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SECURITIES AND EXCHANGE COMMISSIONSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _____________ to _____________
COMMISSION FILE NUMBER: 0-20580
LIFE MEDICAL SCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 14-1745197
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
379 THORNALL STREET, EDISON, NEW JERSEY 08837
(Address of principal executive offices) (Zip Code)
(908) 494-0444
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
(TITLE OF EACH CLASS)
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK--PAR VALUE $.001 PER SHARE
UNITS
REDEEMABLE CLASS A WARRANTS
REDEEMABLE CLASS B WARRANTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 24, 1997 was approximately $26.9 million.
As of March 28, 1997, 7,914,820 shares of Common Stock, $.001 par value,
of the registrant were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement to be filed
pursuant to Regulation 14A in connection with solicitation of proxies for its
Annual Meeting of Stockholders to be held on June 3, 1997 are incorporated by
reference into Part III of this Form 10-K.
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INTRODUCTORY NOTE
Life Medical Sciences, Inc., a Delaware corporation (the "Company"), is a
company engaged in the development and commercialization of innovative and cost-
effective medical products for therapeutic applications.
On May 3, 1996, the Securities and Exchange Commission ( the "Commission")
declared effective the Company's Registration Statement pertaining to its public
offering of 2,300,000 shares of Common Stock (including over-allotments). The
proceeds from this offering were approximately $13.4 million, including proceeds
received upon exercise of the underwriters' over-allotment option and after
deducting underwriting discounts and commissions and other offering expenses.
Certain statements in this Annual Report (the "Report") under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including,
without limitation, statements regarding future cash requirements. Such forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the following: delays in
product development; problems or delays with clinical trials; failure to receive
or delays in receiving regulatory approval; lack of enforceability of patents
and proprietary rights; lack of reimbursement; general economic and business
conditions; industry capacity; industry trends; demographic changes;
competition; material costs and availability; the loss of any significant
customers; changes in business strategy or development plans; quality of
management; availability, terms and deployment of capital; business abilities
and judgment of personnel; availability of qualified personnel; changes in, or
the failure to comply with, government regulations; and other factors referenced
in this Report.
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PART I
ITEM 1. BUSINESS
GENERAL
Life Medical Sciences, Inc. is a company engaged in the development and
commercialization of innovative and cost-effective medical products for
therapeutic applications. The Company's proposed products are derived from its
two proprietary platform technologies: (i) its in-situ tissue culturing
technology, and (ii) its polymer technology. The Company's strategy is to apply
its platform technologies to the development of multiple products that address
unmet therapeutic needs or offer improved, cost-effective alternatives to
current methods of treatment. Products currently under development focus on
wound healing, stimulating hair regrowth, reducing hair loss, improving the
success rate of autologous fat transplantation and preventing or reducing post-
operative surgical adhesions. The Company's proposed products are in various
stages of clinical trials and preclinical studies.
The Company's in-situ tissue culturing technology utilizes proprietary,
defined, serum-free combinations of nutrients and hormones which, when applied
to the body, promote cell growth by: (i) directly supplying essential components
required for cell growth; (ii) stimulating new blood vessel formation
(angiogenesis); and (iii) increasing the flow of blood through existing vessels
(vasodilation). The Company believes that this technology has therapeutic
potential across a broad range of applications in the area of tissue repair and
preservation including acute and chronic wound healing, stimulating hair
regrowth, reducing hair loss, improving the success rate of autologous fat
transplantation for cosmetic and reconstructive surgeries, treating urinary
stress incontinence, and enhancing outcomes of tissue grafting and certain
surgical procedures. The Company is currently developing three products
utilizing the in-situ tissue culturing technology: Cariel/TM/, primarily for
chronic wound healing; Piliel/TM/, for stimulating hair regrowth and reducing
hair loss; and Lipoel/TM/, for improving the success rate of fat transplantation
from a donor site to a recipient site in the same individual (autologous) for
reconstructive or cosmetic surgery with long-term benefits.
The Company's polymer technology is based on a proprietary group of polymers.
The Company believes that these polymers display desirable properties which
enable them to be tailored to a wide variety of applications. These properties
include bioresorbability, flexibility, strength and biocompatibility. Potential
applications for products derived from these polymers are in medical areas such
as the prevention of post-operative surgical adhesions, as well as in consumer
health and hygiene and industrial areas. The Company is currently developing its
bioresorbable adhesion barrier film for the prevention or reduction of post-
operative surgical adhesions in gynecological and general surgical procedures
(Repel/TM/) and cardio-vascular surgery (Repel-CV/TM/), and its bioresorbable
adhesion barrier coating (viscous solution) for the prevention or reduction of
post-operative surgical adhesions in gynecological and general surgical
procedures (Resolve/TM/).
The Company is also developing and testing Scar Care, its externally worn
silicone-based proposed product to be applied to intact skin for diminishing the
size, discoloration and associated discomfort of unsightly scars.
The Company's product development strategy is to maintain a relatively small
core of scientists and researchers within the Company. The Company currently
conducts substantially all of its research and product development through
arrangements with specialized academic and industrial organizations which
broaden the development capabilities of the Company. The Company's
commercialization strategy is to seek joint venture, licensing or collaborative
arrangements for the manufacturing, marketing and sale of its products.
The Company previously developed and marketed the Sure-Closure System/TM/, a
disposable wound closure device. As a result of a strategic decision to focus on
the development and commercialization of its proposed products utilizing its
platform technologies, the Company, in July 1994, sold the Sure-Closure System
to MedChem Products, Inc. ("MedChem") which was subsequently acquired by C.R.
Bard, Inc. ("C.R. Bard"). In October 1996, Zimmer, Inc., a subsidiary of
Bristol-Myers Squibb ("Zimmer"), acquired the Sure - Closure System from C.R.
Bard. The Company receives a 10% royalty on all net sales of the Sure-Closure
System products through June 30, 2004.
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PROPOSED PRODUCTS AND STATUS OF TESTING
PRODUCT PLATFORM POTENTIAL STATUS
TECHNOLOGY THERAPEUTIC
APPLICATION
Cariel In-situ Healing chronic Pivotal
tissue wounds such as clinical
culturing venous stasis, trials in
technology diabetic, and Europe.
decubitus ulcers
Piliel In-situ Stimulating hair Pivotal
tissue regrowth and clinical
culturing reducing hair loss trials in
technology Europe.
Lipoel In-situ Improving success Clinical
tissue of autologous fat development
culturing transplantation ongoing in
technology Israel.
Repel Polymer Preventing or Pilot
technology reducing post- clinical
operative surgical trials in
adhesions in U.S.
ob/gyn surgery
(barrier film.)
Resolve Polymer Preventing or Preclinical
technology reducing trials
post-operative
surgical adhesion
in ob/gyn and
general surgeries
(viscous
formulation.)
Repel - CV Polymer Preventing or Preclinical
technology reducing trials
post-operative
surgical adhesions
in cardio-vascular
surgeries
(barrier film.)
Repel Polymer Preventing or IDE
reducing Preparation
post-operative
surgical adhesions
in general surgery
(barrier film.)
Scar Care Other Diminishing Clinical
unsightly scars and trials in U.S.
associated
discomfort
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PROPRIETARY PLATFORM TECHNOLOGIES
In-Situ Tissue Culturing Technology
The use of a variety of cell growth media for enhancing cell growth ex vivo
(outside the body) in the laboratory setting is well established. Traditionally,
cells such as keratinocytes have been grown ex vivo for the purpose of
implanting them in patients. This technique, however, has faced challenges due
to the compromised blood supply to the implanted tissue and the rejection of
non-autologous cells by the immune system. Additionally, the process of growing
cells ex vivo and implanting them in patients is costly and commercially
complicated.
In contrast, the Company's approach in developing its in-situ tissue culturing
technology has been to optimize cell growth media for direct use on patients.
This technology utilizes nutrients and hormones which, when applied to the
target site, promote cell growth by: (i) directly supplying essential components
required for cell growth thereby stimulating the cells to higher functioning
activity; (ii) stimulating new blood vessel formation (angiogenesis); and (iii)
increasing the flow of blood through existing vessels (vasodilation).
The active ingredients used in the Company's in-situ tissue culturing
technology are present naturally in the body and are used by the Company in
concentrations lower than currently approved by the regulatory authorities for
use by other companies for other indications. Nevertheless, the combination of
these ing redients will require further regulatory approval. The in-situ tissue
culturing technology utilizes defined, serum-free media. Media containing serum
may also contain viruses and is difficult to reproduce, as components of serum
vary from lot to lot. Not incorporating serum in the media avoids the concerns
of viral transmission and allows for consistent reproducibility.
The Company believes that products developed from its in-situ tissue culturing
technology will offer cost benefit advantages and be convenient to use, thus
making certain products well suited for self application as well as use in home
care, long term care or alternate site care environments. Certain applications
of this technology, in particular in the wound healing area, are intended to
offer potentially significant cost savings over current conventional treatments
which often involve skilled nursing or other professional care expense. The
Company believes that this technology has therapeutic potential across a broad
range of applications in the area of tissue repair and preservation, including
acute and chronic wound healing, stimulating hair regrowth, reducing hair loss,
improving the success rate of autologous fat transplantation for cosmetic and
reconstructive surgeries, and enhancing the outcome of tissue grafting and
certain surgical procedures. The Company is currently developing three products
utilizing the in-situ tissue culturing technology: Cariel, primarily for chronic
wound healing; Piliel, for stimulating hair regrowth and reducing hair loss; and
Lipoel, for improving the success rate of fat transplantation from a donor site
to a recipient site in the same individual (autologous) for reconstructive or
cosmetic surgery with long-term benefits. See "Collaborative Agreements--In-Situ
Tissue Culturing Technology."
Polymer Technology
The Company's polymer technology is based on a proprietary group of polymers.
The Company believes that these polymers display desirable properties which
enable them to be tailored to a wide variety of applications. These properties
include bioresorbability, flexibility, strength, and biocompatibility.
Unlike many other polymer systems which may cause untoward responses, polymers
derived from the Company's polymer technology are highly biocompatible and have
not caused any undesirable tissue responses thus far. Medical applications
include the prevention or reduction of post-operative surgical adhesions. In
addition, potential medical implantable uses include artificial blood vessels,
resorbable sutures and drug delivery systems. Utilizing its polymer technology,
the Company is currently developing Repel, a bioresorbable barrier film, for the
prevention or reduction of post-operative surgical adhesions in ob/gyn and
general surgical procedures, Repel-CV, a bioresorbable barrier film, for the
prevention or reduction of post-operative surgical adhesions in cardio-vascular
surgical procedures, and Resolve, a bioresorbable barrier coating (viscous
solution), for the prevention or reduction of post-operative surgical adhesions
in ob/gyn and general surgical procedures. See "Collaborative Agreements--
Polymer Technology."
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PRODUCTS
Cariel--Topical Wound Healing Gel
Cariel is an in-situ tissue culturing based proposed product used for wound
healing. Cariel is being developed primarily to treat chronic wounds such as
venous stasis, diabetic, and decubitus (pressure sores) ulcers and other wounds
such as burns. Cariel is topically applied to the wound site in a gel form.
Skin is the most frequently traumatized organ in the body, and skin injuries
are a major health care concern. A considerable medical need exists for products
that heal chronic wounds. Chronic wounds are severe, nonhealing wounds that have
penetrated the skin and underlying tissue and result from impairment of the
body's normal tissue regeneration and healing process. Chronic wounds heal
slowly, if at all, and are difficult to treat. They can lead to serious
complications, including infection, pain and in extremely severe cases,
amputation and death. The three most common types of chronic wounds are venous
stasis, diabetic and decubitus ulcers. Venous stasis ulcers are caused by poor
blood circulation in compromised veins and inadequate blood supply to skin
cells. Diabetic ulcers generally arise in the lower extremities of diabetic
patients from secondary complications of diabetes such as nerve damage.
Decubitus ulcers mostly affect hospitalized and long term care patients in whom
localized areas of tissue damage develop when soft tissue is compressed between
a bony prominence and an external surface.
Based on published industry sources, the Company believes that there are at
least 2.6 million cases of chronic wounds treated in the United States each year
and that products on the market for the treatment of chronic wounds generate
approximately $3 billion in annual sales in the United States alone.
Normal wound healing consists of the following three phases: vascularization
(creation of an enhanced blood supply), granulation (filling in of the wound bed
with healthy tissue), and epithelialization (resurfacing the wound bed with
specialized skin-surface cells). The Company believes that Cariel actively
accelerates each phase of wound healing by directly supplying essential
components required for cell growth to the compromised tissue and stimulating
both angiogenesis and vasodilation, two processes critical to the healing
process. The Company believes that Cariel could be superior to conventional
therapy.
Current therapy for cutaneous (skin) ulcers depends upon the severity of the
ulcers being treated. Traditional techniques for the treatment of chronic wounds
have principally involved debriding (removing dead tissue), cleansing and
dressing the wound, controlling infection with antibiotics and protecting the
wound. These passive treatments do not, however, directly stimulate the wound
healing process. For more severe chronic wounds, compression therapy, medical
devices, and surgical procedures are used. Current chronic wound treatment
regimens are costly, require extensive professional medical care, are burdensome
to the patient and include a lengthy treatment period. This is particularly true
of compression therapy which is a major component of the current treatment for
venous stasis ulcers. The Company believes that Cariel may be effective without
compression therapy thereby making it the preferable treatment for venous stasis
ulcers. In addition, the use of Cariel without compression should be well-suited
for treatment in the home, long-term or alternate site care environments because
of its ease of use and the resulting reduced dependence on professional medical
care.
In January 1997 the Company initiated pivotal, multi-center, controlled,
clinical trials in Europe designed for marketing approval in certain European
countries for the treatment of venous stasis ulcers. These trials are being
conducted in accordance with a protocol which compares Cariel, in the absence of
compression, to conventional compression therapy. The end point for the trial
protocol is full closure of the wounds or twenty-six weeks of treatment,
whichever occurs sooner. The Company anticipates that results from these studies
will be available in late 1997. Two additional studies have been conducted. In
one uncontrolled clinical study wound closure was accomplished without the use
of compression. The Company decided to terminate another study prior to
completion in order to reformulate Cariel and to change the study design to
treat more severe and more uniform wounds. Data generated from the partially
completed, original study was inconclusive. The Company believes that this was
due principally to limited enrollment, an insufficient number of large deep
wounds and the variability of wound size and depth. No toxicity or side effects
have been observed in any of these studies.
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Upon successful completion of the European clinical trials, the Company
intends to seek regulatory approval to market Cariel in certain European
countries. The Company also intends to file the appropriate applications with
the FDA by mid 1997 for the purpose of gaining approval to conduct clinical
trials in the United States. These studies are preliminary and there can be no
assurances that the FDA will permit them to be conducted or that if conducted
they will be successful or that Cariel will be commercialized.
Piliel--Topical Hair Regrowth Gel
Piliel is an in-situ tissue culturing based proposed product to stimulate hair
regrowth and reduce hair loss. The user applies Piliel directly to the scalp in
a viscous liquid form.
According to industry sources, approximately 33 million males and 19 million
females in the United States experience some form of hair loss. Androgenetic
alopecia (male pattern baldness) is the most common form of baldness and is
responsible for 95% of male hair loss. Typically, females experience a more
diffuse hair loss pattern, the onset of which usually occurs after menopause.
Current conventional therapies include transplants which are painful and
expensive and certain medications which while helpful to some users yield
marginal benefits, at best, to a large number of users.
The Company believes that Piliel, when topically applied to the scalp,
stimulates angiogenesis and vasodilation thus providing increased blood
circulation to the hair follicles, which is critical to hair regrowth. Topical
application of Piliel is also believed to provide direct nutritional and
hormonal support to rejuvenate hair follicles. The Company believes that if
Piliel is successfully developed and tested, it will be effective in stimulating
hair regrowth and in reducing hair loss. Based on results from earlier
observations, the Company also believes that Piliel may restore the original
hair color to gray and whitening hair.
During December 1996, the Company initiated a pivotal clinical trial of Piliel
at multiple sites in Europe for the stimulation of hair regrowth and for the
reduction of hair loss. The pivotal study is designed for market approval in
certain European countries, is randomized, double blinded and placebo-controlled
and is testing Piliel in its lyophilized formulation. The study is measuring the
effectiveness of Piliel for the most common form of hair loss, androgenetic
alopecia. The study is for an eight-month treatment period consisting of once-
daily treatment applications followed by a three-month follow-up period without
treatment application. A pilot clinical study of Piliel for stimulation of
hair regrowth and reduction of hair loss was completed in 1995 in Israel. In
this uncontrolled study, investigators observed that Piliel stimulated hair
regrowth. No toxicity or side effects have been observed in any of these
studies. The Company intends to file an IND application with the FDA to commence
clinical trials in the United States for use of Piliel on patients with
androgenetic alopecia. These studies are preliminary and there can be no
assurances that the FDA will permit them to be conducted or that if conducted
they will be successful or that Piliel will be commercialized.
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Lipoel--Fat Transplantation Enhancer
Lipoel is an in-situ tissue culturing based proposed product to be used to
improve the success of autologous fat transplantation.
Autologous fat transplantation involves the transplantation of fat tissue from
a donor site to a recipient site within the same individual (i) to fill voids
resulting from traumatic injuries, congenital deformities and surgical
procedures; (ii) for use in cosmetic applications, such as reducing or
eliminating wrinkles; and (iii) may be used to treat urinary stress
incontinence. In Lipoel-enhanced autologous fat transplantation, the harvested
fat is obtained by aspiration, treated with Lipoel and re-infused by injection.
The Company believes that there are several potentially significant markets
for Lipoel in the areas of cosmetic and reconstructive surgery, as well as the
treatment of urinary stress incontinence. As an example, industry sources
estimate that at least ten million Americans experience some type of urinary
incontinence.
The Company believes that Lipoel provides nutrients and hormones required by
the fat cells during transplantation and induces blood vessel growth at the site
of implantation. By providing an appropriate physiologic environment, the
survival rate for transplanted fat cells improves significantly. The Company
believes that Lipoel-enhanced autologous fat transplantation, if successfully
developed and tested, could be used as an alternative to current conventional
products and treatments.
Currently, various implants and reconstructive surgical procedures are being
used to replace tissue lost due to trauma, surgery, or to add bulk to soft
tissue as a result of congenital deformities, cosmetic or functional
considerations. Collagen injections are being used to attempt to reduce the
appearance of wrinkles and to treat urinary stress incontinence. The use of
material foreign to the body in these procedures has led to problems including
their premature absorption, sensitivity, allergenic and other inflammatory
responses, toxicity and outright rejection as well as potential increased risks
for autoimmune diseases. Unlike other methods, autologous fat transplantation
does not utilize materials foreign to the body. However, the use of autologous
fat transplantation has been limited due to the premature resorption of the
transplanted fat cells. In contrast, the use of Lipoel-enhanced fat transplants
are not expected to elicit any of the untoward responses or to be prematurely
absorbed and therefore are anticipated to have long-term benefits. The Company
anticipates extensive testing would be required to determine the feasibility of
Lipoel for its use in breast augmentation.
In 1995, the Company initiated a pilot clinical study of Lipoel in Israel for
reconstructive surgery. This study indicated that the material was not
prematurely absorbed, did not migrate from the site of implantation and did not
elicit any untoward responses. Based on observations by investigators to date,
the Company believes that Lipoel-enhanced fat transplants may provide better
cosmetic results, safety advantages and longer-term benefits than non-Lipoel-
enhanced fat transplants and other current alternative treatments. These studies
are preliminary and there can be no assurances that the studies will be
successful or that Lipoel will be commercialized.
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Repel --Bioresorbable Adhesion Barrier Film
Repel-CV --Bioresorbable Adhesion Barrier Film
Resolve--Viscous Solution
Repel and Repel-CV are proprietary bioresorbable post-operative surgical
adhesion barrier films based on the Company's polymer technology. The Company is
also developing Resolve, a post-operative surgical adhesion barrier coating
(viscous solution). Repel, Repel-CV and Resolve are intended to be used
routinely during surgeries to prevent or reduce the formation of post-operative
adhesions
Adhesions are fibrous structures that connect tissues or organ surfaces that
are not normally joined. They are an undesirable side effect of the body's
normal healing process following damage to tissue. Adhesions can cause
significant complications such as bowel obstruction following abdominal surgery,
infertility following gynecological surgery, restricted limb motion following
musculoskeletal surgery, and pain following any surgery. Moreover, adhesions
that form as a result of surgery can increase the complexity, duration and risk
of subsequent surgery. According to industry sources, in the United States,
surgeons perform an estimated 440,000 abdominal operations annually to remove
adhesions, and the annual cost in the United States for the removal of such
adhesions is approximately $1.2 billion in inpatient treatment charges.
According to industry data, adhesions occur in approximately 93% of abdominal
surgeries and between 55% and 100% of gynecologic operations. However, as it is
not possible to predict which patients will develop adhesion related
complications, the Company believes that most surgeries will benefit from
routine use of Repel, Repel-CV or Resolve. The Company is currently developing
these products for applications in abdominal, gynecological, musculoskeletal and
cardiac surgeries. There are at least 4.5 million cardiac, gynecological,
general and orthopedic/spinal surgeries performed in the United States each
year.
The Company believes that current products for the prevention or reduction of
adhesions are limited by various shortcomings including: (i) undesirable
handling characteristics in the surgical environment, (ii) diminished efficacy
in the presence of blood, (iii) inability to be used in laproscopic procedures,
and (iv) failure to be absorbed. The Company believes that Repel, Repel-CV and
Resolve may not suffer from these shortcomings and as a result may become the
preferred method of treatment for the prevention or reduction of adhesions. In
addition, some resorbable polymers may form particles or break-down products as
they degrade which could lead to untoward biological effects or may actually
cause adhesions. The Company believes that Repel, Repel-CV and Resolve uniformly
dissolve without forming particles and do not form break-down products, which
could lead to untoward biological effects.
In February 1997, the Company initiated Phase I clinical trials for Repel in
gynecological surgeries in the United States. The Company intends to initiate
clinical trials in Europe. The Company has conducted several randomized,
controlled, blinded, preclinical studies of Repel, Repel-CV and Resolve in the
United States. The studies were designed to determine the incidence, extent and
severity of abdominal and pericardial adhesions in rabbits following surgery
without an adhesion barrier compared to their formation in rabbits following
surgery and treatment with Repel, Repel-CV and Resolve. These studies have shown
that Repel, Repel-CV and Resolve eliminate or significantly reduce adhesions
following surgery in animal models. These trials are preliminary and there can
be no assurances that the studies will be successful or that Repel, Repel-CV or
Resolve will be commercialized.
Scar Care - Topical Scar Resolution Device
The Company is developing and testing Scar Care, an externally worn silicone-
based product to be applied to intact skin for diminishing unsightly scars and
associated discomfort. Based on observations by clinical investigators to date,
the Company believes that when placed on a scar, Scar Care may diminish the size
of the scar, fade discoloration of the scar for better cosmetic results, as well
as alleviate the itching and discomfort associated with the scar. The Company
has initiated randomized, controlled, blinded clinical trials of Scar Care in
the United States. This clinical study is preliminary and there can be no
assurances that the study will be successful or that Scar Care will be
commercialized. See "Collaborative Agreements--Scar Care Device."
<PAGE>
The Sure-Closure System
The Sure-Closure System is a disposable, single patient use medical device for
wound closure which mechanically causes skin to stretch by harnessing the skin's
natural viscoelastic properties. The principal application for the Sure-Closure
System is for acute wounds involving a loss of skin due to surgery or traumatic
injury. Specifically, the product targets those cases in which the wound is too
wide for conventional suturing or stapling and the surrounding skin is otherwise
viable and capable of being mechanically stretched.
The Company commercialized the Sure-Closure System and introduced its first
product, Sure-Closure I, to the United States market in September 1993. As a
result of a strategic decision to focus on the development and commercialization
of its proposed products utilizing its platform technologies, in July 1994 the
Company sold the Sure-Closure System to MedChem. As part of this agreement, the
Company receives a 10% royalty on net sales through June 2004. MedChem was
subsequently acquired by C.R. Bard in 1995. The Sure-Closure System is currently
marketed by Zimmer, following their acquisition of the Sure-Closure System from
C.R. Bard in October 1996. See "Collaborative Agreements--Sure-Closure System."
COLLABORATIVE AGREEMENTS
In-Situ Tissue Culturing Technology
The in-situ tissue culturing technology was developed at The Bruce Rappaport
Faculty of Medicine at Technion-Israel Institute of Technology in Haifa, Israel
(the "Rappaport Faculty"). In June 1991, the Company entered into an agreement
with Technion Research and Development Foundation, Ltd. (the "Technion") which
was assigned to its wholly-owned subsidiary, Dimotech Ltd. ("Dimotech"), and was
amended in February 1994 and February 1996 (the "in-situ tissue culturing
technology Agreement"). Pursuant to the in-situ tissue culturing technology
Agreement, the Company agreed to finance the research and development conducted
with regard to the in-situ tissue culturing technology. Pursuant to the in-situ
tissue culturing technology Agreement, Technion has assigned to the Company the
worldwide rights to its patent applications, any patents which may issue and
know-how to develop, manufacture and market products relating to this
technology. Under the terms of the in-situ tissue culturing technology
Agreement, all rights in the research or products developed are owned solely by
the Company, except as set forth below. The Company has agreed to favorably
consider manufacturing in Israel products resulting from its in-situ tissue
culturing technology and to explore opportunities to do so.
In consideration for the assignment of the rights to the patents, patent
applications and know-how and in order to perform and finance the research to be
conducted under the in-situ tissue culturing technology Agreement, the Company
has paid Dimotech an aggregate fixed fee of $156,500 and is obligated to pay a
royalty of five percent (5%) per annum of all net sales of the Company's in-situ
tissue culturing technology products up to a maximum amount of $5,500,000 in
royalties during the term of the in-situ tissue culturing technology Agreement.
The in-situ tissue culturing technology Agreement continues until the earlier
of the last date upon which the patents covering the products governed by the
in-situ tissue culturing technology Agreement expire or the end of a period of
15 years from the date of the first commercial sale of products under the
assigned technology. Dimotech has the right in its sole discretion to terminate
the in-situ tissue culturing technology Agreement and/or enter into contracts
with others in order to grant them a license for the development, manufacture
and marketing of a product and other rights detailed in the in-situ tissue
culturing technology Agreement, if, among other things, (i) the Company does not
advise Dimotech of the completion of product development by June 15, 1999; (ii)
the Company does not advise Dimotech of the first commercial sale by June 15,
1999; (iii) the Company does not reach total net sales of products or achieve
income of $1,000,000 by June 15, 2001; (iv) the Company stops manufacturing
and/or marketing the product for a period of more than 12 months; or (v) the
Company breaches the in-situ tissue culturing technology Agreement, a receiver
or liquidator is appointed for the Company, the Company passes a resolution for
voluntary winding up, a winding up application is made against the Company, an
attachment is made over a substantial part of the Company's assets, or execution
proceedings are taken against the Company, and the same is not remedied or set
aside within the time periods specified in the in-situ tissue culturing
technology Agreement. The Company has agreed to indemnify
<PAGE>
Dimotech under certain circumstances. Upon the termination of the in-situ tissue
culturing technology Agreement in accordance with the provisions thereof for any
reason, the patents, patent applications, license and know-how assigned by
Dimotech to the Company will revert in full to Dimotech.
Polymer Technology
The Company's polymer technology was developed at the Hebrew University of
Jerusalem. The Company entered into an agreement with Yissum Research
Development Company of the Hebrew University of Jerusalem ("Yissum") dated June
14, 1991, as amended in February 1994, as of January 1996 and as of October 1996
(the "Yissum Agreement"), pursuant to which the Company agreed to finance
research and development conducted at the Hebrew University of Jerusalem in the
field of biomedical polymers. Pursuant to the Yissum Agreement, Yissum has
assigned to the Company its worldwide rights to patents, patent applications and
know-how to develop, manufacture and market products relating to this
technology. Under the terms of the Yissum Agreement, all rights in the research
or products developed are owned solely by the Company, except as set forth
below. The Company is permitted to grant licenses of its polymer technology upon
certain terms and conditions. The Company has agreed to favorably consider
manufacturing in Israel products resulting from its polymer technology and to
explore opportunities to do so.
In consideration for the assignment of the patents and the patent
applications, the granting of the licensing rights and the know-how, the
research that Yissum agreed to procure pursuant to the Yissum Agreement and
Yissum's performance of its obligations thereunder, the Company paid Yissum a
fixed fee of $750,000 and is obligated to pay a royalty of five percent (5%) per
annum of all net sales of the Company's products under the Yissum Agreement up
to a maximum amount of $5,500,000 in royalties during the term of the Yissum
Agreement.
The Yissum Agreement continues until the earlier of the last date upon which
the patents covering the products governed by the Yissum Agreement expire or the
end of a period of 15 years from the date of the first commercial sale of
products under the assigned technology. Yissum has the right in its sole
discretion, subject to certain exceptions set forth in the following sentences,
to terminate the Yissum Agreement and/or enter into contracts with others in
order to grant them a license for the development, manufacture and marketing of
a product and the other rights detailed in the Yissum Agreement if, among other
things, (i) the Company does not advise Yissum of the completion of development
and manufacturing work necessary to lead to the development of a product by
December 31, 2001; (ii) the Company does not advise Yissum of the first
commercial sale by December 31, 2001; (iii) the Company does not reach total net
sales of products or achieve income of $1,000,000 by December 31, 2002; (iv) the
Company stops manufacturing and/or marketing the product for a period of more
than 12 months; or (v) the Company breaches the Yissum Agreement, a receiver or
liquidator is appointed for the Company or the Company passes a resolution for
voluntary winding up, or a winding up application is made against the Company,
an attachment is made over a substantial part of the Company's assets, or
execution proceedings are taken against the Company, and the same is not
remedied or set aside within the time periods specified in the Yissum Agreement.
Notwithstanding the foregoing: (i) in the event that the Company does not advise
Yissum of the first commercial sale by December 31, 2001, Yissum shall not
terminate the Yissum Agreement during the year ended December 31, 2002 so long
as the Company pays to Yissum a minimum royalty payment of $50,000; (ii) in the
event that the Company does not (a) advise Yissum of the first commercial sale
by December 31, 2002 or (b) reach total net sales of products or achieve income
of $1,000,000 by December 31, 2002, Yissum shall not terminate the Yissum
Agreement during the year ended December 31, 2003 so long as the Company pays to
Yissum a minimum royalty payment of $50,000; and (iii) in the event that the
Company does not reach total net sales of products or achieve income of
$1,000,000 by December 31, 2003, Yissum shall not terminate the Yissum Agreement
during the year ended December 31, 2004 so long as the Company pays to Yissum a
minimum royalty payment of $50,000. The Company has agreed to indemnify Yissum
under certain circumstances. Upon the termination of the Yissum Agreement for
any reason, the patents and patent applications assigned by Yissum to the
Company will revert in full to Yissum.
<PAGE>
In March 1996, pursuant to the Yissum Agreement, the Company paid Yissum
$60,000 for conducting research relating to the development of surgical adhesion
barriers. Effective as of October 1996 the Yissum Agreement was amended as it
relates to the Company financing research at Yissum. The amendment
provides a research term of five years from the date of the amendment, a
proposed budget for the first twelve month period of approximately $264,000, and
requires Yissum personnel to enter into confidentiality and non-competition
agreements with the Company.
Scar Care
The Scar Care device was developed at the Rappaport Faculty. In July 1995, the
Company entered into an agreement with Dimotech (the "Dimotech Agreement")
pursuant to which the Company agreed to finance the research and development
conducted by Dimotech with regard to the Scar Care device. Pursuant to the
Dimotech Agreement, Dimotech has assigned to the Company the worldwide rights to
its patent applications, any patents which may issue and know-how to develop,
manufacture and market products relating to the Scar Care device. Under the
terms of the Dimotech Agreement, all rights in the research or products
developed are owned solely by the Company, except as set forth below. The
Company has agreed to favorably consider manufacturing in Israel products
resulting from the Scar Care device and to explore opportunities to do so.
In consideration for the assignment of the rights to the patents, patent
applications and know-how and in order to perform and finance the research and
development to be conducted under the Dimotech Agreement, the Company has paid
Dimotech an aggregate fixed fee of $25,935 and is obligated to pay a royalty of
five percent (5%) per annum of all net sales of Scar Care device products during
the term of the Dimotech Agreement.
The Dimotech Agreement continues until the earlier of the last date upon which
the patents covering the products governed by the Dimotech Agreement expire, or
the end of a period of 15 years from the date of the first commercial sale
pursuant to the assignment. Dimotech has the right in its sole discretion to
terminate the Dimotech Agreement and/or enter into contracts with others in
order to grant them a license for the development, manufacture and marketing of
a product and other rights detailed in the Dimotech Agreement, if, among other
things, (i) the Company does not advise Dimotech of the first commercial sale by
July 16, 1999; (ii) the Company does not reach total net sales of products or
achieve income of $1,000,000 within 72 months from the date of the Dimotech
Agreement (July 2001); (iii) the Company stops manufacturing and/or marketing
the product for a period of more than 12 months; or (iv) the Company breaches
the Dimotech Agreement, a receiver or liquidator is appointed for the Company,
the Company passes a resolution for voluntary winding up, a winding up
application is made against the Company, an attachment is made over all or a
substantial part of the Company's assets, or execution proceedings are taken
against the Company, and the same is not remedied or set aside within the time
periods specified in the Dimotech Agreement. The Company has agreed to indemnify
Dimotech under certain circumstances. Upon the termination of the Dimotech
Agreement in accordance with the provisions thereof for any reason, the patents,
patent applications and know-how assigned by Dimotech to the Company will revert
in full to Dimotech and any licenses granted by the Company thereunder will
expire.
Sure-Closure System
The Sure-Closure System was invented at the Rambam Medical Center, an
affiliate of Technion-Israel Institute of Technology in Haifa, Israel. The
Company entered into an agreement with Technion dated June 28, 1992 (the "Skin-
Stretching Agreement"), pursuant to which Technion has assigned to the Company
its worldwide rights to its patents, patent applications and know-how to
develop, manufacture and market products relating to the Sure-Closure System
technology, and Technion assigned the Skin-Stretching Agreement to Dimotech. On
July 29, 1994, the Company completed the sale of its Sure-Closure System to
MedChem. The assets sold included substantially all of the Company's assets,
properties, claims, rights and interests related to the Sure-Closure System,
other than accounts receivable. The transaction provided for (i) the payment to
the Company of $4 million; (ii) the assumption of certain liabilities, in an
amount of approximately $644,000 related to the Sure-Closure System and other
accrued expenses, which has been recorded as deferred royalty income and will be
deducted from royalty income beginning in 1996; and (iii) a 10% royalty on net
sales of all current and future Sure-Closure System products to be paid to the
Company through June 30,
<PAGE>
2004. In July 1994, in connection with the sale of the Sure-Closure System,
Technion and Dimotech agreed to the assignment of all rights and duties, under
the Skin Stretching Agreement, to MedChem, relieving the Company of any
obligations under the Skin Stretching Agreement.
In March 1994, the Company entered into an agreement with Technion and
Dimotech, which amended the Skin-Stretching Agreement by providing certain
conditions for release of the Company, by the Chief Scientist of the State of
Israel, from the Company's obligation under the Skin-Stretching Agreement to
manufacture skin stretching products in Israel. Pursuant to this agreement, the
Chief Scientist agreed to permit manufacturing abroad subject to the following
conditions: (i) the office of the Chief Scientist would receive a royalty of two
percent (2%) of net sales of the Sure-Closure System in an aggregate amount not
to exceed $120,000 in royalties; (ii) if more than 450,000 Sure-Closure Systems
were sold in any year, the amount above 450,000 Sure-Closure Systems per year
would be manufactured in Israel; and (iii) the Company would invest $50,000 per
year, for the five-year period commencing on January 1, 1995, in research and
development programs in Israel chosen by the Company. In connection with the
sale of the Sure-Closure System to MedChem, MedChem agreed to assume the
Company's obligations. The Company has invested an amount greater than $50,000
in research and development in Israel in each of 1995 and 1996, sales of the
Sure-Closure System have not exceeded 450,000 Sure-Closure Systems and the
Company has been informed by MedChem that the 2% royalty on the sales of the
Sure-Closure Systems has been paid to the Chief Scientist.
GOVERNMENT REGULATION
FDA and Other Regulations
The Company's research and development activities and the production and
marketing of the Company's products are subject to regulation for safety,
efficacy and compliance with a wide range of regulatory requirements by numerous
governmental authorities in the United States and other countries. In the United
States, drugs, biologic products and medical devices are subject to rigorous FDA
review. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act
and other federal statutes and regulations govern or influence the research,
testing, manufacture, safety, labeling, storage, record keeping, approval,
distribution, reporting, advertising and promotion of such products.
Noncompliance with applicable requirements can result in fines, recall,
injunction or seizure of products, refusal to permit products to be imported
into the United States, refusal of the government to approve or clear product
approval applications or to allow the Company to enter into government supply
contracts, withdrawal of previously approved applications and criminal
prosecution. The FDA may also assess civil penalties for violations of the Food,
Drug, and Cosmetic Act relating to medical devices.
In order to obtain FDA approval of a new drug, a biologic or device, companies
must submit proof of safety and efficacy. In most cases such proof entails
extensive clinical and preclinical laboratory tests. The testing and preparation
of necessary applications and processing of those applications by the FDA is
expensive and may take several years to complete. There is no assurance that the
FDA will act favorably or in a timely manner in reviewing submitted
applications, and the Company may encounter significant difficulties or costs in
its efforts to obtain FDA approvals which could delay or preclude the Company
from marketing any product it may develop. The FDA may also require
postmarketing testing and surveillance of approved products, or place other
conditions on the approvals. These requirements could cause it to be more
difficult or expensive to sell the products, and could therefore restrict the
commercial applications of such products. Product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
following initial marketing. For patented products or technologies, delays
imposed by the governmental approval process may materially reduce the period
during which the Company will have the exclusive right to exploit such
technologies.
The conduct of non-clinical studies must be done in conformity with the FDA's
good laboratory practice ("GLP") regulations. Clinical studies must comply with
the FDA's regulations for institutional review board approval and for informed
consent and, depending on the product, Investigational New Drug ("IND") or
Investigational Device Exemption ("IDE") regulations. In addition, a variety of
state and local permits are required under regulations relating to the Company's
proposed laboratory activity.
<PAGE>
The Company will also be required to register as a manufacturer with the FDA
if it manufactures drugs, biologics or devices in the United States. As such,
the Company would be inspected on a routine basis by the FDA for compliance with
the FDA's Good Manufacturing Practices ("GMP") regulations. These regulations
require that the Company manufacture its products and maintain its documents in
a prescribed manner with respect to manufacturing, testing and control
activities. Foreign manufacturing facilities that produce products for sale in
the United States are also subject to these GMP requirements and to periodic FDA
inspections. FDA regulations also require that the Company provide information
to the FDA on deaths or serious injuries associated with the use of its
products, as well as other post-approval marketing experiences. In addition, the
FDA prohibits a company from marketing approved products for unapproved
applications.
The Company believes that products derived from its in-situ tissue culturing
technology will likely be regulated by the FDA as a new drug for which approval
of a New Drug Application ("NDA") would be required. The FDA could, however,
regulate products derived from its in-situ tissue culturing technology as a
biologic or a device, and require approval of both a Product License Application
("PLA") and an Establishment License Application ("ELA") if it is regulated as a
biologic or a PreMarket Approval ("PMA") application if it is regulated as a
device, prior to commercial distribution in the United States. Products
utilizing the Company's polymer technology are likely to be classified as Class
III devices, requiring the PMA review process. The Company intends to submit a
510(k) pre-market notification to the FDA for the Scar Care device.
New Drugs
The results of the preclinical tests and clinical trials are submitted to the
FDA in the form of an NDA for marketing approval. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
approval process is affected by a number of factors, including the severity of
the disease, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials. Additional animal studies or clinical
trials may be requested during the FDA review period and may delay marketing
approval. After FDA approval for the initial indications, further clinical
trials may be necessary to gain approval for the use of the product for
additional indications. The FDA mandates that adverse effects be reported to the
FDA and may also require post-marketing testing to monitor for adverse effects,
which can involve significant expense.
Clinical trials involve administration of the drug to patients afflicted with
the condition for which the drug is being tested under the supervision of a
qualified principal investigator. Clinical trials are conducted in accordance
with protocols that detail the objectives of the study, the parameters to be
used to monitor safety and the efficacy criteria to be evaluated. Each protocol
is submitted to the FDA as part of the IND. Each clinical study is conducted
under the auspices of an independent Institutional Review Board (the "IRB") at
the institution at which the study will be conducted. The IRB will consider,
among other matters, ethical factors, the safety of human subjects and possible
liability of the institution.
Clinical trials are typically conducted in sequential phases, but the phases
may overlap. Phase I involves the initial introduction of the drug into human
subjects (often healthy), and the testing of the drug for safety (adverse
effects), dosage tolerance, metabolism, distribution, excretion and clinical
pharmacology. Phase II involves studies in a limited patient population to (i)
determine the efficacy of the drug for specific targeted indications, (ii)
determine dosage tolerance and optimal dosage and (iii) identify possible
adverse side effects and safety risks. When a compound is found to be effective
and to have an acceptable safety profile in Phase II evaluations, Phase III or
pivotal trials are undertaken to further evaluate clinical efficacy and safety
within an expanded patient population at multiple clinical study sites. The FDA
reviews both the clinical plans and the results of the trials and may
discontinue the trials at any time if significant safety issues arise.
Biologic Products
Biologic products must obtain both a PLA and an ELA from the FDA before they
can be commercially marketed in the United States. A PLA and ELA must be
submitted by the manufacturer and supported by extensive data,
<PAGE>
including preclinical and clinical data that demonstrate that the manufactured
product meets prescribed standards of safety, purity, and potency. Human
clinical testing of biologic products is also subject to the FDA's IND rules.
The FDA has no regulatory time limit within which it must review and act upon
PLA and ELA submissions. As a result, the time period for final action often
takes years from submission.
Devices
The FDA categorizes devices into three regulatory classifications subject to
varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and record keeping regulations, GMPs, 510(k) pre-market
notification, and are subject to other general controls. Class II devices may be
subject to additional regulatory controls, including performance standards and
other special controls, such as guidelines and postmarket surveillance. Class
III devices, which are typically invasive or life-sustaining products, or new
products never before marketed, require clinical testing to assure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA also
has the authority to require clinical testing of Class I and Class II devices.
If a medical device manufacturer can establish that a newly developed device
is "substantially equivalent" to a Class I or Class II device that was legally
marketed prior to May 1976, the date on which the Medical Device Amendments of
1976 were enacted, or to a device that was legally introduced to the market
after the FDA has found it to be substantially equivalent to a legally marketed
device, the manufacturer may seek clearance from the FDA to market the device by
filing a 510(k) pre-market notification. Substantial equivalence also can be
found for pre-1976 Class III devices for which PMAs have not been required. The
510(k) pre-market notification may need to be supported by appropriate data
establishing the claim of substantial equivalence to the satisfaction of the
FDA. Following submission of the 510(k) pre-market notification, the
manufacturer or distributor may not place the device into commercial
distribution until an order is issued by the FDA. By regulation, the FDA has no
specific time limit by which it must respond to a 510(k) pre-market
notification. At this time, the FDA responds to the submission of a 510(k) pre-
market notification in approximately 150 days on average. The FDA order may
declare that the device is substantially equivalent to another legally marketed
device and allow the proposed device to be marketed in the United States. The
FDA may, however, determine that the proposed device is not substantially
equivalent, or require further information, such as additional test data, before
the FDA is able to make a determination regarding substantial equivalence. Such
determination or request for additional information could delay the Company's
market introduction of its products and could have a material adverse effect on
the Company.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, whether or not the FDA has made a
determination in response to a 510(k) premarket notification, the manufacturer
or distributor must seek pre-market approval of the proposed device through the
submission of a PMA application. A PMA application must be supported by
extensive data, including preclinical and human clinical trial data, as well as
extensive literature, to prove the safety and efficacy of the device. Upon
receipt, the FDA conducts a preliminary review of the PMA application. If
sufficiently complete, the submission is declared fileable by the FDA. By law,
the FDA has 180 days to review a PMA application once it is filed, although PMA
application reviews more often occur over a significantly protracted time
period, and generally take approximately two years or more from the date of
filing to complete. A number of devices for which FDA marketing clearance has
been sought have never been cleared for marketing.
If human clinical trials of a proposed device are required and the device
presents "significant risk," the manufacturer or distributor of the device will
have to file an IDE application with the FDA prior to commencing human clinical
trials. The IDE application must be supported by data, typically including the
results of animal testing. If the IDE application is approved, human clinical
trials may begin at a specified number of investigational sites with the number
of patients approved by the FDA.
Sales of devices, new drugs and biologic products outside the United States
are subject to foreign regulatory requirements that vary widely from country to
country. Whether or not FDA approval has been obtained, approval of a device,
new drug or biologic product by a comparable regulatory authority of a foreign
country must generally be obtained prior to the commencement of marketing in
those countries. The time required to obtain such approval may be longer or
shorter than that required for FDA approval.
<PAGE>
Third Party Reimbursement
Successful commercialization of the Company's proposed products may depend in
part on the availability of adequate reimbursement from third-party health care
payers such as Medicare, Medicaid, and private insurance plans. Reimbursement
matters include both coverage issues and payment issues. Questions of coverage
raise the issue of whether a product will be paid for at all and under what
circumstances. Questions of payment relate to the amount or level of payment.
Reimbursement policies vary among payers and may depend on the setting in which
a product is used.
There are numerous governmental third-party payers. Medicare is a federally
funded health insurance for persons who are age 65 or older, who have end stage
renal disease, or who otherwise qualify by virtue of a disability. Medicare is
the largest single health insurance program in the United States. Medicaid is a
joint federal-state program to provide health services to the indigent. The
Department of Veterans Affairs provides a variety of medical services to
veterans both directly and through arrangements with private health care
providers. The Civilian Health and Medical Program for the Uniformed Services
pays for care and services furnished to dependents of members of the armed
forces. There are also numerous private health insurance plans, including
private nonprofit insurers (e.g., Blue Cross and Blue Shield plans), commercial
insurers, and various types of managed care organizations.
Significant uncertainty may exist as to the coverage and reimbursement status
of newly approved health care products. There can be no assurance that adequate
third-party reimbursement will be available for the Company to establish and
maintain price levels sufficient for realization of an appropriate return on its
investment in developing new therapies. Government and other third-party payers
are increasingly attempting to contain health care costs by limiting both
coverage and payment levels for new therapeutic products approved for marketing
by the FDA and by refusing, in many cases, to provide any coverage for uses of
approved products for disease indications for which the FDA has not granted
marketing approval. If adequate coverage and payment levels are not provided by
government and third-party payers for the Company's proposed products, the
market acceptance of these products would be adversely affected. Failure of the
Company's proposed products to be adequately reimbursed by third-party payers
could have a material adverse effect on the Company's business and financial
condition.
Coverage
As a general matter, third party payers are increasing their level of scrutiny
of new medical technologies with respect to whether such technologies should be
covered. As part of this process, third-party payers are increasingly evaluating
the improvement in health outcomes, price, and cost-effectiveness of medical
products. There can be no assurance that any product developed by the Company
will be considered clinically effective or cost-effective or that the Company's
products will be covered by third-party payers.
Medicare Part A generally covers institutional health care services (e.g.,
inpatient hospital, skilled nursing facility ("SNF"), home health, hospice, and
dialysis services), while Medicare Part B generally covers outpatient services
(e.g., outpatient hospital services, physicians' services, durable medical
equipment, physical and occupational therapy, laboratory services, and medical
supplies). Under Part A, Medicare generally covers drugs ordinarily provided by
hospitals and SNFs for the care and treatment of inpatients. Drug coverage is
not usually provided for home health services (although coverage may be provided
for home visits necessary to administer non-covered drugs). With respect to
hospice care, Medicare covers drugs that are used primarily to relieve pain and
symptoms of a patient's terminal illness. With a few exceptions which do not
appear to apply to the Company's products, Medicare Part B only covers
outpatient prescriptions drugs if (i) they cannot be self-administered by the
patient; (ii) they are administered by a physician or under a physician's
supervision; (iii) they are reasonable and necessary for the treatment for which
they are administered according to accepted standards of medical practice; and
(iv) they are ordinarily furnished in a physician's office or clinic and
represent a cost to the physician which is not separately charged in the
physician's bill. Medicare coverage for Cariel and other proposed products will
depend, in part, on available scientific data and whether they are considered to
be prescription drugs capable of being self-administered by patients. A wound
care product (Procuren/TM/) was denied Medicare coverage based on a
determination that there was insufficient published data to support safety and
efficacy. It is uncertain whether a similar
<PAGE>
determination would be applied to Cariel or the Company's other proposed
products. The Medicare statute also authorizes denial of coverage for personal
comfort items in most cases.
In addition to coverage of prescription drugs furnished as part of other
covered services such as hospital or nursing home services, outpatient
prescription drugs are among the "optional" services that a state may cover
under its Medicaid program. Under Medicaid, states that elect to provide
coverage for outpatient prescription drugs must meet a number of specific
requirements relating to coverage of outpatient prescription drugs adopted as
part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990") and the
Veterans Health Care Act of 1992 ("VHCA"). As a condition to coverage under
those statutes, a drug manufacturer must enter into a series of agreements that
generally require the manufacturer to provide rebates and discounts to specified
government or government-funded purchasers as described in greater detail below.
If a manufacturer does this, the Medicaid statute limits the circumstances under
which a state Medicaid program may otherwise exclude or restrict the
manufacturer's drugs from coverage. However, state Medicaid programs may exclude
products for cosmetic or hair growth purposes, and for uses which are not
medically indicated. Such exclusions could limit Medicaid coverage for Piliel,
Lipoel, or other proposed products of the Company. In addition, state Medicaid
programs may subject products to prior authorization requirements, limit the
quantity or number of refills for products, or restrict coverage of a drug
pursuant to a formulary which meets various federal requirements. There can be
no assurance that state Medicaid programs will not restrict coverage of the
Company's proposed products through such mechanisms.
Recently, managed care delivery systems have taken on increasing importance
under Medicare and Medicaid. Coverage standards for outpatient drugs under
Medicare and Medicaid are different in the managed care context. Health
maintenance organizations furnishing Medicare covered services which are
reimbursed on a capitated basis may offer additional services that may not
otherwise be covered by Medicare, including outpatient prescription drugs, under
certain circumstances. With respect to Medicaid managed care, drugs dispensed
through HMOs are specifically exempt from the requirements relating to
manufacturer rebate agreements, state coverage limits, and formulary standards.
In the context of Medicare and Medicaid managed care, managed care organizations
have significant latitude to employ restrictive formularies, prior
authorization, or other coverage limits. There can be no assurance that such
limits will not be employed to restrict coverage of the Company's proposed
products.
Prescription drug coverage under private insurance programs varies. In the
managed care context (or where prescription drug benefits are provided through a
pharmacy benefits manager under contract with a private health plan), third-
party payers often employ restrictive formularies which limit the number of
products within a therapeutic class which will be covered. There can be no
assurance that private third-party payers will not restrict coverage of the
Company's proposed products.
Payment
Likewise, third-party payers are increasing their level of scrutiny with
respect to the level of payment for new medical technologies, and there can be
no assurance that the level of payment for the Company's proposed products, even
if they are covered, will be adequate to enable the Company to realize an
appropriate return on its investment in developing new therapies.
Under Medicare Part A, payment depends on the service provider that furnishes
the drug to the Medicare beneficiary. For hospital inpatients, Medicare
generally pays on the basis of a prospective payment system in which a fixed
amount for a particular patient is determined by the DRG to which the patient is
assigned. Generally, such payments will not vary regardless of the specific
items or services furnished to the patient during the hospital stay. As a
result, hospitals have an incentive to provide cost-effective treatments that
will reduce hospital costs and shorten the patient's length of stay. There can
be no assurance that the Company's proposed products will be accepted by
hospitals in light of these payment pressures. Cost-based Medicare providers,
such as SNFs and home health agencies, currently are generally paid based on the
lesser of the entity's "reasonable costs" of providing services (including
pharmacy services) or their "customary charges" for such services. For hospices,
payment is made using a cost-related prospective payment method, subject to a
ceiling. As noted above, Medicare generally does not pay for self-administered
outpatient prescription drugs. To the extent that an outpatient prescription
drug is considered administered "incident to" a physician's services and
therefore covered, Medicare pays the lower of (i) the estimated acquisition
costs for the drug or (ii) the national average wholesale price of the drug.
<PAGE>
State Medicaid programs have considerable discretion in establishing the
precise manner and level of payment for prescription drugs furnished under their
Medicaid plans, and accordingly, their payment systems vary considerably.
However, the federal Health Care Financing Administration establishes "upper
limits" for payment for multiple source drugs under Medicaid. In addition, as
noted above, OBRA 1990 and the VHCA require manufacturers of covered outpatient
drugs, as a condition of federal payment for the drugs under Medicaid, to enter
into certain rebate and discount agreements which can significantly impact the
way in which a manufacturer markets, prices, or distributes its products and can
reduce manufacturers' potential revenues for their products. First, a
manufacturer must provide a statutory rebate to state Medicaid programs for each
of its "covered outpatient drugs" (generally, self-administered drugs). Second,
manufacturers must offer discounted pricing pursuant to a statutory formula to
certain "covered entities," which include certain hospitals and covered health
care entities receiving federal grants. Third, manufacturers must agree to offer
their products for procurement to federal agencies under the Federal Supply
Schedule ("FSS"), and to charge certain federal agencies purchasing from the FSS
no more than a statutory "federal ceiling price" for those products.
In the private third-party payer context, limitations on payments to providers
and for pharmaceutical products are also increasing, particularly with the
rising prominence of managed care organizations. In both domestic and foreign
markets, the ability of the Company to commercialize its proposed products could
be significantly affected by the availability and amount of reimbursement from
government payers, private insurers, and other organizations.
Uncertainty Related to Health Care Reform Measures
Congress recently has considered several Medicare reform proposals that could
significantly affect the amount of payment for pharmaceutical products,
including the Company's proposed products. For example, under proposed budget
legislation, SNFs would be reimbursed under a prospective payment system, and
prior to implementation of such a system, SNFs' ancillary costs (including
pharmacy costs) would be subject to payment limits. Similarly, Congressional
proposals would implement a prospective payment system for home health services
and hospital outpatient services. If enacted, such proposals could create cost
pressures similar to those in DRG-based payments for inpatient hospital
services.
Pending legislative proposals would also give states greater flexibility to
implement managed care programs to deliver healthcare to Medicaid recipients. If
such legislation were enacted, it could reduce Medicaid payments for the
Company's products. It is uncertain what legislative proposals will be enacted
or what actions federal, state, or private payers may take in response to any
health reform legislation. The Company cannot predict the effect health care
reforms may have on its business, and no assurance can be given that any such
reforms will not have a material adverse effect on the Company.
Anti-Kickback and Fraud and Abuse Laws
Several types of state and federal laws have been applied to restrict certain
marketing practices in the pharmaceutical industry in recent years. These
include anti-kickback statutes and consumer protection laws prohibiting unfair
or deceptive trade practices.
The federal Medicare/Medicaid anti-kickback statute prohibits persons from
knowingly and willfully offering, paying, soliciting, or receiving remuneration
to induce or in return for purchasing, leasing, ordering, or arranging for or
recommending purchasing, leasing or ordering any service or item payable under
Medicare, Medicaid, or certain other federally funded health care
programs. These provisions have been broadly interpreted to apply to certain
relationships between manufacturers, prescribers, purchasers of manufacturers'
products, and parties, such as pharmacies, in a position to refer or recommend
purchases. Under current law, federal courts and the Office of Inspector General
("OIG") of the United States Department of Health and Human Services have stated
that the statute may be violated if "one purpose" (as opposed to a primary or
sole purpose) of remuneration is to induce prohibited purchases,
recommendations, or referrals. In August of 1994, the OIG issued a "Special
Fraud Alert" describing pharmaceutical manufacturer promotional activities that
may violate the statute. Further, the government has taken several significant
enforcement actions under the statute against pharmaceutical manufacturers.
<PAGE>
There are six statutory exceptions to the basic prohibition against kickbacks.
Such protected practices include properly disclosed discounts or other
reductions in price, payments to bona fide employees, payments to group
purchasing organizations, waiver of coinsurance for Medicare Part B services for
certain individuals who qualify for certain Public Health Service
programs, renumeration under cetain risk-sharing arrangement, and payment
practices set forth in regulations defining conduct that will not be subject to
enforcement (i.e., the "safe harbors"). The OIG's safe harbor regulations
contain further refinements of the statutory exceptions, and also contain safe
harbors for, among other things, warranties, personal services contracts, and
reductions in prices to health plans by contract health care providers. Although
failure to satisfy all of the criteria for a particular safe harbor does not
necessarily mean that an arrangement is unlawful, practices that involve
remuneration intended to induce prohibited purchases or recommendations may be
subject to scrutiny if they do not qualify for the safe harbor. The Company's
practices may not in all cases meet all of the criteria for safe harbor
protection from anti-kickback liability.
The majority of states also have statutes or regulations similar to the
federal Medicare/Medicaid anti-kickback statute. In several states, these laws
apply regardless of whether payment for the services in question may be
made under Medicaid or state health programs. Sanctions under these
federal and state laws may include civil money penalties, license suspension or
revocation, exclusion of providers or practitioners (but, under current
regulations, not manufacturers) from participation in state health care
programs, and criminal fines or imprisonment.
A number of states also have recently sought to regulate pharmaceutical
promotion-and particularly manufacturer-sponsored incentives to promote the
utilization of their products--through state consumer protection statutes. These
laws generally prohibit unfair, deceptive, and misleading trade practices. In
general, the states have challenged programs under which a pharmacy receives a
financial incentive to dispense a particular product but does not disclose that
incentive to the patient.
Because of the breadth of these statues, it is possible that some of the
Company's business activities could be subject to challenge under one or more of
such laws. Such a challenge could have a material adverse effect on the
Company's business and financial condition.
PATENTS AND PROPRIETARY RIGHTS
In connection with Cariel, the Company has two issued patents in the United
States. These patents are directed to the Cariel composition(s) and its use in
treating wounds. In January 1997, the United States Patent and Trademark Office
issued a second patent providing broader composition of matter and use coverage.
The Company has several international patent applications in the following
countries: Canada, Japan, South Korea, Australia and the EPO (designating the
member states of the EPO including Austria, Belgium, Denmark, France, Germany,
Great Britain, Greece, Italy, Liechtenstein, Luxembourg, Netherlands, Spain,
Sweden and Switzerland).
In connection with Piliel, the Company has filed two United States patent
applications related to novel hair and nail growth compositions, methods for
enhancing the growth of hair and nails and revitalizing skin. In addition, one
of these patent applications is directed to methods for restoring the natural
color of hair (follicular melanogenesis). The Company has filed for patent
protection in other countries throughout the world on Piliel.
In connection with Lipoel, the Company has filed a United States patent
application related to compositions and methods for enhancing fat
transplantation for use in surgical and related cosmetic applications. The
Company has filed for patent protection on Lipoel in other countries.
In connection with the polymer technology, the Company currently holds two
issued United States patents, one Canadian patent and two Israeli patents
relating to bioresorbable polymeric compounds and polyurethane polymeric
compounds. In addition, the Company owns one European application (presently in
grant proceedings) designating Germany, France, England, Italy and Switzerland
relating to the polyurethane polymeric compounds. The Company has one pending
patent application in the United States pertaining to bioresorbable polymeric
compounds used in adhesion prevention. The first United States patent claims
novel bioresorbable polymeric compounds of specified chemical structure. Also
claimed are medical articles, including sutures and prosthetic devices, made
from these materials as well as methods for making these materials. The Company
does not currently have comparable patent protection outside the United States
for the bioresorbable polymeric compounds other than in Canada and in Israel.
The second
<PAGE>
United States patent claims novel polyurethane polymeric compounds of specified
chemical structure. Also claimed are medical articles, including sutures and
wound and burn dressings. The two United States patents will remain in effect
until June 2, 2008 and May 3, 2010, respectively, provided that all requisite
maintenance fees are paid to the United States Patent and Trademark Office.
There can be no assurance that the claims in the pending patent applications
will issue as patents, that any issued patents will provide the Company with
significant competitive advantages, that challenges will not be instituted
against the validity or enforceability of any patent owned by the Company, or,
if instituted, that such challenges will not be successful. The cost of
litigation to uphold the validity and prevent infringement of a patent can be
substantial. Furthermore, there can be no assurance that others will not
independently develop similar or superior technologies, duplicate the Company's
technologies or design around the patented aspects of the Company's
technologies. The Company could incur substantial costs in proceedings before
the United States Patent Office, including interference proceedings. The
proceedings could also result in adverse decisions as to the patentability of
the Company's licensed or assigned inventions. Further, there can be no
assurance that the Company will not infringe upon prior or future patents owned
by others, that the Company will not need to acquire licenses under patents
belonging to others for technology potentially useful or necessary to the
Company, or that such licenses will be available to the Company, if at all, on
terms acceptable to the Company. Moreover, there can be no assurance that any
patent issued to or licensed by the Company will not be infringed by others.
Lastly, there can be no assurance that third parties will not bring suits
against the Company for patent infringement or for declaratory judgment to have
the patents owned or licensed by the Company declared invalid. The Company also
relies on trade secrets and other unpatented proprietary technology. No
assurance can be given that the Company can meaningfully protect its rights in
such unpatented technology or that others will not independently develop
substantially equivalent products and processes or otherwise gain access to the
Company's technologies. While obtaining patents is deemed important by the
Company, patents are not considered essential to the success of its business.
However, if further patents do not issue from present or future patent
applications, the Company may be subject to greater competition. In some cases,
the Company may rely on trade secrets to protect its innovations. There can be
no assurance that trade secrets will be established, that secrecy obligations
will be honored, or that others will not independently develop similar or
superior technologies. To the extent that consultants, key employees, third
parties involved in the Company's projects or others independently develop
technological information, disputes may arise as to the proprietary rights to
such information which may not be resolved in favor of the Company.
The Company seeks to protect its trade secrets and proprietary know-how, in
part, through confidentiality agreements with its employees, consultants,
advisors, collaborators and others. There can be no assurance that these
agreements will not be violated by the other parties, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. The Company
has relationships with a number of academic consultants who are employed by
organizations other than the Company. Accordingly, the Company has limited
control over their activities and can expect only limited amounts of their time
to be dedicated to the Company's activities. These persons may have consulting,
employment or advisory arrangements with other entities that may conflict or
compete with their obligations to the Company. Consultants generally sign
agreements that provide for confidentiality of the Company's proprietary
information and results of studies. There can be no assurance, however, that the
Company will, in connection with every relationship, be able to maintain the
confidentiality of the Company's technology, dissemination of which could have a
materially adverse effect on the Company's business. To the extent that the
Company's scientific consultants develop inventions or processes independently
that may be applicable to the Company's proposed products, disputes may arise as
to the ownership of the proprietary rights to such information. Such inventions
or processes will not necessarily become the property of the Company, but may
remain the property of such persons or their full-time employers. The Company
could be required to make payments to the owners of such inventions or
processes, either in the form of cash, equity or a combination thereof. In
addition, protracted and costly litigation may be necessary to enforce and
determine the scope and validity of the Company's proprietary rights.
The Company has filed intent to use applications with the United States Patent
and Trademark Office for the following trademarks: Cariel, Piliel, Lipoel,
Repel, Repel-CV, Resolve and Revisc.
<PAGE>
COMPETITION
General
The Company is engaged in rapidly evolving and highly competitive fields.
Competition from biotechnology companies, medical device manufacturers,
pharmaceutical and chemical companies and other competitors is intense. Many of
these companies have substantially greater capital resources, research and
development staffs, facilities, and experience in obtaining regulatory approvals
as well as in the manufacturing, marketing, and distribution of products than
the Company. Academic institutions, hospitals, governmental agencies and other
public and private research organizations are also conducting research and
seeking patent protection and may develop competing products or technologies on
their own or through joint ventures. These entities also compete with the
Company in recruiting highly qualified scientific personnel. In addition,
recently developed technologies or technologies that may be developed in the
future are, or may be, the basis for competitive products. The Company's
products or processes may become obsolete before the Company can obtain approval
to market them or before it can recoup related research and development or
commercialization expenses. Competitors may also be more successful than the
Company in production and marketing. The Company's products may also be subject
to competition from related products using techniques other than those developed
by the Company or based on advances that may render the Company's products
obsolete.
The Company believes that its competitive position will be based on its
ability to create and maintain scientifically advanced technology and
proprietary products and processes, obtain required government approvals on a
timely basis, develop and manufacture its proposed products on a cost-effective
basis and successfully market clinically effective products.
Cariel
Competition for the management of chronic wounds is intense. Other companies
known to be pursuing therapies in the wound healing area include among others:
Advanced Tissue Sciences Inc., Baxter International, Inc., Bristol-Myers
Squibb, Chiron Corp. and Johnson & Johnson, Ciba Geigy, Creative Biomolecules,
Inc., Curative Health Services, Genzyme Tissue Repair, Integra Life Sciences
Corporation, Kendall International, Inc., Magainin Pharmaceuticals Inc.,
Organogenesis Inc. and Procyte Corporation.
Piliel
Piliel, if successfully developed and tested, could compete with certain
medications currently on the market and in development to stimulate hair growth
as well as current treatments such as transplants. The most widely used and the
only approved product for hair growth is Pharmacia and Upjohn Inc.'s
Rogaine/TM/, which is composed of minoxidil. Several other companies including
Merck & Co. and Chantal Pharmaceutical Corp. are known to be pursuing the
development of therapies for hair growth.
Lipoel
Currently, various implants and reconstructive surgery are being used to
replace tissue lost due to trauma or surgery, or to add bulk to soft tissue as a
result of congenital deformities, cosmetic or functional considerations.
Collagen injections are being used to attempt to reduce the appearance of
wrinkles and to treat urinary stress incontinence. Implantable devices such as
silicone and saline filled implants are being used for breast augmentation. The
Company believes that Lipoel-enhanced autologous fat transplantation, if
successfully developed and tested, could compete with these products.
<PAGE>
Repel, Repel-CV and Resolve
Repel, Repel-CV and Resolve are expected to compete with Interceed/TM/, a
product of Johnson & Johnson, Seprafilm/TM/ and Sepracoat/TM/, products of
Genzyme Corp. and Goretex/TM/, a product of WL Gore. Several other companies
including LifeCore Biomedical Inc. and Gliatech Inc. are known to be pursuing
the development of products for the prevention of adhesions.
Scar Care
Scar Care is expected to compete with various treatment options currently on
the market, such as silicone sheets, silicone gels and the use of corticosteriod
injections.
MANUFACTURING
The Company believes it currently has contracted for sufficient manufacturing
capabilities to allow for production in quantities sufficient to support its
current clinical programs. The Company intends to seek out contracts to obtain
sufficient manufacturing capabilities to allow for production of its other
proposed products in quantities sufficient to support its anticipated needs.
The Company intends primarily to rely on certain manufacturers to produce
Cariel, Piliel, Lipoel, Repel, Repel-CV, Resolve, Scar Care and other proposed
products for testing and commercial production. The manufacturer procures, tests
and inspects all raw materials used in the production of the Company's proposed
products. The manufacturer relies on various sources, approved by the Company,
for its raw materials and components. The Company believes that alternative
sources for these raw materials and components are available. The Company's
products would be manufactured in a facility in compliance with regulatory
requirements. The Company has engaged a third party to inspect the product
formulated by the manufacturer for quality assurance purposes. The Company has
been, and expects to continue to be, able to obtain all materials required for
its production of its proposed products, although there can be no assurances
thereof.
MARKETING AND SALES
If the Company's products are successfully developed, the Company intends to
seek joint venture, licensing or collaborative arrangements for the marketing
and sale of its products.
If development of the Company's products is completed, the Company will seek
to have its products marketed and sold in European countries and the United
States while concurrently seeking product registration in Japan. Products
utilizing the Company's technologies are expected to be targeted to various
segments in the medical community, including physicians, surgeons, and other
care providers in both the institutional and home care markets. The Company's
future growth and profitability will depend, in large part, on the success of
its personnel and others in fostering acceptance of the Company's products as an
alternative to other available products, among the medical community. Such
acceptance will be substantially dependent on educating the medical community as
to the distinctive characteristics and potential benefits of the Company's
technologies and products. There can be no assurance that the efforts of the
Company or others will be successful or that any of the Company's technologies
or proposed products will receive the necessary acceptance by the medical
community.
The Company may, in the future, decide to change its marketing and
distribution approach. Factors which may influence the Company's decision
include, but are not limited to, market size, competition, capital requirements,
projected return on investment, extent of necessary development and other
barriers to entry which could confront the Company when attempting to penetrate
certain markets.
<PAGE>
PRODUCT LIABILITY AND INSURANCE
The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and marketing of medical products. The
Company has obtained product liability insurance for its clinical trials
providing coverage in an aggregate amount of $1,000,000. This insurance policy
has an annual premium of approximately $18,000. The Company does not have
product liability insurance for the commercial sale of any of its products but
intends to obtain such coverage if and when its products are commercialized.
HUMAN RESOURCES
As of March 28, 1997, the Company has seven full time employees. Research and
development activities are conducted through arrangements with various
consultants and companies in Europe, Israel and the United States. The Company's
employees are not a party to any collective bargaining agreement. The Company
believes that it has good relations with its employees. The Company intends to
increase its number of full time employees as it expands its clinical trials and
product development activities.
CONSULTANTS AND ADVISORS
The Company utilizes various consultants and advisors for research,
development and testing of its technologies and products. The Company
periodically confers with such consultants and advisors as necessary to discuss
research, development and testing strategies and specific details of certain
projects. Certain of the listed consultants and advisors have entered into
agreements specifying the terms and scope of their individual advisory
relationship with the Company. The Company does not believe that termination of
any individual consulting or advisory agreement would materially affect its
business. None of the consultants or advisors are employed by the Company and,
therefore, may have commitments to, or consulting or advisory contracts with,
other entities which may compete with their obligations to the Company. Certain
consultants and advisors are not listed herein for reasons of confidentiality.
Except for such excluded consultants and advisors, the Company's consultants and
advisors are as follows:
ADRIAN BARBUL, M.D. Dr. Adrian Barbul is Professor of Surgery, Johns
Hopkins Medical Institutions, and Associate Surgeon-
in-Chief, Sinai Hospital of Baltimore. Dr. Barbul is
a clinical surgeon and also directs the Surgical
Research Laboratories at Sinai Hospital, as a
National Institute of Health-funded investigator. Dr.
Barbul's main research interests are in the area of
wound healingCin particular, chronic wound healing,
wound metabolism and immune regulation of wound
healing.
JOHN A. BONTEMPO, PH.D. Dr. John A. Bontempo, has over 30 years of experience
in the biopharmaceutical industry, and has been a
private consultant in biopharmaceutical product
development, domestically and internationally, since
1991. Dr. Bontempo served as Director of Bioscience
Development at the Robert Wood Johnson Pharmaceutical
Research Institute; Director of Sterile Product
Development and Pharmaceutical Manufacturing at
Genentech, Inc.; and held senior R&D responsibilities
for Hoffmann-LaRoche, Inc., E. R. Squibb & Sons,
Lederle Laboratories, Warner-Lambert and Interferon
Sciences, Inc. Dr. Bontempo's primary area of
expertise is in protein product development,
specifically preformulations, formulations,
stability, scale-up and technology transfer to
manufacturing.
<PAGE>
DANIEL COHN, PH.D. Dr. Daniel Cohn is Professor of Biomaterials Science
and Head of the Biomedical Polymers Research Group,
Casali Institute of Applied Chemistry, Hebrew
University, Jerusalem, Israel. Dr. Cohn's main areas
of research are biomedical resorbable polymers,
surface tailoring of polymeric biomaterials,
biomedical composites and the development of
polymeric scaffolds for tissue engineering. Dr. Cohn
developed the Company's polymer technology.
ALAN H. DECHERNEY, M.D. Dr. Alan DeCherney has, since 1991, been Louis E.
Phaneuf Professor and Chairman of the Department of
Obstetrics and Gynecology at Tufts University School
of Medicine, and Chief of Obstetrics and Gynecology
at the New England Medical Center. Prior to this, Dr.
DeCherney was Director of the Division of
Reproductive Endocrinology, and was John Slade Ely
Professor of Obstetrics and Gynecology at Yale
University School of Medicine. He has been President
of the International Society of Gynecologic
Endoscopy, the Society of Assisted Reproductive
Technologies, the Society of Reproductive Surgeons,
the Society of Reproductive Endocrinologists, the
American Society of Reproductive Medicine, and the
Society of Gynecologic Investigation. Dr. DeCherney
is a member of the American Board of Obstetrics and
Gynecology, is an Associate Editor of the New England
Medical Journal, and Editor of Assisted Reproductive
Reviews. In 1987, Dr. DeCherney was recipient of the
President's Achievement Award of the Society of
Gynecologic Investigation.
MICHAEL P. DIAMOND, M.D. Dr. Michael P. Diamond, since 1994, has served as
Professor of Obstetrics and Gynecology at Wayne State
University in Detroit, Michigan, and Director of the
Division of Reproductive Endocrinology and
Infertility. Dr. Diamond is a Board-certified
Obstetrician/Gynecologist with a subspecialization in
Reproductive Endocrinology and Infertility. Dr.
Diamond previously served on the faculty at Yale
University, and as Associate Professor of Obstetrics
and Gynecology, and Director of the Division of
Reproductive Endocrinology and Infertility at
Vanderbilt University. He has long-standing
involvement in animal and clinical trials assessing
postoperative adhesion development.
WILLIAM H. EAGLSTEIN,
M.D. Dr. William Eaglstein is Professor and Chairman of
the Department of Dermatology and Cutaneous Surgery
at the University of Miami School of Medicine. Dr.
Eaglstein's studies and theories on chronic ulcer
pathogenesis have been a source of ideas and new
hypotheses for many investigators in the field. His
creation of the Wound Care Information Institute at
the University of Miami was a stimulus and precursor
to the national multidisciplinary Wound Healing
Society, of which Dr. Eaglstein is a founding member.
<PAGE>
YARON HAR-SHAI, M.D. Dr. Yaron Har-Shai is Head of Plastic Surgery, Carmel
Hospital, Haifa, Israel. Dr. Har-Shai is Senior
Lecturer with the Faculty of Medicine, Technion-
Israel Institute of Technology, Haifa, Israel. He was
involved in the development of the Sure-Closure
System and Lipoel.
BERNARD HIRSHOWITZ, M.D. Dr. Bernard Hirshowitz is Professor Emeritus of
Plastic Surgery, The Bruce Rappaport Faculty of
Medicine, Technion-Israel Institute of Technology,
Haifa, Israel. Dr. Hirshowitz serves as consultant to
one of the major Sick Benefits Funds of Israel,
comparable to Blue Cross. Dr. Hirshowitz has held
both positions since 1989. Dr. Hirshowitz developed
the Sure-Closure System and was involved in the
development of Lipoel.
MARK G. LEBWOHL, M.D. Dr. Mark Lebwohl is Professor of Dermatology and
Director, Division of Clinical Dermatology, Mount
Sinai Medical Center, New York. Dr. Lebwohl's
involvement is focused on wound healing and hair
regrowth.
ELLA LINDENBAUM, PH.D. Dr. Ella Lindenbaum is the Director of the Morphology
Research Unit, The Bruce Rappaport Faculty of
Medicine, Technion-Israel Institute of Technology,
Haifa, Israel. Dr. Lindenbaum is a cell biologist,
whose field of research is the process of
angiogenesis and angiogenic growth factors. Dr.
Lindenbaum's work in in situ tissue culturing
technology led her to the development of Cariel and
Lipoel.
GARY L. LOOMIS, PH.D Dr. Gary Loomis is founder, president and senior
consultant of G. L. Loomis & Associates, Inc., a firm
providing technical expertise in polymer science to a
diverse international client base. Dr. Loomis is
internationally renowned as an expert in the
preparation, modification, evaluation and processing
of polymers, especially bioresorbable polymers for
medical devices and drug delivery applications.
HENDRIK A.M. NEUMANN, M.D. Dr. Hendrik A. M. Neumann is Head of the Department
of Dermatology, Academisch Zeikenhuis Maastricht,
University of Limburg, the Netherlands and President,
Dutch Society of Dermatology and Venercology. Prior
to 1992, Dr. Neumann practiced as a dermatologist at
Elkerlick Hospital, Helmond-Deurne, the Netherlands,
for twelve years. Dr. Neumann's fields of expertise
are phlebology (particularly non-invasive
measurement of venous circulation, microcirculation
and wound healing) and oncology (especially Mohs'
surgery and pheno- and geno-types of basal cell
carcinoma).
<PAGE>
ITEM 2. PROPERTIES
The Company's executive offices are located in an aggregate of approximately
3,550 square feet of office space in Edison, New Jersey, pursuant to an
operating lease for the period of November 1996 to November 2001. The lease
provides for an annual fixed rent of approximately $80,000 per year for the five
year term, and for the payment of certain operating expenses.
The Company also leases an aggregate of approximately 3,500 square feet of
office space in Princeton, New Jersey, pursuant to a five-year operating lease
expiring in July 1997. The lease provides for rent of approximately $57,000 for
the seven month period remaining under the lease during the year ending December
31, 1997 and for the payment of certain operating expenses. In August 1996, the
Company sublet this space to Palatin Technologies, Inc. through July 1997.
The Company's research and development activities and clinical studies are
currently conducted at various hospitals and universities in Israel, certain
European countries and the United States. The Company believes that these
facilities are adequate for its current research and development needs. The
Company will be required to add additional sites in connection with its expanded
development and testing activities.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
In June 1994, the Company and certain of its directors and officers were
subpoenaed by the Commission to testify as witnesses and to produce documents in
connection with publicity prepared and disseminated by third parties concerning
the Company and as to whether any payments were made by the Company in
connection with such activities. In a letter accompanying the subpoenas, the
Commission advised the Company that the subpoenas should not be construed as an
indication by the Commission or its staff that the Company or any of its
directors or officers have violated any law. Since testifying in 1994, the
Company has had no further communication with the Commission on this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers are as follows:
NAME AGE POSITIONS WITH THE COMPANY
- --------------------------- --- ----------------------------------------------
Dr. Herbert Moskowitz ..... 56 Chairman of the Board of Directors
Robert P. Hickey........... 51 President and Chief Executive Officer
Eli Pines, Ph.D............ 51 Vice President and Chief Scientific Officer
Donald W. Fallon........... 42 Vice President, Chief Financial Officer and
Treasurer
- --------------------------------------------------------------------------------
Dr. Herbert Moskowitz is a co-founder of the Company and is currently the
Chairman of the Board of Directors, Dr. Moskowitz has served as Chairman of the
Board, President and Chief Executive Officer at various periods since the
Company's inception in 1990. Dr. Moskowitz is also president, director and a
principal stockholder of Magar Inc., a private investment firm. Magar Inc. is a
principal stockholder of the Company. He is a co-founder of Advanced Tissue
Sciences, Inc., a publicly traded medical technology company, and at various
periods from 1986 to 1989 served as director, chairman of the board, president
and chief executive officer. Dr. Moskowitz is a director and principal
stockholder of Magna-Lab Inc., a publicly traded medical technology company, and
a director of EchoCath, Inc., a publicly traded medical technology company. Dr.
Moskowitz, a former practicing dentist, has been active in the healthcare field
since 1958.
Robert P. Hickey has served as President and Chief Executive Officer since May
29, 1996 and as a Director since August 1996. From May 1994 until joining the
Company, Mr. Hickey was founder and president of Roberts Healthcare Resources,
Inc., a company engaged in project consulting to Fortune 500 and leading edge
companies in the healthcare industry. From 1975 to 1994 Mr. Hickey served in
various positions at Johnson & Johnson. From 1992 to 1994, Mr. Hickey was Vice
President, Marketing and Director of Ethicon, Inc., a unit of Johnson & Johnson.
Eli Pines, Ph.D. has served as a Vice President and the Chief Scientific
Officer of the Company since June 1995. From June 1992 to June 1995 Dr. Pines
served as vice president and chief technical officer for Fibratek, Inc., a
biopharmaceutical company engaged in research, development and production of
medical products. Prior to joining Fibratek, Inc., Dr. Pines was employed for
seventeen years by Johnson & Johnson, where his last position was director of
new products research and development with worldwide responsibilities for the
Surgical Specialty Division of Johnson & Johnson Medical, Inc. Dr. Pines
received a B.S. in Chemistry from Brooklyn College in 1968, a Ph.D. in
Biophysics from Syracuse University in 1972 and conducted post doctoral research
in Biochemistry at The Rockefeller University from 1972 to 1974.
Donald W. Fallon has served as a Vice President and Chief Financial Officer
since July 1995 and as Treasurer since May 30, 1996. From September 1992 to July
1995, Mr. Fallon was the director of finance and administration for
Oncotherapeutics, Inc., a development stage biotechnology company focusing on
immunotherapies for cancer and infectious diseases. From May 1990 to September
1992, Mr. Fallon was the director of finance at Otsuka America Pharmaceutical,
Inc., the North American research and development branch of Otsuka
Pharmaceutical Company in Japan. Mr. Fallon has 20 years of comprehensive
experience in accounting, finance and administration.
<PAGE>
$$NOFOLIO
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) MARKET INFORMATION
The Company's Common Stock, Units, Class A Warrants, and Class B Warrants
have traded separately on the National Association of Securities Dealers
Automated Quotation System ("Nasdaq") Small-Cap Market under the symbols CHAI,
CHAIU, CHAIW, and CHAIZ, respectively, since September 22, 1992. On May 3, 1996,
the Common Stock, Class A Warrants and Class B Warrants were approved for
quotation on the Nasdaq National Market(R) tier of The Nasdaq Stock Market under
the symbols CHAI, CHAIW and CHAIZ, respectively. The following sets forth the
quarterly high and low sales price for the periods presented as reported by The
Nasdaq Market.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK UNIT WARRANT WARRANT
SALES PRICE SALES PRICE SALES PRICE SALES PRICE
----------- ----------- ----------- -----------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1995
First Quarter................. $ 3 3/8 $ 1 3/4 $ 4 1/2 $ 2 1/4 $ 3/4 $ 1/4 $ 5/16 $ 1/16
Second Quarter................ 7 13/16 2 3/4 12 1/4 3 3 3/4 5/16 1 19/32 1/8
Third Quarter................. 7 1/4 4 3/8 10 3/4 6 3/4 3 3/4 1 5/8 1 21/32 3/4
Fourth Quarter................ 10 1/4 6 1/2 15 1/2 10 1/2 4 5/8 2 13/16 2 3/8 1 1/8
Fiscal Year Ended December 31, 1996
First Quarter................. 11 3/8 6 1/2 18 1/2 13 1/4 5 1/4 2 7/8 2 3/4 1 15/16
Second Quarter................ 9 3/4 6 3/4 15 12 4 7/8 3 1/4 2 3/8 1 7/8
Third Quarter................. 8 1/8 6 12 1/2 11 4 7/8 3 2 3/16 1 3/8
Fourth Quarter................ 7 1/8 4 1/8 10 1/2 7 3 1/4 1 15/32 1 19/32 1
Fiscal Year Ended December 31, 1997
January 1 through March 24, 1997 7 3/16 3 1/4 10 1/2 6 3 1 1/2 1 5/16 7/8
</TABLE>
Each Unit consists of one share of Common Stock, one Redeemable Class A
Warrant and one Redeemable Class B Warrant. The components of the Units are
transferable separately. Each Class A Warrant entitles the holder to purchase,
at an exercise price of $8.40, subject to adjustment, 1.071474 shares of Common
Stock and one Class B Warrant, and each Class B Warrant entitles the holder to
purchase, at an exercise price of $12.60, subject to adjustment, 1.071474 shares
of Common Stock. These exercise prices were adjusted from the initial exercise
prices of $9.00 and $13.50 per share, respectively, at the time the Class A
Warrants and Class B Warrants were issued due primarily to public offerings
completed in the second half of 1993 and the first half of 1996. The Class A
Warrants and the Class B Warrants (collectively, the "Warrants") are exercisable
at any time after issuance until September 21, 1998. The Warrants are subject
to redemption by the Company for $.05 per Warrant, upon 30 days written notice,
if the average closing bid price of the Common Stock exceeds $12.60 per share
with respect to Class A Warrants and $18.90 per share with respect to Class B
Warrants (subject to adjustment in each case) for 20 consecutive business days
ending the date on which the notice of redemption is given.
(b) APPROXIMATE NUMBER OF EQUITY SECURITIES HOLDERS
As of March 3, 1997 the number of holders of record of the Company's Common
Stock was 178. The Company believes that the number of beneficial holders of
its Common Stock on such date was in excess of 400.
(c) DIVIDENDS
The Company has never paid a cash dividend on its Common Stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of any
cash dividends.
28
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for year ended March 31, 1992, the
nine months ended December 31, 1992 and the years ended December 31, 1993, 1994,
1995 and 1996, have been derived from audited financial statements of the
Company. The financial statements of the Company as at December 31, 1995 and
1996 and for the years ended December 31, 1994, 1995 and 1996, together with the
notes thereto and the related report of Richard A. Eisner & Company, LLP,
independent auditors, are included elsewhere in this Form 10K. The selected
financial data set forth below should be read in conjunction with the Financial
Statements of the Company and related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Form 10K.
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
MARCH 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------------------------------
1992 1992 1993 1994 1995 1996
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product Sales............................ $ $ $ 265,230 $ 1,496,281 $ $
Royalty Income........................... 245,488 154,646
---------- ---------- ------------ ------------ ------------ ------------
Operating expenses:
Cost of sales............................ 52,023 551,074
Research and development................. 399,614 937,051 2,493,577 2,012,755 1,994,523 2,779,172
Sales and marketing...................... 2,209,205 2,930,644
General and administrative.............. 240,489 1,415,766 2,507,736 2,791,200 1,230,970 1,742,648
---------- ---------- ------------ ------------ ------------ ------------
Operating expenses....................... 640,103 2,352,817 7,262,541 8,285,673 3,225,493 4,521,820
---------- ---------- ------------ ------------ ------------ ------------
(Loss) from operations.................... (640,103) (2,352,817) (6,997,311) (6,789,392) (2,980,005) (4,367,174)
Interest imcome........................... 3,549 24,780 131,915 77,692 183,213 539,695
Interest expense.......................... (59,733) (177,123) (51,140) (41,010) (504) (2,915)
Gain on sale of the SureClosure
System.................................. 3,353,843
---------- ---------- ------------ ------------ ------------ ------------
Net (loss)................................ $ (696,287) $(2,505,160) $ (6,916,536) $ (3,398,867) $ (2,797,296) $ (3,830,394)
========== =========== ============ ============ ============ ============
Net (loss) per share...................... $(.37) $(1.10) $(2.05) $(.84) $(.58) $(.55)
========== =========== ============ ============ ============ ============
Weighted average shares
outstanding.............................. 1,875,000 2,276,818 3,371,563 4,060,753 4,819,536 6,976,338
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 4,106,900 $ 6,177,230 $ 1,979,615 $ 3,827,530 $ 11,235,976
Working capital........................... 3,430,662 5,458,191 2,794,007 3,656,548 14,121,789
Total assets.............................. 4,181,749 6,737,566 3,234,526 3,964,981 14,800,838
Total liabilities......................... 1,234,453 1,738,452 995,965 864,001 1,006,515
Accumulated deficit....................... (3,221,558) (10,138,094) (13,536,961) (16,334,257) (20,164,651)
Stockholders' equity...................... 2,947,296 4,999,114 2,238,561 3,100,980 13,794,323
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
Since its inception, the Company has been engaged primarily in research and
development of its technologies and proposed products, commercialization of the
Sure-Closure System and organizational activities. In September 1993, the
Company commenced marketing the Sure-Closure System. The Company built and
supported a direct sales organization calling on surgeons. As a result of a
strategic decision to focus on the development and commercialization of its
proposed products based on its platform technologies, in July 1994, the Company
sold the Sure-Closure System to MedChem for payments aggregating $4 million plus
a 10% royalty on net sales through June 2004. The Company had a net gain on the
sale of the Sure-Closure System of approximately $3,354,000. Following the sale
of the Sure-Closure System, sales efforts ceased and sales and marketing
expenses were eliminated; general and administrative expenses were significantly
reduced; and the Company focused its resources primarily on development of its
in-situ tissue culturing technology and bioresorbable polymer technology as well
as proposed products to be derived from such technologies. All revenue to date
has been derived from sales of the Sure-Closure System or the royalties thereon.
RESULTS OF OPERATIONS
1995 vs. 1996
The Company had revenue of $245,488 and $154,646 from royalties on sales of
the Sure-Closure System for the fiscal years ended December 31, 1995 and 1996,
respectively. The reduction in royalties from 1995 to 1996 can be attributed to
the reduced sales of the Sure-Closure System.
The Company incurred research and development expenses of $1,994,523 and
$2,779,172 for the fiscal years ended December 31, 1995 and 1996, respectively.
This increase can be attributed to increased spending due to the development and
pre-clinical studies of bioresorbable polymer adhesion prevention products, a
full year of expenditures supporting the management of the research and
development function, offset by a reduction in the clinical trial expenditures
on Cariel and Piliel. Additionally, a non-cash expense for stock based
compensation costs of $456,273 was recorded in 1996. There was no such expense
in 1995. Research and development expenses are expected to increase for 1997
from the 1996 levels as the Company expands development of and conducts clinical
trials on several products.
General and administrative expenses, which consist of management compensation,
professional fees, investor materials and travel expenses were $1,230,970 and
$1,742,648 for the fiscal years ended December 31, 1995 and 1996, respectively.
This increase is attributable to the additional management added during 1996.
Interest income was $183,213 and $539,695 for the fiscal years ended December
31, 1995 and 1996, respectively. Interest income increased primarily as a
result of a larger cash balance in 1996 as compared to 1995 due to the
public offering completed in May 1996.
Interest expense was $504 and $2,915 for the fiscal years ended December 31,
1995 and 1996, respectively. For both 1995 and 1996, these balances represent
the interest on capital leases entered into during 1995 and 1996 to acquire
certain office equipment.
The Company's net loss was $2,797,296 and $3,830,394 for the fiscal years
ended December 31, 1995 and 1996, respectively. This increase was primarily the
result of the increased scale of operations as the Company expanded its product
development efforts and strengthened its management.
<PAGE>
1994 vs. 1995
The Company had revenue of $1,496,281 from sales of the Sure-Closure System
for the fiscal year ended December 31, 1994. For the fiscal year ended December
31, 1995, the Company had revenue, from royalties only, of $245,488. Revenues
from product sales ceased in July 1994 upon the sale of the Sure-Closure System.
The cost of these sales was $551,074 for the fiscal year ended December 31,
1994.
The Company incurred research and development expenses of $2,012,755 and
$1,994,523 for the fiscal years ended December 31, 1994 and 1995, respectively.
The decrease is attributable to the cessation of research and development
activities on the Sure-Closure System following its sale to MedChem, offset by
an increase in research and development expenditures on its in-situ tissue
culturing technology, polymer technology and other products.
The Company incurred sales and marketing expenses of $2,930,644 in the fiscal
year ended December 31, 1994. Sales and marketing expenses were incurred for the
introduction of the Sure-Closure System and the hiring and supporting of the
direct sales force in the United States. Following the sale of the Sure-Closure
System to MedChem, the Company ceased to incur sales and marketing expenses.
There were no sales and marketing expenses incurred during 1995.
General and administrative expenses, which consist of management compensation,
professional fees, investor materials, consulting expenses and travel expenses
were $2,791,200 and $1,230,970 for the fiscal years ended December 31, 1994 and
1995, respectively. General and administrative expenses were substantially
reduced with the sale of the Sure-Closure System to MedChem.
Interest income was $77,692 and $183,213 for the fiscal years ended December
31, 1994 and 1995, respectively. Interest income increased as a result of larger
cash balances in 1995, as compared with 1994.
Interest expense was $41,010 and $504 for the fiscal years ended December 31,
1994 and 1995, respectively. Included in interest expense for 1994 is accrued
interest on amounts loaned to the Company by certain stockholders, the principal
amount of which totaled $528,000. In November 1994, the Company agreed to
convert indebtedness to certain officers, directors and stockholders into Common
Stock of the Company.
The Company's net loss was $3,398,867 and $2,797,296 for the fiscal years
ended December 31, 1994 and 1995, respectively. This decrease was primarily the
result of scaled back operations subsequent to the sale of the Sure-Closure
System to MedChem.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash, cash equivalents and short-term
investments of $14,277,969 compared to $3,827,530 at December 31, 1995. The
cash, cash equivalents and short-term investments for December 31, 1996,
primarily reflect proceeds to the Company of approximately $13.4 million from
the public offering of Common Stock during May 1996.
<PAGE>
Although the Company believes that the available cash will be sufficient to
meet its cash requirements for approximately the next 18 months, there can be no
assurance that the Company will not require additional financing during that
time or that financing will be available on acceptable terms or at all. The
Company will be required, however, to raise substantial additional funds to
continue the clinical development and commercialization of its proposed products
and to fund the growth that is expected to occur if any of its proposed products
are approved for marketing. The Company plans to seek such additional funding
through collaborative arrangements with strategic partners, licensing
arrangements for certain of its proposed products and additional public or
private financings, including equity financings. Any additional equity
financings may be dilutive to stockholders. There can be no assurance that such
arrangements or financings will be available as needed or on terms acceptable to
the Company. Insufficient funds may require the Company to delay, scale back or
eliminate some or all of its research and development programs and manufacturing
and marketing efforts or require it to license to third parties certain products
or technologies that the Company would otherwise seek to commercialize itself.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements appears on page F-1, the Report of
Independent Auditors appears on page F-2, and the Financial Statements and Notes
to Financial Statements appear on pages F-3 to F-15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item is incorporated by reference herein
to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1996 fiscal year. Certain
information with regard to the executive officers of the Company is contained in
Item 4 hereof and is incorporated by reference in this Part III.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is incorporated herein by reference
to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1996 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item is incorporated herein by reference
to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1996 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item is incorporated herein by reference
to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1996 fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
An Index to Financial Statements appears on page F-1.
2. SCHEDULES.
None
3 EXHIBITS.
3.1 Restated Certificate of Incorporation of Registrant, filed December
26, 1991, as amended. (1)
3.1(a) Amendment to Restated Certificate of Incorporation, dated August 21,
1992. (1)
3.2 By-Laws of Registrant. (1)
10.1 Amended and Restated 1992 Stock Option Plan of Registrant. (2) (13)
10.2 Agreement, dated June 14, 1991, between Registrant and Yissum
Research Development Company of the Hebrew University of Jerusalem
("Yissum"). (1)
10.3 Lease and Lease Agreement, dated as of May 27, 1992, between
Registrant and Carnegie 214 Associates Limited Partnership (the
"Lease"). (1)
10.4 Letter, dated July 21, 1992, relating to the commencement date
of the Lease. (1)
<PAGE>
10.5 Form of Indemnification Agreement entered into between
Registrant and certain officers and directors of Registrant. (2)
10.6 Agreement, dated June 1991, between Registrant and the Technion
Research and Development Foundation, Ltd. (the "Technion") as
assigned by the Technion to Dimotech, Ltd. (1)
10.7 Agreement, dated as of April 14, 1992, bet ween Registrant and
Mr. Joel Gold. (1) (13)
10.8 Assignment of rights relating to a patent on wound dressing to
Registrant by Dimotech, Ltd. (3)
10.9 Assignment of certain rights relating to the polymer technology
to Registrant by Yissum. (3)
10.10 Supplemental Assignment of rights relating to the in-situ tissue
culturing technology to Registrant by the Technion. (4)
10.11 Form of Non-Qualified Stock Option Agreement. (4) (13)
10.12 Form of Incentive Stock Option Agreement. (4) (13)
10.13 Asset Purchase Agreement between Registrant and MedChem
Products, Inc. dated as of July 29, 1994. (5)
10.14 Stock Option Agreement, dated October 26, 1994, between
Registrant and Edward J. Quilty. (6)
10.15 Underwriting Agreement between Registrant and D.H. Blair
Investment Banking Corp. (7)
10.16 Unit Purchase Option between Registrant and D.H. Blair
Investment Banking Corp. (7)
10.17 Amendment, dated October 28, 1993, to Lease. (7)
10.18 Estoppel Certificate, dated December 22, 1993, to lender to
leased premises, State Mutual Life Amendment to Lease, dated
October 28, 1993, for Assurance Company of America. (7)
10.19 Agreement, dated as of February 3, 1994, between Registrant and
Dimotech, Ltd. (7)
10.20 Warrant Agreement among Registrant, D. H. Blair Investment
Banking Corp. and American Stock Transfer & Trust Company
including forms of Class A and Class B Warrants. (7)
10.21 Warrant Agreement among Registrant and American Stock Transfer
and Trust Company. (7)
10.22 Agreement, dated as of February 1994, between Registrant and
Yissum. (7)
10.23 M/A Agreement, dated September 22, 1992, between Registrant and
D. H. Blair Investment Banking Corp. (7)
10.24 Stock Option Agreement, dated as of December 13, 1993, between
Registrant and Dimotech, Ltd. (7)
10.25 Employment Agreement dated June 12, 1995 between Registrant and
Eli Pines, Ph.D. (8) (13)
10.26 Employment Agreement dated June 12, 1995 between Registrant and
Donald W. Fallon. (9) (13)
10.27 Amendment No. 2 dated as of January 1, 1996 to the Agreement
between the Registrant and Yissum. (2)
10.28 Agreement dated July 16, 1995 between the Registrant and
Dimotech, Ltd. (2)
10.29 Amendment No. 2 dated February 11, 1996 to the Agreement between
the Registrant and Dimotech, Ltd. (2)
10.30 Option Agreement dated March 21, 1995 between Registrant and
Herbert Moskowitz. (2) (13)
10.31 Option Agreement dated March 21, 1995 between Registrant and
Irwin Rosenthal. (2) (13)
10.32 Assignment of rights relating to a patent for treatment of
Keloid and Hypertrophic scars to Registrant from Dimotech, Ltd.
(2)
<PAGE>
10.33 Subscription Agreement dated April 23, 1995 between Registrant
and Marathon Investment, LLC. (2)
10.34 Subscription Agreement dated April 23, 1995 between Registrant
and Harold C. Baldauf. (2)
10.35 Warrant Agreement between Registrant and Wedbush Morgan
Securities. *
10.36 Underwriting Agreement between Registrant and Wedbush Morgan
Securities.*
10.37 Employment Agreement dated May 29, 1996 between Registrant and
Robert P. Hickey. (10) (13)
10.38 Employment Agreement dated May 30, 1996 between Registrant and
Dr. Herbert Moskowitz. (10) (13)
10.39 Lease Agreement dated August 13, 1996 between Registrant and
Metro Four Associates, LP, 8/th/ Floor of 379 Thornall Street.
(11)
10.40 Sublease Agreement dated July 13, 1996 between Registrant and
Palatin Technologies, Inc. (11)
10.41 Option Agreement dated June 12, 1995 between Registrant and Eli
Pines, Ph.D. (12) (13)
10.42 Option Agreement dated July 17, 1995 between Registrant and
Donald W. Fallon. (12) (13)
10.43 Option Agreement dated December 29, 1995 between Registrant and
Eli Pines, Ph.D. (12) (13)
10.44 Option Agreement dated May 29, 1996 between Registrant and
Robert P. Hickey. (12) (13)
10.45 Option Agreement dated May 29, 1996 between Registrant and
Robert P. Hickey. (12) (13)
10.46 Option Agreement dated August 6, 1996 between Registrant and
Donald W. Fallon. (12) (13)
10.47 Option Agreement dated August 6, 1996 between Registrant and
Donald W. Fallon. (12) (13)
10.48 Option Agreement dated August 15, 1996 between Registrant and
Walter R. Maupay. (12) (13)
10.49 Option Agreement dated March 5, 1997 between Registrant and
Edward A. Celano.* (13)
23.1 Consent of Richard A. Eisner & Company, LLP.*
27. Financial Data Schedule.*
* Filed herewith.
____________________
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-94008) declared effective on September 22, 1992.
(2) Incorporated by reference to Registrant's Registration Statement on Form S-
1 (File No. 333-02588) declared effective on May 3, 1996.
(3) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended September 30, 1992.
(4) Incorporated by reference to the Registrant's report on Form 10-K for the
year ended December 31, 1993.
(5) Incorporated by reference to the Registrant's report on Form 8-K filed by
the Company on August 12, 1994.
(6) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended September 30, 1994.
(7) Incorporated by reference to the Registrant's report on Form 10-K for the
year ended December 31, 1994.
(8) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended June 30, 1995.
(9) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended September 30, 1995.
(10) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended June 30, 1996.
(11) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended September 30, 1996.
(12) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (File No. 333-19195) declared effective on January 3, 1997.
(13) Includes compensatory plan and or arrngements required to be filed pursuant
to item 14 (c) of Form 10-K.
(b) REPORTS ON FORM 8-K
None
(c) See (a) 3.
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Life Medical Sciences, Inc.
(Registrant)
/s/ Robert P. Hickey
By: _______________________________
Robert P. Hickey
Chief Executive Officer and President
(principal executive officer)
Dated: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Robert P. Hickey Director, President and March 28, 1997
- --------------------
ROBERT P. HICKEY Chief Executive Officer
(principal executive
officer)
/s/ Donald W. Fallon Vice President, March 28, 1997
- ---------------------
DONALD W. FALLON Chief Financial Officer and
Treasurer (principal financial
and accounting officer)
/s/ Herbert Moskowitz
- --------------------- Director and Chairman of March 28, 1997
HERBERT MOSKOWITZ the Board
/s/ Coy Eklund Director March 28, 1997
- ---------------------
COY EKLUND
/s/ Joel L. Gold
- --------------------- Director March 28, 1997
JOEL L. GOLD
/s/ Irwin M. Rosenthal Director March 28, 1997
- ----------------------
IRWIN M. ROSENTHAL
/s/ Walter R. Maupay Director March 28, 1997
- ---------------------
WALTER R. MAUPAY
/s/ Edward A. Celano Director March 28, 1997
- ---------------------
EDWARD A. CELANO
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
------
NUMBER
------
REPORT OF INDEPENDENT AUDITORS.......... F-2
BALANCE SHEETS.......................... F-3
STATEMENTS OF OPERATIONS................ F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY................................. F-5
STATEMENTS OF CASH FLOWS................ F-6
NOTES TO FINANCIAL STATEMENTS........... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Life Medical Sciences, Inc.
Edison, New Jersey
We have audited the accompanying balance sheets of Life Medical Sciences,
Inc. as of December 31, 1995 and December 31, 1996 and the related statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test bases, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of Life Medical Sciences, Inc.
at December 31, 1995 and December 31, 1996 and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1996 in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
January 28, 1997
With respect to Note I
February 7, 1997
F-2
<PAGE>
LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
ASSETS 1995 1996
- --------------------------------------------------------------------- ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note B[1])............................... $ 3,827,530 $ 11,235,976
Short-term investments (Notes B[1]and C)............................ 3,041,993
Prepaid expenses and advances....................................... 19,559 311,330
------------ ------------
Total current assets......................................... 3,847,089 14,589,299
Furniture and equipment-at cost (less depreciation of $41,957........
and $59,830) (Note B [2])........................................... 96,570 182,349
Deposits.............................................................. 21,322 29,190
------------ ------------
TOTAL........................................................ $ 3,964,981 $ 14,800,838
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------
Current liabilities:
Capital lease obligation............................................ $ 2,468 $ 6,798
Accounts payable.................................................... 40,675 111,265
Accrued expenses (Note G[3])........................................ 147,398 349,447
------------ ------------
Total current liabilities.................................... 190,541 467,510
Capital lease obligation.............................................. 15,160 34,128
Deferred royalty income (Notes B[5]and H)............................. 643,622 504,877
Other liabilities..................................................... 14,678
------------ ------------
Total liabilities............................................ 864,001 1,006,515
------------ ------------
Commitments and other matters (Notes D, E, G and H)
Stockholders' equity (Note E):
Preferred stock, $.01 par value; shares authorized-5,000,000; none
issued.............................................................
Common stock, $.001 par value; shares authorized - 23,750,000;
issued and outstanding - 5,422,320 and 7,914,820................... 5,422 7,915
Additional paid-in capital.......................................... 19,429,815 33,951,059
Accumulated deficit................................................. (16,334,257) (20,164,651)
------------ ------------
Total stockholders' equity................................... 3,100,980 13,794,323
------------ ------------
TOTAL........................................................ $ 3,964,981 $ 14,800,838
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Product sales............................................ $ 1,496,281
Royalty income (Note B[5])............................... $ 245,488 $ 154,646
----------- ----------- -----------
Operating expenses:
Cost of sales............................................ 551,074
Research and development expenses (Notes B[3],[4] and D). 2,012,755 1,994,523 2,779,172
Sales and marketing...................................... 2,930,644
General and administrative expenses...................... 2,791,200 1,230,970 1,742,648
----------- ----------- -----------
Operating expenses................................... 8,285,673 3,225,493 4,521,820
----------- ----------- -----------
(Loss) from operations.................................... (6,789,392) (2,980,005) (4,367,174)
Interest income........................................... 77,692 183,213 539,695
Interest expense.......................................... (41,010) (504) (2,915)
Gain on sale of the Sure-Closure System (Note H).......... 3,353,843
----------- ---------- -----------
Net (loss) $(3,398,867) $(2,797,296) $(3,830,394)
=========== =========== ===========
Net (loss) per share (Note B[7]).......................... $(0.84) $(0.58) $(0.55)
=========== =========== ===========
Weighted average shares outstanding....................... 4,060,753 4,819,536 6,976,338
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(NOTE E)
<TABLE>
<CAPTION>
ADDITIONAL
----------
COMMON STOCK PAID-IN ACCUMULATED
------------ ------- -----------
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------- -------
<S> <C> <C> <C> <C>
Balance - January 1, 1994.......... 4,025,000 $4,025 $15,133,183 $(10,138,094)
Common stock issued............. 283,695 284 638,030
Net (loss) for the year......... (3,398,867)
------------ ------------ ------------- --------------
Balance - December 31, 1994........ 4,308,695 4,309 15,771,213 (13,536,961)
Common stock issued............. 1,093,625 1,093 3,602,372
Fair value of common stock issued for compensation 20,000 20 56,230
Net (loss) for the year......... (2,797,296)
------------ ------------ ------------- --------------
Balance - December 31, 1995........ 5,422,320 5,422 19,429,815 (16,334,257)
Common stock issued (net of
expenses)...................... 2,492,500 2,493 14,064,971
Fair value of options issued
for compensation............... 456,273
Net (loss) for the year......... (3,830,394)
------------ ------------ ------------ --------------
Balance - December 31, 1996........ 7,914,820 $ 7,915 $33,951,059 $(20,164,651)
============ ============ ============ ==============
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,____
---------------------------------
1994 1995 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net (loss)................................................. $(3,398,867) ($2,797,296) $(3,830,394)
Adjustments to reconcile net (loss) to net cash (used in)
operations:
Deferred royalty income.................................... (138,745)
Gain on sale of the Sure-Closure System.................... (3,353,843)
Fair value of common stock and options issued as
compensation............................................. 56,250 456,273
Depreciation............................................... 34,981 26,501 32,908
Accrued interest expense................................... 41,011
Provision for bad debts................................... 15,000
Changes in operating assets and liabilities:
Decrease in accounts receivable.......................... 101,009 57,854
Decrease in inventory.................................... 10,086
Decrease (increase) in prepaid expenses and advances..... 6,119 74,644 (291,771)
Decrease (increase)in deposits........................... 587 (7,868)
Increase (decrease) in accounts payable and accrued
expenses................................................ 210,819 (149,592) 272,639
Increase (decrease) in other liabilities................. 14,678 (14,678)
----------- ------------ -----------
Net cash (used in) operating activities................. (6,319,007) (2,731,052) (3,521,636)
----------- ------------ -----------
Cash flows from investing activities:
Purchase of equipment...................................... (108,337) (25,768) (93,017)
Disposition of equipment................................... 1,643 15,793
Purchase of investment securities.......................... (7,042,142)
Proceeds from maturity of investment securities............ 4,000,149
Net proceeds from the sale of the Sure-Closure System...... 2,581,838 1,000,000
----------- ------------ -----------
Net cash provided by (used in) investing activities..... 2,473,501 975,875 (3,119,217)
----------- ------------ -----------
Cash flows from financing activities:
(Decrease) in cash overdraft............................... (352,109)
Proceeds from issuance of common stock, net of expenses.... 3,603,465 14,067,464
Payment on capitalized lease............................... (373) (18,165)
----------- ------------ -----------
Net cash (used in) provided by financing activities..... (352,109) 3,603,092 14,049,299
----------- ------------ -----------
Net (decrease) increase in cash and cash equivalents......... (4,197,615) 1,847,915 7,408,446
Cash and cash equivalents at beginning of period............. 6,177,230 1,979,615 3,827,530
----------- ------------ -----------
Cash and cash equivalents at end of period................... $ 1,979,615 $ 3,827,530 $11,235,976
=========== ============ ===========
Supplementary cash flow information:
Interest paid.............................................. $ 504 $ 2,915
Equipment purchased under capital lease.................... $ 18,001 $ 41,463
</TABLE>
Supplemental disclosure of non-cash investing and financing information-See
Notes E[1] and H
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A)-- THE COMPANY:
Life Medical Sciences, Inc. (the "Company") was incorporated on August 1,
1990. The Company is engaged in the development of cost-effective medical
products. The Company is developing Cariel, a topical wound healing agent for
the treatment of chronic wounds, ulcers and burns; Lipoel, for the autologous
transplantation of fat; Piliel, its hair regrowth formula; Repel and Repel-CV
its resorbable adhesion barrier films used to prevent surgical adhesions; and
Resolve, its resorbable adhesion barrier coating used to prevent surgical
adhesions. In September 1993, the Company commercially introduced its first
product, the Sure-Closure System, a device designed for the mechanical closure
of tissue deficit wounds. On July 29, 1994, the Company sold or assigned to
MedChem Products, Inc. ("MedChem") substantially all of its assets related to
the Sure-Closure System, including rights, agreements and licenses (Note H). In
1996, the Sure-Closure System was acquired by Zimmer, Inc., a subsidiary of
Bristol-Myers Squibb.
(NOTE B) --SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] Cash equivalents and short-term investments:
The Company considers all highly liquid investment instruments purchased with
a maturity of three months or less to be cash equivalents. The Company's short-
term investments at December 31, 1996 consist of readily marketable debt
securities with original maturities of more than 90 days but less than one year.
[2] Depreciation:
Furniture and equipment are recorded at cost, and are depreciated using the
straight-line method based upon estimated useful lives of 5 to 7 years.
[3] Research and development:
Research and development costs, including those payments described in Note D,
are charged to expense as incurred.
[4] Patent costs:
Costs incurred in connection with acquiring patent rights are charged to
expense as incurred.
[5] Royalty income:
Royalty income is based on MedChem's quarterly sales of the Sure-Closure
System and any line extensions or embodiments thereof, except for royalties
earned on 1994 sales of the Sure-Closure System which were based on such sales
for the period from July 29, 1994 to December 31, 1994. Royalties are calculated
by MedChem and are paid or credited to the Company within forty-five days after
the last day of each quarter. The Company recognizes such income when the
amounts earned become fixed and determinable. Beginning with the royalties on
sales for the fourth quarter of 1995, the amounts payable by MedChem are applied
to the outstanding deferred royalty income balance.
F-7
<PAGE>
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
[6] Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
[7] Net (loss) per share:
Net (loss) per share is based on the weighted average number of common shares
outstanding during each period. Outstanding options and warrants have not been
considered since their effect would be antidilutive.
(NOTE C) --SHORT-TERM INVESTMENTS:
At December 31, 1996, short-term investments consist of US Treasury bills with
an original maturity of greater than 90 days but less than one year which are
held as available-for-sale securities. The short-term investments are carried
at amortized cost since such cost approximates fair value at year end.
(NOTE D)-- RESEARCH AND LICENSE AGREEMENTS:
[1] Technion agreements:
During June 1991, the Company entered into an agreement with Technion Research
and Development Foundation, Ltd., in Haifa, Israel (the "Technion"), which was
assigned to its wholly-owned subsidiary Dimotech, Ltd. ("Dimotech") and was
amended in February 1994 and February 1996, pursuant to which the Company
finances, and Dimotech conducts research and development, with regard to the
Company's in-situ tissue culturing technology. In connection with the agreement,
the Technion has assigned to the Company its worldwide rights to patent
applications, any patents which may be issued and know-how to develop,
manufacture and market products relating to this technology.
Pursuant to the agreement the Company is obligated to pay a royalty of five
(5%) percent per annum of all net sales of the Company's products derived under
the agreement. The maximum amount of royalties to be paid during the term of the
agreement is $5,500,000. The agreement continues until the earlier of the last
date upon which the patents expire, or at the end of fifteen (15) years from the
date of the first commercial sale pursuant to the assignment. Dimotech has the
right in its sole discretion to terminate the agreement under certain
circumstances. Upon termination of the agreement for any reason, the patents,
patent applications and know-how assigned by Dimotech to the Company will revert
in full to Dimotech.
In December 1993, the Company issued an option to Dimotech to purchase 200,000
shares of common stock at an exercise price of $9.12. The option was issued as
consideration for services rendered by Dimotech through December 1993. The
option was assigned a value of $828,000, which was charged to research and
development in 1993.
F-8
<PAGE>
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
[2] Yissum agreement:
During June 1991, the Company entered into a research and license agreement
with Yissum Research and Development Company of the Hebrew University of
Jerusalem ("Yissum"), which was amended in February 1994, as of January 1996 and
as of October 1996, pursuant to which the Company finances and Yissum conducts
research and development at the Hebrew University of Jerusalem in the field of
biomedical polymers. In connection with the agreement, Yissum assigned to the
Company its worldwide rights to patents, patent applications and know-how to
develop, manufacture and market products relating to this technology.
Pursuant to the agreement, the Company is obligated to pay a royalty of five
(5%) percent per annum of all net sales of the Company's products derived under
the agreement. The maximum amount of royalties to be paid during the term of the
agreement is $5,500,000. The agreement continues until the earlier of the last
date upon which the patents expire, or at the end of fifteen (15) years from the
date of the first commercial sale pursuant to the assignment. Yissum has the
right in its sole discretion to terminate the agreement if, among other things
the Company does not attain certain milestones by specified dates. The January
1996 amendment gives the Company options for three one-year extensions of the
periods in which certain milestones must be attained, each for a payment of
$50,000. Upon termination of the agreement for any reason, the patents, patent
applications and know-how assigned by Yissum to the Company will revert in full
to Yissum.
The October 1996 amendment provides that research will be performed by Yissum
over a term of five years from the date of the amendment, a proposed budget for
the first twelve months of approximately $264,000 and requires Yissum personnel
to enter into confidentiality and non-competition agreements with the Company.
[3] Dimotech agreement:
During July 1995, the Company entered into an agreement with Dimotech,
pursuant to which the Company finances and Dimotech conducts research and
development with regard to the scar management program. In connection with the
agreement, Dimotech has assigned to the Company its worldwide rights to the
patents and know-how to develop, manufacture and market products relating to
this technology.
Pursuant to the agreement the Company is obligated to pay a royalty of five
(5%) percent per annum of all net sales of the Company's products derived under
this agreement. The agreement continues until the earlier of the last date upon
which the patents expire, or at the end of fifteen (15) years from the date of
the first commercial sale pursuant to the assignment. Dimotech has the right in
its sole discretion to terminate the agreement under certain circumstances. Upon
termination of the agreement for any reason, the patents, license and know-how
assigned by Dimotech to the Company will revert in full to Dimotech.
F-9
<PAGE>
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(NOTE E) -- STOCKHOLDERS' EQUITY:
[1] Common stock:
In 1992, the Company consummated its initial public offering of 1,150,000
units, each unit consisting of one share of common stock and two warrants. The
warrants included in each unit consist of a redeemable Class A Warrant and a
redeemable Class B Warrant. Each Class A Warrant entitles the holder to
purchase, at an exercise price of $8.40, subject to adjustment, 1.071474 shares
of Common Stock and one Class B Warrant. Each Class B Warrant entitles the
holder to purchase, at an exercise price of $12.60, subject to adjustment,
1.071474 shares of Common Stock. The warrants are redeemable by the Company for
$.05 per warrant on 30 days written notice under certain circumstances. The
warrants terminate on September 22, 1998.
In connection with the initial public offering, the Company sold a Unit
Purchase Option to the underwriter for the initial public offering, for nominal
consideration, for the purchase of up to 109,890 units, subject to adjustments.
The option can be exercised at $8.19 per unit for two years beginning September
22, 1995. Under certain circumstances, the holders of the Unit Purchase Options
have registration rights.
In 1993, the Company consummated a public offering of 500,000 units, each unit
consisting of two shares of common stock and one Class A Warrant with proceeds
to the Company (after underwriting discounts and offering expenses) of
$8,092,754.
At December 31, 1996 there were 1,650,000 Class A Warrants and 1,150,000 Class
B Warrants outstanding.
In November 1994, the Company issued an aggregate of 283,695 shares to Dr.
Moskowitz and Mr. Rosenthal, officers, directors and stockholders of the
Company, and the wife of Joel L. Gold, a director and stockholder of the
Company, in consideration for canceling indebtedness of principal and accrued
interest (at 9%) in aggregate of $638,314. During the period May 1992 through
September 1992, such individuals had loaned to the Company $528,000 for working
capital purposes.
In March 1995, the Company issued 20,000 unregistered shares of Common Stock
to a financial consultant for advisory services over the following twelve month
period. The fair market value of the Common Stock on the date of the agreement
was $56,250 and has been amortized to consulting expense over the twelve month
period. These shares were included in a registration statement filed by the
Company and declared effective by the Securities and Exchange Commission (the
"Commission") on January 3, 1997.
In April 1995, the Company sold 909,091 unregistered shares of Common Stock at
$2.75 per share in a private placement to unrelated third parties. The proceeds
of $2,500,000 were received during May 1995. These shares were included in a
registration statement filed by the Company and declared effective by the
Commission on January 3, 1997.
In May 1996, the Company completed a public offering of 2,300,000 shares of
common stock at $6.625 per share (initial offering of 2,000,000 shares plus an
additional 300,000 issued due to the exercise of the underwriters' over-
allotment option) and received net proceeds of approximately $13.4 million,
including proceeds received upon the exercise of the underwriters' over-
allotment option and after deducting underwriting discounts and commissions and
offering expenses. The Company intends to use these proceeds to fund continued
clinical trials, research and development and for general corporate purposes.
F-10
<PAGE>
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
[2] Options:
The Company may issue options to purchase up to an aggregate of 907,500 shares
of Common Stock pursuant to its 1992 Stock Option Plan, as amended (the Plan).
Options to purchase shares may be granted under the Plan to persons who, in the
case of incentive stock options, are employees of the Company; or, in the case
of SARs and nonstatutory stock options, are officers and key employees of the
Company, or agents, medical and scientific advisors, directors of or consultants
to the Company, whether or not otherwise employed by the Company. The exercise
price is determined by the Stock Option Committee of the Board of Directors at
the time of the granting of an option, but in the case of an incentive stock
option, the exercise price shall not be less than the fair market value of the
stock on the date of grant. Options and SARs vest over a period not greater than
five years, and expire no later than ten years from the date of grant.
Options to purchase up to 775,000 shares of Common Stock pursuant to the Plan
are outstanding as of December 31, 1996. In addition to the shares of Common
Stock reserved for issuance pursuant to the Plan, the Company has reserved
683,851 shares of Common Stock for issuance upon exercise of outstanding options
pursuant to other agreements. These options vest over various periods, not
exceeding three years, and expire no later than five years from the date of
vesting.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its options to employees. Although no compensation cost has been recognized
for its stock option grants to employees, the Company has included stock based
compensation costs associated with options granted under consulting agreements,
in research and development expenses and general and administrative expenses of
$435,542 and $20,731, respectively, for 1996. Had compensation cost for the
Company's stock option grants to employees been determined based on the fair
value at the grant dates for awards consistent with the method of FASB Statement
123, the Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below.
1995 1996
------------- ------------
Net Loss As reported $ ( 2,797,296) $( 3,830,394)
Pro forma $ ( 3,453,103) $ (4,329,111)
Net Loss Per Share As reported $ (0.58) $ (0.55)
Pro forma $ (0.72) $ (0.62)
F-11
<PAGE>
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1994, 1995 and 1996, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1994 1995 1996
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 964,500 $7.56 873,334 $6.51 1,027,750 $5.65
Granted 317,000 $4.39 477,500 $4.76 625,000 $8.01
Exercised (184,534) $6.05 (192,500) $3.85
Forfeited (408,166) $7.33 (138,550) $7.49 (1,399) $6.00
Outstanding at end of year 873,334 $6.51 1,027,750 $5.65 1,458,851 $6.90
Options exercisable at year-end 775,670 $6.59 939,417 $5.49 925,518 $6.35
Weighted-average fair value of options
granted during the year. $2.31 $4.09
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- ----------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.00-$2.75 239,000 3 Years $2.62 239,000 $2.62
$6.00-$7.88 539,851 4 Years $6.61 331,518 $6.28
$8.13-$9.25 680,000 5 Years $8.64 355,000 $8.93
--------- ---------------- ----- ------- -----
1,458,851 4 Years $6.90 925,518 $6.35
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: no dividend yield, expected
volatility of 75.6%, a risk-free interest rate of 6.0% and an expected life of
2.5 to 3.3 years.
F-12
<PAGE>
LIFE MEDICAL SCIENCES INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(NOTE F)-- INCOME TAXES:
At December 31, 1996, the Company has net operating loss carryforwards for
income tax purposes of approximately $18,263,000, which expire through 2011.
Under Section 382 of the Internal Revenue Code of 1986, as amended, the Company
is subject to an annual limitation on the utilization of its net operating loss
carryforwards and research & development tax credit carryover because an
ownership change of more than 50% has occurred. Certain other limitations may
apply.
At December 31, 1996, the Company has a research and development tax credit
carryover of approximately $292,000 available to offset future federal income
tax, subject to limitations for alternative minimum tax.
The Company has not recorded a benefit from its net operating loss
carryforwards, research and development tax credit carryover or temporary
differences (primarily due to certain operating expenses which were capitalized
as start-up costs for federal income tax purposes), because a valuation
allowance, which increased by approximately $1,517,000 in 1996, has been
provided for the deferred tax asset otherwise recorded. The valuation allowance
has been provided due to management's uncertainty regarding the future
profitability of the Company.
(NOTE G)-- COMMITMENTS AND OTHER MATTERS:
[1] Leases:
The Company entered into an operating lease for its corporate offices in
November 1996 for approximately 3,550 square feet at an annual fixed rent of
$79,900. The initial term of this lease is for five years and includes one
five-year renewal option.
Previously, the Company entered into an operating lease for its corporate
offices in May 1992 which was amended in October 1993. In September 1994, the
Company sublet this space for the period through July 1996 to MedChem. In
August 1996, the Company sublet this space to Palatin Technologies, Inc. through
July 1997. The lease expires in July 1997.
The leases provide for minimum annual rentals, as follows:
1997.. $136,613
1998.. $ 79,875
1999.. $ 79,875
2000.. $ 79,875
2001.. $ 66,563
The terms of the leases include escalation for increases in real estate taxes
and certain operating expenses.
Rent expense was $65,000, $58,000 and $56,000 for the years ended December 31,
1994, December 31, 1995 and December 31, 1996, respectively.
F-13
<PAGE>
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
[2] Employment agreements:
The Company has employment agreements with five executives which expire at
various dates from 1998 through 2001. Pursuant to such agreements, the Company's
commitments regarding termination benefits aggregates $277,083.
[3] Accrued expenses:
Accrued expenses is comprised of the following:
December 31, 1995 December 31, 1996
----------------- -----------------
Research agreements $ 75,475 $248,609
Other................ 71,923 100,838
-------- --------
Total................ $147,398 $349,447
======== ========
[4] Other:
In connection with an agreement with the Technion and Dimotech, which was
assigned to MedChem in July 1994, the Company must invest $50,000 per year, for
the five-year period ending December 31, 1999, in research and development
programs in Israel if MedChem does not make such investments. The agreement also
provides for a two (2%) percent royalty on sales of the Sure-Closure System to
be paid to the Chief Scientist in Israel. In the event that MedChem does not pay
these royalties the Company may be obligated to make such payments. In addition,
the agreement contains certain commitments to manufacture in Israel, which if
not met could result in the loss of technology and future royalty income.
F-14
<PAGE>
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(NOTE H)-- SURE-CLOSURE SYSTEM SALE:
In July 1994, the Company sold or assigned to MedChem substantially all of its
assets related to the Sure-Closure System, including rights, agreements and
licenses, for $4,018,572. The Company received cash of $3,000,000, a $1,000,000
note receivable and certain obligations totaling $18,572 were assumed by the
purchaser. Furniture and equipment with a carrying value of $115,659 and
inventory costing $130,908 were transferred to MedChem in connection with the
sale. An additional $15,697 was received for certain equipment. Fees of $433,859
were incurred in connection with the sale, resulting in a gain of $3,353,843.
The terms of the asset purchase agreement (the "Agreement") provide that the
Company is entitled to royalties of 10% of the net sales (as defined in the
Agreement), through June 30, 2004, of the Sure-Closure System and any line
extensions or future embodiments. Additionally, in accordance with the terms of
the Agreement, MedChem assumed certain accounts payable and accrued expenses of
the Company, totaling $643,622, which was recorded as deferred royalty income
and has been reduced by royalties earned after October 1, 1995. Royalties of
$138,745 on sales during the twelve-month period ended September 30, 1996 were
offset against the deferred royalty income balance.
A number of the Company's agreements with the Technion and Dimotech were
assigned to MedChem in connection with the sale.
(NOTE I)-- RELATED PARTY:
The Company incurred expenses of approximately $392,000, $91,700 and $402,000
in the years ended December 31, 1994, December 31, 1995 and December 31, 1996,
respectively, for legal services rendered by a firm at which one of the partners
is a director and a principal stockholder of the Company.
In connection with the sale of the Sure-Closure System product line to
MedChem, a fee of approximately $377,000 was paid to Furman Selz Incorporated in
1994, for advisory and investment banking services pursuant to an engagement
agreement. Joel Gold, a director of the Company, was a managing director of
Furman Selz Incorporated.
In February 1997, the Company entered into a one-year consulting agreement
with L.T. Lawrence & Co., Inc., an investment banking firm to provide certain
advisory services to the Company. In addition to an annual consulting fee of
$54,000, the Company has granted to L.T. Lawrence & Co., Inc. an option to
purchase up to 150,000 shares of Common Stock at $6.00 per share. Joel Gold, a
director of the Company, is an executive vice president of L.T. Lawrence & Co.,
Inc.
(NOTE J)-- 401(K) PLAN:
Effective October 1992, the Company adopted a 401(k) pension plan available
to all full time eligible employees. The Company at its discretion may make
contributions to the plan. However, no such contributions have been made through
December 31, 1996.
F-15
<PAGE>
EXHIBIT 1
2,000,000 SHARES
LIFE MEDICAL SCIENCES, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
May 2, 1996
WEDBUSH MORGAN SECURITIES INC.
As Representative of the several Underwriters
c/o Wedbush Morgan Securities Inc.
1000 Wilshire Boulevard, 10th Floor
Los Angeles, California 90017-2457
Ladies and Gentlemen:
Life Medical Sciences, Inc., a Delaware corporation ("Company") proposes to
issue and sell to you and the other firms and corporations named in Schedule A
attached hereto ("Underwriters," which term shall also include any underwriter
substituted as provided in Section 9 hereof), for which you are acting as
representative ("Representative"), 2,000,000 shares of the Company's Common
Stock, $.001 par value per share ("Primary Shares"). In addition, the Company
proposes to grant to the Underwriters an option to purchase, for the purpose of
covering over-allotments, up to an additional 300,000 shares of the Company's
Common Stock, $.001 par value per share ("Over-Allotment Shares"). The Primary
Shares and the Over-Allotment Shares are collectively referred to below as the
"Shares".
You have advised the Company that the Underwriters purpose to make a public
offering of their respective portions of the Shares as soon as you deem
advisable after the registration statement hereinafter referred to becomes
effective, if it has not yet become effective, and the Pricing Agreement
(hereinafter defined) has been executed and delivered.
Prior to the purchase and public offering of the Shares by the several
Underwriters, the Company and the Representative, acting on behalf of the
several Underwriters, shall enter into an agreement substantially in the form of
Exhibit A hereto ("Pricing Agreement"). The Pricing Agreement may take the form
of an exchange of any standard form of written telecommunication between the
Company and the Representative and shall specify such applicable information as
is indicated in Exhibit A hereto. The offering of the Shares will be governed by
this Agreement, as supplemented by the Pricing Agreement. From and after the
date of the execution and delivery of the Pricing Agreement, this Agreement
shall be deemed to incorporate the Pricing Agreement.
<PAGE>
The Company agrees with the several Underwriters as set forth below.
1. Representations, Warranties and Covenants of the Company. The Company
represents and warrants to, and the Company also covenants and agrees with, each
of the Underwriters as follows:
(a) The Company has filed with the Securities and Exchange Commission
("Commission") a registration statement on Form S-1 (No. 333-2588), including a
preliminary prospectus, relating to the Shares and such amendments to the
registration statement and supplements to the prospectus included therein as may
have been required to the date hereof. The Company will file with the Commission
either: (i) prior to effectiveness of such registration statement, a further
amendment thereto, including a form of prospectus, and if required after
effectiveness of such registration statement, a final prospectus in accordance
with Rule 424(b) of the rules and regulations ("Rules and Regulations") under
the Securities Act of 1933, as amended ("Securities Acts"), or (ii) after
effectiveness of such registration statement, a final prospectus in accordance
with Rules 430A and 424(b) of the Rules and Regulations. Such registration
statement (as amended, if applicable) and the prospectus constituting a part
thereof (including, in each case, financial statements, exhibits and all
documents incorporated or deemed to be incorporated by reference therein and the
information, if any, deemed to be part thereof pursuant to Rule 430A(b) of the
Rules and Regulations) are hereinafter referred to as the "Registration
Statement" and the "Prospectus", respectively, except that if the prospectus
filed by the Company pursuant to Rule 424(b) differs from the prospectus on file
at the time the Registration Statement becomes effective, the term "Prospectus"
shall refer to the Rule 424(b) prospectus and the term "preliminary prospectus"
shall refer to any predecessor prospectus.
(b) To the best of the Company's knowledge, the Commission has not issued
an order preventing or suspending the use of any preliminary prospectus. Each
such preliminary prospectus has conformed in all material respects to the
requirements of the Securities Act and the Rules and Regulations and has not
included 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. At the date of this Agreement, when the Registration Statement
becomes effective and at the Closing Date (as defined below) (i) the
Registration Statement and Prospectus, and any amendments or supplements
thereto, will contain all statements that are required to be stated therein by
the Securities Act and the Rules and Regulations and will in all material
respects conform to the requirements of the Securities Act and the Rules and
Regulations, (ii) the Registration Statement will not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, and (iii) the Prospectus will not include any untrue statement of a
material fact and will not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
that the Company makes no representations, warranties or agreements as to
information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written information
finished to the Company by the Underwriters expressly for use therein, it being
understood that the only information supplied by the Underwriters in writing for
use in the Registration Statement, the preliminary prospectus or the Prospectus
are set forth in the last paragraph on the cover of the Prospectus, the
paragraphs under the table under the heading "Underwriting," the paragraphs
under the headings "Underwriting--Over-Allotment Option" and
"Underwriting--Warrants", and the second paragraph under the
"Underwriting--Lock-Up Agreements" in the Prospectus and that no information has
been omitted from the Registration Statement in reliance on information supplied
by the Underwriters in writing.
(c) The financial statements of the Company set forth in the Registration
Statement and Prospectus present fairly, in an material respects, the financial
condition of the Company as of the dates indicated and the results of operations
and cash flows of the Company for the periods therein specified in conformity
with generally accepted accounting principles consistently applied throughout
the periods
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involved (except as otherwise stated therein). No other financial statements of
the Company are required by Form S-1 or otherwise to be included in the
Registration Statement or Prospectus.
(d) Richard A. Eisner & Company, the accountants who have expressed their
opinion with respect to certain of the financial statements included in the
Registration Statement, ("Company Accountants") are independent accountants as
required by the Securities Act and the Rules and Regulations.
(e) The Company has been duly organized and is validly existing in good
standing under the laws of its jurisdiction of incorporation. The Company has
all requisite power and authority to own, lease and operate its properties and
to conduct its business as is described in the Prospectus. The Company is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which such qualification is required, except where the
failure to so qualify will not have a material adverse effect on the Company.
(f) The authorized, issued and outstanding capital stock of the Company is
as set forth under the caption "Capitalization" in the Prospectus and the issued
and outstanding shares of Common Stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable, were issued in
compliance in all material respects with all applicable federal and state
securities laws, and were not issued in violation of or subject to any
preemptive rights, rights of first refusal or similar rights. The sale of the
Shares has been duly authorized and after issuance of and payment for the Shares
in accordance with this Agreement, the Shares will be validly issued, fully paid
and nonassessable and conform to the description thereof contained in the
Prospectus. The Underwriters will acquire good and marketable title to the
Shares, free and clear of any adverse claims whatsoever. Except as disclosed in
the Prospectus, the Company does not make outstanding any options or warrants to
purchase, any preemptive rights or other rights to subscribe for or to purchase,
any securities or obligations convertible into shares of its capital stock, or
any contracts or commitments to issue or sell such shares, or any such options,
warrants, rights, convertible securities or obligations.
(g) The Company has filed an application to list the Shares on the Nasdaq
National Market ("Nasdaq National Market") and has received notification that
the listing has been approved, subject to notice of issuance of the Shares.
(h) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, the Company has not incurred any
liabilities or obligations, direct or contingent, not in the ordinary course of
business, or entered into any transaction not in the ordinary course of
business, which is material to the business of the Company, and there has not
been any change in the capital stock of, or any incurrence of short-term or
long-term debt by, the Company or any issuance of options, warrants or other
rights to purchase the capital stock of the Company or any adverse change or any
development involving, so far as the Company can now reasonably foresee a
prospective adverse change in the condition (financial or other), net worth,
results of operations, business, key personnel or properties of it which would
be material to the business or financial condition of the Company.
(i) Except as set forth in the Prospectus, there is not pending or, to the
best knowledge of the Company, threatened, any action, suit or proceeding to
which the Company is a party, before or by any court, governmental agency or
body or arbitration body, that could reasonably be expected to result in any
material adverse change in the financial condition, business, properties,
prospects, or results of operations of the Company, or might materially and
adversely affect the properties or assets thereof.
(j) There are no contracts or documents that are required to be filed as
exhibits to the Registration Statement by the Securities Act or by the Rules and
Regulations that have not been so filed. Any contract, agreement, instrument,
lease or license required to be described in the Registration Statement or the
Prospectus has been properly described therein in all material respects.
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<PAGE>
(k) Except as set forth in the Prospectus, the Company owns or has valid
leasehold interests in all material properties and assets required for the
operation of its business as now conducted or as proposed to be conducted as set
forth in the Registration Statement and prospectus. The Company has good and
marketable title to all properties and assets owned by it material to its
business subject, except as set forth in the Prospectus, to no lien, mortgage,
pledge, charge or encumbrance. All leases to which the Company is a party are
valid, subsisting and enforceable and no material default by the Company has
occurred and is continuing thereunder, and the Company enjoys peaceful and
undisturbed possession under an such leases to which it is a party as lessee.
(l) The Company has full right, power and authority to enter into this
Agreement and the Pricing Agreement and to perform all of its obligations
hereunder and thereunder. The execution, delivery and performance of this
Agreement and the Pricing Agreement by the Company does not and will not
violate, breach or conflict with (i) the Certificate of Incorporation or Bylaws
of the Company or (ii) any agreement to which the Company is a party or by which
the Company or any of its properties is bound, excluding any violation, breach
or conflict which would not have a material and adverse effect on the Company or
its properties, business, prospects or financial condition or on the
consummation of the transactions contemplated hereby; or (iii) any statute or
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its properties. No consent, approval,
authorization or order of, or filing with, any court or governmental agency or
body is required in connection with the transactions contemplated hereby except
as may be required under the Securities Act or state securities or "Blue Sky"
laws. This Agreement has been duly authorized, executed and delivered by the
Company and constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms; and when executed
and delivered by the Company, the Pricing Agreement will constitute a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms.
(m) The Company has an necessary consents, approvals, authorizations,
orders, registrations, qualifications, licenses and permits ("Governmental
Authorizations") of and from all public, regulatory or governmental agencies and
bodies, to own, lease and operate its properties and conduct its business as now
being conducted and as described in the Registration Statement and the
Prospectus, excluding any Governmental Authorization where the failure to have
obtained such Governmental Authorization would not have a material and adverse
effect on the Company or its properties, business, prospects or financial
condition or on the consummation of the transactions contemplated hereby, and no
such consent, approval authorization, order, registration, qualification,
license or permit contains a materially burdensome restriction not adequately
disclosed in the Registration Statement and the Prospectus. The Company is in
compliance in all material respects with all local state and Federal laws, rules
and regulations including, but not limited to, environmental laws and
regulations governing the use, storage, discharge, handling, emission,
generation, manufacture and disposal of toxic substances, hazardous materials,
waste and other substances or products used in or resulting from the buses of
the Company.
(n) Except as provided for in this Agreement, the Company has not taken and
will not take, directly or indirectly, any action designed to cause or result
in, or which constitutes or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of shares of the Common Stock of
the Company to facilitate the sale or resale of the Shares.
(o) Except as set forth in the Prospectus, the Company owns or possesses
adequate licenses or other rights to use all patents, trademarks, service marks,
trade names, copyrights, technology and know-how necessary to conduct the
businesses as now conducted by the Company as described in the Prospectus, and,
except as disclosed in the Prospectus, the Company has not received any notice
of infringement of or conflict with (or knows of such infringement of or
conflict with) asserted rights of others with respect to any patents,
trademarks, service marks, trade names, copyrights or know-how which,
individually or in the aggregate, could reasonably be expected to result in any
material adverse effect upon the financial condition, business, properties,
prospects, or results of operations of the
4
<PAGE>
Company, and, except as disclosed in the Prospectus and to the knowledge of the
Company, the Company does not in the conduct of its business as now conducted as
described in the Prospectus, infringe or conflict with any right or patent of
any third party, or any discovery, invention, product or process which is the
subject of a patent application filed by any third party, known to the Company,
where such infringement or conflict could reasonably be expected to result in
any material adverse effect upon the financial condition, business, properties,
prospects or results of operations of the Company.
(p) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that: (1) transactions are executed
in accordance with management's general or specific authorizations; (2)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (3) access to assets is permitted only in
accordance with management's general or specific authorization; and (4) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(q) Neither the Company nor, to the Company's knowledge, any other party is
in violation or breach of, or in default with the passage time, with respect to
complying with any material provision of any contract, agreement, instrument,
lease, license, arrangement, or understanding which is material to the Company
and each such contract, agreement, instrument, lease, license, arrangement, and
understanding is in full force and is the legal, valid, and binding obligation
of the Company, and, to the Company's best knowledge, the other parties thereto
and is enforceable against the Company, as applicable, and, to the Company's
best knowledge, against the other parties thereto in accordance with its terms.
The Company is not a party to or bound by any contract, agreement, instrument,
lease, license, arrangement, or understanding, or subject to any charter or
other restriction, which has had or is reasonably expected in the future to have
a material adverse effect on the financial condition, business, properties,
prospects, or results of operations, of the Company. The Company is not in
violation or breach of, or in default with respect to, any term of its
Certificate of Incorporation or Bylaws.
(r) Except as described in the Prospectus, the Company does not own any
shares of capital stock or any other securities of any corporation or have any
equity interest in any firm, partnership, association or other entity or
subsidiary.
(s) Except as described in the Prospectus, no holder of securities of the
Company has any rights to the registration of securities of the Company because
of the filing of the Registration Statement or otherwise in connection with the
sale of the Shares contemplated hereby.
(t) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
(u) The Company has filed all necessary federal, and all material state and
foreign income and franchise tax returns and has paid all taxes shown thereon as
due, and the Company has no knowledge of any tax deficiency which has been or
might be asserted against the Company which would materially and adversely
affect the business or properties of the Company, taken as a whole; to the
Company's knowledge, all tax liabilities are adequately provided for on the
books of the Company.
(v) The Company has obtained from each of its stockholders listed on
Schedule B hereto a written agreement in the form of Exhibit C attached hereto
("Lockup Agreement") to the effect, subject to certain permitted transfers set
forth in the Lockup Agreement, that they will not offer to sell, sell assign or
otherwise transfer or dispose of any shares of Common Stock or securities
convertible into or exchangeable for, or any rights to purchase or acquire,
Common Stock, for a period of 180 days after the effective date of the
Registration Statement, without the prior written consent of the Representative.
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<PAGE>
(w) The Company has not, directly or indirectly, at any time (i) made any
contributions to any candidate for political office, or failed to disclose fully
any such contribution in violation of law or (ii) made any payment to any state,
federal or foreign governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments or contributions
required or allowed by applicable law. The Company's internal accounting
controls and procedures are sufficient to cause the Company to comply in all
material respects with the Foreign Corrupt Practices Act of 1977, as amended.
(x) The Company has not entered into any agreement pursuant to which any
person is entitled either directly or indirectly to compensation from the
Company for services as a finder in connection with the proposed public
offering. No person holds a right of first refusal or other similar right to act
as underwriter or agent in connection with the offering of the Shares.
(y) Except as previously disclosed in writing by the Company to the
Representative, no officer, director or principal stockholder (including,
without limitation, any stockholder holding five percent or more of the
Company's outstanding Common Stock on a fully diluted basis) of the Company has
any National Association of Securities Inc. ("NASD") affiliation.
(z) The Warrant Agreement in the form of Exhibit B ("Warrant Agreement")
has been duty authorized and, when issued and delivered pursuant to this
Agreement, will have been duly executed, issued and delivered and will
constitute valid and legally binding obligations of the Company enforceable in
accordance with its terms. The execution, delivery and performance of the
Warrant Agreement by the Company will not violate, breach or conflict with the
Certificate of Incorporation or Bylaws of the Company or any agreement to which
the Company is a party or by which the Company or any of its properties is bound
or any statute or order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company or any of its properties; and no
consent, approval, authorization or order of, or filing with, any court or
governmental agency or body is required in connection with the transactions
contemplated hereby except as may be required under the Securities Act or state
securities or "Blue Sky" laws. The shares of Common Stock issuable upon exercise
of the Warrants have been reserved for issuance upon the exercise of the
Warrants and when issued in accordance with the terms of the Warrant Agreement,
will be duly and validly authorized, validly issued, fully paid and
non-assessable and free of preemptive rights and no personal liability will
attach to the ownership thereof.
2. Sale and Purchase of the Shares.
(a) The Company hereby agrees to sell the Primary Shares to the several
Underwriters as set forth in Schedule A attached hereto, and the several
Underwriters, in reliance upon the representations, warranties and agreements
herein contained, but subject to the conditions hereinafter stated, agree,
severally and not jointly, to purchase from the Company at the place and the
time specified below, the respective aggregate numbers of Primary Shares set
forth in Schedule A opposite their respective names plus any additional Shares
which such Underwriters may become obligated to purchase pursuant to the
provisions of Section 2(b) hereof, at a price set forth in the Pricing
Agreement.
(b) In addition, on the basis of the representations and warranties herein
contained, upon not less than five days' written notice from the Representative
to the Company, the Company agrees to sell to the Underwriters (but only for the
purpose of covering over-allotments in the sale of the Primary Shares), all or
any portion of the Over-Allotment Shares, as specified by the Representative in
such notice, at the purchase price set forth in the Pricing Agreement. The
Over-Allotment Shares may be purchased on the Closing Date or at any time or
times thereafter so long as the notice to purchase is given within a period of
45 days following the effective date of the Registration Statement.
Over-Allotment Shares shall be purchased by each Underwriter in the proportion
which the number of Primary Shares set opposite the name of each Underwriter in
Schedule A hereto bears to the total number of Primary Shares. No Over-Allotment
Shares shall be delivered to or for the accounts of the Underwriters unless the
Primary Shares
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<PAGE>
shall be simultaneously delivered and paid for or shall theretofore have been
delivered and paid for as herein provided.
(c) The respective purchase obligation of each Underwriter shall be subject
to such adjustments as the Representative may in its absolute discretion make.
3. Terms of Offering and Authority to Use Prospectus. The terms of the
public offering by the Underwriters of the Shares to be purchased by them shall
be as set forth in the Registration Statement and the Prospectus. The Company
authorized the Representative to use preliminary prospectuses and to make them
available for use by prospective Underwriters and dealers and authorize the
Underwriters and all dealers acquiring Shares from an Underwriter to use the
Prospectus (as amended or supplemented, if the Company shall have furnished any
amendments or supplements thereto) in connection with the sale of the Shares
until the earlier of completion of the public offering or the 90th day following
effectiveness of the Registration Statement.
4. Payment and Delivery.
(a) Payment for the Primary Shares which the Underwriters agree to purchase
hereunder shall be made to the Company by bank cashier's check or checks payable
in Los Angeles Clearing House funds at the offices of Gibson, Dunn & Crutcher,
Jamboree Center, 4 Park Plaza, Irvine, California 92714, against delivery to the
Representative for the respective accounts of the several Underwriters of the
Primary Shares in the form of certificates for the securities comprising the
Primary Shares. The date and time of such delivery and payment shall take place
at 7:00 am., Los Angeles time on the following applicable date (unless postponed
in accordance with the provisions of Section 9 hereof): (i) if the Company has
not elected to rely on Rule 430A, on May 8, 1996; (ii) if the Company has
elected to rely on Rule 430A, the third business day after the date on which the
Pricing Agreement is executed and delivered by the Company or (iii) at the
place, time, date (not later than the third or fourth business day after the
date under clause (i) or (ii), as applicable (as permitted under Rule 15c6-1
under the Securities Exchange Act of 1934, as amended ("Exchange Act") agreed
upon by the Representative and the Company. The date and time of this payment
and delivery (which may be postponed as provided in Section 9 hereof) are
sometimes referred to below as the "First Closing Date".
(b) Payment for the Over-Allotment Shares which the Underwriters have the
right to purchase hereunder shall be made to the Company by bank cashiers check
or checks payable in Los Angeles Clearing House funds at the office specified in
the immediately preceding paragraph at the time or times and on the date or
dates specified in the written notice or notices delivered by the Representative
against delivery for the respective accounts of the several Underwriters of the
Over-Allotment Shares in the form of certificates for the securities comprising
the Over-Allotment Shares. The dates and times of these payments and deliveries
are herein singularly or collectively sometimes referred to as the "Second
Closing Date." The term "Closing Date" refers to both the First Closing Date and
the Second Closing Date.
(c) You, individually and not as Representative of the Underwriters, may
(but shall not be obligated to) make payment to the Company for Shares to be
purchased by any Underwriter whose check shall not have been received by you at
the date of payment therefor for the account of that Underwriter. Any payment by
you shall not relieve that Underwriter from any of its obligations hereunder.
(d) The certificates for the Shares shall be registered in the name or
names and shall be in the denominations you, as Representative, at least three
fun business days prior to the First Closing Date, in the case of the Primary
Shares, and at least three full business days prior to the Second Closing Date,
in the case of the Over-Allotment Shares, may request. The Company agrees to
cause certificates for the Shares to be delivered pursuant to this Agreement at
your offices, at the offices of The Depository Trust Company, New York, New
York, or at such other places as may be designated by you as Representative, and
to be made available for checking and packaging at one of the above offices or
such other places as may be designated by you as the Representative at least one
full business day prior to the First Closing
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Date in the case of the Primary Shares, and at least one full day prior to the
Second Closing Date, in the case of the Over-Allotment Shares.
5. Conditions of the Underwriters' Obligations. The several obligations of
the Underwriters hereunder are subject to the following conditions:
(a) The Registration Statement shall have become effective under the
Securities Act not later than (i) 2:00 p.m., Los Angeles time, on the day
following the date of this Agreement or (ii) such other time and date, but not
later than 2:00 p.m., Los Angeles time, on the second day following the date of
this Agreement, as may be approved by you as Representative; and, at the Closing
Date, no stop order suspending the effectiveness of the Registration Statement
or the qualifications of the Shares shall have been issued and no proceedings
for that purpose shall be pending before the Commission or any state securities
or "Blue Sky" commissioner or authority. If the Company has elected not to rely
on Rule 430A, the initial public offering price per share for the Shares and the
purchase price per share for the Shares to be paid by the several Underwriters
shall be agreed upon and set forth in the Pricing Agreement, which shall be
dated the date hereof, and an amendment to the Registration Statement (as
hereinafter defined) containing such per share price information shall be filed
before the Registration Statement becomes effective. If the Company has elected
to rely upon Rule 430A, the information concerning the initial public offering
price of the Shares and price-related information shall have been agreed upon
and set forth in the Pricing Agreement and transmitted to the Commission for
filing pursuant to Rule 424(b) within the prescribed period and the Company will
provide evidence satisfactory to the Representative of such timely filing (or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rules 430A and
424(b)).
(b) At each Closing Date, (i) the representations and warranties of the
Company contained in this Agreement shall be true and correct with the same
effect as if made on and as of such Closing Date and the Company shall have
performed all of the obligations and complied with all of the conditions
hereunder on its part to be performed or complied with on or prior to such
Closing Date; (ii) there shall have been, since the respective dates as of which
information is given, no material adverse change in the financial condition,
properties, prospect, results of operations, capital stock, long term debt or
general affairs of the Company from that set forth in the Registration Statement
and the Prospectus, except such changes which the Registration Statement
indicates might occur after the effective date of the Registration Statement,
and the Company shall not have incurred any material liabilities or material
obligations, direct or contingent, or entered into any material transaction,
contract or agreement not in the ordinary course of business other than as
referred to or contemplated in the Registration Statement; and, (iii) except as
set forth in the Prospectus, no action, suit or proceeding shall be pending or
threatened against the Company which would be required to be set forth in the
Registration Statement, and no proceedings shall be pending or threatened
against the Company before or by any commission, board or administrative agency
in the United States or elsewhere, wherein an unfavorable decision, ruling or
finding would materially and adversely affect the financial condition, business,
properties, prospects or results of operations of the Company, and you shall
have received at each Closing Date, a certificate of the principal executive
officer and the principal financial or accounting officer of the Company, dated
as of such Closing Date, evidencing compliance with the provisions of this
subsection (b), and confirming the accuracy of the representations and
warranties of the Company set forth in Section 1 hereof and confirming that all
conditions set forth herein have been met as of such date.
(c) No Underwriter shall have discovered and disclosed to the Company prior
to either Closing Date that the Registration Statement or the Prospectus or any
amendment or supplement thereto, contains an untrue statement of a fact that in
the reasonable opinion of the Representative is material or omits to state any
material fact required to be stated therein or necessary in order to make the
statements therein, not misleading.
(d) On each Closing Date you shall have received a signed opinion, dated as
of such date, of Gibson, Dunn & Crutcher, counsel to the several Underwriters
("Underwriters' Counsel"), with respect to
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the sufficiency of all corporate proceedings and other legal matters relating to
this Agreement and the transactions contemplated hereby, and the Company shall
have furnished to such counsel such documents as they may have reasonably
requested for the purpose of enabling them to pass upon such matters.
(e) (i) On each Closing Date you shall have received the signed opinion,
dated as of such date, of Rubin Baum Levin Constant & Friedman, counsel to the
Company ("Company Counsel"), in form and substance satisfactory to counsel for
the several Underwriters, together with signed or photostatic copies thereof for
each of the other Underwriters substantially to the effect set forth on Exhibit
D attached hereto.
(ii) On each Closing Date you shall have received the signed opinion,
dated as of such date, of Shiboleth, Yisraeli, Roberts, Yerushalmi, Zisman
& Holender, special Israeli counsel to the Company ("Company Israeli
Counsel"), in form and substance satisfactory to Underwriters Counsel as to
such matters as such counsel may reasonably request, together with signed
or photostatic copies thereof for each of the other Underwriters.
(iii) On each Closing Date you shall have received the signed opinion,
dated as of such date, of Hymen Phelps & McNamara, P.C., special regulatory
counsel to the Company ("Company Regulatory Counsel"), in form and
substance satisfactory to the Underwriters Counsel as to such matters as
such counsel may reasonably request, together with signed or photostatic
copies thereof for each of the other Underwriters.
(iv) On each Closing Date you shall have received the signed opinion,
dated as of such date, of McAuley Fischer Nissen Goldberg & Kiel LLP,
patent counsel to the Company ("Company Patent Counsel"), in form
reasonably satisfactory to the Underwriters Counsel as to such matters as
such counsel may reasonably request, together with signed or photostatic
copies thereof for each of the other Underwriters.
(f) At the time of the signing of this Agreement, on each Closing Date and,
if the Company elects to rely on Rule 430A, on the date of the Prospectus, you
shall have received a signed letter, dated, respectively, as of each such date,
from the Company Accountants, in form and substance satisfactory to you as to
such matters as you may reasonably request, together with, in each case, signed
or photostatic copies thereof for each of the other Underwriters. There shall
not be any changes (increases or decreases) specified in the letters referred to
in this subparagraph which, in the reasonable judgment of the Representative,
are materially adverse with respect to the financial position or results of
operations of the Company and shall be deemed to constitute a failure of the
Company to comply with the conditions to the obligations of the Underwriters
hereunder.
(g) On or prior to the effective date of the Registration Statement, the
Shares shall have been duly authorized for inclusion in the Nasdaq National
Market.
(h) On or prior to the First Closing Date, the Company shall execute and
deliver to the Representative the Pricing Agreement.
(i) If, at the time of effectiveness of the Registration Statement, any
information shall have been omitted therefrom in reliance upon Rule 430A then
immediately following the execution and delivery of the Pricing Agreement, the
Company will prepare, and file or transmit for filing with the Commission in
accordance with such Rule 430A and Rule 424(b), copies of an amended prospectus,
or, if required by such Rule 430A, a post-effective amendment to the
Registration Statement (including an amended prospectus), containing all
information so omitted.
(j) The Company shall have executed and delivered to the Representative the
Warrant Agreement at the First Closing Date.
9
<PAGE>
(k) All proceedings taken at or prior to each Closing Date in connection
with the sale of the Shares shall be reasonably satisfactory in form and
substance to you and the Underwriters Counsel, and at the time of signing this
Agreement and on the Closing Date, you and such counsel shall have received each
and every additional document, letter, opinion, certificate or other item dated
and executed in a manner reasonably satisfactory to you and such counsel, as you
or such counsel may reasonably request in connection with the Prospectus, the
Registration Statement, the offer and sale of the Shares hereunder, or
proceedings at the Closing Date.
If any of the conditions herein provided for in this Section 5 shall not
have been fulfilled as of the date indicated, all obligations of the several
Underwriters under this Agreement may be cancelled by the Representative by
notifying the Company of such cancellation on or prior to the applicable Closing
Date.
6. Covenants of the Company.
6.1 The Company covenants and agrees as follows:
(a) To use its best efforts to bring about the effectiveness of the
Registration Statement and not, at any time, whether before or after the
effective date, file any amendment to the Registration Statement or
Prospectus or supplement thereto of which you shall not previously have
been advised and furnished with a copy or to which you or your counsel
reasonably shall have objected or which is not in compliance with the
Securities Act and the Rules and Regulations, and as soon as the Company is
advised thereto, to advise the Representative and confirm this advice in
writing (i) when the Registration Statement has become effective and (ii)
of the issuance by the Commission or any state securities or "blue sky"
commissioner or authority of any order suspending the effectiveness of the
Registration Statement or any qualification of the Shares or prohibiting
the sale of the Shares or the initiation or threatening of any proceedings
for any such purpose.
(b) To deliver, on or before the effective date of the Registration
Statement and from time to time thereafter, for such period as in the
opinion of the Underwriters Counsel a prospectus is required by the
Securities Act to be delivered in connection with sales of Shares by the
Underwriter or dealer, without charge, to the Representative and to send to
the several Underwriters, at such office or offices as the Representative
may designate, as many copies of the preliminary prospectus and Prospectus
as the Representative may reasonably request.
(c) To furnish the Representative, without charge, one executed copy
of the Registration Statement (including exhibits) and of any amendments
thereto and to furnish the Representative, without charge, a reasonable
number of conformed copies of the Registration Statement (excluding
exhibits) and of any amendments thereto.
(d) To furnish the Representative with a copy of each proposed
amendment or supplement before amending or supplementing the Registration
Statement or the Prospectus.
(e) If during the period specified in Section 6.1(b) above, any event
shall occur as a result of which it shall be necessary to amend or
supplement the Prospectus in order to make the statements therein, in light
of the circumstances when the Prospectus is delivered to a purchaser, not
misleading, forthwith to prepare and furnish, at its own expense, to the
Underwriters and to dealers (whose names
10
<PAGE>
and addresses the Representative will furnish to the Company) to whom
Shares may have been sold by the Representative and to any other dealers
upon request, either amendments or supplements to the Prospectus so that
the statements in the Prospectus as so amended or supplemented, will not,
in light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading.
(f) To make generally available to the Company's security holders, as
soon as practicable, but not later than fifteen months after the end of the
Company's current fiscal quarter, an earnings statement (which need not be
audited) covering a period of twelve months beginning after the effective
date of the Registration Statement, which earnings statement shall satisfy
the provisions of the last paragraph of Section 1l(a) of the Securities
Act.
(g) For a period of three years following the date of this Agreement,
to supply to the Representative, and to each other Underwriter who may so
request in writing, copies of such financial statements and other periodic
and special reports as the Company may from time to time furnish generally
to holders of any class of its securities, and to file with the Commission
on each report required under the Exchange Act, and to furnish to the
Representative a copy of each such report which it files with the
Commission.
(h) To cooperate with the Representative in an endeavor to qualify the
Shares for offer and sale under the "Blue Sky" laws of such jurisdictions
of the United States as the Representative may request, and to pay, or
reimburse if paid by the Representative, fees and disbursements of
Underwriters Counsel and all other expenses and filing fees in connection
therewith; provided, however, that the Company shall not be required to
file any general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which it is
not so qualified or to subject itself to taxation as doing business in any
jurisdiction.
(i) For a period of three years following the date of this Agreement,
to comply to the best of its ability with the Securities Act, the Rules and
Regulations and the Exchange Act, and the rules and regulations thereunder
so as to permit the continuance of sales and dealings in the Common Stock
of the Company; provided, however, that the foregoing obligation shall no
longer be applicable if the Company ceases to exist or becomes a
wholly-owned subsidiary of another entity by reason of an acquisition of
all of the Company's outstanding securities by an unaffiliated entity
pursuant to any merger, exchange or tender offer or other purchase,
transfer or reorganization ("Change of Control").
(j) To apply the net proceeds from the sale of the Shares in
accordance with the statement made under "Use of Proceeds" in the
Prospectus and, if applicable, to comply with Rule 463 under the Securities
Act
(k) To supply the Representative with copies of all correspondence to
and from and all documents issued to and by the Commission in connection
with the registration of the Shares under the Securities Act.
(1) The Company will use its best efforts to maintain such listing of
the Company's Common Stock on the Nasdaq National Market for at least three
years from the date of this Agreement; provided, however, that the
foregoing obligation shall no longer be applicable upon the occurrence of a
Change of Control.
11
<PAGE>
(m) For a period of three years from the effective date of the
Registration Statement the Company, at its expense, shall cause its
regularly engaged independent certified public accountants to review (but
not audit) the Company's financial statements for each of the first three
(3) fiscal quarters prior to the announcement of quarterly financial
information, the filing of the Company's 10-Q quarterly report and the
mailing of quarterly financial information to stockholders; provided,
however, that the foregoing obligation shall no longer be applicable upon
the occurrence of a Change of Control.
6.2 The Company covenants and agrees to pay, or reimburse if paid by the
Representative, whether or not the transactions contemplated hereunder are
consummated or this Agreement is terminated, all costs and expenses incident to
the entry into and performance under this Agreement by the Company, and without
limiting the generality of the foregoing, all costs and expenses incident to (a)
the issuance, purchase, sale and delivery of the Shares to the Underwriters, (b)
the registration of the Shares and preparing, printing and shipping the
Registration Statement and the underwriting documents, (c) the filing fees of
the Commission, the National Association of Securities Dealers, Inc. (including
fees for Nasdaq National Market) and state securities and "blue sky"
commissioners and authorities in connection with the Registration Statement and
this Agreement, and the reasonable fees, disbursements and expenses of counsel
in connection with state securities or "blue sky" matters, (d) the fees and
disbursements of counsel and accountants for the Company, (e) the furnishing to
the Representative and the other Underwriters of copies of the Registration
Statement, any preliminary prospectus, the Prospectus, this Agreement, the Blue
Sky Survey (preliminary and final), and of the documents required by paragraphs
(b), (c), (d) and (e) of Section 6.1, to be so furnished, including costs of
preparing, printing and shipment, (f) the preparation, printing, binding,
mailing, delivery, filing and distribution by the Company of all supplements and
amendments to the Prospectus required by paragraph (e) of Section 6.1, (g) the
furnishing to the Representative and the other Underwriters of all reports and
financial statements required by paragraphs (f) and (g) of Section 6.1, and (h)
the holding of informational meetings related to the offer and sale of the
Shares, other than the Underwriters' expenses for air transportation and hotel
accommodations. Additionally, the Company agrees to pay to the Representative a
non-accountable expense allowance equal to $150,000, of which $50,000 has
previously been paid and the remaining $100,000 to be paid at the closing of the
purchase of the Primary Shares by the Underwriters. The Representative will pay
the fees and costs of its counsel (except as otherwise set forth above) and the
costs of "tombstone" advertisements to be published in financial newspapers. If
the sale of any of the Shares to the several Underwriters pursuant to this
Agreement is not consummated because the offering is abandoned by the Company
for any reason, or by the Underwriters (a) if there is a material adverse change
in the Company's business, financial condition, results of operations or
prospectus, (b) if there is an adverse change in securities market conditions,
or (c) if the Underwriters discover, in the course of their due diligence of the
Company, material facts or circumstances with respect to the Company that render
the offering impracticable, then the Company will reimburse the several
Underwriters for all of their out-of-pocket expenses (including reasonable fees
and expenses of counsel) incurred by the Underwriters in connection with this
Agreement or in investigating, preparing to market or marketing the Shares.
6.3 The Company covenants and agrees that it will not offer to sell, sell
or otherwise dispose of any shares of Common Stock of the Company, or securities
convertible or exchangeable for, any rights to purchase or acquire, Common
Stock, other than as provided in this Agreement, as contemplated by the
Registration Statement, pursuant to any employee benefit plans approved by the
Company's Board of Directors or in connection with any acquisition of or
business combination with an unaffiliated entity so long as the fair value of
such securities issued by the Company is not less than the greater of the
initial public offering price of the Shares sold by the Underwriters and the
fair market of the Company's Common Stock on the date of such transaction, for a
period of 180 days after the effective date of the Registration Statement,
without the prior written consent of the Representative. The Company also will,
at or prior to the first Closing Date, furnish you with the Lockup Agreements of
the stockholders listed on Schedule B hereto.
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<PAGE>
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each Underwriter
(including specifically each person who may be substituted for an Underwriter as
provided in Section 9 hereof) and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Securities Act, from and
against any and all losses, claims, damages, expenses or liabilities, joint or
several, to which they or any of them may become subject under the Securities
Act or any other statute or at common law or otherwise, and except as provided
below, will reimburse each of the Underwriters and each such controlling person,
if any, for any legal or other expenses incurred by them or any of them in
connection with investigating or defending any actions whether or not resulting
in any liability, insofar as such losses, claims, damages, expenses, liabilities
or actions arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement, in
any preliminary prospectus or in the Prospectus or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus or the omission or alleged omission to
state therein a material fact necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading, unless
the untrue statement or omission or alleged untrue statement or omission was
made in such Registration Statement, preliminary prospectus or Prospectus in
reliance upon and in conformity with information furnished in writing to the
Company by you or any Underwriter through you expressly for use therein. The
foregoing indemnity with respect to any untrue statement contained in or
omission from a preliminary prospectus shall not inure to the benefit of the
Underwriter from whom the person asserting any such loss, liabilities, claims,
damages or expenses purchased shares, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or supplemented, if
the Company shall have furnished any amendments or supplements thereto) was not
sent or given by or on behalf of the Underwriters to such person, if such is
required by law, at or prior to the written confirmation of the sale of such
Shares to such person and the untrue statement contained in or omission from
such preliminary prospectus was corrected in the Prospectus (or the Prospectus
as amended or supplemented). This indemnity will be in addition to any liability
which the Company may otherwise have.
(b) Each Underwriter will severally, and not jointly, indemnify and hold
harmless the Company, each of its directors, each of its of officers who have
signed the Registration Statement, each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act from and against any and
all losses, claims, damages, expenses or liabilities, joint or several, to which
they or any of them may become subject under the Securities Act or any other
statute or at common law or otherwise, and, except as provided below, will
reimburse the Company and each such director, officer or controlling person for
any legal or other expenses incurred by them or any of them in connection with
investigating or defending any actions whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement, in
any preliminary prospectus or in the Prospectus or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or (ii) any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus or the Prospectus or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, but only insofar as any such untrue statement or omission or
alleged untrue statement or omission was made in reliance upon and in conformity
with information furnished in writing to the Company by you or any Underwriter
through you expressly for use therein. This indemnity will be in addition to any
liability which the Underwriters may otherwise have.
(c) Any party that proposes to assert the right to be indemnified under
this Section 7 will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 7, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the
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<PAGE>
omission so to notify such indemnifying party will not relieve it from any
liability that it may have to any indemnified party under the foregoing
provisions of this Section 7 unless, and only to the extent that, such omission
results in the forfeiture of substantive rights or defenses by the indemnifying
party. If any such action is brought against any indemnifying party and it
notifies the indemnifying party of its commencement, the indemnifying party will
be entitled to participate in and, to the extent that it elects by delivering
written notice to the indemnified party promptly after receiving notice of the
commencement of the action from the indemnified party, jointly with any other
indemnifying party similarly notified, to assume the defense of the action, with
counsel satisfactory to the indemnified party, and after notice from the
indemnifying party to the indemnified party of its election to assuring the
defense, the indemnifying party will not be liable to the indemnified party for
any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified party
in connection with the defense. The indemnified party will have the right to
employ its own counsel in any such action, but the fees, expenses and other
charges of such counsel will be at the expense of such indemnified party unless
(1) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based on advice of counsel) that there may be legal defenses
available to it or other indemnified parties that are different from or in
addition to those available to the indemnifying party, (3) a conflict or
potential conflict exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (4) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be at
the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm admitted to
practice in such jurisdiction at any one time for all such indemnified party or
parties. All such fees, disbursements and other charges will be reimbursed by
the indemnifying party promptly as they are incurred. An indemnifying party will
not be liable for any settlement of any action or claim effected without its
written consent (which consent will not be unreasonably withheld), but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. No indemnifying
party shall, without the prior written consent of each indemnified party, settle
or compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding relating to the matters contemplated by
this Section 7 (whether or not any indemnified party is a party thereto), unless
such settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising or that may arise out of such
claim, action or proceeding.
(d) In order to provide for just and equitable contribution under the
Securities Act in any case in which (i) any indemnified party makes claim for
indemnification pursuant to this Section 7, but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that the express provisions of this Section 7 provide for indemnification in
such case, or (ii) contribution under the Securities Act may be required on the
part of any indemnified party, then the Company and any such Underwriter shall
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (which shall, for all purposes of this Agreement, include, but
not be limited to, all costs of defense and investigation and all attorneys'
fees) in either such case (after contribution from others) in such proportions
so that all such Underwriters are responsible in the aggregate for that portion
of such losses, claims, damages or liabilities as is determined by multiplying
the total amount of such loses, claims, damages or liabilities times the
difference between the public offering price and the purchase price to the
Underwriter and dividing the product thereof by the public offering price, and
the Company shall be responsible for the portion of such losses, claims, damages
or liabilities as determined by multiplying the total amount of such losses,
claims, damages or liabilities times the purchase price to the Underwriters and
dividing the product thereof by the public
14
<PAGE>
offering price; provided, however, that the contribution of each contributing
Underwriter shall not be in excess of its proportionate share (based on the
ratio of the number of Shares purchased by such Underwriter to the number of
Shares purchased by all contributing Underwriters) of the portion of such
losses, claims, damages or liabilities for which the Underwriters are
responsible and the contribution of the Company shall not be in excess of their
proportionate share (based on the ratio of the number of Shares sold by the
Company to the total number of Shares sold) of the portion of such losses,
claims, damages or liabilities for which the Company are responsible. No person
guilty of a fraudulent misrepresentation (within the meaning of Section 1l(f) of
the Securities Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. The foregoing contribution
agreement shall in no way affect the contribution liabilities of any person
having liability under Section 11 of the Securities Act other than the Company
and the Underwriters. If the full amount of the contribution specified in this
paragraph is not permitted by law, then the Company and any Underwriter, as the
case may be, shall be entitled to contribution from the Company and/or the
Underwriters, as the case may be, to the full extent permitted by law.
(e) It is agreed that the only information supplied by the Underwriters in
writing for use in the Registration Statement, the preliminary prospectus or the
Prospectus are set forth in the last paragraph on the cover of the Prospectus,
the paragraphs under the table under the heading "Underwriting", the paragraphs
under the headings "Underwriting--Over-Allotment Option" and "Underwriting-
Warrants," and the second paragraph under the "Underwriting--Lock-Up Agreements"
in the Prospectus and that no information has been omitted from the Registration
Statement in reliance on information supplied by the Underwriters in writing.
8. Effective Date and Termination.
(a) This Agreement shall become effective at 10:00 am., Los Angeles time,
on the first full business day following the day on which the Registration
Statement becomes effective or at the time of the initial public offering of any
of the Shares by the Underwriters after the Registration Statement becomes
effective, whichever time shall first occur. The time of the initial public
offering shall mean the time of the release by you, for publication, of the
first newspaper advertisement, which is subsequently published, relating to the
Shares, or the time at which the Shares are first generally offered by the
Underwriters to dealers by letter or telegram, whichever shall first occur. You
may prevent this Agreement from becoming effective without liability of any
party to any other party, except as otherwise provided in Sections 8(b) and (c),
by giving notice as indicated below in Section 8(b) prior to the time when this
Agreement would otherwise become effective as herein provided.
(b) This Agreement, except for Sections 6.2, 7, 1O, 11 and 12, may be
terminated by the Representative by notifying the Company at any time at or
prior to the First Closing Date, and the option referred to in Section 2(b)
hereof, if exercised, may be cancelled at any time prior to the Second Closing
Date, if, in the Representative's judgment, payment for and delivery of the
Shares is rendered impracticable or inadvisable by reason of (i) the Company
having sustained a material loss, whether or not insured, by reason of fire,
earthquake, flood, accident or other calamity, or from any labor dispute or
court or government action, order or decree, (ii) trading in securities on the
New York Stock Exchange, the American Stock Exchange or Nasdaq National Market
having been suspended or limited, (iii) material governmental restrictions
having been imposed on trading in securities generally, (iv) a banking
moratorium having been declared by Federal or California or New York state
authorities, (v) an outbreak of major international hostilities or other
national or international calamity having occurred, (vi) the passage by the
Congress of the United States or by any state legislative body, of any act or
measure, or the adoption or proposed adoption of any orders, rules, legislation
or regulations by any governmental body or any authoritative accounting
institute or board, or any governmental executive, which is believed likely by
the Representative to have a material adverse impact on the business, financial
condition or financial statements of the Company or the market for the
securities offered hereby, (vii) any material adverse change having occurred,
since the respective dates as of which information is given in the Prospectus,
in the financial condition, business, properties, prospects or results of
operations of the Company, whether or
15
<PAGE>
not arising in the ordinary course of business which, in your judgment, makes it
impracticable or inadvisable to offer or deliver the Shares on the terms
contemplated by the Prospectus, or (viii) any of the conditions specified in
Section 5 hereof not having been fulfilled or waived in writing by the
Representative, at or prior to the Closing Date, when and as required by this
Agreement to be fulfilled.
(c) If this Agreement shall be terminated pursuant to any of the provisions
hereof, except as provided in Sections 6.2 and 7, the Company shall not be under
any liability to any Underwriter nor shall any Underwriter be under any
liability to the Company, except that no Underwriter which shall have failed or
refused to purchase the Shares agreed to be purchased by it hereunder, without
some reason sufficient hereunder to justify its cancellation or termination of
its obligations hereunder, shall be relieved of liability to the Company or to
the other Underwriters for damages occasioned by its default.
9. Default of Underwriters. If one or more of the Underwriters shall fail
or refuse (other than for a reason sufficient to justify the termination of this
Agreement) to purchase on the First Closing Date or the Second Closing Date the
aggregate number of Primary Shares or Over-Allotment Shares agreed to be
purchased by such Underwriter or Underwriters and the aggregate number of
Primary Shares or Over-Allotment Shares agreed to be purchased by the
Underwriter or Underwriters shall not exceed 10% of the total number of Primary
Shares or Over-Allotment Shares (as the case may be) to be sold hereunder to the
Underwriters, then each of the non-defaulting Underwriters shall be obligated to
purchase these Primary Shares or Over-Allotment Shares on the terms herein set
forth in proportion to their respective obligations hereunder. In that case, the
Representative and the Company shall have the right to postpone the First
Closing Date or the Second Closing Date (as the case may be) for a period of not
more than seven days in order that necessary changes and arrangements may be
effected.
If one or more of the Underwriters shall fall or refuse (other than for a
reason sufficient to justify the termination of this Agreement) to purchase on
the First Closing Date or the Second Closing Date the aggregate number of
Primary Shares or Over-Allotment Shares agreed to be purchased by such
Underwriter or Underwriters and the aggregate number of Primary Shares or
Over-Allotment Shares agreed to be purchased by such Underwriter or Underwriters
shall exceed 10% of the total number of Primary Shares or Over-Allotment Shares
(as the case may be) to be sold hereunder to the Underwriters, then the non-
defaulting Underwriters shall have the right to purchase, or procure one or more
Underwriters reasonably acceptable to the Company, to purchase, in such
proportions as they may agree upon and upon the terms herein set forth, the
Primary Shares or Over-Allotment Shares which such defaulting Underwriter or
Underwriters agreed to purchase, and this Agreement shall be carried out
accordingly. If such other Underwriters do not exercise this right within
twenty-four hours after receiving notice of the default, then the Company shall
be entitled to an additional period of twenty-four hours within which to procure
another party or parties satisfactory to the Representative to purchase or agree
to purchase these Primary Shares or Over-Allotment Shares on the terms herein
set forth. In any such case, the Representative and the Company shall have the
right to postpone the First Closing Date or the Second Closing Date (as the case
may be) for a period of not more than seven days in order that necessary changes
and arrangements may be effected. If this paragraph becomes applicable and
neither the non-defaulting Underwriters nor the Company shall make arrangements
within the period stated for the purchase of the Primary Shares or
Over-Allotment Shares which the defaulting Underwriter or Underwriters agreed to
purchase, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter to the Company and without liability on the part of
the Company except as provided in Sections 6.2 and 7. The provisions of this
Section 9 shall not in any way affect the liability of any defaulting
Underwriter to the Company arising out of the default.
10. Representations and Agreement to Remain in Effect. The expense,
reimbursement and indemnification agreements contained in Sections 6, 7 and 8
shall survive any termination of this Agreement; and the representations,
warranties and covenants of the Company set forth in this Agreement shall remain
operative and in full force and effect regardless of (i) any investigation made
by or on behalf of any of the Underwriters, the Company, any controlling person,
director or officer of the Company or the Underwriters, and (ii) delivery,
acceptance of and payment for the Shares under this Agreement.
11. Parties in Interest. This Agreement has been and is made solely for the
benefit of the Underwriters, the Company and their respective successors and
assigns, to the extent expressed herein, for the
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<PAGE>
benefit of persons controlling any of the Company, or any of the Underwriters,
directors and officers of the Company and their respective successors and
assigns, and no other person, partnership, association or corporation shall
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser of Shares from any
Underwriter merely because of such purchase.
12. Notices, Headings, Applicable Law. Except as otherwise provided in this
Agreement, all statements, requests, notices and other communications hereunder
shall be in writing and shall be mailed, delivered, telegraphed or sent by
facsimile transmission and confirmed to the Representative at the address set
forth above, attention: Investment Banking Division (facsimile number: (213)
688-6642); and if to the Company to Dr. Herbert Moskowitz, Chairman of the
Board of Directors, Life Medical Sciences, Inc., 214 Carnegie Center, Princeton,
New Jersey 08540 (facsimile number: (609) 452-8344). Any party may change the
address at which it is to receive communications hereunder upon notice to the
other parties as provided above. The headings in this Agreement have been
inserted as a matter of convenience and reference and are not a part of this
Agreement. The Agreement shall be construed in accordance with the internal
laws, and not the laws pertaining to choice or conflict of laws, of the State of
California.
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<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
us.
Sincerely yours,
LIFE MEDICAL SCIENCES, INC.
By:/s/Herbert Moskowitz
-------------------------------
Dr. Herbert Moskowitz
Chairman of the Board of Directors
Confirmed and Accepted as of the
date first above written.
WEDBUSH MORGAN SECURITIES INC.
For itself and as Representative
of the several Underwriters.
By:/s/Peter H. Griffith
-----------------------------
Peter H. Griffith
Managing Director
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<PAGE>
SCHEDULE A
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Underwriter Shares
<S> <C>
Wedbush Morgan Securities Inc. .............................. 1,300,000
Hambrecht & Quist LLC ....................................... 50,000
Advest, Inc. ................................................ 30,000
Cruttenden Roth Incorporated ................................ 30,000
Everen Securities, Inc. ..................................... 30,000
Fechtor, Detwiler & Co., Inc. ............................... 30,000
Hanifen Imhoff Inc. ......................................... 30,000
J.J.B. Hilliard, W.L. Lyons, Inc. ........................... 30,000
Janney Montgomery Scott Inc. ................................ 30,000
Josepthal Lyon & Ross Incorporated .......................... 30,000
Morgan Keegan & Company, Inc. ............................... 30,000
Needham & Company, Inc. ..................................... 30,000
Parker/Hunter Incorporated .................................. 30,000
Pennsylvania Merchant Group Ltd. ............................ 30,000
Sands Brothers & Co. Ltd. ................................... 30,000
Scott & Stringfellow Inc. ................................... 30,000
The Seidler Companies Incorporated .......................... 30,000
Stifel, Nicolaus & Company Incorporated ..................... 30,000
Sutro & Co. Incorporated .................................... 30,000
Tucker Anthony Incorporated ................................. 30,000
Van Kasper & Co. ............................................ 30,000
Brookstreet Securities Corporation .......................... 10,000
First Wall Street Corporation ............................... 10,000
GBS Financial Corp. ......................................... 10,000
Grant Bettingen, Inc. ....................................... 10,000
LT Lawrence & Co., Inc. ..................................... 10,000
H.J. Meyers & Co., Inc. ..................................... 10,000
Morgan Fuller Capital Group, LLC ............................ 10,000
Triquest Financial Inc. ..................................... 10,000
Total .................................................... 2,000,000
</TABLE>
19
<PAGE>
SCHEDULE B
LIST OF SHAREHOLDERS
<TABLE>
<CAPTION>
================================================================================
NAME NUMBER OF SHARES BENEFICIALLY OWNED
- --------------------------------------------------------------------------------
<S> <C>
Baldauf, Harold 363,636
- --------------------------------------------------------------------------------
Gold, Miriam 109,919
- --------------------------------------------------------------------------------
Magar, Inc. 857,500
- --------------------------------------------------------------------------------
Marathon Investments 545,455
- --------------------------------------------------------------------------------
Moskowitz, Herbert 1,397,627
- --------------------------------------------------------------------------------
Rosenthal, Irwin 975,825
- --------------------------------------------------------------------------------
Fallon, Donald 30,000
- --------------------------------------------------------------------------------
Pines, Eli 45,000
- --------------------------------------------------------------------------------
Gold, Joel 50,000
- --------------------------------------------------------------------------------
Eklund, Coy 50,000
- --------------------------------------------------------------------------------
Bell Martin A. 1,000
- --------------------------------------------------------------------------------
Brown, Alison 300
- --------------------------------------------------------------------------------
Davis, J. Morton 26,850
- --------------------------------------------------------------------------------
Maio, Richard 1,000
- --------------------------------------------------------------------------------
Monte, Steve 200
- --------------------------------------------------------------------------------
Nachamie, David 500
- --------------------------------------------------------------------------------
Renov, Kalman 26,850
- --------------------------------------------------------------------------------
Siciliano, Michael 500
- --------------------------------------------------------------------------------
Stahler, Alan 26,850
- --------------------------------------------------------------------------------
Wood, Kenton 2,000
- --------------------------------------------------------------------------------
Perlysky, Dov 5,000
- --------------------------------------------------------------------------------
D.H Blair Investment Banking Corp. 8,950
- --------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
EXHIBIT A
2,000,000 SHARES
LIFE MEDICAL SCIENCES, INC.
Common Stock
PRICING AGREEMENT
May 2, 1996
Wedbush Morgan Securities Inc.
as Representative of the Several
Underwriters
c/o Wedbush Morgan Securities Inc.
1000 Wilshire Boulevard, 10th Floor
Los Angeles, California 90017-2457
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement dated May 2, 1996
("Underwriting Agreement") relating to the sale by the Company and the purchase
by the several Underwriters for whom Wedbush Morgan Securities Inc. is acting as
representative ("Representative"), of the above Shares. All terms herein shall
have the definitions contained in the Underwriting Agreement except as otherwise
defined herein.
Pursuant to Section 2 of the Underwriting Agreement, the Company agrees
with the Representative as follows:
1. The initial public offering price per share for the Shares
determined as provided in said Section 2 shall be $6.625.
2. The purchase price per share for the Shares to be paid by the
several Underwriters shall be $6.625, being an amount equal to the initial
public offering price set forth above less $.46 per share.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company and the several Underwriters,
including you, all in accordance with its terms.
Very truly yours,
LIFE MEDICAL SCIENCES,INC.
-----------------------------------
Dr. Herbert Moskowitz
Chairman of the Board of Directors
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
Wedbush Morgan Securities Inc.
For itself and as Representative
of the several Underwriters
By:
------------------------------
Peter H Griffith
Managing Director
<PAGE>
EXHIBIT B
[FORM OF REPRESENTATIVE WARRANT]
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THIS SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT.
UNTIL THE COMMENCEMENT DATE (AS HEREINAFTER DEFINED) THIS WARRANT IS SUBJECT
TO CERTAIN RESTRICTIONS ON TRANSFER AS DESCRIBED IN SECTION 9 HEREOF.
May 8, 1996
WARRANT
TO SUBSCRIBE FOR AND PURCHASE COMMON STOCK OF
LIFE MEDICAL SCIENCES, INC.
VOID AFTER 5:00 P.M.. LOS ANGELES TIME, ON MAY 8, 2001,
OR IF NOT A BUSINESS DAY, AS DEFINED HEREIN, AT 5:00 P.M.
LOS ANGELES TIME, ON THE IMMEDIATELY PRECEDING BUSINESS DAY
No. W-1
THIS CERTIFIES that, for and in consideration of $2,000, WEDBUSH MORGAN
SECURITIES INC., or its registered assigns (Wedbush Morgan Securities, Inc. or
any such registered assign being referred to herein as to the "Warrantholder"),
is entitled to subscribe for and purchase from Life Medical Sciences, Inc., a
Delaware corporation (hereinafter called the "Company"), at the price of $7.95
per share (such price, as from time to time to be adjusted as hereinafter
provided, being hereinafter called the "Warrant Price"), at any time and from
time to time but not earlier than the Commencement Date (as defined below) or
later than the Expiration Date (as defined below), up to 200,000 fully paid,
nonassessable shares of Common Stock, par value $.001 per share, of the Company
("Common Stock"), subject, however, to the provisions and upon the terms and
conditions hereinafter set forth, including without limitation the provisions of
Section 3 hereof. "Commencement Date" shall mean the first anniversary of the
date hereof. "Expiration Date" shall mean 5:00 P.M., Los Angeles time, on the
fifth anniversary of the date hereof, or if not a Business Day, as defined
herein, at 5:00 P.M., Los Angeles time, on the immediately preceding business
day. "Business Day" shall mean a day other than a Saturday, Sunday or other day
on which banks in the State of California are authorized by law to remain
closed.
SECTION 1. EXERCISE OF WARRANT
(A) EXERCISE PROCEDURES
This Warrant may be exercised, at any time and from time to time but not
earlier than the Commencement Date or later than the Expiration Date, by the
Warrantholder, in whole or in part (but not as to a fractional share of Common
Stock and in no event for less than 100 shares (unless Less than an aggregate of
100
1
<PAGE>
shares are then purchasable under all outstanding Warrants held by a
Warrantholder)), by the completion of the subscription form attached hereto and
by the surrender of this Warrant (properly endorsed) at the Company's principal
offices at 214 Carnegie Center, Princeton, New Jersey 08540 (or at such other
location in the United States as it may designate by notice in writing to the
Warrantholder at the address of the Warrantholder appearing on the books of the
Company). In the event of any exercise of the rights represented by this
Warrant, a certificate or certificates for the total number of whole shares of
Common Stock so purchased, registered in the name of the Warrantholder, shall be
delivered to the Warrantholder within a reasonable time, not exceeding five
Business Days, after the rights represented by this Warrant shall have been so
exercised; and, unless this Warrant has expired, a new Warrant representing the
number of shares (except a remaining fractional share), if any, with respect to
which this Warrant shall not then have been exercised shall also be issued to
the Warrantholder within such time. With respect to any such exercise, the
Warrantholder shall for all purposes be deemed to have become the holder of
record of the number of shares of Common Stock evidenced by such certificate or
certificates from the date on which this Warrant was surrendered and if exercise
is pursuant to a cash exercise, payment of the Warrant Price was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and payment is a date on which the stock transfer books
of the Company are closed, such person shall be deemed to have become the holder
of such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
(B) CASH OR NET EXERCISE
The Warrantholder may elect to exercise this Warrant by cash exercise or a
net exercise as described below.
(i) In the case of a cash exercise, the subscription form delivered
under this Section l(a) shall be accompanied by payment to the Company of
the Warrant Price, in cash or by certified or official bank check, for each
share being purchased.
(ii) In the case of a net exercise, the Warrantholder may elect to
exercise this Warrant and receive shares on a "net exercise" basis in an
amount equal to the value of this Warrant by delivery of the subscription
form attached hereto and surrender of this Warrant at the principal office
of the Company, in which event the Company shall issue to Holder a number
of shares computed using the following formula:
X = (P)(Y)(A-B)
A
Where: X = the number of shares of Common Stock to be issued to Holder.
P = the percentage of the Warrant being exercised.
Y = the number of shares of Common Stock issuable upon exercise
of this Warrant.
A = the Current Market Price (as determined pursuant to Section
3) of one share of Common Stock.
B = Warrant Price.
2
<PAGE>
(C) CONTINGENT EXERCISE
At the election of the Warrantholder, an exercise may be made contingent
upon the closing of the sale of the shares issuable upon such exercise in a
public offering pursuant to a registration statement filed or to be filed by the
Company which registers such shares pursuant to the Securities Act of 1933, as
amended
(D) STOCK TO BE RESERVED
The Company will at all times reserve and keep available out of its
authorized Common Stock, solely for the purpose of issuance upon the exercise of
this Warrant as herein provided such number of shares of Common Stock as shall
then be issuable upon the exercise of this Warrant. The Company covenants that
all shares of Common Stock which shall be so issued, upon full payment of the
Warrant Price therefor or as otherwise set forth herein, shall be duly and
validly issued and fully paid and nonassessable and free from all taxes, liens,
charges and other adverse interests. Without limiting the generality of the
foregoing, the Company covenants that it will from time to time take all such
action as may be requited to ensure that the par value per share, if any, of the
Common Stock is at all times equal to or less than the effective Warrant Price.
The Company will take all such action as may be necessary to ensure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirement of any national securities exchange or
automated quotation system upon which the Common Stock of the Company may be
listed. The Company will not take any action which results in any adjustment of
the Warrant Price if the total number of shares of Common Stock issued and
issuable after such action upon exercise of this Warrant would exceed the total
number of shares of Common Stock then authorized by the Company's Certificate of
Incorporation. The Company has not granted and will not grant any right of first
refusal with respect to shares issuable upon exercise of this Warrant, and there
are no preemptive rights associated with such shares.
(E) ISSUE TAX
The issuance of certificates for shares of Common Stock upon exercise of
any Warrant shall be made without a charge to the Warrantholder for any issuance
tax in respect thereof, provided that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than that of the Warrantholder.
(F) CLOSING OF BOOKS
The Company will at no time close its transfer books against the transfer
of the shares of Common Stock issued or issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
(G) DEFINITION OF COMMON STOCK
The shares purchasable pursuant to this Warrant shall include only
securities designated as Common Stock of the Company. As used herein the term
"Common Stock" shall mean and include the Common Stock, par value $.001, of the
Company as authorized on the date hereof, or shares of any class or classes
resulting from any recapitalization or reclassification thereof which are not
limited to any fixed sum or percentage and are not subject to redemption by the
Company and in case at any time there shall be more than one such resulting
class, the shares of each class then so issuable shall be substantially in the
proportion which the total number of shares of such class resulting from all
such reclassification bears to the total number of shares of all such classes
resulting from all such reclassification.
(H) NO FRACTIONAL SHARES
No fractional shares shall be issued upon exercise of this Warrant and no
payment or adjustment shall be made upon any exercise on account of any cash
dividends on the Common Stock issued upon such exercise. If any fractional
interest in a share of Common Stock would, except for the provisions of this
Section 1, be delivered upon
3
<PAGE>
any such exercise, the Company, in lieu of delivering the fractional share
thereof, shall to the Warrantholder an amount in cash equal to the Current
Market Price of such fractional interest, as determined pursuant to Section 3.
(I) LISTING
Prior to the issuance of any shares of Common Stock upon exercise of this
Warrant, the Company shall secure the listing of such shares of Common Stock
upon each national securities exchange or automated quotation system, if any,
upon which shares of Common Stock are then listed (subject to official notice of
issuance upon exercise of this Warrant) and shall maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list on each national securities exchange or automated
quotation system, and shall maintain such listing of, any other shares of
capital stock of the Company issuable upon the exercise of this Warrant if and
so long as any shares of the same class shall be listed on such national
securities exchange or automated quotation system.
SECTION 2. ADJUSTMENTS OF NUMBER OF SHARES AND WARRANT PRICE
(a) ADJUSTMENTS
The Warrant Price and the number and kind of shares issuable hereunder
shall be subject to adjustment from time to time upon the happening of certain
events as provided in this Section 2. Upon each adjustment of the Warrant Price
for any stock dividend or distribution or any subdivision or combination of the
outstanding shares of the Common Stock as provided in this Section 2, the
Warrantholder shall thereafter be entitled to purchase, at the Warrant Price
resulting from such adjustment, the number of shares (calculated to the nearest
tenth of a share) obtained by multiplying the Warrant Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Warrant Price resulting from such adjustment.
(1) If at any time prior to the exercise of this Warrant in full, the
Company shall (A) declare a dividend or make a distribution on the Common Stock
payable in shares of its capital stock (whether shares of Common Stock or of
capital stock of any other class); (B) subdivide, reclassify or recapitalize its
outstanding Common Stock into a greater number of shares; (C) combine,
reclassify or recapitalize its outstanding Common Stock into a smaller number of
shares; or (D) issue any shares of its capital stock by reclassification of its
Common Stock (excluding any such reclassification in connection with a
consolidation or a merger), the Warrant Price in effect at the time of the
record date of such dividend, distribution, subdivision, combination,
reclassification or recapitalization shall be adjusted so that the Warrantholder
shall be entitled to receive the aggregate number and kind of shares which, if
this Warrant had been exercised in full immediately prior to such event, it
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, distribution, subdivision, combination reclassification or
recapitalization. Any adjustment required by this Section 2 (a)(l) shall be made
successively immediately after the record date, in the case of a dividend or
distribution, or the effective date, in the case of a subdivision, combination,
reclassification or recapitalization, to allow the purchase of such aggregate
number and kind of shares.
(2) If at any time prior to the exercise of this Warrant in full, the
Company shall make a distribution to all holders of the Common Stock of stock of
a subsidiary or securities convertible into or exercisable for such stock, then
in lieu of an adjustment in the Warrant Price or the number of shares of Common
Stock purchasable upon the exercise of this Warrant, each Warrantholder, upon
the exercise hereof at any time after such distribution, shall be entitled to
receive from the Company, such subsidiary or both, as the Company shall
determine, the stock or other securities to which such Warrantholder would have
been entitled if such Warrantholder had exercised this Warrant immediately prior
thereto, all subject to further adjustment as provided in this Section 2, and
the Company shall reserve, for the life of the Warrant, such securities of such
subsidiary or other corporation; provided, however that no adjustment in respect
of dividends or interest on such stock or other securities shall be made during
the term of this Warrant or upon its exercise.
4
<PAGE>
(3) If at any time prior to the expiration of this Warrant in full, the
Company shall issue rights or Warrants to all holders of Common Stock as such
entitling them (for a period expiring within sixty days after the record date of
the determination of stockholders entitled to receive the same), to subscribe
for or purchase Common Stock at a price per share less than the current market
price per share (as defined in Section 3) on such record date, then, in each
such case the number of shares subject to this Warrant thereafter purchasable
upon the exercise of this Warrant shall be determined by multiplying the number
of shares of Common Stock therefore purchasable upon exercise of each Warrant by
a fraction, of which the numerator shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights or Warrants, plus the number
of additional shares of Common Stock offered for subscription or purchase, and
of which the denominator shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights or Warrants plus the number
of shares that the aggregate offering price of the total number of shares of
Common Stock so offered would purchase at such current market price. For
purposes of this Section 2(a)(3), the issuance of rights or Warrants to
subscribe for or purchase securities convertible into Common Stock shall be
deemed to be the issuance of rights or Warrants to purchase the Common Stock
into which such securities are convertible at an aggregate offering price equal
to the aggregate offering price of such securities plus the minimum aggregate
amount (if any) payable upon conversion of such securities into Common Stock.
(4) If at any time prior to the exercise of this Warrant in full, the
Company shall distribute to all holders of its Common Stock evidence of
indebtedness of the Company or assets of the Company (excluding cash dividends
or distributions out of earned surplus) or rights or Warrants to subscribe for
securities of the Company (excluding those referred to in Sections 2(a)(2) or
(3) above), then in each case the Warrant Price shall be adjusted to a price
determined by multiplying the Warrant Price in effect immediately prior to such
distribution by a fraction, of which the numerator shall be the then Current
Market Price per share of Common Stock on the record date for determination of
stockholders entitled to receive such distribution, less the then fair value (as
determined by the Board of Directors of the Company in good faith) of the
portion of the assets or evidences of indebtedness so distributed or of such
subscription rights or Warrants which are applicable to one share of Common
Stock, and of which the denominator shall be the Market Price per share of
Common Stock; provided, however, that if the then Current Market Price per share
of Common Stock on the record date for determination of stockholders entitled to
receive such distribution is less than the then fair value of the portion of the
assets or evidence of indebtedness so distributed or of such subscription rights
or Warrants which are applicable to one share of Common Stock, the foregoing
adjustment of the Warrant Price shall not be made and in lieu thereof the number
of shares purchasable upon exercise of each Warrant immediately prior to such
distribution shall be adjusted so that the holder of such Warrant shall be
entitled to receive upon exercise of such Warrant the kind and number of assets,
evidence of indebtedness, subscription rights and Warrants (or, in the event of
the redemption of such evidence of indebtedness, subscription rights or
Warrants, any cash paid in respect of such redemption) that such Warrantholder
would have owned or have been entitled to receive after the happening in such
distribution had such Warrant been exercised immediacy prior to the record date
of such distribution.
(5) No adjustment in the Warrant Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($.05)
in such price; provided, however, that any adjustments which by reason of this
Section 2(a)(5) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
2(a) shall be made to the nearest cent or to the nearest one hundredth of a
share, as the case may be. Notwithstanding anything in this Section 2(a) to the
contrary, the Warrant Price shall not be reduced to less than the then existing
par value of the Common Stock as a result of any adjustment made hereunder.
(6) In the event that at any time, as the result of any adjustment made
pursuant to this Section 2(a), the Warrantholder thereafter shall become
entitled to receive any securities other than Common Stock, thereafter the
number of such other securities so receivable upon exercise of any Warrant shall
be subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in Section 2(a).
(7) For purposes of any computation under this Section 2(a), the Current
Market Price and Market Price per share of Common Stock on any date shall be
deemed calculated as provided in Section 3.
5
<PAGE>
(b) NO ADJUSTMENT FOR CASH DIVIDENDS
Except as provided in Section 2(a) of this Agreement, no adjustment in
respect of any cash dividends shall be made during the term of this Warrant or
upon the exercise of this Warrant.
(c) PRESERVATION OF PURCHASE RIGHTS IN CERTAIN TRANSACTIONS
In case of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock (other than a subdivision or combination of
the outstanding Common Stock and other than a change in the par value of the
Common Stock) or in case of any consolidation or merger of the Company with or
into another corporation or other entity (other than a merger with a subsidiary
in which the Company is the continuing corporation and that does not result in
any reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the class issuable upon exercise of this Warrant) or
in the case of any sale, lease, transfer or conveyance to another corporation or
entity of the property and assets of the Company as an entirety or substantially
as an entirety, the Company shall as a condition precedent to such transaction
cause such successor or purchasing corporation or other entity, as the case may
be, to execute with the Warrantholder an agreement granting the Warrantholder
the right thereafter, upon payment of the Warrant Price in effect immediately
prior to such action, to receive upon exercise of this Warrant the kind and
amount of shares and other securities and property which the Warrantholder would
have owned or have been entitled to receive after the happening of such
reclassification, change, consolidation, merger, sale, or conveyance had this
Warrant been exercised immediately prior to such action. In the event that in
connection with any such reclassification, capital reorganization, change,
consolidation, merger, sale or conveyance, additional shares of Common Stock
shall be issued in exchange, conversion, substitution or payment, in whole or in
part, for, or of, a security of Company other than Common Stock, any such issue
shall be treated as an issue of Common Stock covered by the provisions of this
Section 2. The provisions of this Section 2(c) shall similarly apply to
successive reclassifications, capital reorganizations, consolidations, mergers,
sales or conveyances.
(d) FORM OF WARRANT AFTER ADJUSTMENTS
The form of this Warrant need not be changed because of any adjustments in
the Warrant Price of the number or kind of the shares purchasable pursuant to
this Warrant, and Warrants theretofore or thereafter issued may continue to
express the same price and number and kind of shares as are stated in this
Warrant, as initially issued; provided, however, that the Company may, at any
time in its reasonable discretion make any change in the form of Warrant
certificate that it may deem appropriate and that does not affect the substance
thereof. Any Warrant certificate thereafter issued, whether upon registration of
transfer of, or in exchange or substitution for, an outstanding Warrant
certificate may be in the form so changed.
(e) NOTICE OF ADJUSTMENT
Upon any adjustment of the Warrant Price, then and in each such case the
Company shall give written notice thereof, by first-class mail postage prepaid,
addressed to each Warrantholder at the address of such holder as shown on the
books of the Company, which notice shall state the Warrant Price resulting from
such adjustment, setting forth in reasonable detail the method of calculation
and the facts upon which such calculation is based.
SECTION 3. CURRENT MARKET PRICE
For any computation of Current Market Price or Market Price under this
Warrant, the Current Market Price per share of Common Stock on any date shall be
deemed to be the average of the daily market price per share for the 30
consecutive Trading Days commencing 35 Trading Days before the date in question.
"Market Price" is defined as (i) the closing sale price (or, if no closing sale
price is reported, the closing bid price) of the Common Stock in the
over-the-counter market, and reported by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), or, if the Common Stock is not
quoted on Nasdaq, as reported by the National Quotation Bureau Incorporated;
(ii) in the event that the Common Stock is hereafter listed for trading on one
or more United States national or regional securities exchanges, market price
shall be the closing price on the
6
<PAGE>
exchange or system designated by the Board of Directors of the Company as the
principal United States market in which the Common Stock is traded; (iii) if the
Warrantholder elects a net exercise in connection with and contingent upon a
public offering of the shares issuable upon exercise of this Warrant, and if the
Company's registration statement relating to such public offering has been
declared effective by the Securities and Exchange Commission, then market price
shall be the initial "Price to Public" specified in the final prospectus for
such offering, or (iv) if market price cannot be established as described above,
market price shall be the fair market value of the Common Stock as determined by
mutual agreement of the Warrantholder and the Company, and if the Warrantholder
and the Company are unable to agree, at the Company's sole expense, by an
investment banker of national reputation selected by the Company and reasonably
acceptable to the Warrantholder. The term "Trading Day" shall mean a day on
which Nasdaq or the principal national securities exchange on which the Common
Stock is listed or admitted to trading is open for the transaction of business.
SECTION 4 REGISTRATION RIGHTS
(a) DEFINITIONS
As used in this Section 4, the following capitalized terms shall have the
following respective meanings:
"Demand Registration" means a registration of Registration Securities
under Section 4(b).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Included Registrable Securities" means Registrable Securities
included in a Registration Statement filed under this Section 4.
"Initiating Holders" means any Registration Rights Holder or Holders who
holds or has the right to acquire not less than 25% of the aggregate of (i) all
Warrant Securities issuable under an Warrants outstanding at the time a Demand
Registration is requested and (ii) all Warrant Securities outstanding at such
time.
"Participating Holders" means holders of Included Registrable
Securities.
"Person" means any individual, partnership, joint venture, trust,
corporation, limited liability company or partnership, unincorporated
organization or government or any department or agency thereof.
"Piggyback Registrations" means a registration of Registrable
Securities under Section 4(c).
"Prospectus" means any prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement and all other amendments
and supplements to the Prospectus, including post-effective amendments and
all materials incorporated by reference in such Prospectus.
"Registrable Securities" means any Warrant Securities; provided,
however, that as to any particular security contained in Registrable
Securities, such securities shall cease to be Registrable Securities when
(1) a Registration Statement with respect to the sale of such securities
shall have become effective under the Securities Act and such securities
shall have been disposed of in accordance with such Registration Statement;
or (2) they shall have been sold to the public pursuant to Rule 144 (or any
successor provision) under the Securities Act without any restrictions or
limitation on such resale.
"Registration Expenses" means any and all expenses incurred in
connection with any registration or action incident to performance of or
compliance by the Company with Article 6, including, without limitation (1)
all SEC, national securities exchange and NASD registration and filing
fees; all listing fees and all transfer agent fees; (2) all fees and
expenses of complying with state securities or blue sky laws (including the
fees and disbursements of counsel of the underwriters in connection with
blue sky qualification of the Registrable Securities); (3) all printing,
mailing, messenger and delivery expenses; (4) all fees and disbursements of
counsel
7
<PAGE>
for the Company and of its accountants, including the expenses of any
special audits and/or "cold comfort" letters required by or incident to
such performance and compliance; and (5) any disbursements of underwriters
customarily paid by issuers or sellers of securities including the
reasonable fees and expenses of special experts retained by the
underwriters in connection with the requested registration.
"Registration Rights Holders" means the holders of any Warrant or
Warrant Securities.
"Registration Statement" means any Registration Statement of the
Company filed or to be filed with the SEC which covers any of the
Registrable Securities pursuant to the provisions of this Section 4,
including all amendments (including post-effective amendments) and
supplements thereto, all exhibits thereto and all material incorporated
therein by reference.
"Representative" means Wedbush Morgan Securities, Inc.
"SEC" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act or the Exchange
Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Expenses" means underwriting discounts and commissions,
brokerage fees and transfer taxes, if any, and fees of counsel or
accountants retained by the holders of Included Registrable Securities to
advise them in their capacity as holders of Included Registrable
Securities.
"Underwriting Agreement" means that certain Underwriting Agreement
dated as of May 2, 1996 by and among the Company and the Representative, as
Representative of the several Underwriters named therein.
"Warrants" means this Warrant and all other Warrants issued to the
Representative pursuant to the Underwriting Agreement, including all
Warrants issued in substitution or exchange thereof.
"Warrant Securities" means any Common Stock or other securities
issuable upon exercise of Warrants.
(b) DEMAND REGISTRATION
(i) If, at any time prior to the Expiration Date, Initiating Holders
request that the Company file a Registration Statement covering Registrable
Securities, as soon as practicable thereafter the Company shall use its best
efforts to file a Registration Statement with respect to all Registrable
Securities that it has been requested to register by any Registration Rights
Holder and obtain the effectiveness of such Registration Statement. The Company
shall also take all other action necessary under federal or state law or
regulation to permit the sale or other disposition pursuant to such Registration
Statement of all Registrable Securities requested to be registered and the
Company shall maintain such compliance with each such federal and state law and
regulation for the period necessary for the Participating Holders to effect the
proposed sale or other disposition of Registrable Securities pursuant to such
Registration Statement. Notwithstanding the foregoing, the Company shall be
entitled to defer a Demand Registration for a period of up to 90 days if and to
the extent that the Company's Board of Directors determines, in good faith, that
such registration would substantially interfere with a pending corporate
transaction.
(ii) Upon receipt of a request for registration from Initiating Holders,
the Company shall promptly give written notice to all other Registration Rights
Holders of its intention to effect a Demand Registration and shall include in
such registration all Registrable Securities held by other Registration Rights
Holders who request such registration within 20 Business Days after such notice
has been given by the Company.
(iii) Any request for a Demand Registration shall specify the aggregate
number of Registrable Securities proposed to be sold by a Registration Rights
Holder and the intended method of disposition.
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(iv) If any Demand Registration is requested to be in the form of an
underwritten offering, the managing underwriter shall be selected and obtained
by the holders of a majority of the Included Registrable Securities. Such
selection shall be subject to the Company's consent, which consent shall not be
unreasonably withheld.
(v) The Company shall be required to effect a only one registration
pursuant to this Section 4(b). If any Registration Statement fails to be
declared effective by the SEC by reason of a decision by Participating Holders
or the underwriters to withdraw said Registration Statement, or if the
Registration Statement fails to be declared effective or, after being declared
effective, is stop-ordered by the SEC, in either case, for reasons attributable
to a Participating Holder, such Demand Registration shall count for purposes of
the limitation set forth in this Section 4(b)(v). If any Registration Statement
(1) fails to be declared effective by the SEC for any reason (except (a) by
reason of a decision by Participating Holders or underwriters to withdraw said
Registration Statement, or (B) for reasons attributable to any Participating
Holder), or (2) is stop-ordered by the SEC after being declared effective (other
than for reasons attributable to any Participating Holder) such requested
registration shall not count for purposes of the limitation set forth in this
Section 4(b)(v).
(c) PIGGYBACK REGISTRATION
(i) If, at any time or from time to time prior to the second anniversary of
the Expiration Date, the Company proposes to register any of its securities
under the Securities Act on any form for the registration of securities under
the Securities Act, whether or not for its own account (other than a
Registration Statement filed pursuant to Section 4(b) or a registration
statement filed for registration of securities issuable under the Company's
employee benefit plans or in connection with any merger or acquisition), the
Company shall as expeditiously as possible give written notice to all
Registration Rights Holders of the Company's intention to do so and of such
Registration Rights Holders' rights under this Section 4(c). Upon the written
request of any Registration Rights Holder made within 20 Business Days after the
giving of any such notice (which request shall specify the amount of Registrable
Securities intended to be disposed of by such Registration Rights Holder in such
registration), the Company shall include in such Registration Statement the
Registrable Securities which the Company has been so requested to register and
obtain the effectiveness of such Registration Statement. The Company shall keep
such Registration Statement in effect and maintain compliance with each federal
and state law or regulation for the period necessary for Participating Holders
to effect the proposed sale or other disposition of the Included Registrable
Securities.
(ii) If a Piggyback Registration involves an offering by or through
underwriters, then (1) all Participating Holders must sell their Included
Registrable Securities to the underwriters selected by the Company on the same
terms and conditions as apply to other selling shareholders and (2) any
Participating Holder may elect in writing, not later than 3 Business Days prior
to the effectiveness of the Registration Statement filed in connection with such
registration, to withdraw such holders Registrable Securities from such
registration.
(iii) If a Piggyback Registration involves an offering by or through
underwriters, the Company, except as otherwise provided herein, shall not be
required to include Registrable Shares therein if and to the extent the managing
underwriters the offering reasonably believes in good faith and advises each
Registration Rights Holder requesting to have Registrable Securities included in
the Company's Registration Statement that such inclusion would materially
adversely affect such offering, provided that (1) if other selling shareholders
without contractual registration rights or with contractual registration rights
subordinate to the rights of the Registration Rights Holders have requested
registration of securities in the proposed offering, the Company will reduce or
eliminate such securities held by such selling shareholders before any reduction
or elimination of Registrable Securities; and (2) any such reduction or
elimination (after taking into account the effect or clause (1)) shall be pro
rata (based on the number of securities sought to be registered) with all other
selling shareholders with contractual registration rights which are not
subordinate to the rights of Registration Rights Holders. After the date hereof,
the Company shall not grant any registration rights with respect to any Company
securities which are not subordinate to the rights of the Registration Rights
Holders without the prior written consent of the holders of a majority of the
Warrant Securities outstanding at the time.
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(d) REGISTRATION
If and whenever the Company is required to use its best efforts to take
action pursuant to any federal or state law or regulation to permit the sale or
other disposition of any Registrable Securities Warrants in order to effect or
cause the registration of any Registrable Securities under the Securities Act as
provided in this Section 4, the Company shall, as expeditiously as practicable:
(i) prepare and file with the SEC, as soon as practicable within 90 days
after the end of the period within which requests for registration may be given
to the Company (but subject to the provisions for deferral contained in Section
4(b)(i) hereof) a Registration Statement or Registration Statements relating to
the registration on any appropriate form under the Securities Act, which form
shall be available for the sale of the Registrable Securities in accordance with
the intended method or methods of distribution thereof, and use its best efforts
to cause such Registration Statements to become effective; provided that before
filing a Registration Statement or Prospectus or any amendment or supplements
thereto, including documents incorporated by reference after the initial filing
of any Registration Statement, the Company will furnish to the Participating
Holders and the underwriters, if any, copies of all such documents proposed to
be filed, which documents will be subject to the review of the Participating
Holders and the underwriters.
(ii) Prepare and file with the SEC such amendments and post-effective
amendments to a Registration Statement as may be necessary to keep such
Registration Statement effective for a reasonable period not to exceed 180 days;
cause the related Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424 under the
Securities Act; and comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such Registration
Statement during such period in accordance with the intended methods of
disposition by the Participating Holders as set forth in such Registration
Statement or supplement to such Prospectus.
(iii) Notify the Participating Holders and the managing underwriters, if
any, promptly, and (if requested by any such person) confirm such advice in
writing, (1) when a Prospectus or any Prospectus supplement or post-effective
amendment has been filed, and, with respect to a Registration Statement or any
post-effective amendment, when the same has become effective; (2) of any request
by the SEC for amendments or supplements to a Registration Statement or related
Prospectus or for additional information; (3) of the issuance by the SEC of any
stop order suspending the effectiveness of a Registration Statement or the
initiation of any proceedings for that purpose; (4) if at any time the
representations and warranties of the Company contemplated by subsection (xiii)
below ceases to be true and correct in all material respects; (5) of the receipt
by the Company of any notification with respect to the suspension of the
qualification of any of the Registrable Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose; and (6) of
the happening of any event that makes any statement of a material fact made in
the Registration Statement, the Prospectus or any document incorporated therein
by reference untrue or which requires the making of any changes in the
Registration Statement or Prospectus so that they will not contain any untrue
statement or a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
(iv) Use its best efforts to obtain the withdrawal of any order suspending
the effectiveness of a Registration Statement at the earliest possible moment.
(v) If reasonably requested by the managing underwriters, immediately
incorporate in a Prospectus supplement or post-effective amendment such
information as the managing underwriters believe (on advice of counsel) should
be included therein as required by applicable law relating to such sale of
Registrable Securities, including, without limitation, information with respect
to the purchase price being paid for the Registrable Securities by such
underwriters and with respect to any other terms of the underwritten (or "best
efforts" underwritten) offering; and make all required filings of such
Prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment.
(vi) Furnish to each Participating Holder and each managing underwriter,
without charge, at least one copy of the Registration Statement and any
post-effective amendment therein, including financial statements
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and schedules, an documents incorporated therein by reference and all exhibits
(including those incorporated by reference), which copies, in the case of the
managing underwriters, shall be manually signed.
(vii) Deliver to each Participating Holder and the underwriters, if any,
without charge, as many copies of the Prospectus or Prospectuses (including each
preliminary Prospectus) any amendment or supplement thereto as such persons may
reasonably request, and the Company consents to the use of such Prospectus or
any amendment or supplement thereto by each of the Participating Holders and the
underwriters, if any, in connection with the offering and sale of the Included
Registrable Securities covered by such Prospectus or any amendment or supplement
thereto.
(viii) Prior to any public offering of Registrable Securities, cooperate
with the Participating Holders, the underwriters, if any, and their respective
counsel in connection with the registration or qualification of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any Participating Holder or
underwriter reasonably requests in writing; keep each such registration or
qualification effective during the period such Registration Statement is
required to be kept effective and do any and all other acts or things necessary
or advisable to enable the disposition in such jurisdictions of the Included
Registrable Securities, provided that the Company will not be required to
qualify to do business in any jurisdiction where it is not then so qualified or
to take any action which would subject the Company to general service of process
in any jurisdiction where it is not at the time so subject.
(ix) Cooperate with the holders of Included Registrable Securities and the
managing underwriters, if any, to facilitate the timely preparation and delivery
of certificates representing Registrable Securities to be sold and not bearing
any restrictive legends; and enable such Registrable Securities to be in such
denominations and registered in such names as the managing underwriters may
request at least two Business Days prior to any sale of Registrable Securities
to the underwriters.
(x) Use its best efforts to cause the Registrable Securities covered by the
applicable Registration Statement to be registered with or approved by such
other governmental agencies or authorities within the United States as may be
necessary to enable the seller or sellers thereof or the underwriters, if any,
to consummate the disposition of such Registrable Securities.
(xi) Upon the occurrence of any event contemplated by Section 4(c)(iii)(b)
above, prepare a supplement or post-effective amendment to the applicable
Registration Statement or related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities being sold thereunder,
such Prospectus will not contain an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading.
(xii) With respect to each issue or class of Registrable Securities, use
its best efforts to cause ad Registrable Securities covered by the Registration
Statements to be listed on each securities exchange or automated quotation
system, if any, on which similar securities issued by the Company are then
listed.
(xiii) Enter into such agreements (including an underwriting agreement) and
take all such other action reasonably required in connection therewith in order
to expedite or facilitate the disposition of such Registrable Securities and in
such connection, if the registration is in connection with an underwritten
offering (1) make such representations and warranties to the underwriters in
such form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings and confirm the same if and when
requested; (2) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions in form, scope and substance shall be reasonably
satisfactory to the underwriters) addressed to the underwriters covering the
matters customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by such underwriters; (3)
obtain "cold comfort" letters and updates thereof from the Company's accountants
addressed to the underwriters, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters by
underwriters in connection with underwritten offerings; (4) set forth in full in
any underwriting agreement entered into the indemnification provisions and
procedures of Section 4(e) hereof with respect to all
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parties to be indemnified pursuant to said section; and (5) deliver such
documents and certificates as may be reasonably requested by the underwriters to
evidence compliance with clause (1) above and with any customary conditions
contained in the underwriting agreement or other agreement entered into by the
Company; the above shall be done at each closing under such underwriting or
similar agreement or as and to the extent required hereunder.
(xiv) Make available for inspection by one or more representatives of the
Participating Holders, any underwriter participating in any disposition pursuant
to such registration, and any attorney or accountant retained by such
Participating Holders or underwriter, all financial and other record, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all information reasonably requested
by any such representatives.
(xv) Otherwise use its best efforts to comply with all applicable federal
and state regulations; and take such other action as may be reasonably necessary
to or advisable to enable each Participating Holder and each underwriter to
consummate the sale or disposition in such jurisdiction or jurisdiction in which
any such Participating Holder or underwriter shall have requested that the
Included Registrable Securities be sold.
(xvi) The Company may require each Participating Holder to furnish to the
Company such information regarding the distribution of such securities and such
other information as may otherwise be required by the Securities Act to be
included in such Registration Statement.
(d) FEES AND EXPENSES
The Company shall pay all Registration Expenses and the Participating
Holders shall pay (severally and not jointly and pro rata based upon the number
of Included Registrable Securities held by each Participating Holder) all
Selling Expenses incurred in connection with any registration of Registrable
Securities under this Section 4.
(e) INDEMNIFICATION
(i) In connection with each Registration Statement relating to disposition
of Registrable Securities, the Company shall indemnify and hold harmless each
Participating Holder and each underwriter of Included Registrable Securities and
each Person, if any, who controls such Participating Holder or underwriter
(within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act) against any and all losses, claims, damages and liabilities, joint
or several (including any reasonable investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of any action,
suit or proceeding or any claim asserted), to which they, or any of them, may
become subject under the Securities Act, the Exchange Act or other federal or
state law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities arise out of or are based upon any untrue
statement or alleged untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement, Prospectus or preliminary
prospectus or any amendment thereof or supplement thereto, or arise out of or
are based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, provided, however, that such indemnity shall not inure to the
benefit of any Participating Holder or underwriter (or any person controlling
such Participating Holder or underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) on account of any losses,
claims, damages or liabilities arising from the sale of the Registrable
Securities if such untrue statement or omission or alleged untrue statement or
omission was made in such Registration Statement Prospectus or preliminary
prospectus, or such amendment or supplement, in reliance upon and in conformity
with information furnished in writing to the Company by such Participating
Holder or underwriter specifically for use therein. The Company shall also
indemnify selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, their officers and directors
and each Person who controls such Persons (within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act) to the same extent as
provided above with respect to the indemnification of the Participating Holders.
This indemnify agreement shall be in addition to any liability which the Company
may otherwise have.
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(ii) In connection with each Registration Statement, each Participating
Holder shall indemnify, to the same extent as the indemnification provided by
the Company in Section 4(e)(i), the Company, its directors and each officer who
signs the Registration Statement and each Person who controls the Company
(within the meaning of Section 15 of the Securities Act and Section 20 of the
Exchange Act) by only insofar as such losses, claims, damages and liabilities
arise out of or are based upon any untrue statement or omission or alleged
untrue statement or omission which was made in the Registration Statement, the
Prospectus or preliminary prospectus or any amendment thereof or supplement
thereto, in reliance upon and in conformity with information furnished in
writing by such Participating Holder to the Company specifically for use
therein. In no event shall the liability of any Participating Holder hereunder
be greater in amount than the dollar amount of the net proceeds received by such
Participating Holder upon the sale of such Participating Holder's Included
Registrable Securities giving rise to such indemnification obligation.
(iii) Any party that proposes to assert the right to be indemnified
hereunder will, promptly after receipt of notice of commencement of any action,
suit or proceeding against such party in respect of which a claim is to be made
against an indemnifying party or parties under this Section 4(e), notify each
such indemnifying party of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served. No indemnification provided for in
Section 4(e)(i) or 4(e)(ii) shall be available to any party who shall fail to
give notice as provided in this Section 4(e)(iii) if the party to whom notice
was not given was unaware of the proceeding to which such notice related and was
prejudiced by the failure to receive such notice, but the omission so to notify
such indemnifying party of any such action, suit or proceeding shall not relieve
the indemnifying party from any liability that it may otherwise have to any
indemnified party. In case any such action, suit or proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and to the extent that it shall wish, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense thereof
and the approval by the indemnified party of such counsel, the indemnifying
party shall not be liable to such indemnified party for any legal or other
expenses, except as provided below and except for the reasonable costs of
investigation subsequently incurred by such indemnified party in connection with
the defense thereof. The indemnified party shall have the right to employ its
counsel in any such action, but the fees and expenses of such counsel shall be
at the expense of such indemnified party unless (1) the employment of counsel by
such indemnified party has been authorized in writing by the indemnifying
parties, (2) the indemnified party shall have reasonably concluded that there
may be a conflict of interest between the indemnifying parties and the
indemnified party in the conduct of the defense of such action (in which case
the indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party) or (3) the indemnifying parties shall
not have employed counsel to assume the defense of such action within a
reasonable time after notice of the commencement thereof, in each of which cases
the fees and expenses of counsel shall be at the expense of the indemnifying
parties. An indemnified party shall not be liable for any settlement of any
action, suit, proceeding or claim effected without its written consent.
(iv) In connection with each Registration Statement relating to the
disposition of Registrable Securities, if the indemnification provided for in
subsection 4(e)(i) or 4(e)(ii) hereof is unavailable to an indemnified party
thereunder in respect to any losses, claims damages or liabilities referred to
therein, then the indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of losses, claims, damages or
liabilities referred to in subsection (i) or (ii) of this Section 4(e) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such losses, claims damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or the indemnified party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 1l(f) of the
Securities Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. The foregoing contribution
agreement shall in no way affect the contribution liabilities of any person
having liability under Section 11 of the Securities Act other than the
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Company and the Participating Holders. If the full amount of the contribution
specified in this paragraph is not permitted by law, then the Company and any
Participating Holder, as the case may be, shall be entitled to contribution from
the Company and/or the Participating Holders, as the case may be, to the full
extent permitted by law.
(v) The indemnity and contribution agreements contained in this Section
4(e) shall remain operative and in full force and effect regardless of (i) any
investigation made by or on behalf of the Participating Holders, (ii) sale of
any of Registrable Securities or (iii) any expiration of this Warrant.
(vi) Notwithstanding the foregoing provisions of the Section 4(e), to the
extent that the provisions on indemnification and contribution contained in any
underwriting agreement entered into in connection with the underwritten public
offering of the Registrable Securities are in conflict with the foregoing
provisions, the provisions in such underwriting agreement shall control.
(f) REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934
With a view to making available to the holders of Warrants or Warrant
Securities the benefits of Rule 144 promulgated under the Securities Act and any
other rule or regulation of the SEC that may at any time permit a Holder to sell
securities of the Company to the public without registration or pursuant to a
registration on Form S-3, the Company agrees to:
(i) Make and keep available adequate current public information with
respect to the Company.
(ii) File with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act.
(iii) Furnish to any holder of Registrable Securities, forthwith upon
request (i) a written statement by the Company that it has complied with the
reporting requirements of SEC Rule 144, the Securities Act and the Exchange Act,
or that it qualifies as a registrant whose securities may be resold pursuant to
Form S-3 (at any time after it so qualifies), and (in) a copy of the most recent
annual or quarterly report of the Company and such other reports filed under any
rule or regulation of the SEC.
(g) COMPUTATIONS OF CONSENT
Whenever the consent or approval of Registration Rights Holders of a
specified percentage of Registrable Securities is required hereunder,
Registrable Securities held by the Company or its affiliates (other than any
Warrantholder deemed to be such affiliates solely by reason of their holdings of
such Registrable Securities) shall not be counted in determining whether such
consent or approval was given by the Registration Rights Holders of such
required percentage.
(h) ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES
The Company will not take any action outside the ordinary course of
business, or permit any change within its control to occur outside the ordinary
course of business, with respect to the Registrable Securities which is without
a bona fide business purpose, and which is intended to interfere with the
ability of the Registration Rights Holders to include such Registrable
Securities in a registration undertaken pursuant to this Section 4.
SECTION 5. NOTICES OF RECORD DATES
In the event of:
(a) any taking by the Company of a record of the holders of any class of
securities for the propose of determining the holders thereof who are
entitled to receive any dividend or other distribution (other than
regular cash dividends paid out of earned surplus), or any
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right to subscribe for, purchase or otherwise acquire shares of stock
of any class or any other securities or property, or to receive any
right to sell shares of stock of any class or any other right, or;
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer
of all or substantially all the assets of the Company to or
consolidation or merger of the Company with or into any other
corporation or entity, or
(c) any voluntary or involuntary dissolution, liquidation or winding-up of
the Company,
then and in each such event the Company will give notice to the Warrantholder
specifying (1) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right and stating the amount and character of
such dividend, distribution or right, and (2) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any is to be fixed, as of which the holders of record of Common Stock will be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up. Such notice shall be given at least 20 days and not more than 90
days prior to the date therein specified, and such notice shall state that the
action in question or the record date is subject to the effectiveness of a
registration statement under the Securities Act or to a favorable vote of
stockholders, if either is required. Failure to mail or receive such notice or
any defect therein shall not affect the validity of any action with respect
thereto.
SECTION 6. NO STOCKHOLDERS RIGHTS OR LIABILITIES
This Warrant Shall not entitle the Warrantholder to any voting rights or
other rights as a stockholder of the Company. No provision hereof, in the
absence of affirmative action by the Warrantholder to purchase shares of Common
Stock, and no mere enumeration herein of the rights or privileges of the
Warrantholder shall give rise to any liability of such Warrantholder for the
Warrant Price or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
SECTION 7. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT
In case the certificate or certificates evidencing the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall at the request of the
Warrantholder, issue and deliver in exchange and substitution for and upon
cancellation of the mutilated certificate or certificates, or in lieu of and
substitution for the certificate or certificates lost, stolen or destroyed, a
new Warrant certificate or certificates of like tenor and representing an
equivalent right or interest.
SECTION 8. NOTICES
All notices, requests and other communications required or permitted to be
given or delivered hereunder shall be in writing, and shall be delivered, or
shall be sent by certified or registered mail or overnight courier, postage
prepaid and addressed, or by facsimile. Notices, requests and other
communications to the Warrantholder shall be sent to the Warrantholder at 1000
Wilshire Boulevard, Los Angeles, California 90017-2465, Attention: Investment
Banking, facsimile number (213) 688-6642 or to such other address or facsimile
number as shall have been furnished to the Company by notice from such
Warrantholder, and if to the Company, at 214 Carnegie Center, Princeton, New
Jersey 08540; Attention: President, facsimile number (609) 452-8344, or at such
other address or facsimile number as shall have been furnished to the
Warrantholder by notice from the Company.
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SECTION 9. TRANSFER, ASSIGNMENT EXCHANGE OF WARRANT AND RESTRICTIONS ON TRANSFER
(a) RESTRICTIONS ON TRANSFER
(i) Until the Commencement Date, this Warrant and the underlying shares of
Common Stock which may be acquired upon exercise hereof may not be sold,
transferred, assigned, pledged or hypothecated to any other person or entity
except to any Underwriter that participated in the public offering of shares of
Common Stock of the Company pursuant to the Underwriting Agreement (as defined
in Section 4(a)), and the any bona fide officers or partners thereof. Until the
Commencement Date, any shares of Common Stock acquired upon exercise of this
Warrant shall bear a legend setting forth the foregoing restriction. After the
Commencement Date, this Warrant may be freely transferred or assigned by the
Warrantholder, provided that the Warrant is exercised immediately upon such
transfer, and if not so exercised upon such a transfer, this Warrant shall
lapse. Assignment of this Warrant shall be effected by delivery of the
assignment form attached hereto to the Company at its principal offices.
(ii) Except as otherwise permitted by this Section 9(a)(ii), each Warrant
shall (and each Warrant issued upon transfer or in substitution for any Warrant
shall) be stamped or otherwise imprinted with a legend in substantially the
following form:
"THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN
EXEMPTION FROM REGISTRATION SUCH ACT."
Except as otherwise permitted by this Section 9(a)(ii), each certificate
for securities issued upon the exercise of any Warrant and each certificate
issued upon transfer of any such security shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT."
Notwithstanding the foregoing, the Warrantholder may require the Company to
issue a Warrant or certificate for securities, without a legend, if (1) the
issuance of such securities has been registered under the Securities Act, (2)
such Warrant or such securities, as the case may be, have been registered for
resale under the Securities Act or sold pursuant to Rule 144 under the
Securities Act, or (3) the Warrantholder has received an opinion of counsel (who
may be house counsel for such Warrantholder) reasonably satisfactory to the
Company that such registration is not required with respect to such Warrant or
such securities, as the case may be.
(b) EXCHANGE OF WARRANT
This Warrant may be split-up, combined or exchanged for another Warrant or
Warrants containing the same terms to purchase a like aggregate number of
securities. If the Warrantholder desires to split-up, combine or exchange this
Warrant, the Warrantholder shall make such request in writing delivered to the
Company at its principal office and shall surrender to the Company this Warrant
and any other Warrants to be so split-up, combined or exchanged. Upon any such
surrender for a split-up, combination or exchange, the Company shall execute and
deliver to the person entitled thereto a Warrant or Warrants, as the case may
be, as so requested. The Company shall not be required to effect any split-up,
combination or exchange which will result in the issuance of a Warrant entitling
the Warrantholder to purchase upon exercise a fraction of a share of Common
Stock or a fractional Warrant.
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<PAGE>
(c) TREATMENT WARRANTHOLDER
Prior to due presentment for registration of transfer of this Warrant, the
Company may deem and treat the Warrantholder as the absolute owner of this
Warrant (notwithstanding any notation of ownership or other writing hereon) for
an purposes and shall not be affected by any notice to the contrary.
SECTION 10. AMENDMENTS AND WAIVERS
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought.
SECTION 11. SEVERABILITY
If one or more provisions of this Warrant are held to be unenforceable
under applicable law, such provisions shall be excluded from this Warrant, and
the balance of this Warrant shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
SECTION 12. GOVERNING LAW
This Warrant shall be governed by and construed under the laws of the State
of California without regard to conflict of law principles.
SECTION 13. HEADINGS
The headings in this Warrant are for purposes of reference only and shall
not limit or otherwise affect any of the terms hereof.
SECTION 14. BINDING EFFECT
This Warrant shall insure to the benefit of and shall be binding upon the
Company and the Warrantholder and their respective heirs, legal representatives,
successors and assigns.
SECTION 15. NO INCONSISTENT AGREEMENTS
The Company will not on or after the date of this Warrant enter into any
agreement with respect to its securities which is inconsistent with the rights
granted to the Warrantholder in this Warrant or otherwise conflicts with the
provisions hereof. The rights granted to the Warrantholder hereunder do not in
any way conflict with and are not inconsistent with the rights granted to
holders of the Company's securities under any other agreements.
SECTION 16. ENTIRE AGREEMENT
This Warrant is intended by the parties as a final expression of their
agreement and intended to be a complete and exclusive statement of the agreement
and understanding of the parties hereto in respect of the subject matter
contained herein This Warrant supersedes all prior agreements and understandings
between the parties with respect to such subject matter (other than warrants
previously issued by the Company to the Warrantholder).
SECTION 17. ATTORNEYS' FEES
In any action or proceeding brought to enforce any provisions of this
Warrant, or where any provisions hereof is validly assumed as a defense, the
successful party shall be entitled to recover reasonable attorneys' fees and
disbursements in addition to its costs and expenses and any other available
remedy.
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IN WITNESS WHEREOF, the Company and the Warrantholder have executed this
Warrant on and as of the day and year first above written.
Life Medical Sciences, Inc.,
a Delaware corporation
By:__________________________________________
Dr. Herbert Moskowitz
Chairman of the Board of Directors
Attest:
_____________________
(Corporate Secretary)
Wedbush Morgan Securities Inc.
By:___________________________________
___________________________________
(Printed Name and Title)
18
<PAGE>
EXHIBIT 10.35
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT.
UNTIL THE COMMENCEMENT DATE (AS HEREINAFTER DEFINED) THIS WARRANT IS SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AS DESCRIBED IN SECTION 9 HEREOF.
May 8, 1996
WARRANT
TO SUBSCRIBE FOR AND PURCHASE COMMON STOCK OF
LIFE MEDICAL SCIENCES, INC.
VOID AFTER 5:00 P.M. LOS ANGELES TIME, ON MAY 8, 2001
OR IF NOT A BUSINESS DAY, AS DEFINED HEREIN, AT 5:00 P.M.,
LOS ANGELES TIME, ON THE IMMEDIATELY PRECEDING BUSINESS DAY
No. W-l
THIS CERTIFIES that, for and in consideration of $2,000, WEDBUSH MORGAN
SECURITIES INC., or its registered assigns (Wedbush Morgan Securities, Inc. or
any such registered assign being referred to herein as to the "Warrantholder),
is entitled to subscribe for and purchase from Life Medical Sciences, Inc., a
Delaware corporation (hereinafter called the "Company"), at the price of $7.95
per share (such price, as from time to time to be adjusted as hereinafter
provided, being hereinafter called the "Warrant Price"), at any time and from
time to time but not earlier than the Commencement Date (as defined below) or
later than the Expiration Date (as defined below), up to 200,000 fully paid,
nonassessable shares of Common Stock, par value $.001 per share, of the Company
("Common Stocks"), subject, however, to the provisions and upon the terms and
conditions hereinafter set forth, including without limitation the provisions of
Section 3 hereof."Commencement Date" shall mean the first anniversary of the
date hereof. "Expiration Date" shall mean 5:00 P.M, Los Angeles time, on the
fifth anniversary of the date hereof, or if not a Business Day, as defined
herein, at 5:00 P.M., Los Angeles time, on the immediately preceding business
day. "Business Day" shall mean a day other than a Saturday, Sunday or other day
on which banks in the State of California are authorized by law to remain
closed.
SECTION 1. EXERCISE OF WARRANT
(a) EXERCISE PROCEDURES
This Warrant may be exercised, at any time and from time to time but not
earlier than the Commencement Date or later than the Expiration Date, by the
Warrantholder, in whole or in part (but not as to a fractional share of Common
Stock and in no event for less than 100 shares (unless Less than an aggregate of
100 shares are then purchasable under all outstanding Warrants held by a
Warrantholder)), by the completion of the subscription form attached hereto and
by the surrender of this Warrant (properly endorsed) at the Company's principal
offices at 214 Carnegie Center, Princeton, New Jersey 08540 (or at such other
location in the United States as it may designate by notice in writing to the
Warrantholder at the address of the Warrantholder appearing
<PAGE>
on the books of the Company). In the event of any exercise of the rights
represented by this Warrant, a certificate or certificates for the total number
of whole shares of Common Stock so purchased, registered in the name of the
Warrantholder, shall be delivered to the Warrantholder within a reasonable time,
not exceeding five Business Days, after the rights represented by this Warrant
shall have been so exercised; and, unless this Warrant has expired, a new
Warrant representing the number of shares (except a remaining fractional share),
if any, with respect to which this Warrant shall not then have been exercised
shall also be issued to the Warrantholder within such time. With respect to any
such exercise, the Warrantholder shall for all purposes be deemed to have become
the holder of record of the number of shares of Common Stock evidenced by such
certificate or certificates from the date on which this Warrant was surrendered
and if exercise is pursuant to a cash exercise, payment of the Warrant Price was
made, irrespective of the date of delivery of such certificate, except that, if
the date of such surrender and payment is a date on which the stock transfer
books of the Company are closed such person shall be deemed to have become the
holder of such shares at the close of business on the next succeeding date on
which the stock transfer books are open.
(b) CASH OR NET EXERCISE
The Warrantholder may elect to exercise this Warrant by cash exercise or a
net exercise as described below.
(i) In the case of a cash exercise, the subscription form delivered
under this Section l(a) shall be accompanied by payment to the Company of
the Warrant Price, in cash or by certified or official bank check, for each
share being purchased.
(ii) In the case of a net exercise, the Warrantholder may elect to
exercise this Warrant and receive shares on a "net exercise" basis in an
amount equal to the value of this Warrant by delivery of the subscription
form attached hereto and surrender of this Warrant at the principal office
of the Company, in which event the Company shall issue to Holder a number
of shares computed using the following formula:
X = (P)(Y)(A-B)
-----------
A
Where:
X = the number of shares of Common Stock to be issued to
Holder.
P = the percentage of the Warrant being exercised.
Y = the number of shares of Common Stock issuable upon exercise
of this Warrant.
A = the Current Market Price (as determined pursuant to
Section 3) of one share of Common Stock.
B = Warrant Price.
(c) CONTINGENT EXERCISE
At the election of the Warrantholder, an exercise may be made contingent
upon the closing of the sale of the shares issuable upon such exercise in a
public offering pursuant to a registration statement filed or to be filed by the
Company which registers such shares pursuant to the Securities Act of 1933, as
amended.
(d) STOCK TO BE RESERVED
The Company will at all times reserve and keep available out of its
authorized Common Stock solely for the purpose of issuance upon the exercise of
this Warrant as herein provided, such number of shares of Common Stock as shall
then be issuable upon the exercise of this Warrant. The Company covenants that
all shares of
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<PAGE>
Common Stock which shall be so issued upon full payment of the Warrant Price
therefor as otherwise set forth herein, shall be duly and validly issued and
fully paid and nonassessable and free from all taxes, liens, charges and other
adverse interests. Without limiting the generality of the foregoing, the Company
covenants that it will from time to time take all such action as may be required
to ensure that the par value per share, if any, of the Common Stock is at all
times equal to or less than the effective Warrant Price. The Company will take
all such action as may be necessary to ensure that all such shares of Common
Stock may be so issued without violation of any applicable law or regulation, or
of any requirement of any national securities exchange or automated quotation
system upon which the Common Stock of the Company may be listed. The Company
will not take any action which results in any adjustment of the Warrant Price if
the total number of shares of Common Stock issued and issuable after such action
upon exercise of this Warrant would exceed the total number of shares of Common
Stock then authorized by the Company's Certificate of Incorporation. The Company
has not granted and will not grant any right of first refusal with respect to
shares issuable upon exercise of this Warrant, and there are no preemptive
rights associated with such shares.
(e) ISSUE TAX
The issuance of certificates for shares of Common Stock upon exercise of
any Warrant shall be made without a charge to the Warrantholder for any issuance
tax in respect thereof, provided that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than that of the Warrantholder.
(f) CLOSING OF BOOKS
The Company will at no time close its transfer books against the transfer
of the shares of Common Stock issued or issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
(g) DEFINITION OF COMMON STOCK
The shares purchasable pursuant to this Warrant shall include only
securities designated as Common Stock of the Company. As used herein the term
"Common Stock" shall mean and include the Common Stock par value $.001, of the
Company as authorized on the date hereof, or shares of any class or classes
resulting from any recapitalization or reclassification thereof which are not
limited to any fixed sum or percentage and are not subject to redemption by the
Company and in case at any time there shall be more than one such resulting
class, the shares of each class then so issuable shall be substantially in the
proportion which the total number of shares of such class resulting from all
such reclassification bears to the total number of shares of all such classes
resulting from all such reclassification.
(h) NO FRACTIONAL SHARES
No fractional shares shall be issued upon exercise of this Warrant and no
payment or adjustment shall be made upon any exercise on account of any cash
dividends on the Common Stock issued upon such exercise. If any fractional
interest in a share of Common Stock would, except, for the provisions of this
Section 1, be delivered upon any such exercise, the Company, in lieu of
delivering the fractional share thereof, shall pay to the Warrantholder an
amount in cash equal to the Current Market Price of such fractional interest, as
determined pursuant to Section 3.
(i) LISTING
Prior to the issuance of any shares of Common Stock upon exercise of this
Warrant, the Company shall secure the listing of such shares of Common Stock
upon each national securities exchange or automated quotation system, if any,
upon which shares of Common Stock are then listed (subject to official notice of
issuance upon exercise of this Warrant) and shall maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
3
<PAGE>
Company shall so list on each national securities exchange or automated
quotation system, and shall maintain such listing of any other shares of
capital stock of the Company issuable upon the exercise of this Warrant if and
so long as any shares of the same class shall be listed on such national
securities exchange or automated quotation system.
SECTION 2. ADJUSTMENT OF NUMBER OF SHARES AND WARRANT PRICE
(a) ADJUSTMENTS
The Warrant Price and the number and kind of shares issuable hereunder
shall be subject to adjustment from time to time upon the happening of certain
events as provided in this Section 2. Upon each adjustment of the Warrant Price
for any stock dividend or distribution or any subdivision or combination of the
outstanding shares of the Common Stock as provided in this Section 2, the
Warrantholder shall thereafter be entitled to purchase, at the Warrant Price
resulting from such adjustment, the number of shares (calculated to the nearest
tenth of a share) obtained by multiplying the Warrant Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Warrant Price resulting from such adjustment.
(1) If at any time prior to the exercise of this Warrant in full, the
Company shall (A) declare a dividend or make a distribution on the Common Stock
payable in shares of its capital stock (whether shares of Common Stock or of
capital stock of any other class); (B) subdivide, reclassify or recapitalize its
outstanding Common Stock into a greater number of shares; (C) combine,
reclassify or recapitalize its outstanding Common Stock into a smaller number of
shares; or (D) issue any shares of its capital stock by reclassification of its
Common Stock (excluding any such reclassification in connection with a
consolidation or a merger), the Warrant Price in effect at the time of the
record date of such dividend, distribution, subdivision, combination,
reclassification or recapitalization shall be adjusted so that the Warrantholder
shall be entitled to receive the aggregate number and kind of shares which, if
this Warrant had been exercised in full immediately prior to such event, it
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, distribution, subdivision, combination reclassification or
recapitalization. Any adjustment required by this Section 2 (a)( 1) shall be
made successively immediately after the record date, in the case of a dividend
or distribution, or the effective date, in the case of a subdivision,
combination, reclassification or recapitalization, to allow the purchase of such
aggregate number and kind of shares.
(2) If at any time prior to the exercise of this Warrant in full the
Company shall make a distribution to all holders of the Common Stock of stock of
a subsidiary or securities convertible into or exercisable for such stock, then
in lieu of an adjustment in the Warrant Price or the number of shares of Common
Stock purchasable upon the exercise of this Warrant, each Warrantholder, upon
the exercise hereof at any time after such distribution, shall be entitled to
receive from the Company, such subsidiary or both, as the Company shall
determine, the stock or other securities to which such Warrantholder would have
been entitled if such Warrantholder had exercised this Warrant immediately prior
thereto, all subject to further adjustment as provided in this Section 2, and
the Company shall reserve, for the life of the Warrant, such securities of such
subsidiary or other corporation; provided, however that no adjustment in respect
of dividends or interest on such stock or other securities shall be made during
the term of this Warrant or upon its exercise.
(3) If at any time prior to the expiration of this Warrant in full, the
Company shall issue rights or Warrants to all holders of Common Stock as such
entitling them (for a period expiring within sixty days after the record date of
the determination of stockholders entitled to receive the same), to subscribe
for or purchase Common Stock at a price per share less than the current market
price per share (as defined in Section 3) on such record date, then in each such
case the number of shares subject to this Warrant thereafter purchasable upon
the exercise of this Warrant shall be determined by multiplying the number of
shares of Common Stock theretofore purchasable upon exercise of each Warrant by
a fraction, of which the numerator shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights or Warrants, plus the number
of additional shares of Common Stock offered for subscription or purchase, and
of which the denominator shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights or Warrants plus the number
of
4
<PAGE>
shares that the aggregate offering price of the total number of shares of Common
Stock so offered would purchase at such current market price. For purposes of
this Section 2(a)(3), the issuance of rights or Warrants to subscribe for or
purchase securities convertible into Common Stock shall be deemed to be the
issuance of rights or Warrants to purchase the Common Stock into which such
securities are convertible at an aggregate offering price equal to the aggregate
offering price of such securities plus the minimum aggregate amount (if any)
payable upon conversion of such securities into Common Stock.
(4) If at any time prior to the exercise of this Warrant in full, the
Company shall distribute to all holders of its Common Stock evidence of
indebtedness of the Company or assets of the Company (excluding cash dividends
or distributions out of earned surplus) or rights or Warrants to subscribe for
securities of the Company (excluding those referred to in Sections 2(a)(2) or
(3) above), then in each case the Warrant Price shall be adjusted to a price
determined by multiplying the Warrant Price in effect immediately prior to such
distribution by a fraction, of which the numerator shall be the then Current
Market Price per share of Common Stock on the record date for determination of
stockholders entitled to receive such distribution, less the then fair value (as
determined by the Board of Directors of the Company in good faith) of the
portion of the assets or evidences of indebtedness so distributed or of such
subscription rights or Warrants which are applicable to one share of Common
Stock, and of which the denominator shall be the Market Price per share of
Common Stock; provided, however, that if the then Current Market Price per share
of Common Stock on the record date for determination of stockholders entitled to
receive such distribution is less than the then fair value of the portion of the
assets or evidence of indebtedness so distributed or of such subscription rights
or Warrants which are applicable to one share of Common Stock, the foregoing
adjustment of the Warrant Price shall not be made and in lieu thereof the number
of shares purchasable upon exercise of each Warrant immediately prior to such
distribution shall be adjusted so that the holder of such Warrant shall be
entitled to receive upon exercise of such Warrant the kind and number of assets,
evidence of indebtedness, subscription rights and Warrants (or, in the event of
the redemption of such evidence of indebtedness, subscription rights or
Warrants, any cash paid in respect of such redemption) that such Warrantholder
would have owned or have been entitled to receive after the happening in such
distribution had such Warrant been exercised immediately prior to the record
date of such distribution.
(5) No adjustment in the Warrant Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($.O5)
in such price; provided, however, that any adjustments which by reason of this
Section 2(a)(5) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
2(a) shall be made to the nearest cent or to the nearest one hundredth of a
share, as the case may be. Notwithstanding anything in this Section 2(a) to the
contrary, the Warrant Price shall not be reduced to less than the then existing
par value of the Common Stock as a result of any adjustment made hereunder.
(6) In the event that at any time, as the result of any adjustment made
pursuant to this Section 2(a), the Warrantholder thereafter shall become
entitled to receive any securities other than Common Stock thereafter the number
of such other securities so receivable upon exercise of any Warrant shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in Section 2(a).
(7) For purposes of any computation under this Section 2(a), the Current
Market Price and Market Price per share of Common Stock on any date shall be
deemed calculated as provided in Section 3.
(b) NO ADJUSTMENT FOR CASH DIVIDENDS
Except as provided in Section 2(a) of this Agreement, no adjustment in
respect of any cash dividends shall be made during the term of this Warrant or
upon the exercise of this Warrant.
(c) PRESERVATION OF PURCHASE RIGHTS IN CERTAIN TRANSACTIONS
In case of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock (other than a subdivision or combination of
the outstanding Common Stock and other than a change in the
5
<PAGE>
par value of the Common Stock) or in case of any consolidation or merger of
the Company with or into another corporation or other entity (other than a
merger with a subsidiary in which the Company is the continuing corporation and
that does not result in any reclassification capital reorganization or other
change of outstanding shares of Common Stock of the class issuable upon exercise
of this Warrant) or in the case of any sale, lease, transfer or conveyance to
another corporation or entity of the property and assets of the Company as an
entirety or substantially as an entirety, the Company shall, as a condition
precedent to such transaction cause such successor or purchasing corporation or
other entity, as the case may be, to execute with the Warrantholder an agreement
granting the Warrantholder the right thereafter, upon payment of the Warrant
Price in effect immediately prior to such action, to receive upon exercise of
this Warrant the kind and amount of shares and other securities and property
which the Warrantholder would have owned or have been entitled to receive after
the happening of such reclassification, change, consolidation, merger, sale, or
conveyance had this Warrant been exercised immediately prior to such action. In
the event that in connection with any such reclassification, capital
reorganization, change, consolidation, merger, sale or conveyance, additional
shares of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for, or of, a security of Company other than
Common Stock, any such issue shall be treated as an issue of Common Stock
covered by the provisions of this Section 2. The provisions of this Section 2(c)
shall similarly apply to successive reclassifications, capital reorganizations,
consolidations, mergers, sales or conveyances.
(d) FORM OF WARRANT AFTER ADJUSTMENTS
The form of this Warrant need not be changed because of any adjustments in
the Warrant Price of the number or kind of the shares purchasable pursuant to
this Warrant, and Warrants theretofore or thereafter issued may continue to
express the same price and number and kind of shares as are stated in this
Warrant, as initially issued; provided, however, that the Company may, at any
-------- -------
time in its reasonable discretion make any change in the form of Warrant
certificate that it may deem appropriate and that does not affect the substance
thereof. Any Warrant certificate thereafter issued, whether upon registration of
transfer of, or in exchange or substitution for, an outstanding Warrant
certificate may be in the form so changed.
(e) NOTICE OF ADJUSTMENT
Upon any adjustment of the Warrant Price, then and in each such case the
Company shall give written notice thereof, by first-class mail, postage prepaid,
addressed to each Warrantholder at the address of such holder as shown on the
books of the Company, which notice shall state the Warrant Price resulting from
such adjustment, setting forth in reasonable detail the method of calculation
and the facts upon which such calculation is based.
SECTION 3. CURRENT MARKET PRICE
For any computation of Current Market Price or Market Price under this
Warrant, the Current Market Price per share of Common Stock on any date shall be
deemed to be the average of the daily market price per share for the 30
consecutive Trading Days commencing 35 Trading Days before the date in question.
"Market Price" is defined as (i) the closing sale price (or, if no closing sale
price is reported the closing bid price) of the Common Stock in the
over-the-counter market, and reported by the National Association of Securities
Dealers Automated Quotation System ("Nasdaq"), or, if the Common Stock is not
quoted on Nasdaq, as reported by the National Quotation Bureau Incorporated;
(ii) in the event that the Common Stock is hereafter listed for trading on one
or more United States national or regional securities exchanges, market price
shall be the closing price on the exchange or system designated by the Board of
Directors of the Company as the principal United States market in which the
Common Stock is traded; (iii) if the Warrantholder elects a net exercise in
connection with and contingent upon a public offering of the shares issuable
upon exercise of this Warrant, and if the Company's registration statement
relating to such public offering has been declared effective by the Securities
and Exchange Commission, then market price shall be the initial "Price to
Public" specified in the final prospectus for such offering; or (iv) if market
price cannot be established as described above, market price shall be the fair
market value of the Common Stock as determined by mutual agreement of the
Warrantholder and the Company, and if the Warrantholder and the Company are
unable to agree, at the Company's sole expense, by an investment banker of
national reputation selected by the Company and reasonably acceptable to the
Warrantholder. The term "Trading
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<PAGE>
Day" shall mean a day on which Nasdaq or the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business.
SECTION 4. REGISTRATION RIGHTS
(a) DEFINITIONS
As used in this Section 4, the following capitalized terms shall have the
following respective meanings:
"Demand Registration" means a registration of Registrable Securities under
Section 4(b).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Included Registrable Securities" means Registrable Securities included in
a Registration Statement filed under this Section 4.
"Initiating Holders" means any Registration Rights Holder or Holders who
holds or has the right to acquire not less than 25% of the aggregate of (i) all
Warrant Securities issuable under all Warrants outstanding at the time a Demand
Registration is requested and (ii) all Warrant Securities outstanding at such
time.
"Participating Holders" means holders of Included Registrable Securities.
"Person" means any individual, partnership, joint venture, trust,
corporation, limited liability company or partnership, unincorporated
organization or government or any department or agency thereof.
"Piggyback Registration" means a registration of Registrable Securities
under Section 4(c).
"Prospectus" means any prospectus included in any Registration Statement,
as amended or supplemented by any prospectus supplement, with respect to the
terms of the offering of any portion of the Registrable Securities covered by
such Registration Statement and all other amendments and supplements to the
Prospectus, including post-effective amendments and all materials incorporated
by reference in such Prospectus.
"Registrable Securities" means any Warrant Securities; provided, however,
that as to any particular security contained in Registrable Securities, such
securities shall cease to be Registrable Securities when (1) a Registration
Statement with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall have been disposed
of in accordance with such Registration Statement; or (2) they shall have been
sold to the public pursuant to Rule 144 (or any successor provision) under the
Securities Act without any restrictions or limitation on such resale.
"Registration Expenses" means any and all expenses incurred in connection
with any registration or action incident to performance of or compliance by the
Company with Article 6, including, without limitation (1) all SEC, national
securities exchange and NASD registration and filing fees; all listing fees and
all transfer agent fees; (2) all fees and expenses of complying with state
securities or blue sky laws (including the fees and disbursements of counsel of
the underwriters in connection with blue sky qualification of the Registrable
Securities); (3) all printing, mailing, messenger and delivery expenses: (4) all
fees and disbursements of counsel for the Company and of its accountants,
including the expenses of any special audits and/or "cold comforts letters
required by or incident to such performance and compliance; and (5) any
disbursements of underwriters customarily paid by issuers or sellers of
securities including the reasonable fees and expenses of special experts
retained by the underwriters in connection with the requested registration.
"Registration Rights Holders" means the holders of any Warrant or Warrant
Securities.
"Registration Statement" means any Registration Statement of the Company
filed or to be filed with the SEC which covers any of the Registrable Securities
pursuant to the provisions of this Section 4, including all
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amendments (including post-effective amendments) and supplements thereto, all
exhibits thereto and all material incorporated therein by reference.
"Representative" means Wedbush Morgan Securities, Inc.
"SEC" means the Securities and Exchange Commission or any other federal
agency at the time administering the Securities Act or the Exchange Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Expenses" means underwriting discounts and commissions, brokerage
fees and transfer taxes, if any, and fees of counsel or accountants retained by
the holders of Included Registrable Securities to advise them in their capacity
as holders of Included Registrable Securities.
"Underwriting Agreement" means that certain Underwriting Agreement dated as
of May 2, 1996 by and among the Company and the Representative, as
Representative of the several Underwriters named therein.
"Warrants" means this Warrant and all other Warrants issued to the
Representative pursuant to the Underwriting Agreement, including all Warrants
issued in substitution or exchange thereof.
"Warrant Securities" means any Common Stock or other securities issuable
upon exercise of Warrants.
(b) DEMAND REGISTRATION
(i) If, at any time prior to the Expiration Date, Initiating Holders
request that the Company file a Registration Statement covering Registrable
Securities, as soon as practicable thereafter the Company shall use its best
efforts to file a Registration Statement with respect to all Registrable
Securities that it has been requested to register by any Registration Rights
Holders and obtain the effectiveness of such Registration Statement. The Company
shall also take all other action necessary under federal or state law or
regulation to permit the sale or other disposition pursuant to such Registration
Statement of all Registrable Securities requested to be registered and the
Company shall maintain such compliance with each such federal and state law and
regulation for the period necessary for the Participating Holders to effect the
proposed sale or other disposition of Registrable Securities pursuant to such
Registration Statement. Notwithstanding the foregoing, the Company shall be
entitled to defer a Demand Registration for a period of up to 90 days if and to
the extent that the Company's Board of Directors determines, in good faith, that
such registration would substantially interfere with a pending corporate
transaction.
(ii) Upon receipt of a request for registration from Initiating Holders,
the Company shall promptly give written notice to all other Registration Rights
Holders of its intention to effect a Demand Registration and shall include in
such registration all Registrable Securities held by other Registration Rights
Holders who request such registration within 20 Business Days after such notice
has been given by the Company.
(iii) Any request for a Demand Registration shall specify the aggregate
number of Registrable Securities proposed to be sold by a Registration Rights
Holder and the intended method of disposition.
(iv) If any Demand Registration is requested to be in the form of an
underwritten offering, the managing underwriter shall be selected and obtained
by the holders of a majority of the Included Registrable Securities. Such
selection shall be subject to the Company's consent, which consent shall not be
unreasonably withheld.
(v) The Company shall be required to effect a only one registration
pursuant to this Section 4(b). If any Registration Statement fails to be
declared effective by the SEC by reason of a decision by Participating Holders
or the underwriters to withdraw said Registration Statement, or if the
Registration Statement fails to be declared effective or, after being declared
effective, is stop-ordered by the SEC, in either case, for reasons
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attributable to a Participating Holder, such Demand Registration shall count for
purposes of the limitation set forth in this Section 4(b)(v). If any Statement
(1) fails to be declared effective by the SEC for any reason (except (a) by
reason of a decision by Participating Holders or underwriters to withdraw said
Registration Statement, or (B) for reasons attributable to any Participating
Holder), or (2) is stop-ordered by the SEC after being declared effective (other
than for reasons attributable to any Participating Holder) such requested
registration shall not count for purposes of the limitation set forth in this
Section 4(b)(v).
(c) PIGGYBACK REGISTRATION
(i) If, at any time or from time to time prior to the second anniversary of
the Expiration Date, the Company proposes to register any of its securities
under the Securities Act on any form for the registration of securities under
the Securities Act, whether or not for its own account (other than a
Registration Statement filed pursuant to Section 4(b) or a registration
statement filed for registration of securities issuable under the Company's
employee benefit plans or in connection with any merger or acquisition), the
Company shall as expeditiously as possible give written notice to all
Registration Rights Holders of the Company's intention to do so and of such
Registration Rights Holders' rights under this Section 4(c). Upon the written
request of any Registration Rights Holder made within 20 Business Days after the
giving of any such notice (which request shall specify the amount of Registrable
Securities intended to be disposed of by such Registration Rights Holder in such
registration), the Company shall include in such Registration Statement the
Registrable Securities which the Company has been so requested to register and
obtain the effectiveness of such Registration Statement. The Company shall keep
such Registration Statement in effect and maintain compliance with each federal
and state law or regulation for the period necessary for Participating Holders
to effect the proposed sale or other disposition of the Included Registrable
Securities.
(ii) If a Piggyback Registration involves an offering by or through
underwriters, then (1) all Participating Holders must sell their Included
Registrable Securities to the underwriters selected by the Company on the same
terms and conditions as apply to other selling shareholders and (2) any
Participating Holder may elect in writing, not later than 3 Business Days prior
to the effectiveness of the Registration Statement filed in connection with such
registration, to withdraw such holder's Registrable Securities from such
registration.
(iii) If a Piggyback Registration involves an offering by or through
underwriters, the Company, except as otherwise provided herein, shall not be
required to include Registrable Shares therein if and to the extent the managing
underwriters the offering reasonably believes in good faith and advises each
Registration Rights Holder requesting to have Registrable Securities included in
the Company's Registration Statement that such inclusion would materially
adversely affect such offering; provided that (1) if other selling shareholders
without contractual registration rights or with contractual registration rights
subordinate to the rights of the Registration Rights Holders have requested
registration of securities in the proposed offering, the Company will reduce or
eliminate such securities held by such selling shareholders before any reduction
or elimination of Registrable Securities; and (2) any such reduction or
elimination (after taking into account the effect or clause (1)) shall be pro
rata (based on the number of securities sought to be registered) with all other
selling shareholders with contractual registration rights which are not
subordinate to the rights of Registration Rights Holders. After the date hereof,
the Company shall not grant any registration rights with respect to any Company
securities which are not subordinate to the rights of the Registration Rights
Holders without the prior written consent of the holders of a majority of the
Warrant Securities outstanding at the time.
(d) REGISTRATION PROCEDURES
If and whenever the Company is required to use its best efforts to take
action pursuant to any federal or state law or regulation to permit the sale or
other disposition of any Registrable Securities Warrants in order to effect or
cause the registration of any Registrable Securities under the Securities Act as
provided in this Section 4, the Company shall, as expeditiously as practicable:
(i) prepare and file with the SEC, as soon as practicable within 90 days
after the end of the period within which requests for registration may be given
to the Company (but subject to the provisions for deferral
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contained in Section 4(b)(i) hereof) a Registration Statement or Registration
Statements relating to the registration on any appropriate form under the
Securities Act, which form shall be available for the sale of the Registrable
Securities in accordance with the intended method or Methods of distribution
thereof, and use its best efforts to cause such Registration Statements to
become effective; provided that before filing a Registration Statement or
Prospectus or any amendment or supplements thereto, including documents
incorporated by reference after the initial filing of any Registration
Statement, the Company will furnish to the Participating Holders and the
underwriters, if any, copies of all such documents proposed to be filed, which
documents will be subject to the review of the Participating Holders and the
underwriters.
(ii) Prepare and file with the SEC such amendments and post-effective
amendments to a Registration Statement as may be neccessary to keep such
Registration Statement effective for a reasonable period not to exceed 180 days;
cause the related Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424 under the
Securities Act; and comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such Registration
Statement during such period in accordance with the intended methods of
disposition by the Participating Holders as set forth in such Registration
Statement or supplement to such Prospectus.
(iii) Notify the Participating Holders and the managing underwriters, if
any, promptly, and (if requested by any such person) confirm such advice in
writing, (1) when a Prospectus or any Prospectus supplement or post-effective
amendment has been filed, and, with respect to a Registration Statement or any
post-effective amendment, when the same has become effective; (2) of any request
by the SEC for amendments or supplements to a Registration Statement or related
Prospectus or for additional information; (3) of the issuance by the SEC of any
stop order suspending the effectiveness of a Registration Statement or the
initiation of any proceedings for that purpose; (4) if at any time the
representations and warranties of the Company contemplated by subsection (xiii)
below ceases to be true and correct in all material respects; (5) of the receipt
by the Company of any notification with respect to the suspension of the
qualification of any of the Registrable Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose; and (6) of
the happening of any event that makes any statement of a material fact made in
the Registration Statement, the Prospectus or any document incorporated therein
by reference untrue or which requires the making of any changes in the
Registration Statement or Prospectus so that they will not contain any untrue
statement or a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
(iv) Use its best efforts to obtain the withdrawal of any order suspending
the effectiveness of a Registration Statement at the earliest possible moment.
(v) If reasonably requested by the managing underwriters, immediately
incorporate in a Prospectus supplement or post-effective amendment such
information as the managing underwriters believe (on advice of counsel) should
be included therein as required by applicable law relating to such sale of
Registrable Securities, including, without limitation, information with respect
to the purchase price being paid for the Registrable Securities by such
underwriters and with respect to any other terms of the underwritten (or "best
efforts" underwritten) offering; and make all required filings of such
Prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment.
(vi) Furnish to each Participating Holder and each managing underwriter,
without charge, at least one copy of the Registration Statement and any
post-effective amendment therein, including financial statements and schedules,
all documents incorporated therein by reference and all exhibits (including
those incorporated by reference), which copies, in the case of the managing
underwriters, shall be manually signed.
(vii) Deliver to each Participating Holder and the underwriters, if any,
without charge, as many copies of the Prospectus or Prospectuses (including each
preliminary Prospectus) any amendment or supplement thereto as such persons may
reasonably request, and the Company consents to the use of such Prospectus or
any amendment or supplement thereto by each of the Participating Holders and the
underwriters, if any, in connection with the offering and sale of the Included
Registrable Securities covered by such Prospectus or any amendment or supplement
thereto.
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(viii) Prior to any public offering of Registrable Securities, cooperate
with the Participating Holders, the underwriters, if any, and their respective
counsel in connection with the registration or qualification of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any Participating Holder or
underwriter reasonably requests in writing, keep each such registration or
qualification effective during the period such Registration Statement is
required to be kept effective and do any and all other acts or things necessary
or advisable to enable the disposition in such jurisdictions of the Included
Registrable Securities, provided that the Company will not be required to
qualify to do business in any jurisdiction where it is not then so qualified or
to take any action which would subject the Company to general service of process
in any jurisdiction where it is not at the time so subject.
(ix) Cooperate with the holders of Included Registrable Securities and the
managing underwriters, if any, to facilitate the timely preparation and delivery
of certificates representing Registrable Securities to be sold and not bearing
any restrictive legends; and enable such Registrable Securities to be in such
denominations and registered in such names as the managing underwriters may
request at least two Business Days prior to any sale of Registrable Securities
to the underwriters.
(x) Use its best efforts to cause the Registrable Securities covered by the
applicable Registration Statement to be registered with or approved by such
other governmental agencies or authorities within the United States as may be
necessary to enable the seller or sellers thereof or the underwriters, if any,
to consummate the disposition of such Registrable Securities.
(xi) Upon the occurrence of any event contemplated by Section 4(c)(iii)(b)
above, prepare a supplement or post-effective amendment to the applicable
Registration Statement or related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities being sold thereunder,
such Prospectus will not contain an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading.
(xii) With respect to each issue or class of Registrable Securities, use
its best efforts to cause all Registrable Securities covered by the Registration
Statements to be listed on each securities exchange or automated quotation
system, if any, on which similar securities issued by the Company are then
listed.
(xiii) Enter into such agreements (including an underwriting agreement) and
take all such other action reasonably required in connection therewith in order
to expedite or facilitate the disposition of such Registrable Securities and in
such connection, if the registration is in connection with an underwritten
offering (1) make such representations and warranties to the underwriters, in
such form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings and confirm the same if and when
requested; (2) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions in form, scope and substance shall be reasonably
satisfactory to the underwriters) addressed to the underwriters covering the
matters customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by such underwriters; (3)
obtain "cold comfort" letters and updates thereof from the Company's accountants
addressed to the underwriters, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters by
underwriters in connection with underwritten offerings; (4) set forth in full in
any underwriting agreement entered into the indemnification provisions and
procedures of Section 4(e) hereof with respect to all parties to be indemnified
pursuant to said section; and (5) deliver such documents and certificates as may
be reasonably requested by the underwriters to evidence compliance with clause
(1) above and with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company, the above shall be
done at each closing under such underwriting or similar agreement or as and to
the extent required hereunder.
(xiv) Make available for inspection by one or more representatives of the
Participating Holders, any underwriter participating in any disposition pursuant
to such registration, and any attorney or accountant retained by such
Participating Holders or underwriter, all financial and other record, pertinent
corporate documents and
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properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such
representatives.
(xv) Otherwise use its best efforts to comply with all applicable federal
and state regulations; and take such other action as may be reasonably necessary
to or advisable to enable each Participating Holder and each underwriter to
consummate the sale or disposition in such jurisdiction or jurisdiction in which
any such Participating Holder or underwriter shall have requested that the
Included Registrable Securities be sold.
(xvi) The Company may require each Participating Holder to furnish to the
Company such information regarding the distribution of such securities and such
other information as may otherwise be required by the Securities Act to be
included in such Registration Statement.
(d) FEES AND EXPENSES
The Company shall pay all Registration Expenses and the Participating
Holders shall pay (severally and not jointly and pro rata based upon the number
of Included Registrable Securities held by each Participating Holder) all
Selling Expenses incurred in connection with any registration of Registrable
Securities under this Section 4.
(e) INDEMNIFICATION
(i) In connection with each Registration Statement relating to disposition
of Registrable Securities, the Company shall indemnify and hold harmless each
Participating Holder and each underwriter of Included Registrable Securities and
each Person, if any, who controls such Participating Holder or underwriter
(within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act) against any and all losses, claims, damages and liabilities, joint
or several (including any reasonable investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of any action,
suit or proceeding or any claim asserted), to which they, or any of them, may
become subject under the Securities Act, the Exchange Act or other federal or
state law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities arise out of or are based upon any untrue
statement or alleged untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement, Prospectus or preliminary
prospectus or any amendment thereof or supplement thereto, or arise out of or
are based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, provided, however, that such indemnity shall not inure to the
benefit of any Participating Holder or underwriter (or any person controlling
such Participating Holder or underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) on account of any losses,
claims, damages or liabilities arising from the sale of the Registrable
Securities if such untrue statement or omission or alleged untrue statement or
omission was made in such Registration Statement Prospectus or preliminary
prospectus, or such amendment or supplement, in reliance upon and in conformity
with information furnished in writing to the Company by such Participating
Holder or underwriter specifically for use therein. The Company shall also
indemnity selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, their officers and directors
and each Person who controls such Persons (within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act) to the same extent as
provided above with respect to the indemnification of the Participating Holders.
This indemnify agreement shall be in addition to any liability which the Company
may otherwise have.
(ii) In connection with each Registration Statement, each Participating
Holder shall indemnify, to the same extent as the indemnification provided by
the Company in Section 4(e)(i), the Company, its directors and each officer who
signs the Registration Statement and each Person who controls the Company
(within the meaning of Section 15 of the Securities Act and Section 20 of the
Exchange Act) by only insofar as such losses, claims, damages and liabilities
arise out of or are based upon any untrue statement or omission or alleged
untrue statement or omission which was made in the Registration Statement, the
Prospectus or preliminary prospectus or any amendment thereof or supplement
thereto, in reliance upon and in conformity with information furnished in
writing by such Participating Holder to the Company specifically for use
therein. In no event shall the liability of any Participating Holder hereunder
be greater in amount than the dollar amount of the net proceeds received by
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such Participating Holder upon the sale of such Participating Holder's Included
Registrable Securities giving rise to such indemnification obligation.
(iii) Any party that proposes to assert the right to be indemnified
hereunder will, promptly after receipt of notice of commencement of any action,
suit or proceeding against such party in respect of which a claim is to be made
against an indemnifying party or parties under this Section 4(e), notify each
such indemnifying party of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served. No indemnification provided for in
Section 4(e)(i) or 4(e)(ii) shall be available to any party who shall fail to
give notice as provided in this Section 4(e)(iii) if the party to whom notice
was not given was unaware of the proceeding to which such notice related and was
prejudiced by the failure to receive such notice, but the omission so to notify
such indemnifying party of any such action, suit or proceeding shall not relieve
the indemnifying party from any liability that it may otherwise have to any
indemnified party. In case any such action, suit or proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and to the extent that it shall wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense thereof
and the approval by the indemnified party of such counsel, the indemnifying
party shall not be liable to such indemnified party for any legal or other
expenses, except as provided below and except for the reasonable costs of
investigation subsequently incurred by such indemnified party in connection with
the defense thereof. The indemnified party shall have the right to employ its
counsel in any such action, but the fees and expenses of such counsel shall be
at the expense of such indemnified party unless (1) the employment of counsel by
such indemnified party has been authorized in writing by the indemnifying
parties, (2) the indemnified party shall have reasonably concluded that there
may be a conflict of interest between the indemnifying panics and the
indemnified party in the conduct of the defense of such action (in which case
the indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party) or (3) the indemnifying parties shall
not have employed counsel to assume the defense of such action within a
reasonable time after notice of the commencement thereof, in each of which cases
the fees and expenses of counsel shall be at the expense of the indemnifying
parties. An indemnified party shall not be liable for any settlement of any
action, suit, proceeding or claim effected without its written consent.
(iv) In connection with each Registration Statement relating to the
disposition of Registrable Securities, if the indemnification provided for in
subsection 4(e)(i) or 4(e)(ii) hereof is unavailable to an indemnified party
thereunder in respect to any losses, claims, damages or liabilities referred to
therein, then the indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of losses, claims, damages or
liabilities referred to in subsection (i) or (ii) of this Section 4(e) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such losses, claims, damages
or liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or the indemnified party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 1l(f) of the
Securities Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. The foregoing contribution
agreement shall in no way affect the contribution liabilities of any person
having liability under Section 11 of the Securities Act other than the Company
and the Participating Holders. If the full amount of the contribution specified
in this paragraph is not permitted by law, then the Company and any
Participating Holder, as the case may be, shall be entitled to contribution from
the Company and/or the Participating Holders, as the case may be, to the full
extent permitted by law.
(v) The indemnity and contribution agreements contained in this Section
4(e) shall remain operative and in full force and effect regardless of (i) any
investigation made by or on behalf of the Participating Holders, (ii) sale of
any of Registrable Securities or (iii) any expiration of this Warrant
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(vi) Notwithstanding the foregoing provisions of the Section 4(e), to the
extent that the provisions on indemnification and contribution contained in any
underwriting agreement entered into in connection with the underwritten public
offering of the Registrable Securities are in conflict with the foregoing
provisions, the provisions in such underwriting agreement shall control.
(f) REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934
With a view to making available to the holders of Warrants or Warrant
Securities the benefits of Rule 144 promulgated under the Securities Act and any
other rule or regulation of the SEC that may at any time permit a Holder to sell
securities of the Company to the public without registration or pursuant to a
registration on Form S-3, the Company agrees to:
(i) Make and keep available adequate current public information with
respect to the Company.
(ii) File with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act.
(iii) Furnish to any holder of Registrable Securities, forthwith upon
request (i) a written statement by the Company that it has complied with the
reporting requirements of SEC Rule 144, the Securities Act and the Exchange Act,
or that it qualifies as a registrant whose securities may be resold pursuit to
Form S-3 (at any time after it so qualifies), and (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports filed under any
rule or regulation of the SEC.
(g) COMPUTATIONS OF CONSENT
Whenever the consent or approval of Registration Rights Holders of a
specified percentage of Registrable Securities is required hereunder,
Registrable Securities held by the Company or its affiliates (other than any
Warrantholder deemed to be such affiliates solely by reason of their holdings of
such Registrable Securities) shad not be counted in determining whether such
consent or approval was given by the Registration Rights Holders of such
required percentage.
(h) ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES
The Company will not take any action outside the ordinary course of
business, or permit any change within its control to occur outside the ordinary
course of business, with respect to the Registrable Securities which is without
a bona fide business purpose, and which is intended to interfere with the
ability of the Registration Rights Holders to include such Registrable
Securities in a registration undertaken pursuant to this Section 4.
SECTION 5. NOTICES OF RECORD DATES
In the event of:
(a) any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution (other than
regular cash dividends paid out of earned surplus), or any right to
subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any right
to sell shares of stock of any class or any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer
of all or substantially all the assets of the Company to or
consolidation or merger of the Company with or into any other
corporation or entity, or
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(c) any voluntary or involuntary dissolution, liquidation winding-up of
the Company,
then and in each such event the Company will give notice to the Warrantholder
specifying (1) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right and stating the amount and character of
such dividend, distribution or right, and (2) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any is to be fixed, as of which the holders of record of Common Stock will be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up. Such notice shall be given at least 20 days and not more than 90
days prior to the date therein specified, and such notice shall state that the
action in question or the record date is subject to the effectiveness of a
registration statement under the Securities Act or to a favorable vote of
stockholders, if either is required. Failure to mail or receive such notice or
any defect therein shall not affect the validity of any action with respect
thereto.
SECTION 6. NO STOCKHOLDERS RIGHTS OR LIABILITIES
This Warrant shall not entitle the Warrantholder to any voting rights or
other rights as a stockholder of the Company. No provision hereof, in the
absence of affirmative action by the Warrantholder to purchase shares of Common
Stock, and no mere enumeration herein of the rights or privileges of the
Warrantholder shall give rise to any liability of such Warrantholder for the
Warrant Price or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
SECTION 7. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT
In case the certificate or certificates evidencing the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall, at the request of the
Warrantholder, issue and deliver in exchange and substitution for and upon
cancellation of the mutilated certificate or certificates, or in lieu of and
substitution for the certificate or certificates lost, stolen or destroyed, a
new Warrant certificate or certificates of like tenor and representing an
equivalent right or interest.
SECTION 8. NOTICES
All notices, requests and other communications required or permitted to be
given or delivered hereunder shall be in writing, and shall be delivered, or
shall be sent by certified or registered mail or overnight courier, postage
prepaid and addressed or by facsimile. Notices, requests and other
communications to the Warrantholder shall be sent to the Warrantholder at 1000
Wilshire Boulevard, Los Angeles, California 90017-2465, Attention: Investment
Banking, facsimile number (213) 688 6642 or to such other address or facsimile
number as shall have been furnished to the Company by notice from such
Warrantholder, and if to the Company, at 214 Carnegie Center, Princeton, New
Jersey 08540; Attention: President, facsimile number (609) 452-8344, or at such
other address or facsimile number as shall have been furnished to the
Warrantholder by notice from the Company.
SECTION 9. TRANSFER, ASSIGNMENT AND EXCHANGE OF WARRANT AND RESTRICTIONS ON
TRANSFER
(a) RESTRICTIONS ON TRANSFER
(i) Until the Commencement Date, this Warrant and the underlying shares of
Common Stock which may be acquired upon exercise hereof may not be sold,
transferred, assigned, pledged or hypothecated to any other person or entity
except to any Underwriter that participated in the public offering of shares of
Common Stock of the Company pursuant to the Underwriting Agreement (as defined
in Section 4(a)), and the any bona fide officers or partners thereof. Until the
Commencement Date, any shares of Common Stock acquired upon exercise of this
Warrant shall bear a legend setting forth the foregoing restriction. After the
Commencement Date, this Warrant may be freely transferred or assigned by the
Warrantholder, provided that the Warrant is exercised immediately upon such
transfer, and if not so exercised upon such a transfer, this Warrant shall
lapse. Assignment of this
15
<PAGE>
Warrant shall be effected by delivery of the assignment form attached hereto to
the Company at its principal offices.
(ii) Except as otherwise permitted by this Section 9(a)(ii), each
Warrant shall (and each Warrant issued upon transfer or in substitution for any
Warrant shall) be stamped or otherwise imprinted with a legend in substantially
the following form:
"THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN
EXEMPTION FROM REGISTRATION SUCH ACT."
Except as otherwise permitted by this Section 9(a)(ii), each certificate
for securities issued upon the exercise of any Warrant and each certificate
issued upon transfer of any such security shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT."
Notwithstanding the foregoing, the Warrantholder may require the Company to
issue a Warrant or certificate for securities, without a legend, if (1) the
issuance of such securities has been registered under the Securities Act, (2)
such Warrant or such securities, as the case may be, have been registered for
resale under the Securities Act or sold pursuant to Rule 144 under the
Securities Act, or (3) the Warrantholder has received an opinion of counsel (who
may be house counsel for such Warrantholder) reasonably satisfactory to the
Company that such registration is not required with respect to such Warrant or
such securities, as the case may be.
(b) EXCHANGE OF WARRANT
This Warrant may be split-up, combined or exchanged for another Warrant or
Warrants containing the same terms to purchase a like aggregate number of
securities. If the Warrantholder desires to split-up, combine or exchange this
Warrant, the Warrantholder shall make such request in writing delivered to the
Company at its principal office and shall surrender to the Company this Warrant
and any other Warrants to be so split-up, combined or exchanged. Upon any such
surrender for a split-up, combination or exchange, the Company shall execute and
deliver to the person entitled thereto a Warrant or Warrants, as the case may
be, as so requested. The Company shall not be required to effect any split-up,
combination or exchange which will result in the issuance of a Warrant entitling
the Warrantholder to purchase upon exercise a fraction of a share of Common
Stock or a fractional Warrant.
(c) TREATMENT OF WARRANTHOLDER
Prior to due presentment for registration of transfer of this Warrant, the
Company may deem and treat the Warrantholder as the absolute owner of this
Warrant (notwithstanding any notation of ownership or other writing hereon) for
all purposes and shall not be affected by any notice to the contrary.
SECTION 10. AMENDMENTS AND WAIVERS
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought.
16
<PAGE>
SECTION 11. SEVERABILITY
If one or more provisions of this Warrant are held to be unenforceable
under applicable law, such provisions shall be excluded from this Warrant, and
the balance of this Warrant shad be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
SECTION 12. GOVERNING LAW
This Warrant shall be governed by and construed under the laws of the State
of California without regard to conflict of law principles.
SECTION 13. HEADINGS
The headings in this Warrant are for purposes of reference only and shall
not limit or otherwise affect any of the terms hereof.
SECTION 14. BINDING EFFECT
This Warrant shall insure to the benefit of and shall be binding upon the
Company and the Warrantholder and their respective heirs, legal representatives,
successors and assigns.
SECTION 15. NO INCONSISTENT AGREEMENTS
The Company will not on or after the date of this Warrant enter into any
agreement with respect to its securities which is inconsistent with the rights
granted to the Warrantholder in this Warrant or otherwise conflicts with the
provisions hereof. The rights granted to the Warrantholder hereunder do not in
any way conflict with and are not inconsistent with the rights granted to
holders of the Company's securities under any other agreements.
SECTION 16. ENTIRE AGREEMENT
This Warrant is intended by the parties as a final expression of their
agreement and intended to be a complete and exclusive statement of the agreement
and understanding of the parties hereto in respect of the subject matter
contained herein. This Warrant supersedes all prior agreements and
understandings between the parties with respect to such subject matter (other
than warrants previously issued by the Company to the Warrantholder).
SECTION 17. ATTORNEYS' FEES
In any action or proceeding brought to enforce any provisions of this
Warrant, or where any provisions hereof is validly asserted as a defense, the
successful party shall be entitled to recover reasonable attorneys' fees and
disbursements in addition to its costs and expenses and any other available
remedy.
17
<PAGE>
IN WITNESS WHEREOF, the Company and the Warrantholder have executed this
Warrant on and as of the day and year first above written.
Life Medical Sciences, Inc.,
a Delaware corporation
/s/ Herbert Moskowitz
By:____________________________________
Dr. Herbert Moskowitz
Chairman of the Board of Directors
Attest:
_____________________________
(Corporate Secretary)
Wedbush Morgan Securities Inc.
By:/s/ Peter H. Griffith
------------------------------------
Peter H. Griffith
Managing Director
<PAGE>
EXHIBIT 10.49
LIFE MEDICAL SCIENCES, INC.
STOCK OPTION AGREEMENT
UNDER THE AMENDED AND RESTATED 1992 STOCK OPTION PLAN
(NON-QUALIFIED STOCK OPTION)
AGREEMENT entered into as of the date set forth on the signature page
hereto by and between Life Medical Sciences, Inc., a Delaware corporation, with
a principal place of business at 379 Thornall Street, Edison, New Jersey
(together with its subsidiaries, if any, the "Company"), and the undersigned
(the "Optionee").
WHEREAS, the Company desires to grant to the Optionee a non-qualified stock
option under the Company's Amended and Restated 1992 Stock Option Plan (the
"Plan") to acquire shares of the Company's Common Stock, $.001 par value (the
"Shares"); and
WHEREAS, the Plan provides that each option is to be evidenced by an option
agreement, setting forth the terms and conditions of the option.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
and agreements contained herein, the Company and the Optionee hereby agree as
follows:
1. Grant of Option.
---------------
The Company hereby grants to the Optionee a non-qualified stock option
under the Plan (the "Option") to purchase all or any part of an aggregate of the
number of Shares set forth on the signature page to this Agreement on the terms
and conditions hereinafter set forth. The Option shall NOT be treated as an
incentive stock option under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
2. Purchase Price.
--------------
The purchase price ("Purchase Price") for the Shares covered by the Option
shall be the dollar amount per share set forth on the signature page to this
Agreement.
3. Time of Vesting and Exercise of Option.
--------------------------------------
Subject to Section 4 hereof, the Option shall vest and become
exercisable on the dates and as to the installment amounts set forth on the
signature page to this Agreement. To the extent the Option (or any portion
thereof) is not exercised by the Optionee when it becomes exercisable, it shall
not expire, but shall be carried forward and shall be exercisable, on a
cumulative basis, until the Expiration Date (as hereinafter defined) or until
earlier termination as hereinafter provided.
<PAGE>
4. Term; Extent of Exercisability.
------------------------------
(a) Term.
(i) The Option shall expire as to each installment amount on the
date set forth next to each such amount on the signature page to
this Agreement (the "Expiration Date"), subject to earlier
termination as herein provided.
(ii) Except as otherwise provided in this Section 4, if the
Optionee ceases to perform services for the Company, the Option
shall terminate on the earlier of the last day of the third month
or ninety days after the date such Optionee ceases to perform
services for the Company, or on the date on which the Option
expires by its terms, whichever occurs first.
(iii) If such termination to perform services is because of
dismissal for cause or because the Optionee is in breach of any
employment agreement, such Option will terminate on the date the
Optionee ceases to perform services for the Company.
(iv) If such termination to perform services is because the
Optionee has become permanently disabled (within the meaning of
Section 22(e)(3) of the Code), such Option shall terminate on the
last day of the twelfth month from the date such Optionee ceases
to perform services for the Company, or on the date on which the
Option expires by its terms, whichever occurs first.
(v) In the event of the death of the Optionee, the Option granted
to such Optionee shall terminate on the last day of the twelfth
month from the date of death, or on the date on which the Option
expires by its terms, whichever occurs first.
(b) Extent of Exercisability.
------------------------
(i) Except as provided below, if the Optionee ceases to perform
services for the Company, the Option shall be exercisable only to
the extent that the right to purchase Shares under such Option
has accrued and is in effect on the date such Optionee ceases to
perform services for the Company.
(ii) If the Optionee ceases to perform services for the Company
because he or she has become permanently disabled (within the
meaning of Section 22(e)(3) of the Code), the Option shall be
exercisable to the full number of Shares covered by such Option.
-2-
<PAGE>
(iii) In the event of the death of the Optionee, the Option may
be exer cised with respect to the full number of Shares covered
thereby whether or not under the provisions of Section 3 hereof
the Optionee was entitled to do so at the date of his or her
death, by the estate of such Optionee, or by any person or
persons who acquired the right to exercise such Option by bequest
or inheritance or by reason of the death of such Optionee.
5. Manner of Exercise of Option.
----------------------------
(a) To the extent that the right to exercise the Option has accrued
and is in effect, the Option may be exercised in full or in part by
giving written notice to the Company stating the number of Shares as
to which the Option is being exercised and accompanied by payment in
full for such Shares. No partial exercise may be made for less than
one hundred (100) full Shares of Common Stock. Payment shall be made
in accordance with the terms of the Plan. Upon such exercise, delivery
of a certificate for paid-up, non-assessable Shares shall be made at
the principal office of the Company to the person exercising the
Option, not less than thirty (30) and not more than ninety (90) days
from the date of receipt of the notice by the Company.
(b) The Company shall at all times during the term of the Option
reserve and keep available such number of Shares of its Common Stock
as will be sufficient to satisfy the requirements of the Option.
6. Non-Transferability.
-------------------
The right of the Optionee to exercise the Option shall not be
assignable or trans ferable by the Optionee otherwise than by will or the laws
or descent and distribution or pursuant to a domestic relations order as defined
in the Code or Title 1 of the Employee Retirement Income Security Act or the
rules thereunder, and the Option may be exercised during the lifetime of the
Optionee only by him or her. The Option shall be null and void and without
effect upon the bankruptcy of the Optionee or upon any attempted assignment or
transfer, except as herein provided, including without limitation any purported
assignment, whether voluntary or by operation of law, pledge, hypothecation or
other disposition contrary to the provisions hereof, or levy of execution,
attachment, trustee process or similar process, whether legal or equitable, upon
the Option.
7. Representation Letter and Investment Legend.
-------------------------------------------
In the event that for any reason the Shares to be issued upon exercise
of the Option shall not be effectively registered under the Securities Act of
1933 (" 1933 Act"), upon any date on which the Option is exercised in whole or
in part, the person exercising the Option shall give a written representation to
the Company in the form attached hereto as Exhibit 1 and the Company shall place
an "investment legend", so-called, as described in Exhibit 1, upon any
certificate for the Shares issued by reason of such exercise.
-3-
<PAGE>
8. Adjustments on Changes in Capitalization.
----------------------------------------
Adjustments on changes in capitalization and the like shall be made in
accordance with the Plan, as in effect on the date of this Option.
9. No Special Employment Rights.
----------------------------
The provisions of this Section 9 are applicable only to Optionee's who
are employ ees of the Company. Nothing contained in the Plan or this Option
shall be construed or deemed by any person under any circumstances to bind the
Company to continue the employment of the Optionee for the period within which
this Option may be exercised. However, during the period of the Optionee's
employment, the Optionee shall render diligently and faithfully the services
which are assigned to the Optionee from time to time by the Board of Directors
or by the executive officers of the Company and shall at no time take any action
which directly or indirectly would be inconsistent with the best interests of
the Company.
10. Rights as a Stockholder.
-----------------------
The Optionee shall have no rights as a stockholder with respect to any
Shares which may be purchased by exercise of this Option unless and until a
certificate or certificates representing such Shares are duly issued and
delivered to the Optionee. Except as otherwise expressly provided in the Plan,
no adjustment shall be made for dividends or other rights for which the record
date is prior to the date such stock certificate is issued.
11. Withholding Taxes.
-----------------
Whenever Shares are to be issued upon exercise of this Option, the
Company shall have the right to require the Optionee to remit to the Company an
amount sufficient to satisfy all Federal, state and local withholding tax
requirements prior to the delivery of any certificate or certificates for the
Shares. The Company may agree to permit the Optionee to authorize the Company to
withhold Shares of Common Stock purchased upon exercise of the Option to satisfy
the above-mentioned withholding requirement; provided, however, no such
agreement may be made by an Optionee who is an officer or director within the
meaning of Section 16 of the Securities Exchange Act of 1934, as amended, except
pursuant to a standing election to so withhold Shares of Common Stock purchased
upon exercise of the Option, such election to be made in the form set forth in
Exhibit 2 hereto and to be made not less than six (6) months prior to such
exercise. Such election may be revoked only upon providing six (6) months prior
written notice to the Company.
12. Plan Provisions Control.
-----------------------
In the event of any inconsistency between the provisions of this
Agreement and the provisions of the Plan, the inconsistent provision(s) of this
Agreement shall be superseded by the Plan provision(s) to the extent necessary
to reconcile the inconsistency.
-4-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed, and the Optionee has hereunto set his or her hand, all as of the 5TH
day of MARCH, 1997 .
LIFE MEDICAL SCIENCES, INC.
By: /s/ Herbert Moskowitz
-------------------------------------------------
Title: Chairman of the Board
OPTIONEE
Print Name: Edward Celano
-----------------------------------------
Sign Name: /s/ Edward Celano
-------------------------------------------
Address:
___________________________________________
Social Security Number:
______________________________
OPTION INFORMATION
------------------
TOTAL NUMBER OF SHARES UNDERLYING OPTION: 50,000
PURCHASE PRICE PER SHARE: $ 4.4375
VESTING & EXPIRATION SCHEDULE
-----------------------------
VESTING DATE NUMBER OF SHARES EXPIRATION DATE
- --------------- ---------------- ---------------
March 5, 1997 16,667 March 5, 2002
March 5, 1998 16,667 March 5, 2003
March 5, 1999 16,666 March 5, 2004
[ NOTE: THE GRANTING OF THESE OPTIONS IS CONTINGENT ON THE SHAREHOLDERS OF LIFE
MEDICAL SCIENCES, INC. APPROVING THE INCREASE IN SHARES AVAILABLE FOR GRANT
UNDER THE 1992 STOCK OPTION PLAN AT THE NEXT ANNUAL MEETING OF SHAREHOLDERS
SCHEDULED FOR MAY 29,1997.]
-5-
<PAGE>
EXHIBIT 1
TO STOCK OPTION AGREEMENT
-------------------------
Gentlemen:
In connection with the exercise by me of an option to purchase shares of
Common Stock, $.001 par value, of Life Medical Sciences, Inc. (the "Company"), I
hereby acknowledge that I have been informed as follows:
1. The shares of Common Stock of the Company to be issued to me pursuant
to the exercise of said option (the "Shares") have not been registered under the
Securities Act of 1933, as amended (the "Securities Act") and, accordingly, must
be held indefinitely unless the Shares are subsequently registered under the
Securities Act, or an exemption from such registration is available.
2. Routine sales of securities made in reliance upon Rule 144 under the
Securities Act can be made only after the holding period provided by that Rule
has been satisfied, and, in any sale to which that Rule is not applicable,
registration or compliance with some other exemption under the Securities Act
will be required.
3. The availability of Rule 144 is dependent upon adequate current public
information with respect to the Company being available and, at the time that I
may desire to make a sale pursuant to the Rule, the Company may neither wish nor
be able to comply with such requirement.
In consideration of the issuance of certificates for the Shares to me, I
hereby represent and warrant that I am acquiring the Shares for my own account
for investment, and that I will not sell, pledge or transfer the Shares in the
absence of an effective registration statement covering the same, except as
permitted by the provisions of Rule 144, if applicable, or some other applicable
exemption under the Securities Act. In view of this representation and warranty,
I agree that there may be affixed to the certificates for the Shares to be
issued to me, and to all certificates issued hereafter representing the Shares
(until in the opinion of counsel, which opinion must be reasonably satisfactory
in form and substance to counsel for the Company, it is no longer necessary or
required) a legend as follows:
"The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and were acquired by the
registered holder pursuant to a representation and warranty that such holder was
acquiring the Shares for his own account and for investment, with no intention
of transfer or disposition of the same in violation of the registration
requirements of that Act. These securities may not be sold, pledged, or
transferred in the absence of an effective registration statement under such
Act, or an opinion of counsel, which opinion is reasonably satisfactory to
counsel to the Company, to the effect that registration is not required under
such Act."
I further agree that the Company may place a stop transfer order with its
transfer agent,
-6-
<PAGE>
prohibiting the transfer of the Shares, so long as the legend remains on the
certificates representing the Shares.
Very truly yours,
Dated: _____________
-7-
<PAGE>
EXHIBIT 2
TO STOCK OPTION AGREEMENT
-------------------------
Gentlemen:
The undersigned Optionee hereby elects and agrees that, whenever the
undersigned exercises a stock option (including any options which now or may
hereafter be granted), Life Medical Sciences, Inc. (the "Company") shall
withhold from that exercise such number of Shares equal in value to the federal
and state withholding taxes due upon such exercise. The undersigned further
acknowledges and agrees that this election may not be revoked without six (6)
months' prior written notice to the Company.
OPTIONEE:
--------------------------------------
(Signature)
--------------------------------------
(Print Name)
--------------------------------------
-8-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration No. 333-03895) of our report dated January
28, 1997 (February 7, 1997 with respect to Note I) on the financial statements
included in the 1996 annual report on Form 10-K of Life Medical Sciences, Inc.
Richard A. Eisner & Company, LLP.
New York, New York
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 3,827,530 11,235,976
<SECURITIES> 0 3,041,993
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,847,089 14,589,299
<PP&E> 138,527 242,179
<DEPRECIATION> 41,957 59,830
<TOTAL-ASSETS> 3,964,981 14,800,838
<CURRENT-LIABILITIES> 190,541 467,510
<BONDS> 0 0
0 0
0 0
<COMMON> 5,422 7,915
<OTHER-SE> 3,095,558 13,786,408
<TOTAL-LIABILITY-AND-EQUITY> 3,964,981 14,800,838
<SALES> 0 0
<TOTAL-REVENUES> 245,488 154,646
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 3,225,493 4,521,820
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 504 2,915
<INCOME-PRETAX> (2,797,296) (3,830,394)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,797,296) (3,830,394)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,797,296) (3,830,394)
<EPS-PRIMARY> (.58) (.55)
<EPS-DILUTED> 0 0
</TABLE>
