<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended September 30, 1998.
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period from _______________ to
______________.
Commission file number 0-27976.
GalaGen Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1719104
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1275 Red Fox Road
Arden Hills, Minnesota 55112
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(Address of principal executive offices) (Zip Code)
(634) 643-4233
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(Registrant's telephone number, including area code)
4001 Lexington Ave. N., Arden Hills, MN 55126
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(Former name, former address and former fiscal year, if changed since last
report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 par
value--8,341,619 shares as of October 31, 1998.
1
<PAGE>
INDEX
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1998 and December 31, 1997....................3
Statements of Operations - Three and Nine months ended September 30,
1998 and September 30, 1997 and for the period
November 17, 1987 (inception) through September 30, 1998.....................4
Statements of Cash Flows - Nine months ended September 30, 1998 and
September 30, 1997 and for the period
November 17, 1987 (inception) through September 30, 1998.....................5
Notes to Financial Statements................................................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.............................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................15
PART II. OTHER INFORMATION
Item 4. Changes in Securities and Use of Proceeds...................................16
Item 6. Exhibits and Reports on Form 8-K............................................16
SIGNATURES............................................................................22
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 2,608,911 $ 155,908
Available-for-sale securities ..................................... 2,383,439 7,511,619
Prepaid expenses .................................................. 87,993 196,672
------------ ------------
Total current assets ............................................... 5,080,343 7,864,199
Property, plant and equipment ...................................... 585,133 1,869,974
Less accumulated depreciation ..................................... (243,293) (363,355)
------------ ------------
341,840 1,506,619
Deferred expenses .................................................. 124,778 158,953
------------ ------------
Total assets ....................................................... $ 5,546,961 $ 9,529,771
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 585,864 $ 559,498
Note payable ....................................................... -- 238,250
Accrued expenses ................................................... 100,365 38,129
------------ ------------
Total current liabilities ........................................... 686,229 835,877
Commitments
Convertible notes, net of discount .................................. 426,999 1,071,818
Note payable, long term portion ..................................... 923,998
Other long-term liabilities ......................................... 45,000 45,000
Stockholders' equity:
Preferred Stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - none ........................... -- --
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued and outstanding shares - 8,308,619 at September 30, 1998;
7,234,974 at December 31, 1997.................................. 83,086 72,350
Additional paid-in capital ......................................... 60,957,206 59,669,586
Deficit accumulated during the development stage ................... (56,520,805) (52,819,054)
Deferred compensation .............................................. (130,754) (269,804)
------------ ------------
Total stockholders' equity ......................................... 4,388,733 6,653,078
------------ ------------
Total liabilities and stockholders' equity .......................... $ 5,546,961 $ 9,529,771
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
Note: The balance sheet at December 31, 1997 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
3
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GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Period from
Three months Ended Nine months Ended November 17,1987
September 30 September 30 (inception) to
---------------------------------------------------------- September 30,
1998 1997 1998 1997 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales...................................... $ 160,890 $ - $ 173,699 $ - 1,623,292
Product royalties.................................. - - - - 62,747
Research and development revenues.................. - - - - 396,350
------------- ------------- ------------- ------------ -------------
160,890 - 173,699 - 2,082,389
Operating costs and expenses:
Cost of goods sold................................. 60,447 - 66,852 - 3,535,563
Research and development........................... 235,736 902,283 1,654,245 3,057,849 28,785,598
Selling, general and administrative................ 675,765 436,673 1,896,832 1,545,768 17,911,428
------------- ------------- ------------- ------------- -------------
971,948 1,338,956 3,617,929 4,603,617 50,232,589
------------- ------------- ------------- ------------- -------------
Operating loss...................................... (811,058) (1,338,956) (3,444,230) (4,603,617) (48,150,200)
Interest income..................................... 42,928 96,664 235,204 327,831 1,440,878
Interest expense.................................... (110,751) (40,651) (492,725) (40,651) (3,120,060)
---------------------------- -------------- -------------- --------------
Net loss before extraordinary gain.................. (878,881) (1,282,943) (3,701,751) (4,316,437) (49,829,382)
Extraordinary gain on extinguishment of debt........ - - - - 605,421
------------- ------------- ------------- ------------ -------------
Net loss for the period and deficit accumulated
during the development stage....................... (878,881) (1,282,943) (3,701,751) (4,316,437) (49,223,961)
Less preferred stock dividends...................... - - - - (7,296,844)
------------- ------------- ------------- ------------- --------------
Net loss applicable to common stockholders.......... $ (878,881) $(1,282,943) $(3,701,751) $(4,316,437) $(56,520,805)
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
Net loss per share applicable to common stockholders
Basic and Diluted................................. $ (0.11) $ (0.18) $ (0.46) $ (0.60) $ (16.74)
Weighted average number of common shares outstanding
Basic and Diluted................................. 8,284,673 7,186,180 8,115,654 7,173,078 3,375,662
</TABLE>
See accompanying notes.
4
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GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Period from
November 17, 1987
Nine months Ended September 30 (inception) to
---------------------------------- September 30,
1998 1997 1998
------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................... $ (3,701,751) $ (4,316,437) $ (56,520,805)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization......................... 845,004 384,824 3,235,761
Preferred stock dividend ............................. - - 7,296,844
Warrants issued, net.................................. - - 907,064
Extraordinary gain on extinguishment of debt.......... - - (605,421)
Equity/debt issued for services....................... - 3,953 2,990,615
Changes in operating assets and liabilities........... 141,174 (1,303,831) 1,492,292
--------------- ---------------- ---------------
Net cash used in operating activities.................. (2,715,573) (5,231,491) (41,203,650)
---------------- ---------------- ----------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment.............. (34,178) (273,391) (3,757,067)
Change in available-for-sale securities, net........... 5,128,180 2,413,890 (2,383,439)
--------------- --------------- ----------------
Net cash provided by (used in) investing activities... 5,094,002 2,140,499 (6,140,506)
--------------- --------------- ----------------
FINANCING ACTIVITIES:
Proceeds from sale of stock, net of offering costs..... 214,304 126,895 32,556,407
Proceeds/payment from/on note payable.................. (139,730) 1,214,625 17,396,660
--------------- -------------- ---------------
Net cash provided by financing activities.............. 74,574 1,341,520 49,953,067
-------------- -------------- ---------------
Increase (decrease) in cash............................ 2,453,003 (1,749,472) 2,608,911
Cash and cash equivalents at beginning of period....... 155,908 3,869,549 -
--------------- --------------- ---------------
Cash and cash equivalents at end of period............. $ 2,608,911 $ 2,120,077 $ 2,608,911
--------------- --------------- ---------------
--------------- --------------- ---------------
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Discount valuation for convertible debentures.......... $ - $ - $ 500,182
Valuation of issued options and warrants............... 62,500 33,333 350,083
Deferred compensation recognized for employee options.. - - 1,657,000
Deferred compensation adjustment for canceled options.. - - 297,000
Conversion of note to operating lease.................. 1,047,904 - 1,047,904
Conversion of convertible promissory notes plus related
accrued interest, net of financing costs........... 1,021,552 - 9,886,377
</TABLE>
See accompanying notes.
5
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of normal, recurring accruals) considered necessary
for fair presentation have been included. Operating results for the nine
months ended September 30, 1998, are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. These
financial statements should be read in conjunction with the audited
financial statements and accompanying notes contained in the Annual Report
of GalaGen Inc. (the "Company") on Form 10-K for the fiscal year ended
December 31, 1997.
2. CASH AND CASH EQUIVALENTS
Cash equivalents include short-term highly liquid investments
purchased at cost, which approximate market, with original maturities of
three months or less.
3. INVESTMENTS
Investments in debt securities with a remaining maturity of more
than three months at the date of purchase are classified as
available-for-sale securities. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates
such designation as of each balance sheet date. The book value of the
investments approximates their estimated market value. As of September 30,
1998 the Company's investments were all U.S. Government agency securities
with an estimated market value of $2,383,439. All investments have a
contractual maturity of one year or less.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation
and amortization are provided for on the straight line method.
5. NET LOSS PER SHARE
Basic and diluted net loss per share is presented in conformance
with Financial Accounting Standards Board Statement No. 128.
6. COMPREHENSIVE INCOME
As of January 1, 1998 the Company adopted Statement No. 130,
Reporting Comprehensive Income. Statement No. 130 established new rules for
the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's net
income or shareholder's equity.
7. CONVERTIBLE DEBENTURES
In November 1997, the Company raised $1,500,000 through the
private placement sale of 6% convertible debentures (the "Debentures") to
three institutional investors pursuant to Regulation D under the Securities
Act of 1933. The principal and interest of the Debentures can be converted
into shares of the Company's common stock at 82.5% of the lowest closing
bid price of the Company's common stock three days prior to conversion.
One-third of the Debentures can convert to common stock upon the effective
date of
6
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GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
7. CONVERTIBLE DEBENTURES - continued
registration, one-third after five months from the closing date and the
remaining one third twelve months after the closing date. An aggregate
maximum of 1,400,000 discounted shares of common stock (the "Discounted
Shares") can be issued upon the conversion of the Debentures, with each
investor owning at any given time a maximum of 4.99% of the then issued and
outstanding shares of common stock. If there remains any unconverted
principal and accrued interest due to all the Discounted Shares being
issued, the Company has the obligation to repay the investors, in the
aggregate, a maximum principal of $500,000. The Debentures automatically
convert into the Discounted Shares eighteen months from the closing date.
Five-year warrants were issued to the investors to purchase, in the
aggregate, 200,000 shares of common stock at $2.3375 per share which is
110% of the market value of the common stock on the closing date. The value
of the warrants plus the value of the discount of the Discounted Shares was
$500,182, which the Company is amortizing to interest expense over the term
of the Debentures. A deferred expense was recorded for $144,467, which
represents costs associated with closing the Debentures. These deferred
expenses are being amortized until the Debentures are converted into
Discounted Shares. As of September 30, 1998, $1,000,000 of Debenture
principal plus accrued interest was converted into 977,848 shares of common
stock. The net carrying value of the Debentures approximates fair market
value.
8. NOTE PAYABLE
In June 1997, the Company established a note payable with
Transamerica Business Credit Corporation to purchase certain lab equipment,
computer equipment and tenant improvements. In June 1998, the Company
converted the note payable into an operating lease in accordance with
Financial Accounting Standards Board Statement 13 and as such the
applicable assets and the related note payable have been eliminated. At the
time of the conversion to an operating lease, the net book value of the
associated assets approximated the note payable balance. Payment schedules
and other terms of the operating lease are similar to the terms of the note
payable.
9. ASSET PURCHASE
In September 1998, the Company entered into an asset purchase
agreement with Nutrition Medical, Inc. ("NMI") to acquire NMI's developed
line of critical care enteral nutrition products and formulas. The asset
purchase agreement is subject to NMI's shareholder approval that is
expected in late 1998. According to the terms of the agreement, the Company
will purchase substantially all of NMI's critical care enteral nutrition
products and formulas, all related inventory and certain other assets
including the existing customer base of hospitals and home healthcare
facilities. Total consideration for the transaction is approximately
$800,000, comprised of $175,000 in cash and $625,000 of the Company's
common stock at a share price to be determined. In addition, the two
companies have entered into a marketing agreement that provides GalaGen the
rights to commence selling the purchased products as of September 1, 1998.
The terms of the interim marketing agreement will terminate upon the
earlier of the purchase closing or December 31, 1998. The Company commenced
recording revenue in September 1998.
7
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
10. SUBSEQUENT EVENT
In October 1998, the Company entered into a collaboration and
license agreement and a manufacturing and supply agreement with
Wyeth-Ayerst, a division of American Home Products. The two companies will
develop and commercialize a proprietary ingredient with unique
antibacterial properties for use in infant formula and other nutritional
products. The companies will collaborate during the research and
development phase of the product, which will be funded by Wyeth-Ayerst
through payments to the Company. Additionally, Wyeth-Ayerst will have
financial and oversight responsibilities for all clinical trials and
regulatory compliance related to the use of the ingredient in infant
formula products. Wyeth-Ayerst will have worldwide rights to the use of the
ingredient in its infant formula and other nutritional products. The
Company will retain certain rights for the manufacture, product development
and licensing of the ingredient in non-infant formula nutritional products.
The Company will also receive licensing and milestone payments.
8
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information presented in this Item contains forward-looking
statements within the meaning of the safe harbor provisions of Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Such statements are subject to risks and uncertainties, including those
discussed under "Risk Factors" below, that could cause actual results to
differ materially from those projected. Because actual results may differ,
readers are cautioned not to place undue reliance on these forward-looking
statements. Certain forward-looking statements are indicated below by an
asterisk.
GENERAL
GalaGen's mission is to develop a portfolio of proprietary
consumer and clinical nutritional products that enhance the body's immune
function, with an emphasis on products that target the gastrointestinal
tract. These products will target needs of both consumers and healthcare
professionals. In developing its portfolio of nutritional products, GalaGen
is utilizing its expertise in its platform antibody technology to
incorporate its Proventra-TM- Brand Natural Immune Components
("Proventra-TM-") into these products. Antibodies and other active immune
enhancing components are food proteins that are derived from the milk
collected in the first few milkings of a dairy cow after its calf is born
and are branded by GalaGen under the name Proventra. These antibodies and
other active immune enhancing components are found in dairy foods that are
already widely consumed. Using its proprietary procedures, the Company has
produced antibodies that target specific pathogens infecting the human
gastrointestinal tract, including bacteria and their toxins, parasites,
fungi and viruses.
RECENT DEVELOPMENTS
In December 1997, the Company introduced Basics Plus, a dietary
supplement product, in conjunction with its marketing and manufacturing
partner, Lifeway Foods, Inc. Basics Plus is the first product to emerge
from the collaboration with Lifeway Foods, Inc. and contains active
beneficial kefir cultures and Proventra-TM-.
In March 1998, the Company and Land O'Lakes, Inc. ("Land
O'Lakes"), the large food and agricultural cooperative from which GalaGen
was spun-out in 1992, signed an amended and restated license agreement (the
"Restated License") under which the Company has significantly broadened its
rights to develop and market functional foods, which include nutritional
products. Under the Restated License, the Company can use, improve,
exploit, license or share existing Procor Technologies, Inc. (the Company's
predecessor, "Procor") technology, Procor technology improvements and new
technologies, as defined, in all areas of functional foods except under
certain "reserved food product" and "first refusal food product"
categories, as defined. If the Company intends to engage in manufacturing
or marketing any "first refusal food product", the Company must give Land
O'Lakes notice of its intent, in which case Land O'Lakes can negotiate with
the Company, in good faith and within a defined period of time, to
undertake any part of the manufacturing or marketing areas. If the Company
intends to engage in manufacturing or marketing any "reserved food
product", the Company must give Land O'Lakes notice of its intent and must
work only with Land O'Lakes to undertake the manufacturing or marketing of
such products.
In May 1998, the Company announced that it has entered into a
consumer product development agreement with Land O'Lakes. Under terms of
the agreement, the two companies will collaborate on the development of
yogurt products containing Proventra-TM-. GalaGen will supply its
Proventra-TM-, and possibly other active components, for this product.* The
Company expects to be in regional test markets with this yogurt in 1999,
with Land O'Lakes providing the product development, manufacturing, sales,
distribution and marketing of the product.* From this collaboration with
Land O'Lakes, the Company expects to incur increased marketing research
expenses and increased marketing consulting expenses.*
In September 1998, the Company entered into an asset purchase
agreement with Nutrition Medical, Inc. ("NMI") to acquire NMI's developed
line of critical care enteral nutrition products and formulas. The products
were recently introduced by NMI and are being sold to the hospital and home
healthcare industries. The
9
<PAGE>
asset purchase agreement is subject to NMI's shareholder approval that is
expected in late 1998.* According to the terms of the agreement, GalaGen
will purchase substantially all of NMI's critical care enteral nutrition
products and formulas, all related inventory and certain other assets
including the existing customer base of over 500 hospitals and home
healthcare facilities. Total consideration for the transaction is
$800,000, comprised of $175,000 cash and $625,000 of the Company's common
stock at a share price to be determined. In addition, the two companies
have entered into a marketing agreement that provides GalaGen the rights
to commence selling the purchased products September 1, 1998. The terms of
the interim marketing agreement will terminate upon the earlier of the
purchase closing or December 31, 1998. The sales and marketing group from
NMI joined the Company to provide continuity in operations and an
essential marketing base. Sales of the products for NMI were on track to
generate approximately $1.1 million in 1998.* The Company will continue to
have all products associated with this asset purchase manufactured by
outside parties.
In conjunction with the Company's consumer and clinical product
development efforts described above, the Company expects to incur further
expenses for product development, personnel, clinical marketing studies,
marketing research and outside legal counsel in 1998 and 1999.*
In October 1998, the Company entered into a collaboration and
license agreement and a manufacturing and supply agreement with
Wyeth-Ayerst, a division of American Home Products. The two companies will
develop and commercialize a proprietary ingredient with unique
antibacterial properties for use in infant formula and other nutritional
products. The companies will collaborate during the research and
development phase of the product, which will be funded by Wyeth-Ayerst.
Additionally, Wyeth-Ayerst will have financial and oversight
responsibilities for all clinical trials and regulatory compliance related
to the use of the ingredient in infant formula products. Wyeth-Ayerst will
have worldwide rights to the use of the ingredient in its infant formula
and other nutritional products. GalaGen will retain certain rights for the
manufacture, product development and licensing of the ingredient in
non-infant formula nutritional products. GalaGen will also receive
licensing and milestone payments.
In May 1998, the Company announced that it would limit
further spending on development of pharmaceutical products, believing that
applying its technology and resources toward nutritional product
development will provide superior shareholder value.*
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
GENERAL. The net loss applicable to common stockholders decreased
$404,062 or 31.5%, for the three months ended September 30, 1998 to
$878,881 from $1,282,943 for the same period in 1997. The decrease was
due primarily to decreased research and development expense, including
the receipt of a fee of $250,000 in September 1998 relating to the
re-licensing of previously licensed technology, offset by increased
selling, general and administrative expense. As described above, the
Company entered into a purchase agreement and a marketing agreement with
NMI regarding critical care enteral nutrition products. As part of these
transactions, the Company commenced selling critical care enteral
nutrition products beginning September 1, 1998. The sales and marketing
group from NMI has joined the Company, effective September 1, 1998, to
provide continuity in the marketing and selling operations. The
marketing agreement will remain effective until the earlier of the
purchase transaction being approved by NMI shareholders, which is
expected in late 1998, or December 31, 1998. During this interim
marketing phase, the Company is purchasing inventory from NMI, at NMI's
cost, and paying NMI certain administrative expenses, depending upon the
sales volume that the Company generates, and certain fixed operating
expenses. The Company expects that upon the closing of the purchase
agreement, the ongoing selling, general and administrative expenses
associated with these products will decrease.*
10
<PAGE>
REVENUES. For the three months ended September 30, 1998 revenues
of $160,890 consisted of sales of the Company's recently acquired critical
care enteral nutrition products and formulas or approximately $141,000,
and sales of the Company's Proventra-TM- for use in Basics Plus of
approximately $20,000.
COST OF GOODS SOLD. For the three months ended September 30, 1998,
cost of goods sold were $60,447, which consisted of approximately $50,000
relating to the critical care enteral nutrition products and $10,000
relating to Proventra-TM- for use in Basics Plus.
RESEARCH AND DEVELOPMENT EXPENSES. Expenses for research and
development decreased $666,547, or 73.9%, to $235,736 for the three
months ended September 30, 1998 from $902,283 for the three months ended
September 30, 1997. The decrease was due primarily to a fee of $250,000
received in September 1998 relating to the re-licensing of previously
licensed technology which was netted against research and development
expense. In addition, personnel and related expense decreased
approximately $246,000, clinical trial expenses associated with the
Company's terminated pharmaceutical products decreased approximately
$141,000 and other pharmaceutical research related expenses decreased
approximately $30,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $239,092, or 54.8%, to $675,765 for the
three months ended September 30, 1998 from $436,673 for the same period in
1997. The increase was due to increased marketing expenses of approximately
$176,000 associated with the Company's consumer product development,
increased critical care nutrition sales personnel expenses of approximately
$43,000 and increased administrative and operating expenses of
approximately $20,000 associated with the Company's interim marketing
agreement with NMI.
INTEREST INCOME. Interest income decreased to $42,928 for the three
months ended September 30, 1998 from $96,664 for the three months ended
September 30, 1997. This $53,736 decrease, or 55.6%, is attributable to the
Company's decreased level of investable funds.
INTEREST EXPENSE. Interest expense was $110,751 for the three months
ended September 30, 1998 and $40,651 for the three months ended September
30, 1997. The interest expense for the third quarter in 1998 consisted of
approximately $100,000 of amortization expense associated with the
Company's convertible debentures (see Note 7 in Notes to Financial
Statements), approximately $7,000 of accrued interest expense on the
outstanding convertible debentures and approximately $3,000 of other
interest expense. Interest expense in 1997 was due to the Company's note
payable (see Note 8 in Notes to Financial Statements) and the amortization
of the valuation of the associated warrants.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
GENERAL. The net loss applicable to common stockholders decreased
$614,686 or 14.2%, to $3,701,751 for the nine months ended September 30,
1998 from $4,316,437 for the nine months ended September 30, 1997. The
decrease was primarily due to decreased research and development expense
offset by increased interest expense and increased general and
administrative expense.
REVENUES. For the nine months ended September 30, 1998 revenues of
$173,699 consisted of sales of the Company's recently acquired critical
care enteral nutrition products and formulas of approximately $141,000, and
sales of the Company's Proventra-TM- for use in Basics Plus of
approximately $32,000.
COST OF GOODS SOLD. For the nine months ended September 30, 1998, cost
of goods sold were $66,852, which consisted of approximately $50,000
relating to the critical care enteral nutrition products and approximately
$17,000 relating to Proventra-TM- for use in Basics Plus.
RESEARCH AND DEVELOPMENT EXPENSES. Expenses for research and
development decreased $1,403,604, or 45.9%, to $1,654,245 for the nine
months ended September 30,1998 from $3,057,849 for the nine months ended
September 30, 1997. Approximately $585,000 of the decrease was due to
decreased associated personnel expenses, decreased development and
clinical trial expenses associated with a terminated pharmaceutical
product of approximately $514,000, a fee of $250,000 received in
September 1998 relating to the re-licensing of previously licensed
technology which was netted against research and development expense and
decreases in other pharmaceutical research, quality and procurement
expenses of approximately $212,000. These decreases were offset by
increased expenses associated with nutritional products of approximately
$87,000 and increased clinical expense for a terminated pharmaceutical
product of approximately $70,000.
11
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $351,064, or 22.7%, to $1,896,832 for the
nine months ended September 30, 1998 from $1,545,768 for the nine months
ended September 30, 1997. The increase was due to increased marketing
related expenses of approximately $307,000 associated with the Company's
consumer product development, increased administrative personnel expense of
approximately $59,000, increased critical care nutrition sales personnel
expense of approximately $43,000 and increased administrative and operating
expenses of approximately $20,000 associated with the Company's interim
marketing agreement with NMI offset by decreased outside service expenses
of approximately $78,000.
INTEREST INCOME. Interest income decreased to $235,204 for the nine
months ended September 30, 1998 from $327,831 for the nine months ended
September 30, 1997. This $92,627 decrease, or 28.3%, is attributable to the
decreased level of investable funds offset by a slightly increased earnings
rate.
INTEREST EXPENSE. Interest expense was $492,725 for the nine months
ended September 30, 1998 and $40,651 for the nine months ended September
30, 1997. The interest expense in 1998 consisted of approximately $356,000
of amortization expense associated with the Company's convertible
debentures (see Note 7 in Notes to Financial Statements), approximately
$37,000 of accrued interest expense on the outstanding convertible
debentures, approximately $97,000 of interest expense associated with the
Company's note payable (see Note 8 in Notes to Financial Statements) and
approximately $3,000 of other interest expense. Interest expense in 1997
was due to the Company's note payable (see Note 8 in Notes to Financial
Statements) and the amortization of the valuation of the associated
warrants.
LIQUIDITY AND CAPITAL RESOURCES
The Company was incorporated in March 1992. On July 24, 1992, Procor,
the Company's predecessor, was merged with and into the Company (the
"Procor-GalaGen Merger"). At the time of the Procor-GalaGen Merger, Procor
was a wholly-owned subsidiary of Land O'Lakes. Since the Company's
inception through September 30, 1998, investments in the Company have
totaled approximately $53.1 million, including approximately $7.1 million
of inter-company obligations payable to Land O'Lakes which were forgiven
and recorded as contributed capital at the time of the Procor-GalaGen
Merger, $17.9 million from the Company's initial public offering (the
"Offering"), after deducting underwriting discounts and offering expenses,
and approximately $28.1 million from private placements of equity and
convertible debt and from conversion of accrued interest on such debt and
the exercise of stock options and warrants. The Company has invested funds
received in the Offering and these private placements in investment-grade,
interest-bearing obligations.
Cash used in operating activities decreased by $2,515,918, or 48.1%,
for the nine months ended September 30, 1998 to $2,715,573 from $5,231,491
for the same period in 1997. Cash used in operations for the nine month
period ended September 30, 1998 went primarily to fund operating losses,
and for the same period in 1997 cash was used to fund operating losses and
for repayment of current liabilities.
For the nine months ended September 30, 1998 the Company redeemed
$5,128,180 of its available-for-sale securities. The Company invested
$34,178 in equipment related to the Company's pilot plant manufacturing
facility for the nine months ended September 30, 1998. For the same period
in 1997 the Company invested $210,036 in equipment and tenant improvements
related to the pilot plant manufacturing facility and $63,355 in lab
equipment, computer equipment and software and furniture used primarily to
support the Company's operations.
The Company anticipates that its existing resources and interest
thereon will be sufficient to satisfy its anticipated cash requirements
through approximately the third quarter of 1999.* The Company's working
capital and capital requirements will depend upon numerous factors,
including the progress of the Company's market research, product
development and ability to obtain partners with the appropriate
manufacturing, sales, distribution and marketing capabilities.* The
Company's capital requirements also will depend on the levels of resources
devoted to the development of manufacturing capabilities, technological
advances, the status of competitive products and the ability of the Company
to establish partners or strategic alliances to provide funding to the
Company for certain manufacturing, sales, product development and marketing
activities.*
12
<PAGE>
The Company expects to incur substantial additional product
development and other costs, including costs related to clinical studies
and marketing activities.* Capital expenditures may be necessary to obtain
licensure of the existing pilot plant facility and to establish additional
commercial scale manufacturing facilities.* The Company will need to raise
substantial additional funds for longer-term product development,
manufacturing and marketing activities that may be required in the future.
The Company's ability to continue funding its planned operations beyond the
third quarter of 1999 is dependent upon its ability to generate product
revenues or to obtain additional funds through equity or debt financing,
strategic alliances, license agreements or from other financing sources.* A
lack of adequate revenues or funding could eventually result in the
insolvency or bankruptcy of the Company.* At a minimum, if adequate funds
are not available, the Company may be required to delay or to eliminate
expenditures for certain of its product development efforts or to license
to third parties the rights to commercialize products or technologies that
the Company would otherwise seek to develop itself.* Because of the
Company's significant long-term capital requirements, it may seek to raise
funds when conditions are favorable, even if it does not have an immediate
need for such additional capital at such time.* If the Company has not
raised funds prior to such time as the Company's needs for funding become
immediate, the Company may be forced to raise funds when conditions are
unfavorable which could result in substantial dilution to the Company's
current stockholders.*
YEAR 2000 ISSUES
The Company began the process of assessing its risks associated with
Year 2000 date conversion in early 1998. This assessment included three
main areas: 1.) the business hardware and software applications, mainly
certain accounting applications and office network, 2.) the manufacturing
facilities and 3.) the external business partners or suppliers. After the
Company completed its assessment, it concluded that the Year 2000 risk was
focused mainly in the area of its business computer hardware and computer
software applications. The Company has addressed this issue by authorizing
the installation of new network server hardware and software, specifically
for its accounting applications and office network. This process has begun
and is anticipated to be completed in late 1998 with costs of approximately
$50,000. The Company has contracted this work out to outside parties. The
manufacturers of the hardware and software have guaranteed Year 2000
compliance for their products. In planning for the worst case scenarios, we
have addressed this issue in the plan. The Company believes that its
hardware and software systems for its business will be operational for Year
2000, but it may experience isolated incidences of non-compliance.* The
Company's manufacturing facility, completed and operational in mid 1997,
has been Year 2000 compliant since inception and no further work is
necessary. The Company has identified its key business partners and has
started to assess their readiness for Year 2000 and mitigate the risk to
the Company if they are not Year 2000 compliant. If certain vendors are
unable to deliver product on a timely basis due to their own Year 2000
issues, the Company anticipates that there will be other companies who will
be able to deliver product on a timely basis. The Company also recognizes
the risks if other key suppliers in utilities, communications, banking and
government are not ready for Year 2000, but does not believe the Company
will be materially adversely impacted.* The Company is currently in the
process of developing its contingency plans for each of its three main
areas and should have them completed in early 1999.*
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q for the third quarter ended September 30, 1998 contains
certain forward looking statements within the meaning of Section 21E of the
Exchange Act. Such forward-looking statements are based on the beliefs of
the Company's management as well as on assumptions made by and information
currently available to the Company at the time such statements were made.
When used in this Form 10-Q, the words "anticipate", "believe", "estimate",
"expect", "intend" and similar expressions, as they relate to the Company,
are intended to identify such forward-looking statements. Although the
Company believes these statements are reasonable, readers of this Form 10-Q
should be aware that actual results could differ materially from those
projected by such forward-looking statements as a result of the risk
factors listed below and set forth in the Company's Annual Report on Form
10-K for 1997 ("Form 10-K") under the caption "Risk Factors." Readers of
this Form 10-Q should consider carefully the factors listed below and under
the caption "Risk Factors" in the Company's Form 10-K, as well as the other
information and data contained in this Form 10-Q. The Company cautions the
reader, however, that such list of factors under the caption "Risk Factors"
in the Company's Form 10-K may not be exhaustive and that those or other
factors, many of which are outside of the Company's control, could have a
material adverse effect on the Company and its results of operations.
Factors that could cause actual results to differ include, without
limitation, the Company's ability to generate sufficient working capital
and obtain necessary financing, the Company's ability to form strategic
alliances with marketing and
13
<PAGE>
distribution partners, the Company's exposure to product liability claims,
consumers' perception of product safety and quality, the Company's
reliance on flawed market research, potential competitors that are larger
and financially stronger, the Company's ability to receive regulatory
approval for its products and the Company's ability to manufacture an
acceptable product on a commercial scale. All forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements set forth
hereunder and under the caption "Risk Factors" in the Company's Form 10-K.
RISK FACTORS
Certain statements made above, including those indicated by an
asterisk (some of which are summarized below), are forward-looking
statements that involve risks and uncertainties, and actual results may
differ. Factors that could cause actual results to differ include those
identified below.
EXPECTATION THAT A PRODUCT FROM THE LAND O'LAKES COLLABORATION WILL BE
IN A REGIONAL TEST MARKET IN 1999. The timing of product introduction into
test markets is dependent upon the Company's and Land O'Lakes ability to
successfully finalize market research, product development, product
manufacturing, marketing, sales and distribution activities or the ability
to provide the funding necessary to obtain those activities. The inability
of the Company to bring a product to regional test markets in 1999 could
have a material adverse effect on the Company.
IN CONJUNCTION WITH THE COMPANY'S CONSUMER AND CLINICAL PRODUCT
DEVELOPMENT EFFORTS DESCRIBED ABOVE, THE COMPANY EXPECTS TO INCUR FURTHER
EXPENSES FOR PRODUCT DEVELOPMENT, PERSONNEL, CLINICAL MARKETING STUDIES,
MARKETING RESEARCH AND OUTSIDE LEGAL COUNSEL IN 1998 AND 1999. The
Company's length of consumer product development and associated costs,
costs of any clinical marketing studies needed for the clinical products to
be acquired from NMI and any outside legal costs are dependent upon, to a
certain degree, results of the Company's market research for consumer and
clinical products and discussions with certain end users or purchasers of
the clinical products to be acquired from NMI. These may give the Company
certain indications of whom the Company's target customers may be, what
types of products they may desire and what clinical information is
necessary for effective marketing and sales.
THE PURCHASE OF NMI'S CRITICAL CARE ENTERAL NUTRITION PRODUCTS REQUIRE
NMI SHAREHOLDER APPROVAL. NMI'S current management believes that
shareholder approval will be obtained, but no assurances can be given that
such approval will be given. If NMI shareholder approval is not obtained,
the inability of the Company to continue marketing the products could have
a material adverse effect on the Company.
NMI'S CRITICAL CARE ENTERAL NUTRITION PRODUCTS WERE ON TRACK TO
GENERATE $1.1 MILLION IN REVENUES IN 1998. The Company's ability to
maintain this current level of sales revenues in 1999 and beyond or to
increase sales revenue will depend upon the ability of the Company to
successfully complete certain clinical marketing studies and the ability of
the sales and marketing group hired by the Company from NMI to effectively
execute its operating sales and marketing plans. The inability of the
Company to complete certain clinical marketing studies or the inability of
the sales and marketing personnel to effectively execute its operating
plans could have a material adverse effect on the Company.
THE COMPANY EXPECTS THAT UPON THE CLOSING OF THE PURCHASE AGREEMENT,
THE ONGOING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ASSOCIATED WITH
THESE PRODUCTS WILL DECREASE. There can be no assurances that the Company
will be able to effectively eliminate any expenses of certain
administrative and operational costs that may be associated with the
interim marketing agreement upon termination of the marketing agreement and
effective ongoing operations after the closing of the purchase agreement.
The inability of the Company to decrease such expenses could have a
material adverse effect on the Company.
ABILITY OF THE COMPANY TO SATISFY ITS ANTICIPATED CASH REQUIREMENTS
THROUGH APPROXIMATELY THE END OF THE THIRD QUARTER OF 1999. The Company's
working capital and capital requirements will depend upon numerous factors,
including the progress of the Company's product development programs and
the timing and cost of market research. The Company's capital requirements
also will depend on the levels of resources devoted to the development of
manufacturing and marketing capabilities, technological advances, the
status of competitive products and the ability of the Company to establish
strategic alliances to provide funding to the Company for certain
manufacturing, sales, product development and marketing activities. The
inability of the Company to satisfy its cash requirements could have a
material adverse effect on the Company.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
15
<PAGE>
PART II. OTHER INFORMATION
Item 2.
RECENT SALES OF UNREGISTERED SECURITIES
During the nine months ended September 30, 1998, the Company has isued the
following equity securities pursuant to exemptions from registration under the
Securities Act of 1933, as amended (the "Securities Act"). All such sales were
made in reliance upon the exemptions from registration provided under Sections
3(b) and 4(2) of the Securities Act.
1. In April 1998, the Company issued warrants to purchase 75,000 shares of
Common Stock, granted at the fair market value on the date of grant, for certain
marketing services to be rendered by Henry J. Cardello. The warrant is
immediately exercisable and expires in April 2003.
2. In April 1998, the Company issued warrants to purchase 25,000 shares of
Common Stock, granted at the fair market value on the date of grant, for certain
marketing services to be rendered by Henry J. Cardello. The warrant is
immediately exercisable and expires in April 2003.
3. In June 1998, the Company issued warrants to purchase 25,000 shares of
Common Stock, granted at the fair market value on the date of grant, for certain
marketing services to be rendered by Henry J. Cardello. The warrant is
immediately exercisable and expires in June 2003.
4. In November 1997, the Company raised $1,500,000 through the private
placement sale of 6% convertible debentures (the "Debentures") to CPR (USA)
INC., Libertyview Plus Fund and Libertyview Fund, LLC, all institutional
investors. The principal and interest of the Debentures can be converted into
shares of the Company's Common Stock. As of September 30, 1998, $1,000,000 of
the debentures, plus accrued interest of approximately $23,330, has been
converted into 977,848 shares of Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
3.2 Restated Certificate of Incorporation of the Company.(3) Incorporated By
Reference
3.4 Restated Bylaws of the Company.(1) Incorporated By
Reference
4.1 Specimen Common Stock Certificate.(1) Incorporated By
Reference
4.2 Warrant to purchase 13,541 shares of Common Stock of the Incorporated By
Company issued to Piper Jaffray Inc., dated January 26, Reference
1993.(1)
4.3 Warrant to purchase 20,312 shares of Common Stock of the Incorporated By
Company issued to Gus A. Chafoulias, dated October 12, Reference
1993.(1)
4.4 Warrant to purchase 20,312 shares of Common Stock of the Incorporated By
Company issued to John Pappajohn, dated October 12, 1993.(1) Reference
4.5 Warrant to purchase 9,479 shares of Common Stock of the Incorporated By
Company issued to Cato Holding Company, dated June 21, Reference
1994.(1)
16
<PAGE>
4.6 Form of common stock Warrant to purchase shares of Common Incorporated By
Stock of the Company, issued in connection with the sale of Reference
Convertible Promissory Notes.(1)
4.7 Warrant to purchase 17,144 shares of Series F-1 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.8 Warrant to purchase 42,856 shares of Series F-2 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.9 Warrant to purchase 60,000 shares of Series F-3 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.10 Warrant to purchase 80,000 shares of Series F-3 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.11 Warrant to purchase 18,250 shares of Common Stock of the Incorporated By
Company issued to IAI Investment Funds VI, Inc. (IAI Reference
Emerging Growth Fund), dated January 30, 1996.(1)
4.12 Warrant to purchase 6,250 shares of Common Stock of the Incorporated By
Company issued to IAI Investment Funds IV, Inc. (IAI Reference
Regional Fund), dated January 30, 1996.(1)
4.13 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to John Pappajohn, dated February 2, 1996.(1) Reference
4.14 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to Edgewater Private Equity Fund, L.P., dated Reference
February 2, 1996.(1)
4.15 Warrant to purchase 10,000 shares of Common Stock of the Incorporated By
Company issued to Joseph Giamenco, dated February 2, Reference
1996.(1)
4.16 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to Gus A. Chafoulias, dated February 2, Reference
1996.(1)
4.17 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to JIBS Equities, dated February 2, 1996.(1) Reference
4.18 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to Land O'Lakes, Inc., dated February 2, Reference
1996.(1)
4.19 6% Convertible Debenture Purchase Agreement dated Incorporated By
November 18, 1997 among the Company and the Purchasers named Reference
therein.(8)
4.20 Registration Rights Agreement dated November 18, 1997 among Incorporated By
the Company and the Holders named therein.(9) Reference
4.21 6% Convertible Debenture due May 18, 1999 issued to CPR Incorporated By
(USA) Inc. dated November 18, 1997.(10) Reference
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
4.22 6% Convertible Debenture due May 18, 1999 issued to Incorporated By
Libertyview Plus Fund dated November 18, 1997.(11) Reference
4.23 6% Convertible Debenture due May 18, 1999 issued to Incorporated By
Libertyview Fund, LLC dated November 18, 1997.(12) Reference
4.24 Stock Purchase Warrant issued to CPR (USA) Inc. dated Incorporated By
November 18, 1997.(13) Reference
4.25 Stock Purchase Warrant issued to Libertyview Plus Fund dated Incorporated By
November 18, 1997.(14) Reference
4.26 Stock Purchase Warrant issued to Libertyview Fund, LLC dated Incorporated By
November 18, 1997.(15) Reference
4.27 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(16) Reference
4.28 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(17) Reference
4.29 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(18) Reference
4.30 Warrant issued to Henry J. Cardello dated as of April 13, Incorporated By
1998. (20) Reference
4.31 Warrant issued to Henry J. Cardello dated as of April 30, Incorporated By
1998. (20) Reference
4.32 Warrant issued to Henry J. Cardello dated as of June 19, Incorporated By
1998. (20) Reference
#10.1 License Agreement between the Company and Land O'Lakes dated Incorporated By
May 7, 1992.(1) Reference
#10.2 Royalty Agreement between the Company and Land O'Lakes dated Incorporated By
May 7, 1992.(1) Reference
#10.3 Supply Agreement between the Company and Land O'Lakes dated Incorporated By
May 7, 1992.(1) Reference
10.4 Master Services Agreement between the Company and Land Incorporated By
O'Lakes dated May 7, 1992.(1) Reference
*10.5 GalaGen Inc. 1992 Stock Plan, as amended. (5) Incorporated By
Reference
10.7 Stock and Warrant Purchase Agreement between the Company and Incorporated By
Chiron Corporation dated March 20, 1995.(1) Reference
#10.8 License and Collaboration Agreement between the Company and Incorporated By
Chiron Corporation dated March 20, 1995.(1) Reference
*10.9 GalaGen Inc. Employee Stock Purchase Plan, as amended. (2) Incorporated By
Reference
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.10 Credit Agreement between the Company and Norwest Bank Incorporated By
Minnesota, N.A., dated as of January 24, 1996.(1) Reference
10.11 Commitment Letter between the Company and Cargill Leasing Incorporated By
Corporation, dated June 5, 1996. (2) Reference
10.12 Master Equipment Lease between the Company and Cargill Incorporated By
Leasing Corporation, dated June 6, 1996. (2) Reference
10.13 Agreement for Progress Payments between the Company and Incorporated By
Cargill Leasing Corporation, dated June 6, 1996. (2) Reference
10.14 Agreement for Lease between the Company and Land O'Lakes, Incorporated By
dated June 3, 1996. (2) Reference
*10.15 Letter agreement with John G. Watson dated September 14, Incorporated By
1996.(3) Reference
#10.16 Agreement with Colorado Animal Research Enterprises, Inc. Incorporated By
dated November 1, 1996. (4) Reference
*10.17 Letter agreement with Francois Lebel, M.D., dated December Incorporated By
27, 1996. (4) Reference
*10.18 Consulting agreement with Stanley Falkow, Ph.D., dated Incorporated By
January 15, 1997. (4) Reference
*10.19 GalaGen Inc. Annual Short Term Incentive Cash Compensation Incorporated By
Plan. (4) Reference
*10.20 GalaGen Inc. Annual Long Term Incentive Stock Option Incorporated By
Compensation Plan. (4) Reference
*10.21 GalaGen Inc. 1997 Incentive Plan. (6) Incorporated By
Reference
10.22 Master Loan and Security Agreement with TransAmerica Incorporated By
Business Credit Corporation dated June 8, 1997. (7) Reference
10.23 Amended and Restated License Agreement between the Company Incorporated By
and Land O'Lakes dated March 11, 1998. (19) Reference
#10.24 License Agreement between the Company and Metagenics, Inc. Incorporated By
dated April 7, 1998. (20) Reference
10.25 Marketing Agreement between the Company and Nutrition Electronic
Medical, Inc., dated September 1, 1998. Transmission
10.26 Asset Purchase Agreement between the company and Nutrition Electronic
Medical, Inc., dated September 1, 1998. Transmission
*10.27 Letter agreement with John G. Watson dated September 16, 1998 Electronic
Transmission
11.1 Statement re: computation of per share earnings (loss). Electronic
Transmission
27.1 Financial Data Schedule for Quarter ended September 30, Electronic
1998. Transmission
27.2 Restated Financial Data Schedule for Quarter ended March 31, Incorporated By
1996. (19) Reference
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
(1) Incorporated herein by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-1032).
(2) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996 (File No. 0-27976).
(3) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996 (File No. 0-27976).
(4) Incorporated herein by reference to the same numbered Exhibit to
the Company's Annual Report on Form 10-K for the period ended
December 31, 1996 (File No. 0-27976).
(5) Incorporated herein by reference to the same numbered Exhibit to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997 (File No. 0-27976).
(6) Incorporated herein by reference to Appendix A to the Company's
1997 Definitive Proxy Statement on Schedule 14A (File No. 0-27976).
(7) Incorporated herein by reference to the same numbered Exhibit to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997 (File No. 0-27976).
(8) Incorporated herein by reference to Exhibit No. 4.4 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(9) Incorporated herein by reference to Exhibit No. 4.5 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(10) Incorporated herein by reference to Exhibit No. 4.6 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(11) Incorporated herein by reference to Exhibit No. 4.7 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(12) Incorporated herein by reference to Exhibit No. 4.8 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(13) Incorporated herein by reference to Exhibit No. 4.9 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(14) Incorporated herein by reference to Exhibit No. 4.10 to the
Company's Registration Statement on Form S-3 (Registration No. 333-41151).
(15) Incorporated herein by reference to Exhibit No. 4.11 to the
Company's Registration Statement on Form S-3 (Registration No. 333-41151).
(16) Incorporated herein by reference to Exhibit No. 4.12 to Amendment
No. 1 to the Company's Registration Statement on Form S-3
(Registration No. 333-41151).
(17) Incorporated herein by reference to Exhibit No. 4.13 to Amendment
No. 1 to the Company's Registration Statement on Form S-3
(Registration No. 333-41151).
(18) Incorporated herein by reference to Exhibit No. 4.14 to Amendment
No. 1 to the Company's Registration Statement on Form S-3
(Registration No. 333-41151).
(19) Incorporated herein by reference to the same numbered Exhibit to
the Company's Annual Report on Form 10-K for the period ended
December 31, 1997 (File No. 0-27976).
20
<PAGE>
(20) Incorporated herein by reference to the same numbered Exhibit to
the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1998 (File No. 0-27976).
* Management contact or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
# Contains portions for which confidential treatment has been granted
to the Company.
</TABLE>
(b) REPORTS ON FORM 8-K
No reports of Form 8-K were filed during the quarter ended September
30, 1998.
21
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
GalaGen Inc.
------------
(Registrant)
Date: November 13, 1998 By: /s/ Robert A. Hoerr
-------------------
Robert A. Hoerr,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1998 By: /s/ Gregg A. Waldon
-------------------
Gregg A. Waldon,
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Decription Method of Filing
- ------- ---------- ----------------
<S> <C> <C>
3.2 Restated Certificate of Incorporation of the Company.(3) Incorporated By
Reference
3.4 Restated Bylaws of the Company.(1) Incorporated By
Reference
4.1 Specimen common stock Certificate.(1) Incorporated By
Reference
4.2 Warrant to purchase 13,541 shares of common stock of the Incorporated By
Company issued to Piper Jaffray Inc., dated January 26, Reference
1993.(1)
4.3 Warrant to purchase 20,312 shares of common stock of the Incorporated By
Company issued to Gus A. Chafoulias, dated October 12, Reference
1993.(1)
4.4 Warrant to purchase 20,312 shares of common stock of the Incorporated By
Company issued to John Pappajohn, dated October 12, 1993.(1) Reference
4.5 Warrant to purchase 9,479 shares of common stock of the Incorporated By
Company issued to Cato Holding Company, dated June 21, Reference
1994.(1)
4.6 Form of common stock Warrant to purchase shares of common Incorporated By
stock of the Company, issued in connection with the sale of Reference
Convertible Promissory Notes.(1)
4.7 Warrant to purchase 17,144 shares of Series F-1 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.8 Warrant to purchase 42,856 shares of Series F-2 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.9 Warrant to purchase 60,000 shares of Series F-3 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.10 Warrant to purchase 80,000 shares of Series F-3 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.11 Warrant to purchase 18,250 shares of common stock of the Incorporated By
Company issued to IAI Investment Funds VI, Inc. (IAI Reference
Emerging Growth Fund), dated January 30, 1996.(1)
4.12 Warrant to purchase 6,250 shares of common stock of the Incorporated By
Company issued to IAI Investment Funds IV, Inc. (IAI Reference
Regional Fund), dated January 30, 1996.(1)
4.13 Warrant to purchase 25,000 shares of common stock of the Incorporated By
Company issued to John Pappajohn, dated February 2, 1996.(1) Reference
4.14 Warrant to purchase 25,000 shares of common stock of the Incorporated By
Company issued to Edgewater Private Equity Fund, L.P., dated Reference
February 2, 1996.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Decription Method of Filing
- ------- ---------- ----------------
<S> <C> <C>
4.15 Warrant to purchase 10,000 shares of common stock of the Incorporated By
Company issued to Joseph Giamenco, dated February 2, Reference
1996.(1)
4.16 Warrant to purchase 25,000 shares of common stock of the Incorporated By
Company issued to Gus A. Chafoulias, dated February 2, Reference
1996.(1)
4.17 Warrant to purchase 25,000 shares of common stock of the Incorporated By
Company issued to JIBS Equities, dated February 2, 1996.(1) Reference
4.18 Warrant to purchase 25,000 shares of common stock of the Incorporated By
Company issued to Land O'Lakes, Inc., dated February 2, Reference
1996.(1)
4.19 6% Convertible Debenture Purchase Agreement dated Incorporated By
November 18, 1997 among the Company and the Purchasers named Reference
therein.(8)
4.20 Registration Rights Agreement dated November 18, 1997 among Incorporated By
the Company and the Holders named therein.(9) Reference
4.21 6% Convertible Debenture due May 18, 1999 issued to CPR Incorporated By
(USA) Inc. dated November 18, 1997.(10) Reference
4.22 6% Convertible Debenture due May 18, 1999 issued to Incorporated By
Libertyview Plus Fund dated November 18, 1997.(11) Reference
4.23 6% Convertible Debenture due May 18, 1999 issued to Incorporated By
Libertyview Fund, LLC dated November 18, 1997.(12) Reference
4.24 Stock Purchase Warrant issued to CPR (USA) Inc. dated Incorporated By
November 18, 1997.(13) Reference
4.25 Stock Purchase Warrant issued to Libertyview Plus Fund dated Incorporated By
November 18, 1997.(14) Reference
4.26 Stock Purchase Warrant issued to Libertyview Fund, LLC dated Incorporated By
November 18, 1997.(15) Reference
4.27 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(16) Reference
4.28 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(17) Reference
4.29 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(18) Reference
4.30 Warrant issued to Henry J. Cardello dated as of April 13, Incorporated By
1998. (20) Reference
4.31 Warrant issued to Henry J. Cardello dated as of April 30, Incorporated By
1998. (20) Reference
4.32 Warrant issued to Henry J. Cardello dated as of June 19, Incorporated By
1998. (20) Reference
#10.1 License Agreement between the Company and Land O'Lakes dated Incorporated By
May 7, 1992.(1) Reference
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Decription Method of Filing
- ------- ---------- ----------------
<S> <C> <C>
#10.2 Royalty Agreement between the Company and Land O'Lakes dated Incorporated By
May 7, 1992.(1) Reference
#10.3 Supply Agreement between the Company and Land O'Lakes dated Incorporated By
May 7, 1992.(1) Reference
10.4 Master Services Agreement between the Company and Land Incorporated By
O'Lakes dated May 7, 1992.(1) Reference
*10.5 GalaGen Inc. 1992 Stock Plan, as amended. (5) Incorporated By
Reference
10.7 Stock and Warrant Purchase Agreement between the Company and Incorporated By
Chiron Corporation dated March 20, 1995.(1) Reference
#10.8 License and Collaboration Agreement between the Company and Incorporated By
Chiron Corporation dated March 20, 1995.(1) Reference
*10.9 GalaGen Inc. Employee Stock Purchase Plan, as amended. (2) Incorporated By
Reference
10.10 Credit Agreement between the Company and Norwest Bank Incorporated By
Minnesota, N.A., dated as of January 24, 1996.(1) Reference
10.11 Commitment Letter between the Company and Cargill Leasing Incorporated By
Corporation, dated June 5, 1996. (2) Reference
10.12 Master Equipment Lease between the Company and Cargill Incorporated By
Leasing Corporation, dated June 6, 1996. (2) Reference
10.13 Agreement for Progress Payments between the Company and Incorporated By
Cargill Leasing Corporation, dated June 6, 1996. (2) Reference
10.14 Agreement for Lease between the Company and Land O'Lakes, Incorporated By
dated June 3, 1996. (2) Reference
*10.15 Letter agreement with John G. Watson dated September 14, Incorporated By
1996.(3) Reference
#10.16 Agreement with Colorado Animal Research Enterprises, Inc. Incorporated By
dated November 1, 1996. (4) Reference
*10.17 Letter agreement with Francois Lebel, M.D., dated December Incorporated By
27, 1996. (4) Reference
*10.18 Consulting agreement with Stanley Falkow, Ph.D., dated Incorporated By
January 15, 1997. (4) Reference
*10.19 GalaGen Inc. Annual Short Term Incentive Cash Compensation Incorporated By
Plan. (4) Reference
*10.20 GalaGen Inc. Annual Long Term Incentive Stock Option Incorporated By
Compensation Plan. (4) Reference
*10.21 GalaGen Inc. 1997 Incentive Plan. (6) Incorporated By
Reference
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Decription Method of Filing
- ------- ---------- ----------------
<S> <C> <C>
10.22 Master Loan and Security Agreement with TransAmerica Incorporated By
Business Credit Corporation dated June 8, 1997. (7) Reference
10.23 Amended and Restated License Agreement between the Company Incorporated By
and Land O'Lakes dated March 11, 1998. (19) Reference
#10.24 License Agreement between the Company and Metagenics, Inc. Incorporated By
dated April 7, 1998. (20) Reference
10.25 Marketing Agreement between the Company and Nutrition Electronic
Medical, Inc., dated September 1, 1998. Transmission
10.26 Asset Purchase Agreement between the company and Nutrition Electronic
Medical, Inc., dated September 1, 1998. Transmission
*10.27 Letter agreement with John G. Watson dated September 16, 1998 Electronic
Transmission
11.1 Statement re: computation of per share earnings (loss). Electronic
Transmission
27.1 Financial Data Schedule for quarter ended September 30, Electronic
1998. Transmission
27.2 Restated Financial Data Schedule for Quarter ended March 31, Incorporated By
1996. (19) Reference
</TABLE>
- ----------------------
(1) Incorporated herein by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No.
333-1032).
(2) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996 (File No. 0-27976).
(3) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996 (File No. 0-27976).
(4) Incorporated herein by reference to the same numbered Exhibit to
the Company's Annual Report on Form 10-K for the period ended
December 31, 1996 (File No. 0-27976).
(5) Incorporated herein by reference to the same numbered Exhibit to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997 (File No. 0-27976).
(6) Incorporated herein by reference to Appendix A to the Company's
1997 Definitive Proxy Statement on Schedule 14A (File No. 0-27976).
(7) Incorporated herein by reference to the same numbered Exhibit to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997 (File No. 0-27976).
(8) Incorporated herein by reference to Exhibit No. 4.4 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(9) Incorporated herein by reference to Exhibit No. 4.5 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(10) Incorporated herein by reference to Exhibit No. 4.6 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(11) Incorporated herein by reference to Exhibit No. 4.7 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
<PAGE>
(12) Incorporated herein by reference to Exhibit No. 4.8 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(13) Incorporated herein by reference to Exhibit No. 4.9 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(14) Incorporated herein by reference to Exhibit No. 4.10 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(15) Incorporated herein by reference to Exhibit No. 4.11 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(16) Incorporated herein by reference to Exhibit No. 4.12 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(17) Incorporated herein by reference to Exhibit No. 4.13 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(18) Incorporated herein by reference to Exhibit No. 4.14 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(19) Incorporated herein by reference to the same numbered Exhibit to
the Company's Annual Report on Form 10-K for the period ended
December 31, 1997 (File No. 0-27976).
(20) Incorporated herein by reference to the same numbered Exhibit to
the Company's Quarterly Report on Form 10-Q for the period ended
September 30 , 1998 (File No. 0-27976).
* Management contact or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
# Contains portions for which confidential treatment has been granted
to the Company.
<PAGE>
EXHIBIT 10.25
MARKETING AGREEMENT
This Marketing Agreement (the "Agreement") is made and entered into as of
this 1st day of September, 1998 (the "Effective Date"), by and between Nutrition
Medical, Inc., a Minnesota corporation ("NMI"), and GalaGen Inc., a Delaware
corporation ("GALAGEN"), collectively referred to hereinafter as the "Parties"
or individually as a "Party."
1. PURPOSE OF AGREEMENT.
The purpose of this Agreement is to set forth the relationship of the
Parties in the marketing, sale and distribution of certain critical care
products of NMI. The products of NMI that are subject to this Agreement
(individually a "Product" and together the "Products") are listed on SCHEDULE 1
attached hereto. The Parties acknowledge that this Agreement is entered into in
contemplation of the proposed acquisition by GALAGEN of certain assets of NMI
pursuant to an Asset Purchase Agreement, of even date herewith, between the
Parties (the "Asset Purchase Agreement"). The transactions contemplated by the
Asset Purchase Agreement are hereafter collectively referred to as the
"Acquisition".
2. TERM.
The term of this Agreement (the "Term") shall be from the Effective Date
until December 31, 1998, unless terminated sooner pursuant to SECTION 10 herein.
3. GRANT OF DISTRIBUTION RIGHTS AND ASSIGNMENT OF CONTRACTS.
3.1 GLUTASORB READY TO USE. NMI hereby grants to GALAGEN an exclusive
license to market, sell and distribute, at prices and upon terms to be
determined by GALAGEN, the Product known as "Glutasorb Ready to Use" in the
United States, Japan, France, England, Scotland, Belgium, Holland, Switzerland,
Denmark, Sweden, Norway and Finland.
3.2 ALL OTHER PRODUCTS. NMI hereby grants GALAGEN an exclusive license to
market, sell and distribute, at prices and upon terms to be determined by
GALAGEN, in the United States all Products other than "Glutasorb Ready to Use".
3.3 ASSIGNMENT OF PURCHASE ORDERS AND CUSTOMER CONTRACTS. In connection
with the licenses granted above, NMI hereby assigns to GALAGEN, subject to
GALAGEN's acceptance, all outstanding customer purchase orders and other
customer purchase contracts received by NMI on or after the Effective Date
relating to the Products originating from customers in those countries listed
above. NMI retains all rights to all customer purchase orders and other
customer purchase contracts received prior to the Effective Date.
<PAGE>
4. LICENSE TO USE MARKS.
NMI hereby grants to GALAGEN a royalty-free, exclusive license to use any
trademark, trade name, or identifying slogan of NMI, whether or not registered
(each, a "Mark" and collectively, the "Marks") which are affixed to the Products
or any accompanying labels, containers, cartons, or technical or promotional
literature and used in connection with the marketing, sale, distribution, or
service of the Products pursuant to this Agreement. Such license will be
exclusive to GALAGEN in the United States, and with respect to the Product known
as "Glutasorb Ready to Use," will also be exclusive in those countries listed in
Section 3.1 hereof.
5. SALE OF PRODUCTS BY NMI TO GALAGEN.
5.1 OBLIGATIONS OF NMI. During the Term NMI will sell Products to GALAGEN
in sufficient quantities out of available inventory to fill all orders placed by
GALAGEN's customers. Each such sale of a Product from NMI to GALAGEN will be
deemed to occur, and risk of loss and title to the Product will transfer at the
time that, but not before, NMI delivers the Product to a common carrier for
transportation to GALAGEN's customer in satisfaction of an order placed by such
customer, or NMI delivers the Product directly to GALAGEN's customer in
satisfaction of an order placed with GALAGEN.
5.2 PURCHASE PRICE OF PRODUCTS. In consideration of the Products to be
sold by NMI to GALAGEN, GALAGEN will pay to NMI:
(a) the invoice price for each Product, as invoiced by the Product
manufacturer, less any discounts, rebates, refunds, incentives or other
reductions in cost in any form whatsoever granted by the manufacturer to
NMI; plus
(b) NMI's cost (if any) to ship such Product from the manufacturer to
NMI; plus
(c) NMI's cost to ship the Product from NMI to GALAGEN's customer;
plus
(d) NMI's cost (if any) for packaging materials and supplies used in
shipping Products to GALAGEN's customers; plus
(e) NMI's actual direct labor costs for packaging Products shipped to
GALAGEN's customers. For purposes of this provision, direct labor costs
will be limited to the actual amounts paid by NMI to third parties for
packaging services.
5.3 REPORTING AND PAYMENTS. NMI will provide to GALAGEN a weekly report
during the Term, setting forth in reasonable detail the following information:
(a) the quantity of each Product shipped during the previous week, by
customer;
2
<PAGE>
(b) the manufacturer's invoice price (in accordance with SECTION
5.2(A) herein) for Products shipped during the previous week;
(c) the Administrative Charge (as defined in SECTION 7 hereof) for
Products shipped during the previous week;
(d) the costs incurred by NMI in each of the categories listed in
SECTION 5.2(B) through (E); and
(e) the aggregate amount payable by GALAGEN relating to Products
shipped during the previous week.
GALAGEN will pay to NMI such aggregate amount at the earlier of (i) 45 days
after the date of the customer invoice or (ii) receipt by GALAGEN of the
customer payment from NMI in accordance with SECTION 6.4 hereunder.
5.4 VOLUME AND INVENTORY. GALAGEN shall not be required to purchase any
minimum amount or quantity of the Products. NMI agrees to use its reasonable
best efforts to maintain sufficient inventory, in accordance with past
practices, to fulfill all orders generated by GALAGEN (including those assigned
by NMI to GALAGEN hereunder) on a timely basis.
5.5 SAMPLES OF GLUTASORB READY TO USE. GALAGEN will have the right to
provide customers or potential customers with free samples of the Product known
as Glutasorb Ready to Use from the inventory of such Product held by NMI. There
will be no charge to GALAGEN for such samples, provided, however, that GALAGEN
may not charge customers or potential customers for such samples.
6. ACCESS TO NMI COMPUTER SYSTEM; ADMINISTRATIVE SERVICES TO BE PROVIDED BY
NMI.
6.1 GENERAL. NMI will make available for use by GALAGEN and employees of
GALAGEN its computer system and databases of customers and prospects. During
the Term, NMI will continue to be responsible for protecting the integrity and
security of such system, including without limitation performing hardware and
software maintenance and maintaining a backup system in the event of a system
failure. NMI will use its best efforts to safeguard any proprietary data of
GALAGEN which may become part of such system and databases, including
restricting access to NMI employees on a need-to-know basis. NMI will continue
to provide off-site storage of back-up computer files and programs in accordance
with current practices (I.E., on a daily basis).
6.2 CUSTOMER DATA. NMI will make available to GALAGEN and GALAGEN's
employees, at GALAGEN's expense, copies of all customer records and account
information relating to Products sold prior to the Effective Date. GALAGEN may,
at its option, alter the terms of such customer relationship, including credit
terms and discounts, and may add new customers or terminate existing customers.
3
<PAGE>
6.3 ORDER PROCESSING. Customer orders will be processed by GALAGEN
employees located at NMI's facility or, at GALAGEN's option, by NMI employees
located at NMI's facility working under the direction of GALAGEN. Such
processing will include: (a) receiving customer orders on NMI phone lines; (b)
entering order information into the NMI computer system; (c) filling customer
orders in accordance with their terms and updating records accordingly; and (d)
after an order has been shipped, invoicing the customer, recording that the sale
is attributable to GALAGEN and specifying payment terms and remittance
instructions determined by GALAGEN.
6.4 ACCOUNTS RECEIVABLE PROCESSING. Accounts receivable records will be
maintained on the NMI computer system. NMI will be responsible for all
collections of accounts receivable and will remit to bank accounts specified by
GALAGEN all customer payments owed to GALAGEN for sales made by GALAGEN
hereunder on a weekly basis. All payments will be applied to open customer
invoices in accordance with the customer's instructions, and if no such
instructions are specified the parties will contact such customer to determine
such instructions. NMI will provide to GALAGEN periodically a list of all open
customer accounts receivable assigned to GALAGEN.
6.5 REPORTS. By the fifth business day after the end of each month during
the Term, NMI will provide to GALAGEN such reports relating to sales of the
Products as GALAGEN may reasonably request to allow GALAGEN to properly record
such sales, maintain its accounting records and manage its business related to
the Products. Such reports may include, without limitation, sales and cost of
sales, collections, accounts receivable balances, orders placed and order
backlog.
7. FACILITIES AND SERVICE PAYMENTS.
7.1 ADMINISTRATIVE CHARGE. In consideration for the services to be
provided by NMI hereunder, GALAGEN will pay to NMI an administrative charge
(the "Administrative Charge") equal to 15% of the price charged by GALAGEN from
its customers for Products sold during the Term. The Administrative Charge
will cover, without limitation, warehouse rent, warehouse support services
(E.G., insurance, personnel, depreciation, etc.), invoicing services and
collection services.
7.2 OFFICE SPACE SERVICE CHARGES. GALAGEN will pay to NMI the expenses
referred to in Section 14.7 of the Asset Purchase Agreement for the services
referred to therein. GALAGEN will make such payments on a monthly basis, in
arrears.
8. WARRANTY CLAIMS.
During the Term, GALAGEN will offer warranties on the Products sold by
GALAGEN hereunder consistent with the warranties offered by NMI, and NMI will
continue to cover warranty claims, consistent with past practices, on Products
sold by it prior to the Effective Date. GALAGEN agrees to obtain NMI's approval
(which approval shall not be unreasonably withheld) prior to offering
replacement Products directly to customers.
4
<PAGE>
If any Product returned by a customer to GALAGEN cannot be resold under normal
business conditions (for example, if the Product has an expiration date of six
months or less from the date on which it is returned), NMI will pay GALAGEN an
amount equal to the amount of the credit that GALAGEN gave to the customer for
such Product.
9. ADDITIONAL OBLIGATIONS OF THE PARTIES.
9.1 OBLIGATIONS OF GALAGEN. GALAGEN shall:
(a) use reasonable efforts to promote the sale of the Products and to
solicit and obtain orders for the same; and
(b) promote the sale of the Products in a manner consistent with the
specifications, features or capabilities of the Products as described in
the technical and marketing literature provided by NMI and not knowingly
make any false or misleading representations regarding the Products.
9.2 OBLIGATIONS OF NMI. NMI shall:
(a) upon signing this Agreement, immediately deliver to GALAGEN all
Product samples, technical specifications, Product lists, price lists,
Product inventory and availability information, sales literature, customer
lists, customer order history, and all other information useful or
necessary to GALAGEN to carry out its obligations under this Agreement;
(b) provide GALAGEN with the time and cooperation of NMI's personnel
as may be reasonably useful or necessary for GALAGEN to carry out its
obligations under this Agreement;
(c) provide to GALAGEN a certificate of insurance reflecting GALAGEN
as an additional insured party to its coverage for products liability
insurance; and
(d) keep accurate books and records relating to sales of the
Products.
10. EXPIRATION AND TERMINATION OF AGREEMENT.
10.1 AUTOMATIC TERMINATION. This Agreement shall terminate on the earliest
to occur of December 31, 1998, the consummation of the Acquisition or the
termination of the Asset Purchase Agreement.
10.2 OPTION TO TERMINATE. This Agreement may be terminated at any time:
(a) by a written agreement signed by both Parties hereto;
(b) by either Party if the other Party defaults in the performance of
any material term or condition of this Agreement, and if such default shall
continue
5
<PAGE>
unremedied for a period of ten (10) days after written notice thereof is
given to the defaulting Party by the other Party;
(c) by either Party upon liquidation, dissolution, reorganization,
merger, sale of substantially all of the assets or change in the voting
control or corporate form of the other Party; or
(d) by either Party:
(i) if a receiver is appointed for the other Party or its
property;
(ii) if the other Party becomes insolvent or unable to pay
its debts as they become due or ceases to pay its debts as they
become due in the ordinary course of business or makes an
assignment for the benefit of its creditors; or
(iii) if any proceedings are commenced by or for the other
Party under any bankruptcy, insolvency, or debtor's relief law.
10.3 EFFECT OF TERMINATION. In the event of expiration or termination of
this Agreement:
(a) neither Party shall be liable to the other because of such
expiration or termination for compensation, reimbursement or damages for
the loss of prospective business, customers, profits or anticipated sales
on account of any expenditures, investments, leases or commitments made by
either Party in connection with the business or goodwill of NMI or GALAGEN
or for any other reason whatsoever arising out of such expiration or
termination. Notwithstanding the foregoing, in the event of the
termination of this Agreement, NMI shall fulfill on a timely basis all
orders for Products placed with NMI;
(b) adjustment and payment of all claims (excluding any warranty or
product liability claims) between GALAGEN and NMI arising from orders
accepted and shipped by NMI under this Agreement shall occur no later than
sixty (60) days after the effective date of expiration or termination of
the Agreement;
(c) each Party shall return to the other all property and
proprietary information of the other; and
(d) any default under or breach of this Agreement shall constitute
a default or breach of the Asset Purchase Agreement, and the parties shall
be entitled to all appropriate remedies thereunder.
10.4 SURVIVAL. Upon the termination of this Agreement, all privileges,
rights and obligations herein shall expire, except that NMI's obligations under
SECTION 8 and each
6
<PAGE>
Party's obligations under SECTIONS 11 through 18 shall survive and continue
in full force and effect.
11. RELATIONSHIP OF PARTIES
The parties are independent contractors under this Agreement and nothing
herein shall be construed to create an employment, partnership, joint venture or
agency relationship between them. Neither Party shall have the power to act
for, bind, or otherwise create or assume any obligation on behalf of the other
Party, express or implied, for any purpose whatsoever. Except as specifically
provided herein, neither Party assumes any liabilities of the other Party.
12. NOTICES
Any notice required hereunder to be given by either Party shall be in
writing and shall be delivered personally or sent by certified or registered
mail, postage prepaid, or by courier service, with written verification of
delivery, or by facsimile transmission (with receipt confirmed) to the other
Party to the address or telephone number set forth below or to such other
address or telephone number as either Party may designate from time to time
according to this provision. A notice delivered personally shall be effective
upon receipt. A notice sent by facsimile transmission shall be effective
twenty-four hours after the dispatch thereof. A notice delivered by mail or by
private courier service shall be effective on the third day after the day of
mailing.
If to NMI: with a copy to
Nutrition Medical, Inc. Dorsey & Whitney LLP
9850 51st Ave N. 220 South Sixth Street
Minneapolis, MN 55442 Minneapolis, MN 55402
Attention: President Attention: Kenneth L. Cutler
If to GALAGEN: with a copy to:
GalaGen Inc. Faegre & Benson LLP
4001 Lexington Avenue North 2200 Norwest Center
Arden Hills, Minnesota 55126 90 South Seventh Street
Attention: Robert A. Hoerr Minneapolis, Minnesota 55402
Attention: Kris Sharpe
13. SEVERABILITY
If any provision of this Agreement is found to be unenforceable by a court
of competent jurisdiction, the remaining provisions shall nevertheless remain in
full force and effect.
7
<PAGE>
14. WAIVER OR MODIFICATION
Any waiver, modification, or amendment of any provision of this Agreement
shall be effective only if in writing in a document that specifically refers to
this Agreement and such document is signed by the Parties hereto.
15. ENTIRE AGREEMENT
This Agreement constitutes the full and complete understanding and
agreement of the Parties hereto with respect to the license and sale and
distribution of the Products by NMI to GALAGEN during the Term and, except as
specifically provided herein, supersedes all prior oral or written
understandings and agreements with respect thereto.
16. PROPRIETARY INFORMATION
The Parties recognize that certain technical information which may be
disclosed pursuant to this Agreement represents confidential and valuable
proprietary information and therefore, except in accordance with the Asset
Purchase Agreement or any ancillary document, each Party will not, without the
written consent of the other Party, disclose such information to any person
other than those of its employees who have a need to know such information in
order to utilize it for the purposes of this Agreement or use such information
other than for the purposes of this Agreement.
In the event that the Asset Purchase Agreement is terminated, NMI will
retain all customer information relating to sales of the Products hereunder.
In addition, GALAGEN will return all proprietary information of NMI to NMI or
provide certification of destruction thereof, except that GALAGEN may retain
copies of such documents as may be required for GALAGEN to maintain its
corporate records. Any proprietary information of NMI retained by GALAGEN for
its corporate records may not be used by GALAGEN for any purpose other than as
documentation of its past transactions.
17. SUCCESSORS
The rights and liabilities of the Parties hereto shall bind and inure to
the benefit of their respective successors, heirs, executors, and
administrators, as the case may be, except that neither this Agreement nor the
rights or obligations hereunder shall be assignable or transferable by either
Party, either in whole or in part, without the prior written consent of the
other Party.
18. GOVERNING LAW; VENUE
This Agreement shall be governed by and construed in accordance with the
laws of the State of Minnesota without regard to the conflict of laws. The
Parties agree that proper venue and jurisdiction for any action or proceeding in
connection with this Agreement shall be the courts in the State of Minnesota.
8
<PAGE>
19. COUNTER PARTS
This Agreement may be executed in counterparts, each of which shall be
considered an original.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by their duly authorized representatives to be effective as of the date first
given above.
NUTRITION MEDICAL, INC. GALAGEN INC.
By By
----------------------------------- -----------------------------------
Its Its
------------------------------- -------------------------------
9
<PAGE>
SCHEDULE 1
PRODUCTS
1. Fiber-PRO
2. Glutasorb Ready to Use
3. GlucoPro Vanilla
4. L-Emental Hepatic
5. L-Emental Pediatric
6. L-Emental
7. Nitro-PRO
8. Pro-Peptide for Kids
9. Pro-Peptide Unflavored
10. Pro-Peptide VHN
11. Pro-Peptide Vanilla
12. Nutrition Liquid
13. Nutrition Plus Liquid
14. Instant Nutrition
15. Instant Nutrition (Lactose Free)
16. ISO-PRO
17. ISO-LAN
18. ULTRA-PRO
19. ULTRA-LAN
20. NUTRA-LAN
<PAGE>
Exhibit 10.26
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
GALAGEN INC.
AND
NUTRITION MEDICAL, INC.
DATED AS OF SEPTEMBER 1, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. PURCHASE AND SALE OF ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2. PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.1 Cash and Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.2 Assignment of International Marketing Consideration.. . . . . . . . .3
2.3 Royalty.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.4 Adjustment to Cash Payment. . . . . . . . . . . . . . . . . . . . . .3
3. ASSUMPTION OF LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . .4
4. CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
5. LABOR AND EMPLOYMENT MATTERS . . . . . . . . . . . . . . . . . . . . . . . . .4
6. LOSS, DESTRUCTION, CONDEMNATION OR DAMAGE TO ASSETS. . . . . . . . . . . . . .5
7. NONCOMPETITION AGREEMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . .5
8. REPRESENTATIONS AND WARRANTIES OF SELLER . . . . . . . . . . . . . . . . . . .5
8.1 Corporate Organization. . . . . . . . . . . . . . . . . . . . . . . .5
8.2 Corporate Power . . . . . . . . . . . . . . . . . . . . . . . . . . .5
8.3 Conflicting Agreements, Governmental Consents . . . . . . . . . . . .5
8.4 Corporate Authority . . . . . . . . . . . . . . . . . . . . . . . . .6
8.5 Actions, Suits, Proceedings . . . . . . . . . . . . . . . . . . . . .6
8.6 No Material Violations. . . . . . . . . . . . . . . . . . . . . . . .6
8.7 Title to Personal Property. . . . . . . . . . . . . . . . . . . . . .6
8.8 Condition of Assets . . . . . . . . . . . . . . . . . . . . . . . . .6
8.9 Purchase Contracts, Sales Contracts and Other Contracts and
Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
8.10 Intellectual Property Rights. . . . . . . . . . . . . . . . . . . . .7
8.11 Licenses and Permits. . . . . . . . . . . . . . . . . . . . . . . . .8
8.12 Taxes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
8.13 Composition of Assets.. . . . . . . . . . . . . . . . . . . . . . . .8
8.14 Investment Purpose. . . . . . . . . . . . . . . . . . . . . . . . . .8
8.15 Continuity of Seller; No Distribution of Shares.. . . . . . . . . . .8
8.16 Access to Information Regarding Buyer.. . . . . . . . . . . . . . . .9
8.17 Restricted Shares.. . . . . . . . . . . . . . . . . . . . . . . . . .9
8.18 Shareholder Approval. . . . . . . . . . . . . . . . . . . . . . . . .9
8.19 Brokers and Finders.. . . . . . . . . . . . . . . . . . . . . . . . .9
8.20 Full Disclosure.. . . . . . . . . . . . . . . . . . . . . . . . . . .9
8.21 Proxy Statement.. . . . . . . . . . . . . . . . . . . . . . . . . . .9
9. REPRESENTATIONS AND WARRANTIES OF BUYER. . . . . . . . . . . . . . . . . . . 10
9.1 Corporate Organization. . . . . . . . . . . . . . . . . . . . . . . 10
9.2 Conflicting Agreements, Governmental Consents . . . . . . . . . . . 10
9.3 Corporate Authority . . . . . . . . . . . . . . . . . . . . . . . . 10
9.4 Authorized Shares . . . . . . . . . . . . . . . . . . . . . . . . . 10
9.5 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . 10
9.6 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9.7 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . 10
i
<PAGE>
9.8 SEC Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10. CONDITIONS TO OBLIGATION OF BUYER TO CLOSE TRANSACTIONS. . . . . . . . . . . 11
10.1 Approval of Seller's Shareholders . . . . . . . . . . . . . . . . . 11
10.2 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . 11
10.3 Representations and Warranties. . . . . . . . . . . . . . . . . . . 12
10.4 No Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . 12
10.5 Observance and Performance. . . . . . . . . . . . . . . . . . . . . 12
10.6 Officer's Certificate . . . . . . . . . . . . . . . . . . . . . . . 12
10.7 Searches. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
10.8 Consents of Third Parties . . . . . . . . . . . . . . . . . . . . . 12
10.9 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
10.10 Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . 12
10.11 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
10.12 Copies of Documents . . . . . . . . . . . . . . . . . . . . . . . . 12
10.13 No Legal Action . . . . . . . . . . . . . . . . . . . . . . . . . . 12
10.14 Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . 13
10.15 Noncompetition Agreement. . . . . . . . . . . . . . . . . . . . . . 13
10.16 Distribution Agreement. . . . . . . . . . . . . . . . . . . . . . . 13
10.17 Settlement of Claims. . . . . . . . . . . . . . . . . . . . . . . . 13
11. CONDITIONS TO OBLIGATION OF SELLER TO CLOSE TRANSACTIONS . . . . . . . . . . 13
11.1 Approval of Seller's Shareholders.. . . . . . . . . . . . . . . . . 13
11.2 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . 13
11.3 Representations and Warranties. . . . . . . . . . . . . . . . . . . 13
11.4 Observance and Performance. . . . . . . . . . . . . . . . . . . . . 13
11.5 Officer's Certificate . . . . . . . . . . . . . . . . . . . . . . . 13
11.6 Consents of Third Parties . . . . . . . . . . . . . . . . . . . . . 14
11.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
11.8 Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . 14
11.9 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
11.10 No Legal Actions. . . . . . . . . . . . . . . . . . . . . . . . . . 14
11.11 International Marketing Agreement . . . . . . . . . . . . . . . . . 14
11.12 Nasdaq Listing. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
11.13 Consent of Buyer to Settlement Agreement. . . . . . . . . . . . . . 14
12. EXCLUSIVE MARKETING PRIOR TO CLOSING . . . . . . . . . . . . . . . . . . . . 14
13. OPERATION OF BUSINESS PRIOR TO CLOSING; COOPERATION. . . . . . . . . . . . . 14
13.1 Maintenance of Business . . . . . . . . . . . . . . . . . . . . . . 15
13.2 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
13.3 No Disposition of Assets. . . . . . . . . . . . . . . . . . . . . . 15
13.4 No Additional Liens . . . . . . . . . . . . . . . . . . . . . . . . 15
13.5 No Modification of Agreements . . . . . . . . . . . . . . . . . . . 15
13.6 Maintenance of Tangible Assets. . . . . . . . . . . . . . . . . . . 15
13.7 No Extraordinary Agreements . . . . . . . . . . . . . . . . . . . . 15
13.8 Maintenance of Insurance. . . . . . . . . . . . . . . . . . . . . . 15
13.9 Accounts Receivable; Accounts Payable . . . . . . . . . . . . . . . 15
ii
<PAGE>
13.10 Inventories; Supplies . . . . . . . . . . . . . . . . . . . . . . . 15
13.11 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
13.12 Inspection Rights . . . . . . . . . . . . . . . . . . . . . . . . . 16
13A. COVENANTS OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
13A.1 Nasdaq Listing. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
13A.2 Blue Sky Approval . . . . . . . . . . . . . . . . . . . . . . . . . 16
13A.3 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . 16
14. POST-CLOSING TRANSITIONAL MATTERS. . . . . . . . . . . . . . . . . . . . . . 17
14.1 Invoices for Existing or Previously Shipped Inventory of
Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
14.2 Delivery of Tangible Assets . . . . . . . . . . . . . . . . . . . . 17
14.3 Delivery and Assignment of International Marketing Consideration. . 17
14.4 Transitional Consulting . . . . . . . . . . . . . . . . . . . . . . 17
14.5 Use of Nutrition Medical Name . . . . . . . . . . . . . . . . . . . 18
14.6 Use of Purchased Supplies . . . . . . . . . . . . . . . . . . . . . 18
14.7 Use of Office Space . . . . . . . . . . . . . . . . . . . . . . . . 18
14.8 Accounts Receivable Remittances.. . . . . . . . . . . . . . . . . . 18
15. REGISTRATION REQUIREMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 18
15.1 Required Registration . . . . . . . . . . . . . . . . . . . . . . . 18
15.2 Registration Procedures . . . . . . . . . . . . . . . . . . . . . . 19
15.3 Delayed Effectiveness of Registration Statement . . . . . . . . . . 20
15.4 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
15.5 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . 21
15.6 Contribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
15.7 Right to Suspend Sales. . . . . . . . . . . . . . . . . . . . . . . 23
16. LIMITATIONS ON TRANSACTIONS IN SHARES. . . . . . . . . . . . . . . . . . . . 23
16.1 No Distribution of Shares . . . . . . . . . . . . . . . . . . . . . 23
16.2 Limitations on Resale of the Shares . . . . . . . . . . . . . . . . 23
17. TAXES, FEES AND OTHER EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 24
17.1 Taxes and Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
17.2 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
18. INDEMNIFICATION BY SELLER. . . . . . . . . . . . . . . . . . . . . . . . . . 24
18.1 Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
18.2 Settlement and Compromise . . . . . . . . . . . . . . . . . . . . . 25
18.3 Termination of Indemnification. . . . . . . . . . . . . . . . . . . 25
18.4 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
19. INDEMNIFICATION BY BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . 25
19.1 Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
19.2 Settlement and Compromise . . . . . . . . . . . . . . . . . . . . . 26
19.3 Termination of Indemnification. . . . . . . . . . . . . . . . . . . 26
19.4 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
20. TERMINATION OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 26
20.1 Mutual Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
20.2 Breach of Agreement . . . . . . . . . . . . . . . . . . . . . . . . 26
20.3 Delayed Closing . . . . . . . . . . . . . . . . . . . . . . . . . . 26
iii
<PAGE>
20.4 Government Action . . . . . . . . . . . . . . . . . . . . . . . . . 26
21. NONSOLICITATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
22. SALE OF ADDITIONAL PRODUCT . . . . . . . . . . . . . . . . . . . . . . . . . 27
22.1 Additional Product. . . . . . . . . . . . . . . . . . . . . . . . . 27
22.2 Right of First Refusal. . . . . . . . . . . . . . . . . . . . . . . 27
22.3 Qualifying Offeror. . . . . . . . . . . . . . . . . . . . . . . . . 28
22.4 Termination of Right of First Refusal . . . . . . . . . . . . . . . 28
23. ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
24. COVENANT OF FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . . . . . 28
25. CONFIDENTIALITY AND NONDISCLOSURE. . . . . . . . . . . . . . . . . . . . . . 28
26. SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . 28
27. PUBLIC ANNOUNCEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
28. ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
29. AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
30. CHOICE OF LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
31. ARBITRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
32. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
33. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
34. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
35. BULK TRANSFER LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
36. DEFINITION OF KNOWLEDGE. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
iv
<PAGE>
SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
Schedules
---------
<S> <C>
Schedule 1. Products
Schedule 1.1(b) Fixed Assets
Schedule 1.1(j) Intellectual Property
Schedule 1.1(k) Licenses and Permits
Schedule 1.2 Purchase Money Security Interests
Schedule 8.5 Actions, Suites, Proceedings
Schedule 8.8 Inventory Locations
Schedule 8.9 Contracts
Schedule 8.10(e) Judgments, Orders, Consent Decrees or Settlement
Agreements Affecting the Products
Schedule 14.7 Office Space Costs
Exhibits
--------
Exhibit A Form of Marketing Agreement
</TABLE>
v
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is dated as of September 1, 1998, by and
between GalaGen Inc., a Delaware corporation ("Buyer"), and Nutrition Medical,
Inc., a Minnesota corporation ("Seller").
RECITALS
WHEREAS, Seller owns the rights to the products listed in Schedule 1 (each
a "Product" and together the "Products") and is engaged in the business of
selling and distributing the Products (the "Business"); and
WHEREAS, Seller desires to sell and Buyer desires to purchase the Seller's
interests in the Products and certain related assets of Seller used in, related
to or arising from the Business on the terms and subject to the conditions of
this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual covenants and conditions contained herein, the parties hereby agree as
follows:
1. PURCHASE AND SALE OF ASSETS.
1.1 ASSETS. On the terms and subject to the conditions of this
Agreement, Seller agrees to sell, transfer, convey and deliver to Buyer, and
Buyer agrees to purchase from Seller, on and as of the Closing Date (as defined
in Section 4 hereof), the following property and assets of Seller (together the
"Assets"):
(a) All of Seller's rights to the Products;
(b) The fixed assets described in Schedule 1.1(b) attached hereto;
(c) All Seller's interest in inventory of the Products, wherever held,
existing at the Closing Date;
(d) All rights of Seller under contracts, purchase orders and agreements
pursuant to which Seller has agreed to purchase Products after the Closing Date
("Product Manufacturing Contracts");
(e) All rights of Seller under any warranty or guarantee by any
manufacturer, supplier or other transferor of any of the Assets;
(f) All rights of Seller under contracts and agreements pursuant to which
Seller has agreed to sell Products after the Closing Date;
<PAGE>
(g) Electronic or manual copies of all sales records, purchase records,
customer lists, supplier lists, production records and other similar records
related to the Products or associated with the Business as it applies to the
Products;
(h) All advertising, marketing and promotional materials associated with
the Products;
(i) All rights of Seller under any contracts (in addition to those
specified in Sections 1.1(d) and (f) above), indentures, guarantees, leases,
commitments, or other agreements related to the Products;
(j) All interests of Seller in any copyrights, patents, trademarks, trade
names, logos, trade secrets, inventions, know how, other confidential
information and other intellectual property of any nature related to or arising
from the Products, utilized in their production or associated with the Business
as it applies to the Products, together with pending applications for any of the
foregoing, including without limitation those identified in Schedule 1.1(j)
hereto;
(k) All rights of Seller, except for those rights identified in Schedule
1.1.(k) hereto as nontransferable, under any franchises, approvals, permits,
licenses, orders, registrations, certificates, variances, and similar rights
obtained from governments and governmental agencies, related to the Products or
associated with the Business as it applies to the Products including without
limitation the licenses and permits listed in Schedule 1.1(k) hereto; and
(l) All goodwill and other general intangibles of Seller related to the
Products or arising from the Business as it applies to the Products.
1.2 TITLE TO ASSETS. Except as hereinafter specifically provided,
the Assets will be transferred by Seller to Buyer in accordance with this
Agreement free and clear of all liens, security interests, encumbrances or debts
of any nature, except for (i) liens for taxes not yet due or delinquent or being
contested in good faith by appropriate proceedings, (ii) liens identified in the
disclosure schedules attached hereto, (iii) liens imposed by law and incurred in
the ordinary course of business for obligations not yet due or delinquent,
(iv) liens in respect of pledges or deposits under workers' compensation laws,
and (v) purchase money security interests on any Assets securing indebtedness
incurred or assumed for the purpose of financing all or any part of the cost of
acquiring such Assets, provided that any such lien attaches solely to the Assets
so acquired and that the amount of the debt secured thereby does not exceed 100%
of the cost of such Assets. A list of each Asset covered by a purchase money
security interest referred to in clause (v) above, including in each case the
amount of outstanding debt secured thereby, is attached as Schedule 1.2 hereto.
2. PURCHASE PRICE.
2.1 CASH AND SHARES. At the Closing, on the terms and subject to the
conditions of this Agreement, Buyer will transfer to Seller, in consideration of
the Assets:
(a) Cash in the amount of $175,000, adjusted as set forth in Section 2.4
hereof, by wire transfer of immediately available funds to the cash account or
accounts as may be specified by Seller, and;
2
<PAGE>
(b) Shares of Common Stock of Buyer (each a "Share" and together the
"Shares") having an aggregate fair market value, as defined below, of $625,000.
For purposes of determining the number of Shares to be delivered to Seller
at the Closing, each Share shall be deemed to have a fair market value equal to
the average of the closing sale price of a Share on the Nasdaq National Market
for the thirty trading days immediately preceding the Closing Date.
2.2 ASSIGNMENT OF INTERNATIONAL MARKETING CONSIDERATION. Buyer and Seller
anticipate that, prior to the Closing Date, Buyer will enter into an
international marketing agreement (the "International Marketing Agreement") with
an entity controlled by William L. Rush (the "International Marketing Entity")
containing mutually acceptable terms whereby, effective upon the Closing, Buyer
will license to the International Marketing Entity the exclusive right to
market, sell and distribute certain Products in certain countries other than the
United States in return for certain consideration (the "International Marketing
Consideration"). The International Marketing Consideration to be received from
the International Marketing Entity pursuant to the International Marketing
Agreement shall be delivered or assigned by Buyer to Seller, together with all
rights to any collateral related to the International Marketing Consideration,
as additional consideration for the Assets. Buyer shall have no obligation, as
guarantor or otherwise, for payment of any International Marketing Consideration
to be made by the International Marketing Entity upon assignment of such
consideration to Seller. Buyer will have no obligation to enter into the
International Marketing Agreement unless and until Mr. Rush has entered into a
noncompetition agreement with the Buyer containing mutually acceptable terms and
conditions.
2.3 ROYALTY. Buyer will pay Seller a royalty of nine percent (9%) of net
sales, reduced by uncollectible accounts, of the Products in excess of (i)
$5,000,000 during the year ending December 31, 2000, (ii) $6,000,000 during the
year ending December 31, 2001, and (iii) $7,500,000 during the year ending
December 31, 2002. Buyer will make payment, if any is required, of the royalty
no later than 120 days after the end of the year to which such royalty relates,
accompanied by such documentation as may be agreed upon by the parties. Buyer
will promptly inform Seller if it discontinues sales of any of the Products for
any reason, including due to development of alternative products.
2.4 ADJUSTMENT TO CASH PAYMENT. In the event that the aggregate Inventory
Value as defined herein is less than $200,000, the amount of the cash payment to
be made by Buyer to Seller pursuant to Section 2.1(a) hereof will be reduced by
the difference between the aggregate Inventory Value as determined hereby and
$200,000, provided, however, such reduction will not exceed $175,000. Aggregate
Inventory Value will be determined by a physical inventory count and valuation
conducted by Buyer not more than three days prior to the Closing Date (the
"Physical Inventory") of the Products owned by Seller and subject to transfer to
Buyer pursuant to this Agreement. "Inventory Value" shall mean the amount
invoiced to Seller by the manufacturers of such inventory plus freight from the
manufacturers to Seller, provided, however, that Inventory Value will be
recognized only (a) for inventory of Products other than Glutasorb Ready to Use,
Pro-Peptide VHN and Prop-Peptide Vanilla (i) having a shelf life, as measured
from the expiration date of the inventory, ("Shelf Life") of eight months or
more at the date of the Physical Inventory, and (ii) for ten percent (10%) of
such inventory having a Shelf
3
<PAGE>
Life of between six and eight months at the date of the Physical Inventory,
further provided, however, that no Inventory Value will be recognized under
(i) or (ii) of this part (a) for inventory representing greater than a
twelve-month supply of a Product based on Historical Sales of that Product
("Historical Sales" of any Product means sales of such Product for the period
six months prior to the date hereof), and (b) for the inventory of Glutasorb
Ready to Use expected to be sold between the Closing Date and January 31,
1999 based on Historical Sales of such Product, and (c) (i) if the expiration
dates of existing inventories of Pro-Peptide VHN and Pro-Peptide Vanilla are
not extended through September 30, 1999, for the inventory of Pro-Peptide VHN
expected to be sold between the Closing Date and December 31, 1998, based on
Historical Sales of such Product and for inventory of Pro-Peptide Vanilla
expected to be sold between the Closing Date and March 31, 1999, based on
Historical Sales of such product or (ii) if the expiration dates of existing
inventories of Pro-Peptide VHN and Pro-Peptide Vanilla are extended through
September 30, 1999, for the inventory of Pro-Peptide VHN and Pro-Peptide
Vanilla expected to be sold between the Closing Date and August 31, 1999
based on Historical Sales of such Products.
3. ASSUMPTION OF LIABILITIES. Except as hereinafter specifically
provided, Buyer shall not assume any liabilities or obligations of Seller and
Seller shall be solely liable for all liabilities and obligations, known or
unknown, fixed or contingent, arising from or in connection with ownership of
the Assets or operation of the Business as it relates to the Products prior to
the Closing Date, whether or not reflected in its books and records. Subject to
the conditions of this Agreement, on the Closing Date Buyer shall assume only
those liabilities and obligations of Seller, if any, (a) arising after the
Closing Date under Product Manufacturing Contracts assigned to or assumed by
Buyer, (b) arising after the Closing Date under any other contracts, purchase
orders and agreements assigned to or assumed by Buyer pursuant to
Sections 1.1(d), 1.1(f) and 1.1(i) hereof, (c) as provided in Section 1.2(v)
related to purchase money security interests, if any, and (d) as provided in
Section 5 related to accrued vacation benefits for certain employees of Seller
hired by Buyer.
4. CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Faegre & Benson
LLP, Minneapolis, Minnesota, at 10:00 a.m. on the seventh business day following
fulfillment or appropriate waiver of all of the conditions specified in Sections
10 and 11 hereof, or such other date as Buyer and Seller may mutually agree (the
"Closing Date "). At the Closing (a) Buyer shall (i) pay to Seller cash in the
amount specified in Section 2.1(a) hereof, (ii) deliver to Seller a certificate
for the number of Shares as specified in Section 2.1(b) hereof, (iii) deliver to
Seller the International Marketing Consideration, if any, with any such
endorsement as may be required, together with an assignment of rights to any
future benefits related to the International Marketing Consideration and any
related collateral securing payment thereof, and (iv) deliver to Seller the
various certificates, instruments and documents referred to in Section 11
hereof, and (b) Seller shall (i) deliver to Buyer such bills of sale,
assignments and other documents of transfer reasonably required to transfer to
Buyer the interest of Seller in the Assets and (ii) deliver to Buyer the various
certificates, instruments and documents referred to in Section 10 hereof.
5. LABOR AND EMPLOYMENT MATTERS. Without limiting the generality of
Section 3 hereof, Buyer, except as otherwise provided in this Section 5, shall
not assume any employment or employee benefit obligation, or any wage or salary
payment obligation, including without limitation those arising under any
pension, profit sharing, deferred compensation, bonus, stock option,
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severance, welfare, sick leave, vacation, wage or other employee benefit or
compensation plan, procedure, policy or practice of Seller regardless of
whether such plan, procedure, policy or practice is disclosed to Buyer. For
each employee of Seller who enters into an employment agreement with Buyer on
or prior to the Closing Date, Buyer will assume Seller's obligation, if any,
to provide such employee with up to five days of vacation to be taken in
accordance with the Vacation/PFT policy of Buyer within such employee's first
year of employment with Buyer. Seller and Buyer hereby agree and acknowledge
that Seller shall have no further obligations to Buyer or any employee who
enters into an employment agreement with Buyer on or prior to the Closing
Date in connection with or related to such employee's employment with Buyer
except as otherwise required under applicable federal or state law or as may
be provided in any contract between Seller and such employee.
6. LOSS, DESTRUCTION, CONDEMNATION OR DAMAGE TO ASSETS. If, between the
date of this Agreement and the Closing Date, tangible Assets (other than
inventory) are lost, destroyed, or condemned or suffer any material damage, and
if Buyer shall have waived the conditions precedent contained in Section 10
hereof, where applicable, then, the number of Shares to be transferred from
Buyer to Seller pursuant to Section 2.1(b) hereof shall be reduced by that
number of Shares having an aggregate fair market value equal to the excess of
(i) the liquidation value of such Assets prior to such loss, destruction,
condemnation or damage, over (ii) the salvage value, if any, of such Assets
following such loss, destruction, condemnation or damage. In no event shall the
aggregate adjustments made pursuant to this Section 6 exceed $25,000.
7. NONCOMPETITION AGREEMENT. On the terms and subject to the conditions
of this Agreement, on the Closing Date, Buyer and Seller will execute and
deliver a Noncompetition Agreement in form and substance mutually agreeable to
Buyer and Seller (the "Noncompetition Agreement").
8. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents
and warrants to Buyer that, except as set forth in the disclosure schedules
accompanying this Agreement:
8.1 CORPORATE ORGANIZATION. Seller is a corporation duly organized and
validly existing, is in good standing under the laws of the State of Minnesota,
and has the corporate power and authority to own the Assets and carry on the
Business as now being conducted.
8.2 CORPORATE POWER. Seller has the corporate power to execute and
deliver this Agreement and the Noncompetition Agreement and to consummate the
transactions contemplated hereby and thereby.
8.3 CONFLICTING AGREEMENTS, GOVERNMENTAL CONSENTS. The execution and
delivery by Seller of this Agreement and the Noncompetition Agreement and the
other agreements, documents and instruments contemplated hereby, the
consummation of the transactions contemplated hereby or thereby, and the
performance or observance by Seller of any of the terms or conditions hereof or
thereof, will not (a) conflict with, or result in a breach or violation of the
terms or conditions of, or constitute a default under, or result in the creation
of any lien on any of the Assets pursuant to, the Articles of Incorporation or
By-Laws of Seller, any award of any arbitrator, or any indenture, contract or
agreement (including any agreement with Seller's shareholders), instrument,
order, judgment, decree, statute, law, rule or regulation to which Seller or the
Assets is subject, in each
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case, the result of which would have a material adverse effect on the Business
or the financial condition of the Business, or (b) require any filing or
registration with, or any consent or approval of, any federal, state or local
governmental agency or authority.
8.4 CORPORATE AUTHORITY. The execution and delivery by Seller of this
Agreement and the Noncompetition Agreement and the other agreements, documents
and instruments contemplated hereby, and the consummation of the transactions
contemplated hereby or thereby, have been duly authorized by all necessary
corporate action on the part of Seller, subject only to the approval by the
holders of the requisite number of outstanding shares of the common stock of
Seller. This Agreement and the Noncompetition Agreement and all other
instruments required hereby to be executed and delivered by Seller are, or when
delivered will be, legal, valid and binding obligations of Seller, enforceable
in accordance with their respective terms subject only to the approval by the
holders of the requisite number of outstanding shares of the common stock of
Seller, and except as such enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
affecting enforcement of creditors' rights or by general principles of equity.
8.5 ACTIONS, SUITS, PROCEEDINGS. Except as disclosed in Schedule 8.5
hereof, there are no requests, notices, investigations, claims, demands,
actions, suits or other legal or administrative proceedings pending or, to the
best knowledge of Seller, threatened against Seller or any of its property in
any court or before any federal, state, municipal or other governmental agency
which (a) if decided adversely to Seller, would have a material adverse effect
upon the Business or the Assets, (b) seek to restrain or prohibit the
transactions contemplated by this Agreement or obtain any damages in connection
therewith, or (c) if decided adversely to, Seller would have a material adverse
effect on the enforceability of this Agreement or the Noncompetition Agreement;
nor is Seller in default with respect to any order of any court or governmental
agency entered against it in respect of the Business or the Assets.
8.6 NO MATERIAL VIOLATIONS. To its knowledge, Seller is not in material
violation of any applicable law, rule or regulation relating to the Business or
any of the Assets, which violation could have a material adverse effect on the
Business or the financial condition of the Business. To the Seller's knowledge,
there are no requests, notices, investigations, claims, demands, actions,
administrative proceedings, hearings or other governmental claims or proceedings
against Seller alleging or investigating the existence of any such violation.
Seller has provided to Buyer copies of all written field inspection reports in
its possession submitted to Seller by governmental authorities since the
inception of any of the Products.
8.7 TITLE TO PERSONAL PROPERTY. Seller has good title to all personal
property included in the Assets, free and clear of all mortgages, liens,
pledges, charges and encumbrances, except for (i) liens for taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings,
(ii) liens identified in Schedule 1.2 attached hereto, (iii) liens imposed by
law and incurred in the ordinary course of business for obligations not yet due
or delinquent, and (iv) liens in respect of pledges or deposits under workers'
compensation laws.
8.8 CONDITION OF ASSETS. All of the tangible Assets are, in all material
respects, in good operating condition and repair (subject to normal wear and
tear) and are adequate and suitable for
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the purposes for which they are currently being used. All inventory is located
at the facilities specified in Schedule 8.8 hereto.
8.9 PURCHASE CONTRACTS, SALES CONTRACTS AND OTHER CONTRACTS AND
AGREEMENTS. Schedule 8.9 hereto sets forth under the headings of "Purchase
Contracts", "Sales Contracts" or "Other Contracts and Agreements" all contracts,
indentures, guarantees, leases, commitments, distribution agreements or other
agreements related to the Business to which Seller is a party or by which it is
bound; provided, however, that with respect to contracts, leases, commitments or
other agreements involving payments remaining to or from the Company, only those
contracts, leases, commitments or other agreements involving such payments in
excess of $5,000 are set forth on such Schedule. Seller and, to the knowledge
of Seller, each other party thereto have substantially performed all obligations
required to be performed by them to date, and are not in default in any material
respect, under any of the instruments or agreements described above. The
instruments and agreements described above which are to be assigned to Buyer
hereunder are each in full force and effect and are assignable to Buyer without
the consent of third parties, and Seller has not waived or assigned to any other
person any of its rights thereunder. Seller has delivered to Buyer true and
correct copies of all such contracts, indentures, guarantees, leases,
commitments and other agreements.
8.10 INTELLECTUAL PROPERTY RIGHTS.
(a) Seller owns or possesses, is licensed under, or otherwise has lawful
access to all patents, trade secrets, know-how, other confidential information,
trademarks, service marks, copyrights, mask works, trade names, logos and other
intellectual property, whether registered or unregistered, necessary for the
lawful conduct of the Business as it is currently conducted. Seller has not
received any notice of any infringement or misappropriation by, or conflict
from, any third party with respect to such intellectual property rights. Seller
has no knowledge of any unauthorized use or disclosure or misappropriation of
any of its intellectual property necessary for the lawful conduct of the
Business, and Seller has obtained appropriate employee agreements and taken
other reasonable steps to protect against the unauthorized use or disclosure of
such intellectual property.
(b) Schedule 1.1(j) hereto lists and describes correctly all patents and
all registered trademarks, service marks, copyrights, mask works, trade names,
logos and other registered intellectual property (and all applications for any
of the foregoing) included in the Assets, all of which are owned of record
solely in the name of Seller or are beneficially owned solely by Seller, and
have not been licensed or otherwise been made available by Seller for use by
others. All such patents and registered intellectual property rights are in
full force and effect, and will not expire or require renewal until the
respective dates (if any) set forth in Schedule 1.1(j). Seller (i) does not own
or have any license or other interest in or to any other patents or registered
trademarks, service marks, copyrights, mask works, trade names, logos or other
registered intellectual property (or applications for any of the foregoing) used
in the Business, and (ii) does not license from others the right to use any
other industrial or intellectual property used in the Business.
(c) Except as disclosed in Schedule 1.1(j), Seller has no knowledge that
(i) any of the intellectual property rights owned or used by Seller in the
Business is invalid or unenforceable (whether due to the existence of prior art,
inequitable conduct such as patent fraud or misuse, prior use or creation,
abandonment or otherwise), (ii) any payments to governmental agencies required
to
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maintain the effectiveness of any patents or any registered intellectual
properties have not been timely paid, or (iii) any pending applications of
Seller for patents or for registration of other intellectual property will be
denied or will be materially restricted or conditioned, or any prior art or
other information or circumstance exists which would cause such denial,
restriction or condition.
(d) Seller (i) has not received any written communications, nor has any
officer or director of Seller received any communications of any kind from any
person or entity containing any express or implied allegation that Seller is or
may be infringing any of such person's or entity's intellectual property in
connection with Seller's conduct of the Business, and (ii) is not currently
evaluating any intellectual property of another person or entity (and has not,
to Seller's knowledge, conducted any such evaluations in the past five years) to
determine whether a license thereof is necessary or desirable in connection with
Seller's conduct of the Business or whether such intellectual property may
otherwise have a material effect on the Business as now conducted.
(e) Except as set forth in Schedule 8.10(e), there are no judgments,
orders, consent decrees or settlement agreements affecting the Seller's
production or sale of the Products.
8.11 LICENSES AND PERMITS. Schedule 1.1(k) hereto correctly describes all
material licenses and permits granted to or by Seller in connection with the
operation of the Business. Seller has all material licenses and permits
required by law or otherwise necessary for the proper operation of the Business.
To the Seller's knowledge, all licenses and permits granted to Seller are in
full force and effect, and no action to terminate, withdraw, not renew or
materially limit or otherwise change any such license or permit is pending or
has been threatened by any governmental agency or other party. Except as
discloseded in Schedule 1.1(k), to the Seller's knowledge, the consummation of
the transactions contemplated by this Agreement will not violate the provisions
of, or require Buyer to reapply for, any such license or permit. Seller has
delivered to Buyer true and correct copies of all such licenses and permits.
8.12 TAXES. Seller has filed all federal, state and local tax returns
required to be filed by it with regard to the Products or the Business, and has
paid all federal, state and local income, profits, franchise, sales, use,
property, excise, payroll, and other taxes and assessments (including interest
and penalties) related to the Products or the Business to the extent that such
have become due. No claims for additional taxes have been asserted against
Seller and no audits are pending with respect to any tax liabilities of Seller
related to the Products or the Business.
8.13 COMPOSITION OF ASSETS. The Assets comprise all property and assets
sufficient to conduct the Business in its present form.
8.14 INVESTMENT PURPOSE. Seller is acquiring the Shares for investment
purposes and not with a view to distribution thereof within the meaning of the
Securities Act of 1933, as amended (the "Securities Act") and the rules and
regulations thereunder.
8.15 CONTINUITY OF SELLER; NO DISTRIBUTION OF SHARES.
(a) This Agreement is not part of a plan for dissolution of Seller.
(b) Seller will make no PRO RATA or similar distribution of the Shares to
its shareholders.
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(c) The board of directors of Seller has no current intent to adopt
resolutions to dissolve Seller or make a PRO RATA or similar
distribution of the Shares to Seller's shareholders within one year
after the Closing Date.
8.16 ACCESS TO INFORMATION REGARDING BUYER.
(a) Seller has received copies of Buyer's annual report to shareholders
and annual report on Form 10-K for the year ended December 31, 1997,
and a copy of Buyer's definitive proxy statement dated March 30, 1998.
(b) Seller has received copies of Buyer's quarterly reports on Form 10-Q
for the periods ended March 31, 1998 and June 30, 1998.
(c) Seller has had the opportunity to ask questions and receive answers
concerning the terms and conditions upon which the Shares will be
issued to Seller and to obtain additional information that Buyer
possesses that is necessary to verify the accuracy of information
contained in the documents referenced in parts (a) and (b) of this
Section 8.16.
8.17 RESTRICTED SHARES. Seller is aware and acknowledges that the Shares
to be transferred to it pursuant to Section 2.1(b) hereof will be issued without
registration under the Securities Act or under any state securities laws, and,
therefore, may not be sold, transferred or pledged in the absence of an
effective registration statement under the applicable federal and state
securities laws or an opinion of counsel satisfactory to the Buyer that the
transfer is exempt from registration. Seller further acknowledges that the
certificate or certificates representing the Shares to be transferred to Seller
will bear a legend restricting transfer of the Shares as provided above.
Reference is made to Section 15 hereof regarding the agreement of Buyer to
registration of the Shares for resale by Seller under the conditions therein
specified.
8.18 SHAREHOLDER APPROVAL. Seller will use its reasonable best efforts and
will cause its officers and agents to use their reasonable best efforts to
promptly secure any approval of shareholders of Seller required to consummate
the transactions contemplated by this Agreement.
8.19 BROKERS AND FINDERS. Seller has not retained or engaged any broker,
finder or other financial intermediary in connection with the transaction
contemplated by this Agreement.
8.20 FULL DISCLOSURE. No representation or warranty by Seller contained in
this Agreement or the schedules hereto, and no written representation, statement
or certificate made or furnished, or to be made or furnished hereafter, by
Seller or any officer or representative of Seller pursuant to this Agreement or
in connection with the transactions contemplated hereby contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the representations or statements contained
herein or therein not misleading.
8.21 PROXY STATEMENT. At the time the Proxy Statement (as defined herein)
is mailed to the shareholders of Seller in order to obtain their approval
referred to in Section 10.1 and at all times subsequent to such mailing up to
and including the time of such approval, the Proxy Statement (including all
supplements thereto), with respect to all information set forth therein relating
to Seller (including its subsidiaries, if any) will (a) comply in all material
respects with applicable provisions
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of the Securities Act, and (b) not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances under which they are made, not misleading.
9. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and
warrants to Seller as follows:
9.1 CORPORATE ORGANIZATION. Buyer is a corporation duly organized and
validly existing, is in good standing under the laws of the State of Delaware
and has the corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby.
9.2 CONFLICTING AGREEMENTS, GOVERNMENTAL CONSENTS. The execution and
delivery by Buyer of this Agreement and the other agreements, documents and
instruments contemplated hereby, the consummation of the transactions
contemplated hereby, and the performance or observance by Buyer of any of the
terms or conditions hereof, will not (a) conflict with, or result in a breach or
violation of the terms or conditions of, or constitute a default under, the
Certificate of Incorporation or By-Laws of Buyer, any award of any arbitrator,
or any indenture, contract or agreement (including any agreement with
shareholders), instrument, order, judgment, decree, statute, law, rule or
regulation to which Buyer is subject, or (b) require any filing or registration
with, or any consent or approval of, any federal, state or local governmental
agency or authority, except in connection with the registrations rights granted
hereby in Section 15.
9.3 CORPORATE AUTHORITY. The execution and delivery by Buyer of this
Agreement and the other agreements, documents and instruments contemplated
hereby, and the consummation of the transactions contemplated hereby, have been
duly authorized by all necessary corporate action on the part of Buyer. This
Agreement and all other documents and instruments required hereby to be executed
and delivered by Buyer are, or when delivered will be, legal, valid and binding
obligations of Buyer, enforceable in accordance with their respective terms,
except as such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights or by general principles of equity.
9.4 AUTHORIZED SHARES. All Shares to be issued by Buyer pursuant to
Section 2.1(b) hereof will, upon issuance, be duly authorized and validly
issued, fully paid and non-assessable.
9.5 BROKERS AND FINDERS. Buyer has not retained any broker, finder or
other financial intermediary in connection with the transactions contemplated by
this Agreement.
9.6 FULL DISCLOSURE. No representation or warranty by Buyer contained in
this Agreement or the exhibits hereto, and no written representation, statement
or certificate made or furnished, or to be made or furnished hereafter, by Buyer
or any officer or representative of Buyer pursuant to this Agreement or in
connection with the transactions contemplated hereby contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the representations or statements contained
herein or therein not misleading.
9.7 PROXY STATEMENT. At the time the Proxy Statement (as defined herein)
is mailed to the shareholders of Seller in order to obtain their approval
referred to in Section 10.1 and at all times
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subsequent to such mailing up to and including the time of such approval, the
Proxy Statement (including all supplements thereto), with respect to all
information set forth therein relating to Buyer and supplied by Buyer or on
behalf of Buyer for inclusion therein, will (a) comply in all material
respects with applicable provisions of the Securities Act, and (b) not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances under which they are made,
not misleading.
9.8 SEC DOCUMENTS. Buyer has filed all required reports, schedules,
forms, statements and other documents with the Securities and Exchange
Commission (the "SEC") since April 1, 1996 (together with later filed documents
that revise or supersede earlier filed documents, the "Buyer SEC Documents").
As of their respective dates, the Buyer SEC Documents complied as to form in all
material respects with the requirements of the Securities Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as the case may be, and
the rules and regulations of the SEC promulgated thereunder applicable to such
Buyer SEC Documents. None of the Buyer SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of Buyer included in the Buyer SEC Documents complied as of their
respective dates of filing with the SEC as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except, in the case of unaudited statements, as
permitted by Form 10-Q of the Exchange Act) applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto), and
fairly present the financial position of Buyer as of the dates thereof and the
results of its operations and cash flows for the periods then ended (subject, in
the case of unaudited statements, to normal year-end audit adjustments). Except
as set forth in the Buyer SEC Documents, and except for liabilities and
obligations incurred in the ordinary course of business consistent with past
practice, Buyer has no liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) required by generally accepted
accounting principles to be set forth in a balance sheet of Buyer or in the
notes thereto which, individually or in the aggregate, would have a material
adverse effect on the business or results of operations of Buyer.
10. CONDITIONS TO OBLIGATION OF BUYER TO CLOSE TRANSACTIONS. The
obligation of Buyer to effect the closing of the transactions contemplated by
this Agreement is subject to the satisfaction prior to or at the Closing of the
following conditions, except for any such condition expressly waived in writing
by Buyer prior to the Closing Date:
10.1 APPROVAL OF SELLER'S SHAREHOLDERS. The holders of outstanding shares
of common stock of Seller, by the requisite vote of such holders, shall have
approved this Agreement and authorized the transactions contemplated hereby and
such approval and authorization shall remain effective as of the Closing Date.
10.2 SECRETARY'S CERTIFICATE. Seller shall have delivered to Buyer a
certificate of the Secretary of Seller, dated the Closing Date, to the effect
that the execution and delivery by Seller of this Agreement, the Noncompetition
Agreement and the other agreements, documents and instruments contemplated
hereby, and the consummation of the transaction contemplated hereby and thereby,
have been duly authorized by all necessary corporate action on the part of
Seller.
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10.3 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Seller contained in this Agreement shall be true and correct on the Closing
Date, as if made on the Closing Date, except that any such representation or
warranty made as of a specified date (other than the date hereof) shall only be
required to be true on and as of such date.
10.4 NO ADVERSE CHANGE. There shall have occurred no material adverse
change in the Assets as a whole or the Business as it relates to the Products or
results of operations of the Business as it relates to the Products since the
date hereof.
10.5 OBSERVANCE AND PERFORMANCE. Seller shall have observed and performed
all covenants and agreements required by this Agreement to be observed or
performed by Seller on or prior to the Closing Date.
10.6 OFFICER'S CERTIFICATE. Seller shall have delivered to Buyer a
certificate of a responsible officer of Seller, dated the Closing Date, to the
effects set forth in Sections 10.3, 10.4 and 10.5 above.
10.7 SEARCHES. Buyer shall have received Uniform Commercial Code searches
against Seller from the Secretary of State of Minnesota and from such other
states and/or counties as Buyer shall reasonably request, together with tax lien
and judgment searches and disclosing no liens or security interests against the
Assets.
10.8 CONSENTS OF THIRD PARTIES. Buyer shall have received duly executed
copies of any material consents necessary to permit the assignment of the
contracts, leases, commitments and agreements described under Schedule 8.9
hereto without breach thereof.
10.9 NOTICES. Seller shall have made all filings and registrations with
all federal, state and local governmental agencies or authorities required to be
made by Seller in connection with the execution and delivery hereof and the
consummation of the purchase and sale of the Assets contemplated hereby.
10.10 REGULATORY APPROVALS. Seller and Buyer shall have received all
authorizations, consents and approvals of governments and governmental agencies
required in connection with the purchase and sale of the Assets contemplated by
this Agreement.
10.11 LEGAL OPINION. Buyer shall have received an opinion, dated as of
the Closing Date, from Dorsey & Whitney LLP, counsel to Seller, as to such
matters as Buyer may reasonably request.
10.12 COPIES OF DOCUMENTS. Buyer shall have received accurate and
complete copies of all documents and instruments related to the purchase and
sale of the Assets and listed in any of the schedules to this Agreement (and of
any amendments, waivers or similar supplementary materials related thereto).
10.13 NO LEGAL ACTION. No court or governmental authority of competent
jurisdiction shall have issued an order restraining, enjoining or otherwise
prohibiting the consummation of the purchase and sale of the Assets contemplated
by this Agreement, and no person, firm, corporation or governmental agency shall
have instituted an action or proceeding which shall not have been
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previously dismissed seeking to restrain, enjoin or prohibit the consummation
of the purchase and sale of the Assets contemplated by this Agreement.
10.14 CLOSING DOCUMENTS. Buyer shall have received such bills of sale,
assignments and other documents of transfer reasonably required to transfer to
Buyer the interests of Seller in the Assets consistent with the terms of this
Agreement.
10.15 NONCOMPETITION AGREEMENT. Seller shall have entered into the
Noncompetition Agreement.
10.16 DISTRIBUTION AGREEMENT. Seller shall have terminated all
distribution agreements, independent representative agreements and the VHA, Inc.
purchase agreement, as listed in Schedule 8.9, related to the Products and shall
have provided evidence of such termination satisfactory to Buyer.
10.17 SETTLEMENT OF CLAIMS. All material litigation and claims related
to the Products shall have been resolved to the reasonable satisfaction of
Buyer.
11. CONDITIONS TO OBLIGATION OF SELLER TO CLOSE TRANSACTIONS. The
obligation of Seller to effect the closing of the transactions contemplated by
this Agreement is subject to the satisfaction prior to or at the Closing of the
following conditions, except for any such condition expressly waived in writing
by Seller prior to the Closing Date:
11.1 APPROVAL OF SELLER'S SHAREHOLDERS. The holders of outstanding shares
of common stock of Seller, by the requisite vote of such holders, shall have
approved this Agreement and authorized the transactions contemplated hereby and
such approval and authorization shall remain effective as of the Closing Date.
11.2 SECRETARY'S CERTIFICATE. Buyer shall have delivered to Seller a
certificate of the Secretary of Buyer, dated the Closing Date, to the effect
that the execution and delivery by Buyer of this Agreement and the other
agreements, documents and instruments contemplated hereby, and the consummation
of the transactions contemplated hereby, have been duly authorized by all
necessary corporate action on the part of the Buyer.
11.3 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Buyer contained in this Agreement shall be true and correct on the Closing Date,
as if made on the Closing Date, except that any such representation or warranty
made as of a specified date (other than the date hereof) shall only be required
to be true on and as of such date.
11.4 OBSERVANCE AND PERFORMANCE. Buyer shall have observed and performed
all covenants and agreements required by this Agreement to be observed or
performed by Buyer on or prior to or at the Closing Date.
11.5 OFFICER'S CERTIFICATE. Buyer shall have delivered to Seller a
certificate of a responsible officer of Buyer, dated the Closing Date, to the
effects set forth in Sections 11.3 and 11.4 above.
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11.6 CONSENTS OF THIRD PARTIES. Seller shall have received duly executed
copies of any material consents necessary to permit the assignment of the
contracts, leases, commitments and agreements described in Schedule 8.9 hereto
without breach thereof.
11.7 NOTICES. Buyer shall have made all filings and registrations with all
federal, state and local governmental agencies or authorities required to be
made by Buyer in connection with the execution and delivery hereof and
consummation of the purchase and sale of the Assets contemplated hereby.
11.8 REGULATORY APPROVALS. Seller and Buyer shall have received all
authorizations, consents and approvals of governments and governmental agencies
required in connection with the purchase and sale of the Assets contemplated by
this Agreement.
11.9 LEGAL OPINION. Seller shall have received an opinion, dated the
Closing Date, from Faegre & Benson LLP, counsel to Buyer, as to such matters as
Seller may reasonably request.
11.10 NO LEGAL ACTIONS. No court or governmental authority of
competent jurisdiction shall have issued an order restraining, enjoining or
otherwise prohibiting the consummation of the purchase and sale of the Assets
contemplated by this Agreement, and no person, firm, corporation or governmental
agency shall have instituted an action or proceeding which shall not have been
previously dismissed seeking to restrain, enjoin or prohibit the consummation of
the purchase and sale of the Assets contemplated by this Agreement.
11.11 INTERNATIONAL MARKETING AGREEMENT. If William L. Rush and Buyer
have entered into a mutually satisfactory noncompetition agreement, Buyer and
the International Marketing Entity shall have entered into the International
Marketing Agreement as described in Section 2.2 hereof.
11.12 NASDAQ LISTING.
(a) The Common Stock of Buyer shall continue to be listed for trading on
the Nasdaq National Market or The Nasdaq SmallCap Market.
(b) The Shares shall have been approved for listing, upon official notice
of issuance, on the Nasdaq National Market or The Nasdaq SmallCap Market.
11.13 CONSENT OF BUYER TO SETTLEMENT AGREEMENT. Buyer shall have
consented to be bound by the terms of any settlement agreement resolving the
lawsuit described in Schdule 8.5 hereof to the extent required by such
settlement agreement.
12. EXCLUSIVE MARKETING PRIOR TO CLOSING. Contemporaneously with the
execution of this Agreement, and pending the Closing, Buyer and Seller are
entering into an exclusive marketing agreement (the "Marketing Agreement")
substantially in the form of Exhibit A hereto.
13. OPERATION OF BUSINESS PRIOR TO CLOSING; COOPERATION. Seller agrees
that, from the date of this Agreement to the Closing:
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13.1 MAINTENANCE OF BUSINESS. Seller will use reasonable efforts to
preserve intact the business organization of the Business, keep available the
services of key employees on terms no less favorable to Seller than those on
which such employees are presently employed, and preserve for Buyer the goodwill
of suppliers, customers and others having business relationships with the
Business. Seller will maintain its books and records related to the Business
during such period in a manner consistent with past practice.
13.2 EMPLOYEES. Seller will not hire any new employees for the Business,
or effect any increase in compensation or employee benefits for its employees
engaged in operating the Business.
13.3 NO DISPOSITION OF ASSETS. Seller will not sell, transfer, dispose of
or abandon any portion of the Assets, except in the ordinary course of business
and consistent with past practice.
13.4 NO ADDITIONAL LIENS. Seller will not permit any of the Assets to
become subject to any mortgage, lien, charge or encumbrance, other than liens
imposed by law and incurred in the ordinary course of business for obligations
not yet due or delinquent, and liens identified in Schedule 1.2 attached hereto.
13.5 NO MODIFICATION OF AGREEMENTS. Seller will not modify or amend any
material contract, lease, commitment or agreement to be assigned to or assumed
by Buyer hereunder, or waive or assign to any third party any of its rights
under any such contract, lease, commitment or agreement.
13.6 MAINTENANCE OF TANGIBLE ASSETS. Seller will maintain all tangible
Assets in good order and repair, ordinary wear and tear excepted.
13.7 NO EXTRAORDINARY AGREEMENTS. Seller will not enter into any contract
or agreement that relates to the Business or Assets and that contains terms or
conditions inconsistent with past business practices of Seller or the continued
operation of the Business as a going concern.
13.8 MAINTENANCE OF INSURANCE. Seller will continue to carry all existing
policies of insurance relating to the Assets, or will effect renewals or
replacements thereof in substantially the same form and amount, and providing
substantially the same coverage, as such existing policies.
13.9 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE. With respect to the Business,
Seller will continue to collect its accounts receivable and pay its accounts
payable in accordance with its past business practices.
13.10 INVENTORIES; SUPPLIES. With respect to the Business, Seller will
maintain its inventories and other consumable materials and supplies at levels
as reasonably required to conduct the Business.
13.11 COOPERATION. Seller will furnish to Buyer all information
concerning Seller, the Business and the Assets required for inclusion in any
statement or application made by Buyer to any governmental body in connection
with the transactions contemplated by this Agreement (all of which information
Seller represents, warrants and covenants shall when furnished be true and
complete in all material respects). Without limiting the foregoing sentence,
Seller will reasonably cooperate with Buyer in good faith to obtain all consents
and approvals required from governmental
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and regulatory authorities and private third parties necessary to consummate
the transactions contemplated hereby and to enable the Buyer thereafter to
carry on the Business without material disruption. Seller will inform Buyer
when Seller believes that the extent of services provided by Seller's
employees under this Section 13.11 or under Section 14.4 requires
compensation from Buyer. Thereafter, Buyer and Seller will mutually agree
upon the terms for such services. No payments made under the Marketing
Agreement will be considered compensation for services provided by Seller's
employees under this Section 13.11 or under Section 14.4. Buyer will
reimburse Seller for the documented fees and expenses, if any, of Seller's
independent auditors or other third parties that are charged solely for
services performed by them in connection with this Section 13.11.
13.12 INSPECTION RIGHTS. Seller will permit employees and agents of
Buyer during normal business hours and on reasonable notice to Seller to inspect
the Assets and to inspect all contracts, agreements, other documents and records
reflecting or reasonably relating to the Assets or the Business. All
information and records obtained by Buyer pursuant to this Section 13.12 shall
be maintained as confidential and shall not be disclosed to any third party
without the prior written consent of Seller except in response to legal process
or to the extent required to comply with applicable law. Buyer will not be
obligated to maintain as confidential any information obtained from Seller which
is publicly available, readily ascertainable from public sources, known to Buyer
at the time the information was disclosed or which is rightfully obtained from a
third party. The obligations of confidentiality arising under this Section
13.12 shall survive the termination or abandonment of this Agreement.
13A. COVENANTS OF BUYER.
13A.1 NASDAQ LISTING. Buyer will file an application for listing of
additional shares in accordance with the rules of the Nasdaq Stock Market in
order to have the Shares approved for listing on the Nasdaq National Market or
The Nasdaq SmallCap Market and will use its best efforts to have such
application approved by the Nasdaq National Market or The Nasdaq SmallCap Market
prior to Closing.
13A.2 BLUE SKY APPROVAL. Buyer will file all documents required to
obtain, prior to Closing, all necessary approvals under state securities laws,
if any, required to carry out the transactions contemplated by this Agreement,
will pay all expenses incident thereto and will use its reasonable best efforts
to obtain such approvals.
13A.3 PROXY STATEMENT. Buyer will furnish, or cause to be furnished,
to Seller all the information concerning Buyer required for inclusion in the
proxy statement (the "Proxy Statement") for the meeting of Seller's shareholders
at which this Agreement and the transactions contemplated hereby will be
submitted to for approval, and Buyer shall cooperate with Seller in the
preparation of the Proxy Statement. Any financial statement for any fiscal year
provided under this Section 13A must include the audit opinion of Buyer's
independent accountant, and the consent of such accountant to use such opinion
in the Proxy Statement. Buyer agrees promptly to notify Seller if at any time
prior to such meeting the Proxy Statement becomes incorrect or incomplete in any
material respect with regard to any information furnished by Buyer for inclusion
in the Proxy Statement, and to provide Seller with the information needed to
correct such inaccuracy or omission.
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14. POST-CLOSING TRANSITIONAL MATTERS.
14.1 INVOICES FOR EXISTING OR PREVIOUSLY SHIPPED INVENTORY OF PRODUCTS.
With respect to any purchase orders or contracts assumed by Buyer pursuant to
Section 1.1(d) hereof, in the event that Buyer receives, subsequent to the
Closing, an invoice from a product manufacturer for any item of inventory of
Products (i) existing and owned by the Seller as of the Closing Date the value
of which was included in calculating the aggregate Inventory Value pursuant to
Section 2.4 hereof was satisfied or (ii) included within Products shipped by
Seller prior to the Closing, Buyer shall promptly deliver to Seller a copy of
such invoice. Seller shall review such invoice and shall, within five business
days of delivery of such invoice to Seller, deliver to Buyer documentation,
signed by the product manufacturer, of any adjustment to the amounts reflected
on such invoice. On the sixth business day after delivery of a copy of such
invoice to Seller, Buyer shall have the right, in its sole discretion, either to
pay such invoice, as adjusted, and be promptly reimbursed therefor by Seller or
demand payment of such invoice, as adjusted, by Seller. Seller agrees to
reimburse Buyer for any such invoice amount so paid or to pay any such invoice
amount, as requested by Buyer, promptly upon receipt from Buyer of instructions
to make such a payment. Nothing in this Section 14.1 shall be deemed to prevent
Seller from disputing with the product manufacturer any amounts paid by Seller,
and retaining any amounts remitted by the product manufacturer as a result of
any such dispute.
14.2 DELIVERY OF TANGIBLE ASSETS. Promptly after the Closing Date, Seller
shall make the tangible Assets available to Buyer at Seller's facilities at
Suite 110, 9850 51st Avenue North, Minneapolis, Minnesota and shall cooperate
with Buyer's personnel in arranging for the orderly assembly, packing and
shipment which shall be at Buyer's expense of all tangible Assets to such
locations as Buyer shall specify; provided, however, that (a) machinery,
equipment and tooling, if any, in the possession of third parties for production
purposes shall be left in their possession and Seller and Buyer shall jointly
notify and confirm to such third parties that Buyer has purchased such assets
from Seller; (b) Buyer shall be entitled if it so desires to continue to store
inventory of the Products at the facilities of the Seller through November 30,
1998 and (c) Buyer shall, with Seller's assistance, identify any books and
records the originals of which should remain in the possession of Seller. In
consideration of the use of the Seller's facilities to store inventory of the
Products, Buyer agrees to pay Seller $3,000 per month pro rated on a daily basis
from the Closing Date through the last date upon which any inventory of the
Products is stored at the facilities of the Seller.
14.3 DELIVERY AND ASSIGNMENT OF INTERNATIONAL MARKETING CONSIDERATION.
Immediately upon the Closing, Buyer will inform the International Marketing
Entity of the Closing; obtain from the International Marketing Entity the
International Marketing Consideration; and tender the International Marketing
Consideration with any such endorsement as may be required, and with an
assignment of any future benefits related to the International Marketing
Consideration and any related collateral securing payment thereof in form
approved by Seller, to Seller.
14.4 TRANSITIONAL CONSULTING. The parties contemplate that Buyer will, for
a period of nine months after the Closing Date, periodically require the advice
and assistance of a number of Seller's scientific, technical, regulatory and
marketing executives and employees who are familiar with the history and current
status of the Business. Seller will, so long as such persons remain employed by
Seller or any other entity affiliated with Seller, make such persons reasonably
available to assist Buyer in interpreting and reconciling the books, records
and correspondence
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transferred to Buyer hereunder, responding to customer inquiries and
complaints, providing information about regulatory matters and the status of
and issues being considered in pending regulatory proceedings, and otherwise
carrying forward the Business. Buyer and Seller will use their reasonable
best efforts to schedule the availability of the appropriate executives and
employees of Seller in such manner that will not materially delay, impede or
otherwise adversely affect either Buyer's pursuit of the Business or Seller's
pursuit of its remaining business. Buyer will use its reasonable best
efforts to reduce its reliance on Seller's personnel as soon as reasonably
possible following the date hereof. Seller will inform Buyer when Seller
believes that the extent of services provided by Seller's employees under
this Section 14.4 or under Section 13.11 requires compensation from Buyer.
Thereafter, Buyer and Seller will mutually agree upon the terms for such
services. No payments made under the Marketing Agreement will be considered
compensation for services provided by Seller's employees under this Section
14.4 or under Section 13.11.
14.5 USE OF NUTRITION MEDICAL NAME. Buyer will have the right to use the
name "Nutrition Medical" and any related trademarks or symbols in connection
with the Products for a period commencing on the Closing Date and ending one
year after the Closing Date.
14.6 USE OF PURCHASED SUPPLIES. Subject to any applicable laws, rules or
regulations, Buyer shall be entitled following the Closing or Subsequent
Closing, if any, to use up any then existing supplies of packaging or
promotional materials bearing Seller's name.
14.7 USE OF OFFICE SPACE. Each employee of Seller hired by Buyer will
continue to have access to, and working from, the office space assigned to such
employee in the facility of the Seller until the earlier of November 30, 1998 or
the date upon which such employee is instructed by Buyer to begin working from
Buyer's facility. Buyer will be allowed to use Seller's copy machine(s) and fax
machine(s), provided that Buyer purchases paper and other supplies for such use.
In consideration of the use of office space, Buyer agrees to pay Seller the
amounts enumerated in Schedule 14.7 hereof from the Closing Date through the
last date upon which any employee under Buyer's employment works from a facility
of Seller.
14.8 ACCOUNTS RECEIVABLE REMITTANCES. If Seller receives payments on
accounts receivable for sales of the Products made by Buyer, it will promptly
remit such payments to Buyer. If Buyer receives payments on accounts receivable
for sales of Products made by Seller, it will promptly remit such payments to
Seller.
15. REGISTRATION REQUIREMENTS.
15.1 REQUIRED REGISTRATION. Following the Closing, and to facilitate
resale of the Shares by Seller to the public following the Closing, Buyer shall
promptly prepare and file (in any event no later than 45 days of the Closing
Date) a registration statement under the Securities Act covering all of the
Shares issued to Seller and shall use its reasonable best efforts to cause such
registration statement to become effective. Buyer shall be obligated to
prepare, file and cause to become effective only one registration statement (on
Form S-3 or any successor form promulgated by the SEC) pursuant to this Section
15.1, and to pay the expenses associated with such registration statement. In
the event that Buyer shall not be eligible to use Form S-3, Buyer shall be
obligated to prepare, file and cause to become effective one registration
statement on Form S-1, S-2 or other
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applicable form or any other successor form promulgated by the SEC at Buyer's
election, in which case references herein to "Form S-3" shall be deemed to
refer to such other form. In Buyer's sole discretion, such registration
statement may include Shares of Common Stock of Buyer held by other
shareholders of Buyer.
15.2 REGISTRATION PROCEDURES. Buyer will:
(a) prepare and file with the SEC a registration statement with respect to
the Shares issued to Seller, and use its reasonable best efforts to cause such
registration statement to become and remain effective until the earlier of two
years from the date upon which such registration statement is declared effective
by the SEC (the "Effective Time") or the date that all Shares registered on such
registration statement have been sold by Seller;
(b) prepare and file with the SEC such amendments to such registration
statement and supplements to the prospectus contained therein as may be
necessary to keep such registration statement effective for the period described
in clause (a) above;
(c) notify Seller as to the filing of any such registration statement and
of all amendments or supplements thereto;
(d) subject to Section 15.7 hereof, prepare promptly upon request of
Seller or any underwriter for Seller, during the period during which Buyer is
obligated to keep any such registration statement effective, such amendment or
amendments to such registration statement and such prospectus or prospectuses as
may be reasonably necessary to permit compliance with the requirements of
Section 10(a)(3) of the Securities Act;
(e) furnish Seller with copies of such opinions of counsel and
accountants' "comfort" letters as it reasonably may request with respect to the
registration of the Shares, any registration statement covering the Shares and
the financial statements included therein;
(f) in connection with the preparation and filing of each registration
statement registering Shares under the Securities Act, give Seller and any
underwriter, and their respective counsel and accountants, the opportunity to
participate in the preparation of such registration statement, each prospectus
included therein or filed with the SEC, and each amendment thereof or supplement
thereto, and will give each of them such access to its books and records and
such opportunities to discuss the business of Buyer with its officers and the
independent accountants who have certified its financial statements as shall be
necessary, in the opinion of Seller and such underwriters, or their respective
counsel, to conduct a reasonable investigation within the meaning of the
Securities Act;
(g) subject to Section 15.7 hereof, prepare and promptly file with the SEC
and promptly notify Seller of the filing of any amendments or supplements to
such registration statement or prospectus as may be necessary to correct any
statements or omissions if, at any time when a prospectus relating to the Shares
is required to be delivered under the Securities Act, any event with respect to
Buyer shall have occurred as a result of which any such prospectus or any other
prospectus as then in effect would include an untrue statement of a
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material fact or omit to state any material fact necessary to make the
statements therein not misleading;
(h) furnish to Seller and to the underwriters, if any, of the Shares to be
registered such reasonable number of copies of the registration statement,
preliminary prospectus, final prospectus, prospectus supplements and such other
documents as Seller or such underwriters may reasonably request in order to
facilitate the public offering of the Shares;
(i) use its reasonable best efforts to register or qualify the Shares
covered by such registration statement under such state securities or blue sky
laws of such jurisdictions as Seller may reasonably request in writing, except
that Buyer shall not for any purpose be required to execute a general consent to
service of process or to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified;
(j) notify Seller, promptly after it shall receive notice thereof, of the
time when such registration statement has become effective;
(k) notify Seller promptly of any request by the SEC for the amending or
supplementing of such registration statement or prospectus or for additional
information;
(m) subject to Section 15.7 hereof, prepare and file with the SEC,
promptly upon the request of Seller or any underwriter, any amendments or
supplements to such registration statement or prospectus which, in the opinion
of counsel for Seller (and concurred in by counsel for Buyer), is required or
advisable under the Securities Act in connection with the distribution of the
Shares by Seller;
(n) advise Seller, promptly after it shall receive notice or obtain
knowledge thereof, of the issuance of any stop order by the SEC suspending the
effectiveness of such registration statement or any amendment thereto or the
initiation or threatening of any proceeding for that purpose and promptly use
its reasonable best efforts to prevent the issuance of any stop order or to
obtain its withdrawal if such stop order should be issued; and
(o) not file any amendment or supplement to such registration statement or
prospectus to which Seller shall have reasonably objected on the grounds that
such amendment or supplement does not comply in all material respects with the
requirements of the Securities Act, after having been furnished with a copy
thereof at least five business days prior to the filing thereof, unless in the
opinion of counsel for Buyer the filing of such amendment or supplement is
reasonably necessary to protect Buyer from any liabilities under any applicable
federal or state law and such filing will not violate applicable law.
15.3 DELAYED EFFECTIVENESS OF REGISTRATION STATEMENT. If the registration
statement with respect to the Shares has not become effective on or prior to 180
days after the Closing Date, Buyer will issue to Seller, as liquidated damages,
that number of Shares equal to ten percent (10%) of the Shares issued to Buyer
pursuant to Section 2.1(b) of this Agreement. The registration statement will
be amended to cover the Shares, if any, issued pursuant to this
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Section 15.3. The Shares, if any, issued pursuant to this Section 15.3 will,
upon issuance, be duly authorized and validly issued, fully paid and
non-assessable.
15.4 EXPENSES. With respect to such registration, Buyer shall bear the
following fees, costs and expenses: all registration, filing and NASD fees,
printing expenses, fees and disbursements of counsel and accountants for Buyer,
all internal Buyer expenses, and all legal fees and disbursements and other
expenses of complying with state securities or blue sky laws of any
jurisdictions in which the Shares are to be registered or qualified. Fees and
disbursements of counsel and accountants for Seller, as the selling security
holder, underwriting discounts and commissions and transfer taxes and any other
expenses incurred by Seller not expressly included above shall be borne by
Seller, provided that Buyer shall bear up to $1,250 of the fees and expenses of
counsel to Seller in connection with the registration provided for by this
Section 15, provided, however that in the event that Buyer is unable to register
the Shares on Form S-3 Buyer shall bear the full fees and expenses of counsel to
Seller in connection with the registration provided for by this Section 15.
15.5 INDEMNIFICATION. With respect to such registration:
(a) Buyer will indemnify and hold harmless Seller, its directors and
officers, and any underwriter (as defined in the Securities Act) for Seller
and each person, if any, who controls Seller or such underwriter within the
meaning of the Securities Act, from and against, and will reimburse Seller
and each such director, officer, underwriter and controlling person with
respect to, any and all loss, damage, liability, cost and expense (including
legal fees) to which Seller or any such director, officer, underwriter or
controlling person may become subject under the Securities Act, the Exchange
Act or otherwise, insofar as such losses, damages, liabilities, costs or
expenses are caused by any untrue statement or alleged untrue statement of
any material fact contained in such registration statement, any prospectus
contained therein or any amendment or supplement thereto, 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, in light of the circumstances in which they were made, not
misleading, or any violation or alleged violation by Buyer of the Securities
Act, the Exchange Act, any state securities law or any regulation promulgated
under the Securities Act, the Exchange Act or any state securities law;
provided, however, that Buyer will not be liable in any such case to the
extent that any such loss, damage, liability, cost or expense arises out of
or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission so made in conformity with information furnished by
Seller, such director, officer, underwriter or such controlling person in
writing specifically for use in the preparation thereof.
(b) Seller will indemnify and hold harmless Buyer, its directors and
officers, any controlling person and any underwriter from and against, and will
reimburse Buyer, its directors and officers, any controlling person and any
underwriter with respect to, any and all loss, damage, liability, cost or
expense (including legal fees) to which Buyer or any controlling person and/or
any director, officer or underwriter may become subject under the Securities
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Act, the Exchange Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue or alleged untrue
statement of any material fact contained in such registration statement, any
prospectus contained therein or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was so made in
reliance upon and in strict conformity with written information furnished by
Seller specifically for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 15.5 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of said
paragraph (a) or (b), promptly notify the indemnifying party of the commencement
thereof; but the omission to so notify the indemnifying party will only relieve
it from liability to the extent that such failure to so notify shall materially
adversely prejudice the indemnifying party in the defense of any such claim. In
case such action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party shall
have the right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party,
provided, however, if the defendants in any action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, or if there is a conflict of interest which would
prevent counsel for the indemnifying party from also representing the
indemnified party, the indemnified party or parties shall have the right to
select separate counsel to participate in the defense of such action on behalf
of such indemnified party or parties. After notice from the indemnifying party
to such indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party pursuant to the
provisions of said paragraph (a) or (b) for any legal or other expense
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation, unless (i) the indemnified
party shall have employed counsel in accordance with the proviso of the
preceding sentence, (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after the notice of the commencement of the
action, or (iii) the indemnifying party has authorized in writing the employment
of counsel for the indemnified party at the expense of the indemnifying party.
No indemnifying party, in the defense of any such claim or litigation shall,
except with the prior written consent of the indemnified party, consent to entry
of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to the
indemnified party of a release from all liability in respect to such claim or
litigation in form and substance reasonably satisfactory to the indemnified
party.
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15.6 CONTRIBUTION.
(a) If the indemnification provided for in Section 15.5 from the
indemnifying party is unavailable to or unenforceable by the indemnified party
in respect to any losses, claims, damages, liabilities or expenses referred to
herein, then the indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified party in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying
party and indemnified party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact, has been made by, or relates to information supplied by, such indemnifying
party or indemnified party, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include, subject
to the limitations set forth in Section 15.5, any legal or other fees or
expenses reasonably incurred by such party in connection with any investigation
or proceeding.
(b) Buyer and Seller agree that it would not be just and equitable if
contribution pursuant to this Section 15.6 were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in Section 15.6(a). No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
(c) If indemnification is available under Section 15.5, the indemnifying
party shall indemnify each indemnified party to the full extent provided in
Section 15.5 without regard to the relative fault of the indemnifying party or
indemnified party or any other equitable consideration provided for in this
Section 15.6.
15.7 RIGHT TO SUSPEND SALES. Buyer may suspend sales of Shares under the
registration statement for a limited time, which in no event shall be longer
than 90 days, if (a) such sales would materially adversely affect, or would be
improper in view of (or improper without disclosure in a prospectus or other
filing with the SEC), a proposed financing, reorganization, recapitalization,
merger, acquisition, consolidation or similar transaction or other development
involving or with respect to Buyer (including, without limitation, through the
premature disclosure thereof) or (b) Buyer is conducting a public offering of
capital stock (including during the effectiveness of any registration statement
pertaining thereto) and the managing underwriter concludes in its reasonable
judgment that sales of Shares held by the Seller would materially adversely
affect the success of the offering. Buyer will promptly notify Seller any time
sales of Shares under the registration statement are suspended and will promptly
notify Seller of the termination of any such suspension.
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16. LIMITATIONS ON TRANSACTIONS IN SHARES.
16.1 NO DISTRIBUTION OF SHARES. Seller agrees not to distribute the Shares
to its shareholders as a part of the transactions contemplated hereby and not to
sell or otherwise transfer any Shares except in accordance with applicable
federal and state securities laws and otherwise in accordance with the terms and
conditions hereof.
16.2 LIMITATIONS ON RESALE OF THE SHARES. Seller agrees that it will not
sell or otherwise transfer any Shares except pursuant to the registration
statement described in Section 15 hereof during the two-year period following
the Closing Date and, further, that any such sales or transfers will be limited
as follows:
(a) immediately upon effectiveness of the above-mentioned registration
statement, Seller may sell or transfer up to 10% of the Shares;
(b) during each of the first through the sixth months following the
Closing Date (the month of the Closing Date being counted as the first such
month), Seller may sell or transfer up to an additional 5% of the Shares per
month; and
(c) during each of the seventh through the twelfth months following the
Closing Date, Seller may sell or transfer up to an additional 10% of the Shares
per month.
The foregoing percentages are intended to be cumulative, such that any
amounts not sold within such limitations at the time or within the period
permitted shall continue to be available for sale at any time during the
remainder of the one-year period following the Closing Date.
17. TAXES, FEES AND OTHER EXPENSES.
17.1 TAXES AND FEES. Seller shall be responsible for and shall pay all
sales, transfer or similar taxes or governmental charges, if any, with respect
to the sale and purchase of the Assets, whether levied against the Assets,
Seller or Buyer.
17.2 EXPENSES. Except as otherwise provided herein, each party shall pay
all of the costs and expenses incurred by it in negotiating and preparing this
Agreement (and all other agreements, certificates, instruments and documents
executed in connection herewith), in soliciting any required shareholder
approval for this Agreement, in performing its obligations under this
Agreement, and in otherwise consummating the transactions contemplated by this
Agreement, including without limitation its attorneys' fees and accountants'
fees.
18. INDEMNIFICATION BY SELLER.
18.1 GENERALLY. Seller hereby agrees to defend, indemnify and hold
harmless Buyer against and with respect to:
(a) Any and all liabilities and obligations arising from or in connection
with ownership of the Assets or operation of the Business, as it relates to the
Assets, on or prior to the Closing Date,
24
<PAGE>
whether or not reflected in Seller's books and records and whether or not
readily apparent on or prior to the Closing Date;
(b) Without limiting the generality of the foregoing, any and all products
liability or similar claims in respect of Products sold or delivered by Seller
on or prior to the Closing Date;
(c) Any and all loss, injury, damage or deficiency resulting from any
misrepresentation, omission or breach of warranty on the part of Seller under
this Agreement or any other agreement, instrument or document contemplated
hereby;
(d) Any and all loss, injury, damage or deficiency resulting from any
non-fulfillment of any covenant or agreement on the part of Seller under this
Agreement; and
(e) Any and all demands, claims, actions, suits, proceedings, assessments,
judgments, costs and legal and other expenses incident to any of the foregoing.
(f) Any and all liabilities and obligations arising from or in connection
with the performance by Seller of Seller's obligations under the Marketing
Agreement.
18.2 SETTLEMENT AND COMPROMISE. Seller shall not settle or compromise any
demands, claims, actions, suits or proceedings for which Buyer has sought
indemnification from Seller unless it shall have given Buyer not less than 15
days prior written notice of the proposed settlement or compromise and afforded
Buyer an opportunity to consult with Seller regarding the proposed settlement or
compromise.
18.3 TERMINATION OF INDEMNIFICATION. The right to indemnification under
this Section 18 to the extent based on any misrepresentation or breach of
warranty shall terminate twelve months after the Closing Date except (a) for (i)
any claim based on the untruth or inaccuracy of any representation or warranty
of Seller contained in Section 8.12 hereof or (ii) any claim based on the
untruth or inaccuracy of any other representation or warranty made herein or in
any statement, certificate or schedule furnished hereunder with an intent to
deceive or defraud or with reckless disregard for the truth or accuracy thereof,
and (b) that with respect to any pending claim for indemnity hereunder which
shall have been made within twelve months after the Closing Date, the right to
indemnity shall not terminate until the final determination and satisfaction of
such claim.
18.4 LIMITATIONS. No claim for indemnification under this Section 18 shall
be made by Buyer unless and until the aggregate amount of such claims by Buyer
shall exceed $5,000. Seller shall be liable for a maximum of $175,000 of
payments made under this Section 18.
19. INDEMNIFICATION BY BUYER.
19.1 GENERALLY. Buyer hereby agrees to defend, indemnify and hold harmless
Seller against and with respect to:
(a) Any and all liabilities and obligations arising from or in connection
with ownership of the Assets or operation of the Business, as it relates to the
Assets, after the Closing Date, except to the extent Seller is required to
indemnify Buyer in respect thereof pursuant to Section 18.1;
25
<PAGE>
(b) Without limiting the generality of the foregoing, any and all products
liability claims or similar claims in respect of Products sold or delivered by
Buyer after the Closing Date;
(c) Any and all loss, injury, damage or deficiency resulting from any
misrepresentation, omission or breach of warranty on the part of Buyer under
this Agreement or any other agreement, instrument or document contemplated
hereby;
(d) Any and all loss, injury, damage or deficiency resulting from any
non-fulfillment of any covenant or agreement on the part of Buyer under this
Agreement; and
(e) Any and all demands, claims, actions, suits or proceedings,
assessments, judgments, costs and legal and other expenses incident to any of
the foregoing.
(f) Any and all liabilities and obligations arising from or in connection
with the performance by Buyer of Buyer's obligations under the Marketing
Agreement, except to the extent Seller is required to indemnify Buyer in respect
thereof pursuant to Section 18.1.
19.2 SETTLEMENT AND COMPROMISE. Buyer shall not settle or compromise any
demands, claims, actions, suits or proceedings for which Seller has sought
indemnification from Buyer unless it shall have given Seller not less than 15
days prior written notice of the proposed settlement or compromise and afforded
Seller an opportunity to consult with Buyer regarding the proposed settlement or
compromise.
19.3 TERMINATION OF INDEMNIFICATION. The right to indemnification under
this Section 19 to the extent based on any misrepresentation or breach of
warranty shall terminate twelve months after the Closing Date except (a) for any
claim based on the untruth or inaccuracy of any representation or warranty made
herein or in any statement, certificate or schedule furnished hereunder with an
intent to deceive or defraud or with reckless disregard for the truth or
accuracy thereof, and (b) that with respect to any pending claim for indemnity
hereunder which shall have been made within twelve months after the Closing
Date, the right to indemnity shall not terminate until the final determination
and satisfaction of such claim
19.4 LIMITATIONS. No claim for indemnification under this Section 19 shall
be made by Seller unless and until the aggregate amount of such claims by Seller
shall exceed $5,000. Buyer shall be liable for a maximum of $175,000 of
payments made under this Section 19.
20. TERMINATION OF AGREEMENT. This Agreement may be terminated at any
time prior to the Closing Date only as follows:
20.1 MUTUAL CONSENT. By mutual consent of Buyer and Seller.
20.2 BREACH OF AGREEMENT. By Buyer giving written notice to Seller if
Seller is in breach, or by Seller giving written notice to Buyer if Buyer is in
breach, in any material respect of any representation, warranty or covenant
contained in this Agreement and such breach shall not have been cured by the
fourteenth calendar day after the giving of such notice.
20.3 DELAYED CLOSING. By Buyer giving written notice to Seller, or by
Seller giving written notice to Buyer, if the transactions contemplated by this
Agreement shall not have been
26
<PAGE>
consummated by December 31, 1998, unless such failure shall be due to the
failure of the party seeking to terminate this Agreement to perform or
observe the covenants, agreements and conditions hereof to be performed or
observed by such party at or before the Closing Date.
20.4 GOVERNMENT ACTION. By Buyer or Seller if any court of competent
jurisdiction in the United States or other United States governmental body shall
have issued an order, decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting the consummation of the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable.
21. NONSOLICITATION. Until the termination of this Agreement in
accordance with Section 20, Seller will not, directly or indirectly, through any
officer, director, agent, affiliate, employee or otherwise, solicit, initiate or
encourage submission of any proposal or offer from any person, group or entity
relating to any acquisition of the Products or the Business (an "Acquisition
Proposal"); will not participate in any negotiations or discussions regarding or
furnish to any other person any information with respect to, or otherwise
cooperate in any way with, assist or participate in, facilitate or encourage,
any effort or attempt by any other person or entity to do or seek such
acquisition; will inform any person making inquiry with respect to such
acquisition of this Agreement; and will inform Buyer of any such inquiry;
provided, that in response to an Acquisition Proposal made without any
solicitation, initiation or encouragement by Seller or any officer, director,
agent, affiliate or employee thereof, Seller may (i) furnish information to any
person pursuant to a confidentiality agreement no more favorable to such person
than any confidentiality agreement that may be entered into between Buyer and
Seller, and (ii) participate in negotiations regarding such Acquisition
Proposal, in each case if and only to the extent that the Board of Directors of
Seller shall have concluded in good faith based on the advice of outside counsel
that such action is required for the Board of Directors of Seller to comply with
its fiduciary duties under applicable law. If any Acquisition Proposal is
received or indicated to be forthcoming, Seller shall notify Buyer immediately
of such Acquisition Proposal, including the material terms and conditions of
such Acquisition Proposal.
22. SALE OF ADDITIONAL PRODUCT.
22.1 ADDITIONAL PRODUCT. Seller is the owner of an additional product,
L-Emental Plus ("LEP"), that is not one of the Products for purposes of this
Agreement. Pending the mutually satisfactory resolution of certain litigation
relating to LEP, Buyer may be interested in purchasing Seller's rights to LEP
pursuant to a separate purchase agreement to be negotiated by Buyer and Seller
(the "LEP Agreement").
22.2 RIGHT OF FIRST REFUSAL. Pending negotiation and execution of the LEP
Agreement, Seller will not at any time assign, transfer, convey or otherwise
dispose of any of its rights to LEP unless Seller has first (a) received from a
Qualifying Offeror (as hereinafter defined) a BONA FIDE written offer for such
rights, in form and substance such that acceptance thereof by signature of an
officer of Seller would cause formation of a legally binding contract for such
disposition (a "Qualifying Offer") and (b) complied in full with the following
provisions:
27
<PAGE>
(i) Seller will give written notice to Buyer of each Qualifying
Offer, including a complete copy thereof, the identify of the
Qualifying Offeror, purchase price, rights and other assets involved
and all other terms and conditions thereof (the "Notice").
(ii) With respect to each Qualifying Offer, Buyer shall have 21
days after receipt of the Notice in which to elect to purchase such
rights on the same terms and conditions as those contained in the
Qualifying Offer.
(iii) If Buyer gives notice of its election to purchase such
rights within such 21-day period, then Buyer and Seller will proceed
to close the transfer of such rights on the terms set forth in such
Qualifying Offer.
(iv) If Buyer gives notice of its election not to purchase such
rights or fails to give any notice to Seller within such 21-day
period, Buyer will be deemed to have waived its rights with regard to
such Qualifying Offer, and Seller will have 60 days after the end of
such 21-day period in which to accept such Qualifying Offer and close
the disposition contemplated therein on the terms set forth in such
Qualifying Offer. If the disposition contemplated by such Qualifying
Offer has not been closed by the end of such 60-day period, then
Seller's right to do so shall lapse and terminate at the end of such
60-day period, such Qualifying Offer shall be deemed to have lapsed
and all rights granted to Seller hereunder shall again be subject to
all of the provisions hereof.
22.3 QUALIFYING OFFEROR. For purposes of this Section 22, a "Qualifying
Offeror" shall mean a person or entity which (a) is not under any legal or
contractual disability preventing completion of the related Qualifying Offer and
(b) is financially ready, willing and able to complete the transaction being
proposed.
22.4 TERMINATION OF RIGHT OF FIRST REFUSAL. Buyer's rights under this
Section 22 shall terminate and be of no further force one year after the Closing
Date.
23. ASSIGNMENT. This Agreement may not be assigned by either party hereto
without the prior written consent of the other. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto, their successors and
permitted assigns, and no person, firm or corporation other than the parties,
their successors and permitted assigns shall acquire or have any rights under or
by virtue of this Agreement.
24. COVENANT OF FURTHER ASSURANCES. From time to time after the Closing,
at the request of Buyer and without further consideration, Seller will execute
and deliver such other instruments of transfer and take such other actions as
Buyer may reasonably require to transfer the acquired Assets to, and vest title
of the acquired Assets in, Buyer, and to put Buyer in possession of the acquired
Assets. In the event that it shall be necessary for Seller to qualify to do
business as a foreign corporation in any state after the Closing in order for
Buyer to enforce any material claim, Seller shall so qualify promptly upon
written request of Buyer.
28
<PAGE>
25. CONFIDENTIALITY AND NONDISCLOSURE. Seller covenants and agrees from
and after the date hereof to maintain in strict confidence and not to use or
disclose to others the industrial and intellectual property of Seller to be
transferred to Buyer pursuant to this Agreement.
26. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained herein, and all other written representations and
warranties of Buyer and Seller contained in the instruments executed in
connection with the consummation of the transactions provided for herein, shall
survive the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby until twelve months after the Closing Date;
provided, however, that the foregoing shall not bar the parties hereto, and
their respective successors and assigns, from asserting at any time thereafter
any cause of action based on (a) the untruth or inaccuracy of any representation
or warranty of Seller contained in Section 8.12 hereof, or (b) the untruth or
inaccuracy of any other representation or warranty made herein or in any
statement, certificate or schedule furnished hereunder with an intent to deceive
or defraud or with reckless disregard for the truth or accuracy thereof.
27. PUBLIC ANNOUNCEMENT. Any and all public announcements of any kind or
nature whatsoever concerning the transactions contemplated hereby made before,
on or after the Closing Date shall require the prior written approval of Buyer
and Seller.
28. ENTIRE AGREEMENT. This Agreement, including the exhibits and
schedules attached to this Agreement, and other agreements contemplated hereby
constitutes the entire agreement and understanding between Seller and Buyer with
respect to the sale and purchase of the Assets and the other transactions
contemplated by this Agreement. All prior representations, understandings and
agreements between the parties with respect to the purchase and sale of the
Assets and the other transactions contemplated by this Agreement are superseded
by the terms of this Agreement.
29. AMENDMENT AND WAIVER. Any provision of this Agreement may be amended
or waived only by a writing signed by the party against which enforcement of the
amendment or waiver is sought.
30. CHOICE OF LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Minnesota, without giving effect to the
conflict of laws provision thereof, as though all acts and omissions related to
this Agreement occurred in the State of Minnesota.
31. ARBITRATION. Except as provided below, any controversy or claim
arising out of or relating to this Agreement, including disputes relating to its
formation, or the breach thereof, shall be settled by arbitration in
Minneapolis, Minnesota, at a time and location designated by the arbitrator, but
not exceeding 90 days after a demand for arbitration has been made. Arbitration
shall be conducted by the American Arbitration Association in accordance with
its Rules of Commercial Arbitration, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. The
arbitrator shall be agreed to by both Buyer and Seller and shall be a retired
state or federal judge or any attorney who has practiced business litigation for
at least 10 years. If Buyer and Seller cannot agree upon the arbitrator within
10 days after a demand for arbitration has been made, the arbitrator shall be
selected in accordance with the rules of the American Arbitration Association.
Arbitration will be conducted pursuant to the provisions of this
29
<PAGE>
Agreement, and the Commercial Arbitration Rules of the American Arbitration
Association. Limited civil discovery shall be permitted for the production of
documents and taking of depositions. Unresolved discovery disputes may be
brought to the attention of, and may be decided by, the arbitrator. The
arbitrator shall assess the costs and expenses of the arbitration against the
parties in such proportion as may be fair and equitable. Nothing herein
contained shall bar either party from seeking equitable remedies in a court
of appropriate jurisdiction.
32. SEVERABILITY. The provisions of this Agreement shall, where possible,
be interpreted so as to sustain their legality and enforceability, and for that
purpose the provisions of this Agreement shall be read as if they cover only the
specific situation to which they are being applied. The invalidity or
unenforceability of any provision of this Agreement in a specific situation
shall not affect the validity or enforceability of that provision in other
situations or of other provisions of this Agreement.
33. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be considered an original.
34. NOTICES. All notices given pursuant to this Agreement shall be in
writing and shall be delivered by hand or sent by United States registered mail,
postage prepaid, addressed as follows (or to another address or person as a
party may specify on notice to the other):
(i) If to Seller:
Nutrition Medical, Inc.
Suite 110
9850 51st Avenue North
Minneapolis, Minnesota 55442
Attention: President
(ii) If to Buyer:
GalaGen Inc.
4001 Lexington Avenue North
Arden Hills, Minnesota 55126
Attention: Robert A. Hoerr
35. BULK TRANSFER LAWS. Buyer acknowledges that Seller will not comply
with the provisions of any bulk transfer laws of any jurisdiction in connection
with the transactions contemplated by this Agreement.
36. DEFINITION OF KNOWLEDGE. For purposes of this Agreement, "knowledge"
shall mean the actual knowledge of an executive officer or director of Seller or
Buyer, as the case may be, and
30
<PAGE>
including such knowledge as a reasonably prudent person in such position would
have obtained upon the exercise of reasonable diligence.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their duly authorized officers as of the date and year first
above written.
GALAGEN INC.
By
--------------------------------
Its
----------------------------
NUTRITION MEDICAL, INC.
By
--------------------------------
Its
----------------------------
31
<PAGE>
SCHEDULE 1.
PRODUCTS
1. Fiber-PRO
2. Glutasorb Ready to Use
3. GlucoPro Vanilla
4. L-Emental Hepatic
5. L-Emental Pediatric
6. L-Emental
7. Nitro-PRO
8. Pro-Peptide for Kids
9. Pro-Peptide Unflavored
10. Pro-Peptide VHN
11. Pro-Peptide Vanilla
12. Nutrition Liquid
13. Nutrition Plus Liquid
14. Instant Nutrition
15. Instant Nutrition (Lactose Free)
16. ISO-PRO
17. ISO-LAN
18. ULTRA-PRO
19. ULTRA-LAN
20. NUTRA-LAN
32
<PAGE>
SCHEDULE 1.1.(b)
FIXED ASSETS
Buyer will acquire all fixed assets owned and used in the Business by
Seller including, without limitation, the fixed assets listed in Appendix A
hereto, except that Seller will retain and Buyer will not acquire the fixed
assets listed in Appendix B hereto.
33
<PAGE>
SCHEDULE 1.1(j)
INTELLECTUAL PROPERTY
1. Patent application pending Serial No. 08/964,556 for "Liquid Amino Acid
Nutritional Composition."
2. Trademark license agreement dated as of October 15, 1995 with VHA, Inc.
34
<PAGE>
SCHEDULE 1.1(k)
LICENSES AND PERMITS
1. Minnesota Department of Agriculture - Wholesale Food Handler License,
No. 20038078, expires June 30, 1999. Not transferable.
2. United States Department of Health and Human Services Public Health Service
Food and Drug Administration - Annual Registration of Drug Establishment,
for the year 1998. Not transferable.
35
<PAGE>
SCHEDULE 8.5
ACTIONS, SUITS, PROCEEDINGS
1. In August, 1998, Seller was named as a defendant in a patent infringement
lawsuit brought by Novartis Nutrition ("Novartis"), formerly Sandoz Nutrition
Corporation, in the United States District Court for the District of Minnesota.
The complaint asserts that one of Seller's products, L-Emental-TM- Plus, which
is not a Product or subject of this Agreement, infringes on two patents held by
Novartis and asks for relief in the form of an injunction that would prevent
Seller from selling the product as well as damages of an unspecified amount.
Both patents were issued subsequent to Seller's introduction of L-Emental Plus.
Seller responded with a counter claim seeking a declaration of invalidity,
unenforceability, non-infringement and inventorship of the subject patents. A
court order stayed the litigation pending a reexamination by the United States
Patent and Trademark Office of both patents. On August 13, 1997, Seller
received notification that the United States Patent and Trademark Office will
issue the two patents under review. Although the scope of the patents was
narrowed, the litigation, which was stayed pending this determination, has
resumed, and Seller intends to continue to vigorously defend against the claim.
2. In November 1997, Seller was named as a defendant in a patent infringement
lawsuit brought by Nestle Clinical Nutrition ("Nestle") in the United States
District Court for the Northern District of Illinois. The suit asserts that one
of Seller's products, Pro-Peptide-TM- -For-Kids, infringes on a patent held by
Nestle and asks for relief in the form of an injunction that would prevent
Seller from selling the product as well as damages of an unspecified amount.
36
<PAGE>
SCHEDULE 8.8
INVENTORY LOCATIONS
<TABLE>
<CAPTION>
Location Inventory
-------- ---------
<S> <C>
IFP, Inc. Custom Blends, Amino Acids and
Hayfield, MN Ingredients
IFP, Inc. Packaging Materials
Faribault, MN
Curtice Burns Foods Pro-Peptide Labels
Benton Harbor, MI Raw materials for Glutasorb
Dedicated Logistics Finished Goods
New Hope, MN
Nutrition Medical, Inc. Finished Goods
Plymouth, MN
</TABLE>
37
<PAGE>
SCHEDULE 8.9
CONTRACTS
PURCHASE CONTRACTS
1. Agrilink, dated May 1, 1998 (Section 5.7 pertaining to Supply Pro-
Peptide Products for three years), attached hereto as Appendix A.
2. VHA, Inc., dated October 15, 1995, attached hereto as Appendix B.
SALES CONTRACTS
1. Distributor Agreements:
a. Davis Enterprises, dated April 1, 1998, attached hereto as
Appendix C.
b. Stat Systems, dated April 1, 1998, attached hereto as Appendix D.
c. Advanced Medical Systems, dated August 15, 1997, attached hereto
as Appendix E.
d. H R Medical, dated April 1, 1998, attached hereto as Appendix F.
e. Medical Technologies, dated September 18, 1997, attached hereto
as Appendix G.
f. Tacy Medical, dated September 1, 1997, attached hereto as
Appendix H.
2. Independent Representative Agreements
a. Charles C. Bently and Associates, dated December 1, 1997, attached
hereto as Appendix I.
b. Mary C. Eicher, dated April 29, 1998, attached hereto as
Appendix J.
3. Distribution Agreement with Nelson Nutraceutical, dated August 25,
1997, attached hereto as Appendix K.
OTHER CONTRACTS AND
AGREEMENTS
1. Woodrow Monty, consulting agreement, dated November 1, 1994, expired,
attached hereto as Appendix L.
2. ABIC International Consultants, Inc., consulting agreement - no
written
38
<PAGE>
agreement.
39
<PAGE>
SCHEDULE 8.10(e)
JUDGMENTS, ORDERS CONSENT DECREES OR
SETTLEMENT AGREEMENTS AFFECTING THE PRODUCTS
Settlement Agreement and Mutual Release dated October 31, 1995 between
Clintec Nutrition Company and Seller, attached hereto as Appendix A.
40
<PAGE>
SCHEDULE 14.7
OFFICE SPACE COSTS
All expenses will be pro rated on a daily basis for the number of days of actual
occupancy by Buyer.
1. RENT EXPENSE. -- $1,950 per month.
2. DEPRECIATION EXPENSE. -- $1,500 per month.
3. TELEPHONE EXPENSES.
a. Eighty percent (80%) of monthly long-distance charges paid by
Seller related to the facility.
b. Ninety percent (90%) of monthly charges for the toll-free (800)
phone line paid by Seller related to the facility.
c. Sixty percent (60%) of monthly charges for phone services other
than long-distance charges or toll-free phone line charges paid
by Seller related to the facility.
41
<PAGE>
SCHEDULE 1.2
PURCHASE MONEY SECURITY INTERESTS
None.
42
<PAGE>
EXHIBIT 10.27
DIRECT DIAL: 651-481-2473 ROBERT A. HOERR, M.D., PH.D.
FACSIMILE: 651-481-2380 PRESIDENT AND CHIEF EXECUTIVE OFFICER
E-Mail: [email protected]
September 16, 1998
Mr. John Watson
585 Harriet Avenue, Apt #102
Shoreview, MN 55126
Dear John:
This is official notice of my acknowledgment regarding your resignation
effective September 16, 1998.
As part of the terms of your employment arrangement, a net check with applicable
withholding taxes for the gross amounts outlined in this letter will be mailed
to you within three days.
- - You will receive a payment in the amount of $43,750 which is equal to
three-months of your base salary, plus $673.08 which is equal to one-day of
earnings in payment for September 16th.
- - Company policy states that you be paid one-half of your outstanding accrued
PFT balance, accordingly, this check also includes 421/2 PFT hours at your
base rate of pay which is equal to gross earnings of $3,575.72.
- - Also included with this check is $364.60 which was withdrawn from the
employee stock purchase plan and represents earnings previously deducted
from your payroll checks.
- - As an offset to the early termination of your apartment lease, GalaGen will
provide you a one-time payment of $6,000.
Subsequent to your separation from the Company, you remain obligated to continue
to protect confidential information and trade secrets of GalaGen to which you
have been exposed during the period of your employment. The agreements you
signed in connection with this obligation are:
- Policies Regarding Confidentiality and Securities Trading and
Annual Certification Form
- Supplemental Policy To Policies Regarding Confidentiality And
Securities Trading And Annual Certification Form
- Invention and Trade Secret Agreement
- Conflicts of Interest and Business Ethics
<PAGE>
John G. Watson September 16, 1998 Page 2
- --------------------------------------------------------------------------------
As part of your employment with the Company, you are required to sign the
attached confidentiality agreement.
Additionally, if GalaGen completes a sublicense agreement with Lifeway Foods by
October 23rd, you will receive a one-time payment of $5,000; if GalaGen closes
the Wyeth deal by October 30th you will receive a one-time payment of $25,000;
and, if GalaGen executes the American Institutional Products agreement by
November 30th you will receive a one-time payment of $10,000. All applicable
withholding taxes will be applied to these payments. These payment terms are
under the condition that you are available to assist the Company as a
consultant, if necessary, in the negotiation process.
During your employment with GalaGen you have been granted stock options and as
of September 16, 1998 you have 28,000 vested options at an exercise price of
$2.5625. Additionally, vesting will be accelerated for the second and third
year of options for 56,000 shares of common stock. The acceleration of vesting
will cause a portion of such options to be treated, for tax purposes, as
nonqualified stock options rather than incentive stock options. Per the terms
of the option agreements, you may exercise any or all of the vested options as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
CURRENTLY VESTED:
- ----------------------------------------------------------------------------------
Plan Original Grant # of Options Exercise By Grant Date
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outside Stock Plan (OSP) 38,045 7,609 90 days 9/30/96
- ----------------------------------------------------------------------------------
1992 86,955 17,391 90 days 9/30/96
- ----------------------------------------------------------------------------------
1992 7,700 1,540 90 days 12/30/96
- ----------------------------------------------------------------------------------
1997 7,300 1,460 3 months 12/30/96
- ----------------------------------------------------------------------------------
28,000
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
ADDITIONAL VESTING: (IF APPROVED BY BOARD)
- ----------------------------------------------------------------------------------
Plan Original Grant # of Options Exercise By Grant Date
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outside Stock Plan (OSP) 38,045 15,218 90 days 9/30/96
- ----------------------------------------------------------------------------------
1992 86,955 34,782 90 days 9/30/96
- ----------------------------------------------------------------------------------
1992 7,700 3,080 90 days 12/30/96
- ----------------------------------------------------------------------------------
1997 7,300 2,920 3 months 12/30/96
- ----------------------------------------------------------------------------------
56,000
- ----------------------------------------------------------------------------------
</TABLE>
Additionally, you are required to return all Company property including computer
information and equipment, software, files, telephone lists, scientific
references, files and other documents in your possession.
A summary of your benefits will be reviewed with you during the exit process.
Your COBRA healthcare benefits will be administered through CFG Employers
Services.
<PAGE>
John G. Watson September 16, 1998 Page 3
- --------------------------------------------------------------------------------
You and GalaGen also agree that the Company shall not disparage or defame you
and that you shall not disparage or defame the Company and neither of us shall
make any disparaging or defamatory comments concerning your employment with the
Company. For the purposes of this paragraph, the "Company" means GalaGen, Inc.
and its officers, agents, directors and employees.
By signing this letter, you authorize the officers and directors of the Company
to provide appropriate and professional employment references about you to those
prospective employers seeking such references from the Company.
The terms outlined in this letter are subject to Board approval. I wish you the
best of luck in your new endeavors.
Sincerely,
Robert A. Hoerr, M.D., Ph.D.
/sr
I acknowledge receipt of this letter.
ACKNOWLEDGED:
-------------------------------
John G. Watson
<PAGE>
EXHIBIT 11.1---STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
Period from
November 17,
1987 (inception)
For the Three months Ended For the Nine months Ended to September 30,
September 30, September 30, September 30, September 30, 1998
1998 1997 1998 1997
-------------- ----------------- --------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
BASIC LOSS PER SHARE:
-------------- ----------------- --------------- ------------------ -------------------
Weighted average shares outstanding 8,284,673 7,186,180 8,115,654 7,173,078 3,375,662
-------------- ----------------- --------------- ------------------ -------------------
-------------- ----------------- --------------- ------------------ -------------------
Net loss applicable to common $(878,881) $(1,282,943) $(3,701,751) $(4,316,437) $(56,520,805)
stockholders
-------------- ----------------- --------------- ------------------ -------------------
-------------- ----------------- --------------- ------------------ -------------------
Basis net loss per share applicable
to common stockholders $(0.11) $(0.18) $(0.46) $(0.60) $(16.74)
-------------- ----------------- --------------- ------------------ -------------------
-------------- ----------------- --------------- ------------------ -------------------
DILUTED LOSS PER SHARE:
Weighted average shares outstanding 8,284,673 7,186,180 8,115,654 7,173,078 3,375,662
-------------- ----------------- --------------- ------------------ -------------------
Dilutive potential common shares - - - - -
-------------- ----------------- --------------- ------------------ -------------------
Total 8,284,673 7,186,180 8,115,654 7,173,078 3,375,662
-------------- ----------------- --------------- ------------------ -------------------
-------------- ----------------- --------------- ------------------ -------------------
Net loss applicable to common $(878,881) $(1,282,943) $(3,701,751) $(4,316,437) $(56,520,805)
stockholders
-------------- ----------------- --------------- ------------------ -------------------
-------------- ----------------- --------------- ------------------ -------------------
Diluted loss per share applicable to
common stockholders $(0.11) $(0.18) $(0.46) $(0.60) $(16.74)
-------------- ----------------- --------------- ------------------ -------------------
-------------- ----------------- --------------- ------------------ -------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTER
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,608,911
<SECURITIES> 2,383,439
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,080,343
<PP&E> 585,133
<DEPRECIATION> 243,293
<TOTAL-ASSETS> 5,546,961
<CURRENT-LIABILITIES> 686,229
<BONDS> 0
0
0
<COMMON> 83,086
<OTHER-SE> 4,305,647
<TOTAL-LIABILITY-AND-EQUITY> 5,546,961
<SALES> 173,699
<TOTAL-REVENUES> 173,699
<CGS> 66,852
<TOTAL-COSTS> 66,852
<OTHER-EXPENSES> 3,551,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 492,725
<INCOME-PRETAX> (3,701,751)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,701,751)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,701,751)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
