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As filed with the Securities and Exchange Commission on February 27, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PENEDERM INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 2834
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
77-0146116
(I.R.S. employer identification number)
320 LAKESIDE DRIVE, FOSTER CITY, CALIFORNIA 94404, (650) 358-0100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
LLOYD H. MALCHOW
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PENEDERM INCORPORATED
320 LAKESIDE DRIVE
FOSTER CITY, CALIFORNIA 94404
(650) 358-0100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
RICHARD FRIEDMAN, ESQ.
Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
(650) 324-7000(phone)
(650) 324-0638 (fax)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box.
[ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [ X ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, 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 of 1933, as amended, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF SHARES TO BE REGISTERED TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED PER SHARE (1) OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value.. 1,225,000 $10.35 $12,678,750 $3,741
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(1) Estimated in accordance with Rule 457(c) for the purpose of computing the
amount of the registration fee based on the average of the high and low
prices of the Company's Common Stock on the Nasdaq National Market on
February 23, 1998.
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 27, 1998
PROSPECTUS
PENEDERM INCORPORATED
1,225,000 Shares of Common Stock
All of the 1,225,000 shares (the "Shares") of common stock, par
value $.01 per share (the "Common Stock"), of Penederm Incorporated
("Penederm" or the "Company") covered by this Prospectus may be offered
for sale for the account of the stockholder of the Company (the "Selling
Stockholder") described herein under the heading "Selling Stockholder."
1,200,000 of the Shares are issuable pursuant to a Common Stock
Investment Agreement, dated January 21, 1998, between the Company and
the Selling Stockholder (the "Investment Agreement") and 25,000 of the
Shares are issuable upon exercise of a warrant issued to the Selling
Stockholder (the "Warrant") in connection with the Investment Agreement.
See "Selling Stockholder."
The Company's Common Stock is traded on the Nasdaq National
Market under the symbol "DERM". On February 26, 1998, the closing price
for the Common Stock, as reported on the Nasdaq National Market, was
$11.375 per share.
Shares offered by this Prospectus by the Selling Stockholder may
be offered for sale from time to time by the Selling Stockholder at such
prices and on such terms as may then be obtainable in negotiated
transactions or otherwise. See "Plan of Distribution". This Prospectus
may be used by the Selling Stockholder or by any broker-dealer who may
participate in sales of securities covered hereby. The Selling
Stockholder and the brokers and dealers through whom such sales are
effected may be deemed to be underwriters under the Securities Act of
1933, as amended (the "Securities Act"). The Selling Stockholder will
pay all commissions, transfer taxes, and certain other expenses
associated with the sales of securities by them. Pursuant to an
agreement with the Selling Stockholder, the Company has paid the
expenses of the preparation of this Prospectus and certain other
expenses. The Company has also agreed to indemnify the Selling
Stockholder against certain liabilities, including liabilities arising
under the Securities Act.
Penederm has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement under the Securities Act
with respect to the securities offered by this Prospectus. As permitted
by the rules and regulations of the Commission, this Prospectus does not
contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with
respect to Penederm and the securities offered hereby, reference is made
to the Registration Statement and the exhibits thereto, which may be
examined without charge at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of which may be obtained from the
Commission upon payment of the prescribed fees.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 3.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ___________, 1998
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No person is authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized. This Prospectus does not constitute an
offer of any securities other than those to which it relates or an offer to any
person in any jurisdiction where such offer would be unlawful. The delivery of
this Prospectus at any time does not imply that the information herein is
correct as of any time subsequent to the date hereof.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Commission.
Reports, proxy and information statements and other information filed by the
Company with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at the following addresses: New York
Regional Office, Seven World Trade Center, New York, New York 10048 and Chicago
Regional Office, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511. Copies of such material can be obtained from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated in this Prospectus by reference:
(i) the Company's annual report on Form 10-K for the fiscal year ended
December 31, 1997; and
(ii) the description of the Company's Common Stock contained in the
Registration Statement on Form 8-A of Penederm Incorporated, a California
corporation which was the predecessor to the Company ("Penederm California"),
filed pursuant to Section 12 of the Exchange Act on October 25, 1993 and of the
Common Stock Purchase Rights contained in Penederm California's Registration
Statement on Form 8-A filed pursuant to Section 12 of the Exchange Act on
November 27, 1996, each as amended by the Company's Current Report on Form 8-K
filed on August 1, 1997.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the
offering of securities hereunder shall be deemed to be incorporated herein by
reference and shall be a part hereof from the date of the filing of such
documents. Any statements contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or replaced for
purposes of this Prospectus to the extent that a statement contained herein or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or replaces such statement. Any such
statement so modified or replaced shall not be deemed, except as so modified or
replaced, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a Prospectus is delivered, upon written or oral
request of such person, a copy of any document incorporated by reference in this
Prospectus, other than exhibits to such documents not specifically incorporated
by reference. Such requests should be directed to Penederm Incorporated, 320
Lakeside Drive, Foster City, California 94404, Attention: President, telephone
(650) 358-0100.
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RISK FACTORS
In addition to the other information contained in this Prospectus or
incorporated herein by reference, the following risk factors should be
considered carefully in evaluating the Company and its business before
purchasing shares of the Common Stock offered hereby. These factors, among
others, may cause actual results, events or performance to differ materially
from those expressed in any forward-looking statements made by the Company in
this Prospectus.
Uncertainty of Early Commercialization Efforts and Market Acceptance of
Prescription Products. Although the Company has invested significant
expenditures in the launch of both Avita and Mentax in 1996 and 1997, the
products have achieved only modest market shares and will continue to face
manufacturing, sales and marketing, market acceptance and other risks associated
with the continued commercialization of prescription pharmaceutical products.
The Company will face certain risks related to the initial launch of its Avita
gel product and Acticin product in 1998. The Company relies on third-party
contract manufacturers for commercial production of all of its products. There
can be no assurance that the Company will be able to obtain contract
manufacturing of adequate quantities on a timely basis or on commercially
acceptable terms, if at all, for its products. The Company has commenced
marketing in the United States prescription products through a pharmaceutical
specialty contract sales force which will be replaced by its own direct,
employee-based sales force in early 1998. The Company has no experience
developing or managing a sales force and limited experience promoting
prescription products, and there can be no assurance that the Company will be
able to manage the sales force transition without customer disruption, or
establish and maintain a successful marketing and sales effort. A number of
factors may limit the market acceptance of the Company's products, including the
timing of market entry, the availability of alternative products, the price of
the Company's products relative to alternative products, the availability of
third-party reimbursement, acceptance by prescribing physicians, managed care
providers and patients, the nature of publicity regarding the products (if any),
and the extent of marketing efforts by the Company's collaborators or partners
(if any). The Company's products will be subject to continued post-market review
which may result in restrictions on marketing or withdrawal of any such products
from the market. There can be no assurance that prescribing physicians, managed
care providers or patients will demand the products in quantities consistent
with expectations of public market analysts and investors. The failure of such
products to receive market acceptance could have a material adverse effect on
the Company's operating results or the market price of the Company's Common
Stock.
Competition and Technological Change. The Company faces significant
competition from, among others, large pharmaceutical companies with established
dermatology divisions. The Company believes that its principal competition with
respect to Mentax are products marketed by Allergan Inc., Johnson & Johnson and
Novartis (formerly Sandoz Pharmaceuticals). The Company believes that its
principal competition with respect to Avita initially are the retinoic acid
products marketed by Johnson & Johnson and Galderma. Such Johnson & Johnson
products have been on the market for many years and have substantially all of
the market share for prescription acne treatments. The Company is aware of other
newly-approved novel acne treatments that may present substantial competition
for Avita, including another Johnson & Johnson tretinoin gel product and a new
topical retinoid product from Galderma that are both being promoted as less
irritating. Most of the Company's competitors have substantially greater
financial, technical, production, marketing and regulatory experience and
resources, larger sales and marketing forces and more experience than the
Company in developing, commercializing and marketing drug and skin care
products. There can be no assurance that the Company's existing and proposed
products, including Avita and Mentax, will compete successfully with the
existing and proposed products of the Company's competitors, and the failure of
the Company's products to do so would have a material adverse effect on the
Company's operating results.
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The following trademarks of Penederm are used in this Form S-3:
Avita(TM), Mentax(R) and Acticin(TM).
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The Company's current products and those under development are based on
relatively new technologies. The Company expects technological developments in
its business to occur at a rapid rate and believes that competition may
intensify as technological advances in the field are made and become more widely
known. In recent years, several other companies have been formed and, in certain
instances, are collaborating with large pharmaceutical companies, to develop
specific drug delivery systems or drug or skin care products that might compete
directly with the Company's technologies and products. Delivery systems and
products developed by the Company's competitors may be superior to, or gain
greater or faster market acceptance than, the Company's drug delivery systems
and products. There can be no assurance that the Company's competitors will not
succeed in developing technologies and products that are more effective than any
which have been or are being developed by the Company or that would render the
Company's products and technologies obsolete or noncompetitive.
Dependence on Sole Suppliers and Third Party Manufacturers. The Company
is dependent on third parties for both the supply of raw materials used to
produce TopiCare Delivery Compounds and finished products and the manufacturing
of these compounds and products. One of the materials used in TopiCare Delivery
Compounds is currently available from only one supplier, Bayer Corporation. The
Company currently obtains certain other raw materials, including butenafine and
retinoic acid, from other sole sources. The Company currently secures many of
these supplies pursuant to purchase orders or contracts that are terminable on
short notice. In the event of termination or breach by a supplier or other
failure to continue to supply materials, the Company would be required to secure
and qualify an alternate supplier. Although the Company has not experienced
difficulty acquiring raw materials, maintains significant inventories of these
materials and believes it could qualify alternate suppliers for these materials,
there can be no assurance that interruptions in supplies will not occur in the
future or that the Company would be able to timely secure the materials
necessary to produce its products so as to not experience a disruption in
manufacturing if a supplier breached or terminated its contract and the Company
experienced a disruption in supply. Any significant interruption in the supply
of raw materials could have a material adverse effect on the Company's ability
to produce its compounds and finished products and its operating results.
The Company neither has nor plans to acquire the equipment and
facilities necessary to manufacture its current and future products and is and
will be dependent upon third-party contract manufacturers for commercial
production of all of its existing and proposed products. The Company currently
secures the manufacture of its products pursuant to contracts or purchase
orders. In the event of breach by a manufacturer or other failure to provide
manufacturing services, the Company would be required to secure and qualify an
alternate manufacturer, which could delay production and sale of the Company's
products. In addition, because the Company must contract for the manufacture of
its products, the Company has little control over the production of finished
products and the associated raw materials costs. There can be no assurance that
the Company will continue to be able to obtain contract manufacturing on
commercially acceptable terms, if at all, for its products in the quantities
required. Quality control and manufacturing problems have arisen from time to
time, and there can be no assurance that future manufacturing or quality control
problems will not arise at the plants of the Company's contract manufacturers or
that such manufacturers will be able to maintain the necessary licenses from
governmental authorities to continue or to commence manufacturing the Company's
products. For example, in 1994 one of the Company's contract manufacturers had
certain regulatory deficiencies which led to the Company removing the
manufacturer from its drug application and qualifying a new manufacturing site.
There can be no assurance that the Company will be able to secure the timely and
cost-efficient manufacture of its products in accordance with FDA requirements
from these independent parties, and the inability of the Company to do so could
have a material adverse effect on the Company's operating results.
Marketing and Sales Uncertainties; Dependence on Collaborative Partners
for Product Distribution. In 1997, the Company commenced marketing in the United
States prescription products through a pharmaceutical specialty contract sales
force specializing in pharmaceuticals and solely dedicated to Penederm products.
In early 1998, Penederm began the transition to a direct, employee-based sales
force. Although the sales force is partially comprised of representatives that
previously worked for the contract sales force, and that the reorganized sales
force consists of personnel with experience promoting principally dermatological
products, none of the sales representatives has experience working under the
direction of the Company or the experience promoting its products for a
substantial period of time and certain of its representatives may not have
experience promoting dermatological products. Accordingly, the ongoing training
and management of the sales force will require significant management attention
and cost. The Company has no experience establishing, training or managing a
sales force and has limited experience promoting prescription products. There
can be no assurance that the Company will be able to successfully train and
maintain a sales force or that such sales force will be able to commercialize
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Avita, Mentax, Acticin or any of the Company's other products successfully. The
inability to establish a successful sales effort would have a material adverse
effect on the Company's operating results.
The Company's strategy for the distribution of certain of its products,
including prescription products in certain geographic territories, requires
entering into various arrangements with corporate collaborators such as
Schering-Plough HealthCare Products ("Schering-Plough"), Warner Wellcome
Consumer Health Products ("Warner"), UCB Group of Belgium ("UCB"), Pharmascience
Inc., SmithKline Beecham, and Mylan. Revenues from these agreements constituted
substantially all of the Company's revenues in 1996. These agreements often are
of short duration, terminable with little or no notice and subject to periodic
amendment. Although the Company believes parties to any such arrangements would
have an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources to be devoted to these
activities are not within the control of the Company. There can be no assurance
that such parties will perform their obligations, that the agreements will not
be terminated or renegotiated or that the Company will derive any revenue from
such arrangements. Any such event could have a material adverse effect on the
Company's operating results. The Company intends to seek additional
collaborative arrangements to commercialize certain of its products. There can
be no assurance that the Company will be able to negotiate acceptable
collaborative arrangements in the future, or that current or future
collaborative arrangements will be successful.
In 1997, no customer accounted for more than 10% of the Company's
revenues.
Fluctuations in Quarterly Results; History of Operating Losses. The
Company's future operating results may be subject to significant quarterly
variations based on a wide variety of factors, including, but not limited to,
the timing of regulatory notifications and approvals, the commercial success of
Avita and Mentax in the United States, the timing of the commercial introduction
of other products both in the United States and abroad, the timing and extent of
marketing efforts by the Company and its partners, the timing of contract
payments to and from the Company, the introduction of competing products by
other companies, the pricing of existing and future products by the Company's
competitors, the publication of clinical results from the Company's products
under development, interruptions in the supply of raw materials necessary to
produce the Company's products, and interruptions or delays in the manufacturing
of such products. In addition, sales of a product upon initial market
introduction generally include a significant amount of initial orders for
inventory by wholesalers and distributors and are not necessarily indicative of
actual demand for the product by patients and physicians. There can be no
assurance that distributors or wholesalers will be able to forecast demand for
product accurately. Fluctuations in operating results will occur to the extent
that resales do not meet distributors' or wholesalers' expectations. The
Company's expense levels are based, in part, on its expectations of future sales
levels and have increased significantly in 1997 with the launch of Avita and
Mentax. The Company's selling expense will increase significantly in 1998 as the
Company makes the transition from a contract sales force in 1997 to a direct
sales force that is employee based. The Company may be unable to estimate
accurately when revenues will be realized from the sales of these and other
products. If sales are below expectations or the release of products is delayed,
the Company's quarterly and annual operating results will be adversely affected,
which would have a material adverse effect on the market price of the Company's
Common Stock. In any event, it is likely that in future quarters the Company's
operating results may from time to time be below the expectations of public
market analysts and investors, which also could have a material adverse effect
on the price of the Company's Common Stock.
The Company is in the early stages of commercializing its products and
developing collaborative relationships. To date, the Company has generated only
limited revenues from the sale of its products and from licensing arrangements.
As of December 31, 1997 the Company had accumulated net losses of approximately
$51.1 million. To achieve profitable operations, the Company must, among other
things, successfully market its existing products, develop and market new
products and may need to establish significant long-term collaborative
relationships with other pharmaceutical companies. The Company's products under
development will require significant additional development, laboratory and
clinical testing, regulatory approvals and investment prior to
commercialization. The Company may continue to incur significant additional
operating losses depending principally on the market acceptance of the Company's
products, the success of product development efforts, the timing of potential
FDA approvals and subsequent launch of the drug products, the timing of
expenditures and other related factors. There can be no assurance that the
Company will achieve profitability.
Government Regulation; No Assurance of Product Approvals. The research,
testing, manufacture and marketing of drug products is subject to extensive
regulation by numerous regulatory authorities in the United States and other
countries. Failure to comply with FDA or other applicable regulatory
requirements may subject a company to administrative or
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judicially-imposed sanctions such as civil penalties, criminal prosecution,
injunctions, product seizure or detention, product recalls, total or partial
suspension of production and FDA refusal to approve pending premarket approval
applications or supplements to approved applications. The process of obtaining
FDA and other required regulatory approvals, including foreign approvals, often
takes many years and can vary substantially based upon the type, complexity and
novelty of the products involved. Furthermore, such approval process is
extremely expensive and uncertain. There can be no assurance that the Company
will be able to obtain the labeling claims necessary or desirable for the
promotion of those products. FDA requirements prohibit the marketing or
promotion of a drug for unapproved indications. Furthermore, regulatory
marketing approval may entail ongoing requirements for postmarketing studies.
Even after regulatory approval is obtained, whether for Avita or Mentax or
potential future products of the Company, a marketed product, its manufacture
and its manufacturing facilities are subject to continued regulatory review and
periodic inspection by the FDA. Later discovery of previously unknown problems
or failure to comply with applicable regulatory requirements may result in
penalties such as restrictions on a product's marketing or withdrawal of the
product from the market.
Prior to the submission of premarket approval applications, drugs
developed by the Company must undergo rigorous preclinical and clinical testing,
which may take several years and the expenditure of substantial resources.
Before commencing clinical trials in humans, the Company must submit to the FDA
and receive clearance of an investigational new drug application ("IND"). There
can be no assurance that submission of an IND for future clinical testing of any
products under development or other future products of the Company would result
in FDA authorization to commence clinical trials or that the Company will be
able to obtain the necessary approvals for future clinical testing in any
foreign jurisdiction. Further, there can be no assurance that if such testing of
products under development is completed, any such drug compounds will be
accepted for formal review by the FDA or any foreign regulatory body or approved
by the FDA for marketing in the United States or by any such foreign regulatory
bodies for marketing in particular foreign jurisdictions.
The Company's research and development involves the controlled use of
hazardous materials, including but not limited to chemicals, fungi and various
radioactive compounds. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the coverage limits of or not be
covered by the Company's insurance and could have a material adverse effect on
the Company's operating results.
Uncertainty of Future Product Development. The future success of the
Company will be dependent upon development of new products that obtain
regulatory approval and market acceptance. Such development will require that
the Company successfully identify appropriate products, compounds or
technologies and that the Company obtain any necessary rights thereto. The
Company's strategy for the development of future products requires entering into
various arrangements with third party development partners, licensors and
licensees, such as Kaken Pharmaceutical Co. Ltd. ("Kaken"), Schering-Plough
Healthcare Products, Inc., Wisconsin Alumni Research Foundation ("WARF") and
Renaissance Corporation ("Renaissance"). The development of new pharmaceutical
products is subject to a number of significant risks and uncertainties.
Potential products, compounds or technologies that appear to be promising at
various stages of development may not receive regulatory approval, reach the
market or achieve widespread use for a number of reasons. In any event,
development of new products will subject the Company to significant product
development costs for which the Company may never receive revenue or for which
revenue may be significantly delayed. In addition, the Company may be required
to pay royalties or other license development or commercialization fees, which
could have a material adverse effect on the profitability of such products to
the Company. There can be no assurance that the Company will be able to
in-license products, compounds or technologies on terms financially acceptable
to the Company, successfully develop potential products, obtain regulatory
approval for any such products, obtain necessary support from third party
collaborators, or successfully commercialize such products, and the inability of
the Company to do so could have a material adverse affect on the Company's
operating results.
Proprietary Technology; Patent Protection. The Company's success,
competitive position, revenue and profits, if any, will depend in part upon its
ability to obtain patent protection in various jurisdictions related to the
technologies and processes it possesses and the technologies and products it
develops. The University of California has obtained three United States and 17
foreign patents for the technology underlying the TopiCare Delivery Compounds
and has licensed these patents to the Company on a worldwide exclusive basis for
the life of the patents. These patents will expire in 2007 and 2008. Under the
license arrangement, the University of California is required to file, prosecute
and maintain foreign patent applications as requested by the Company at the
Company's expense. The Company has licensed rights to certain patented compounds
from
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Kaken, WARF, and Renaissance and in the future may license patented compounds
from other parties. Any failure by these parties properly to file, prosecute or
maintain any such patents licensed by the Company could materially adversely
affect the Company's operating results.
The Company has filed and intends to file additional patent
applications, when appropriate, relating to its technologies, improvements to
its technologies and specific products that it develops and to direct the
University of California to file any additional patent applications where
appropriate. The Company has filed two United States patent applications, one of
which has a corresponding Patent Cooperation Treaty application, and also has
four foreign patent applications pending. The scope and breadth of patent
protection with respect to pharmaceutical products is uncertain and involves
complex legal, scientific and factual questions. Accordingly, it is impossible
to anticipate the breadth or degree of protection that any such patents will
afford. Furthermore, there can be no assurance that litigation seeking to
challenge such patent protection will not be brought against the Company or the
University of California or that the Company's or the University of California's
patents will not be successfully challenged. The expenses involved in any patent
litigation can be significant and cannot be estimated by the Company. In
addition, there can be no assurance that the scope and validity of the Company's
or the University of California's existing or future patents, if any, will
prevent third parties from developing similar or competing products.
Third parties may hold or be issued patents which the Company's
technology may infringe. The Company could incur substantial costs in defending
itself and its collaborative partners against any resulting claims. Furthermore,
parties making such claims may be able to obtain injunctive or other equitable
relief which could effectively block the Company's ability to further develop or
commercialize its products in the United States and abroad, and could result in
the award of substantial damages. In the event of a claim of infringement, the
Company may be required to obtain one or more licenses from third parties. There
can be no assurance that the Company will be able to obtain such licenses at a
reasonable cost, if at all. Defense of any lawsuit or failure to obtain any such
license could have a material adverse effect on the Company's operating results.
In July 1996, Johnson & Johnson filed a complaint in federal district
court alleging that the Company's Avita gel formulation infringes a Johnson &
Johnson patent. The parties entered into a settlement agreement in December 1996
pursuant to which the Company agreed not to market the Avita gel formulation
before the expiration of the Johnson & Johnson patent in January 1998.
The Company also relies upon unpatented trade secrets and know-how.
There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology or that
the Company can meaningfully protect its rights to its unpatented trade secrets.
The PTO has recently adopted changes to United States patent law which
changed the term of issued patents, subject to certain transition periods, to 20
years from the date of filing rather than 17 years from date of issuance. For
applications filed after June 7, 1995, the patent term will be 20 years from the
earliest effective filing date of the priority patent application. Such change
may reduce the effective term of protection for patents that are pending for
more than three years in the PTO. While the Company cannot predict the effect
that such changes will have on its business, the adoption of such changes could
have a material adverse effect on the Company's ability to protect its
proprietary information and sustain the commercial viability of its products.
Furthermore, the possibility of shorter terms of patent protection, combined
with the lengthy FDA review process and possibility of extensive delays in such
process, could effectively further reduce the term during which a marketed
product could be protected by patents.
Uncertainty of Pharmaceutical Pricing and Reimbursement. The Company's
business may be materially adversely affected by the continuing efforts of
governmental and third-party payors to contain or reduce the costs of health
care in general and drugs in particular. For example, in most international
markets, pricing of prescription pharmaceuticals is subject to government price
controls. In these markets, once marketing approval is received, pricing
negotiation could take another six to 12 months or longer. In the United States
there have been, and there may continue to be, federal and state proposals to
implement similar government price controls. In addition, an increasing emphasis
on managed care and consolidation of hospital purchasing in the United States
has and will continue to put pressure on pharmaceutical pricing. Such proposals,
if adopted, and such initiatives could decrease the price that the Company
receives for any current or future
7
<PAGE> 9
products and thereby have a material adverse effect on the Company's business,
financial condition and results of operations. Further, to the extent that such
proposals or initiatives have a material adverse effect on pharmaceutical
companies that are collaborators or prospective collaborators for certain of the
Company's products, the Company's ability to commercialize its products may be
materially adversely affected. In addition, price competition may result from
competing product sales, attempts to gain market share or introductory pricing
programs, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's ability to commercialize its products may depend in part
on the extent to which reimbursement for such products and related treatments
will be available from government health administration authorities, private
health insurers and other third-party payors. Significant uncertainty exists as
to the reimbursement status of newly approved health care products, and
third-party payors are increasingly challenging the prices charged for medical
products and services. There can be no assurance that any third-party insurance
coverage will be available to patients for any of the Company's products.
Government and other third-party payors are increasingly attempting to contain
health care costs by limiting the level of reimbursement for new therapeutic
products, and be refusing, in some cases, to provide coverage or reimbursement
for indications for which the FDA has not granted marketing clearance. Moreover,
reimbursement may be denied even for FDA-approved indications. If adequate
coverage and reimbursement levels are not provided by the government and
third-party payors for the Company's products, the Company's business, financial
condition and results of operations would be materially adversely affected.
Dependence on Key Personnel. The success of the Company is dependent
upon its ability to retain and attract highly qualified scientific, management
and marketing personnel. The Company faces intense competition for personnel
from other companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful in
attracting and retaining key personnel. The loss of key personnel, or the
inability to attract and retain the additional, highly-skilled employees
required for the expansion of the Company's activities, could adversely affect
its business.
Risk of Product Liability Claims; No Assurance of Adequate Insurance.
Testing, manufacturing and marketing of the Company's products entail a risk of
product liability. In addition, third-party manufacturers of certain drugs and
skin care agents used by the Company in its products have limited contractual
responsibility for product liability. Although the Company has obtained
aggregate product liability insurance coverage in the amount of $3,000,000,
there can be no assurance that the existing coverage is adequate for current
operations. Furthermore, this existing coverage may not be adequate as the
Company further develops products, and there can be no assurance that additional
insurance coverage will be available in the future at an acceptable cost, if at
all. Failure of the Company to prevail on a product liability claim could have a
material adverse effect on the Company's operating results. In addition, the
Company could incur substantial costs in defending a claim, even where that
claim was ultimately unsuccessful, and defense of any such claim could divert
management's efforts and attention from the Company's business and have a
material adverse effect on the Company's operating results.
Volatility of Stock Price. The Nasdaq National Market has from time to
time experienced significant price and volume fluctuations that may be unrelated
to the operating performance of particular companies. In addition, the market
price of the Common Stock, like the stock prices of many publicly traded
pharmaceutical and biotechnology companies, has been, and may continue to be,
highly volatile. Announcements of technological innovations or new commercial
products by the Company or its competitors, developments or disputes concerning
patent or proprietary rights, publicity regarding actual or potential medical
results relating to products under development by the Company or its
competitors, regulatory developments in both the United States and foreign
countries, public concern as to the safety of biotechnology and pharmaceutical
products and economic and other external factors, as well as period-to-period
fluctuations in financial results, among other factors, may have a material
adverse effect on the market price of the Common Stock.
8
<PAGE> 10
SELLING STOCKHOLDER
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock by the Selling Stockholder as of
February 26, 1998. Because the Selling Stockholder may sell some or all of the
Shares offered hereby, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the Shares, no
estimate can be given as to the actual amount of Shares that will be held by the
Selling Stockholder after completion of such distribution. See "Plan of
Distribution".
The Selling Stockholder has not had a material relationship with the
Company within the past three years, except as a result of entering into the
Investment Agreement with the Company.
<TABLE>
<CAPTION>
Common Stock Common Stock Common Stock
Beneficially Owned to be Beneficially Owned
Prior to Offering (1) Sold After Offering (1)
--------------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Holder Number Percent Number Percent
- ------ ------ ------- ------ -------
Promethean Investment Group, 25,000 * 1,225,000 -- --
L.L.C.
TOTALS 25,000 * 1,225,000 -- --
====== ========== ========= ====== =======
</TABLE>
- ----------
* Less than one percent.
(1) The Selling Stockholder is deemed to beneficially own the 25,000
Shares issuable upon exercise of the Warrant.
The Shares offered hereby by the Selling Stockholder may be acquired
pursuant to a Common Stock Investment Agreement dated as of January 21, 1998
(the "Investment Agreement") between the Company and the Selling Stockholder,
and upon exercise of the Warrant. Under the Investment Agreement, the Company
may request that the Selling Stockholder purchase up to $10,000,000 of shares of
Common Stock in tranches through April 2000. Under certain circumstances, the
Company may deliver to the Selling Stockholder notices (each, a "Put Notice")
stating a dollar amount (a "Dollar Amount") of Common Stock which the Company
intends to sell to the Selling Stockholder within the next 35 business days (a
"Purchase Period"). Following the delivery of each Put Notice, the Selling
Stockholder, subject to the terms and conditions of the Investment Agreement,
must purchase within the corresponding Purchase Period such number of shares of
Common Stock with a value equivalent to the Dollar Amount of the Put Notice.
Under the terms of the Investment Agreement, the Selling Stockholder may require
the Company to sell to it shares with a value in excess of the Dollar Amount.
The timing of the delivery of Put Notices will be determined by the Company,
though the timing of purchases within each Purchase Period will be determined by
the Selling Stockholder.
The Selling Stockholder has represented to the Company that it will
acquire the Shares from the Company without any present intention of effecting a
distribution of those shares. However, in accordance with the Investment
Agreement, the Company agreed to register the Shares for resale by the Selling
Stockholder to permit such resales from time to time in the market or in
privately-negotiated transactions. The Company will prepare and file such
amendments and supplements to the registration statement as may be necessary in
accordance with the rules and regulations of the Securities Act to keep it
effective for a period of three years.
9
<PAGE> 11
The Company has agreed to bear certain expenses (other than broker discounts and
commissions, if any) in connection with the registration statement.
PLAN OF DISTRIBUTION
All or a portion of the Shares offered hereby by the Selling Stockholder
may be delivered and/or sold in transactions from time to time on the
over-the-counter market, on the Nasdaq National Market, in negotiated
transactions, or a combination of such methods of sale, at market prices
prevailing at the time, at prices related to such prevailing prices or at
negotiated prices and/or may also be used to cover any short positions
previously established. The Selling Stockholder may effect such transactions by
selling to or through one or more broker-dealers, and such broker-dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Stockholder. The Selling Stockholder and any
broker-dealers that participate in the distribution may under certain
circumstances be deemed to be "underwriters" within the meaning of the
Securities Act, and any commissions received by such broker-dealers and any
profits realized on the resale of Shares by them may be deemed to be
underwriting discounts and commissions under the Securities Act. The Selling
Stockholder may agree to indemnify such broker-dealers against certain
liabilities, including liabilities under the Securities Act. In addition, the
Company has agreed to indemnify the Selling Stockholder with respect to the
Shares offered hereby against certain liabilities, including, without
limitation, certain liabilities under the Securities Act, or, if such indemnity
is unavailable, to contribute toward amounts required to be paid in respect of
such liabilities.
Any broker-dealer participating in such transactions as agent may
receive commissions from the Selling Stockholder (and, if they act as agent for
the purchaser of such Shares, from such purchaser). Broker-dealers may agree
with the Selling Stockholder to sell a specified number of Shares at a
stipulated price per share, and, to the extent such a broker-dealer is unable to
do so acting as agent for the Selling Stockholder, to purchase as principal any
unsold Shares at the price required to fulfill the broker-dealer commitment to
the Selling Stockholder. Broker-dealers who acquire Shares as principal may
thereafter resell such Shares from time to time in transactions (which may
involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or otherwise
at market prices prevailing at the time of sale or at negotiated prices, and in
connection with such resales may pay to or receive from the purchasers of such
Shares commissions computed as described above.
Under applicable rules and regulations under the 1934 Act, any person
engaged in the distribution of the Resale of Shares may not simultaneously
engage in market making activities with respect to the Common Stock of the
Company for a period of two business days prior to the commencement of such
distribution. In addition and without limiting the foregoing, the Selling
Stockholder will be subject to applicable provisions of the Exchange Act, and
the rules and regulations thereunder, including, without limitation, Regulation
M, which provisions may limit the timing of purchases and sales of shares of the
Company's Common Stock by the Selling Stockholder.
The Selling Stockholder will pay all commissions, transfer taxes, and
other expenses associated with the sale of securities by them. The Shares
offered hereby are being registered pursuant to contractual obligations of the
Company, and the Company has paid the expenses of the preparation of this
Prospectus. The Company has not made any underwriting arrangements with respect
to the sale of Shares offered hereby.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
shares by the Selling Stockholder.
10
<PAGE> 12
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Heller Ehrman White & McAuliffe, Palo Alto, California, counsel
to the Company in connection with the offering.
EXPERTS
The consolidated financial statements of Penederm appearing in
Penederm's Annual Report (Form 10-K) for the year ended December 31, 1997 have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon and included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
11
<PAGE> 13
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered. All of the amounts
shown are estimates except the Securities and Exchange Commission registration
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission
Registration Fee.................................................... $ [ 3,741]
Legal fees and expenses.................................................... [12,500]
Accounting fees and expenses............................................... [12,000]
Miscellaneous.............................................................. [ 1,759]
Total...................................................................... $ [30,000]
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a
corporation to include in its charter documents, and in agreements between the
corporation and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article TENTH of the Company's Certificate of Incorporation provides for
the indemnification of officers, directors and third parties acting on behalf of
the corporation to the fullest extent permissible under the Delaware General
Corporation Law. Article TENTH of the Company's Certificate of Incorporation
provides as follows:
"TENTH. A. RIGHT TO INDEMNIFICATION Each person who was or is made a
party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he or she or
a person of whom he or she is the legal representative, is or was a
director or officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director or officer,
employee or agent of another corporation, or of a partnership, joint
venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee
or agent, shall be indemnified and held harmless by the corporation to
the fullest extent authorized by the Delaware General Corporation Law,
as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the
corporation to provide broader indemnification rights than that law
permitted the corporation to provide before the amendment) against all
expenses, liabilities and losses including, without limitation,
attorneys' fees, judgments, fines, ERISA excise taxes and penalties and
amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith. Such indemnification
shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators. However, the corporation shall indemnify
any such person seeking indemnity in connection with an action, suit or
proceeding (or part thereof) initiated by that person only if that
action, suit or proceeding (or part thereof) was authorized by the board
of directors of the corporation. The rights set forth in this Article
TENTH shall be contract rights and shall include the right to be paid
expenses incurred in defending any such proceeding in advance of its
final disposition. However, the payment of such expenses incurred by a
director or officer of the corporation in his or her capacity as a
director or officer (and not in any other capacity in which service was
or is rendered by such person while a director or officer, including,
without limitation, service to an employee benefit plan) in advance of
the final disposition of such proceeding shall be made only upon
II-1
<PAGE> 14
delivery to the corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it should be
determined ultimately that such director or officer is not entitled to
be so indemnified.
B. RIGHT OF CLAIMANT TO BRING SUIT If a claim under
Paragraph A of this Article TENTH is not paid in full by the corporation
within 90 days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against
the corporation to recover the unpaid amount of the claim. If successful
in whole or in part, the claimant shall be entitled to be paid the
expense of prosecuting that claim. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition
where the required undertaking, if any, has been tendered to this
corporation) that the claimant has not met the standards of conduct
which make it permissible under the Delaware General Corporation Law for
the corporation to indemnify the claimant for the amount claimed.
However, the burden of proving such defense shall be on the corporation.
Neither the failure of the corporation (including its board of
directors, independent legal counsel or its stockholders) to have made a
determination before the commencement of such action that
indemnification of the claimant is proper in the circumstances because
he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the
corporation (including its board of directors, independent legal counsel
or its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a
presumption that the claimant has not met the applicable standard of
conduct.
C. NON-EXCLUSIVITY OF RIGHTS The rights conferred on any
person by Paragraphs A and B of this Article TENTH shall not be
exclusive of any other rights which such person may have or hereafter
may acquire under any statute, provision of the Certificate of
Incorporation, by-law, agreement, vote of stockholders or of
disinterested directors, or otherwise.
D. EXPENSES AS A WITNESS To the extent that any director,
officer, employee, or agent of the corporation is by reason of such
position, or a position with another entity at the request of the
corporation, a witness in any action, suit or proceeding, he or she
shall be indemnified against all costs and expenses actually and
reasonably incurred by him or her on his or her behalf in connection
therewith.
E. INDEMNITY AGREEMENTS The corporation may enter into
agreements with any director, officer, employee or agent of the
corporation or any person who serves at the request of the corporation
as a director, officer, employee, or agent of another corporation or
other enterprise, providing for indemnification to the fullest extent
permissible under the Delaware General Corporation Law and the
corporation's Certificate of Incorporation.
F. EFFECT OF REPEAL OR MODIFICATION Any repeal or
modification of this Article TENTH shall not adversely affect any right
of indemnification of a director or officer, employee or agent of the
corporation existing at the time of such repeal or modification with
respect to any action or omission occurring before the repeal or
modification.
G. SEPARABILITY Each and every paragraph, sentence, term
and provision of this Article TENTH is separate and distinct. If any
paragraph, sentence, term or provision is held to be invalid or
unenforceable for any reason, such invalidity or unenforceability shall
not affect the validity or enforceability of any other such paragraph,
sentence, term or provision. To the extent required in order to make any
such paragraph, sentence, term or provision of this Article TENTH valid
or enforceable, the corporation shall, and the indemnitee or potential
indemnitee may, request a court of competent jurisdiction to modify the
paragraph, sentence, term or provision in order to preserve its validity
and provide the broadest possible indemnification permitted by
applicable law.
H. INSURANCE The corporation may maintain insurance, at
its expense, to protect itself and any director, officer, employee or
agent of the corporation or another corporation, partnership, joint
venture, trust or other enterprise against any expense, liability or
loss of the type referred to in this Article TENTH, whether or not the
corporation would have the power to indemnify such person against such
expense, liability or loss under applicable law."
II-2
<PAGE> 15
The Company has obtained insurance to indemnify its officers and
directors for liability incurred in serving the Company up to a maximum amount
of $3,000,000, including the costs of defense with respect to any such alleged
activity.
ITEM 16. EXHIBITS
Exhibit Description
------- -----------------------------------------------------------------
4.1 Common Stock Investment Agreement between Registrant and the
Selling Stockholder, dated January 21, 1998
5.1 Opinion of Heller Ehrman White & McAuliffe
23.1 Consent of Heller Ehrman White & McAuliffe
(filed as part of Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page II-5)
- ----------
ITEM 17. UNDERTAKINGS
A. 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 Securities Act of 1933;
(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;
provided, however, that paragraphs A(1)(i) and A(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
B. The undersigned registrant hereby undertakes that, for purposes of
determining liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed a new registration statement relating to the
II-3
<PAGE> 16
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
C. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the 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 question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE> 17
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 S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Foster City, State of California, on February 26,
1998.
PENEDERM INCORPORATED
/s/ LLOYD H. MALCHOW
-----------------------------------------
Lloyd H. Malchow
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Lloyd
H. Malchow and Michael Bates his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to the Registration Statement,
and to sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, as amended, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ LLOYD H. MALCHOW President, Chief Executive Officer and February 26, 1998
- ----------------------------- Director (Principal Executive Financial
Lloyd H. Malchow Officer)
/s/ MICHAEL A. BATES Chief Financial Officer (Principal February 26, 1998
- ----------------------------- Financial and Accounting Officer)
Michael A. Bates
/s/ DAVID E. COLLINS Chairman of the Board February 26, 1998
- -----------------------------
David E. Collins
/s/ ROBERT F. ALLNUTT Director February 26, 1998
- -----------------------------
Robert F. Allnutt
/s/ WILLIAM I. BERGMAN Director February 26, 1998
- -----------------------------
William I. Bergman
/s/ MARK J. GABRIELSON Director February 26, 1998
- -----------------------------
Mark J. Gabrielson
/s/ HARVEY S. SADOW Director February 26, 1998
- -----------------------------
Harvey S. Sadow, Ph.D.
/s/ GERALD D. WEINSTEIN Director February 26, 1998
- -----------------------------
Gerald D. Weinstein, M.D.
</TABLE>
II-5
<PAGE> 18
PENEDERM INCORPORATED
Index to Exhibits
Exhibit No. Description
- ---------------- ---------------------------------------------------------
4.1 Common Stock Investment Agreement between Registrant and
the Selling Stockholder, dated January 21, 1998
5.1 Opinion of Heller Ehrman White & McAuliffe
23.1 Consent of Heller Ehrman White & McAuliffe (filed as part
of Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (See Page II-5)
- ----------
<PAGE> 1
EXHIBIT 4.1
PROPRIETARY AND CONFIDENTIAL
COMMON STOCK
INVESTMENT AGREEMENT
Between
Promethean Investment Group L.L.C.
And
Penederm Incorporated
Dated as of January 21, 1998
<PAGE> 2
INVESTMENT AGREEMENT dated as of January 21, 1998 between Promethean
Investment Group L.L.C., a limited liability company organized and existing
under the laws of the State of New York (together with its successors in
interest and assigns or its designees, the "Investor"), and Penederm
Incorporated, a corporation duly organized and existing under the laws of the
State of Delaware (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Investor shall invest up to $10,000,000
(subject to increase as set forth in Section 2.2(a)) in shares (the "Shares") of
the Company's common stock, par value $.01 per share (collectively, the "Common
Stock"),
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Definitions
Terms used herein which are not defined herein but are defined in the
Registration Rights Exhibit, which is annexed hereto, incorporated herein and
hereby made an integral part hereof shall have the same meaning herein as
therein. This Agreement and the Registration Rights Exhibit attached hereto are
referred to collectively herein as, the "Agreement".
ARTICLE II
Purchase and Sale of Common Stock
Section 2.1. Purchase and Sale of Common Stock. Upon the terms and conditions
set forth herein, the Company shall issue and sell to the Investor, and the
Investor shall purchase from the Company, up to those number of Shares having a
value of $10,000,000 (subject to increase as set forth in Section 2.2(a)).
Section 2.2. Delivery of Put Notices.
(a) At any time and from time to time during the period beginning
on the Business Day following the initial effective date of the Registration
Statement and ending on the earlier of (i) the date twenty-seven (27) months
after the date hereof and (ii) termination of this Agreement in accordance with
Article VIII (the "Open Period"), the Company may, in its sole discretion,
deliver written notices to the Investor (each such notice hereinafter referred
to as a "Put Notice") stating a dollar amount (the "Dollar Amount") of Common
Stock which the Company intends to sell to the Investor within the thirty-five
(35) Business Days (the "Purchase Period") following the date (the
<PAGE> 3
"Put Notice Date") on which the Put Notice is given to the Investor by the
Company in accordance with this Agreement. "Business Day" shall mean any day on
which the Company's Principal Market is open for trading. The Dollar Amount
designated by the Company in any given Put Notice shall be in increments of
$250,000. Notwithstanding anything herein to the contrary, (A) the Investor
shall not be required to purchase during the Purchase Period following a Put
Notice Date a dollar amount of Common Stock which exceeds the lesser of (i) the
Dollar Amount, subject to reduction during the Purchase Period as hereinafter
provided, (ii) $3,000,000, subject to reduction during the Purchase Period as
hereinafter provided, or (iii) twelve percent (12%) of the aggregate Trading
Dollar Value (hereinafter defined) during those of the first thirty (30)
Business Days of the Purchase Period during which the average per share Trading
Dollar Value is $4.50 or more (the lesser of (i), (ii) or (iii) above shall be
referred to herein as the "Required Dollar Amount"), but (B) the Investor may,
at its election and pursuant to its Purchase Notices (hereinafter defined),
purchase during any such Purchase Period up to one hundred thirty percent of the
Required Dollar Amount; provided that (x) the Investor may not, pursuant to
clause (B) of this Section, invest all or any portion of any amount in excess of
a Required Dollar Amount, and (y) a Required Dollar Amount may not in any event
include an amount which, if invested by the Investor hereunder, would result, in
the case of either (x) or (y), in the Investor purchasing, during a Purchase
Period, shares of Common Stock at a price determined in accordance with Section
2.3 hereof which, when aggregated with all other shares of Common Stock acquired
by the Investor pursuant to this Agreement in the 90 calendar days preceding
such Purchase Period, would result in the Investor having purchased pursuant to
this Agreement, during such Purchase Period and such period of 90 calendar days,
shares of Common Stock totaling more than 4.9% of the Common Stock outstanding
on the Put Notice Date for such Purchase Period, as determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the regulations promulgated thereunder. The Put Notice shall
include a representation of the Company as to the Common Stock outstanding on
the Put Notice Date as determined in accordance with Section 13(d) of the
Exchange Act. In the event that the amount of Common Stock outstanding as
determined in accordance with Section 13(d) of the Exchange Act and the
regulations promulgated thereunder is different on any date during a Purchase
Period than on the Put Notice Date associated with such Purchase Period, the
amount of Common Stock outstanding on such date during such Purchase Period
shall govern for purposes of determining whether the Investor, when aggregating
all purchases of Common Stock made pursuant to this Agreement in the 90 calendar
days preceding such date, would have acquired more than 4.9% of the Common Stock
during such period. The amount provided in clause (A)(i) of this Section 2.2(a)
shall be in effect at the beginning of each Purchase Period but shall be reduced
during such Purchase Period by an amount equal to one-thirtieth of the Dollar
Amount in effect at the beginning of such Purchase Period
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for each trading day during such Purchase Period on which the average per share
Trading Dollar Value is less than $4.50 per share. The amount provided in clause
(A)(ii) of this Section 2.2(a) shall be in effect at the beginning of each
Purchase Period but shall be reduced during such Purchase Period by $100,000 for
each trading day during such Purchase Period on which the average per share
Trading Dollar Value is less than $4.50 per share. For purposes hereof "Trading
Dollar Value" shall mean the dollar value of the Common Stock traded on the
Principal Market for the applicable day or period, provided that individual
trades of 15,000 shares or more on any trading day shall, for this purpose, be
treated as a trade of 10,000 shares at the average per share price at which such
trades of 15,000 shares or more were actually made.
(b) Notwithstanding any of the foregoing, the Company may not deliver a
Put Notice and the Investor shall not be required to purchase any Common Shares
(i) if the Applicable Trading Price (hereinafter defined) on the Business Day
prior to delivery of such Put Notice was less than $4.50 per share, (ii) if
trading of the Common Stock on the Principal Market is suspended or the Common
Stock is delisted or the Company receives notification from the Principal Market
that the Company does not or will not meet the continued listing requirements
for such Principal Market (unless the Company has addressed the matters set
forth in such notification to the reasonable satisfaction of the Investor),
(iii) if the Common Stock is not registered under the Exchange Act or if the
Registration Statement is no longer effective or is subject to a stop order or
its use or the use of the prospectus which is a part thereof is otherwise
suspended, (iv) if a Market Standoff Agreement (as defined in the Registration
Rights Exhibit) is in effect or the Company has delivered a request to the
Investor to enter into a Market Standoff Agreement, or (v) if no trade of the
Common Stock on the Principal Market Occurred on the Business Day prior to the
Put Notice. If (a) the Applicable Trading Price on any trading day during the
Purchase Period associated with an effective Put Notice shall be less than $4.50
per share or (b) any of the events described in clauses (ii) and (iii) above
occurs after an effective Put Notice is so delivered, and if any such
circumstance described in (a) or (b) above so occurs before the entire Required
Dollar Amount of Common Stock covered by such Put Notice shall have been
purchased during the Purchase Period, then the Investor shall have no further
obligation to purchase the balance of such Required Dollar Amount of Common
Stock during such Purchase Period; provided, however, that on any day during the
balance of such Purchase Period upon which such events described in clauses (ii)
and (iii) above do not exist or which follows a trading day upon which the
Applicable Trading Price shall be $4.50 per share or more, the Investor may in
its sole discretion but shall not be required to give the Company one or more
Purchase Notices covering some or all of such balance of the Required Dollar
Amount, as well as some or all of the additional amounts of Common Stock which
the Investor may elect to purchase during such Purchase Period pursuant to
Section 2.2(a)(B) above. The "Applicable Trading Price" with respect to the
Common Stock on any day,
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shall mean the dollar volume-weighted average price of Common Stock reported on
such Business Day (as calculated by Bloomberg Financial Markets through its
"Volume at Price" function) or, in case no sales take place on such day, the
average of the closing bid and asked prices on such prior day, in either case,
as reported on the Bloomberg Financial Markets for such day, or, if not reported
on the Bloomberg Financial Markets, the last quoted price on such prior day (or,
if not so quoted, the average of the last quoted high bid and low asked prices)
in the over the counter market, as reported by NASDAQ or such other system then
in use, or, if on any such prior day no bids are quoted by any such
organization, the average of the closing bid and asked prices on such prior day
furnished by a professional market maker making a market in Common Stock
selected by the Board of Directors of the Company, and, if on any such prior
day, no market maker is making a market in the Common Stock, the fair market
value of the Common Stock as of such prior day determined reasonably and in good
faith by the Board of Directors of the Company.
(c) During the Open Period, Put Notices may be delivered no more
frequently than once in each period of thirty-six (36) consecutive Business
Days, such that Put Notices and associated Purchase Periods do not overlap each
other.
(d) The Investor shall not in any event be required to invest
more than $10,000,000 in the aggregate (excluding additional purchases which may
be made at the election or option of the Investor pursuant to Section
2.2(a)(B)), under or pursuant to Put Notices given hereunder.
(e) During the Open Period, the Company shall deliver such number
of Put Notices to cause the Investor to purchase a Required Dollar Amount of
Common Stock equal to $2,500,000 (the "Minimum Investor Purchase Amount").
During the first twelve (12) months of the Open Period, the Company shall
deliver such number of Put Notices to cause the Investor to purchase a Required
Dollar Amount of Common Stock equal to $1,000,000 (the "First Year Minimum
Investor Purchase Amount").
Notwithstanding the provisions of Section 2.2(e) above, the Company
shall be under no obligation to issue any Put Notices during the term of this
Agreement. If the Company fails to deliver Put Notices sufficient to cause the
Investor to purchase the Minimum Investor Purchase Amount or the First Year
Minimum Investor Purchase Amount, as the case may be, the Company shall not be
considered in default of this Agreement, but the Company shall provide to the
Investor the Shortfall Compensation. For the purposes hereof, "Shortfall
Compensation" shall mean for each $1.00 of the Minimum Investor Purchase Amount
or First Year Minimum Investor Purchase Amount that the Investor is not able to
purchase due to lack of delivery of Put Notice(s), as the case may be, any one
of the following as the Company shall elect in its sole discretion: (i) such
number of shares of Common Stock that are registered and qualified for resale
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under applicable federal and state securities laws and that would equal $0.07,
(ii) a three-year Common Stock purchase warrant exercisable for such number of
shares of Common Stock that would result in such warrant having a value (using
the Black-Scholes model) equal to $0.07, or (iii) $0.07 in cash. The Shortfall
Compensation shall be due, in the case of the First Year Minimum Investor
Purchase Amount, ten (10) Business Days after the date which is the last day of
the fifteenth month after the date hereof and, in the case the Minimum Investor
Purchase Amount, ten (10) Business days after the date which is twenty-seven
months from the date hereof. The determination of the number of Common Stock
shares or warrant shares under (i) and (ii) above shall be made using the
Applicable Trading Price on the seventh (7th) Business Day of the ten (10)
Business Day period referenced in the preceding sentence. For each $0.07 in cash
or the equivalent amount in shares of Common Stock or a Common Stock purchase
warrant that the Company pays or issues (as the case may be) to the Investor as
Shortfall Compensation with respect to the First Year Minimum Investor Purchase
Amount, the Minimum Investor Purchase Amount shall be reduced by $1.00.
Section 2.3. Determination of Price Per Share. The prices (each, a
"Purchase Period Price Per Share") at which shares that the Company shall be
obligated to issue and sell and the Investor shall be obligated to purchase in
connection with a Put Notice (including, without limitations any such additional
purchases pursuant to Section 2.2(a)(B)) shall be 90.5% (the "Common Stock
Investment Percentage") of the Market Stock Price. For the purposes hereof, the
"Market Stock Price" shall mean the average of each Applicable Trading Price
during the five (5) Business Days immediately preceding a Purchase Notice Date
(hereinafter defined) upon which shares of the Common Stock were traded on the
Principal Market. The number of shares so to be purchased pursuant to each
Purchase Notice shall be rounded to the nearest whole number so as to avoid the
issuance of fractional shares.
Section 2.4. Purchase Closings.
(a) Purchases of Common Stock by the Investor during a Purchase
Period may be made at any time and from time to time during the Purchase Period
pursuant to one or more "Purchase Notices" given by the Investor to the Company
during the Purchase Period, each specifying the dollar amount to be invested by
the Investor pursuant to such Purchase Notice and the Purchase Period Price Per
Share at which Common Stock is to be so purchased pursuant to such Purchase
Notice. If the entire Required Dollar Amount of Common Stock required to be
purchased during such Period shall not have been covered by Purchase Notices
before the last day of the Purchase Period, the Investor shall be deemed so to
have given the Company a Purchase Notice on the last day of the Purchase Period
specifying therein the balance of such Required Dollar Amount of Common Stock so
to be purchased during such Period and the
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Purchase Period Price Per Share applicable to such purchase. Each date upon
which a Purchase Notice is or is deemed so to have been given is herein referred
to as a "Purchase Notice Date."
(b) Each purchase and sale of Common Stock pursuant to a Purchase
Notice (a "Closing") shall take place on the third Business Day following the
delivery of the Purchase Notice to which such Closing relates, or the earliest
date thereafter on which all conditions to Closing have been satisfied. Each
date on which a Closing occurs is referred to herein as a "Closing Date."
(c) (i) On each Closing Date, the Company shall deliver to the
Investor certificates representing the shares of Common Stock to be issued and
sold to the Investor on such date and registered in the name of the Investor or
deposit such shares into the accounts (and the Investor has confirmation that
the shares are in such account) designated by the Investor for the benefit of
the Investor and (ii) on each Closing Date, the Investor shall deliver to the
Company the price to be paid for such shares (after receipt of confirmation of
delivery of such shares), determined as aforesaid, by cashier's check or wire
transfer in immediately available funds to such account as shall be designated
in writing by the Company. In addition, each of the Company and the Investor
shall deliver all documents, instruments and writings required to be delivered
by either of them pursuant to this Agreement at or prior to each Closing.
(d) In the alternative to physical delivery of certificates for
Common Stock, if delivery of the shares of Common Stock may be effectuated by
electronic book-entry through Depository Trust Company ("DTC"), then delivery of
the shares of Common Stock pursuant to such conversion shall, unless requested
otherwise by such Investor (or holder of such shares), settle by book-entry
transfer through DTC by the third Business Day following the Investor's delivery
of a Purchase Notice to the Company. The parties agree to coordinate with DTC to
accomplish this objective.
(e) Subject to the Company's compliance with all of the terms and
conditions of this Agreement, with respect to each Purchase Period, if the
Investor shall fail to purchase the entire Required Dollar Amount by the third
Business Day following the end of such Purchase Period, the Investor shall, in
addition to any other remedies under this Agreement, pay as additional damages
in cash to the Company, on the eighth Business Day following the end of such
Purchase Period and on each succeeding fifth Business Day thereafter until the
Required Dollar Amount is paid, an amount equal to one percent (1%) of the
balance of the Required Dollar Amount that was not paid to the Company for such
Purchase Period.
(f) Subject to the Investor's compliance with all of the terms
and conditions of this Agreement, with respect to each Closing, if the Company
shall
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fail to deliver to the Investor the shares of Common Stock to be issued and sold
to the Investor by the third Business Day following delivery of a Purchase
Notice, whether by physical delivery of certificates or by book-entry transfer
through DTC for such shares of Common Stock, the Company shall, in addition to
any other remedies under this Agreement, pay as additional damages in cash to
the Investor, by the eighth Business Day following the delivery of a Purchase
Notice and on each succeeding fifth Business Day thereafter until the shares of
Common Stock are delivered, an amount equal to one percent (1%) of the value of
the shares not delivered to the Investor by the third Business Day following the
delivery of a Purchase Notice.
Section 2.5. Certain Adjustments. Applicable Trading Prices, Market
Stock Prices, Purchase Period Prices Per Share, the Maximum Common Stock
Issuance (hereinafter defined), the $4.50 amounts provided in Sections 2.2(a)
and 2.2(b) hereof and the $4.50 amounts provided in Section 5.2 shall be
adjusted appropriately to reflect stock splits, stock dividends, combinations
and like transactions affecting the Common Stock.
Section 2.6. Delisting/Deregistration/Suspension. If at any time during
the Open Period or within thirty days after the end of the Open Period, (i) the
Common Stock is delisted from the Principal Market or (ii) the Common Stock is
not registered under the Exchange Act or (iii) trading of the Common Stock on
the Principal Market is suspended for more than four (4) consecutive full
Business Days for any reason(s) specific to the Company which have or are likely
to have, individually or in the aggregate, an effect on the ongoing business,
operations, properties or financial condition of the Company and any other
entities controlled by the Company, taken as a whole, which is material and
adverse to the Company and such entities, taken as a whole or (iv) if any
registration statement with respect to the Common Stock issued or issuable
hereunder (including the Registration Statement) is no longer effective or
subject to a stop order or otherwise suspended by the Company as a result of
action or inaction by the Company, and if, in the case of the circumstances
described in clause (iv) of this Section 2.6, such circumstances shall exist for
periods in excess of those provided in Section 7 of the Registration Rights
Exhibit with respect thereto, the Investor shall have the right, at its option
in its sole discretion, which right shall be exercised within thirty days of
such event or occurrence, to sell to the Company, and the Company agrees to buy,
promptly upon the exercise of such right by the Investor, but in any event
within thirty (30) calendar days of the exercise of such right, and subject to
the limitations imposed by the Delaware General Corporation Law, all or any part
of the Common Stock issued to the Investor within 45 Business Days preceding the
Investor's exercise of the option provided to it in this Section 2.6 and then
held by the Investor at a price per share equal to the Market Stock Price at the
time such share was purchased (the "Payment Amount"); provided, however, that
the Company shall be under no obligation to repurchase such shares if the
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Board of Directors of the Company determines in good faith, and the Company
delivers written notice thereof to the Investor, that the repurchase is
prohibited by the provisions of Section 160 of the Delaware General Corporation
Law or any other provision of the Delaware General Corporation Law and further
provided that the number of Shares of Common Stock subject to the Investor's
option hereunder shall in no event exceed the number of such Shares acquired by
the Investor hereunder during the 45 Business Days preceding the Investor's
exercise of the option provided to it in this Section 2.6 and during no part of
which any of the circumstances described in clause (i) through (iv) of this
Section 2.6 existed. If the Company fails to purchase the number of Shares of
Common Stock from the Investor within thirty (30) calendar days of the exercise
of the Investor's option hereunder for any reason other than the repurchase
being prohibited pursuant to the Delaware General Corporation Law, the Company
shall pay to the Investor, on the first Business Day following such thirtieth
calendar day, in addition to and not in lieu of the amount payable by the
Company to the Investor upon exercise of the option, an amount equal to two
percent (2%) of the aggregate Payment Amount then due and payable to the
Investor, in cash or by certified check or wire transfer, plus compounded annual
interest of fifteen percent (15%) on such Payment Amount during the period,
beginning on the day following such thirtieth calendar day, during which such
amount, or any portion, is outstanding.
Section 2.7. Overall Limit on Common Stock Issuable; Minimum Dollar
Amount. Notwithstanding anything herein contained to the contrary, the number of
shares of Common Stock issuable by the Company hereunder shall not exceed twenty
percent of the outstanding Common Stock of the Company as of the date hereof,
subject to appropriate adjustment for stock splits, stock dividends,
combinations or other similar recapitalization affecting the Common Stock, (the
"Maximum Common Stock Issuance"), unless the issuance of Common Stock hereunder
in excess of the Maximum Common Stock Issuance shall first be approved by the
Company's stockholders in accordance with applicable law and the by-laws of the
Company. Without limiting the generality of the foregoing, such stockholders'
approval will duly authorize the issuance by the Company of shares of Common
Stock totaling twenty percent or more of the Company's Common Stock outstanding
on the date hereof. The parties understand and agree that the Company's failure
to obtain such approval shall in no way adversely affect the validity and due
authorization, as provided in Sections 4.4 and 4.6 hereof of the issuance and
sale of Common Stock hereunder, and that such approval pertains only to the
applicability of the Maximum Common Stock Issuance limitation provided in this
Section 2.7.
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ARTICLE III
Representations and Warranties of Investor
The Investor represents and warrants to the Company that:
Section 3.1. Intent. The Investor will be purchasing the Common Stock to
be purchased by it hereunder for its own account and the Investor has no present
intention or arrangement (whether or not legally binding) at any time to sell or
distribute any such Common Stock to or through any person or entity; provided,
however, that by making the representations herein, the Investor does not agree
to hold such Common Stock for any minimum or other specific term and reserves
the right to dispose of such Common Stock at any time in accordance with federal
and state securities laws applicable to such disposition. The Investor
understands that such Common Stock must be held indefinitely unless such Common
Stock is, either at the time of purchase or subsequently, registered under the
Securities Act or an exemption from registration is available. The Investor has
been advised or is aware of the provisions of Rule 144 promulgated under the
Securities Act.
Section 3.2. Sophisticated Investor. The Investor is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D promulgated under
the Securities Act ("Regulation D")) and an accredited investor (as defined in
Rule 501 of Regulation D), and the Investor has such experience in business and
financial matters that it is capable of evaluating the merits and risks of an
investment in such Common Stock. The Investor acknowledges that an investment in
the Common Stock is speculative and involves a high degree of risk.
Section 3.3. Authorization, Enforcement. (i) The Investor has the
requisite power and authority to enter into and perform this Agreement all in
accordance with the terms hereof, (ii) the execution and delivery of this
Agreement and the consummation by the Investor of the transactions contemplated
hereby to be performed and observed by the Investor have been duly authorized by
the Investor, (iii) this Agreement has been duly executed and delivered by the
Investor, and (iv) this Agreement constitutes the valid and binding obligation
of the Investor enforceable against the Investor in accordance with its terms,
except where such enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application or the limitations on indemnification and contribution that may be
imposed by Federal securities laws.
Section 3.4. No Brokers. The Investor has taken no action which would
give rise to any claim by any person for brokerage commission, finder fees, or
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similar payments relating to this Agreement or the transactions contemplated
hereby.
Section 3.5. Not an Affiliate. The Investor is not an officer, director
or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company.
Section 3.6. Organization and Standing. The Investor is duly organized,
validly existing, and in good standing under the laws of the place of its
organization set forth at the beginning of this Agreement. The Investor, if a
corporation, partnership, trust or other entity, has not been organized,
reorganized or recapitalized specifically for the purpose of investing in the
Company.
Section 3.7. Absence of Conflicts. The execution and delivery of this
Agreement and any other documents or instruments executed in connection
herewith, and the consummation of the transactions contemplated hereby and
thereby, and compliance with the requirements thereof, will not violate the
Investor's organizational documents or any law, rule, regulation, order, writ,
judgment, injunction, decree or award applicable to the Investor, or the
provision of any indenture, instrument or agreement to which the Investor is a
party or is subject, or by which the Investor or any of its assets is bound, or
conflict with or constitute a material default thereunder, or result in the
creation or imposition of any lien pursuant to the terms of any such indenture,
instrument or agreement, or constitute a breach of any fiduciary duty owed by
the Investor to any third party, or require the approval of any third party
pursuant to any material contract, agreement, instrument, relationship or legal
obligation to which the Investor is subject or to which any of its assets,
operations or management may be subject.
Section 3.8. Disclosure, Access to Information. The Investor has
received all documents, records, books and other information pertaining to
Investor's Common Stock investment in the Company that have been requested by
the Investor. The Investor further acknowledges that it understands that the
Company is subject to the periodic reporting requirements of the Exchange Act,
and the Investor has reviewed or received copies of any such reports that have
been requested by it. The Investor has carefully reviewed the representations
concerning the Company contained in this Agreement and has made inquiry
concerning the Company, its business and its personnel; the officers of the
Company have made available to the Investor any and all written information
which it has requested and have answered all inquiries made by the Investor; and
the Investor has sufficient knowledge and experience in investing in companies
similar to the Company so as to be able to evaluate the risks and merits of its
investment in the Company and is able financially to bear the risks thereof.
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Section 3.9. Manner of Sale. At no time was the Investor presented with
or solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising with
respect to Investor's Common Stock investment.
Section 3.10. Reliance on Company. The Investor acknowledges that it has
had the opportunity to review this Agreement and the transactions contemplated
by this Agreement with its own legal counsel and tax advisors. Except for any
statements or representations of the Company made in this Agreement and the SEC
Documents (as defined below), the Investor is not relying on any other
statements or representations of the Company or any of its representatives or
agents with respect to such investment.
Section 3.11. Hart-Scott-Rodino. (A) The Person (as that term is defined
in 16 C.F.R. ss.801.1(a)(I)) of which the Investor is a part does not have total
assets or annual net sales of $100,000,000 or more, as measured under the
applicable rules and regulations interpreting the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, ("HSR"), and/or (B) for purposes of
ss.802.9 of HSR, the Investor's acquisition of Common Stock will be made solely
for the purposes of investment and, as a result of such acquisition and any such
conversion or exercise, the Investor will hold ten percent or less of the voting
securities of the Company outstanding on the date hereof, and/or (C) as a result
of such acquisition and any such conversion or exercise, the Investor will not
hold assets or voting securities of the Company valued at more than $1,500,000,
and/or (D) the Investor is an Institutional Investor for purposes of ss.802.64
of HSR, such voting securities of the Company will be acquired directly by the
Investor in the ordinary course of its business and solely for the purpose of
investment (for purposes of such ss.802.64) and, as a result of any such
acquisition the Investor will hold fifteen percent or less of the voting
securities of the Company outstanding on the date hereof or voting securities of
the issuer valued at $25,000,000 or less.
Section 3.12. Ownership of Company Common Stock. Prior to execution of
this Agreement, the Investor does not beneficially own any Common Stock of the
Company.
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to the Investor that:
Section 4.1. Company Status. The Company has registered its Common Stock
pursuant to Section 12(b) or 12(g) of the Exchange Act, is in compliance in all
material respects with all reporting requirements of the Exchange Act, and the
Company has maintained all requirements for the continued listing of its
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Common Stock, and such Common Stock is currently listed on the Principal Market.
As of the date hereof the Company's "Principal Market" is the Nasdaq National
Market.
Section 4.2. Current Public Information. The Company has furnished the
Investor with true and correct copies of the Company's latest proxy statement
and Annual Report on Form 10-K and all reports and other documents filed with
the SEC by the Company since December 31, 1996, pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act (collectively, the "SEC Documents")
Section 4.3. General Solicitation in Regard to this Transaction. Neither
the Company nor any of its affiliates nor any distributor or any person acting
on its or their behalf has conducted any "directed selling efforts" (as that
term is defined in Rule 902(b) of Regulation S under the Securities Act) with
respect to the Common Stock which may be acquired hereunder, nor has the Company
conducted any general solicitation (as that term is used in Rule 502(c) of
Regulation D) with respect to any of such Common Stock, nor have they made any
offers or sales of any security or solicited any offers to buy any security,
under circumstances that would require registration of such Common Stock under
the Securities Act.
Section 4.4. Capitalization and Valid Issuance of Stock. As of December
31, 1997, the Company had an authorized capitalization consisting of 30,000,000
shares of Common Stock, par value $.01, and 10,000,000 shares of Preferred
Stock, par value $.01. As of December 31, 1997, the Company had issued and
outstanding 8,154,098 shares of Common Stock and no shares of Preferred Stock.
All options and warrants to acquire shares of the Company's Common Stock, which
were outstanding as of September 30, 1997 or which the Company was obligated to
issue as of September 30, 1997, are described to the extent required in the SEC
Documents. As of December 31, 1997, the Company had outstanding stock options to
acquire a total of 989,865 shares of the Company's Common Stock, which
outstanding options, to the extent issued or granted prior to September 30,
1997, are described to the extent required in the SEC Documents and, to the
extent granted since September 30, 1997, are upon terms which are not materially
different from the terms of those options as have been issued or granted on or
before September 30, 1997. Except as described in the SEC Documents, the Company
has not issued or granted and there are not as of the date hereof outstanding,
nor has the Company undertaken or become obligated to issue or grant, any
convertible securities or, apart from such stock options and warrants
outstanding on the date hereof, any options, warrants or other rights to acquire
Common Stock. All of the issued shares of Common Stock of the Company have been
duly and validly authorized and issued and are fully paid and non-assessable;
the Common Stock issuable pursuant to this Agreement, when issued, sold and
delivered against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued,
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fully paid and nonassessable; and the holders of outstanding Common Stock of the
Company are not and shall not be entitled to preemptive or other rights afforded
by the Company to subscribe for the capital stock or other securities of the
Company as a result of the sale of the Common Stock to the Investor hereunder.
Section 4.5. Organization and Qualification. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company does
not have any subsidiaries, except for those listed in the SEC Documents. The
Company and each such subsidiary, if any, is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, other than those in which the failure so to qualify
would not have a Material Adverse Effect. "Material Adverse Effect" means any
effect on the ongoing business, operations, properties or financial condition of
the entity with respect to which such term is used and which is material and
adverse to such entity and other entities controlling or controlled by such
entity, taken as a whole, and/or any condition or situation which would prohibit
or otherwise interfere with the ability of the entity with respect to which said
term is used to enter into and perform its obligations under this Agreement,
including the Registration Rights Exhibit.
Section 4.6. Authorization, Enforcement. (i) The Company has the
requisite corporate power and authority to enter into and perform this Agreement
and to issue the Common Stock pursuant to this Agreement, all in accordance with
the terms hereof, (ii) the execution and delivery of this Agreement and the
issuance of such Common Stock by the Company and the consummation by the Company
of the transactions contemplated hereby to be performed and observed by the
Company have been duly authorized by all necessary corporate action, and no
further consent or authorization of the Company or its Board of Directors or
stockholders is required, (iii) this Agreement has been duly executed and
delivered by the Company, and (iv) this Agreement constitutes the valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable principles
of general application or the limitations on indemnification and contribution
that may be imposed by Federal securities laws.
Section 4.7. Corporate Documents. The Company has furnished or made
available to the Investor true and correct copies of the Company's Certificate
of Incorporation, as amended and in effect on the date hereof (the
"Certificate"),
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and the Company's By-Laws, as amended and in effect on the date hereof (the
"By-Laws").
Section 4.8. No Conflicts. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby, including without limitation the issuance of
the Common Stock, do not and will not (i) result in a violation of the Company's
Certificate or By-Laws or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of any material agreement, indenture or instrument to which the
Company or any of its subsidiaries is a party, or (iii) result in a violation of
any federal, state, local or foreign law, rule, regulation, order, judgment or
decree (including federal and state securities laws and regulations) applicable
to the Company or any of its subsidiaries or by which any property or asset of
the Company or any of its subsidiaries is bound or affected (except in the case
of any of clause (i), (ii) or (iii) for such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect). The business
of the Company is not being conducted in violation of any law, ordinance or
regulation of any governmental entity, except for possible violations which
either singly or in the aggregate do not and will not have a Material Adverse
Effect. The Company is not required under federal, state, local or foreign law,
rule or regulation to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this Agreement or issue
and/or sell such Common Stock in accordance with the terms hereof (other than
any SEC, NASD or state securities filings which may be required or permitted to
be made by the Company subsequent to this date hereof, and any registration
statement which may be filed incident to this Agreement), provided that, for
purposes of the representation made in this sentence, the Company is assuming
and relying upon the accuracy of the relevant representations and agreements of
the Investors herein. For purposes of the Company's representations and
warranties as to foreign law, rule or regulation made in clause (iii) above and
in the next preceding sentence of this Section 4.8, such representations and
warranties are made only to the best of the Company's knowledge insofar as the
execution, delivery and performance of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
are or may be affected by the status of the Investor under or pursuant to any
such foreign law, rule or regulation.
Section 4.9. SEC Documents. The Company has delivered or made available
to the Investor true and complete copies of the SEC Documents (including,
without limitation, proxy information and solicitation materials). The Company
has not provided to the Investor any information which, according
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to applicable law, rule or regulation, should have been disclosed publicly prior
to the date hereof by the Company but which has not been so disclosed. As of
their respective dates, the SEC Documents complied in all material respects with
the requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder, and none of the SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC. Such financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements or to the extent they are subject to
normal year-end audit adjustments) and fairly present in all material respects
the financial position of the Company as of the dates thereof and the results of
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
Section 4.10. No Material Adverse Change. Since December 31, 1996, no
event which had or is likely to have a Material Adverse Effect on the Company
has occurred or exists.
Section 4.11. No Undisclosed Liabilities. The Company and its
subsidiaries have no liabilities or obligations which are material, individually
or in the aggregate, and which are not disclosed in the SEC Documents, other
than those incurred in the ordinary course of the Company's or its subsidiaries'
respective businesses since December 31, 1996, and which, individually or in the
aggregate, have had or are likely to have a Material Adverse Effect on the
Company and upon any of its subsidiaries.
Section 4.12. No Undisclosed Events or Circumstances. No event or
circumstance has occurred or exists with respect to the Company or its
subsidiaries or their respective businesses, properties, prospects, operations
or financial condition, which, under applicable law, rule or regulation,
requires public disclosure or announcement prior to the date hereof by the
Company but which has not been so publicly announced or disclosed.
Section 4.13. No Integrated Offering. Prior to the date hereof, neither
the Company, nor any of its affiliates, nor any person acting on its or their
behalf has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, other than pursuant to this Agreement,
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under circumstances that would require registration under the Securities Act of
the Common Stock issuable hereunder.
Section 4.14. No Brokers. The Company has taken no action which would
give rise to any claim by any person for brokerage commissions, finder's fees or
similar payments by the Investor relating to this Agreement or the transactions
contemplated hereby and thereby.
Section 4.15. Litigation and Other Proceedings. Except as may be set
forth in the SEC Documents, there are no lawsuits or proceedings pending or
threatened, against the Company, nor has the Company received any written or
oral notice of any such action, suit, proceeding or investigation, which, if
decided adversely, is reasonably expected to have a Material Adverse Effect on
the Company or which might materially and adversely affect this Agreement or the
transactions contemplated by this Agreement. Except as set forth in the SEC
Documents, no judgment, order, writ, injunction or decree or award has been
issued by or requested of any court, arbitrator or governmental agency which is
reasonably expected to result in a Material Adverse Effect on the Company or
which might materially and adversely affect the transactions contemplated by
this Agreement.
ARTICLE V
Covenants of The Company
Section 5.1. Registration Rights. The Registration Rights Exhibit is
hereby incorporated herein by reference and is hereby made an integral part
hereof as though fully set forth herein.
Section 5.2. Reservation of Common Stock. As of the date hereof, the
Company has reserved and the Company shall continue to reserve and keep
available at all times, free of preemptive rights, shares of Common Stock for
the purpose of enabling the Company to satisfy any obligation to issue shares of
its Common Stock hereunder; provided, however, that the number of shares of
Common Stock initially so reserved, as of the beginning of each such fiscal
quarter, on the date hereof shall not be less than 1,200,000 shares and provided
further that in no event shall the number of shares so reserved be less than the
number which might thereafter be issued at the Purchase Period Price Per Share
of the Common Stock on the Principal Market as of the last trading day of the
immediately preceding fiscal quarter. The number of shares so reserved from time
to time, as theretofore increased or reduced as hereinafter provided, may be
reduced by the number of shares of Common Stock actually delivered hereunder and
the number of shares so reserved shall be increased to reflect stock splits and
stock dividends and distributions and like transactions with respect to the
Common Stock. In the event that, notwithstanding the foregoing,
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the Company determines that it does not have a sufficient number of authorized
shares of Common Stock to reserve and keep available for issuance as described
in this Section 5.2, the Company shall use its best efforts to increase the
number of authorized shares of Common Stock by seeking stockholder approval for
the authorization of such additional shares.
Section 5.3. Listing of Shares. The Company hereby agrees, promptly
following the date hereof, to take such action required, if any, as may be
required to cause 1,200,000 shares of Common Stock which may be or become
issuable hereunder to be listed on the Principal Market as promptly as possible
but no later than ninety (90) days following the date hereof. The Company
further agrees, if the Company applies to have the Common Stock traded on any
other Principal Market, it will include in such application all of the Common
Stock so issuable and will take such other action as is necessary or desirable
to cause the Common Stock to be listed on such other Principal Market as
promptly as possible.
Section 5.4. Exchange Act Registration. The Company will use its best
efforts to cause its Common Stock to continue to be registered under Section
12(b) or 12(g) of the Exchange Act, will comply in all material respects with
its reporting and filing obligations under said Act, and will not take any
action or file any document (whether or not permitted by said Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Act. The Company will take all
reasonable action necessary to continue the listing and trading of its Common
Stock on the Principal Market and will comply in all material respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the NASD and the Principal Market.
Section 5.5. A. Legends. Except as hereinafter provided, certificates
evidencing any Common Stock issued hereunder will bear the following legend (the
"Legend").
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR
SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AS TO THE
SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS
UNLESS AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS OBTAINED TO
THE EFFECT THAT REGISTRATION UNDER SAID ACT IS NOT REQUIRED.
On the date hereof, the Company will issue to the transfer agent for its
Common Stock (and to any substitute or replacement transfer agent for its Common
Stock coterminous with the Company's appointment of any such
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substitute or replacement transfer agent) instructions in substantially the form
and substance of the Transfer Agent Irrevocable Instruction Exhibit which is
annexed hereto and hereby made a part hereof as Exhibit 5.5. Such instructions
shall be irrevocable by the Company from and after the date hereof or from and
after the issuance thereof to any such substitute or replacement transfer agent,
as the case may be, except as otherwise expressly provided in the Registration
Rights Exhibit. Notwithstanding the foregoing, such Irrevocable Instruction may
be revoked if required by a change in law, as determined mutually by counsel to
the Company and counsel to the Investor or the successors and assigns of the
Investor. It is the intent and purpose of such instructions, as provided
therein, to require the transfer agent for the Common Stock from time to time to
issue certificates evidencing Common Stock free of the Legend and/or stock
transfer restrictions during the following periods and under the following
circumstances and without consultation by the transfer agent with the Company or
its counsel and without the need for any further advice or instruction to the
transfer agent by or from the Company or its counsel:
(a) For so long as the Registration Statement remains effective,
other than during any period of time (a "Black-Out Period") during which the
Registration Statement is not effective, for any reason or no reason, or during
which the Company has suspended the use of the Registration Statement pursuant
to Section 7 of the Registration Rights Exhibit,
(i) incident to the issuance of Common Stock hereunder
by the Company; and
(ii) upon any surrender of one or more certificates
evidencing Common Stock and which bear the Legend;
provided that in connection with such event, a notice is provided to the
transfer agent and copied to the Company and its counsel representing that (i)
the holder of or the person or entity acquiring such shares of Common Stock has
sold or intends promptly to sell such shares pursuant to and in accordance with
the Registration Statement, including the prospectus delivery requirements
applicable thereto, and that (ii) to the holder's knowledge, which has been
confirmed in writing by the Company, the Registration Statement was or will be
effective on the date of the sale and the sale did not occur or will not occur
during a Black-Out Period, and requesting that certificates for the shares sold
or to be sold be issued free of the Legend to the transferee of the holder or to
the holder, as the case may be; and provided further that if, in the event of
any such representation in accordance with Clause (i) of the preceding proviso,
such certificate evidencing the Common Stock so sold or to be sold is not
delivered incident to or for purposes of the completion of such sale within ten
(10) Business Days after the receipt of such certificate by the Holder or by the
Holder's designee, the Holder will return such certificate to the transfer agent
for the purpose of enabling the transfer agent
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to add the Legend to such Certificate and then return the legended certificate
to the Holder.
(b) At any time from and after the date hereof, upon any
surrender of one or more certificates evidencing Common Stock and which bear the
Legend, to the extent accompanied by a notice requesting the issuance of new
certificates free of the Legend to replace those surrendered and containing or
also accompanied by an opinion of counsel satisfactory to the Company that (i)
the then holder thereof is permitted to dispose thereof pursuant to Rule 144(k)
under the Securities Act or (ii) such holder intends to effect the sale or other
disposition of such stock, whether or not pursuant to the Registration
Statement, to a purchaser or purchasers who will not be subject to the
registration requirements of the Act, or (iii) such holder or the disposition of
such Common Stock is not then subject to such requirements.
B. No Other Legend or Stock Transfer Restrictions. No other
restrictive legends have been or shall be placed on the share certificates
representing such Common Stock and no instructions or "stop transfers," so
called, "stock transfer restrictions," so called, or other restrictions have
been or shall be given to the Company's transfer agent with respect thereto,
other than as expressly set forth in Section 5.5 A. hereof.
C. Investor's Compliance. Nothing in this Section 5.5 shall
affect in any way each holder's obligations under and agreement to comply with
all applicable securities laws upon resale of such Common Stock.
Section 5.6. Corporate Existence. The Company will take all steps
reasonably necessary to preserve and continue the corporate existence of the
Company.
Section 5.7. Additional SEC Documents. The Company will furnish to the
Investors upon request, promptly after the originals thereof are submitted to
the SEC for filing, copies of all SEC Documents so furnished or submitted to the
SEC.
ARTICLE VI
Preliminary Put Notice
In order to provide the Investor's designated representatives adequate
opportunity to conduct appropriate due diligence in connection with each Put
Notice, the Company shall deliver to the Investor, at least seventeen (17)
calendar days prior to the delivery of each Put Notice, a Preliminary Put
Notice, which Notice shall state that the Company is considering delivery of a
Put Notice to the Investor seventeen (17) or more calendar days following
delivery of the Preliminary Put Notice (a "Preliminary Put Period"). In no event
shall
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delivery of a Preliminary Put Notice to the Investor obligate the Company to
deliver any Put Notice to the Investor, provided, however, that if the Company
fails on more than two occasions to deliver a Put Notice within thirty (30) days
of delivery of a Preliminary Put Notice, then the Company shall pay the
reasonable due diligence costs of the Investor with respect to each subsequent
Preliminary Put Notice delivered, not to exceed $15,000 in each such case.
ARTICLE VII
Conditions
Section 7.1. Conditions Precedent to the Obligation of the Company to
Sell Shares. The obligation hereunder of the Company to issue and/or sell the
Shares to the Investor is further subject to the satisfaction, at or before each
Closing, of each of the following conditions set forth below. These conditions
are for the Company's sole benefit and may be waived by the Company at any time
in its sole discretion.
(a) Accuracy of the Investor Representations and Warranties. The
representations and warranties of the Investor shall be true and correct in all
material respects as of the date when made and as of each Closing Date as though
made at that time (except for representations and warranties that speak as of a
particular date or refer to a particular point in time).
(b) Performance by the Investor. The Investor shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Investor at or prior to such date.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
Section 7.2. Conditions Precedent to the Obligation of the Investor to
Purchase any Shares. The obligation of the Investor hereunder to acquire and pay
for Shares is subject to the satisfaction, at or before each Closing, of each of
the following conditions set forth below. These conditions are for the
Investor's sole benefit and may be waived by the Investor at any time in its
sole discretion.
(a) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and correct in all
material respects as of the date when made and as of each Closing Date, as
though made at that time (except for (i) representations and warranties that
speak as of a particular date or refer to a particular point in time and (ii)
with
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respect to the representations made in Sections 4.10, 4.11 and 4.15 hereof,
events which occur on or after the date of this Agreement and are disclosed in
SEC filings made by the Company prior to such Closing).
(b) Performance by the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to such Closing.
(c) Principal Market. Trading in the Company's Common Stock shall
not then be suspended by the SEC or the Principal Market (except for any
suspension of trading of limited duration agreed to between the Company and the
Principal Market, solely to permit dissemination of material information
regarding the Company), and trading in securities generally as reported by the
Principal Market, shall not then be suspended or minimum prices shall not have
been established on securities whose trades are reported by the Principal
Market.
(d) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(e) Opinion of Counsel, Etc. At the first Closing to occur in
each Purchase Period and at the last Closing to occur in each Purchase Period,
the Investor shall have received an opinion of outside counsel to the Company,
in form attached hereto as Exhibit 7.2(e), dated the effective date of such
Closing.
(f) Effectiveness of Registration Statement. The Registration
Statement shall be effective at the time of each Closing and no stop order
suspending the effectiveness of the Registration Statement shall have been
instituted or shall be pending.
(g) Accuracy of Registration Statement. At the time of each
Closing, subject to Section 9.2(c) hereof, the Registration Statement (including
information or documents incorporated by reference therein) and any amendments
or supplements thereto shall not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(h) Auditor's Letter. At the first Closing to occur in each
Purchase Period, the Investor shall have received a letter of the type, in the
form and with the substance of the letter described in Section 2(b)(iii) of the
Registration Rights Exhibit.
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(i) Officer's Certificate. At each Closing the Investor shall
have received a certificate(s) substantially in the form of the certificate
attached hereto as Exhibit 7.2(i) from the CEO and/or CFO of the Company
relating to the representations and warranties of the Company herein which shall
be satisfactory to the Investor in form and substance.
(j) No Bankruptcy Filing. There shall have been no filing of a
petition in bankruptcy, either voluntarily or involuntarily with respect to the
Company and there shall not have been commenced any proceedings under any
bankruptcy or insolvency laws, or any laws relating to the relief of debtors,
readjustment of indebtedness or reorganization of debtors, and there shall have
been no calling of a meeting of creditors of the Company or appointment of a
committee of creditors or liquidating agents or offering of a composition or
extension to creditors by, for, with or without the consent or acquiescence of
the Company.
ARTICLE VIII
Termination
Section 8.1. Optional Termination. This Agreement may be terminated (i)
at any time by the mutual written consent of the Company and the Investor and
upon payment by the Company to the Investor of the amount of the Shortfall
Compensation, if any, then due, or (ii) at any time upon written notice
delivered to the Investor by the Company and upon payment by the Company to the
Investor of the amount of the Shortfall Compensation, if any, then due. The
representations, warranties and covenants contained in or incorporated into this
Agreement, insofar as applicable to the transactions consummated hereunder prior
to such termination, shall survive its termination for the period of any
applicable statute of limitations.
Section 8.2. Automatic Termination. This Agreement shall automatically
terminate without any further action of either party hereto (a) when the
Investor has invested an aggregate of $10,000,000 in the Common Stock of the
Company pursuant to this Agreement, apart from additional amounts which may be
invested pursuant to Section 2.2(a); provided that the representations,
warranties and covenants contained in this Agreement insofar as applicable to
the transactions consummated hereunder prior to such termination, shall survive
the termination of this Agreement for the period of any applicable statute of
limitations or (b) on the date which is 27 months from the date hereof.
All representations, warranties and covenants shall survive the
termination of this Agreement.
Section 8.3. Change in Control. From and after the date hereof upon any
Change of Control (as defined below), the Company shall no longer have the right
to deliver any
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Put Notice to the Investor but shall pay to the Investor, in cash, on the
Business Day prior to such Change of Control the amount of any Shortfall
Compensation, if any, then due, unless otherwise agreed by the Investor. A
"Change of Control" shall mean any transaction or series of transactions which
results in any person or affiliated group of persons becoming the beneficial
owner of 50% or more of the voting stock of the Company or constituting 50% or
more of the Company's board of directors.
ARTICLE IX
Miscellaneous
Section 9.1. Fees and Expenses. (a) Upon execution of this Agreement (i)
the Company shall pay to the Investor an amount equal to $150,000 by cashier's
check or wire transfer in immediately available funds to such account as shall
be designated in writing by the Investor and (ii) the Company shall issue to the
Investor a three-year Common Stock purchase warrant exercisable for 25,000
shares of Common Stock at an exercise price equal to 125% of the closing market
price of the Common Stock on the Business Day immediately preceding the date
hereof.
(b) As a further inducement to the Investor to enter into this
Agreement, the Company agrees to reimburse the Investor or its designees or
clients, as applicable, for reasonable expenses relating to the negotiation and
execution of this Agreement and any closings hereunder up to $50,000 in the
aggregate. Such amounts to be paid promptly upon submission of an invoice by the
Investor to the Company.
(c) Except as otherwise set forth in this Section 9.1 and Article
VI, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. Any attorneys' fees and expenses incurred by
either the Company or by any Holder in connection with the preparation,
negotiation, execution and delivery of any amendments to this Agreement or
relating to the enforcement of the rights of any party, after the occurrence of
any breach of the terms of this Agreement by another party or any default by
another party in respect of the transactions contemplated hereunder, shall be
paid on demand by the party which breached the Agreement and/or defaulted, as
the case may be. The Company shall pay all stamp and other taxes and duties
levied in connection with the issuance of any Shares issued pursuant hereto.
Section 9.2. Specific Enforcement; Consent to Jurisdiction.
(a) The Company and the Investor acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
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Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent or cure breaches of the provisions of
this Agreement and to enforce specifically the terms and provisions hereof, this
being in addition to any other remedy to which either of them may be entitled by
law or equity.
(b) Each of the Company and the Investor (i) hereby irrevocably
submits to the exclusive jurisdiction of the United States District Court and
other courts of the United States sitting in New York City for the purposes of
any suit, action or proceeding arising out of or relating to this Agreement and,
if such court or courts shall lack or deny jurisdiction thereof, of the courts
of the State of New York sitting in New York City and having jurisdiction
thereof and (ii) hereby waives, and agrees not to assert in any such suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of such court, that the suit, action or proceeding is brought in an
inconvenient forum or that the venue of the suit, action or proceeding is
improper. Each of the Company and the Investor consents to process being served
in any such suit, action or proceeding by mailing a copy thereof to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing in this paragraph shall affect or limit any right to serve
process in any other manner permitted by law.
(c) In the event that a dispute arises between the Company and
the Investor as to whether the condition set forth in Section 7.2(g) hereof has
been satisfied with respect to any Closing, the Investor shall not be required
to perform at such Closing unless such condition has been satisfied to the
Investor's reasonable satisfaction. If any dispute arises with respect to the
foregoing, the Company shall have the burden of proof in showing that the
Investor acted unreasonably.
Section 9.3. Entire Agreement; Amendments. Other than with respect to
matters described in the Registration Rights Exhibit and documents and
agreements relating thereto and hereto, this Agreement contains the entire
understanding of the parties with respect to the transactions contemplated
hereby and, except as specifically set forth herein, neither the Company nor the
Investor makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or amended
other than by a written instrument signed by the party against whom enforcement
of any such amendment or waiver is sought.
Section 9.4. Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be effective upon
hand delivery or delivery by facsimile at the address or number designated
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below (if delivered on a Business Day during normal business hours where such
notice is to be received), or the first Business Day following such delivery (if
delivered other than on a Business Day during normal business hours where such
notice is to be received). The addresses for such communications shall be:
to the Company: Penederm Incorporated
320 Lakeside Drive, Suite A
Foster City, CA 94404
Attn: Michael Bates, Chief Financial Officer
Fax: 650-358-0101
with copies to: Richard Friedman
Heller Ehrman White & McAuliffe
525 University Avenue, Suite 900
Palo Alto, CA 94301-1900
Fax: 650-324-0638
to the Investor: Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520
New York, New York 10019
Attn: James F. O'Brien, Jr., Managing Member
Fax: 212-698-0505
with copies to: Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
Attn: James C. Stokes, Esq.
Fax: 617-951-8736
Any of the foregoing may from time to time change its address for notices under
this Section 9.4 by giving written notice of such changed address to the other
party hereto.
Section 9.5. Waivers. No waiver by either party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter. The parties hereto waive any and
all rights to a jury trial in connection with any action or proceeding arising
under this Agreement or transactions contemplated hereby or thereby.
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Section 9.6. Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
Section 9.7. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and assigns.
The parties hereto may amend this Agreement without notice to or the consent of
any third party. Neither the Company nor the Investor shall assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the other (which consent may be withheld for any reason in the sole
discretion of the party from whom consent is sought); provided, however, that
the Company may assign its rights and obligations hereunder to any acquirer of
substantially all of the assets or a controlling equity interest of the Company
provided that such assignment shall be subject to (i) the Change of Control
provisions contained in Section 8.3 above, (ii) Investor's prior written consent
which consent may not be unreasonably withheld; and provided further that the
Investor may assign its rights and obligations hereunder to any person or entity
either controlled by the Investor or whose portfolio investments are made
through accounts over which the Investor has discretionary authority without the
Company's consent, and other than those described in the immediately preceding
clause, with the Company's prior written consent, which consent may not be
unreasonably withheld. The assignment by a party of this Agreement or any rights
hereunder shall not affect the obligations of such party under this Agreement.
Section 9.8. No Third Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
Section 9.9. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to the principles of conflict of laws.
Section 9.10. Execution. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart. In the event any signature is delivered by facsimile
transmission, the party using such means of delivery shall cause four additional
executed signature pages to be physically delivered to the other party within
five days of the execution and delivery hereof.
Section 9.11. Publicity. The Company and the Investor shall obtain the
prior written consent of the other party before issuing any press releases or
27
<PAGE> 28
otherwise making public statements with respect to the transactions contemplated
hereby, provided the foregoing shall not interfere with the legal obligations of
either party with respect to public disclosure; and provided further, that
neither the Company nor the Investor shall be required to consult with the other
if any such press release or public statement does not specifically name the
other.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the date hereof.
PENEDERM INCORPORATED
By: /s/ Michael A. Bates
--------------------------------------
Name: Michael A. Bates
Its Vice President, Finance and
Administration
PROMETHEAN INVESTMENT GROUP
L.L.C.
By: /s/ James F. O'Brien, Jr.
--------------------------------------
James F. O'Brien, Jr.
Managing Member
28
<PAGE> 1
EXHIBIT 5.1
February 26, 1998
13912-0001
Penederm Incorporated
320 Lakeside Drive
Foster City, California 94404
Re: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have acted as counsel to Penederm Incorporated, a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-3 (the "Registration Statement") to be filed with the Securities and
Exchange Commission on or about February 27, 1998, for the purpose of
registering under the Securities Act of 1933, as amended, 1,225,000 shares of
its Common Stock, $0.01 par value (the "Shares"). 1,200,000 of the Shares may be
issued to Promethean Investment Group, L.L.C. ("Promethean") pursuant to the
Common Stock Investment Agreement, dated January 21, 1998, (the "Agreement")
between the Company and Promethean, and 25,000 of the Shares are issuable to
Promethean upon exercise of a warrant to purchase Company Common Stock (the
"Warrant") issued to Promethean in connection with the Agreement.
In connection with this opinion, we have assumed the authenticity of all
records, documents and instruments submitted to us as originals, the genuineness
of all signatures, the legal capacity of natural persons and the conformity to
the originals of all records, documents and instruments submitted to us as
copies. We have based our opinion upon our review of the following records,
documents and instruments:
(a) The Certificate of Incorporation of the Company certified by the
Secretary of State of the State of Delaware as of February 26, 1998
and certified to us by the Chief Financial Officer of the Company as
being complete and in full force and effect as of the date of this
opinion;
<PAGE> 2
(b) The Bylaws of the Company certified to us by the Chief Financial
Officer of the Company as being complete and in full force and
effect as of the date of this opinion;
(c) A Good Standing Certificate relating to the Company issued by the
Secretary of State of the State of Delaware, dated February 24,
1998;
(d) Records certified to us by the Chief Financial Officer of the
Company as constituting all records of proceedings and actions of
the Board of Directors of the Company relating to the Shares;
(e) A letter from ChaseMellon Shareholder Services, L.L.C., the
Company's Transfer Agent, dated February 26, 1998 as to the number
of shares of Common Stock that were outstanding as of February 25,
1998;
(f) The Registration Statement;
(g) The Agreement; and
(h) The Warrant.
This opinion is limited to the federal law of the United States of
America and the Delaware General Corporation Law. We disclaim any opinion as to
any other statute, rule, regulation, ordinance, order or other promulgation of
any other jurisdiction or any regional or local governmental body.
Our opinion expressed herein assumes that the full consideration stated
in the Agreement and the Warrant will be paid upon issuance of the Shares.
Based upon the foregoing and our examination of such questions of law as
we have deemed necessary or appropriate for the purpose of this opinion and
assuming that (i) the Registration Statement becomes and remains effective
during the period when the Shares are offered and sold; (ii) the Shares will be
issued in accordance with the terms of the Agreement upon appropriate
authorization of the Company and the Warrant; (iii) appropriate stock
certificates evidencing the Shares will be executed and delivered and (iv) all
applicable securities laws are complied with, it is our opinion that the Shares
upon issuance will be duly authorized and validly issued, and will be fully paid
and nonassessable.
This opinion is rendered to you in connection with the Registration
Statement and is solely for your benefit. This opinion may not be relied upon by
you for any other
<PAGE> 3
purpose, or relied upon by any other person, firm, corporation or other entity
for any purpose, without our prior written consent. We disclaim any obligation
to advise you of any change of law that occurs, or any facts which we become
aware after the date of this opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ HELLER EHRMAN WHITE & McAULIFFE
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Penederm
Incorporated ("Penederm") for the registration of 1,225,000 shares of its
Common Stock to be filed on February 27, 1998 and to the incorporation by
reference therein of our report dated January 27, 1998 with respect to the
consolidated financial statements of Penederm included in its Annual Report
(Form 10-K) for the year ended December 31, 1998, filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
---------------------------
Palo Alto, California
February 26, 1998
