purchase (or into which the
convertible securities so offered are convertible). Such adjustment shall be
made successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
10
<PAGE>
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the
holders of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions and-dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the number of shares
then comprising an Option Securities by the product of the Exercise Price in
effect immediately prior thereto multiplied by a fraction, the numerator of
which shall be the total number of shares of Common Stock outstanding multiplied
by the current market price per share of Common Stock (as defined in Subsection
(e) below), less the fair market value (as determined by the Company's Board of
Directors) of said assets or evidences of indebtedness so distributed or of such
rights or warrants, and the denominator of which shall be the total number of
shares of Common Stock outstanding multiplied by such current market price per
share of Common Stock. Such adjustment shall be made successively whenever such
a record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such
distribution.
(d) Whenever the Exercise Price payable upon exercise of this
Option is adjusted pursuant to Subsections (a), (b) or (c) above, the number of
Option Securities purchasable upon exercise of this Option shall simultaneously
be adjusted by multiplying the number of Option Securities initially issuable
upon exercise of this Option by the Exercise Price in effect on the date hereof
and dividing the product so obtained by the Exercise Price, as adjusted.
(e) For the purpose of any computation under Subsections
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<PAGE>
(b) or (c) above, the current market price per share of Common Stock at any date
shall be deemed to be the average of the daily closing prices for 20 consecutive
business days before such date. The closing price for each day shall be the last
sale price regular way or, in case no such reported sale takes place on such
day, the average of the last reported bid and asked prices regular way, in
either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Board of Directors.
(f) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least fifteen
cents ($0.15) in such price; provided, however, that any adjustments which by
reason of this Subsection (i) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 8 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be. Anything in
this Section 8 to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in the Exercise Price, in
addition to those required by this Section 8, as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
Stock, hereafter made by the Company shall not result in any Federal Income tax
liability to the holders of Common Stock or securities convertible into Common
Stock (including Warrants issuable upon exercise of this Option).
(g) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly, but no later than 10 days after any
request for such an adjustment by the Holder, cause a notice setting forth the
adjusted Exercise Price and adjusted number of Option Securities issuable upon
exercise of this Option and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to the Holder, at the
address set forth herein, and shall cause a certified copy thereof to be mailed
to its transfer agent, if any. The Company may retain a firm of independent
certified public accountants selected by the
12
<PAGE>
Board of Directors (who may be the regular accountants employed by the Company)
to make any computation required by this Section 8, and a certificate signed by
such firm shall be conclusive evidence of the correctness of such adjustment.
(h) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (a) above, the Holder thereafter shall
become entitled to receive any shares of the Company, other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of this
Option shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the Common
Stock contained in Subsections (a) to (g), inclusive above.
(i) No adjustments shall be made in connection with future
public offerings.
9. This Agreement shall be governed by and in accordance with the laws
of the State of New York.
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<PAGE>
IN WITNESS WHEREOF, Flemington Pharmaceutical Corporation has
caused this Option to be signed by its duly authorized officers under its
corporate seal, and this Option to be dated as of the date first above written.
FLEMINGTON PHARMACEUTICAL CORPORATION
By:______________________________
Chief Executive Officer
(Corporate Seal)
14
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of option)
THE UNDERSIGNED, the holder of the foregoing Option, hereby irrevocably
elects to exercise the purchase rights represented by such Option for, and to
purchase thereunder,
_____Units, each consisting of one (1) Share of Common Stock, par value $.01 per
share, of Flemington Pharmaceutical Corporation and one (1) Warrant and herewith
makes payment of $______________ therefor, and requests that the Warrants and
certificates for shares of Common Stock be issued in the name(s) of, and
delivered to _________________________ whose address(es) is (are)_______________
_______________________________________________________________________________.
Dated:
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and
transfers unto _________________________________ the right to purchase Units,
each consisting of one (1) share of Common Stock and one (1) Warrant of
Flemington Pharmaceutical Corporation, in the numbers set forth below
represented by the foregoing Option to the extent of _____ shares of Common
Stock and ____ Warrants, and appoints _________________________________ attorney
to transfer such rights on the books of Flemington Pharmaceutical Corporation,
with full power of substitution in the premises.
Dated:
By: ______________________________
Address:
______________________________
______________________________
______________________________
In the presence of:
